# Medicare Program; Proposed Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2007 Rates > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A06-3629 ## Record - **Collection:** Federal Register - **Document type:** Proposed Rule - **Published:** April 25, 2006 - **Citation:** 71 FR 23996 ## Text DEPARTMENT OF HEALTH AND HUMAN SERVICES Centers for Medicare & Medicaid Services 42 CFR Parts 409, 410, 412, 413, 424, 485, and 489 [CMS-1488-P] RIN 0938-AO12 Medicare Program; Proposed Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2007 Rates AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS. ACTION: Proposed rule. SUMMARY: We are proposing to revise the Medicare hospital inpatient prospective payment systems (IPPS) for operating and capital-related costs to implement changes arising from our continuing experience with these systems, and to implement a number of changes made by the Deficit Reduction Act of 2005 (Pub. L. 109-171). In addition, in the Addendum to this proposed rule, we describe the proposed changes to the amounts and factors used to determine the rates for Medicare hospital inpatient services for operating costs and capital-related costs. We also are setting forth proposed rate-of-increase limits as well as proposed policy changes for hospitals and hospital units excluded from the IPPS that are paid in full or in part on a reasonable cost basis subject to these limits. These proposed changes would be applicable to discharges occurring on or after October 1, 2006. In this proposed rule, we discuss our proposals to refine the diagnosis-related group (DRG) system under the IPPS to better recognize severity of illness among patients—for FY 2007, we are proposing to use a hospital-specific relative value cost center weighting methodology to adjust DRG relative weights and in FY 2008 (if not earlier), to implement consolidated severity-adjusted DRGs or alternative severity adjustment methods. Among the other policy changes that we are proposing to make are changes related to: limited revisions of the reclassification of cases to DRGs; the long-term care (LTC)-DRGs and relative weights; the wage data, including the occupational mix data, used to compute the wage index; applications for new technologies and medical services add-on payments; payments to hospitals for the direct and indirect costs of graduate medical education; submission of hospital quality data; payments to sole community hospitals and Medicare-dependent, small rural hospitals; and provisions governing emergency services under the Emergency Medical Treatment and Labor Act of 1986 (EMTALA). We are also inviting comments on a number of issues including performance-based hospital payments for services and health information technology, as well as how to improve data transparency for consumers. DATES: To be assured consideration, comments must be received at one of the addresses provided below, no later than 5 p.m. on June 12, 2006. ADDRESSES: In commenting, please refer to file code CMS-1488-P. Because of staff and resource limitations, we cannot accept comments by facsimile (FAX) transmission. You may submit comments in one of three ways (no duplicates, please): 1. Electronically. You may submit electronic comments on specific issues in this regulation to http://www.cms.hhs.gov/eRulemaking. Click on the link “Submit electronic comments on CMS regulations with an open comment period”. (Attachments should be in Microsoft Word, WordPerfect, or Excel; however, we prefer Microsoft Word.) 2. By regular mail. You may mail written comments (one original and two copies) to the following address ONLY: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-1488-P, P.O. Box 8011, Baltimore, MD 21244-1850. Please allow sufficient time for mailed comments to be received before the close of the comment period. 3. By express or overnight mail. You may send written comments (one original and two copies) to the following address ONLY: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-1488-P, Mail Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850. 4. By hand or courier. If you prefer, you may deliver (by hand or courier) your written comments (one original and two copies) before the close of the comment period to one of the following addresses. If you intend to deliver your comments to the Baltimore address, please call telephone number (410) 786-7195 in advance to schedule your arrival with one of our staff members. Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., Washington, DC 20201, or 7500 Security Boulevard, Baltimore, MD 21244-1850. (Because access to the interior of the Hubert H. Humphrey Building is not readily available to persons without Federal Government identification, commenters are encouraged to leave their comments in the CMS drop slots located in the main lobby of the building. A stamp-in clock is available for persons wishing to retain proof of filing by stamping in and retaining an extra copy of the comments being filed.) Comments mailed to the addresses indicated as appropriate for hand or courier delivery may be delayed and received after the comment period. Submission of comments on paperwork requirements. You may submit comments on this document's paperwork requirements by mailing your comments to the addresses provided at the end of the “Collection of Information Requirements” section in this document. For information on viewing public comments, see the beginning of the SUPPLEMENTARY INFORMATION section. FOR FURTHER INFORMATION CONTACT: Marc Hartstein, (410) 786-4548, Operating Prospective Payment, Diagnosis-Related Groups (DRGs), Wage Index, New Medical Services and Technology Add-On Payments, Hospital Geographic Reclassifications, Sole Community Hospital, Disproportionate Share Hospital, and Medicare-Dependent, Small Rural Hospital Issues. Tzvi Hefter, (410) 786-4487, Capital Prospective Payment, Excluded Hospitals, Graduate Medical Education, Critical Access Hospitals, and Long-Term Care (LTC)-DRG Issues. Siddhartha Mazumdar, (410) 786-6673, Rural Community Hospital Demonstration Issues. Sheila Blackstock, (410) 786-3502, Quality Data for Annual Payment Update Issues. Thomas Valuck, (410) 786-7479, Hospital Value-Based Purchasing Issues. Frederick Grabau, (410) 786-0206, Services in Foreign Hospitals Issues. Brian Reitz, (410) 786-5001, Obsolete Paper Claims Forms Issues. SUPPLEMENTARY INFORMATION: Submitting Comments: We welcome comments from the public on all issues set forth in this rule to assist us in fully considering issues and developing policies. You can assist us by referencing the file code CMS-1488-P and the specific “issue identifier” that precedes the section on which you choose to comment. Inspection of Public Comments: All comments received before the close of the comment period are available for viewing by the public, including any personally identifiable or confidential business information that is included in a comment. We post all comments received before the close of the comment period on the following Web site as soon as possible after they have been received: http://www.cms.hhs.gov/eRulemaking. Click on the link “Electronic Comments on CMS Regulations” on that Web site to view public comments. Comments received timely will also be available for public inspection as they are received, generally beginning approximately 3 weeks after publication of a document, at the headquarters of the Centers for Medicare & Medicaid Services, 7500 Security Boulevard, Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 a.m. to 4 p.m. To schedule an appointment to view public comments, phone 1-800-743-3951. Electronic Access This Federal Register document is also available from the Federal Register online database through GPO Access, a service of the U.S. Government Printing Office. Free public access is available on a Wide Area Information Server (WAIS) through the Internet and via asynchronous dial-in. Internet users can access the database by using the World Wide Web; the Superintendent of Documents' home page address is http://www.gpoaccess.gov/, by using local WAIS client software, or by telnet to swais.access.gpo.gov, then login as guest (no password required). Dial-in users should use communications software and modem to call (202) 512-1661; type swais, then login as guest (no password required). Acronyms AHA American Hospital Association AHIMA American Health Information Management Association AHRO Agency for Health Care Research and Quality AMI Acute myocardial infarction AOA American Osteopathic Association APR DRG All Patient Refined Diagnosis Related Group System ASC Ambulatory surgical center ASP Average sales price AWP Average wholesale price BBA Balanced Budget Act of 1997, Public Law 105-33 BBRA Medicare, Medicaid, and SCHIP [State Children's Health Insurance Program] Balanced Budget Refinement Act of 1999, Public Law 106-113 BIPA Medicare, Medicaid, and SCHIP [State Children's Health Insurance Program] Benefits Improvement and Protection Act of 2000, Public Law 106-554 BLS Bureau of Labor Statistics CAH Critical access hospital CART CMS Abstraction & Reporting Tool CBSAs Core-based statistical areas CC Complication or comorbidity CDAC Clinical Data Abstraction Center CIPI Capital input price index CPI Consumer price index CMI Case-mix index CMS Centers for Medicare & Medicaid Services CMSA Consolidated Metropolitan Statistical Area COBRA Consolidated Omnibus Reconciliation Act of 1985, Public Law 99-272 CPI Consumer price index CRNA Certified registered nurse anesthetist CY Calendar year DRA Deficit Reduction Act of 2005, Public Law 109-171 DRG Diagnosis-related group DSH Disproportionate share hospital ECI Employment cost index EMR Electronic medical record EMTALA Emergency Medical Treatment and Labor Act of 1986, Public Law 99-272 FDA Food and Drug Administration FFY Federal fiscal year FIPS Federal information processing standards FQHC Federally qualified health center FTE Full-time equivalent FY Fiscal year GAAP Generally Accepted Accounting Principles GAF Geographic Adjustment Factor GME Graduate medical education HCAHPS Hospital Consumer Assessment of Healthcare Providers and Systems HCFA Health Care Financing Administration HCRIS Hospital Cost Report Information System HHA Home health agency HHS Department of Health and Human Services HIC Health insurance card HIPAA Health Insurance Portability and Accountability Act of 1996, Public Law 104-191 HIPC Health Information Policy Council HIS Health information system HIT Health information technology HMO Health maintenance organization HSA Health savings account HSCRC Maryland Health Services Cost Review Commission HSRV Hospital-specific relative value HSRVcc Hospital-specific relative value cost center HQA Hospital Quality Alliance HQI Hospital Quality Initiative HwH Hospital-within-a-hospital ICD-9-CM International Classification of Diseases, Ninth Revision, Clinical Modification ICD-10-PCS International Classification of Diseases, Tenth Edition, Procedure Coding System ICU Intensive care unit IHS Indian Health Service IME Indirect medical education IOM Institute of Medicine IPF Inpatient psychiatric facility IPPS Acute care hospital inpatient prospective payment system IRF Inpatient rehabilitation facility JCAHO Joint Commission on Accreditation of Healthcare Organizations LAMCs Large area metropolitan counties LTC-DRG Long-term care diagnosis-related group LTCH Long-term care hospital MCE Medicare Code Editor MCO Managed care organization MCV Major cardiovascular condition MDC Major diagnostic category MDH Medicare-dependent, small rural hospital MedPAC Medicare Payment Advisory Commission MedPAR Medicare Provider Analysis and Review File MEI Medicare Economic Index MGCRB Medicare Geographic Classification Review Board MMA Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Public Law 108-173 MRHFP Medicare Rural Hospital Flexibility Program MSA Metropolitan Statistical Area NAICS North American Industrial Classification System NCD National coverage determination NCHS National Center for Health Statistics NCQA National Committee for Quality Assurance NCVHS National Committee on Vital and Health Statistics NECMA New England County Metropolitan Areas NICU Neonatal intensive care unit NQF National Quality Forum NTIS National Technical Information Service NVHRI National Voluntary Hospital Reporting Initiative OES Occupational employment statistics OIG Office of the Inspector General OMB Executive Office of Management and Budget O.R. Operating room OSCAR Online Survey Certification and Reporting (System) PRM Provider Reimbursement Manual PPI Producer price index PMSAs Primary metropolitan statistical areas PPS Prospective payment system PRA Per resident amount ProPAC Prospective Payment Assessment Commission PRRB Provider Reimbursement Review Board PS&R Provider Statistical and Reimbursement (System) QIG Quality Improvement Group, CMS QIO Quality Improvement Organization RHC Rural health clinic RHQDAPU Reporting hospital quality data for annual payment update RNHCI Religious Nonmedical Health care Institution RRC Rural referral center RUCAs Rural-urban commuting area codes RY Rate year SAF Standard Analytic File SCH Sole community hospital SFY State fiscal year SIC Standard Industrial Classification SNF Skilled nursing facility SOCs Standard occupational classifications SOM State Operations Manual SSA Social Security Administration SSI Supplemental Security Income TAG Technical Advisory Group TEFRA Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248 UHDDS Uniform hospital discharge data set Table of Contents I. Background A. Summary 1. Acute Care Hospital Inpatient Prospective Payment System (IPPS) 2. Hospitals and Hospital Units Excluded From the IPPS a. Inpatient Rehabilitation Facilities (IRFs) b. Long-Term Care Hospitals (LTCHs) c. Inpatient Psychiatric Facilities (IPFs) 3. Critical Access Hospitals (CAHs) 4. Payments for Graduate Medical Education (GME) B. Provisions of the Deficit Reduction Act of 2005 (DRA) C. Major Contents of this Proposed Rule 1. Proposed DRG Reclassifications and Recalibrations of Relative Weights 2. Proposed Changes to the Hospital Wage Index 3. Other Decisions and Proposed Changes to the IPPS for Operating Costs and GME Costs 4. Proposed Changes to the PPS for Capital-Related Costs 5. Proposed Changes for Hospitals and Hospital Units Excluded From the IPPS 6. Payment for Services Furnished Outside the United States 7. Payment for Blood Clotting Factor Administered to Inpatients With Hemophilia 8. Limitation on Payments to Skilled Nursing Facilities for Bad Debt 9. Determining Proposed Prospective Payment Operating and Capital Rates and Rate-of-Increase Limits 10. Impact Analysis 11. Recommendation of Update Factors for Operating Cost Rates of Payment for Inpatient Hospital Services 12. Discussion of Medicare Payment Advisory