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

SUMMARY: We are revising the Medicare hospital inpatient prospective

payment systems for operating costs and capital-related costs to

implement necessary changes arising from our continuing experience with

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

describing changes in the amounts and factors necessary to determine

prospective payment rates for Medicare hospital inpatient services for

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

to discharges occurring on or after October 1, 1995. We are also

setting forth rate-of-increase limits as well as policy changes for

hospitals and hospital units excluded from the prospective payment

systems. Finally, we are setting forth several requirements concerning

Essential Access Community Hospitals (EACHs) and Rural Primary Care

Hospitals (RPCHs), in accordance with provisions of the Social Security

Act Amendments of 1994.

DATES: Effective Date: This final rule is effective on October 1, 1995,

except that revised Sec. 412.46 (concerning the physician attestation

requirement for inpatient claims) is effective September 1, 1995.

Comments: Comments on revised Sec. 485.645 (concerning the

requirements for RPCH providers of long-term care services (``swing

beds'')) will be considered if we receive them at the appropriate

address, as provided below, no later than 5 p.m. on October 31, 1995.

We will not consider comments concerning any other issue.

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

following address: Health Care Financing Administration, Department of

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

Baltimore, MD 21207-0517.

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

and 3 copies) to one of the following addresses: Room 309-G, Hubert H.

Humphrey Building, 200 Independence Avenue SW., Washington, DC 20201,

or Room C5-09-26, 7500 Security Boulevard, Baltimore, MD 21244-1850.

Because of staffing and resource limitations, we cannot accept

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

to file code BPD-825-FC. Comments received timely will be available for

public inspection as they are received, generally beginning

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

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

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

(phone: (202) 690-7890).

Copies: To order copies of the Federal Register containing this

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

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

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

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

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

calling the order desk at (202) 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.

FOR FURTHER INFORMATION CONTACT:

Nancy Edwards, (410) 786-4531, Operating Prospective Payment, DRG, Wage

Index Issues.

Tzvi Hefter, (410) 786-4529, 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.

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 the Provisions of the June 2, 1995 Proposed Rule

On June 2, 1995, we published a proposed rule in the Federal

Register (60 FR 29202) setting forth proposed changes to the Medicare

hospital inpatient prospective payment systems for both operating costs

and capital-related costs, as well as changes affecting hospitals

excluded from those payment systems. The following is a summary of the

major changes that we proposed to make:

We proposed changes for FY 1996 DRG classifications and

relative weighting factors as required by section 1886(d)(4)(C) of the

Act.

We proposed to update the wage index for FY 1996. Specific

issues included allocation of general service salaries and hours to

excluded areas, and revisions to the wage index based on hospital

redesignations.

[[Page 45779]]

We also proposed revisions to the criteria for seeking

MGCRB reclassification and discussed comments received on alternative

labor market areas.

We discussed 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.

We discussed several provisions of the regulations in 42

CFR part 412 concerning the prospective payment system for capital

related costs and set forth certain proposed changes concerning the

following:

--New update framework.

--Specific adjustment for taxes to the capital prospective payment

system Federal rate.

We discussed 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 concerned 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.

In the addendum to the 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 also proposed 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.

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

analysis of the impact that the proposed changes would have on affected

entities.

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

technical appendix on the proposed FY 1996 capital acquisition model.

In Appendix C to the proposed rule as corrected (60 FR

39304, August 2, 1995), we included our report to Congress on our

initial estimate of an update factor for FY 1996 for both hospitals

included in and hospitals excluded from the prospective payment systems

as required by section 1886(e)(3)(B) of the Act.

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

in Appendix D, we provided 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.

In the proposed rule, we discussed in detail the March 1,

1995 recommendations made by the Prospective Payment Assessment

Commission (ProPAC). ProPAC is directed by section 1886(e)(2)(A) of the

Act to make recommendations on the appropriate percentage change factor

to be used in updating the average standardized amounts. In addition,

section 1886(e)(2)(B) of the Act directs ProPAC to make recommendations

regarding changes in each of the Medicare payment policies under which

payments to an institution are prospectively determined. In particular,

the recommendations relating to the hospital inpatient prospective

payment systems are to include recommendations concerning the number of

DRGs used to classify 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 printed ProPAC's March 1, 1995 report, which included its

recommendations, as Appendix E of the proposed rule. The

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

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

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

to the proposed rule. Set forth below in sections II, III, IV, V, VI,

and VII of this preamble, the addendum to this final rule, and the

appendices are detailed discussion of the June 2 proposed rule, the

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

responses to those comments, as well as the changes we are making.

C. Public Comments Received in Response to the June 2 Proposed Rule

A total of 2,006 items of correspondence containing comments on the

proposed rule were received timely. Two issues, physician attestation

of hospital patient claims and the DRG classification of the procedure

for insertion of a coronary artery stent, were the subject of write-in

campaigns. We received close to 1,000 letters on physician attestation

and over 700 letters on coronary stent. Of the remaining letters, the

main areas of concern addressed by the commenters were the following:

The adjustment for taxes to the capital prospective

payment system Federal rate.

The new requirements for certain long-term hospitals

excluded from the prospective payment system.

The discussion on the definition of a transfer case.

II. Changes to DRG Classifications and Relative Weights

A. Background

Under the prospective payment system, we pay for inpatient hospital

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

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

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

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

is assigned. Each DRG weight represents the average resources required

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

resources used to treat cases in other DRGs.

Congress recognized that it would be necessary to recalculate the

DRG relative weights periodically to account for changes in resource

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

that the Secretary adjust the DRG classifications and relative weights

annually. These adjustments are made to reflect changes in treatment

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

relative use of hospital resources. The changes to the DRG

classification system and the recalibration of the DRG weights for

discharges occurring on or after October 1, 1995, are discussed below.

B. DRG Reclassification

1. General

Cases are classified into DRGs for payment under the prospective

payment

[[Page 45780]]

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.

We proposed to make several changes to the DRG classification

system for FY 1996. These proposed changes, the comments we received

concerning them, our responses to those comments, and the final DRG

changes, 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). In the

proposed rule, we presented our analysis of AICD cases based on FY 1994

MedPAR data. We concluded that these cases continue to be appropriately

assigned to DRG 116. Therefore, we did not propose any further changes

to the DRG assignment. We received two public comments on our analysis

and conclusion.

Comment: One commenter commended the continued assignment to DRG

116 of cases in which replacement or implantation of only part of the

AICD system is performed. However, the other commenter requested that

we change the DRG assignment for these cases to DRG 115 (Permanent

Cardiac Pacemaker Implantation with AMI, Heart Failure or Shock). The

second commenter stated that the resource use of these patients is

similar to those in DRG 115, even though the patients in DRG 115 have

much longer lengths of stay.

Response: 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 latest update of the FY 1994 MedPAR file (June 1995),

the average standardized charge for the 2,569 AICD cases assigned to

DRG 116 is $27,806. The average standardized charge for all cases in

DRG 116 is $19,637 and for DRG 115, is $29,086. The $8,169 difference

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

DRG 116 is within the normal range of charges for that DRG. (One

standard deviation from the mean of the charges for DRG 116 is

$10,512.) 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 between all cases in DRG 116

and the AICD cases.

The average length of stay for the AICD cases in DRG 116 is 3.98

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

length of stay for cases in DRG 115 is 11.8. 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 (59 FR 45346), 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

[[Page 45781]]

charges for AICD cases between the FY 1992 and FY 1993 data was

approximately $6,000.) Based on this evidence, we will continue to

assign the AICD implant cases to DRG 116 for FY 1996. However, we will

reassess this assignment as a part of our FY 1997 DRG analysis in order

to verify that the current pattern is maintained.

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

proposed 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.

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We received one comment on this proposal, which supported our

proposed change. Therefore, we are adopting this change as final.

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 inpatient 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 these 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 did not propose an

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

propose to adjust the DRG relative weights for 36 Medicare low-volume

DRGs (defined as those DRGs with fewer than 10 cases). 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 proposed DRG relative weights for these low-volume

DRGs were calculated based on the non-Medicare data we acquired from

the 19 States. We note that, based on the June 1995 update to the FY

1994 MedPAR file, there are only 34 low-volume DRGs in the final

recalibration.

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 did not propose to revise

the assignment of these diagnoses and conditions. Rather, we indicated

that we would incorporate the necessary and appropriate assignment of

these cases with our overall modification of the neonate DRGs.

Comment: We received two comments on our proposal to base the

relative weights for low-volume DRGs on all patient data, both of which

supported our proposal. However, one of these commenters objected to

the proposed assignment of a weight of 0.1460 to DRG 391 (Normal

Newborn), the only DRG within MDC 15 for which the proposed relative

weight decreased compared to the previous year's weights. This

commenter stated that changes to the relative weight of DRG 391 should

be postponed until our evaluation of claims data has been completed.

