Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 1996 Rates

SUMMARY: We are proposing to revise 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

proposed rule, we are describing proposed 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 would be applicable to discharges occurring on or

after October 1, 1995. We are also setting proposed rate-of-increase

limits as well as proposing policy changes for hospitals and hospital

units excluded from the prospective payment systems.

DATES: Comments will be considered received at the appropriate address,

as provided below, no later than 5 p.m. on August 1, 1995.

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

following address: Health Care Financing Administration, Department of

Health and Human Services, Attention: BPD-825-P, P.O. Box 7517,

Baltimore, MD 21207-0517.

If you prefer, you may deliver your written comments (an 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-825-P. 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).

For comments that relate to information collection requirements,

mail a copy of comments to: Office of Information and Regulatory

Affairs, Office of Management and Budget, Room 10235, New Executive

Office Building, Washington, DC 20503, Attn: Allison Herron Eydt, HCFA

Desk Officer.

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) 512-1800 or by faxing to (202) 512-

2250. The cost for each copy is $8.00. 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.

To obtain data used in deriving the standardized amounts and DRG

relative weights, see section VIII.B of the Supplementary Information

section of this preamble, Requests for Data From the Public.

FOR FURTHER INFORMATION CONTACT:

Nancy Edwards (410) 966-4532, Operating Prospective Payment, DRG, Wage

Index Issues.

Tzvi Hefter (410) 966-4529, Capital Prospective Payment, Excluded

Hospitals, EACH, RPCH.

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 care 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, 1994, we published a final rule with comment period (59 FR 45330) to

implement changes to the prospective payment system for hospital

operating costs beginning with Federal fiscal year (FY) 1995. We

invited comments only on certain revisions to the criteria for

geographic reclassification by the Medicare Geographic Classification

Review Board (MGCRB). We did not receive any timely comments in

response to the September 1, 1994 final rule with comment period.

Therefore, we are confirming the provisions of that rule as final and

are not publishing another final rule.

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. Major Contents of This Proposed Rule

In this proposed rule, we are setting forth proposed changes to the

Medicare hospital inpatient prospective payment systems for both

operating costs and capital-related costs. This proposed rule would be

effective for discharges occurring on or after October 1, 1995.

Following is a summary of the major changes that we are proposing to

make: [[Page 29203]]

1. Changes to the DRG Classifications and Relative Weights

As required by section 1886(d)(4)(C) of the Act, we must adjust the

DRG classifications and relative weights at least annually. Our

proposed changes for FY 1996 are set forth in section II of this

preamble.

2. Changes to the Hospital Wage Index

In section III of this preamble, we discuss revisions to the wage

index and the annual update of the wage data. Specific issues addressed

in this section include:

FY 1996 wage index update.

Allocation of general service salaries and hours to

excluded areas.

Revisions to the wage index based on hospital

redesignations.

Criteria for seeking MGCRB reclassification.

Alternative labor market areas.

3. Other Changes to the Prospective Payment System for Inpatient

Operating Costs

In section IV of this preamble, we discuss several provisions of

the regulations in 42 CFR parts 412, 424, and 485 and set forth certain

proposed changes concerning the following:

Payment for transfer cases.

Rural referral centers.

Determination of number of beds in determining the

indirect medical education adjustment.

Disproportionate share adjustment.

Essential access community hospitals (EACHs) and rural

primary care hospitals (RPCHs).

Rebasing the hospital market baskets.

4. Changes and Clarifications to the Prospective Payment System for

Capital-Related Costs

In section V of this preamble, we discuss several provisions of the

regulations in 42 CFR part 412 and set forth certain proposed changes

concerning the following:

New update framework.

Specific adjustment for taxes to the capital prospective

payment system Federal rate.

5. Changes for Hospitals and Hospital Units Excluded From the

Prospective Payment Systems

In section VI of this preamble, we discuss changes to the

regulations at 42 CFR parts 412 and 413 for hospitals and hospital

units excluded from the prospective payment system. The proposed

changes concern the following:

Requirements for certain long-term care hospitals excluded

from the prospective payment systems.

Payment window for preadmission services.

Criteria for exclusion.

Request for payment adjustment.

6. Determining Prospective Payment Rates and Rate-of-Increase Limits

In the addendum to this proposed rule, we set forth proposed

changes to the amounts and factors for determining the FY 1996

prospective payment rates for operating costs and capital-related

costs. We are also proposing new update factors for determining the

rate-of-increase limits for cost reporting periods beginning in FY 1996

for hospitals and hospital units excluded from the prospective payment

system.

7. Impact Analysis

In Appendix A, we set forth an analysis of the impact that the

proposed changes described in this rule would have on affected

entities.

8. Capital Acquisition Model

Appendix B contains the technical appendix on the proposed FY 1996

capital acquisition model.

9. Report to Congress on the Update Factor for Prospective Payment

Hospitals and Hospitals Excluded From the Prospective Payment System

Section 1886(e)(3)(B) of the Act requires that the Secretary report

to Congress no later than March 1, 1995 on our initial estimate of an

update factor for FY 1996 for both hospitals included in and hospitals

excluded from the prospective payment systems. This report is included

as Appendix C to this proposed rule.

10. Proposed Recommendation of Update Factor for Hospital Inpatient

Operating Costs

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

D provides our recommendation of the appropriate percentage change for

FY 1996 for the following:

Large urban area and other area 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.

11. Discussion of Prospective Payment Assessment Commission

Recommendations

The Prospective Payment Assessment Commission (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

patients, 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 are printing ProPAC's March 1, 1995 report, which includes its

recommendations, as Appendix E of this document. The recommendations,

and the actions we are proposing to take with regard to them (when an

action is recommended), are discussed in detail in the appropriate

sections of this preamble, the addendum, or the appendices to this

proposed rule. See section VII of this preamble for specific

information concerning where individual recommendations are addressed.

For a brief summary of the ProPAC recommendations, we refer the reader

to the beginning of the ProPAC report as set forth in Appendix E of

this proposed rule. ProPAC also produced technical appendices in its

March 1, 1995 report that provide background material and detailed

analyses used in preparation of the ProPAC recommendations. For further

information relating specifically to the ProPAC report or to obtain a

copy of the technical appendices, contact ProPAC at (202) 401-8986.

II. Proposed 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 [[Page 29204]] 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 proposed changes to the DRG

classification system and the proposed recalibration of the DRG weights

for discharges occurring on or after October 1, 1995 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 492 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 five 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, bone marrow, and

lung transplant (DRGs 480, 481, and 495, 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.

The changes we are proposing to make to the DRG classification

system for FY 1996 and other decisions concerning DRGs are set forth

below.

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

a. Automatic Implantable Cardioverter Defibrillator (AICD)

Procedures (DRG 116). For several years, we have received

correspondence regarding 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 Valve Procedures With or Without

Cardiac Catheterization). However, for discharges occurring before

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 reclassified to DRG 116 (Other Permanent

Cardiac Pacemaker Implant or AICD Lead or Generator Procedure).

As we stated in the September 1, 1994, final rule (59 FR 45347), we

have continued to monitor the appropriate placement of the AICD cases

that are currently assigned to DRG 116. The AICD cases are represented

by the following procedure codes: 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). Some hospitals and the manufacturer of the first of

these devices to be approved by the Food and Drug Administration (FDA)

believe that a more appropriate DRG assignment would be DRG 115

(Permanent Cardiac Pacemaker Implantation with AMI, Heart Failure or

Shock), because, in their opinion, the higher relative weight assigned

to this DRG would provide more equitable payment.

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

possible fit.

Since reassignment of these procedures to DRG 116, we have annually

analyzed the cases based on the most recent data. Based on data in the

FY 1994 Medicare Provider Analysis and Review (MedPAR) file, the

average standardized charge for the 2,459 AICD cases assigned to DRG

116 is $27,965. The average standardized charge for all cases in DRG

116 is $19,584 and, for DRG 115, $28,965. The $8,381 difference between

the average charge for AICD cases in DRG 116 and all cases in DRG 116

is within the variation in charges for that DRG. We note that compared

to last year's analysis using FY 1993 MedPAR data, the average charge

for the AICD cases has decreased slightly as has the difference in

charges [[Page 29205]] between all cases in DRG 116 and the AICD cases.

The average length of stay for the AICD cases in DRG 116 is 4.0

days compared to 5.89 days for all cases in DRG 116. However, the

length of stay for cases in DRG 115 is 11.77. In general, the patients

classified to DRG 115 are seriously ill and the long length of stay

supports this contention. We continue to believe that the AICD patients

are clinically much more similar to the patients classified to DRG 116

than to those in DRG 115 and that 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.

In the September 1, 1994 final rule, we stated our belief that as

new AICD devices were approved by the FDA and entered the market,

increased competition would result in a decrease in the price of the

devices and a corresponding drop in the average charge for a hospital

stay for AICD procedures. Second and third generations of several

manufacturers' devices are now on the market. In addition, we believe

that the slight decrease in average charges seen in the FY 1994 data

compared to the FY 1993 data is a direct result of hospitals' ability

to obtain AICD devices from multiple sources. (The increase in charges

for AICD cases between FY 1992 data and FY 1993 was approximately

$6,000.) Based on this evidence, we will continue to assign the AICD

implant cases to DRG 116 for FY 1996. We will reassess this assignment

as a part of our FY 1997 DRG analysis.

b. Sympathectomy Procedures. When performed in connection with a

principal diagnosis assigned to MDC 5, procedure code 05.24 (presacral

sympathectomy) is assigned to DRGs 478 and 479 (Other Vascular

Procedures).1 However, the four other sympathectomy procedures

related to MDC 5 diagnoses are classified to DRG 120 (Other Circulatory

System OR Procedures). In order to improve clinical consistency, we

propose to assign procedure code 05.24 to DRG 120 rather than to DRGs

478 and 479.

\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 DRG 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.

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

We realize that this proposal moves a procedure from a specific

surgical DRG class to the ``other OR procedures'' surgical class in MDC

5. There are very few presacral sympathectomies performed for the

Medicare population, therefore, we believe that this move will not

unduly affect any cases in the Medicare population. We note that we are

not moving this procedure from the DRGs to which it is assigned in MDC

1 (Diseases and Disorders of the Nervous System) or MDC 13 (Diseases

and Disorders of the Female Reproductive System).

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

the Perinatal Period)

In the September 1, 1994 final rule (59 FR 45341), we stated our

intention to improve the classification and relative weights of the

DRGs that apply to newborns, children, and maternity patients. Because

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. Non-

Medicare discharge records from Maryland and Michigan hospitals were

used to calculate the original Medicare weights for the DRGs to which

newborns, children, and maternity patients are classified. Since that

time, because of the lack of Medicare 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 patients.

Accordingly, we have acquired hospital claims data representative

of the total patient population for analysis and evaluation. These

data, collected and formatted by the Urban Institute under contract

with HCFA (Contract 500-92-0024), represent claims for non-Medicare

payers from 19 States. The data base contains approximately 17 million

discharge records. Using this data, we are evaluating possible

modifications to MDC 15 that would better address the requirements for

an all-patient population.

As we have not yet completed this evaluation, we are not proposing

an MDC 15 DRG reclassification structure for FY 1996. However, we are

proposing to adjust the DRG relative weights for the Medicare low-

volume DRGs. We identified 36 low-volume DRGs (defined as those DRGs

with fewer than 10 cases) in the FY 1994 MedPAR data, which is being

used to calculate the FY 1996 DRG relative weights. These DRGs are

generally those assigned to patients age 0-17, many of the neonate and

newborn MDC 15 DRGs, and one DRG in MDC 14 (Pregnancy, Childbirth and

Puerperium). The DRG relative weights for these low-volume DRGs were

calculated based on the non-Medicare data we acquired from the 19

States.

During the year, we have received suggestions from the public

concerning improvements for the neonate DRG classifications. Among

these suggestions have been recommendations concerning specific

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).

Another issue is the assignment to MDC 15 of discharges with a

principal diagnosis of certain congenital defects regardless of the age

of the patient. Because the MDC 15 modifications that we are

considering should resolve these concerns, we are not proposing to

revise the assignment of these diagnoses and conditions at this time.

Rather, we will incorporate the necessary and appropriate assignment of

these cases with our overall modification of the neonate DRGs.

