Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 1997 Rates

SUMMARY: We are proposing to revise the Medicare hospital inpatient

prospective payment systems for operating costs and capital-related

costs to implement necessary changes arising from our continuing

experience with the systems. In addition, in the addendum to this

proposed rule, we are describing proposed changes in the amounts and

factors necessary to determine prospective payment rates for Medicare

hospital inpatient services for operating costs and capital-related

costs. These changes would be applicable to discharges occurring on or

after October 1, 1996. We are also setting forth proposed rate-of-

increase limits as well as proposing changes for hospitals and hospital

units excluded from the prospective payment systems.

DATES: Comments will be considered if received at the appropriate

address, as provided below, no later than 5 p.m. on July 31, 1996.

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

following address:

Health Care Financing Administration, Department of Health and Human

Services, Attention: BPD-847-P, P.O. Box 7517, Baltimore, MD 21207-

0517.

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

and 3 copies) to one of the following addresses:

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

Washington, DC 20201, or

Room C5-09-26, Central Building, 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-847-P. Comments received timely will be available for

public inspection as they are received, generally beginning

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

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

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

(phone: (202) 690-7890).

For comments that relate to information collection requirements,

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

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

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

Desk Officer.

Copies: To order copies of the Federal Register containing this

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

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

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

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

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

calling the order desk at (202) 512-1800 or by faxing to (202) 512-

2250. The cost for each copy is $8.00. As an alternative, you can view

and photocopy the Federal Register document at most libraries

designated as Federal Depository Libraries and at many other public and

academic libraries throughout the country that receive the Federal

Register.

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.

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, 1995, we published a final rule with comment period (60 FR 45778) to

implement changes to the prospective payment system for hospital

operating costs beginning with Federal fiscal year (FY) 1996.

For cost reporting periods beginning before October 1, 1991,

hospital inpatient operating costs were the only costs covered under

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

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

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

from the definition of inpatient operating costs. However, section

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

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

hospitals paid under the prospective payment system for operating

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

payment system effective with cost reporting periods beginning on or

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

replaced the reasonable cost-based payment methodology with a

prospective payment methodology for hospital inpatient capital-related

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

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

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

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

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

system for hospital inpatient capital-related costs.)

B. Major Contents of This Proposed Rule

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

Medicare hospital inpatient prospective payment systems for both

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

effective for discharges occurring on or after October 1, 1996.

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

make:

1. Changes to the DRG Classifications and Relative Weights

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

DRG classifications and relative weights at least annually. Our

proposed changes for FY 1997 are set forth in section II of this

preamble.

2. Changes to the Hospital Wage Index

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

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

in this section include:

FY 1997 wage index update.

[[Page 27445]]

Revisions to the wage index based on hospital

redesignations.

Solicitation of public comment on possible changes to the

following:

--Contract labor--expansion of allowable costs.

--Revision in Puerto Rico labor market areas.

Medicare Geographic Classification Review Board--

composition and criteria.

3. Rebasing and Revision of the Hospital Market Baskets

In section IV of this preamble, we discuss our proposal to use a

rebased and revised hospital market basket in developing the FY 1997

update factor for the operating prospective payment rates, the capital

prospective payment rates, and the excluded hospital rate-of-increase

limits.

4. Other Changes to the Prospective Payment System for Inpatient

Operating Costs

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

regulations in 42 CFR parts 412, 413, and 489 and set forth certain

proposed changes concerning the following:

Sole community hospitals.

Rural referral centers.

Disproportionate share adjustment.

Direct graduate medical education programs.

Hospital distribution of ``An Important Message from

Medicare.''

5. Changes and Clarifications to the Prospective Payment System for

Capital-Related Costs

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

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

changes concerning the following:

Use of simplified cost accounting.

The capital Federal and hospital-specific rates.

6. Changes for Hospitals and Hospital Units Excluded From the

Prospective Payment Systems

In section VII of this preamble, we discuss a clarification

concerning the calculation of payments to hospitals excluded from the

prospective payment system.

7. Determining Prospective Payment Operating and Capital Rates and

Rate-of-Increase Limits

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

changes to the amounts and factors for determining the FY 1997

prospective payment rates for operating costs and capital-related

costs. We are also proposing update factors for determining the rate-

of-increase limits for cost reporting periods beginning in FY 1997 for

hospitals and hospital units excluded from the prospective payment

system. In addition, we have included a detailed discussion of our

methodology for setting thresholds for outlier cases. We are inviting

comments on our methodology and any suggestions for changes in that

methodology that could help us better predict outlier payments.

