Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 1994 Rates

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Part 412

[BPD-771-F]

RIN 0938-AG23

Medicare Program; Changes to the Hospital Inpatient Prospective

Payment Systems and Fiscal Year 1994 Rates

AGENCY: Health Care Financing Administration (HCFA), HHS.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: On September 1, 1993, we published a final rule with comment

period that implemented certain changes in the hospital inpatient

prospective payment systems resulting from the enactment of the Omnibus

Budget Reconciliation Act of 1993 on August 10, 1993. This final rule

responds to public comments on that publication.

EFFECTIVE DATE: These regulations are effective on July 25, 1994.

ADDRESSES: Copies: To order copies of the Federal Register containing

this document, send your request to: New Orders, Superintendent of

Documents, P.O. Box 371954, Pittsburgh, PA 15250-7954. Specify the date

of the issue requested and enclose a check or money order payable to

the Superintendent of Documents, or enclose your Visa or Master Card

number and expiration date. Credit card orders can also be placed by

calling the order desk at (202) 783-3238 or by faxing to (202) 275-

6802. The cost for each copy is $4.50. As an alternative, you can view

and photocopy the Federal Register document at most libraries

designated as Federal Depository Libraries and at many other public and

academic libraries throughout the country that receive the Federal

Register.

FOR FURTHER INFORMATION CONTACT: Lana Price, (410) 966-4529.

SUPPLEMENTARY INFORMATION:

I. Background

A. Summary

Under section 1886(d) of the Social Security Act (the Act), a

system of payment for the operating costs of acute hospital inpatient

stays under Medicare Part A (Hospital Insurance) based on

prospectively-set rates was established effective with hospital cost

reporting periods beginning on or after October 1, 1983. Under this

system, Medicare payment for hospital inpatient operating costs is made

at a predetermined, specific rate for each hospital discharge. All

discharges are classified according to a list of diagnosis-related

groups (DRGs). The regulations governing the hospital inpatient

prospective payment system are located in 42 CFR part 412.

For cost reporting periods beginning before October 1, 1991,

hospital inpatient operating costs were the only costs covered under

the prospective payment system. Payment for capital-related costs had

been made on a reasonable cost basis because, under sections 1886(a)(4)

and (d)(1)(A) of the Act, those costs had been specifically excluded

from the definition of inpatient operating costs. However, section

4006(b) of the Omnibus Budget Reconciliation Act of 1987 (Public Law

100-203) revised section 1886(g)(1) of the Act to require that, for

hospitals paid under the prospective payment system for operating

costs, capital-related costs would also be paid under a prospective

payment system effective with cost reporting periods beginning on or

after October 1, 1991. As required by section 1886(g) of the Act, we

replaced the reasonable cost-based payment methodology with a

prospective payment methodology for hospital inpatient capital-related

costs. Under the new methodology, effective for cost reporting periods

beginning on or after October 1, 1991, a predetermined payment amount

per discharge is made for Medicare inpatient capital-related costs.

B. Relevant Provisions of the Omnibus Budget Reconciliation Act of 1993

On August 10, 1993, the Omnibus Budget Reconciliation Act of 1993

(Pub. L. 103-66) was enacted. The provisions of sections 13501, 13502,

13505, 13506, and 13563 of Public Law 103-66 made the following changes

that affect Medicare payments for hospital inpatient services under the

prospective payment system during Federal fiscal year (FY) 1994:

The update factor for the standardized amounts for FY 1994

is the market basket rate of increase minus 2.5 percentage points for

hospitals located in urban areas and the market basket rate of increase

minus 1.0 percentage point for hospitals located in rural areas. The

applicable increases in the update factors for FYs 1995 through FY 1998

(and each subsequent fiscal year) are also established.

Beginning in FY 1994, updates to the hospital-specific

rates for sole community hospitals (SCHs) and Medicare-dependent, small

rural hospitals (MDHs) are to be made on a Federal fiscal year basis,

rather than on a cost reporting period basis. The FY 1994 update is

computed taking into account the portion of the 12-month cost reporting

period beginning during FY 1993 that occurred during FY 1994. In

addition, the update for SCHs and MDHs is the market basket rate of

increase minus 2.3 percentage points for FY 1994. The applicable

percentage increase for FY 1995 and the methodology for computing the

increase in FY 1996 and subsequent fiscal years also are established.

