Medicare Program; Inpatient Rehabilitation Facility Prospective Payment System for Federal Fiscal Year 2016

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 412

[CMS-1624-P]

RIN 0938-AS45

Medicare Program; Inpatient Rehabilitation Facility Prospective Payment System for Federal Fiscal Year 2016

AGENCY:

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

ACTION:

Proposed rule.

SUMMARY:

This proposed rule would update the prospective payment rates for inpatient rehabilitation facilities (IRFs) for federal fiscal year (FY) 2016 as required by the statute. We are also proposing to adopt an IRF-specific market basket that reflects the cost structures of only IRF providers, phase in the revised wage index changes, and revise and update quality measures and reporting requirements under the IRF quality reporting program (QRP).

DATES:

To be assured consideration, comments must be received at one of the addresses provided below, no later than 5 p.m. on June 22, 2015.

ADDRESSES:

In commenting, please refer to file code CMS-1624-P. Because of staff and resource limitations, we cannot accept comments by facsimile (FAX) transmission.

You may submit comments in one of four ways (please choose only one of the ways listed):

1.

Electronically.

You may submit electronic comments on this regulation to

http://www.regulations.gov

. Follow the “Submit a comment” instructions.

2.

By regular mail.

You may mail written comments to the following address ONLY: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-1624-P, P.O. Box 8016, Baltimore, MD 21244-8016.

Please allow sufficient time for mailed comments to be received before the close of the comment period.

3.

By express or overnight mail.

You may send written comments to the following address ONLY: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-1624-P, Mail Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850.

4.

By hand or courier.

Alternatively, you may deliver (by hand or courier) your written comments ONLY to the following addresses prior to the close of the comment period:

a. For delivery in Washington, DC—Centers for Medicare & Medicaid Services, Department of Health and Human Services, Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue SW., Washington, DC 20201.

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

b. For delivery in Baltimore, MD—Centers for Medicare & Medicaid Services, Department of Health and Human Services, 7500 Security Boulevard, Baltimore, MD 21244-1850.

If you intend to deliver your comments to the Baltimore address, please call telephone number (410) 786-7195 in advance to schedule your arrival with one of our staff members.

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

For information on viewing public comments, see the beginning of the

SUPPLEMENTARY INFORMATION

section.

FOR FURTHER INFORMATION CONTACT:

Gwendolyn Johnson, (410) 786-6954, for general information.

Charles Padgett, (410) 786-2811, for information about the quality reporting program.

Kadie Thomas, (410) 786-0468, or Susanne Seagrave, (410) 786-0044, for information about the payment policies and the proposed payment rates.

Catherine Kraemer, (410) 786-0179, for information about the revised wage index.

Bridget Dickensheets, (410) 786-8670, or Heidi Oumarou, (410) 786-7942, for information about the IRF-specific market basket.

SUPPLEMENTARY INFORMATION:

The IRF PPS Addenda along with other supporting documents and tables referenced in this proposed rule are available through the Internet on the CMS Web site at

http://www.cms.hhs.gov/Medicare/Medicare-Fee-for-Service-Payment/InpatientRehabFacPPS/

.

Inspection of Public Comments:

All comments received before the close of the comment period are available for viewing by the public, including any personally identifiable or confidential business information that is included in a comment. We post all comments received before the close of the comment period on the following Web site as soon as possible after they have been received:

http://www.regulations.gov

. Follow the search instructions on that Web site to view public comments.

Comments received timely will also be available for public inspection as they are received, generally beginning approximately 3 weeks after publication of a document, at the headquarters of the Centers for Medicare & Medicaid Services, 7500 Security Boulevard, Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 a.m. to 4 p.m. To schedule an appointment to view public comments, phone 1-800-743-3951.

Executive Summary

A. Purpose

This proposed rule would update the payment rates for IRFs for FY 2016 (that is, for discharges occurring on or after October 1, 2015, and on or before September 30, 2016) as required under section 1886(j)(3)(C) of the Social Security Act (the Act). Section 1886(j)(5) of the Act requires the Secretary to publish in the

Federal Register

on or before the August 1 that precedes the start of each fiscal year, the classification and weighting factors for the IRF PPS's case-mix groups and a description of the methodology and data used in computing the prospective payment rates for that fiscal year. This proposed rule would also revise and update quality measures and reporting requirements under the IRF QRP.

B. Summary of Major Provisions

In this proposed rule, we use the methods described in the FY 2015 IRF PPS final rule (79 FR 45872) to propose updates to the federal prospective payment rates for FY 2016 using updated FY 2014 IRF claims and the most recent available IRF cost report data. We are also proposing to adopt an IRF-specific market basket that reflects the cost structures of only IRF providers. We are proposing that the IRF-specific market basket will be used to update the IRF PPS base payment rate and to determine the FY 2016 labor-related share. We are also proposing to phase in the revised wage index changes, and revise and update quality measures and reporting requirements under the IRF QRP.

C. Summary of Impacts

Provision Description

Transfers

FY 2016 IRF PPS payment rate update

The overall economic impact of this proposed rule is an estimated $130 million in increased payments from the Federal government to IRFs during FY 2016.

Provision Description

Costs

New quality reporting program requirements

The total costs in FY 2016 for IRFs as a result of the proposed new quality reporting requirements are estimated to be $24,042,291.01.

To assist readers in referencing sections contained in this document, we are providing the following Table of Contents.

Table of Contents

I. Background

A. Historical Overview of the IRF PPS

B. Provisions of the Affordable Care Act Affecting the IRF PPS in FY 2012 and Beyond

C. Operational Overview of the Current IRF PPS

II. Summary of Provisions of the Proposed Rule

III. Proposed Update to the Case-Mix Group (CMG) Relative Weights and Average Length of Stay Values for FY 2016

IV. Continued Use of FY 2014 Facility-Level Adjustment Factors

V. Proposed FY 2016 IRF PPS Payment Update

A. Background

B. Overview of the Proposed 2012-Based IRF Market Basket

C. Creating an IRF-specific Market Basket

D. Proposed FY 2016 Market Basket Update and Productivity Adjustment

E. Proposed Labor-Related Share for FY 2016

F. Proposed Wage Adjustment

G. Description of the Proposed IRF Standard Payment Conversion Factor and Payment Rates for FY 2016

H. Example of the Methodology for Adjusting the Proposed Federal Prospective Payment Rates

VI. Proposed Update to Payments for High-Cost Outliers under the IRF PPS

A. Proposed Update to the Outlier Threshold Amount for FY 2016

B. Proposed Update to the IRF Cost-to-Charge Ratio Ceiling and Urban/Rural Averages

VII. ICD-10-CM Implementation for IRF PPS

VIII. Revisions and Updates to the IRF QRP

A. Background and Statutory Authority

B. General Considerations Used for Selection of Quality, Resource Use, and Other Measures for the IRF QRP

C. Policy for Retention of IRF QRP Measures Adopted for Previous Payment Determinations

D. Policy for Adopting Changes to IRF QRP Measures

E. Quality Measures Previously Finalized for and Currently Used in the IRF QRP

F. Proposal of Previously Adopted IRF QRP Quality Measures for the FY 2018 Payment Determination and Subsequent Years

G. Proposed Additional IRF QRP Quality Measures for the FY 2018 Payment Determination and Subsequent Years

H. IRF QRP Quality Measures and Measure Concepts under Consideration for Future Years

I. Proposed Form, Manner, and Timing of Quality Data Submission for the FY 2018 Payment Determination and Subsequent Years

J. Previously Adopted and Proposed Timing for New IRFs to Begin Submitting Quality Data under the IRF QRP for the FY 2018 Payment Determination and Subsequent Years

K. IRF QRP Data Completion Thresholds for the FY 2016 Payment Determination and Subsequent Years

L. Proposed Suspension of the IRF QRP Data Validation Process for the FY 2016 Payment Determination and Subsequent Years

M. Previously Adopted and Proposed IRF QRP Submission Exception and Extension Requirements for the FY 2017 Payment Determination and Subsequent Years

N. Previously Adopted and Proposed IRF QRP Reconsideration and Appeals Procedures for the FY 2017 Payment Determination and Subsequent Years

O. Proposed Public Display of Quality Measure Data for the IRF QRP

P. Proposed Method for Applying the Reduction to the FY 2016 IRF Increase Factor for IRFs That Fail to Meet the Quality Reporting Requirements

IX. Collection of Information Requirements

A. Statutory Requirements for Solicitation of Comments

B. Collection of Information Requirements for Updates Related to the IRF QRP

X. Response to Public Comments

XI. Regulatory Impact Analysis

A. Statement of Need

B. Overall Impacts

C. Detailed Economic Analysis

D. Alternatives Considered

E. Accounting Statement

F. Conclusion

Acronyms, Abbreviations, and Short Forms

Because of the many terms to which we refer by acronym, abbreviation, or short form in this final rule, we are listing the acronyms, abbreviation, and short forms used and their corresponding terms in alphabetical order.

The Act The Social Security Act

ADC Average Daily Census

The Affordable Care Act Patient Protection and Affordable Care Act (Pub. L. 111-148, enacted on March 23, 2010)

AHA American Hospital Association

AHE Average Hourly Earnings

AHIMA American Health Information Management Association

ASAP Assessment Submission and Processing

ASCA Administrative Simplification Compliance Act (Pub. L. 107-105, enacted on December 27, 2002)

BEA Bureau of Economic Analysis

BLS U.S. Bureau of Labor Statistics

CAH Critical Access Hospitals

CARE Continuity Assessment Record and Evaluation

CAUTI Catheter-Associated Urinary Tract Infection

CBSA Core-Based Statistical Area

CCR Cost-to-Charge Ratio

CDC The Centers for Disease Control and Prevention

CDI

Clostridium difficile

Infection

CFR Code of Federal Regulations

CMG Case-Mix Group

CMS Centers for Medicare & Medicaid Services

CPI Consumer Price Index

DSH Disproportionate Share Hospital

DSH PP Disproportionate Share Patient Percentage

ECI Employment Cost Index

EHR Electronic Health Record

ESRD End-Stage Renal Disease

FFS Fee-for-Service

FR Federal Register

FY Federal Fiscal Year

GDP Gross Domestic Product

HAI Healthcare Associated Infection

HCP Health Care Personnel

HHS U.S. Department of Health & Human Services

HIE Health Information Exchange

HIPAA Health Insurance Portability and Accountability Act of 1996 (Pub. L. 104-191, enacted on August 21, 1996)

HOMER Home Office Medicare Records

ICD-9-CM International Classification of Diseases, 9th Revision, Clinical Modification

ICD-10-CM International Classification of Diseases, 10th Revision, Clinical Modification

IGI IHS Global Insight

IMPACT Act Improving Medicare Post-Acute Care Transformation Act of 2014 (Pub. L. 113-185, enacted on October 6, 2014)

I-O Input-Output

IPF Inpatient Psychiatric Facility

IQR Inpatient Quality Reporting Program

IRF Inpatient Rehabilitation Facility

IRF-PAI Inpatient Rehabilitation Facility-Patient Assessment Instrument

IRF PPS Inpatient Rehabilitation Facility Prospective Payment System

IRF QRP Inpatient Rehabilitation Facility Quality Reporting Program

IRVEN Inpatient Rehabilitation Validation and Entry

LIP Low-Income Percentage

LOS Length of Stay

LPN Licensed Practical Nurse

LTCH Long-Term Care Hospital

MAC Medicare Administrative Contractor

MAP Measure Applications Partnership

MA (Medicare Part C) Medicare Advantage

MedPAC Medicare Payment Advisory Commission

MDS Minimum Data Set

MFP Multifactor Productivity

MLN Medicare Learning Network

MMSEA Medicare, Medicaid, and SCHIP Extension Act of 2007 (Pub. L. 110-173, enacted on December 29, 2007)

MRSA Methicillin-Resistant

Staphylococcus aureus

MSA Metropolitan Statistical Area

MUC Measures under Consideration

NAICS North American Industry Classification System

NHSN National Healthcare Safety Network

NPP National Priorities Partnership

NPUAP National Pressure Ulcer Advisory Panel

NQF National Quality Forum

OMB Office of Management and Budget

ONC Office of the National Coordinator for Health Information Technology

OT Occupational Therapists

PAC Post-Acute Care

PAI Patient Assessment Instrument

PLI Professional Liability Insurance

POA Present on Admission

PPI Producer Price Index

PPS Prospective Payment System

PRA Paperwork Reduction Act of 1995 (Pub. L. 104-13, enacted on May 22, 1995)

PRRB Provider Reimbursement Review Board

PT Physical Therapist

QIES Quality Improvement Evaluation System

QM Quality Measure

QRP Quality Reporting Program

RIA Regulatory Impact Analysis

RIC Rehabilitation Impairment Category

RFA Regulatory Flexibility Act (Pub. L. 96-354, enacted on September 19, 1980)

RN Registered Nurse

RPL Rehabilitation, Psychiatric, and Long-Term Care market basket

RSRR Risk-standardized readmission rate

SDTI Suspected Deep Tissue Injuries

SIR Standardized Infection Ratio

SLP Speech-Language Pathologist

SOC Standard Occupational Classification System

SNF Skilled Nursing Facilities

SRR Standardized Risk Ratio

SSI Supplemental Security Income

TEP Technical Expert Panel

I. Background

A. Historical Overview of the IRF PPS

Section 1886(j) of the Act provides for the implementation of a per-discharge PPS for inpatient rehabilitation hospitals and inpatient rehabilitation units of a hospital (collectively, hereinafter referred to as IRFs). Payments under the IRF PPS encompass inpatient operating and capital costs of furnishing covered rehabilitation services (that is, routine, ancillary, and capital costs), but not direct graduate medical education costs, costs of approved nursing and allied health education activities, bad debts, and other services or items outside the scope of the IRF PPS. Although a complete discussion of the IRF PPS provisions appears in the original FY 2002 IRF PPS final rule (66 FR 41316) and the FY 2006 IRF PPS final rule (70 FR 47880), we are providing below a general description of the IRF PPS for fiscal years (FYs) 2002 through 2015.

Under the IRF PPS from FY 2002 through FY 2005, as described in the FY 2002 IRF PPS final rule (66 FR 41316), the federal prospective payment rates were computed across 100 distinct case-mix groups (CMGs). We constructed 95 CMGs using rehabilitation impairment categories (RICs), functional status (both motor and cognitive), and age (in some cases, cognitive status and age may not be a factor in defining a CMG). In addition, we constructed five special CMGs to account for very short stays and for patients who expire in the IRF.

For each of the CMGs, we developed relative weighting factors to account for a patient's clinical characteristics and expected resource needs. Thus, the weighting factors accounted for the relative difference in resource use across all CMGs. Within each CMG, we created tiers based on the estimated effects that certain comorbidities would have on resource use.

We established the federal PPS rates using a standardized payment conversion factor (formerly referred to as the budget-neutral conversion factor). For a detailed discussion of the budget-neutral conversion factor, please refer to our FY 2004 IRF PPS final rule (68 FR 45684 through 45685). In the FY 2006 IRF PPS final rule (70 FR 47880), we discussed in detail the methodology for determining the standard payment conversion factor.

We applied the relative weighting factors to the standard payment conversion factor to compute the unadjusted federal prospective payment rates under the IRF PPS from FYs 2002 through 2005. Within the structure of the payment system, we then made adjustments to account for interrupted stays, transfers, short stays, and deaths. Finally, we applied the applicable adjustments to account for geographic variations in wages (wage index), the percentage of low-income patients, location in a rural area (if applicable), and outlier payments (if applicable) to the IRFs' unadjusted federal prospective payment rates.

For cost reporting periods that began on or after January 1, 2002, and before October 1, 2002, we determined the final prospective payment amounts using the transition methodology prescribed in section 1886(j)(1) of the Act. Under this provision, IRFs transitioning into the PPS were paid a blend of the federal IRF PPS rate and the payment that the IRFs would have received had the IRF PPS not been implemented. This provision also allowed IRFs to elect to bypass this blended payment and immediately be paid 100 percent of the federal IRF PPS rate. The transition methodology expired as of cost reporting periods beginning on or after October 1, 2002 (FY 2003), and payments for all IRFs now consist of 100 percent of the federal IRF PPS rate.

We established a CMS Web site as a primary information resource for the IRF PPS which is available at

http://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/InpatientRehabFacPPS/index.html

. The Web site may be accessed to download or view publications, software, data specifications, educational materials, and other information pertinent to the IRF PPS.