Response: In previous years, we computed the weight for the low-

volume DRGs by adjusting the original weights of these DRGs as

calculated based on 1981 bills by the percentage change in the average

weight of the cases in the remaining DRGs. Thus, the weight for these

DRGs was not based solely on actual experience and was, in some cases,

artificially inflated. Using empirical data from more recent actual

claims resulted in figures that more accurately reflect current

utilization and resource use. We note that of the final 34 low-volume

DRGs, only 8 experienced an increase in relative weight based on the

all-patient data. Of these eight DRGs, four are in MDC 15. The decrease

in the relative weight for DRG 391 is the one exception within that

MDC. The decrease in weight is a function of the expanded data base and

the difference between applying an automatic percentage increase and

calculating a relative weight using an averaging process as we do for

the other DRGs. Taking into account the changes in practice for

treating normal newborns that have taken place over the last several

years, it is not surprising that the weight for DRG 391 has decreased.

In any case, we see no reason why we should adjust all the low-

volume weights to the new data except DRG 391. Therefore, we will

proceed with the proposed methodology for updating these weights.

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 was brought to our attention that diagnosis code 851.06

(Cerebral cortex contusion with loss of consciousness of unspecified

duration) was 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 proposed to add this

diagnosis to the significant head trauma list effective with discharges

occurring on or after October 1, 1995.

The one comment we received in response to this proposal stated

that the change was appropriate. Thus, we have

[[Page 45782]]

included this change in the final DRG classifications.

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 most to least resource intensive,

performs that function. Its application ensures that cases involving

multiple surgical procedures are assigned to the DRG associated with

the most resource-intensive surgical class.

Because the relative resource intensity of surgical classes can

shift as a function of DRG reclassification and recalibration, we

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

reclassifications, to determine if the ordering of classes coincided

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

billing data used to compute the DRG relative weights.

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

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

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

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

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

most resource-intensive surgical class, therefore, involves weighting

each DRG for frequency to determine the average resources for each

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

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

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

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

determine whether surgical class A should be higher or lower than

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

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

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

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

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

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

This methodology may occasionally result in a case involving

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

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

alternatives. However, given that the logic underlying the surgical

hierarchy provides that the GROUPER searches for the procedure in the

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

cases involving multiple procedures, this result is unavoidable.

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

few instances when a surgical class with a lower average relative

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

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

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

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

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

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

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

diagnoses in the MDC but are occasionally performed on patients with

these diagnoses. Therefore, these procedures should only be considered

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

has been performed.

A second example occurs when the difference between the average

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

small differences generally do not warrant reordering of the hierarchy

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

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

average weight than the class ordered below it.

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

modify the surgical hierarchy as set forth below:

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

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

Retinal Procedures (DRG 36).

In MDC 8 (Diseases and Disorders of the Musculoskeletal

System and Connective Tissue), we proposed to 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).

We received one comment in support of both surgical hierarchy

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

most recent MedPAR file and the revised GROUPER software, we have found

that the changes are still supported by the data and no additional

changes are indicated. Therefore, we are now incorporating the proposed

surgical hierarchy as final.

6. Refinement of Complications and Comorbidities List

a. Addition or Deletion of CCs. 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.

Based upon clinical review by our medical consultants and analysis

of charge data, we proposed to revise the list of diagnoses that are

considered CCs as follows:

We proposed to 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 proposed to delete diagnosis code 276.8

(Hypopotassemia) from the CC list. This diagnosis would no longer be

considered a CC for any principal diagnosis.

Comment: We received one comment that supported our addition of

diagnosis code 008.49 to the list of CCs. However, two commenters

disagreed with our proposal to remove diagnosis code 276.8 from the

list. The commenters state that hypokalemia, which is one of the

conditions coded to 276.8, is a serious medical condition that can

complicate a patient's treatment and increase the length of stay.

Response: We agree that severe cases of hypokalemia can affect a

patient's clinical course. However, based on our analyses and the

judgment of our expert medical advisors, we believe that when a patient

has a case of hypokalemia severe enough to affect the clinical course

of treatment, there will be additional manifestations of the condition.

Thus, we expect that in such cases, in addition to an abnormal

laboratory report finding of low potassium, the patient will have other

manifestations of this condition, many of which are coded to diagnoses

considered to be CCs. Therefore, we believe that a patient with severe

hypoalemia will be classified to a CC DRG based on his other secondary

diagnoses. However, an abnormal

[[Page 45783]]

laboratory finding of low potassium, which is one of the conditions

coded to 276.8, does not by itself generally result in increased

resource use.

Comment: One commenter requested that we add the following

diagnoses to the CC list:

008.45 Clostridium difficile

331.0 Alzheimer's disease

423.9 Unspecified disease of the pericardium

348.5 Cerebral edema

333.4 Huntington's chorea

458.0 Orthostatic hypotension

458.9 Hypotension, not otherwise specified

In addition, the commenter suggested that the following diagnoses

be added as CCs for DRGs 121 and 122 only:

434.xx Occlusion of cerebral arteries

436 Acute but ill-defined, cerebrovascular disease

Response: Our analysis of FY 1994 MedPAR data did not support

granting CC status to these diagnoses. However, we have limited

Medicare data on several of these codes. We will reevaluate these codes

as part of our DRG analysis for FY 1997.

b. CC Exclusion List. We proposed a limited revision of the CC

Exclusions List to take into account the changes that will be made in

the ICD-9-CM diagnosis coding system effective October 1, 1995, as well

as the proposed CC changes in Section II.B.6.a. described above. (See

section II.B.8 for a discussion of the diagnosis coding system

changes.) The proposed revisions were made in accordance with the

principles established when we created the CC Exclusions List in 1987.

Tables 6G and 6H in section V of the addendum to this final rule

contain the revisions to the CC Exclusions List that will be effective

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

the principal diagnoses with 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 occurring 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 occurring 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 for 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; U.S. Department of Commerce;

5285 Port Royal Road, Springfield, VA 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 13.0, which includes the

changes set forth in this final rule, is available for $195.00, which

includes $15.00 for shipping and handling. Manuals may be obtained by

writing 3M/HIS at: 100 Barnes Road; Wallingford, CT 06492; or by

calling (203) 949-0303.

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 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 did

not propose 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

[[Page 45784]]

our review this year, we proposed to move a limited number of

procedures.

In reviewing the list of OR procedures that produce DRG 468

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

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

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

477. We identified 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

proposed 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 are assigned

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.

Comment: We received one comment that objected to our proposed move

of procedure codes 18.21, 18.31, 18.39, 18.5, 18.6, 18.71, 18.72, 18.9

from DRG 468 to DRG 477. The commenter did not indicate the basis of

the objections.

Response: In analyzing the procedures that produce assignments to

each of DRG 468, 476, and 477 for possible reassignment, we evaluate

both average charge and length of stay, as well as clinical evaluation

to determine the appropriate classification. These procedure codes were

significantly less resource intensive than other procedures assigned to

DRG 468, and more closely resembled the average charge and length of

stay for procedures classified to DRG 477. Our data continue to support

the reclassification of these procedures to DRG 477. Therefore, we are

reassigning these procedures from DRG 468 to DRG 477 as proposed.

All of the reassignments of procedures in DRGs 468 and 477 will be

effective with discharges occurring 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. The ICD-9-CM Coordination and

Maintenance Committee, a Federal interdepartmental committee formed in

1985, is 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 FY 1996 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, MD 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; Room C5-06-27; 7500 Security Boulevard;

Baltimore, MD 21244-1850.

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

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

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

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

Coordination and Maintenance Committee meetings. Both oral and written

comments were considered before the codes were approved. Therefore, we

solicited comments on the proposed DRG classifications only.

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 Diagnosis Code Titles) and 6f (Revised Procedure Code Titles),

which also include the DRG assignments for these revised codes.

There are three new procedure codes that were previously included

in codes

[[Page 45785]]

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

In the proposed rule, these three new codes were 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.

Comment: We received over 700 comments requesting that we assign

cases involving the insertion of a coronary artery stent along with

percutaneous transluminal coronary angioplasty (PTCA) to a different

DRG than conventional PTCA. These cases are all currently assigned to

DRG 112 (Percutaneous Cardiovascular Procedures). The commenters stated

that hospital costs for inserting coronary stents along with an

angioplasty are significantly greater than those for conventional

angioplasty alone and the clinical results of the stent implantation

are significantly better, leading to a reduction in the need for repeat

interventions and to improved quality of care. These comments are based

on two studies that were published in the August 25, 1994, New England

Journal of Medicine as well the results of an analysis commissioned by

the manufacturer of one of the two stent devices currently approved by

the Food and Drug Administration (FDA).

In this latter analysis, the contractor used the Medicare cases

reported to DRG 112 in the FY 1994 MedPAR file and information provided

voluntarily by 19 hospitals on interventional catheter procedures

performed between July 1, 1994, and September 30, 1994, including

information on coronary stent implantation. By matching the individual

hospital data to the MedPAR file, the contractor identified 655 cases

of PTCA, 68 of which involved insertion of a stent device. The

following are the findings of the analysis:

The difference between the average length of stay for the

stent cases and the non-stent cases is 2.8 days (7.7 days versus 4.9

days).

The difference between the average standardized charges

for stent cases and non-stent cases was approximately $8,500 ($22,500

versus $14,000).

The contractor projects that approximately 10 percent of

the PTCA cases assigned to DRG 112 during FY 1996 will receive a stent,

resulting in approximately 10,000 stent cases.

One commenter stated that section 1886(d)(4)(C) of the Act gives

HCFA the authority to adjust the DRG classifications and relative

weights annually to ``reflect changes in treatment patterns,

technology, and other factors that may change the relative use of

hospital resources.'' Because insertion of the coronary stent is both a

new technology and a change in treatment patterns, the commenter

believes that we have a duty to revise the DRG classification for this

procedure.

