Medicare Program; Prospective Payment System for Long-Term Care Hospitals: Annual Payment Rate Updates, Policy Changes, and Clarification

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 412

[CMS-1483-F]

RIN 0938-AN28

Medicare Program; Prospective Payment System for Long-Term Care Hospitals: Annual Payment Rate Updates, Policy Changes, and Clarification

AGENCY:

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

ACTION:

Final rule.

SUMMARY:

This final rule updates the annual payment rates for the Medicare prospective payment system (PPS) for inpatient hospital services provided by long-term care hospitals (LTCHs). The payment amounts and factors used to determine the updated Federal rates that are described in this final rule have been determined based on the LTCH PPS rate year July 1, 2005 through June 30, 2006. The annual update of the long-term care diagnosis-related group (LTC-DRG) classifications and relative weights remains linked to the annual adjustments of the acute care hospital inpatient diagnosis-related group system, and will continue to be effective each October 1. The outlier threshold for July 1, 2005 through June 30, 2006 is also derived from the LTCH PPS rate year calculations. We are adopting new labor market area definitions for the purpose of geographic classification and the wage index. We are also making policy changes and clarifications.

DATES:

This final rule is effective July 1, 2005.

FOR FURTHER INFORMATION CONTACT:

Tzvi Hefter, (410) 786-4487 (General information). Judy Richter, (410) 786-2590 (General information, transition payments, payment adjustments for special cases, and onsite discharges and readmissions, interrupted stays, co-located providers, and short-stay outliers). Michele Hudson, (410) 786-5490 (Calculation of the payment rates, relative weights and case-mix index, market basket update, and payment adjustments). Mark Zezza, (410) 786-7937 (Calculation of the payment rates wage index, wage index, and payment adjustments). Ann Fagan, (410) 786-5662 (Patient classification system). Miechal Lefkowitz, (410) 786-5316 (High-cost outliers and budget neutrality). Linda McKenna, (410) 786-4537 (Payment adjustments, interrupted stay, and transition period).

Table of Contents

I. Background

A. Legislative and Regulatory Authority

B. Criteria for Classification as a LTCH

1. Classification as a LTCH

2. Hospitals Excluded from the LTCH PPS

C. Transition Period for Implementation of the LTCH PPS

D. Administrative Simplification Compliance Act and Health Insurance Portability and Accountability Act Compliance

II. Publication of Proposed Rulemaking

III. Summary of Major Contents of This Final Rule

A. Update Changes

B. Policy Changes

C. MedPAC Report

D. Impact

IV. Long-Term Care Diagnosis-Related Group (LTC-DRG) Classifications and Relative Weights

A. Background

B. Patient Classifications into DRGs

C. Organization of DRGs

D. Update of LTC-DRGs

E. ICD-9-CM Coding System

1. Uniform Hospital Discharge Data Set (UHDDS) Definitions

2. Maintenance of the ICD-9-CM Coding System

3. Coding Rules and Use of ICD-9-CM Codes in LTCHs

F. Method for Updating the LTC-DRG Relative Weights

V. Changes to the LTCH PPS Rates and Changes in Policy for the 2006 LTCH PPS Rate Year

A. Overview of the Development of the Payment Rates

B. Update to the Standard Federal Rate for the 2006 LTCH PPS Rate Year

1. Standard Federal Rate Update

a. Description of the Market Basket for the 2006 LTCH PPS Rate Year

b. LTCH Market Basket Increase for the 2006 LTCH PPS Rate Year

2. Standard Federal Rate for the 2006 LTCH PPS Rate year

C. Calculation of LTCH Prospective Payments for the 2006 LTCH PPS Rate Year

1. Adjustment for Area Wage Levels

a. Background

b. Labor-Related Share

c. Revision of the LTCH PPS Geographic Classifications

1. Current LTCH PPS Labor Market Areas Based on MSAs

2. Core-Based Statistical Areas

3. Revision of the Labor Market Areas

a. New England MSAs

b. Metropolitan Divisions

c. Micropolitan Areas

4. Implementation of the Revised Labor Market Areas Under the LTCH PPS

d. Wage Index Data

2. Adjustment for Cost-of-Living in Alaska and Hawaii

3. Adjustment for High-Cost Outliers

a. Background

b. Cost-to-charge ratios (CCRs)

c. Establishment of the Fixed-Loss Amount

d. Reconciliation of Outlier Payments Upon Cost Report Settlement

e. Application of Outlier Policy to Short-Stay Outlier Cases

4. Adjustments for Special Cases

a. General

b. Adjustment for Short-Stay Outlier Cases

5. Hospital-within-Hospitals and Satellites of LTCHs Notification Requirements

6. Other Payment Adjustments

7. Budget Neutrality Offset to Account for the Transition Methodology

8. Extension of the Interrupted Stay Policy

9. Onsite Discharges and Readmittances

VI. Computing the Adjusted Federal Prospective Payments for the 2005 LTCH PPS Rate Year

VII. Transition Period

VIII. Payments to New LTCHs

IX. Method of Payment

X. MedPAC Recommendations/Monitoring

XI. Collection of Information Requirements

XII. Regulatory Impact Analysis

Acronyms

Because of the many terms to which we refer by acronym in this proposed rule, we are listing the acronyms used and their corresponding terms in alphabetical order below:

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

BBRA Medicare, Medicaid, and SCHIP [State Children's Health Insurance Program] Balanced Budget Refinement Act of 1999, (Pub. L. 106-113).

BIPA Medicare, Medicaid, and SCHIP [State Children's Health Insurance Program] Benefits Improvement and Protection Act of 2000, (Pub. L. 106-554).

CBSA Core-Based Statistical Area.

CMS Centers for Medicare & Medicaid Services.

COPS Medicare conditions of participation.

DRGs Diagnosis-related groups.

FY Federal fiscal year.

HCRIS Hospital Cost Report Information System.

HHA Home health agency.

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

IPF Inpatient Psychiatric Facility.

IPPS Acute Care Hospital Inpatient Prospective Payment System.

IRF Inpatient rehabilitation facility.

LTC-DRG Long-term care diagnosis-related group.

LTCH Long-term care hospital.

MedPAC Medicare Payment Advisory Commission.

MedPAR Medicare provider analysis and review file.

OSCAR Online Survey Certification and Reporting (System).

PPS Prospective Payment System.

QIO Quality Improvement Organization (formerly Peer Review Organization (PRO)).

RY Rate Year (July 1 through June 30).

SNF Skilled nursing facility.

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

I. Background

A. Legislative and Regulatory Authority

The Medicare, Medicaid, and SCHIP [State Children's Health Insurance Program] Balanced Budget Refinement Act of 1999 (BBRA) (Pub. L. 106-113) and the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA) (Pub. L. 106-554) provide for payment for both the operating and capital-related costs of hospital inpatient stays in long-term care hospitals (LTCHs) under Medicare Part A based on prospectively set rates. The Medicare prospective payment system (PPS) for LTCHs applies to hospitals described in section 1886(d)(1)(B)(iv) of the Social Security Act (the Act), effective for cost reporting periods beginning on or after October 1, 2002.

Section 1886(d)(1)(B)(iv)(I) of the Act defines a LTCH as “a hospital which has an average inpatient length of stay (as determined by the Secretary) of greater than 25 days.” Section 1886(d)(1)(B)(iv)(II) of the Act also provides an alternative definition of LTCHs: specifically, a hospital that first received payment under section 1886(d) of the Act in 1986 and has an average inpatient length of stay (as determined by the Secretary) of greater than 20 days and has 80 percent or more of its annual Medicare inpatient discharges with a principal diagnosis that reflects a finding of neoplastic disease in the 12-month cost reporting period ending in FY 1997.

Section 123 of the BBRA requires the PPS for LTCHs to be a per discharge system with a diagnosis-related group (DRG) based patient classification system that reflects the differences in patient resources and costs in LTCHs while maintaining budget neutrality.

Section 307(b)(1) of the BIPA, among other things, mandates that the Secretary shall examine, and may provide for, adjustments to payments under the LTCH PPS, including adjustments to DRG weights, area wage adjustments, geographic reclassification, outliers, updates, and a disproportionate share adjustment.

In a

Federal Register

document issued on August 30, 2002 (67 FR 55954), we implemented the LTCH PPS authorized under BBRA and BIPA. This system uses information from LTCH patient records to classify patients into distinct long-term care diagnosis-related groups (LTC-DRGs) based on clinical characteristics and expected resource needs. Payments are calculated for each LTC-DRG and provisions are made for appropriate payment adjustments. Payment rates under the LTCH PPS are updated annually and published in the

Federal Register

.

The LTCH PPS replaced the reasonable cost-based payment system under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) (Pub. L. 97-248) for payments for inpatient services provided by a LTCH with a cost reporting period beginning on or after October 1, 2002. (The regulations implementing the TEFRA reasonable cost-based payment provisions are located at 42 CFR part 413.) With the implementation of the prospective payment system for acute care hospitals authorized by the Social Security Amendments of 1983 (Pub. L. 98-21), which added section 1886(d) to the Act, certain hospitals, including LTCHs, were excluded from the PPS for acute care hospitals and were paid their reasonable costs for inpatient services subject to a per discharge limitation or target amount under the TEFRA system. For each cost reporting period, a hospital-specific ceiling on payments was determined by multiplying the hospital's updated target amount by the number of total current year Medicare discharges. The August 30, 2002 final rule further details payment policy under the TEFRA system (67 FR 55954).

In the August 30, 2002 final rule, we presented an in-depth discussion of the LTCH PPS, including the patient classification system, relative weights, payment rates, additional payments, and the budget neutrality requirements mandated by section 123 of the BBRA. The same final rule that established regulations for the LTCH PPS under 42 CFR part 412, subpart O, also contained LTCH provisions related to covered inpatient services, limitation on charges to beneficiaries, medical review requirements, furnishing of inpatient hospital services directly or under arrangement, and reporting and recordkeeping requirements.

We refer readers to the August 30, 2002 final (67 FR 55954) rule for a comprehensive discussion of the research and data that supported the establishment of the LTCH PPS.

On June 6, 2003, we published a final rule in the

Federal Register

(68 FR 34122) that set forth the 2004 annual update of the payment rates for the Medicare PPS for inpatient hospital services furnished by LTCHs. It also changed the annual period for which the payment rates are effective. The annual updated rates are now effective from July 1 through June 30 instead of from October 1 through September 30. We refer to the July through June time period as a “long-term care hospital rate year” (LTCH PPS rate year). In addition, we changed the publication schedule for the annual update to allow for an effective date of July 1. The payment amounts and factors used to determine the annual update of the LTCH PPS Federal rate is based on a LTCH PPS rate year. While the LTCH payment rate update is effective July 1, the annual update of the LTC-DRG classifications and relative weights are linked to the annual adjustments of the acute care hospital inpatient diagnosis-related groups and are effective each October 1.

On May 7, 2004 we published a final rule in the

Federal Register

(69 FR 25674) that set forth the 2005 LTCH PPS rate year annual update of the payment rates for the Medicare PPS for inpatient hospital services provided by LTCHs. We also discussed clarification of the procedures under which a satellite facility or remote location of a LTCH may be designated as a separately certified LTCH. In addition, the final rule included a provision to expand the existing interrupted stay policy at § 412.531, and a revision to the procedure for computing the day count in the average length of stay calculation for Medicare patients for hospitals qualifying as LTCHs at § 412.23(e)(3)(ii).

B. Criteria for Classification as a LTCH

1. Classification as a LTCH

Under the existing regulations at § 412.23(e)(1) and (e)(2)(i), which implement section 1886(d)(1)(B)(iv)(I) of the Act, to qualify to be paid under the LTCH PPS, a hospital must have a provider agreement with Medicare and must have an average Medicare inpatient length of stay of greater than 25 days. Alternatively, for cost reporting periods beginning on or after August 5, 1997, a hospital that was first excluded from the PPS in 1986, and can demonstrate that at least 80 percent of its annual Medicare inpatient discharges in the 12-month cost reporting period ending in FY 1997 have a principal diagnosis that reflects a finding of neoplastic disease must have an average inpatient length of stay for all patients, including both Medicare and non-Medicare inpatients, of greater than 20 days (§ 412.23(e)(2)(ii)).

Regulations at § 412.23(e)(3) provide that, subject to the provisions of paragraphs (e)(3)(ii) through (e)(3)(iv) of this section, the average Medicare inpatient length of stay, specified under § 412.23(e)(2)(i) is calculated by dividing the total number of covered

and noncovered days of stay of Medicare inpatients (less leave or pass days) by the number of total Medicare discharges for the hospital's most recent complete cost reporting period. Section 412.23 also provides that subject to the provisions of paragraphs (e)(3)(ii) through (e)(3)(iv) of this section, the average inpatient length of stay specified under § 412.23(e)(2)(ii) is calculated by dividing the total number of days for all patients, including both Medicare and non-Medicare inpatients (less leave or pass days) by the number of total discharges for the hospital's most recent complete cost reporting period.

In the LTCH PPS final rule published on May 7, 2004, we specified the procedure for calculating a hospital's inpatient average length of stay for purposes of classification as a LTCH. That is, if a patient's stay includes days of care furnished during two or more separate consecutive cost reporting periods, the total days of a patient's stay would be reported in the cost reporting period during which the patient is discharged. (69 FR 25705). Therefore, we have revised the regulations at § 412.23(e)(3)(ii) to specify that, effective for cost reporting periods beginning on or after July 1, 2004, in calculating a hospital's average length of stay, if the days of a stay of an inpatient involves days of care furnished during two or more separate consecutive cost reporting periods, the total number of days of the stay are considered to have occurred in the cost reporting period during which the inpatient was discharged.

Effective for cost reporting periods beginning on or after July 1, 2004, but before July 1, 2005, a one-year exception is provided in the event some providers failed to meet the 25-day ALOS criteria due to this change in policy. In these cases, the fiscal intermediary (FI) will do an additional calculation to determine if these providers meet the average length of stay methodology found in § 412.23(e)(3)(i).

FIs verify that LTCHs meet the average length of stay requirements. We note that the inpatient days of a patient who is admitted to a LTCH without any remaining Medicare days of coverage, regardless of the fact that the patient is a Medicare beneficiary, will not be included in the above calculation. Because Medicare would not be paying for any of the patient's treatment, data on the patient's stay would not be included in the Medicare claims processing systems. In order for both covered and noncovered days of a LTCH hospitalization to be included, a patient admitted to the LTCH must have at least one remaining benefit day as described in § 409.61 (68 FR 34123).

The FI's determination of whether or not a hospital qualified as an LTCH is based on the hospital's discharge data from the hospital's most recent complete cost reporting period (§ 412.23(e)(3)) and is effective at the start of the hospital's next cost reporting period (§ 412.22(d)). However, if the hospital does not meet the average length of stay requirement as specified in § 412.23(e)(2)(i) and (ii), the hospital may provide the intermediary with data indicating a change in the average length of stay by the same method for the period of at least 5 months of the immediately preceding 6-month period (69 FR 25676). Our interpretation of the current regulations at § 412.23(e)(3) was to allow hospitals to submit data using a period of at least 5 months of the most recent data from the immediately preceding 6-month period.

As we stated in the IPPS final rule, published August 1, 2003, prior to the implementation of the LTCH PPS, we did rely on data from the most recently submitted cost report for purposes of calculating the average length of stay. The calculation to determine whether an acute care hospital qualifies for LTCH status was based on total days and discharges for LTCH inpatients. However, with the implementation of the LTCH PPS, with respect to the average length of stay specified under § 412.23(e)(2)(i), we revised § 412.23(e)(3)(i) to only count total days and discharges for Medicare inpatients (68 FR 45464). In addition, the average length of stay specified under § 412.23(e)(2)(ii) is calculated by dividing the total number of days for all patients, including both Medicare and non-Medicare inpatients (less leave or pass days) by the number of total discharges for the hospital's most recent complete cost reporting period. As we pointed out in the IPPS final rule, we are unable to capture the necessary data from our present cost reporting forms. We have, therefore, notified fiscal intermediaries and LTCHs that until the cost reporting forms are revised, for purposes of calculating the average length of stay, we will be relying upon census data extracted from MedPAR files that reflect each LTCH's cost reporting period (68 FR 45464). Requirements for hospitals seeking classification as LTCHs that have undergone a change in ownership, as described in § 489.18, are set forth in § 412.23(e)(3)(iv).