Section 1886(j) of the Act confers broad statutory authority upon the Secretary to propose refinements to the IRF PPS. In the FY 2006 IRF PPS final rule (70 FR 47880) and in correcting amendments to the FY 2006 IRF PPS final rule (70 FR 57166) that we published on September 30, 2005, we finalized a number of refinements to the IRF PPS case-mix classification system (the CMGs and the corresponding relative weights) and the case-level and facility-level adjustments. These refinements included the adoption of the Office of Management and Budget's (OMB) Core-Based Statistical Area (CBSA) market definitions, modifications to the CMGs, tier comorbidities, and CMG relative weights, implementation of a new teaching status adjustment for IRFs, revision and rebasing of the market basket index used to update IRF payments, and updates to the rural, low-income percentage (LIP), and high-cost outlier adjustments. Beginning with the FY 2006 IRF PPS final rule (70 FR 47908 through 47917), the market basket index used to update IRF payments was a market basket reflecting the operating and capital cost structures for freestanding IRFs, freestanding inpatient psychiatric facilities (IPFs), and long-term care hospitals (LTCHs) (hereafter referred to as the rehabilitation, psychiatric, and long-term care (RPL) market basket). Any reference to the FY

2006 IRF PPS final rule in this final rule also includes the provisions effective in the correcting amendments. For a detailed discussion of the final key policy changes for FY 2006, please refer to the FY 2006 IRF PPS final rule (70 FR 47880 and 70 FR 57166).

In the FY 2007 IRF PPS final rule (71 FR 48354), we further refined the IRF PPS case-mix classification system (the CMG relative weights) and the case-level adjustments, to ensure that IRF PPS payments would continue to reflect as accurately as possible the costs of care. For a detailed discussion of the FY 2007 policy revisions, please refer to the FY 2007 IRF PPS final rule (71 FR 48354).

In the FY 2008 IRF PPS final rule (72 FR 44284), we updated the federal prospective payment rates and the outlier threshold, revised the IRF wage index policy, and clarified how we determine high-cost outlier payments for transfer cases. For more information on the policy changes implemented for FY 2008, please refer to the FY 2008 IRF PPS final rule (72 FR 44284), in which we published the final FY 2008 IRF federal prospective payment rates.

After publication of the FY 2008 IRF PPS final rule (72 FR 44284), section 115 of the Medicare, Medicaid, and SCHIP Extension Act of 2007 (Pub. L. 110-173, enacted on December 29, 2007) (MMSEA), amended section 1886(j)(3)(C) of the Act to apply a zero percent increase factor for FYs 2008 and 2009, effective for IRF discharges occurring on or after April 1, 2008. Section 1886(j)(3)(C) of the Act required the Secretary to develop an increase factor to update the IRF federal prospective payment rates for each FY. Based on the legislative change to the increase factor, we revised the FY 2008 federal prospective payment rates for IRF discharges occurring on or after April 1, 2008. Thus, the final FY 2008 IRF federal prospective payment rates that were published in the FY 2008 IRF PPS final rule (72 FR 44284) were effective for discharges occurring on or after October 1, 2007, and on or before March 31, 2008; and the revised FY 2008 IRF federal prospective payment rates were effective for discharges occurring on or after April 1, 2008, and on or before September 30, 2008. The revised FY 2008 federal prospective payment rates are available on the CMS Web site at:

http://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/InpatientRehabFacPPS/Data-Files.html

.

In the FY 2009 IRF PPS final rule (73 FR 46370), we updated the CMG relative weights, the average length of stay values, and the outlier threshold; clarified IRF wage index policies regarding the treatment of “New England deemed” counties and multi-campus hospitals; and revised the regulation text in response to section 115 of the MMSEA to set the IRF compliance percentage at 60 percent (the “60 percent rule”) and continue the practice of including comorbidities in the calculation of compliance percentages. We also applied a zero percent market basket increase factor for FY 2009 in accordance with section 115 of the MMSEA. For more information on the policy changes implemented for FY 2009, please refer to the FY 2009 IRF PPS final rule (73 FR 46370), in which we published the final FY 2009 IRF federal prospective payment rates.

In the FY 2010 IRF PPS final rule (74 FR 39762) and in correcting amendments to the FY 2010 IRF PPS final rule (74 FR 50712) that we published on October 1, 2009, we updated the federal prospective payment rates, the CMG relative weights, the average length of stay values, the rural, LIP, teaching status adjustment factors, and the outlier threshold; implemented new IRF coverage requirements for determining whether an IRF claim is reasonable and necessary; and revised the regulation text to require IRFs to submit patient assessments on Medicare Advantage (MA) (Medicare Part C) patients for use in the 60 percent rule calculations. Any reference to the FY 2010 IRF PPS final rule in this final rule also includes the provisions effective in the correcting amendments. For more information on the policy changes implemented for FY 2010, please refer to the FY 2010 IRF PPS final rule (74 FR 39762 and 74 FR 50712), in which we published the final FY 2010 IRF federal prospective payment rates.

After publication of the FY 2010 IRF PPS final rule (74 FR 39762), section 3401(d) of the Patient Protection and Affordable Care Act (Pub. L. 111-148, enacted on March 23, 2010), as amended by section 10319 of the same Act and by section 1105 of the Health Care and Education Reconciliation Act of 2010 (Pub. L. 111-152, enacted on March 30, 2010) (collectively, hereafter referred to as “The Affordable Care Act”), amended section 1886(j)(3)(C) of the Act and added section 1886(j)(3)(D) of the Act. Section 1886(j)(3)(C) of the Act requires the Secretary to estimate a multi-factor productivity adjustment to the market basket increase factor, and to apply other adjustments as defined by the Act. The productivity adjustment applies to FYs from 2012 forward. The other adjustments apply to FYs 2010 to 2019.

Sections 1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(i) of the Act defined the adjustments that were to be applied to the market basket increase factors in FYs 2010 and 2011. Under these provisions, the Secretary was required to reduce the market basket increase factor in FY 2010 by a 0.25 percentage point adjustment. Notwithstanding this provision, in accordance with section 3401(p) of the Affordable Care Act, the adjusted FY 2010 rate was only to be applied to discharges occurring on or after April 1, 2010. Based on the self-implementing legislative changes to section 1886(j)(3) of the Act, we adjusted the FY 2010 federal prospective payment rates as required, and applied these rates to IRF discharges occurring on or after April 1, 2010, and on or before September 30, 2010. Thus, the final FY 2010 IRF federal prospective payment rates that were published in the FY 2010 IRF PPS final rule (74 FR 39762) were used for discharges occurring on or after October 1, 2009, and on or before March 31, 2010, and the adjusted FY 2010 IRF federal prospective payment rates applied to discharges occurring on or after April 1, 2010, and on or before September 30, 2010. The adjusted FY 2010 federal prospective payment rates are available on the CMS Web site at

http://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/InpatientRehabFacPPS/Data-Files.html

.

In addition, sections 1886(j)(3)(C) and (D) of the Act also affected the FY 2010 IRF outlier threshold amount because they required an adjustment to the FY 2010 RPL market basket increase factor, which changed the standard payment conversion factor for FY 2010. Specifically, the original FY 2010 IRF outlier threshold amount was determined based on the original estimated FY 2010 RPL market basket increase factor of 2.5 percent and the standard payment conversion factor of $13,661. However, as adjusted, the IRF prospective payments are based on the adjusted RPL market basket increase factor of 2.25 percent and the revised standard payment conversion factor of $13,627. To maintain estimated outlier payments for FY 2010 equal to the established standard of 3 percent of total estimated IRF PPS payments for FY 2010, we revised the IRF outlier threshold amount for FY 2010 for discharges occurring on or after April 1, 2010, and on or before September 30, 2010. The revised IRF outlier threshold amount for FY 2010 was $10,721.

Sections 1886(j)(3)(c)(ii)(II) and 1886(j)(3)(D)(i) of the Act also required the Secretary to reduce the market basket increase factor in FY 2011 by a

0.25 percentage point adjustment. The FY 2011 IRF PPS notice (75 FR 42836) and the correcting amendments to the FY 2011 IRF PPS notice (75 FR 70013) described the required adjustments to the FY 2011 and FY 2010 IRF PPS federal prospective payment rates and outlier threshold amount for IRF discharges occurring on or after April 1, 2010, and on or before September 30, 2011. It also updated the FY 2011 federal prospective payment rates, the CMG relative weights, and the average length of stay values. Any reference to the FY 2011 IRF PPS notice in this final rule also includes the provisions effective in the correcting amendments. For more information on the FY 2010 and FY 2011 adjustments or the updates for FY 2011, please refer to the FY 2011 IRF PPS notice (75 FR 42836 and 75 FR 70013).

In the FY 2012 IRF PPS final rule (76 FR 47836), we updated the IRF federal prospective payment rates, rebased and revised the RPL market basket, and established a new quality reporting program for IRFs in accordance with section 1886(j)(7) of the Act. We also revised regulation text for the purpose of updating and providing greater clarity. For more information on the policy changes implemented for FY 2012, please refer to the FY 2012 IRF PPS final rule (76 FR 47836), in which we published the final FY 2012 IRF federal prospective payment rates.

The FY 2013 IRF PPS notice (77 FR 44618) described the required adjustments to the FY 2013 federal prospective payment rates and outlier threshold amount for IRF discharges occurring on or after October 1, 2012, and on or before September 30, 2013. It also updated the FY 2013 federal prospective payment rates, the CMG relative weights, and the average length of stay values. For more information on the updates for FY 2013, please refer to the FY 2013 IRF PPS notice (77 FR 44618).

In the FY 2014 IRF PPS final rule (78 FR 47860), we updated the federal prospective payment rates, the CMG relative weights, and the outlier threshold amount. We also updated the facility-level adjustment factors using an enhanced estimation methodology, revised the list of diagnosis codes that count toward an IRF's 60 percent rule compliance calculation to determine “presumptive compliance,” revised sections of the Inpatient Rehabilitation Facility-Patient Assessment Instrument (IRF-PAI), revised requirements for acute care hospitals that have IRF units, clarified the IRF regulation text regarding limitation of review, updated references to previously changed sections in the regulations text, and revised and updated quality measures and reporting requirements under the IRF quality reporting program. For more information on the policy changes implemented for FY 2014, please refer to the FY 2014 IRF PPS final rule (78 FR 47860), in which we published the final FY 2014 IRF federal prospective payment rates.

In the FY 2015 IRF PPS final rule (79 FR 45872), we updated the federal prospective payment rates, the CMG relative weights, and the outlier threshold amount. We also further revised the list of diagnosis codes that count toward an IRF's 60 percent rule compliance calculation to determine “presumptive compliance,” revised sections of the IRF-PAI, and revised and updated quality measures and reporting requirements under the IRF quality reporting program. For more information on the policy changes implemented for FY 2015, please refer to the FY 2015 IRF PPS final rule (79 FR 45872) and the FY 2015 IRF PPS correction notice (79 FR 59121).

B. Provisions of the Affordable Care Act Affecting the IRF PPS in FY 2012 and Beyond

The Affordable Care Act included several provisions that affect the IRF PPS in FYs 2012 and beyond. In addition to what was previously discussed, section 3401(d) of the Affordable Care Act also added section 1886(j)(3)(C)(ii)(I) (providing for a “productivity adjustment” for fiscal year 2012 and each subsequent fiscal year). The productivity adjustment for FY 2016 is discussed in section V.D. of this proposed rule. Section 3401(d) of the Affordable Care Act requires an additional 0.2 percentage point adjustment to the IRF increase factor for FY 2016, as discussed in section V.D. of this proposed rule. Section 1886(j)(3)(C)(ii)(II) of the Act notes that the application of these adjustments to the market basket update may result in an update that is less than 0.0 for a fiscal year and in payment rates for a fiscal year being less than such payment rates for the preceding fiscal year.

Section 3004(b) of the Affordable Care Act also addressed the IRF PPS program. It reassigned the previously designated section 1886(j)(7) of the Act to section 1886(j)(8) and inserted a new section 1886(j)(7), which contains requirements for the Secretary to establish a quality reporting program for IRFs. Under that program, data must be submitted in a form and manner and at a time specified by the Secretary. Beginning in FY 2014, section 1886(j)(7)(A)(i) of the Act requires the application of a 2 percentage point reduction of the applicable market basket increase factor for IRFs that fail to comply with the quality data submission requirements. Application of the 2 percentage point reduction may result in an update that is less than 0.0 for a fiscal year and in payment rates for a fiscal year being less than such payment rates for the preceding fiscal year. Reporting-based reductions to the market basket increase factor will not be cumulative; they will only apply for the FY involved.

Under section 1886(j)(7)(D)(i) and (ii) of the Act, the Secretary is generally required to select quality measures for the IRF quality reporting program from those that have been endorsed by the consensus-based entity which holds a performance measurement contract under section 1890(a) of the Act. This contract is currently held by the National Quality Forum (NQF). So long as due consideration is given to measures that have been endorsed or adopted by a consensus-based organization, section 1886(j)(7)(D)(ii) of the Act authorizes the Secretary to select non-endorsed measures for specified areas or medical topics when there are no feasible or practical endorsed measure(s).

Section 1886(j)(7)(E) of the Act requires the Secretary to establish procedures for making the IRF PPS quality reporting data available to the public. In so doing, the Secretary must ensure that IRFs have the opportunity to review any such data prior to its release to the public. Future rulemaking will address these public reporting obligations.

C. Operational Overview of the Current IRF PPS

As described in the FY 2002 IRF PPS final rule, upon the admission and discharge of a Medicare Part A Fee-for-Service patient, the IRF is required to complete the appropriate sections of a patient assessment instrument (PAI), designated as the IRF-PAI. In addition, beginning with IRF discharges occurring on or after October 1, 2009, the IRF is also required to complete the appropriate sections of the IRF-PAI upon the admission and discharge of each Medicare Part C (Medicare Advantage) patient, as described in the FY 2010 IRF PPS final rule. All required data must be electronically encoded into the IRF-PAI software product. Generally, the software product includes patient classification programming called the Grouper software. The Grouper software uses specific IRF-PAI data elements to classify (or group) patients into distinct

CMGs and account for the existence of any relevant comorbidities.

The Grouper software produces a 5-character CMG number. The first character is an alphabetic character that indicates the comorbidity tier. The last 4 characters are numeric characters that represent the distinct CMG number. Free downloads of the Inpatient Rehabilitation Validation and Entry (IRVEN) software product, including the Grouper software, are available on the CMS Web site at

http://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/InpatientRehabFacPPS/Software.html

.

Once a Medicare Fee-for-Service Part A patient is discharged, the IRF submits a Medicare claim as a Health Insurance Portability and Accountability Act of 1996 (Pub. L. 104-191, enacted on August 21, 1996) (HIPAA) compliant electronic claim or, if the Administrative Simplification Compliance Act of 2002 (Pub. L. 107-105, enacted on December 27, 2002) (ASCA) permits, a paper claim (a UB-04 or a CMS-1450 as appropriate) using the five-character CMG number and sends it to the appropriate Medicare Administrative Contractor (MAC). In addition, once a Medicare Advantage patient is discharged, in accordance with the Medicare Claims Processing Manual, chapter 3, section 20.3 (Pub. 100-04), hospitals (including IRFs) must submit an informational-only bill (TOB 111), which includes Condition Code 04 to their MAC. This will ensure that the Medicare Advantage days are included in the hospital's Supplemental Security Income (SSI) ratio (used in calculating the IRF low-income percentage adjustment) for Fiscal Year 2007 and beyond. Claims submitted to Medicare must comply with both ASCA and HIPAA.

Section 3 of the ASCA amends section 1862(a) of the Act by adding paragraph (22), which requires the Medicare program, subject to section 1862(h) of the Act, to deny payment under Part A or Part B for any expenses for items or services “for which a claim is submitted other than in an electronic form specified by the Secretary.” Section 1862(h) of the Act, in turn, provides that the Secretary shall waive such denial in situations in which there is no method available for the submission of claims in an electronic form or the entity submitting the claim is a small provider. In addition, the Secretary also has the authority to waive such denial “in such unusual cases as the Secretary finds appropriate.” For more information, see the “Medicare Program; Electronic Submission of Medicare Claims” final rule (70 FR 71008). Our instructions for the limited number of Medicare claims submitted on paper are available at

http://www.cms.gov/manuals/downloads/clm104c25.pdf

.

Section 3 of the ASCA operates in the context of the administrative simplification provisions of HIPAA, which include, among others, the requirements for transaction standards and code sets codified in 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 covered electronic transactions according to the applicable transaction standards. (See the CMS program claim memoranda at

http://www.cms.gov/ElectronicBillingEDITrans/

and listed in the addenda to the Medicare Intermediary Manual, Part 3, section 3600).

The MAC processes the claim through its software system. This software system includes pricing programming called the “Pricer” software. The Pricer software uses the CMG number, along with other specific claim data elements and provider-specific data, to adjust the IRF's prospective payment for interrupted stays, transfers, short stays, and deaths, and then applies the applicable adjustments to account for the IRF's wage index, percentage of low-income patients, rural location, and outlier payments. For discharges occurring on or after October 1, 2005, the IRF PPS payment also reflects the teaching status adjustment that became effective as of FY 2006, as discussed in the FY 2006 IRF PPS final rule (70 FR 47880).

II. Summary of Provisions of the Proposed Rule

In this proposed rule, we propose to update the IRF federal prospective payment rates, adopt an IRF-specific market basket that will be used to determine the market basket update and labor-related share, phase in the revised wage index changes, and revise and update quality measures and reporting requirements under the IRF QRP.

