Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and FY 1995 Rates; Final Rule DEPARTMENT OF HEALTH AND HUMAN SERVICES

SUMMARY: We are revising the Medicare hospital inpatient prospective

payment systems for operating costs and capital- related costs to

implement necessary changes arising from our continuing experience with

the system. In addition, in the addendum to this final rule, we are

describing changes in the amounts and factors necessary to determine

prospective payment rates for Medicare hospital inpatient services for

operating costs and capital-related costs. These changes are applicable

to discharges occurring on or after October 1, 1994. We are also

setting forth rate-of-increase limits for hospitals and hospital units

excluded from the prospective payment systems. Finally, we are revising

the criteria used by the Medicare Geographic Classification Review

Board (MGCRB) to decide on applications by hospitals for geographic

reclassification for prospective payment purposes.

DATES: Effective Date: This final rule with comment period is effective

on October 1, 1994, except that the changes to Sec. 412.230 (concerning

the geographic reclassification criteria used by the MGCRB) are

effective on September 1, 1994.

Comments: Comments on the revisions to the criteria for geographic

reclassification by the MGCRB will be considered if we receive them at

the appropriate address, as provided below, no later than October 31,

1994. We will not consider comments concerning any other issues.

ADDRESSES: Mail written comments (1 original and 3 copies) to the

following address: Health Care Financing Administration, Department of

Health and Human Services, Attention: BPD-802-FC, P.O. Box 7517,

Baltimore, MD 21207-0517.

If you prefer, you may deliver your written comments (1 original

and 3 copies) to one of the following addresses:

Room 309-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW.,

Washington, DC 20201, or

Room 132, East High Rise Building, 6325 Security Boulevard, Baltimore,

MD 21207.

Because of staffing and resource limitations, we cannot accept

comments by facsimile (FAX) transmission. In commenting, please refer

to file code BPD-802-FC. Comments received timely will be available for

public inspection as they are received, generally beginning

approximately 3 weeks after publication of a document, in Room 309-G of

the Department's offices at 200 Independence Avenue, SW., Washington,

DC, on Monday through Friday of each week from 8:30 a.m. to 5 p.m.

(phone: (202) 690-7890).

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) 512-

2250. The cost for each copy is $6.00. 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. On September

1, 1993, we published a final rule with comment period (58 FR 46270) to

implement changes to the prospective payment system for hospital

operating costs beginning with Federal fiscal year (FY) 1994.

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.

(See subpart M of 42 CFR part 412, and the August 30, 1991, final rule

(56 FR 43358) for a complete discussion of the prospective payment

system for hospital inpatient capital-related costs.)

B. Summary of the Provisions of the May 27, 1994 Proposed Rule

On May 27, 1994, we published a proposed rule in the Federal

Register (59 FR 27708) to amend the prospective payment systems for

operating costs and capital-related costs as follows:

We proposed changes for FY 1995 DRG classifications and

weighting factors as required by section 1886(d)(4)(C) of the Act. This

section requires that we adjust the DRG classifications and relative

weights at least annually.

We proposed to revise the methodology for computing the

wage index and to update the wage data. Specific issues addressed

included updating the wage index for FY 1995, changes in the reporting

of hospital wage index data, revising the wage index based on hospital

redesignations, the impact of the revised hospital wage index,

occupational mix adjustment, research on refinements to labor market

areas, and State labor market options.

We discussed several provisions of the regulations in 42

CFR parts 412, 413, 485, and 489 concerning the prospective payment

system for inpatient operating costs. The proposed changes concerned

the following:

--Definition of and payment for transfer cases.

--Review of DRG assignments.

--National average standardized amounts for FY 1995.

--Outliers.

--Rural referral centers.

--Determination of number of beds in determining the indirect medical

education adjustment.

--Disproportionate share adjustment.

--Changes affecting essential access community hospitals (EACHs) and

rural primary care hospitals (RPCHs).

--Clarification of payments to rural referral center/EACH hospitals.

--Direct graduate medical education payment.

--Other technical changes.

We discussed several provisions of the regulations in 42

CFR parts 412 and 413 concerning the prospective payment for capital-

related costs. The proposed changes concerned the following:

--Evaluation of provisions relating to obligated capital for hospitals

subject to lengthy certificate-of-need (CON) process.

--Specific adjustment for taxes to the capital prospective payment

system federal rate.

--Revision of provision relating to exceptions payments.

--Extraordinary circumstances exceptions payments.

--Funding of depreciation.

We discussed changes to the regulations at 42 CFR parts

412 and 413 for hospital units excluded from the prospective payment

system. The proposed changes concerned the following:

--New requirements for certain long-term care hospitals excluded from

the prospective payment systems.

--Removal of the 1986 malpractice rule.

--Related technical changes.

In the addendum to the proposed rule, we set forth

proposed changes to the amounts and factors for determining the FY 1995

prospective payment rates for operating costs and capital-related

costs. We also proposed new update factors for determining the rate-of-

increase limits for cost reporting periods beginning in FY 1995 for

hospitals and hospital units excluded from the prospective payment

system.

In Appendix A of the proposed rule, we set forth an

analysis of the impact that the proposed changes described in the

proposed rule would have on affected entities.

In Appendix B of the proposed rule, we set forth the

technical appendix on the proposed FY 1995 capital acquisition model

and budget neutrality adjustment.

In Appendix C of the proposed rule, we set forth our

initial estimate of a recommended update factor for FY 1995 for both

prospective payment hospitals and hospitals excluded from the

prospective payment system, as required by section 1886(e)(3)(B) of the

Act.

In Appendix D of the proposed rule, we provided our

recommendation of the appropriate percentage change for FY 1995, as

required by sections 1886(e)(4) and (e)(5) of the Act, for the

following:

--Large urban, other urban, and rural average standardized amounts (and

hospital-specific rates applicable to sole community hospitals) for

hospital inpatient services paid for under the prospective payment

system for operating costs.

--Target rate-of-increase limits to the allowable operating costs of

hospital inpatient services furnished by hospitals and hospital units

excluded from the prospective payment system.

In Appendix E of the proposed rule, we set forth a

preliminary framework for developing the annual update factor for

inpatient hospital capital-related costs.

In the May 27, 1994 proposed rule, we also discussed in detail the

March 1, 1994 recommendations made by the Prospective Payment

Assessment Commission (ProPAC). ProPAC is directed by section

1886(e)(2)(A) of the Act to make recommendations on the appropriate

percentage change factor to be used in updating the average

standardized amounts. In addition, section 1886(e)(2)(B) of the Act

directs ProPAC to make recommendations regarding changes in each of the

Medicare payment policies under which payments to an institution are

prospectively determined. In particular, the recommendations relating

to the hospital inpatient prospective payment systems are to include

recommendations concerning the number of DRGs used to classify

discharges, adjustments to the DRGs to reflect severity of illness, and

changes in the methods under which hospitals are paid for capital-

related costs. Under section 1886(e)(3)(A) of the Act, the

recommendations required of ProPAC under sections 1886(e)(2)(A) and (B)

of the Act are to be reported to Congress not later than March 1 of

each year.

We printed ProPAC's March 1, 1994 report, which includes its

recommendations, as Appendix F of the proposed rule. The

recommendations, and the actions we proposed to take with regard to

them (when an action is recommended), were discussed in detail in the

appropriate sections of the preamble, the addendum, or the appendices

of the proposed rule.

Set forth below in sections II, III, IV, V, VI, VII, and VIII of

this preamble, the addendum to this final rule, and the appendices, are

detailed discussions of the May 27, 1994 proposed rule, the public

comments received in response to the proposed rule, and the responses

to those comments, as well as any changes we are making.

We note that the proposed rule included an extensive discussion of

our research concerning refinements to the labor market areas that are

used to construct the hospital wage index. Comments on this issue were

due on August 31, 1994, and we intend to discuss the comments and

respond to them in the FY 1996 prospective payment system proposed

rule.

C. Public Comments Received in Response to the May 27, 1994 Proposed

Rule

A total of 1339 items of correspondence containing comments on the

May 27, 1994 proposed rule were received timely. The main areas of

concern addressed by commenters were the following:

Changes in the reporting of hospital wage index data.

Definition of and payment for transfer cases.

New exclusion criteria for long-term care hospitals.

Revisions to the capital exceptions policy.

Requests for changes in DRG classifications and relative

weights.

II. Changes to DRG Classifications and Relative Weights

A. Background

Under the prospective payment system, we pay for inpatient hospital

services on the basis of a rate per discharge that varies by the DRG to

which a beneficiary's stay is assigned. The formula used to calculate

payment for a specific case takes an individual hospital's payment rate

per case and multiplies it by the weight of the DRG to which the case

is assigned. Each DRG weight represents the average resources required

to care for cases in that particular DRG relative to the average

resources used to treat cases in other DRGs.

Congress recognized that it would be necessary to recalculate the

DRG relative weights periodically to account for changes in resource

consumption. Accordingly, section 1886(d)(4)(C) of the Act requires

that the Secretary adjust the DRG classifications and relative weights

annually. These adjustments are made to reflect changes in treatment

patterns, technology, and any other factors that may change the

relative use of hospital resources. The changes to the DRG

classification system and the recalibration of the DRG weights for

discharges occurring on or after October 1, 1994 are discussed below.

B. DRG Reclassification

1. General

Cases are classified into DRGs for payment under the prospective

payment system based on the principal diagnosis, up to eight additional

diagnoses, and up to six procedures performed during the stay, as well

as age, sex, and discharge status of the patient. The diagnosis and

procedure information is reported by the hospital using codes from the

International Classification of Diseases, Ninth Edition, Clinical

Modification (ICD-9-CM). The Medicare fiscal intermediary enters the

information into its claims system and subjects it to a series of

automated screens called the Medicare Code Editor (MCE). These screens

are designed to identify cases that require further review before

classification into a DRG can be accomplished.

After screening through the MCE and any further development of the

claims, cases are classified by the GROUPER software program into the

appropriate DRG. The GROUPER program was developed as a means of

classifying each case into a DRG on the basis of the diagnosis and

procedure codes and demographic information (that is, sex, age, and

discharge status). It is used both to classify past cases in order to

measure relative hospital resource consumption to establish the DRG

weights and to classify current cases for purposes of determining

payment. The records for all Medicare hospital inpatient discharges are

maintained in the Medicare Provider Analysis and Review (MedPAR) file.

The data in this file are used to evaluate possible DRG classification

changes and to recalibrate the DRG weights.

Currently, cases are assigned to one of 491 DRGs in 25 major

diagnostic categories (MDCs). Most MDCs are based on a particular organ

system of the body (for example, MDC 6, Diseases and Disorders of the

Digestive System); however, some MDCs are not constructed on this basis

since they involve multiple organ systems (for example, MDC 22, Burns).

In general, principal diagnosis determines MDC assignment. However,

there are four DRGs to which cases are assigned on the basis of

procedure codes rather than first assigning them to an MDC based on the

principal diagnosis. These are the DRGs for liver and bone marrow

transplant (DRGs 480 and 481, respectively) and the two DRGs for

tracheostomies (DRGs 482 and 483). Cases are assigned to these DRGs

before classification to an MDC.

Within most MDCs, cases are then divided into surgical DRGs (based

on a surgical hierarchy that orders individual procedures or groups of

procedures by resource intensity) and medical DRGs. Medical DRGs

generally are differentiated on the basis of diagnosis and age. Some

surgical and medical DRGs are further differentiated based on the

presence or absence of complications or comorbidities (hereafter CC).

Generally, GROUPER does not consider other procedures; that is,

nonsurgical procedures or minor surgical procedures generally not

performed in an operating room are not listed as operating room (OR)

procedures in the GROUPER decision tables. However, there are a few

non-OR procedures that do affect DRG assignment for certain principal

diagnoses, such as extracorporeal shock wave lithotripsy for patients

with a principal diagnosis of urinary stones.

We proposed to make several changes to the DRG classification

system for FY 1995. These proposed changes and the comments we received

concerning them, as well as our responses to those comments and the

final DRG changes, are set forth below.

2. MDC 2 (Diseases and Disorders of the Eye)

When a case is coded with a principal diagnosis of subcorneal

pustular dermatosis (diagnosis code 694.1), it is classified to MDC 2

(Diseases and Disorders of the Eye), where it is assigned to DRGs 46,

47, and 48 (Other Disorders of the Eye).\1\ As discussed in the

proposed rule, we received a suggestion from the public that we should

review the DRG classification of subcorneal pustular dermatosis because

it is a dermatological condition and is not a disease or disorder of

the eye.

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\1\A single title combined with two DRG numbers is used to

signify pairs. Generally, the first DRG is for cases with CC and the

second is for cases without CC. If a third number is included, it

represents cases of patients who are age 0-17. Occasionally, a pair

of DRGs is split on age >17 and age 0-17.

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Since this issue involves a possible medical misclassification of a

diagnosis, we asked our medical consultants to evaluate the condition.

They determined that subcorneal pustular dermatosis is indeed a

dermatological condition and not an eye condition. Based on their

determination and recommendations, we proposed to remove diagnosis code

694.1 from its current classification in MDC 2 and assign it to MDC 9

(Diseases and Disorders of the Skin, Subcutaneous Tissue and Breast).

In order to determine the appropriate DRG assignment in MDC 9, we

first made a clinical evaluation of the medical DRGs. Based on the

current MDC 9 configuration, the only possible DRGs appear to be DRGs

272 and 273 (Major Skin Disorders) or DRGs 283 and 284 (Minor Skin

Disorders). After reviewing the average standardized charges and the

types of costs assigned to DRGs 272 and 273, we believe the best

assignment for 694.1 is DRGs 283 and 284. The proposed FY 1995 relative

weights of DRGs 46, 47, and 48 (0.7573, 0.4330, and 0.4182,

respectively) were approximately equal to those of DRGs 283 and 284

(0.7142 and 0.4358, respectively). Therefore, we proposed to move

diagnosis code 694.1 to DRGs 283 and 284. We received only one comment

on this proposal, which supported our change. Thus, we are

incorporating our proposal in this final rule.

3. MDC 15 (Newborns and Other Neonates With Conditions Originating in

the Perinatal Period)

In the September 1, 1993 final rule (58 FR 46283), we stated that

we would evaluate the newborn and neonate DRG classifications and

relative weights for possible improvements. Because of the low volume

of cases in these DRGs in the MedPAR file, we stated that we intended

to rely on data bases outside the Medicare claims file to supplement

our data. We expect that any major reclassification changes to MDC 15

will be based on an evaluation of actual neonate case data, including

charges and clinical information.

In the proposed rule, we stated that we had not yet completed this

evaluation, so we did not propose MDC 15 revisions for FY 1995.

However, we discussed several suggestions from the public concerning

improvements for the neonate DRG classifications. Some commenters

suggested that we reevaluate the diagnoses that are currently

considered significant problems in determining the assignment of a

neonate case to DRG 390 (Neonate with Other Significant Problems)

rather than DRG 391 (Normal Newborn). These commenters believe that

many of the diagnoses currently assigned to DRG 390 are not truly

significant clinically and in terms of resource use. These commenters

also identified specific diagnoses within this group that are

problematic. Even though we are not ready to proceed with a

comprehensive proposal for revising MDC 15, we did ask our medical

specialists to evaluate the specific conditions that were identified as

problematic in the assignment of newborns to DRG 390.

Currently, cases of otherwise normal newborns with one of the

following diagnoses are assigned to DRG 390 rather than DRG 391:

752.5 Undescended testicle

795.4 Other nonspecific abnormal histological findings

V05.3 Need for prophylactic vaccination against viral hepatitis

V05.4 Need for prophylactic vaccination against Varicella

V20.1 Other healthy infant or child receiving care

All of these diagnoses were identified by the commenters as

nonsignificant conditions that either are not problems or require only

minimal diagnostic work-up, no treatment, and result in the consumption

of minimal or no additional resources. For these reasons, the

commenters believe that these diagnoses should be added to the list of

conditions that may be found as secondary diagnoses for DRG 391.