4. MDC 24 (Multiple Significant Trauma)

Several years ago, we created a new MDC 24 to classify cases of

multiple significant trauma. In order to be assigned to this MDC, a

patient must have a principal diagnosis of trauma and at least two

significant trauma diagnosis codes from two different body sites

reported as either principal or secondary diagnoses. We recognize eight

different body site categories: head, chest, abdomen, kidney, urinary,

pelvis and spine, upper limb, and lower limb.

It has been brought to our attention that diagnosis code 851.06

(Cerebral cortex contusion with loss of consciousness of unspecified

duration) was mistakenly excluded from the list of diagnoses that count

as principal or secondary diagnoses in the significant head trauma

section of MDC 24. Because this code is clinically similar to those

already on the list of principal or secondary diagnoses that cause

assignment to DRG 487 (Other Multiple Significant Trauma), we propose

to add this diagnosis to the significant head trauma list effective

with discharges occurring on or after October 1, 1995.

5. 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 [[Page 29206]] 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 are

proposing to modify the surgical hierarchy as set forth below. As we

stated in the September 1, 1989 final rule (54 FR 36457), we are unable

to test the effects of the proposed revisions to the surgical hierarchy

and to reflect these changes in the proposed relative weights due to

the unavailability of revised GROUPER software at the time this

proposed rule is prepared. Rather, we simulate most major

classification changes to approximate the placement of cases under the

proposed reclassification and then determine the average charge for

each DRG. These average charges then serve as our best estimate of

relative resource use for each surgical class. We test the proposed

surgical hierarchy changes after the revised GROUPER is received and

reflect the final changes in the DRG relative weights in the final

rule. Further, as discussed below in section II.C of this preamble, we

anticipate that the final recalibrated weights will be somewhat

different from those proposed, since they will be based on more

complete data. Consequently, further revision of the hierarchy, using

the above principles, may be necessary in the final rule.

At this time, we would revise the surgical hierarchy for MDC 2

(Diseases and Disorders of the Eye) and MDC 8 (Diseases and Disorders

of the Musculoskeletal System and Connective Tissue) as follows:

In MDC 2, we would reorder Extraocular Procedures Except

Orbit (DRGs 40 and 41) above Retinal Procedures (DRG 36).

In MDC 8, we would reorder Major Thumb or Joint Procedures

or Other Hand or Wrist Procedures with CC (DRG 228) above Major

Shoulder/Elbow Procedures or Other Upper Extremity Procedures with CC

(DRG 223).

6. 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 1996, we are proposing the following changes to the current CC list:

We would add diagnosis code 008.49 (Bacterial enteritis)

to the CC list. This diagnosis would be considered a CC for any

principal diagnosis not shown in Table 6f, Addition to the CC

Exclusions List (see discussion of CC Exclusions list in section V of

the addendum below).

We would delete diagnosis code 276.8 (Hypopotassemia) from

the CC list. This diagnosis would no longer be considered a CC for any

principal diagnosis.

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 [[Page 29207]] 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 FY 1990 revision (54 FR 36552); the September 4,

1990 final rule for the FY 1991 revision (55 FR 36126); the August 30,

1991 final rule for the FY 1992 revision (56 FR 43209); the September

1, 1992 final rule for the FY 1993 revision (57 FR 39753); the

September 1, 1993 final rule for the FY 1994 revisions (58 FR 46278);

and the September 1, 1994 rule for the FY 1995 revisions (59 FR

45334).)

We are proposing 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, 1995 as well as the

proposed CC changes described above. (See section II.B.8, below, for a

discussion of these changes.) These proposed changes are being made in

accordance with the principles established when we created the CC

Exclusions List in 1987.

The changes discussed above have been added to Table 6g, Additions

to the CC Exclusions List, in section V of the addendum to this

proposed rule.

Tables 6g and 6h in section V of the addendum to this proposed rule

contain the proposed revisions to the CC Exclusions List that would be

effective for discharges occurring on or after October 1, 1995. Each

table shows the principal diagnoses with proposed 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 6g--Additions to the CC

Exclusions List. Beginning with discharges on or after October 1, 1995,

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 6h--Deletions from

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

1, 1995, 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

plus $6.00 shipping and handling and on microfiche for $20.50, plus

$4.00 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, 1994, and 1995) and

those in Tables 6g and 6h 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, 1995.

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

current DRG Definitions Manual, Version 12.0, is available for $195.00,

which includes $15.00 for shipping and handling. Version 13.0 of this

manual, which will include the changes proposed in this document as

finalized in response to public comment, will be available in September

1995 for $195.00. 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.

7. 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 it would be appropriate to change the procedures 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 prostatic 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, September 1, 1993, and September 1,

1994, we moved several other procedures from DRG 468 to 477. (See 55 FR

36135, 56 [[Page 29208]] FR 43212, 57 FR 23625, 58 FR 46279, and 59 FR

45336 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. This

year's review did not identify any necessary changes; therefore, we are

not proposing to move any procedures from DRG 468 or DRG 477 to one of

the surgical DRGs.

b. Reassignment of Procedures Among DRGs 468, 476, and 477. 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 are proposing 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 several procedures that are significantly less

resource intensive than the other procedures assigned to DRG 468. These

procedures occur in the same ``family'' (that is, they relate to

procedures on the same body part or system) and at least one of this

family of codes is already present within DRG 477. Therefore, we are

proposing to move the following procedures to the list of procedures

that result in assignment to DRG 477:

18.21 Excision of preauricular sinus

18.31 Radical excision of lesion of external ear

18.39 Other excision of external ear

18.5 Surgical correction of prominent ear

18.6 Reconstruction of external auditory canal

18.71 Construction of auricle of ear

18.72 Reattachment of amputated ear

18.9 Other operations of external ear

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.

All of the proposed reassignments of procedures in DRGs 468 and 477

would be effective with discharges beginning on or after October 1,

1995.

8. 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 5 and December 1 and 2, 1994, and finalized the

coding changes after consideration of comments received at the meetings

and in writing within 30 days following the December 1994 meeting. The

initial meeting for consideration of coding issues for implementation

in FY 1997 was held on May 4, 1995. 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 Hospital Policy; Division of

Prospective Payment System; Rm. 1-H-1 East Low Rise Building; 6325

Security Boulevard; Baltimore, Maryland 21207.

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

effective October 1, 1995. The new ICD-9-CM codes are listed, along

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

Diagnosis Codes and New Procedure Codes, respectively) in section V of

the addendum to this proposed 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, we are soliciting comments 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

procedure codes that have been replaced by expanded codes or have been

deleted are in Table 6d (Invalid Procedure Codes). These invalid

diagnosis and procedure codes will not be recognized by the GROUPER

beginning with discharges occurring on or after October 1, 1995. The

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

Revisions to diagnosis and procedure code titles are in Tables 6e

(Revised [[Page 29209]] Diagnosis Code Titles) and 6f (Revised

Procedure Code Titles), which also include the proposed DRG assignments

for these revised codes.

There are three new procedure codes that were previously included

in codes classified as operating room procedures even though the

specific procedures specified by the new codes may not be routinely

performed in an operating room. The three codes are as follows:

48.36 [Endoscopic] polypectomy of rectum

59.72 Injection of implant into urethra and/or bladder neck

92.3 Stereotactic radiosurgery

These three new codes are being classified as Non-OR procedures

that affect DRG assignment and are indicated as such in Table 6b--

New Procedure Codes. We will continue to assign these three codes to

the surgical DRGs to which they are currently assigned. As we have

stated in previous rules, most recently in the September 1, 1994,

final rule (59 FR 45340), our practice is to assign a new code to

the same DRG as its predecessor. One compelling reason for this

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

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

recalibration. However, in 2 years, when data on the new procedure

codes are available, we will reevaluate the DRG classification of

the codes. At that time, we may move one or more of the procedure

codes to a different surgical DRG or we may classify them as non-OR

procedures that do not affect DRG assignment.

9. 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 Medicare DRG system to include

severity measurements, 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 May 27, 1994 proposed rule, we announced the availability of

a paper we had prepared that describes our preliminary severity DRG

classification system as well as the analysis upon which our proposal

was formulated.

Comments were due to HCFA by September 30, 1994. We received 99

individual letters commenting on the DRG refinements. Many of the

commenters supported the change in theory, but there were numerous

specific comments on the methodology.

Our plan was to incorporate comments and suggestions we received

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

the FY 1996 prospective payment system proposed rule. However, as the

final rule published on September 1, 1992 (57 FR 39761) indicated, 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 increases in the case-mix index from accumulating in

the DRG weights and to account for expected changes in coding practice.

In addition, we are exploring a means of estimating anticipated case-

mix change due to changes in coding practice that are a result of DRG

classification revisions. (See section VII.E of this preamble for a

more detailed description of this process in response to a ProPAC

recommendation.) However, since we have not yet resolved these issues,

we are unable to propose our refined DRG severity system for FY 1996.

We will continue to analyze the comments we received and validate our

previous research with later MedPAR data. We remain committed to

proposing our revised system as soon as possible.

C. Recalibration of DRG Weights

We are proposing to use the same basic methodology for the FY 1996

recalibration as we did for FY 1995. (See the September 1, 1994 final

rule (59 FR 45347).) That is, we would recalibrate the weights based on

charge data for Medicare discharges. However, we would use the most

current charge information available, the FY 1994 MedPAR file, rather

than the FY 1993 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 are constructed from

FY 1994 MedPAR data, based on bills received by HCFA through December

1994, from all hospitals subject to the prospective payment system and

short-term acute care hospitals in waiver States. The FY 1994 MedPAR

file includes data for approximately 10.9 million Medicare discharges.

Although we are using the same basic methodology for recalibration,

we are making two revisions which are described below. The methodology

used to calculate the proposed DRG relative weights from the FY 1994

MEDPAR file is as follows:

To the extent possible, all the claims were regrouped

using the proposed 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. In computing the

FY 1995 weights, we eliminated all cases outside of 3.0 standard

deviations from the mean of the log distribution of charges per case

for each DRG. For the proposed FY 1996 relative weights, we would

[[Page 29210]] eliminate a case only if it met the current criterion

and was also outside of 3.0 standard deviations from the mean log of

distribution of charges per day. We believe that this refinement to the

methodology will reduce the risk of eliminating cases with unusually

low or high total charges that are nevertheless accurately reported.

For example, a case with extremely high charges and a corresponding

extremely long length of stay would be less likely to be eliminated

under the revised methodology.

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.

The second revision we are making is in the treatment of transfer

cases. In the current recalibration methodology, we count transfer

cases as full cases. This distorts the average standardized charges,

particularly in DRGs with a high percentage of transfer cases, because

the charges associated with a transfer case often do not reflect the

resources necessary for a complete course of treatment. Therefore, in

calculating the proposed FY 1996 relative weights, a transfer case is

counted as a fraction of a case based on the ratio of its length of

stay to the geometric mean length of stay of the cases assigned to the

DRG. That is, a 5-day length of stay transfer case assigned to a DRG

with a geometric mean length of stay of 10 days is counted as 0.5 of a

total case.

We established the relative weight for heart and liver

transplants (DRGs 103 and 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 that have cases in the FY

1994 MedPAR file. (Medicare coverage for heart and liver transplants is

limited to those facilities that have received approval from HCFA as

transplant centers.) Similarly, we limited the lung transplant cases we

used to establish the weight for DRG 495 (Lung Transplant) to those

hospitals that are established lung transplant centers. (As discussed

in detail in the final notice with comment period of Medicare coverage

of lung transplants published in the Federal Register on February 2,

1995 (60 FR 6543), payment for lung transplants will not be limited to

Medicare-approved facilities until July 31, 1995.)

Acquisition costs for kidney, heart, liver, and lung

transplants continue to be 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 propose to use that same case threshold

in recalibrating the DRG weights for FY 1995. Using the FY 1994 MedPAR

data set, there are 37 DRGs that contain fewer than 10 cases. As we

discuss in detail in section II.B.3 of this preamble, we computed the

weight for the 37 low-volume DRGs by using the non-Medicare cases from

19 States.

The weights developed according to the methodology described above,

using the proposed 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.