Commission Recommendations 13. Appendix C—Combinations of Consolidated Severity-Adjusted DRGs and Appendix D—Crosswalk of Consolidated Severity-Adjusted DRGs to Respective APR DRGs II. Proposed Changes to DRG Classifications and Relative Weights A. Background B. DRG Reclassifications 1. General 2. Yearly Review for Making DRG Changes 3. Refinement of DRGs Based on Severity of Illness C. Proposals for Revisions to the DRG System Used Under the IPPS 1. MedPAC Recommendations 2. Refinement of the Relative Weight Calculation 3. Refinement of DRGs Based on Severity of Illness a. Comparison of the CMS DRG System and the APR DRG System b. Consolidated Severity-Adjusted DRGs for Use in the IPPS c. Changes to Case-Mix Index (CMI) From a New DRG System 4. Effect of Consolidated Severity-Adjusted DRGs on the Outlier Threshold 5. Impact of Refinement of DRG System on Payments 6. Conclusions D. Proposed Changes to Specific DRG Classifications 1. Pre-MDCs: Pancreas Transplants 2. MDC 1 (Diseases and Disorders of the Nervous System) a. Implantation of Intracranial Neurostimulator System for Deep Brain Stimulation (DBS) b. Carotid Artery Stents 3. MDC 5 (Diseases and Disorders of the Circulatory System) a. Insertion of Epicardial Leads for Defibrillator Devices b. Application of Major Cardiovascular Diagnoses (MCVs) List to Defibrillator DRGs 4. MDC 8 (Diseases and Disorders of the Musculoskeletal System and Connective Tissue) a. Hip and Knee Replacements b. Spinal Fusion c. Charite TM Spinal Disc Replacement Device 5. MDC 18 (Infectious and Parasitic Diseases (Systemic or Unspecified Sites)): Severe Sepsis 6. Medicare Code Editor (MCE) Changes a. Newborn Diagnoses Edit b. Diagnoses Allowed for Females Only Edit c. Diagnoses Allowed for Males Only Edit d. Manifestations Not Allowed as Principal Diagnosis Edit e. Nonspecific Principal Diagnosis Edit f. Unacceptable Principal Diagnosis Edit g. Nonspecific O.R. Procedures Edit h. Noncovered Procedures Edit i. Bilateral Procedure Edit 7. Surgical Hierarchies 8. Refinement of Complications and Comorbidities (CC) List a. Background b. Comprehensive Review of the CC List c. CC Exclusions List Proposed for FY 2007 9. Review of Procedure Codes in DRGs 468, 476, and 477 a. Moving Procedure Codes From DRG 468 or DRG 477 to MDCs b. Reassignment of Procedures Among DRGs 468, 476, and 477 c. Adding Diagnosis or Procedure Codes to MDCs 10. Changes to the ICD-9-CM Coding System E. Proposed Recalibration of DRG Weights F. Proposed LTC-DRG Reclassifications and Relative Weights for LTCHs for FY 2007 1. Background 2. Proposed Changes in the LTC-DRG Classifications a. Background b. Patient Classifications into DRGs 3. Development of the Proposed FY 2007 LTC-DRG Relative Weights a. General Overview of Development of the LTC-DRG Relative Weights b. Data c. Hospital-Specific Relative Value Methodology d. Proposed Low-Volume LTC-DRGs 4. Steps for Determining the Proposed FY 2007 LTC-DRG Relative Weights G. Proposed Add-On Payments for New Services and Technologies 1. Background 2. Public Input Before Publication of This Notice of Proposed Rulemaking on Add-On Payments 3. FY 2007 Status of Technologies Approved for FY 2006 Add-On Payments a. Kinetra® Implantable Neurostimulator for Deep Brain Stimulation b. Endovascular Graft Repair of the Thoracic Aorta c. Restore® Rechargeable Implantable Neurostimulator 4. FY 2007 Applicants for New Technology Add-On Payments a. C-Port® Distal Anastomosis System b. NovoSeven® for Intracerebral Hemorrhage c. X STOP Interspinous Process Decompression System III. Proposed Changes to the Hospital Wage Index A. Background B. Core-Based Statistical Areas for the Proposed Hospital Wage Index C. Proposed Occupational Mix Adjustment to the Proposed FY 2007 Index 1. Development of Data for the Proposed Occupational Mix Adjustment 2. Calculation of the Proposed FY 2007 Occupational Mix Adjustment Factor and the Proposed FY 2007 Occupational Mix Adjusted Wage Index D. Worksheet S-3 Wage Data for the Proposed FY 2007 Wage Index Update E. Verification of Worksheet S-3 Wage Data F. Computation of the Proposed FY 2007 Unadjusted Wage Index G. Computation of the Proposed FY 2007 Blended Wage Index H. Proposed Revisions to the Wage Index Based on Hospital Redesignations 1. General 2. Effects of Reclassification 3. FY 2007 MGCRB Reclassifications 4. Proposed FY 2007 Redesignations Under Section 1886(d)(8)(B) of the Act 5. Reclassifications Under Section 508 of Pub. L. 108-173 6. Proposed Wage Indices for Reclassified Hospitals and Proposed Reclassification Budget Neutrality Factor I. Proposed FY 2007 Wage Index Adjustment Based on Commuting Patterns of Hospital Employees J. Process for Requests for Wage Index Data Corrections K. Labor-Related Share for the Wage Index for FY 2007 L. Proxy for the Hospital Market Basket IV. Other Decisions and Proposed Changes to the IPPS for Operating Costs and GME Costs A. Reporting of Hospital Quality Data for Annual Hospital Payment Update 1. Background 2. New Procedures for Hospital Reporting of Quality Data 3. Electronic Medical Records B. Value-Based Purchasing 1. Introduction 2. Premier Hospital Quality Incentive Demonstration 3. RHQDAPU Program a. Section 501(b) of Pub. L. 108-173 (MMA) b. Section 5001(a) of Pub. L. 109-171 (DRA) 4. Plan for Implementing Hospital Value-Based Purchasing Beginning With FY 2009 a. Measure Development and Refinement b. Data Infrastructure c. Incentive Methodology d. Public Reporting 5. Considerations Related to Certain Conditions, Including Hospital-Acquired Infections 6. Promoting Effective Use of Health Information Technology C. Sole Community Hospitals (SCHs) and Medicare-Dependent, Small Rural Hospitals (MDHs) 1. Background 2. Volume Decrease Adjustment for SCHs and MDHs a. HAS/Monitrend Data b. HAS/Monitrend Data Book Replacement Alternative 3. Mandatory Reporting Requirements for Any Changes in the Circumstances Under Which a Hospital Was Designated as an SCH or MDH 4. Proposed Payment Changes for MDHs Under the DRA of 2005 a. Background b. Proposed Regulation Changes 5. Proposed Technical Change D. Rural Referral Centers 1. Case-Mix Index 2. Discharges E. Indirect Medical Education (IME) Adjustment 1. Background 2. IME Adjustment Factor for FY 2007 3. Technical Change to Revise Cross-Reference F. Payment Adjustment for Disproportionate Share Hospitals (DSHs) 1. Background 2. Technical Corrections 3. Proposed Reinstatement of Inadvertently Deleted Provisions on DSH Payment Adjustment Factors 4. Enhanced DSH Adjustment for MDHs G. Geographic Reclassifications 1. Background 2. Reclassifications under Section 508 of Pub. L. 108-173 3. Multicampus Hospitals 4. Urban Group Hospital Reclassifications 5. Effect of Change of Ownership on Urban County Group Reclassifications 6. Requested Reclassification for Hospitals Located in a Single Hospital MSA Surrounded by Rural Counties H. Payment for Direct Graduate Medical Education 1. Background 2. Determination of Weighted Average Per Resident Amounts (PRAs) for Merged Teaching Hospitals 3. Determination of Per Resident Amounts (PRAs) for New Teaching Hospitals 4. Requirements for Counting and Appropriate Documentation of FTE Residents: Clarification 5. Resident Time Spent in Nonpatient Care Activities as Part of Approved Residency Programs 6. Medicare GME Affiliated Groups: Technical Changes to Regulations I. Payment for the Costs of Nursing and Allied Health Education Activities: Clarification J. Hospital Emergency Services Under EMTALA 1. Background 2. Role of the EMTALA Technical Advisory Group (TAG) 3. Definition of “Labor” 4. Application of EMTALA Requirements to Hospitals Without Dedicated Emergency Departments 5. Clarification of Reference to “Referral Centers” K. Other Proposed Technical Changes 1. Proposed Cross-Reference Correction in Regulations on Limitations on Beneficiary Charges 2. Proposed Cross-Reference Corrections in Regulations on Payment Denials Based on Admissions and Quality Reviews 3. Proposed Cross-Reference Correction in Regulations on Outlier Payments 4. Removing References to Two Paper Claims Forms L. Rural Community Hospital Demonstration Program M. Health Care Information Transparency Initiative V. Proposed Changes to the PPS for Capital-Related Costs A. Background B. Treatment of Certain Urban Hospitals Reclassified as Rural Hospitals Under § 412.103 C. Other Technical Corrections Relating to the Capital PPS Geographic Adjustment Factors VI. Proposed Changes for Hospitals and Hospital Units Excluded From the IPPS A. Payments to Existing Hospitals and Hospital Units 1. Payments to Existing Excluded Hospitals and Hospital Units 2. Separate PPS for IRFs 3. Separate PPS for LTCHs 4. Separate PPS for IPFs 5. Grandfathering of Hospitals-Within-Hospitals (HwHs) and Satellite Facilities 6. Proposed Changes to the Methodology for Determining LTCH Cost-to-Charge Ratios (CCRs) and the Reconciliation of High-Cost and Short-Stay Outlier Payments Under the LTCH PPS a. Background b. High-Cost Outliers c. Short-Stay Outliers 7. Technical Corrections Relating to LTCHs 8. Proposed Cross-Reference Correction in Authority Citations for 42 CFR 412 and 413 B. Critical Access Hospitals (CAHs) 1. Background 2. Sunset of Designation of CAHs as Necessary Providers: Technical Correction VII. Payment for Services Furnished Outside the United States A. Background B. Proposed Clarification of Regulations VIII. Payment for Blood Clotting Factor Administered to Inpatients With Hemophilia IX. Limitation on Payments to Skilled Nursing Facilities for Bad Debt A. Background B. Changes Made by Section 5004 of the DRA C. Proposed Regulation Changes X. MedPAC Recommendations XI. Other Required Information A. Requests for Data From the Public B. Collection of Information Requirements C. Public Comments XII. Regulation Text Addendum—Proposed Schedule of Standardized Amounts Effective With Discharges Occurring On or After October 1, 2006 and Update Factors and Rate-of-Increase Percentages Effective With Cost Reporting Periods Beginning on or After October 1, 2006 I. Summary and Background II. Proposed Changes to Prospective Payment Rates for Hospital Inpatient Operating Costs for FY 2007 A. Calculation of the Adjusted Standardized Amount 1. Standardization of Base-Year Costs or Target Amounts 2. Computing the Average Standardized Amount 3. Updating the Average Standardized Amount 4. Other Adjustments to the Average Standardized Amount a. Recalibration of DRG Weights and Updated Wage Index—Budget Neutrality Adjustment b. Reclassified Hospitals—Budget Neutrality Adjustment c. Outliers d. Rural Community Hospital Demonstration Program Adjustment (Section 410A of Pub. L. 108-173) 5. Proposed FY 2007 Standardized Amount B. Adjustments for Area Wage Levels and Cost-of-Living 1. Adjustment for Area Wage Levels 2. Adjustment for Cost-of-Living in Alaska and Hawaii C. DRG Relative Weights D. Calculation of the Proposed Prospective Payment Rates for FY 2007 1. Federal Rate 2. Hospital-Specific Rate (Applicable Only to SCHs and MDHs) a. Calculation of Hospital-Specific Rate b. Updating the FY 1982, FY 1987, FY 1996, and FY 2002 Hospital-Specific Rates for FY 2007 3. General Formula for Calculation of Proposed Prospective Payment Rates for Hospitals Located in Puerto Rico Beginning On or After October 1, 2006 and Before October 1, 2007 a. Puerto Rico Rate b. National Rate III. Proposed Changes to Payment Rates for Acute Care Hospital Inpatient Capital-Related Costs for FY 2007 A. Determination of Proposed Federal Hospital Inpatient Capital-Related Prospective Payment Rate Update 1. Projected Capital Standard Federal Rate Update a. Description of the Update Framework b. Comparison of CMS and MedPAC Update Recommendation 2. Proposed Outlier Payment Adjustment Factor 3. Proposed Budget Neutrality Adjustment Factor for Changes in DRG Classifications and Weights and the GAF 4. Proposed Exceptions Payment Adjustment Factor 5. Proposed Capital Standard Federal Rate for FY 2007 6. Proposed Special Capital Rate for Puerto Rico Hospitals B. Calculation of the Proposed Inpatient Capital-Related Prospective Payments for FY 2007 C. Capital Input Price Index 1. Background 2. Forecast of the CIPI for FY 2007 IV. Payment Rates for Excluded Hospitals and Hospital Units: Proposed Rate-of-Increase Percentages A. Payments to Existing Excluded Hospitals and Units B. New Excluded Hospitals and Units V. Proposed Payment for Blood Clotting Factor Administered to Inpatients With Hemophilia Tables Table 1A—National Adjusted Operating Standardized Amounts, Labor/Nonlabor (69.7 Percent Labor Share/30.3 Percent Nonlabor Share If Wage Index Is Greater Than 1) Table 1B—National Adjusted Operating Standardized Amounts, Labor/Nonlabor (62 Percent Labor Share/38 Percent Nonlabor Share If Wage Index Is Less Than or Equal to 1) Table 1C—Adjusted Operating Standardized Amounts for Puerto Rico, Labor/Nonlabor Table 1D—Capital Standard Federal Payment Rate Table 2—Hospital Case-Mix Indexes for Discharges Occurring in Federal Fiscal Year 2005; Hospital Wage Indexes for Federal Fiscal Year 2007; Hospital Average Hourly Wage for Federal Fiscal Years 2005 (2001 Wage Data), 2006 (2002 Wage Data), and 2007 (2003 Wage Data); Wage Indexes and 3-Year Average of Hospital Average Hourly Wages Table 3A—FY 2007 and 3-Year Average Hourly Wage for Urban Areas by CBSA Table 3B—FY 2007 and 3-Year Average Hourly Wage for Rural Areas by CBSA Table 4A-1—Wage Index and Capital Geographic Adjustment Factor (GAF) for Urban Areas by CBSA—FY2007 Table 4A-2—Wage Index and Capital Geographic Adjustment Factor (GAF) for Certain Urban Areas by CBSA for the Period April 1 through September 30, 2007 Table 4B—Wage Index and Capital Geographic Adjustment Factor (GAF) for Rural Areas by CBSA—FY 2007 Table 4C-1—Wage Index and Capital Geographic Adjustment Factor (GAF) for Hospitals That Are Reclassified by CBSA—FY 2007 Table 4C-2—Wage Index and Capital Geographic Adjustment Factor (GAF) for Certain Hospitals That Are Reclassified by CBSA for the Period April 1 Through September 30, 2007 Table 4F—Puerto Rico Wage Index and Capital Geographic Adjustment Factor (GAF) by CBSA—FY 2007 Table 4J—Out-Migration Wage Adjustment—FY 2007 Table 5—List of Diagnosis-Related Groups (DRGs), Relative Weighting Factors, and Geometric and Arithmetic Mean Length of Stay (LOS) Table 6A—New Diagnosis Codes Table 6B—New Procedure Codes Table 6C—Invalid Diagnosis Codes Table 6D—Invalid Procedure Codes Table 6E—Revised Diagnosis Code Titles Table 6F—Revised Procedure Code Titles Table 6G—Additions to the CC Exclusions List Table 6H—Deletions from the CC Exclusions List Table 7A—Medicare Prospective Payment System Selected Percentile Lengths of Stay: FY 2005 MedPAR Update December 2005 GROUPER V23.0 Table 7B—Medicare Prospective Payment System Selected Percentile Lengths of Stay: FY 2005 MedPAR Update December 2005 