The commenter also noted that we have used this authority in the

past, citing two other changes made in response to technology changes.

Effective for discharges occurring in FY 1993, we reclassified certain

automatic implantable cardiac defibrillator (AICD) cases from DRG 120

(Other Circulatory System OR Procedures) to DRG 116 (Other Permanent

Cardiac Pacemaker Implant or AICD Lead or Generator Procedure). (See 57

FR 39749, September 1, 1992.) The commenter stated that this change was

made in response to complaints that hospitals were not adequately

compensated for these procedures. Also, effective for discharges

occurring in FY 1987, we reclassified all extracorporeal shockwave

lithotripsy (ESWL) cases to DRG 323 (Urinary Stones with CC and/or

ESWL) even in the absence of a CC (which would have resulted in

classification to DRG 324 (Urinary Stones without CC)). (See 51 FR

31485, September 3, 1986.) The commenter stated that we made this

change even though we did not conduct an analysis of Medicare data and

instead relied on an outside source for the analysis. Thus, the

commenter believes that HCFA could make a change in the assignment of

stent cases even though HCFA cannot, at this time, conduct a complete

analysis based on Medicare data. The commenter requested that a

separate DRG be created for coronary stent implantation and that

payment be established at a level that is appropriate for the cost of

the procedure.

We received one comment supporting our proposed assignment of

coronary stent implant as non-OR. The commenter stated that the

published studies that were the basis for FDA approval do not show an

overwhelming improvement in any clinical event when a stent was used in

place of balloon PTCA. Thus, the commenter believes that it is obvious

that coronary stenting is not a ``good buy,'' and further studies are

needed.

Response: Currently, the insertion of coronary stents are included

in the codes for PTCA (procedure codes 36.01, 36.02, and 36.05). That

is, there is no separate code to indicate that a coronary stent was

inserted during a PTCA procedure. Therefore, at this time, we cannot

identify which PTCA cases in the MedPAR file include insertion of a

stent. Effective October 1, 1995, a new procedure code for insertion of

a coronary stent (code 36.06) will be introduced. We have designated

this code as non-OR and have not assigned it to a specific DRG (see

Table 6b in section V of the addendum to this final rule). However,

since it is always performed in connection with PTCA, the cases will

continue to be assigned to DRG 112.

When a new code is introduced, our longstanding practice is to

assign it to the same DRG category as its predecessor code. One

compelling reason for this practice is our inability to move the cases

associated with a new code to a new DRG assignment as part of DRG

reclassification and recalibration. We have discussed this policy in

several previous rules, most recently in the September 1, 1994, final

rule (59 FR 45340).

Since coronary angioplasty with stent is currently assigned

currently to the same DRG as those without stent, this classification

will continue until data on the new procedure code are available.

Hospitals will begin coding claims with procedure code 36.06 beginning

with discharges in FY 1996. Therefore, the resource use and other data

associated with that code will be available to us for analysis as part

of the FY 1998 DRG changes. We will evaluate the DRG assignment of

coronary stent insertion at that time.

We agree with the commenter who stated that section 1886(d)(4)(C)

of the Act gives HCFA the authority to adjust DRG classification and

relative weights. In fact, that section of the law requires that the

Secretary adjust the DRG classifications and relative weights annually.

However, we virtually always limit our adjustments to those that are

supported by Medicare data we have collected through the claims

submittal process. Although the change in DRG assignment for AICD

procedures was requested by commenters because they did not believe

that the payment associated with DRG 120 was adequate compensation, the

revision in DRG assignment was based on our analysis of the FY 1991

MedPAR data. In fact, we had conducted other analyses of these cases in

several previous years that did not support a DRG change. (See final

rules published September 1, 1989 (54

[[Page 45786]]

FR 36465), September 4, 1990 (55 FR 36023), and August 30, 1991 (56 FR

43216).)

Concerning the change for ESWL cases made effective October 1,

1986, we note that this revision was made in response to a ProPAC

recommendation and was based on ProPAC's analysis, which found that

payment under DRG 324 substantially understated the cost of ESWL. As

discussed in detail in the September 3, 1986 final rule, a commenter

had requested that the ESWL cases be assigned to a separate DRG based

on a study conducted by the National Health Services and Practice

Pattern Survey (51 FR 31486). Our response was that we are generally

opposed to the creation of a single procedure DRG and that ``. . . this

avenue should be employed only if there is substantial evidence of

inequity through classification in any of the existing clinically

consistent groupings.'' In addition, we stated that we intended ``. . .

to monitor ESWL closely as Medicare data become available. If it

becomes apparent that reclassification is necessary in the future, we

will consider the alternative of developing a specific DRG for ESWL

among the options for reclassification.'' We note that, since 1986, the

assignment of ESWL has never been revised.

We intend to maintain the non-OR designation of procedure code

36.06 until we have collected claims data from all hospitals performing

this procedure, which will be available in 1997. We will carefully

examine these data as part of our analysis of DRG changes for FY 1998

and we will discuss our findings in the FY 1998 proposed rule.

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 were able either to improve our ability to predict

coding changes by validating in advance the impact that potential DRG

changes may have on coding behavior, or to make methodological changes

to prevent building the inflationary effects of the coding changes into

future program payments.

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

provides that aggregate payments may not be affected by DRG

reclassification and recalibration changes, we do not believe it is

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

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

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

both the statutory requirement to make appropriate DRG classification

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

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

neutral manner.

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

weight at 1.0 after recalibration, thereby eliminating the process of

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

the new relative weights upward to carry forward the cumulative effects

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

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

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

relatively simple and straightforward system for preventing the effects

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

DRG weights 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 were 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.

We received several comments on our plan to introduce refinements

to the DRG classification to include a measure of severity. In general,

these comments were supportive of the concept of a severity-adjusted

DRG system to improve compensation for the treatment of severely ill

patients.

Comment: One commenter supported HCFA's decision to postpone a

final proposal until all related issues were resolved. Another

commenter stated we should not postpone new refinements on the basis of

political reasons that arise due to shifts in payments. Other

commenters, while stating appreciation of our desire to predict

beforehand the effect of severity changes on coding behavior, urged us

to resolve the issues regarding the effect of severity-adjusted DRGs on

case mix, payment, and budget neutrality. One commenter stated we

should set standards for ``predictive accuracy'' that are reasonable

and attainable.

Response: We continue to maintain our position that, until we can

improve our ability to predict coding changes, or prevent inflationary

effects of coding change through methodological changes to DRG

recalibration, we will not propose any significant changes to the DRG

classification system. However, we note that we have continued to

evaluate approaches to resolve this issue.

One approach to improving our ability to predict coding changes is

to develop a data base of abstracted medical records to be used to

estimate the real and coding components of case-mix change and to

forecast future coding improvements. As we stated in the proposed rule

(60 FR 29247), HCFA has recently implemented a record reabstracting

process being conducted by two clinical data abstraction centers

(CDACs) under contract with the Health Standards and Quality Bureau

(HSQB). This will provide a data base consisting of 30,000 records per

year. When we have evaluated the results of this reabstracting effort,

we will determine if it is suitable for predicting coding

[[Page 45787]]

behavior. We believe we are proceeding at an appropriate pace that will

result in both reasonable and attainable predictive standards.

As to the statement that HCFA should not postpone DRG refinements

because of political reasons due to payment shifts, we note that we are

constricted by 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 have experienced severe

inflationary effects in prior years (see the September 1, 1989, final

rule for a discussion of the inflationary effect of the FY 1987 DRG

changes (54 FR 36468)), and reiterate our position that it would not be

prudent payment policy to make changes for which we cannot predict nor

control the effects.

Comment: One commenter recommended that HCFA issue a GROUPER that

includes the severity refinements for review and comment by the

industry.

Response: We believe it would be neither cost effective nor

efficient to issue a GROUPER preliminary to a decision to proceed with

the severity refinements. Thus, because the severity methodology is

still in the preliminary planning stages, we have not prepared a public

use GROUPER for release. The figures used in the initial analysis will

be subject to change based on more current data and to modification

based on comments received. At such time as the severity-adjusted

methodology is officially implemented, a GROUPER will be made

available. This is consistent with HCFA policy on the availability of

GROUPER software for other modifications to the DRG classification

system. We note that we made a complete FY 1992 MedPAR file with the

current and revised (severity) DRG designations available to the public

as part of the May 27, 1994 proposed rule (59 FR 27756).

10. Other Issues

a. Epilepsy (DRGs 24, 25, and 26). Comment: We received two

comments concerning the classification in DRGs 24, 25, and 26 (Seizure

and Headache) of patients with intractable epilepsy, specifically those

admitted for neurodiagnostic monitoring. The commenters believe that a

revision to the existing DRGs is necessary to account for the greater

resource use and length of stay for these patients. The commenters

stated that the financial risk is greatest in DRG 25, the DRG most

commonly used by specialized centers to evaluate patients, and that

these patients are typically under age 40.