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 we have done in past years and as discussed in

section II.A.4.b of the Addendum to this proposed rule, we are

proposing to make a budget neutrality adjustment to assure that the

requirement of section 1886(d)(4)(C)(iii) of the Act is met.

III. Proposed Changes to the Hospital Wage Index

A. Background

Section 1886(d)(3)(E) of the Act requires that, as part of the

methodology for determining prospective payments to hospitals, the

Secretary must 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 Metropolitan Statistical Areas (MSAs) issued by the Office of

Management and Budget (OMB). In addition, as discussed below, 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

FY 1995 wage index includes wages and salaries paid by a hospital, home

office salaries, fringe benefits, and certain contract labor costs. The

FY 1995 computation for the wage index excludes salaries and wages

associated with nonhospital-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.

As discussed in detail below, we are proposing to use updated wage

data to construct the wage index as required by section 1886(d)(3)(E)

of the Act. The FY [[Page 29211]] 1996 wage index would be based on

data for hospital cost reporting periods beginning on or after October

1, 1991 and before October 1, 1992 (FY 1992).

B. FY 1996 Wage Index Update

We propose to base the FY 1996 wage index, effective for hospital

discharges occurring on or after October 1, 1995 and before October 1,

1996, on the data collected from the Medicare cost report (Worksheet S-

3, Part II) submitted by hospitals for cost reporting periods beginning

in FY 1992.

We propose to use all of the categories of data collected from

Worksheet S-3, Part II. Therefore, the proposed FY 1996 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 nonhospital type

services such as skilled nursing facility services, home health

services, or other subprovider components that are not subject to the

prospective payment system.

1. Verification of Wage Data From the Medicare Cost Report

The data for the proposed FY 1996 wage index were obtained from

Worksheet S-3, Part II, of the HCFA-2552 form submitted by short-term,

acute care hospitals for cost reporting periods beginning during FY

1992. The wage data are reported electronically to HCFA through the

Hospital Cost Report Information System (HCRIS). As in past years, we

initiated an intensive review of the wage data submitted by hospitals

and made numerous edits to ensure quality and accuracy. Medicare

intermediaries were instructed to transmit any revisions in wage data

made as a result of this review through HCRIS by early January 1995.

We then subjected the revised cost report data to several edit

checks. Of the 5,304 hospitals in the data base, 3,274 hospitals had

data elements that failed an edit. Five of these involved mathematical

errors and have been resolved. The other edit failures involved data

that appeared unusual and had to be verified by the intermediary. Only

57 hospitals have data elements that were unresolved as of March 21,

1995. Most of the unresolved data elements fall outside established

edit parameters and require verification by the intermediary. We

deleted seven hospitals from the database because they had extremely

high fringe benefit to salary ratios, and the intermediary was unable

to provide documentation to substantiate the fringe benefit amount. We

will continue to try to resolve these problems so that these seven

hospitals can be included in the data used to establish the final wage

index.

The wage file used to construct the proposed wage index includes

data obtained in late January 1995 from the HCRIS data base and

subsequent changes we received from intermediaries through March 21,

1995. We have instructed the intermediaries to complete their

verification of questionable data elements and to transmit any changes

to the wage data, through HCRIS, no later than June 15, 1995. We expect

that all outstanding data elements will be resolved by that date and

that the revised data will be reflected in the final rule.

Following a procedure initiated last year with the proposed FY 1995

wage index, to allow hospitals more time to evaluate the wage data used

to construct the proposed hospital wage index, we made available to the

public a diskette containing the raw hospital wage data that were used

to construct the proposed FY 1996 wage index. In a memorandum dated

February 28, 1995, we instructed all fiscal intermediaries to inform

the prospective payment hospitals they serve that the FY 1992 data

diskette would be available approximately mid-March 1995. The fiscal

intermediaries were also instructed to advise hospitals of the

availability of the data either through their representative hospital

organizations or directly from HCFA using order forms provided to them.

Additional details on the cost and ordering of this data file are

discussed below in section VIII.B of this preamble, Requests for Data

from the Public.

In addition, we note that Table 3C in the Addendum to this proposed

rule contains each hospital's inflated average hourly wage used to

construct the proposed wage index values. By dividing the hourly wage

by the applicable inflation factors (set forth below in section

III.B.3. of this preamble), a hospital can determine its uninflated

average hourly wage as reflected in the proposed wage index. A

corresponding table will also be included in the final rule. If, based

on its review of the data on the diskette or in Table 3C, a hospital

believes that there is a problem with its wage data, the hospital

should immediately contact its intermediary as discussed below.

2. Requests for Wage Data Corrections

As noted above, we will use cost report data from FY 1992 (that is,

cost reporting periods beginning on or after October 1, 1991 and before

October 1, 1992) for the FY 1996 update to the wage index. We believe

hospitals have had ample time to ensure the accuracy of their FY 1992

wage data. Moreover, the ultimate responsibility for accurately

completing the cost report rests with the hospital, which must attest

to the accuracy of the data at the time the cost report is filed.

However, if after review of the diskette or Table 3C, a hospital

believes that its FY 1992 wage data have been incorrectly reported, the

hospital must submit corrections along with complete supporting

documentation to its intermediary in time to allow for review,

verification, and transmission of the data before the development of

the final wage index.

In the February 28 memorandum to the intermediaries, we indicated

that, to allow sufficient time to process any changes, a hospital must

submit requests for corrections to its fiscal intermediary by May 15,

1995. Requests were to include all documentation necessary to support

the requested change. To be reflected in the final wage index, any wage

data corrections must be reviewed by the intermediary and transmitted

to HCFA through HCRIS on or before June 15, 1995. These deadlines,

which correspond to the deadlines we used last year for the FY 1995

wage index, are necessary to allow sufficient time to review and

process the data so that the final wage index calculation can be

completed for development of the final prospective payment rates to be

published by September 1, 1995. We cannot guarantee that corrections

transmitted to HCFA after June 15, 1995, will be reflected in the final

wage index.

After reviewing requested changes submitted by hospitals,

intermediaries will transmit any revised cost reports to HCRIS and

forward a copy of the revised Worksheet S-3, Part II to the hospitals.

If requested changes are not accepted, fiscal intermediaries will

notify hospitals in writing of reasons why the changes were not

accepted. This procedure will ensure that hospitals have an opportunity

to verify the data that will be used to construct their wage index

values. We believe that fiscal intermediaries are generally 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, if a hospital disagrees with the intermediary's

resolution of a requested change, the hospital may contact HCFA in an

effort to resolve the dispute. We note that the June 15 deadline also

applies to these requested changes. [[Page 29212]]

We have created the process described above to resolve all

substantive wage data correction disputes before we finalize the raw

wage data for the FY 1996 payment rates. Accordingly, hospitals that do

not meet the procedural deadlines set forth above will not be afforded

a later opportunity to submit wage corrections or to dispute the

intermediary's decision with respect to requested changes. We intend to

make a diskette available in mid-August that will contain the finalized

raw wage data that will be used to construct the wage index values in

the final rule. As with the diskette made available in March 1995, HCFA

will make the August diskette available to hospital associations and

the public. This August diskette, however, is being made available only

for the limited purpose of identifying any potential errors made by

HCFA or the intermediary in the entry of the final wage data that

result from the process described above, not for the initiation of new

wage data correction requests. Hospitals are encouraged to review their

hospital wage data promptly after the release of the second diskette.

If, after reviewing the August diskette, a hospital believes that

its wage data are incorrect due to a fiscal intermediary or HCFA error

in the entry or tabulation of the final wage data, it should 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

21, 1995 to allow inclusion in the wage index values effective October

1, 1995. Requests should be sent to: Office of Hospital Policy;

Attention: Nancy Edwards, Director; Division of Prospective Payment

System; Central 5-02-17; 7500 Security Boulevard; Baltimore, Maryland

21244-1850. 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 indicated above, after mid-August, we will make changes to the

hospital wage data only in those very limited situations involving an

error by the intermediary or HCFA that the hospital could not have

known about before its review of the August diskette. Specifically,

neither the intermediary nor HCFA will accept the following types of

requests in conjunction with this mid-August process: requests for wage

data corrections that were submitted too late to be included in the

data transmitted to the HCRIS system on or before June 15, 1995;

requests for correction of errors made by the hospital that were not,

but could have been, identified during the hospital's review of the

March 1995 data; or requests to revisit factual determinations or

policy interpretations made by the intermediary or HCFA during the wage

data correction process. Verified corrections to the wage index made as

a result of an intermediary or HCFA error received timely (that is, by

September 21, 1995) will be effective October 1, 1995.

We believe the wage data correction process described above

provides hospitals with sufficient opportunity to bring errors made

during the preparation of Worksheet S-3 to the intermediary's

attention. Moreover, because hospitals will have access to the raw wage

data in mid-August, they will have the opportunity to detect any data

entry or tabulation errors made by the intermediary or HCFA before the

implementation of the prospective payment rates on October 1. We

believe that if hospitals avail themselves of this opportunity, the

wage index implemented on October 1 should be free of such errors.

Nevertheless, in the unlikely event that such errors should occur, we

retain the right to make midyear changes to the wage index under very

limited circumstances.

Specifically, in accordance with Sec. 412.63(s)(2), we 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 an error in tabulating its data, and (2) that the hospital

could not have known about the error, or did not have an opportunity to

correct the error, before the beginning of FY 1996 (that is, by the

September 21, 1995 deadline). As indicated earlier, since a hospital

will have the opportunity to verify its data, and the intermediary will

notify the hospital of any changes, we do not foresee 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.

It has been our longstanding policy to make midyear revisions to

wage index data prospectively only (see, for example, 49 FR 258 (Jan.

3, 1984); 54 FR 36,478 (Sept. 1, 1989)), and we continue to believe

that, to the extent that midyear wage data revisions are appropriate,

those revisions should be made prospectively only. Some hospitals whose

requests for wage data revisions have been denied by HCFA have sought

relief in the Federal courts. While no court has yet reversed a HCFA

decision denying a hospital's wage data revision request, these cases

have the potential to present the question of what effect we would give

to such a final judicial decision.

Because we have not previously addressed this question in any

rulemaking, we now propose to clarify our position regarding the

temporal effect of a final judicial decision reversing a HCFA denial of

a hospital's request for a wage data revision. We propose to add a new

Sec. 412.63(s)(5) to give such a decision limited retroactive effect.

If a final judicial decision reverses a HCFA denial of a hospital's

wage data revision request, we propose to treat the hospital as if

HCFA's decision on the hospital's wage data revision request had been

favorable rather than unfavorable. HCFA would pay the hospital by

applying a revised wage index that reflects the revised wage data at

issue. The revised wage data would not be considered for purposes of

revisiting past adjudications of requests for geographic

reclassification under section 1886(d)(10) of the Act. Under the

statutory scheme established by Congress, decisions on applications for

MGCRB reclassification must be finalized prior to the Federal fiscal

year for which the reclassifications would take effect.

In some Federal fiscal years, wage data revision requests were

initially reviewed by the intermediaries and forwarded to HCFA's Office

of Hospital Policy (or the former Office of Payment Policy) for a

determination of whether a revision should be made. In other years, the

intermediaries themselves have made determinations on wage data

revision requests. The latter is our current policy. Therefore, in the

foregoing discussion, the phrases ``HCFA denial of a hospital's wage

data revision request'' and ``HCFA decision on the hospital's wage data

revision request'' mean the decision by either HCFA's Office of

Hospital Policy or the intermediary denying a hospital's request for a

wage data revision.

We considered proposing to apply a strict policy of prospectivity

to final judicial decisions reversing HCFA denials of wage data

revision requests--that is, adopting a policy to apply such judicial

decisions prospectively from the date they are made. While we continue

to believe that prospective-only changes are most appropriate under a

prospective rate-setting system such as the hospital inpatient

prospective payment system, we also recognize that hospitals have

sought, and will continue to seek, judicial [[Page 29213]] review of

unfavorable HCFA decisions on hospitals' requests for wage data

revisions. Applying a policy of strict prospectivity to final judicial

decisions reversing HCFA denials of wage data revision requests might

be viewed, in some cases, as frustrating the purpose of judicial

review, since such a decision might not be made until after the close

of the fiscal year or years at issue. Therefore, on balance, we believe

the better policy is the one we are currently proposing, under which we

would give effect to a final judicial decision reversing a HCFA denial

of a hospital's wage data revision request by applying a revised wage

index that reflects the revised wage data as if HCFA's decision had

been favorable rather than unfavorable.