Specifically, a healthy newborn with undescended testicles requires

only a minimal diagnostic work-up and no treatment at the time of

birth. In addition, the conditions that are assigned to diagnosis code

795.4 (Other nonspecific abnormal histological findings) are

nonsignificant problems and require no additional resources to treat.

Commenters also pointed out that it has become standard practice to

inoculate newborns against viral hepatitis, and that a prophylactic

vaccination against Varicella is normal and routine and does not

indicate a problem with the newborn. Diagnosis code V20.1 is generally

used to identify a healthy infant that remains in the hospital for an

extended period of time because of maternal illness, and should not be

considered a significant problem.

All of the conditions listed above were reevaluated on a clinical

basis by our medical specialists, who determined that these diagnoses

are not significant problems in neonates. Therefore, we proposed to add

them to the list of secondary diagnoses that would assign an otherwise

normal newborn to DRG 391.

We also reevaluated perinatal jaundice (diagnosis codes 774.0

through 774.7) and its DRG assignments in response to suggestions we

received. Currently, all of these diagnosis codes except 774.6

(unspecified fetal and neonatal jaundice) are considered major problems

and are assigned to DRGs 387 (Prematurity with Major Problems) and 389

(Full Term Neonate with Major Problems). Diagnosis code 774.6 is not

considered a significant problem and is assigned to DRG 388

(Prematurity without Major Problems) and DRG 391. Some did not believe

that 774.6 should be assigned to DRG 391 when all the other perinatal

jaundice codes are considered major problems. Others believe that some

of the perinatal jaundice diagnoses that are currently considered major

are really not that resource intensive.

Our medical specialists reevaluated these perinatal jaundice

conditions, and, based on their determinations, we proposed several

revisions to the neonatal DRG assignments. First, the following

diagnosis codes would be removed from the major problems list in DRGs

387 and 389 and would be added to the significant problems list:

774.0 Perinatal jaundice from hereditary hemolytic anemias

774.1 Perinatal jaundice from other excessive hemolysis

774.2 Neonatal jaundice associated with preterm delivery

Thus, a premature newborn with one of these codes would be assigned to

DRG 388 and a full-term newborn with one of these codes would be

assigned to DRG 390.

The following diagnosis codes would be removed from the major

problems list in DRGs 387 and 389 and would not be added to the

significant problems list:

774.30 Neonatal jaundice due to delayed conjugation, cause unspecified

774.31 Neonatal jaundice due to delayed conjugation in diseases

classified elsewhere

774.39 Other neonatal jaundice due to delayed conjugation from other

causes

774.5 Perinatal jaundice from other causes

Therefore, a premature newborn with one of these conditions would be

assigned to DRG 388 and a full-term newborn with one of these

conditions would be assigned to DRG 391.

The following diagnosis codes would remain on the major problems

list and continue to result in assignment to DRGs 387 and 389:

774.4 Perinatal jaundice due to hepatocellular damage

774.7 Kernicterus not due to isoimmunization

Finally, diagnosis codes 774.6 (Unspecified fetal and neonatal

jaundice) would continue to be considered a nonsignificant condition

and result in assignment to DRGs 388 and 391.

We note again that these proposals were based only on clinical

considerations and responded to specific requests made by the public.

We will continue our work on a more comprehensive evaluation of the MDC

15 DRGs and will announce our proposal when that evaluation is

completed.

Comment: We received two comments regarding these proposed changes.

One commenter supported all of the changes; the other commenter

supported the reassignment of diagnosis codes 752.5, 795.4, V05.3,

V05.4, and V20.1 from DRG 390 to DRG 391, but disagreed with the

proposed changes to the classification of the perinatal jaundice codes.

This commenter stated that perinatal jaundice frequently involves

significant testing and prolonged hospitalization and that

classification changes to these diagnoses should be delayed until HCFA

completes the evaluation of the newborn and neonate DRGs.

Response: Under our proposal, two perinatal jaundice diagnoses

remain on the major problems list (codes 774.4 and 774.7) and three

remain on the significant problems list (codes 774.0, 774.1, and

774.2). The diagnoses that have been redesignated from the major and

significant problems list are conditions that are not considered to be

clinically significant. That is, our medical staff do not believe that

these conditions require the expenditure of significant additional

resources by the hospital for treatment.

We note that under the New York All-Patient (AP) DRGs, the only

perinatal jaundice conditions considered to be major problems are 774.4

and 774.7. This is consistent with our proposal. In addition, of the

remaining codes, only 774.2 is considered a significant problem. The

remaining perinatal jaundice codes are not considered problems for

newborns under the AP-DRGs. Since New York uses the AP-DRGs to classify

and pay hospitals for the treatment of an all-patient population, we

believe that their classification of neonate diagnosis codes is a

reliable reflection of the actual resources used.

Since there is agreement with the AP-DRGs on the major problems and

we have included additional codes under the Medicare significant

problem DRGs, we are confident that our proposal is supportable.

Therefore, we are incorporating our proposed changes as final. As a

part of our analysis of the MDC 15 DRGs, we will evaluate our revisions

to verify that we have appropriately classified the perinatal jaundice

diagnoses. We note again that these changes are made in response to

public request and do not have a significant impact on the Medicare

population. In FY 1993, there were 25 cases classified in DRGs 387

through 391.

4. Surgical Hierarchies

Some inpatient stays entail multiple surgical procedures, each one

of which, occurring by itself, could result in assignment of the case

to a different DRG within the MDC to which the principal diagnosis is

assigned. It is therefore necessary to have a decision rule by which

these cases are assigned to a single DRG. The surgical hierarchy, an

ordering of surgical classes from most to least resource intensive,

performs that function. Its application ensures that cases involving

multiple surgical procedures are assigned to the DRG associated with

the most resource-intensive surgical class.

Because the relative resource intensity of surgical classes can

shift as a function of DRG reclassification and recalibration, we

reviewed the surgical hierarchy of each MDC, as we have for previous

reclassifications, to determine if the ordering of classes coincided

with the intensity of resource utilization, as measured by the same

billing data used to compute the DRG relative weights.

A surgical class can be composed of one or more DRGs. For example,

in MDC 5, the surgical class ``heart transplant'' consists of a single

DRG (DRG 103) and the class ``coronary bypass'' consists of two DRGs

(DRGs 106 and 107). Consequently, in many cases, the surgical hierarchy

has an impact on more than one DRG. The methodology for determining the

most resource-intensive surgical class, therefore, involves weighting

each DRG for frequency to determine the average resources for each

surgical class. For example, assume surgical class A includes DRGs 1

and 2 and surgical class B includes DRGs 3, 4, and 5, and that the

average charge of DRG 1 is higher than that of DRG 3, but the average

charges of DRGs 4 and 5 are higher than the average charge of DRG 2. To

determine whether surgical class A should be higher or lower than

surgical class B in the surgical hierarchy, we would weight the average

charge of each DRG by frequency (that is, by the number of cases in the

DRG) to determine average resource consumption for the surgical class.

The surgical classes would then be ordered from the class with the

highest average resource utilization to that with the lowest, with the

exception of ``other OR procedures'' as discussed below.

This methodology may occasionally result in a case involving

multiple procedures being assigned to the lower-weighted DRG (in the

highest, most resource-intensive surgical class) of the available

alternatives. However, given that the logic underlying the surgical

hierarchy provides that the GROUPER searches for the procedure in the

most resource-intensive surgical class, which may sometimes occur in

cases involving multiple procedures, this result is unavoidable.

We note that, notwithstanding the foregoing discussion, there are a

few instances when a surgical class with a lower average relative

weight is ordered above a surgical class with a higher average relative

weight. For example, the ``other OR procedures'' surgical class is

uniformly ordered last in the surgical hierarchy of each MDC in which

it occurs, regardless of the fact that the relative weight for the DRG

or DRGs in that surgical class may be higher than that for other

surgical classes in the MDC. The ``other OR procedures'' class is a

group of procedures that are least likely to be related to the

diagnoses in the MDC but are occasionally performed on patients with

these diagnoses. Therefore, these procedures should only be considered

if no other procedure more closely related to the diagnoses in the MDC

has been performed.

A second example occurs when the difference between the average

weights for two surgical classes is very small. We have found that

small differences generally do not warrant reordering of the hierarchy

since, by virtue of the hierarchy change, the relative weights are

likely to shift such that the higher-ordered surgical class has a lower

average weight than the class ordered below it.

Based on the preliminary recalibration of the DRGs, we proposed to

modify the surgical hierarchy as set forth below. As discussed in

section II.C of this preamble, the final recalibrated weights are

somewhat different from those proposed, since they are based on more

complete data. Consequently, we have further revised the hierarchy in

this final rule using the principles set forth above.

In MDC 2 (Diseases and Disorders of the Eye), we proposed

to reorder Extraocular Procedures Except Orbit (DRGs 40 and 41) above

Intraocular Procedures Except Retina, Iris and Lens (DRG 42).

In MDC 3 (Diseases and Disorders of the Ear, Nose, Mouth

and Throat), we proposed to reorder Rhinoplasty (DRG 56) above Salivary

Gland Procedures Except Sialoadenectomy (DRG 51).

We received no comments concerning the proposed surgical hierarchy.

In addition, based on a test of the proposed changes using the most

recent MedPAR file and the revised GROUPER software, we find that the

changes are still supported by the data and are adopting the proposals

in this final rule. However, based on the final MedPAR file, we need to

make another change in the surgical hierarchy for MDC 3. In MDC 3, in

addition to reordering DRG 56 above DRG 51, we will also reorder DRG 56

above DRG 50 (Sialoadenectomy). Therefore, the final revised hierarchy

for these three DRGs is as follows:

Rhinoplasty (DRG 56)

Sialoadenectomy (DRG 50)

Salivary Gland Procedures Except Sialoadenectomy (DRG 51)

5. Refinement of Complications and Comorbidities List

There is a standard list of diagnoses that are considered

complications or comorbidities (CCs). We developed this list using

physician panels to include those diagnoses that, when present as a

secondary condition, would be considered a substantial complication or

comorbidity. In preparing the original CC list, a substantial CC was

defined as a condition that, because of its presence with a specific

principal diagnosis, would increase the length of stay by at least 1

day for at least 75 percent of the patients.

In previous years, we have made changes to the standard list of

CCs, either by adding new CCs or deleting CCs already on the list. For

FY 1995, we did not propose to make any changes to the current CC list.

In the September 1, 1987 final notice concerning changes to the DRG

classification system (52 FR 33143), we modified the GROUPER logic so

that certain diagnoses included on the standard list of CCs would not

be considered a valid CC in combination with a particular principal

diagnosis. Thus, we created the CC Exclusions List. We made these

changes to preclude coding of CCs for closely related conditions, to

preclude duplicative coding or inconsistent coding from being treated

as CCs, and to ensure that cases are appropriately classified between

the complicated and uncomplicated DRGs in a pair.

In the May 19, 1987 proposed notice concerning changes to the DRG

classification system (52 FR 18877), we explained that the excluded

secondary diagnoses were established using the following five

principles:

Chronic and acute manifestations of the same condition

should not be considered CCs for one another (as subsequently corrected

in the September 1, 1987 final notice (52 FR 33154)).

Specific and nonspecific (that is, not otherwise specified

(NOS)) diagnosis codes for a condition should not be considered CCs for

one another.

Conditions that may not co-exist, such as partial/total,

unilateral/bilateral, obstructed/unobstructed, and benign/malignant,

should not be considered CCs for one another.

The same condition in anatomically proximal sites should

not be considered CCs for one another.

Closely related conditions should not be considered CCs

for one another.

The creation of the CC Exclusions List was a major project

involving hundreds of codes. The FY 1988 revisions were intended to be

only a first step toward refinement of the CC list in that the criteria

used for eliminating certain diagnoses from consideration as CCs were

intended to identify only the most obvious diagnoses that should not be

considered complications or comorbidities of another diagnosis. For

that reason, and in light of comments and questions on the CC list, we

have continued to review the remaining CCs to identify additional

exclusions and to remove diagnoses from the master list that have been

shown not to meet the definition of a CC stated above, as appropriate.

(See the September 30, 1988 final rule for the revision made for the

discharges occurring in FY 1989 (53 FR 38485), the September 1, 1989

final rule for the revision made for discharges occurring in FY 1990

(54 FR 36552), the September 4, 1990 final rule for the revision made

for discharges occurring in FY 1991 (55 FR 36126), the August 30, 1991

final rule for the revision made for discharges occurring in FY 1992

(56 FR 43209), the September 1, 1992 final rule for the revisions made

for discharges occurring in FY 1993 (57 FR 39753), and the September 1,

1993 final rule for the revisions made for discharges occurring in FY

1994 (58 FR 46278).)

We proposed a limited revision of the CC Exclusions List to take

into account the changes that will be made in the ICD-9-CM diagnosis

coding system effective October 1, 1994. (See section II.B.7, below,

for a discussion of these changes.) These proposed changes were made in

accordance with the principles established when we created the CC

Exclusions List in 1987.

In addition, upon review of our current CC Exclusions List, we

found that there are some diagnosis codes that do not exclude

themselves as CCs. In the September 1, 1987 final notice, we noted that

a very few codes were not excluded from themselves because they may

signify the bilateral occurrence of a particular condition (for

example, diagnosis code 730.02 (acute osteomyelitis of upper arm)) (52

FR 33154). However, we found some diagnosis codes that do not meet this

criterion. Therefore, we proposed to add the following diagnosis codes

to the CC Exclusions List as excluding themselves when they are

secondary diagnoses:

710.0 Systemic lupus erythematous

710.1 Systemic sclerosis

710.3 Sicca syndrome

710.4 Dermatomyositis

710.8 Other specified diffuse diseases of connective tissue

Based on a comment we received, we also proposed to exclude

diagnosis code 707.1 (Ulcer of lower limb, except decubitus) as a CC

when the principal diagnosis is 440.23 (Atherosclerosis of the

extremities with ulceration). The commenter believes that this

exclusion is similar to the current exclusion of 785.4 (Gangrene) when

the principal diagnosis is 440.24 (Atherosclerosis of the extremities

with gangrene), and we agree with the commenter's assessment.

Finally, it was brought to our attention by another commenter that

when a patient's principal diagnosis is complication of a transplant

condition (diagnosis codes 996.71 and 996.8x), the diagnosis codes used

to denote transplant status (V42.x) should not be considered CCs. Thus,

for the following principal diagnoses, we proposed to delete the

indicated status code:

For code 996.71 (Complications due to heart valve

prosthesis) delete code V42.2 (Heart valve transplant influencing

health status) as a CC.

For code 996.80 (Complications of unspecified organ

transplant) delete code V42.0 (Kidney transplant influencing health

status), V42.1 (Heart transplant influencing health status), V42.6

(Lung transplant influencing health status), V42.7 (Liver transplant

influencing health status), V42.8 (Other specified organ or tissue

transplant influencing health status) as CCs.

For code 996.81 (Complications of kidney transplant)

delete code V42.0 (Kidney transplant influencing health status) as a

CC.

For code 996.82 (Complications of liver transplant) delete

code V42.7 (Liver transplant influencing health status) as a CC.

For code 996.83 (Complications of heart transplant) delete

code V42.1 (Heart transplant influencing health status) as a CC.

For code 996.84 (Complications of lung transplant) delete

code V42.6 (Lung transplant influencing health status) as a CC.

For code 996.86 (Complications of pancreas transplant)

delete code V42.8 (Other specified organ or tissue transplant

influencing health status) as a CC.

For code 996.89 (Complications of other specified organ

transplant) V42.8 (Other specified organ or tissue transplant

influencing health status) as a CC.

Comment: We received one comment that supported our revision of the

CC Exclusions List. However, another commenter, while agreeing that

transplant status (V42.x) is implied in the organ-specific complication

codes (996.8x), disagreed with one of our revisions. Specifically, the

commenter believes that code V42.8 (Other specified organ or tissue

transplant influencing health status) should not be excluded for cases

in which the principal diagnosis is 996.86 (Complications of pancreas

transplant) or 996.89 (Complications of other specified organ

transplant). The commenter notes that code V42.8 includes transplants

other than pancreas (for example, intestines). Therefore, to exclude as

a CC a code that is not organ specific means that, for example, a

pancreatic transplant patient experiencing a complication with an

intestinal transplant would not have the V42.8 code associated

classified as a CC.