The commenters referred to an analysis conducted by HCFA based on

FY 1993 Medicare data that indicated that the charges for cases

assigned to DRG 25 were twice as great per patient for intractable

epilepsy patients with monitoring than for all other patients in that

DRG. This analysis was discussed in the September 1, 1994, final rule

(59 FR 45343). Based on these results, the commenters argue that a

change in the DRG classification system for FY 1996 is imperative,

using the following criteria to classify patients into a separate DRG:

A diagnosis of intractable epilepsy (diagnosis codes 345.0

through 345.9, with a 5th digit of 1); and

Procedure code 89.19 for video and radio-telemetered

monitoring.

In addition, one commenter noted that the relatively low volume of

cases of intractable epilepsy with telemetered monitoring (fewer than

500) is not a valid objection to establishing a separate DRG for these

cases because there are currently over 70 DRGs with 500 or fewer cases.

Response: The epilepsy treatment community has for some time

expressed concern that the resources used to treat intractable epilepsy

patients far exceeded those needed for other patients in the same DRGs,

and that Medicare payment is inadequate to meet these costs. We have

addressed the issue of Medicare payment for intractable epilepsy cases

for the past 4 years. As a result of our previous analyses, we

concluded that although intractable epilepsy patients incur higher

average charges than other patients in the same DRGs, there is neither

sufficient differential in the charges nor sufficient volume to warrant

a DRG change.

We updated our most recent study and evaluated the March 1995

update of the FY 1994 MedPAR file. We identified 2,385 intractable

epilepsy cases with an average charge of $9,084, compared to an average

charge of $7,636 for all patients in the same DRGs (that is, DRGs 24,

25, and, 26).

We note that, although the incidence of inpatient admissions for

all cases of epilepsy decreased nearly 30 percent in FY 1993, in FY

1994 intractable epilepsy inpatient admissions increased by a little

over 4 percent, with nonintractable epilepsy admissions continuing to

decrease (down 21 percent). The largest increase in admissions occurred

in DRG 25, up more than 16 percent. Nonintractable epilepsy cases

incurred an average charge of $7,458, for 10,536 cases.

The following table summarizes our most recent epilepsy analysis

findings, comparing the average charges between epilepsy and other

cases assigned to the same DRG (the number of cases is included in

parentheses):

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

Intractable Nonintractable

DRG epilepsy epilepsy All epilepsy All cases

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

24.................................. $11,083 $8,626 $8,937 $8,649

(1,065) (7,342) (8,407) (58,726)

25.................................. 7,471 4,762 5,555 4,946

(1,320) (3,190) (4,510) (22,121)

26.................................. 0 $13,060 $13,060 7,834

(0) (4) (4) (43)

All cases........................... 9,084 7,458 7,758 7,636

(2,385) (10,536) (12,921) (80,890)

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

Based on the recommendation of the commenters, we focused our

analysis on DRG 25, with and without video-telemetered monitoring

(procedure code 89.19). Our results parallel the expectations of the

commenters. That is, patients with intractable epilepsy who receive

monitoring incur charges significantly higher than both intractable

cases without monitoring and nonintractable cases with monitoring.

Also, this differential is greatest in DRG 25, with an average charge

of $11,088 for intractable patients with monitoring compared to $5,397

for intractable patients not receiving monitoring. We note that the

number of intractable epilepsy inpatient admissions has increased over

last year; the number of cases with monitoring has increased almost 34

percent in DRG 25. Thus, it would appear that access to care is not

being jeopardized, particularly in this area over which

[[Page 45788]]

commenters expressed the greatest concern. It is notable, also, that

the charges for treating intractable epilepsy patients with monitoring

increased 9 percent, while the cost of treating these patients without

monitoring decreased 2 percent. The results of our analysis of DRG 25

are summarized in the following table:

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

Intractable Nonintractable

DRG epilepsy epilepsy

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

24 with 89.19.............................. $14,299 $9,826

(107) (35)

24 without 89.19........................... 10,724 8,620

(958) (7,307)

25 with 89.19.............................. 11,088 7,454

(481) (88)

25 without 89.19........................... 5,397 4,685

(839) (3,102)

26 with 89.19.............................. 0 0

(0) (0)

26 without 89.19........................... 0 13,060

(0) (4)

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

As we did last year, we evaluated the experience of intractable

epilepsy patients under age 65 in DRG 25. These patients qualify for

Medicare benefits on the basis of disability rather than age. We

focused our analysis on DRG 25 because patients admitted for

neurodiagnostic monitoring must be relatively healthy and, thus, do not

usually have any complicating conditions. Again, we found that those

patients under 65 years of age with intractable epilepsy and

telemetered monitoring (454 cases) incurred higher average charges

($11,330) than similar patients (27 cases) over 65 ($7,030).

The results of our analysis of DRG 25 by age category are as

follows:

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

DRG 25 Age 65 All ages

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

All Epilepsy... $6,002 $4,911 $5,555

(2,659) (1,851) (4,510)

All Intractable 7,757 5,383 7,470

(1,161) (159) (1,320)

Intractable

with 89.19.... 11,330 7,030 11,088

(454) (27) (481)

Intractable

without 89.19. 5,464 5,046 5,397

(707) (132) (839)

All

Nonintractable 4,643 4,867 4,762

(1,498) (1,692) (3,190)

Nonintractable

with 89.19.... 7,679 5,699 7,454

(78) (10) (88)

Nonintractable

without 89.19. 4,476 4,862 4,685

(1,420) (1,682) (3,102)

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

We also reviewed the intractable cases where sphenoidal electrodes

were inserted and identified 62 cases, with an average charge of

$12,220. It is interesting to note that while there was more than a 14

percent increase in the incidence of these cases, the average charge

actually decreased. These patients continue to incur higher charges

than those with video-telemetered monitoring.

We note that, as a group, the intractable epilepsy cases are not

the most resource intensive set of cases assigned to DRGs 24, 25, and

26. The highest volume of epilepsy cases are coded 345.3 (Epilepsy,

Grand Mal status), with 5,608 cases and an average charge of $12,054.

Of the epilepsy diagnoses, the average charge for grand mal epilepsy is

exceeded only by intractable epilepsy partialis continua (diagnosis

code 345.71) with an average charge of $13,095, but only 94 cases.

In response to the commenters' contention that epilepsy centers are

at financial risk, we also evaluated the distribution of epilepsy cases

across hospitals. There were 740 hospitals treating intractable

epilepsy patients: approximately 55 percent treated only one patient;

an additional 20 percent treated 2 patients; and 7 percent treated 3

patients. Of the providers treating 10 or more cases of intractable

epilepsy (7 percent or 52 hospitals), 34 treated more than 20

intractable cases (approximately 5 percent of the total providers).

Recognized epilepsy specialty centers accounted for about 3 percent of

total intractable admissions (24 epilepsy center providers). As in our

prior analyses, we found that among the high volume hospitals, charges

for these cases were normally distributed, with only 21 percent

incurring charges greater than the average charge for intractable

epilepsy cases with telemetered monitoring, and 33 percent above the

average for all epilepsy cases. Accounting for those cases that fall

within the average range, 69 percent of the providers incurred average

charges below the overall average for intractable cases with

monitoring, and 61 percent incurred charges below the average for all

epilepsy cases.

Of the 30 recognized epilepsy treatment centers, only 24 reported

any intractable epilepsy discharges in FY 1994. Approximately 71

percent (17 of 24 centers) treated 10 or more cases. However, of the

total 2,385 intractable epilepsy cases, only 20 percent (477 cases)

were treated at epilepsy centers. There were 16 centers (67 percent)

with average charges at or below the average charge of $9,084 for all

intractable epilepsy cases; only 8 centers incurred average charges

above the intractable average charge for treating intractable epilepsy

cases.

As we have stated in previous final rules, we acknowledge that,

even though the volume of hospitals is small, many hospitals treating

high numbers of intractable epilepsy patients may incur charges above

the average. This is particularly true for the specialized treatment

centers. However, we note that these hospitals are, for the most part,

large urban or teaching hospitals or both and, as such, receive some of

the highest Medicare payment rates.

We are not recommending any DRG modification for epilepsy cases at

this time. Although the intractable epilepsy cases, especially those

using procedure 89.19, result in higher charges than other cases in the

same DRGs, neither the volume nor the differential in average charges

is sufficient to justify a separate DRG for these patients.

Concerning the comment that there are over 70 DRGs with fewer than

500 cases, we note that the vast majority of these lower volume DRGs

(59 out of 89 for FY 1994) are for patients age 0 to 17 years, or are

located in MDC 14 (Pregnancy, Childbirth, and Puerperium) or MDC 15

(Newborns and Other Neonates with Conditions Originating in the

Perinatal Period). None of these is reflective of the Medicare

population, who are primarily

[[Page 45789]]

age 65 or older. Many of the remaining lower volume DRGs are for cases

that are generally no longer performed in the hospital inpatient

setting. That is, they are assigned to surgical procedures that have

moved from being generally performed in the inpatient setting to being

performed in an outpatient setting. A few remaining DRGs were

established during the initial classification of cases and were

determined to have no other clinically appropriate DRG assignment (for

example, DRG 43 (Hyphema)). This is not true for epilepsy cases, which

are clinically similar to other cases in the DRGs to which they are

currently assigned.

Comment: One commenter expressed concern that, in order to ensure

access to care, DRG revisions must occur to account for the higher

charges incurred by intractable epilepsy patients receiving

neurodiagnostic monitoring.