3. Computation of the Wage Index

As noted above, we are proposing to base the FY 1996 wage index on

wage data reported on the FY 1992 cost report. The proposed wage index

is based on data from 5,238 hospitals paid under the prospective

payment system and short-term, acute care hospitals in waiver States.

The method used to compute the proposed wage index is as follows:

Step 1--We gathered data from each of the non-Federal short-term,

acute care hospitals for which data were reported on the Worksheet S-3,

Part II of the Medicare cost report for the hospital's cost reporting

periods beginning on or after October 1, 1991, and before October 1,

1992. Each hospital was assigned to its appropriate urban or rural area

prior to any reclassifications under section 1886(d)(8) or 1886(d)(10)

of the Act. In addition, we included data from a few hospitals that had

cost reporting periods beginning in September 1991 and had reported a

cost reporting period exceeding 52 weeks. The data were included

because no other data from these hospitals would be available for the

cost reporting period described above, and particular labor market

areas might be affected due to the omission of these hospitals.

However, we generally describe these wage data as FY 1992 data.

Step 2--For each hospital, we subtracted the excluded salaries

(that is, direct salaries attributable to skilled nursing facility

services, home health services, and other subprovider components not

subject to the prospective payment system) from gross hospital salaries

to determine net hospital salaries. To the net hospital salaries, we

added hospital contract labor costs, hospital fringe benefits, and any

home office salaries and fringe benefits reported by the hospital to

determine total salaries plus fringe benefits.

Step 3--For each hospital, we inflated or deflated, as appropriate,

the total salaries plus fringe benefits resulting from Step 2 to a

common period to determine total adjusted salaries. To make the wage

inflation adjustment, we used the percentage change in average hourly

earnings for each 30-day increment from October 14, 1991 through

September 15, 1993, for hospital industry workers from Standard

Industry Classification 806, Bureau of Labor Statistics Employment and

Earnings Bulletin. The annual inflation rates used were 5.6 percent for

FY 1991, 4.8 percent for FY 1992, and 3.6 percent for FY 1993. The

inflation factors used to inflate the hospital's data were based on the

midpoint of the cost reporting period as indicated below.

Midpoint of Cost Reporting Period

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

Adjustment

After Before factor

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

10/14/91................................ 11/15/91 1.059411

11/14/91................................ 12/15/91 1.055280

12/14/91................................ 01/15/92 1.051165

01/14/92................................ 02/15/92 1.047066

02/14/92................................ 03/15/92 1.042983

03/14/92................................ 04/15/92 1.038916

04/14/92................................ 05/15/92 1.034865

05/14/92................................ 06/15/92 1.030830

06/14/92................................ 07/15/92 1.026810

07/14/92................................ 08/15/92 1.022806

08/14/92................................ 09/15/92 1.018818

09/14/92................................ 10/15/92 1.014845

10/14/92................................ 11/15/92 1.011859

11/14/92................................ 12/15/92 1.008881

12/14/92................................ 01/15/93 1.005912

01/14/93................................ 02/15/93 1.002952

02/14/93................................ 03/15/93 1.000000

03/14/93................................ 04/15/93 0.997057

04/14/93................................ 05/15/93 0.994123

05/14/93................................ 06/15/93 0.991197

06/14/93................................ 07/15/93 0.988280

07/14/93................................ 08/15/93 0.985372

08/14/93................................ 09/15/93 0.982472

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

For example, the midpoint of a cost reporting period beginning January

1, 1992 and ending December 31, 1992 is June 30, 1992. An inflation

adjustment factor of 1.026810 would be applied to the wages of a

hospital with such a cost reporting period. In addition, for the data

for any cost reporting period that began in FY 1992 and covers a period

of less than 360 days or greater than 370 days, we annualized the data

to reflect a 1-year cost report. Annualization is accomplished by

dividing the data by the number of days in the cost report and then

multiplying the results by 365.

Step 4--For each hospital, we subtracted the reported excluded

hours from the gross hospital hours to determine net hospital hours. We

increased the net hours by the addition of any reported contract labor

hours and home office hours to determine total hours.

Step 5--As part of our editing process, we deleted data for 59

hospitals for which we lacked sufficient documentation to verify data

that failed [[Page 29214]] edits because the hospitals are no longer

participating in the Medicare program or are in bankruptcy status. We

retained the data for other hospitals that are no longer participating

in the Medicare program because these hospitals contributed to the

relative wage levels in their labor market areas during their FY 1992

cost reporting period.

Step 6--Within each urban or rural labor market area, we added the

total adjusted salaries plus fringe benefits obtained in Step 3 for all

hospitals in that area to determine the total adjusted salaries plus

fringe benefits for the labor market area.

Step 7--We divided the total adjusted salaries plus fringe benefits

obtained in Step 6 by the sum of the total hours (from Step 4) for all

hospitals in each labor market area to determine an average hourly wage

for the area.

Step 8--We added the total adjusted salaries plus fringe benefits

obtained in Step 3 for all hospitals in the nation and then divided the

sum by the national sum of total hours from Step 4 to arrive at a

national average hourly wage. Using the data as described above, the

national average hourly wage is $18.8939.

Step 9--For each urban or rural labor market area, we calculated

the hospital wage index value by dividing the area average hourly wage

obtained in Step 7 by the national average hourly wage computed in Step

8.

C. Allocation of General Service Salaries and Hours to Areas Excluded

From the Wage Index

In constructing the wage index, we exclude the direct wages and

hours associated with certain subprovider components of the hospital,

such as skilled nursing facilities and home health agencies. The cost

reporting form used to collect the FY 1992 wage data also includes

within the definition of excluded areas any rehabilitation and

psychiatric distinct part units of the hospital that are excluded from

the prospective payment system. Thus, the wage index is constructed by

including only the direct wages and hours associated with those areas

of the hospital subject to the prospective payment systems. However,

the general service hours associated with excluded areas are not

excluded from the wage index calculation.

In the May 26, 1993 proposed rule, we discussed our analysis of our

first attempt to allocate overhead salaries and hours to areas of the

hospital that are excluded from the prospective payment system (58 FR

30237). This analysis was prompted by several suggestions from hospital

representatives that, in addition to excluding the direct salaries and

hours for subprovider components of the hospital, HCFA should also

exclude the general service, or overhead, wages and hours that are

associated with these areas. For example, we currently include all of

the wage costs associated with housekeeping in the wage index data,

even if a facility has excluded subprovider components that receive

housekeeping services. Because the hours associated with workers in the

general service areas of the hospital were not collected in the FY 1990

cost reports (the most recent wage data available in 1993), we

initiated a special data collection to obtain these data in order to

calculate an overhead allocation to excluded areas for the FY 1994 wage

index. As we discussed in detail in the May 26, 1993 proposed rule, we

identified several problems with the data collected that led us to the

conclusion that it would be inappropriate to use the data in allocating

the overhead wages and hours. Specifically, there were a large number

of hospitals removed due to the edits, a large number of hospitals that

experienced significant swings in their average hourly wages when the

overhead salaries and hours were allocated, and a large proportion of

hospitals whose average hourly wage decreased as a result of the

allocation (58 FR 30237-30238). Thus, we did not allocate general

service salaries and hours to the excluded areas of hospitals in

calculating the FY 1994 wage index.

In the September 1, 1993 final rule, we indicated that we would

revisit this issue when the data for cost reporting periods beginning

in FY 1992 became available (58 FR 46298). We stated that the overhead

allocation performed with data from the 1992 cost reports would be more

accurate because the overhead salaries and hours would be determined at

the same time. We believed that the retroactive determination of

overhead hours for the FY 1990 cost reports may have caused some of the

problems with the data. We stated that the FY 1992 cost report might

allow a more accurate allocation since both overhead salaries and

overhead hours would be directly reported on the Worksheet S-3.

In calculating the FY 1996 wage index, we are using data for cost

reporting periods beginning in FY 1992. We received general service

hour data for 4,356 of the 4,441 hospitals that reported excluded

salaries. We analyzed these data to determine whether we could

reasonably allocate the overhead wages and hours to the excluded areas

of the hospital. First, we determined the total general service wages

(including fringe benefits) from Worksheet A of the cost report. We

then developed a ratio of total indirect costs (net of capital costs)

allocated to the excluded areas of the hospital to total noncapital

general service costs (using Worksheet B, Parts I, II, and III from the

cost report). We call this the ``indirect cost ratio.'' We computed the

general service salaries and hours allocated to the excluded areas by

multiplying the indirect cost ratio by the total general service

salaries and by the total general service hours reported by the

hospital on the cost report. For example, if 10 percent of a hospital's

total indirect costs were allocated to excluded areas, we allocated 10

percent of its overhead salaries and 10 percent of its overhead hours

to the excluded areas.

We analyzed the results of the general service allocation to remove

any clearly incorrect or distorted allocations. We began by performing

preliminary data edits. We eliminated 20 hospitals with allocated

salaries or hours greater than the total salaries or hours reported on

the cost report (after adjustment for the excluded areas of the

hospital). We then analyzed the data for the remaining 4,336 hospitals

in order to remove any obviously incorrect allocations. Two hospitals

had general service average hourly wages below $5.00. Considering the

Federal minimum wage of $4.25, we believe this indicates an obvious

error in reporting the hours or salaries. We also eliminated the

allocation for eight hospitals with a general service average hourly

wage of $100 per hour or greater.

The next edit we performed was based on a comparison of the

indirect cost ratio and the ratio of excluded hours (as reported on the

cost report) to total hours (including excluded hours). We reasoned

that the allocation was probably erroneous if the indirect cost ratio

was extraordinarily high, unless there was also a large proportion of

the hospital's total hours reported in excluded areas of the hospital.

As a result, we eliminated allocations for 58 hospitals that had

indirect cost ratios more than 3 standard deviations above the mean

(that is, above 0.589986) but hour ratios less than 3 standard

deviations above the mean (0.445800).

After completing the above edits, we eliminated the allocation for

48 hospitals whose general service average hourly wage was more than 3

standard deviations above the mean for the remaining hospitals, or

above $36.75. Finally, we eliminated the allocation for 21 hospitals

for which the percentage difference between their pre-allocation

average hourly wage and their general service average hourly wage was

more than 3 standard deviations from the mean (if the difference was

greater than [[Page 29215]] 66.62 percent or less than -88.24 percent,

we eliminated the allocation). These edits eliminated the most extreme

and inexplicable general service allocations.

After we completed the above edits, 4,199 hospitals still had

overhead allocations. Of these, 71 percent (2,978) had average hourly

wages that were lower after the overhead allocation was made to the

excluded areas. The average difference between the pre- and post-

allocation average hourly wage was -0.14 percent. Eighty-six hospitals

had a percentage change of more than 10 percent in their average hourly

wage, of which 45 were decreases. An additional 158 hospitals had a

percentage change of between 5 and 10 percent, of which 104 were

decreases. Thirty-seven of 49 rural labor market areas would experience

decreases in their wage index value if we performed the allocation,

while 195 of 317 urban areas would experience decreases. The average

wage index value for all hospitals would decrease 0.08 percentage

points if we performed the overhead allocation.

Thus, we again conclude that it would not be appropriate to perform

the allocation of overhead salaries and hours to excluded areas of the

hospital in computing the wage index. The data still have the same

variations that were prevalent when we declined to use this methodology

in the proposed rule for FY 1994: Many hospitals were removed due to

the edits, many have large swings in their average hourly wages, and

many more hospitals' average hourly wages would decrease as a result of

the allocation than would increase, particularly for rural hospitals.

As we noted in the September 1, 1993 final rule (58 FR 46297), if

these allocations are accurate, it would mean that for the majority of

hospitals with excluded areas, the average hourly wage for the overhead

areas (such as laundry and housekeeping) is higher than that for

patient care areas (such as nursing). We do not believe that this could

be the case for such a large number of hospitals, and we have therefore

concluded that the reported data regarding overhead hours are

inaccurate. As a result, we have decided not to employ the allocation

of general service salaries and hours to excluded areas of the hospital

in constructing the FY 1996 wage index.