The unadjusted standard Federal rate for capital payments

to prospective payment hospitals is reduced by 7.4 percent for FY 1994.

We note that this provision does not supersede the provision of section

1886(g) of the Act that requires that aggregate payments equal 10

percent less than the amount that would have been paid to hospitals

under reasonable cost reimbursement.

Hospitals in urban areas with wage indexes below the wage

index for rural areas in the State and hospitals in a State comprised

of a single urban area are not subject to further decreases in their

wage indexes as a result of reclassification of other hospitals. Under

the statute, this provision is effective retroactive to October 1,

1991.

Hospitals classified as regional referral centers on

September 30, 1992, will maintain that classification for cost

reporting periods beginning in FYs 1993 and 1994, unless the area in

which the hospitals are located are redesignated as Metropolitan

Statistical Areas by the Office of Management and Budget for such a

fiscal year.

The special payment provisions for Medicare-dependent,

small rural hospitals (MDHs) are extended through discharges occurring

before October 1, 1994. However, after a hospital's first three 12-

month cost reporting periods as an MDH, there is a revision in the

payment methodology.

Hospitals that lost their classifications as regional

referral centers for cost reporting periods beginning during FY 1993

are entitled to receive a lump-sum payment equal to the difference

between the hospital's actual aggregate payment during that period and

the aggregate payment that the hospital would have received if the

hospital had been classified as a regional referral center. Hospitals

that lost their classification as MDHs for cost reporting periods

beginning during FYs 1992 or 1993 are entitled to receive a similar

lump-sum payment.

Hospitals that fail to qualify as regional referral

centers or MDHs as a result of a decision by the Medicare Geographic

Classification Review Board to reclassify the hospitals as being

located in an urban area for either FY 1993 or FY 1994 may decline such

reclassification.

The regional floor provision, which allows hospitals in

census regions for which regional standardized amounts exceed the

national standardized amount to be paid based on 15 percent of the

regional amount and 85 percent of the national amount, is extended

through FY 1996.

For FYs 1994 through 1997, the applicable rate-of-increase

percentages (the market basket percentage increase) for hospitals that

are excluded from the prospective payment system are reduced by the

lesser of one percentage point or the percentage point difference

between 10 percent and the percentage by which the hospitals' allowable

operating costs of inpatient hospital services for cost reporting

periods beginning in FY 1990 exceed the hospitals' target amounts.

Hospitals or distinct part hospital units with FY 1990 operating costs

exceeding target amounts by 10 percent or more receive the market

basket percentage increase.

Payments to hospitals for the cost of administering blood

clotting factor to Medicare beneficiaries who have hemophilia are

reinstated retroactively to discharges occurring on or after December

19, 1991, and extended through discharges occurring before October 1,

1994.

Effective with discharges occurring on or after August 10,

1993, the time spent by graduate medical residents providing services

at a community health center under the ownership and control of a

hospital are included in the hospital's resident count for purposes of

computing indirect medical education payments.

For cost reporting periods beginning in FYs 1994 and 1995,

direct graduate medical education payments are not updated, except for

payments for residents in primary care, and obstetrics and gynecology.

Effective August 10, 1993, a resident in an approved

preventive medicine training program may be counted as a full-time

resident for up to 2 additional years beyond the initial residency

period.

On September 1, 1993, we published a final rule with comment period

(58 FR 46270) to implement changes to the prospective payment systems

for hospital operating costs and capital-related costs for FY 1994.

II. Analysis of and Responses to Public Comments

In the final rule with comment period of September 1, 1993, we

announced that comments on changes to the May 26, 1993 proposed rule

resulting from provisions of Public Law 103-66 would be considered if

we received them no later than November 1, 1993. A total of 18 items of

correspondence containing comments were received timely. Most of the

comments addressed the requirement that hospital-specific rates be

updated on a Federal fiscal year basis. Two commenters expressed

concern about the issue of payment for direct costs of graduate medical

education (GME), and one commenter discussed the pricing of hemophilia

products. These comments and our responses to them are set forth below.

A. Payment for Blood Clotting Factor for Hemophilia Inpatients

(Secs. 412.2 and 412.115)

Hemophilia is a blood disorder characterized by prolonged

coagulation time, caused by an inherited deficiency of a factor in

plasma necessary for blood to clot. Hemophilia encompasses three

conditions: Factor VIII deficiency (classical hemophilia); Factor IX

deficiency (plasma thromboplastin component); and Von Willebrand's

disease. The most common factors required by hemophiliacs to increase

coagulation are Factor VIII and Factor IX; a small number of

hemophiliacs have developed inhibitors to these factors and require

special treatment.