In the May 7, 2004 final rule (69 FR 25709), we revised the regulations at § 412.23(e) to clarify our longstanding policy by stating that a satellite facility or remote location that voluntarily separates from its parent LTCH in order to become an independent LTCH must first be considered a State-licensed and Medicare-certified hospital before seeking classification as a LTCH. In this regard, a satellite facility or remote location that voluntarily wishes to become an independent LTCH is required to demonstrate that it meets the average length of stay requirements, as specified under § 412.23(e)(2)(i) and (ii), based on discharges that occur on or after the effective date of its participation under Medicare as a separate hospital. Once the satellite facility or remote location is Medicare certified, then the hospital may consider using the length of stay data accumulated as a hospital to satisfy the classification requirements for becoming a “specialty” hospital (in this case, a LTCH). That is, the hospital must demonstrate that it has a Medicare inpatient length of stay of greater than 25 days. The data used to calculate the Medicare average length of stay is based on discharges that occur after the satellite facility or remote location has established itself as a separate participating hospital. However, there is an exception to this policy for satellite facilities and remote locations of LTCHs that are affected by § 413.65(e)(3) and that were in existence prior to the effective date of the provider-based location requirements; that is, cost reporting periods beginning on or after July 1, 2003. We will assign new Medicare provider numbers to former satellite facilities or remote locations that have become certified as Medicare participating hospitals. However, if these newly certified hospitals should fail the provider-based locations requirements under § 413.65(e)(3), they may be classified as LTCHs if they meet specific conditions. Under this exception, calculation of the ALOS for purposes of qualifying as a LTCH are based on discharge data during the 5 months of the immediate 6 months preceding the facility's separation from the main hospital. This provision only applies to those facilities or locations that became subject to the revised provider-based location rules on July 1, 2003, and that seek classification as LTCHs for Medicare payment purposes.

2. Hospitals Excluded From the LTCH PPS

The following hospitals are paid under special payment provisions, as described in § 412.22(c) and, therefore, are not subject to the LTCH PPS rules:

• Veterans Administration hospitals.

• Hospitals that are reimbursed under State cost control systems approved under 42 CFR part 403.

• Hospitals that are reimbursed in accordance with demonstration projects authorized under section 402(a) of Public Law 90-248 (42 U.S.C. 1395b-1) or section 222(a) of Public Law 92-603 (42 U.S.C. 1395b-1 (note)) (statewide all-payer systems, subject to the rate-of-increase test at section 1814(b) of the Act).

• Nonparticipating hospitals furnishing emergency services to Medicare beneficiaries.

C. Transition Period for Implementation of the LTCH PPS

In the August 30, 2002 final rule, we provided for a 5-year transition period from reasonable cost-based reimbursement to fully Federal prospective payment for LTCHs (67 FR 56038). However, LTCHs have the option to elect to be paid based on 100 percent of the Federal prospective payment. During the 5-year period, two payment percentages are to be used to determine a LTCH's total payment under the PPS. The blend percentages are as follows:

Cost reporting periods beginning on or after

Prospective

payment

Federal rate

percentage

Reasonable cost-based reimbursement rate

percentage

October 1, 2002

20

80

October 1, 2003

40

60

October 1, 2004

60

40

October 1, 2005

80

20

October 1, 2006

100

0

D. Administrative Simplification Compliance Act and Health Insurance Portability and Accountability Act Compliance

Claims submitted to Medicare must comply with both the Administrative Simplification Compliance Act (ASCA), Pub. L. 107-105, and Health Insurance Portability and Accountability Act (HIPAA). Section 3 of ASCA requires the Medicare Program, subject to subsection (h), to deny payment under Part A or Part B for any expenses for items or services “for which a claim is submitted other than in an electronic form specified by the Secretary.” Subsection (h) provides that the Secretary shall waive such denial in two types of cases and may also waive such denial “in such unusual cases as the Secretary finds appropriate.” (Also, see 68 FR 48805 (August 15, 2003).) Section 3 of ASCA operates in the context of the Administrative Simplification provisions of HIPAA, which include, among other provisions, the transactions and code sets standards requirements codified as 45 CFR parts 160 and 162, subparts A and I through R (generally known as the Transactions Rule). The Transactions Rule requires covered entities, including covered providers, to conduct covered electronic transactions according to the applicable transactions and code sets standards.

II. Publication of Proposed Rulemaking

On February 3, 2005, we published a proposed rule in the

Federal Register

(70 FR 5724-5805) that set forth the proposed annual update to the payment rates for the Medicare prospective payment system (PPS) for inpatient hospital services provided by long-term care hospitals (LTCHs) for the 2006 LTCH PPS rate year. (The annual update of the LTC-DRG classifications and relative weights for FY 2006 remains linked to the annual adjustments of the acute care hospital inpatient DRG system, which will be published by August 1, and will be effective October 1, 2004.)

In the February 3, 2005 LTCH PPS proposed rule, we discussed the annual update of LTC-DRG classifications and relative weights and specified that they remain linked to the annual adjustments of the acute care hospital inpatient DRG system, which are based on the annual revisions to the International Classification of Diseases, Ninth Revision, Clinical Modification (ICD-9-CM) codes, effective each October 1. (See section V. of this preamble.)

In that same proposed rule, we proposed to adopt new labor market area definitions for LTCHs which are based on the new Core-Based Statistical Areas (CBSAs), announced by the OMB late in 2000, which are effective for acute care inpatient hospitals October 1, 2004 in the FY 2005 IPPS final rule. The CBSAs were adopted for acute care hospitals under the IPPS (See section V.C.1. of this preamble.)

We also proposed revisions to the wage index, the proposed excluded hospital with capital market basket that would be applied to the current standard Federal rate to determine the prospective payment rates, the applicable adjustments to payment rates, the proposed outlier threshold, the transition period, and the proposed budget neutrality factor. (See sections VII. through X. of this preamble.)

We proposed to clarify our notification policy in § 412.22(e)(3) and (h) to require that when a LTCH or satellite of a LTCH informs its FI of its co-located status, it also is required to include the name, address and provider numbers of the other co-located hospitals (that is, acute care hospitals, IRFs, and IPFs). Additionally, we proposed to clarify and modify the notification requirement under § 412.532. (Special payment provisions for patients who are transferred to onsite providers and readmitted to a long-term care hospital.)

We also proposed to extend the surgical DRG exception to the “under arrangements” requirement of the 3-day or less interruption of stay policy at § 412.531(b)(1)(ii)(A)(1) through the 2006 rate year, from July 1, 2005 through June 30, 2006. We also propose to extend the surgical DRG exception to the “under arrangements” requirement for the 3-day or less interruption of stay policy at § 412.531(b)(1)(i)(C) from July 1, 2005 through June 30, 2006.

We discussed the recommendations made in the June 2004 Medicare Payment Advisory Commission (MedPAC) Report concerning the definition of LTCHs and our continuing monitoring efforts to evaluate the LTCH PPS, including a review of the QIO's role. (See section X. of this preamble.)

Lastly, we analyzed the impact of the proposed changes in the proposed rule on Medicare expenditures and on Medicare-participating LTCHs and Medicare beneficiaries. (See section XII. of this preamble.)

We received a total of 13 timely items of correspondence containing multiple comments on the proposed rule. The major issues addressed by the commenters included: the reduction of the fixed loss amount pertaining to high-cost outliers, notification in writing to fiscal intermediaries regarding co-located status, adoption of

the CBSA designations, extension of the surgical DRGs and MedPAC/monitoring issues.

Summaries of the public comments received and our responses to those comments are described below under the appropriate heading.

III. Summary of the Major Contents of This Final Rule

In this final rule, we set forth the annual update to the payment rates for the Medicare 2006 LTCH PPS rate year and make other policy changes. The following is a summary of the major areas that we are addressing in this final rule:

A. Update Changes

• In section IV. of this preamble, we discuss the annual update of the LTC-DRG classifications and relative weights and specify that they remain linked to the annual adjustments of the acute care hospital inpatient DRG system, which are based on the annual revisions to the International Classification of Diseases, Ninth Revision, Clinical Modification (ICD-9-CM) codes effective each October 1.

• In sections V. through X. of this preamble, we specify the factors and adjustments used to determine the LTCH PPS rates that are applicable to the 2006 LTCH PPS rate year, including revisions to the wage index, the excluded hospital with capital market basket that will be applied to the current standard Federal rate to determine the prospective payment rates, the applicable adjustments to payments, the outlier threshold, the short-stay outlier policy for certain LTCHs, the budget neutrality factor, Core-Based Statistical Areas (CBSAs), and MedPAC recommendations/monitoring.

B. Policy Changes

In section IV.8. of this preamble, we are extending the surgical DRG exception in the 3-day or less interruption of stay policy at § 412.531(b)(1)(ii)(A)(1) and § 412.531(b)((1)(i)(C) through the 2006 rate year.

In section V.C.5. of this preamble, we clarify our notification policy for co-located LTCHs and satellites of LTCHs in § 412.22(e)(3) and (h)(5). We require LTCH HwHs and LTCH satellites to inform their FI of their co-located status and also provide relevant identifying information concerning other co-located hospitals.

In section V.C.9. of this preamble, we clarify and modify existing notification requirements for the purpose of implementing § 412.532.

C. MedPAC Report

In section X. of this preamble, we discuss the recommendations made in the June 2004 MedPAC Report concerning the definition of LTCHs and our continuing monitoring efforts to evaluate the LTCH PPS, including a review of the QIO's role.

D. Impact

In section XII. of this preamble, we analyze the impact of the changes in this final rule on Medicare expenditures and on Medicare-participating LTCHs and Medicare beneficiaries.

IV. Long-Term Care Diagnosis-Related Group (LTC-DRG) Classifications and Relative Weights

A. Background

Section 123 of BBRA specifically requires that the PPS for LTCHs be a per discharge system with a DRG-based patient classification system reflecting the differences in patient resources and costs in LTCHs while maintaining budget neutrality. Section 307(b)(1) of the BIPA modified the requirements of section 123 of the BBRA by specifically requiring that the Secretary examine “the feasibility and the impact of basing payment under such a system [the LTCH PPS] on the use of existing (or refined) hospital DRGs that have been modified to account for different resource use of LTCH patients as well as the use of the most recently available hospital discharge data.”

In accordance with section 307(b)(1) of BIPA and § 412.515 of our existing regulations, the LTCH PPS uses information from LTCH patient records to classify patient cases into distinct LTC-DRGs based on clinical characteristics and expected resource needs. The LTC-DRGs used as the patient classification component of the LTCH PPS correspond to the hospital inpatient DRGs in the IPPS. We apply weights to the existing hospital inpatient DRGs to account for the difference in resource use by patients exhibiting the case complexity and multiple medical problems characteristic of LTCHs.

In a departure from the IPPS, we use low volume LTC-DRGs (less than 25 LTCH cases) in determining the LTC-DRG weights, since LTCHs do not typically treat the full range of diagnoses as do acute care hospitals. In order to deal with the large number of low volume DRGs (all DRGs with fewer than 25 cases), we group low volume DRGs into 5 quintiles based on average charge per discharge. (A listing of the current composition of low volume quintiles used in determining the FY 2005 LTC-DRG relative weights appears in the FY 2005 IPPS final rule (August 11, 2004; 69 FR 48986-48989).) We also take into account adjustments to payments for cases in which the stay at the LTCH is five-sixths of the geometric average length of stay and classify these cases as short-stay outlier cases. (A detailed discussion of the application of the Lewin Group model that was used to develop the LTC-DRGs appears in the August 30, 2002 LTCH PPS final rule at 67 FR 55978.)

B. Patient Classifications Into DRGs

Generally, under the LTCH PPS, Medicare payment is made at a predetermined specific rate for each discharge; that payment varies by the LTC-DRG to which a beneficiary's stay is assigned. Cases are classified into LTC-DRGs for payment based on the following six data elements:

(1) Principal diagnosis.

(2) Up to eight additional diagnoses.

(3) Up to six procedures performed.

(4) Age.

(5) Sex.

(6) Discharge status of the patient.

As indicated in the August 30, 2002 LTCH PPS final rule, upon the discharge of the patient from a LTCH, the LTCH must assign appropriate diagnosis and procedure codes from the most current version of the International Classification of Diseases, Ninth Edition, Clinical Modification (ICD-9-CM). HIPAA, Pub. L. 104-191, transactions and code sets standards regulations (45 CFR parts 160 and 162) require that no later than October 16, 2003, all covered entities must comply with the applicable requirements of subparts A and I through R of part 162. Among other requirements, those provisions direct covered entities that electronically transmit institutional health care claim or equivalent encounter information, for instance, to use the ASC X12N 837 Health Care Claims: Institutional, Volumes 1 and 2, version 4010, and the applicable standard medical data code sets. (See 45 CFR 162.1002 and 45 CFR 162.1102.)

Medicare fiscal intermediaries enter the clinical and demographic information into their claims processing systems and subject this information to a series of automated screening processes called the Medicare Code Editor (MCE). These screens are designed to identify cases that require further review before assignment into a DRG can be made. During this process, the following types of cases are selected for further development:

• Cases that are improperly coded. (For example, diagnoses are shown that are inappropriate, given the sex of the

patient. Code 68.6, Radical abdominal hysterectomy, would be an inappropriate code for a male.)

• Cases including surgical procedures not covered under Medicare. (For example, organ transplant in a non-approved transplant center.)

• Cases requiring more information. (For example, ICD-9-CM codes are required to be entered at their highest level of specificity. There are valid 3-digit, 4-digit, and 5-digit codes. That is, code 136.3, Pneumocystosis, contains all appropriate digits, but if it is reported with either fewer or more than 4 digits, the claim will be rejected by the MCE as invalid.)

• Cases with principal diagnoses that do not usually justify admission to the hospital. (For example, code 437.9, unspecified cerebrovascular disease. While this code is valid according to the ICD-9-CM coding scheme, a more precise code should be used for the principal diagnosis.)

After screening through the MCE, each claim will be classified into the appropriate LTC-DRG by the Medicare LTCH GROUPER. As indicated in August 30, 2002 LTCH PPS final rule, the Medicare GROUPER, which is used under the LTCH PPS, is specialized computer software, and is the same GROUPER software program used under the IPPS. The GROUPER software was developed as a means of classifying each case into a DRG on the basis of diagnosis and procedure codes and other demographic information (age, sex, and discharge status). Following the LTC-DRG assignment, the Medicare fiscal intermediary determines the prospective payment by using the Medicare PRICER program, which accounts for hospital-specific adjustments. As provided for under the IPPS, we provide an opportunity for the LTCH to review the LTC-DRG assignments made by the fiscal intermediary and to submit additional information within a specified timeframe (§ 412.513(c)).

The GROUPER is used both to classify past cases in order to measure relative hospital resource consumption to establish the DRG weights and to classify current cases for purposes of determining payment. The records for all Medicare hospital inpatient discharges are maintained in the MedPAR file. The data in this file are used to evaluate possible DRG classification changes and to recalibrate the DRG weights during our annual update under both the IPPS (§ 412.60(e)) and the LTCH PPS (§ 412.517). As discussed in greater detail below in sections III.D. and E. of this preamble, with the implementation of section 503(a) of the MMA, there is the possibility that one feature of the GROUPER software program may be updated twice during a Federal fiscal year (October 1 and April 1) as required by the statute for the IPPS (69 FR 48954-48957), August 11, 2004). Specifically, ICD-9 diagnosis and procedure codes for new medical technology may be created and added to existing DRGs in the middle of the Federal fiscal year on April 1. This policy change will have no effect, however, on the LTC-DRG relative weights which will continue to be updated only once a year (October 1), nor will there be any impact on Medicare payments under the LTCH PPS.

C. Organization of DRGs

The DRGs are organized into 25 Major Diagnostic Categories (MDCs), most of which are based on a particular organ system of the body; the remainder involve multiple organ systems (such as MDC 22, Burns). Accordingly, the principal diagnosis determines MDC assignment. Within most MDCs, cases are then divided into surgical DRGs and medical DRGs. Surgical DRGs are assigned based on a surgical hierarchy that orders operating room (O.R.) procedures or groups of O.R. procedures by resource intensity. The GROUPER does not recognize all ICD-9-CM procedure codes as procedures that affect DRG assignment, that is, procedures which are not surgical (for example, EKG), or minor surgical procedures (for example, 86.11, Biopsy of skin and subcutaneous tissue).

The medical DRGs are generally differentiated on the basis of diagnosis. Both medical and surgical DRGs may be further differentiated based on age, sex, discharge status, and presence or absence of complications or comorbidities (CC). We note that CCs are defined by certain secondary diagnoses not related to, or not inherently a part of, the disease process identified by the principal diagnosis. (For example, the GROUPER would not recognize a code from the 800.0x series, Skull fracture, as a CC when combined with principal diagnosis 850.4, Concussion with prolonged loss of consciousness, without return to preexisting conscious level.) In addition, we note that the presence of additional diagnoses does not automatically generate a CC, as not all DRGs recognize a comorbid or complicating condition in their definition. (For example, DRG 466, Aftercare without History of Malignancy as Secondary Diagnosis, is based solely on the principal diagnosis, without consideration of additional diagnoses for DRG determination.)