We note that hospital representatives that support the allocation

of overhead salaries to excluded areas do so because they believe that,

for those hospitals with excluded areas, the current average hourly

wage is artificially weighted downward (see the September 1, 1994 final

rule (59 FR 45359)). They believe that the current methodology, which

removes the higher nursing costs in excluded areas from the hospital's

direct salaries, but leaves in the lower general services salaries,

distorts wages downward. The reported data, however, are not consistent

with this concern.

While we continue to believe that an allocation of overhead

salaries and hours to the excluded subprovider components may be

appropriate, it would not benefit the hospital industry or the Medicare

program to implement an allocation that is not reliable. Clearly, the

overhead hours reported by many hospitals did not accurately reflect

the salaries reported. In addition, we realize that the allocation

method described above may not necessarily be the most accurate method

to make this allocation. We invite public comment concerning

alternative methods that might produce a more accurate and uniform

allocation method and at the same time impose little or no additional

reporting burden on the hospital industry. Commenters should note that,

under any acceptable allocation method, we would require that the

method be used by all hospitals with excluded areas and that the

intermediary be able to verify the accuracy of the reported data.

The cost report effective for FY 1995 (that is for cost reporting

periods that begin on or after October 1, 1994 and before October 1,

1995) will collect overhead data, both paid hours and the related

salaries, by general service area. These data will be used to construct

the wage index for FY 1999. We propose to reevaluate an allocation of

overhead salaries and hours to excluded areas of the hospital once the

data from this new cost report are available or possibly earlier if we

receive comments or suggestions from the public or otherwise determine

alternative methods to better allocate overhead salaries.

D. Revisions to the Wage Index Based on Hospital Redesignation

Under section 1886(d)(8)(B) of the Act, hospitals in certain rural

counties adjacent to one or more Metropolitan Statistical Areas (MSAs)

are considered to be located in one of the adjacent MSAs if certain

standards are met. Under section 1886(d)(10) of the Act, the Medicare

Geographic Classification Review Board (MGCRB) considers applications

by hospitals for geographic reclassification for purposes of payment

under the prospective payment system.

The methodology for determining the wage index values for

redesignated hospitals is applied jointly to the hospitals located in

those rural counties that were deemed urban under section 1886(d)(8)(B)

of the Act and those hospitals that were reclassified as a result of

the MGCRB decisions under section 1886(d)(10) of the Act. Section

1886(d)(8)(C) of the Act provides that the application of the wage

index to redesignated hospitals is dependent on the hypothetical impact

that the wage data from these hospitals would have on the wage index

value for the area to which they have been redesignated. Therefore,

pursuant to section 1886(d)(8)(C) of the Act, the wage index values

were determined by considering the following:

If including the wage data for the redesignated hospitals

reduces the MSA wage index value by 1 percentage point or less, the MSA

wage index value determined exclusive of the wage data for the

redesignated hospitals applies to the redesignated hospitals.

If including the wage data for the redesignated hospitals

reduces the wage index value for the area to which the hospitals are

redesignated by more than 1 percentage point, the hospitals that are

redesignated are subject to the wage index value of the area that

results from including the wage data of the redesignated hospitals (the

``combined'' wage index value). However, the wage index value for the

redesignated hospitals cannot be reduced below the wage index value for

the rural areas of the State in which the hospitals are located.

Rural areas whose wage index values would be reduced by

excluding the data for hospitals that have been redesignated to another

area continue to have their wage index calculated as if no

redesignation had occurred. Those rural areas whose wage index value

increases as a result of excluding the wage data for the hospitals that

have been redesignated to another area have their wage index calculated

exclusive of the redesignated hospitals.

The wage index value for an urban area is calculated

exclusive of the wage data for hospitals that have been reclassified to

another area. However, geographic reclassification may not reduce the

wage index for an urban area below the Statewide rural average,

provided the wage index prior to reclassification was greater than the

Statewide rural wage index value.

A change in classification of hospitals from one area to

another may not result in the reduction in the wage index for any urban

area whose wage index is below the rural wage index for the State. This

provision also applies to any urban area that encompasses an entire

State.

We note that, except for those rural areas where redesignation

would reduce [[Page 29216]] the rural wage index value, and for urban

areas whose wage index values are already below the rural wage index

and would be reduced by redesignations, the wage index value for each

area is computed exclusive of the data for hospitals that have been

redesignated from the area for purposes of their wage index. As a

result, several MSAs listed in Table 4a have no hospitals remaining in

the MSA. This is because all the hospitals originally in these MSAs

have been reclassified to another area by the MGCRB. For those areas,

we have listed the Statewide rural wage index value.

The proposed revised wage index values for FY 1996 are shown in

Tables 4a, 4b, and 4c of the addendum to this proposed rule. Hospitals

that are redesignated should use the wage index values shown in Table

4c. For some areas, more than one wage index value will be shown in

Table 4c. This occurs when hospitals from more than one State are

included in the group of redesignated hospitals, and one State has a

higher Statewide rural wage index value than the wage index value

otherwise applicable to the redesignated hospitals. Tables 4d and 4e

list the average hourly wage for each labor market area based on the FY

1992 wage data. In addition, as discussed above, we have expanded Table

3C (Hospital Case-Mix Indexes for Discharges) to include the average

hourly wage for each hospital based on the FY 1992 data. The MGCRB will

use the average hourly wage published in the final rule to evaluate a

hospital's application for reclassification, unless that average hourly

wage is later revised in accordance with the wage data correction

policy described in Sec. 412.63(s)(2). In such cases, the MGCRB will

use the most recent revised data used for purposes of the hospital wage

index. Hospitals that choose to apply before publication of the final

rule can use the proposed wage data in applying to the MGCRB for wage

index reclassifications that would be effective for FY 1997. We note

that in adjudicating these wage reclassification requests during FY

1996, the MGCRB will use the average hourly wages for each hospital and

labor market area that are reflected in the final FY 1996 wage index.

The proposed FY 1996 wage index values incorporate all hospital

redesignations for FY 1996. At the time this proposed wage index was

constructed, the MGCRB had completed its review. For FY 1996, 436

hospitals are redesignated for purposes of the wage index (including

hospitals redesignated under both sections 1886(d)(8)(B) and

1886(d)(10) of the Act). The number of reclassifications may change

because some MGCRB decisions are still under review by the

Administrator.

Any changes to the wage index that result from withdrawals of

requests for reclassification, wage index corrections, appeals, and the

Administrator's review process will be incorporated into the wage index

values published in the final rule. The changes may affect not only the

wage index value for specific geographic areas, but also whether

redesignated hospitals receive the wage index value for the area to

which they are redesignated or a combined wage index that includes the

data for both the hospitals already in the area and the redesignated

hospitals. Further, the wage index value for the area from which the

hospitals are redesignated may be affected.

Under Sec. 412.273, hospitals that have been reclassified by the

MGCRB are permitted to withdraw their applications within 45 days of

the publication of this Federal Register document. The request for

withdrawal of an application for reclassification that would be

effective in FY 1996 must be received by the MGCRB by July 17, 1995. A

hospital that requests to withdraw its application may not later

request that the MGCRB decision be reinstated.

E. Proposed Changes to the Medicare Geographic Classification Review

Board (MGCRB) Guidelines

Under section 1886(d)(10) of the Act, the MGCRB considers

applications by hospitals for geographic reclassification for purposes

of payment under the prospective payment system. Guidelines concerning

the criteria and conditions for hospital reclassification are located

at Secs. 412.230 through 412.236. The purpose of these criteria is to

provide direction, to both the MGCRB and those hospitals seeking

geographic reclassification, with respect to the situations that merit

an exception to the rules governing the geographic classification of

hospitals under the prospective payment system. As discussed in detail

below, we are proposing the following three changes to the MGCRB

guidelines:

Individual hospitals may not be reclassified from rural to

other urban areas for purposes of the standardized amount.

An individual hospital may be reclassified for purposes of

the wage index only to an area that has a higher pre-reclassification

average hourly wage.

For group reclassifications either the standardized amount

or the pre-reclassification average hourly wage of the area to which

the hospitals seek reclassification must be higher than the

standardized amount or pre-reclassification average hourly wage,

respectively, of the area in which the hospitals are currently located.

In addition to the changes to the MGCRB guidelines, we propose a

minor revision to Sec. 412.266 concerning hospital requests for data

from HCFA that are needed to complete applications to the MGCRB.

1. Limitations on Hospital Reclassification (Secs. 412.230, 412.232,

and 412.234)

a. Elimination of Reclassification from Rural to Other Urban Areas

for Purposes of the Standardized Amount. Section 1886(d)(10)(C)(i)(I)

of the Act requires the MGCRB to consider applications of hospitals

requesting reclassification for purposes of the standardized amount.

Section 1886(d)(10)(D)(i)(II) of the Act requires that the MGCRB

utilize guidelines published by the Secretary for determining whether

the county in which a particular hospital is located should be treated

as being a part of a particular MSA. Accordingly, the MGCRB allows

reclassifications for purposes of the standardized amount for

individual hospitals that meet the guidelines under Sec. 412.230, and

for groups of rural and urban hospitals that represent an entire county

and that meet the guidelines under Secs. 412.232 and 412.243

respectively.

As required by section 1886(d)(3)(A)(iii) of the Act, effective for

discharges occurring on or after October 1, 1994, the average

standardized amount for hospitals located in a rural area was made

equal to the average standardized amount for hospitals located in other

urban areas. The standardized amount effective for those areas is now

known as the other standardized amount. Large urban areas continue to

receive a separate, higher standardized amount. The effect of this

provision is that in FY 1995 or later, hospitals reclassified from

rural to other urban areas for purposes of the standardized amount

receive no increase in their standardized payment amount, since the two

rates are now the same.

However, we continue to receive applications from individual

hospitals seeking to be reclassified from rural to other urban areas

for the standardized amount because of certain payment advantages that

accompany the urban designation. When an individual

[[Page 29217]] hospital reclassifies from a rural to an urban area for

purposes of the standardized amount, we consider it urban for all

purposes except the wage index. For some rural hospitals, the urban

designation enables them to qualify as a disproportionate share

hospital (DSH) and to receive special payment adjustments. For other

rural hospitals that already qualify for DSH payments, the urban

designation qualifies them for a higher adjustment than they would

receive as a rural hospital.

We do not believe that the MGCRB provisions of the law were

intended to allow hospitals to be reclassified merely for the purpose

of receiving higher DSH payments. Rather, we believe that the intent of

the MGCRB legislation was to provide a hospital with the opportunity to

receive a more appropriate base payment rate, that is, the standardized

amount. Applying to an area with an identical standardized amount does

not produce this benefit. Section 1886(d)(10)(C)(i) of the Act states,

in part:

``The [MGCRB] shall consider the application of any subsection

(d) hospital requesting that the Secretary change the hospital's

geographic classification for purposes of determining for a fiscal

year--

(I) the hospital's average standardized amount under paragraph

(2)(D) * * *''

Since the standardized amounts applicable to hospitals in rural

areas and other urban areas are now equal, there is no reason to

request geographic reclassification from a rural area to an other urban

area ``for purposes of * * * the hospital's standardized amount.''

Therefore, we propose to provide under new Sec. 412.230(a)(5)(ii) that

a rural hospital may not be reclassified to an other urban area for

purposes of the standardized amount. This change would be effective for

hospital applications due October 2, 1995, requesting reclassification

for FY 1997. (Since October 1 is a Sunday, the MGCRB will accept

applications through October 2, 1995.)

We note that this change would not prevent individual rural

hospitals from applying for reclassification to large urban areas,

since the standardized amount for large urban areas is greater than

that of rural or other urban areas. Also, group applications from all

hospitals in a rural county to be reclassified to urban areas would not

be affected, since these hospitals are required to meet a different

``metropolitan character'' criterion under Sec. 412.232(b).

b. Reclassification for Purposes of the Wage Index. Section

1886(d)(10)(C)(i)(II) of the Act requires the MGCRB to consider the

application of any prospective payment hospital for purposes of

changing its applicable wage index. Sections 412.230, 412.232, and

412.234 set forth the types of individual and group reclassifications

that are currently allowed. An individual rural hospital may reclassify

to another rural area or to an urban area. An individual urban hospital

may reclassify to another urban area for purposes of the wage index,

the standardized amount or both. A rural group may reclassify to an

urban area and an urban group may reclassify to another urban area, but

only for purposes of both the wage index and the standardized amount.

