# Medicare Program; Prospective Payment System for Long-Term Care Hospitals RY 2008: Annual Payment Rate Updates, and Policy Changes; and Hospital Direct and Indirect Graduate Medical Education Policy Changes > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A07-2206 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** May 11, 2007 - **Citation:** 72 FR 26870 ## Text DEPARTMENT OF HEALTH AND HUMAN SERVICES Centers for Medicare & Medicaid Services 42 CFR Part 412 and 413 [CMS-1529-F] RIN 0938-AO30 Medicare Program; Prospective Payment System for Long-Term Care Hospitals RY 2008: Annual Payment Rate Updates, and Policy Changes; and Hospital Direct and Indirect Graduate Medical Education Policy Changes AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS. ACTION: Final Rule. SUMMARY: This final rule updates the annual payment rates for the Medicare prospective payment system (PPS) for inpatient hospital services provided by long-term care hospitals (LTCHs). The final payment amounts and factors used to determine the updated Federal rates that are described in this final rule were determined based on the LTCH PPS rate year July 1, 2007 through June 30, 2008. 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 continue to be effective each October 1. The final outlier threshold for July 1, 2007, through June 30, 2008, is derived from the LTCH PPS rate year calculations. We are also finalizing policy changes which include revisions to the GME and IME policies. In addition, we are adding a technical amendment correcting the regulations text at § 412.22. EFFECTIVE DATE: These regulations are effective on July 1, 2007. 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 (Graduate Medical Education payments). Linda McKenna, (410) 786-4537 (Payment adjustments, interrupted stay, and transition period). Renate Rockwell, (410) 786-4645 (Graduate Medical Education payments). Elizabeth Truong, (410) 786-6005 (Federal rate update, budget neutrality, other adjustments, and calculation of the payment rates). Michael Treitel, (410) 786-4552 (High cost outliers and cost-to-charge ratios). 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 the Provisions of the Final Rule A. Summary of Major Contents of this Final Rule B. Responses to Comments 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 1. Background 2. Method for Updating the LTC-DRG Relative Weights 3. Budget Neutrality (BN) Requirement for the Annual LTC-DRG Update 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 IV. Changes to the LTCH PPS Payment Rates for the 2008 LTCH PPS Rate Year A. Overview of the Development of the Payment Rates B. LTCH PPS Market Basket 1. Overview of the RPL Market Basket 2. Market Basket Estimate for the 2008 LTCH PPS Rate Year C. Standard Federal Rate for the 2008 LTCH PPS Rate Year 1. Background 2. Update to the Standard Federal Rate for the 2008 LTCH PPS Rate Year 3. Standard Federal Rate for the 2008 LTCH PPS Rate Year D. Calculation of LTCH Prospective Payments for the 2008 LTCH PPS Rate Year 1. Adjustment for Area Wage Levels a. Background b. Geographic Classifications/Labor Market Area Definitions c. Labor-Related Share d. Wage Index Data 2. Adjustment for Cost-of-Living in Alaska and Hawaii 3. Adjustment for High-Cost Outliers (HCOs) a. Background b. Cost-to-charge ratios (CCRs) c. Establishment of the Fixed-Loss Amount d. Reconciliation of Outlier Payments Upon Cost Report Settlement e. Application of Outlier Policy to Short-Stay Outlier (SSO) Cases 4. Other Payment Adjustments 5. Budget Neutrality (BN) Offset to Account for the Transition Methodology 6. One-time Prospective Adjustment to the Standard Federal Rate V. Other Policy Changes for the 2008 LTCH PPS Rate Year A. Short-Stay Outlier (SSO) Cases 1. Background 2. Additional Discussion of the SSO Payment Formula (Includes Technical Correction) 3. Determination of Cost-to-Charge Ratios (CCRs) 4. Reconciliation of SSO Cases B. Expansion of Special Payment Provisions for LTCH Hospitals within Hospitals (HwHs) and LTCH Satellites: Expansion of the 25 Percent Rule to Certain Situations Not Currently Covered Under Existing § 412.534 VI. Computing the Adjusted Federal Prospective Payments for the 2008 LTCH PPS Rate Year VII. Transition Period VIII. Payments to New LTCHs IX. Method of Payment X. Monitoring XI. MedPAC Recommendations: The RTI Contract XII. Graduate Medical Education (GME) A. GME Background B. Resident Training in Nonhospital Settings 1. Background 2. Moratorium on Disallowances of Allopathic or Osteopathic Family Practice Residents Training Time in Nonhospital Settings, and Questions and Answers (Qs&As) on CMS Web site (Section 713 of the MMA and § 413.78) 3. Requirements for Written Agreements for Residency Training in Nonhospital Settings (§ 413.78(e)) 4. Modification of the Definition of “All or Substantially All of the Costs for the Training Program in the Nonhospital Setting” 5. Implementation of a 90 Percent Cost Threshold C. Other Issues to be Considered D. Summary of Final Provisions XIII. Technical Amendment XIV. Collection of Information Requirements XV. Regulatory Impact Analysis A. Introduction 1. Executive Order 12866 2. Regulatory Flexibility Act (RFA) 3. Impact on Rural Hospitals 4. Unfunded Mandates 5. Federalism 6. Alternatives Considered B. Anticipated Effects of Payment Rate Changes 1. Budgetary Impact 2. Impact on Providers 3. Calculation of Prospective Payments 4. Results 5. Effects on the Medicare Program C. Impact of Other Policy Changes 1. Effects of Policy Expansion of the Special Payment Provisions for LTCH HwHs and LTCH Satellites to Certain Situations Not Presently Covered by Existing § 412.534 for Subclause (I) LTCHs 2. Effects of Policy Change Relating to Payment for Direct Graduate Medical Education (GME) D. Accounting Statement Addendum: Tables Acronyms Because of the many terms to which we refer by acronym in this final rule, we are listing the acronyms used and their corresponding terms in alphabetical order below: AAMC Association of American Medical Colleges AFMAA Academic Family Medicine Advocacy Alliance AHA American Hospital Association AHIMA American Health Information Management Association ALOS Average length of stay ALTHA Acute Long Term Hospital Association AMGA American Medical Group Association AMPRA American Medical Peer Review Association AOA American Osteopathic Association 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) BN Budget neutrality CBSA Core-based statistical area CCR Cost-to-charge ratio C&M Coordination and maintenance CMI Case-mix index CMS Centers for Medicare & Medicaid Services COLA Cost of living adjustment CS Consolidated severity-adjusted CY Calendar year DSH Disproportionate share of low-income patients DRGs Diagnosis-related groups FI Fiscal intermediary FMC Family Medicine Center FTE Full-time equivalent FY Federal fiscal year GME Graduate medical education HCO High-cost outlier 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 MMA Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (Pub. L. 108-173) MSA Metropolitan statistical area NAICS North American Industrial Classification System NALTH National Association of Long Term Hospitals NCHS National Center for Health Statistics OACT [CMS'] Office of the Actuary OBRA 86 Omnibus Budget Reconciliation Act of 1986 (Pub. L. 99-509) OMB Office of Management and Budget OPM U.S. Office of Personnel Management O.R. Operating room OSCAR Online Survey Certification and Reporting (System) OTN One-Time Notification PIP Periodic interim payment PLI Professional liability insurance PMSA Primary metropolitan statistical area PPI Producer Price Indexes PPS Prospective payment system PRA Per resident amount PSF Provider specific file QIO Quality Improvement Organization (formerly Peer Review organization (PRO)) RIA Regulatory impact analysis RPL Rehabilitation psychiatric long-term care (hospital) RTI Research Triangle Institute, International RY Rate year (begins July 1 and ends June 30) SIC Standard industrial code SNF Skilled nursing facility SSO Short-stay outlier TEFRA Tax Equity and Fiscal Responsibility Act of 1982 (Pub. L. 97-248) TEP Technical expert panel UHDDS Uniform hospital discharge data set I. Background 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) provides 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 fiscal year (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. It also requires that the “per discharge” system maintain budget neutrality (BN). We believe the statutory mandate for BN applies only to the first year of the implementation of the LTCH PPS such that estimated payments in the first year of the PPS were projected to equal payments that would have been paid for operating and capital-related costs of LTCHs had this new payment system not been enacted. Section 307(b)(1) of the BIPA, among other things, mandates that the Secretary shall examine, and may provide for, adjustments to payments under the LTCH PPS, including adjustments to DRG weights, area wage adjustments, geographic reclassification, outliers, updates, and a disproportionate share adjustment. In the August 30, 2002 Federal Register , we issued a final rule that 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. (Generally, in this document when we refer to discharges, the intent is to describe 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 BN 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). In the June 6, 2003 Federal Register , we published a final rule that set forth the FY 2004 annual update of the payment rates for the Medicare PPS for inpatient hospital services furnished by LTCHs (68 FR 34122). 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. In the Prospective Payment System for Long-Term Care Hospitals RY 2007: Annual Payment Rate Updates, Policy Changes, and Clarifications final rule (71 FR 27798) (hereinafter referred to as the RY 2007 LTCH PPS final rule), we set forth the 2007 LTCH PPS rate year annual update of the payment rates for the Medicare PPS for inpatient hospital services provided by LTCHs. We also adopted the “Rehabilitation, Psychiatric, Long-Term Care (RPL)” market basket under the LTCH PPS in place of the excluded hospital with capital market basket. In addition, we implemented a zero percent update to the LTCH PPS Federal rate for RY 2007. We also revised the existing payment adjustment for short stay outlier (SSO) cases by reducing part of the current payment formula and adding a fourth component to that payment formula. In addition, we sunsetted the surgical DRG exception to the payment policy established under the 3-day or less interruption of stay policy. Finally, we clarified the policy at § 412.534(c) for adjusting the LTCH PPS payment so that the LTCH PPS payment is equivalent to what would otherwise be payable under § 412.1(a). 