Medicare Program; Prospective Payment System for Long-Term Care Hospitals RY 2007: Proposed Annual Payment Rate Updates, Policy Changes, and Clarification

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 412

[CMS-1485-P]

RIN 0938-AO06

Medicare Program; Prospective Payment System for Long-Term Care Hospitals RY 2007: Proposed Annual Payment Rate Updates, Policy Changes, and Clarification

AGENCY:

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

ACTION:

Proposed rule.

SUMMARY:

This proposed rule would update the annual payment rates for the Medicare prospective payment system (PPS) for inpatient hospital services provided by long-term care hospitals (LTCHs). The proposed payment amounts and factors used to determine the updated Federal rates that are described in this proposed rule were determined based on the LTCH PPS rate year July 1, 2006 through June 30, 2007. The annual update of the long-term care diagnosis-related group (LTC-DRG) classifications and relative weights remains linked to the annual adjustments of the acute care hospital inpatient diagnosis-related group system, and would continue to be effective each October 1. The proposed outlier threshold for July 1, 2006, through June 30, 2007, would also be derived from the LTCH PPS rate year calculations. We are also proposing to make policy changes and clarifications.

DATES:

To be assured consideration, comments must be received at one of the addresses provided below, no later than 5 p.m. on March 20, 2006.

ADDRESSES:

In commenting, please refer to file code CMS-1485-P. Because of staff and resource limitations, we cannot accept comments by facsimile (FAX) transmission.

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

1.

Electronically.

You may submit electronic comments on specific issues in this regulation to

http://www.cms.hhs.gov/eRulemaking/

. (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-1485-P, P.O. Box 8012, Baltimore, MD 21244-8012.

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-1485-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) 786-7197 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 HHH 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 a 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:

Tzvi Hefter, (410) 786-4487 (General information).

Judy Richter, (410) 786-2590 (General information, payment adjustments for special cases, and onsite discharges and readmissions, interrupted stays, co-located providers, and short-stay outliers).

Michele Hudson, (410) 786-5490 (Calculation of the payment rates, LTC-DRGs, relative weights and case-mix index, market basket, wage index, budget neutrality, and other payment adjustments).

Ann Fagan, (410) 786-5662 (Patient classification system).

Miechal Lefkowitz, (410) 786-5316 (High-cost outliers and cost-to-charge ratios).

Linda McKenna, (410) 786-4537 (Payment adjustments, interrupted stay, and transition period).

Nancy Kenly, (410) 786-7792 (Federal rate update and case-mix index).

SUPPLEMENTARY INFORMATION:

Submission of Public 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-1485-P] and the specific “issue identifier” that precedes the section on which you choose to comment.

Inspection of Public Comments:

All comments received before the close of the comment period are available for viewing by the public, including any personally identifiable or confidential business information that is included in a comment. CMS posts all comments received before the close of the comment period on its public website as soon as possible after they are received. Comments received timely will be available for public inspection as they are received, generally beginning approximately 3 weeks after publication of a document, at the headquarters of the Centers for Medicare & Medicaid Services, 7500 Security Boulevard, Baltimore, 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.

Table of Contents

I. Background

A. Legislative and Regulatory Authority

B. Criteria for Classification as a LTCH

1. Classification as a LTCH

2. Hospitals Excluded From the LTCH PPS

C. Transition Period for Implementation of the LTCH PPS

D. Limitation on Charges to Beneficiaries

E. Administrative Simplification Compliance Act (ASCA) and Health Insurance Portability and Accountability Act (HIPAA) Compliance

II. Summary of Major Contents of This Proposed Rule

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

A. Background

B. Patient Classifications Into DRGs

C. Organization of DRGs

D. Update of LTC-DRGs

E. ICD-9-CM Coding System

1. Uniform Hospital Discharge Data Set (UHDDS) Definitions

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

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

F. Method for Updating the LTC-DRG Relative Weights

IV. Proposed Changes to the LTCH PPS Payment Rates for the 2007 LTCH PPS Rate Year

A. Overview of the Development of the Payment Rates

B. Proposed LTCH PPS Market Basket

1. Overview of the RPL Market Basket

2. Proposed Methodology for Determining the Operating Portion of the RPL LTCH PPS Market Basket

3. Proposed Methodology for Determining the Capital Portion of the RPL Market Basket

4. Proposed Market Basket Estimate for the 2007 LTCH PPS Rate Year

C. Proposed Standard Federal Rate for the 2007 LTCH PPS Rate Year

1. Background

2. Description of a Preliminary Model of an Update Framework Under the LTCH PPS

3. Proposed Update to the Standard Federal Rate for the 2007 LTCH PPS Rate Year

4. Proposed Standard Federal Rate for the 2007 LTCH PPS Rate Year

D. Calculation of Proposed LTCH Prospective Payments for the 2007 LTCH PPS Rate Year

1. Proposed Adjustment for Area Wage Levels

a. Background

b. Geographic Classifications/Labor Market Area Definitions

c. Proposed Labor-Related Share

d. Proposed Wage Index Data

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

3. Proposed Adjustment for High-Cost Outliers

a. Background

b. Cost-to-charge ratios (CCRs)

c. Establishment of the Proposed Fixed-Loss Amount

d. Reconciliation of Outlier Payments Upon Cost Report Settlement

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

4. Other Payment Adjustments

5. Proposed Budget Neutrality Offset To Account for the Transition Methodology

6. One-time Prospective Adjustment to the Standard Federal Rate.

V. Other Proposed Policy Changes for the 2007 LTCH PPS Rate Year

A. Proposed Adjustments for Special Cases

1. Adjustment of Short-Stay Outlier Cases

a. Proposed Changes to the Method for Determining the Payment Amount for Short-Stay Outlier Cases

b. Proposed Changes to the Determination for Cost-to-Charge Ratios (CCRs) and Reconciliation of Short-Stay Outlier Cases

2. The 3-Day or Less Interruption of Stay

B. Special payment provisions for LTCH Hospitals Within Hospitals (HwHs) and LTCH Satellites

VI. Computing the Proposed Adjusted Federal Prospective Payments for the 2007 LTCH PPS Rate Year

VII. Transition Period

VIII. Payments to New LTCHs

IX. Method of Payment

X. Monitoring

XI. RTI Report on MedPAC June 2004 LTCH Recommendations

A. Overview of the Issues

B. Describing the LTCH Universe Since FY 2003

C. Patient, Facility, and Alternative Treatment Site Analysis

D. Specific Findings From Claims Analysis

XII. Collection of Information Requirements

XIII. Regulatory Impact Analysis

Addendum—Tables

Appendix A—Description of a Preliminary Model of an Update Framework Under the LTCH PPS

Acronyms

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

3M 3M Health Information Systems

AHA American Hospital Association

AHIMA American Health Information Management Association

ALOS Average length of stay

APR All patient refined

ASCA Administrative Simplification Compliance Act of 2002 (Pub. L. 107-105)

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

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

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

BLS Bureau of Labor Statistics

CBSA Core-based statistical area

CC Complications and comorbidities

CCR Cost-to-charge ratio

C&M Coordination and maintenance

CMI Case-mix index

CMS Centers for Medicare & Medicaid Services

CMSA  Consolidated metropolitan statistical area

COLA Cost of living adjustment

COPS Medicare conditions of participation

CPI Consumer Price Indexes

DSH Disproportionate share of low-income patients

DRGs Diagnosis-related groups

ECI Employment Cost Indexes

FI Fiscal intermediary

FY Federal fiscal year

HCRIS Hospital cost report information system

HHA Home health agency

HHS (Department of) Health and Human Services

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

HIPC Health Information Policy Council

HwHs Hospitals Within Hospitals

ICD-9-CM International Classification of Diseases, Ninth Revision, Clinical Modification (codes)

IME Indirect medical education

I-O Input-Output

IPF Inpatient psychiatric facility

IPPS Acute Care Hospital Inpatient Prospective Payment System

IRF Inpatient rehabilitation facility

LOS Length of stay

LTC-DRG Long-term care diagnosis-related group

LTCH Long-term care hospital

MCE Medicare code editor

MDC Major diagnostic categories

MedPAC  Medicare Payment Advisory Commission

MedPAR Medicare provider analysis and review file

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

MSA Metropolitan statistical area

NCHS National Center for Health Statistics

NECMA New England County metropolitan area

OPM U.S. Office of Personnel Management

O.R. Operating room

OSCAR Online Survey Certification and Reporting (System)

PIP Periodic interim payment

PLI Professional liability insurance

PMSA Primary metropolitan statistical area

PPI Producer Price Indexes

PPS Prospective payment system

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

RPL Rehabilitation psychiatric long-term care (hospital)

RTI Research Triangle Institute, International

RY Rate year (July 1 through June 30)

SNF Skilled nursing facility

SSO Short-stay outlier

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

UHDDS Uniform hospital discharge data set

I. Background

[If you choose to comment on issues in this section, please include the caption “BACKGROUND” at the beginning of your comments.]

A. Legislative and Regulatory Authority

Section 123 of the Medicare, Medicaid, and SCHIP (State Children's

Health Insurance Program] Balanced Budget Refinement Act of 1999 (BBRA) (Pub. L. 106-113) as amended by section 307(b) of the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA) (Pub. L. 106-554) provide for payment for both the operating and capital-related costs of hospital inpatient stays in long-term care hospitals (LTCHs) under Medicare Part A based on prospectively set rates. The Medicare prospective payment system (PPS) for LTCHs applies to hospitals described in section 1886(d)(1)(B)(iv) of the Social Security Act (the Act), effective for cost reporting periods beginning on or after October 1, 2002.

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

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

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

In a

Federal Register

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

Federal Register

.

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

In the August 30, 2002 final rule, we also presented an in-depth discussion of the LTCH PPS, including the patient classification system, relative weights, payment rates, additional payments, and the budget neutrality requirements mandated by section 123 of the BBRA. The same final rule that established regulations for the LTCH PPS under 42 CFR part 412, subpart O, also contained LTCH provisions related to covered inpatient services, limitation on charges to beneficiaries, medical review requirements, furnishing of inpatient hospital services directly or under arrangement, and reporting and recordkeeping requirements. We refer readers to the August 30, 2002 final rule for a comprehensive discussion of the research and data that supported the establishment of the LTCH PPS (67 FR 55954).

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

Federal Register

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

On May 6, 2005, we published the Prospective Payment System for Long-Term Care Hospitals: Annual Payment Rate Updates, Policy Changes, and Clarifications final rule (70 FR 24168) (hereinafter referred to as the RY 2006 LTCH PPS final rule). In this rule, we set forth the 2006 LTCH PPS rate year annual update of the payment rates for the Medicare PPS for inpatient hospital services provided by LTCHs. We also discussed clarification of the notification policy for colocated LTCHs and satellite facilities. The RY 2006 LTCH PPS final rule also included a provision to extend the surgical DRG exception in the 3-day or less interruption of stay policy at § 412.531 as well as a provision that clarified and modified existing notification requirements for the purpose of implementing § 412.532.

B. Criteria for Classification as a LTCH

1. Classification as a LTCH

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

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

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

In the RY 2005 LTCH PPS final rule (69 FR 25674), we specified the procedure for calculating a hospital's inpatient average length of stay (ALOS) for purposes of classification as a LTCH. That is, if a patient's stay includes days of care furnished during two or more separate consecutive cost reporting periods, the total days of a patient's stay would be reported in the cost reporting period during which the patient is discharged (69 FR 25705). Therefore, we revised the regulations at § 412.23(e)(3)(ii) to specify that, effective for cost reporting periods beginning on or after July 1, 2004, in calculating a hospital's ALOS, if the days of an inpatient stay involve days of care furnished during two or more separate consecutive cost reporting periods, the total number of days of the stay are considered to have occurred in the cost reporting period during which the inpatient was discharged.

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

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

As we stated in the Inpatient Prospective Payment System (IPPS) final rule, published August 1, 2003, prior to the implementation of the LTCH PPS, we did rely on data from the most recently submitted cost report for purposes of calculating the ALOS. The calculation to determine whether an acute care hospital qualifies for LTCH status was based on total days and discharges for LTCH inpatients. However, with the implementation of the LTCH PPS, for the ALOS specified under § 412.23(e)(2)(i), we revised § 412.23(e)(3)(i) to only count total days and discharges for Medicare inpatients (67 FR 55970 through 55974). In addition, the ALOS specified under § 412.23(e)(2)(ii) is calculated by dividing the total number of days for all patients, including both Medicare and non-Medicare inpatients (less leave or pass days) by the number of total discharges for the hospital's most recent complete cost reporting period. As we discussed in the August 1, 2003 IPPS final rule, we are unable to capture the necessary data from our present cost reporting forms. Therefore, we have notified FIs and LTCHs that until the cost reporting forms are revised, for purposes of calculating the ALOS, we will be relying upon census data extracted from Medicare Provider Analysis and Review (MedPAR) files that reflect each LTCH's cost reporting period (68 FR 45464). Requirements for hospitals seeking classification as LTCHs that have undergone a change in ownership, as described in § 489.18, are set forth in § 412.23(e)(3)(iv).

2. Hospitals Excluded From the LTCH PPS

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

• Veterans Administration hospitals.

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

• Hospitals that are reimbursed in accordance with demonstration projects authorized under section 402(a) of the Social Security Amendments of 1967 (Pub. L. 90-248) (42 U.S.C. 1395b-1) or section 222(a) of the Social Security Amendments of 1972 (Pub. L. 92-603) (42 U.S.C. 1395b-1 (note)) (Statewide all-payer systems, subject to the rate-of-increase test at section 1814(b) of the Act).

• Nonparticipating hospitals furnishing emergency services to Medicare beneficiaries.