We have recently received hospital requests for reclassification to

a labor market area with a lower wage index. Although such requests

initially would appear illogical, they can result, in some cases, in a

hospital gaining reclassification to an area from which all other

hospitals have reclassified, that is, to an empty labor market area.

Thus, a hospital reclassified to such an area could receive a wage

index value based only on its own hourly wages.

In the June 4, 1991 final rule with comment period, we stated our

belief that geographic reclassification should be limited to hospitals

that are disadvantaged by their current classification because they

compete with hospitals that are located in the geographic area to which

they seek reclassification (56 FR 25469). We do not believe it is

appropriate for hospitals to seek reclassification to an area with a

lower wage index in an effort to use the MGCRB system inequitably.

Therefore, we are proposing that a hospital that seeks to

reclassify for the purpose of the wage index may apply for

reclassification only to an area that has a higher pre-reclassified

average hourly wage than the pre-reclassified average hourly wage in

the hospital's original geographic area. We would revise Secs. 412.230,

412.232, and 412.234 to reflect this proposal.

We recognize that this change could present a problem for hospital

group requests for reclassification from a rural or other urban area to

a large urban area for purposes of the standardized amount. A group of

hospitals seeking to reclassify to a large urban area must apply for

both the wage index and the standardized amount. It is possible that

the pre-reclassified average hourly wage for the area to which the

group seeks reclassification may be lower than the average hourly wage

for the group's original area. The same problem could occur if a group

seeks to reclassify to an area that has a higher wage index, although

the standardized amount is the same (that is, a group of rural

hospitals seek to reclassify to an other urban area). Therefore, for

group reclassifications, we propose that either the pre-reclassified

average hourly wage or the standardized amount of the area to which the

hospitals seek reclassification must be higher than the corresponding

figure of the area in which the hospitals are located for the group to

qualify for reclassification. These revisions would be effective for

applications for reclassification due by October 1, 1995, for

reclassifications effective October 1, 1996.

Accordingly, we propose the following changes to the MGCRB

guidelines:

We would specify under new Sec. 412.230(a)(5)(i) that, for

purposes of the wage index, a hospital may not be reclassified to an

area whose pre-reclassification average hourly wage is lower than the

hospital's current pre-reclassification average hourly wage. As noted

above, we would provide under Sec. 412.230(a)(5)(ii) that a rural

hospital may not be reclassified to an other urban area for purposes of

the standardized amount. In addition, we would move the current

limitation that a hospital may only be reclassified to one area from

Sec. 412.230(a)(1) to new Sec. 412.230(a)(5)(iii).

We would add a new paragraph (a)(4) to Secs. 412.232 and

412.234 to provide that for rural or urban group requests for

reclassification, the standardized amount of the area to which the

group seeks reclassification must be higher than the group's current

standardized amount, or the average hourly wage of the area to which

the group seeks reclassification must be higher than the group's

current average hourly wage.

2. Hospital Requests for Wage Data from HCFA

Currently, regulations at Sec. 412.266 provide that a hospital may

request from HCFA certain wage data that are necessary for a complete

reclassification application to the MGCRB. The regulations also set

forth dates by which HCFA must respond to such requests. Before 1994,

hospitals needed to obtain data on average hourly wages directly from

HCFA, since the data were not available from any other source.

Beginning with the May 27, 1994, proposed rule, we have included the

average hourly wage data for each hospital in the proposed and final

rules as part of Table 3c. Therefore, hospitals no longer need to

contact HCFA to obtain the data necessary to apply for

reclassification. Thus, we are proposing [[Page 29218]] to revise

Sec. 412.266 to indicate that hospitals are to obtain the necessary

data from the Federal Register document.

3. Elimination of the MGCRB

As discussed above, under section 1886(d)(10) of the Act, the MGCRB

is charged with reviewing and making decisions on hospital requests for

geographic reclassification. Since implementation of this process 5

years ago, many changes have been made to the criteria that hospitals

must meet in order to qualify for reclassification. The majority of

these criteria are now objective standards that are easily assessed.

However, the MGCRB application process remains essentially unchanged.

We believe that it may be appropriate to revise the current MGCRB

process. That is, we believe that it may now be possible to establish a

simplified hospital application process and transfer the Board's

decision making authority to HCFA. In general, we believe that this

could result in a more efficient system and reduce the paperwork burden

to hospitals. However, we would need a change in the current law to

accomplish this transfer.

One area in which it may be possible to make changes if we are

granted legislative authority is in the use of more current data. By

statute, the MGCRB must issue all of its decisions by March 30 each

year, before the final wage data for the upcoming Federal fiscal year

are computed. Given the current application and review process, the

best data we can use are the previous year's final wage data. If the

reclassification system were revised and simplified, then it might be

possible to use more current data in making the reclassification

decisions. However, this would require a statutory change. We welcome

comments on this issue and on how we could simplify the application

process.

F. Alternative Labor Market Areas

1. Background

Almost from the beginning of the prospective payment system, we

have received comments from hospitals and ProPAC questioning the use of

MSA-based labor market areas to construct the wage index. In light of

these concerns, we have examined a variety of options for revising wage

index labor market areas.

In the May 27, 1994, proposed rule (59 FR 27724), we presented our

latest research concerning possible future refinements to the wage

index labor market areas. Specifically, we discussed in detail ProPAC's

proposal for hospital-specific labor market areas based on each

hospital's nearest neighbors, and our research and analysis on

alternative labor market areas. We solicited comments on these possible

revisions to the labor market areas. In this proposed rule, we will

summarize our position with regard to further research into changing

labor market areas and summarize the major comments we received in

response to last year's proposals.

2. Summary of Research on Labor Market Areas

In the May 27, 1994 proposed rule, we described our research on

alternative labor market areas including a number of hospital-specific

labor market alternatives and the criteria we used to analyze each of

the alternatives. We also discussed our belief that even though none of

the alternative labor market areas that we studied provided a distinct

improvement over the current reclassification wage index, a combination

of the current MSA-based system and the ``nearest neighbors'' based

system proposed by ProPAC, in which a hospital's wage index is based on

its wages and those of the other hospitals closest to it, might have

considerable potential for improving the wage index.

We presented an option using the current MSA-based system but

generally giving a hospital's own wages a higher weight than under the

current system. Under this approach, the wage index of each hospital

would be based on a weighted average of that hospital's own average

hourly wages and the average hourly wages of other hospitals in its

labor market area (either an MSA or Statewide rural area).

We considered two alternative wage indexes. The first, known as

``M25'' or ``minimum 25,'' placed a minimum 25 percent (.25) weight on

each hospital's own average hourly wage and a 75 percent weight (.75)

on the average hourly wage of the other hospitals in each hospital's

MSA or Statewide rural area. If a hospital's data already represented

more than 25 percent of the hours in its labor market area, that higher

percent was used instead in calculating the hospital's weighted average

hourly wage. The resulting weighted average hourly wage was divided by

the national average hourly wage to obtain each hospital's wage index

value. The second wage index, known as ``M50'' or ``Minimum 50,''

differs from the first alternative only in that a minimum 50 percent

weight is given to the hospital's own average hourly wage, instead of a

minimum 25 percent. We refer to these as the M25/50 labor market

classification options.

However, we recognized that in some cases a hospital's immediate

labor market area as defined under a ``nearest neighbor'' approach

could be more representative of its true labor market area than an MSA-

based labor market area. To address such situations, we described a

mechanism that would essentially provide a hospital with an alternative

wage index derived entirely or in part from its nearest neighbors labor

market. We presented two methods for reclassification, a ``simple''

method and a ``refined'' method. Both methods utilized the two wage

indexes described above and like the current MGCRB reclassification

system, also required a hospital's own wages to exceed certain

thresholds to meet eligibility. Under the simple reclassification

methodology, if a hospital's wages met certain thresholds, the average

hourly wage of that hospital's 10 nearest neighbors would be

substituted for the MSA or statewide rural average hourly wage in

calculating the numerator of that hospital's wage index. Under the

refined reclassification methodology, if certain tests were met, in

addition to using the neighboring hospitals' average hourly wages in

computing a hospital's wage index, the hospital's hours percentage in

its nearest neighbors' labor market area would also be substituted for

the weight that would otherwise be used. For example, if a hospital's

wages made up 80 percent of all hospital wages in its nearest

neighbors' labor market area, then the hospital would receive that

weight (.80) in computing its wage index.

We also described for comment a State labor market option (SLMO)

under which hospitals would be allowed to design labor market areas

within their own State boundaries. We specified that aggregate payments

to hospitals participating in the SLMO must be budget neutral; that is,

the payments could be no higher than they otherwise would have been in

the absence of the SLMO. We discussed options for applying the budget

neutrality adjustment and a number of issues that would have to be

resolved before a SLMO could be instituted. Among these issues were how

to determine when a SLMO should be approved for a particular area. We

asked for comment on whether unanimous support from all of the

hospitals participating should be required, or whether it would be

sufficient to obtain support from only a specific percentage of the

covered hospitals. [[Page 29219]]

3. Summary of Comments on Labor Market Areas

We received 74 comments on our labor market alternatives. These

comments were from individual hospitals, national, State and local

hospital associations, hospital consultant groups and ProPAC. Of the

individual comments received, 27 were from New York hospitals and the

rest were relatively evenly distributed around the country.

Many of the commenters limited their comments to specific aspects

of the issues mentioned in the proposed rule. The majority focused on

the M25/50 labor market classifications option. Of those, 42 were

opposed, 16 gave conditional support, and 11 were in favor. The

alternative reclassification mechanism received 43 comments of which 36

opposed the option, 4 gave conditional support, and 3 were in favor. We

received the fewest number of comments on the SLMO proposal, with nine

commenters expressing opposition, nine expressing conditional support,

and two in favor.

M25/50 Labor Market Option

Many of those who commented on the M25/50 proposal expressed

concern that a blended wage index would undermine the principles on

which the prospective payment system is based. One commenter said that

the present system is designed to allow a cost effective hospital to

move toward profitability and questioned why HCFA would want to change

directions. Other commenters noted that a blended wage index would

reward the highest cost hospitals with high wage indexes.

Several commenters believe that we should complete a detailed

financial analysis for each option. Although we did not include sample

wage index values in the proposed rule, two associations did financial

analyses upon which many hospitals based their comments. A number of

commenters were concerned about the redistribution of funds under the

blended wage index. One association commented that under such a

proposal, twice as many hospitals in its State would receive a lower

wage index as would benefit. Two national associations recommended that

if M25/50 were adopted it should be implemented gradually because of

the redistributive nature of the proposal. One association recommended

that we provide ``buffer zones'' to protect hospitals from payment

swings that exceeded a fixed percentage. Rural referral centers were

generally opposed to the blended wage index because they believe it

would create a new system with significant redistribution of funds,

produce new inequities, and not correct the major problem of rural

referral centers being grouped with unlike hospitals in rural areas.

Both ProPAC and another commenter stated that labor market changes

should be implemented in conjunction with an occupational mix

adjustment. ProPAC said that it was difficult to evaluate competing

labor market options without such data and that therefore it had not

done so. ProPAC also stated that a blended wage index would be likely

to increase occupational mix bias as more weight is attached to a

hospital's own wage rate.

Several State and national hospital association representatives

recommended that we convene a meeting of hospital association

representatives to discuss our labor market proposals in greater

detail. They called for a meeting similar to the one we held in

November 1993 to discuss options for redefining labor market areas, as

discussed in last year's May 27, 1994 proposed rule (59 FR 27726).

On the positive side, several hospital associations expressed their

belief that a blended wage index holds potential to create a more

equitable and supportable payment mechanism and could significantly

reduce the number of hospitals requiring reclassification. One national

association stated that a blended wage index balances the model that

hospitals can purchase labor at the same price within a market with the

recognition that imperfections in measuring labor markets will persist.