In its June 2000 Report to Congress, MedPAC recommended that the Secretary “* * * improve the hospital inpatient prospective payment system by adopting, as soon as practicable, diagnosis-related group refinements that more fully capture differences in severity of illness among patients,” (Recommendation 3A, p. 63). We have determined it is not practical at this time to develop a refinement to inpatient hospital DRGs based on severity due to time and resource requirements. However, this does not preclude us from development of a severity-adjusted DRG refinement in the future. That is, a refinement to the list of comorbidities and complications could be incorporated into the existing DRG structure. It is also possible that a more comprehensive severity adjusted structure may be created if a new code set is adopted. That is, if ICD-9-CM is replaced by ICD-10-CM (for diagnostic coding) and ICD-10-PCS (for procedure coding) or by other code sets, a severity concept may be built into the resulting DRG assignments. Of course any change to the code set would be adopted through the process established in the HIPAA Administrative Simplification Standards provisions.

D. Update of LTC-DRGs

For FY 2005, the LTC-DRG patient classification system is based on LTCH data from the FY 2003 MedPAR file, which contained hospital bills data from the March 2004 update. The patient classification system consists of 520 DRGs that formed the basis of the FY 2005 LTCH PPS GROUPER. The 520 LTC-DRGs included two “error DRGs.” As in the IPPS, we include two error DRGs in which cases that cannot be assigned to valid DRGs will be grouped. These two error DRGs are DRG 469 (Principal Diagnosis Invalid as a Discharge Diagnosis) and DRG 470 (Ungroupable). (See the FY 2005 IPPS FY 2005 final rule (69 FR 48982-49000).) The other 518 LTC-DRGs are the same DRGs used in the IPPS GROUPER for FY 2005 (Version 22.0).

In the past, in the health care industry, annual changes to the ICD-9-CM codes were effective for discharges occurring on or after October 1 each year. Thus, the manual and electronic versions of the GROUPER software, which are based on the ICD-9-CM codes, were also revised annually and effective for discharges occurring on or after October 1 each year. As discussed earlier, the patient classification system for the LTCH PPS (LTC-DRGs) is based on the IPPS patient classification system

(CMS-DRGs), which had historically been updated annually and was effective for discharges occurring on or after October 1 through September 30 each year.

Recently, the ICD-9-CM coding update process has been revised as discussed in greater detail in the FY 2005 IPPS final rule (69 FR 48954). Specifically, section 503(a) of the MMA includes a requirement for updating ICD-9-CM codes twice a year instead of the current process of annual updates on October 1 of each year. This requirement is included as part of the amendments to the Act relating to recognition of new medical technology under the IPPS. Section 503(a) of the MMA amended section 1886(d)(5)(K) of the Act by adding a new clause (vii) which states that “the Secretary shall provide for the addition of new diagnosis and procedure codes by April 1 of each year, but the addition of such codes shall not require the Secretary to adjust the payment (or diagnosis-related group classification) * * * until the fiscal year that begins after such date.” This requirement will improve the recognition of new technologies under the IPPS by accounting for the GROUPER software at an earlier date. Despite the fact that aspects of the GROUPER software may be updated to recognize any new technology codes, there will be no impact on either LTC-DRG assignments or payments under the LTCH PPS. That is, no new LTC-DRGs will be created or deleted and the relative weights will remain the same.

When we implemented the LTCH PPS, we established that the DRG-based patient classification system for the LTCH PPS would use the same GROUPER software as the IPPS (August 30, 2002, 67 FR 55954). IPPS updates occur each October 1, as set forth in § 412.8(b). In the June 6, 2003 LTCH PPS final rule (68 FR 34125), when we revised the annual rate update for the LTCH PPS to a July 1 through June 30 schedule, we specified that updates of the LTC-DRGs and re-weighting of LTC-DRG weights would remain linked to the IPPS GROUPER update which functions on an October 1 through September 30 schedule. Therefore, under this existing policy, during a LTCH PPS rate year, two versions of the GROUPER software are utilized for purposes of LTC-DRG creation or deletion and relative weight assignment during the LTCH PPS rate year that is established each July 1. The updated LTC-DRG classifications and relative weights in the GROUPER that were finalized on October 1, preceding the beginning of a LTCH rate year on July 1, are in effect with the new Federal rate from July 1 through September 30. On October 1, the updated version of the GROUPER with respect to the LTC-DRG classifications and relative weights will be used from that October 1 through June 30.

The updated DRGs and GROUPER software, used by both the IPPS and the LTCH PPS, are based on the ICD-9-CM codes updated. (The use of the ICD-9-CM codes in this manner is consistent with current usage and the HIPAA regulations.) As noted above, historically, these codes have been published annually in the IPPS proposed rule and final rule. Consistent with historical approaches taken in the IPPS and LTCH PPS, October 1 will continue to be the effective date of revisions to the CMS DRGs and the LTC-DRGs. However, because of the statutory changes under Section 503(a) of the MMA, new ICD-9-CM codes may become effective on both October 1 and April 1. In the past, the new or revised ICD-9-CM codes were not used by the industry for either the IPPS or the LTCH PPS until the beginning of the Federal fiscal year (effective for discharges occurring on or after October 1). Beginning with FY 2005, as we explained above, under the authority of Section 503(a) of the MMA which amends section 1886(d)(5)(K) of the Act, there is the potential for new ICD-9-CM codes to become effective both at the beginning of the Federal fiscal year, October 1, and also on April 1. As we have already noted, a full discussion along with a description of the implementation of this provision, was published in the

Federal Register

in the FY 2005 IPPS final rule (69 FR 48954). We want to emphasize, however, that although it was established that the IPPS GROUPER, which is also used by the LTCH PPS, could be calibrated with respect to ICD-9-CM codes two times each year (October and April), as necessary, to allow the inclusion of new codes reflecting new medical technologies and procedures for patients in acute care hospitals. The inclusion of these new codes in April would not result in the creation or deletion of LTC-DRGs or changes in the relative weights and, therefore, would not affect the DRG assigned by the GROUPER for LTC-DRGs, nor payments under the LTCH PPS.

As noted above, updates to the GROUPER for both the IPPS and the LTCH PPS (with respect to relative weights and the creation or deletion of DRGs) are made in the annual IPPS proposed and final rules and are effective each October 1. We explained in the FY 2005 IPPS final rule (69 FR 48956), that since we do not publish a mid-year IPPS rule, April 1 code updates discussed above will not be published in a mid-year IPPS rule. Rather, we will assign any new diagnostic or procedure codes to the same DRG in which its predecessor code was assigned, so that there will be no impact on the DRG assignment. Any proposed coding updates will be available through the websites indicated in the FY 2005 IPPS final rule (69 FR 48956) and provided below in section III.E.2. of this preamble and through the Coding Clinic for ICD-9-CM. Publishers and software vendors currently obtain code changes through these sources in order to update their code books and software systems. If new codes are implemented on April 1, revised code books and software systems, including the GROUPER software program, will be necessary because we must use current ICD-9-CM codes. Therefore, for purposes of the LTCH PPS, since each ICD-9-CM code must be included in the GROUPER algorithm to classify each case into a LTC-DRG, the GROUPER software program used under the LTCH PPS would need be revised to accommodate any new codes.

As mentioned above, however, an April 1 update of the ICD-9-CM codes would only result in a change to the CMS DRG GROUPER software program effective April 1, so that it will recognize the new technology code and assign it to the appropriate DRG, but will not result in a change to the relative weights used under either the IPPS or the LTCH PPS, respectively. Consistent with our current practice, any changes to the DRGs or relative weights will be made at the beginning of the next Federal fiscal year (October 1).

As specified in the May 7, 2004 LTCH PPS final rule (69 FR 25674) and the FY 2005 IPPS final rule (69 FR 48982), and discussed above, we annually update to the LTCH PPS payment rates effective from July 1 through June 30 each year. As a result, the LTCH PPS currently uses two GROUPER software programs during a LTCH PPS rate year (July 1 through June 30): one GROUPER for 3 months (from July 1 through September 30); and an updated GROUPER for 9 months (from October 1 through June 30). The need to use two GROUPERs was based upon the October 1 effective date of the updated ICD-9-CM coding system. As previously discussed, new ICD-9-CM codes may result in changes to the structure of the DRGs caused by mapping the new codes to existing DRGs. In order for the industry to be on the same schedule (for both the IPPS and the LTCH PPS) for the use of the most current ICD-9-CM codes, it had been necessary for us to apply two

GROUPER programs under the LTCH PPS.

With the potential addition of new codes effective on April 1, the LTCH PPS may now use three GROUPER programs during the LTCH PPS rate year (July 1 through June 30), if new diagnosis and procedure codes are added on April 1. Specifically, one GROUPER (GROUPER 1) would be used for the first 3 months (from July 1 through September 30); a second GROUPER (GROUPER 2) would be used for the next 6 months (from October 1 through March 31); and the third GROUPER (GROUPER 3) would be used for the last 3 months (from April 1 through June 30). The need to use three GROUPER software programs during a single LTCH PPS rate year in the event of an April 1 ICD-9-CM code update is because it is necessary to use the updated ICD-9-CM codes (as explained above) in order to classify each case into a LTC-DRG for payment purposes. The change from GROUPER 1 to GROUPER 2 (on October 1) would coincide with the annual update to the LTC-DRGs and relative weights under § 412.517, which would be effective for that entire Federal fiscal year, just as it has been since we implemented the LTCH PPS. The change from GROUPER 2 to GROUPER 3 (on April 1) would only update the CMS DRG structure by mapping the new code to an existing DRG, and would not result in the addition or deletion of any DRGs nor would it result in a change to the LTC-DRG relative weights. If no new diagnoses or procedure codes are added on April 1, however, there would be no need to update the GROUPER and we would continue to use 2 GROUPERS during the course of a LTCH PPS rate year as is currently done. But even with an April 1 update to the ICD-9-CM codes (and consequently the GROUPER software), only two sets of LTC-DRG relative weights will be used during a LTCH PPS rate year (July 1 through June 30), one set from July 1 though September 30 and a second set from October 1 through June 30, just as we have done since we moved the annual LTCH PPS update to July 1 (effective beginning July 1, 2003).

As we discussed in the FY 2005 IPPS final rule (69 FR 48956), in implementing section 503(a) of the MMA, there will only be an April 1 update if new technology codes are requested and approved. In that same IPPS final rule, we specified that there are no new codes for April 1, 2005 implementation. However, if new codes had been approved for April 1, 2005 implementation, the subsequent changes to the DRG structure (that is, the mapping of the new codes to existing DRGs), but not to FY 2005 LTC-DRG relative weights and, consequently, LTCH PPS payment rates, would have resulted in the use of a third GROUPER during the 2005 LTCH PPS rate year. However, as noted above, since there are no new codes for April 1, 2005 implementation, and the next update to the ICD-9-CM coding system will not occur until October 1, 2005, only two GROUPER software programs will be used during the 2005 LTCH PPS rate year (July 1, 2004 through June 30, 2005): one GROUPER from July 1, 2004 through September 30, 2004, and a second GROUPER from October 1, 2004 through June 30, 2005.

Discharges beginning on or after October 1, 2004 and before October 1, 2005 (Federal FY 2005) are using Version 22.0 of the GROUPER software for both the IPPS and the LTCH PPS. Consistent with our current practice, any changes to the DRGs or relative weights will be made at the beginning of the Federal fiscal year (October 1). We will notify LTCHs of any revised LTC-DRG relative weights based on the final DRGs and the applicable GROUPER version for the IPPS that will be effective October 1, 2005. The proposed changes to the LTC-DRGs and relative weights based on the proposed Version 23.0 GROUPER, which would be effective beginning with discharges occurring on or after October 1, 2005, are discussed in the May 4, 2005 IPPS proposed rule. Furthermore, as discussed above, we would notify LTCHs of any revisions to the CMS GROUPER that would be implemented April 1, 2006.

E. ICD-9-CM Coding System

1. Uniform Hospital Discharge Data Set (UHDDS) Definitions

Because the assignment of a case to a particular LTC-DRG will help determine the amount that will be paid for the case, it is important that the coding is accurate. Classifications and terminology used in the LTCH PPS are consistent with the ICD-9-CM and the UHDDS, as recommended to the Secretary by the National Committee on Vital and Health Statistics (“Uniform Hospital Discharge Data: Minimum Data Set, National Center for Health Statistics, April 1980”) and as revised in 1984 by the Health Information Policy Council (HIPC) of the U.S. Department of Health and Human Services.

We point out that the ICD-9-CM coding terminology and the definitions of principal and other diagnoses of the UHDDS are consistent with the requirements of the HIPAA Administrative Simplification Act of 1996 (45 CFR part 162). Furthermore, the UHDDS has been used as a standard for the development of policies and programs related to hospital discharge statistics by both governmental and nongovernmental sectors for over 30 years. In addition, the following definitions (as described in the 1984 Revision of the UHDDS, approved by the Secretary of Health and Human Services for use starting January 1986) are requirements of the ICD-9-CM coding system, and have been used as a standard for the development of the CMS-DRGs:

• Diagnoses are defined to include all diagnoses that affect the current hospital stay.

• Principal diagnosis is defined as the condition established after study to be chiefly responsible for occasioning the admission of the patient to the hospital for care.

• Other diagnoses (also called secondary diagnoses or additional diagnoses) are defined as all conditions that coexist at the time of admission, that develop subsequently, or that affect the treatment received or the length of stay or both. Diagnoses that relate to an earlier episode of care that have no bearing on the current hospital stay are excluded.

• All procedures performed will be reported. This includes those that are surgical in nature, carry a procedural risk, carry an anesthetic risk, or require specialized training.

We provide LTCHs with a 60-day window after the date of the notice of the initial LTC-DRG assignment to request review of that assignment. Additional information may be provided by the LTCH to the fiscal intermediary as part of that review.

2. Maintenance of the ICD-9-CM Coding System

The ICD-9-CM Coordination and Maintenance (C&M) Committee is a Federal interdepartmental committee, co-chaired by the National Center for Health Statistics (NCHS) and CMS, that is, charged with maintaining and updating the ICD-9-CM system. The C&M Committee is jointly responsible for approving coding changes, and developing errata, addenda, and other modifications to the ICD-9-CM to reflect newly developed procedures and technologies and newly identified diseases. The C&M Committee is also responsible for promoting the use of Federal and non-Federal educational programs and other communication techniques with a view toward standardizing coding applications and

upgrading the quality of the classification system.

The NCHS has lead responsibility for the ICD-9-CM diagnosis codes included in the Tabular List and Alphabetic Index for Diseases, while CMS has lead responsibility for the ICD-9-CM procedure codes included in the Tabular List and Alphabetic Index for Procedures.

The C&M Committee encourages participation by health-related organizations in the above process and holds public meetings for discussion of educational issues and proposed coding changes twice a year at the CMS Central Office located in Baltimore, Maryland. The agenda and dates of the meetings can be accessed on our Web site at:

http://www.cms.gov/paymentsystems/icd9.

As discussed above, section 503(a) of the MMA includes a requirement for updating ICD-9-CM codes twice a year instead of the current process of annual updates on October 1 of each year. This requirement will improve the recognition of new technologies under the IPPS by accounting for them in the GROUPER software at an earlier date. Because this new statutory requirement could have a significant impact on health care providers, coding staff, publishers, system maintainers, and software systems, among others, we solicited comments on our proposed provisions to implement this requirement as part of the FY 2005 IPPS proposed rule (69 FR 28220). We responded to comments and published our new policy regarding the updating of ICD-9-CM codes in the FY 2005 IPPS final rule (69 FR 48954-48957).

While this new requirement states that the Secretary shall not adjust the payment of the DRG classification for any codes created for use on April 1, DRG software and other systems will have to be updated in order to recognize and accept the new codes. Because, as discussed above, the LTC-DRGs are the same DRGs used under the IPPS, this means that the Medicare GROUPER software program used under both the IPPS and the LTCH PPS would need to be revised to reflect ICD-9-CM codes, if any coding changes were implemented on April 1. Furthermore, although the CMS GROUPER software used under both the IPPS and the LTCH PPS would need to be revised to accommodate the new codes effective April 1, there would be no additions or deletions of DRGs nor would the relative weights used under the IPPS and the LTCH PPS, respectively, be changed until the annual update October 1 (to the extent that those changes are warranted), just as they have been historically updated. As the LTCH PPS is based on the IPPS, we will adopt the same approach used under the IPPS for potential April 1 ICD-9-CM coding changes. That is, we will assign any new diagnosis codes or procedure codes to the same DRG in which its predecessor code was assigned, so there will be no DRG impact in terms of potential DRG assignment until the following October 1. We will maintain the current method of publicizing any new code changes, as noted below. Current addendum and code title information is published on the CMS Web page at:

http://www.cms.hhs.gov/paymentsystem/icd9.