Response: We agree with the commenter that the fact that all the

complication codes (996.8x) and the status codes (V42.x) are not

perfectly matched in organ specificity occasionally leads to the

inability to code certain otherwise allowable CCs. However, we believe

the problem is extremely limited in the Medicare population, who do not

tend to have multiple transplanted organs. The problem with leaving

V42.8 (a ``not elsewhere classified'' code) as a CC for 996.86 and

996.89 is that it opens the door for incorrect coding in order to gain

a higher DRG assignment.

If hospitals followed correct coding guidelines concerning the V

status codes, we would not have had to make the proposed changes to the

CC Exclusions List. That is, it is not correct to code the status code

for an organ transplant when the principal diagnosis is complication of

the same organ transplant. However, based on the information in the

MedPAR file, hospitals were following this incorrect procedure and were

gaining an inappropriate financial advantage. Therefore, we believe

that leaving V42.8 off the exclusion list for 996.86 and 996.89 would

cause more incorrect DRG assignments than including it on the list. We

note that when a transplant complication is coded as the principal

diagnosis, hospitals may code the actual complication and any other

secondary diagnoses documented by the physician.

Tables 6f and 6g in section V of the addendum to this final rule

contain the final revisions to the CC Exclusions List (including the

change for V42.8) that will be effective for discharges occurring on or

after October 1, 1994. Each table shows the principal diagnoses with

the changes to the excluded CCs. Each of these principal diagnoses is

shown with an asterisk and the additions or deletions to the CC

Exclusions List are provided in an indented column immediately

following the affected principal diagnosis.

CCs that are added to the list are in Table 6f--Additions to the CC

Exclusions List. Beginning with discharges on or after October 1, 1994,

the indented diagnoses will not be recognized by the GROUPER as valid

CCs for the asterisked principal diagnosis.

CCs that are deleted from the list are in Table 6g--Deletions from

the CC Exclusions List. Beginning with discharges on or after October

1, 1994, the indented diagnoses will be recognized by the GROUPER as

valid CCs for the asterisked principal diagnosis.

Copies of the original CC Exclusions List applicable to FY 1988 can

be obtained from the National Technical Information Service (NTIS) of

the Department of Commerce. It is available in hard copy for $84.00 and

on microfiche for $20.50, plus $3.00 for shipping and handling. A

request for the FY 1988 CC Exclusions List (which should include the

identification accession number, (PB) 88-133970) should be made to the

following address: National Technical Information Service; United

States Department of Commerce; 5285 Port Royal Road, Springfield,

Virginia 22161; or by calling (703) 487-4650.

Users should be aware of the fact that all revisions to the CC

Exclusions List (FYs 1989, 1990, 1991, 1992, 1993, and 1994) and those

in Tables 6f and 6g of this document must be incorporated into the list

purchased from NTIS in order to obtain the CC Exclusions List

applicable for discharges occurring on or after October 1, 1994.

Alternatively, the complete documentation of the GROUPER logic,

including the current CC Exclusions List, is available from 3M/Health

Information Systems (HIS), which, under contract with HCFA, is

responsible for updating and maintaining the GROUPER program. The DRG

Definitions Manual, Version 12.0, which includes the changes set forth

in this final rule, is available for $195.00, which includes $15.00 for

shipping and handling. These manuals may be obtained by writing 3M/HIS

at: 100 Barnes Road; Wallingford, Connecticut 06492; or by calling

(203) 949-0303. Please specify the revision or revisions requested.

6. Review of Procedure Codes in DRGs 468, 476, and 477

Each year, we review cases assigned to DRG 468 (Extensive OR

Procedure Unrelated to Principal Diagnosis), DRG 476 (Prostatic OR

procedure Unrelated to Principal Diagnosis), and DRG 477 (Nonextensive

OR Procedure Unrelated to Principal Diagnosis) in order to determine

whether procedures are properly assigned among these DRGs.

DRGs 468, 476, and 477 are reserved for those cases in which none

of the OR procedures performed is related to the principal diagnosis.

These DRGs are intended to capture atypical cases, that is, those cases

not occurring with sufficient frequency to represent a distinct,

recognizable clinical group. DRG 476 is assigned to those discharges in

which one or more of the following prostatic procedures are performed

and are unrelated to the principal diagnosis:

60.0 Incision of prostate

60.12 Open biopsy of prostate

60.15 Biopsy of periprostatic tissue

60.18 Other diagnostic procedures on prostate and periprostatic tissue

60.2 Transurethral prostatectomy

60.61 Local excision of lesion of prostate

60.69 Prostatectomy NEC

60.81 Incision of periprostatic tissue

60.82 Excision of periprostatic tissue

60.93 Repair of prostate

60.94 Control of (postoperative) hemorrhage of prostate

60.95 Transurethral balloon dilation of the prostratic urethra

60.99 Other operations on prostate

All remaining OR procedures are assigned to DRGs 468 and 477, with

DRG 477 assigned to those discharges in which the only procedures

performed are nonextensive procedures that are unrelated to the

principal diagnosis. The original list of the ICD-9-CM procedure codes

for the procedures we consider nonextensive procedures if performed

with an unrelated principal diagnosis was published in Table 6C in

section IV of the addendum to the September 30, 1988 final rule (53 FR

38591). As part of the final rules published on September 4, 1990,

August 30, 1991, September 1, 1992, and September 1, 1993, we moved

several other procedures from DRG 468 to 477. (See 55 FR 36135, 56 FR

43212, 57 FR 23625, and 58 FR 46279, respectively.)

a. Adding Procedure Codes to MDCs. We annually conduct a review of

procedures producing DRG 468 or 477 assignments on the basis of volume

of cases in these DRGs with each procedure. Our medical consultants

then identify those procedures occurring in conjunction with certain

principal diagnoses with sufficient frequency to justify adding them to

one of the surgical DRGs for the MDC in which the diagnosis falls. On

the basis of this review, we proposed the following DRG classification

changes in order to reduce unnecessary assignment of cases to DRG 468

or 477.

MDC 1 (Diseases and Disorders of the Nervous System).

We have observed that surgical pacemaker procedures are being

performed with increasing frequency for anatomical nerve problems

associated with heart block. These diagnoses, diagnosis codes 337.0

(Idiopathic peripheral autonomic neuropathy), 742.8 (Other specified

anomalies of nervous system), and 742.9 (Unspecified anomaly of brain,

spinal cord, and nervous system), are assigned to MDC 1, but the

surgical pacemaker procedures are not. Consequently, when a pacemaker

procedure is performed on a patient with one of these diagnoses, the

case is assigned to DRG 468. Therefore, we proposed to add the

following procedure codes to DRGs 7 and 8 (Peripheral and Cranial Nerve

and Other Nervous System Procedures):

37.74 Insertion or replacement of epicardial lead (electrode) into

epicardium

37.75 Revision of lead (electrode)

37.76 Replacement of transvenous atrial and/or ventricular lead(s)

(electrode)

37.77 Removal of lead(s) (electrode) without replacement

37.79 Revision or relocation of pacemaker pocket

37.80 Insertion of permanent pacemaker, initial or replacement, type

of device not specified

37.85 Replacement of any type pacemaker device with single-chamber

device, not specified as rate responsive

37.86 Replacement of any type pacemaker device with single-chamber

device, rate responsive

37.87 Replacement of any type pacemaker device with dual-chamber

device

37.89 Revision or removal of pacemaker device

In addition, during our review of DRG 468 cases, we found that

there are several hundred cases of lower limb amputation procedures

with a principal diagnosis from MDC 1. Patients with diabetes often

develop complications that require the performance of a lower limb

amputation. Although the majority of the diagnosis codes for diabetes

are assigned to MDC 10 (Endocrine, Nutritional and Metabolic Diseases

and Disorders), cases with a principal diagnosis of diabetes with

neurological manifestations (diagnosis codes 250.60, 250.61, 250.62 and

250.63) are assigned to MDC 1. Therefore, we proposed to move the

following procedures to DRGs 7 and 8:

84.11 Amputation of toe

84.12 Amputation through foot

84.13 Disarticulation of ankle

84.14 Amputation of ankle through malleoli of tibia and fibula

84.15 Other amputation below knee

84.16 Disarticulation of knee

84.17 Amputation above knee

Two commenters wrote concerning the proposal to add pacemaker and

amputation procedures to DRGs 7 and 8.

Comment: One commenter noted that pacemaker procedure codes that

are not recognized by the GROUPER unless they are paired with their

related codes were excluded from the list of codes to be moved to DRGs

7 and 8. The commenter recommends that all pacemaker procedures with a

principal diagnosis assigned to MDC 1 be added to DRG 7 and 8.

Response: The pacemaker codes we proposed to move to DRGs 7 and 8

are only those codes considered to be OR procedures. The pacemaker

procedures that are considered to be non-OR procedures were not moved.

Coding the initial implantation of a permanent cardiac pacemaker

requires that one lead and one device code must be used in combination

for DRG assignment. Coding of revision and replacement pacemaker

procedures does not require combined codes to be assigned to DRGs.

The pacemaker procedure codes that are non-OR procedures are not

recognized by the GROUPER unless they are combined with their related

codes. That is, they are considered for DRG assignment only if they

occur in pairs. Otherwise they are treated as other non-OR procedures

and do not affect DRG assignment. These non-OR procedures are as

follows:

37.70 Initial insertion pacemaker lead, not otherwise specified

37.71 Initial insertion of transvenous lead into ventricle

37.72 Initial insertion of transvenous leads into atrium and ventricle

37.73 Initial insertion of transvenous lead into atrium

37.81 Initial insertion of single-chamber device, not specified as

rate responsive

37.82 Initial insertion of single-chamber device, rate responsive

37.83 Initial insertion of dual-chamber device

These non-OR procedures were not included in the list of pacemaker

codes that we proposed to move from DRGs 7 and 8 when they occurred

with an MDC 1 principal diagnosis.

However, we agree with the commenter that these non-OR pacemaker

procedure codes, when accompanying an MDC 1 principal diagnosis, should

be assigned to DRGs 7 or 8 rather that DRG 468 when they are paired

with the related procedure code. Therefore, we are adding the following

pacemaker codes, when they occur in combination, to DRGs 7 and 8:

37.70 & 37.81 Initial insertion pacemaker lead and single-chamber

device, non-rate responsive

37.70 & 37.82 Initial insertion pacemaker lead and single-chamber

device, rate responsive

37.71 & 37.81 Initial insertion of transvenous lead into ventricle and

single-chamber device, non-rate responsive

37.71 & 37.82 Initial insertion of transvenous lead into ventricle and

single-chamber device, rate responsive

37.72 & 37.83 Initial insertion of transvenous leads into atrium and

ventricle & dual-chamber device

37.73 & 37.81 Initial insertion of transvenous lead into atrium and

single-chamber device, non-rate responsive

37.73 & 37.82 Initial insertion of transvenous lead into atrium and

single-chamber device, rate responsive

We emphasize that procedure codes 37.70, 37.71, 37.72, 37.73,

37.81, 37.82, and 37.83 are not considered by the GROUPER unless used

in combination with their related codes. If used singularly, these

codes will be ignored for the purpose of DRG assignment. The pacemaker

codes originally proposed may occur alone or in pairs, and will be

assigned to DRG 7 or 8 when they occur with a principal diagnosis in

MDC 1 as proposed.

We are adopting the changes in the proposed rule, with the

revisions discussed above.

Comment: We received a comment that objected to the placement of

pacemaker procedures and lower limb amputation procedures in DRGs 7 and

8. The commenter stated that unless clinical evidence supported the

assignment of these pacemaker cases to DRG 7 or 8, it would be more

reasonable to move these cases to DRG 115 (Permanent Cardiac Pacemaker

Implant with AMI, Heart Failure, or Shock) or DRG 116 (Other Permanent

Pacemaker Implant or AICD Lead or Generator Procedures) in MDC 5

(Diseases and Disorders of the Circulatory System). It was also

suggested that the amputation cases be assigned to DRGs in MDC 10

(Endocrine, Nutritional, and Metabolic Diseases and Disorders), where

diabetic patients with manifestations are classified.

Response: The DRGs were developed as a patient classification

scheme consisting of classes of patients who were similar clinically

and in terms of their consumption of hospital resources. The concept of

clinical coherence requires that the patient characteristics included

in the definition of each DRG relate to a common organ system or

etiology and that a specific medical specialty should typically provide

care to the patients in the DRG. Each case is assigned to a DRG,

usually within an MDC. The MDCs are generally based on a common organ

system that is identified by principal diagnosis.

Thus, the proposed assignment of procedures from DRG 468 was based

on the principal diagnosis that is currently assigned to the DRGs in

question. For example, a patient may have a principal diagnosis of

idiopathic peripheral autonomic neuropathy (diagnosis code 337.0) and a

secondary diagnosis of congestive heart failure (diagnosis code 428.0)

that requires the insertion of a pacemaker lead and a single chamber

device (procedure codes 37.70 and 37.82, respectively). Cases with the

principal diagnosis code 337.0 are assigned to MDC 1; however, the

pacemaker procedures have not been assigned to this MDC. Therefore,

this case would be grouped to DRG 468. We have proposed to place the

pacemaker procedures, when occurring with a principal diagnosis found

in MDC 1, to the most appropriate DRG within that category. It would be

inappropriate to assign the pacemaker procedures, when they occur with

a principal diagnosis classified to MDC 1, to a DRG in MDC 5 or any

other unrelated MDC. In the past, these cases have been assigned to DRG

468 because the procedure performed is unrelated to the principal

diagnosis.

This is true, also, for the amputation procedures. The principal

diagnoses defining diabetes with neurological manifestations are found

in MDC 1, although the procedures were not. Clinical experts concurred

with the classification of the neurological manifestations of diabetes

to MDC 1 as sharing a common body system rather than to MDC 10, which

relates to the endocrine and metabolic manifestations of the condition.

MDC 5 (Diseases and Disorders of the Circulatory System).

Closed endoscopic biopsy of lung (procedure code 33.27) and open

biopsy of lung (procedure code 33.28), diagnostic tools for vascular

tumors, are often performed on patients with a principal diagnosis of

228.00 (Hemangioma of unspecified site) or 228.09 (Hemangioma of other

sites). Although these principal diagnoses are assigned to MDC 5, the

diagnostic procedures are not. Thus, if they are included together on

the same claim, the case will be assigned to DRG 468. Therefore, we

proposed to assign procedure codes 33.27 and 33.28 to DRG 120 (Other

Circulatory System OR Procedures) in MDC 5.

In addition, we identified the following nonextensive OR procedures

(that is, procedures assigned to DRG 477) as appropriate to move to MDC

5:

40.11 Biopsy of lymph structure

40.19 Other diagnostic procedures on lymphatic structures

40.21 Excision of deep cervical lymph node

40.23 Excision of axillary lymph node

40.24 Excision of inguinal lymph node

40.29 Simple excision of other lymphatic structure

40.3 Regional lymph node excision

These procedures are commonly performed with a variety of diagnoses

found in MDC 5 such as disorders of the peripheral vascular system

(diagnosis codes 747.60 and 747.69) and peripheral angiopathy

(diagnosis code 443.81), as well as a number of heart conditions

including malignant neoplasm of the heart (diagnosis code 164.1), and

coxsackie carditis, coxsackie pericarditis, coxsackie endocarditis, and

coxsackie myocarditis (diagnosis codes 074.20, 074.21, 074.22, 074.23,

respectively). We note that these commonly performed diagnostic

procedures are assigned to virtually every other MDC because they are

associated with many diagnoses. Therefore, we proposed to move these

procedures to DRG 120.

We also note that hemangioma and anomalies of the peripheral

vascular system may require open rectal biopsy (procedure code 48.25)

or excision of the rectal lesion (procedure code 48.35) as part of

their treatment. At the present time, neither of these procedure codes

classify to MDC 5. Thus, we proposed to move procedure codes 48.25 and

48.35 to DRG 120.