The proposed updates to the IRF federal prospective payment rates for FY 2016 are as follows:

• Update the FY 2016 IRF PPS relative weights and average length of stay values using the most current and complete Medicare claims and cost report data in a budget-neutral manner, as discussed in section III of this proposed rule.

• Describe the continued use of FY 2014 facility-level adjustment factors as discussed in section IV of this proposed rule.

• Adopt the proposed IRF-specific market basket, as discussed in section V of this proposed rule.

• Update the FY 2016 IRF PPS payment rates by the proposed market basket increase factor, based upon the most current data available, with a 0.2 percentage point reduction as required by sections 1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(iv) of the Act and a proposed productivity adjustment required by section 1886(j)(3)(C)(ii)(I) of the Act, as described in section V of this proposed rule.

• Update the FY 2016 IRF PPS payment rates by the FY 2016 wage index and the labor-related share in a budget-neutral manner and discuss the proposed wage adjustment transition as discussed in section V of this proposed rule.

• Describe the calculation of the IRF standard payment conversion factor for FY 2016, as discussed in section V of this proposed rule.

• Update the outlier threshold amount for FY 2016, as discussed in section VI of this proposed rule.

• Update the cost-to-charge ratio (CCR) ceiling and urban/rural average CCRs for FY 2016, as discussed in section VI of this proposed rule.

• Discuss implementation of International Classification of Diseases, 10th Revision, Clinical Modification (ICD-10-CM) for the IRF PPS as discussed in section VII of this proposed rule.

• Describe proposed revisions and updates to quality measures and reporting requirements under the quality reporting program for IRFs in accordance with section 1886(j)(7) of the Act, as discussed in section VIII of this proposed rule.

III. Proposed Update to the CMG Relative Weights and Average Length of Stay Values for FY 2016

As specified in § 412.620(b)(1), we calculate a relative weight for each CMG that is proportional to the resources needed by an average inpatient rehabilitation case in that CMG. For example, cases in a CMG with a relative weight of 2, on average, will cost twice as much as cases in a CMG with a relative weight of 1. Relative weights account for the variance in cost per discharge due to the variance in resource utilization among the payment groups, and their use helps to ensure that IRF PPS payments support beneficiary access to care, as well as provider efficiency.

In this proposed rule, we propose to update the CMG relative weights and average length of stay values for FY 2016. As required by statute, we always

use the most recent available data to update the CMG relative weights and average lengths of stay. For FY 2016, we propose to use the FY 2014 IRF claims and FY 2013 IRF cost report data. These data are the most current and complete data available at this time. Currently, only a small portion of the FY 2014 IRF cost report data are available for analysis, but the majority of the FY 2014 IRF claims data are available for analysis.

In this proposed rule, we propose to apply these data using the same methodologies that we have used to update the CMG relative weights and average length of stay values each fiscal year since we implemented an update to the methodology to use the more detailed CCR data from the cost reports of IRF subprovider units of primary acute care hospitals, instead of CCR data from the associated primary care hospitals, to calculate IRFs' average costs per case, as discussed in the FY 2009 IRF PPS final rule (73 FR 46372). In calculating the CMG relative weights, we use a hospital-specific relative value method to estimate operating (routine and ancillary services) and capital costs of IRFs. The process used to calculate the CMG relative weights for this proposed rule is as follows:

Step 1.

We estimate the effects that comorbidities have on costs.

Step 2.

We adjust the cost of each Medicare discharge (case) to reflect the effects found in the first step.

Step 3.

We use the adjusted costs from the second step to calculate CMG relative weights, using the hospital-specific relative value method.

Step 4.

We normalize the FY 2016 CMG relative weights to the same average CMG relative weight from the CMG relative weights implemented in the FY 2015 IRF PPS final rule (79 FR 45872).

Consistent with the methodology that we have used to update the IRF classification system in each instance in the past, we propose to update the CMG relative weights for FY 2016 in such a way that total estimated aggregate payments to IRFs for FY 2016 are the same with or without the changes (that is, in a budget-neutral manner) by applying a budget neutrality factor to the standard payment amount. To calculate the appropriate budget neutrality factor for use in updating the FY 2016 CMG relative weights, we use the following steps:

Step 1.

Calculate the estimated total amount of IRF PPS payments for FY 2016 (with no changes to the CMG relative weights).

Step 2.

Calculate the estimated total amount of IRF PPS payments for FY 2016 by applying the changes to the CMG relative weights (as discussed in this proposed rule).

Step 3.

Divide the amount calculated in step 1 by the amount calculated in step 2 to determine the budget neutrality factor (1.0000) that would maintain the same total estimated aggregate payments in FY 2016 with and without the changes to the CMG relative weights.

Step 4.

Apply the budget neutrality factor (1.0000) to the FY 2015 IRF PPS standard payment amount after the application of the budget-neutral wage adjustment factor.

In section V.G. of this proposed rule, we discuss the proposed use of the existing methodology to calculate the standard payment conversion factor for FY 2016.

Table 1, “Relative Weights and Average Length of Stay Values for Case-Mix Groups,” presents the CMGs, the comorbidity tiers, the corresponding relative weights, and the average length of stay values for each CMG and tier for FY 2016. The average length of stay for each CMG is used to determine when an IRF discharge meets the definition of a short-stay transfer, which results in a per diem case level adjustment.

Table 1—Relative Weights and Average Length of Stay Values for Case-Mix Groups

CMG

CMG description (M=motor, C=cognitive, A=age)

Relative weight

Tier 1

Tier 2

Tier 3

None

Average length of stay

Tier 1

Tier 2

Tier 3

None

0101

Stroke, M>51.05

0.8074

0.7072

0.6585

0.6300

10

9

9

8

0102

Stroke, M>44.45 and M<51.05 and C>18.5

1.0213

0.8946

0.8329

0.7968

11

10

10

10

0103

Stroke, M>44.45 and M<51.05 and C<18.5

1.1406

0.9991

0.9302

0.8899

12

13

12

11

0104

Stroke, M>38.85 and M<44.45

1.2382

1.0846

1.0098

0.9661

13

13

12

12

0105

Stroke, M>34.25 and M<38.85

1.4520

1.2718

1.1841

1.1329

14

15

14

14

0106

Stroke, M>30.05 and M<34.25

1.6190

1.4181

1.3204

1.2632

16

16

15

15

0107

Stroke, M>26.15 and M<30.05

1.8114

1.5867

1.4773

1.4133

18

17

17

17

0108

Stroke, M<26.15 and A>84.5

2.2985

2.0133

1.8745

1.7933

24

23

21

21

0109

Stroke, M>22.35 and M<26.15 and A<84.5

2.0987

1.8383

1.7115

1.6374

21

20

19

19

0110

Stroke, M<22.35 and A<84.5

2.7572

2.4151

2.2486

2.1512

27

27

24

24

0201

Traumatic brain injury, M>53.35 and C>23.5

0.8167

0.6711

0.6056

0.5721

10

9

8

8

0202

Traumatic brain injury, M>44.25 and M<53.35 and C>23.5

1.0578

0.8692

0.7844

0.7410

11

11

10

9

0203

Traumatic brain injury, M>44.25 and C<23.5

1.2056

0.9906

0.8939

0.8445

11

12

10

11

0204

Traumatic brain injury, M>40.65 and M<44.25

1.3276

1.0909

0.9844

0.9300

13

12

11

11

0205

Traumatic brain injury, M>28.75 and M<40.65

1.5856

1.3028

1.1757

1.1107

15

15

14

13

0206

Traumatic brain injury, M>22.05 and M<28.75

1.8996

1.5609

1.4086

1.3306

17

18

17

15

0207

Traumatic brain injury, M<22.05

2.5249

2.0746

1.8722

1.7687

30

24

20

19

0301

Non-traumatic brain injury, M>41.05

1.1140

0.9299

0.8528

0.7958

10

11

10

10

0302

Non-traumatic brain injury, M>35.05 and M<41.05

1.3920

1.1620

1.0656

0.9943

13

13

12

12

0303

Non-traumatic brain injury, M>26.15 and M<35.05

1.6177

1.3504

1.2384

1.1556

16

15

14

14

0304

Non-traumatic brain injury, M<26.15

2.1480

1.7930

1.6443

1.5344

22

20

18

17

0401

Traumatic spinal cord injury, M>48.45

0.9962

0.8479

0.7764

0.7177

10

10

9

10

0402

Traumatic spinal cord injury, M>30.35 and M<48.45

1.4305

1.2175

1.1149

1.0306

14

14

14

13

0403

Traumatic spinal cord injury, M>16.05 and M<30.35

2.2868

1.9463

1.7823

1.6475

27

22

19

20

0404

Traumatic spinal cord injury, M<16.05 and A>63.5

3.8616

3.2865

3.0096

2.7820

44

36

32

33

0405

Traumatic spinal cord injury, M<16.05 and A<63.5

3.4241

2.9142

2.6687

2.4668

41

34

29

28

0501

Non-traumatic spinal cord injury, M>51.35

0.8671

0.6910

0.6416

0.5890

9

7

8

8

0502

Non-traumatic spinal cord injury, M>40.15 and M<51.35

1.1417

0.9098

0.8448

0.7754

12

11

10

10

0503

Non-traumatic spinal cord injury, M>31.25 and M<40.15

1.4429

1.1499

1.0676

0.9800

14

13

13

12

0504

Non-traumatic spinal cord injury, M>29.25 and M<31.25

1.6605

1.3232

1.2286

1.1278

16

16

14

13

0505

Non-traumatic spinal cord injury, M>23.75 and M<29.25

1.9434

1.5487

1.4379

1.3200

19

17

16

16

0506

Non-traumatic spinal cord injury, M<23.75

2.7170

2.1652

2.0104

1.8454

27

24

22

21

0601

Neurological, M>47.75

1.0388

0.8197

0.7649

0.6911

10

10

9

9

0602

Neurological, M>37.35 and M<47.75

1.3344

1.0529

0.9825

0.8878

12

12

11

11

0603

Neurological, M>25.85 and M<37.35

1.6570

1.3074

1.2201

1.1024

15

14

13

13

0604

Neurological, M<25.85

2.1771

1.7178

1.6031

1.4485

20

18

17

16

0701

Fracture of lower extremity, M>42.15

0.9663

0.8091

0.7663

0.6961

11

9

9

9

0702

Fracture of lower extremity, M>34.15 and M<42.15

1.2542

1.0502

0.9947

0.9035

13

12

12

11

0703

Fracture of lower extremity, M>28.15 and M<34.15

1.5016

1.2574

1.1909

1.0817

14

14

14

13

0704

Fracture of lower extremity, M<28.15

1.9536

1.6359

1.5494

1.4073

18

18

17

16

0801

Replacement of lower extremity joint, M>49.55

0.8023

0.6319

0.5733

0.5295

8

8

7

7

0802

Replacement of lower extremity joint, M>37.05 and M<49.55

1.0579

0.8332

0.7560

0.6981

10

10

9

9

0803

Replacement of lower extremity joint, M>28.65 and M<37.05 and A>83.5

1.4254

1.1227

1.0186

0.9407

13

12

12

11

0804

Replacement of lower extremity joint, M>28.65 and M<37.05 and A<83.5

1.2747

1.0040

0.9109

0.8412

12

11

11

10

0805

Replacement of lower extremity joint, M>22.05 and M<28.65

1.5372

1.2107

1.0985

1.0145

15

14

12

12

0806

Replacement of lower extremity joint, M<22.05

1.9126

1.5064

1.3668

1.2622

17

17

15

14

0901

Other orthopedic, M>44.75

0.9548

0.7679

0.7038

0.6416

10

9

9

8

0902

Other orthopedic, M>34.35 and M<44.75

1.2720

1.0231

0.9377

0.8547

13

12

11

11

0903

Other orthopedic, M>24.15 and M<34.35

1.5872

1.2767

1.1701

1.0666

14

14

13

13

0904

Other orthopedic, M<24.15

2.0061

1.6136

1.4789

1.3481

19

18

16

16

1001

Amputation, lower extremity, M>47.65

1.0786

0.9456

0.8420

0.7598

11

11

10

10

1002

Amputation, lower extremity, M>36.25 and M<47.65

1.3378

1.1728

1.0443

0.9423

13

12

12

11

1003

Amputation, lower extremity, M<36.25

1.9202

1.6835

1.4990

1.3526

18

19

17

16

1101

Amputation, non-lower extremity, M>36.35

1.3537

1.3537

1.0753

1.0104

13

13

12

11

1102

Amputation, non-lower extremity, M<36.35

1.7741

1.7741

1.4093

1.3242

16

19

15

16

1201

Osteoarthritis, M>37.65

0.9828

0.9542

0.8689

0.8106

9

11

10

10

1202

Osteoarthritis, M>30.75 and M<37.65

1.1972

1.1624

1.0585

0.9875

11

14

13

12

1203

Osteoarthritis, M<30.75

1.4863

1.4431

1.3140

1.2259

14

16

15

14

1301

Rheumatoid, other arthritis, M>36.35

1.1640

0.9591

0.9044

0.8258

9

11

10

10

1302

Rheumatoid, other arthritis, M>26.15 and M<36.35

1.4812

1.2205

1.1509

1.0509

15

13

13

13

1303

Rheumatoid, other arthritis, M<26.15

1.9711

1.6241

1.5314

1.3984

21

18

17

16

1401

Cardiac, M>48.85

0.9070

0.7454

0.6741

0.6066

9

9

8

8

1402

Cardiac, M>38.55 and M<48.85

1.2037

0.9893

0.8946

0.8050

11

11

11

10

1403

Cardiac, M>31.15 and M<38.55

1.4509

1.1924

1.0783

0.9703

13

13

12

12

1404

Cardiac, M<31.15

1.8350

1.5081

1.3637

1.2271

17

16

15

14

1501

Pulmonary, M>49.25

1.0508

0.8465

0.7794

0.7499

11

10

9

9

1502

Pulmonary, M>39.05 and M<49.25

1.3338

1.0745

0.9893

0.9519

12

12

11

11

1503

Pulmonary, M>29.15 and M<39.05

1.6182

1.3036

1.2002

1.1549

15

13

13

13

1504

Pulmonary, M<29.15

2.0127

1.6215

1.4928

1.4364

21

17

15

15

1601

Pain syndrome, M>37.15

1.1408

0.8388

0.8240

0.7577

11

10

10

9

1602

Pain syndrome, M>26.75 and M<37.15

1.4837

1.0909

1.0718

0.9854

14

12

12

12

1603

Pain syndrome, M<26.75

1.9166

1.4093

1.3845

1.2730

15

15

15

15

1701

Major multiple trauma without brain or spinal cord injury, M>39.25

1.0739

0.9109

0.8312

0.7736

10

10

11

9

1702

Major multiple trauma without brain or spinal cord injury, M>31.05 and M<39.25

1.3886

1.1779

1.0748

1.0002

13

14

12

12

1703

Major multiple trauma without brain or spinal cord injury, M>25.55 and M<31.05

1.5890

1.3479

1.2299

1.1446

19

15

14

14

1704

Major multiple trauma without brain or spinal cord injury, M<25.55

2.0894

1.7724

1.6172

1.5051

21

20

18

17

1801

Major multiple trauma with brain or spinal cord injury, M>40.85

1.2728

0.9643

0.8811

0.7840

14

12

11

10

1802

Major multiple trauma with brain or spinal cord injury, M>23.05 and M<40.85

1.8675

1.4148

1.2928

1.1503

19

17

15

14

1803

Major multiple trauma with brain or spinal cord injury, M<23.05

3.0253

2.2920

2.0942

1.8635

31

26

21

21

1901

Guillain Barre, M>35.95

1.1501

0.9999

0.9724

0.8501

15

11

11

11

1902

Guillain Barre, M>18.05 and M<35.95

2.2469

1.9534

1.8997

1.6609

25

22

21

20

1903

Guillain Barre, M<18.05

3.6057

3.1347

3.0485

2.6652

48

31

28

30

2001

Miscellaneous, M>49.15

0.9280

0.7626

0.7034

0.6367

9

9

9

8

2002

Miscellaneous, M>38.75 and M<49.15

1.2002

0.9863

0.9097

0.8235

11

11

10

10

2003

Miscellaneous, M>27.85 and M<38.75

1.4940

1.2277

1.1324

1.0250

14

14

13

12

2004

Miscellaneous, M<27.85

1.9243

1.5813

1.4586

1.3203

18

17

16

15

2101

Burns, M>0

1.6922

1.6922

1.3135

1.2742

18

19

15

15

5001

Short-stay cases, length of stay is 3 days or fewer

0.1562

2

5101

Expired, orthopedic, length of stay is 13 days or fewer

0.7204

8

5102

Expired, orthopedic, length of stay is 14 days or more

1.6962

18

5103

Expired, not orthopedic, length of stay is 15 days or fewer

0.7928

9

5104

Expired, not orthopedic, length of stay is 16 days or more

1.9018

20

Generally, updates to the CMG relative weights result in some increases and some decreases to the CMG relative weight values. Table 2 shows how we estimate that the application of the proposed revisions for FY 2016 would affect particular CMG relative weight values, which would affect the overall distribution of payments within CMGs and tiers. Note that, because we propose to implement the CMG relative weight revisions in a budget-neutral manner (as previously described), total estimated aggregate payments to IRFs for FY 2016 would not be affected as a result of the proposed CMG relative weight revisions. However, the proposed revisions would affect the distribution of payments within CMGs and tiers.