GROUPER V24.0 Table 8A—Statewide Average Operating Cost-to-Charge Ratios—March 2006 Table 8B—Statewide Average Capital Cost-to-Charge Ratios—March 2006 Table 8C—Proposed Statewide Average Total Cost-to-Charge Ratios for LTCHs—March 2006 Table 9A—Hospital Reclassifications and Redesignations by Individual Hospital and CBSA—FY 2007 Table 9B—Hospital Reclassifications and Redesignation by Individual Hospital Under Section 508 of Pub. L. 108-173—FY 2007 Table 9C—Hospitals Redesignated as Rural Under Section 1886(d)(8)(E) of the Act—FY 2007 Table 10—Geometric Mean Plus the Lesser of .75 of the National Adjusted Operating Standardized Payment Amount (Increased to Reflect the Difference Between Costs and Charges) or .75 of One Standard Deviation of Mean Charges by Diagnosis-Related Groups (DRGs)—March 2006 Table 11—Proposed FY 2007 LTC-DRGs, Relative Weights, Geometric Average Length of Stay, and 5/6 ths of the Geometric Average Length of Stay Appendix A—Regulatory Impact Analysis I. Overall Impact II. Objectives III. Limitations on Our Analysis IV. Hospitals Included In and Excluded From the IPPS V. Effects on Excluded Hospitals and Hospital Units VI. Quantitative Effects of the Proposed Policy Changes Under the IPPS for Operating Costs A. Basis and Methodology of Estimates B. Analysis of Table I C. Effects on the Hospitals that Failed the Quality Data Submission Process (Column 2) D. Effects of the DRA Provision Related to MDHs (Column 3) E. Effects of the Changes to the DRG Reclassifications and Relative Cost-Based Weights (Column 4) F. Effects of Proposed Wage Index Changes (Column 5) G. Combined Effects of Proposed DRG and Wage Index Changes, Including Budget Neutrality Adjustment (Column 6) H. Effects of the 3-Year Provision Allowing Urban Hospitals that Were Converted to Rural as a Result of the FY 2005 Labor Market Area Changes to Maintain the Wage Index of the Urban Labor Market Area in Which They Were Formerly Located (Column 7) I. Effects of MGCRB Reclassifications (Column 8) J. Effects of the Proposed Wage Index Adjustment for Out-Migration (Column 9) K. Effects of All Changes (Column 10) L. Effects of Policy on Payment Adjustments for Low-Volume Hospitals M. Impact Analysis of Table II VII. Effects of Other Proposed Policy Changes A. Effects of LTC-DRG Reclassifications and Relative Weights for LTCHs B. Effects of Proposed New Technology Add-On Payments C. Effects of Requirements for Hospital Reporting of Quality Data for Annual Hospital Payment Update D. Effects of Other Proposed Policy Changes Affecting Sole Community Hospitals (SCHs) and Medicare-Dependent, Small Rural Hospitals (MDHs) E. Effects of Proposed Policy on Payment for Direct Costs of Graduate Medical Education 1. Determination of Weighted Average GME PRAs for Merged Teaching Hospitals 2. Determination of PRAs for New Teaching Hospitals 3. Requirements for Counting and Appropriate Documentation of FTE Residents 4. Resident Time Spent in Nonpatient Care Activities as Part of an Approved Residency Program F. Effects of Proposed Policy Changes Relating to Emergency Services Under EMTALA G. Effects of Policy on Rural Community Hospital Demonstration Program H. Effects of Proposed Policy on Hospitals-Within-Hospitals and Satellite Facilities I. Effects of Proposed Policy Changes to the Methodology for Determining LTCH CCRs and the Reconciliation LTCH PPS Outlier Payments J. Effects of Proposed Policy on Payment for Services Furnished Outside the United States K. Effects of Proposed Policy on Limitation on Payments to SNFs VIII. Effects of Proposed Changes in the Capital PPS A. General Considerations B. Results IX. Alternatives Considered X. Overall Conclusion XI. Accounting Statement XII. Executive Order 12866 Appendix B—Recommendation of Update Factors for Operating Cost Rates of Payment for Inpatient Hospital Services I. Background II. Inpatient Hospital Update for FY 2007 III. Secretary's Recommendation IV. MedPAC Recommendation for Assessing Payment Adequacy and Updating Payments in Traditional Medicare Appendix C—Combinations of Proposed Consolidated Severity-Adjusted DRGs Appendix D—Crosswalk of Proposed Consolidated Severity-Adjusted DRGs to Respective APR DRGs I. Background A. Summary 1. Acute Care Hospital Inpatient Prospective Payment System (IPPS) Section 1886(d) of the Social Security Act (the Act) sets forth a system of payment for the operating costs of acute care hospital inpatient stays under Medicare Part A (Hospital Insurance) based on prospectively set rates. Section 1886(g) of the Act requires the Secretary to pay for the capital-related costs of hospital inpatient stays under a prospective payment system (PPS). Under these PPSs, Medicare payment for hospital inpatient operating and capital-related costs is made at predetermined, specific rates for each hospital discharge. Discharges are classified according to a list of diagnosis-related groups (DRGs). The base payment rate is comprised of a standardized amount that is divided into a labor-related share and a nonlabor-related share. The labor-related share is adjusted by the wage index applicable to the area where the hospital is located; and if the hospital is located in Alaska or Hawaii, the nonlabor-related share is adjusted by a cost-of-living adjustment factor. This base payment rate is multiplied by the DRG relative weight. If the hospital treats a high percentage of low-income patients, it receives a percentage add-on payment applied to the DRG-adjusted base payment rate. This add-on payment, known as the disproportionate share hospital (DSH) adjustment, provides for a percentage increase in Medicare payments to hospitals that qualify under either of two statutory formulas designed to identify hospitals that serve a disproportionate share of low-income patients. For qualifying hospitals, the amount of this adjustment may vary based on the outcome of the statutory calculations. If the hospital is an approved teaching hospital, it receives a percentage add-on payment for each case paid under the IPPS, known as the indirect medical education (IME) adjustment. This percentage varies, depending on the ratio of residents to beds. Additional payments may be made for cases that involve new technologies or medical services that have been approved for special add-on payments. To qualify, a new technology or medical service must demonstrate that it is a substantial clinical improvement over technologies or services otherwise available, and that, absent an add-on payment, it would be inadequately paid under the regular DRG payment. The costs incurred by the hospital for a case are evaluated to determine whether the hospital is eligible for an additional payment as an outlier case. This additional payment is designed to protect the hospital from large financial losses due to unusually expensive cases. Any outlier payment due is added to the DRG-adjusted base payment rate, plus any DSH, IME, and new technology or medical service add-on adjustments. Although payments to most hospitals under the IPPS are made on the basis of the standardized amounts, some categories of hospitals are paid the higher of a hospital-specific rate based on their costs in a base year (the higher of FY 1982, FY 1987, FY 1996, or FY 2002) or the IPPS rate based on the standardized amount. For example, sole community hospitals (SCHs) are the sole source of care in their areas, and Medicare-dependent, small rural hospitals (MDHs) are a major source of care for Medicare beneficiaries in their areas. Both of these categories of hospitals are afforded this special payment protection in order to maintain access to services for beneficiaries. (Until FY 2007, an MDH has received the IPPS rate plus 50 percent of the difference between the IPPS rate and its hospital-specific rate if the hospital-specific rate is higher than the IPPS rate. In addition, an MDH does not have the option of using FY 1996 as the base year for its hospital-specific rate. As discussed below, for discharges occurring on or after October 1, 2007, but before October 1, 2011, an MDH will receive the IPPS rate plus 75 percent of the difference between the IPPS rate and its hospital-specific rate, if the hospital-specific rate is higher than the IPPS rate.) Section 1886(g) of the Act requires the Secretary to pay for the capital-related costs of inpatient hospital services “in accordance with a prospective payment system established by the Secretary.” The basic methodology for determining capital prospective payments is set forth in our regulations at 42 CFR 412.308 and 412.312. Under the capital PPS, payments are adjusted by the same DRG for the case as they are under the operating IPPS. Capital PPS payments are also adjusted for IME and DSH, similar to the adjustments made under the operating IPPS. In addition, hospitals may receive outlier payments for those cases that have unusually high costs. The existing regulations governing payments to hospitals under the IPPS are located in 42 CFR Part 412, Subparts A through M. 2. Hospitals and Hospital Units Excluded From the IPPS Under section 1886(d)(1)(B) of the Act, as amended, certain specialty hospitals and hospital units are excluded from the IPPS. These hospitals and units are: rehabilitation hospitals and units; long-term care hospitals (LTCHs); psychiatric hospitals and units; children's hospitals; and cancer hospitals. Religious nonmedical health care institutions (RNHCIs) are also excluded from the IPPS. Various sections of the Balanced Budget Act of 1997 (Pub. L. 105-33), the Medicare, Medicaid and SCHIP [State Children's Health Insurance Program] Balanced Budget Refinement Act of 1999 (Pub. L. 106-113), and the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (Pub. L. 106-554) provide for the implementation of PPSs for rehabilitation hospitals and units (referred to as inpatient rehabilitation facilities (IRFs)), LTCHs, and psychiatric hospitals and units (referred to as inpatient psychiatric facilities (IPFs)), as discussed below. Children's hospitals, cancer hospitals, and RNHCIs continue to be paid solely under a reasonable cost-based system. The existing regulations governing payments to excluded hospitals and hospital units are located in 42 CFR Parts 412 and 413. a. Inpatient Rehabilitation Facilities (IRFs) Under section 1886(j) of the Act, as amended, rehabilitation hospitals and units (IRFs) have been transitioned from payment based on a blend of reasonable cost reimbursement subject to a hospital-specific annual limit under section 1886(b) of the Act and the adjusted facility Federal prospective payment rate for cost reporting periods beginning on or after January 1, 2002 through September 30, 2002, to payment at 100 percent of the Federal rate effective for cost reporting periods beginning on or after October 1, 2002. IRFs subject to the blend were also permitted to elect payment based on 100 percent of the Federal rate. The existing regulations governing payments under the IRF PPS are located in 42 CFR Part 412, Subpart P. b. Long-Term Care Hospitals (LTCHs) Under the authority of sections 123(a) and (c) of Pub. L. 106-113 and section 307(b)(1) of Pub. L. 106-554, LTCHs that do not meet the definition of “new” under § 412.23(e)(4) are being transitioned from being paid for inpatient hospital services based on a blend of reasonable cost-based reimbursement under section 1886(b) of the Act to 100 percent of the Federal rate during a 5-year period, beginning with cost reporting periods that start on or after October 1, 2002. These LTCHs that do not meet the definition of “new” may elect to be paid based on 100 percent of the Federal prospective payment rate instead of a blended payment in any year during the 5-year transition. For cost reporting periods beginning on or after October 1, 2006, LTCHs will be paid 100 percent of the Federal rate. The existing regulations governing payment under the LTCH PPS are located in 42 CFR Part 412, Subpart O. c. Inpatient Psychiatric Facilities (IPFs) Under the authority of sections 124(a) and (c) of Pub. L. 106-113, inpatient psychiatric facilities (IPFs) (formerly psychiatric hospitals and psychiatric units of acute care hospitals) are paid under the IPF PPS. Under the IPF PPS, some IPFs are transitioning from being paid for inpatient hospital services based on a blend of reasonable cost-based payment and a Federal per diem payment rate, effective for cost reporting periods beginning on or after January 1, 2005 (November 15, 2004 IPF PPS final rule (69 FR 66922) and January 23, 2006 IPF PPS proposed rule (71 FR 3616)). For cost reporting periods beginning on or after January 1, 2008, all IPFs will be paid 100 percent of the Federal per diem payment amount. The existing regulations governing payment under the IPF PPS are located in 42 CFR 412, Subpart N. 3. Critical Access Hospitals (CAHs) Under sections 1814, 1820, and 1834(g) of the Act, payments are made to critical access hospitals (CAHs) (that is, rural hospitals or facilities that meet certain statutory requirements) for inpatient and outpatient services based on 101 percent of reasonable cost. Reasonable cost is determined under the provisions of section 1861(v)(1)(A) of the Act and existing regulations under 42 CFR Parts 413 and 415. 