Response: We believe that the increase in the number of intractable

epilepsy cases overall (up 4 percent) and the 27 percent increase in

intractable epilepsy admissions for video-telemetered monitoring are

evidence that access to care is adequate for these patients. Also, a

hospital may not refuse to provide a covered service to a Medicare

beneficiary if it provides that service to other patients.

Specifically, the Medicare regulations at 42 CFR 489.53(a)(2) provide

that HCFA may terminate a hospital's Medicare provider agreement if it

finds that the hospital places restrictions on the persons it accepts

for treatment and fails to apply them to Medicare beneficiaries the

same as to all other persons seeking care.

Comment: One commenter noted that many other payers utilize

Medicare's DRG classification system, causing an even greater financial

loss attributable to treating intractable epilepsy patients because of

an arguably inadequate DRG payment.

Response: We have regularly cautioned against the use of the DRG

classification system for populations other than the one for which it

was designed. Medicare serves a predominantly elderly population, and,

thus, the assignment of cases reflects the unique needs and conditions

of this age group. To attempt to classify other populations within this

structure may result in inappropriate designation of cases. We do not

believe that we should develop a system that reflects the experience of

another patient group and expect to apply such categorizations to the

elderly population. Nor can we assume responsibility for other payers

who may attempt to use the Medicare classification system for

populations for which it was not intended.

b. Cochlear Implants (DRG 49). Comment: We received one comment

regarding cochlear implants. The commenter expressed concern that the

proposed weight for DRG 49 (Major Head and Neck Procedures) is

insufficient to compensate hospitals for the cost of providing the

cochlear implant to Medicare patients. The commenter is concerned that

this will exacerbate a growing access problem for those who need the

device. The commenter stated that several hospitals each year have

determined that the loss suffered in providing the cochlear implant to

the Medicare population makes an ongoing cochlear implant program

unsustainable. The commenter quotes utilization figures for the past 4

years, indicating a steady decline in Medicare patient volume.

Because the cochlear implant is a technology-intensive rather than

a labor-intensive procedure, the commenter believes that the current

system, designed to encourage hospitals to control their costs,

suppresses the diffusion of the cochlear implant among the Medicare

population. In the absence of a payment policy that the commenter

believes will adequately reimburse technology intensive procedures,

they requested the following:

Cochlear implant procedures be placed in DRG 1 (Craniotomy

Age >17 except for Trauma).

HCFA allow separate payment of the speech processor which

is not provided during the hospital stay.

A separate, temporary DRG be created, with a weight of at

least 3.0, until such time that a more acceptable policy for

technology-intensive DRG's is implemented.

Response: Cochlear implants were first covered by Medicare in 1986

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

weighted surgical DRG in MDC 3 (Diseases and Disorders of the Ear,

Nose, Mouth and Throat). Since that time, the cochlear industry has

contended that the weight of DRG 49 is too low and does not adequately

reflect the resources necessary for the cochlear implant procedure. In

response to these concerns, we have analyzed Medicare data every year

since 1986.

Our latest analysis, using FY 1994 Medicare claims data, identified

a total of 76 cochlear implant cases. Of these cases, 67 were assigned

to DRG 49 (9 cases were assigned to DRG 468, Extensive OR Procedure

Unrelated to Principal Diagnosis), representing 3.3 percent of all

cases in DRG 49. These 67 cases incurred an average charge of $21,793,

compared to an average charge of $15,938 for all cases in DRG 49. The

average charge for cochlear implant cases is down slightly from FY 1993

claims ($22,386) while the average charge for all cases in DRG 49 shows

a small increase (up from $15,679). This increase is most likely a

function of the reclassification, effective October 1, 1993, of the low

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

(Mouth Procedures).

Although there is a higher charge for the 67 cochlear cases than

for many of the other cases in DRG 49, we note that the cochlear cases

are distributed across 44 hospitals, with no more than 6 cases at any

one hospital. The majority of hospitals (30 of 44 hospitals, or 68

percent) have only one case.

We have repeatedly addressed the recommendation that we assign

cochlear implants to DRG 1, most recently in the September 1994

prospective payment final rule (59 FR 45342). Our rejection of this

suggestion continues to be based on our conclusion that the diagnosis

code associated with cochlear cases (diagnosis code 389, hearing loss)

is not clinically coherent with the diagnosis codes assigned to MDC 1.

A basic premise of DRG classification is the assignment of clinically

similar discharges within categories based on a common body system or

organ system. To reassign cochlear implant cases to MDC 1, we would

have to move the principal diagnosis code 389 from MDC 3, the

clinically appropriate MDC.

The commenter requested that HCFA allow separate payment of the

speech processor, which is typically provided to the patient 4 to 6

weeks after the surgery, thus ``unbundling'' these costs from other

inpatient supplies and services to be billed by the surgeon or

audiologist to Medicare Part B. Prior to implementation of the

prospective payment system, it was a practice for certain nonphysician

services and supplies furnished to hospital inpatients to be billed

directly to patients under Medicare Part B. However, with the enactment

of Public Law 98-21 and the implementation of the prospective payment

system, several statutory changes concerning the bundling policy were

made. Specifically, section 1862(a)(14) of the Act provides that, to

qualify for Medicare payment, all nonphysician services (with limited

exceptions) furnished to hospital inpatients must be provided directly

or arranged for by the hospital. Thus, these services become inpatient

hospital services payable under Medicare Part A. Section 1833(d) of the

Act, in turn, provides that services payable under

[[Page 45790]]

Part A may not be paid for under Part B. Therefore, all the services

provided to a Medicare beneficiary as part of the inpatient hospital

stay are covered under Part A and may not be billed under Part B. This

includes the external components of the cochlear device that are

implanted during an inpatient stay covered under Part A. Therefore, we

do not allow separate Part B payment for part of the cochlear device.

In response to the recommendation submitted by the commenter to

assign cochlear implant cases to a new DRG with a weight of at least

3.0, we believe the process for assigning cases as well as calculating

DRG relative weights needs to be clarified. HCFA does not assign

weights to DRGs arbitrarily, but, rather, calculates the weight for

each DRG based on the resources necessary to treat patients assigned to

that DRG relative to all other DRGs. A DRG weight cannot be adjusted or

a new DRG created without affecting the weight of other DRGs. It would

be inappropriate and inadvisable for us to create a new DRG with a

specified weight assigned, as such action would impact the weight and,

therefore, the payment, for other DRGs. The process by which DRG

weights are recalibrated is described in detail below in section II.C

of this preamble.

We acknowledge that the Medicare payment for cochlear implant

patients has been an issue for several years. However, we find no

justification for creating a special DRG for cochlear implants. We have

consistently classified clinically similar patients in DRGs who use

approximately the same amount of hospital resources. In addition, we

prefer to maintain DRGs with enough cases to ensure a normal

distribution and relative stability over time.

Although some technologies may not be flexible in their costs, and

thus, not lend themselves readily to cost control techniques, there are

other areas within the hospital's control that are responsive to cost

containment. Thus, the incentive to the hospital is to treat a mix of

patients and to manage its operations in such a way to offset lower

payment-to-cost cases with those where the payment is in excess of

cost.

We continue to believe that the low volume of these cases does not

justify the establishment of a new DRG specific to cochlear implants.

Nor do we generally create DRGs that are specific to a single

technology, especially those available through a single source

manufacturer.

In response to the commenter's concern that cochlear implants may

not be available to Medicare beneficiaries in the future, as stated

above in section II.B.10.a of this preamble, we note that a hospital

may not refuse to provide a covered service to a Medicare beneficiary

if it provides that service to other patients. Specifically, the

Medicare regulations at Sec. 489.53(a)(2) provide that HCFA may

terminate a hospital's Medicare provider agreement if it finds that the

hospital places restrictions on the number of Medicare beneficiaries it

will accept for a particular treatment without placing the same

restriction on the other populations it treats.

c. Bipolar Hip Replacement (DRG 209). We received a comment

concerning the DRG assignment of certain cases in MDC 8 (Diseases and

Disorders of the Musculoskeletal System and Connective Tissue).

Comment: The commenter believes that cases of bipolar hip

replacement should be assigned to DRGs 210, 211, and 212 (Hip and Femur

Procedures Except Major Joint) rather than to its current assignment,

DRG 209 (Major Joint and Limb Reattachment Procedures of Lower

Extremity). The commenter stated that procedure code 81.52 (partial hip

replacement) is very similar to procedure code 79.35 (open reduction of

fracture of the femur with internal fixation), which is already

assigned to DRGs 210, 211, and 212. Further, the commenter believes

that partial hip replacement patients are generally more frail

individuals as compared to the population that elects total hip

replacement surgery, and that they should, therefore, not be assigned

to the same DRG.

Response: In recent years, we have conducted several analyses of

the procedures assigned to the surgical DRGs in MDC 8. In the final

rules dated September 4, 1990 (56 FR 43205) and September 1, 1993 (58

FR 46286), we addressed two of those analyses in detail. Although the

specific issues that concern the commenter were not addressed, the

result of our analyses was to retain the current DRGs 209, and 210,

211, and 212 classifications. We will, however, reexamine these

assignments as part of our annual update and revision process for FY

1997.

d. Add-On Payment for Blood Clotting for Hemophiliacs. We received

one comment regarding payment for blood clotting factors administered

to hemophilia inpatients.