Summary tables showing new, revised, and deleted code titles are also posted on the following CMS Web page:

http://www.cms.hhs.gov/medlearn/icd9code.asp.

Information on ICD-9-CM diagnosis codes can be found at

http://www.cdc.gov/nchs/icd9.htm.

Information on new, revised, and deleted ICD-9-CM codes is also available in the AHA publication Coding Clinic for ICD-9-CM. AHA also distributes information to publishers and software vendors. We also send copies of all ICD-9-CM coding changes to our contractors for use in updating their systems and providing education to providers.

If the April 1 changes are made to ICD-9-CM diagnosis or procedure codes, LTCHs will be required to obtain the new codes, coding books, or encoder updates, and make other system changes in order to capture and report the new codes. We indicated in the IPPS final rule that we were aware of the additional burden this will have on health care providers.

It should be noted that any new codes created for April 1 implementation will be limited to those diagnosis and procedure code revisions primarily needed to describe new technologies and medical services. However, we reiterate that the process for discussing updates to the ICD-9-CM has been an open process through the ICD-9-CM C&M Committee since 1995. Any requestor who makes a clear and convincing case for the need to update ICD-9-CM codes for purposes of the IPPS new technology add-on payment process through an April 1 update will be given the opportunity to present the merits of their proposed new code.

To reiterate, at the October 2004 C&M Committee meeting, no new codes were proposed for update on April 1, 2005. While no DRG additions or deletions or changes to relative weights will occur prior to the usual October 1 update, in the event any new codes had been created to describe new technologies and medical services through an April 1, 2005 update, under our policy, LTCH systems would have been expected to recognize and report those new codes through the channels as described above in this section.

As discussed above, the ICD-9-CM coding changes that have been adopted by the C&M Committee could become effective either at the beginning of each Federal fiscal year, October 1, or, in the case of codes created to capture new technology, April 1 of each year. Coders will be expected to use the most current updated ICD-9-CM codes, as updated. Because we do not publish a mid-year IPPS rule, the currently accepted avenues of information dissemination will be used to inform all ICD-9-CM code users of any changes to the coding system. These avenues were described above in section IV.D. of this preamble and have been discussed at length in the FY 2005 IPPS final rule (69 FR 48956). Coders in LTCHs using the updated ICD-9-CM coding system will be on the same schedule as the rest of the health care industry. In the past, the updated ICD-9-CM was not available for use until October 1 of each year.

Therefore, because the LTCH PPS and the IPPS uses the identical GROUPER software, the LTCH PPS will be directly affected by the statutory mandates directed at the IPPS, published in section 503(a) of the MMA. (We note that there is no statutory requirement in the LTCH PPS to make additional payments for new technology.) The practical effect of this provision is that the GROUPER software must accept new ICD-9 codes reflecting the incorporation of new technologies into inpatient treatment at an acute care hospital prior to the scheduled annual update of the GROUPER software. While DRG assignments would not change from October 1 through September 30, it is possible that there could be additional new ICD-9-CM diagnosis and procedure codes during that time, which would be assigned to predecessor DRGs (as described above). For both the IPPS and LTCH coders, it is possible that there will be ICD-9-CM codes in effect from October 1 through March 31, with additional ICD-9-CM codes in effect from April 1 through September 30. Presently, as there were no coding changes suggested for an April 1, 2005 update, the ICD-9-CM coding set implemented on October 1, 2004 will continue through September 30, 2005 (FY 2005).

Of particular note to LTCHs are the invalid diagnosis codes (Table 6C) and the invalid procedure codes (Table 6D) located in the annual proposed and final rules for the IPPS. Claims with invalid

codes are not processed by the Medicare claims processing system.

3. Coding Rules and Use of ICD-9-CM Codes in LTCHs

We emphasize the need for proper coding by LTCHs. Inappropriate coding of cases can adversely affect the uniformity of cases in each LTC-DRG and produce inappropriate weighting factors at recalibration. We continue to urge LTCHs to focus on improved coding practices. Because of concerns raised by LTCHs concerning correct coding, we have asked the American Hospital Association (AHA) to provide additional clarification or instruction on proper coding in the LTCH setting. The AHA will provide this instruction via their established process of addressing questions through their publication “Coding Clinic for ICD-9-CM.” Written questions or requests for clarification may be addressed to the Central Office on ICD-9-CM, American Hospital Association, One North Franklin, Chicago, IL 60606. A form for the question(s) is available to be downloaded and mailed on AHA's Web site at:

http://www.ahacentraloffice.org.

In addition, current coding guidelines are available at the National Center for Health Statistics (NCHS) Web site:

http://www.cdc.gov/nchs.icd9.htm.

In conjunction with the cooperating parties (AHA, the American Health Information Management Association (AHIMA), and NCHS), we reviewed actual medical records and are concerned about the quality of the documentation under the LTCH PPS, as was the case at the beginning of the IPPS. We fully believe that, with experience, the quality of the documentation and coding will improve, just as it did for the IPPS. As noted above, the cooperating parties have plans to assist their members with improvement in documentation and coding issues for the LTCHs through specific questions and coding guidelines. The importance of good documentation is emphasized in the revised ICD-9-CM Official Guidelines for Coding and Reporting: “A joint effort between the attending physician and coder is essential to achieve complete and accurate documentation, code assignment, and reporting of diagnoses and procedures. The importance of consistent, complete documentation in the medical record cannot be overemphasized. Without such documentation, the application of all coding guidelines is a difficult, if not impossible, task.” (Coding Clinic for ICD-9-CM, Fourth Quarter 2002, page 115.)

To improve medical record documentation, LTCHs should be aware that if the patient is being admitted for continuation of treatment of an acute or chronic condition, guidelines at Section I.B.10 of the Coding Clinic for ICD-9-CM, Fourth Quarter 2002 (page 129) are applicable concerning selection of principal diagnosis. To clarify coding advice issued in the August 30, 2002 final rule (67 FR 55979), we would like to point out that at Guideline I.B.12, Late Effects, a late effect is considered to be the residual effect (condition produced) after the acute phase of an illness or injury has terminated (Coding Clinic for ICD-9-CM, Fourth Quarter 2002, page 129). Regarding whether a LTCH should report the ICD-9-CM code(s) for an unresolved acute condition instead of the code(s) for late effect of rehabilitation, we emphasize that each case must be evaluated on its unique circumstances and coded appropriately. Depending on the documentation in the medical record, either a code reflecting the acute condition or rehabilitation could be appropriate in a LTCH.

Since implementation of the LTCH PPS, our Medicare fiscal intermediaries have been conducting training and providing assistance to LTCHs in correct coding. We have also issued manuals containing procedures as well as coding instructions to LTCHs and fiscal intermediaries. We will continue to conduct such training and provide guidance on an as-needed basis. We also refer readers to the detailed discussion on correct coding practices in the August 30, 2002 LTCH PPS final rule (67 FR 55979). Additional coding instructions and examples will be published in Coding Clinic for ICD-9-CM.

F. Method for Updating the LTC-DRG Relative Weights

As discussed in the May 7, 2004 LTCH PPS final rule (68 FR 25681), under the LTCH PPS, each LTCH will receive a payment that represents an appropriate amount for the efficient delivery of care to Medicare patients. The system must be able to account adequately for each LTCH's case-mix in order to ensure both fair distribution of Medicare payments and access to adequate care for those Medicare patients whose care is more costly. Therefore, in accordance with § 412.523(c), we adjust the standard Federal PPS rate by the LTC-DRG relative weights in determining payment to LTCHs for each case.

Under this payment system, relative weights for each LTC-DRG are a primary element used to account for the variations in cost per discharge and resource utilization among the payment groups (§ 412.515). To ensure that Medicare patients who are classified to each LTC-DRG have access to an appropriate level of services and to encourage efficiency, we calculate a relative weight for each LTC-DRG that represents the resources needed by an average inpatient LTCH case in that LTC-DRG. For example, cases in a LTC-DRG with a relative weight of 2 will, on average, cost twice as much as cases in a LTC-DRG with a weight of 1.

As we discussed in the FY 2005 IPPS final rule (69 FR 48982), the LTC-DRG relative weights effective under the LTCH PPS for Federal FY 2005 were calculated using the March 2004 update of FY 2003 MedPAR data and Version 22.0 of the CMS GROUPER software. We use total days and total charges in the calculation of the LTC-DRG relative weights.

By nature, LTCHs often specialize in certain areas, such as ventilator-dependent patients and rehabilitation and wound care. Some case types (DRGs) may be treated, to a large extent, in hospitals that have, from a perspective of charges, relatively high (or low) charges. Distribution of cases with relatively high (or low) charges in specific LTC-DRGs has the potential to inappropriately distort the measure of average charges. To account for the fact that cases may not be randomly distributed across LTCHs, we use a hospital-specific relative value method to calculate relative weights. We believe this method removes this hospital-specific source of bias in measuring average charges. Specifically, we reduce the impact of the variation in charges across providers on any particular LTC-DRG relative weight by converting each LTCH's charge for a case to a relative value based on that LTCH's average charge. (See the FY 2005 IPPS final rule (69 FR 48984) for further information on the hospital-specific relative value methodology.)

In order to account for LTC-DRGs with low volume (that is, with fewer than 25 LTCH cases), we grouped those low volume LTC-DRGs into one of five categories (quintiles) based on average charges, for the purposes of determining relative weights. For FY 2005 based on the FY 2003 MedPAR data, we identified 172 LTC-DRGs that contained between 1 and 24 cases. This list of low volume LTC-DRGs was then divided into one of the five low volume quintiles, each containing a minimum of 34 LTC-DRGs (172/5 = 34 with 2 LTC-DRG as a remainder). Each of the low volume LTC-DRGs grouped to a specific quintile received the same relative

weight and average length of stay using the formula applied to the regular LTC-DRGs (25 or more cases), as described below. (See the FY 2005 IPPS final rule (69 FR 48988-48989) for further explanation of the development and composition of each of the five low volume quintiles for FY 2005.)

After grouping the cases in the appropriate LTC-DRG, we calculated the relative weights by first removing statistical outliers and cases with a length of stay of 7 days or less. Next, we adjusted the number of cases in each LTC-DRG for the effect of short-stay outlier cases under § 412.529. The short-stay adjusted discharges and corresponding charges were used to calculate “relative adjusted weights” in each LTC-DRG using the hospital-specific relative value method described above. (See the FY 2005 IPPS final rule (69 FR 48989) for further details on the steps for calculating the LTC-DRG relative weights.)

We also adjusted the LTC-DRG relative weights to account for nonmonotonically increasing relative weights. That is, we made an adjustment if cases classified to the LTC-DRG “with comorbidities (CCs)” of a “with CC”/“without CC” pair had a lower average charge than the corresponding LTC-DRG “without CCs” by assigning the same weight to both LTC-DRGs in the “with CC”/“without CC” pair. (See FY 2005 IPPS final rule, 69 FR 48991-48992.) In addition, of the 520 LTC-DRGs in the LTCH PPS for FY 2005, based on the FY 2003 MedPAR data, we identified 171 LTC-DRGs for which there were no LTCH cases in the database. That is, no patients who would have been classified to those DRGs were treated in LTCHs during FY 2003 and, therefore, no charge data were reported for those DRGs. Thus, in the process of determining the relative weights of LTC-DRGs, we were unable to determine weights for these 171 LTC-DRGs using the method described above. However, since patients with a number of the diagnoses under these LTC-DRGs may be treated at LTCHs beginning in FY 2005, we assigned relative weights to each of the 171 “no volume” LTC-DRGs based on clinical similarity and relative costliness to one of the remaining 349 (520 − 171 = 349) LTC-DRGs for which we were able to determine relative weights, based on the FY 2003 claims data. (A list of the current no-volume LTC-DRGs and further explanation of their FY 2005 relative weight assignment can be found in the FY 2005 IPPS final rule (69 FR 48992-48999).)

Furthermore, for FY 2005, we established LTC-DRG relative weights of 0.0000 for heart, kidney, liver, lung, and simultaneous pancreas/kidney transplants (LTC-DRGs 103, 302, 480, 495, 512 and 513, respectively) because Medicare will only cover these procedures if they are performed at a hospital that has been certified for the specific procedures by Medicare and presently no LTCH has been so certified. If in the future, however, a LTCH applies for certification as a Medicare-approved transplant center, we believe that the application and approval procedure would allow sufficient time for us to propose appropriate weights for the LTC-DRGs affected. At the present time, though, we included these six transplant LTC-DRGs in the GROUPER program for administrative purposes. As the LTCH PPS uses the same GROUPER program for LTCHs as is used under the IPPS, removing these DRGs would be administratively burdensome.

As we stated in the FY 2005 IPPS final rule, we will continue to use the same LTC-DRGs and relative weights for FY 2005 until October 1, 2005. Accordingly, Table 3 in the Addendum to this final rule lists the LTC-DRGs and their respective relative weights and arithmetic mean length of stay that we will continue to use for the period of July 1, 2005 through September 30, 2005. (This table is the same as Table 11 of the Addendum to the FY 2005 IPPS final rule (69 FR 49738-49754), including the revisions to Table 11 published in the October 7, 2004 correction notice (69 FR 60267-60271)). As we noted above, the next proposed update to the ICD-9-CM coding system is presented in the May 4, 2005 FY 2006 IPPS proposed rule (since there were no April 1 updates to the ICD-9-CM coding system). The final update to the ICD-9-CM coding system that will be effective beginning October 1, 2005, and the final DRGs and GROUPER for FY 2006 that will be used for the IPPS and the LTCH PPS, effective October 1, 2005, will be presented in the IPPS FY 2006 proposed and final rule in the

Federal Register

. The final LTC-DRG relative weights that will be established in the FY 2006 IPPS final rule will be used in determining payments for discharges occurring between October 1, 2005 and September 30, 2006 (We note that if there is an April 1, 2006 update to the ICD-9-CM coding system, there will be a change in the GROUPER software effective April 1, 2006; however, there would be no change to the LTC-DRG relative weights, as discussed above).

V. Changes to the LTCH PPS Rates and Changes in Policy for the 2006 LTCH PPS Rate Year

A. Overview of the Development of the Payment Rates

The LTCH PPS was effective for a LTCH's first cost reporting period beginning on or after October 1, 2002. Effective with that cost reporting period, LTCHs are paid, during a 5-year transition period, on the basis of an increasing proportion of the LTCH PPS Federal rate and a decreasing proportion of a hospital's payment under reasonable cost-based payment system, unless the hospital makes a one-time election to receive payment based on 100 percent of the Federal rate (see § 412.533). New LTCHs (as defined at § 412.23(e)(4)) are paid based on 100 percent of the Federal rate, with no phase-in transition payments.

The basic methodology for determining LTCH PPS Federal prospective payment rates is set forth in the regulations at § 412.515 through § 412.532. Below we discuss the factors that will be used to update the LTCH PPS standard Federal rate for the 2006 LTCH PPS rate year that will be effective for LTCHs discharges occurring on or after July 1, 2005 through June 30, 2006. When we implemented the LTCH PPS in the August 30, 2002 LTCH PPS final rule (67 FR 56029), we computed the LTCH PPS standard Federal payment rate for FY 2003 by updating the best available (FY 1998 or FY 1999) Medicare inpatient operating and capital costs per case data, using the excluded hospital market basket.

Section 123(a)(1) of the BBRA requires that the PPS developed for LTCHs be budget neutral. Therefore, in calculating the standard Federal rate under § 412.523(d)(2), we set total estimated LTCH PPS payments equal to estimated payments that would have been made under the reasonable cost-based payment methodology had the PPS for LTCHs not been implemented. Section 307(a) of the BIPA specified that the increases to the hospital-specific target amounts and cap on the target amounts for LTCHs for FY 2002 provided for by section 307(a)(1) of BIPA shall not be taken into account in the development and implementation of the LTCH PPS.