4. Payments for Graduate Medical Education (GME) Under section 1886(a)(4) of the Act, costs of approved educational activities are excluded from the operating costs of inpatient hospital services. Hospitals with approved graduate medical education (GME) programs are paid for the direct costs of GME in accordance with section 1886(h) of the Act; the amount of payment for direct GME costs for a cost reporting period is based on the hospital's number of residents in that period and the hospital's costs per resident in a base year. The existing regulations governing payments to the various types of hospitals are located in 42 CFR Part 413. B. Provisions of the Deficit Reduction Act of 2005 (DRA) On February 8, 2006, the Deficit Reduction Act of 2005 (DRA), Pub. L. 109-171, was enacted. Pub. L. 109-171 made a number of changes to the Act relating to prospective payments to hospitals and other providers for inpatient services. This proposed rule would implement amendments made by the following sections of Pub. L. 109-171: • Section 5001(a), which, effective for FY 2007 and subsequent years, expands the requirements for hospital quality data reporting. • Section 5003, which makes various improvements to the MDH program. It extends special payment provisions, requires MDHs to use FY 2002 as their base year for determining whether use of their hospital-specific rate enhances payment (but permits them to continue to use either their 1982 or 1987 hospital-specific rate if using either of those rates results in higher payments), and removes the application of the 12-percent cap on the DSH payment adjustment factor for MDHs. • Section 5004, which reduces certain allowable SNF bad debt payments by 30 percent. Payments for the bad debts of full-benefit, dual eligible individuals are not reduced. In this proposed rule, we also discuss and invite comments on the requirements of section 5001(b) of Pub. L. 109-171, which require us to develop a plan to implement, beginning with FY 2009, a value-based purchasing plan for section 1886(d) hospitals. This discussion also includes the provisions of section 5001(c) of Pub. L. 109-171, which requires a quality adjustment in DRG payments for certain hospital-acquired conditions, effective for FY 2008. C. Major Contents of This Proposed Rule In this proposed rule, we are setting forth proposed changes to the Medicare IPPS for operating costs and for capital-related costs in FY 2007. We also are setting forth proposed changes relating to payments for GME costs, payments to certain hospitals and units that continue to be excluded from the IPPS and paid on a reasonable cost basis, and payments for SCHs and MDHs. The changes being proposed would be effective for discharges occurring on or after October 1, 2006, unless otherwise noted. The following is a summary of the major changes that we are proposing to make: 1. Proposed DRG Reclassifications and Recalibrations of Relative Weights In section II. of the preamble to this proposed rule, as required by section 1886(d)(4)(C) of the Act, we are proposing limited revisions to the DRG classifications structure. In this section, we respond to several recommendations made by MedPAC intended to improve the DRG system. We are also proposing to use, for FY 2007, hospital-specific relative values for 10 cost centers to compute DRG relative weights. In addition, we are proposing to use consolidated severity-adjusted DRGs or alternative severity adjustment methods in FY 2008 (if not earlier). We also are presenting our reevaluation of certain FY 2006 applicants for add-on payments for high-cost new medical services and technologies, and our analysis of FY 2007 applicants (including public input, as directed by Pub. L. 108-173, obtained in a town hall meeting). We are proposing the annual update of the long-term care diagnosis-related group (LTC-DRG) classifications and relative weights for use under the LTCH PPS for FY 2007. 2. Proposed Changes to the Hospital Wage Index In section III. of the preamble to this proposed rule, we are proposing revisions to the wage index and the annual update of the wage data. Specific issues addressed include the following: • The FY 2007 wage index update, using wage data from cost reporting periods that began during FY 2003. • The proposed FY 2007 occupational mix adjustment to the wage index. • The proposed revisions to the wage index based on hospital redesignations and reclassifications. • The proposed adjustment to the wage index for FY 2007 based on commuting patterns of hospital employees who reside in a county and work in a different area with a higher wage index. • The timetable for reviewing and verifying the wage data that will be in effect for the proposed FY 2007 wage index. • The labor-related share for the FY 2007 wage index, including the labor-related share for Puerto Rico. 3. Other Decisions and Proposed Changes to the IPPS for Operating Costs, GME Costs, and Promoting Hospitals' Effective Use of Health Information Technology In section IV. of the preamble to this proposed rule, we discuss a number of provisions of the regulations in 42 CFR Parts 412 and 413 including the following: • The reporting of hospital quality data as a condition for receiving the full annual payment update increase. • Proposed changes in payments to SCHs and MDHs. • Proposed updated national and regional case-mix values and discharges for purposes of determining rural referral center status. • The statutorily-required IME adjustment factor for FY 2007. • Proposed changes relating to hospitals' geographic classifications, including reclassifications under section 508 of Pub. L. 108-173, multicampus hospitals, urban group hospital reclassification and the effect of change in ownership on urban county group reclassifications. • Proposed changes and clarifications relating to GME that address determining the per resident amounts (PRAs) for merged hospitals and new teaching hospitals, counting and appropriate documentation of FTE residents, and counting of resident time spent in nonpatient care activities as part of approved residency programs. • Proposed changes relating to payment for costs of nursing and allied health education programs. • Proposed changes relating to requirements for emergency services for hospitals under EMTALA. • Discussion of the third year of implementation of the Rural Community Hospital Demonstration Program. We also are inviting comments on promoting hospitals' effective use of health information technology. 4. Proposed Changes to the PPS for Capital-Related Costs In section V. of the preamble to this proposed rule, we discuss the payment policy requirements for capital-related costs and capital payments to hospitals and propose several technical corrections to the regulations. 5. Proposed Changes for Hospitals and Hospital Units Excluded From the IPPS In section VI. of the preamble to this proposed rule, we discuss payments to excluded hospitals and hospital units, proposed policy changes regarding increases or decreases in square footage or decreases in the number of beds of the “grandfathering” HwHs and satellite facilities, proposed changes to the methodology for determining LTCH CCRs and the reconciliation of high-cost and short-stay outlier payments under the LTCH PPS, and a proposed technical change relating to the designation of CAHs as necessary providers. 6. Payments for Services Furnished Outside the United States In section VII. of the preamble to this proposed rule, we set forth proposed changes to clarify what is considered “outside the United States” for Medicare payment purposes. 7. Payment for Blood Clotting Factor Administered to Inpatients With Hemophilia In section VIII. of the preamble to this proposed rule, we discuss the proposed changes in payment for blood clotting factor administered to Medicare beneficiaries with hemophilia for FY 2007. 8. Limitation on Payments to Skilled Nursing Facilities for Bad Debt In section IX. of the preamble to this proposed rule, we propose to implement section 5004 of Pub. L. 109-171 relating to reduction in payments to SNFs for bad debt. 9. Determining Proposed Prospective Payment Operating and Capital Rates and Rate-of-Increase Limits In the Addendum to this proposed rule, we set forth proposed changes to the amounts and factors for determining the FY 2007 prospective payment rates for operating costs and capital-related costs. We also establish the proposed threshold amounts for outlier cases. In addition, we address the proposed update factors for determining the rate-of-increase limits for cost reporting periods beginning in FY 2007 for hospitals and hospital units excluded from the PPS. 10. Impact Analysis In Appendix A of this proposed rule, we set forth an analysis of the impact that the proposed changes would have on affected hospitals. 11. Recommendation of Update Factors for Operating Cost Rates of Payment for Inpatient Hospital Services In Appendix B of this proposed rule, as required by sections 1886(e)(4) and (e)(5) of the Act, we provided our recommendations of the appropriate percentage changes for FY 2007 for the following: • A single average standardized amount for all areas for hospital inpatient services paid under the IPPS for operating costs (and hospital-specific rates applicable to SCHs and MDHs). • Target rate-of-increase limits to the allowable operating costs of hospital inpatient services furnished by hospitals and hospital units excluded from the IPPS. 12. Discussion of Medicare Payment Advisory Commission Recommendations Under section 1805(b) of the Act, MedPAC is required to submit a report to Congress, no later than March 1 of each year, in which MedPAC reviews and makes recommendations on Medicare payment policies. MedPAC's March 2006 recommendation concerning hospital inpatient payment policies addressed the update factor for inpatient hospital operating costs and capital-related costs under the IPPS and for hospitals and distinct part hospital units excluded from the IPPS. This recommendation is addressed in Appendix B of this proposed rule. For further information relating specifically to the MedPAC March 2006 reports or to obtain a copy of the reports, contact MedPAC at (202) 220-3700 or visit MedPAC's Web site at: www.medpac.gov. 13. Appendix C and Appendix D In Appendix C of this proposed rule, we list the combinations of the consolidated severity-adjusted DRGs that we are proposing to implement on FY 2008 (if not earlier), as discussed in section II.C. of the preamble of this proposed rule. In Appendix D of this proposed rule, we provide a crosswalk of the proposed consolidated severity-adjusted DRG system to the respective All Patient Related Diagnosis-Related Group (APR DRG) system. II. Proposed Changes to DRG Classifications and Relative Weights (If you choose to comment on issues in this section, please include the caption “DRG Reclassifications” at the beginning of your comment.) A. Background Section 1886(d) of the Act specifies that the Secretary shall establish a classification system (referred to as DRGs) for inpatient discharges and adjust payments under the IPPS based on appropriate weighting factors assigned to each DRG. Therefore, under the IPPS, we pay for inpatient hospital services on a rate per discharge basis that varies according to the DRG to which a beneficiary's stay is assigned. The formula used to calculate payment for a specific case multiplies an individual hospital's payment rate per case by the weight of the DRG to which the case is assigned. Each DRG weight represents the average resources required to care for cases in that particular DRG, relative to the average resources used to treat cases in all DRGs. Congress recognized that it would be necessary to recalculate the DRG relative weights periodically to account for changes in resource consumption. Accordingly, section 1886(d)(4)(C) of the Act requires that the Secretary adjust the DRG classifications and relative weights at least annually. These adjustments are made to reflect changes in treatment patterns, technology, and any other factors that may change the relative use of hospital resources. B. DRG Reclassifications 1. General For FY 2007, we are proposing only limited changes to the current DRG classifications, as discussed in section II.D. of the preamble to this proposed rule, that would be applicable to discharges occurring on or after October 1, 2006. We are limiting our proposed changes because, as discussed in detail in section II.C. of the preamble to this proposed rule, we are focusing our efforts on addressing the recommendations made last year by MedPAC to refine the entire CMS DRG system by taking into account severity of illness (if not earlier) and applying hospital-specific relative value (HSRV) weights to DRGs. Currently, cases are classified into CMS DRGs for payment under the IPPS based on the principal diagnosis, up to eight additional diagnoses, and up to six procedures performed during the stay. In a small number of DRGs, classification is also based on the age, sex, and discharge status of the patient. The diagnosis and procedure information is reported by the hospital using codes from the International Classification of Diseases, Ninth Revision, Clinical Modification (ICD-9-CM). The process of forming the DRGs was begun by dividing all possible principal diagnoses into mutually exclusive principal diagnosis areas, referred to as Major Diagnostic Categories (MDCs). The MDCs were formed by physician panels as the first step toward ensuring that the DRGs would be clinically coherent. The diagnoses in each MDC correspond to a single organ system or etiology and, in general, are associated with a particular medical specialty. Thus, in order to maintain the requirement of clinical coherence, no final DRG could contain patients in different MDCs. Most MDCs are based on a particular organ system of the body. For example, MDC 6 is Diseases and Disorders of the Digestive System. This approach is used because clinical care is generally organized in accordance with the organ system affected. However, some MDCs are not constructed on this basis because they involve multiple organ systems (for example, MDC 22 (Burns)). For FY 2006, cases are assigned to one of 526 DRGs in 25 MDCs. The table below lists the 25 MDCs. Major Diagnostic Categories (MDCs) 1 Diseases and Disorders of the Nervous System. 2 Diseases and Disorders of the Eye. 3 Diseases and Disorders of the Ear, Nose, Mouth, and Throat. 4 Diseases and Disorders of the Respiratory System. 5 Diseases and Disorders of the Circulatory System. 6 Diseases and Disorders of the Digestive System. 7 Diseases and Disorders of the Hepatobiliary System and Pancreas. 8 Diseases and Disorders of the Musculoskeletal System and Connective Tissue. 9 Diseases and Disorders of the Skin, Subcutaneous Tissue and Breast. 10 Endocrine, Nutritional and Metabolic Diseases and Disorders. 11 Diseases and Disorders of the Kidney and Urinary Tract. 12 Diseases and Disorders of the Male Reproductive System. 13 Diseases and Disorders of the Female Reproductive System. 14 Pregnancy, Childbirth, and the Puerperium. 15 Newborns and Other Neonates with Conditions Originating in the Perinatal Period. 16 Diseases and Disorders of the Blood and Blood Forming Organs and Immunological Disorders. 17 Myeloproliferative Diseases and Disorders and Poorly Differentiated Neoplasms. 18 Infectious and Parasitic Diseases (Systemic or Unspecified Sites). 19 Mental Diseases and Disorders. 20 Alcohol/Drug Use and Alcohol/Drug Induced Organic Mental Disorders. 21 Injuries, Poisonings, and Toxic Effects of Drugs. 22 Burns. 23 Factors Influencing Health Status and Other Contacts with Health Services. 24 Multiple Significant Trauma. 