Comment: The commenter questioned why there was no reference in the

proposed rules to the continuation of the add-on payment for blood

clotting factors administered to Medicare hemophilia patients. The

commenter believes that if this additional payment program is not

continued, then some other mechanism should be developed to help

alleviate the financial burden of treating these patients.

Response: We did not include a discussion of the payment for blood

clotting factors provided to hemophilia inpatients in the proposed rule

because the legislation that required this add-on payment expired

effective with discharges beginning on or after October 1, 1994.

Section 6011 of the Omnibus Budget Reconciliation Act of 1989

(Public Law 101-239), as amended by section 13505 of the Omnibus Budget

Reconciliation Act of 1993 (Public Law 103-66), provided that

prospective payment hospitals receive an additional payment for blood

clotting factors furnished to Medicare hospital inpatients who are

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

before October 1, 1994.

We discussed the issue of payment for Medicare inpatients with

hemophilia who require blood clotting factors in detail in the

September 1, 1992 final rule in response to a ProPAC recommendation

that the add-on payment was no longer necessary. Briefly, ProPAC found

that, even though hemophiliacs were more costly to treat than the

average case within a given DRG, there were insufficient data to

indicate that these differences were due to the administration of the

clotting factor. In addition, ProPAC found that not only was there a

low volume of patients receiving the blood clotting factor, there were

very few hospitals with a significant number of cases. Analyses

performed by HCFA resulted in similar findings. Thus, we agreed with

ProPAC's conclusion that this add-on payment for blood clotting factors

is not necessary.

e. Stem Cell Transplant. Comment: We received one comment

requesting that we classify procedure code 41.04 (autologous

hematopoietic stem cell transplant) as an OR procedure. The code was

effective beginning October 1, 1994, and was classified as a non-OR

procedure at that time. The commenter believes that we should

reconsider this policy based on the resource use associated with stem

cell transplant. In addition, the commenter requested that the code be

assigned to DRG 481 (Bone Marrow Transplant) along with the other codes

in category 41.0 (bone marrow transplant).

Response: As discussed in the September 1, 1994, final rule in

response to a similar comment, prior to the creation of procedure code

41.04 for stem cell transplants, this procedure

[[Page 45791]]

was included in procedure code 99.73 (therapeutic erythrocytapheresis),

a non-OR procedure (59 FR 45340). As we have noted several times, our

practice is to assign a new code to the same category as its

predecessor code. Because we could not separately identify the stem

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

reclassify them and their charges to another DRG, we were unable to

predict the resources required for this code and unable to calculate

the new weights of both the DRG in which this code was classified and

the DRG to which it would be assigned. Therefore, we were prevented

from redesignating code 41.04 as an OR procedure and assigning it to

another DRG.

Although it was requested that this code be reassigned to DRG 481,

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

marrow transplant procedure. While it may consume hospital resources

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

that assumption until we can evaluate the newly coded stem cell

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

available in calendar year 1996 and we will analyze the cases with

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

C. Recalibration of DRG Weights

We proposed 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 proposed to recalibrate the weights

based on charge data for Medicare discharges. However, we proposed to

use the most current charge information available, the FY 1994 MedPAR

file, rather than the FY 1993 MedPAR file. The MedPAR file includes

fully-coded diagnostic and surgical procedure data for all Medicare

inpatient hospital bills.

The proposed recalibrated DRG relative weights were 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 at that time included data for approximately 10.9

million Medicare discharges. The MedPAR file updated through June 1995

includes data from approximately 11 million discharges and is the file

used to calculate the weights set forth in Table 5 of the addendum to

this final rule.

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 DRG relative weights from the FY 1994 MEDPAR file

is as follows:

To the extent possible, all the claims were regrouped

using the DRG classifications discussed above in section II.B of this

preamble. As noted in section II.B.4, due to the unavailability of

final GROUPER software, we must simulate some classification changes to

approximate the placement of cases under the revised 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 FY 1996 relative weights, we proposed to

eliminate a case only if it met the current criterion and also was

outside of 3.0 standard deviations from the mean log of distribution of

charges per day. We believe that this refinement to the methodology

reduces 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.

We received no comment on this refinement and we have identified

the statistical outliers in the final recalibration using this

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 proposed to make is in the treatment of transfer

cases. In past recalibrations, we have counted transfer cases as full

cases. This may distort 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 was 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 was counted as 0.5 of a total

case.

We received one comment concerning this methodology, which

supported our change. Therefore, we have included it in the final

recalibration.

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 is limited to Medicare-

approved facilities, effective 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 proposed to use that same case

threshold in recalibrating the DRG weights for FY 1996. Using the final

FY 1994 MedPAR data set, there are 34 DRGs that contain fewer than 10

cases. As discussed in detail in section II.B.3 of this preamble, we

computed the

[[Page 45792]]

weight for the 34 low-volume DRGs using the non-Medicare cases from 19

States.

The weights developed according to the methodology described above,

using the DRG classification changes, result in an average case weight

that is different from the average case weight before recalibration.

Therefore, the new weights are normalized by an adjustment factor, so

that the average case weight after recalibration is equal to the

average case weight before recalibration. This adjustment is intended

to ensure that recalibration by itself neither increases nor decreases

total payments under the prospective payment system.

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 final rule, we are making a

budget neutrality adjustment to implement that the requirement of

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

III. 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 1996, 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 1992 (that is, cost reporting periods

beginning on or after October 1, 1991 and before October 1, 1992). The

FY 1996 wage index includes wages and salaries paid by a hospital, home

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

current 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 proposed to use updated wage data

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

Act. Set forth below is a discussion of that update as well as a

discussion of other wage index issues. In addition, we proposed to

change certain guidelines for hospital reclassification used by the

Medicare Geographic Classification Review Board (MGCRB). That change is

discussed in section III.E of this preamble.

B. FY 1996 Wage Index Update

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

Worksheet S-3, Part II. Therefore, the 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 costs and

hours.

The exclusion of salaries and hours for nonhospital

services such as skilled nursing facility services, home health

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

prospective payment system.

Although we did not propose any changes in the reporting of

hospital wage index data, we received some comments on this issue.

Comment: One commenter noted that, in early 1995, HCFA distributed

special audit instructions to the fiscal intermediaries that defined

``direct patient care'' as ``hands on care.'' The commenter believes

that the ``hands on'' definition will create problems because it may be

subject to various interpretations. Also, the commenter objects to a

recent HCFA statement that ``travel time'' in connection with contract

labor is excluded in costs and hours if the information is specifically

identified, but otherwise is included. Again, the commenter believes

there will be inconsistencies when travel time cannot be identified.

Rather than continually refining the definition of direct patient care,

the commenter suggested that we adopt a different approach, such as

``chargeable services'' or ``services provided in revenue producing

cost centers.'' In addition, the commenter recommends that HCFA consult

with industry representatives before any special data requests or audit

instructions are issued that involve large numbers of hospitals.

Response: Before FY 1994, the wage index did not include any costs

associated with contract services because the data collected on

contract services as part of the 1988 wage survey were unreliable. (See

the September 1, 1993 final rule, 58 FR 46295.) However, many hospitals

indicated that they were inappropriately disadvantaged because they

were forced to contract out for nurses and technicians due to shortages

of these services in their areas. To alleviate this problem, we revised

the cost report effective for FY 1990 to collect the data associated

with any direct patient care service contracts such as service

contracts for nurses, therapists, and diagnostic imaging technicians.

We specifically excluded any Part B services, Part A physician

services, management contracts, or any contract for services not

directly involved with patient care.

The contract labor definition is limited to those services directly

related to hands-on patient care. This definition was adopted to

address the main concern expressed by hospitals with respect to the

inclusion of contract labor

[[Page 45793]]

in the wage index, that is, that many hospitals have problems hiring

nurses in areas experiencing nursing shortages and must rely on

contract labor sources. We believe that defining direct patient care as

``chargeable services'' or ``services provided in revenue producing

cost centers'' would result in confusion on the part of hospitals

attempting to exclude nonlabor-related expenses such as payments for

equipment and supplies and nonpatient care contract services such as

management and housekeeping services.

Regarding the exclusion of travel time in connection with contract

labor, we believe that it is appropriate to exclude from the wage data

those nonlabor costs associated with contract services that are billed

separately. Contract labor typically involves negotiating a dollar

amount for labor to be provided. This negotiated amount may include

other costs involved in providing the labor, such as travel costs for

lodging, mileage, and time. However, if these nonlabor costs are billed

separately from the negotiated contract, they are not to be included in

the contract labor wage data.

We believe that our definition of direct patient care is accurate

and clear. Special audit instructions were issued earlier this year

because we were receiving many inquiries regarding contract labor for

services such as pharmacy and clinical laboratory. In the instructions,

which were issued in February 1995, we provided all fiscal

intermediaries with written guidelines concerning our policy to exclude

payments and hours not attributable to direct patient care-related

contract services, which would include pharmacy and clinical laboratory

services.

We believe it is appropriate to issue clarifying instructions to

our fiscal intermediaries on policies without industry input, but we

agree with the commenter that we should consult with industry

representatives before making changes in the types of costs that are

included in the wage index. In fact, virtually all our recent proposals

were made in response to requests from hospital and industry

representatives. In addition, we have conducted special surveys and

task forces to address these issues. One example of our efforts to

involve industry representatives before making a change in policy is

the summer 1993 survey concerning which costs should be recognized as

fringe benefit costs. (See the September 1, 1994 final rule (59 FR

45356).)