Table 2—Distributional Effects of the Changes to the CMG Relative Weights

[FY 2015 values compared with FY 2016 values]

Percentage change

Number of cases

affected

Percentage of cases

affected

Increased by 15% or more

157

0.0

Increased by between 5% and 15%

2,292

0.6

Changed by less than 5%

353,020

99.0

Decreased by between 5% and 15%

1,195

0.3

Decreased by 15% or more

63

0.0

As Table 2 shows, 99 percent of all IRF cases are in CMGs and tiers that would experience less than a 5 percent change (either increase or decrease) in the CMG relative weight value as a result of the proposed revisions for FY 2016. The largest estimated increase in the proposed CMG relative weight values that affects the largest number of

IRF discharges would be a 0.2 percent increase in the CMG relative weight value for CMG 0704—Fracture of lower extremity, with a motor score less than 28.15-in the “no comorbidity” tier. In the FY 2014 claims data, 17,812 IRF discharges (5.0 percent of all IRF discharges) were classified into this CMG and tier.

The largest decrease in a CMG relative weight value affecting the largest number of IRF cases would be a 0.8 percent decrease in the CMG relative weight for CMG 0604—Neurological, with a motor score less than 25.85-in the “no comorbidity” tier. In the FY 2014 IRF claims data, this change would have affected 8,544 cases (2.4 percent of all IRF cases).

The proposed changes in the average length of stay values for FY 2016, compared with the FY 2015 average length of stay values, are small and do not show any particular trends in IRF length of stay patterns.

We invite public comment on our proposed update to the CMG relative weights and average length of stay values for FY 2016.

IV. Continued Use of FY 2014 Facility-Level Adjustment Factors

Section 1886(j)(3)(A)(v) of the Act confers broad authority upon the Secretary to adjust the per unit payment rate “by such . . . factors as the Secretary determines are necessary to properly reflect variations in necessary costs of treatment among rehabilitation facilities.” Under this authority, we currently adjust the federal prospective payment amount associated with a CMG to account for facility-level characteristics such as an IRF's LIP, teaching status, and location in a rural area, if applicable, as described in § 412.624(e).

Based on the substantive changes to the facility-level adjustment factors that were adopted in the FY 2014 final rule (79 FR 45872, 45882 through 45883), we froze the facility-level adjustment factors at the FY 2014 levels for FY 2015 and all subsequent years. For FY 2016, we will continue to hold the adjustment factors at the FY 2014 levels as we continue to monitor the most current IRF claims data available and continue to evaluate and monitor the effects of the FY 2014 changes.

V. Proposed FY 2016 IRF PPS Payment Update

A. Background

Section 1886(j)(3)(C) of the Act requires the Secretary to establish an increase factor that reflects changes over time in the prices of an appropriate mix of goods and services included in the covered IRF services, which is referred to as a market basket index. According to section 1886(j)(3)(A)(i) of the Act, the increase factor shall be used to update the IRF federal prospective payment rates for each FY. Section 1886(j)(3)(C)(ii)(I) of the Act requires the application of a productivity adjustment, as described below. In addition, sections 1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(iv) of the Act require the application of a 0.2 percentage point reduction to the market basket increase factor for FY 2016. Thus, in this proposed rule, we propose to update the IRF PPS payments for FY 2016 by a market basket increase factor based upon the most current data available, with a productivity adjustment as required by section 1886(j)(3)(C)(ii)(I) of the Act, and a 0.2 percentage point reduction as required by sections 1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(iv) of the Act.

We have utilized various market baskets through the years in the IRF PPS program. When we implemented the IRF PPS in January 2002, it used the Excluded Hospital with Capital market basket (which was based on 1992 Medicare cost reports for Medicare participating IRFs, IPFs, LTCHs, cancer hospitals, and children's hospitals) as an “input price index” (66 FR 41427 through 41430). Although “market basket” technically describes the mix of goods and services used in providing health care at a given point in time, this term is also commonly used to denote the input price index (that is, cost category weights and price proxies) derived from that market basket. Accordingly, the term “market basket,” as used in this document, refers to an input price index.

Beginning with the FY 2006 IRF PPS final rule (70 FR 47908), we adopted a 2002-based RPL market basket for the IRF PPS. This market basket reflected the operating and capital cost structures for freestanding IRFs, freestanding IPFs, and LTCHs. Cancer and children's hospitals were excluded from the RPL market basket because their payments are based entirely on reasonable costs subject to rate-of-increase limits established under the authority of section 1886(b) of the Act and not through a PPS. Also, the 2002 cost structures for cancer and children's hospitals were noticeably different than the cost structures of freestanding IRFs, freestanding IPFs, and LTCHs. See the FY 2006 IRF PPS final rule (70 FR 47908) for a complete discussion of the 2002-based RPL market basket.

In the FY 2010 IRF proposed rule (74 FR 21062), we expressed an interest in exploring the feasibility of creating a stand-alone IRF, or IRF-specific, market basket that reflects the cost structures of only IRF providers. But, as we noted in that discussion, Medicare cost report data revealed differences between cost levels and cost structures for freestanding and hospital-based IRF facilities. As we were unable at that time to fully understand these differences even after reviewing explanatory variables such as geographic variation, case mix, urban/rural status, share of low income patients, teaching status, and outliers (short stay and high-cost), we noted that we would continue to research ways to reconcile the differences and solicited public comment for additional information that might help us to better understand the reasons for the observed variations (74 FR 21062). We summarized the public comments we received and our responses in the FY 2010 IRF PPS final rule (74 FR 39762, 39776 through 39778). Despite receiving comments from the public on this issue, however, we were still unable to sufficiently reconcile the observed variations, and, therefore, were unable to establish a stand-alone IRF market basket at that time.

Beginning with the FY 2012 IRF PPS, payments were updated using a 2008-based RPL market basket reflecting the operating and capital cost structures for freestanding IRFs, freestanding IPFs, and LTCHs (76 FR 47849 through 47860). In doing so, we also used a more specific composite chemical price proxy; broke the professional fees cost category into two separate categories (Labor-related and Nonlabor-related); and added two additional cost categories (Administrative and Business Support Services and Financial Services), which were previously included in the residual All Other cost category. The FY 2012 IRF PPS proposed rule (76 FR 24229 through 24241) and FY 2012 IRF PPS final rule (76 FR 47849 through 47860) contain a complete discussion of the development of the 2008-based RPL market basket.

We have continued to work on addressing our concerns regarding the development of a stand-alone IRF market basket since our FY 2010 rulemaking cycle and, for the reasons described below, we believe using data from hospital-based and freestanding providers to derive the market basket cost weights despite their differences in cost levels and cost structures. Therefore, for FY 2016, we are proposing to create and adopt a 2012-based IRF market basket, using Medicare cost report data for both freestanding and hospital-based IRFs. In

the following discussion, we provide an overview of the proposed market basket and describe the methodologies used to determine the operating and capital portions of the proposed 2012-based IRF market basket.

B. Overview of the Proposed 2012-Based IRF Market Basket

The proposed 2012-based IRF market basket is a fixed-weight, Laspeyres-type price index. A Laspeyres price index measures the change in price, over time, of the same mix of goods and services purchased in the base period. Any changes in the quantity or mix of goods and services (that is, intensity) purchased over time relative to a base period are not measured.

The index itself is constructed in 3 steps. First, a base period is selected (in this proposed rule the base period is FY 2012), total base period costs are estimated for a set of mutually exclusive and exhaustive cost categories, and the proportion of total costs that each cost category represents is calculated. These proportions are called cost weights. Second, each cost category is matched to an appropriate price or wage variable, referred to as a price proxy. In nearly every instance where we have selected price proxies for the various market baskets, these price proxies are derived from publicly available statistical series that are published on a consistent schedule (preferably at least on a quarterly basis). In cases where a publicly available price series is not available (for example, a price index for malpractice insurance), we have collected price data from other sources and subsequently developed our own index to capture changes in prices for these types of costs. Finally, the cost weight for each cost category is multiplied by the established price proxy. The sum of these products (that is, the cost weights multiplied by their price levels) for all cost categories yields the composite index level of the market basket for the given time period. Repeating this step for other periods produces a series of market basket levels over time. Dividing the composite index level of one period by the composite index level for an earlier period produces a rate of growth in the input price index over that timeframe.

As previously noted, the market basket is described as a fixed-weight index because it represents the change in price over time of a constant mix (quantity and intensity) of goods and services needed to furnish IRF services. The effects on total costs resulting from changes in the mix of goods and services purchased subsequent to the base period are not measured. For example, an IRF hiring more nurses to accommodate the needs of patients would increase the volume of goods and services purchased by the IRF, but would not be factored into the price change measured by a fixed-weight IRF market basket. Only when the index is rebased would changes in the quantity and intensity be captured, with those changes being reflected in the cost weights. Therefore, we rebase the market basket periodically so that the cost weights reflect recent changes in the mix of goods and services that IRFs purchase (hospital inputs) to furnish inpatient care between base periods.

C. Creating an IRF-Specific Market Basket

As discussed in section V.A of this proposed rule, we have been exploring the possibility of creating a stand-alone, or IRF-specific, market basket that reflects the cost structures of only IRF providers. The major cost weights for the 2008-based RPL market basket were calculated using Medicare cost report data for those providers that complete a stand-alone Medicare cost report. We define a “major cost weight” as one for which we are able to obtain data from the Medicare cost report for that particular cost category (for example, Wages and Salaries). However, the Medicare cost report data does not collect detailed input cost data for the more detailed cost categories for which we would like to capture input price pressures (for example, Chemicals). Therefore, a public data source is used to identify the costs associated with these more detailed cost categories. For the 2008-based RPL market basket, we used only data from stand-alone Medicare cost reports due to concerns regarding our ability to incorporate Medicare cost report data for hospital-based providers. In the FY 2015 IRF PPS final rule (79 FR 45884 through 45886), we presented several of these concerns (as restated below) but explained that we would continue to research the possibility of creating an IRF-specific market basket to update IRF PPS payments.

Since the FY 2015 IRF PPS final rule, we have performed additional research on the Medicare cost report data available for hospital-based IRFs and evaluated these concerns. We subsequently concluded from this research that Medicare cost report data for both hospital-based IRFs and freestanding IRFs can be used to calculate the major market basket cost weights for a stand-alone IRF market basket. We have developed a detailed methodology to derive market basket cost weights that are representative of the universe of IRF providers. We believe the use of this proposed 2012-based IRF market basket is a technical improvement over the RPL market basket that is currently used to update IRF PPS payments. As a result, in this FY 2016 IRF PPS proposed rule, we are proposing to adopt a 2012-based IRF market basket that reflects data for both freestanding and hospital-based IRFs. Below we discuss our prior concerns and provide reasons for why we believe it is technically feasible to create a stand-alone IRF market basket using Medicare cost report data for both hospital-based and freestanding IRFs.

One concern discussed in the FY 2015 IRF PPS final rule (79 FR 45884) was that the cost level differences for hospital-based IRFs relative to freestanding IRFs were not readily explained by the specific characteristics of the individual providers and/or the patients that they served (for example, characteristics related to case mix, urban/rural status, or teaching status). To address this concern, we used regression analysis to evaluate the effect of including hospital-based IRF Medicare cost report data in the calculation of cost distributions (which refers to how costs for certain categories relate to total costs for a particular provider). A more detailed description of these regression models can be found in the FY 2015 IRF final rule (79 FR 45884 through 45885). Based on this analysis, we concluded that the inclusion of those IRF providers with unexplained variability in costs would not significantly impact the cost weights and, therefore, should not be a major cause of concern.

Another concern regarding the incorporation of hospital-based IRF data into the calculation of the market basket cost weights was the complexity of the Medicare cost report data for these providers. The freestanding IRFs independently submit a Medicare cost report for their facilities, making it relatively straightforward to obtain the cost categories necessary to determine the major market basket cost weights for such facilities. However, Medicare cost report data submitted for a hospital-based IRF are embedded in the Medicare cost report submitted for the entire hospital facility in which the IRF is located. To use Medicare cost report data from these providers, we needed to determine the appropriate adjustments to apply to the data to ensure that the cost weights we use would represent only the hospital-based IRF (not the hospital as a whole). Over the past year, we worked to develop detailed methodologies to calculate the major cost weights for both freestanding and

hospital-based IRFs. We believe that our proposed methodologies and the resulting cost weights, described in section V.C.1 of this proposed rule, are reasonable and appropriate, but, as noted in that section, we welcome public comments on these proposals.

We also evaluated the differences in cost weights for hospital-based and freestanding IRFs and found the most significant differences occurred for salary and pharmaceutical costs. Specifically, the hospital-based IRF salary cost shares tend to be lower than those of freestanding IRFs while hospital-based IRF pharmaceutical cost shares tend to be higher than those of freestanding IRFs. Our proposed methodology for deriving costs for each of these categories can be found in section V.C.1 of this proposed rule. We will continue to research and monitor these cost shares to ensure these differences are explainable.

In summary, our research over the past year allowed us to evaluate the appropriateness of including hospital-based IRF data in the calculation of the major cost weights for an IRF market basket. We believe that the proposed methodologies described below give us the ability to create a stand-alone IRF market basket that reflects the cost structure of the universe of IRF providers. Therefore, we believe that the use of this proposed 2012-based IRF market basket to update IRF PPS payments is a technical improvement over the current 2008-based RPL market basket, as the major cost weights are based on Medicare cost report data from both freestanding and hospital-based IRFs and do not include costs from either IPF or LTCH providers, which could have a different cost structure than IRFs.

1. Development of Cost Categories and Weights for the Proposed 2012-Based IRF Market Basket

a. Use of Medicare Cost Report Data

The proposed 2012-based IRF market basket consists of seven major cost categories derived from the FY 2012 Medicare cost reports (CMS Form 2552-10) for freestanding and hospital-based IRFs, consisting of Wages and Salaries, Employee Benefits, Contract Labor, Pharmaceuticals, Professional Liability Insurance (PLI), Capital, and a residual category. The residual category reflects all remaining costs that are not captured in the other six cost categories. The FY 2012 cost reports include providers whose cost reporting period began on or after October 1, 2011, and prior to September 30, 2012. We selected FY 2012 as the base year because the Medicare cost reports for that year were the most recent, complete set of Medicare cost report data available for IRFs at the time of development of the proposed IRF market basket.

Since our goal was to establish cost weights that were reflective of case mix and practice patterns associated with the services IRFs provide to Medicare beneficiaries, we limited the cost reports used to establish the 2012-based IRF market basket to those from facilities that had a Medicare average length of stay (LOS) that was relatively similar to their facility average LOS. We believe that this trim eliminates statistical outliers and ensures a more accurate market basket that reflects the costs generally incurred during a Medicare-covered stay. We defined the Medicare average LOS for freestanding IRFs based on what the IRFs reported on line 14 of Worksheet S-3, Part I. We defined the Medicare average LOS for hospital-based IRFs based on what was reported on line 17 of Worksheet S-3, Part I. We then used the cost reports from IRFs with a Medicare average LOS within 15 percent (that is, 15 percent higher or lower) than the facility average LOS for IRFs to establish the 2012-based IRF market basket. We apply this LOS edit to the data for IRFs to exclude providers that serve a population whose LOS would indicate that the patients served are not consistent with a LOS of a typical Medicare patient. This process resulted in the exclusion of about eight percent of the freestanding and hospital-based IRF Medicare cost reports. Of those excluded, about 18 percent were freestanding IRFs and 82 percent were hospital-based IRFs. This ratio is relatively consistent with the ratio of the universe of freestanding to hospital-based IRF providers. In the FY 2012 IRF PPS final rule (76 FR 47850), the same process was used to derive the 2008-based RPL market basket.

We then used the cost reports for IRFs that were not excluded through this process to calculate the costs for six of the seven major cost categories (Wages and Salaries, Employee Benefits, Contract Labor, Professional Liability Insurance, Pharmaceuticals, and Capital) for the market basket.

Similar to the 2008-based RPL market basket major cost weights, the resulting 2012-based IRF market basket cost weights reflect Medicare allowable costs (routine, ancillary and capital)—costs that are eligible for reimbursement through the IRF PPS. We propose to define Medicare allowable costs for freestanding facilities as cost centers (CMS Form 2552-10): 30 through 35, 50 through 76 (excluding 52 and 75), 90 through 91 and 93. We propose to define Medicare allowable costs for hospital-based facilities as cost centers (CMS Form 2552-10): 40, 50 through 76 (excluding 52 and 75), 90 through 91 and 93.