C. Transition Period for Implementation of the LTCH PPS

In the August 30, 2002 final rule, we provided for a 5-year transition period from reasonable cost-based reimbursement to a full Federal prospective payment based on 100 percent of the Federal rate for LTCHs (67 FR 56038). However, existing LTCHs and LTCHs that are not defined as new in § 412.533(d) have the option to elect to be paid based on 100 percent of the Federal prospective payment. During the 5-year period, two payment percentages are to be used to determine a LTCH's total payment under the PPS. The blend percentages are as shown in Table 1.

Table 1

Cost reporting periods beginning on or after

Prospective payment federal rate percentage

Reasonable cost-based reimbursement rate

percentage

October 1, 2002

20

80

October 1, 2003

40

60

October 1, 2004

60

40

October 1, 2005

80

20

October 1, 2006

100

0

D. Limitation on Charges to Beneficiaries

In the August 30, 2002 final rule, we presented an in-depth discussion of beneficiary liability under the LTCH PPS (67 FR 55974 through 55975). In the RY 2005 LTCH PPS final rule (69 FR 25676), we clarified that the discussion of beneficiary liability in the August 30, 2002 final rule was not meant to establish rates or payments for, or define Medicare-eligible expenses. Under § 412.507, as consistent with other established hospital prospective payment systems, a LTCH may not bill a Medicare beneficiary for more than the deductible and coinsurance amounts as specified under § 409.82, § 409.83, and § 409.87 and for items and services as specified under § 489.30(a), if the Medicare payment to the LTCH is the full LTC-DRG payment amount. However, under the LTCH PPS, Medicare will only pay for days for which the beneficiary has coverage until the short-stay outlier (SSO) threshold is exceeded. (See section V.A.1.a. of this preamble.) Therefore, if the Medicare payment was for a SSO case (§ 412.529) that was less than the full LTC-DRG payment amount because the beneficiary had insufficient remaining Medicare days, the LTCH could also charge the beneficiary for services delivered on those uncovered days (§ 412.507).

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

Claims submitted to Medicare must comply with both the Administrative Simplification Compliance Act (ASCA) (Pub. L. 107-105), and Health Insurance Portability and Accountability Act (HIPAA) (Pub. L. 104-191). Section 3 of ASCA requires the Medicare Program, to deny payment under Part A or Part B for any expenses for items or services “for which a claim is submitted other than in an electronic form specified by the Secretary.” Section 1862(h) of the Act (as added by section 3(a) of ASCA) provides that the Secretary shall waive such denial in two types of cases and may also waive such denial “in such unusual cases as the Secretary finds appropriate.” (Also, see 68 FR 48805, August 15, 2003, implementing section 3 of ASCA.) Section 3 of ASCA operates in the context of the Administrative Simplification provisions of HIPAA, which include, among other provisions, the transactions and code sets standards requirements codified as 45 CFR parts 160 and 162, subparts A and I through R (generally known as the Transactions Rule). The Transactions Rule requires covered entities, including covered providers, to conduct covered electronic transactions according to the applicable transactions and code sets standards.

II. Summary of the Major Contents of This Proposed Rule

In this proposed rule, we are setting forth the proposed annual update to the payment rates for the Medicare LTCH PPS, as well as, proposing other policy changes. The following is a summary of the major areas that we are addressing in this proposed rule:

In section III of this preamble, we discuss the LTCH PPS patient classification and the relative weights which remain linked to the annual adjustments of the acute care hospital inpatient DRG system, and are based on the annual revisions to the International Classification of Diseases, Ninth Revision, Clinical Modification (ICD-9-CM) codes effective each October 1.

In section IV.B. of this preamble, we propose to adopt the “Rehabilitation, Psychiatric, Long Term Care (RPL)” market basket under the LTCH PPS in place of the excluded hospital with capital market basket.

As discussed in section IV.C. of this preamble, we are proposing a zero percent update to the LTCH PPS Federal rate for the 2007 LTCH PPS rate year instead of the most recent estimate of the LTCH PPS market basket.

Also in section IV.C. of this preamble, we discuss the proposed prospective payment rate for RY 2007, and in section IV.D. we discuss the applicable adjustments to the proposed payment rates, including the proposed revisions to the wage index, the proposed cost-of-living adjustment factors, the proposed outlier threshold, and the proposed transition period budget neutrality factor for the 2007 LTCH PPS rate year. We are also proposing revisions to the cost-to-charge ratio and reconciliation provisions as they apply to LTCH outlier payment policies.

In section IV.D.1.c. of this preamble, we also discuss our proposal to revise the LTCH PPS labor-related share based on RPL market basket. Also in section IV.D. of this preamble, we are proposing to postpone the deadline for making the one-time prospective adjustment for the Federal rate at § 412.523(d)(3).

In section V.A. of this preamble, we are proposing to revise the existing payment adjustment for SSO cases by reducing the part of the current payment formula that is based on costs and adding a fourth component to the current payment formula. Also in section V.A. of this preamble, we are proposing to sunset the surgical DRG exception to the payment policy established under the 3-day or less interruption of stay regulations at § 412.531(a)(1).

In section V.B. of this preamble, for LTCH hospitals within hospitals (HwHs) and LTCH satellites, we are proposing to clarify at § 412.534(c) that under the policy for adjusting the LTCH PPS payment based on the amount that would be determined under the IPPS payment methodology, we calculate the LTCH PPS payment amount that is equivalent to what would otherwise be paid under the IPPS. We are also proposing to codify in regulations the general formula we currently use to give affect to the regulations as they pertain to calculating an amount under subpart O that is equivalent to an amount that would be determined under § 412.1(a).

In section X. of this preamble, we will discuss our on-going monitoring protocols under the LTCH PPS.

In section XI of this preamble, we will discuss the recommendations made by the Research Triangle Institute, International's (RTI) evaluation of the feasibility of adopting recommendations made in the June 2004 MedPAC Report.

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

In Appendix A of this proposed rule, we present a description of a preliminary model of an update framework under the LTCH PPS that we may propose to use in the future for purposes of the annual updating of the LTCH PPS Federal rate in future years.

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

[If you choose to comment on issues in this section, please include the caption “LTC-DRG CLASSIFICATIONS AND RELATIVE WEIGHTS” at the beginning of your comments.]

A. Background

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

resource use of LTCH patients as well as the use of the most recently available hospital discharge data.”

In accordance with section 123 of the BBRA as amended by section 307(b)(1) of BIPA and § 412.515, we use information derived from LTCH PPS patient records to classify these cases into distinct LTC-DRGs based on clinical characteristics and estimated resource needs. The LTC-DRGs used as the patient classification component of the LTCH PPS correspond to the hospital inpatient DRGs in the IPPS. We assign an appropriate weight to the LTC-DRGs to account for the difference in resource use by patients exhibiting the case complexity and multiple medical problems characteristic of LTCHs.

In a departure from the IPPS, we use low volume LTC-DRGs (less than 25 LTCH cases) in determining the LTC-DRG weights, since LTCHs do not typically treat the full range of diagnoses as do acute care hospitals. In order to manage the large number of low volume DRGs (all DRGs with fewer than 25 cases), we group low volume DRGs into 5 quintiles based on average charge per discharge. (A listing of the current composition of low volume quintiles used in determining the FY 2006 LTC-DRG relative weights appears in the FY 2006 IPPS final rule (70 FR 47329 through 47332).) We also account for adjustments to payments for cases in which the stay at the LTCH is less than or equal to five-sixths of the geometric ALOS and classify these cases as SSO cases. (A detailed discussion of the application of the Lewin Group model that was used to develop the LTC-DRGs appears in the August 30, 2002 LTCH PPS final rule (67 FR 55978).)

B. Patient Classifications Into DRGs

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

(1) Principal diagnosis.

(2) Up to eight additional diagnoses.

(3) Up to six procedures performed.

(4) Age.

(5) Sex.

(6) Discharge status of the patient.

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

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

• Cases that are improperly coded. (For example, diagnoses are shown that are inappropriate, given the sex of the patient. Code 68.6, Radical abdominal hysterectomy, would be an inappropriate code for a male.)

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

• Cases requiring more information. (For example, ICD-9-CM codes are required to be entered at their highest level of specificity. There are valid 3-digit, 4-digit, and 5-digit codes. That is, code 262, Other severe protein-calorie malnutrition, contains all appropriate digits, but if it is reported with either fewer or more than 3 digits, the claim will be rejected by the MCE as invalid.)

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

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

The GROUPER software is used both to classify past cases in order to measure relative hospital resource consumption to establish the DRG weights and to classify current cases for purposes of determining payment. The records for all Medicare hospital inpatient discharges are maintained in the MedPAR file. The data in this file are used to evaluate possible DRG classification changes and to recalibrate the DRG weights during our annual update under both the IPPS (§ 412.60(e)) and the LTCH PPS (§ 412.517). As discussed in greater detail in sections III.D. and E. of this preamble, with the implementation of section 503(a) of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) (Pub. L. 108-173), there is the possibility that one feature of the GROUPER software program may be updated twice during a Federal fiscal year (FY) (October 1 and April 1) as required by the statute for the IPPS (69 FR 48954 through 48957). Specifically, as we discussed in the FY 2006 IPPS final rule, ICD-9 diagnosis and procedure codes for new medical technology may be created and added to existing DRGs in the middle of the Federal FY on April 1 (70 FR 47323). However, this policy change will have no effect on the LTC-DRG relative weights, which will continue to be updated only once a year (October 1), nor will there be any impact on Medicare payments under the LTCH PPS. The use of the ICD-9-CM code set is also compliant with the current requirements of the Transactions and Code Sets Standards regulations at 45 CFR parts 160 and 162, published in accordance with HIPAA.

C. Organization of DRGs

The DRGs are organized into 25 major diagnostic categories (MDCs), most of which are based on a particular organ system of the body; the remainder involve multiple organ systems (such as MDC 22, Burns). Accordingly, the principal diagnosis determines MDC assignment. Within most MDCs, cases are then divided into surgical DRGs and medical DRGs. Surgical DRGs are assigned based on a surgical hierarchy that orders operating room (O.R.) procedures or groups of O.R. procedures

by resource intensity. The GROUPER software program does not recognize all ICD-9-CM procedure codes as procedures that affect DRG assignment, that is, procedures which are not surgical (for example, EKG), or minor surgical procedures (for example, 86.11, Biopsy of skin and subcutaneous tissue).

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

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

In its March 2005 Report to Congress, “Physician-Owned Specialty Hospitals,” MedPAC recommended that the Secretary improve payment accuracy in the hospital IPPS by, among other things, “refining the current DRGs to more fully capture differences in severity of illness among patients.” (Recommendation 1, p. 93.) In the FY 2006 IPPS final rule (70 FR 47474 through 47479), we stated that we expected to make changes to the DRGs to better reflect severity of illness and we indicated that we plan to conduct a comprehensive review of the CCs list for FY 2007. We also indicated that we are considering the possibility of proposing to use the All Patient Refined (APR) DRGs under the IPPS for FY 2007. We explained that we did not propose to adopt the APR-DRGS under the IPPS for FY 2006 because it would represent a significant undertaking that could have a substantial effect on all hospitals and there was insufficient time to fully analyze a change of that magnitude. However, as an interim step to better recognize severity in the DRG system for FY 2006, until we can complete a more comprehensive analysis of the APR-DRG system and CC list as part of a complete analysis of the MedPAC recommendations that we plan to perform over the next year, we established cardiovascular DRGs 547 through 558 as described in the FY 2006 IPPS final rule (70 FR 47474 through 47478).

D. Update of LTC-DRGs

For FY 2006, the LTC-DRG patient classification system was based on LTCH data from the FY 2004 MedPAR file, which contained hospital bills data from the March 2005 update. The patient classification system consists of 526 DRGs that formed the basis of the FY 2006 LTCH PPS GROUPER program. The 526 LTC-DRGs included two “error DRGs.” As in the IPPS, we included two error DRGs in which cases that cannot be assigned to valid DRGs will be grouped. These two error DRGs are DRG 469 (Principal Diagnosis Invalid as a Discharge Diagnosis) and DRG 470 (Ungroupable). (See the FY 2006 IPPS final rule (70 FR 47323 through 47341)). The other 524 LTC-DRGs are the same DRGs used in the IPPS GROUPER program for FY 2006 (Version 23.0).

In the past, the annual update to the CMS DRGs was based on the annual revisions to the ICD-9-CM codes and was effective each October 1. Recently, the ICD-9-CM coding update process was revised as discussed in greater detail in the FY 2005 IPPS final rule (69 FR 48954 through 48957). Specifically, section 503(a) of the MMA includes a requirement for updating ICD-9-CM codes twice a year instead of the current process of annual updates on October 1 of each year. This requirement is included as part of the amendments to the Act relating to recognition of new medical technology under the IPPS. (For additional information on this provision, including its implementation and its impact on the LTCH PPS, refer to the FY 2005 IPPS final rule (69 FR 48952 through 48957) and the RY 2006 LTCH PPS final rule (70 FR 24172 through 24177).)

As discussed in the RY 2006 LTCH PPS final rule, with the implementation of section 503(a) of the MMA, there is the possibility that one feature of the GROUPER software program may be updated twice during a Federal FY (October 1 and April 1) as required by the statute for the IPPS (70 FR 24173 through 24175). Specifically, ICD-9-CM diagnosis and procedure codes for new medical technology may be created and added to existing DRGs in the middle of the Federal FY on April 1. No new LTC-DRGs will be created or deleted. Consistent with our current practice, any changes to the DRGs or relative weights will be made at the beginning of the next Federal FY (October 1). Therefore, there will not be any impact on Medicare payments under the LTCH PPS. The use of the ICD-9-CM code set is also compliant with the current requirements of the Transactions and Code Sets Standards regulations at 45 CFR parts 160 and 162, issued under HIPAA.