Comment: The national representative of a group of fiscal

intermediaries requested that the February 1995 special instruction be

distributed to all fiscal intermediaries.

Response: The February 1995 instruction on direct patient care

related contract services was distributed to all fiscal intermediaries.

Therefore, there should be consistent application of this policy in

future data collection.

Comment: One commenter noted that the wage index for seven out of

eight MSAs in one State decreased between FY 1995 and the proposed FY

1996 values while other areas of the country experienced significant

increases. The commenter suggested that HCFA review in detail those

MSAs that experience significant increases in their wage index values

from the prior year in order to maintain consistency and equity of the

payment system.

Response: HCFA does review the percent change in the updated wage

index from the prior year wage index, by MSA and by urban and rural

hospital location. In addition, we review the wage data for any area

that experiences a wage index change of 10 percent or more to determine

the reason for the fluctuation. When necessary, we contact the

appropriate fiscal intermediary to ensure the validity of the data or

to obtain an explanation for the change. We note that none of the MSAs

referred to by the commenter experienced a change of 10 percent or

more. Therefore, they were not subject to any special review.

We also analyze the impact of the updated wage index on hospitals

using categories such as census division, teaching status, and

geographic reclassification status. This impact analysis is located in

section VI.C of Appendix A to this final rule. We include this impact

analysis in both the proposed and final rules.

1. Verification of Wage Data from the Medicare Cost Report

The data for the FY 1996 wage index were obtained from Worksheet S-

3, Part II, of the HCFA-2552 form submitted and certified for accuracy

by short-term, acute care hospitals for cost reporting periods

beginning during FY 1992 (October 1, 1991 through September 30, 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

performed numerous edits to ensure quality and accuracy. Medicare

intermediaries were instructed to transmit any revisions in wage data

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

In the proposed rule, we discussed in detail our review of the wage

data as well as the process that hospitals could use to verify their

wage data and to submit corrections if necessary (60 FR 29211).

The wage file used to construct the proposed wage index included

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

subsequent changes we received from intermediaries through March 21,

1995. To allow sufficient time to process changes, we instructed

hospitals to submit requests for corrections to their intermediaries by

May 15, 1995. To be reflected in the final wage index, wage data

corrections had to be reviewed, verified, and transmitted to HCFA

through HCRIS on or before June 15, 1995 (except for tabulation or data

entry errors). All data elements that failed edits have been resolved

and are reflected in this final rule.

Comment: One commenter stated that the fiscal intermediaries should

not be given as much discretion to make determinations regarding which

costs should be allowed as wage data for purposes of calculating the

wage index. The commenter believes that HCFA should clearly define

allowable items, and intermediaries should be required to use those

definitions. It is the commenter's opinion that this action would

greatly improve the comparability of wage data from one MSA to another.

Response: We promote consistency in the treatment of allowable wage

costs to the extent possible. We have provided the intermediaries with

the wage data cost report instructions and guidelines for allowable

wage data in the desk review, but it is not possible to define every

allowable wage data item. (See the September 1, 1993 final rule, 58 FR

46299.) We believe that the fiscal intermediaries are generally in the

best position to make determinations regarding the appropriateness of a

particular cost and whether it should be included in the wage index

data. We note that, effective October 1, 1994, hospital cost reports

were revised to further promote equitable and consistent treatment of

wage-related costs (59 FR 45357, September 1, 1994).

Comment: One commenter is concerned that HCFA's edits are not

adequate to ensure consistent treatment of the wage data by the fiscal

intermediaries and to produce wage index values that reflect the true

labor market situation. The commenter is also concerned about delays in

making changes to improve the wage index.

Response: In response to concerns voiced in the past about

inconsistent treatment of wage data, we have taken steps that we

believe should eliminate

[[Page 45794]]

most inconsistencies. Specifically, in November and December of each

year, the fiscal intermediaries perform desk reviews on the wage data

reported by each hospital. These reviews are conducted based on

reasonableness parameters (edits) established by HCFA. HCFA also edits

the wage data using additional edits, such as comparing each hospital's

current year wage data to the prior year wage data, comparing each

hospital's wage data to its MSA's data, and reviewing aggregate data

such as all hospitals with average hourly wages below the second

percentile for all hospitals nationally. The FY 1992 data that were

used to calculate the FY 1996 wage index were subjected to a total of

55 edits. We have also instructed fiscal intermediaries to contact HCFA

when questions arise. In addition, if a hospital disagrees with how a

fiscal intermediary deals with a particular issue, the hospital is

encouraged to bring it to our attention.

Regarding the fluctuations in the wage index by area, as discussed

in a previous response, we analyze the impact of the updated wage index

and review the data for any area that experienced a wage index value

change of 10 percent or more to determine the reason for the

fluctuation. When necessary, we contact the intermediary to determine

the validity of the data or to obtain an explanation for the change.

Regarding changes to improve the wage index, we note that the cost

report form for reporting wage data has been revised effective for FY

1995 (that is, for cost reporting periods that begin on or after

October 1, 1994 and before October 1, 1995). Because this revised cost

report form and instructions are more specific, we expect that the

reporting of wage data and the review of that data will be more

consistent across hospitals and fiscal intermediaries. However, because

of the 4-year time lag between improved data reporting and the use of

those data in the wage index, there is a necessary delay before the

changes can affect the wage index.

2. Requests for Wage Data Corrections

In the proposed rule, we noted that we would make a diskette

available in mid-August that would contain the finalized raw wage data

used to construct the wage index values in this final rule. As with the

diskette made available in March 1995, HCFA made the August diskette

available to hospital associations and the public. The August diskette

is 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 (60 FR 29212).

If, after reviewing the data in the August diskette or in this

final rule, 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. These letters should outline why the hospital

believes an error exists. These requests must be received by the

intermediary and 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; Room C5-06-27; 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 noted in the proposed rule, 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 by

the hospital during the preparation of Worksheet S-3 to the

intermediary's attention. Moreover, because hospitals had access to the

raw wage data in mid-August, they will have had 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 these

opportunities, 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. We received several comments concerning the collection and

verification of the wage data.

Comment: One commenter is concerned that the definition of ``HCFA

or intermediary error'' related to requests for wage data corrections

has been modified to mean only those errors relating to the entry or

tabulation of the wage data. The commenter also stated that it is not

clear if this would remove inconsistent applications or interpretations

of HCFA policy by the intermediary from the definition of an error. The

commenter disagrees with excluding an inconsistent application of

policy from the definition of errors.

Response: In the proposed rule, we stated that, after mid-August,

we would 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

diskette we made available in August (60 FR 29212). We specified that

after the May 15 deadline for submission of requests for corrections,

hospitals would not be able to request that we reconsider factual

determinations or policy interpretations made by the intermediary or

HCFA. We believe that hospitals had sufficient opportunities to raise

these types of issues, including review of the March 1995 data. Thus,

after May 15, correctable errors to the wage data are limited to data

entry or tabulation errors made by HCFA or the intermediary.

[[Page 45795]]

Comment: One commenter believes that any wage data and wage index

changes made for one hospital after the final rule is published should

not have a negative impact on other hospitals. While acknowledging

budget neutrality limitations, the commenter stated that, last year,

several MSAs were subject to wage index changes even though only one

MSA had a hospital that made a mistake in reporting certain data.

Response: We do not believe it is appropriate to make a ``partial

correction,'' that is, correcting a hospital's wage data but not

incorporating the effects of the correction into the wage index value

for all hospitals in the MSA. We note that we make both types of

corrections--those that decrease the wage index value of an MSA as well

as those that result in an increase in the wage index value.

Comment: One commenter requested that we specify a date by which

intermediaries must notify hospitals regarding determinations on wage

data correction requests. The commenter believes the rules should be

changed to specify a date prior to the June 15 deadline, in order to

give hospitals the opportunity to appeal the intermediary decision to

HCFA.

Response: In order to allow sufficient time to review and process

the wage data so that the final wage index and prospective payment

rates can be published by September 1, it is necessary that the

intermediary transmit any wage data corrections to HCFA through HCRIS

on or before June 15. The raw hospital wage data become available to

the public in mid-March, and we allow hospitals 2 months to review

their wage data and submit wage data corrections, including all

documentation necessary to support the requested change. We then allow

the intermediary 1 month in which to review, verify and submit revised

data in response to these correction requests. We do not believe that

it would be appropriate to shorten the time available to the

intermediaries for these determinations.

In each of the past two years, a commenter has suggested that we

establish a formal appeals process for disputes over corrections

submitted by hospitals to intermediaries (58 FR 46301 and 59 FR 45351).

We continue to believe that a formal appeals process is neither

necessary nor feasible. We believe that maintaining the current

timeframes gives hospitals more flexibility in their review. We

encourage hospitals to submit their wage data correction requests to

the fiscal intermediary as soon as possible in order to allow the

intermediary sufficient time to review the request prior to June 15.

Comment: One commenter requested changes in the format of the wage

data diskette that we make available to the industry. The commenter

believes that HCFA should provide additional information on the wage

data diskette, such as each hospital's MSA, redesignated MSAs, and

inflation factors. This would allow purchasers of the diskette to group

hospitals by MSA in order to make comparisons and to verify the

published wage index.