25 Human Immunodeficiency Virus Infections. In general, cases are assigned to an MDC based on the patient's principal diagnosis before assignment to a DRG. However, for FY 2006, there are nine DRGs to which cases are directly assigned on the basis of ICD-9-CM procedure codes. These DRGs are for heart transplant or implant of heart assist systems, liver and/or intestinal transplants, bone marrow transplants, lung transplants, simultaneous pancreas/kidney transplants, and pancreas transplants, and for tracheostomies. Cases are assigned to these DRGs before they are classified to an MDC. The table below lists the nine current pre-MDCs. Pre-Major Diagnostic Categories (Pre-MDCs) DRG 103 Heart Transplant or Implant of Heart Assist System. DRG 480 Liver Transplant and/or Intestinal Transplant. DRG 481 Bone Marrow Transplant. DRG 482 Tracheostomy for Face, Mouth, and Neck Diagnoses. DRG 495 Lung Transplant. DRG 512 Simultaneous Pancreas/Kidney Transplant. DRG 513 Pancreas Transplant. DRG 541 ECMO or Tracheostomy with Mechanical Ventilation 96+ Hours or Principal Diagnosis Except for Face, Mouth, and Neck Diagnosis with Major O.R. DRG 542 Tracheostomy with Mechanical Ventilation 96+ Hours or Principal Diagnosis Except for Face, Mouth, and Neck Diagnosis without Major O.R. Once the MDCs were defined, each MDC was evaluated to identify those additional patient characteristics that would have a consistent effect on the consumption of hospital resources. Because the presence of a surgical procedure that required the use of the operating room would have a significant effect on the type of hospital resources used by a patient, most MDCs were initially divided into surgical DRGs and medical DRGs. Surgical DRGs are based on a hierarchy that orders operating room (O.R.) procedures or groups of O.R. procedures by resource intensity. Medical DRGs generally are differentiated on the basis of diagnosis and age (0 to 17 years of age or greater than 17 years of age). Some surgical and medical DRGs are further differentiated based on the presence or absence of a complication or a comorbidity (CC). Generally, nonsurgical procedures and minor surgical procedures that are not usually performed in an operating room are not treated as O.R. procedures. However, there are a few non-O.R. procedures that do affect DRG assignment for certain principal diagnoses, for example, extracorporeal shock wave lithotripsy for patients with a principal diagnosis of urinary stones. Once the medical and surgical classes for an MDC were formed, each class of diagnoses was evaluated to determine if complications, comorbidities, or the patient's age would consistently affect the consumption of hospital resources. Physician panels classified each diagnosis code based on whether the diagnosis, when present as a secondary condition, would be considered a substantial CC. A substantial CC was defined as a condition which, because of its presence with a specific principal diagnosis, would cause an increase in the length of stay by at least one day in at least 75 percent of the patients. Each medical and surgical class within an MDC was tested to determine if the presence of any substantial CC would consistently affect the consumption of hospital resources. A patient's diagnosis, procedure, discharge status, and demographic information is fed into the Medicare claims processing systems and subjected to a series of automated screens called the Medicare Code Editor (MCE). The MCE screens are designed to identify cases that require further review before classification into a DRG. After patient information is screened through the MCE and any further development of the claim is conducted, the cases are classified into the appropriate DRG by the Medicare GROUPER software program. The GROUPER program was developed as a means of classifying each case into a DRG on the basis of the diagnosis and procedure codes and, for a limited number of DRGs, demographic information (that is, sex, age, and discharge status). After cases are screened through the MCE and assigned to a DRG by the GROUPER, the PRICER software calculates a base DRG payment. The PRICER calculates the payment for each case covered by the IPPS based on the DRG relative weight and additional factors associated with each hospital, such as IME and DSH adjustments. These additional factors increase the payment amount to hospitals above the base DRG payment. The records for all Medicare hospital inpatient discharges are maintained in the Medicare Provider Analysis and Review (MedPAR) file. The data in this file are used to evaluate possible DRG classification changes and to recalibrate the DRG weights. However, in the July 30, 1999 IPPS final rule (64 FR 41500), we discussed a process for considering non-MedPAR data in the recalibration process. In order for us to consider using particular non-MedPAR data, we must have sufficient time to evaluate and test the data. The time necessary to do so depends upon the nature and quality of the non-MedPAR data submitted. Generally, however, a significant sample of the non-MedPAR data should be submitted by mid-October for consideration in conjunction with the next year's proposed rule. This allows us time to test the data and make a preliminary assessment as to the feasibility of using the data. Subsequently, a complete database should be submitted by early December for consideration in conjunction with the next year's proposed rule. The limited changes that we are proposing to the DRG classification system for FY 2007 for the FY 2007 GROUPER, version 24.0 and to the methodology used to recalibrate the DRG weights are set forth under section II.E. of this proposed rule. Unless otherwise noted in this proposed rule, our DRG analysis is based on data from the December 2005 update of the FY 2005 MedPAR file, which contains hospital bills received through December 31, 2005, for discharges occurring in FY 2005. 2. Yearly Review for Making DRG Changes Many of the changes to the DRG classifications are the result of specific issues brought to our attention by interested parties. We encourage individuals with concerns about DRG classifications to bring those concerns to our attention in a timely manner so they can be carefully considered for possible inclusion in the annual proposed rule and, if included, may be subjected to public review and comment. Therefore, similar to the timetable for interested parties to submit non-MedPAR data for consideration in the DRG recalibration process, concerns about DRG classification issues should be brought to our attention no later than early December in order to be considered and possibly included in the next annual proposed rule updating the IPPS. The actual process of forming the DRGs was, and continues to be, highly iterative, involving a combination of statistical results from test data combined with clinical judgment. For purposes of this proposed rule, in deciding whether to create a separate DRG, we consider whether the resource consumption and clinical characteristics of the patients with a given set of conditions are significantly different than the remaining patients in the existing DRG. We evaluate patient care costs using average charges and lengths of stay as proxies for costs and rely on the judgment of our medical officers to decide whether patients are clinically distinct or similar to other patients in the DRG. In evaluating resource costs, we consider both the absolute and percentage differences in average charges between the cases we are selecting for review and the remainder of cases in the DRG. We also consider variation in charges within these groups; that is, whether observed average differences are consistent across patients or attributable to cases that are extreme in terms of charges or length of stay, or both. Further, we also consider the number of patients who will have a given set of characteristics and generally prefer not to create a new DRG unless it will include a substantial number of cases. C. Proposals for Revisions to the DRG System Used Under the IPPS 1. MedPAC Recommendations In the FY 2006 IPPS final rule, we discussed a number of recommendations made by MedPAC regarding revisions to the DRG system used under the IPPS (70 FR 47473 through 47482). In Recommendation 1-3 in the 2005 Report to Congress on Physician-Owned Specialty Hospitals, MedPAC recommended that CMS: • Refine the current DRGs to more fully capture differences in severity of illness among patients, including— • Base the DRG relative weights on the estimated cost of providing care. • Base the weights on the national average of the hospital-specific relative values (HSRVs) for each DRG (using hospital-specific costs to derive the HSRVs). • Adjust the DRG relative weights to account for differences in the prevalence of high-cost outlier cases. • Implement the case-mix measurement and outlier policies over a transitional period. As we noted in the FY 2006 IPPS final rule, we had insufficient time to complete a thorough evaluation of these recommendations for full implementation in FY 2006. However, we did adopt severity-weighted cardiac DRGs in FY 2006 to address public comments on this issue and the specific concerns of MedPAC regarding cardiac surgery DRGs. We also indicated that we planned to further consider all of MedPAC's recommendations and thoroughly analyze options and their impacts on the various types of hospitals in the FY 2007 IPPS proposed rule. Following the publication of the FY 2006 IPPS final rule, we contracted with 3M Health Information Systems to assist us in performing this analysis. Beginning with MedPAC's relative weight recommendations, we analyzed MedPAC's recommendations to move to a cost-based HSRV weighting methodology. In performing this portion of the analysis, we studied hospital cost report data, departmental cost-to-charge ratios (CCRs), MedPAR claims data, and HSRV weighting methodology. Our intention in undertaking this portion of the analysis was to find an administratively feasible approach to improving the accuracy of the DRG weights. As we describe in detail below, we believe some changes can be made to MedPAC's methodology for determining the relative weights that will make it more feasible to replicate on an annual basis but will result in similar impacts. In conjunction with analyzing MedPAC's relative weight recommendations, we looked at refining the current DRG system to better recognize severity of illness. Starting with the APR DRG GROUPER used by MedPAC in its analysis, we studied Medicare claims data. Based on this analysis, we developed a consolidated severity-adjusted DRG GROUPER that we believe could be a better alternative for recognizing severity of illness among the Medicare population. We note that MedPAC's recommendations with regard to revising the DRGs to better recognize severity of illness may have implications for the outlier threshold, the measurement of real case-mix versus apparent case-mix, and the IME and the DSH adjustments. We will discuss these implications in more detail in the following sections. As we present below, we believe that the recommendations made by MedPAC, or some variants of them, have significant promise to improve the accuracy of the payment rates in the IPPS. For instance, the percent of DRGs with payment-to-cost ratios between 0.95 and 1.05 will increase substantially from adoption of these recommendations. 1 We agree with MedPAC about exploring possible refinements to our payment methodology even in the absence of concerns about the proliferation of specialty hospitals. In the FY 2006 final rule, we indicated that until we had completed further analysis of the options and their effects, we could not predict the extent to which changing to APR DRGs would provide payment equity between specialty and general hospitals. In fact, we cautioned that any system that groups cases will always present some opportunities for providers to specialize in cases they believe to have higher margins. We believe that improving payment accuracy should reduce these opportunities, and potentially reduce the incentives that Medicare payments may provide for the further development of specialty hospitals. 1 Medicare Payment Advisory Commission: Report to the Congress; Physician-Owned Specialty Hospitals, March 2005, p. 37. We considered MedPAC's recommendation to adjust the relative weights to account for differences in the prevalence of outlier cases. However, we placed most of our attention and resources on the recommendations related to refinement of the current DRGs to more fully capture differences in severity of illness among patients as we do not have the statutory authority to make the specific changes to our outlier policy that MedPAC recommended. While we have not made MedPAC's recommendation regarding outliers a central focus of our analysis, we do intend to examine this issue in more detail in the future. In the following sections II.C.2. through C.6. of this proposed rule, we present our analysis and discuss a number of issues related to the MedPAC recommendations. We also present the estimated impacts of implementing the recommendations and conclude with a specific proposal for FY 2007 and some proposed intended actions for implementation for FY 2008. We also are soliciting comments on other possible proposals or actions in FY 2007, FY 2008, or a combination of both. 2. Refinement of the Relative Weight Calculation (If you choose to comment on issues in this section, please include the caption “HSRV Weights” at the beginning of your comment.) MedPAC made two recommendations with respect to the DRG relative weight calculation. First, MedPAC recommended that CMS base the DRG relative weights on the estimated cost of providing care. Second, MedPAC recommended that CMS base the weights on the national average of the HSRVs in each DRG (using hospital-specific costs to derive the HSRVs). Because both of these recommendations address the relative weight calculation, we are addressing them together. The work we have done to address these recommendations is discussed below. MedPAC recommended that CMS replace its charge-based relative weight methodology with cost-based HSRV weights as it believed that the charge-based relative weight methodology that CMS has utilized since 1983 has introduced bias into the weights due to differential markups for ancillary services among the DRGs. In analyzing claims data, it is evident to us that some hospital types (for example, teaching hospitals) are systematically more expensive overall than the average hospital and certain case types are more commonly treated at these more expensive facilities. This fact results in an upward bias in the weights for these types of cases. The HSRV methodology recommended by MedPAC would help reduce the bias that may be present in the national relative weights due to differences in case-mix adjusted costs. Under the HSRV method recommended by MedPAC, charges are standardized for each provider by converting its charges for each case to hospital-specific relative charge values and then adjusting those values for the hospital's case-mix. The first step in this process involves dividing the charge for each case at the hospital by the average charge for all cases at the hospital in which the case was treated. The hospital-specific relative charge value, by definition, averages 1.0 for each hospital. The resulting ratio is then multiplied by the hospital's case-mix index (CMI). In this way, each hospital's relative charge value