As we explained in the FY 2006 IPPS final rule, in the health care industry, historically annual changes to the ICD-9-CM codes were effective for discharges occurring on or after October 1 each year (70 FR 47323). Thus, the manual and electronic versions of the GROUPER software, which are based on the ICD-9-CM codes, were also revised annually and effective for discharges occurring on or after October 1 each year. The patient classification system used under the LTCH PPS (LTC-DRGs) is based on the DRG patient classification system used under the IPPS, which historically had been updated annually and effective for discharges occurring on or after October 1 through September 30 each year. As we also mentioned, the ICD-9-CM coding update process was revised as a result of the implementation of section 503(a) of the MMA, which includes a requirement for updating ICD-9-CM codes as often as twice a year instead of the current process of annual updates on October 1 of each year. As discussed

in the FY 2005 IPPS final rule, this requirement is included as part of the amendments to the Act relating to recognition of new medical technology under the IPPS (69 FR 48954 through 48957). Section 503(a) of the MMA amended section 1886(d)(5)(K) of the Act by adding a new paragraph (vii) which states that “the Secretary shall provide for the addition of new diagnosis and procedure codes in [sic] April 1 of each year, but the addition of such codes shall not require the Secretary to adjust the payment (or diagnosis-related group classification) * * * until the FY that begins after such date.” This requirement will improve the recognition of new technologies under the IPPS by accounting for those ICD-9-CM codes in the MedPAR claims data at an earlier date.

Despite the fact that aspects of the GROUPER software may be updated to recognize any new technology ICD-9-CM codes, there will be no impact on either LTC-DRG assignments or payments under the LTCH PPS at that time. That is, changes to the LTC-DRGs (such as the creation or deletion of LTC-DRGs) and the relative weights will continue to be updated in the manner and timing (October 1) as they are now.

Updates to the GROUPER software for both the IPPS and the LTCH PPS (for relative weights and the creation or deletion of DRGs) are made in the annual IPPS proposed and final rules and are effective each October 1. We also explained that since we do not publish a midyear IPPS rule, April 1 code updates will not be published in a midyear IPPS rule. Rather, we will assign any new diagnosis or procedure codes to the same DRG in which its predecessor code was assigned, so that there will be no impact on the DRG assignments. Any coding updates will be available through the Web sites provided in section III.E. of this preamble and through the

Coding Clinic for ICD-9-CM.

Publishers and software vendors currently obtain code changes through these sources in order to update their code books and software system. If new codes are implemented on April 1, revised code books and software systems, including the GROUPER software program, will be necessary because we must use current ICD-9-CM codes. Therefore, for purposes of the LTCH PPS, because each ICD-9-CM code must be included in the GROUPER algorithm to classify each case into a LTC-DRG, the GROUPER software program used under the LTCH PPS would need to be revised to accommodate any new codes.

In implementing section 503(a) of the MMA, there will only be an April 1 update if new technology codes are requested and approved. We note that any new codes created for April 1 implementation will be limited to those diagnosis and procedure code revisions primarily needed to describe new technologies and medical services. However, we reiterate that the process of discussing updates to the ICD-9-CM has been an open process through the ICD-9-CM Coordination and Maintenance Committee since 1995. Requestors will be given the opportunity to present the merits for a new code and make a clear and convincing case for the need to update ICD-9-CM codes for purposes of the IPPS new technology add-on payment process through an April 1 update.

Discharges between October 1, 2005, and September 30, 2006, (Federal FY 2006) are using Version 23.0 of the GROUPER software for both the IPPS and the LTCH PPS. Consistent with our current practice, any changes to the DRGs or relative weights will be made at the beginning of the Federal FY (October 1). We will notify LTCHs of any revised LTC-DRG relative weights based on the final DRGs and the applicable version of the GROUPER software program that will be effective October 1, 2006, in the annual IPPS proposed and final rules. At the September 2005 ICD-9-CM Coordination and Maintenance Committee meeting, there were no requests for an April 1, 2006 implementation of ICD-9-CM codes, and therefore, the next update to the ICD-9-CM coding system will not occur until October 1, 2006 (FY 2007). Presently, as there were no coding changes suggested for an April 1, 2006 update, the ICD-9-CM coding set implemented on October 1, 2005, will continue through September 30, 2006 (FY 2006). The next update to the LTC-DRGs and relative weights for FY 2007 will be presented in the FY 2007 IPPS proposed and final rules. Furthermore, we would notify LTCHs of any revisions to the GROUPER software used under the IPPS and LTCH PPS that would be implemented April 1, 2007.

E. ICD-9-CM Coding System

1. Uniform Hospital Discharge Data Set (UHDDS) Definitions

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

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

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

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

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

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

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

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

The ICD-9-CM Coordination and Maintenance (C&M) Committee is a Federal interdepartmental committee, co-chaired by the National Center for Health Statistics (NCHS) and CMS, that is charged with maintaining and updating the ICD-9-CM system. The C&M Committee is jointly responsible for approving coding changes, and developing errata, addenda, and other modifications to the ICD-9-CM to

reflect newly developed procedures and technologies and newly identified diseases. The C&M Committee is also responsible for promoting the use of Federal and non-Federal educational programs and other communication techniques with a view toward standardizing coding applications and upgrading the quality of the classification system.

The NCHS has lead responsibility for the ICD-9-CM diagnosis codes included in the Tabular List and Alphabetic Index for Diseases, while we have the lead responsibility for the ICD-9-CM procedure codes included in the Tabular List and Alphabetic Index for Procedures. The C&M Committee encourages participation by health-related organizations in this process and holds public meetings for discussion of educational issues and proposed coding changes twice a year at the CMS Central Office located in Baltimore, Maryland. The agenda and dates of the meetings can be accessed on our Web site at:

http://www.cms.hhs.gov/ICD9ProviderDiagnosticCodes.

As discussed previously in this section of the preamble, section 503(a) of the MMA includes a requirement for updating ICD-9-CM codes twice a year instead of the current process of annual updates on October 1 of each year. This requirement will improve the recognition of new technologies under the IPPS by accounting for them in the GROUPER software at an earlier date. Because this new statutory requirement could have a significant impact on health care providers, coding staff, publishers, system maintainers, and software systems, among others, we solicited comments on our proposed provisions to implement this requirement as part of the FY 2005 IPPS proposed rule (69 FR 28220 through 28221). We responded to comments and published our new policy regarding the updating of ICD-9-CM codes in the FY 2005 IPPS final rule (69 FR 48954 through 48957).

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

http://www.cms.hhs.gov/ICD9ProviderDiagnosticCodes/04_addendum.asp.

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

http://www.cms.hhs.gov/ICD9ProviderDiagnosticCodes/07_summarytables.asp.

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

http://www.cms.hhs.gov/ICD9ProviderDiagnosticCodes/.

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

If the April 1 changes are made to ICD-9-CM diagnosis or procedure codes, LTCHs will be required to obtain the new codes, coding books, or encoder updates, and make other system changes in order to capture and report the new codes. When we implemented section 503(a) of the MMA in the FY 2005 IPPS final rule, we indicated that we were aware of the additional burden this will have on health care providers.

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

At the September 2005 C&M Committee meeting, no new codes were proposed for update on April 1, 2006. While no DRG additions or deletions or changes to relative weights will occur prior to the usual October 1 update, in the event any new codes were created to describe new technologies and medical services through an April 1, 2006 update, under our policy established in the RY 2006 final rule (70 FR 24176), LTCH systems would be expected to recognize and report those new codes through the channels as described in this section.

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

Therefore, because the LTCH PPS and the IPPS use the same GROUPER software, the LTCH PPS will be directly affected by the statutory mandates directed at the IPPS as amended by section 503(a) of the MMA. (We note that there is no statutory requirement in the LTCH PPS to make additional payments for new technology.) The practical effect of this provision is that the GROUPER software must accept new ICD-9-CM codes reflecting the incorporation of new technologies into inpatient treatment at an acute care hospital prior to the scheduled annual update of the GROUPER software. Despite the fact that there are no provisions for additional payments for new technology under the LTCH PPS as there are under the IPPS, statutory compliance requires an alteration of the GROUPER software used under the IPPS, and since the LTCH PPS uses the same GROUPER software that is used under the IPPS, this consequently means that the GROUPER software used under the LTCH PPS would change.”

While DRG assignments would not change from October 1 through September 30, it is possible that there could be additional new ICD-9-CM diagnosis and procedure codes during that time, which would be assigned to predecessor DRGs. For both the IPPS and LTCH coders, it is possible that there will be ICD-9-CM codes in effect from October 1 through March 31, with additional ICD-9-CM codes in effect from April 1 through September 30. Presently, as there were no coding changes suggested for an April 1, 2006 update, the ICD-9-CM coding set implemented on October 1, 2005, will continue through September 30, 2006 (FY 2006).

Of particular note to LTCHs are the invalid diagnosis codes (Table 6C) and the invalid procedure codes (Table 6D) located in the annual proposed and final rules for the IPPS. Claims with invalid codes are not processed by the Medicare claims processing system.

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

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

www.ahacentraloffice.org.

In addition, current coding guidelines are available at the NCHS Web site:

http://www.cdc.gov/nchs/datawh/ftpserv/ftpicd9/ftpicd9.htm#conv.

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

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

Since implementation of the LTCH PPS, our Medicare FIs have conducted training and provided assistance to LTCHs in correct coding. We have also issued manuals containing procedures as well as coding instructions to LTCHs and FIs. We will continue to conduct training and provide guidance on an as-needed basis. We also refer readers to the detailed discussion on correct coding practices in the August 30, 2002 LTCH PPS final rule (67 FR 55981 through 55983). Additional coding instructions and examples will be published in Coding Clinic for ICD-9-CM.

F. Method for Updating the LTC-DRG Relative Weights

As discussed in the August 30, 2002 LTCH PPS final rule that implemented the LTCH PPS, under the LTCH PPS, each LTCH will receive a payment that represents an appropriate amount for the efficient delivery of care to Medicare patients (67 FR 55984). The system must be able to account adequately for each LTCH's case-mix in order to ensure both a fair distribution of Medicare payments and access to adequate care for those Medicare patients whose care is more costly. Therefore, in § 412.523(c), we adjust the standard Federal PPS rate by the LTC-DRG relative weights in determining payment to LTCHs for each case.

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

As we discussed in the FY 2006 IPPS final rule, the LTC-DRG relative weights effective under the LTCH PPS for Federal FY 2006 were calculated using the March 2005 update of FY 2004 MedPAR data and Version 23.0 of the GROUPER software (70 FR 47325). We use total days and total charges in the calculation of the LTC-DRG relative weights.

By nature, LTCHs often specialize in certain areas, such as ventilator-dependent patients and rehabilitation and wound care. Some case types (DRGs) may be treated, to a large extent, in hospitals that have, from a perspective of charges, relatively high (or low) charges. Distribution of cases with relatively high (or low) charges in specific LTC-DRGs has the potential to inappropriately distort the measure of average charges. To account for the fact that cases may not be randomly distributed across LTCHs, we use a hospital-specific relative value method to calculate relative weights. We believe this method removes this hospital-specific source of bias in measuring average charges. Specifically, we reduce the impact of the variation in charges across providers on any particular LTC-DRG relative weight by converting each LTCH's charge for a case to a relative value based on that LTCH's average charge. (See the FY 2006 IPPS final rule for further information on the hospital-

specific relative value methodology (70 FR 47328 through 47329).)

In order to account for LTC-DRGs with low volume (that is, with fewer than 25 LTCH cases), we grouped those low volume LTC-DRGs into 1 of 5 categories (quintiles) based on average charges, for the purposes of determining relative weights. For FY 2006 based on the FY 2004 MedPAR data, we identified 171 LTC-DRGs that contained between 1 and 24 cases. This list of low volume LTC-DRGs was then divided into 1 of the 5 low volume quintiles, each containing a minimum of 34 LTC-DRGs (171/5 = 34 with 1 LTC-DRG as a remainder). Each of the low volume LTC-DRGs grouped to a specific quintile received the same relative weight and ALOS using the formula applied to the regular LTC-DRGs (25 or more cases). (See the FY 2006 IPPS final rule for further explanation of the development and composition of each of the 5 low volume quintiles for FY 2006 (70 FR 47329 through 47332).)

After grouping the cases in the appropriate LTC-DRG, we calculated the relative weights by first removing statistical outliers and cases with a LOS of 7 days or less. Next, we adjusted the number of cases remaining in each LTC-DRG for the effect of short-stay outlier cases under § 412.529. The short-stay adjusted discharges and corresponding charges were used to calculate “relative adjusted weights” in each LTC-DRG using the hospital-specific relative value method. We also adjusted the LTC-DRG relative weights to account for nonmonotonically increasing relative weights. That is, we made an adjustment if cases classified to the LTC-DRG “with complications or comorbidities (CCs)” of a “with CC”/“without CC” pair had a lower average charge than the corresponding LTC-DRG “without CCs” by assigning the same weight to both LTC-DRGs in the “with CC”/“without CC” pair. (See the FY 2006 IPPS final rule for further details on the steps for calculating the LTC-DRG relative weights (70 FR 47336 through 47341).)

In addition, of the 526 LTC-DRGs in the LTCH PPS for FY 2006, based on LTCH cases in the FY 2004 MedPAR files, we identified 196 LTC-DRGs for which there were no LTCH cases in the database. That is, no patients who would have been classified to those DRGs were treated in LTCHs during FY 2004 and, therefore, no charge data were reported for those DRGs. Thus, in the process of determining the relative weights of LTC-DRGs, we were unable to determine weights for these 196 LTC-DRGs using the method described in this section of the preamble. However, since patients with a number of the diagnoses under these LTC-DRGs may be treated at LTCHs beginning in FY 2006, we assigned relative weights to each of the 196 “no volume” LTC-DRGs based on clinical similarity and relative costliness to one of the remaining 330 (526 − 196 = 330) LTC-DRGs for which we were able to determine relative weights, based on the FY 2004 claims data. (A list of the current no-volume LTC-DRGs and further explanation of their FY 2006 relative weight assignment can be found in the FY 2006 IPPS final rule (70 FR 47337 through 47341).)