For freestanding IRFs, total Medicare allowable costs would be equal to the total costs as reported on Worksheet B, part I, column 26. For hospital-based IRFs, total Medicare allowable costs would be equal to total costs for the IRF inpatient unit after the allocation of overhead costs (Worksheet B, part I, column 26, line 41) and a proportion of total ancillary costs. We calculated the portion of ancillary costs attributable to the hospital-based IRF for a given ancillary cost center by multiplying total facility ancillary costs for the specific cost center (as reported on Worksheet B, Part I, column 26) by the ratio of IRF Medicare ancillary costs for the cost center (as reported on Worksheet D-3, column 3 for hospital-based IRFs) to total Medicare ancillary costs for the cost center (equal to the sum of Worksheet D-3, column 3 for all relevant PPS (that is, IPPS, IRF, IPF and SNF)). We propose to use these methods to derive levels of total costs for IRF providers. With this work complete, we then set about deriving cost levels for six of the seven major cost categories.

(i) Wages and Salaries Costs

For freestanding IRFs, Wages and Salaries costs are derived as the sum of inpatient salaries, ancillary salaries and a proportion of overhead (or general service cost center) salaries as reported on Worksheet A, column 1. Since overhead salary costs are attributable to the entire IRF, we only include the proportion attributable to the Medicare allowable cost centers. We estimate the proportion of overhead salaries that are attributed to Medicare allowable costs centers by multiplying the ratio of Medicare allowable area salaries to total salaries (Worksheet A, column 1, line 200) times total overhead salaries. In the FY 2012 IRF PPS final rule (76 FR 47850), a similar methodology was used to derive Wages and Salaries costs in the 2008-based RPL market basket.

For hospital-based IRFs, Wages and Salaries costs are derived as the sum of inpatient unit wages and salaries (Worksheet A, column 1, line 41) and a portion of salary costs attributable to total facility ancillary and overhead cost centers as these cost centers are shared with the entire facility. We calculate the portion of ancillary salaries attributable to the hospital-based IRF for a given ancillary cost center by multiplying total facility ancillary salary costs for the specific cost center (as reported on Worksheet A, column 1) by the ratio of

IRF Medicare ancillary costs for the cost center (as reported on Worksheet D-3, column 3 for hospital-based IRFs) to total Medicare ancillary costs for the cost center (equal to the sum of Worksheet D-3, column 3 for all relevant PPS units [that is, IPPS, IRF, IPF and SNF]). For example, if hospital-based IRF Medicare physical therapy costs represent 30 percent of the total Medicare physical therapy costs for the entire facility, then 30 percent of total facility physical therapy salaries (as reported in Worksheet A, column 1, line 66) would be attributable to the hospital-based IRF. We believe it is appropriate to use only a portion of the ancillary costs in the market basket cost weight calculations since the hospital-based IRF only utilizes a portion of the facility's ancillary services. We believe the ratio of reported IRF Medicare costs to reported total Medicare costs provides a reasonable estimate of the ancillary services utilized, and costs incurred, by the hospital-based IRF.

We calculate the portion of overhead salary costs attributable to hospital-based IRFs by multiplying the total overhead costs attributable to the hospital-based IRF (sum of columns 4-18 on Worksheet B, part I, line 41) by the ratio of total facility overhead salaries (as reported on Worksheet A, column 1, lines 4-18) to total facility overhead costs (as reported on Worksheet A, column 7, lines 4-18). This methodology assumes the proportion of total costs related to salaries for the overhead cost center is similar for all inpatient units (that is, acute inpatient or inpatient rehabilitation). Since the 2008-based RPL market basket did not include hospital-based providers, this proposed methodology cannot be compared to the derivation of Wages and Salaries costs in the RPL market basket.

(ii) Employee Benefits Costs

Effective with our implementation of CMS Form 2552-10, we began collecting Employee Benefits and Contract Labor data on Worksheet S-3, Part V. Previously, with CMS Form 2540-96, Employee Benefits and Contract Labor data were reported on Worksheet S-3, part II, which was applicable to only IPPS providers and, therefore, these data were not available for the derivation of the RPL market basket. Due to the lack of such data, the Employee Benefits cost weight for the 2008-based RPL market basket was derived by multiplying the 2008-based RPL market basket Wages and Salaries cost weight by the ratio of the IPPS hospital market basket Employee Benefits cost weight to the IPPS hospital market basket Wages and Salaries cost weight. Similarly, the Contract Labor cost weight for the 2008-based RPL market basket was derived by multiplying the 2008-based RPL market basket Wages and Salaries cost weight by the ratio of the IPPS hospital market basket Contract Labor cost weight to the IPPS hospital market basket Wages and Salaries cost weight (

see

FY 2012 IRF PPS final rule (76 FR 47850 through 47851)).

For FY 2012 Medicare cost report data, while there were providers that did report data on Worksheet S-3, part V, many providers did not complete this worksheet. However, our analysis indicates that we had a large enough sample to enable us to produce a reasonable Employee Benefits cost weight. Specifically, we found that when we recalculated the cost weight after weighting to reflect the characteristics of the universe of IRF providers (freestanding and hospital-based), it did not have a material effect on the resulting cost weight. We continue to encourage all providers to report these data on the Medicare cost report.

For freestanding IRFs, Employee Benefits costs are equal to the data reported on Worksheet S-3, Part V, line 2, column 2.

For hospital-based IRFs, we calculate total benefits as the sum of benefit costs reported on Worksheet S-3 Part V, line 4, column 2, and a portion of ancillary benefits and overhead benefits for the total facility. Ancillary benefits attributable to the hospital-based IRF are calculated by multiplying ancillary salaries for the hospital-based IRF as determined in the derivation of Wages and Salaries for the hospital-based IRF by the ratio of total facility benefits to total facility salaries. Similarly, overhead benefits attributable to the hospital-based IRF are calculated by multiplying overhead salaries for the hospital-based IRF as determined in the derivation of Wages and Salaries for the hospital-based IRF by the ratio of total facility benefits to total facility salaries.

(iii) Contract Labor Costs

Similar to the RPL and IPPS market baskets, Contract Labor costs are primarily associated with direct patient care services. Contract labor costs for services such as accounting, billing, and legal are estimated using other government data sources. As previously discussed in the Employee Benefits section, we now have data reported on Worksheet S-3, Part V that we can use to derive the Contract Labor cost weight for the 2012-based IRF market basket. As previously noted, for FY 2012 Medicare cost report data, while there were providers that did report data on Worksheet S-3, part V, many providers did not complete this worksheet. However, our analysis indicates that we had a large enough sample to enable us to produce a reasonable Contract Labor cost weight. Specifically, we found that when we recalculated the cost weight after weighting to reflect the characteristics of the universe of IRF providers (freestanding and hospital-based), it did not have a material effect on the resulting cost weight. We continue to encourage all providers to report these data on the Medicare cost report.

For freestanding IRFs, Contract Labor costs are based on data reported on Worksheet S-3, part V, column 1, line 2, and for hospital-based IRFs, Contract Labor costs are based on line 4 of this same worksheet.

(iv) Pharmaceuticals Costs

For freestanding IRFs, pharmaceuticals costs are based on non-salary costs reported on Worksheet A, column 7, less Worksheet A, column 1, for the pharmacy cost center (line 15) and drugs charged to patients cost center (line 73).

For hospital-based IRFs, pharmaceuticals costs are based on a portion of the non-salary pharmacy costs and a portion of the non-salary drugs charged to patient costs reported for the total facility. Non-salary pharmacy costs attributable to the hospital-based IRF are calculated by multiplying total pharmacy costs attributable to the hospital-based IRF (as reported on Worksheet B, column 15, line 41) by the ratio of total non-salary pharmacy costs (Worksheet A, column 2, line 15) to total pharmacy costs (sum of Worksheet A, column 1 and 2 for line 15) for the total facility. Non-salary drugs charged to patient costs attributable to the hospital-based IRF are calculated by multiplying total non-salary drugs charged to patient costs (Worksheet B, part I, column 0, line 73, plus Worksheet B, part I, column 15, line 73, less Worksheet A, column 1, line 73) for the total facility by the ratio of Medicare drugs charged to patient ancillary costs for the IRF unit (as reported on Worksheet D-3 for hospital-based IRFs, line 73, column 3) to total Medicare drugs charged to patient ancillary costs for the total facility (equal to the sum of Worksheet D-3, line 73, column 3, for all relevant PPS (that is, IPPS, IRF, IPF and SNF)).

(v) Professional Liability Insurance Costs

For freestanding IRFs, Professional Liability Insurance (PLI) costs (often referred to as malpractice costs) are equal to premiums, paid losses and self-insurance costs reported on Worksheet S-2, line 118, columns 1 through 3. For hospital-based IRFs, we assume that the PLI weight for the total facility is similar to the hospital-based IRF unit since the only data reported on this worksheet is for the entire facility, as we currently have no means to identify the proportion of total PLI costs that are only attributable to the hospital-based IRF. Therefore, hospital-based IRF PLI costs are equal to total facility PLI (as reported on Worksheet S-2, line 118, columns 1 through 3) divided by total facility costs (as reported on Worksheet A, line 200) times hospital-based IRF Medicare allowable total costs. We welcome comments on this proposed method of deriving the PLI costs for hospital-based IRFs.

(vi) Capital Costs

For freestanding IRFs, capital costs are equal to Medicare allowable capital costs as reported on Worksheet B, Part II, column 26.

For hospital-based IRFs, capital costs are equal to IRF inpatient capital costs (as reported on Worksheet B, part II, column 26, line 41) and a portion of IRF ancillary capital costs. We calculate the portion of ancillary capital costs attributable to the hospital-based IRF for a given cost center by multiplying total facility ancillary capital costs for the specific ancillary cost center (as reported on Worksheet B, Part II, column 26) by the ratio of IRF Medicare ancillary costs for the cost center (as reported on Worksheet D-3, column 3 for hospital-based IRFs) to total Medicare ancillary costs for the cost center (equal to the sum of Worksheet D-3, column 3 for all relevant PPS (that is, IPPS, IRF, IPF and SNF). For example, if hospital-based IRF Medicare physical therapy costs represent 30 percent of the total Medicare physical therapy costs for the entire facility, then 30 percent of total facility physical therapy capital costs (as reported in Worksheet B, part II, column 26, line 66) would be attributable to the hospital-based IRF.

b. Final Major Cost Category Computation

After we derived costs for the six major cost categories for each provider using the Medicare cost report data as previously described, we address data outliers using the following steps. First, we divide the costs for each of the six categories by total Medicare allowable costs calculated for the provider to obtain cost weights for the universe of IRF providers. We then remove those providers whose derived cost weights fall in the top and bottom five percent of provider specific derived cost weights to ensure the removal of outliers. After the outliers have been removed, we sum the costs for each category across all remaining providers. We then divide this by the sum of total Medicare allowable costs across all remaining providers to obtain a cost weight for the proposed 2012-based IRF market basket for the given category. Finally, we calculate the residual “All Other” cost weight that reflects all remaining costs that are not captured in the six cost categories listed. See Table 3 for the resulting cost weights for these major cost categories that we obtain from the Medicare cost reports.

Table 3—Major Cost Categories as Derived From Medicare Cost Reports

Major cost categories

2012-based IRF

(percent)

2008-based RPL

(percent)

Wages and Salaries

45.5

47.4

Employee Benefits

1

10.7

12.3

Contract Labor

1

0.8

2.6

Professional Liability Insurance (Malpractice)

0.9

0.8

Pharmaceuticals

5.1

6.5

Capital

8.6

8.4

All Other

28.4

22.0

* Total may not sum to 100 due to rounding.

1

Due to the lack of Medicare cost report data, the Employee Benefits and Contract Labor cost weights in the 2008-based RPL market basket were based on the IPPS market basket.

The Wages and Salaries cost weight obtained directly from the Medicare cost reports for the proposed 2012-based IRF market basket is approximately 2 percentage points lower than the Wages and Salaries cost weight for the 2008-based RPL market basket. This is primarily a result of the inclusion of hospital-based IRF data into the 2012-based IRF market basket. The lower Employee Benefits and Contract Labor cost weights in the 2012-based IRF market basket relative to the 2008-based RPL market basket are due to the incorporation of freestanding and hospital-based IRF specific data. The predecessor 2008-based RPL market basket used the IPPS market basket to derive the Employee Benefits and Contract Labor cost weights due to the lack of data on the Medicare cost reports. The lower pharmaceutical cost weight in the proposed 2012-based IRF market basket relative to the 2008-based RPL market basket is mostly due to freestanding IRFs; the hospital-based IRFs pharmaceuticals cost weight is almost twice as large as the freestanding IRF pharmaceuticals cost weight.

As we did for the 2008-based RPL market basket, we propose to allocate the Contract Labor cost weight to the Wages and Salaries and Employee Benefits cost weights based on their relative proportions under the assumption that contract labor costs are comprised of both wages and salaries and employee benefits. The Contract Labor allocation proportion for Wages and Salaries is equal to the Wages and Salaries cost weight as a percent of the sum of the Wages and Salaries cost weight and the Employee Benefits cost weight. This rounded percentage is 81 percent; therefore, we propose to allocate 81 percent of the Contract Labor cost weight to the Wages and Salaries cost weight and 19 percent to the Employee Benefits cost weight. Table 4 shows the Wages and Salaries and Employee Benefit cost weights after Contract Labor cost weight allocation for both the proposed 2012-based IRF market basket and 2008-based RPL market basket.

Table 4—Wages and Salaries and Employee Benefits Cost Weights After Contract Labor Allocation

Major cost categories

2012-based IRF

2008-based RPL

Wages and Salaries

46.1

49.4

Employee Benefits

10.9

12.8

c. Derivation of the Detailed Operating Cost Weights

To further divide the “All Other” residual cost weight estimated from the FY 2012 Medicare cost report data into more detailed cost categories, we propose to use the 2007 Benchmark Input-Output (I-O) “Use Tables/Before Redefinitions/Purchaser Value” for NAICS 622000, Hospitals, published by the Bureau of Economic Analysis (BEA). This data is publicly available at the following Web site:

http://www.bea.gov/industry/io_annual.htm

The BEA Benchmark I-O data are scheduled for publication every five years with the most recent data available for 2007. The 2007 Benchmark I-O data are derived from the 2007 Economic Census and are the building blocks for BEA's economic accounts. Thus, they represent the most comprehensive and complete set of data on the economic processes or mechanisms by which output is produced and distributed.

1

BEA also produces Annual I-O estimates; however, while based on a similar methodology, these estimates reflect less comprehensive and less detailed data sources and are subject to revision when benchmark data becomes available. Instead of using the less detailed Annual I-O data, we inflate the 2007 Benchmark I-O data forward to 2012 by applying the annual price changes from the respective price proxies to the appropriate market basket cost categories that are obtained from the 2007 Benchmark I-O data. We repeat this practice for each year. We then calculate the cost shares that each cost category represents of the inflated 2012 data. These resulting 2012 cost shares are applied to the All Other residual cost weight to obtain the detailed cost weights for the proposed 2012-based IRF market basket. For example, the cost for Food: Direct Purchases represents 6.5 percent of the sum of the “All Other” 2007 Benchmark I-O Hospital Expenditures inflated to 2012; therefore, the Food: Direct Purchases cost weight represents 6.5 percent of the 2012-based IRF market basket's “All Other” cost category (28.4 percent), yielding a “final” Food: Direct Purchases cost weight of 1.8 percent in the proposed 2012-based IRF market basket (0.065 * 28.4 percent = 1.8 percent).

1

http://www.bea.gov/papers/pdf/IOmanual_092906.pdf

Using this methodology, we derive eighteen detailed IRF market basket cost category weights from the proposed 2012-based IRF market basket residual cost weight (28.4 percent). These categories are: (1) Electricity, (2) Fuel, Oil, and Gasoline (3) Water & Sewerage (4) Food: Direct Purchases, (5) Food: Contract Services, (6) Chemicals, (7) Medical Instruments, (8) Rubber & Plastics, (9) Paper and Printing Products, (10) Miscellaneous Products, (11) Professional Fees: Labor-related, (12) Administrative and Facilities Support Services, (13) Installation, Maintenance, and Repair, (14) All Other Labor-related Services, (15) Professional Fees: Nonlabor-related, (16) Financial Services, (17) Telephone Services, and (18) All Other Nonlabor-related Services.

d. Derivation of the Detailed Capital Cost Weights

As described in section V.C.1.a.6 of this proposed rule, we are proposing a Capital-Related cost weight of 8.6 percent as obtained from the FY 2012 Medicare cost reports for freestanding and hospital-based IRF providers. We are proposing to then separate this total Capital-Related cost weight into more detailed cost categories.