Under section 6011 of Public Law 101-239, Congress amended section

1886(a)(4) of the Act to provide that prospective payment hospitals

receive an additional payment for the costs of administering blood

clotting factor to Medicare hemophiliacs who are hospital inpatients.

This add-on payment was effective for blood clotting factor furnished

on or after June 19, 1990, and before December 19, 1991. We addressed

the issue of payment for Medicare inpatients with hemophilia who

require blood clotting factors in detail in the April 20, 1990 final

rule with comment period (55 FR 15157), the September 4, 1990, final

rule (55 FR 36000), and the final rule published August 30, 1991 (56 FR

43223). Section 13505 of Public Law 103-66 amended section 6011(d) of

Public Law 101-239 to extend the period covered by the add-on payment

for blood clotting factors administered to Medicare inpatients with

hemophilia through September 30, 1994. Thus, section 6011 of Public Law

101-239 as amended provides for additional payment to be made to

hospitals under the prospective payment system for the administration

of blood clotting factor to Medicare hospital inpatients who have

hemophilia for discharges occurring on or after June 19, 1990, and

before October 1, 1994.

In our September 1, 1993 final rule with comment period (58 FR

46304), we calculated the add-on payment for the extended period of

applicability using the same methodology we used in FYs 1990, 1991, and

1992. The payment for blood clotting factor was based on a

predetermined price per unit of clotting factor multiplied by the

number of units provided. We established a price per unit of clotting

factor based on the most current price listing available from the Drug

Topics Red Book, the publication of pharmaceutical average wholesale

prices (AWP). We set three separate add-on amounts, one for each of the

three basic types of clotting factor. The add-on payment amount for

each of the three factor types was based on the median AWP of the

several products available in that category of factor, discounted by 15

percent.

To account for new products, the discontinuation of existing

products, and other changes affecting the price of these factors, we

reevaluated the price per unit for blood clotting factors for each

Federal fiscal year based on the most current Drug Topics Red Book. In

the August 30, 1991 final rule, we calculated updated prices for FY

1992 effective with discharges occurring on or after October 1, 1991,

as follows:

Factor VIII; $.72 per unit

Factor IX; $.26 per unit

Other Hemophilia Blood Clotting Factor; $1.11 per unit

Given the extension of coverage under section 13505 of Public Law

103-66 for the add-on payment, the above prices remained in effect for

discharges occurring in FY 1992; that is, from October 1, 1991 through

September 30, 1992.

As stated in the September 1, 1993 final rule (58 FR 46305), due to

the retroactive application of section 13505 of Public Law 103-66, we

had to calculate add-on payment prices for both FYs 1993 and 1994. We

followed our past practice and set separate prices for each of those

Federal fiscal years using the most recent Drug Topics Red Book. Thus,

for discharges occurring in FY 1993, we calculated the price per unit

of blood clotting factor based on the 1992 Drug Topics Red Book.

Following the same methodology, that is, identifying the median price

in the range of a specific factor type discounted by 15 percent, we

established the following prices per unit effective for discharges

occurring in FY 1993 (October 1, 1992, through September 30, 1993):

Factor VIII; $.76 per unit

Factor IX; $.30 per unit

Other Hemophilia Blood Clotting Factor; $1.02 per unit

For discharges occurring during FY 1994, following the AWP

guidelines in the 1993 Drug Topics Red Book, the updated prices per

unit of factor are as follows:

Factor VIII; $.76 per unit

Factor IX; $.33 per unit

Other Hemophilia Blood Clotting Factor; $1.02 per unit

We stated that these prices are effective for add-on payment for blood

clotting factor administered to inpatients who have hemophilia for

discharges beginning on or after October 1, 1993, through September 30,

1994.

As determined in prior years, we included in the category ``Other''

those new products that were most similar in terms of cost and

effectiveness.

When the add-on payment for blood clotting factors was first

implemented, specific codes were developed to identify these factors.

(See the April 20, 1990, final rule with comment period (55 FR 15159).)

We stated that we intend to use these same codes for both the

retroactive and prospective periods covered by section 6011 of Public

Law 101-239, as amended.