Furthermore, for FY 2006, we established LTC-DRG relative weights of 0.0000 for heart, kidney, liver, lung, and simultaneous pancreas/kidney transplants (LTC-DRGs 103, 302, 480, 495, 512 and 513, respectively) because Medicare will only cover these procedures if they are performed at a hospital that has been certified for the specific procedures by Medicare and presently no LTCH has been so certified. If in the future, however, a LTCH applies for certification as a Medicare-approved transplant center, we believe that the application and approval procedure would allow sufficient time for us to propose appropriate weights for the LTC-DRGs affected. At the present time, we included these 6 transplant LTC-DRGs in the GROUPER software program for administrative purposes. As the LTCH PPS uses the same GROUPER software program for LTCHs as is used under the IPPS, removing these DRGs would be administratively burdensome.

As we noted previously, there were no new ICD-9-CM code requests for an April 1, 2006 update. Therefore, Version 23.0 of the DRG GROUPER software established in the FY 2006 IPPS final rule (70 FR 47284 through 47322) will continue to be effective until October 1, 2006. Moreover, the LTC-DRGs and relative weights for FY 2006 established in that same IPPS final rule (70 FR 47681 through 47689) will continue to be effective until October 1, 2006, (just as they would have been even if there had been any new ICD-9-CM code requests for an April 1, 2006 update). Accordingly, Table 3 in the Addendum to this proposed rule lists the LTC-DRGs and their respective relative weights, geometric mean LOS, and five-sixths of the geometric mean LOS that we will continue to use for the period of July 1, 2006 through September 30, 2006. (This table is the same as table 11 of the Addendum to the FY 2006 IPPS final rule (70 FR 47681 through 47689). The next update to the ICD-9-CM coding system will be presented in the FY 2007 IPPS proposed rule (since there will be no April 1, 2006 updates to the ICD-9-CM coding system). The final update to the ICD-9-CM coding system that would become effective October 1, 2006, and the final DRGs and GROUPER for FY 2007 that would be used for the IPPS and the LTCH PPS, effective October 1, 2006, will be presented in the IPPS FY 2007 proposed and final rule in the

Federal Register

. At that time, we will also present the next annual update to the LTC-DRG relative weights based on the final DRGs and GROUPER software version that will be established for FY 2007.

IV. Proposed Changes to the LTCH PPS Payment Rates for the 2007 LTCH PPS Rate Year

[If you choose to comment on issues in this section, please include the caption “PROPOSED CHANGES TO LTCH PPS PAYMENT RATES FOR THE 2007 LTCH PPS RATE YEAR” at the beginning of your comments.]

A. Overview of the Development of the Payment Rates

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

The basic methodology for determining LTCH PPS Federal prospective payment rates is set forth in the regulations at § 412.515 through § 412.532. Below we discuss the proposed factors that will be used to update the LTCH PPS standard Federal rate for the 2007 LTCH PPS rate year that would be effective for LTCHs discharges occurring on or after July 1, 2006 through June 30, 2007. When we implemented the LTCH PPS in the August 30, 2002 final rule (67 FR 56029 through 56031), we computed the LTCH PPS standard Federal payment rate for FY 2003 by updating the best available (FY 1998 or FY 1999) Medicare inpatient operating and capital costs per case data, using the excluded hospital market basket.

Section 123(a)(1) of the BBRA requires that the PPS developed for LTCHs be budget neutral. Therefore, in

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

Furthermore, as specified at § 412.523(d)(1), the standard Federal rate is reduced by an adjustment factor to account for the estimated proportion of outlier payments under the LTCH PPS to total estimated LTCH PPS payments (8 percent). For further details on the development of the FY 2003 standard Federal rate, see the August 30, 2002 LTCH PPS final rule (67 FR 56027 through 56037), and for subsequent updates to the LTCH PPS Federal rate, refer to the following final rules: RY 2004 LTCH PPS final rule (68 FR 34134 through 34140), RY 2005 LTCH PPS final rule (69 FR 25682 through 25684), and RY 2006 LTCH PPS final rule (70 FR 24179 through 24180).

B. Proposed LTCH PPS Market Basket

Historically, the Medicare program used a market basket to account for price increases of the services furnished by providers. The market basket used for the LTCH PPS includes both operating and capital-related costs of LTCHs because the LTCH PPS uses a single payment rate for both operating and capital-related costs. The development of the LTCH PPS standard Federal rate is discussed in further detail in the August 30, 2002 LTCH PPS final rule (67 FR 56027 through 56033).

In the August 30, 2002 final rule (67 FR 56016 through 56017 and 56030), which implemented the LTCH PPS, we established the use of the excluded hospital with capital market basket as the LTCH PPS market basket. The excluded hospital market basket was used to update the limits on LTCHs' operating costs for inflation under the former reasonable cost-based (TEFRA) payment system. We explained in that same final rule that we believe that the use of the excluded hospital market basket to update LTCHs' costs for inflation was appropriate because the excluded hospital market basket (with a capital component) measures price increases of the services furnished by excluded hospitals, including LTCHs. Since the costs of LTCHs are included in the excluded hospital market basket, this market basket index, in part, also reflects the costs of LTCHs. However, in order to capture the total costs (operating and capital-related) of LTCHs, we added a capital component to the excluded hospital market basket for use under the LTCH PPS. We refer to this index as the “Excluded Hospital with Capital” market basket. Currently, the excluded hospital with capital market basket used to update LTCH PPS payments is based on 1997 Medicare cost report data and includes Medicare participating psychiatric, rehabilitation, long term care, cancer, and childrens hospitals (68 FR 34137). (For further details on the development of the FY 1997-based LTCH PPS market basket, see the RY 2004 LTCH PPS final rule (68 FR 34134 through 34137)).

In the RY 2006 LTCH PPS final rule (70 FR 24179), we noted that based on our research, we did not develop a market basket specific to LTCH services. Presently, we are still unable to create a separate market basket specifically for LTCHs due to the small number of facilities and the limited data that are provided (for instance, approximately 15 percent of LTCHs reported contract labor cost data for 2002). We noted in that same final rule that we would discuss the use of the “Rehabilitation, Psychiatric and Long-Term Care (RPL) market basket” under the LTCH PPS, which is currently used under the IRF PPS. The RPL market basket is based on the operating and capital costs of inpatient rehabilitation facilities (IRFs), inpatient psychiatric facilities (IPFs) and LTCHs. Since all IRFs are now paid under the IRF PPS Federal payment rate, nearly all LTCHs are paid 100 percent of the Federal rate under the LTCH PPS, and most IPFs are transitioning to payment based on 100 percent of the Federal per diem payment amount under the IPF PPS (payments will be based on 100 percent of the Federal rate for cost reporting periods beginning on or after January 1, 2008), under broad authority conferred upon the Secretary by section 123 of the BBRA as amended by section 307(b) of BIPA to develop the LTCH PPS, we are proposing to adopt the RPL market basket as the appropriate market basket of goods and services under the LTCH PPS for discharges occurring on or after July 1, 2006. The RPL market basket would reflect the operating and capital cost structures for these hospitals. Specifically, beginning in the 2007 LTCH PPS rate year, we are proposing to adopt under the LTCH PPS the RPL market basket based on FY 2002 cost report data as it is the best available data. We choose to use the FY 2002 Medicare cost reports because these are the most recent, relatively complete cost data for IRFs, IPF, and LTCHs serving Medicare beneficiaries.

We propose to exclude childrens, cancer hospitals, and religious nonmedical healthcare institutions (RNHCIs) from the RPL market basket because their payments are based entirely on reasonable costs subject to rate-of-increase limits established under the authority of section 1886(b) of the Act, and implemented in § 413.40. Childrens and cancer hospitals are not reimbursed under a PPS. Also, based on FY 2002 data, the cost structures for childrens and cancer hospitals are noticeably different than the cost structures of the IRFs, IPFs, and LTCHs. The services offered in IRFs, IPFs, and LTCHs are typically more labor-intensive than those offered in cancer and childrens hospitals. Therefore, the compensation cost weights for IRFs, IPFs, and LTCHs are larger than those in cancer and childrens hospitals. In addition, the depreciation cost weights for IRFs, IPFs, and LTCHs are noticeably smaller than those for childrens and cancer hospitals.

Therefore, including the fact that IRFs, IPFs and LTCHs are subject to a PPS while childrens, cancer and RNCHIs continue to receive payment based on reasonable costs, we believe a market basket based on the data of IRFs, IPFs and LTCHs is appropriate to use under the LTCH PPS since it is the best available data that would reflect the cost structures of LTCHs. In the following discussion we provide a background on market baskets and describe the methodologies we propose to use under broad authority conferred upon the Secretary by section 123 of the BBRA as amended by section 307(b) of BIPA to develop the LTCH PPS for purposes of determining the operating and capital portions of the FY 2002-based RPL market basket.

1. Overview of the RPL Market Basket

The proposed RPL market basket is a fixed weight, Laspeyres-type price index that is constructed in three steps. First, a base period is selected (in this case, FY 2002) and total base period expenditures are estimated for a set of mutually exclusive and exhaustive spending categories based upon type of expenditure. Then the proportion of total operating costs that each category represents is determined. These proportions are called cost or expenditure weights. Second, each expenditure category is matched to an appropriate price or wage variable, referred to as a price proxy. In nearly every instance, these price proxies are price levels derived from publicly

available statistical series that are published on a consistent schedule, preferably at least on a quarterly basis. Finally, the expenditure weight for each cost category is multiplied by the level of its respective price proxy for a given period. The sum of these products (that is, the expenditure weights multiplied by their price levels) for all cost categories yields the composite index level of the market basket in a given period. Repeating this step for other periods produces a series of market basket levels over time. Dividing an index level for a given period by an index level for an earlier period produces a rate of growth in the input price index over that time period.

A market basket is described as a fixed-weight index because it quantifies the cost, at another time, to purchase the same mix of goods and services purchased to provide hospital services in a base period. The effects on total expenditures resulting from changes in the quantity or mix of goods and services (intensity) purchased subsequent to the base period are not measured. In this manner, the market basket measures only pure price change. Only when the index is rebased would the quantity and intensity effects be captured in the cost weights. Therefore, we rebase the market basket periodically so that cost weights reflect changes in the mix of goods and services that hospitals purchase (hospital inputs) to furnish patient care between base periods.

The terms rebasing and revising, while often used interchangeably, actually denote different activities. Rebasing means moving the base year for the structure of costs of an input price index (for example, shifting the base year cost structure from FY 1997 to FY 2002). Revising means changing data sources, methodology, or price proxies used in the input price index. In this proposed rule, we are proposing to rebase and revise the market basket used to update the LTCH PPS. Specifically, as noted above in this section, for the 2007 LTCH PPS rate year, we are proposing to use the FY 2002-based RPL market basket, which is described in greater detail below in this section.

2. Proposed Methodology for Operating Portion of the RPL Market Basket

The proposed operating portion of the FY 2002-based RPL market basket consists of several major cost categories derived from the FY 2002 Medicare cost reports for IRFs, IPFs, and LTCHs. We choose to use the FY 2002 Medicare cost reports because these are the most recent, relatively complete cost data for IRFs, IPFs, and LTCHs serving Medicare beneficiaries. Generally, if detailed cost data are not available for these Medicare cost reports, we prefer to use the PPS hospital (IPPS) Medicare cost reports to supplement IPF, IRF, and LTCH data because this is a comprehensive source of cost data for hospitals serving Medicare beneficiaries. When the IPPS Medicare cost report data are not available, we choose the best publicly available data source, such as the Bureau of Economic Analysis Input-Output Tables.

We use the IRF, IPF, and LTCH Medicare cost reports to derive these major cost categories for the RPL market basket which include wages, drugs, professional liability insurance (PLI), and a residual “all other.” As stated above in this section, we propose to use FY 2002 as the base year because we believe this is the most recent, relatively complete year of Medicare cost report data. Due to insufficient Medicare cost report data for IRFs, IPFs, and LTCHs, we propose to develop cost weights for benefits, contract labor, and blood and blood products using the FY 2002-based IPPS market basket (70 FR 23384), which we explain in more detail later in this section. For example, less than 30 percent of IRF, IPF, and LTCH reported benefit cost data in FY 2002. We noticed an increase in the cost data for these expense categories over the last four years. (we note that in the future, there may be sufficient IRFs, IPFs, and LTCHs cost report data to develop the weights for these expenditure categories.

Since the cost weights for the proposed RPL market basket are based on facility costs, we are proposing to limit our sample to hospitals with a Medicare average LOS within a comparable range of the total facility ALOS. We believe this provides a more accurate reflection of the structure of costs for Medicare treatments. Our goal is to measure cost shares that are reflective of case-mix and practice patterns associated with providing services to Medicare beneficiaries.

We propose to use those cost reports for IRFs and LTCHs whose Medicare ALOS is within 15 percent (that is, 15 percent higher or lower) of the total facility ALOS for the hospital. This is the same edit applied to the FY 1992-based and FY 1997-based excluded hospital with capital market basket. Consistent with the development of the RPL market basket adopted under the IRF PPS in the FY 2006 IRF PPS final rule (70 FR 47909), we propose 15 percent because it includes those LTCHs and IRFs whose Medicare LOS is within approximately 5 days of the facility LOS. We believe this edit provides us with a representative sample of LTCHs and IRFs serving Medicare beneficiaries.

We propose to use a less stringent measure of Medicare LOS for IPFs whose ALOS is within 30 or 50 percent (depending on the total facility ALOS) of the total facility ALOS. This less stringent edit allows us to increase our sample size by over 150 reports and produce a cost weight more consistent with the overall facility. When developing the FY 1997-based excluded hospital with capital market basket, the edit we applied to IPFs was based on the best available data at the time.