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 for 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 § 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 qualifies as an LTCH is based on the hospital's discharge data from the hospital's most recent complete cost reporting period as specified in § 412.23(e)(3) and is effective at the start of the hospital's next cost reporting period as specified in § 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 FI 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 § 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 FY 2004 Inpatient Prospective Payment System (IPPS) final rule, published in the August 1, 2003 Federal Register , 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 (68 FR 45464). 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 FY 2004 IPPS final rule, we are unable to capture the necessary data from our present cost reporting forms (68 FR 45464). 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 (67 FR 55954), we provided for a 5-year transition period. During this 5-year transition period, a LTCH's total payment under the PPS was based on an increasing percentage of the Federal rate with a corresponding decrease in the percentage of the LTCH PPS payment that is based on reasonable cost concepts. However, effective for cost reporting periods beginning on or after October 1, 2006, total LTCH PPS payments are based on 100 percent of the Federal rate. 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, if the Medicare payment to the LTCH is the full LTC-DRG payment amount, 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). However, under the LTCH PPS, Medicare will only pay for days for which the beneficiary has coverage until the 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 (ASCA) and Health Insurance Portability and Accountability Act (HIPAA) 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 the ASCA requires that the Medicare Program deny payment under Part A or Part B for any expenses incurred 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 the ASCA) provides that the Secretary shall waive such denial in two specific types of cases and may also waive such denial “in such unusual cases as the Secretary finds appropriate” (68 FR 48805). Section 3 of the ASCA operates in the context of the ASCA 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 health care providers, to conduct the covered electronic transactions according to the applicable transactions and code sets standards. II. Summary of the Provisions of the Final Rule A. Major Contents of This Final Rule In this final rule, we are setting forth the annual update to the payment rates for the Medicare LTCH PPS, as well as, other policy changes. The following is a summary of the major areas that we have addressed in this final 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. Also, in section III. of this preamble, we have established a BN requirement for the annual update of the LTC-DRG classifications and relative weights to reflect changes in relative LTCH resource use. This requirement ensures that estimated aggregate LTCH PPS payments will not decrease or increase as a result of the annual update to the LTC-DRG classifications and relative weights based on the most recent available data. In this section, we also summarize the proposed severity adjusted MS-LTC-DRGs and the development of the proposed relative weights for FY 2008 presented in the FY 2008 IPPS proposed rule. As discussed in section IV.C. of this preamble, we are implementing a 0.71 percent update to the LTCH PPS Federal rate for the 2008 LTCH PPS rate year based on an adjustment to account for changes in coding practices. Also in section IV. of this preamble, we discuss the prospective payment rate for RY 2008, and in section VI., we discuss the applicable adjustments to the payment rates, including the revisions to the wage index, the labor-related share, the cost-of-living adjustment (COLA) factors, and the outlier threshold, for the 2008 LTCH PPS rate year. In section V.A. of this preamble, we discuss our change to the current payment formula for certain SSO cases. That is, those cases with a LOS that is less than or equal to one standard deviation of the ALOS of an IPPS discharge that was grouped into the same DRG. However, in situations where the SSO cases would exceed the IPPS discharge that was grouped in the same DRG, payment would continue to be paid under the existing formula. In section V.B. of this preamble, we discuss the expansion of the present 25 percent admission policy at § 412.534(c) to those certain situations not already affected by the existing policy. Previously, this policy only applied to co-located LTCHs and LTCH satellites whose percentage of discharges exceeded the 25 percent threshold (or the applicable percentage). This is extended to include an adjusted payment to LTCH discharges that were admitted from referring hospitals not co-located with the LTCH or the satellite of a LTCH where those discharges exceed the 25 percent (or applicable percentage) threshold. The final policy also applies to grandfathered LTCHs and satellite facilities of LTCHs that have Medicare discharges that were admitted from a hospital co-located with the LTCH or satellite facility of the grandfathered LTCH. 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 discuss the recommendations made by the Research Triangle Institute, International's (RTI) evaluation of the feasibility of adopting recommendations made in the June 2004 Medicare Payment Advisory Commission (MedPAC) Report. In section XII. of this preamble, we discuss our revisions to redefine the statutory term “all or substantially all of the costs for the training program in the nonhospital setting.” The statute requires that hospitals must pay “all or substantially all” of the costs for a training program in a nonhospital setting in order to count FTE residents training in the nonhospital setting for Medicare graduate medical education (GME) payment purposes. We are revising § 413.75(b) to introduce a new definition of “all or substantially all of the costs for the training program in the nonhospital setting” to mean, at least 90 percent of the total of the costs of the residents' salaries and fringe benefits (including travel and lodging where applicable) and the portion of the cost of teaching physicians' salaries attributable to nonpatient care direct GME activities. In addition, we are revising § 412.105(f)(1)(ii)(C) for IME and § 413.78 to reflect this new definition of “all or substantially all” of the GME costs in a nonhospital setting, effective for cost reporting periods beginning on or after July 1, 2007. In section XV. of this preamble, we analyze the impact of the changes presented in this final rule on Medicare expenditures, Medicare-participating LTCHs, and Medicare beneficiaries. B. Responses to Comments We received 270 comments on the RY 2007 LTCH PPS proposed rule. Comments and responses follow the appropriate policy section in this rule. The following is a comment we received regarding the schedule of the LTCH PPS update. Comment: One commenter urged CMS to consolidate the July 1 update of the LTCH PPS rates and the October 1 development of the LTC-DRG weights into one publication cycle, a step which the commenter states would be very beneficial for the LTCH industry. Response: We appreciate the commenter's suggestion and we will evaluate whether such a consolidation is a workable alternative to our present schedule. III. Long-Term Care Diagnosis-Related Group (LTC-DRG) Classifications and Relative Weights A. Background Section 123 of the BBRA requires that the Secretary implement a PPS for LTCHs (that is, a per discharge system with a DRG-based patient classification system reflecting the differences in patient resource use and costs). Section 307(b)(1) of the BIPA modified the requirements of section 123 of the BBRA by 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 the 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. (As discussed in greater detail below in this section, in the FY 2008 IPPS proposed rule, we have proposed to adopt the severity-weighted patient classification system, the proposed MS-LTC-DRGs, for the LTCH PPS beginning in FY 2008, which is the same patient classification system proposed for use under the IPPS for FY 2008.) 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. 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 2007 LTC-DRG relative weights appears in the FY 2007 IPPS final rule (71 FR 47974 through 47978). A listing of the proposed composition of low volume quintiles used in determining the proposed FY 2008 MS-LTC-DRG relative weights appears in the FY 2008 IPPS proposed rule.) 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, a 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. Consistent with our historical practice of having LTC-DRGs correspond to the DRGs applicable under the IPPS, we will continue to model the LTCH-DRGs after their predecessor CMS DRGs. In addition, we are proposing to use the FY 2008 GROUPER Version 25.0 to be effective for discharges occurring on or after October 1, 2007 through September 30, 2008. Cases are classified into LTC-DRGs for payment based on the following six data elements: (1) Principal diagnosis. (2) Up to eight additional diagnoses. (3) Up to six procedures performed. (4) Age. (5) Sex. (6) Discharge status of the patient. As indicated in the August 30, 2002 LTCH PPS final rule, upon the discharge of the patient from a LTCH, the LTCH must assign appropriate diagnosis and procedure codes from the most current version of the International Classification of Diseases, Ninth Revision, Clinical Modification (ICD-9-CM). HIPAA Transactions and Code Sets Standards regulations at 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 to use the ASC X12N 837 Health Care Claim: Institutional, Volumes 1 and 2, version 4010, and the applicable standard medical data code sets for the institutional health care claim or equivalent encounter information transaction (see 45 CFR 162.1002 and 45 CFR 162.1102). Medicare FIs/MACs 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, among others, 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.) After screening through the MCE, each claim will be classified into the appropriate LTC-DRG by the Medicare LTCH GROUPER software. As indicated in the 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/MAC 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 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 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 2007 IPPS final rule, diagnosis and procedure codes for new medical technology may be created and added to existing CMS DRGs in the middle of the Federal FY on April 1 (71 FR 47959 and 47971). However, this policy change will have no effect on the LTC-DRG relative weights during the FY, which will continue to be updated only once a year on October 1, nor will there be any impact on Medicare payments under the LTCH PPS during the FY as a result of this policy. 