We also stated that because these codes were not required to be

included on hospital inpatient claims for discharges occurring on or

after December 19, 1991, hospitals that wish to receive payment for

blood clotting factor provided to hemophiliacs will have to submit

amended bills for discharges occurring on or after that date.

We further stated that we will re-issue instructions to Medicare

hospitals and fiscal intermediaries concerning the codes to use for

clotting factor and how to use them. We noted that payment will be made

for blood clotting factor only if there is an ICD-9-CM diagnosis code

for hemophilia included on the bill.

In the final rule with comment period of September 1, 1993 (58 FR

46335), we revised Secs. 412.2(f)(8) and 412.115(b) to reflect the new

effective date.

Comment: We received one comment concerning payment for blood

clotting factors for hemophilia inpatients. The commenter stated that a

new Factor IX product (Bebulin) has been introduced that is, according

to the commenter, the only Factor IX concentrate that has been shown to

be virally safe. Because Bebulin is rated differently from other Factor

IX products, the commenter believes its price should not be included in

the regular price category of Factor IX; rather, its pricing structure

should be separate and be set at $0.56 per unit, minus the 15 percent

discount.

Response: The Factor IX product identified by the commenter

(Bebulin) was included with the other Factor IX clotting factor

products in establishing the median price for Factor IX for FY 1994. We

note that, although Bebulin was at the upper price range of the Factor

IX products, its price did not differ sufficiently to warrant separate

consideration.

B. Changes to the Update Factor Applied to Hospital-Specific Rates

(Sec. 412.73)

Under section 1886(b)(3)(C) and (D) of the Act, certain hospitals

that qualify as SCHs and MDHs are paid using the higher of their FY

1982 or FY 1987 hospital-specific rate, updated through the current

year. Section 13501(a)(2) of Public Law 103-66 amended section

1886(b)(3)(B) of the Act by adding a new paragraph (iv) to provide

that, starting in FY 1994, updates to the hospital-specific rates be

made on a Federal fiscal year basis rather than on a cost reporting

period basis. That section further states that the FY 1994 update

factor will be computed taking into account the portion of the 12-month

cost reporting period beginning during FY 1993 that occurred during FY

1994. To implement this provision, we established a ``deemed FY 1993

update'' that was used to determine the FY 1994 hospital-specific

rates. That is, we prorated the FY 1993 update according to the number

of months in the cost reporting period that were included in FY 1993.

This deemed update was used to determine the FY 1993 hospital-specific

payment rates to which the FY 1994 update would be applied, but it did

not affect payments to MDHs and SCHs in FY 1993.

The deemed update factors were as follows:

------------------------------------------------------------------------

Deemed FY

1993 update

FY 1993 cost reporting period beginning between factor

(percent)

------------------------------------------------------------------------

10/1/92-10/31/92........................................... 4.1000

11/1/92-11/30/92........................................... 3.7520

12/1/92-12/31/92........................................... 3.4052

1/1/93-1/31/93............................................. 3.0595

2/1/93-2/28/93............................................. 2.7150

3/1/93-3/31/93............................................. 2.3716

4/1/93-4/30/93............................................. 2.0294

5/1/93-5/31/93............................................. 1.6883

6/1/93-6/30/93............................................. 1.3484

7/1/93-7/31/93............................................. 1.0096

8/1/93-8/31/93............................................. 0.6719

9/1/93-9/30/93............................................. 0.3354

------------------------------------------------------------------------

We calculated the deemed update factor by compounding the FY 1993

update factor, using the number of months of the cost reporting period

occurring in FY 1993. We raised 1.041 (the amount applied to the

hospital-specific rates for cost reporting periods that began in FY

1993) to a power equal to the number of months in the cost reporting

period that occurred during FY 1993 divided by 12, and determined the

relevant percentage increase. For instance, for the update factor

calculated for cost reporting periods beginning in June 1993, we raised

1.041 to the \4/12\ power, which equals 1.013484. The percentage

increase is therefore 1.3484 percent (1.013484-1, converted to

percentage terms).

Comment: Some commenters objected to our interpretation of section

13501(a)(2) of Public Law 103-66, believing that Congress intended for

the Secretary to prorate the FY 1994 update of 2.0 percent rather than

the FY 1993 update of 4.1 percent. The commenters pointed out that the

methodology of calculating a deemed update by prorating the FY 1993 4.1

percent update, and applying the full FY 1994 update of 2.0 percent,

resulted in a decrease in hospital-specific rates for hospitals with

cost reporting periods beginning between April 1, 1993 and September

30, 1993. These commenters requested that we recompute the hospital-

specific rates for FY 1994 by prorating the FY 1994 update of 2.0

percent according to the number of months in a hospital's cost

reporting period included in FY 1994. These updates would be applied to

FY 1993 hospital-specific rates that reflect the full FY 1993 update

amount of 4.1 percent rather than a prorated share.