The detailed cost categories under the residual (that is, the remaining portion of the market basket after excluding wages and salaries, drugs, and professional liability cost weights) are derived from the FY 2002-based IPPS market basket and the 1997 Benchmark Input-Output (I-O) Tables published by the Bureau of Economic Analysis, U.S. Department of Commerce. The FY 2002-based IPPS market basket was developed using FY 2002 Medicare hospital cost reports with the most recent and detailed cost data (70 FR 47388). The 1997 Benchmark I-O is the most recent, comprehensive source of cost data for all hospitals. The proposed RPL cost weights for benefits, contract labor, and blood and blood products were derived using the FY 2002-based IPPS market basket. For example, the ratio of the benefit cost weight to the wages and salaries cost weight in the FY 2002-based IPPS market basket was applied to the RPL wages and salaries cost weight to derive a benefit cost weight for the RPL market basket. The remaining proposed RPL operating cost categories were derived using the 1997 Benchmark I-O Tables, aged to 2002 using relative price changes. (The methodology we used to age the data involves applying the annual price changes from the price proxies to the appropriate cost categories. We repeat this practice for each year.) Therefore, using this methodology, roughly 59 percent of the proposed RPL market basket is accounted for by wages, drugs, and PLI data from FY 2002 Medicare cost report data for IRFs, LTCHs, and IPFs.

The following is a summary outlining the choice of the proxies we propose to use for the operating portion of the market basket. The price proxies for the capital portion are described in more detail in section IV.B.3. of this preamble. With the exception of the Professional Liability proxy, all the proposed price proxies for the operating portion of the proposed RPL market basket are based on Bureau of Labor

Statistics (BLS) data and are grouped into one of the following BLS categories:

• Producer Price Indexes (PPIs) measure price changes for goods sold in other than retail markets. PPIs are preferable price proxies for goods that hospitals purchase as inputs in producing their outputs because the PPIs would better reflect the prices faced by hospitals. For example, we propose to use a special PPI for prescription drugs, rather than the Consumer Price Index (CPI) for prescription drugs because hospitals generally purchase drugs directly from the wholesaler. The PPIs that we propose to use measure price change at the final stage of production.

• Consumer Price Indexes (CPIs) measure changes in the prices of final goods and services bought by the typical consumer. Because they may not represent the price faced by a producer, we use CPIs only if an appropriate PPI were not available, or if the expenditures were more similar to those of retail consumers in general rather than purchases at the wholesale level. For example, the CPI for food purchases away from home is used as a proxy for contracted food services.

• Employment Cost Indexes (ECIs) measure the rate of change in employee wage rates and employer costs for employee benefits per hour worked. These indexes are fixed-weight indexes and strictly measure the change in wage rates and employee benefits per hour. Appropriately, they are not affected by shifts in employment mix.

We evaluated the price proxies using the criteria of reliability, timeliness, availability, and relevance. Reliability indicates that the index is based on valid statistical methods and has low sampling variability. Widely accepted statistical methods ensure that the data were collected and aggregated in a way that can be replicated. Low sampling variability is desirable because it indicates that the sample reflects the typical members of the population. (Sampling variability is variation that occurs by chance because a sample was surveyed rather than the entire population.) Timeliness implies that the proxy is published regularly, preferably at least once a quarter.

The market baskets are updated quarterly, and therefore, it is important that the underlying price proxies be up-to-date, reflecting the most recent data available. We believe that using proxies that are published regularly (at least quarterly, when possible) helps to ensure that we are using the most recent data available to update the market basket. We strive to use publications that are disseminated frequently because we believe that this is an optimal way to stay abreast of the most current data available. Availability means that the proxy is publicly available. We prefer that our proxies are publicly available because this will help ensure that our market basket updates are as transparent to the public as possible. In addition, this enables the public to be able to obtain the price proxy data on a regular basis.

Finally, relevance means that the proxy is applicable and representative of the cost category weight to which it is applied. The CPIs, PPIs, and ECIs selected by us to be proposed in this regulation meet these criteria. Therefore, we believe that they continue to be the best measure of price changes for the cost categories to which they would be applied.

We note that the proxies are the same as those used for the FY 1997-based excluded hospital with capital market basket, which is currently used under the LTCH PPS, and are the same proxies as those used for the FY 2002-based excluded hospital market basket that is used to update the reasonable cost-based portion of LTCHs' blended transition payments (70 FR 47399 through 47403). Because these proxies meet our criteria of reliability, timeliness, availability, and relevance, we believe they continue to be the best measure of price changes for the cost categories. For further discussion on the FY 1997-based excluded hospital with capital market basket, see the 2004 LTCH PPS rate year final rule (68 FR 34134 through 34136). For further discussion on the FY 2002-based excluded hospital market basket, see the FY 2006 IPPS final rule (70 FR 47400 through 47403).

Table 2 sets forth the complete proposed 2002-based RPL market basket including cost categories, weights, and price proxies. For comparison purposes, the corresponding FY 1997-based excluded hospital with capital market basket, which is currently used under the LTCH PPS, is also listed.

Wages and salaries are 52.895 percent of total costs for the proposed FY 2002-based RPL market basket compared to 47.335 percent for the FY 1997-based excluded hospital with capital market basket. Employee benefits are 12.982 percent for the proposed FY 2002-based RPL market basket compared to 10.244 percent for the FY 1997-based excluded hospital with capital market basket. As a result, compensation costs (wages and salaries plus employee benefits) for the proposed FY 2002-based RPL market basket are 65.877 percent of costs compared to 57.579 percent for the FY 1997-based excluded hospital with capital market basket. Of the 8 percentage-point difference between the compensation shares, approximately three percentage points are due to the proposed new base year (FY 2002 instead of FY 1997), three percentage points are due to revised LOS edit (that is, including only IRFs and LTCHs whose Medicare ALOS is within 15 percent of the total facility ALOS for the hospital and including only IPFs whose Medicare average LOS in within 30 or 50 percent of the total facility ALOS), and the remaining two percentage points are due to the proposed exclusion of other types of IPPS-excluded hospitals (that is, only including IPFs, IRFs, and LTCHs in the market basket and excluding childrens, cancer hospitals and RNCHIs.).

Table 2.—Proposed FY 2002-Based RPL Market Basket Cost Categories, Weights, and Proxies With FY 1997-Based Excluded Hospital With Capital Market Basket Used for Comparison

Expense categories

FY 1997-based

excluded

hospital with capital

market basket

Proposed FY 2002-based RPL market basket

Proposed FY 2002 RPL market basket price proxies

Total

100.000

100.000

Compensation

57.579

65.877

Wages and Salaries *

47.335

52.895

ECI-Wages and Salaries, Civilian Hospital Workers.

Employee Benefits *

10.244

12.982

ECI-Benefits, Civilian Hospital Workers.

Professional Fees, Non-Medical

4.423

2.892

ECI-Compensation for Professional, Specialty & Technical Workers.

Utilities

1.180

0.656

Electricity

0.726

0.351

PPI-Commercial Electric Power.

Fuel Oil, Coal, etc.

0.248

0.108

PPI-Refined Petroleum Products.

Water and Sewage

0.206

0.197

CPI-U—Water & Sewage Maintenance

Professional Liability Insurance

0.733

1.161

CMS Professional Liability Premium Index.

All Other Products and Services

27.117

19.265

All Other Products

17.914

13.323

Pharmaceuticals

6.318

5.103

PPI Prescription Drugs.

Food: Direct Purchase

1.122

0.873

PPI Processed Foods & Feeds.

Food: Contract Service

1.043

0.620

CPI-U Food Away From Home.

Chemicals

2.133

1.100

PPI Industrial Chemicals.

Blood and Blood Products **

0.748

Medical Instruments

1.795

1.014

PPI Medical Instruments & Equipment.

Photographic Supplies

0.167

0.096

PPI Photographic Supplies.

Rubber and Plastics

1.366

1.052

PPI Rubber & Plastic Products.

Paper Products

1.110

1.000

PPI Converted Paper & Paperboard Products.

Apparel

0.478

0.207

PPI Apparel.

Machinery and Equipment

0.852

0.297

PPI Machinery & Equipment.

Miscellaneous Products

0.783

1.963

PPI Finished Goods less Food & Energy.

All Other Services

9.203

5.942

Telephone

0.348

0.240

CPI-U Telephone Services.

Postage

0.702

0.682

CPI-U Postage.

All Other: Labor Intensive

4.453

2.219

ECI-Compensation for Private Service Occupations.

All Other: Non-labor Intensive

3.700

2.800

CPI-U All Items.

Capital-Related Costs

8.968

10.149

Depreciation

5.586

6.186

Fixed Assets

3.503

4.250

Boeckh Institutional Construction 23-year useful life.

Movable Equipment

2.083

1.937

WPI Machinery & Equipment 11-year useful life.

Interest Costs

2.682

2.775

Nonprofit

2.280

2.081

Average yield on domestic municipal bonds (source: Moody's Aaa bonds vintage).

For Profit

0.402

0.694

Average yield on Moody's AAA bonds vintage weighted (23 years).

Other Capital-Related Costs

0.699

1.187

CPI-U Residential Rent.

* Labor-related

** Blood and blood-related products are included in miscellaneous products

Note:

Due to rounding, weights may not sum to total.

The following is an explanation of the proposed expense categories from Table 2.

a. Wages and Salaries

For measuring the price growth of wages in the proposed FY 2002-based RPL market basket, we propose to use the ECI for wages and salaries for civilian hospital workers as the proxy for wages in the RPL market basket.

b. Employee Benefits

The proposed FY 2002-based RPL market basket uses the ECI for employee benefits for civilian hospital workers.

c. Nonmedical Professional Fees

The ECI for compensation for professional and technical workers in private industry would be applied to this category since it includes occupations such as management and consulting, legal, accounting, and engineering services.

d. Fuel, Oil, Coal, and Gasoline.

The percentage change in the price of gas fuels as measured by the PPI (Commodity Code #0552) would be applied to this component.

e. Electricity

The percentage change in the price of commercial electric power as measured by the PPI (Commodity Code #0542) would be applied to this component.

f. Water and Sewerage

The percentage change in the price of water and sewage maintenance as measured by the CPI for all urban consumers (CPI Code #CUUR0000SEHG01) would be applied to this component.

g. Professional Liability Insurance (PLI)

The proposed FY 2002-based RPL market basket would use the percentage change in hospital PLI premiums as estimated by the CMS Hospital Professional Liability Index for the proxy of this category. In the FY 1997-based excluded hospital with capital market basket, the same proxy was used. We continue to research options for improving our proxy for PLI. This research includes exploring various options for expanding our current survey, including the identification of another entity that would be willing to work with us to collect more complete and comprehensive data. We are also exploring other options such as third party or industry data that might assist us in creating a more precise measure of PLI premiums. At this time we have not identified a preferred option, therefore no change is proposed for the proxy in this proposed rule.

h. Pharmaceuticals

The percentage change in the price of prescription drugs as measured by the PPI (PPI Code #PPI32541DRX) would be used as a proxy for this cost category.

This is a special index produced by BLS as a proxy in the 1997-based excluded hospital with capital market basket.

i. Food: Direct Purchases

The percentage change in the price of processed foods and feeds as measured by the PPI (Commodity Code #02) would be applied to this component.

j. Food: Contract Service

The percentage change in the price of food purchased away from home as measured by the CPI for all urban consumers (CPI Code #CUUR0000SEFV) would be applied to this component.

k. Chemicals

The percentage change in the price of industrial chemical products as measured by the PPI (Commodity Code #061) would be applied to this component. While the chemicals hospitals purchase include industrial as well as other types of chemicals, the industrial chemicals component constitutes the largest proportion by far. Thus we believe that Commodity Code #061 is the appropriate proxy.

l. Medical Instruments

The percentage change in the price of medical and surgical instruments as measured by the PPI (Commodity Code #1562) would be applied to this component.

m. Photographic Supplies

The percentage change in the price of photographic supplies as measured by the PPI (Commodity Code #1542) would be applied to this component.

n. Rubber and Plastics

The percentage change in the price of rubber and plastic products as measured by the PPI (Commodity Code #07) would be applied to this component.

o. Paper Products

The percentage change in the price of converted paper and paperboard products as measured by the PPI (Commodity Code #0915) would be used.

p. Apparel

The percentage change in the price of apparel as measured by the PPI (Commodity Code #381) would be applied to this component.

q. Machinery and Equipment

The percentage change in the price of machinery and equipment as measured by the PPI (Commodity Code #11) would be applied to this component.

r. Miscellaneous Products

The percentage change in the price of all finished goods less food and energy as measured by the PPI (Commodity Code #SOP3500) would be applied to this component. Using this index would remove the double-counting of food and energy prices, which are captured elsewhere in the market basket. The weight for this cost category is higher, in part, than in the 1997-based index because the weight for blood and blood products (1.188) is added to it. In the 1997-based excluded hospital with capital market basket we included a separate cost category for blood and blood products, using the BLS PPI for blood and derivatives as a price proxy. A review of recent trends in the PPI for blood and derivatives suggests that its movements may not be consistent with the trends in blood costs faced by hospitals. While this proxy did not match exactly with the product hospitals are buying, its trend over time appears to be reflective of the historical price changes of blood purchased by hospitals. However, an apparent divergence between the BLS PPI for blood and derivatives and trends in blood costs faced by hospitals over recent years led us to reevaluate whether the PPI for blood and derivatives was an appropriate measure of the changing price of blood. As discussed in both the FY 2006 IPPS and IRF PPS proposed rules, we ran test market baskets classifying blood into three separate cost categories: Blood and blood products; contained within chemicals as was done for the 1992-based excluded hospital with capital market basket; and, within miscellaneous products. These categories use as proxies the following PPIs: the PPI for blood and blood products, the PPI for chemicals, and the PPI for finished goods less food and energy, respectively. Of these three proxies, the PPI for finished goods less food and energy moved most like the recent blood cost and price trends. In addition, the impact on the overall market basket by using different proxies for blood was negligible, mostly due to the relatively small weight for blood in the market basket.