8. Impact Analysis

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

proposed changes described in this rule would have on affected

entities.

9. Capital Acquisition Model

Appendix B contains the technical appendix on the proposed FY 1997

capital acquisition model.

10. Rebased Market Basket Data Sources

Appendix C sets forth the data sources used to determine the market

basket relative weights and choice of price proxies.

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

Hospitals and Hospitals Excluded From the Prospective Payment System

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

to Congress on our initial estimate of an update factor for FY 1997 for

both hospitals included in and hospitals excluded from the prospective

payment systems. This report is included as Appendix D to this proposed

rule.

12. Proposed Recommendation of Update Factor for Hospital Inpatient

Operating Costs

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

E provides our recommendation of the appropriate percentage change for

FY 1997 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.

13. Discussion of Prospective Payment Assessment Commission

Recommendations

The Prospective Payment Assessment Commission (ProPAC) is directed

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

appropriate percentage change factor to be used in updating the average

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

directs ProPAC to make recommendations regarding changes in each of the

Medicare payment policies under which payments to an institution are

prospectively determined. In particular, the recommendations relating

to the hospital inpatient prospective payment systems are to include

recommendations concerning the number of DRGs used to classify

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

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

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

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

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

each year.

We are printing ProPAC's March 1, 1996 report, which includes its

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

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

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

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

proposed rule. See section VIII of this preamble for specific

information concerning where individual recommendations are addressed.

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

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

this proposed rule. For further information relating specifically to

the ProPAC report, contact ProPAC at (202) 401-8986.

II. Proposed Changes to DRG Classifications and Relative Weights

A. Background

Under the prospective payment system, we pay for inpatient hospital

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

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

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

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

is assigned. Each DRG weight represents the average resources required

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

resources used to treat cases in all DRGs.

Congress recognized that it would be necessary to recalculate the

DRG relative weights periodically to account

[[Page 27446]]

for changes in resource consumption. Accordingly, section 1886(d)(4)(C)

of the Act requires that the Secretary adjust the DRG classifications

and relative weights annually. These adjustments are made to reflect

changes in treatment patterns, technology, and any other factors that

may change the relative use of hospital resources. The proposed changes

to the DRG classification system and the proposed recalibration of the

DRG weights for discharges occurring on or after October 1, 1996 are

discussed below.

B. DRG Reclassification

1. General

Cases are classified into DRGs for payment under the prospective

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

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

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

procedure information is reported by the hospital using codes from the

International Classification of Diseases, Ninth Edition, Clinical

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

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

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

are designed to identify cases that require further review before

classification into a DRG can be accomplished.

After screening through the MCE and any further development of the

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

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

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

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

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

measure relative hospital resource consumption to establish the DRG

weights and to classify current cases for purposes of determining

payment. The records for all Medicare hospital inpatient discharges are

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

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

changes and to recalibrate the DRG weights.

Currently, cases are assigned to one of 492 DRGs in 25 major

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

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

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

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

In general, principal diagnosis determines MDC assignment. However,

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

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

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

lung transplant (DRGs 480, 481, and 495, respectively) and the two DRGs

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

before classification to an MDC.

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

on a surgical hierarchy that orders individual procedures or groups of

procedures by resource intensity) and medical DRGs. Medical DRGs

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

surgical and medical DRGs are further differentiated based on the

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

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

nonsurgical procedures or minor surgical procedures generally not

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

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

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

diagnoses, such as extracorporeal shock wave lithotripsy for patients

with a principal diagnosis of urinary stones.

The changes we are proposing to make to the DRG classification

system for FY 1997 and other decisions concerning DRGs are set forth

below.

2. Pre-MDC DRGs

Effective October 1, 1994, ICD-9-CM procedure code 41.04,

Autologous hematopoietic stem cell transplant, was created to capture

the transplantation of stem cells obtained from bone marrow or

peripheral blood. At that time, we designated the code as non-OR. This

transplant procedure was previously assigned to procedure code 99.73,

Therapeutic erythrocytapheresis, which is designated as a non-OR

procedure. When we created this code, we received comments requesting

that it be designated as an OR procedure and assigned to DRG 481 (Bone

Marrow Transplant) based on the resource use associated with the type

of transplant. However, as we stated in the September 1, 1994 final

rule (59 FR 45340), 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. 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 a new DRG, we

were unable to predict the new weights of both the DRGs in which this

code currently is classified and the new DRG to which it would be

assigned. Therefore, we were prevented from redesignating code 41.04 as

an OR procedure or assigning it to a DRG. However, we stated that we

would analyze the stem cell cases as soon as the FY 1995 cases were

available.