MDC 6 (Diseases and Disorders of the Digestive System).

A total splenectomy (procedure code 41.5) may be performed on

patients with a principal diagnosis of secondary malignant neoplasm of

other digestive organs and spleen (diagnosis code 197.8). This

diagnosis is included in MDC 6, but the procedure is not, resulting in

the assignment of cases to DRG 468. Thus, we proposed to add procedure

code 41.5 to DRG 170 and 171 (Other Digestive System OR Procedures) in

MDC 6.

Comment: One commenter, while concurring with the proposed

assignment of procedure codes from DRG 468 to relevant MDCs, did not

agree with several of our proposed DRG classifications. This objection

was based on the DRG relative weight differential between the relative

weight of the proposed DRG and the relative weight of other DRGs to

which these procedures are already assigned. This commenter believes

that new DRGs should be created within the MDCs for the procedures we

proposed to move out of DRG 468 with weights similar to the weights

they command in other DRG assignments. If we cannot do this, the

commenter requested that these cases remain in DRG 468.

Specifically, this commenter agreed with the assignment of

pacemaker codes, as well as lower limb amputation associated with

diabetes, to MDC 1 but disagreed with their assignment to DRGs 7 and 8.

Further, this commenter supported the addition of the lung biopsy codes

33.27 and 33.28 to MDC 5, but objected to their assignment to DRG 120

because the weights of DRG 75 (Major Chest Procedures) and DRG 76 and

77 (Other Respiratory System OR Procedures) in MDC 4 (Diseases and

Disorders of the Respiratory System) to which procedure 33.27 and 33.28

are classified, respectively, have a higher relative weight than DRG

120.

Nor did this commenter agree with the assignment of procedure code

41.5 to DRGs 170 and 171 because the weights of these DRGs do not

reflect the resources used in these cases. Again, the commenter

believes that a new DRG should be created within MDC 6 for this

procedure with a relative weight similar to that of DRG 392

(Splenectomy Age > 17) in MDC 16 (Diseases and Disorders of the Blood,

Blood Forming Organs and Immunological Disorders), to which these

procedures are also assigned, or the cases should remain in DRG 468.

Response: We do not believe it is appropriate to compare the DRG

relative weights for the proposed DRG assignments to other DRGs in

which the same procedures may be classified. Each surgical DRG

classification is determined by a combination of principal diagnosis,

secondary diagnoses, surgical procedures, age, and sex. To compare

procedure classifications and relative weights without taking into

consideration the principal diagnosis and other factors is

inappropriate and results in misinterpretation and misleading

comparisons.

Many of the procedures we have proposed to move from DRG 468 are

assigned to multiple DRGs, depending on the principal diagnosis. Thus,

to compare lung biopsies (procedure codes 33.27 and 33.28) to DRG

assignments in MDC 4 fails to take into account the principal diagnosis

responsible for the MDC assignment. Procedure code 33.28 is currently

assigned to 7 DRGs in 4 MDCs, with FY 1995 weights that range from

0.9529 to 3.0551. (The FY 1995 weights for DRGs 7 and 8 are 2.5005 and

0.9185, respectively). Similarly, to compare splenectomy procedures

with a principal diagnosis of secondary malignant neoplasm of other

digestive organs and spleen (diagnosis code 197.6), for example, to a

splenectomy performed in conjunction with a principal diagnosis

assigned to DRG 392 in MDC 16 is specious. To interpolate from a DRG

assignment with one set of related principal diagnoses to one with

another set of related principal diagnoses significantly underestimates

the role of principal diagnosis in determining resource intensity.

As noted above, one of the basic principles of DRG classification

is that cases assigned to each DRG should be similar both clinically

and in resource utilization. As the first step in ensuring clinical

coherence, we subject all DRG modifications under consideration to

careful, thorough medical judgment and evaluation. Total charges,

submitted by hospitals on inpatient claims, serve as a proxy measure of

resource use. Similar resource use does not mean identical resource

use, but, rather, that the resources used to treat a range of patients

within one DRG classification will be relatively consistent and that

this level of variation is known and predictable. Thus, although the

procedures we have proposed moving from DRG 468 to more specific DRGs

may have charges slightly higher or lower than the average for the DRG

to which they are assigned, this variation is well within the expected

range and can be accurately predicted.

In each MDC there is usually a surgical class referred to as

``other surgical procedures.'' The ``other'' classes are not as

precisely defined from a clinical perspective and include diagnoses or

procedures which are infrequently encountered or not well defined

clinically. The ``other'' surgical category contains surgical

procedures which, while infrequent, could still reasonably be expected

to be performed for a patient in the particular MDC. We note that the

procedures we proposed to move from DRG 468 to specific MDCs are all

assigned to the ``other'' surgical class DRG or DRGs. We believe it is

appropriate to assign cases to the DRG that contains clinically similar

cases within the most specific MDC possible. DRG 468 exists for those

patients who receive surgical procedures that are completely unrelated

to the MDC to which the patient was assigned. For the procedures

identified to be assigned to specific MDCs, the principal diagnosis was

appropriate for the proposed MDC assignment, the cases occurred in

sufficient volume and were clinically similar enough to those existing

in the proposed DRG assignment to justify our decision to move them.

The ``other'' category exists within each MDC for this express purpose:

to classify those cases that are sufficiently related to be assigned to

the MDC, but are not clearly defined or occur in low volume. We believe

the procedures we have recommended for MDC assignment meet these

criteria.

We do not believe it would be prudent policy to create new DRGs

within the relevant MDCs to cover the procedures being reassigned from

DRG 468. This would represent a departure from the process of defining

the surgical classes within MDCs by organizing a DRG based on

procedures more appropriately categorized in the ``other'' surgical

class. DRG classification requires physician judgment, statistical

analysis, and historical data. Until we have sufficient data to

determine the performance of these procedures within the relevant DRGs,

we can not justify creating additional DRGs. We will continue to review

and evaluate these procedures to determine the appropriateness of DRG

assignment. Until we have data documenting the need for further

modification, we are adopting the DRG assignment of the procedures as

proposed with revisions as discussed.

b. Reassignment of Procedures Among DRGs 468, 476, and 477. For the

proposed rule, we also reviewed the list of procedures that produce

assignments to each of DRG 468, 476, and 477 to ascertain if any of

those procedures should be moved to one of the other DRGs based on

average charges and length of stay. Generally, we move only those

procedures for which we have an adequate number of discharges to

analyze the data. Based on our review this year, we proposed to move a

limited number of procedures.

In reviewing the list of OR procedures that produce DRG 468

assignments, we analyzed the average charge and length of stay data for

cases assigned to that DRG to identify those procedures that are more

similar to the discharges that currently group to either DRG 476 or

477. We identified three procedures that are significantly less

resource intensive than the other procedures assigned to DRG 468.

Therefore, we proposed to move the following procedures to the list of

procedures that result in assignment to DRG 477:

24.5 Alveoloplasty

53.61 Incisional hernia repair with prosthesis

53.69 Repair of other hernia of anterior abdominal wall with

prosthesis

We conducted a similar analysis of the procedures that assign cases

to DRG 477 to determine if any of those procedures might more

appropriately be classified to DRG 468. Again, we analyzed charge and

length of stay data to identify procedures that were more similar to

discharges assigned to DRG 468 than to those classified in DRG 477. We

did not identify any procedures in DRG 477 that should be assigned to

DRG 468.

We received no comments on the proposed reassignments to DRG 477,

therefore, they are adopted as final and will be effective with

discharges beginning on or after October 1, 1994.

7. Changes to the ICD-9-CM Coding System

As discussed above in section II.B.1 of this preamble, the ICD-9-CM

is a coding system that is used for the reporting of diagnoses and

procedures performed on a patient. In September 1985, the ICD-9-CM

Coordination and Maintenance Committee was formed. This is a Federal

interdepartmental committee charged with the mission of maintaining and

updating the ICD-9-CM. That mission includes approving coding changes,

and developing errata, addenda, and other modifications to the ICD-9-CM

to reflect newly developed procedures and technologies and newly

identified diseases. The Committee is also responsible for promoting

the use of Federal and non-Federal educational programs and other

communication techniques with a view toward standardizing coding

applications and upgrading the quality of the classification system.

The Committee is co-chaired by the National Center for Health

Statistics (NCHS) and HCFA. The NCHS has lead responsibility for the

ICD-9-CM diagnosis codes included in Volume 1--Diseases: Tabular List

and Volume 2--Diseases: Alphabetic Index, while HCFA has lead

responsibility for the ICD-9-CM procedure codes included in Volume 3--

Procedures: Tabular List and Alphabetic Index.

The Committee encourages participation in the above process by

health-related organizations. In this regard, the Committee holds

public meetings for discussion of educational issues and proposed

coding changes. These meetings provide an opportunity for

representatives of recognized organizations in the coding fields, such

as the American Health Information Management Association (AHIMA)

(formerly American Medical Record Association (AMRA)), the American

Hospital Association (AHA), and various physician specialty groups as

well as physicians, medical record administrators, health information

management professionals, and other members of the public to contribute

ideas on coding matters. After considering the opinions expressed at

the public meetings and in writing, the Committee formulates

recommendations, which then must be approved by the agencies.

The Committee presented proposals for coding changes at public

meetings held on May 6, August 5, and December 2, 1993, and finalized

the coding changes after consideration of comments received at the

meetings and in writing within 30 days following the December 1993

meeting. The initial meeting for consideration of coding issues for

implementation in FY 1996 was held on May 5, 1994. Copies of the

minutes of these meetings may be obtained by writing to one of the co-

chairpersons representing NCHS and HCFA. We encourage commenters to

address suggestions on coding issues involving diagnosis codes to: Sue

Meads, Co-Chairperson; ICD-9-CM Coordination and Maintenance Committee;

NCHS; Rm. 9-58; 6525 Belcrest Road; Hyattsville, Maryland 20782.

Questions and comments concerning the procedure codes should be

addressed to: Patricia E. Brooks, Co-Chairperson; ICD-9-CM Coordination

and Maintenance Committee; HCFA, Office of Coverage and Eligibility

Policy; Rm. 401 East High Rise Building; 6325 Security Boulevard;

Baltimore, Maryland 21207.

The ICD-9-CM code changes that have been approved will become

effective October 1, 1994. The new ICD-9-CM codes are listed, along

with their DRG classifications, in Tables 6a and 6b (New Diagnosis

Codes and New Procedure Codes, respectively) in section IV of the

addendum to this final rule. As we stated above, the code numbers and

their titles were presented for public comment in the ICD-9-CM

Coordination and Maintenance Committee meetings. Both oral and written

comments were considered before the codes were approved. Therefore,

comments were solicited only on the proposed DRG classification.

Further, the Committee has approved the expansion of certain ICD-9-

CM codes to require an additional digit for valid code assignment.

Diagnosis codes that have been replaced by expanded codes, other codes,

or have been deleted are in Table 6c (Invalid Diagnosis Codes). The

invalid diagnosis codes will not be recognized by the GROUPER beginning

with discharges occurring on or after October 1, 1994. The

corresponding new or expanded codes are included in Tables 6a and 6b.

The committee did not delete any procedure codes effective for October

1, 1994. Revisions to diagnosis and procedure code titles are in Tables

6d (Revised Diagnosis Code Titles) and 6e (Revised Procedure Code

Titles), which also include the proposed DRG assignments for these

revised codes.

The comments we received regarding the ICD-9-CM coding changes fall

into three general categories: Spelling or other technical errors in

our Tables 6a through 6e; disagreement with the assignment of a new

code or revised code; and comments about coding policy.

Based on the comments and our own review, we have corrected

misspellings, added omitted codes, and corrected phrasing in the code

descriptions in Tables 6a, 6c, and 6d. The codes for which changes have

been made are as follows: Table 6a: 709.01, 760.76, 996.04, V12.00, and

V57.22. Table 6c: 305.10, 305.11, 305.12, and 305.13 were added. Table

6d: 440.24.

The remaining comments are addressed below.

Comment: We received one inquiry regarding our assignment of

procedure code 998.81 (Emphysema resulting from a procedure) to DRGs

452 and 453 (Complications of Treatment). The commenter suggested that

the code be assigned to DRGs 101 and 102 (Other Respiratory System

Diagnoses) in MDC 4 (Diseases and Disorders of the Respiratory System).

Response: Procedure code 998.81 is one of three new codes that are

5th-digit expansions of the existing 998.8 category of codes for

specific complications of procedures, not elsewhere classified. The new

code 998.81 is to be used for a systemic condition, subcutaneous

emphysema, that results from a procedure rather than one of the more

specific emphysema conditions assigned to a DRG in MDC 4. Therefore, we

are not changing its designation in this final rule.

We note that the current 4-digit code 998.8 is assigned to DRGs 452

and 453. Our usual practice is to continue to assign 5th-digit

expansions of a code to the same DRGs to which the 4-digit code was

assigned unless there is a compelling or practical reason to make a

different assignment. As noted by the commenter, we did assign code

998.82 (Cataract fragment in eye following cataract surgery) to DRGs

46, 47, and 48 (Other Disorders of the Eye) in MDC 2 because of the

specificity of the coded condition and the similarity of the new code

to the other complication codes currently assigned to DRGs 46 through

48. However, this is a very isolated case of change in DRG assignment.

Comment: We received one comment regarding the DRG assignment of

code 440.24 (Atherosclerosis of native arteries of the extremities with

gangrene). The commenter requested that the code be assigned to DRG 387

(Prematurity with Major Problems) in addition to DRGs 130 and 131

(Peripheral Vascular Disorders) as is indicated in Table 6d.

Response: The DRG assignment of code 440.24, which has a revised

title for FY 1995, has not been changed. It continues to be considered

a ``major problem'' for purposes of assignment to DRG 387 and we have

corrected this oversight in Table 6d.

Comment: A commenter questioned why we assigned new diagnosis code

677 (Late effect of complication of pregnancy, childbirth, the

puerperium) to DRG 469 (Principal Diagnosis Invalid as Discharging

Diagnosis) rather than DRGs 373 (Vaginal Delivery without Complicating

Diagnoses), 376 (Postpartum and Post Abortion Diagnoses without OR

Procedure), and 384 (Other Antepartum Diagnoses without Medical

Complications).

Response: This code was created by the National Center for Health

Statistics, the group responsible for revisions to the ICD-9-CM

diagnosis codes, for use as an epidemiologic tool to trace the

physical, long-term effects of childbearing. It should not be used as a

principal diagnosis. Rather, the specific complication that has

occasioned the inpatient stay should be coded as the principal

diagnosis. Code 677 should be included as a secondary diagnosis.

Therefore, if 677 is coded as principal, the case will group to DRG

469.

Comment: We received two comments requesting that we reconsider our

non-OR designation for new procedure code 41.04 (Autologous

hematopoietic stem cell transplant). The commenters both believe that

this should be considered an OR procedure based on the resource use

associated with it. In addition, one commenter has requested that the

code be assigned to DRG 481 (Bone Marrow Transplant) along with the

other codes in category 41.0 (Bone marrow transplant).

Response: Currently, these stem cell transplant procedures are

included in procedure code 99.73 (Therapeutic erythrocytapheresis), a

non-OR procedure. As noted above, our practice is to assign a new code

to the same category as its predecessor code. One compelling reason for

this practice is our inability to move the cases associated with a new

code to a new DRG assignment as a part of DRG reclassification and

recalibration. Because we cannot separately identify the stem cell

transplant cases from the other cases coded with 99.73 in order to

reclassify them and their charges to a new DRG, we are unable to

predict the new weights of both the DRGs in which this code currently

is classified and the new DRG to which it would be assigned. Therefore,

we are prevented from redesignating code 41.04 as an OR procedure.

Regarding the request that this code be reassigned to DRG 481, we

note that the procedure represented by this code is not a bone marrow

transplant procedure. While it may consume hospital resources similar

to those transplant procedures, we will be unable to verify that

assumption until we can evaluate the newly coded stem cell transplant

cases in the FY 1995 MedPAR file. That file will be available in

calendar year 1996 and we will analyze the cases with procedure code

41.04 as a part of our DRG agenda for FY 1997.