Therefore, we are proposing to use the PPI for finished goods less food and energy for the blood proxy because we believe it more appropriately proxies price changes (not quantities or required tests) associated with blood purchased by hospitals because it moved most like the recent blood cost and price trends. (We note that we would continue to evaluate this proxy for its appropriateness and, if adopted, would explore the development of alternative price indexes to proxy the price changes associated with this cost for presentation in a future proposed rule.)

s. Telephone

The percentage change in the price of telephone services as measured by the CPI for all urban consumers (CPI Code #CUUR0000SEED) would be applied to this component.

t. Postage

The percentage change in the price of postage as measured by the CPI for all urban consumers (CPI Code #CUUR0000SEEC01) would be applied to this component.

u. All Other Services, Labor Intensive

The percentage change in the ECI for compensation paid to service workers employed in private industry would be applied to this component.

v. All Other Services, Nonlabor Intensive

The percentage change in the all items component of the CPI for all urban consumers (CPI Code # CUUR0000SA0) would be applied to this component.

3. Proposed Methodology for Capital Portion of the RPL Market Basket

Unlike for the operating costs of the proposed FY 2002-based RPL market basket, we did not have IRF, IPF, and LTCH FY 2002 Medicare cost report data for the capital cost weights, due to a change in the FY 2002 reporting requirements. Rather, we propose to use these hospitals' expenditure data for the capital cost categories of depreciation, interest, and other capital expenses for FY 2001, and age the data to a FY 2002 base year using relevant price proxies. We believe this is the best approach since these data are the capital cost structures of those IRFs, IPFs and LTCHs serving Medicare beneficiaries that require inpatient hospital services.

We calculated weights for the proposed RPL market basket capital costs using the same set of Medicare cost reports used to develop the operating share for IRFs, IPFS, and LTCHs in order to use consistent expense data in developing the proposed weights for both operating and capital costs. The resulting proposed capital weight for the FY 2002 base year is 10.149 percent. This is based on FY 2001 Medicare cost report data for IRFs, IPFs, and LTCHs, aged to FY 2002 using relevant price proxies.

Lease expenses are not a separate cost category in the proposed market basket, but are distributed among the cost categories of depreciation, interest, and

other, reflecting the assumption that the underlying cost structure of leases is similar to capital costs in general. We assumed 10 percent of lease expenses are overhead and assigned them to the other capital expenses cost category as overhead. We base this assignment of 10 percent of lease expenses to overhead on the common assumption that overhead is 10 percent of costs. The remaining lease expenses were distributed to the three cost categories based on the weights of depreciation, interest, and other capital expenses not including lease expenses.

Depreciation contains two subcategories: building and fixed equipment, and movable equipment. The proposed split between building and fixed equipment and movable equipment was determined using the FY 2001 Medicare cost reports for IRFs, IPFs, and LTCHs. We believe this is the best available data source because it reflects the capital cost structures of those IRFs, IPFs and LTCHs serving Medicare beneficiaries. This methodology was also used to compute the 1997-based index (67 FR 50044).

The proposed total interest expense cost category is split between the government/nonprofit and for-profit hospitals. The 1997-based excluded hospital with capital market basket allocated 85 percent of the total interest cost weight to the government nonprofit interest, proxied by average yield on domestic municipal bonds, and 15 percent to for-profit interest, proxied by average yield on Moody's Aaa bonds.

We propose to derive the split using the relative FY 2001 Medicare cost report data for PPS hospitals on interest expenses for the government/nonprofit and for-profit hospitals. Due to insufficient Medicare cost report data for IPFs, IRFs, and LTCHs, we propose to use the same split used in the IPPS capital input price index, which is 75 percent of the total interest cost weight of the government/non-profit interest and 25 percent of for-profit interest. We believe that this split reflects the latest relative cost structure of interest expenses for hospitals because it is based on the most recent complete hospital cost report data and, therefore, we propose to use a 75-25 split to allocate interest expenses to government/nonprofit and for-profit hospitals' interest (70 FR 47408).

Since capital is acquired and paid for over time, capital expenses in any given year are determined by both past and present purchases of physical and financial capital. The vintage-weighted capital index is intended to capture the long-term consumption of capital, using vintage weights for depreciation (physical capital) and interest (financial capital). These vintage weights reflect the purchase patterns of building and fixed equipment and movable equipment over time. Depreciation and interest expenses are determined by the amount of past and current capital purchases. Therefore we are proposing to use the vintage weights to compute vintage-weighted price changes associated with depreciation and interest expense.

Vintage weights are an integral part of the proposed FY 2002-based RPL market basket. Capital costs are inherently complicated and are determined by complex capital purchasing decisions, over time, based on factors such as interest rates and debt financing. In addition, capital is depreciated over time instead of being consumed in the same period it is purchased. The capital portion of the proposed FY 2002-based RPL market basket would reflect the annual price changes associated with capital costs, and would be a useful simplification of the actual capital investment process. By accounting for the vintage nature of capital, we are able to provide an accurate, stable annual measure of price changes. Annual nonvintage price changes for capital are unstable due to the volatility of interest rate changes. Therefore, they do not reflect the actual annual price changes for Medicare capital-related costs. The capital component of the proposed FY 2002-based RPL market basket would reflect the underlying stability of the capital acquisition process and provide hospitals with the ability to plan for changes in capital payments.

To calculate the vintage weights for depreciation and interest expenses, we needed a time series of capital purchases for building and fixed equipment and movable equipment. We found no single source that provides the best time series of capital purchases by hospitals for all of the above components of capital purchases. The early Medicare Cost Reports were not sufficiently completed to have capital data to meet this need. While the AHA Panel Survey provided a consistent database back to 1963, it did not provide annual capital purchases. However, the AHA Panel Survey provided a time series of depreciation expenses through 1997 which could be used to infer capital purchases over time. From 1998 to 2001, hospital depreciation expenses were calculated by multiplying the AHA Annual Survey total hospital expenses by the ratio of depreciation to total hospital expenses from the Medicare cost reports. Beginning in 2001, the AHA Annual Survey began collecting depreciation expenses. We note that we hope to be able to propose to use these data in proposed rebasings that would be presented in future proposed rules.

In order to estimate capital purchases from AHA data on depreciation and interest expenses, the expected life for each cost category (building and fixed equipment, movable equipment, and debt instruments) is needed. Due to insufficient Medicare cost report data for IPFs, IRFs, and LTCHs, we propose to use FY 2001 Medicare Cost Reports for IPPS hospitals to determine the expected life of building and fixed equipment and movable equipment. We believe this data source reflects the latest relative cost structure of depreciation expenses for all hospital types, including IPFs, IRFs, and LTCHs, and is the best available data at this time. The expected life of any piece of equipment can be determined by dividing the value of the asset (excluding fully depreciated assets) by its current year depreciation amount. This calculation yields the estimated useful life of an asset if depreciation were to continue at current year levels, assuming straight-line depreciation. From the FY 2001 Medicare cost reports for IPPS hospitals the expected life of building and fixed equipment was determined to be 23 years, and the expected life of movable equipment was determined to be 11 years.

We also propose to use the fixed and movable weights derived from FY 2001 Medicare cost reports for IPFs, IRFs, and LTCHs to separate the depreciation expenses into annual amounts of building and fixed equipment depreciation and movable equipment depreciation because this is the best available data source. By multiplying the annual depreciation amounts by the expected life calculations from the FY 2001 Medicare cost reports, year-end asset costs for building and fixed equipment and movable equipment were determined. Then, we calculated a time series back to 1963 of annual capital purchases by subtracting the previous year asset costs from the current year asset costs. From this capital purchase time series we are able to calculate the vintage weights for building and fixed equipment, movable equipment, and debt instruments. An explanation of each of these sets of vintage weights follows.

For proposed building and fixed equipment vintage weights, the real annual capital purchase amounts for building and fixed equipment derived from the AHA Panel Survey were used. The real annual purchase amount was used to capture the actual amount of the physical acquisition, net of the effect of price inflation. This real annual

purchase amount for building and fixed equipment was produced by deflating the nominal annual purchase amount by the building and fixed equipment price proxy, the Boeckh Institutional Construction Index. This is the same proxy used for the FY 1997-based excluded hospital with capital market basket. We believe this proxy continues to meet our criteria of reliability, timeliness, availability, and relevance. Since building and fixed equipment has an expected life of 23 years, the vintage weights for building and fixed equipment are deemed to represent the average purchase pattern of building and fixed equipment over 23-year periods. With real building and fixed equipment purchase estimates back to 1963, 16 23-year periods could be averaged to determine the average vintage weights for building and fixed equipment that are representative of average building and fixed equipment purchase patterns over time. Vintage weights for each 23-year period are calculated by dividing the real building and fixed capital purchase amount in any given year by the total amount of purchases in the 23-year period. This calculation is done for each year in the 23-year period, and for each of the 16 23-year periods. The average of each year across the 16 23-year periods is used to determine the 2002 average building and fixed equipment vintage weights.

For proposed movable equipment vintage weights, the real annual capital purchase amounts for movable equipment derived from the AHA Panel Survey were used to capture the actual amount of the physical acquisition, net of price inflation. This real annual purchase amount for movable equipment is calculated by deflating the nominal annual purchase amount by the movable equipment price proxy, the PPI for Machinery and Equipment. This is the same proxy used for the FY 1997-based excluded hospital with capital market basket. We believe this proxy, which meets our criteria, is the best measure of price changes for this cost category. Since movable equipment has an expected life of 11 years, the vintage weights for movable equipment are deemed to represent the average purchase pattern of movable equipment over an 11-year period. With real movable equipment purchase estimates available back to 1963, 28 11-year periods could be averaged to determine the average vintage weights for movable equipment that are representative of average movable equipment purchase patterns over time. Vintage weights for each 11-year period are calculated by dividing the real movable capital purchase amount for any given year by the total amount of purchases in the 11-year period. This calculation is done for each year in the 11-year period, and for each of the 28 11-year periods. The average of the 28 11-year periods is used to determine the proposed FY 2002 average movable equipment vintage weights.

For proposed interest vintage weights, the nominal annual capital purchase amounts for total equipment (building and fixed and movable) derived from the AHA Panel and Annual Surveys were used. Nominal annual purchase amounts were used to capture the value of the debt instrument. Since hospital debt instruments have an expected life of 23 years, the vintage weights for interest are deemed to represent the average purchase pattern of total equipment over 23-year periods. With nominal total equipment purchase estimates available back to 1963, 16 23-year periods could be averaged to determine the average vintage weights for interest that are representative of average capital purchase patterns over time. Vintage weights for each 23-year period are calculated by dividing the nominal total capital purchase amount for any given year by the total amount of purchases in the 23-year period. This calculation is done for each year in the 23-year period and for each of the 16 23-year periods. The average of the 16 23-year periods is used to determine the proposed FY 2002 average interest vintage weights. The proposed vintage weights for the index are presented in Table 3.

In addition to the proposed price proxies for depreciation and interest costs described above in the vintage weighted capital section, we propose to use the CPI-U for Residential Rent as a price proxy for other capital-related costs. Other capital-related costs are mainly composed of taxes and insurance. There is no price proxy for these specific costs; however, we believe the price changes associated with these costs would be reflected in the price changes of residential rent because rent is assumed to move with taxes and insurance on order to maintain profit margins. The price proxies for each of the capital cost categories are the same as those used for the IPPS final rule (67 FR 50044) capital input price index.

Table 3.—Proposed CMS FY 2002-Based RPL Market Basket Capital Vintage Weights

Year

Fixed assets

(23 year weights)

Movable assets

(11 year weights)

Interest:

capital-related

(23 year weights)

1

.021

.065

.010

2

.022

.071

.012

3

.025

.077

.014

4

.027

.082

.016

5

.029

.086

.019

6

.031

.091

.023

7

.033

.095

.026

8

.035

.100

.029

9

.038

.106

.033

10

.040

.112

.036

11

.042

.117

.039

12

.045

.043

13

.047

.048

14

.049

.053

15

.051

.056

16

.053

.059

17

.056

.062

18

.057

.064

19

.058

.066

20

.060

.070

21

.060

.071

22

.061

.074

23

.061

.076

Total

1.000

1.000

1.000

4. Proposed Market Basket Estimate for the 2007 LTCH PPS Rate Year

As discussed previously in this proposed rule, beginning in the 2007 LTCH PPS rate year, we are proposing to adopt the FY 2002-based RPL market basket as the appropriate market basket of goods and services under the LTCH PPS. We are proposing a zero percent update to the LTCH PPS Federal rate for the 2007 LTCH PPS rate year rather than proposing an update based solely on the most recent estimate of the proposed LTCH PPS market basket as we have done in the past. However, as we discuss in section IV.D.1.c. of this preamble, we are proposing to revise the LTCH PPS labor-related share based on the proposed RPL market basket. In Table 4, we are presenting a comparison of the most recent estimates of the increase to the current LTCH PPS market basket (that is, the FY 1997-based excluded hospital with capital market basket) and the proposed FY 2002-based RPL market basket.

Based on Global Insight's 3rd quarter 2005 forecast with history through the 2nd quarter of 2005, the most recent estimate of the RPL market basket for July 1, 2006 through June 30, 2007 (the 2007 LTCH PPS rate year) is 3.6 percent. Global Insight, Inc. is a nationally recognized economic and financial forecasting firm that contracts with CMS to forecast the components of the market baskets. Using the current FY 1997-based excluded hospital with capital market basket, Global Insight's 3rd quarter 2005 forecast, with history through the 2nd quarter of 2005, for the 2007 LTCH PPS rate year would also be 3.6 percent. Table 4 compares the proposed FY 2002-based RPL market basket and the FY 1997-based excluded hospital with capital market basket percent changes. For both the historical and forecasted periods between FY 2000 and FY 2008, the difference between the two market baskets is minor with the exception of FY 2002, where the proposed FY 2002-based RPL market basket increased 3/10 of a percentage point higher than the FY 1997-based excluded hospital with capital market basket. This is primarily due to the proposed FY 2002-based RPL having a larger compensation (this is, the sum of wages and salaries and benefits) cost weight than the FY 1997-based index and the price changes associated with compensation costs increasing much faster than the prices of other market basket components. Also contributing is the “all other nonlabor intensive” cost weight, which is smaller in the proposed FY 2002-based RPL market basket than in the FY 1997-based index, as well as the slower price changes associated with these costs.