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. In the IPPS proposed rule, we proposed to create and implement MS-DRGs for FY 2008; that is, the proposed MS-DRGs would be effective beginning with discharges on or after October 1, 2007 through September 30, 2008. The proposed MS-DRGs are a severity-based system of DRGs in which all existing CMS DRGs were refined to better recognize severity of illness among patients. The details of this proposal can be reviewed online at http://www.cms.hhs.gov/AcuteInpatientPPS/downloads/CMS-1533-P.pdf. Under the broad authority of section 123(a) of the BBRA as modified by section 307(b) of the BIPA, we intend to model the proposed MS-LTC-DRGs on the corresponding CMS DRGs as described in the FY 2008 IPPS proposed rule if this DRG system is implemented for the IPPS in FY 2008. In addition, as stated above in this section, we intend to use the FY 2008 GROUPER Version 25.0, effective for discharges occurring on or after October 1, 2007 through September 30, 2008 for the LTCH PPS if the IPPS system is implemented for FY 2008. To elaborate, if the proposed MS-DRGs are adopted for use by the IPPS, the LTC-DRGs will use the same structure as the proposed MS-DRGs, and will be referred to as the MS-LTC-DRGs. Cases will continue to be classified into MS-LTC-DRGs using the six data elements listed above, and will be subject to review by the MCE as they have in the past. After screening through the MCE, claims will be classified into the appropriate MS-LTC-DRG by the LTCH PPS GROUPER software. Following the MS-LTC-DRG assignment, the Medicare FI/MAC determines the appropriate payment using the Medicare PRICER program. 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). The proposed MS-DRGs, as defined in the FY 2008 IPPS proposed rule, and the MS-LTC-DRGs contain base DRGs that have been subdivided into one, two, or three severity levels. The most severe level has at least one code that is a major CC, referred to as “with MCC”. The next lower severity level contains cases with at least one CC, referred to as “with CC”. Those DRGs without an MCC or a CC are referred to as “without CC/MCC”. When data did not support the creation of three severity levels, the base DRG was divided into either two levels or the base was not subdivided. The proposed two-level subdivisions consist of one of the following subdivisions: • With CC/MCC. • Without CC/MCC. In this type of subdivision, cases with at least one code that is on the CC or MCC list are assigned to the “with CC/MCC” DRG. Cases without a CC or an MCC are assigned to the “without CC/MCC” DRG. The other type of proposed two-level subdivision is as follows: • With MCC. • Without MCC. In this type of subdivision, cases with at least one code that is on the MCC list are assigned to the “with MCC” DRG. Cases that do not have an MCC are assigned to the “without MCC” DRG. This type of subdivision could include cases with a CC code, but no MCC. 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 MS-DRGs or MS-LTC-DRGs recognize comorbid or complicating conditions in their definition. (For example, proposed MS-DRG 069, Transient Ischemia (formerly CMS DRG 524, Transient Ischemia), is based solely on the principal diagnosis, without consideration of additional diagnoses for DRG determination.) As discussed in greater detail in the FY 2007 IPPS final rule (71 FR 47898 through 47912 and 47973), 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.) As we discussed in that same final rule (71 FR 47973), we did not adopt a new severity-adjusted patient classification system under the IPPS, for FY 2007, but we did refine the CMS DRG patient classification system for Version 24.0 of the GROUPER software to improve the CMS DRG system's recognition of severity of illness for FY 2007. The updates to the CMS DRG patient classification system used under the IPPS for FY 2007 (GROUPER Version 24.0), were also applied to the LTC-DRGs used under the LTCH PPS for FY 2007. In the FY 2008 IPPS proposed rule, we presented the changes to the proposed MS-DRG patient classification system for FY 2008. In that rule, we proposed the IPPS GROUPER Version 25.0 for FY 2008 to process LTCH PPS claims for LTCH discharges occurring from October 1, 2007 through September 30, 2008. As noted above in this section and as we also discussed in the FY 2007 IPPS final rule, in its March 1, 2005 Report to Congress on Medicare Payment Policy (page 64) and in Recommendation 1 of the 2005 Report to Congress on Physician-Owned Specialty Hospitals, MedPAC recommended that CMS, among other things, refine the current DRGs under the IPPS to more fully capture differences in severity of illness among patients. D. Update of LTC-DRGs 1. Background We propose to modify the existing LTC-DRGs so that they reflect the changes made to the CMS DRGs under the proposed IPPS notice. As discussed in greater detail in the FY 2008 IPPS proposed rule, under the LTCH PPS, relative weights for each proposed MS-LTC-DRG are a primary element used to account for the variations in cost per discharge and resource utilization among the payment groups (that is, proposed MS-LTC-DRGs). To ensure that Medicare patients classified to each proposed MS-LTC-DRG have access to an appropriate level of services and to encourage efficiency, each year based on the best available data, we calculate a relative weight for each proposed MS-LTC-DRG that represents the resources needed by an average inpatient LTCH case in that proposed MS-LTC-DRG. For example, cases in a proposed MS-LTC-DRG with a relative weight of 2 will, on average, cost twice as much as cases in a proposed MS-LTC-DRG with a relative weight of 1. Under § 412.517, the proposed MS-LTC-DRG classifications and weighting factors (that is, relative weights) are adjusted annually to reflect changes in factors affecting the relative use of LTCH resources, including treatment patterns, technology and number of discharges. For FY 2008, the proposed MS-LTC-DRG classifications and relative weights were updated based on LTCH data from the FY 2005 MedPAR file, which contained hospital bills data from the December 2006 update. The proposed MS-LTC-DRG patient classification system is based upon 745 MS-DRGs that formed the structure of the FY 2008 LTCH PPS GROUPER program. The FY 2008 proposed MS-LTC-DRGs continues to include 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 proposed error MS-LTC-DRGs are MS-LTC-DRG 999 (Principal Diagnosis Invalid as a Discharge Diagnosis) and MS-LTC-DRG 998 (Ungroupable). The other 743 proposed MS-LTC-DRGs are the same MS-DRGs used in the IPPS GROUPER program for FY 2008 (Version 25.0). For FY 2008, as discussed in greater detail in the FY 2008 IPPS proposed rule, we proposed to adopt the MS-LTC-DRGs for the LTCH PPS for RY 2008. (Additional information on the proposed MS-LTC-DRG classifications and proposed MS-LTC-DRG relative weights can be found in the FY 2008 IPPS proposed rule.) 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. The ICD-9-CM coding update process was revised as discussed in greater detail in the FY 2005 IPPS final rule (69 FR 48953 through 48957). Specifically, section 503(a) of the MMA includes a requirement for updating diagnosis and procedure 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 48953 through 48957), the RY 2006 LTCH PPS final rule (70 FR 24172 through 24177), and the RY 2008 LTCH PPS proposed rule (72 FR 4783 through 4784).) As discussed in the RY 2008 proposed rule (72 FR 4784), in implementing section 503(a) of the MMA, there will only be an April 1 update if diagnosis and procedure 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 (C&M) 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 through an April 1 update. At the September 2006 ICD-9-CM C&M Committee meeting, there were no requests for an April 1, 2007 implementation of ICD-9-CM codes, and therefore, the next update to the ICD-9-CM coding system will not occur until October 1, 2007 (FY 2008). Presently, as there were no coding changes suggested for an April 1, 2007 update, the ICD-9-CM coding set implemented on October 1, 2006, will continue through September 30, 2007 (FY 2007). As discussed above in this section, the next update to the proposed MS-LTC-DRGs and relative weights for proposed FY 2008 will be presented in the FY 2008 IPPS proposed rule. Furthermore, we will notify LTCHs of any revisions to the GROUPER software used under the IPPS and LTCH PPS that would be implemented April 1, 2008. As noted previously in this section, in the FY 2007 IPPS final rule (71 FR 47973), we established the use of Version 24.0 of the CMS GROUPER, which is used under the IPPS for FY 2007, to classify cases for LTCH PPS discharges that would occur on or after October 1, 2006 and on or before September 30, 2007. 2. 