Comment: One commenter requested that we publish revised diagnosis

code category headings when a formerly valid diagnosis code is made

invalid due to a revision of the codes in that group to require a

fourth or fifth digit.

Response: We publish the ICD-9-CM coding system changes in the

proposed and final rules in order to display our CC and DRG assignments

of new and revised codes. We also publish an informational list of

invalid codes that will no longer be recognized by the Medicare

GROUPER. The proposed and final prospective payment rules are not a

replacement for ICD-9-CM coding manuals. We publish only that coding

information that is necessary for public understanding and

implementation of the DRG classification system. Therefore, we do not

believe that we should publish the information requested by the

commenter.

Comment: We received one comment expressing disappointment in the

very minor changes made to Volume 3 of the ICD-9-CM (the procedure

codes) for FY 1995. The commenter recommends that we do much more to

update and revise Volume 3.

Response: There are severe physical space constraints that limit

the number of changes that can be made to the procedure codes in Volume

3. HCFA is aware that this Volume does not contain the most current

codes to match changing technology, but, due to its current

configuration, Volume 3 is limited to 4-digit codes. We have begun the

process to revise this Volume, but that work will require several years

for completion and implementation.

We again encourage commenters to address questions, comments, and

suggestions on issues involving diagnosis codes to Sue Meads and those

concerning procedure codes to Patricia E. Brooks at the addresses set

forth above.

8. DRG Refinements

For several years, we have been analyzing major refinements to the

DRG classification system to compensate hospitals more equitably for

treating severely ill Medicare patients. These refinements, generally

referred to as severity of illness adjustments, would create DRGs

specifically for hospital discharges involving very ill patients who

consume far more resources than do other patients classified to the

same DRGs in the current system. This approach has been taken by

various other groups in refining the DRG system, most notably the

research done for Yale, the changes incorporated by the State of New

York into its all patient (AP) DRG system, and the all-patient refined

(APR) DRGs, which are a joint effort of 3M/HIS and the National

Association of Children's Hospitals and Related Institutions.

In the proposed rule, we announced the availability of a paper we

have prepared that describes our proposed severity DRG classification

system as well as the analysis upon which our proposal was formulated.

Comments are due to HCFA by September 30, 1994.

Our plan is to incorporate comments and suggestions we receive and

to consider proposing the complete revised DRG system as part of the FY

1996 prospective payment system proposed rule, which will be published

in the spring of 1995. However, as the final rule published on

September 1, 1992 (57 FR 39761) indicates, we would not propose to make

significant changes to the DRG classification system unless we are able

either to improve our ability to predict coding changes by validating

in advance the impact that potential DRG changes may have on coding

behavior, or to make methodological changes to prevent building the

inflationary effects of the coding changes into future program

payments.

Besides the mandate of section 1886(d)(4)(C)(iii) of the Act, which

provides that aggregate payments may not be affected by DRG

reclassification and recalibration changes, we do not believe it is

prudent policy to make changes for which we cannot predict the effect

on the case-mix index and, thus, payments. Our goal is to refine our

methodology so that we can fulfill, in the most appropriate manner,

both the statutory requirement to make appropriate DRG classification

changes and to recalibrate DRG relative weights (as mandated by section

1886(d)(4)(C) of the Act) as well as to make DRG changes in a budget

neutral manner.

One approach to this problem would be to maintain the average case

weight at 1.0 after recalibration, thereby eliminating the process of

normalization. In other words, after recalibration, we would not scale

the new relative weights upward to carry forward the cumulative effects

of past case-mix increases. We would, instead, make an adjustment or

include in the annual update factor a specific allowance for any real

case-mix change that occurred during the previous year. This is a

relatively simple and straightforward system for preventing the effects

of year-to-year increase in the case-mix index from accumulating in the

DRG weights. It could be done in a budget neutral fashion.

In addition to the severity changes, we also intend to improve the

classification and relative weights of the DRGs that apply to newborns,

children, and maternity patients. The Medicare population does not

include many of these individuals. The original DRG classification

system was developed from analysis of claims data representative of the

total inpatient population. When we calculated the original Medicare

weights for the DRGs to which newborn, children and maternity patients

are classified, we used non-MedPAR discharge records from Maryland and

Michigan hospitals because there were either no MedPAR cases or too few

cases assigned to these DRGs to provide a reasonably precise estimate

of the average cost of care. (See the September 1, 1983 prospective

payment final rule with comment period (48 FR 39768).) Since that time,

because of the lack of MedPAR data, these low-volume DRGs have not been

analyzed and refined, and the relative weights assigned to them may no

longer be entirely reflective of the resources needed to treat the

patients. We again intend to rely on data bases outside the MedPAR file

to supplement our data.

We received some comments on the proposed revisions to the DRGs to

incorporate a measure of severity. We do not intend to answer any of

the specific comments at this time, but rather answer all the comments

in the document that sets forth our final proposal. There were,

however, two general types of comments that we will respond to in this

document.

Comment: Several commenters requested that HCFA make more

information available to the public so that they can more easily assess

some of the changes in case-mix value that result from implementation

of the revised DRGs. One commenter noted that it appears that 10

percent of the Medicare inpatient payments are shifted from rural to

urban hospitals.

Response: The data we have made available to the public on the

severity DRG proposal are similar to the data we make available during

the annual rulemaking process addressing changes to the prospective

payment system. These include a complete MedPAR file with the current

and revised DRG designations, a revised case-mix index file, a revised

DRG Table 5, and the AOR/BOR File. We believe that these data, coupled

with the description of the changes in the paper, the list of revised

CC designations of all diagnosis codes, and the impact analysis are

sufficient to allow analysis of our proposal. Since the available

MedPAR file lists every case and its revised DRG assignment and the new

weights are listed in Table 5, we believe that those who are interested

can evaluate why the case-mix index value for specific hospitals or

groups of hospitals has changed.

Concerning the commenter's contention that there is a shift of 10

percent of Medicare payments from rural to urban hospitals, we note

that the impact analysis of the refined DRGs shows that rural hospitals

overall lose 0.6 percent of their payments, other urban hospitals lose

0.3 percent, and large urban hospitals gain 0.2 percent.

Comment: We received several comments concerning the proposal to

recalibrate the DRG weights to 1.0. Some commenters believe that this

will eliminate all real case-mix index increase as well as coding

``creep.'' Other commenters stated that HCFA should not pursue this

policy as there currently is no way to measure satisfactorily real

case-mix index change.

Response: We did not include a proposal to recalibrate the DRG

weights to 1.0 in the proposed rule. We presented it as one solution to

our current problem of being unable to make DRG reclassification

changes in a budget neutral fashion. We agree with commenters that it

is important to develop a mechanism to accurately distinguish real

case-mix increase from that attributable merely to changes in coding.

As noted above, we would make an additional adjustment to include real

case-mix change in Medicare payments. We intend to continue to analyze

possible solutions to this problem.

9. Other Issues

a. Lung Transplants.

Comment: We received comments urging that we create a new DRG

solely for lung transplants. The commenters state that, even though

HCFA has not made a national coverage determination for these

procedures, Part A fiscal intermediaries are approving some lung

transplant cases for coverage. Because there is no specific lung

transplant DRG, these cases are classified to DRG 75 (Major Chest

Procedures), which the commenters argue results in a DRG payment that

is woefully inadequate to cover the costs of the procedure. In

addition, one of the commenters understands that HCFA is in the process

of approving a national coverage determination for lung transplants

that will be effective in the very near future. Therefore, the

commenter believes that HCFA should not delay in having a DRG in place

for the procedure. This commenter also recommends that heart/lung

transplants be assigned to the new DRG.

Response: Because we are considering making a Medicare national

coverage determination on lung transplants in the near future, we are

establishing a new DRG for lung transplants as a part of this final

rule. As noted by the commenters, these cases currently are assigned to

DRG 75 in MDC 4 (Diseases and Disorders of the Respiratory System).

Cases will be assigned to the new DRG 495, Lung Transplant, based

on the presence of the procedure code for lung transplants (33.5) and

will not first be assigned to an MDC based on the principal diagnosis.

This is the same procedure we follow for liver and bone marrow

transplants.

As is our current policy for organ acquisition costs for kidney,

heart, and liver transplant cases paid under Medicare, lung acquisition

costs will be paid on a reasonable cost basis and are not included in

the prospective payment amount. We are revising Secs. 412.2(d)(4) and

412.113(d), which describe payment for organ acquisition costs as a

reasonable cost payment, to include lung acquisition costs.

The relative weight assigned to DRG 495 is based on the lung

transplant cases in the FY 1993 MedPAR file. When the weight of DRG 495

was initially calculated, the weight was less than the weight of DRG

483, Tracheostomy Except for Face, Mouth and Neck Diagnoses. Since

several lung transplant cases also received tracheostomies, we removed

these cases from DRG 495 and classified them to DRG 483 to receive the

higher payment assigned to that DRG. We note that each of these cases

had an average standardized charge that was much higher than the

average for all lung transplants. Thus, the final DRG 495 weight of

12.8346 is based on 105 cases of lung transplants in which no

tracheostomy was performed in the FY 1993 MedPAR file. This weight

places DRG 495 after DRGs 480, 483, and 481 (Bone Marrow Transplant) in

the pre-MDC surgical hierarchy. For a detailed discussion of surgical

hierarchy, see section II.B. 4 of this preamble.

Regarding the commenter's request that we include heart/lung

transplants with lung transplants in the new DRG, we note that heart/

lung transplants remain covered on a case-by-case basis as determined

by the fiscal intermediaries. Therefore, we do not believe we should

move them from their current classification in DRG 103, Heart

Transplant. We note that, for FY 1995, the relative weight for DRG 103

(13.5495) is actually higher than the weight for DRG 495.

b. Cochlear Implants (DRG 49).

Comment: We received two comments regarding cochlear implants. Both

commenters expressed concern that the cost incurred by cases receiving

the implant device far exceeds the Medicare payment these cases receive

under DRG 49 (Major Head and Neck Procedures) to which they are

assigned. According to these commenters, the cost of the device itself

represents more than the total DRG payment and, thus, is not subject to

traditional hospital cost control techniques. One commenter noted that

the economic facts regarding the costs of this implant procedure

require a more expeditious and effective adjustment than has been

granted in the past. This commenter suggests that the payment weight

assigned to cochlear implants should be appropriately adjusted, either

by assignment to a different DRG or by creation of a new DRG

specifically for cochlear implants. The other commenter requests that

cochlear implant procedures be assigned to DRG 1 (Craniotomy Age > 17

Except for Trauma) in MDC 1 (Diseases and Disorders of the Nervous

System).

Both commenters noted that, although we agreed in the September 1,

1993 final rule (58 FR 46273) to continue monitoring cochlear implant

cases, we did not discuss them in the proposed rule. One of the

commenters requested that we review the FY 1994 data for DRG 49, as

this would be the first data to reflect the change in DRG 49 weight as

a result of moving a lower cost procedure to another DRG.

In addition to the issue of inadequate payment, one commenter

observes that the number of Medicare cochlear implant cases continue to

decline. The commenter attributes this decrease to hospitals

determining that the financial loss suffered in providing the cochlear

implant to the Medicare population precludes a viable ongoing cochlear

implant program. This commenter is concerned that cochlear implants may

not exist for the Medicare population in the future.

The commenter also observes that the number of extraordinarily low

charges submitted by hospitals for the cochlear implant procedure has

decreased substantially and may be an indication that our instructions

to intermediaries on proper coding for this implant is having an

effect.

Response: Cochlear implants were first covered by Medicare in 1986

and were assigned to DRG 49 (Major Head & Neck Procedures), the highest

weighted surgical DRG in major diagnostic category (MDC) 3 (Diseases

and Disorders of the Ear, Nose, Mouth and Throat). Since that time, the

cochlear industry has contended that the weight of DRG 49 is too low

and does not adequately reflect the resources necessary for the

cochlear implant procedure. In response to these concerns, we have

analyzed Medicare data every year since 1986.

Effective October 1, 1993, in an effort to improve the homogeneity

of resource use in cases within DRG 49, we moved the lowest charge

procedure, partial glossectomy, from DRG 49 to DRGs 168 and 169 (Mouth

Procedures). This resulted in a slight increase in the average charge

for DRG 49. We have evaluated the remaining procedures in DRG 49 to

determine if further reclassification is appropriate. However, there

are no other low charge procedures remaining in DRG 49 that occur in

sufficient volume to justify further DRG shifts. We note that FY 1994

does not end until September 30, 1994, so we will not be able to

evaluate thoroughly the impact of the modification to DRG 49 until

after that date.

We note also that although we do not always publish the results of

our analysis in the Federal Register, this does not mean we have failed

to honor our commitment to continue monitoring the cochlear implant

procedures. On the contrary, we have reviewed and analyzed these data

annually. We did not include our results in the May 1994 proposed rule

because they did not vary from previous findings and we had nothing new

to add to our prior discussions. However, we will present them now.

Using FY 1993 Medicare claims data, we identified a total of 81

cochlear implant cases. These cases represent 3.5 percent of all cases

in DRG 49, and incurred an average charge of $22,386 compared to an

average charge of $15,679 for all cases in DRG 49. While there is a

higher charge for the 81 cochlear cases than for the other cases in DRG

49, we note that the cases are distributed across 54 hospitals, with no

more than 7 cases at any one hospital. The majority of hospitals (70

percent) treated only one case (38 of 54 hospitals).

We have repeatedly addressed the recommendation that we assign

cochlear implants to DRG 1, most recently in the September 1993 final

rule (58 FR 46274). Our objection to this suggestion is that the

diagnosis associated with cochlear cases (diagnosis code 389 (Hearing

loss)) is not clinically coherent with the diagnosis codes assigned to

MDC 1. A basic premise of DRG classification is the assignment of

clinically similar discharges within categories based on a common body

system or organ system. To reassign cochlear implant cases to MDC 1, we

would have to move the principal diagnosis code 389 from MDC 3, which

would move all cases with this diagnosis to a clinically inappropriate

MDC.

We acknowledge that the Medicare payment for cochlear implant

patients has been an issue for several years. However, we find no

justification for creating a special DRG for cochlear implants. We have

consistently classified clinically similar patients in DRGs who use

approximately the same amount of hospital resources. In addition, we

prefer to maintain DRGs with enough cases to ensure a normal

distribution and relative stability over time. We continue to believe

that the low volume of these cases does not justify the establishment

of a new DRG specific to cochlear implants. Nor do we generally create

DRGs that are specific to a single technology, especially those

available through a single source manufacturer.

Although some new technologies may engender a certain amount of

fixed costs, and thus, do not lend themselves readily to cost control

techniques, there are other occasions within the hospital's performance

that are responsive to cost containment. Thus, the incentive is for the

hospital to treat a mix of patients and to manage its operations in

such a way to offset losses on cases where payment is less than cost

with gains on cases where the payment is in excess of cost.

In response to the commenter's concern that cochlear implants may

not be available to Medicare beneficiaries in the future, we note that

a hospital may not refuse to provide a covered service to a Medicare

beneficiary if it provides that service to other patients.

Specifically, the Medicare regulations at 42 CFR 489.53(a)(2) provide

that HCFA may terminate a hospital's Medicare provider agreement if it

finds that the hospital places restrictions on the persons it accepts

for treatment and fails to apply them to Medicare beneficiaries the

same as to all other persons seeking care.

c. Epilepsy (DRGs 24, 25, and 26).

Comment: We received several comments addressing the classification

in DRGs 24, 25, and 26 (Seizure and Headache) of patients with

intractable epilepsy, particularly those admitted for neurodiagnostic

monitoring. The commenters believe that it is critical that a revision

be made to these DRGs for the intractable epilepsy patients to account

for the greater resource use and length of stay compared to all other

patients admitted under the same DRGs. The commenters state that the

financial risk is greatest to the small number of specialized epilepsy

centers that treat the majority of these complex patients.