Table 4.—Proposed FY 2002-Based RPL Market Basket and FY 1997-Based Excluded Hospital With Capital Market Basket, Percent Changes: 2000-2008

Fiscal year (FY)

Proposed rebased FY 2002-based RPL market basket

FY 1997-based excluded hospital market basket with capital

Historical data:

RY 2001

3.8

3.9

RY 2002

4.1

3.8

RY 2003

3.8

3.7

RY 2004

3.6

3.6

RY 2005

3.8

3.9

Average RY 2001-2005

3.8

3.8

Forecast:

RY 2006

3.7

3.8

RY 2007

3.6

3.6

RY 2008

3.5

3.5

RY 2009

3.3

3.1

Average RY 2006-2009

3.5

3.5

Source: Global Insight, Inc. 3rd Qtr 2005, @USMACRO/CNTL0905 @CISSIM/TL0805.SIM.

C. Proposed Standard Federal Rate for the 2007 LTCH PPS Rate Year

1. Background

Under the existing regulations at § 412.523(c)(3)(ii), we update the standard Federal rate annually to adjust for the most recent estimate of the projected increases in prices for LTCH inpatient hospital services. We established this regulation in the August 30, 2002 final rule (67 FR 56030), which implemented the LTCH PPS, because at that time we believed that was the most appropriate method for updating the LTCH PPS Standard Federal rate annually for years after FY 2003. When we moved the date of the annual update of the LTCH PPS from October 1 to July 1 in the RY 2004 LTCH PPS final rule (68 FR 34138), we revised § 412.523(c)(3) to specify that for LTCH PPS rate years beginning on or after July 1, 2003, the annual update to the standard Federal rate for the LTCH prospective payment system would be equal previous rate year's Federal rate updated by the most recent estimate of increases in the appropriate market basket of goods and services included in

covered inpatient LTCH services because, at that time, we continued to believe that was the most appropriate method for updating the LTCH PPS Standard Federal rate annually for years after RY 2004. As established in the RY 2006 LTCH PPS final rule (70 FR 24179), based on the most recent estimate of the excluded hospital with capital market basket, adjusted to account for the change in the LTCH PPS rate year update cycle, the current LTCH PPS standard Federal rate which is effective from July 1, 2005 through June 30, 2006 (the 2006 LTCH PPS rate year) is $38,086.04 (70 FR 24179). In the discussion that follows, we explain how we developed the proposed standard Federal rate for the 2007 LTCH PPS rate year. Specifically, we explain our rationale, which is based on our ongoing monitoring activities, for proposing a zero percent update to the standard Federal rate for the 2007 LTCH PPS rate year rather than proposing to solely use the most recent estimate of the proposed RPL market basket as the update factor for the Federal rate for the upcoming rate year. Thus, the proposed standard Federal rate for the 2007 LTCH PPS rate year would be $38,086.04.

2. Description of a Preliminary Model of an Update Framework Under the LTCH PPS

In the August 30, 2002 final rule (67 FR 56087), which implemented the LTCH PPS, we stated that in the future we may propose to develop a framework to update payments to LTCHs that would account for other appropriate factors that affect the efficient delivery of services and care provided to Medicare patients. A conceptual basis for the proposal of developing an update framework in the future was presented in Appendix B of that same final rule (67 FR 56086). In subsequent final rules that updated the LTCH PPS standard Federal rate for years after FY 2003, we explained that we did not propose an update framework because we had not yet collected sufficient data to allow for the analysis and development of a framework under the LTCH PPS (see 68 FR 34134, 69 FR 25682, and 70 FR 24179). Since the LTCH PPS was implemented just slightly over 3 years ago (for cost reporting periods beginning on or after October 1, 2002) and due to the time lag in the availability of Medicare data, we continue to believe that we still do not yet have sufficient data to develop an update framework upon which to base the proposed update to the standard Federal rate for the 2007 LTCH PPS rate year.

Although we do not have enough complete data at this time to propose an update for RY 2007 based on an update framework, we believe that the almost 2 full years of data generated under the LTCH PPS is sufficient data to begin the discussion of the development of a potential update framework that we may propose to use in the future under the LTCH PPS for the annual update to the LTCH standard Federal rate. Therefore, although we are not proposing to employ an analytical update framework in this proposed rule to determine the proposed 2007 LTCH PPS rate year update to the standard Federal rate, in Appendix A of this proposed rule, we are presenting a preliminary model of an update framework, using the best available data and concepts, which we may propose to adopt at some time in the future.

We are soliciting comments on this preliminary update framework methodology and its application that may be proposed in the future. Also, we would appreciate comments regarding recommendations to improve it. We note that this preliminary model of an update framework for the LTCH PPS is based on the conceptual discussion of a LTCH PPS update framework that was presented in the August 30, 2002 final rule (67 FR 56086), and is similar to the update framework formerly used to develop the operating IPPS annual update recommendation (69 FR 28816 through 28817) and that which is currently used under the capital IPPS for inpatient short-term acute-care hospitals set forth at § 412.308(c)(1)(ii).

3. Proposed Update to the Standard Federal Rate for the 2007 LTCH PPS Rate Year

Currently, under § 412.523, the annual update to the LTCH PPS standard Federal rate is equal to the most recent estimate of increases in the prices of an appropriate market basket of goods and services included in covered inpatient LTCH services (that is, presently, the excluded hospital with capital market basket). As we indicated in previous LTCH PPS final rules (67 FR 56014, 68 FR 34157, 69 FR 25712, and 70 FR 24209 through 24213), we have developed a monitoring system to assist us in evaluating the LTCH PPS. We have used the results of these monitoring efforts, along with the most recently available LTCH PPS data to assess current payment adequacy under the LTCH PPS. As we discuss in greater detail, because we believe that current payments are more than adequate to account for price increases in the services furnished by LTCHs during the 2007 LTCH PPS rate year, under the broad authority conferred upon the Secretary by section 123 of the BBRA as amended by section 307(b) of BIPA to include appropriate adjustments in the establishment of the LTCH PPS, we are proposing to revise § 412.523(c)(3)(ii), to specify that, for discharges occurring on or after July 1, 2006 and on or before June 30, 2007, the standard Federal rate from the previous year would be updated by a factor of zero percent. That is, the standard Federal rate for the July 1, 2006 through June 30, 2007 rate year would remain the same as the standard Federal rate in effect during the 2006 rate year (July 1, 2005 through June 30, 2006), that is, $38,086.04.

In the August 30, 2002 final rule (67 FR 56014), we describe an on-going monitoring component of the new LTCH PPS that would enable us to evaluate the impact of the new payment policies. We stated that if our data indicate that changes to the system might be warranted, we may consider proposing revisions to these policies in the future. Since the implementation of the LTCH PPS (for cost reporting periods beginning on or after October 1, 2002), there has been tremendous growth in the number of LTCHs reimbursed by Medicare. Specifically, the number of LTCHs has almost doubled over the past 3 years from approximately 200 LTCHs in FY 2003 to 378 LTCHs at the start of FY 2005. In addition, Medicare spending for LTCHs has also grown rapidly, as noted in MedPAC's June 2004 Report to Congress (page 122). Rapid increases in LTCH growth and Medicare spending under the LTCH PPS, in conjunction with the fact that over 98 percent of LTCHs are currently paid based fully on the Federal rate (rather than choosing to be paid under a blend of the reasonable cost-based (TEFRA) payment amount and the LTCH PPS Federal rate payment amount), prompted us to examine changes in LTCHs' patient case-mix index (CMI) and margins under the LTCH PPS. Margins are defined as payment-to-cost ratios of LTCH inpatient Medicare payments to LTCH inpatient Medicare costs. We believe the proposed zero percent update factor for RY 2007 is supported by our findings regarding CMI, Medicare margins, and patient census based on the most recent complete LTCH data. The following is a discussion of our analysis of each of these factors.

A LTCH's CMI is defined as its case weighted average LTC-DRG relative weight for all its discharges in a given period. Changes in CMI consist of two components: “real” CMI changes and “apparent” CMI changes. Real CMI increase is defined as the increase in the average LTC-DRG relative weights resulting from the hospital's treatment

of more resource intensive patients. Apparent CMI increase is defined as the increase in CMI due to changes in coding practices. Observed CMI increase is defined as real CMI increase plus the increase in computed CMI due to changes in coding practices (including better documentation of the medical record by physicians and more complete coding of the medical record by coders). If LTCH patients have more costly impairments, lower functional status, or increased comorbidities, and thus require more resources in the LTCH, we would consider this a real change in case-mix. Conversely, if LTCH patients have the same impairments, functional status, and comorbidities but are coded differently, resulting in higher payment, we consider this an apparent change in case-mix. We believe that changes in payment rates should accurately reflect changes in LTCHs' true cost of treating patients (real CMI increase), and should not be influenced by changes in coding practices (apparent CMI increase). Apparent CMI increase results in a case being grouped to a LTC-DRG with a higher weight than it would be without such changes in coding practices, which results in a higher LTCH PPS payment that does not necessarily reflect the true cost of treating the patient. Therefore, under the broad discretionary authority conferred upon the Secretary by section 123 of the BBRA as amended by section 307(b) of BIPA to include appropriate adjustments in the establishment of the LTCH PPS, we are proposing to revise the annual update to the LTCH PPS standard Federal rate set forth at § 412.523(a)(2) for the 2007 LTCH PPS rate year to adjust the payment amount for LTCH inpatient hospital services to eliminate the effect of coding or classification changes that do not reflect real changes in LTCHs' case-mix. It is important to eliminate the effect of coding or classification changes because, as discussed above in this section, they do not reflect the true cost of treating patients. We believe that the adjustment we are proposing to eliminate the effect of coding or classification changes that do not reflect real changes in LTCHs' case-mix would reduce the amount that RY 2007 LTCH PPS payments would have been absent this adjustment so that payments would become more aligned with the true costs of treating LTCH patients.

As described in our August 30, 2002 final rule, we contracted with 3M Health Information Systems (3M) to analyze LTCH data to support our efforts in developing the original LTCH PPS in 2002. We have continued our contract with 3M to assist CMS in developing potential refinements to the LTCH PPS, including some of the proposed changes presented in this proposed rule. As part of this research, we asked 3M to examine changes in case-mix and coding since the implementation of the LTCH PPS based on the most recently available data. As part of their analysis, 3M compared FY 2003 LTCH claims data from the first year of implementation of the PPS with the FY 2001 claims data (generated prior to the implementation of the LTCH PPS), which is the same LTCH claims data used to develop the LTCH PPS.

The analysis performed by 3M indicates that the observed case-mix in LTCHs increased by 5.6 percent between FY 2001 and FY 2003. The average annual CMI increase from FY 2001 to FY 2003 was 2.75 percent. Since coding of diagnoses was not a factor in determining payments under the former reasonable cost-based (TEFRA) payment system, and since payments were not directly tied to diagnosis codes, there was no incentive for LTCHs to attempt to influence payments through changes in coding practices. Therefore, it is reasonable to assume that the observed 2.75 percent change in case-mix in the years prior to the implementation of the LTCH PPS represent the value for the real CMI increase (that is, we assume that the increase in case-mix is not due to improvements in documentation or more complete coding of the medical record during this period). Using the average annual 2.75 percent observed CMI increase as a baseline, we can separate the CMI increase between FYs 2003 and 2004 into the real CMI increase, which is based on the treatment of more resource intensive patients, and the apparent CMI increase, which is due to improvements in documentation and coding practices.

The calculated observed CMI increase between FYs 2003 and 2004 was 6.75 percent. Assuming that the real CMI increase observed (on average) from FY 2001 to FY 2003 remained relatively constant into FY 2005, then the difference of 4.0 percent (6.75 percent minus 2.75 percent) represents the apparent CMI increase due to improvements in documentation and coding. This is considerably higher than the 0.34 percent behavioral offset originally estimated by CMS actuaries, which was used in the development of the FY 2003 LTCH PPS standard Federal rate (67 FR 56033). We note that the 4.0 percent apparent CMI increase is a conservative estimate when compared to the 5.35 percent apparent CMI increase that would result if we applied the information from past studies on case-mix change. Based on past studies of IPPS case-mix change by the RAND Corporation, (“Has DRG Creep Crept Up? Decomposing the Case-Mix Index Change Between 1987 and 1988” by G.M. Carter, J.P. Newhouse, and D.A. Relles, R-4098-HCFA/ProPAC (1991)), we have assumed that real case-mix change for IPPS hospitals was a fairly steady 1.0 to 1.4 percent per year. If we apply this same assumption to LTCHs, nearly 5.35 percent (6.75 percent − 1.4 percent) of the change in case-mix during the first year of the LTCH PPS is apparent CMI and not real CMI.