Response: The purpose of the diskette that HCFA makes available is

to allow each hospital to review its wage data in order to verify that

it is correct before it is used in the calculation of the final wage

index. We agree with the commenter that the hospital's MSA should be

included in the diskette and we will revise the format accordingly.

However, we are unable to add any other data elements to the diskette

because of space limitations. That is, we would be forced to expand to

two diskettes, requiring the purchase of both diskettes to obtain all

wage data. We are, however, considering the possibility of providing

all of the requested data elements electronically (that is, on-line).

In the meantime, we note that there is a Payment Impact file available

for both the proposed and final rules. This file contains the data used

to estimate payments, and we suggest that members of the public who

wish to make comparisons order this disk. See our June 2, 1995 proposed

rule for ordering information (60 FR 29250).

3. Effect of Judicial Reversal of Wage Data Denial

It has been our longstanding policy to make midyear revisions to

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

(January 3, 1984); 54 FR 36478 (September 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 an 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 had not previously addressed this question in any

rulemaking, we proposed to clarify our position regarding the temporal

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

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

Sec. 412.63(s)(5) to clarify that such a decision has limited

retroactive effect. If a final judicial decision reverses an HCFA

denial of a hospital's wage data revision request, we proposed 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 fiscal intermediaries and forwarded to HCFA

for a determination of whether a revision should be made. In other

years, the fiscal intermediaries themselves have made determinations on

wage data revision requests (with input from HCFA when necessary). The

latter is our current policy. 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 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 proposed,

[[Page 45796]]

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.

No comments were received on this proposal. Therefore, we will

implement the change as proposed effective beginning FY 1996, that is,

October 1, 1995.

4. Computation of the Wage Index

As noted above, we are basing the FY 1996 wage index on wage data

reported on the FY 1992 cost report. The final wage index is based on

data from 5,269 hospitals paid under the prospective payment system and

short-term, acute care hospitals in waiver States. The method used to

compute the FY 1996 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 15, 1991 through

September 14, 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 37

hospitals for which we lacked sufficient documentation to verify data

that failed 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 $18.9296.

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.

Comment: One commenter noted that Flagstaff, Arizona, a new MSA,

was not designated as an MSA for either wage index or hourly wage

purposes in the proposed rule. The commenter requested that we reflect

this change in the final rule.

Response: After publication of the proposed rule on June 2, Office

of Management and Budget (OMB) Bulletin Number 95-04 established two

new MSAs effective June 30, 1995: Flagstaff, Arizona-Utah MSA

(comprising Coconino County, Arizona and Kane County, Utah) and Grand

Junction, Colorado MSA (comprising Mesa County, Colorado). The bulletin

also changed the name of the Hickory-Morganton, North Carolina MSA to

Hickory-Morganton-Lenoir, North Carolina MSA. These new MSAs and the

revised designation are incorporated in the final wage index (see

Tables 4a and 4d).

Comment: One commenter requested that we establish a wage index

floor for each of the labor market areas in Puerto Rico equal to the

level of the wage index at the time Puerto Rico became subject to the

prospective payment system (October 1, 1987). An alternative proposal

made by the commenter was to

[[Page 45797]]

establish a wage index floor based on the current wage index for rural

Mississippi. The commenter also suggested that, after making either of

the two recommended wage index changes, we should adjust the Puerto

Rico standardized amounts to reflect the higher wage index values

leading to a decrease in the labor share percentage of the Puerto Rico

standardized amounts.

Response: At this time, we do not believe it would be appropriate

to set up a floor level for the wage index. The wage index measures

relative hospital wage levels, so that labor market areas that

experience slower wage growth than the national average wage growth (on

a percentage basis) experience wage index decreases while those who

experience faster growth receive wage index increases. Since the wages

in Puerto Rico have increased at a significantly slower level than

national wages, Puerto Rico's wage index values have decreased

accordingly. The average hourly wage for rural Puerto Rico has

increased 51.7 percent (from $5.40 to $8.19) from FY 1984 to FY 1992,

while the national average hourly wage has increased 94.0 percent (from

$9.76 to $18.93). Consequently, the wage index for rural Puerto Rico

has decreased from 0.5536 in FY 1988, which is based on the FY 1984

data, to 0.4326 in FY 1996, which is based on the FY 1992 wage data.

While we are concerned about the fall in the wage index values in

Puerto Rico, the implementation of a wage index floor would create new

problems. For example, we also must consider that the introduction of a

wage index floor would have to be executed in a budget neutral manner.

Thus, any wage index floor would deprive hospitals with wage index

values above the floor level of their appropriate payment level through

lower standardized amounts. We will continue to study this issue in the

hope of finding a solution that is equitable to hospitals in all areas.

Since we do not believe a wage index floor is appropriate, we will not

be making any changes to the labor share percentage for Puerto Rico

standardized amounts.

Comment: One commenter suggested that we eliminate the Puerto Rico

Rural Area classification and classify those hospitals to their nearest

geographic area (that is, one of the urban Puerto Rico areas). The

commenter's suggestion is based on the belief that there is no

socioeconomic difference between the rural hospitals and any other

hospital on the island.

Response: We do not believe it is appropriate to offer special

treatment for any rural area. Unless and until we decide to adopt a new

method for defining labor market areas, we will continue to use rural

areas for hospitals in counties that are not designated as part of

MSAs. We note that the Puerto Rico rural wage index value has increased

since publication of the proposed rule based on corrections we have

received. The final rural area wage index value is 0.4326, an increase

of 11 percent over the proposed value of 0.3888, and only a slight

decrease from the FY 1995 wage index value.

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

currently 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. 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. 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 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 cost report.

In calculating the FY 1996 wage index, we used 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.

In the June 2, 1995 proposed rule (60 FR 29214), we discussed in

detail our analysis of the general service allocation. We found that

after we completed the data 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

[[Page 45798]]

0.08 percentage points if we performed the overhead allocation.

Thus, we again concluded 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

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 invited 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. We noted 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 proposed 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.

Comment: Three commenters expressed support for the exclusion of

overhead salaries and hours associated with excluded areas of the

hospital and made suggestions regarding allocation methods. One

commenter stated that HCFA's allocation method had merits in terms of

modeling the impact and collectability of the data and requested that

we continue to apply the same methodology in future studies. Another

commenter suggested that HCFA incorporate in this final rule the

collection of data on overhead dollars and hours separately and the

exclusion of overhead salaries and hours associated with excluded

subprovider components. A third commenter suggested a stepped-down cost

finding basis for the allocation of salaries and hours from general

service areas. This commenter believes that the data necessary to

perform the step-down would be readily available to the intermediary

and recommended that HCFA add cost center hours to Worksheet B-1 of the

HCFA 2552-89 to facilitate data collection.

Response: As discussed above, while we agree with the commenters

that an allocation of overhead salaries and hours to the excluded

subprovider components may be appropriate, we believe that it would not

benefit the hospital industry or the Medicare program to implement at

this time an allocation that is not reliable.

Both the commenters who suggested a change in methodology based

that change on the collection of new data. We do not agree with one

commenter's suggestion to employ an allocation method based on stepped-

down cost finding as it would impose additional reporting burden on the

hospital industry. The approach would require a new or revised cost

reporting form to allocate overhead hours and salaries to all of a

hospital's cost centers. In addition, hospitals would have to adopt

uniform statistics for allocating costs to cost centers to ensure data

comparability. As we noted above, any method we use should impose

little or no additional reporting burden. At this time, we do not

believe the merits of an allocation of general service salaries and

hours to excluded areas warrant the additional reporting burden. We

have implemented new cost reporting instructions concerning overhead

data. We will wait to evaluate those data (which will be available for

the FY 1999 wage index) before imposing any additional data

collections.

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 for the area to which the hospitals

are redesignated 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

[[Page 45799]]

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 otherwise reduce the rural wage index value, and for urban areas

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

would otherwise 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.

Comment: We received one comment on our policy of assigning the

Statewide rural wage index value to MSAs where all of the hospitals

have been reclassified to another area. The commenter believes that our

policy is unfair to new hospitals that open in such an MSA, because

they would be automatically assigned the Statewide rural wage index

value, which is generally much lower than the pre-reclassified value

for the MSA. The commenter stated that the Statewide rural wage index

value would not reflect the labor costs in the labor market in which

the hospital would be operating. Therefore, the commenter requested

that we revise this policy and assign the MSA's pre-reclassified wage

index value to the empty MSA.

Response: We adopted our current policy in response to comments as

part of the August 30, 1991 final rule (56 FR 43222). Upon

reconsideration, we agree with the commenter that the wage levels a new

hospital must pay may be better reflected by the pre-reclassified wage

index value for the area than the State-wide rural wage index value.

Therefore, effective October 1, 1995, we will assign the pre-

reclassified wage index value for an MSA to any MSA where all of the

hospitals have been reclassified to another area. That value would

apply as long as the MSA remains empty or until the new hospital has

reported wage data that are used to calculate a wage index value

(approximately 4 years). This change has been incorporated into the

final wage index tables.

The final revised wage index values for FY 1996 are shown in Tables

4a, 4b, and 4c of the addendum to this final 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 valu

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