is adjusted by its case-mix to an average that reflects the complexity of the cases it treats relative to the complexity of the cases treated by all other hospitals. Our analysis of departmental-level CCRs from the Medicare cost report data has shown that charges for routine days, intensive care days, and various ancillary services are not marked up by a consistent amount. For example, the markup amounts for cardiology services are higher than average. Because charges are the current basis for the DRG relative weights, the practice of differential markups can lead to bias in the DRG weights because various DRGs use, on average, more or less of particular ancillary services. MedPAC believes that the bias in the national DRG relative weights that may arise as a result of differential markups across various cost centers can be removed by moving from charge-based to cost-based weights. Based on the analysis we have conducted, we agree that it may be appropriate to adjust the DRG relative weights to account for the differences in charge markups across cost centers and to adopt an HSRV methodology. However, we have several concerns about the methodology used by MedPAC. MedPAC's methodology to reduce hospital charges to cost is administratively burdensome, not only to develop, but also to maintain. First, MedPAC developed CCRs for individual hospitals at the most detailed department level. Specifically, in calculating costs as the basis for the relative weights, MedPAC applied hospital-specific CCRs from each provider's cost report to the line item charges on the claims that the hospital submitted during the same time period. This methodology required matching cost report data to claims data, and because cost report data take longer to compile and file, the method necessitates using older claims data to set relative weights. The most recent complete set of Medicare cost reports available to us is from FY 2003. Thus, if we were to model the exact approach used by MedPAC and use claims data for a matching year, we would be using claims data from FY 2003. If we set DRG weights for FY 2007 using our current charge-based method, we would use FY 2005 hospital claims to set the proposed relative weights. In addition, MedPAC's hospital-specific approach required detailed cost center distinctions for each hospital that are difficult to define, map, and apply. This approach also required the use of the Standard Analytic File (SAF) because MedPAR data that we currently use to set DRG weights did not have the necessary level of detail. Using the SAF increases processing time and adds further complexity to the process of setting the relative weights. Second, because MedPAC applied these CCRs at the individual claim level, missing or invalid data resulted in MedPAC deleting a large number of claims (approximately 10 percent) from the relative weight calculation. Lastly, MedPAC acknowledged that its method was too difficult to replicate on an annual basis and suggested that the weights be recalculated once every 5 years with other adjustments based on charges during the intervening years. We have developed an alternative to MedPAC's approach that we believe would achieve similar results in a more administratively feasible manner. This method involves developing hospital-specific charge relative weights at the cost center level to remove the bias introduced by hospital characteristics (that is, teaching, disproportionate share, location, and size, among others) and then scaling the weights to costs using the national cost center charge ratios developed from the cost report data. After studying Medicare cost report data, we established 10 cost center categories based upon broad hospital accounting definitions. In our cost center categories, there are 8 ancillary cost groups in addition to routine day costs and intensive care day costs, and each category represents at least 5 percent of the charges in the claims data. The specific cost report lines that contribute to each category and the corresponding charge lines from the MedPAR claims data are itemized in Table A below. We believe this alternative approach, which we are labeling as the HSRV cost center (HSRVcc) methodology, has several advantages. First, the use of national average rather than hospital-specific CCRs avoids the complexity encountered with cost center CCRs at the hospital level and allows us to retain more data for use in the relative weight calculation. In addition, the methodology eliminates the need to match claims to the time period of the CCRs, resulting in the ability to use more timely claims data. Furthermore, the alternative approach makes it more feasible to update the relative weights annually using a single methodology. We do not have to replicate the methodology once every 5 years and make adjustments based on changes in charges in the intervening years. In developing an alternative method of calculating DRG weights, we utilized two data sources: claims data and cost report data. The claims data are taken from the FY 2004 MedPAR file. This file is based on fully coded diagnostic and procedure data for all Medicare inpatient hospital bills. The FY 2004 MedPAR data include discharges occurring between October 1, 2003, and September 30, 2004, based on bills received by CMS through March 30, 2005, from all hospitals subject to the IPPS. The full FY 2004 MedPAR file includes data for approximately 13,673,607 Medicare discharges. We excluded discharges for Medicare beneficiaries enrolled in a Medicare+Choice managed care plan from the analysis. In addition, we excluded data for any hospital that was paid under the IPPS during FY 2004 but became a CAH at any time before February 28, 2005; data from IPFs, IRFs, and LTCHs; data from Maryland hospitals; data from Indian Health Service hospitals; and data from all-inclusive rate providers. The Medicare cost report data used in the analysis were from FY 2003, the most recent full set of data available. Under our alternative methodology, we calculated DRG weights from MedPAR and cost report data as follows: a. Step One: Clean the Data (1) All of the claims were grouped using Version 23.0 of the CMS DRGs. • The transplant cases that were used to establish the alternative relative weights for heart and heart-lung, liver and/or intestinal, and lung transplants (DRGs 103, 480, and 495 under the current Version 23.0 GROUPER) were limited to those Medicare-approved transplant centers that have cases in the FY 2004 MedPAR file. (Medicare coverage for heart, heart and lung, liver and/or intestinal, and lung transplants is limited to those facilities that have received approval from CMS as transplant centers.) • Organ acquisition for kidney, heart, heart-lung, liver, lung, pancreas, and intestinal (or multivisceral organs) transplants continue to be paid on a reasonable cost basis. Because these acquisition costs are paid separately from the prospective payment rate, it is necessary to subtract the acquisition charges from the total charges on each transplant bill that showed acquisition charges before adjusting the charges under the HSRVcc methodology and before eliminating statistical outliers. (2) The FY 2004 MedPAR data were edited to exclude claims for hospitals with no cost report data. Claims with total charges or total length of stay less than or equal to zero were eliminated. Claims that had an amount in the total charge field that differed by more or less than $10 from the sum of charges for routine days, intensive care, pharmacy, special equipment, therapy, operating room, cardiology, laboratory, radiology, and other services were deleted. In addition, we deleted claims for providers that had charges only in the routine days and intensive care days cost centers and had no charges in any of the eight ancillary cost centers. These claims were deleted because we believe the charges for the eight ancillary cost centers were included in the routine days and intensive care days cost centers. Had we included these claims, the charges for the routine days and intensive care days would have been inflated. After applying these edits, we identified 11,142,651 claims that we used in this analysis. (3) Statistical outliers were eliminated by removing all cases that were beyond 3.0 standard deviations from the mean of the log distribution of both the charges per case and the charges per day for each DRG. b. Step Two: Compute HSRVs for Each Cost Center for Each DRG Once the MedPAR data were edited, we sorted the data by provider so that charges could be standardized under the HSRVcc methodology. To do this, an average charge was computed for each provider for each of 10 proposed cost centers (see Table A). The average charge was computed by summing the charges for each cost center and dividing by the transfer-adjusted case count for each provider. A transfer case, identified by discharge code, DRG, and length of stay, was counted as a fraction of a case based on the ratio of its length of stay plus 1 day relative to the geometric mean length of stay for that DRG. That is, a transfer case with a length of stay of 2 days in a DRG with a geometric mean length of stay of 6 days would be counted as 3 (2 days plus 1 extra day) divided by 6 or 0.5 of a total case. This treatment of transfer cases is consistent with payment rules. After computing the average charge for each provider for each cost center, the cost center charges on each claim were divided by the provider's average charge for the matching cost center across all services. For example, the routine day charges on each individual claim were divided by the average routine day charge for the provider across all services, the intensive care unit charges on the same claim were divided by the average intensive care unit charge for the provider across all services, and so on. By using a hospital's relative charge structure, we found that the resulting weights did not reflect differences in charges among providers for factors such as location, size, wages, relative efficiency, average markup, IME adjustment, DSH adjustment, and the variety of cases treated. Therefore, once charge weights were computed at the hospital cost center level, they were multiplied by the provider's CMI. We made this adjustment for the CMI to rescale the hospital-specific relative charge values which, by definition, averaged to 1.0 for each cost center. We believed that the CMI was a reasonable scale factor to use to further adjust the relative charges to reflect the complexity of cases treated by the provider. We assigned a starting CMI of 1 to the cost center for each provider. However, an alternative starting CMI could have been assigned because the algorithm is not sensitive to starting values of CMI. After the relative charges (cost center claim charge divided by the average cost center charge for the provider) were multiplied by the hospital's matching cost center CMI, they were summed by DRG. The transfer adjusted case count for each DRG was also summed. Average charges by DRG were calculated for each cost center by taking the sum of the relative CMI-adjusted charges for that DRG and dividing by the transfer-adjusted case count for that DRG. A national average charge for each cost center was calculated summing all relative CMI-adjusted charges in the trimmed MedPAR data set and dividing by the total transfer-adjusted case count. We then created a set of cost center DRG weights by dividing the national average charge for each DRG for each cost center by the national average charge for that cost center. The result was a set of 10 weights for each DRG. These 10 weights are then assigned to each claim, and a new CMI is created for each provider. Then the relative charges for each cost center on the claim (total charge for cost center is divided by the provider's average charge for that cost center) are multiplied by this new CMI and the weights are iterated until the national average CMI for each cost center stops changing between iterations. In preparing the proposed weights for their simulation, we used a transfer-adjusted CMI that was computed by taking the sum of the transfer-adjusted weights and dividing by a full case count, where the transfer-adjusted weight is computed by multiplying the transfer-adjusted case count (length of stay for the claim plus 1 day divided by geometric mean length of stay for the DRG) by the DRG weight. Table A below illustrates the charge line items from MedPAR that were included in each cost center charge group. In addition, it shows the corresponding line items from Worksheet C, Part 1, columns 5, 6, and 7 of the Medicare cost reports. The name of each cost report line item appears as it is listed in the Hospital Cost Report Information System (HCRIS) cost report database record layout which is available for download via the Web site: www.cms.hhs.gov. BILLING CODE 4120-01-P EP25AP06.000 EP25AP06.001 [BILCOD]BILLING CODE 4120-01-C c. Step Three: Compute CCRs From the Cost Reports for Each of the 10 Cost Center Groups Identified in Table A After the iteration process was completed, we removed the effects of differential markups within cost centers. The first step in this process was to develop national cost center CCRs. Taking FY 2003 cost report data, we edited the data to remove data for CAHs, IPFs, IRFs, LTCHs, Maryland hospitals, Indian Health Service hospitals, and all inclusive rate hospitals, and cost reports that represented time periods of less than 1 year (365 days). We then created CCRs for each provider for each group of cost centers (see Table A for line items used in the calculations) while removing any cost center CCRs that were greater than 10 or less than .01, as we believe that these CCRs are outside of a reasonable range. We then took the logs of all of the cost center CCRs and removed any cost center CCRs where the log of the cost center CCR was greater or less than the mean log plus/minus 1.96 standard deviations of the log of that cost center CCR. We used 1.96 standard deviations as a trim factor because the logs of the cost center CCRs are normally distributed and 1.96 standard deviations represent the 95th percentile of the T-Distribution for large sample size, for which 2,000 to 3,000 hospitals qualify. Once the cost report data were trimmed, we calculated the geometric mean CCR for each cost center. d. Step Four: Sum the Average Charge for Each Cost Center From the MedPAR Data and Apply the National CCRs From the MedPAR File Once the national average CCRs from Step Three were computed, they were multiplied by the total unadjusted charges for the matching cost centers in the MedPAR file. The estimated costs were then summed to derive a total cost for all cases across the Nation. The percentage that each cost center was contributing to the overall total costs is calculated