Using FY 2012 Medicare cost reports, we are able to group Capital-Related costs into the following categories: Depreciation, Interest, Lease, and Other Capital-Related costs. For each of these categories, we are proposing to determine separately for hospital-based IRFs and freestanding IRFs what proportion of total capital-related costs the category represents.

For freestanding IRFs, we are proposing to derive the proportions for Depreciation, Interest, Lease, and Other Capital-related costs using the data reported by the IRF on Worksheet A-7, which is similar to the methodology used for the 2008-based RPL market basket.

For hospital-based IRFs, data for these four categories are not reported separately for the hospital-based IRF; therefore, we are proposing to derive these proportions using data reported on Worksheet A-7 for the total facility. We are assuming the cost shares for the overall hospital are representative for the hospital-based IRF unit. For example, if depreciation costs make up 60 percent of total capital costs for the entire facility, we believe it is reasonable to assume that the hospital-based IRF would also have a 60 percent proportion because it is a unit contained within the total facility.

To combine each detailed capital cost weight for freestanding and hospital-based IRFs into a single capital cost weight for the proposed 2012-based IRF market basket, we are proposing to weight together the shares for each of the categories (Depreciation, Interest, Lease, and Other Capital-related costs) based on the share of total capital costs each provider type represents of the total capital costs for all IRFs for 2012. Applying this methodology, results in proportions of total capital-related costs for Depreciation, Interest, Lease and Other Capital-related costs that are representative of the universe of IRF providers.

We are also proposing to allocate lease costs across each of the remaining detailed capital-related cost categories as was done in the 2008-based RPL market basket. This would result in three primary capital-related cost categories in the proposed 2012-based IRF market basket: Depreciation, Interest, and Other Capital-Related costs. Lease costs are unique in that they are not broken out as a separate cost category in the proposed 2012-based IRF market basket. Rather, we are proposing to proportionally distribute these costs among the cost categories of Depreciation, Interest, and Other Capital-Related, reflecting the assumption that the underlying cost structure of leases is similar to that of capital-related costs in general. As was done under the 2008-based RPL market basket, we are proposing to assume that 10 percent of the lease costs as a proportion of total capital-related costs represents overhead and assign those costs to the Other Capital-Related cost category accordingly. We propose to distribute the remaining lease costs proportionally across the three cost categories (Depreciation, Interest, and Other Capital-Related) based on the proportion that these categories comprise of the sum of the Depreciation,

Interest, and Other Capital-related cost categories (excluding lease expenses). This is the same methodology used for the 2008-based RPL market basket. The allocation of these lease expenses are shown in Table 5.

Finally, we are proposing to further divide the Depreciation and Interest cost categories. We are proposing to separate Depreciation into the following two categories: (1) Building and Fixed Equipment and (2) Movable Equipment; and proposing to separate Interest into the following two categories: (1) Government/Nonprofit and (2) For-profit.

To disaggregate the Depreciation cost weight, we need to determine the percent of total Depreciation costs for IRFs that is attributable to Building and Fixed Equipment, which we hereafter refer to as the “fixed percentage.” For the proposed 2012-based IRF market basket, we are proposing to use slightly different methods to obtain the fixed percentages for hospital-based IRFs compared to freestanding IRFs.

For freestanding IRFs, we are proposing to use depreciation data from Worksheet A-7 of the FY 2012 Medicare cost reports, similar to the methodology used for the 2008-based RPL market basket. However, for hospital-based IRFs, we determined that the fixed percentage for the entire facility may not be representative of the hospital-based IRF unit due to the entire facility likely employing more sophisticated movable assets that are not utilized by the hospital-based IRF. Therefore, for hospital-based IRFs, we are proposing to calculate a fixed percentage using: (1) Building and fixture capital costs allocated to the hospital-based IRF unit as reported on Worksheet B, part I line 41 and (2) building and fixture capital costs for the top five ancillary cost centers utilized by hospital-based IRFs. We propose to weight these two fixed percentages (inpatient and ancillary) using the proportion that each capital cost type represents of total capital costs in the proposed 2012-based IRF market basket. We are proposing to then weight the fixed percentages for hospital-based and freestanding IRFs together using the proportion of total capital costs each provider type represents.

To disaggregate the Interest cost weight, we need to determine the percent of total interest costs for IRFs that are attributable to government and nonprofit facilities, which we hereafter refer to as the “nonprofit percentage,” as price pressures associated with these types of interest costs tend to differ from those for for-profit facilities. For the IRF market basket, we are proposing to use interest costs data from Worksheet A-7 of the FY 2012 Medicare cost reports for both freestanding and hospital-based IRFs, similar to the methodology used for the 2008-based RPL market basket. We are proposing to determine the percent of total interest costs that are attributed to government and nonprofit IRFs separately for hospital-based and freestanding IRFs. We then are proposing to weight the nonprofit percentages for hospital-based and freestanding IRFs together using the proportion of total capital costs that each provider type represents.

Table 5 provides the detailed capital cost shares obtained from the Medicare cost reports. Ultimately, these detailed capital cost shares are applied to the total Capital-Related cost weight determined in section V.C.1.a.6 of this proposed rule to split out the total weight of 8.6 percent into more detailed cost categories and weights.

Table 5—Detailed Capital Cost Weights for the Proposed 2012-Based IRF Market Basket

Cost shares

obtained from

medicare cost

reports

(percent)

Proposed detailed

capital cost

shares after

allocation of

lease expenses

(percent)

Depreciation

61

74

Building and Fixed Equipment

39

48

Movable Equipment

22

26

Interest

13

16

Government/Nonprofit

8

10

For Profit

5

6

Lease

20

n/a

Other

6

10

e. Proposed 2012-Based IRF Market Basket Cost Categories and Weights

Table 6 shows the cost categories and weights for the proposed 2012-based IRF market basket compared to the 2008-based RPL market basket.

BILLING CODE 4120-01-P

EP27AP15.000

EP27AP15.001

* Detail may not add to total due to rounding.

BILLING CODE 4120-01-C

The proposed 2012-based IRF market basket does not include separate cost categories for Apparel, Machinery & Equipment, and Postage. Due to the small weights associated with these detailed categories and relatively stable price growth in the applicable price proxy, we are proposing to include Apparel and Machinery & Equipment in the Miscellaneous Products cost category and Postage in the All-Other Nonlabor-related Services. We note that these Machinery & Equipment expenses are for equipment that is paid for in a given year and not depreciated over the asset's useful life. Depreciation expenses for movable equipment are reflected in the Capital-related costs of the proposed 2012-based IRF market basket. For the proposed 2012-based IRF market basket, we are also proposing to include a separate cost category for Installation, Maintenance, and Repair.

2. Selection of Price Proxies

After developing the cost weights for the proposed 2012-based IRF market basket, we selected the most appropriate wage and price proxies currently available to represent the rate of price change for each expenditure category. For the majority of the cost weights, we base the price proxies on U.S. Bureau of Labor Statistics (BLS) data and group them into one of the following BLS categories:

•

Employment Cost Indexes.

Employment Cost Indexes (ECIs) measure the rate of change in employment wage rates and employer costs for employee benefits per hour worked. These indexes are fixed-weight indexes and strictly measure the change in wage rates and employee benefits per hour. ECIs are superior to Average Hourly Earnings (AHE) as price proxies for input price indexes because they are not affected by shifts in occupation or industry mix, and because they measure pure price change and are available by both occupational group and by industry. The industry ECIs are based on the North American Industry Classification System (NAICS), and the occupational ECIs are based on the Standard Occupational Classification System (SOC).

•

Producer Price Indexes.

Producer Price Indexes (PPIs) measure price changes for goods sold in other than retail markets. PPIs are used when the purchases of goods or services are made at the wholesale level.

•

Consumer Price Indexes.

Consumer Price Indexes (CPIs) measure change in the prices of final goods and services bought by consumers. CPIs are only used when the purchases are similar to those of retail consumers rather than purchases at the wholesale level, or if no appropriate PPIs are available.

We evaluated the price proxies using the criteria of reliability, timeliness, availability, and relevance:

•

Reliability.

Reliability indicates that the index is based on valid statistical methods and has low sampling variability. Widely accepted statistical methods ensure that the data were collected and aggregated in a way that can be replicated. Low sampling variability is desirable because it indicates that the sample reflects the typical members of the population. (Sampling variability is variation that occurs by chance because only a sample was surveyed rather than the entire population.)

•

Timeliness.

Timeliness implies that the proxy is published regularly, preferably at least once a quarter. The market baskets are updated quarterly, and therefore, it is important for the underlying price proxies to be up-to-date, reflecting the most recent data available. We believe that using proxies that are published regularly (at least quarterly, whenever possible) helps to ensure that we are using the most recent data available to update the market basket. We strive to use publications that are disseminated frequently, because we believe that this is an optimal way to stay abreast of the most current data available.

•

Availability.

Availability means that the proxy is publicly available. We prefer that our proxies are publicly available because this will help ensure that our market basket updates are as transparent to the public as possible. In addition, this enables the public to be able to obtain the price proxy data on a regular basis.

•

Relevance.

Relevance means that the proxy is applicable and representative of the cost category weight to which it is applied. The CPIs, PPIs, and Employment Cost Index (ECIs) that we have selected to propose in this regulation meet these criteria. Therefore, we believe that they continue to be the best measure of price changes for the cost categories to which they would be applied.

Table 6 lists all price proxies for the proposed 2012-based IRF market basket. Below is a detailed explanation of the price proxies we are proposing for each cost category weight. We note that many of the proxies for the 2012-based IRF market basket are the same as those used for the FY 2008-based RPL market basket. For further discussion on the FY 2008-based RPL market basket, see the FY 2012 IRF final rule (76 FR 47852 through 47860).

a. Price Proxies for the Operating Portion of the Proposed 2012-Based IRF Market Basket

1. Wages and Salaries

We are proposing to continue to use the ECI for Wages and Salaries for All Civilian workers in Hospitals (BLS series code #CIU1026220000000I) to measure the wage rate growth of this cost category. This is the same price proxy used in the 2008-based RPL market basket.

2. Benefits

We are proposing to continue to use the ECI for Total Benefits for All Civilian workers in Hospitals to measure price growth of this category. This ECI is calculated using the ECI for Total Compensation for All Civilian workers in Hospitals (BLS series code # CIU1016220000000I) and the relative importance of wages and salaries within total compensation. This is the same price proxy used in the 2008-based RPL market basket.

3. Electricity

We are proposing to continue to use the PPI for Commercial Electric Power (BLS series code #WPU0542) to measure the price growth of this cost category. This is the same price proxy used in the 2008-based RPL market basket.

4. Fuel, Oil, and Gasoline

We are proposing to change the proxy used for the Fuel, Oil, and Gasoline cost category. The 2008-based RPL market basket uses the PPI for Petroleum Refineries (BLS series code #PCU32411-32411) to proxy these expenses.

For the proposed 2012-based IRF market basket, we are proposing to use a blend of the PPI for Petroleum Refineries and the PPI Commodity for Natural Gas (BLS series code #WPU0531). Our analysis of the Bureau of Economic Analysis' 2007 Benchmark Input-Output data (use table before redefinitions, purchaser's value for NAICS 622000 [Hospitals]), shows that Petroleum Refineries expenses accounts for approximately 70 percent and Natural Gas accounts for approximately 30 percent of the Fuel, Oil, and Gasoline expenses. Therefore, we propose a blend using of 70 percent of the PPI for Petroleum Refineries (BLS series code #PCU32411-32411) and 30 percent of the PPI Commodity for Natural Gas (BLS series code #WPU0531). We believe that these 2 price proxies are the most technically appropriate indices available to measure the price growth of the Fuel, Oil, and Gasoline cost category in the proposed 2012-based IRF market basket.

5. Water and Sewerage

We are proposing to continue to use the CPI for Water and Sewerage Maintenance (BLS series code #CUUR0000SEHG01) to measure the price growth of this cost category. This is the same proxy used in the 2008-based RPL market basket.

6. Professional Liability Insurance

We are proposing to continue to use the CMS Hospital Professional Liability Index to measure changes in PLI premiums. To generate this index, we collect commercial insurance premiums for a fixed level of coverage while holding non-price factors constant (such as a change in the level of coverage). This is the same proxy used in the 2008-based RPL market basket.

7. Pharmaceuticals

We are proposing to continue to use the PPI for Pharmaceuticals for Human Use, Prescription (BLS series code #WPUSI07003) to measure the price growth of this cost category. This is the same proxy used in the 2008-based RPL market basket.

8. Food: Direct Purchases

We are proposing to continue to use the PPI for Processed Foods and Feeds (BLS series code #WPU02) to measure the price growth of this cost category. This is the same proxy used in the 2008-based RPL market basket.

9. Food: Contract Purchases

We are proposing to continue to use the CPI for Food Away From Home (BLS series code #CUUR0000SEFV) to measure the price growth of this cost category. This is the same proxy used in the 2008-based RPL market basket.

10. Chemicals

We are proposing to continue to use a four part blended PPI composed of the PPI for Industrial Gas Manufacturing (BLS series code PCU325120325120P), the PPI for Other Basic Inorganic Chemical Manufacturing (BLS series code #PCU32518-32518), the PPI for Other Basic Organic Chemical Manufacturing (BLS series code #PCU32519-32519), and the PPI for Soap and Cleaning Compound Manufacturing (BLS series code #PCU32561-32561). We propose updating the blend weights using 2007 Benchmark I-O data, which compared to 2002 Benchmark I-O data is weighted more toward organic chemical products and weighted less toward inorganic chemical products.

Table 7 shows the proposed weights for each of the four PPIs used to create the blended PPI. These are the same four proxies used in the 2008-based RPL market basket; however, the blended PPI weights in the 2008-based RPL market baskets were based on 2002 Benchmark I-O data.

Table 7—Blended Chemical PPI Weights

Name

Proposed

2012-based

IRF weights

(percent)

2008-based

RPL weights

(percent)

NAICS

PPI for Industrial Gas Manufacturing

32

35

325120

PPI for Other Basic Inorganic Chemical Manufacturing

17

25

325180

PPI for Other Basic Organic Chemical Manufacturing

45

30

325190

PPI for Soap and Cleaning Compound Manufacturing

6

10

325610

11. Medical Instruments

We are proposing to use a blend for the Medical Instruments cost category. The 2007 Benchmark Input-Output data shows an approximate 50/50 split between Surgical and Medical Instruments and Medical and Surgical Appliances and Supplies for this cost category. Therefore, we propose a blend composed of 50 percent of the commodity-based PPI for Surgical and Medical Instruments (BLS code #WPU1562) and 50 percent of the commodity-based PPI for Medical and Surgical Appliances and Supplies (BLS code #WPU1563). The 2008-based RPL market basket uses the single, higher level PPI for Medical, Surgical, and Personal Aid Devices (BLS series code #WPU156).

12. Rubber and Plastics

We are proposing to continue to use the PPI for Rubber and Plastic Products (BLS series code #WPU07) to measure price growth of this cost category. This is the same proxy used in the 2008-based RPL market basket.

13. Paper and Printing Products

We are proposing to continue to use the PPI for Converted Paper and Paperboard Products (BLS series code #WPU0915) to measure the price growth of this cost category. This is the same proxy used in the 2008-based RPL market basket.

14. Miscellaneous Products

We are proposing to continue to use the PPI for Finished Goods Less Food and Energy (BLS series code #WPUSOP3500) to measure the price growth of this cost category. This is the same proxy used in the 2008-based RPL market basket.

15. Professional Fees: Labor-Related

We are proposing to continue to use the ECI for Total Compensation for Private Industry workers in Professional and Related (BLS series code #CIU2010000120000I) to measure the price growth of this category. This is the same proxy used in the 2008-based RPL market basket.

16. Administrative and Facilities Support Services

We are proposing to continue to use the ECI for Total Compensation for Private Industry workers in Office and Administrative Support (BLS series code #CIU2010000220000I) to measure the price growth of this category. This is the same proxy used in the 2008-based RPL market basket.

17. Installation, Maintenance, and Repair

We are proposing to use the ECI for Total Compensation for Civilian workers in Installation, Maintenance, and Repair (BLS series code #CIU1010000430000I) to measure the price growth of this new cost category. Previously these costs were included in the All Other: Labor-related Services category and were proxied by the ECI for Total Compensation for Private Industry workers in Service Occupations (BLS series code #CIU2010000300000I). We believe that this index better reflects the price changes of labor associated with maintenance-related services and its incorporation represents a technical improvement to the market basket.

18. All Other: Labor-Related Services

We are proposing to continue to use the ECI for Total Compensation for Private Industry workers in Service Occupations (BLS series code #CIU2010000300000I) to measure the price growth of this cost category. This is the same proxy used in the 2008-based RPL market basket.

19. Professional Fees: Nonlabor-Related

We are proposing to continue to use the ECI for Total Compensation for Private Industry workers in Professional and Related (BLS series code #CIU2010000120000I) to measure the price growth of this category. This is the same proxy used in the 2008-based RPL market basket.