We recognize that the LTCH PPS may have increased incentives for LTCHs to take patients with greater impairment, lower function, or increased comorbidities because the more complicated the patient's principle diagnosis and accompanying comorbidities, the higher the relative weight for the LTC-DRG, and the higher the resulting LTCH PPS payment. Under TEFRA, LTCHs were paid on the basis of Medicare reasonable costs limited by a hospital-specific target amount per discharge, which were based on base-year cost per case. Thus, LTCHs may have greater incentives to admit more costly patients and therefore, we expected to see an increase in the observed CMI due to the implementation of the LTCH PPS. However, we believe a significant portion of the 6.75 percent increase in CMI between FY 2003 and FY 2004 is due to changes in coding practices rather than the treatment of more resource intensive patients. In our analysis of cost per discharge, we found that while payments (revenue) per discharge increased approximately 17 percent from FY 2002 to FY 2003 (the first year of LTCH PPS), costs (expenses) per discharge increased by only 8 percent for the same period. Thus payments to LTCHs from FY 2002 to FY 2003 increased more than 2 times as much as the increase of costs during the same period. We didn't observe a large increase in cost per discharge, which we would have expected to see if the observed CMI was due to “real” CMI change (treating sicker patients). We would have expected to see a large increase in costs per discharge if the CMI was due to real CMI change because we expected LTCHs to admit more severely ill patients as described previously which we thought would have required more resources to treat these patients. Furthermore, review by a Medicare program safeguard contractor working with the FI sampled LTCH claims with specific diagnoses in one LTCH and determined that the majority of those patients were not “hospital-

level” patients. Rather, the level of care needed by these patients was more suitable for a Skilled Nursing Facility (SNF) than a LTCH. The QIO reviewed a sample of the claims that had been determined not to be hospital-level patients by the Medicare program safeguard contractor and concurred with its assessment of most of those cases. Anecdotally, we have heard of other investigations of LTCHs treating patients that do not require hospital-level care. This finding further supports the data showing that cost per discharge did not increase as rapidly as LTCHs' CMI and that the increase in LTCHs' CMI is primarily due to factors other than real CMI.

In addition, an internal CMS analysis shows high Medicare margins among LTCHs since the implementation of the LTCH PPS in FY 2003. Specifically, we calculated “revenue-weighted” Medicare margins, which are the sum of hospital inpatient Medicare revenue (payments) minus the sum of hospital inpatient Medicare expenses (costs) divided by the sum of hospital inpatient Medicare revenue (payments). This margin calculation, also utilized by MedPAC in its analyses, is used to evaluate the overall financial status of LTCHs. In an analysis of the latest available LTCH cost reports, we found that LTCH Medicare payments for FY 2003 (the first year of the LTCH PPS) were 8.8 percent higher than LTCHs' Medicare costs. Preliminary cost report data for FY 2004 reveal an even higher Medicare margin of 11.7 percent. For the period prior to the implementation of the LTCH PPS (that is, FY 1996 through FY 2002), we found that Medicare margins ranged between a minimum of −2.2 percent in FY 2002, and a maximum of 2.9 percent in FY 1997.

We note that MedPAC is presently engaged in an evaluation of payment adequacy for LTCHs, which upon completion, will be published in the Commission's 2006 Reports to the Congress. At the Commission's October 7, 2005 public meeting, the preliminary findings were presented. The report included the following:

• The number of LTCHs increased rapidly since the implementation of the LTCH PPS; the increase in the volume of cases was even greater; and beneficiaries' access to care has also increased;

• Medicare spending has increased more rapidly than volume.

• LTCHs have access to capital and are rapidly expanding into market areas that had no LTCHs prior to the establishment of the LTCH PPS for FY 2003, as well as in areas that already had LTCHs.

• Medicare payments under the LTCH PPS are “attractive” since despite the fact that LTCHs could opt to be phased-in to the fully Federal payments over 5 years, with a decreasing percentage of payments based on their former TEFRA payments, since 2004, 93 percent of LTCHs have opted to be paid 100 percent under the Federal rate.

• In evaluating adequacy of payments, it can generally be assumed that if the payments are adequate, the volume of patients will increase. This was true under the LTCH PPS, where cases increased 12 percent per year between 2001 and 2004, while Medicare spending increased 25 percent per year for the same period.

• Medicare LTCH spending increased 28 percent from 2003 to 2004.

(The transcript of the discussion of LTCH payment adequacy from the October 7, 2005 MedPAC public meeting can be found at the following web address:

http://www.medpac.gov/public_meetings/transcripts/1005_allcombined_transc.pdf

(pages 256 through 298).)

Consistent with MedPAC's most recent research, our margins analysis indicates that in spite of the estimated real increase in case-mix (severity of patients), payments to LTCHs under the LTCH PPS are generally more than adequate to cover the Medicare costs of the inpatient hospital services provided to LTCH patients. We believe this is because the large observed increase in LTCH case-mix was not accompanied by a corresponding increase in Medicare costs. This is consistent with our belief expressed earlier that a significant part of this observed increase in case-mix is “apparent” and not “real.” Therefore, under the broad discretionary authority conferred upon the Secretary in section 123(a) of the BBRA as amended by section 307(b)(1) of the BIPA to make appropriate adjustments, as explained previously, we believe that it is fiscally prudent and appropriate to propose to revise § 412.523(c)(3)(iii) to specify that the standard Federal rate for the LTCH PPS rate year July 1, 2006 through June 30, 2007, would be the standard Federal rate from the previous year be updated by a factor of zero percent. A zero percent update factor would reflect an adjustment to the market basket update to account for the increase in the apparent case-mix in the prior period. Based on our analysis of the observed LTCH case-mix increase, we estimate that 4 percent of the 6.75 percent calculated observed LTCH CMI increase is due to improvements in documentation and coding and not due to an increase in the severity of the patients being treated at LTCHs. As previously noted, the Federal payment rate was offset by 0.34 percent to reflect expected behavioral changes, including changes in coding. The recent estimate of apparent CMI increase (4 percent) indicates that an additional 3.66 percent adjustment (4 percent apparent CMI increase minus 0.34 percent behavioral offset) should be made to the Federal payment rate to account for improvements in coding. Accounting for the most recent estimate of the RPL market basket increase (3.6 percent) and the additional adjustment for improvements in coding (3.66 percent), the resulting update is within rounding error of zero percent. We are proposing a zero percent update for the 2007 LTCH PPS rate year, which would result in a proposed LTCH PPS standard Federal rate of $38,086.04 for the 2007 LTCH PPS rate year. We believe that a zero percent update for the 2007 LTCH PPS rate year is appropriate to protect the integrity of the Medicare Trust Funds by ensuring that the LTCH PPS payment rates better reflect the true costs of treating LTCH patients. Furthermore, based on the sizeable Medicare margins among LTCHs, we believe that the proposed standard Federal rate for the 2007 LTCH PPS rate year would not affect beneficiary access to LTCH services since LTCHs would continue to be paid adequately to reflect the cost of resources needed to treat Medicare beneficiaries.

As discussed in section IV.B.4. of this preamble, the most recent estimate of the proposed LTCH PPS market basket is 3.6 percent for the 2007 LTCH PPS rate year. If we were not proposing to revise § 412.523(c)(3) to provide a zero percent update to the standard Federal rate for the 2007 LTCH PPS rate year to account for changes in coding that do not reflect real changes in the severity and cost of LTCH patients presented in this proposed rule, under existing § 412.523(c)(3)(ii) the proposed update would have been 3.6 percent.

We note that the proposed revision to § 412.525(c)(3) would only address an update to the LTCH PPS Federal rate through the 2007 LTCH PPS rate year. We intend to propose future revisions to § 412.525(c)(3) to address future proposed updates to the LTCH PPS Federal rates in future rate years based on an analysis of the most recent available LTCH data that would be presented in upcoming LTCH proposed rules. As noted previously in this proposed rule and in the August 30, 2002 final rule (67 FR 56097), we are examining the potential for developing and implementing an update framework

under the LTCH PPS. We believe an update framework, used in combination with the market basket, would enhance the methodology for updating payments by addressing factors beyond changes in pure input prices (measured by the market basket) such as case-mix, intensity, and productivity. (As noted in section IV.C.2 of this proposed rule, a preliminary model of an update framework that may be proposed at some later date for future use under the LTCH PPS is presented in Appendix A of this proposed rule.) However, we are not proposing a specific annual update framework until we have collected sufficient complete LTCH PPS data to evaluate payments and costs under the LTCH PPS.

In addition, currently as implemented in § 412.523(d)(3), we have provided for the possibility of making a one-time prospective adjustment to the LTCH PPS rates so that any significant difference from actual payments and the estimated payments for the first year of the LTCH PPS is not perpetuated in the prospective payment rates for future years. As discussed in section IV.D.5. of this proposed rule, we are not proposing an adjustment to the LTCH PPS rates under § 412.523(d)(3) in this proposed rule; however, we intend to continue to collect and interpret new data to determine if an adjustment should be proposed in the future. In addition, as also discussed in section IV.D.5. of this proposed rule, we are proposing to postpone the deadline of the possible one-time prospective adjustment to the LTCH PPS rates provided for in § 412.523(d)(3) to July 1, 2008 in order to maximize the availability of data used to conduct a comprehensive evaluation of the LTCH PPS. However, we note that the proposed zero percent update for the 2007 LTCH PPS rate year may make this one-time prospective adjustment to the LTCH PPS Federal rate unnecessary if our comprehensive analysis of the LTCH PPS determines that LTCH PPS payments and the costs for LTCH services become aligned as a result of this proposed change. We solicit comments on whether the proposed zero percent for the 2007 LTCH PPS rate year is appropriate or if an alternative percentage reduction should be applied to the standard Federal rate for the 2007 LTCH PPS rate year.

4. Proposed Standard Federal Rate for the 2007 LTCH PPS Rate Year

In the RY 2006 LTCH PPS final rule (70 FR 24180), we established a standard Federal rate of $38,086.04 for the 2006 LTCH PPS rate year that was based on the best available data and policies established in that final rule. In this proposed rule, we would revise § 412.523(c)(3) to establish a standard Federal rate based on a zero percent update as discussed in section IV. B. of this proposed rule. Therefore, based on the proposed zero percent update, the proposed standard Federal rate for RY 2007 would be $38,086.04. As we stated in the RY 2006 LTCH PPS final rule, the standard Federal rate of $38,086.04 was already adjusted for differences in case-mix, wages, cost-of-living, and high cost outlier payments. Therefore, we made additional adjustments in the RY 2006 LTCH PPS standard Federal rate for those factors (70 FR 24180). Similarly, since the proposed standard Federal rate for the 2007 LTCH PPS rate year has already been adjusted for differences in case-mix, wages, cost-of-living, and high-cost outlier payments, we would not propose to make any additional adjustments in the proposed standard Federal rate for these factors.

D. Calculation of Proposed LTCH Prospective Payments for the 2007 LTCH PPS Rate Year

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

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

Table 5

Cost reporting periods beginning on or after

Federal rate percentage

Reasonable cost-based payment rate percentage

October 1, 2002

20

80

October 1, 2003

40

60

October 1, 2004

60

40

October 1, 2005

80

20

October 1, 2006

100

0

Accordingly, for cost reporting periods beginning during FY 2005 (that is, on or after October 1, 2004, and on or before September 30, 2005), blended payments under the transition methodology are based on 40 percent of the LTCH's reasonable cost-based payment rate and 60 percent of the adjusted LTCH PPS Federal rate. For cost reporting periods that begin during FY 2006 (that is, on or after October 1, 2005 and on or before September 30, 2006), blended payments under the transition methodology will be based on 20 percent of the LTCH's reasonable cost-based payment rate and 80 percent of the adjusted LTCH PPS Federal rate. For cost reporting periods beginning on or after October 1, 2006 (FY 2007), Medicare payment to LTCHs will be determined entirely (100 percent) under the LTCH PPS Federal rate.

1. Proposed Adjustment for Area Wage Levels

a. Background

Under the authority of section 123 of the BBRA as amended by section 307(b) of the BIPA, we established an adjustment to the LTCH PPS Federal rate to account for differences in LTCH area wage levels at § 412.525(c). The labor-related share of the LTCH PPS Federal rate, currently estimated by the excluded hospital with capital market basket, is adjusted to account for geographic differences in area wage levels by applying the applicable LTCH PPS wage index. The applicable LTCH PPS wage index is computed using wage data from inpatient acute care hospitals without regard to reclassification under sections 1886(d)(8) or 1886(d)(10) of the Act. Furthermore, as we discussed in the August 30, 2002 LTCH PPS final rule (67 FR 56015), we established a 5-year transition to the full wage adjustment. The applicable wage index phase-in percentages are based on the start of a LTCH's cost reporting period as shown in Table 6.

Table 6

Cost reporting periods beginning on or after

Phase-in percentage of the full wage index

October 1, 2002

1/5th (20 percent).

October 1, 2003

2/5ths (40 percent).

October 1, 2004

3/5ths (60 percent).

October 1, 2005

4/5ths (80 percent).

October 1, 2006

5/5ths (100 percent).

For example, for cost reporting periods beginning on or after October 1, 2004 and on or before September 30, 2005 (FY 2005), the applicable LTCH wage index value is three-fifths of the applicable full LTCH PPS wage index value. Similarly, for cost reporting periods beginning on or after October 1, 2005 and on or before September 30, 2006 (FY 2006), the applicable LTCH wage index value will be four-fifths of the applicable full LTCH PPS wage index value. The wage index adjustment will be completely phased-in beginning with cost reporting periods beginning in FY 2007, that is, for cost reporting periods beginning on or after October 1, 2006, the applicable LTCH wage index value will be the full (five-fifths) LTCH PPS wage index value. As we established in the August 30, 2002 LTCH PPS final rule (67 FR 56018), the applicable full LTCH PPS wage index value is calculated from acute-care hospital inpatient wage index data without taking into account geographic reclassification under sections 1886(d)(8) and (d)(10) of the Act.

In that same final rule (67 FR 56018), we stated that we would continue to reevaluate LTCH data as they become available and would propose to adjust the phase-in if subsequent data support a change. As we discussed in the RY 2006 LTCH PPS final rule (70 FR 24181), because the LTCH PPS was only recently implemented (slightly over 2 years) and because of the time lag in availability of cost report data, sufficient new data have not been generated that would enable us to conduct a comprehensive reevaluation of the

This text is long and has been trimmed here. Open the source document for the complete record.