This year, the FY 1995 Medicare Provider Analysis and Review

(MedPAR) file is available for use in DRG analysis and weight setting

for FY 1997. In the December 1995 update to the FY 1995 MedPAR file,

there are a total of 178 cases reporting the performance of a stem cell

transplant. Of that number, 13 cases also reported the performance of a

bone marrow transplant. Those cases were removed from our analysis

because they are already classified to DRG 481. Of the remaining 165

cases, 100 cases did not meet the coverage criteria for Medicare

payment. As set forth in the Medicare Coverage Issues Manual at section

35-30.1 (see Transmittal No. 84, April 1996), autologous stem cell

transplants are not covered when performed for the following

conditions:

Acute leukemia not in remission (diagnosis codes 204.00,

205.00, 206.00, 207.00, and 208.00).

Chronic granulocytic leukemia (diagnosis codes 205.10 and

205.11).

Solid tumors (other than neuroblastomas) (diagnosis codes

140.0 through 199.1)

Multiple myeloma (diagnosis codes 203.00, 203.01 and

238.6).

After eliminating the noncovered cases, 65 cases of stem cell

transplant remained. The average standardized charge for these cases

was approximately $83,000. The average standardized charge for bone

marrow transplant cases in the FY 1995 MedPAR file is approximately

$98,000. Thus, since the average resource use associated with stem cell

transplant is similar to that associated with bone marrow transplant,

we are proposing to assign procedure code 41.04 to DRG 481 effective

with discharges occurring on or after October 1, 1996. The overall

average charge for stem cell and bone marrow combined is just under

$93,000. In addition, we propose to designate stem cell transplant as

an OR procedure.

[[Page 27447]]

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

a. Sleep Apnea

We have received correspondence requesting that we review the DRG

assignment of cases in which surgery is performed to correct

obstructive sleep apnea (diagnosis code 780.57). When coded as a

principal diagnosis, sleep apnea is assigned to DRGs 34 and 35 (Other

Disorders of the Nervous System)\1\ in MDC 1.

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

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

second 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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Recently, new surgical interventions to correct sleep apnea have

been introduced. The procedures most frequently performed for this

condition are the following:

Code and Description

27.69 Other plastic repair of palate

29.4 Plastic operation on pharynx

29.59 Other repair of pharynx

Since none of these surgical procedures is assigned to MDC 1, cases

of sleep apnea treated with one of these surgeries are assigned to DRG

468 (Extensive OR Procedure Unrelated to Principal Diagnosis) in the

case of codes 25.59 and 78.49 or to DRG 477 (Nonextensive OR Procedure

Unrelated to Principal Diagnosis) in the case of code 29.4.

We are proposing to address this situation by assigning the three

surgical procedures to MDC 1. Based on the charges associated with

these cases and the fact that they are not clinically similar to the

other surgical DRGs in MDC 1, we are proposing to include them in DRGs

7 and 8 (Peripheral and Cranial Nerve and Other Nervous System

Procedures).

b. Guillain-Barre Syndrome

Guillain-Barre syndrome (diagnosis code 357.0) is a post-infectious

polyneuropathy in which severely affected patients may require

ventilatory assistance and long stays in intensive care. In recognition

of the high resource consumption associated with this diagnosis,

effective with FY 1991, we reassigned code 357.0 from DRGs 18 and 19

(Cranial and Peripheral Nerve Disorders) to DRG 20 (Nervous System

Infection Except Viral Meningitis). (See the September 4, 1990 final

rule (55 FR 36024).) A commenter stated that although DRG 20 would

provide a higher payment for these cases, it would still be inadequate

to cover the costs of treating these patients, and we agreed that we

would monitor this issue.

We have recently received requests that we again review this

assignment. These commenters stated that the treatment for these cases

remains very costly and often entails long hospital stays. Therefore,

we conducted an analysis of the cases assigned to DRG 20 using the 10

percent random sample of the FY 1995 MedPAR file that we use for

analyzing possible classification changes.