20. Financial Services

We are proposing to continue to use the ECI for Total Compensation for Private Industry workers in Financial Activities (BLS series code #CIU201520A000000I) to measure the price growth of this cost category. This is the same proxy used in the 2008-based RPL market basket.

21. Telephone Services

We are proposing to continue to use the CPI for Telephone Services (BLS series code #CUUR0000SEED) to measure the price growth of this cost category. This is the same proxy used in the 2008-based RPL market basket.

22. All Other: Nonlabor-Related Services

We are proposing to continue to use the CPI for All Items Less Food and Energy (BLS series code #CUUR0000SA0L1E) to measure the price growth of this cost category. This is the same proxy used in the 2008-based RPL market basket.

b. Price Proxies for the Capital Portion of the Proposed 2012-Based IRF Market Basket

1. Capital Price Proxies Prior to Vintage Weighting

We are proposing to apply the same price proxies to the detailed capital-related cost categories as were applied in the 2008-based RPL market basket, which are provided in Table 7 and described below. We are also proposing to continue to vintage weight the capital price proxies for Depreciation and Interest to capture the long-term consumption of capital. This vintage weighting method is similar to the method used for the 2008-based RPL market basket and is described in section V.C.2.b.2 of this proposed rule.

We are proposing to proxy the Depreciation: Building and Fixed Equipment cost category by BEA's Chained Price Index for Nonresidential Construction for Hospitals and Special Care Facilities (BEA Table 5.4.4. Price Indexes for Private Fixed Investment in Structures by Type), the Depreciation: Movable Equipment cost category by the PPI for Machinery and Equipment (BLS series code #WPU11), the Nonprofit Interest cost category by the average yield on domestic municipal bonds (Bond Buyer 20-bond index), the For-profit Interest cost category by the average yield on Moody's Aaa bonds (Federal Reserve), and the Other Capital-Related cost category by the CPI-U for Rent of Primary Residence (BLS series code #CUUS0000SEHA). We believe these are the most appropriate proxies for IRF capital-related costs that meet our selection criteria of relevance, timeliness, availability, and reliability.

2. Vintage Weights for Price Proxies

Because capital is acquired and paid for over time, capital-related expenses in any given year are determined by both past and present purchases of physical and financial capital. The vintage-weighted capital-related portion of the proposed 2012-based IRF market basket is intended to capture the long-term consumption of capital, using vintage weights for depreciation (physical capital) and interest (financial capital). These vintage weights reflect the proportion of capital-related purchases attributable to each year of the expected life of building and fixed equipment, movable equipment, and interest. We are proposing to use vintage weights to compute vintage-weighted price changes associated with depreciation and interest expenses.

Capital-related costs are inherently complicated and are determined by complex capital-related purchasing decisions, over time, based on such factors as interest rates and debt financing. In addition, capital is depreciated over time instead of being consumed in the same period it is purchased. By accounting for the vintage nature of capital, we are able to provide an accurate and stable annual measure of price changes. Annual non-vintage price changes for capital are unstable due to the volatility of interest rate changes and, therefore, do not reflect the actual annual price changes for IRF capital-related costs. The capital-related component of the proposed 2012-based IRF market basket reflects the underlying stability of the capital-related acquisition process.

To calculate the vintage weights for depreciation and interest expenses, we first need a time series of capital-related purchases for building and fixed

equipment and movable equipment. We found no single source that provides an appropriate time series of capital-related purchases by hospitals for all of the above components of capital purchases. The early Medicare cost reports did not have sufficient capital-related data to meet this need. Data we obtained from the American Hospital Association (AHA) do not include annual capital-related purchases. However, we are able to obtain data on total expenses back to 1963 from the AHA. Consequently, we are proposing to use data from the AHA Panel Survey and the AHA Annual Survey to obtain a time series of total expenses for hospitals. We are then proposing to use data from the AHA Panel Survey supplemented with the ratio of depreciation to total hospital expenses obtained from the Medicare cost reports to derive a trend of annual depreciation expenses for 1963 through 2012. We propose to separate these depreciation expenses into annual amounts of building and fixed equipment depreciation and movable equipment depreciation as determined earlier. From these annual depreciation amounts we derive annual end-of-year book values for building and fixed equipment and movable equipment using the expected life for each type of asset category. While data is not available that is specific to IRFs, we believe this information for all hospitals serves as a reasonable alternative for the pattern of depreciation for IRFs.

To continue to calculate the vintage weights for depreciation and interest expenses, we also need to account for the expected lives for Building and Fixed Equipment, Movable Equipment, and Interest for the proposed 2012-based IRF market basket. We are proposing to calculate the expected lives using Medicare cost report data from freestanding and hospital-based IRFs. The expected life of any asset can be determined by dividing the value of the asset (excluding fully depreciated assets) by its current year depreciation amount. This calculation yields the estimated expected life of an asset if the rates of depreciation were to continue at current year levels, assuming straight-line depreciation. We are proposing to determine the expected life of building and fixed equipment separately for hospital-based IRFs and freestanding IRFs, and then weight these expected lives using the percent of total capital costs each provider type represents. We are proposing to apply a similar method for movable equipment. Using these proposed methods, we determined the average expected life of building and fixed equipment to be equal to 23 years, and the average expected life of movable equipment to be equal to 11 years. For the expected life of interest, we believe vintage weights for interest should represent the average expected life of building and fixed equipment because, based on previous research described in the FY 1997 IPPS final rule (61 FR 46198), the expected life of hospital debt instruments and the expected life of buildings and fixed equipment are similar. We note that for the 2008-based RPL market basket, we used FY 2008 Medicare cost reports for IPPS hospitals to determine the expected life of building and fixed equipment and movable equipment (76 FR 51763). The 2008-based RPL market basket was based on an expected average life of building and fixed equipment of 26 years and an expected average life of movable equipment of 11 years, which were both calculated using data for IPPS hospitals.

Multiplying these expected lives by the annual depreciation amounts results in annual year-end asset costs for building and fixed equipment and movable equipment. We then calculate a time series, beginning in 1964, of annual capital purchases by subtracting the previous year's asset costs from the current year's asset costs.

For the building and fixed equipment and movable equipment vintage weights, we are proposing to use the real annual capital-related purchase amounts for each asset type to capture the actual amount of the physical acquisition, net of the effect of price inflation. These real annual capital-related purchase amounts are produced by deflating the nominal annual purchase amount by the associated price proxy as provided earlier in this proposed rule. For the interest vintage weights, we are proposing to use the total nominal annual capital-related purchase amounts to capture the value of the debt instrument (including, but not limited to, mortgages and bonds). Using these capital-related purchase time series specific to each asset type, we are proposing to calculate the vintage weights for building and fixed equipment, for movable equipment, and for interest.

The vintage weights for each asset type are deemed to represent the average purchase pattern of the asset over its expected life (in the case of building and fixed equipment and interest, 23 years, and in the case of movable equipment, 11 years). For each asset type, we used the time series of annual capital-related purchase amounts available from 2012 back to 1964. These data allow us to derive twenty-seven 23-year periods of capital-related purchases for building and fixed equipment and interest, and thirty-nine 11-year periods of capital-related purchases for movable equipment. For each 23-year period for building and fixed equipment and interest, or 11-year period for movable equipment, we calculate annual vintage weights by dividing the capital-related purchase amount in any given year by the total amount of purchases over the entire 23-year or 11-year period. This calculation is done for each year in the 23-year or 11-year period and for each of the periods for which we have data. We then calculate the average vintage weight for a given year of the expected life by taking the average of these vintage weights across the multiple periods of data. The vintage weights for the capital-related portion of the 2008-based RPL market basket and the proposed 2012-based IRF market basket are presented in Table 8.

Table 8—2008-Based RPL Market Basket and Proposed 2012-Based IRF Market Basket Vintage Weights for Capital-Related Price Proxies

Year

Building and fixed equipment

2012-based

23 years

2008-based

26 years

Movable equipment

2012-based

11 years

2008-based

11 years

Interest

2012-based

23 years

2008-based

26 years

1

0.029

0.021

0.069

0.071

0.017

0.010

2

0.031

0.023

0.073

0.075

0.019

0.012

3

0.034

0.025

0.077

0.080

0.022

0.014

4

0.036

0.027

0.083

0.083

0.024

0.016

5

0.037

0.028

0.087

0.085

0.026

0.018

6

0.039

0.030

0.091

0.089

0.028

0.020

7

0.040

0.031

0.096

0.092

0.030

0.021

8

0.041

0.033

0.100

0.098

0.032

0.024

9

0.042

0.035

0.103

0.103

0.035

0.026

10

0.044

0.037

0.107

0.109

0.038

0.029

11

0.045

0.039

0.114

0.116

0.040

0.033

12

0.045

0.041

0.042

0.035

13

0.045

0.042

0.044

0.038

14

0.046

0.043

0.046

0.041

15

0.046

0.044

0.048

0.043

16

0.048

0.045

0.053

0.046

17

0.049

0.046

0.057

0.049

18

0.050

0.047

0.060

0.052

19

0.051

0.047

0.063

0.053

20

0.051

0.045

0.066

0.053

21

0.051

0.045

0.067

0.055

22

0.050

0.045

0.069

0.056

23

0.052

0.046

0.073

0.060

24

0.046

0.063

25

0.045

0.064

26

0.046

0.068

Total

1.000

1.000

1.000

1.000

1.000

1.000

Note: Numbers may not add to total due to rounding.

The process of creating vintage-weighted price proxies requires applying the vintage weights to the price proxy index where the last applied vintage weight in Table 8 is applied to the most recent data point. We have provided on the CMS Web site an example of how the vintage weighting price proxies are calculated, using example vintage weights and example price indices. The example can be found at the following link:

http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/MedicareProgramRatesStats/MarketBasketResearch.html

in the zip file titled “Weight Calculations as described in the IPPS FY 2010 Proposed Rule.”

c. Summary of Price Proxies of the Proposed 2012-Based IRF Market Basket

BILLING CODE 4120-01-P

EP27AP15.002

EP27AP15.003

BILLING CODE 4120-01-P

D. Proposed FY 2016 Market Basket Update and Productivity Adjustment

1. Proposed FY 2016 Market Basket Update

For FY 2016, we are proposing to use the proposed 2012-based IRF market basket increase factor described in section V.C. of this proposed rule to update the IRF PPS base payment rate. Consistent with historical practice, we estimate the market basket update for the IRF PPS based on IHS Global Insight's forecast using the most recent available data. IHS Global Insight (IGI), Inc. is a nationally recognized economic and financial forecasting firm with which CMS contracts to forecast the components of the market baskets and multifactor productivity (MFP).

Based on IGI's first quarter 2015 forecast with historical data through the fourth quarter of 2014, the projected proposed 2012-based IRF market basket increase factor for FY 2016 would be 2.7 percent. Therefore, consistent with our historical practice of estimating market basket increases based on the best available data, we are proposing a market basket increase factor of 2.7 percent for FY 2016. We are also proposing that if more recent data are subsequently available (for example, a more recent estimate of the market basket) we would use such data, to determine the FY 2016 update in the final rule.

For comparison, the 2008-based RPL market basket is projected to be 2.8 percent in FY 2016; this estimate is based on IGI's first quarter 2015 forecast (with historical data through the fourth quarter of 2014). Table 10 compares the proposed 2012-based IRF market basket and the 2008-based RPL market basket percent changes.

Table 10—Proposed 2012-Based IRF Market Basket and 2008-Based RPL Market Basket Percent Changes, FY 2010 Through FY 2018

Fiscal year (FY)

Proposed

2012-based

IRF market

basket index

percent

change

2008-based

RPL market

basket index

percent

change

Historical data:

FY 2010

2.1

2.2

FY 2011

2.3

2.5

FY 2012

1.8

2.2

FY 2013

2.0

2.1

FY 2014

1.8

1.8

Average 2010-2014

2.0

2.2

Forecast:

FY 2015

1.8

2.2

FY 2016

2.7

2.8

FY 2017

3.0

3.0

FY 2018

3.1

3.1

Average 2015-2018

2.7

2.8

Note that these market basket percent changes do not include any further adjustments as may be statutorily required.

Source: IHS Global Insight, Inc. 1st quarter 2015 forecast.

For FY 2016, the proposed 2012-based IRF market basket update (2.7 percent) is a tenth of a percentage point lower than the 2008-based RPL market basket (2.8 percent). The 0.1 percentage point difference stems from the lower Compensation cost weight in the proposed 2012-based IRF market basket (57.0 percent) compared to the 2008-based RPL market basket (62.3 percent) and the lower Pharmaceuticals cost weight in the proposed 2012-based IRF market basket (5.1 percent) compared to the 2008-based RPL market basket (6.5 percent). The downward pressure on the proposed 2012-based IRF market basket update from these two categories is partially offset by the higher All Other Services cost weight in the proposed 2012-based IRF market basket (17.2 percent) compared to the 2008-based RPL market basket (11.4 percent).

2. Proposed Productivity Adjustment

According to Section 1886(j)(3)(C)(i) of the Act, the Secretary shall establish an increase factor based on an appropriate percentage increase in a market basket of goods and services. As described in section V.C and V.D.1. of this proposed rule, we are proposing to estimate the IRF PPS increase factor for FY 2016 based on the proposed 2012-based IRF market basket. Section 1886(j)(3)(C)(ii) of the Act then requires that, after establishing the increase factor for a FY, the Secretary shall reduce such increase factor for FY 2012 and each subsequent FY, by the productivity adjustment described in section 1886(b)(3)(B)(xi)(II) of the Act. Section 1886(b)(3)(B)(xi)(II) of the Act sets forth the definition of this productivity adjustment. The statute defines the productivity adjustment to be equal to the 10-year moving average of changes in annual economy-wide private nonfarm business MFP (as projected by the Secretary for the 10-year period ending with the applicable FY, year, cost reporting period, or other

annual period) (the “MFP adjustment”). The BLS publishes the official measure of private nonfarm business MFP. Please see

http://www.bls.gov/mfp

for the BLS historical published MFP data.

MFP is derived by subtracting the contribution of labor and capital input growth from output growth. The projections of the components of MFP are currently produced by IGI, a nationally recognized economic forecasting firm with which CMS contracts to forecast the components of the market basket and MFP. As described in the FY 2012 IRF PPS final rule (76 FR 47836, 47858 through 47859), to generate a forecast of MFP, IGI replicated the MFP measure calculated by the BLS using a series of proxy variables derived from IGI's U.S. macroeconomic models. In the FY 2012 IRF PPS final rule, we identified each of the major MFP component series employed by the BLS to measure MFP as well as provided the corresponding concepts determined to be the best available proxies for the BLS series. Beginning with the FY 2016 rulemaking cycle, the MFP adjustment is calculated using a revised series developed by IGI to proxy the aggregate capital inputs. Specifically, IGI has replaced the Real Effective Capital Stock used for Full Employment GDP with a forecast of BLS aggregate capital inputs recently developed by IGI using a regression model. This series provides a better fit to the BLS capital inputs, as measured by the differences between the actual BLS capital input growth rates and the estimated model growth rates over the historical time period. Therefore, we are using IGI's most recent forecast of the BLS capital inputs series in the MFP calculations beginning with the FY 2016 rulemaking cycle. A complete description of the MFP projection methodology is available on CMS Web site at:

http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/MedicareProgramRatesStats/MarketBasketResearch.html

. Although we discuss the IGI changes to the MFP proxy series in this proposed rule, in the future, when IGI makes changes to the MFP methodology, we will announce them on our Web site rather than in the annual rulemaking.

Using IGI's first quarter 2015 forecast, the MFP adjustment for FY 2016 (the 10-year moving average of MFP for the period ending FY 2016) is projected to be 0.6 percent. Thus, in accordance with section 1886(j)(3)(C) of the Act, we propose to base the FY 2016 market basket update, which is used to determine the applicable percentage increase for the IRF payments, on the most recent estimate of the proposed 2012-based IRF market basket (currently estimated to be 2.7 percent based on IGI's first quarter 2015 forecast). We propose to then reduce this percentage increase by the current estimate of the MFP adjustment for FY 2016 of 0.6 percentage point (the 10-year moving average of MFP for the period ending FY 2016 based on IGI's first quarter 2015 forecast). Following application of the MFP, we further reduce the applicable percentage increase by 0.2 percentage point, as required by sections 1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(iv) of the Act. Therefore, the current estimate of the FY 2016 IRF update is 1.9 percent (2.7 percent market basket update, less 0.6 percentage point MFP adjustment, less 0.2 percentage point legislative adjustment). Furthermore, we note that if more recent data are subsequently available (for example, a more recent estimate of the market basket and MFP adjustment), we would use such data to determine the FY 2016 market basket update and MFP adjustment in the final rule.