Response: The commenters are correct in stating that under the

policy announced in our September 1, 1993 final rule, the hospital-

specific rate for SCHs and MDHs with cost reporting periods beginning

between April 1, 1993 and September 30, 1993 will be lower in FY 1994

than FY 1993. We agree with commenters that Congress probably did not

intend that the FY 1994 hospital-specific rates for these hospitals be

reduced below the FY 1993 rates. Based on these comments, we have

revisited this issue and agree that the better interpretation of

section 13501(a)(2) of Public Law 103-66 is to prorate the FY 1994

update and incorporate the full amount of the FY 1993 update.

Therefore, we are revising the FY 1994 hospital-specific rates by

applying a prorated share of the 2.0 percent update for FY 1994 to FY

1993 hospital-specific rates that reflect the full 4.1 percent update.

This revision affects only the calculation of the hospital-specific

rates for SCHs and MDHs. The prorated share of the FY 1994 update will

be based on the number of months in the hospital's cost reporting

period included in FY 1994. The updates to be applied for FY 1994 are

as follows:

------------------------------------------------------------------------

FY 1994

FY 1994 cost reporting period beginning between update

(percent)

------------------------------------------------------------------------

10/1/93-10/31/93........................................... 2.0000

11/1/93-11/30/93........................................... 1.8318

12/1/93-12/31/93........................................... 1.6639

01/1/94-01/31/94........................................... 1.4963

02/1/94-02/28/94........................................... 1.3289

03/1/94-03/31/94........................................... 1.1619

04/1/94-04/30/94........................................... 0.9950

05/1/94-05/31/94........................................... 0.8285

06/1/94-06/30/94........................................... 0.6623

07/1/94-07/31/94........................................... 0.4963

08/1/94-08/31/94........................................... 0.3306

09/1/94-09/30/94........................................... 0.1652

------------------------------------------------------------------------

To calculate the FY 1994 hospital-specific rate, we applied the

appropriate FY 1994 update to the FY 1993 hospital-specific rate, which

incorporates the full FY 1993 update. The updates in the table above

are based on the number of months in the cost reporting period

occurring in FY 1994. We raised 1.02 (the amount applied to the

hospital-specific rates for cost reporting periods that began in FY

1994) to a power equal to the number of months in the cost reporting

period that occurred during FY 1994, divided by 12, and determined the

relevant percentage increase. For instance, for the update factor

calculated for cost reporting periods beginning in June, 1994, we

raised 1.020 to the \4/12\ power, which equals 1.006623 or 0.6623

percent when converted to percentage terms.

C. Direct Graduate Medical Education Payment (Sec. 413.86)

Section 1886(h) of the Act requires the calculation of hospital-

specific approved per resident graduate medical education amounts for

cost reporting periods beginning on or after July 1, 1985, based on the

hospital's allowable costs for its cost reporting period beginning

during FY 1984. Section 1886(h)(2)(D) of the Act generally provides for

updating the approved per resident amount for subsequent years by the

estimated percentage change in the Consumer Price Index (CPI-U).

Section 13563(a)(1) of Public Law 103-66 requires that for cost

reporting periods beginning in FYs 1994 and 1995 the approved per

resident amount for a hospital is updated for primary care residents

and obstetrics and gynecology (OB-GYN) residents only. For all other

residents, the per resident amount for cost reports beginning in FYs

1994 and 1995 is not updated for inflation. The effect of this change

for teaching hospitals with both primary care (or OB-GYN) residents and

non-primary care residents is to have two different per resident

amounts.

In addition, section 13563(a)(2) of Public Law 103-66 amended

section 1886(h)(5) to specify that the term ``primary care resident''

means a resident enrolled in an approved medical residency training

program in family medicine, general internal medicine, general

pediatrics, preventive medicine, geriatric medicine or osteopathic

general practice.