Furthermore, as specified at § 412.523(d)(1), the standard Federal rate is reduced by an adjustment factor to account for the estimated proportion of outlier payments under the LTCH PPS to total estimated LTCH PPS payments (8 percent). For further details on the development of the FY 2003 standard Federal rate, see the August 30,

2002 LTCH PPS final rule (67 FR 56027), for the 2004 LTCH PPS rate year rate, see the June 6, 2003 final rule (68 FR 34122-34190), and for the 2005 LTCH PPS rate year rate, see the May 7, 2004 LTCH PPS final rule (69 FR 25674-25748). Under the existing regulations at § 412.523(c)(3)(ii), we update the standard Federal rate annually to adjust for the most recent estimate of the projected increases in prices for LTCH inpatient hospital services.

B. Update to the Standard Federal Rate for the 2006 LTCH PPS Rate Year

As established in the May 7, 2004 LTCH PPS final rule (69 FR 25683), based on the most recent estimate of the excluded hospital with capital market basket, adjusted to account for the change in the LTCH PPS rate year update cycle, the current LTCH PPS standard Federal rate which is effective from July 1, 2004 through June 30, 2005 (the 2005 LTCH PPS rate year), is $36,833.69.

In the discussion that follows, we explain how we developed the standard Federal rate for the 2006 LTCH PPS rate year. The standard Federal rate for the 2006 LTCH PPS rate year will be calculated based on the update factor of 1.034. Thus, the standard Federal rate for the 2006 LTCH PPS rate year will increase 3.4 percent compared to the 2005 LTCH PPS rate year standard Federal rate due to the final update to the LTCH PPS Federal rate established in this final rule.

1. Standard Federal Rate Update

Under § 412.523, the annual update to the LTCH PPS standard Federal rate must be equal to the percentage change in the excluded hospital with capital market basket. As we discussed in the August 30, 2002 LTCH PPS final rule (67 FR 56087), in the future we may propose to develop a framework to update payments to LTCHs that would account for other appropriate factors that affect the efficient delivery of services and care provided to Medicare patients. As we discussed in the February 3, 2005 proposed rule (70 FR 5735), we have not yet collected sufficient data to allow for the analysis and development of an update framework under the LTCH PPS because the LTCH PPS has only been implemented for slightly more than 2 years (that is, for cost reporting periods beginning on or after October 1, 2002). Therefore, we did not address an update framework for the 2006 LTCH PPS rate year in that same proposed rule or in this final rule. However, we note that a conceptual basis for the proposal of developing an update framework in the future can be found in Appendix B of the August 30, 2002 LTCH PPS final rule (67 FR 56086).

a. Description of the Market Basket for LTCHs for the 2006 LTCH PPS Rate Year

A market basket has historically been used in the Medicare program to account for price increases of the services furnished by providers. The market basket used for the LTCH PPS includes both operating and capital-related costs of LTCHs because the LTCH PPS uses a single payment rate for both operating and capital-related costs. The development of the LTCH PPS standard Federal rate is discussed in further detail in the August 30, 2002 LTCH PPS final rule (67 FR 56027).

Under the reasonable cost-based payment system, the excluded hospital market basket was used to update the hospital-specific limits on payment for operating costs of LTCHs. Currently, the excluded hospital market basket is based on operating costs from cost report data from FY 1997 and includes data from Medicare-participating long-term care, rehabilitation, psychiatric, cancer, and children's hospitals. Since the costs of LTCH are included in the excluded hospital market basket, this market basket index, in part, also reflects the costs of LTCHs. However, in order to capture the total costs (operating and capital-related) of LTCHs, we added a capital component to the excluded hospital market basket for use under the LTCH PPS. We refer to this index as the excluded hospital with capital market basket.

As we discussed in the August 30, 2002 LTCH PPS final rule (67 FR 56016 and 56086), beginning with the implementation of the LTCH PPS in FY 2003, the excluded hospital with capital market basket, based on FY 1992 Medicare cost report data, has been used for updating payments to LTCHs. In the May 7, 2004 LTCH PPS final rule (69 FR 25683), we revised and rebased the excluded hospital with capital market basket, using more recent data, that is, using FY 1997 base year data beginning with the 2004 LTCH PPS rate year. (For further details on the development of the FY 1997-based LTCH PPS market basket, see the May 7, 2004 LTCH PPS final rule (69 FR 25683)).

In the August 30, 2002 LTCH PPS final rule (67 FR 56016 and 56085-56086), we discussed why we believe the excluded hospital with capital market basket provides a reasonable measure of the price changes facing LTCHs. In the May 7, 2004 LTCH PPS final rule (69 FR 25682-25683), we discussed our research into the feasibility of developing a market basket specific to LTCH services. However, based on this research, we did not develop a market basket specific to LTCH services. In that same final rule, we explained why we continue to believe that the excluded hospital with capital market basket is the appropriate market basket for the LTCH PPS.

As we explained in the February 3, 2005 proposed rule (70 FR 5737), for the reasons discussed in those final rules (August 30, 2002 and May 7, 2004), we continue to believe that an excluded hospital with capital market basket adequately reflects the price changes facing LTCHs. We considered whether we would propose the use of a new “Rehabilitation, Psychiatric and Long-Term Care (RPL) market basket” instead of the existing excluded hospital with capital market basket for IRFs, IPFs, and LTCHs. The RPL market basket would have been based on the operating and capital costs of IRFs, IPFs, and LTCHs, which are almost all paid under a prospective payment systems. (We note that not all IPFs have begun to be paid under the IPF PPS yet because it was implemented for cost reporting periods beginning on or after January 1, 2005.) Because the development of the RPL market basket was not completed in time for us to consider proposing its use for the proposed 2006 LTCH PPS rate year update, we were unable to discuss it in the February 3, 2005 LTCH PPS proposed rule, and, therefore, we proposed to continue to use the excluded hospital with capital market basket. Thus, in that same proposed rule (70 FR 5737), we did not propose to revise the market basket used under the LTCH PPS because, as we explain above, we believe that the excluded hospital with capital market basket was the most appropriate market basket available at that time to use in determining the proposed update to the Federal rate for the 2006 LTCH PPS rate year.

Therefore, although we are considering the development of the RPL market basket because we did not propose to use the RPL market basket under the LTCH PPS for the 2006 LTCH PPS rate year, we are not discussing its use under the LTCH PPS for the 2006 rate year in this final rule. We will consider proposing the use of the RPL market basket under the LTCH PPS in the future and will analyze its applicability for the LTCH PPS. We intend to present our analyses in the 2007 LTCH PPS rate year proposed rule. Any future revisions to the LTCH PPS market basket will be proposed and subject to public comment.

We received no comments on our continued use of the FY 1997-based excluded hospital with capital market basket under the LTCH PPS. Accordingly, in this final rule, we will continue to use the FY 1997-based excluded hospital with capital market basket as the LTCH PPS market basket for determining the update to the LTCH PPS standard Federal rate for the 2006 LTCH PPS rate year. Even though we did not receive any comments on our continued use of the FY 1997-based excluded hospital with capital market basket under the LTCH PPS, in future proposed rules, we will continue to solicit comments about issues particular to LTCHs that should be considered in relation to the appropriate market basket to use under the LTCH PPS and to encourage suggestions for additional data sources that may be available.

b. LTCH Market Basket Increase for the 2006 LTCH Rate Year

As we discussed in the May 7, 2004 LTCH PPS final rule (69 FR 25683), for the update to the 2005 LTCH PPS rate year, we calculated the estimated increase between the 2004 LTCH PPS rate year (July 1, 2003 through June 30, 2004) and the 2005 LTCH PPS rate year (July 1, 2004 through June 30, 2005) based on Global Insight's forecast of the revised and rebased FY 1997-based excluded hospital with capital market basket using data available through the fourth quarter of 2003. The market basket for the 2005 LTCH PPS rate year was 3.1 percent (69 FR 25683).

Consistent with our historical practice of estimating market basket increases based on Global Insight's forecast of the FY 1997-based excluded hospital with capital market basket, in the February 3, 2005 proposed rule (70 FR 5735), we proposed a 3.1 percent update to the Federal rate based on the most recent available data at that time (that is, data through the third quarter of 2004). Global Insights, Inc. is a nationally recognized economic and financial forecasting firm that contracts with CMS to forecast components of the market basket. In this final rule, consistent with our historical practice of estimating market basket increases based on Global Insight's forecast of the FY 1997-based excluded hospital with capital market basket, using more recent data through the first quarter of 2005, we are using a 3.4 percent update to the Federal rate for the 2006 LTCH PPS rate year. In accordance with § 412.523, this update will represent the most recent estimate of the increase in the excluded hospital with capital market basket for the 2006 LTCH PPS rate year.

2. Standard Federal Rate for the 2006 LTCH PPS Rate Year

In the May 7, 2004 LTCH PPS final rule (69 FR 25683), we established a standard Federal rate of $36,833.69 for the 2005 LTCH PPS rate year that was based on the best available data and policies established in that final rule. In the February 3, 2005 proposed rule (70 FR 5736), we proposed a standard Federal rate of $37,975.53 for the 2006 LTCH PPS rate year based on a proposed market basket update of 3.1 percent. Since the proposed standard Federal rate for the 2006 LTCH PPS rate year had already been adjusted for differences in case-mix, wages, cost-of-living, and high-cost outlier payments, we did not propose to make any additional adjustments in the standard Federal rate for those factors.

In this final rule, in accordance with § 412.523, we are establishing a standard Federal rate of $38,086.04 based on the most recent estimate of the LTCH PPS market basket of 3.4 percent. Since the standard Federal rate for the 2006 LTCH PPS rate year has already been adjusted for differences in case-mix, wages, cost-of-living, and high-cost outlier payments, we did not make any additional adjustments in the standard Federal rate for these factors.

C. Calculation of LTCH Prospective Payments for the 2006 LTCH PPS Rate Year

The basic methodology for determining prospective payment rates for LTCH inpatient operating and capital-related costs is set forth in § 412.515 through § 412.532. In accordance with § 412.515, we assign appropriate weighting factors to each LTC-DRG to reflect the estimated relative cost of hospital resources used for discharges within that group as compared to discharges classified within other groups. The amount of the prospective payment is based on the standard Federal rate, established under § 412.523, and adjusted for the LTC-DRG relative weights, differences in area wage levels, cost-of-living in Alaska and Hawaii, high-cost outliers, and other special payment provisions (short-stay outliers under § 412.529 and interrupted stays under § 412.531).

In accordance with § 412.533, during the 5-year transition period, payment is based on the applicable transition blend percentage of the adjusted Federal rate and the reasonable cost-based payment rate unless the LTCH makes a one-time election to receive payment based on 100 percent of the Federal rate. A LTCH defined as “new” under § 412.23(e)(4) is paid based on 100 percent of the Federal rate with no blended transition payments (§ 412.533(d)). As discussed in the August 30, 2002 final rule (67 FR 56038), and in accordance with § 412.533(a), the applicable transition blends are as follows:

Cost reporting periods beginning on or after

Federal rate

percentage

Reasonable cost-based payment rate percentage

October 1, 2002

20

80

October 1, 2003

40

60

October 1, 2004

60

40

October 1, 2005

80

20

October 1, 2006

100

0

Accordingly, for cost reporting periods beginning during FY 2005 (that is, on or after October 1, 2004, and before September 30, 2005), blended payments under the transition methodology are based on 40 percent of the LTCH's reasonable cost-based payment rate and 60 percent of the adjusted LTCH PPS Federal rate. For cost reporting periods that begin during FY 2006 (that is, on or after October 1, 2005 and before September 30, 2006), blended payments under the transition methodology will be based on 20 percent of the LTCH's reasonable cost-based payment rate and 80 percent of the adjusted LTCH PPS Federal rate.

1. Adjustment for Area Wage Levels

a. Background

Under the authority of section 307(b) of the BBA, we established an adjustment to the LTCH PPS Federal rate to account for differences in LTCH area wage levels at § 412.525(c). The labor-related share of the LTCH PPS Federal rate, estimated by the excluded

hospital with capital market basket, is adjusted to account for geographic differences in area wage levels by applying the applicable LTCH PPS wage index. The applicable LTCH PPS wage index is computed using wage data from inpatient acute care hospitals without regard to reclassification under section 1886(d)(8) or section 1886(d)(10) of the Act. Furthermore, as we discussed in the August 30, 2002 LTCH PPS final rule (67 FR 56015), we established a 5-year transition to the full wage adjustment. The applicable wage index phase-in percentages are based on the start of a LTCH's cost reporting period as shown in the following table:

Cost reporting periods beginning on or after

Phase-in percentage of the full wage index

October 1, 2002

1/5

th (20)

October 1, 2003

2/5

ths (40)

October 1, 2004

3/5

ths (60)

October 1, 2005

4/5

ths (80)

October 1, 2006

5/5

ths (100)

For example, for cost reporting periods beginning on or after October 1, 2004 and on or before September 30, 2005 (FY 2005), the applicable LTCH wage index value is three-fifths of the applicable full LTCH PPS wage index value. Similarly, for cost reporting periods beginning on or after October 1, 2005 and on or before September 30, 2006 (FY 2006), the applicable LTCH wage index value will be four-fifths of the applicable full LTCH PPS wage index value. As we established in the August 30, 2002 LTCH PPS final rule (67 FR 56018), the applicable full LTCH PPS wage index value is calculated from acute-care hospital inpatient wage index data without taking into account geographic reclassification under sections 1886(d)(8) and (d)(10) of the Act.

In that same final rule (67 FR 56018), we stated that we would continue to reevaluate LTCH data as they become available and would propose to adjust the phase-in if subsequent data support a change. As we discussed in the February 3, 2005 proposed rule (70 FR 5736), because the LTCH PPS has only been recently implemented (slightly over 2 years) and because of the lag time in availability of cost report data, sufficient new data have not been generated that would enable us to conduct a comprehensive reevaluation of the appropriateness of adjusting the phase-in. However, as we discussed in that same proposed rule, we have reviewed the most recent cost report and claims data (FY 2001-FY 2003) available and did not find any evidence to support a change in the 5-year phase-in of the wage index. Specifically, our statistical analysis still does not show a significant relationship between LTCHs' costs and their geographic location. Accordingly, in the February 3, 2005 proposed rule, we did not propose a change in the phase-in of the adjustment for area wage levels under § 412.525(c).

Comment:

One commenter urges us to immediately implement 100 percent area wage index adjustment instead of the existing five-year phase-in of the wage index adjustment.

Response:

As noted above, we have reevaluated our wage-index phase-in policy and for the 2006 LTCH PPS rate year, we will not be implementing a full wage index adjustment for LTCHs. In the August 30, 2002 LTCH PPS final rule in which we described our determinations regarding the inclusion of various payment adjustments in the new LTCH PPS, we included a highly detailed description of the full range of data analyses and reasoning upon which we based our decision to include a 5-year phase-in to a full wage-index adjustment for the LTCH PPS (67 FR 55954 and 56015-56019). As we discussed in greater detail in that same final rule (67 FR 56018), “the limitations in the current data from LTCHs and we noted that although “* * * the statistical analysis did not show a significant relationship between LTCHs' costs and their geographic location, we believe that it is appropriate to include some adjustment for area wages.” We also explained that the conceptual reasons for having a wage index adjustment support transitioning to a wage adjustment despite the data problems and issues with the regression analyis. Accordingly, we adopted the suggestion of one of our commenters and established a 5-year phase-in for the area-wage adjustment with an assurance to revisit relevant data as it became available and that we would propose to adjust the phase-in if subsequent data support a change. As we discussed in the May 7, 2004 LTCH PPS final rule (69 FR 25684), because the LTCH PPS has only been recently implemented (slightly over 2 years) and because of the lag time in availability of cost report data, sufficient new data have not been generated that would enable us to conduct a comprehensive reevaluation of the appropriateness of adjusting the phase-in. In the August 30, 2002 LTCH PPS final rule (67 FR 56018), we stated that we would continue to reevaluate LTCH data as they become available and would propose to adjust the phase-in if subsequent data support a change. As we noted above and as we discussed in the February 3, proposed rule, upon review of the most recent data (FY 2001-FY 2003), we did not find any evidence to support a change in the 5-year phase-in of the wage index. Specifically, our statistical analysis still does not show a significant relationship between LTCHs' costs and their geographic location that would justify a full 100 percent implementation of an area wage index adjustment for LTCHs. Therefore, at this time, we are not adjusting the phase-in of the wage index adjustment in this final rule. The 5-year phase-in of the wage index adjustment will continue as shown in the table above (as we established in the August 30, 2002 final rule (67 FR 56015)).