Cases coded with 357.0 comprise approximately 20 percent of the

cases assigned to DRG 20. As the commenters predicted, the average

standardized charges for these cases, approximately $22,400, was higher

than the average charge for the DRG, approximately $17,100. However,

the length of stay was only slightly higher, 9.1 days compared to 8.4.

We believe that DRG 20 is the appropriate assignment clinically for

Guillain-Barre cases and the average charge is well within the

variation in charges for this DRG. In addition, DRG 20 is the most

resource-intensive, and, thus, the highest-weighted medical DRG in MDC

1.

However, in reviewing the other cases assigned to DRG 20, we noted

that the average charges for two diagnoses were significantly lower

than the overall average charge. These diagnoses, herpes zoster of the

nervous system (code 053.10) and herpes zoster of the nervous system,

NEC (code 053.19) had average charges of only $7,700 and $7,100,

respectively. They also had significantly lower average lengths of stay

(4.4 and 4.2 days, respectively). Because these two diagnoses also

account for approximately 20 percent of the cases in DRG 20, their low

average charge has the effect of significantly lowering the average

charge for the DRG. Removing these two codes from DRG 20 increases the

average charge to approximately $20,000. After reviewing the remaining

medical DRGs in MDC 1, we believe that reassigning codes 053.10 and

053.19 to DRGs 18 and 19 is appropriate both clinically and in terms of

resource consumption. In the 10 percent MedPAR file, these DRGs had an

average charge of approximately $8,000 and $5,300, respectively.

Therefore, we are proposing to make this DRG classification change

effective for FY 1997. This change would significantly increase the

relative weight for DRG 20 and provide higher payment for the Guillain-

Barre cases. The proposed weight for DRG 20 is 2.4782, an increase of

17 percent over the FY 1996 weight of 2.1157.

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

Effective for discharges occurring on or after October 1, 1995, we

created a new code for insertion of a coronary artery stent (procedure

code 36.06). Until creation of the new code, insertion of coronary

artery stent had been included in the codes for percutaneous

transluminal coronary angioplasty (PTCA) (procedure codes 36.01, 36.02,

and 36.05).

As discussed above in section II.B.2, when a new code is

introduced, our longstanding practice is to assign it to the same DRG

category as its predecessor code or codes. Therefore, in the June 2,

1995 proposed rule, we assigned procedure code 36.06 to DRG 112

(Percutaneous Cardiovascular Procedures), the DRG to which PTCA is

assigned. In response to comments received, in the September 1, 1995

final rule, we explained our policy on DRG assignment of new codes (60

FR 45785). We also stated that the resource use and other data

associated with procedure code 36.06 will be available in the FY 1996

Medicare cases which are used for analysis as part of FY 1998 DRG

changes. We will evaluate the DRG assignment of coronary artery stent

insertion at that time.

Since publication of the September 1, 1995 final rule, we have

received data on stent cases provided by the manufacturer of one of the

two stent devices currently approved by the Food and Drug

Administration (FDA). In addition, the manufacturer has provided us

with an analysis of the charges and length of stay of approximately

7,500 Medicare patients who received stents in FY 1995. Because there

was no code for the procedure during that year, the manufacturer

matched its list of stent recipients with the FY 1995 MedPAR file.

The manufacturer's analysis found that the FY 1995 average charge

for PTCA cases without stent is approximately $15,700 and the average

charge for cases with stent is approximately $21,000. However, our

analysis of the data shows that there is wide variation in the hospital

standardized charges reported for cases with implant of coronary artery

stent. Individual hospital average charges for these cases range from

about $9,000 to over $45,000.

This inconsistency in the data illustrates why our policy of not

reassigning new codes until we have collected an entire year of coded

Medicare data for analysis is prudent. The uncertainty associated with

using incomplete data collected outside the

[[Page 27448]]

Medicare program that cannot be verified remains a problem. Therefore,

we are not proposing any DRG assignment change for implant of coronary

artery stent. As noted above, a full year of coded FY 1996 Medicare

data will be available in early 1997 for analysis. We will review the

data at that time, and any proposed DRG changes will be announced in

the FY 1998 proposed rule.