The commenters refer to an analysis conducted by HCFA that reviewed

the FY 1993 average charges for all cases with a diagnosis of

intractable epilepsy where video/radio-telemetered monitoring

(procedure code 89.19) was performed. The commenters believe that the

results of the HCFA study support the need for a change in the DRG

classification system for certain cases, to be implemented in FY 1995,

using the following criteria:

A diagnosis of intractable epilepsy (diagnosis codes

345.0-345.9 with a 5th digit of 1).

The performance of video/radio-telemetered monitoring

(procedure code 89.19).

Patient age under 60.

Finally, one commenter believes that we need to address the

appropriate diagnosis code to use for patients who receive

neurodiagnostic monitoring whose seizures are not epileptic. These

patients are currently coded under 780.3 (Convulsions). The commenter

would prefer to include these patients under the unspecified

intractable epilepsy code of 345.91 so that they can be included in any

new DRG we create.

Response: The epilepsy treatment community has for some time

expressed concern that the resources used to treat the intractable

epilepsy patients far exceeded those needed for other patients in the

same DRGs, and that Medicare payment is inadequate to meet these costs.

We have previously addressed the issue of Medicare payment for

intractable epilepsy cases, most recently in the September 1, 1993

final rule (58 FR 46287). As a result of our previous analyses, we have

concluded that although intractable epilepsy patients incur higher

average charges than other patients in the same DRGs, there is not a

sufficient differential nor a sufficient volume to warrant a DRG

change.

In order to respond to the comments, we updated our most recent

study and evaluated the June 1994 update of the FY 1993 MedPAR file. We

identified 2,284 intractable epilepsy cases with an average charge of

$8,820 compared to an average charge of $7,602 for all patients in the

same DRGs. Nonintractable epilepsy cases incurred an average charge of

$7,423, for 13,412 cases. The incidence of inpatient admissions for all

cases of epilepsy has decreased by nearly 30 percent, with intractable

inpatient admissions down 19 percent from the FY 1992 data (2,817 to

2,284 cases). The following table summarizes our most recent epilepsy

analysis findings, comparing the average charges between epilepsy and

other cases assigned to the same DRG (the number of cases is included

in parentheses):

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

Intractable Nonintractable All

DRG epilepsy epilepsy epilepsy All cases

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

24................... $10,605

(1,152) $8,525

(9,595) $8,748

(10,747) $8,630

(57,041)

25................... $7,003

(1,132) $4,654

(3,811) $5,192

(4,943) $4,738

(20,456)

26................... 0 $4,003

(6) $4,003

(6) $5,912

(43)

All Cases............ $8,820

(2,284) $7,423

(13,412) $7,626

(15,696) $7,602

(77,540)

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

Focusing our analysis on intractable epilepsy patients with and

without video-telemetered monitoring (procedure code 89.19) confirms

our earlier findings; that is, intractable epilepsy patients who

receive the neurodiagnostic monitoring do in fact incur charges greater

than those of other intractable epilepsy cases and of all other

patients in the same DRGs. Although, in the past, there has been a

problem with the underreporting of procedure code 89.19 and an

inability to identify the extent of use of this procedure, we note that

there has been a substantial increase in reporting in the FY 1993 data.

The number of cases now appears to more accurately match the volume

predicted in the past by the epilepsy treatment centers. The results of

this analysis are summarized in the following table:

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

Intractable Nonintractable

DRG epilepsy epilepsy

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

24 with 89.19.............................. $13,493

(104) $9,711

(28)

24 w/o 89.19............................... $10,318

(1,048) $8,521

(9,567)

25 with 89.19.............................. $10,178

(359) $9,544

(77)

25 w/o 89.19............................... $5,529

(773) $4,553

(3,734)

26 with 89.19.............................. 0 0

26 w/o 89.19............................... 0 $4,003

(6)

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

The commenters recommend that, in revising the DRGs, we target the

under age 60 patients who are hospitalized with intractable epilepsy

and receive a neurodiagnostic work-up with video-telemetered

monitoring. We used age 65 rather than age 60 in our analysis because

that is a natural age break in the Medicare patient population. That

is, patients under age 65 who receive Medicare benefits qualify on the

basis of disability rather than on the basis of age. We do not believe

the difference in age break is significant.

Our analysis identified 335 cases of intractable epilepsy with

video-telemetered monitoring in DRG 25 that were under age 65. (We

concentrated on DRG 25 as suggested by the commenters because patients

admitted for neurodiagnostic monitoring must be relatively healthy and,

thus, do not usually have any complicating conditions.) The average

charge for all intractable epilepsy patients in DRG 25 with procedure

89.19 was $10,178. When age less than 65 was taken into account, the

average charge was $10,368, compared to an average of $7,527 for the 24

patients age 65 and over. The following table summarizes the DRG 25

average charges for intractable epilepsy patients under age 65 compared

to other patients:

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

DRG 25 Age 65 All Ages

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

All Cases........................... $4,740

($7,422) $4,737

(13,034) $4,738

(20,456)

Intractable Epilepsy Cases.......... $7,323

(952) $5,313

(180) $7,003

(1,132)

Intractable Epilepsy Cases with

89.19.............................. $10,368

(335) $7,527

(24) $10,178

(359)

Intractable Epilepsy Cases w/o 89.19 $5,670

(617) $4,973

(156) $5,529

(773)

Nonintractable Epilepsy Cases with

89.19.............................. $10,078

(58) $7,913

(19) $9,544

(77)

Nonintractable Epilepsy Cases w/o

89.19.............................. $4,180

(1,520) $4,808

(2,214) $4,553

(3,734)

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

While we concur with the commenters that the average charges for

intractable epilepsy receiving video-telemetered monitoring are indeed

greater than those who do not, our findings indicate that this is more

a function of the procedure than age of the patient. The highest

charges of any group are those intractable epilepsy cases with

procedure 89.19 in DRG 24 ($13,493 for 104 cases). The average charge

for all intractable epilepsy cases with procedure code 89.19 is

$10,922, while those under 65 in DRG 24 have average charges of $13,452

and those under 65 in DRG 25 average $10,368. Thus, based on the FY

1993 data, the majority of the intractable epilepsy cases under age 65

who receive video-telemetered monitoring classify to DRG 25 (79

percent; 335 cases of 423). However, the highest average charges for

this age group and procedure are found in DRG 24. In addition, the

nonintractable epilepsy patients under age 65 who receive procedure

code 89.19 in DRG 25 averaged charges of $10,078, only slightly lower

than the average charge for the intractable epilepsy cases in the same

DRG and age category.

At the request of one commenter, we reviewed the number of cases

with diagnosis code 780.3 (Convulsions) and found this diagnosis

accounted for 61 percent of the total cases in DRGs 24 through 26

(47,340 of 77,540 cases). Intractable epilepsy was reported as a

secondary diagnosis in only 10 of these cases, with an average charge

of $3,502; nonintractable epilepsy was a secondary diagnosis in 81

instances, with an average charge of $6,351. We note that, in response

to the commenter's suggestion that these cases would be more

appropriately coded to diagnosis 345.91, the coding notes for 345.91

specifically excludes conditions coded to 780.3. We agree with the

commenter this change in coding be pursued through the ICD-9-CM

Coordination and Maintenance Committee.

As a result of our analysis, we note that, as a group, the

intractable epilepsy cases are not the most resource-intensive set of

cases assigned to DRGs 24 through 26. The highest volume of epilepsy

cases are coded 345.3 (Epilepsy, Grand Mal status), with 5,708 cases

reported in the FY 1993 MedPAR and an average charge of $12,324. Of the

epilepsy diagnoses, the average charge for grand mal epilepsy is

exceeded only by intractable epilepsy partialis continua (diagnosis

code 345.71) with an average charge of $13,346 but only 47 cases.

In response to the commenter's contention that epilepsy centers are

at financial risk, we also evaluated the distribution of epilepsy cases

across hospitals. We found 830 hospitals admitted patients with

intractable epilepsy; 3,141 hospitals treated patients with

nonintractable epilepsy. Of those hospitals treating intractable

epilepsy cases, only 5 percent of these hospitals (44) treated 10 or

more cases, while 2.3 percent treated 20 or more cases. The vast

majority (86 percent) treated 3 or fewer cases (711 of 830 hospitals).

As in our prior analyses, we found that among the high volume

hospitals, charges for these cases were normally distributed, with

approximately 50 percent above the average charge and 50 percent below

the average.

Of the 30 recognized epilepsy treatment centers, only 23 reported

any intractable epilepsy discharges in FY 1993. The remaining epilepsy

centers are either children's hospitals and are excluded from the

prospective payment system or did not treat intractable epilepsy

patients in FY 1993. Approximately 70 percent (16 of 23 centers)

treated 10 or more cases; less than 2 percent treated fewer than 4

intractable epilepsy cases. However, of the total 2,284 intractable

epilepsy cases, less than 18 percent (405 cases) were admitted to

epilepsy treatment centers. The average charge per intractable epilepsy

case treated at an epilepsy treatment center was $9,546, only slightly

higher than the $8,820 average charge at all hospitals.

Although the distribution of intractable epilepsy patients across

hospitals tends to minimize the impact of higher charges on any one

hospital, we acknowledge that, even though the volume of hospitals is

small, many hospitals treating high numbers of intractable epilepsy

patients may incur charges above the average. This is particularly true

for the specialized treatment centers. However, we note that these

hospitals are for the most part large urban or teaching hospitals or

both and, as such, receive some of the highest Medicare payment rates.

We are not recommending any DRG modification for epilepsy cases at

this time. Although the intractable epilepsy cases, especially those

using procedure 89.19, result in higher charges than other cases in the

same DRGs, the difference is neither clearly defined by age category or

DRG nor of sufficient volume to justify a separate DRG for these

patients. Therefore, we do not accept the commenters' recommendation

that we create a DRG for intractable epilepsy patients, under age 60,

using video-telemetered monitoring.

Comment: Another commenter expressed concern that the current

Medicare payment policy may be having an adverse effect on patient

access for those intractable epilepsy cases requiring neurodiagnostic

monitoring.

Response: As noted above, in our response to cochlear implant

comments, hospitals may not refuse to offer a covered service to

Medicare patients if they provide this same service to other patients.

d. Heart Assist Devices.

Comment: We received several comments concerning the DRG assignment

of and payment for the implantation of ventricular assist devices. The

commenters believe that the current assignment of this procedure

(procedure code 37.62) to DRGs 110 and 111 (Major Cardiovascular

Procedures) was made based on outdated data and does not reflect

current practice.

The commenters note that only one heart assist device, the BVS 5000

biventricular support system, has received approval from the Food and

Drug Administration (FDA) and is covered by Medicare when used in

patients suffering from postcardiotomy ventricular dysfunction. (See

section 65-15 of the Medicare Coverage Issues Manual (HCFA Pub. 6).)

One of the commenters, the manufacturer of the BVS 5000, submitted the

results of a study it commissioned to analyze the current Medicare

payments for that device.

The study analyzed the hospital bills for 36 cases of implantation

of the heart assist device that were performed at 13 hospitals. Using

the information on the hospital bills, total hospital charges were

calculated for each of the 36 cases and then standardized using

Medicare formulas and adjustment factors. (The 36 cases are a sample of

all patients receiving the BVS 5000 and are not restricted to Medicare

beneficiaries.) The results of the study indicated that the average

standardized charge for the 36 cases was consistently much higher than

the average standardized charge for each of the nine DRGs to which

these cases would have been assigned. Overall, the average standardized

charge for the 36 cases was $155,396, compared to an estimated average

DRG payment of $30,488, exclusive of capital and outlier payments.

Using the average standardized charge of $155,396, the study

imputes a DRG weight of 19.3803 for these cases. Even if the cases that

would group to DRG 103 (Heart Transplant) and DRG 483 (Tracheostomy

Except for Face, Mouth, and Neck Diagnoses) are excluded, the average

standardized charge is still $114,299, implying a weight of 14.2548.

Based on this result, the study recommends that the BVS 5000 cases be

reassigned from DRGs 110 and 111 to DRG 103, which, with an FY 1994

weight of 14.0215, is the most appropriate DRG assignment in MDC 5

(Diseases and Disorders of the Circulatory System). In addition, from a

clinical perspective, both patients assigned to DRG 103 and those who

receive a BVS 5000 are seriously ill, have cardiac dysfunction that

cannot continue to sustain life, and require lengthy and intensive

hospital care.

Finally, one commenter expressed concern that the volume of cases

in the FY 1993 MedPAR file with procedure code 37.62 (406 cases)

indicates that many of the Medicare patients are receiving nonapproved

heart assist devices that should be excluded from Medicare payment. The

commenter suggested that hospitals should be directed to use code 37.62

only for procedures involving FDA-approved and Medicare-covered

devices.

Response: Our analysis of the FY 1993 MedPAR file identified 406

cases with a procedure code of 37.62. Approximately 10 percent of these

cases (38 cases) were assigned to DRGs outside of MDC 5, with the

highest volume (25 cases) classified to DRG 483. Of the remaining 368

cases, 266 were assigned to DRGs other than DRGs 110 and 111.

Therefore, there were only 102 cases (approximately 25 percent of the

total) that were assigned to a DRG based on the presence of a heart

assist device (96 cases to DRG 110 and 6 cases to DRG 111). In DRG 110,

the average standardized charge for cases with procedure code 37.62 was

$39,038 and the average for all cases in that DRG was $32,939. For the

6 cases assigned to DRG 111, the average standardized charge was

$57,375 compared to $18,259 for all cases in that DRG.

Based on the results of our analysis, we do not believe that the

cases of implantation of a heart assist system assigned to DRG 110 are

vastly underpaid. In fact, the average charge for those cases is only

$6,000 higher than the other cases in the DRG and is well within the

normal range of charges for DRG 110. In addition, although the average

charge for the 6 cases assigned to DRG 111 is much higher than the

overall average (almost $40,000 more), the exclusion of one extremely

expensive case (standardized charge of $258,172) results in an average

charge of $17,218 for the remaining 5 cases, which is below the DRG 111

average charge. We note that the expensive case would have received a

large outlier payment in addition to its operating and capital DRG

payments.

Unlike the manufacturer's study, which identified specific cases

using the FDA-approved device, we are not able to distinguish the

approved device from other devices which are still investigational.

Based on the volume of cases in the FY 1993 data, we are certain that

several different devices are being captured by the 37.62 code for

heart assist implants. We note that the cases in this file were all

discharged prior to the date the BVS 5000 was approved for coverage

(October 1, 1993). Therefore, with the exception of those limited cases

in which contractor discretion has been exercised, there are no covered

devices in the FY 1993 MedPAR file, including the BVS 5000 cases. The

manufacturer of the BVS 5000 declined to honor our request for a list

of the hospitals that purchase and implant its device. A list of

identified hospitals could help us to narrow our analysis to cases that

are likely to be covered under Medicare.

Because of our inability to identify specifically the FDA-approved

device, we cannot determine the DRG distribution nor the charges

attributable to the implant of the BVS 5000. Nor is it possible to

identify those cases where the heart assist device is used as a bridge

to heart transplant, for which it is not covered under Medicare policy.

Therefore, at this time, we do not believe that we have enough

information to recommend any change in DRG classification for this

device. Based on the data available, it does not appear that DRGs 110

and 111 are inappropriate designations for procedure code 37.62.

We cannot advise hospitals that they may use procedure code 37.62

only for those devices that are approved and covered under Medicare.