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 to ensure both a fair distribution of Medicare payments and access to 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. As we have noted above, we are proposing to adopt the MS-LTC-DRGs for the LTCH PPS for FY 2008. However, as discussed in the FY 2008 IPPS proposed rule, this proposed change in the patient classification system does not affect the basic principles of the development of relative weights under a DRG-based PPS. For purposes of clarity, in the general discussion below in which we describe the basic methodology of the patient classification system in use since the start of the LTCH PPS, we use the acronym “MS-LTC-DRG” to specify the proposed DRG patient classification system to be used by the LTCH PPS in FY 2008. Although the proposed adoption of the MS-LTC-DRGs would result in some modifications of existing procedures for assigning weights (for example, in cases of zero volume and/or nonmonotonicity, as discussed below), the basic methodology for developing the proposed FY 2008 MS-LTC-DRG relative weights presented in the FY 2008 IPPS proposed rule continued to be determined in accordance with the general methodology established in the August 30, 2002 LTCH PPS final rule (67 FR 55989 through 55991), which is discussed below. Therefore, in the discussion below, the term “LTC-DRGs” will be used in descriptions of the basic methodology established at the beginning of the LTCH PPS that will remain unchanged if we adopt the proposed MS-LTC-DRGs. The use of the term “MS-LTC-DRGs” in the following discussion will indicate a discussion of specifics aspects of our proposed adoption of the severity-weighted patient classification system for FY 2008 as presented in the FY 2008 IPPS proposed rule.) Under the LTCH PPS, 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 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 2007 IPPS final rule, the LTC-DRG relative weights effective under the LTCH PPS for FY 2007 were calculated using the March 2006 update of FY 2005 MedPAR data and Version 24.0 of the GROUPER software (71 FR 47973). We use total days and total charges in the calculation of the LTC-DRG relative weights. LTCHs often specialize in certain areas, such as ventilator-dependent patients and rehabilitation or 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 2007 IPPS final rule for further information on the application of the hospital-specific relative value methodology under the LTCH PPS (71 FR 47974 through 47975).) 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 2007 based on the FY 2005 MedPAR data, we identified 180 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 36 LTC-DRGs (180/5 = 36). 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 2007 IPPS final rule for further explanation of the development and composition of each of the 5 low volume quintiles for FY 2007 and their composition (71 FR 47975 through 47978).) 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 SSO 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 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 2007 IPPS final rule for further details on the steps for calculating the LTC-DRG relative weights (71 FR 47978 through 47984).) In addition, of the 538 LTC-DRGs in the LTCH PPS for FY 2007, based on LTCH cases in the FY 2005 MedPAR files, we identified 183 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 2005, 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 183 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 2007, we assigned relative weights to each of the 183 “no volume” LTC-DRGs based on clinical similarity and relative costliness to one of the remaining 355 (538-183 = 355) LTC-DRGs for which we were able to determine relative weights, based on the FY 2005 claims data. (A list of the current no-volume LTC-DRGs and further explanation of their FY 2007 relative weight assignment can be found in the FY 2007 IPPS final rule (71 FR 47980 through 47984).) Furthermore, for FY 2007, we established LTC-DRG relative weights of 0.0000 for heart, kidney, liver/intestinal, lung, simultaneous pancreas/kidney, and pancreas transplants (LTC-DRGs 103, 302, 480, 495, 512 and 513, respectively) because presently no LTCH meets the applicable requirements to perform Medicare covered transplant procedures. However, if in the future, a LTCH seeks to meet such requirements as a Medicare-approved transplant center to perform Medicare-covered transplant procedures, 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 in this section, there were no new ICD-9-CM code requests for an April 1, 2007 update. Therefore, Version 24.0 of the DRG GROUPER software established in the FY 2007 IPPS final rule will continue to be effective until October 1, 2007. Moreover, the LTC-DRGs and relative weights for FY 2007 established in Table 11 of that same IPPS final rule (71 FR 48321 through 48331) will continue to be effective until October 1, 2007, (just as they would have been even if there had been any new ICD-9-CM code requests for an April 1, 2007 update). Accordingly, Table 3 in the Addendum to this final rule lists the LTC-DRGs and their respective relative weights, geometric ALOS, and five-sixths of the geometric ALOS that we will continue to use for the period of July 1, 2007 through September 30, 2007. (This table is the same as Table 11 of the Addendum to the FY 2007 IPPS final rule.) The next update to the ICD-9-CM coding system will be presented in the FY 2008 IPPS proposed rule (since there will be no April 1, 2007 updates to the ICD-9-CM coding system). In addition, the proposed DRGs and GROUPER for FY 2008 that would be effective October 1, 2007, will be presented in the IPPS FY 2008 proposed rule. Below we provide a summary of the development of the proposed LTC-DRG relative weights for FY 2008 presented in that same proposed rule. To calculate the proposed MS-LTC-DRG relative weights for FY 2008 in the FY 2008 IPPS proposed rule, we obtained total Medicare allowable charges from FY 2006 Medicare LTCH bill data from the December 2006 update of the MedPAR file, which are the best available data at this time, and we used the proposed Version 25.0 of the CMS GROUPER used under the IPPS (as discussed in section II.B. of the preamble of that proposed rule) to classify cases. To calculate the final MS-LTC-DRG relative weights for FY 2008, we proposed that, if more recent data are available (for example, data from the March 2007 update of the MedPAR file), we would use those data and the finalized Version 25.0 of the CMS GROUPER used under the IPPS. We continued to use total days and total charges in the calculation of the proposed MS-LTC-DRG relative weights. We also continued to use the hospital-specific relative value methodology, described above, for determining the proposed MS-LTC-DRG relative weights for FY 2008. As noted above in this section, although the proposed adoption of the MS-LTC-DRGs would result in some modifications of existing procedures discussed above for assigning relative weights under the current system (as discussed in detail below), the basic methodology for developing the proposed FY 2008 MS-LTC-DRG relative weights in the FY 2008 IPPS proposed rule continue to be determined in accordance with the general methodology established in the August 30, 2002 LTCH PPS final rule (67 FR 55989 through 55991) summarized above. With the implementation of the LTCH PPS for FY 2003, we established a procedure to address setting relative weights for LTC-DRG “pairs” that were differentiated on the presence or absence of CCs (71 FR 47979). As discussed in the FY 2008 IPPS proposed rule, our proposal to adopt a severity-based patient classification system for the LTCH PPS, the MS-LTC-DRGs described above, required us to adapt our existing approach for setting relative weights for the severity levels within a specific base DRG. We are also proposed to modify our existing methodology for maintaining monotonicity when setting relative weights for the proposed MS-LTC-DRGs. As under the existing procedure, under the proposed MS-LTC-DRGs, for purposes of the annual setting of the relative weights, there continue to be three different categories of DRGs based on volume of cases within specific LTC-DRGs. LTC-DRGs with at least 25 cases are each assigned a relative weight; low-volume proposed MS-LTC-DRGs (that is, proposed MS-LTC-DRGs that contain between 1 and 24 cases annually) are grouped into quintiles (described below) and assigned the weight of the quintile. Cases with no-volume proposed MS-LTC-DRGs (that is, no cases in the database were assigned to those proposed MS-LTC-DRGs) are cross-walked to other proposed MS-LTC-DRGs based on the clinical similarities and assigned the weight of the quintile that is closest to the relative weight of the cross-walked proposed MS-LTC-DRG. (For in-depth discussions of our proposals regarding proposed relative weight setting for low-volume MS-LTC-DRGs and for no-volume MS-LTC-DRGs, see the FY 2008 IPPS proposed rule.) As noted above, for FY 2008, we are proposing to adopt the MS-DRGs for use in both the LTCH PPS and the IPPS. While the LTCH PPS and the IPPS use the same patient classification system, the methodology that is used to set the DRG weights for use in each payment system differs because the overall volume of cases in the LTCH PPS is much less than in the IPPS. As a general rule, as described in the FY 2008 IPPS proposed rule, we are proposing to set the weights for the proposed MS-LTC-DRGs using the following steps: (1) If an MS-LTC-DRG has at least 25 cases, it is assigned its own relative weight; (2) if an MS-LTC-DRGs has between 1 and 24 cases, it is assigned to a quintile to which we will assign a relative weight; and (3) if an MS-LTC-DRG has no cases, it is cross-walked to another DRG based upon clinical similarities and assigned the appropriate relative weight. Theoretically, as with the existing LTC-DRG system, cases under the proposed MS-LTC-DRG system that are more severe require greater expenditure of medical care resources and will result in higher average charges. Therefore, in the three severity levels of the base MS-LTC-DRG, relative weights should increase with severity, from lowest to highest. If the relative weights do not increase (that is, if based on the relative weight calculation using the most recent LTCH claims data, a proposed MS-LTC-DRG with MCC would have a lower relative weight than one with CC, or the DRG without CC/MCC would have a higher relative weight than either of the others), there is a problem with monotonicity. As discussed above in this section, to account for LTC-DRGs with low volume (that is, with fewer than 25 LTCH cases), we group those “low-volume LTC-DRGs” (that is, DRGs that contained between 1 and 24 cases annually) into one of five categories (quintiles) based on average charges, for the purposes of determining relative weights. As discussed in the FY 2008 IPPS proposed rule, we proposed to continue to employ this treatment of low-volume proposed MS-LTC-DRGs with a modification to combine proposed MS-LTC-DRGs for the purpose of computing a relative weight in cases where necessary to maintain monotonicity in determining the proposed FY 2008 MS-LTC-DRG relative weights using the best available LTCH data. In that proposed rule, using LTCH cases from the December 2006 update of the FY 2006 MedPAR file, we identified 307 proposed MS-LTC-DRGs that contained between 1 and 24 cases. This list of proposed MS-LTC-DRGs was then divided into one of the 5 low-volume quintiles, each containing a minimum of 61 proposed MS-LTC-DRGs (307/5 = 61, with a remainder of 2 proposed MS-LTC-DRGs). Consistent with our current methodology, we are proposing to make an assignment to a specific low-volume quintile by sorting the low-volume proposed MS-LTC-DRGs in ascending order by average charge. ( See the FY 2008 IPPS proposed rule for further explanation of the development and composition of each of the 5 low volume quintiles for FY 2007 and their proposed composition.) As we noted previously, although the proposed adoption of the MS-LTC-DRGs would result in some modifications of existing procedures for assigning relative weights, the proposed FY 2008 MS-LTC-DRG relative weights presented in Table 11 of the FY 2008 IPPS proposed rule are based on the methodology established in the August 30, 2002 LTCH PPS final rule (67 FR 55989 through 55991). In summary, as described in greater detail in that same proposed rule, LTCH cases would be grouped to the appropriate proposed MS-LTC-DRG, while taking into account the low-volume proposed MS-LTC-DRGs as described above, before the proposed FY 2008 MS-LTC-DRG relative weights can be determined. After grouping the cases to the appropriate proposed MS-LTC-DRG, we proposed to calculate the proposed relative weights for FY 2008 by first removing statistical outliers and cases with a LOS of 7 days or less and to adjust the number of cases in each proposed MS-LTC-DRG for the effect of SSO cases under § 412.529. The short-stay adjusted discharges and corresponding charges are used to calculate “relative adjusted weights” in each proposed MS-LTC-DRG using the HSRV method described above. Next we proposed to determine relative weights for the no-volume proposed MS-LTC-DRGs. As discussed in the FY 2008 IPPS proposed rule, of the 745 proposed MS-LTC-DRGs for FY 2008, we identified 124 proposed MS-LTC-DRGs for which there were no LTCH cases in the database. That is, no patients who would have been classified to those proposed MS-LTC-DRGs were treated in LTCHs during FY 2006, and therefore, no charge data were reported for those proposed MS-LTC-DRGs. Thus, in the process of determining the proposed MS-LTC-DRG relative weights, we are unable to determine weights for these 124 proposed MS-LTC-DRGs using the methodology described above. However, because patients with a number of the diagnoses under these proposed MS-LTC-DRGs may be treated at LTCHs beginning in FY 2008, we are proposing to assign relative weights to each of the 124 no-volume proposed MS-LTC-DRGs based on clinical similarity and relative costliness to one of the remaining 621 (745-124 = 621) proposed MS-LTC-DRGs for which we are able to determine proposed relative weights, based on FY 2006 LTCH claims data. In general, we determined proposed relative weights for the 124 proposed MS-LTC-DRGs with no LTCH cases in the FY 2006 MedPAR file used in this proposed rule by cross-walking these proposed MS-LTC-DRGs to other proposed MS-LTC-DRGs and then grouping them to the appropriate proposed low-volume quintile. (A list of the proposed no-volume MS-LTC-DRGs and further explanation of their proposed FY 2008 relative weight assignment can be found in the FY 2008 IPPS proposed rule.) We also adjusted the proposed MS-LTC-DRG relative weights to account for nonmonotonically increasing relative weights, including any no volume proposed MS-LTC-DRGs, where applicable, as described above. Furthermore, for FY 2008 we proposed to establish proposed MS-LTC-DRG relative weights of 0.0000 for the following transplant proposed MS-LTC-DRGs: Heart transplant or implant of heart assist system w MCC (proposed MS-LTC-DRG 1); Heart transplant or implant of heart assist system w/o MCC (proposed MS-LTC-DRG 2); Liver transplant w MCC or intestinal transplant (proposed MS-LTC-DRG 5); Liver transplant w/o MCC (proposed MS-LTC-DRG 6); Lung transplant (proposed MS-LTC-DRG 7); Simultaneous pancreas/kidney transplant (proposed MS-LTC-DRG 8); and Pancreas transplant (proposed MS-LTC-DRG 10). As explained in the FY 2008 IPPS proposed rule, this is 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 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 determine appropriate weights for the proposed MS-LTC-DRGs affected. At the present time, we would only include these seven proposed transplant MS-LTC-DRGs in the GROUPER program for administrative purposes only. Because we use the same GROUPER program for LTCHs as is used under the IPPS, removing these proposed MS-LTC-DRGs would be administratively burdensome. ( See the FY 2008 IPPS proposed rule for further details on the steps for calculating the proposed MS-LTC-DRG relative weights for FY 2008.) 3. Budget Neutrality (BN) Requirement for the Annual LTC-DRG Update As noted above in this section, currently under § 412.517, the LTC-DRG classifications and relative weights are adjusted annually to reflect changes in factors affecting the relative use of LTCH resources, such as treatment patterns, technology and number of discharges. Currently, there are no statutory or regulatory requirements that the annual update to the LTC-DRG classifications and relative weights be done in a budget neutral manner. Historically, since the initial implementation of the LTCH PPS in FY 2003, we have updated the LTC-DRG relative weights each year without a BN adjustment based on the most recent available LTCH claims data, which reflect current LTCH patient mix and coding practices, and appropriately reflected more or less resource use than the previous year's LTC-DRG relative weights (71 FR 47991). When we proposed changes to the LTC-DRGs for FY 2007 in the FY 2007 IPPS proposed rule, we estimated that those proposed changes to the LTC-DRG classifications and relative weights would result in about an estimated 1.4 percent decrease in estimated aggregate LTCH PPS payments (71 FR 24413). As we discussed in the FY 2007 IPPS final rule (71 FR 47991), several commenters, including MedPAC, urged us to establish a BN requirement for the annual reclassification and recalibration of the LTC-DRGs so that, in future years, the LTCH PPS could avoid an estimated decrease in estimated aggregate payments, such as the estimated 1.4 percent decrease that resulted from the proposed update to the LTC-DRGs and relative weights for FY 2007. In response to previous proposed annual updates to the LTC-DRG relative weights, we also received comments recommending that a BN adjustment be applied in determining the LTC-DRG relative weights to mitigate LTCH PPS payment fluctuations. ( See the FY 2005 IPPS final rule (69 FR 48999 through 49000), and the FY 2006 IPPS final rule (70 FR 47333 through 47334).) In response to those comments, we explained that we understood the commenters' concern with the estimated decrease in payments under LTCH PPS based upon the changes in the LTC-DRGs and relative weights proposed for FY 2007. However, as we discussed in the FY 2007 IPPS final rule, we did not postpone the proposed FY 2007 reclassification and recalibration of the LTC-DRGs, nor did we implement those changes in a budget neutral manner. We noted several reasons for the annual fluctuations in LTC-DRG relative weights that have resulted in both estimated increases and decreases in estimated aggregate LTCH PPS payments in the 4 years since the implementation of the LTCH PPS in FY 2003. Specifically, we reiterated our belief that several factors have affected the changes to the LTC-DRG relative weights over the past 4 years, including actual improvements in coding so that cases are appropriately assigned to LTC-DRGs. We also explained that historically we recalibrated the LTC-DRG relative weights each year based on the most recent available LTCH claims data, which reflect current LTCH patient mix and coding practices, and appropriately reflects more or less resource use than the previous year's LTC-DRG relative weights. The intended purpose of the annual recalibration of the LTC-DRG relative weights is to reflect any variation in coding practices and charges from the previous year and to help ensure that the LTC-DRG relative weights in the upcoming fiscal year will result in appropriate and accurate payments to LTCHs for the resources they expend to treat their Medicare patients. (71 FR 47984 through 47989) We also reminded the commenters that under the IPPS, there is a statutory requirement that the annual DRG reclassification and recalibration changes be made in a manner that assures that the estimated aggregate payments are neither greater than nor less than the estimated aggregate payments that would have been made without the changes, but there is no corresponding statutory requirement under the LTCH PPS. However, we noted that, given the considerable discretion granted to the Secretary under section 123 of the BBRA and section 307(b) of the BIPA of 2000 to develop the LTCH PPS, it is possible that, at some point, the Secretary would consider using this broad authority to establish a BN policy for the annual update of the LTC-DRG classifications and relative weights. We further stated that if we find that it would be appropriate to propose making the updates to the LTC-DRGs and relative weights in a budget neutral manner, the public would have the opportunity to submit comments on any proposed change during the rulemaking process. As we discussed in the RY 2007 LTCH PPS proposed rule (72 FR 4784 through 4786), a LTCH's case-mix index (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. The computed (or observed) CMI increase is defined as real CMI increase (due to an increase in patient severity) plus the increase 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 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, including the LTC-DRG relative weights, 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). As stated above in this section, apparent CMI increase results from cases being grouped to a LTC-DRG with a higher weight than it would be without such changes in coding practices. As we discussed in the FY 2007 IPPS final rule (71 FR 48343 through 48344), in discussing the impact of the changes to the LTC-DRG classifications and relative weights established for FY 2007 that were estimated to result in an aggregate decrease in LTCH PPS payments of approximately 1.3 percent, we explained that changes in coding practices (rather than patient severity) primarily resulted in fluctuations in the LTC-DRG relative weights in the past. Specifically, based on an analysis of FY 2005 LTCH claims data, we continued to observe that the average LTC-DRG relative weight decreases due to an increase of relatively lower charge cases being assigned