Section 1886(h)(4) of the Act bases payment for direct GME costs on

a hospital's number of full-time equivalent (FTE) residents multiplied

by a hospital-specific per resident amount. The number of FTE residents

is determined by applying a weighting factor to each resident. A

resident in an initial residency period is weighted as 1.0. If the

resident is not in an initial residency period the weighting factor is

reduced, as specified at Sec. 413.86(g)(3). The initial residency

period is defined at Sec. 413.86(g)(1), as the minimum number of years

of formal training necessary to satisfy the requirements for initial

board eligibility in the particular specialty plus 1 year, not to

exceed 5 years.

Section 13563(b) of Public Law 103-66 also added a preventive

medicine residency provision to the GME payment provisions at section

1886(h) of the Act. Section 1886(h)(5)(F) of the Act is amended to

allow a hospital to treat a resident or fellow in an approved

preventive medicine residency or fellowship program the same as a

resident in a geriatric program for purposes of determining whether a

resident is in an initial residency period. That is, a preventive

medicine resident or fellow would also be allowed to be counted as an

FTE resident weighted as 1.0, for up to an additional 2 years beyond

the initial residency period limitations. This change is effective on

August 10, 1993. Before this effective date, the weighted FTE factor

for preventive medicine residents beyond their initial residency period

was reduced as specified at Sec. 413.86(g)(3).

In the final rule with comment period of September 1, 1993 (58 FR

46343), we revised the regulations at Sec. 413.86, concerning direct

graduate medical education payments, to implement these statutory

requirements. We added to the regulations at Sec. 413.86(b) the

statutory definition of primary care resident. ``Primary care

resident'' is a resident enrolled in an approved medical residency

training program in family medicine, general internal medicine, general

pediatrics, preventive medicine, geriatric medicine or osteopathic

general practice.

We also revised Sec. 413.86(e)(3) to add paragraph (e)(3)(ii),

which limits to primary care residents and OB-GYN residents only the

adjustment of each hospital's per resident amount in the previous cost

reporting period by the projected change in the CPI-U, for cost

reporting periods beginning in FYs 1994 and 1995.

Finally, we added a sentence to the end of the first paragraph in

Sec. 413.86(g)(1) to specify that, effective August 10, 1993, a

resident or fellow in an approved preventive medicine residency or

fellowship program may also be counted as a full FTE resident for up to

2 additional years beyond the initial residency period limitations.

Comment: Two commenters raised concerns regarding our

implementation of the provision of Public Law 103-66 dealing with

Medicare payments for the direct costs of GME. The commenters' concern

was that the Accreditation Council for Graduate Medical Education

(ACGME) does not use the terms ``general internal medicine'' or

``general pediatrics'' for accrediting residency programs. Both

commenters suggested that HCFA apply the GME inflation update to all

internal medicine and pediatrics residents in approved programs in

their first 3 years of training, which is the minimum number of years

required for board eligibility in those particular specialties.

Response: Section 1886(h)(5) of the Act, as amended by section

13563(a)(2) of Public Law 103-66, defines ``primary care resident'' as

``a resident enrolled in an approved medical residency training program

in family medicine, general internal medicine, general pediatrics,

geriatric medicine, preventive medicine, or osteopathic general

practice.'' We recognize that this definition, and specifically the

terms ``general internal medicine'' and ``general pediatrics'', is not

consistent with the ACGME terminology for accrediting medical residency

training programs in internal medicine and pediatrics. However, after

considering the public comments, we believe that the use of the word

``general'' encompasses those residents that are in approved internal

medicine and pediatrics training programs, that is, those who are in

the first 3 years of training, the minimum required for board

eligibility. Residents who continue training beyond their first 3 years

are considered to be training in a subspecialty, and should not be

treated as primary care residents. Therefore, we agree with the

commenters' suggestion that the GME inflation update be applied to all

internal medicine and pediatrics residents participating in approved

primary care specialty programs during their first 3 years of training.

Comment: One commenter objected to the change in the statutory

definition of ``initial residency period'' that was mandated by Public

Law 103-66. Specifically, section 13563(b) amended section

1886(h)(5)(F) of the Act by deleting the phrase ``plus one year'' from

the definition of initial residency period, effective July 1, 1995.

Response: As the commenter points out, the change in the statutory

definition of the initial residency period is not effective until July

1, 1995. Therefore, we did not address this provision in our September

1, 1993 final rule with comment period, which set forth prospective

payment system policies for FY 1994. We intend to address the issue

raised by the commenter in the FY 1995 prospective payment system

rulemaking process.