Finally, we note that section 505 of the MMA established new section 1886(d)(13) of the Act, which requires that the Secretary establish a process to make adjustments to the hospital wage index based on commuting patterns of hospital employees. We believe that this requirement for an “out-commuting” or “out-migration” adjustment applies specifically to the acute care hospitals paid under the IPPS. Therefore, we did not propose such an adjustment under the LTCH PPS in the February 3, 2005 proposed rule, nor are we establishing such an adjustment under the LTCH PPS in this final rule.

b. Labor-Related Share

In the August 30, 2002 LTCH PPS final rule (67 FR 56016), we established a labor-related share of 72.885 percent based on the relative importance of the labor-related share of operating costs (wages and salaries, employee benefits, professional fees, postal services, and all other labor-intensive services) and capital costs of the excluded hospital with capital market basket based on FY 1992 data. In the March 7, 2003 proposed rule (68 FR 11249), in conjunction with our revision and rebasing of the excluded hospital with capital market basket from a FY 1992 to a FY 1997 base year, we discussed revising the labor-related share based on the relative importance of the labor-related share of operating and capital costs of the excluded hospital with capital market basket based on FY 1997 data. However, in the June 6, 2003 final rule (68 FR 34142), while we adopted the revised and rebased FY 1997-based LTCH PPS market basket as the LTCH PPS update factor for the 2004 LTCH PPS rate year, we decided not to update the labor-related share under the LTCH PPS pending further analysis of the current labor share methodology.

In the August 1, 2002 IPPS final rule, we did not update the IPPS or excluded hospital labor-related shares for FY 2003 (67 FR 50041), and we discussed our research into the appropriateness of this

policy. Specifically, we discussed the methods that we were reviewing for establishing the labor-related share and our intention to continue to explore all options for alternative data and a methodology for determining the labor-related share. We also stated that we would propose to update the IPPS and excluded hospital labor-related shares, if necessary, once our research is complete.

As we discussed in greater detail in the May 7, 2004 LTCH PPS final rule (69 FR 25685), the LTCH PPS was modeled after the IPPS for short-term, acute care hospitals. Specifically, the LTCH PPS uses the same patient classification system (that is, the DRGs) as the IPPS, and many of the case-level and facility-level adjustments explored or adopted for the LTCH PPS are payment adjustments under the IPPS (69 FR 25686). In fact, LTCHs are certified as acute care hospitals to participate as a hospital in the Medicare program, and in general, qualify for payment under the LTCH PPS instead of the IPPS solely because their Medicare inpatient average length of stay is greater than 25 days (69 FR 25686). In addition, prior to qualifying as a LTCH, hospitals generally are paid under the IPPS during the period in which they demonstrate that they have an average Medicare inpatient length of stay of greater than 25 days (69 FR 25686).

The primary reason that we did not update the LTCH PPS labor-related share for the 2004 and 2005 LTCH PPS rate years was the same reason that we explained for not updating the labor-related share under the IPPS for FY 2004 (see August 1, 2003; 68 FR 27226) and FY 2005 (see FY 2005 IPPS final rule (69 FR 49069)), which are equally applicable to the LTCH PPS. As we noted above, and as we explained in the May 7, 2004 LTCH PPS final rule (69 R 5686), we did not revise the labor-related share under the IPPS based on the revised and rebased FY 1997 hospital market basket and the excluded hospital market basket because of data and methodological concerns. We indicated that we would conduct further analysis to determine the most appropriate methodology and data for determining the labor-related share.

The IPPS labor-related share of 71.066 percent was established in the August 29, 1997 IPPS final rule (62 FR 45995), effective for IPPS discharges occurring on or after October 1, 1997 (FY 1998). This (71.066 percent) is the most recent estimate of “the proportion (as estimated by CMS from time to time) of Federal rates” under the IPPS adjusted to account for different area wage levels and labor-related costs (§ 412.62(k)). As also explained in the August 29, 1997 IPPS final rule (62 FR 45995), the labor-related portion of the IPPS operating standardized amounts is determined by summing the labor-related items of the revised 1992-based operating prospective payment hospital market basket (that is, wages and salaries, employee benefits, professional fees, business services, computer and data processing services, postage, and all other labor intensive services). This is the same methodology used to determine the operating portion of the current LTCH PPS labor-related share established in the August 30, 2002 LTCH PPS final rule (67 FR 56016), which is effective for LTCH PPS discharges occurring in cost reporting periods beginning on or after October 1, 2002 (FY 2003). (Note, as discussed in the August 30, 2002 LTCH PPS final rule (67 FR 56016), because the LTCH PPS standard Federal rate includes both operating and capital costs, the LTCH PPS labor-related share includes the labor-related share of capital costs as well as the labor-related share of operating costs.)

As noted above, the IPPS labor-related share of 71.066 percent became effective for IPPS discharges occurring on or after October 1, 1997. As we also discussed in the February 3, 2005 proposed rule (70 FR 5737), for purposes of payment under the IPPS, section 403 of MMA amended section 1886(d) of the Act to provide that for discharges occurring on or after October 1, 2004, the Secretary must employ 62 percent as the labor-related share under the IPPS, unless this “would result in lower payments to a hospital than would otherwise be made.” That is, beginning in FY 2005 under the IPPS, the labor-related share remains 71.066 percent for acute-care hospitals with a wage index greater than 1.0, while the labor-related share is equal to 62 percent for acute-care hospitals under the IPPS with a wage index less than or equal to 1.0 (69 FR 49070). This alternative labor-related share is only applicable to acute care hospitals paid under the IPPS and does not apply to LTCHs.

The current LTCH PPS labor share (72.885 percent) was developed using the same methodology used to develop the existing IPPS labor share (71.066). The statutory alternative (62 percent) is limited to acute care hospitals paid under the IPPS and does not apply to hospitals paid under the LTCH PPS. Since we had not yet completed the research of the labor-share methodology used to establish the current IPPS labor-related share estimated by CMS from time (71.066 percent) and the current LTCH PPS labor-related share (72.885 percent), we did not change the LTCH PPS labor-share for the 2005 LTCH PPS rate year.

Since we are continuing our research into updating the hospital labor-related share and because we have not implemented a change in the methodology for determining both the existing IPPS labor-related share estimated by CMS from time to time (as discussed in the FY 2005 IPPS final rule (69 FR 49069)) and the current LTCH PPS labor-related share, in the February 3, 2005 proposed rule, we did not propose to change the LTCH PPS labor-related share at this time. We received no comments on our proposal not to revise the labor-related share for the 2006 LTCH PPS rate year. Accordingly, under the broad authority in section 123 of the BBRA and section 307(b)(1) of BIPA, the labor-related share for the 2006 LTCH PPS rate year will remain at 72.885 percent. As is the case under the IPPS, once our research on the labor-related share is complete, any future revisions to the LTCH PPS labor-related share will be proposed and subject to public comment in a future rule.

c. Revision of LTCH PPS Geographic Classifications

As discussed in the August 30, 2002 LTCH PPS final rule, which implemented the LTCH PPS (67 FR 56015), in establishing an adjustment for area wage levels under § 412.525(c), the labor-related portion of a LTCH's Federal prospective payment is adjusted by using an appropriate wage index. As set forth in § 412.525(c), a LTCH's wage index is determined based on the location of the LTCH in an urban or rural area as defined in § 412.62(f)(1)(ii) and (f)(1)(iii), respectively. An urban area, under the LTCH PPS, is defined at § 412.62(f)(1)(ii)(A) and (B). In general, an urban area is defined as a Metropolitan Statistical Area (MSA) or New England County Metropolitan Area (NECMA) as defined by the Office of Management and Budget (OMB). (In addition, a few counties located outside of MSAs are considered urban as specified at § 412.62(f)(1)(ii)(B).) Under § 412.62(f)(1)(iii), a rural area is defined as any area outside of an urban area. The geographic classifications defined in § 412.62(f)(1)(ii) and (f)(1)(iii), respectively, were used under the IPPS from FYs 1984 through 2004 (§ 412.62(f) and § 412.63(b)), and have been used under the LTCH PPS since it was implemented for cost reporting periods beginning on or after October 1, 2002 (FY 2003).

Under the IPPS, the wage index is calculated and assigned to hospitals on the basis of the labor market area in

which the hospital is located or geographically reclassified to in accordance with sections 1886(d)(8) and (d)(10) of the Act. Under the LTCH PPS, the wage index is calculated using IPPS wage index data (as discussed below in section V.C.1.d of this preamble) on the basis of the labor market area in which the hospital is located, but without taking into account geographic reclassification under sections 1886(d)(8) and (d)(10) of the Act. The applicable LTCH wage index value is assigned to a LTCH on the basis of the labor market area in which the LTCH is geographically located.

The current LTCH PPS labor market areas are defined based on the definitions of MSAs, Primary MSAs (PMSAs), and NECMAs issued by the OMB (commonly referred to collectively as MSAs). These MSA definitions, which are discussed in greater detail below, are currently used under the LTCH PPS and other non-IPPS prospective payment systems (that is, the inpatient rehabilitation facility PPS (IRF PPS), the inpatient psychiatric facility PPS (IPF PPS), the home health agency PPS (HHA PPS), and the skilled nursing facility PPS (SNF PPS)). In the FY 2005 IPPS final rule (67 FR 49026-49034), revised labor market area definitions were adopted under the IPPS (§ 412.64(b)), which were effective October 1, 2004. These new standards, called Core-Based Statistical Areas (CBSAs), were announced by the OMB late in 2000 and are discussed in greater detail below.

1. Current LTCH PPS Labor Market Areas Based on MSAs

Below, we will provide a description of the current labor markets that have been used for area wage adjustments under the LTCH PPS since its implementation for cost reporting periods beginning on or after October 1, 2002. As we discussed in the February 3, 2005 proposed rule, previously, we have not described the labor market areas used under the LTCH PPS in detail, although we have published each area's wage index in tables, in the LTCH PPS final rules, each year and noted the use of the geographic area (MSA) in applying the wage index adjustment in LTCH PPS payment examples in the final regulation implementing the LTCH PPS (August 30, 2002, 67 FR 56037). The LTCH industry has also understood that the same labor market areas in use under the IPPS (from the time LTCH PPS was implemented, for cost reporting periods beginning on or after October 1, 2002) would be used under the LTCH PPS. As we also explained in the February 3, 2005 proposed rule, because OMB has adopted new statistical area definitions (as discussed in greater detail below) and we proposed to adopt new labor market area definitions based on these areas under the LTCH PPS (as discussed in greater detail below), we believe it is helpful to provide a more detailed description of the current LTCH PPS labor market areas, in order to better understand the change to the LTCH PPS labor market areas presented below in this final rule.

As mentioned earlier, since the implementation of the LTCH PPS in the August 30, 2002 LTCH PPS final rule, we have used labor market areas to further characterize urban and rural areas as determined under § 412.62(f)(1)(ii) and (iii). To this end, we have defined labor market areas under the LTCH PPS based on the definitions of MSAs, PMSAs, and NECMAs issued by the OMB, which is consistent with the IPPS approach (prior to the adoption of the new CBSA-based labor market areas under the IPPS rule beginning in FY 2005). Prior to modifying its statistical area definitions. The OMB also designates Consolidated MSAs (CMSAs). A CMSA is a metropolitan area with a population of one million or more, comprising two or more PMSAs (identified by their separate economic and social character). For purposes of the LTCH PPS wage index, we use the PMSAs rather than CMSAs because they allow a more precise breakdown of labor costs. If a metropolitan area is not designated as part of a PMSA, we use the applicable MSA.

These different designations use counties as the building blocks upon which they are based. Therefore, under the LTCH PPS, hospitals are assigned to either an MSA, PMSA, or NECMA based on whether the county in which the LTCH is located is part of that area. All of the counties in a State outside a designated MSA, PMSA, or NECMA are designated as rural. Specifically, for purposes of calculating the wage index, we currently combine all of the counties in a State outside a designated MSA, PMSA, or NECMA together to calculate the statewide rural wage index for each State. The labor market area definitions currently used under the LTCH PPS are the same as those used for acute care inpatient hospitals under the IPPS prior to FY 2005 (69 FR 49026).

2. Core-Based Statistical Areas

The OMB reviews its Metropolitan Area definitions preceding each decennial census. As discussed in the FY 2005 IPPS final rule (69 FR 49027), in the fall of 1998, the OMB chartered the Metropolitan Area Standards Review Committee to examine the Metropolitan Area standards and develop recommendations for possible changes to those standards. Three notices related to the review of the standards, providing an opportunity for public comment on the recommendations of the Committee, were published in the

Federal Register

on the following dates: December 21, 1998 (63 FR 70526); October 20, 1999 (64 FR 56628); and August 22, 2000 (65 FR 51060).

In the December 27, 2000

Federal Register

(65 FR 82228), OMB announced its new standards. In that notice, OMB defines a CBSA, beginning in 2003, as “a geographic entity associated with at least one core of 10,000 or more population, plus adjacent territory that has a high degree of social and economic integration with the core as measured by commuting ties. The standards designate and define two categories of CBSAs: MSAs and Micropolitan Statistical Areas.” (65 FR 82236)

According to OMB, MSAs are based on urbanized areas of 50,000 or more population, and Micropolitan Statistical Areas (referred to in this discussion as Micropolitan Areas) are based on urban clusters of at least 10,000 population, but less than 50,000 population. Counties that do not fall within CBSAs (either MSAs or Micropolitan Areas) are deemed “Outside CBSAs.” In the past, the OMB defined MSAs around areas with a minimum core population of 50,000, and smaller areas were “Outside MSAs.” On June 6, 2003, OMB announced the new CBSAs, comprised of MSAs and the new Micropolitan Areas based on Census 2000 data. (A copy of the announcement may be obtained at the following Internet address:

http://www.whitehouse.gov/omb/bulletins/fy04/b04-03.html.

) The new CBSA designations recognize 49 new MSAs and 565 new Micropolitan Areas, and extensively revise the composition of many of the existing MSAs. There are 1,090 counties in MSAs under the new CBSA designations (previously, there were 848 counties in MSAs). Of these 1,090 counties, 737 are in the same MSA as they were prior to the change in designations, 65 are in a different MSA, and 288 were not previously designated to any MSA. There are 674 counties in Micropolitan Areas. Of these, 41 were previously in an MSA, while 633 were not previously designated to an MSA. There are five counties that previously were designated to an MSA but are no longer designated to either an MSA or a new Micropolitan Area: Carter County,

KY; St. James Parish, LA; Kane County, UT; Culpepper County, VA; and King George County, VA. For a more detailed discussion of the conceptual basis of the new CBSAs, refer to the FY 2005 IPPS final rule (67 FR 49026-49034).

3. Revision of the LTCH PPS Labor Market Areas

In its June 6, 2003 announcement, OMB cautioned that these new definitions “should not be used to develop and implement Federal, State, and local nonstatistical programs and policies without full consideration of the effects of using these definitions for such purposes. These areas should not serve as a general-purpose geographic framework for nonstatistical activities, and they may or may not be suitable for use in program funding formulas.”

As discussed in the FY 2005 IPPS final rule (69 FR 49027), we have previously examined alternatives to the use of MSAs for the purpose of establishing labor market areas for Medicare wage indices in general. For purposes of the proposed changes to the LTCH PPS labor market areas, we examined the same alternatives to the use of MSAs as examined under the IPPS. In the May 27, 1994, IPPS proposed rule (59 FR 27724), we presented our latest research concerning possible future refinements to the labor market areas. Specifically, we discussed and solicited comment on the proposal by the Prospective Payment Assessment Commission (ProPAC), a predecessor organization to the MedPAC, for hospital-specific labor market areas based on each hospital's nearest neighbors, and our research and analysis on alternative labor market areas. Even though we found that none of the alternative labor market areas that we studied provided a distinct improvement over the use of MSAs, we presented an option using the MSA-based wage index, but generally giving a hospital's own wages a higher weight than under the current system. We also described for comment a State labor market option, under which hospitals would be allowed to design labor market areas within their own State boundaries.

We described the comments we received in the June 2, 1995 IPPS proposed rule (60 FR 29219). Specifically, as we discussed in that same proposed rule, there was no consensus among the commenters on the choice for new labor market areas. Many individual hospitals that commented on that proposed rule expressed dissatisfaction with all of the proposals. However, several State hospital associations that commented on that proposed rule stated that the options merited further study. Therefore, at that time we contacted the association representatives that participated in our November 1993 meeting on labor market issues in which we solicited ideas for additional types of labor market research to conduct. None of the individuals we contacted suggested any ideas for further research. After considering these same options for the LTCH PPS, we conclude that there is no basis for believing that either the nearest neighbor option or the State labor market option would result in a wage index adjustment that would be more appropriate for LTCHs than the MSA-based wage index adjustment. As discussed in the June 2, 1995 IPPS proposed rule (60 FR 29219), these options could inappropriately reward the highest cost hospitals with higher wage indexes and there would likely be less than full consent by hospitals to participate in the alternative options, particularly if hospitals face lower reimbursement due to the change.