to LTC-DRGs with higher relative weights in the prior year. Contributing to this increase in these relatively lower charge cases being assigned to LTC-DRGs with higher relative weights in the prior year are improvements in coding practices, which are typical when moving from a reasonable cost-based payment system to a PPS. The impact of including cases with relatively lower charges into LTC-DRGs that had a relatively higher relative weight in the previous version of the GROUPER software is a decrease in the average relative weight for those LTC-DRGs in the updated version of the GROUPER software. We noted in the RY 2008 LTCH PPS proposed rule (72 FR 4785) that this same phenomenon of relatively lower charge cases being assigned to LTC-DRGs with higher relative weights in the prior year was also observed when we analyzed the LTCH claims data from FY 2003 and FY 2004 to update the LTC-DRG relative weights for FY 2005 and FY 2006, respectively (see the FY 2005 IPPS final rule (69 FR 48999) and the FY 2006 IPPS final rule (70 FR 47701 through 47702).) However, this phenomenon was more notable based on the FY 2004 LTCH claims data that were used to update the LTC-DRG relative weights for FY 2006, where the changes to the LTC-DRG weights established were estimated to result in a decrease in aggregate LTCH PPS payments of 4.2 percent (as compared to the estimated 1.3 percent decrease in aggregate LTCH PPS payments based on the FY 2005 LTCH claims data used to determine the FY 2007 LTC-DRG relative weights). Because the estimated decrease in aggregate LTCH PPS payments due to the update to the LTC-DRG relative weights based on more recent (FY 2005) LTCH claims data was significantly lower (1.3 percent estimated based on the LTC-DRG changes for FY 2007) than it was based on FY 2004 LTCH claims data (4.2 percent estimated based on the LTC-DRG changes for FY 2006), we believe that, as LTCHs have become more familiar with the ICD-9-CM coding principles and guidelines used under a DRG-based system, annual changes in LTCH CMI are approaching the point where the observed CMI increase is primarily due to changes in real CMI (that is, increased patient severity) rather than apparent CMI (that is, changes in coding practices). In other words, because we have observed that, over time as LTCHs have gained more experience with ICD-9-CM coding, estimated changes in LTCH PPS payments due to recalibration of the LTC-DRG relative weights based on more recent claims data (for example, the FY 2007 LTC-DRG relative weights calculated from FY 2005 LTCH claims data as compared to the FY 2006 LTC-DRG relative weights calculated from FY 2004 LTCH claims data) have diminished over time. That is, we have estimated smaller fluctuations in aggregate LTCH PPS payments as a result of the annual recalibration of the LTC-DRG relative weights based on more recent LTCH claims data generated after the implementation of the LTCH PPS (for example, the 1.3 percent estimated decrease in aggregate LTCH PPS payments for FY 2007 based on FY 2004 LTCH claims data as compared to the 4.2 percent estimated decrease in aggregate LTCH PPS payments for FY 2007 based on FY 2005 LTCH claims data). For these reasons, as discussed in the RY 2008 LTCH PPS proposed rule (72 FR 4785), we believe that LTCH coding practices have stabilized such that the most recent available LTCH claims data now primarily reflect changes in the resources used by the average LTCH patient in a particular LTC-DRG (and not changes in coding practices). Thus, we believe that the most recent available data (as described below in this section) mainly reflect the true costs of treating LTCH patients, and we believe changes in payment rates, including the LTC-DRGs, should reflect such costs. Furthermore, in that same proposed rule, we explained that a LTCH CMI analysis based on the most recent available LTCH claims data, which is discussed in section IV.C. of this preamble, also supports our belief that observed CMI increase is primarily due to changes in real CMI (that is, increased patient severity) rather than apparent CMI (that is, changes in coding practices). Specifically, this CMI analysis indicates that changes in LTCH coding practices, which resulted in fluctuations in the LTC-DRG relative weights in the past, appear to be stabilizing as LTCHs have become more familiar with a DRG-based system. Specifically, this LTCH CMI analysis shows that the overall observed change in LTCH CMI from FY 2003 compared to FY 2004 was an increase of approximately 6.75 percent while the overall observed change in LTCH CMI from FY 2004 compared to FY 2005 was an increase of approximately 3.49 percent, which is only about half of the LTCH CMI growth measured from the prior period (that is, the 6.75 percent from FY 2003 to FY 2004). Furthermore, preliminary analysis of FY 2006 LTCH claims data, which reflects over 3 full years of experience under the LTCH PPS for most LTCHs, showed an even smaller overall observed CMI increase of about 1.9 percent from FY 2005 compared to FY 2006. Again, the observed CMI increase from FY 2005 to FY 2006 is only about half of the LTCH CMI growth measured from the prior period (that is, the 3.49 percent from FY 2004 to FY 2005). Because this LTCH CMI analysis shows that observed CMI is declining, we believe that LTCH coding practices have stabilized such that changes in LTCH CMI are now primarily due to changes in real CMI (that is, increased patient severity) rather than apparent CMI (that is, changes in coding practices). In other words, because we believe that the observed annual CMI increase is primarily “real” and not “apparent,” it is no longer necessary to update the LTC-DRGs in a non-budget neutral manner (as discussed in greater detail below in this section). As stated above in this section, we believe that changes in payment rates, including the LTC-DRG relative weights, 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). In light of these facts, in order to mitigate estimated fluctuations in estimated aggregate LTCH PPS payments, as urged by past commenters, we stated in the RY 2008 proposed rule (72 FR 4785) that we had given further consideration to the issue of establishing a BN requirement for annual LTC-DRG reclassification and recalibration. Therefore, in that proposed rule, under the broad authority conferred upon the Secretary under section 123 of the BBRA as amended by section 307(b) of the BIPA to develop the LTCH PPS, we proposed that, beginning with the LTC-DRG update for FY 2008, the annual update to the LTC-DRG classifications and relative weights would be done in a budget neutral manner such that estimated aggregate LTCH PPS payments would be unaffected, that is, would be neither greater than nor less than the estimated aggregate LTCH PPS payments that would have been made without the LTC-DRG classification and relative weight changes. Accordingly, we proposed to revise § 412.517 to specify that annual changes to the LTC-DRG classifications and the recalibration of the LTC-DRG relative weights would be made in a budget neutral manner such that estimated aggregate LTCH PPS payments are not affected. Comment: Numerous commenters, including MedPAC, supported our proposal to recalibrate the LTC-DRGs annually in a budget neutral manner. Some commenters also recommended that we should monitor the recalibration so that any reweighting of the LTC-DRGs is conducted in a manner that does not result in a redistribution of payments from high acuity DRGs to lower acuity DRGs, pending implementation of revised certification criteria designed to screen out LTCH inappropriate patients. Response: We appreciate the commenters' support of our proposed BN requirement for the annual LTC-DRG update. As discussed in the RY 2008 LTCH PPS proposed rule (72 FR 4785 through 4786), we explained that we believe that it would be appropriate to update the LTC-DRG classifications and relative weights in a budget neutral manner at this time for the reasons discussed below. As noted above in this section, the relative weight for each LTC-DRG represents the resources needed by an average inpatient LTCH case in that LTC-DRG, such that LTCH 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 relative weight of 1. In the past when we recalibrated the LTC-DRG relative weights each year without a BN adjustment based on the most recent available LTCH claims data, we believe that the resulting LTC-DRG relative weights appropriately reflected more or less resource use than the previous year's LTC-DRG relative weights, and that the estimated aggregate payment changes were appropriate given that the LTCH claims data used to determine those LTC-DRG relative weights reflected changes in coding practices, as well as changes in actual resource use. Historically, we have not updated the LTC-DRGs in a budget neutral manner because we believed that past fluctuations in the LTC-DRG relative weights were primarily due to changes in LTCH coding practices, which included both “real” and “apparent” changes in LTCHs' case-mix (as discussed above in this section). We believe that changes in the LTCH PPS payment rates, including the LTC-DRG relative weights, 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). Therefore, in the past we did not update the LTC-DRGs in a budget neutral manner so that “apparent” CMI changes were not permanently built into the LTCH PPS payment rates. Because LTCH 2006 claims data does not appear to significantly reflect changes in LTCH coding practices in response to the implementation of the LTCH PPS (as explained above in this section), we believe that it may be appropriate to update the LTC-DRGs so that estimated aggregate LTCH PPS payments would neither increase or decrease since we believe that changes in the LTC-DRG classifications and relative weights should accurately reflect changes in LTCHs' resource use (that is, true cost of treating patients) and should not be influenced by changes in coding practices, and that the most recent such LTCH claims data primarily reflects changes in the resources needed by an average LTCH case in a particular LTC-DRG (and not changes in coding practices). Thus, we now believe it would be reasonable and appropriate to update the LTC-DRGs in a budget neutral manner, beginning in FY 2008, so that estimated aggregate payments under the LTCH PPS would be unaffected (that is, estimated aggregate LTCH PPS payments would not be greater than or less than they would have been without the proposed LTC-DRG classification and relative weight changes) by any changes resulting from the annual