Reclassification Option

As noted above, the majority of commenters (36 of 43) were opposed

to the alternative reclassification option. A number of commenters are

concerned that the proposed 'simple' and 'refined' reclassification

methodologies were too complicated. A State hospital association

favored ``a simplified [reclassification] approach that could easily be

administered by the intermediary.'' Some commenters stated that they

disagreed with the formula-driven nature of the reclassification

process and believed that it was contrary to Congressional intent. Some

commenters were concerned about the effect of this proposal on group

reclassifications. While some commenters decried the loss of group

reclassification, another commenter believes that hospitals should be

allowed to continue to use commuting data to justify their county's

eligibility for reclassification. One State hospital association

expressed its belief that reclassification was originally intended to

benefit small, rural hospitals, but that our proposal went far beyond

that original intent by allowing many more urban and large urban

hospitals to qualify for reclassification.

Rural referral centers are concerned that they will lose money due

to more stringent reclassification criteria in proposed methodologies.

Two commenters were concerned that the reclassification proposal

did not address inequities in the Boston NECMA (New England County

Metropolitan Area). They believe that the core problem is the Boston

NECMA itself, which should be replaced by a central/outlying county

framework.

Two hospital associations were concerned about the proposed

reclassification methodologies' reliance on ``nearest neighbors''. A

regional hospital association questioned why the nearest neighbor

approach would be utilized for geographic reclassification purposes

after it was rejected as a model for all market areas.

ProPAC stated that the reclassification options are likely to

increase occupational mix bias. A hospital with a low wage rate, which

results partially from a low occupational mix, would be unlikely to

qualify for reclassification. However, a hospital with a high wage

index (such as a large teaching hospital) would be more likely to

qualify for reclassification and thus be able to ``lock in'' the

occupational mix bias. One positive comment received was that the data

for all hospitals in the region would be retained in calculating wage

index values and that it would be an improvement over the current

system.

State Labor Market Option

Regarding this option, the main area of concern was the level of

support required to allow hospitals in a State to select the SLMO. Some

commenters expressed concern that if a SLMO could be established only

by an overwhelming or unanimous majority of a State's hospitals, the

possibility of such unanimity would be unrealistic given the

requirement of budget neutrality. As one hospital stated, ``We do not

understand the circumstances in which a hospital that would lose

reimbursement under this method would consent to participate.'' On the

other hand, some commenters expressed concern that if we were to allow

the creation of a SLMO with less than full agreement by all

participating hospitals, it could create a system where the few would

suffer greatly at the whim of the many.

4. Conclusion

As the comment summary illustrates, there was no consensus among

the [[Page 29220]] commenters on the choice for new labor market areas.

Many individual hospitals that commented expressed dissatisfaction with

all of the proposals. However, several State hospital association

representatives commented that while the M25/50 labor market

classification option and the simple and refined reclassification

options were not ready for implementation, they did merit further

study. Based on the commenters' suggestions that we convene a group of

hospital association representatives to discuss these issues, in

February we sent letters to association representatives that

participated in our November 1993 meeting on labor market issues in

which we solicited ideas for additional types of labor market research

that HCFA should conduct. None of the individuals we contacted

suggested any new avenues for research. While we believe a blended wage

index such as the M25 or M50 option may have merit, we are not planning

to propose it at this time given the comments we received. Although we

believe that the response to the various proposals we have made in the

last couple of years demonstrates that there is no clear ``best'' labor

market area option to pursue, we are willing to continue research on

possible labor market refinements. However, we believe we have

exhausted most available avenues for new research.

IV. Other Decisions and Proposed Changes to the Prospective Payment

System for Inpatient Operating Costs

A. Payment for Transfer Cases (Sec. 412.4)

The prospective payment system distinguishes between

``discharges,'' situations in which a patient leaves an acute-care

hospital after receiving complete treatment, and ``transfers,''

situations in which the patient is transferred to another acute-care

hospital for related care. If a full DRG payment were made to each

hospital involved in a transfer situation irrespective of the length of

time the patient spent in the ``sending'' hospital before transfer,

this would create a strong incentive to increase transfers, thereby

unnecessarily endangering patients' health. Therefore, the regulations

at Sec. 412.4(d) provide that, in a transfer situation, full payment is

made to the final discharging hospital and each transferring hospital

is paid a per diem rate for each day of the stay, not to exceed the

full DRG payment that would have been made if the patient had been

discharged without being transferred.

Currently, the per diem rate paid to a transferring hospital is

determined by dividing the full DRG payment that would have been paid

in a nontransfer situation by the geometric mean length-of-stay for the

DRG into which the case falls. Transferring hospitals are also eligible

for outlier payments for cases that meet the cost outlier criteria

established for all cases (nontransfer and transfer cases alike)

classified to the DRG. They are not, however, eligible for day outlier

payments. Two exceptions to the transfer payment policy are transfer

cases classified into DRG 385 (Neonates, Died or Transferred to Another

Acute Care Facility) or DRG 456 (Burns, Transferred to Another Acute

Care Facility), which are not paid on a per diem basis but instead

receive the full DRG payment.

In the May 27, 1994 proposed rule, we proposed to revise our

payment methodology for transfer cases. Under the proposal, for the

first day of a transfer, the per diem amount would be doubled, while a

flat per diem amount would be paid for each succeeding day, up to the

full DRG payment (59 FR 27734). We also proposed at that time to change

our definition of a transfer case to include cases transferred from an

acute-care setting paid under the prospective payment system to a

hospital or unit excluded from the prospective payment system. When we

published the September 1, 1994 final rule with comment period, we

withdrew these proposals for FY 1995 (59 FR 45362) based on negative

comments and further analysis. In that final rule, however, we stated

our intention to continue to evaluate the appropriateness of our

transfer policy.

For FY 1996, we are again proposing to adopt a graduated per diem

payment methodology for transfer cases. Again, under this proposed

methodology, we would pay double the per diem amount for the first day

and the per diem amount for subsequent days. We are not proposing to

revise our definition of transfers at this time. However, we note that

we are concerned about an accelerating trend toward earlier discharges

to post-acute settings. We are, therefore, soliciting public comments

regarding this trend and the implications this has for the design of

our payment systems. In its March 1, 1995 report, ProPAC supported our

proposed payment methodology (Recommendation 11) and expressed its

concern ``about the continuity of care across treatment settings.'' The

Commission also indicated its willingness to work with the Secretary to

explore this issue. The following discussion describes our proposed

change to the transfer payment methodology and some of the issues

identified by our further analysis of transfer cases.

1. Payment for Transfer Cases

As part of a study of Medicare transfer cases funded by HCFA

(``Transfers of Medicare Hospital Patients under the Prospective

Payment System'', PM-191-HCFA, January 1994), RAND found that among

cases transferred before reaching the geometric mean length-of-stay, 1-

day stays cost 2.096 times the per diem payment amount for cases in

nonsurgical DRGs and 2.576 times the per diem for surgical DRGs (based

on FY 1991 data). Among nonsurgical transfer cases, the costs of 2-day

stays were about 1.215 times the per diem payment amount, and cases

transferred after 2 days cost about 10 percent more than the applicable

per diem amount. Among surgical cases, the costs of stays of 2 or more

days were actually about 7 percent below the applicable per diem

amount.

In order to pay hospitals more appropriately for the treatment they

furnish to patients before transfer, we are proposing to revise

Sec. 412.4(d)(1) to pay transfers twice the per diem amount for the

first day of any transfer stay plus the per diem amount for each of the

remaining days before transfer, up to the full DRG amount. (Our

concerns about basing the gradation of the per diem scale on the actual

coefficients as estimated by RAND were described in last year's

proposed and final rules, as referenced above.) We are proposing that

this change be applied uniformly for both medical and surgical transfer

cases; although surgical transfer cases appear to be more costly on

average for the first day, they are relatively less costly for the

second day and beyond.

If the patient is transferred again before final discharge, then,

under the change we are proposing, all sending hospitals involved would

be paid using the graduated per diem methodology rather than the flat

per diem rate they currently receive. For example, a case transferred

from a community hospital to a tertiary care hospital for a procedure

that is not performed at the community hospital, may subsequently be

transferred back to the community hospital, which ultimately discharges

the patient home. In such a case, the community hospital and the

tertiary care hospital would be paid using the transfer payment

methodology for the first two phases of the hospitalization, and the

community hospital would also receive a DRG amount for the final phase

when it discharges the patient. This is our current policy, as well.

Each phase of the hospitalization is assigned a DRG based on the

diagnosis and procedures applicable to that particular

[[Page 29221]] phase; therefore, a different DRG could be assigned to

each phase.

Transfer cases would continue to be eligible for additional

payments as cost outliers. In the September 1, 1993 final rule, we set

forth revised qualifying criteria for transfer cases to be eligible for

cost outlier payments (58 FR 46305). Before that change, transfer cases

were required to meet the same criteria to qualify for cost outliers as

were discharges. The revised policy adjusts the outlier threshold for

transfer cases to reflect the fact that transfer cases were receiving a

reduced payment amount under the per diem methodology. Last year, when

we revised the cost outlier qualifying criteria so that it was based on

a fixed loss threshold, the qualifying criteria for transfers continued

to reflect the fact that their payment amounts are reduced relative to

discharges. Specifically, the cost outlier threshold for transfer cases

is equal to the fixed loss amount (for FY 1995, the prospective payment

rate for the DRG plus $20,500), divided by the geometric mean for the

DRG, multiplied by the length of stay before transfer. Although we did

not state this explicitly in the September 1, 1994 final rule, it is

the policy we have employed, and intend to continue to employ, since

the fixed loss threshold was implemented October 1, 1994.

Using the proposed graduated per diem methodology, RAND estimated

the payment-to-cost ratio of transfer cases that were transferred

before reaching the geometric mean length of stay would be 0.9321.

While this is somewhat less than the payment-to-cost ratio for

nontransfer cases (0.9645), it represented a significant improvement

over the current ratio for transfer cases (0.7224). Using more recent

data (FY 1993 MedPAR) and payment policies (FY 1995), we estimated the

improvement in the payment-to-cost ratio for transfer cases to be from

0.7548 under the current flat per diem policy to 0.9701 under the

proposed graduated per diem policy.

Section 109 of the Social Security Act Amendments of 1994 (Public

Law 103-432) authorized the Secretary to make adjustments to the

prospective payment system standardized amounts so that adjustments to

the payment policy for transfer cases do not affect aggregate payments.

In light of this authority, we believe the benefits of the graduated

per diem methodology now outweigh the concerns that we expressed in the

September 1, 1994 final rule. Our methodology for applying this

adjustment is described in section II of the Addendum to this proposed

rule.

Finally, we are also proposing to revise the DRG recalibration

methodology so that transfer cases are treated as a proportion of a

full case based on the length of stay (as discussed above in section

II.C of this preamble). Specifically, we are proposing to weight

transfer cases as less than a full discharge based on the proportion of

the number of days the patient was hospitalized before transfer. This

would have the effect of increasing the relative weights of the DRGs

with a high number of short stay transfer cases.

2. Definition of a Transfer Case

Under current policy, cases that are transferred from an acute-care

hospital paid under the prospective payment system to another type of

provider or unit are considered to be discharges (as opposed to

transfers) from the acute-care hospital. As a discharge, payment for

the case is the full DRG amount.

As noted above, we are concerned that the current trend of

declining average lengths of stay as hospitals transfer Medicare

patients into alternative health care settings (other than acute care)

in less time may result in a misalignment of payments and costs under

our existing payment systems. In particular, we are concerned that

hospitals paid under the prospective payment system may be shifting

costs (for which they are compensated through the DRG payments) to

alternative settings, which are in turn paid on a cost basis.

In the September 1, 1994 final rule, we explained our rationale for

proposing to consider patients transferred to excluded hospitals or

units as transfers rather than discharges. Briefly, our proposal was

``based upon the premise that an increasing number of patients are

being transferred to excluded hospitals or units and that these

patients are still in the acute care phase of treatment when they are

transferred.'' (See 59 FR 45364). We also explained our reason for

continuing to consider patients going to a skilled nursing facility

(SNF) as discharges. In that regard, we stated that ``(w)e did not

propose to consider discharges to SNFs as transfers because we do not

consider SNFs to be hospital settings; thus, there is generally little

overlap with acute care hospitals in the services provided.'' Based

upon further analysis of patient discharge trends and research on the

type and outcomes of care provided in SNFs, as well as anecdotal

evidence drawn from the health care industry, we no longer believe

there is a clear distinction between the type of care provided in SNFs

and the type of care provided in hospitals or units excluded from the

prospective payment system, such as rehabilitation facilities and long-

term care hospitals.