III. Provisions of the Final Rule

This final rule responds to public comments received on the

provisions of our September 1, 1993 final rule with comment period that

resulted from the enactment of Public Law 103-66. Based on those

comments, we are confirming the regulatory provisions adopted in the

September 1, 1993 final rule, with one exception. We are revising

Sec. 412.73(c) to specify that for purposes of determining the

hospital-specific rate for FY 1994, the update factor is adjusted to

take into account the portion of the 12-month cost reporting period

beginning during FY 1993 that occurs in FY 1994.

IV. Impact Statement

Unless the Secretary certifies that a final rule will not have a

significant economic impact on a substantial number of small entities,

we generally prepare a regulatory flexibility analysis that is

consistent with the Regulatory Flexibility Act (RFA) (5 U.S.C. 601

through 612). For purposes of the RFA, we consider all hospitals to be

small entities.

Also, section 1102(b) of the Act requires the Secretary to prepare

a regulatory impact analysis for any final rule that may have

significant impact on the operations of a substantial number of small

rural hospitals. Such an analysis must conform to the provisions of

section 604 of the RFA. With the exception of hospitals located in

certain rural counties adjacent to urban areas, for purposes of section

1102(b) of the Act, we define a small rural hospital as a hospital with

fewer than 50 beds.

The only provision that is changed by this final rule is that for

sole community hospitals and Medicare-dependent, small rural hospitals,

we are revising the FY 1994 hospital specific rates by applying a

prorated share of the 2.0 percent update for FY 1994 to FY 1993

hospital-specific rates that reflect the full 4.1 percent update. The

prorated share of the 1994 update will be based on the number of months

in the hospital's cost reporting period included in FY 1994. We do not

anticipate that the aggregate impact of this change will be

significant, but some SCHs and MDHs will receive increased FY 1994

payments as a result of the change.

We have determined, and the Secretary certifies, that this final

rule will not have a significant effect on the operations of a

substantial number of small entities or on small rural hospitals.

Therefore, we have not prepared a regulatory flexibility analysis or an

analysis of the effects of this rule on small rural hospitals.

This regulation has been reviewed by the Office of Management and

Budget.

V. Collection of Information Requirements

This document does not impose information collection and

recordkeeping requirements. Consequently, it need not be reviewed by

the Office of Management and Budget under the authority of the

Paperwork Reduction Act of 1980 (44 U.S.C. 3501 et seq.).

List of Subjects in 42 CFR Part 412

Administrative practice and procedure, Health facilities, Medicare,

Puerto Rico, Reporting and recordkeeping requirements.

42 CFR chapter IV is amended as follows:

A. Part 412 is amended as follows:

PART 412--PROSPECTIVE PAYMENT SYSTEMS FOR INPATIENT HOSPITAL

SERVICES

1. The authority citation for part 412 continues to read as

follows:

Authority: Secs. 1102, 1815(e), 1820, 1871, and 1886 of the

Social Security Act (42 U.S.C. 1302, 1395g(e), 1395i-4, 1395hh, and

1395ww).

* * * * *

2. In Sec. 412.73, paragraphs (c)(9) and (c)(10) are revised to

read as follows:

Sec. 412.73 Determination of the hospital-specific rate based on a

Federal fiscal year 1982 base period.

* * * * *

(c) * * *

(9) For Federal fiscal years 1992 and 1993. For Federal fiscal

years 1992 and 1993, the update factor is the percentage increase in

the market basket index for prospective payment hospitals (as defined

in Sec. 413.40(a) of this chapter).

(10) For Federal fiscal year 1994. For Federal fiscal year 1994,

the update factor is the percentage increase in the market basket index

for prospective payment hospitals (as defined in Sec. 413.40(a) of the

chapter) minus 2.3 percentage points. For purposes of determining the

hospital-specific rate for Federal fiscal year 1994 and subsequent

years, this update factor is adjusted to take into account the portion

of the 12-month cost reporting period beginning during Federal fiscal

year 1993 that occurs in Federal fiscal year 1994.

* * * * *

(Catalog of Federal Domestic Assistance Program No. 93.773,

Medicare--Hospital Insurance)

Dated: May 5, 1994.

Bruce C. Vladeck,

Administrator, Health Care Financing Administration.

Dated: May 10, 1994.

Donna E. Shalala,

Secretary.

[FR Doc. 94-15297 Filed 6-22-94; 8:45 am]

BILLING CODE 4120-01-P