reclassification and recalibration of the LTC-DRGs. Updating the LTC-DRGs in a budget neutral manner would result in an annual update to the individual LTC-DRG classifications and relative weights based on the most recent available data to reflect changes in relative LTCH resource use; however, the LTC-DRG relative weights would be uniformly adjusted to ensure that estimated aggregate payments under the LTCH PPS would not be affected (that is, decreased or increased). In this final rule, under the broad authority conferred upon the Secretary under section 123 of the BBRA as amended by section 307(b) of the BIPA to develop the LTCH PPS, beginning with the LTC-DRG update for FY 2008 (discussed in greater detail below), the annual update to the LTC-DRG classifications and relative weights will be done in a budget neutral manner such that estimated aggregate LTCH PPS payments will be unaffected, that is, will be neither greater than nor less than the estimated aggregate LTCH PPS payments that would have been made without the LTC-DRG classification and relative weight changes. Accordingly, we are revising § 412.517 to specify that annual changes to the LTC-DRG classifications and the recalibration of the LTC-DRG relative weights are made in a budget neutral manner such that estimated aggregate LTCH PPS payments are not affected. As discussed above, we believe that the most recent available LTCH claims data reflects the intensity of resource use of the treatment of Medicare patients based on current LTCH coding and treatment practices. Accordingly, we believe that annually updating the LTC-DRG relative weights using the most recent available LTCH claims data reflects more or less resource use than the previous year's LTC-DRG relative weights based on the current LTCH practices. Therefore, we believe that any redistribution in payments as a result of the annual recalibration of the LTC-DRG relative weights based on this updated LTCH claims data appropriately reflects LTCH resource use in the treatment of their Medicare patients. While we will continue to monitor LTCH data, including any redistribution of payments upon the annual update of the LTC DRGs, for the reasons discussed above, we are not adopting the commenters' suggestion to establish a requirement that the annual recalibration of the relative weights be done in a manner that would adjust for redistribution of payments from high acuity LTC-DRGs to lower acuity LTC-DRGs. As we explained in the RY 2008 LTCH PPS proposed rule (72 FR 4786), we intend to update the LTC-DRG classifications and relative weights for FY 2008 based on the best available data at the time to allow for changes in factors affecting hospital resource use, including but not limited to, practice patterns and new technology. This will be done in a budget neutral manner, such that estimated aggregate payments under the LTCH PPS would neither decrease or increase as a result of the changes due to the annual reclassification and recalibration of the LTC-DRGs. Because we will continue to use the most recent available LTCH data, the updated LTC-DRG relative weights will continue to reflect changes in LTCH resource use (as is the case under the current (non-budget neutral) LTC-DRG update methodology). Thus, for example, if the most recent LTCH claims data showed that the resource use for hypothetical LTC-DRG “ABC” is double the resource use for hypothetical LTC-DRG “XYZ,” then the value of the relative weight for LTC-DRG “ABC” would be about twice the value of relative weight for LTC-DRG “XYZ.” In addition to accounting for changes in relative resource use, to include a BN requirement for the annual update to the LTC-DRGs, the updated LTC-DRG relative weights will need to be uniformly adjusted to ensure that estimated aggregate LTCH PPS payments will not be affected. That is, a BN factor will need to be computed to ensure that the LTC-DRG reclassification and recalibration process, by itself, neither increases nor decreases estimated aggregate LTCH PPS payments. As discussed in the FY 2008 IPPS proposed rule, to accomplish BN when annually updating the LTC-DRG classifications and relative weights under revised § 412.517, we proposed to use a method that is similar to the methodology used under the IPPS. (Information on the IPPS DRG BN adjustment can be found in the FY 2007 IPPS final rule (71 FR 47970).) As noted above, we proposed to adopt the MS-LTC-DRGs for the LTCH PPS for FY 2008. Therefore, in the discussion that follows, we will refer to the development of the proposed budget neutrality factor in terms of the proposed MS-LTC-DRG severity-weighted patient classification system. Specifically, after recalibrating the proposed MS-LTC-DRG relative weights, as we do under our existing methodology (as described in detail in the FY 2007 IPPS final rule (71 FR 47978 through 47981)), as described in greater detail in the FY 2008 IPPS proposed rule, we would calculate and apply a normalization factor (which will be published annually in the IPPS proposed and final rules when we update the LTC-DRGs and relative weights) to the proposed MS-LTC-DRG relative weights to ensure that estimated aggregate LTCH PPS payments are not influenced by changes in the composition of case types or changes made to the classification system. That is, the normalization adjustment is intended to ensure that the recalibration of the proposed MS-LTC-DRG relative weights (that is, the process itself) neither increases nor decreases total estimated payments. To calculate the normalization factor, we proposed to use the most recent available claims data (FY 2006) and apply the proposed GROUPER (Version 25.0) to calculate the proposed MS-LTC-DRG relative weights. (We also proposed to use the most recent available claims data in the analysis for this final rule.) These weights were determined such that the average CMI value is 1.0. Then, we proposed to group the same claims data (FY 2006) using the current GROUPER (Version 24.0) and current LTC-DRG relative weights. The average CMI was calculated for the claims data using the current GROUPER and relative weights. Finally, the ratio of the average CMI of the claims data set under the current GROUPER and the proposed GROUPER was calculated as the proposed normalization factor. For FY 2008, based on the latest available data, the proposed normalization factor is estimated as 1.020302, which was applied to each proposed MS-LTC-DRG relative weight. (We also stated that if more current data become available prior to publication of the final rule, we will use those data to determine the normalization factor.) That is, each proposed MS-LTC-DRG relative weight was multiplied by 1.020302 in the first step of the BN process. We are also proposed to ensure that estimated aggregate LTCH PPS payments (based on the most recent available LTCH claims data) after recalibration (the proposed relative weights) would be equal to estimated aggregate LTCH PPS payments (for the same most recent available LTCH claims data) before recalibration (the existing relative weights). Therefore, we proposed to calculate the BN adjustment factor by simulating estimated payments under both sets of GROUPERs and relative weights. We proposed to simulate total estimated payments under the current payment policies (RY 2007) using the most recent available claims data (FY 2006) and using the proposed GROUPER (Version 25.0), and normalized relative weights. Then, we proposed to simulate estimated payments using the most recent available claims data (FY 2006) and apply the proposed GROUPER (Version 25.0). We next calculated payments using the same claims data (FY 2006) with the current GROUPER (Version 24.0). The ratio of the estimated average payment under the current GROUPER and the proposed GROUPER was calculated as the proposed BN factor. Then each of the proposed normalized relative weights was multiplied by the proposed BN factor to determine the proposed budget neutral relative weight for each proposed MS-LTC-DRG. Accordingly, based on the most recent available data, we proposed to apply a BN factor of 1.003924 to the relative weights after normalizing. To calculate the proposed MS-LTC-DRG relative weights for FY 2008, we obtained total Medicare allowable charges from FY 2006 Medicare LTCH bill data from the December 2006 update of the MedPAR file, which are the best available data at that time. We also proposed that if more current data become available prior to publication of the final rule, we will use those data to determine the budget neutrality factor. The proposed FY 2008 MS-LTC-DRG relative weights are presented in Table 11 in the Addendum of the FY 2008 IPPS proposed rule, which reflect the budget neutral adjustment described above. In the recently issued FY 2008 IPPS proposed rule, we proposed significant refinements to the DRGs used under both the IPPS and LTCH PPS to better recognize severity of illness among patients. The proposed refinements would be effective October 1, 2007. The proposed new MS-DRG and MS-LTC-DRG systems present opportunities to acute care hospitals and LTCHs, respectively, to improve documentation and coding to receive higher payments without a real increase in patient severity of illness. The Office of the Actuary estimates an adjustment of −2.4 percent to the IPPS rates for each of FY 2008 and FY 2009 will be necessary to account for the anticipated improvements in coding and documentation. In the FY 2008 IPPS proposed rule, we proposed to apply this −2.4 percent adjustment for case mix increase in FY 2008 and in FY 2009 in both the IPPS and LTCH PPS systems to address the proposed change to the refined severity DRGs. It should be noted that this adjustment is not related to the finalized budget neutrality adjustment included in this LTCH final rule and discussed above. The budget neutrality adjustment in this rule is an annual requirement that is needed to assure that annual recalibration of the DRG weights based on the most recent available claims data, results in no changes (increase or decrease) in estimated payments that stem from updating the DRG weights, while the proposed −2.4 percent adjustment for FYs 2008 and 2009 is tied solely to the proposed change to the MS-LTC-DRGs. Accordingly, each of the proposed MS-LTC-DRG relative weights in Table 11 of the Addendum to the FY 2008 IPPS proposed rule reflects this proposed adjustment. That is, each proposed MS-LTC-DRG relative weight was multiplied by a factor of 0.976 to account for changes in coding or classification of discharges resulting from the proposed adoption of the new patient classification system. This proposed adjustment is consistent with the proposed adjustment applied to the proposed IPPS rates for FYs 2008 and 2009 to eliminate the effect of changes in coding or classification of discharges that do not reflect real change in case-mix because we believe that adoption of the proposed MS-LTC-DRGs would create a risk of increased aggregate levels of payment as a result of increased documentation and coding. 