For FY 2016, the Medicare Payment Advisory Commission (MedPAC) recommends that a 0 percent update be applied to IRF PPS payment rates. As discussed, and in accordance with sections 1886(j)(3)(C) and 1886(j)(3)(D) of the Act, the Secretary proposes to update IRF PPS payment rates for FY 2015 by an adjusted market basket increase factor of 1.9 percent, as section 1886(j)(3)(C) of the Act does not provide the Secretary with the authority to apply a different update factor to IRF PPS payment rates for FY 2016.

We invite public comment on these proposals.

E. Proposed Labor-Related Share for FY 2016

Section 1886(j)(6) of the Act specifies that the Secretary is to adjust the proportion (as estimated by the Secretary from time to time) of rehabilitation facilities' costs which are attributable to wages and wage-related costs, of the prospective payment rates computed under section 1886(j)(3) for area differences in wage levels by a factor (established by the Secretary) reflecting the relative hospital wage level in the geographic area of the rehabilitation facility compared to the national average wage level for such facilities. The labor-related share is determined by identifying the national average proportion of total costs that are related to, influenced by, or vary with the local labor market. We continue to classify a cost category as labor-related if the costs are labor-intensive and vary with the local labor market. As stated in the FY 2015 IRF PPS final rule (79 FR 45886), the labor-related share for FY 2015 was defined as the sum of the FY 2015 relative importance of Wages and Salaries, Employee Benefits, Professional Fees: Labor- Related Services, Administrative and Business Support Services, All Other: Labor-related Services, and a portion of the Capital Costs from the 2008-based RPL market basket.

Based on our definition of the labor-related share and the cost categories in the proposed 2012-based IRF market basket, we are proposing to include in the labor-related share for FY 2016 the sum of the FY 2016 relative importance of Wages and Salaries, Employee Benefits, Professional Fees: Labor- Related, Administrative and Facilities Support Services, Installation, Maintenance, and Repair, All Other: Labor-related Services, and a portion of the Capital-Related cost weight from the proposed 2012-based IRF market basket. As noted in Section V.C.2.a of this proposed rule, for the proposed 2012-based IRF market basket, we have created a separate cost category for Installation, Maintenance, and Repair services. These expenses were previously included in the “All Other” Labor-related Services cost category in the 2008-based RPL market basket, along with other services, including, but not limited to, janitorial, waste management, security, and dry cleaning/laundry services. Because these services tend to be labor-intensive and are mostly performed at the facility (and, therefore, unlikely to be purchased in the national market), we continue to believe that they meet our definition of labor-related services.

Similar to the 2008-based RPL market basket, the proposed 2012-based IRF market basket includes two cost categories for nonmedical Professional fees (including, but not limited to, expenses for legal, accounting, and engineering services). These are Professional Fees: Labor-related and Professional Fees: Nonlabor-related. For the proposed 2012-based IRF market basket, we propose to estimate the labor-related percentage of non-medical professional fees (and assign these expenses to the Professional Fees: Labor-related services cost category) based on the same method that was used to determine the labor-related percentage of professional fees in the 2008-based RPL market basket.

To summarize, the professional services survey found that hospitals purchase the following proportion of these four services outside of their local labor market:

• 34 percent of accounting and auditing services.

• 30 percent of engineering services.

• 33 percent of legal services.

• 42 percent of management consulting services.

We applied each of these percentages to the respective Benchmark I-O cost category underlying the professional fees cost category to determine the Professional Fees: Nonlabor-related costs. The Professional Fees: Labor-related costs were determined to be the difference between the total costs for each Benchmark I-O category and the Professional Fees: Nonlabor-related costs. This is the same methodology that we used to separate the 2008-based RPL market basket professional fees category into Professional Fees: Labor-related and Professional Fees: Nonlabor-related cost categories. For more detail regarding this methodology, see the FY 2012 IRF final rule (76 FR 47861).

In addition to the professional services listed, we also classified expenses under NAICS 55, Management of Companies and Enterprises, into the Professional Fees cost category as was done in the 2008-based RPL market basket. The NAICS 55 data are mostly comprised of corporate, subsidiary, and regional managing offices, or otherwise referred to as home offices. Since many facilities are not located in the same geographic area as their home office, we analyzed data from a variety of sources to determine what proportion of these costs should be appropriately included in the labor-related share. For the 2012-based IRF market basket, we are proposing to derive the home office percentages using data for both freestanding IRF providers and hospital-based IRF providers. In the 2008-based RPL market basket, we used the home office percentages based on the data reported by freestanding IRFs, IPFs, and LTCHs.

Using data primarily from the Medicare cost reports and the Home Office Medicare Records (HOMER) database that provides the address (including city and state) for home offices, we were able to determine that 38 percent of the total number of freestanding and hospital-based IRFs that had home offices had those home offices located in their respective local labor markets—defined as being in the same Metropolitan Statistical Area (MSA).

The Medicare cost report requires hospitals to report their home office provider numbers. Using the HOMER database to determine the home office location for each home office provider number, we compared the location of the provider with the location of the hospital's home office. We then placed providers into one of the following two groups:

• Group 1—Provider and home office are located in different MSAs.

• Group 2—Provider and home office are located in the same MSA.

We found that 62 percent of the providers with home offices were classified into Group 1 (that is, different MSAs) and, thus, these providers were determined to not be located in the same local labor market as their home office. We found that 38 percent of all providers with home offices were classified into Group 2 (that is, the same MSA). Given these results, we are proposing to classify 38 percent of the Professional Fees costs into the Professional Fees: Labor-related cost category and the remaining 62 percent into the Professional Fees: Nonlabor-related Services cost category. This methodology for apportioning the Professional Fee expenses between Labor-related and Nonlabor-related categories was similar to the method used in the 2008-based RPL market basket. For more details regarding this methodology, see the FY 2012 IRF final rule (76 FR 47860 through 47863).

Using this proposed method and the IHS Global Insight, Inc. first quarter 2015 forecast for the proposed 2012-based IRF market basket, the proposed IRF labor-related share for FY 2016 is the sum of the FY 2016 relative importance of each labor-related cost category. The relative importance reflects the different rates of price change for these cost categories between the base year (FY 2012) and FY 2016. Table 11 compares the proposed FY 2016 labor-related share using the proposed 2012-based IRF market basket relative importance with the FY 2015 labor-related share using the 2008-based RPL market basket.

The sum of the relative importance for FY 2016 operating costs (Wages and Salaries, Employee Benefits, Professional Fees: Labor-related, Administrative and Facilities Support Services, Installation Maintenance & Repair Services, and All Other: Labor-related Services) is 65.7 percent, as shown in Table 11. We are proposing to specify the labor-related share to one decimal place, which is consistent with the IPPS labor-related share (79 FR 49990) (currently the labor-related share from the RPL market basket is specified to three decimal places).

We are proposing that the portion of Capital that is influenced by the local labor market is estimated to be 46 percent, which is the same percentage applied to the 2008-based RPL market basket. Since the relative importance for Capital-Related Costs is 8.4 percent of the proposed 2012-based IRF market basket in FY 2016, we are proposing to take 46 percent of 8.4 percent to determine the proposed labor-related share of Capital for 2016. The result would be 3.9 percent, which we propose to add to 65.7 percent for the operating cost amount to determine the total proposed labor-related share for FY 2016. Thus, the labor-related share that we propose to use for IRF PPS in FY 2016 would be 69.6 percent. This proposed labor-related share is determined using the same methodology as employed in calculating all previous IRF labor-related shares (see 76 FR 47862). By comparison, the FY 2015 labor-related share under the 2008-based RPL market basket was 69.294 percent. Therefore, the change from the RPL market basket to the IRF market basket has only a minimal impact on the labor-related share for IRF providers.

Table 11—Proposed IRF Labor-Related Share

FY 2016

proposed

labor-

related

share

1

FY 2015

final labor-

related

share

2

Wages and Salaries

46.0

48.271

Employee Benefits

11.0

12.936

Professional Fees: Labor-related

3.8

2.058

Administrative and Facilities Support Services

0.9

0.415

Installation, Maintenance, and Repair

2.1

All Other: Labor-related Services

1.9

2.061

Subtotal

65.7

65.741

Labor-related portion of capital (46%)

3.9

3.553

Total Labor-Related Share

69.6

69.294

1

Based on the 2012-based IRF Market Basket, IHS Global Insight, Inc. 1st quarter 2015 forecast.

2

Federal Register

79 FR 45886.

F. Proposed Wage Adjustment

1. Background

Section 1886(j)(6) of the Act requires the Secretary to adjust the proportion of rehabilitation facilities' costs attributable to wages and wage-related costs (as estimated by the Secretary from time to time) by a factor (established by the Secretary) reflecting the relative hospital wage level in the geographic area of the rehabilitation facility compared to the national average wage level for those facilities. The Secretary is required to update the IRF PPS wage index on the basis of information available to the Secretary on the wages and wage-related costs to furnish rehabilitation services. Any adjustment or updates made under section 1886(j)(6) of the Act for a FY are made in a budget-neutral manner.

For FY 2016, we propose to maintain the policies and methodologies described in the FY 2012 IRF PPS final rule (76 FR 47836, 47863 through 47865) related to the labor market area definitions and the wage index methodology for areas with wage data. Thus, we propose to use the CBSA labor market area definitions and the FY 2015 pre-reclassification and pre-floor hospital wage index data. In accordance with section 1886(d)(3)(E) of the Act, the FY 2015 pre-reclassification and pre-floor hospital wage index is based on data submitted for hospital cost reporting periods beginning on or after October 1, 2010, and before October 1, 2011 (that is, FY 2011 cost report data).

The labor market designations made by the OMB include some geographic areas where there are no hospitals and, thus, no hospital wage index data on which to base the calculation of the IRF PPS wage index. We propose to continue to use the same methodology discussed in the FY 2008 IRF PPS final rule (72 FR 44299) to address those geographic areas where there are no hospitals and, thus, no hospital wage index data on which to base the calculation for the FY 2016 IRF PPS wage index.

2. Update

The wage index used for the IRF PPS is calculated using the pre-reclassification and pre-floor acute care hospital wage index data and is assigned to the IRF on the basis of the labor market area in which the IRF is geographically located. IRF labor market areas are delineated based on the Core-Based Statistical Areas (CBSAs) established by the Office of Management and Budget (OMB). The current CBSA labor market definitions used in FY 2015 are based on OMB standards published on December 27, 2000 (65 FR 82228). As stated in the FY 2015 IRF PPS proposed rule (79 FR 26308) and final rule (79 FR 45871), we intend to consider the inclusion of the 2010 Census-based CBSA changes in the IRF PPS wage index for FY 2016.

On February 28, 2013, OMB issued OMB Bulletin No. 13-01, which established revised delineations for Metropolitan Statistical Areas, Micropolitan Statistical Areas, and Combined Statistical Areas, and provided guidance on the use of the delineations of these statistical areas. A copy of this bulletin is available online at

http://www.whitehouse.gov/sites/default/files/omb/bulletins/2013/b-13-01.pdf.

The OMB bulletin provides the delineations of all Metropolitan Statistical Areas, Metropolitan Divisions, Micropolitan Statistical Areas, Combined Statistical Areas, and New England City and Town Areas in the United States and Puerto Rico based on the standards published on June 28, 2010, in the

Federal Register

(75 FR 37246 through 37252) and Census Bureau data.

While the revisions OMB published on February 28, 2013 are not as sweeping as the changes made when we adopted the CBSA geographic designations in the FY 2006 IRF PPS final rule, the February 28, 2013 OMB bulletin does contain a number of significant changes. For example, there are new CBSAs, urban counties that become rural, rural counties that become urban, and existing CBSAs that are being split apart. However, because the bulletin was not issued until February 28, 2013, with supporting data not available until later, and because the changes made by the bulletin and their ramifications needed to be extensively reviewed and verified, these changes were not incorporated into the hospital wage index until FY 2015. In the FY 2015 IRF PPS final rule (79 FR 45886), we stated that we intended to consider changes to the wage index based on the most current OMB delineations in this FY 2016 IRF PPS proposed rule. As discussed below, we are proposing to implement the new OMB delineations as described in the February 28, 2013 OMB Bulletin No. 13-01, for the IRF PPS wage index beginning in FY 2016.

3. Proposed Implementation of New Labor Market Delineations

As discussed in the FY 2015 IRF PPS proposed rule (79 FR 26308) and final rule (79 FR 45871), CMS delayed implementing the new OMB statistical area delineations to allow for sufficient time to assess the new changes. We believe it is important for the IRF PPS to use the latest OMB delineations available to maintain a more accurate and up-to-date payment system that reflects the reality of population shifts and labor market conditions. While CMS and other stakeholders have explored potential alternatives to the current CBSA-based labor market system (we refer readers to the CMS Web site at

www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/AcuteInpatientPPS/Wage-Index-Reform.html

), no consensus has been achieved regarding how best to implement a replacement system. As discussed in the FY 2005 IPPS final rule (69 FR 49027), while we recognize that MSAs are not designed specifically to define labor market areas, we believe they do represent a useful proxy for this purpose. We further believe that using the most current OMB delineations would increase the integrity of the IRF PPS wage index by creating a more

accurate representation of geographic variation in wage levels. We have reviewed our findings and impacts relating to the new OMB delineations, and have concluded that there is no compelling reason to further delay implementation. Because we believe that we have broad authority under section 1886(j)(6) of the Act to determine the labor market areas used for the IRF PPS wage index, and because we also believe that the most current OMB delineations accurately reflect the local economies and wage levels of the areas in which hospitals are currently located, we are proposing to implement the new OMB delineations as described in the February 28, 2013 OMB Bulletin No. 13-01, for the IRF PPS wage index effective beginning in FY 2016. As discussed below, we are proposing to implement a one-year transition with a blended wage index for all providers and a 3 year phase-out of the rural adjustment for a subset of providers in FY 2016 to assist providers in adapting to the new OMB delineations. We invite comments on this proposal. This proposed transition is discussed in more detail below.

a. Micropolitan Statistical Areas

OMB defines a “Micropolitan Statistical Area” as a CBSA associated with at least one urban cluster that has a population of at least 10,000, but less than 50,000 (75 FR 37252). We refer to these as Micropolitan Areas. After extensive impact analysis, consistent with the treatment of these areas under the IPPS as discussed in the FY 2005 IPPS final rule (69 FR 49029 through 49032), CMS determined the best course of action would be to treat Micropolitan Areas as “rural” and include them in the calculation of each state's IRF PPS rural wage index. Thus, the IRF PPS statewide rural wage index is determined using IPPS hospital data from hospitals located in non-MSA areas, and the statewide rural wage index is assigned to IRFs located in those areas. Because Micropolitan Areas tend to encompass smaller population centers and contain fewer hospitals than MSAs, we determined that if Micropolitan Areas were to be treated as separate labor market areas, the IRF PPS wage index would have included significantly more single-provider labor market areas. As we explained in the FY 2006 IRF PPS final rule (70 FR 47920 through 47921), recognizing Micropolitan Areas as independent labor markets would generally increase the potential for dramatic shifts in year-to-year wage index values because a single hospital (or group of hospitals) could have a disproportionate effect on the wage index of an area. Dramatic shifts in an area's wage index from year to year are problematic and create instability in the payment levels from year to year, which could make fiscal planning for IRFs difficult if we adopted this approach. For these reasons, we adopted a policy to include Micropolitan Areas in the state's rural wage area for purposes of the IRF PPS wage index, and have continued this policy through the present.

Based upon the new 2010 Decennial Census data, a number of urban counties have switched status and have joined or became Micropolitan Areas, and some counties that once were part of a Micropolitan Area, have become urban. Overall, there are fewer Micropolitan Areas (541) under the new OMB delineations based on the 2010 Census than existed under the latest data from the 2000 Census (581). We believe that the best course of action would be to continue the policy established in the FY 2006 IRF PPS final rule (70 FR 47880) and include Micropolitan Areas in each state's rural wage index. These areas continue to be defined as having relatively small urban cores (populations of 10,000 to 49,999). We do not believe it would be appropriate to calculate a separate wage index for areas that typically may include only a few hospitals for the reasons discussed in the FY 2006 IRF PPS final rule (70 FR 47880), and as previously discussed. Therefore, in conjunction with our proposal to implement the new OMB labor market delineations beginning in FY 2016 and consistent with the treatment of Micropolitan Areas under the IPPS, we are proposing to continue to treat Micropolitan Areas as “rural” and to include Micropolitan Areas in the calculation of the state's rural wage index.

b. Urban Counties Becoming Rural

As previously discussed, we are proposing to implement the new OMB statistical area delineations (based upon the 2010 decennial Census data) beginning in FY 2016 for the IRF PPS wage index. Our analysis shows that a total of 37 counties (and county equivalents) that are currently considered part of an urban CBSA would be considered located in a rural area, for IRF PPS payment beginning in FY 2016, if we adopt the new OMB delineations. Table 12 lists the 37 urban counties that would be rural if we finalize our proposal to implement the new OMB delineations.

TABLE 12—Counties That Would Transition From Urban to Rural Status

County

State

Previous

CBSA

Previous urban area

(constituent counties)

Greene County

IN

14020

Bloomington,

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