by dividing the individual cost center cost by the total. For example, the total cost for routine days was divided by the total cost for all cases to arrive at 0.29, which indicated that routine costs were responsible for approximately 29 percent of total costs. The 10 scaling factors sum to 1.0. e. Step Five: Adjust Relative Weights From Step Two to Cost by Applying Scaling Factors From Step Four For each DRG, the cost center weights are multiplied by these scaling factors (that is, the routine day weight is multiplied by the routine day scaling factor, the intensive care unit weight is multiplied by the intensive care unit scaling factor, and so on). After the weights are adjusted by the scaling factor, they are summed by DRG to create one final weight for each DRG. f. Step Six: Normalize the Weights In order to compare the weights calculated in Step Five to the charge-based weights that are in effect in FY 2006, the weights were normalized by the FY 2006 normalization factor of 1.47462 (70 FR 47332). This factor was applied to the charge-based weights from FY 2006 to ensure that recalibration by itself neither increases nor decreases total payments under the IPPS. We used the same normalization factor that we applied for purposes of calculating the DRG relative weights in the FY 2006 IPPS final rule because we used the same FY 2004 MedPAR data and FY 2003 cost report data that we used to set the FY 2006 DRG relative weights. We note that we likely will have more recent data available when we determine the DRG relative weights for the FY 2007 IPPS final rule. 3. Refinement of DRGs Based on Severity of Illness (If you choose to comment on issues in this section, please include the caption “DRGs: Severity of Illness” at the beginning of your comment.) For purposes of the following discussions, the term “CMS DRGs” means the DRG system we currently use under the IPPS; the term “APR DRGs” means the severity DRG system designed by 3M Health Information Systems that currently is used by the State of Maryland; and the term “consolidated severity-adjusted DRGs” means the DRG system based on a consolidated version of the APR DRGs (as described in detail below). Although we discuss the consolidated severity-adjusted DRGs in this proposed rule, we are interested in public comments on whether there are alternative DRG systems that could result in better recognition of severity than the consolidated severity-adjusted DRGs we are proposing. We refer to adopting consolidated severity-adjusted DRGs numerous times in this proposed rule. As we make clear in the detailed discussion below, there are still further changes that we believe may be important to make to this proposed system before it is ready for adoption. In the remainder of this proposed rule, “consolidated severity-adjusted DRGs” refers to the DRG system we have analyzed. However, it is possible that the public comment process will present compelling evidence that there are potential alternatives to the consolidated severity-adjusted DRG system for us to consider that could more effectively recognize severity of illness. In the FY 2006 IPPS final rule (70 FR 47474), we stated that we would consider making changes to the CMS DRGs to better reflect severity of illness among patients. We indicated that we would conduct a comprehensive review of the CC list as well as consider the possibility of using the APR DRGs for FY 2007. We did not adopt APR DRGs for FY 2006 because such an adoption would represent a significant undertaking that could have a substantial effect on all hospitals. There was insufficient time between the release of the MedPAC reports in March 2005 and the publication of the FY 2006 IPPS final rule for us to analyze fully a change of this magnitude. Instead, we adopted a more limited policy by implementing severity-adjusted cardiac DRGs. After publication of the FY 2006 IPPS final rule, CMS contracted with 3M Health Information Systems to further analyze the MedPAC recommendations in support of our consideration of possible changes to the IPPS for FY 2007. Under one task of this contract, 3M Health Information Systems analyzed the feasibility of using a revised DRG system under the IPPS that is modeled on the APR DRGs Version 23 to better recognize severity of illness. The APR DRGs have been used successfully as the basis of Belgium's hospital prospective global budgeting system since 2002. The State of Maryland began using APR DRGs as the basis of its all-payer hospital payment system in July 2005. More than a third of the hospitals in the United States are already using APR DRG software to analyze comparative hospital performance. Many major health information system vendors have integrated this system into their products. Several State agencies utilize the APR DRGs for the public dissemination of comparative hospital performance reports. APR DRGs have been widely applied in policy and health services research. In addition to being used in research by MedPAC, the APR DRGs also contain a separate measure of risk of mortality that is used in the Quality Indicators of the Agency for Healthcare Research and Quality, the Premier Hospital Quality Incentive Demonstration discussed in section IV.B. of this preamble, and the Joint Commission on Accreditation of Healthcare Organizations (JCAHO) hospital accreditation survey process (Shared Visions-New Pathways). Below we present a comparison of the CMS DRG system and the APR DRG system. a. Comparison of the CMS DRG System and the APR DRG System The CMS DRG and APR DRG systems have a similar basic structure. There are 25 MDCs in both systems. The DRG assignments for both systems are based on the reporting of ICD-9-CM diagnosis and procedure codes. Both DRG systems are composed of a base DRG that describes the reason for hospital admission and a subdivision of the base DRG based on other patient attributes that affect the care of the patient. For surgical patients, the base DRG is defined based on the type of procedure performed. For medical patients, the base DRG is defined based on the principal diagnosis. In Version 23.0 of the CMS DRG system, there are 367 base DRGs and 526 total DRGs. In Version 23 of the APR DRG system, there are 314 base DRGs and 1,258 total APR DRGs. Some of the base DRGs in the two systems are virtually identical. For example, there is no significant difference between the base DRG under both systems for medical treatment of congestive heart failure. For other base DRGs, there are substantial differences. For example, in the CMS DRG system, there are two base DRGs for appendectomy (simple and complex); in the APR DRG system, there is only one base DRG for appendectomy (the relative complexity of the patient is addressed in the subsequent subdivision of the base DRG into severity of illness subclasses). The focus of the CMS DRGs is on complexity. Complexity is defined as the relative volume and types of diagnostic, therapeutic, and bed services required for the treatment of a particular illness. Thus, the focus of payment in the CMS DRG system reflects the relative resource use needed by the patient in one DRG group compared to another. Resource use is generally correlated with severity of illness but an intensive resource use does not necessarily indicate a high level of severity in every case. It is possible that some patients will be resource-intensive and require high-cost services even though they are less severely ill than other patients. The CMS DRG system subdivides the base DRGs using age and the presence of a secondary diagnosis that represents a CC. The age subdivisions primarily relate to pediatric patients (those who are less than 18 years of age). Patients are assigned to the CC subgroup if they have at least one secondary diagnosis that is considered a CC. The diagnoses that are designated as CCs are the same across all base DRGs. The subdivisions of the base CMS DRGs are not uniform: some base DRGs have no subdivision; some base DRGs have a two-way subdivision based on the presence of a CC; and other base DRGs have a three-way subdivision based on a pediatric subdivision followed by a CC subdivision of the adult patients. In addition, some base DRGs in MDC 5 (Diseases and Disorders of the Circulatory System) have a subdivision based on the presence of a major cardiovascular condition or complex diagnosis. The APR DRG system subdivides the base DRGs by adding four severity of illness subclasses to each DRG. Under the APR DRG system, severity of illness is defined as the extent of physiologic decompensation or organ system loss of function. The underlying clinical principle of APR DRGs is that the severity of illness of a patient is highly dependent on the patient's underlying problem and that patients with high severity of illness are usually characterized by multiple serious diseases or illnesses. The assessment of the severity of illness of a patient is specific to the base APR DRG to which a patient is assigned. In other words, the determination of the severity of illness is disease-specific. High severity of illness is primarily determined by the interaction of multiple diseases. Patients with multiple comorbid conditions involving multiple organ systems are assigned to the higher severity of illness subclasses. The four severity of illness subclasses under the APR DRG system are numbered sequentially from 1 to 4, indicating minor (1), moderate (2), major (3), and extreme (4) severity of illness. The APR DRG system does not subdivide base DRGs based on the age of the patient. Instead, patient age is used in the determination of the severity of illness subclass. In the CMS DRG system, the CC list is generally the same across all base DRGs. However, there are CC list exclusions for secondary diagnoses that are related to the principal diagnosis. In the APR DRG system, the significance of a secondary diagnosis is dependent on the base DRG. For example, an infection is considered more significant for an immune-suppressed patient than for a patient with a broken arm. The logic of the CC subdivision in the CMS DRG system is a simple binary split for the presence or absence of a CC. In the APR DRG system, the determination of the severity subclass is based on an 18-step process that takes into account secondary diagnoses, principal diagnosis, age, and procedures. The 18 steps are divided into three phases. There are six steps in Phase I, three steps in Phase II, and nine steps in Phase III. The diagram below illustrates the three-phase process for determining patient severity of illness subclass. BILLING CODE 4120-01-P EP25AP06.002 BILLING CODE 4120-01-C Under the CMS DRG system, a patient is assigned to the DRG with CC if there is at least one secondary diagnosis present that is a CC. There is no recognition of the impact of multiple CCs. Under the APR DRG system, high severity of illness is primarily determined by the interaction of multiple diseases. Under the CMS DRG system, patients are assigned to an MDC based on their principal diagnosis. While the principal diagnosis is generally used to assign the patient to an MDC in the APR DRG system, there is a rerouting step that assigns some patients to another MDC. For example, lower leg amputations can be performed for circulatory, endocrine, or musculoskeletal principal diagnoses. Instead of having three separate amputation base DRGs in different MDCs as is done in the CMS DRG system, the APR DRG system reroutes all of these amputation patients into a single base APR DRG in the musculoskeletal MDC. The CMS DRG system uses death as a variable in the DRG definitions but the APR DRG system does not. Both DRG systems are based on the information contained in the Medicare Uniform Bill. The APR DRG system requires the same information used by the current CMS DRG system. No changes to the claims form or the data reported would be necessary if CMS were to adopt APR DRGs or a variant of them. The CMS DRG structure makes some DRG modifications difficult to accommodate. For example, high severity diseases that occur in low volume are difficult to accommodate because the only choice is to form a separate base DRG with relatively few patients. Such an approach would lead to a proliferation of low-volume DRGs. Alternatively, these cases may be included in DRGs with other patients that are dissimilar clinically or in costs. Requests for new base DRGs formed on the use of a specific technology may also be difficult to accommodate. Base DRGs formed based on the use of a specific technology would result in the payment weight for the DRG being dominated by the price set by the manufacturer for the technology. The structure of the APR DRGs provides a means of addressing high severity cases that occur in low volume through assignment of the case to a severity of illness subclass. However, the APR DRG structure does not currently accommodate distinctions based on complexity. Technologies that represent increased complexity, but not necessarily greater severity of illness, are not explicitly recognized in the APR DRG system. For example, in the CMS DRGs, there are separate DRGs for coronary angioplasty with or without insertion of stents. The APR DRGs do not make such a differentiation. The insertion of the stent makes the patient's case more complex but does not mean the patient is more severely ill. However, the inability to insert a stent may be indicative of a patient's more advanced coronary artery disease. Although such conflicts are relatively few in number, they do represent an underlying difference between the two systems. If Medicare were to adopt a severity DRG system based on the APR DRG logic but assign cases based on complexity as well as severity as we do under the current Medicare DRG system, such a distinction would represent a departure from the exclusive focus on severity of illness that currently forms the basis of assigning cases in the APR DRG system. Section 1886(d)(4) of the Act specifies that the Secretary must adjust the classifications and weighting factors at least annually to reflect changes in treatment patterns, technology, and other factors that may change the relative use of hospital resources. Therefore, we believe a method of recognizing technologies that represent increased complexity, but not necessarily greater severity of illness, should be included in the system. We plan to develop criteria for determining when it is appropriate to recognize increased complexity in the structure of the DRG system and how these criteria interact with the existing statutory provisions for new technology add-on payments. We invite public comments on this particular issue. Another difference between the CMS DRG system and the APR DRG system is the assignment of diagnosis codes in category 996 (Complications peculiar to certain specified procedures). The CMS DRG system treats virtually all of these codes as CCs. With the exceptions of complications of organ transplant and limb reattachments, these complication codes do not contribute to the severity of illness subclass in the APR DRG system. While these codes could be added to the severity logic, the appropriateness of recognizing codes such as code 998.4 (Foreign body accidentally left during a procedure) as a factor in payment calculation could create the appearance of incentives for less than optimal quality. Although there is no direct recognition of the codes under the 996 category, the precise complication, in general, can be coded separately and could contribute to the severity of illness subclass assignment. Table B below summarizes the differences between the two DRG systems: Table B.