Consequently, consistent with the approach taken under the IPPS, we have used MSAs to define labor market areas for purposes of Medicare wage indices in the LTCH PPS since its implementation for cost reporting periods beginning on or after October 1, 2002. In fact, MSAs are also used to define labor market areas for purposes of the wage index for many of the other Medicare payment systems (for example, IRF PPS, SNF PPS, HHA PPS, Outpatient PPS, and IPF PPS). While we recognize MSAs are not designed specifically to define labor market areas, we believe they do represent a reasonable and appropriate proxy for this purpose, because they are based upon characteristics we believe also generally reflect the characteristics of unified labor market areas. For example, CBSAs reflect a core population plus an adjacent territory that reflects a high degree of social and economic integration. This integration is measured by commuting ties, thus, demonstrating that these areas may draw workers from the same general areas. In addition, the most recent CBSAs reflect the most up to date information. The OMB reviews its Metropolitan Area definitions preceding each decennial census to reflect recent population changes and the CBSAs are based on the Census 2000 data. Our analysis and discussion here are focused on issues related to adopting the new CBSA-based designations to define labor market areas for purposes of the IPPS and for purposes of proposing them for LTCH PPS.

Historically, Medicare PPSs have utilized Metropolitan Area definitions developed by OMB. The labor market areas currently used under the LTCH PPS (described above in section V.C.1.c.1. of this preamble) are based on the Metropolitan Area definitions issued by OMB. As noted above, OMB reviews its definitions preceding each decennial census to reflect more Metropolitan Area recent population changes. As discussed in greater detail above in section V.C.1.c.2., the CBSAs are the OMB's latest Metropolitan Area definitions based on the Census 2000 data. As we discussed in the February 3, 2005 proposed rule (70 FR 5739), because we believe that OMB's latest Metropolitan Area designations more accurately reflect the local economies and wage levels of the areas in which hospitals are currently located, under the LTCH PPS we proposed to adopt revised labor market area designations based on the OMB's CBSA designations which were adopted under the IPPS.

Comment:

Five commenters supported our proposed adoption of revised labor market area designations under the LTCH PPS based on the OMB's CBSA designations, stating that they believe that as the CBSA designations more precisely defines distinct labor market areas for LTCHs. We received no comments opposing the proposed revisions to the LTCH PPS labor market area definitions.

Response:

We appreciate the commenters' support for the adoption of the proposed changes to the LTCH PPS labor market area definitions based on OMB's new CBSA designations for, as noted above, and we agree with the commenters that the proposed changes to the LTCH PPS labor market area definitions would more precisely define distinct labor market areas for LTCHs. Accordingly, in this final rule, under the broad authority of section 123 of Pub. L. 106-113 and section 307(b)(1) of Pub. L. 106-554, we are adopting revised labor market area definitions under the LTCH PPS based on OMB's new CBSA designations, as discussed in greater detail below. When we implemented the wage index adjustment at § 412.525(c) under the LTCH PPS in the August 30, 2002 LTCH PPS final rule (67 FR 56016), we explained that the LTCH PPS wage index adjustment was intended to reflect the relative hospital wage levels in the geographic area of the hospital as compared to the national average hospital wage level. Because we believe that OMB's CBSA designations based on Census 2000 data reflect the most recent available geographic classifications (Metropolitan Area definitions), we are revising the labor market area definitions used under the LTCH PPS based on OMB's CBSA

designations to ensure that the LTCH PPS wage index adjustment most appropriately accounts for and reflects the relative hospital wage levels in the geographic area of the hospital as compared to the national average hospital wage level. Specifically, we are revising the LTCH PPS labor market definitions based on OMB's new CBSA designations (as discussed in greater detail below) effective for LTCH PPS discharges occurring on or after July 1, 2005. Accordingly, as we proposed in the February 3, 2005 proposed rule (70 FR 5739), we are revising § 412.525(c) to specify that for discharges occurring on or after July 1, 2005, the application of the wage index under the LTCH PPS will be made on the basis of the location of the facility in an urban or rural area as defined in § 412.64(b)(1)(ii)(A)-(C). (As a conforming change, as we proposed in the February 3, 2005 LTCH PPS proposed rule, we are also revising § 412.525(c) to specify when the current labor area definitions in the existing § 412.525(c) are applicable. We note that in this final rule, we are revising the final regulations text at § 412.525(c)(1) to explicitly state that the current MSA-based labor area definitions are effective “for cost reporting periods beginning on or after October 1, 2002, with respect to discharges occurring during the period covered by such cost reports but before July 1, 2005.” We are clarifying the regulations text because we do not want the public to misinterpret the “July 1, 2005” date as referring to “cost reporting periods” when in fact it applies to “discharges.” In addition, we want to make it clear that the urban and rural definitions in § 412.62(f)(1)(iii), respectively, apply to a LTCH's discharges occurring no earlier than the date upon which the LTCH became subject to the LTCH PPS. Although we did our best to convey this in the proposed regulations text presented in the February 3, 2005 proposed rule, we believe that the regulations text could be improved to better reflect this clarification. While this revision is not a change in the policy presented in the February 3, 2005 LTCH PPS proposed rule (70 FR 5739), we believe that this language change more clearly articulates that the current MSA-based labor market definitions are effective for LTCH discharges occurring before July 1, 2005 that are subject to the LTCH PPS (that is, occurring in cost reporting periods beginning on or after October 1, 2002). We also note that these are the same labor market area definitions (based on the OMB's new CBSA designations) implemented for acute care inpatient hospitals under the IPPS at § 412.64(b), which were effective for those hospitals beginning October 1, 2004 as discussed in the FY 2005 IPPS final rule (69 FR 49026).

As discussed above in section V.C.1.b. of this preamble, the LTCH PPS was modeled after the IPPS for short-term acute care inpatient hospitals. The similarity between the IPPS and the LTCH PPS includes the adoption in the initial implementation of the LTCH PPS of the same labor market area definitions under the LTCH PPS that existed under the IPPS at that time, as well as the use of acute care inpatient hospitals' wage data in calculating the LTCH PPS wage index. Therefore, besides reflecting the most recent available geographic classifications and, consequently, more accurately reflecting the current labor markets (which is the primary reason for adopting OMB's new CBSA-based designations), we believe that this revision to the LTCH PPS labor market area definitions based on OMB's new CBSA-based designations is also consistent with our historical practice of modeling LTCH PPS policy after IPPS policy.

Below, we discuss the composition of the LTCH PPS labor market areas based on the OMB's new CBSA designations, as we proposed in the February 3, 2005 proposed rule. It should be noted that OMB's new CBSA designations are comprised of several county-based area definitions as explained above, which include Metropolitan Areas, Micropolitan Areas, and areas “outside CBSAs.” Under the LTCH PPS, since the implementation of the LTCH PPS, we have used two types of labor market areas, urban and rural. As discussed in greater detail below, in this final rule, in adopting revised labor market areas under the LTCH PPS based on OMB's new CBSA-based designations, we will continue to have 2 types of labor market areas (urban and rural). In the discussion that follows, we explain our recognition of Metropolitan Areas, which include New England MSAs and Metropolitan Divisions, as urban. We also explain our recognition of Micropolitan Areas and areas “outside CBSAs” as rural. The following discussion, which was presented in the February 3, 2005 proposed rule (70 FR 5739-5742), describes the methodology for mapping OMB's CBSA-based designations into the LTCH PPS (urban area or rural area) format.

a. New England MSAs

As stated above, under the LTCH PPS, we currently use NECMAs to define labor market areas in New England, because these are county-based designations rather than the 1990 MSA definitions for New England, which used minor civil divisions such as cities and towns. Under the current MSA definitions, NECMAs provided more consistency in labor market definitions for New England compared with the rest of the country, where MSAs are county-based. Under the new CBSAs, OMB has now defined the MSAs and Micropolitan Areas in New England on the basis of counties. OMB also established New England City and Town Areas, which are similar to the previous New England MSAs.

In order to create consistency across all LTCH labor market areas, in the February 3, 2005 proposed rule (70 FR 5740), under the LTCH PPS, we proposed to use the county-based areas for all MSAs in the nation, including those in New England. The OMB has now defined the New England area based on counties, creating a city and town-based system as an alternative. As we explained in that same proposed rule, we believe that adopting county-based labor market areas for the entire country except those in New England would lead to inconsistencies in our designations. Adopting county-based labor market areas for the entire country provides consistency and stability in Medicare program payment because all of the labor market areas throughout the country, including New England, would be defined using the same system (that is, counties) rather than different systems in different areas of the country, and minimizes programmatic complexity.

In addition, we have consistently employed a county-based system for New England for precisely that reason: To maintain consistency with the labor market definitions used throughout the country. Because we have never used cities and towns for defining LTCH labor market areas, employing a county-based system in New England maintains that consistent practice. We note that this is consistent with the implementation of the CBSA-based designations under the IPPS for New England (69 FR 49028). Accordingly, under the LTCH PPS we will use the New England MSAs as determined under the new CBSA-based labor market area definitions in defining the revised LTCH PPS labor market areas. We did not receive any comments regarding the proposed use of county-based areas for all MSAs in the nation, including those in New England, in our proposal to make revisions to the LTCH PPS labor market area definitions based on OMB's CBSA designations. Therefore, under the broad authority of section 123 of Pub. L. 106-113 and section 307(b)(1) of Pub. L. 106-554, we are adopting this

policy as final as part of the changes to the LTCH PPS labor market area definitions we are establishing in this final rule for the reasons explained above.

b. Metropolitan Divisions

Under the OMB's new CBSA designations, a Metropolitan Division is a county or group of counties within a CBSA that contains a core population of at least 2.5 million, representing an employment center, plus adjacent counties associated with the main county or counties through commuting ties. A county qualifies as a main county if 65 percent or more of its employed residents work within the county and the ratio of the number of jobs located in the county to the number of employed residents is at least 0.75. A county qualifies as a secondary county if 50 percent or more, but less than 65 percent, of its employed residents work within the county and the ratio of the number of jobs located in the county to the number of employed residents is at least 0.75. After all the main and secondary counties are identified and grouped, each additional county that already has qualified for inclusion in the MSA falls within the Metropolitan Division associated with the main/secondary county or counties with which the county at issue has the highest employment interchange measure. Counties in a Metropolitan Division must be contiguous. (65 FR 82236)

The construct of relatively large MSAs being comprised of Metropolitan Divisions is similar to the current construct of CMSAs comprised of PMSAs. As noted above, in the past, the OMB designated CMSAs as Metropolitan Areas with a population of one million or more and comprised of two or more PMSAs. Under the LTCH PPS, we currently use the PMSAs rather than CMSAs to define labor market areas because they comprise a smaller geographic area with potentially varying labor costs due to different local economies. As we discussed in the February 3, 2005 proposed rule (70 FR 5740), we believe that CMSAs may be too large of an area with a relatively large number of hospitals, to accurately reflect the local labor costs of all of the individual hospitals included in that relatively “large” area. A large market area designation increases the likelihood of including many hospitals located in areas with very different labor market conditions within the same market area designation. This variation could increase the difficulty in calculating a single wage index that would be relevant for all hospitals within the market area designation. Similarly, we believe that MSAs with a population of 2.5 million or greater may be too large of an area to accurately reflect the local labor costs of all of the individual hospitals included in that relatively “large” area. Furthermore, as indicated above, Metropolitan Divisions represent the closest approximation to PMSAs, the building block of the current LTCH PPS labor market area definitions, and, therefore, would most accurately maintain our current structuring of the LTCH PPS labor market areas. Therefore, as implemented under the IPPS (69 FR 49029), under the LTCH PPS we proposed to use the Metropolitan Divisions where applicable (as described below) under the new CBSA-based labor market area definitions. We did not receive any comments regarding our proposed use of Metropolitan Divisions under our proposed revisions to the LTCH PPS labor market area definitions based on OMB's new CBSA designations. Therefore, under the broad authority of section 123 of Pub. L. 106-113 and section 307(b)(1) of Pub. L. 106-554, we are adopting this policy as final as part of the changes we are making to the LTCH PPS labor market area definitions in this final rule for the reasons explained above.

In addition to being comparable to the organization of the labor market areas under current MSA designations (that is, the use of PMSAs rather than CMSAs), we believe that using Metropolitan Divisions where applicable (as described below) under the LTCH PPS will result in a more accurate adjustment for the variation in local labor market areas for LTCHs. Specifically, if we recognize the relatively “larger” CBSA that comprises two or more Metropolitan Divisions as an independent labor market area for purposes of the wage index, it will be too large and will include the data from too many hospitals to compute a wage index that would accurately reflect the various local labor costs of all of the individual hospitals included in that relatively “large” CBSA. As mentioned earlier, a large market area designation increases the likelihood of including many hospitals located in areas with very different labor market conditions within the same market area designation. This variation could increase the difficulty in calculating a single wage index that would be relevant for all hospitals within the market area designation. Rather, by recognizing Metropolitan Divisions where applicable (as described below) under the new CBSA-based labor market area definitions under the LTCH PPS, we believe that in addition to more accurately maintaining the current structuring of the LTCH PPS labor market areas, the local labor costs will be more accurately reflected, thereby resulting in a wage index adjustment that better reflects the variation in the local labor costs of the local economies of the LTCHs located in these relatively “smaller” areas.

As discussed below, and in the February 3, 2005 proposed rule (70 FR 5741), we describe where Metropolitan Divisions will be applicable under the new CBSA-based labor market area definitions under the LTCH PPS.

Under OMB's new CBSA-based designations, there are 11 MSAs containing Metropolitan Divisions: Boston; Chicago; Dallas; Detroit; Los Angeles; Miami; New York; Philadelphia; San Francisco; Seattle; and Washington, DC. Although these MSAs were also CMSAs under the prior definitions, in some cases these areas have been significantly altered. Under the current LTCH PPS MSA designations, Boston is a single NECMA. Under the CBSA-based labor market area designations, it will be comprised of 4 Metropolitan Divisions. Los Angeles will go from 4 PMSAs under the current LTCH PPS MSA designations to 2 Metropolitan Divisions under the CBSA-based labor market area designations because 2 MSAs became separate MSAs. The New York CMSA will go from 15 PMSAs under the current LTCH PPS MSA designations down to only 4 Metropolitan Divisions under the CBSA-based labor market area designations. Five PMSAs in Connecticut under the current LTCH PPS MSA designations will become separate MSAs under the CBSA-based labor market area designations, and the number of PMSAs in New Jersey under the current LTCH PPS MSA designations will go from 5 to 2, with the consolidation of 2 New Jersey PMSAs (Bergen-Passaic and Jersey City) into the New York-Wayne-White Plains, NY-NJ Division, under the CBSA-based labor market area designations. In San Francisco, under the CBSA-based labor market area designations, only 2 Divisions will remain where there were once 6 PMSAs some of which are now separate MSAs under the current LTCH PPS labor market area designations.

Under the current LTCH PPS labor market area designations, Cincinnati, Cleveland, Denver, Houston, Milwaukee, Portland, Sacramento, and San Juan are all designated as CMSAs, but will no longer be designated as CMSAs under the CBSA-based labor

market area designations. As noted previously, the population threshold to be designated a CMSA under the current LTCH PPS labor market area designations is one million. In most of these cases, counties currently in a PMSA under the current LTCH PPS labor market area designations will become separate, independent MSAs under the CBSA-based labor market area designations.

c. Micropolitan Areas

Under the OMB's new CBSA-based designations, Micropolitan Areas are essentially a third area definition made up mostly of currently rural areas, but also include some or all of areas that are currently designated as an urban MSA. As discussed in greater detail in the FY 2005 IPPS final rule (69 FR 49029), how these areas are treated would have significant impacts on the calculation and application of the wage index. Specifically, whether or not Micropolitan Areas are included as part of the respective statewide rural wage indices would impact the value of statewide rural wage index of any State that contains a Micropolitan Area because a hospital's classification as urban or rural affects which hospitals' wage data are included in the statewide rural wage index. As discussed above in section V.C.1.c.1., we combine all of the counties in a State outside a designated urban area together to calculate the statewide rural wage index for each State.

In general, as discussed in the February 3, 2005 proposed rule (70 FR 5741), including Micropolitan Areas as part of the statewide rural labor market area would result in an increase to the statewide rural wage index because hospitals located in those Micropolitan Areas typically have higher labor costs than other rural hospitals in the State. Alternatively, as discussed in greater detail below, if Micropolitan Areas would be recognized as independent labor market areas, because there would be so few hospitals in each labor market area, the wage indices for LTCHs in those areas could become relatively unstable as they would change considerably from year to year.