Therefore, we considered proposing to expand our definition of

transfers to include not only cases going from one hospital paid under

the prospective payment system to another but also cases transferred to

excluded hospitals and units as well as SNFs. However, as discussed

below, our analysis has identified problems that need to be addressed.

Nevertheless, once we are convinced these problems can be effectively

handled, we intend to proceed with implementing policy changes designed

to remedy this issue.

First, our analysis (as well as anecdotal evidence) indicates that

the settings where acute care is now being delivered are rapidly

expanding and evolving. To the extent that payment is affected by where

a patient goes after an acute hospitalization, it is critical to

understand the clinical capabilities of different types of settings, so

that the incentives treated by the payment system do not unduly

influence the choice of where to send a patient for post-acute care.

That is, all like provider settings should be treated equally in terms

of payment incentives. Currently, the settings that are considered as

alternatives to acute care are expanding rapidly, and we want to be

sure that we do not create unforeseen financial incentives toward one

alternative over another by any redefinition of transfers.

In addition, as discussed in last year's final rule, hip

replacement cases (which, as a group, constitute one of the largest

sources of Medicare cases going from acute to post-acute settings)

would be systematically underpaid under either the current or the

proposed per diem methodology. This is because the cost of the surgery

including the prosthetic device, which is incurred in the first day or

two of the stay, constitutes a large percentage of the total cost of

the stay. A graduated per diem would have to be skewed greatly toward

the first day to approximate the daily cost distribution.

We are soliciting public comment with regard to these issues.

Specifically, we are interested in suggestions on how best to adapt our

payment methodologies for hospitals and units (both acute care paid

under the prospective payment system and those excluded from this

system), SNFs, and home health agencies in response to the evolving

integrated delivery systems. We are particularly interested in comments

and suggestions on how to design a comprehensive payment system that

better matches payments with the costs providers actually incur

[[Page 29222]] in furnishing care (that is, reducing hospital payments

when a significant phase of a patient's acute episode is treated in

other than an acute hospital inpatient setting). A major issue in

developing such an integrated payment system is to neutralize the

incentives that arise in terms of where patients are treated. For

example, hospitals should continue to be adequately compensated for

acute inpatient hospitalization where appropriate, so that there will

not be an adverse incentive to move patients prematurely to alternative

settings.

We will continue to analyze and explore various solutions to this

issue, including any that are provided by commenters.

B. Rural Referral Centers (Sec. 412.96)

Under the authority of section 1886(d)(5)(C)(i) of the Act,

Sec. 412.96 sets forth the criteria a hospital must meet in order to

receive special treatment under the prospective payment system as a

rural referral center. For discharges occurring before October 1, 1994,

rural referral centers received the benefit of payment based on the

other urban payment rate rather than the rural payment rate. As of that

date, the other urban and rural payment rates are the same. However,

rural referral centers continue to receive special treatment under both

the disproportionate share hospital payment adjustment and the criteria

for geographic reclassification.

One of the criteria under which a rural hospital may qualify as a

referral center is to have 275 or more beds available for use. A rural

hospital that does not meet the bed size criterion can qualify as a

rural referral center if the hospital meets two mandatory criteria

(number of discharges and case-mix index) and at least one of three

optional criteria (medical staff, source of inpatients, or volume of

referrals). With respect to the two mandatory criteria, a hospital may

be classified as a rural referral center if its--

Case-mix index is at least equal to the lower of the

median case-mix index for urban hospitals in its census region,

excluding hospitals with approved teaching programs, or the median

case-mix index for all urban hospitals nationally; and

Number of discharges is at least 5,000 discharges per year

or, if fewer, the median number of discharges for urban hospitals in

the census region in which the hospital is located. (The number of

discharges criterion for an osteopathic hospital is at least 3,000

discharges per year.)

1. Case-Mix Index

Section 412.96(c)(1) provides that HCFA will establish updated

national and regional case-mix index values in each year's annual

notice of prospective payment rates for purposes of determining rural

referral center status. In determining the proposed national and

regional case-mix index values, we would follow the same methodology we

used in the November 24, 1986 final rule, as set forth in regulations

at Sec. 412.96(c)(1)(ii). Therefore, the proposed national case-mix

index value includes all urban hospitals nationwide, and the proposed

regional values are the median values of urban hospitals within each

census region, excluding those with approved teaching programs (that

is, those hospitals receiving indirect medical education payments as

provided in Sec. 412.105).

These values are based on discharges occurring during FY 1994

(October 1, 1993 through September 30, 1994) and include bills posted

to HCFA's records through December 1994. Therefore, in addition to

meeting other criteria, we are proposing that to qualify for initial

rural referral center status or to meet the triennial review standards

for cost reporting periods beginning on or after October 1, 1995, a

hospital's case-mix index value for FY 1994 would have to be at least--

1.3165; or

Equal to the median case-mix index value for urban

hospitals (excluding hospitals with approved teaching programs as

identified in Sec. 412.105) calculated by HCFA for the census region in

which the hospital is located.

The median case-mix values by region are set forth in the table

below:

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

Case-mix

Region index

value

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

1. New England (CT, ME, MA, NH, RI, VT)...................... 1.2186

2. Middle Atlantic (PA, NJ, NY).............................. 1.2090

3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV)....... 1.3112

4. East North Central (IL, IN, MI, OH, WI)................... 1.2280

5. East South Central (AL, KY, MS, TN)....................... 1.2782

6. West North Central (IA, KS, MN, MO, NE, ND, SD)........... 1.1912

7. West South Central (AR, LA, OK, TX)....................... 1.2995

8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY)................. 1.3606

9. Pacific (AK, CA, HI, OR, WA).............................. 1.3300

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

The above numbers will be revised in the final rule to the extent

required to reflect the updated MedPAR file, which will contain data

from additional bills received for discharges through September 30,

1994.

For the benefit of hospitals seeking to qualify as referral centers

or those wishing to know how their case-mix index value compares to the

criteria, we are publishing each hospital's FY 1994 case-mix index

value in Table 3C in section V of the addendum to this proposed rule.

In keeping with our policy on discharges, these case-mix index values

are computed based on all Medicare patient discharges subject to DRG-

based payment.

2. Discharges

Section 412.96(c)(2)(i) provides that HCFA will set forth the

national and regional numbers of discharges in each year's annual

notice of prospective payment rates for purposes of determining

referral center status. As specified in section 1886(d)(5)(C)(ii) of

the Act, the national standard is set at 5,000 discharges. However, we

are proposing to update the regional standards. The proposed regional

standards are based on discharges for urban hospitals' cost reporting

periods that began during FY 1993 (that is, October 1, 1992 through

September 30, 1993). That is the latest year for which we have complete

discharge data available.

Therefore, in addition to meeting other criteria, we are proposing

that to qualify for initial rural referral center status or to meet the

triennial review standards for cost reporting periods beginning on or

after October 1, 1995, the number of discharges a hospital must have

for its cost reporting period that began during FY 1994 would have to

be at least--

5,000; or

Equal to the median number of discharges for urban

hospitals in the census region in which the hospital is located, as

indicated in the table below.

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

Number of

Region discharges

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

1. New England (CT, ME, MA, NH, RI, VT)..................... 6808

2. Middle Atlantic (PA, NJ, NY)............................. 8611

3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV)...... 7320

4. East North Central (IL, IN, MI, OH, WI).................. 6959

5. East South Central (AL, KY, MS, TN)...................... 5520

6. West North Central (IA, KS, MN, MO, NE, ND, SD).......... 5001

7. West South Central (AR, LA, OK, TX)...................... 4473

8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY)................ 8421

9. Pacific (AK, CA, HI, OR, WA)............................. 5594

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

[[Page 29223]] We reiterate that, to qualify for rural referral

center status for cost reporting periods beginning on or after October

1, 1995, an osteopathic hospital's number of discharges for its cost

reporting period that began during FY 1994 would have to be at least

3,000.

3. Retention of Referral Center Status

Section 412.96(f) states that each hospital receiving the referral

center adjustment is reviewed every 3 years to determine if the

hospital continues to meet the criteria for referral center status. To

retain status as a referral center, a hospital must meet the criteria

for classification as a referral center specified in Sec. 412.96(b)(1)

or (b)(2) or (c) for 2 of the last 3 years, or for the current year. A

hospital may meet any one of the three sets of criteria for individual

years during the 3-year period or the current year. For example, a

hospital may meet the two mandatory requirements in Sec. 412.96(c)(1)

(case-mix index) and (c)(2) (number of discharges) and the optional

criterion in paragraph (c)(3) (medical staff) during the first year.

During the second or third year, the hospital may meet the criteria

under Sec. 412.96(b)(1) (rural location and appropriate bed size).

A hospital must meet all of the criteria within any one of these

three sections of the regulations in order to meet the retention

requirement for a given year. That is, it will have to meet all of the

criteria of Sec. 412.96(b)(1) or Sec. 412.96(b)(2) or Sec. 412.96(c).

For example, if a hospital meets the case-mix index standards in

Sec. 412.96(c)(1) in years 1 and 3 and the number of discharge

standards in Sec. 412.96(c)(2) in years 2 and 3, it will not meet the

retention criteria. All of the standards would have to be met in the

same year.

In accordance with Sec. 412.96(f)(2), the review process is limited

to the hospital's compliance during the last 3 years. Thus, if a

hospital meets the criteria in effect for at least 2 of the last 3

years or if it meets the criteria in effect for the current year (that

is, the criteria for FY 1996 outlined above in this section of the

preamble), it will retain its status for another 3 years. We have

constructed the following chart and example to aid hospitals that

qualify as referral centers under the criteria in Sec. 412.96(c) in

projecting whether they will retain their status as a referral center.

Under Sec. 412.96(f), to qualify for a 3-year extension effective

with cost reporting periods beginning in FY 1996, a hospital must meet

the criteria in Sec. 412.96(c) for FY 1996 or it must meet the criteria

for 2 of the last 3 years as follows:

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

Use the

discharges

Use for the Use numerical

hospital's hospital's standards as

For the cost reporting period case-mix cost published in the

beginning during FY index for reporting Federal Register

FY period on

beginning

during FY

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

1995.......................... 1993 1993 Sept. 1, 1994.

1994.......................... 1992 1992 Sept. 1, 1993.

1993.......................... 1991 1991 Sept. 1, 1992.

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

Example: A hospital with a cost reporting period beginning July

1 qualified as a referral center effective July 1, 1993. The

hospital has fewer than 275 beds. Its 3-year status as a referral

center is protected through June 30, 1996 (the end of its cost

reporting period beginning July 1, 1995). To determine if the

hospital should retain its status as a referral center for an

additional 3-year period, we will review its compliance with the

applicable criteria for its cost reporting periods beginning July 1,

1993, July 1, 1994, and July 1, 1995. The hospital must meet the

criteria in effect either for its cost reporting period beginning

July 1, 1996, or for two out of the three past periods. For example,

to be found to have met the criteria at Sec. 412.96(c) for its cost

reporting period beginning July 1, 1994, the hospital's case-mix

index value during FY 1992 must have equaled or exceeded the lower

of the national or the appropriate regional standard as published in

the September 1, 1993 final rule with comment period. The hospital's

total number of discharges during its cost reporting year beginning

July 1, 1992, must have equaled or exceeded 5,000 or the regional

standard as published in the September 1, 1993 final rule with

comment period.

For those hospitals that seek to retain referral center status by

meeting the criteria of Sec. 412.96(b)(1) (i) and (ii) (that is, rural

location and at least 275 beds), we will look at the number of beds

shown for indirect medical education purposes (as defined at

Sec. 412.105(b)) on the hospital's cost report for the appropriate

year. We will consider only full cost reporting periods when

determining a hospital's status under Sec. 412.96(b)(1)(ii). This

definition varies from the number of beds criterion used to determine a

hospit

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