—Comparison of the CMS DRG System and the APR DRG System Element CMS DRG system APR DRG system Number of base DRGs 367 314. Total number of DRGs 526 1,258. Number of CC (severity) subclasses 2 4. Multiple CCs recognized No Yes. CC assignment specific to base DRG No Yes. Logic of CC subdivision Presence or absence 18-step process. Logic of MDC assignment Principal diagnosis Principal diagnosis with rerouting. Death used in DRG definitions Yes No. Data requirements Hospital claims Hospital claims. To illustrate the differences between the two DRG systems, we compare in Table C below four cases that have been assigned to CMS DRGs and APR DRGs. In all four cases, the patient is a 67-year-old who is admitted for diverticulitis of the colon and who has a multiple segmental resection of the large intestine performed. ICD-9-CM diagnosis code 562.11 (Diverticulitis of colon (without mention of hemorrhage)) and ICD-9-CM procedure code 45.71 (Multiple segmental resection of large intestine) would be reported to capture this case. In both DRG systems, the patient would be assigned to the base DRG for major small and large bowel procedures. These four cases would fall into two different CMS DRGs and four different APR DRGs. We include Medicare average charges in the table to illustrate the differences in hospital resource use. Case 1: The patient receives only a secondary diagnosis of an ulcer of anus and rectum (ICD-9-CM diagnosis code 569.41). Under the CMS DRG system, the patient is assigned to base DRG 149 (Major Small and Large Bowel Procedures Without CC). Under the APR DRG system, the patient is assigned to base DRG 221 (Major Small and Large Bowel Procedures) with a severity of illness subclass of 1 (minor). Case 2: The patient receives a secondary diagnosis of an ulcer of anus and rectum and an additional secondary diagnosis of unspecified intestinal obstruction (ICD-9-CM diagnosis code 560.9). Under the CMS DRG system, the patient is assigned to DRG 148 (Major Small and Large Bowel Procedures With CC). Under the APR DRG system, the patient is assigned to base DRG 221 and the severity of illness subclass increases to 2 (moderate). Case 3: The patient receives multiple secondary diagnoses of an ulcer of anus and rectum, unspecified intestinal obstruction, acute myocarditis (ICD-9-CM diagnosis code 422.99), and atrioventricular block, complete (ICD-9-CM diagnosis code 426.0). Under the CMS DRG system, the patient is assigned to DRG 148. Under the APR DRG system, the patient is assigned to base DRG 221 and the severity of illness subclass increases to 3 (major). Case 4: The patient receives multiple secondary diagnoses of an ulcer of anus and rectum, unspecified intestinal obstruction, acute myocarditis, atrioventricular block, complete, and the additional diagnosis of acute renal failure, unspecified (ICD-9-CM diagnosis code 584.9). Under the CMS DRG system, the patient is assigned to DRG 148. Under the APR DRG system, the patient is assigned to base DRG 221 and the severity of illness subclass increases to 4 (extreme). Table C.—Example of Sample Cases Assigned Under the CMS DRG System and Under the APR DRG System Principal diagnosis code: 562.11 Procedure code: 45.71 CMS DRG system DRG assigned Average charge APR DRG system DRG assigned Average charge Case 1—Secondary Diagnosis: 569.41 149 without CC $25,147 221 with severity of illness subclass 1 $25,988 Case 2—Secondary Diagnoses: 569.41, 560.9 148 with CC 59,519 221 with severity of illness subclass 2 38,209 Case 3—Secondary Diagnoses: 569.41, 560.9, 422.99, 426.0 148 with CC 59,519 221 with severity of illness subclass 3 66,597 Case 4—Secondary Diagnoses: 569.41, 560.9, 422.99, 426.0, 584.9 148 with CC 59,519 221 with severity of illness subclass 4 130,750 The largest significant difference in average charges is seen in case 4 where the average charge under the APR DRG assigned to the patient ($130,750) is more than double the average charge under the CMS DRG assigned to the patient ($59,519). b. Consolidated Severity-Adjusted DRGs for Use in the IPPS APR DRGs were developed to encompass all-payer patient populations. As a result, we found that, for the Medicare population, some of the APR DRGs have very low volume. MedPAC noted that the larger number of DRGs under a severity-weighted system might mean that CMS would be faced with establishing weights in many categories that have few cases and, thus, potentially creating unstable estimates. While volume is an important consideration in evaluating any potential consolidation of APR DRGs for use under the IPPS, we believe that hospital resource use and clinical interpretability also need to be taken into consideration. For example, any consolidation of severity of illness subclasses within a base DRG should be restricted to contiguous severity of illness subclasses. Thus, it would not be reasonable clinically to combine severity of illness subclasses 1 and 4 solely because both consist of low-volume cases. We analyzed consolidating APR DRGs by either combining the base DRGs or the severity of illness subclasses within a base DRG. For consolidation across base APR DRGs, we considered patient volume, similarity of hospital charges across all four severity of illness subclasses and clinical similarity of the base APR DRGs. For consolidations of severity of illness subclasses within a base DRG, we considered patient volume and the similarity of hospital charges between severity of illness subclasses. In considering how to consolidate severity of illness subclasses, we believed it was important to use uniform criteria across all DRGs to avoid creating confusing and difficult to interpret results. That is, we were concerned about inconsistencies in the number of severity levels across different DRGs. The objective to simultaneously take into consideration patient volume and average charges often produced conflict. Table D below contains the overall patient volume and average charge by APR DRG severity of illness subclass. While severity of illness subclass 4 (extreme) has had the lowest patient volume of 5.80 percent, we found that the dramatically different average charges between severity of illness subclass 3 (major) and subclass 4 (extreme) patients of approximately $32,426 and $81,952, respectively, would make it difficult to consolidate severity of illness subclass 3 and 4 patients. Conversely, we found that, while the average charge difference between severity of illness subclass 1 (minor) and 2 (moderate) patients was much smaller, of approximately $17,649 and $20,021, respectively, the majority of patient volume (68.08 percent) is in these two subclasses. Thus, low patient volume and small average charge differences rarely coincided. Table D.—Overall Average Charges and Patient Volume by APR DRG Severity of Illness Subclass All cases APR DRG severity of illness subclass 1 APR DRG severity of illness subclass 2 APR DRG severity of illness subclass 3 APR DRG severity of illness subclass 4 Count 11,142,651 21.47% 46.61% 26.12% 5.80% Average Charges $26,342 $17,649 $20,021 $32,426 $81,952 There were also few opportunities to consolidate base DRGs. For base DRGs for which there was a clinical basis for considering a consolidation, there were usually significant differences in average charges for one or more of the severity of illness subclasses. APR DRGs already represented a considerable consolidation of base DRGs (314) compared to CMS DRGs (367). Thus, we expected that further base DRG consolidation would be difficult. We reviewed the patient volume and average charges across APR DRGs and found that medical cases assigned severity of illness subclass 4 within an MDC have similar average charges. We observed the same pattern in average charges across severity of illness subclass 4 surgical patients within an MDC. The data suggest that, in cases with a severity of illness of subclass 4, the severity of the cases had more impact on hospital resource use than the reason for admission (that is, the base APR DRG within an MDC). Thus, we believe that, within each MDC, the severity of illness subclass 4 medical and surgical patients, respectively, could be consolidated into a single group. In some MDCs, it was not possible to consolidate into a single medical and a single surgical severity of illness subclass 4 group. In these MDCs, more than one group was necessary. For instance, Table E below contains the patient volume and average charges for severity of illness subclass 4 cases in MDC 11 (Diseases and Disorders of the Kidney and Urinary Tract). Taking into consideration volume and average charges, except for APR DRG 440 (Kidney Transplant), surgical cases assigned severity of illness subclass 4 in MDC 11 could be consolidated into a single group having 5,492 patients and an average charge of $107,258. However, we decided not to include kidney transplant patients in this severity of illness 4 subclass due to their very high average charges (approximately $203,732 or more than $100,000 greater than other patients in MDC 11 having a severity of illness 4 subclass). Average charges within the consolidated severity of illness 4 surgical DRG in MDC 11 show some variation but are much higher than the corresponding average charges for the severity of illness subgroup 3 patients of $48,863. Thus, our analysis suggests that the data support maintaining three severity of illness levels for each base DRG in MDC 11; a separate severity of illness 4 subclass for all patients other than those having kidney transplant; and a separate DRG for kidney transplants. Table E.—Summary Statistics for Surgical Cases With Severity of Illness Subclass 4 in MDC 11 APR DRG Number of cases Average length of stay Average total charges 440 (Kidney Transplant) 378 18.0 $203,732 441 (Major Bladder Procedures) 528 21.5 128,729 442 (Kidney & Urinary Tract Procedure for Malignancy) 833 16.6 101,501 443 (Kidney & Urinary Tract Procedure for Non-Malignancy) 966 18.4 103,905 444 (Renal Dialysis Access Device Procedure Only Severity of Illness Subclass 4) 935 18.3 104,249 445 (Other Bladder Procedures) 186 15.2 80,197 446 (Urethral & Transurethral Procedure—Severity of Illness Subclass 4) 492 13.4 73,110 447 (Other Kidney, Urinary Tract & Related Procedures) 1,552 19.3 121,011 The consolidation of severity of illness 4 subclass APR DRG into fewer groups was done for all MDCs except MDC 15 (Newborn and Other Neonates With Conditions Originating in the Perinatal Period), MDC 19 (Mental Diseases and Disorders), and MDC 20 (Alcohol/Drug Use and Alcohol/Drug Induced Organic Mental Disorders). In the 22 MDCs in which the severity of illness subclass 4 consolidation was applied, the number of separate severity of illness subclass 4 groups was reduced from 262 to 69. For MDC 14 (Pregnancy, Childbirth, and Puerperium), the base APR DRGs were consolidated from 12 to 6. Severity of illness subclass 1 through 3 were retained, and severity of illness subclass 4 was consolidated into a single APR DRG, except for cesarean section and vaginal deliveries, which were maintained as separate APR DRGs. This consolidation reduced the total number of obstetric APR DRGs from 48 to 22. The Medicare patient volume in MDC 15 was very low, allowing for a more aggressive consolidation. For MDC 15, we consolidated 28 base APR DRGs into 7 base consolidated severity-adjusted DRGs. For each of the 7 consolidated base MDC 15 DRGs, we combined severity of illness subclasses 1 and 2 into one DRG and severity of illness subclass 3 and 4 into another one. This consolidation reduced the total number of MDC 15 DRGs from 112 in the APR DRG system to 14 consolidated severity-adjusted DRGs. In MDC 19, we consolidated 12 base DRGs into 4 base DRGs. We retained the 4 severity of illness subclasses in MDC 19 for each of the 4 base DRGs. In MDC 20, the base APR DRG for patients who left against medical advice has severity of illness subclass 1 and 2 consolidated and severity of illness subclass 3 and 4 consolidated. The remaining 4 base DRGs were consolidated into 1 base DRG and retained in 4 severity of illness subclasses. We did not consolidate any of the pre-MDC subclass 4 APR DRGs such as Heart Transplant. As explained earlier, pre-MDC DRGs are DRGs to which cases are directly assigned on the basis of ICD-9-CM procedure codes. These DRGs are for liver and/or intestinal transplants, heart and/or lung transplants, bone marrow transplants, pancreas transplants, and tracheotomies. For the pre-MDC DRGs, except for Bone Marrow Transplant, we consolidated severity of illness subclasses 1 and 2 into one DRG. In addition, the three base APR DRGs for Human Immunodeficiency Virus (HIV) with multiple or major HIV-related conditions had severity of illness subclasses 1 and 2 consolidated. In total, we reduced 1,258 APR DRGs to 861 consolidated severity-adjusted DRGs. In Appendix C of this proposed rule, we present the 861 unique combinations of consolidated severity-adjusted DRGs. Table F below includes a description of the consolidations that we did within each individual MDC and includes information about the total number of DRGs that were eliminated from the APR DRGs to develop the consolidated severity-adjusted DRGs. BILLING CODE 4120-01-P EP25AP06.003 BILLING CODE 4120-01-C Appendix D of this proposed rule shows the crosswalk of each consolidated severity-adjusted DRG to its respective APR DRG. We numbered the DRGs sequentially and incorporated the severity of illness subclass into the DRG description. However, within the range of sequential numbers used for an MDC, we retained some unused numbers to allow for future DRG expansion. By using a three-digit number for the consolidated severity-adjusted DRGs, we also avoid the need for reprogramming of computer systems that would be necessary to accommodate a change from the current three-digit DRG number to separate fields for the base consolidated severity-adjusted DRG number and the severity of illn [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A06-3629. Public record. Not legal advice.