The ICD-9-CM procedure codes are not the exclusive domain of Medicare

payment policy. These codes are used by many other organizations and

agencies for various health-related purposes. We suggest that the

commenters contact Patricia E. Brooks, co-chairperson of the ICD-9-CM

Coordination and Maintenance Committee, concerning the feasibility of

creating a procedure code specific to implant of the FDA-approved

biventricular support system. Ms. Brooks' address is set forth in

section II.B.7 of this preamble.

e. Automatic implantable cardioverter defibrillator (AICD)

procedures (DRG 116). For several years, we have received

correspondence concerning the appropriate DRG assignment of certain

procedures involving automatic implantable cardioverter defibrillators

(AICDs). When a patient whose principal diagnosis is classified to MDC

5 (Diseases and Disorders of the Circulatory System) receives a total

AICD system implant or replacement (procedure code 37.94), the case is

assigned to DRG 104 or 105 (Cardiac Catheterization). However, prior to

October 1, 1992, if a procedure was performed that involved the

implantation or replacement of only part of the AICD system (that is,

replacement or implant of either the leads or pulse generator only),

the case was assigned to DRG 120 (Other Circulatory System OR

Procedures). Effective with discharges occurring on or after October 1,

1992, these procedures were assigned to DRG 116 (Other Permanent

Cardiac Pacemaker Implant or AICD Lead or Generator Procedure).

Although we proposed no further changes to this DRG assignment for FY

1995, we received several comments.

Comment: Commenters requested that we change the DRG assignment for

procedures in which replacement or implantation of only part of the

AICD system (either the leads or pulse generator) is performed from DRG

116 to DRG 115 (Permanent Cardiac Pacemaker Implantation with AMI,

Heart Failure or Shock). The relevant procedure codes are the

following: 37.95 (Implantation of automatic cardioverter/defibrillator

lead(s) only), 37.96 (Implantation of automatic cardioverter/

defibrillator pulse generator only), 37.97 (Replacement of automatic

cardioverter/defibrillator lead(s) only), 37.98 (Replacement of

automatic cardioverter/defibrillator pulse generator only).

The commenters expressed concern that, even with the revised

classification to DRG 116, hospitals are not adequately compensated for

these procedures. Based on the results of an August 1992 study

commissioned by the only AICD manufacturer at that time, the commenters

estimate that these procedures should be assigned to a DRG with a

relative weight of 3.7300. (The FY 1995 relative weights for DRGs 115

and 116 are 3.5936 and 2.4514, respectively.) Therefore, the commenters

assert that assignment of AICD cases to DRG 115 would be more

equitable.

Response: As explained in detail in the September 1, 1992 final

rule (57 FR 39749), the current clinical composition and relative

weights of the surgical DRGs in MDC 5 do not offer a perfect match with

the AICD cases. After reviewing the current DRGs in terms of clinical

coherence and similar resource use, we determined that DRG 116 was the

best fit possible.

Since reassignment of these procedures to DRG 116, we have annually

reanalyzed the cases based on the most recent data. Based on data in

the 1993 MedPAR file, the average standardized charge for AICD cases

was $27,999 for the 1,933 cases assigned to DRG 116. The average

standardized charge for all cases in DRG 116 was $19,456 and, for DRG

115, $29,001. Although the $8,543 difference between the average charge

for AICD cases in DRG 116 and all cases in DRG 116 is within the normal

range of charges for that DRG, the difference in charges has grown over

the last 2 years.

The average length of stay for these AICD cases is 4.6 days

compared to 4.6 for all cases in DRG 116. However, the length of stay

for cases in DRG 115 is 12.8 days. In general, the patients classified

to DRG 115 are seriously ill and the long length of stay supports this

contention. We believe that even though the average charge for an AICD

case is closer to the average charge in DRG 115 than that of DRG 116,

clinically, the AICD patients are much more similar to the patients

classified to DRG 116 than those in DRG 115. Thus, it is the cost of

the AICD device that is responsible for the high average charge for

these cases and not the intensity of hospital services required to

treat the patient.

Although originally there was only one AICD device on the market,

others have become approved and are now available for hospitals. We

believe that with these new devices, increased competition may result

in a decrease in the price and a corresponding drop in the average

charge for a hospital stay for AICD procedures. In any case, as with

the cochlear implants discussed above in this section of the preamble,

we are reluctant to provide higher DRG weights for categories of cases

that are made costly due to the cost of a device. We do, however,

acknowledge that this problem with new technologies is increasing and

we are interested in finding a cost-effective solution to the problem.

In the meantime, we believe continued assignment of AICD implant cases

to DRG 116 is appropriate. We will continue reviewing this issue during

FY 1995.

f. DRG Assignment Issues. Among the comments received on the

proposed rule were three inquiries regarding DRG case assignments.

These comments, although unrelated to any changes in the proposed rule,

are representative of the types of questions that we receive throughout

the year concerning DRG assignment. We are responding to these comments

in this final rule in the interest of public information and

clarification of the DRG classification system.

Comment: One commenter requests an explanation of why a patient

with a principal diagnosis of osteomyelitis (diagnosis code 730.xx) who

has a toe amputation (procedure code 84.11) is assigned to DRG 225

(Foot Procedures) with a proposed FY 1995 weight of 0.9056 when a

patient with the same principal diagnosis who has no surgical

intervention is assigned to higher-weighted DRG 238 (Osteomyelitis),

with a proposed weight of 1.4971. The commenter suggests that a more

appropriate assignment for the toe amputation would be DRGs 233 and 234

(Other Musculoskeletal System and Connective Tissue OR Procedures) with

proposed weights of 1.9004 and .9497, respectively.

Response: The classification of a case to a DRG begins with

assignment to an MDC based on principal diagnosis. A patient with

osteomyelitis is assigned to MDC 8 (Diseases and Disorders of the

Musculoskeletal System and Connective Tissue). The next step is to

group the case into the appropriate DRG within that MDC. If an

operating room procedure is performed, the case will group to one of

the surgical DRGs in MDC 8. A case with the same principal diagnosis

code and no surgical procedure will group to a medical DRG.

The DRG relative weights assigned to a particular DRG are based on

the average amount of resources used in treating the patients in that

DRG, as measured by total charges, relative to the average resources

used to treat all patients. The commenter assumes that a case in which

surgery is performed has higher resource use and, therefore, should

have a weight that is higher than a case in which no surgery is

performed. This assumption is unfounded since many other aspects,

including length of stay and severity of illness, also account for

resource use. In fact, cases in DRG 225 have a much shorter average

length of stay (5.2 days) than cases in DRG 238 (12.8 days). One reason

we have found for lower relative weights in some surgical DRGs as

compared to medical DRGs in the same MDC is the fact that often the

patients in the surgical DRG have received a clear diagnosis and begin

treatment soon after they are admitted to the hospital. On the other

hand, some medical cases involve lengthy medical diagnostic workup and

testing to discover both the reason for the hospital stay and the

treatment that should be given.

The cases that group to DRG 225 receive one of several well-

defined, relatively low-resource use procedures and are discharged

within a few days. However, the cases that group to DRG 238 encompass a

large range of principal diagnoses, many of which can take several days

to diagnose and treat.

Comment: The same commenter is also concerned about a case in which

a patient is admitted with chest pain, has a cardiac catheterization,

and is ultimately diagnosed with a noncardiac diagnosis such as

gastritis. In this scenario, the case is assigned to a DRG consistent

with the principal diagnosis of gastritis, and the cardiac

catheterization does not affect the DRG assignment. The commenter,

therefore, believes that the hospital is not being adequately

compensated for the resources expended. If the same patient had been

determined to have a cardiac condition, the catheterization would have

counted in DRG assignment.

Response: As discussed above, the classification of a case to a DRG

begins with assignment to an MDC based on the principal diagnosis. In

order to maintain the integrity of the system, cases must be assigned

to DRGs to which they are most clinically related. Cardiac

catheterization is a non-OR procedure that is considered for DRG

assignment within MDC 5, but is treated as any other non-OR procedure

in all the other MDCs. This policy recognizes the fact that

catheterization is an important determinant in the resources used in

the cardiac cases in MDC 5. However, it is not generally associated

with treatment or diagnosis in other MDCs.

Under the prospective payment system, Medicare does not pay for the

costs of individual cases. Because it is a system based on an averaging

process, some cases in a particular DRG will incur costs in excess of

payment while others will receive payment in excess of costs. Thus,

although a patient with a principal diagnosis of gastritis who receives

a cardiac catheterization may consume more resources than the average

patient with that diagnosis, there will no doubt be patients with the

same principal diagnosis and DRG assignment who consume fewer than

average resources.

Comment: Another commenter questions the assignment of a patient

with pulmonary edema and heart disease (principal diagnosis code 428.0

(Congestive heart failure)) who requires mechanical ventilation to DRG

127 (Heart Failure and Shock) with a final FY 1995 relative weight of

1.0239. However, a patient with acute pulmonary edema and no heart

condition (principal diagnosis code of 518.4 (Acute edema of lung,

unspecified)) who requires mechanical ventilation is assigned to DRG

475 (Respiratory System Diagnosis with Ventilator Support) with a FY

1995 relative weight of 3.7005. Again, the commenter cannot understand

the different payment amount for the same type of case.

Response: Although these cases exhibit the same symptom (pulmonary

edema), the principal diagnoses are assigned to two different MDCs.

Under our current system, mechanical ventilation is a determining

factor in the assignment of cases in MDC 4. Therefore, the case that

groups to that MDC is classified to a DRG based on the mechanical

ventilation. In all other MDCs, the use of mechanical ventilation is

not considered in the assignment of the case. In the September 1, 1993

final rule, we discussed our intention to analyze cases with mechanical

ventilation in all MDCs and to consider the appropriate placement of

these cases as a part of our larger DRG refinement work (58 FR 46285.)

As we have discussed above in section II.B.8 of this preamble, that

refinement will not be implemented before FY 1996.

C. Recalibration of DRG Weights

We proposed to use the same basic methodology for the FY 1995

recalibration as we did for FY 1994. (See the September 1, 1993 final

rule (58 FR 46290).) That is, we proposed to recalibrate the weights

based on charge data for Medicare discharges. However, we proposed to

use the most current charge information available, the FY 1993 MedPAR

file, rather than the FY 1992 MedPAR file. The MedPAR file is based on

fully-coded diagnostic and surgical procedure data for all Medicare

inpatient hospital bills.

The proposed recalibrated DRG relative weights were constructed

from FY 1993 MedPAR data, received by HCFA through December 1993, from

all hospitals subject to the prospective payment system and short-term

acute care hospitals in waiver States. The FY 1993 MedPAR file at that

time included data for approximately 10.5 million Medicare discharges.

The MedPAR file updated through June 1994 includes data from

approximately 10.7 million discharges and is the file used to calculate

the weights set forth in Table V of the addendum to this final rule.

The methodology used to calculate the DRG relative weights from the

FY 1993 MedPAR file is as follows:

To the extent possible, all the claims were regrouped

using the revised DRG classification revisions discussed above in

section II.B of this preamble. As noted in section II.B.4, due to the

unavailability of revised GROUPER software, we simulate most major

classification changes to approximate the placement of cases under the

proposed reclassification. However, there are some changes that cannot

be modeled.

Charges were standardized to remove the effects of

differences in area wage levels, indirect medical education costs,

disproportionate share payments, and, for hospitals in Alaska and

Hawaii, the applicable cost-of-living adjustment.

The average standardized charge per DRG was calculated by

summing the standardized charges for all cases in the DRG and dividing

that amount by the number of cases classified in the DRG.

We then eliminated statistical outliers using the same

criterion as was used in computing the current weights. That is, all

cases outside of 3.0 standard deviations from the mean of the log

distribution of charges per case for each DRG were eliminated.

The average charge for each DRG was then recomputed

(excluding the statistical outliers) and divided by the national

average standardized charge per case to determine the relative weight.

We established the relative weight for heart transplants

(DRG 103) and liver transplants (DRG 480) in a manner consistent with

the methodology for all other DRGs except that the transplant cases

that were used to establish the weights were limited to those Medicare-

approved heart and liver transplant centers, respectively, that have

cases in the FY 1993 MedPAR file. Similarly, we limited the lung

transplant cases that were used to establish the weight for DRG 495

(Lung Transplant) to those hospitals that are established lung

transplant centers.

Acquisition costs for kidney, heart, liver, and lung

transplants are paid on a reasonable cost basis. Unlike other excluded

costs, the acquisition costs are concentrated in specific DRGs (DRG 302

(Kidney Transplant); DRG 103 (Heart Transplant); DRG 480 (Liver

Transplant); and DRG 495 (Lung Transplant)). Because these costs are

paid separately from the prospective payment rate, it is necessary to

make an adjustment to prevent the relative weights for these DRGs from

including the effect of the acquisition costs. Therefore, we subtracted

the acquisition charges from the total charges on each transplant bill

that showed acquisition charges before computing the average charge for

the DRG and before eliminating statistical outliers.

When we recalibrated the DRG weights for previous years, we set a

threshold of 10 cases as the minimum number of cases required to

compute a reasonable weight. We proposed to use that same case

threshold in recalibrating the DRG weights for FY 1995. Using the final

FY 1993 MedPAR data set, there are 35 DRGs that contain fewer than 10

cases. We computed the weight for the 35 low-volume DRGs by adjusting

the original weights of these DRGs by the percentage change in the

average weight of the cases in the remaining DRGs.

The weights developed according to the methodology described above,

using the DRG classification changes, result in an average case weight

that is different from the average case weight before recalibration.

Therefore, the new weights are normalized by an adjustment factor, so

that the average case weight after recalibration is equal to the

average case weight before recalibration. This adjustment is intended

to ensure that recalibration by itself neither increases nor decreases

total payments under the prospective payment system.

Although we received no comments on the recalibration of the DRG

weights, we did receive two comments that relate to that process.

Comment: Two commenters were concerned that the proposed FY 1995

DRG weights for certain transplant cases were lower than the weights

that were in effect for FY 1994. The DRGs in question are those for

liver transplants (DRG 480) and heart transplants (DRG 103). The

commenters believe that these cases are getting more costly, not less,

as the lower weights would lead one to believe. The commenters suggest

that we further investigate the data on these cases.

Response: Every year when the relative weights are recalibrated, we

use charge information from the most recent Medicare data available.

That is, we use the charges reported by hospitals for the cases paid

under each DRG. Therefore, any change in the relative weight of a DRG

is directly related to the average charge of the cases classified to

that DRG compared to the average charge of all the cases.

The average charges used to calculate the weight for DRG 103

actually increased between the FY 1992 data used to calculate the FY

1994 weights and the FY 1993 data used to calculate the FY 1995

weights; however, the average charge for DRG 480 decreased. The average

charge for DRG 103 increased from $105,748 to $107,489 and the average

charge for DRG 480 decreased from $146,824 to $144,843. These changes

reflect an increase of less than 2 percent in the charges for DRG 103

and a decrease of slightly more than 1 percent in the charges for DRG

480. However, the average charge of all cases in the 2 years increased

from $10,483 to $11,108, an increase of 6 percent. Thus, the weights of

DRG 103 and 480 both decrease between FY 1994 and FY 1995 because the

change in the average charges for those DRGs is less than the increase

in the average charge for all cases.

We note that the relative weight of DRG 103 has been slightly

erratic in the last 5 years, with a low of 12.5568 in FY 1993 and a

high of 14.0323 in FY 1992. This is not unusual for a relatively low

volume DRG (under 400 cases) with a large range of reported charges

(approximately $25,000 to $600,000). A few very low or very high charge

cases can make a dramatic difference in the DRG weight. Regarding DRG

480, we note that the weight has been steadily decreasing since FY 1992

(relative weight of 22.8213).

Section 1886(d)(4)(C)(iii) of the Act requires that beginning with

FY 1991, reclassification and recalibration changes be made in a manner

that assures that the aggregate payments are neither greater than nor

less than the aggregate payments that would have been made without the

changes. Although normalization is intended to achieve this effect,

equating the average case weight after recalibration to the average

case weight before recalibration does not necessarily achieve budget

neutrality with respect to aggregate payments to hospitals because

payment to hospitals is affected by factors other than average case

weight. Therefore, as discussed in section II.A.4.b. of the Addendum to

this final rule, we are making a budget neutrality adjustment to

implement the requirement of section 1886(d)(4)(C)(iii) of the Act.

III. Changes to the Hospital Wage Index and Medicare Geographic

Classification Review Board Guidelines

A. Background

Under the Medicare prospective payment system, different payment

rates are calculated for hospitals located in rural, urban, and large

urban areas. For purposes of the standardized payment amount, section

1886(d)(2)(D) of the Social Security Act requires that we use

Metropolitan Statistical Areas (MSAs) as defined by the Office of

Management and Budget (OMB) to determine whether hospitals are located

in rural, urban or large urban areas (areas with a population over 1

million). However, section 1886(d)(3)(A) of the Act provides for the

elimination of separate urban and rural standardized payment amounts

beginning in FY 1995.