Because we currently use MSAs to define urban labor market areas and we group all the hospitals in counties within each State that are not assigned to an MSA together into a statewide rural labor market area, we have used the terms “urban” and “rural” wage indexes in the past for ease of reference. However, the introduction of Micropolitan Areas by the OMB potentially complicates this terminology because these areas include many hospitals that are currently included in the statewide rural labor market areas.

In the February 3, 2005 proposed rule (70 FR 5741), we proposed to treat Micropolitan Areas as rural labor market areas under the LTCH PPS for the reasons outlined below. That is, counties that are assigned to a Micropolitan area under the CBSA-based designations would be treated the same as other “rural” counties that are not assigned to either an MSA (Metropolitan Statistical Area) or a Micropolitan Area. We received no comments on our proposal to treat Micropolitian Areas as rural labor market areas under the LTCH PPS. Therefore, for the reasons discussed above and under the broad authority of section 123 of Pub. L. 106-113 and section 307(b)(1) of Pub. L. 106-554, we are adopting this policy as final as part of the changes we are making to the LTCH PPS labor market area definitions in this final rule. Accordingly, in determining a LTCH's applicable wage index (based on IPPS hospital wage index data, as discussed in greater detail below in section V.C.d. of this preamble), a LTCH in a Micropolitan Area under the OMB's CBSA-based designations will be classified as “rural” and will be assigned the statewide rural wage index for the State in which it resides.

In the FY 2005 IPPS final rule (69 FR 49029-49032), we discuss our evaluation of the impact of treating Micropolitan Areas as part of the statewide rural labor market area instead of treating Micropolitan Areas as independent labor market areas for hospitals paid under the IPPS. As an alternative to treating Micropolitan Areas as part of the statewide rural labor market area for purposes of the LTCH PPS, we examined treating Micropolitan Areas as separate (urban) labor market areas, just as we did when implementing the revised labor market areas under the IPPS. As discussed in that same final rule, one of the reasons Micropolitan Areas have such a dramatic impact on the wage index is, because Micropolitan Areas encompass smaller populations than MSAs, they tend to include fewer hospitals per Micropolitan Area. There were only 25 MSAs with one hospital in the MSA. However, under the new CBSA-based definitions, there are 373 Micropolitan Areas with one hospital, and 49 MSAs with only one hospital.

This large number of labor market areas with only one hospital and the increased potential for dramatic shifts in the wage indexes from 1 year to the next is a problem for several reasons. First, it creates instability in the wage index from year to year for a large number of hospitals. Second, it reduces the averaging effect (This averaging effect allows for more data points to be used to calculate a representative standard of measured labor costs within a market area.) lessening some of the incentive for hospitals to operate efficiently. This incentive is inherent in a system based on the average hourly wages for a large number of hospitals, as hospitals could profit more by operating below that average. In labor market areas with a single hospital, high wage costs are passed directly into the wage index with no counterbalancing averaging with lower wages paid at nearby competing hospitals. Third, it creates an arguably inequitable system when so many hospitals have wage indexes based solely on their own wages, while other hospitals' wage indexes are based on an average hourly wage across many hospitals.

For the reasons noted above, and consistent with the treatment of these areas under the IPPS, we are not adopting Micropolitan Areas as independent labor market areas under the LTCH PPS, but instead, Micropolitan Areas, under the CBSA-based labor market area definitions, will be considered part of the statewide rural labor market area. Accordingly, the LTCH PPS statewide rural wage index will be determined using acute-care IPPS hospital wage data (the rationale for using IPPS hospital wage data is discussed in greater detail below in section V.C.1.d. of this preamble) from hospitals located in non-MSA areas (for example, rural areas, including Micropolitan Areas) and that statewide rural wage index will be assigned to LTCHs located in those non-MSA areas.

Comment:

One commenter brought to our attention the fact that that we included two Micropolitian Areas, Enid, OK (CBSA 21240) and Jamestown, NY (CBSA 27640), in our Table of proposed urban area wage indexes (as shown in Table 1 of the addendum to the February 3, 2005 proposed rule (70 FR 5772)).

Response:

We thank the commenter for bringing this inadvertent error to our attention. We have removed those two Micropolitan areas (which we proposed to treat as rural) from Table 1 (urban area wage indexes) of the Addendum to this final rule. We also want to note that, despite this error, the statewide average rural wage indexes in Table 2 for rural OK and NY, respectively, correctly included the wage data for these Micropolitan areas.

4. Implementation of the Revised Labor Market Areas Under the LTCH PPS

As we discussed in the February 3, 2005 proposed rule (70 FR 5742), consistent with our policy under the IPPS, we did not propose to adopt the new labor market area definitions themselves in a budget neutral manner. We did not receive any comments and, therefore, under the generally broad authority conferred upon the Secretary to develop the LTCH PPS under section 123 of Pub. L. 106-113 and section 307 of Pub. L. 106-554, are not adopting the new labor market area definitions under the LTCH PPS in a budget neutral manner, just as implemented under the IPPS.

Furthermore, as we also discussed in that same proposed rule and as we discussed in the August 30, 2002 LTCH PPS final rule, under section 123 of the BBRA, and section 307 of the BIPA, the Secretary generally has broad authority in developing the LTCH PPS, including whether and how to make adjustments to the LTCH PPS. In that same final rule we state that we will consider whether it is appropriate for us to propose a budget neutrality adjustment in the annual update of some aspects of the LTCH PPS under our broad discretionary authority under the statute to provide “appropriate adjustments” to the LTCH PPS. Until the 5-year transition from cost-based reimbursement to prospective payment is complete, including the end of the phase-in of the wage index adjustment under § 412.525(c), as we explained in the February 3, 2005 proposed rule, we believe that it would not be appropriate to update any aspects of the LTCH PPS in a budget neutral manner. A primary reason for waiting until after the transition is complete before evaluating aspects of the LTCH PPS, including the budget neutrality issue, is that the data available to analyze such issues is very limited because the LTCH PPS is still relatively new and there is a lag time in data availability. Also, the fact that a number of LTCHs were and some still are transitioning to 100 percent of the Federal prospective payment rate may make the available data even less appropriate for an analysis, since hospitals may still be modifying their behavior based on their transition to prospective payment and our data may not yet replace any operational changes LTCHs may have made in response to prospective payment. Once the transition is complete, we will have a better opportunity to evaluate the impacts of the implementation of this new payment system based on a number of years of LTCH PPS data.

To facilitate an understanding of the policies related to the change to the LTCH PPS labor market areas discussed above, in Table 4 of the Addendum of this final rule, we are providing a listing of each LTCH's State and county location; existing labor market area designation; and its new CBSA-based labor market area designation based on the best available cost report data from HCRIS (FYs 1999-2003) and county information from our OSCAR database. Any questions or corrections (including additions or deletions) to the information provided in Table 4 should be e-mailed to the following CMS Web address:

cmsltchpps@cms.hhs.gov.

A link to this address can be found on the following CMS Web page

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

. We also note that a crosswalk file is available on the CMS Web page

http://www.cms.hhs.gov/providers/longterm/frnotices.asp

, which shows, by county, a crosswalk of the MSA-based labor market areas to the new CBSA-based labor-market areas adopted in this final rule.

As we discussed in the February 3, 2005 proposed rule (70 FR 5743), when the revised labor market areas based on the OMB's new CBSA-based designations were adopted under the acute care hospital IPPS beginning on October 1, 2004, a transition to the new labor market area designations was established due to the scope and significant implications of these new boundaries and to buffer the subsequent significant impacts it may have on payments to numerous hospitals. As discussed in the FY 2005 IPPS final rule (69 FR 49032), during FY 2005, a blend of wage indexes is calculated for those acute care IPPS hospitals experiencing a drop in their wage indexes because of the adoption of the new labor market areas. Also, as described in that same final rule (69 FR 49032), under the IPPS, hospitals that previously were located in an urban MSA, but then became rural under the new CBSA-based definitions are assigned the wage index value of the urban area to which they previously belonged, for 3 years (FYs 2005-2007).

Also, in the February 3, 2005 proposed rule, we explained that we did not believe it was necessary to propose a transition policy for the revision to the LTCH PPS labor market area definitions because the impact of the revision to the labor market area definitions would only have a minimal impact on LTCH PPS payments (as explained below). Instead, under the LTCH PPS, we proposed to adopt the new CBSA-based labor market area definitions beginning with the 2006 LTCH PPS rate year without a transition period. As also discussed in greater detail below, we believe that this policy is appropriate because despite significant similarities between the LTCH PPS and the IPPS, there are clear distinctions between the payment systems, particularly regarding wage index issues.

The most significant distinction upon which we have based this policy determination, as we discussed in the February 3, 2005 proposed rule, is that where acute care hospitals under the IPPS have been paid using full wage index adjusted payments since 1983 and had used the previous IPPS MSA-based labor market area designations for over 10 years, under the LTCH PPS, a wage index adjustment is being phased-in over a 5-year period, and as noted above, most LTCHs are still in their FY 2004 cost reporting period (the vast majority of LTCHs start their cost reporting periods on July 1 or September 1), and are, therefore, in the 2nd year of the 5-year phase-in of the LTCH PPS wage index adjustment, and the applicable wage index value is

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ths (40 percent) of the applicable full LTCH PPS wage index adjustment. Since most LTCHs are only in the 2nd year of the 5-year phase-in of the wage index adjustment, for most LTCHs, the labor-related portion of the standard Federal rate is only adjusted by 40 percent of the applicable full wage index (that is,

2/5

th wage index value). The LTCH PPS wage index adjustment is made by multiplying the LTCH PPS standard Federal rate by the applicable wage index value, and the current LTCH PPS labor related-share is 72.885 percent. Consequently, for most LTCHs, only 29 percent of the standard Federal rate is affected by the wage index adjustment (72.885 percent × 0.4 = 29.154 percent), and the revision to the labor market area definitions based on OMB's new CBSA-based designations will only have a minimal impact on LTCH PPS payments. Thus, the impact that the wage index can have on LTCH PPS payments is limited at this point, since only a small percentage of the LTCH PPS standard Federal rate is affected by the wage index (approximately 29 percent in most cases, as explained above) because of the 5-year phase-in of the wage index adjustment.

Our initial analysis of the appropriateness of including a wage index adjustment in the March 22, 2002 proposed rule for the LTCH PPS (67 FR 13465) indicated that a wage adjustment did not lead to an increase in the accuracy of LTCH PPS payments because a statistical analysis did not show a significant relationship between LTCHs costs and their geographic location. However, based upon

comments, we revisited this proposed determination after additional data analysis and a more general policy evaluation, and we stated that we “believe that the conceptual reasons for having an area wage adjustment support transitioning into a wage adjustment, notwithstanding the data problems and issues with the regression analysis” (see August 30, 2002 LTCH PPS final rule (67 FR 56018)). However, given the lack of strong empirical evidence to support a wage index adjustment under the LTCH PPS, we provided for a 5-year transition to the full implementation of the wage index adjustment. We also noted that we would “* * * continue to reevaluate LTCH data as they become available and would propose to adjust the phase-in if subsequent data support a change.” In each subsequent LTCH PPS proposed and final rule since FY 2003, we have evaluated the most recent LTCH data available and still have found no empirical evidence to support a change in the 5-year phase-in of the wage index adjustment under the LTCH PPS.

A wage index adjustment has been a stable feature of the acute care hospital IPPS since its 1983 implementation and, furthermore, the IPPS had utilized the prior MSA-based labor market area designation for over 10 years. As explained in detail above, the proposed revisions to the labor market area definitions based on OMB's new CBSA designations would not have the same impact on the LTCH PPS, which has only been implemented since October 1, 2002, as it did on the IPPS. Given the clear distinction between the impact of the revisions to the labor market area definitions on the IPPS as compared to those same proposed revisions to the LTCH PPS, therefore, we believe that, although it is appropriate to adopt transition policies for acute care hospitals under the IPPS, it is also equally appropriate not to treat the impact of the proposed revisions to the LTCH PPS labor market area definitions in the same way under the LTCH PPS. We believe that the revision to the labor market area definitions based on OMB's new CBSA-based designations would only have a minimal impact on LTCH PPS payments.

As we discussed in the February 3, 2005 proposed rule, because the impact of the revision to the labor market area definitions would only have a minimal impact on LTCH PPS payments (as explained above), we do not believe it is necessary to have a transition policy for the revision to the LTCH PPS labor market area definitions. In contrast, a transition policy to the revised IPPS labor market area definitions under the IPPS was appropriate because individual hospitals could experience a significant impact as a result of the new labor market definitions, especially because the full labor-related share of either 71.066 percent or 62 percent (as discussed above in section V.C.1.b. of this preamble) of the IPPS standardized amount (that is, Federal rate) is affected by the IPPS wage index adjustment, which resulted in a more significant projected impact for acute care hospitals under the IPPS. Furthermore, as we explained in that same proposed rule, we do not believe that it is necessary to further transition any changes to the LTCH PPS wage index adjustment, including the revision of the labor market area definitions, because, in fact, the LTCH PPS wage index adjustment is still being phased-in over 5 years as established in the August 30, 2002 LTCH PPS final rule (67 FR 56018). Accordingly, in the February 3, 2005 proposed rule, we explained that, to the extent the new CBSA-based labor market area definitions are implemented, we would not expect them to have as significant of an impact on LTCHs, as they do for IPPS hospitals since the full wage index adjustment had been a stable factor of IPPS payment for over 20 years.

Comment:

One commenter believes that we should implement our proposed revisions to the LTCH PPS labor market area based on OMB's CBSA designations with the same transition as was implemented under the IPPS.

Response:

As discussed in the February 3, 2005 proposed rule, we did not provide for a transition policy under the LTCH PPS for changes to the labor market area definitions even though a transition policy was implemented under the IPPS. We believe it was necessary to provide additional protection to acute care hospitals that due to the new CBSA designations experienced reductions in their wage indices, given the scope and potentially significant implications of these new labor market areas. Moreover, as noted above, a wage index adjustment has been a stable feature of the acute care hospital IPPS almost since its implementation in 1983. The prior MSA-based labor market area designations were utilized in IPPS for over 10 years, thus, reinforcing our belief that a transition policy was appropriate.

We recognize that, just like IPPS hospitals, many LTCHs would experience decreases in their wage index as a result of the labor market area changes. At the same time, a significant number of LTCHs may benefit from these changes. However, we believe that because we are in the midst of a 5-year transition to a full wage-index adjustment under the LTCH PPS, the effects of these newest CBSA-based changes to the LTCH PPS labor market areas definitions will be mitigated. Specifically, as noted above, many LTCHs are still in the early stages of the 5-year phase-in of the LTCH PPS wage index adjustment. In fact, many LTCHs are only in the 2nd year of the 5-year phase-in of the LTCH PPS wage index adjustment. Therefore, for most LTCHs, the labor-related portion of the standard Federal rate is only adjusted by 40 percent of the applicable full wage index (that is,

2/5

th wage index value). Also, as noted above, the LTCH PPS wage index adjustment is made by multiplying the LTCH PPS standard Federal rate by the applicable wage index value, and the current LTCH PPS labor related-share is 72.885 percent. Consequently, for most LTCHs, only 29 percent of the standard Federal rate is affected by the wage index adjustment (72.885 percent × 0.4 = 29.154 percent), and the proposed revision to the labor market area definitions based on OMB's new CBSA-based designations will only have a minimal impact on LTCH PPS payments.

An additional distinction between the IPPS and the LTCH PPS regarding the wage index adjustment is that the IPPS policies that provide for a transition policy from MSA-based labor market areas to CBSA-based labor market areas were implemented in a budget neutral manner under the IPPS (69 FR 49034-49035 and 49275). However, as noted above, wage index changes are not budget neutral under the LTCH PPS; therefore, a transition policy similar to what was implemented for the IPPS would result in additional LTCH spending by the Medicare program. Therefore, as explained in more detail above, despite the fact that we have established a transition policy for the implementation of CBSA-based labor market areas under the IPPS, we do not believe that it is either appropriate or necessary to establish a similar transition policy under the LTCH PPS. This is the case, in large part, because there are clear differences in the impact of the wage index adjustment between the IPPS and the LTCH PPS. Primarily, we would note that the full 100 percent wage index adjustment has been a feature of the IPPS since its beginning in 1983 where under the LTCH PPS, which has been in effect for cost reporting periods beginning on or after October 1, 2002, many LTCHs are only in the 2nd year of a 5-year phase-in of a full wage index adjustment. Therefore,

even though there are many LTCHs that will experience decreases in their wage in

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