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 or the proposed MS-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 coding scheme 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 (NCHS), April 1980”) and as revised in 1984 by the Health Information Policy Council (HIPC) of the Department of Health and Human Services (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 or proposed MS-LTC-DRG assignment to request review of that assignment of the discharge to an LTC-DRG or MS-LTC-DRG. 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 C&M Committee is a Federal interdepartmental committee, co-chaired by the National Center for Health Statistics (NCHS) and CMS, which is charged with maintaining and updating the ICD-9-CM system. The C&M Committee is jointly responsible for approving coding changes, and developing errata, addenda, and other modifications to the ICD-9-CM to reflect newly developed procedures and technologies and newly identified diseases. The C&M Committee is also responsible for promoting the use of Federal and non-Federal educational programs and other communication techniques with a view toward standardizing coding applications and upgrading the quality of the classification system. The NCHS has lead responsibility for the ICD-9-CM diagnosis codes included in the Tabular List and Alphabetic Index for Diseases, while CMS has 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, for the IPPS, section 503(a) of the MMA includes a requirement for updating diagnosis and procedure codes twice a year instead 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 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 diagnosis and procedure codes (currently the ICD-9-CM) in the FY 2005 IPPS final rule (69 FR 48953 through 48957). In addition, we established a policy for the possibility of an April 1 ICD-9-CM diagnosis and procedure code update in the RY 2006 LTCH PPS final rule (70 FR 24176) since LTCH systems would be expected to recognize and report those new codes through the channels described in this section even though no DRG additions or deletions or changes to relative weights will occur prior to the usual October 1 update. (For more detailed information on the affect of the statutory mandates directed at the IPPS as amended by section 503(a) of the MMA, refer to the FY 2005 IPPS final rule (69 FR 48954 through 48957) and the RY 2007 LTCH PPS final rule (71 FR 27806 through 27808)). Current addendum and code title information is published on the CMS Web site at: http://www.cms.hhs.gov/ICD9ProviderDiagnosticCodes/04_addendum.asp . Summary tables showing new, revised, and deleted code titles are also posted on the CMS Web site at 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, the 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. In addition, 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 continue to urge LTCHs to focus on improved coding practices. Inappropriate coding of cases can adversely affect the uniformity of cases in each LTC-DRG or proposed MS-LTC-DRG and produce inappropriate weighting factors at the annual recalibration. Because of concerns raised by LTCHs concerning correct coding, we have asked the AHA to provide additional clarification and instruction on proper coding in the LTCH setting. The AHA will provide this instruction via their established process of addressing questions through their publication, the 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 continue to emphasize the importance of the quality of the documentation under the LTCH PPS. Based on the LTCH claims data analysis described above in section III.D.2. of this preamble, we fully believe that with some experience under a PPS, the quality of the documentation and coding of LTCHs has improved, as it did for the IPPS. However, because of the need for proper coding by LTCHs, the cooperating parties will assist their members with continued improvement in documentation and coding issues for the LTCHs through specific questions and coding guidelines. The importance of consistent and complete 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 for the selection of principal diagnosis. To clarify coding advice issued in the August 30, 2002 LTCH PPS 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 effects 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 the Coding Clinic for ICD-9-CM. IV. Changes to the LTCH PPS Payment Rates for the 2008 LTCH PPS Rate Year A. Overview of the Development of the Payment Rates The LTCH PPS was effective beginning with 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, a total LTCH prospective payment that is comprised of an increasing proportion of the LTCH PPS Federal rate and a decreasing proportion based on reasonable cost-based principles, unless the hospital makes a one-time election to receive payment based on 100 percent of the Federal rate, as specified in § 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 at § 412.515 through § 412.532. In this section, we discuss the factors that will be used to update the LTCH PPS standard Federal rate for the 2008 LTCH PPS rate year that will be effective for LTCH discharges occurring on or after July 1, 2007 through June 30, 2008. When we implemented the LTCH PPS in the August 30, 2002 LTCH PPS final rule (67 FR 56029 through 56031), we computed the LTCH PPS standard Federal payment rate for FY 2003 by updating the latest available (FY 1998 or FY 1999) Medicare inpatient operating and capital cost data, using the excluded hospital market basket. Section 123(a)(1) of the BBRA requires that the PPS developed for LTCHs be budget neutral for the initial year of implementation. Therefore, in calculating the standard Federal rate under § 412.523(d)(2), we set total estimated LTCH PPS payments equal to estimated payments that would have been made under the reasonable cost-based payment methodology had the PPS for LTCHs not been implemented. Section 307(a) of the BIPA specified that the increases to the hospital-specific target amounts and the cap on the target amounts for LTCHs for FY 2002 provided for by section 307(a)(1) of the BIPA shall not be considered 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), RY 2006 LTCH PPS final rule (70 FR 24179 through 24180), and RY 2007 LTCH PPS final rule (71 FR 27819 through 27827). B. LTCH PPS Market Basket 1. Overview of the RPL Market Basket Historically, the Medicare program has 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, using the excluded hospital with capital market basket, 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 with capital market basket was also used to update the limits on LTCHs' operating costs for inflation under the TEFRA reasonable cost-based payment system. We explained that we believe the use of the excluded hospital with capital 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. For further details on the development of the excluded hospital with capital market basket, see the RY 2004 LTCH PPS final rule (68 FR 34134 through 34137). In the RY 2007 LTCH PPS final rule (71 FR 27810), we noted that based on our research, we did not develop a market basket specific to LTCH services. We are still unable to create a separate market basket specifically for LTCHs due to the small number of facilities and the limited amount of data that is reported (for instance, only approximately 15 percent of LTCHs reported contract labor cost data for 2002). In that same final rule, under the broad authority conferred upon the Secretary by section 123 of the BBRA as amended by section 307(b) of the BIPA, we adopted the “Rehabilitation, Psychiatric and Long-Term Care (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. Specifically, beginning with the 2007 LTCH PPS rate year, for the LTCH PPS, we adopted the use of the RPL market basket based on FY 2002 cost report data as it was 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 inpatient rehabilitation facilities (IRFs), inpatient psychiatric facilities (IPF), and LTCHs. The RPL market basket is determined based on the operating and capital costs of IRFs, 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 to IPFs will be based exclusively on 100 percent of the Federal rate for cost reporting periods beginning on or after January 1, 2008), the RPL market basket reflects changes in the operating and capital costs for these hospitals. As we explained in that same final rule, 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 reflects the cost structures of LTCHs. For further details on the development of the RPL market basket, including the methodology for determining the operating and capital portions of the RPL market basket, see the RY 2007 LTCH PPS final rule (71 FR 27810 through 27817). 2. Market Basket Estimate for the 2008 LTCH PPS Rate Year Consistent with our historical practice, we estimate market basket increase based on Global Insight's forecast using the most recent available data. The most recent estimate of the RPL market basket for July 1, 2007 through June 30, 2008 (the 2008 LTCH PPS rate year), based on Global Insight's 1st quarter 2007 forecast with history through the 4th quarter of 2006, is 3.2 percent. Global Insight, Inc. is a nationally recognized economic and financial forecasting firm that contracts with CMS to forecast changes in the components of the market baskets. Consistent with our historical practice of using market basket estimates based on the most recent available data, we are finalizing 3.2 percent as the estimate of the RPL market basket for the 2008 LTCH PPS rate year. As discussed in greater detail in this section, for the 2008 LTCH PPS rate year, we are updating the standard Federal rate by 0.71 percent. The update reflects an adjustment based on the most recent market basket estimate (currently 3.2 percent) and an adjustment to account for the increase in case-mix in the prior period (FY 2005) that resulted from changes in coding practices rather than an increase in patient severity. C. Standard Federal Rate fo [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A07-2206. Public record. Not legal advice.