Section 1886(d)(3)(E) of the Act requires that, as part of the

methodology for determining prospective payments to hospitals, the

Secretary shall adjust the standardized amounts ``for area differences

in hospital wage levels by a factor (established by the Secretary)

reflecting the relative hospital wage level in the geographic area of

the hospital compared to the national average hospital wage level.'' In

accordance with the broad discretion conferred by this provision, we

currently define hospital labor market areas based on the definitions

of MSAs issued by OMB. Additionally, we adjust the wage index to take

into account the geographic reclassification of hospitals in accordance

with sections 1886(d)(8)(B) and 1886(d)(10) of the Act.

Section 1886(d)(3)(E) of the Act also requires that the wage index

be updated annually beginning October 1, 1993. This section further

provides that the Secretary base the update on a survey of wages and

wage-related costs of short- term acute care hospitals. The survey

should measure, to the extent feasible, the earnings and paid hours of

employment by occupational category and must exclude data with respect

to the wages and wage-related costs incurred in furnishing skilled

nursing services.

For determining prospective payments to hospitals in FY 1995, the

wage index is based on the data collected from the Medicare cost

reports submitted by short-term acute care hospitals for cost reporting

periods beginning in FY 1991 (that is, cost reporting periods beginning

on or after October 1, 1990 and before October 1, 1991). The current

wage index includes wages and salaries paid by a hospital, home office

salaries, fringe benefits, and certain contract labor costs and hours.

The current computation of the wage index excludes salaries and wages

associated with non-hospital type services, such as skilled nursing

facility services, home health agency services, or other subprovider

components that are not subject to the prospective payment system.

In the May 27, 1994 proposed rule, we proposed to use updated wage

data to construct the FY 1995 wage index as required by section

1886(d)(3)(E) of the Act. In addition, we proposed changes in the

future reporting of hospital wage index data. The changes we proposed

to the wage index are discussed in detail below.

In the proposed rule, we also presented our research and analysis

concerning several options for alternative labor market areas and

solicited public comment. The deadline for comments concerning any of

the labor market alternatives was August 31, 1994. As stated in the

proposed rule, we will consider all comments received by this date as

we continue to evaluate possible options for revising wage index labor

market areas.

In addition, we are revising the guidelines for reclassification by

the MGCRB by eliminating the adjacency requirement for individual

hospital reclassifications. This change is discussed below in section

III.F. of this preamble. We welcome public comments on the elimination

of this requirement.

B. FY 1995 Wage Index Update

We proposed to base the FY 1995 wage index, effective for hospital

discharges occurring on or after October 1, 1994 and before October 1,

1995, upon the data collected from the Medicare cost report (Worksheet

S-3, Part II) submitted by hospitals for cost reporting periods

beginning in FY 1991.

We proposed to use all of the categories of data collected from

Worksheet S-3, Part II. Therefore, the FY 1995 wage index reflects the

following:

Total short-term acute care hospital salaries and hours.

Home office costs and hours.

Fringe benefits associated with hospital and home office

salaries.

Direct patient care related contract labor cost and hours.

The exclusion of salaries and hours for non-hospital type

services such as skilled nursing facility services, home health

services, or other sub-provider components that are not subject to the

prospective payment system.

1. Midyear Wage Data Corrections

The data for the proposed FY 1995 wage index was obtained from

Worksheet S-3, Part II, of the HCFA-2552 submitted by short-term acute

care hospitals for cost reporting periods beginning during FY 1991. The

wage data are reported electronically to HCFA through the Hospital Cost

Report Information System (HCRIS). Because of substantial deficiencies

in the initial data reported by hospitals on the cost report (including

missing data items such as excluded hours and total paid hours), we

initiated an intensive review of the wage data and made numerous edits

to ensure quality and accuracy. Medicare intermediaries were instructed

to transmit any revisions to HCFA through HCRIS by early January 1994.

In the proposed rule, we discussed in detail the review of the cost

report data (59 FR 27718), as well as the process that hospitals could

use to verify their wage data and to submit corrections if necessary.

The wage file used to construct the proposed wage index included

data obtained in late January 1994 from the HCRIS database and

subsequent changes we received from intermediaries through March 14,

1994. To allow sufficient time to process any changes, we instructed

hospitals to submit requests for corrections to their fiscal

intermediaries by May 15, 1994. To be reflected in the final wage

index, any wage data corrections had to be reviewed by the intermediary

and transmitted to HCFA via HCRIS on or before June 15, 1994. In the

proposed rule, we noted that we would make a diskette available in mid-

August that would contain the finalized raw wage data used to construct

the wage index values in this final rule. We also noted that we were

making the August diskette available for the limited purpose of

identifying any potential errors made by HCFA or the intermediary in

the tabulation of finalized wage data, not for the initiation of new

wage data correction requests (59 FR 27719).

If, after reviewing the diskette made available to hospitals in

August or after reviewing the data published in this rule, a hospital

believes that its wage data is incorrect due to a fiscal intermediary

or HCFA error, it should immediately send a letter to both its fiscal

intermediary and HCFA. The letters to the intermediary and HCFA should

outline why the hospital believes an error exists. These requests must

be received by HCFA no later than September 23, 1994. Requests should

be sent to: Charles R. Booth, Director; Office of Payment Policy; 181

East High Rise; 6325 Security Boulevard; Baltimore, Maryland 21207. The

intermediary will review requests upon receipt and, if it is determined

that an intermediary or HCFA error exists, the fiscal intermediary will

notify HCFA immediately. As we noted in the proposed rule, after mid-

August, we will make changes to the hospital wage data only in those

very limited circumstances involving an error by the intermediary or

HCFA that the hospital could not have known about before review of the

August diskette.

We stated that if hospitals followed the steps outlined in the

proposed rule, errors in the final wage index should be eliminated.

However, we proposed to allow midyear corrections to the wage data

under limited circumstances. Accordingly, we are revising

Sec. 412.63(s)(2) to provide that the Secretary may make midyear

corrections to the wage index only in those limited circumstances where

a hospital can show: (1) that the intermediary or HCFA made a

tabulation error, and (2) that the hospital could not have known about

the error, or did not have an opportunity to correct the error, by

September 23, 1994. Since a hospital will have the opportunity to

verify its data and the intermediary will notify the hospital of any

changes, we foresee few, if any, specific circumstances under which

midyear corrections would be made. However, should a midyear correction

be necessary, the wage index change for the affected area will be made

prospectively from the date the correction is made. If midyear

corrections to the wage index values are made, we will take their

effect into account in establishing the standardized amounts for the

following Federal fiscal year in accordance with Sec. 412.63(s)(4).

Comment: We received numerous comments about our proposed midyear

correction process. One commenter suggested that we allow providers to

change their wage data at any point in the fiscal year. Another agreed

with our plan for allowing midyear corrections only in cases of

intermediary or HCFA error but wanted us to apply any changes

retroactive to October 1, 1994. Another commenter suggested that we

expand the midyear correction process to include cases in which the

intermediary should have known the data was wrong and therefore should

have investigated any obvious discrepancy as well as cases in which the

intermediary should have reviewed a hospital's data because the

hospital's average hourly wage decreased from the prior fiscal year.

Response: We do not believe that it is appropriate to allow

hospitals to change their wage data at any point in the fiscal year or

to expand the midyear correction process as the commenter has

suggested. As we stated in the proposed rule (59 FR 27719), we believe

that midyear corrections should not be made in most cases. The wage

data correction process described above and in the proposed rule has

provided hospitals with sufficient opportunity to bring errors made in

the preparation of Worksheet S-3 to the intermediary's attention.

Moreover, because hospitals have had access to the raw wage data in

mid-August, they will have had the opportunity to detect any

ministerial tabulation errors made by the intermediary or HCFA before

the implementation of the prospective payment rates. We believe that if

hospitals have availed themselves of the opportunity to review their FY

1991 wage data, the wage index implemented on October 1 should be free

of errors.

We believe our policy is consistent with section 1886(d)(3)(E) of

the Act, which requires that the wage index be updated annually

beginning with October 1, 1993. In so providing, Congress has

essentially created an annual wage data review process that ends with

the publication of the payment rates for the fiscal year at issue.

Moreover, as we noted in the September 1, 1992 final rule (57 FR

39765), implementation of midyear corrections in previous years

resulted in several problems related to the reclassification of

hospitals by the Medicare Geographic Classification Review Board.

Allowing hospitals to continue to raise wage data issues beyond the

deadlines described in this rule would also divert resources that would

otherwise be used to ensure that the following year's wage index is as

accurate as possible. Accordingly, we believe that it is incumbent that

HCFA and the hospital community direct their energies to reviewing and

correcting wage data before the prospective payment system rates for a

given year are constructed.

We also disagree with the commenter's suggestion that the failure

of an intermediary to detect an error made by a hospital in reporting

its wage data should be characterized as an intermediary error or

should require a midyear correction. Hospitals are required to complete

the Worksheet S-3, Part II, along with the rest of the cost report and

to attest to its accuracy at the time the cost report is filed. The

cost report is signed by an Officer or Administrator of the hospital

certifying that the cost report is ``a true, correct and complete

statement prepared from the books and records of the provider in

accordance with applicable instructions * * *.'' Thus, the ultimate

responsibility for the accuracy of the wage data reported on the

Medicare cost report rests with the hospital. Moreover, we have

repeatedly stressed in the Federal Register and other communications

with the hospital industry the importance of reporting accurate wage

data to both the development of the wage index and to the geographic

reclassification process.

We have also expended considerable time and effort to review

hospital wage data for potential errors. Because our initial

examination of the FY 1991 wage data detected substantial deficiencies

in the initial data reported by hospitals on the cost report (including

missing data items such as excluded hours and total paid hours), we

initiated an intensive review of the wage data, which we described in

detail in the proposed rule (59 FR 27718). In September 1993, we sent

each fiscal intermediary a listing of its hospitals' wage data. In

November and December of 1993, our fiscal intermediaries performed desk

reviews for each hospital to ensure the reasonableness of the data. As

a result of this effort and our own review of the wage data, edits for

over 1,300 providers were resolved prior to constructing the proposed

hospital wage index published in the proposed rule.

Intermediaries were also responsible for reviewing hospital

requests for data changes submitted by the May 15, 1994 deadline and

for transmitting any corrections to HCFA on or before June 15, 1994.

After receiving any new wage data from fiscal intermediaries by June

15, 1994, we once again completed our own review of the wage data in

early July. Finally, on July 26, 1994, we sent each intermediary a

listing of the wage data for all their hospitals and requested one

final review to ensure that our database reflected the latest wage data

for each hospital.

In short, we are confident that we have created as accurate a

database as possible under existing time and resource constraints.

Moreover, as we described in detail in the proposed rule, we have

provided ample opportunities to hospitals to review for accuracy the

wage data used to construct the wage index. We note that the diskette

made available to the public in mid-March 1994 contained the raw

hospital wage data for all prospective payment system hospitals. This

not only enabled individual hospitals to detect errors concerning their

own data, but also allowed all hospitals in an MSA or rural area to

check for any obvious discrepancies in the wage index data of other

hospitals in their area, as well as any reduction in the average hourly

wage from previous years. In light of the above, we do not believe that

it is appropriate to make midyear changes to the wage index to correct

substantive wage data reporting errors.

We have also taken steps to ensure that the wage index that will go

into effect October 1, 1994 is free from any ministerial tabulation

errors. As noted above, in mid-August we made available a diskette with

all the wage data used to construct the wage index set forth in this

final rule. We believe hospitals will have ample opportunity to verify

their data prior to the September 23 deadline. Therefore, we foresee

few, if any, circumstances under which midyear corrections would be

made to correct a tabulation error. In those limited cases where a

midyear correction is warranted, the wage index change for the affected

area will be made prospectively from the date the correction is made.

This is consistent with our longstanding policy to allow wage index

corrections on a prospective basis only. This policy was originally set

forth in the preambles to the September 1, 1983 interim final rule (48

FR 39765) and the January 3, 1984 final rule (49 FR 258) implementing

the prospective payment system and was later codified at Sec. 412.63 as

part of the September 4, 1990 final rule (55 FR 36042).

Comment: One commenter suggested that we establish an appeals

process for disputes over corrections submitted by hospitals to

intermediaries. The commenter was concerned over the inability of

hospitals to make final corrections to wage index data before it is

submitted to HCFA. The commenter noted that, even with hospitals having

time to verify their data, any decisions on the changes submitted by

hospitals are left to the discretion of the intermediary without an

appeal process for the hospital.

Response: We do not believe a formal appeals process is necessary.

Moreover, we do not believe that a formal appeals process would be

feasible, since the process could not be completed before the

development of the final wage index. In the few cases where the

hospital and the intermediary have disagreed on specific cost items

reported on Worksheet S-3, the issue has been resolved by contacts

between the hospital or intermediary and HCFA. We continue to believe

that this informal method is sufficient to resolve disputes between

hospitals and intermediaries.

In the proposed rule (59 FR 27718), we detailed the steps that a

hospital must follow to ensure that any corrections to its wage data

are included in the final wage index. We stated that to be reflected in

the final wage index, any wage data corrections had to be reviewed by

the intermediary and transmitted to HCFA via HCRIS on or before June

15, 1994. This deadline was necessary to allow sufficient time to

download and edit the data so that the final wage index calculation

could be completed for development of the final prospective payment

rates to be published in this final rule. After reviewing requested

changes submitted by hospitals, intermediaries transmitted any revised

cost reports to HCRIS and forwarded to the hospitals a copy of the

revised Worksheet S-3, Part II. If requested changes were not accepted,

fiscal intermediaries notified hospitals in writing of reasons why the

changes were not accepted. This procedure ensured that hospitals had an

opportunity to verify the data that will be used to construct their

wage index values.

We continue to believe that fiscal intermediaries are in the best

position to make evaluations regarding the appropriateness of a

particular cost and whether it should be included in the wage index

data. However, in the event that a hospital disagrees with the

intermediary's resolution of a requested change, hospitals may request

that intermediaries re-review the issue and receive HCFA's concurrence.

The intermediary was to submit a written request to HCFA for

concurrence describing its handling of the issue raised by the

hospital. After evaluating the facts, HCFA contacted the intermediary

with the decision, and the intermediary notified the hospital.

This process was designed to resolve all substantive wage data

correction disputes before we finalized the raw wage data for the FY

1995 payment rates. However, we note that this process must be

completed at least 3 months before the publication of the final rule,

to allow the intermediary sufficient time to submit wage data changes.

Therefore, to initiate a change to the FY 1991 data, a hospital had to

submit such requests to its intermediary by May 15, 1994. The hospital

can evaluate the data HCFA is using either by requesting from the

intermediary a copy of the Worksheet S-3, Part II that has been

transmitted to HCRIS or, as indicated in the proposed rule, by

requesting a copy of the public use wage file.

Comment: Several commenters raised concerns about inconsistent

auditing of wage data by the fiscal intermediaries. They indicated that

while certain fiscal intermediaries acted stringently in applying HCFA

guidelines, other fiscal intermediaries were not as restrictive in

their auditing processes. Specifically, commenters cited instances in

which providers have been allowed to include questionable fringe

benefit costs, such as parking expenses, and salaries for Part B

physicians' services. One commenter recommended that our desk review

program include a specific check for Line 1B of the Worksheet S-3, Part

II, to ensure that Part B physicians' services are removed.

Response: We are concerned about all instances of inconsistent

auditing by the fiscal intermediaries and have taken several steps that

we believe should have eliminated most inconsistencies. Specifically,

in November and December of 1993, the fiscal intermediaries performed

desk reviews on the wage data reported by each hospital. These reviews

were conducted based on reasonableness parameters established by HCFA.

Additionally, all fiscal intermediaries have been given a fringe

benefit guideline to assis

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