5. MDC 8 (Diseases and Disorders of the Musculoskeletal System and

Connective Tissue)

In the September 1, 1995 final rule (60 FR 45790), we responded to

a comment we received regarding the DRG assignment in MDC 8 of bipolar

hip replacement cases. The commenter requested that cases of bipolar

hip replacement 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 the procedure for partial hip

replacement (code 81.52) is very similar to the procedure for open

reduction of fracture of the femur with internal fixation (code 79.35),

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

believes that partial hip replacement patients are more frail

individuals than the population that elects total hip replacement

surgery and need longer hospital stays to recover.

In the September 1, 1995 final rule, we stated that we would

reexamine this assignment as part of our DRG agenda for FY 1997. Using

the FY 1995 MedPAR file, we compared charges and lengths of stay for

cases assigned to DRG 209 in which the procedures 81.51 (total hip

replacement), 81.52, and 81.53 (revision of hip replacement) were

performed with the charges for the entire DRG. The average standardized

charges for these cases are very similar to each other as well as the

other cases assigned to DRG 209. The average charge was $18,310 for

partial hip replacement, $19,924 for total hip replacement, and $23,094

for revision of hip replacement. The $1,278 difference between the

average charge for partial hip replacement cases in DRG 209 and the

average charge of $19,588 for all cases in DRG 209 is within the normal

range of charges for that DRG. However, the average charge for cases in

DRG 210 was $15,119, or $2,157 less than the partial hip replacement

charges.

A comparison of lengths of stay yields slightly different results.

The partial hip replacement cases in DRG 209 had an average stay of 8.6

days. The overall average lengths of stay for DRGs 209 and 210 were 6.7

days and 8.5 days, respectively. Based on these data alone, it would

seem that the commenter is correct that partial hip replacement

patients are more similar to the patients in DRG 210, in terms of

hospital length of stay. However, we also must consider these cases'

higher average charges. The higher charges of the partial hip

replacement cases indicate that they are more resource-intense than the

cases in DRG 210. The proposed relative weights for DRG 209 and 210 are

2.2617 and 1.8458, respectively. Therefore, we believe that DRG 209 is

the most appropriate assignment for procedure code 81.52 so that

payment will most closely relate to the costs of care for these

patients.

6. 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 are

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

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

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

and to reflect these changes in the proposed relative

[[Page 27449]]

weights due to the unavailability of revised GROUPER software at the

time this proposed rule is prepared. Rather, we simulate most major

classification changes to approximate the placement of cases under the

proposed reclassification and then determine the average charge for

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

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

surgical hierarchy changes after the revised GROUPER is received and

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

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

anticipate that the final recalibrated weights will be somewhat

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

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

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

At this time, we would revise the surgical hierarchy for the Pre-

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

Throat), and MDC 10 (Endocrine, Nutritional and Metabolic Diseases and

Disorders) as follows:

In the Pre-MDC DRGs, we would reorder Tracheostomy Except

for Face, Mouth and Neck Diagnoses (DRG 483) above Liver Transplant

(DRG 480).

In MDC 3, we would reorder Cleft Lip and Palate Repair

(DRG 52) and Sinus and Mastoid Procedures (DRGs 53 and 54) above

Tonsillectomy and Adenoidectomy, Except Tonsillectomy and/or

Adenoidectomy Only (DRGs 57 and 58).

In MDC 10, we would reorder Adrenal and Pituitary

Procedures (DRG 286) above Amputation of Lower Limb for Endocrine,

Nutritional, and Metabolic Disorders (DRG 285).

7. Refinement of Complications and Comorbidities List

There is a standard list of diagnoses that are considered

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

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

secondary condition, would be considered a substantial complication or

comorbidity.

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

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

this time, we do not propose to delete any of the diagnosis codes on

the CC list.

In the September 1, 1995 final rule (60 FR 45782), we added

diagnosis code 008.49 (Bacterial enteritis) to the CC list. In response

to a request from one commenter that we also add diagnosis code 008.45

(Clostridium difficile), we stated that we would review that request as

part of our DRG analysis for FY 1997. We have reevaluated diagnosis

code 008.45 as well as the remainder of the ``family'' of codes

assigned to Intestinal infections due to other specified bacteria

(008.41, 008.42, 008.43, 008.44, 008.46, and 008.47). Our analysis

shows that all of these diagnoses, when present as a secondary

condition, do lead to higher resource use. Therefore, we are proposing

to add the following diagnosis codes to the CC list:

008.41 Intestinal infections due to staphylococcus

008.42 Intestinal infections due to pseudomonas

008.43 Intestinal infections due to campylobacter

008.44 Intestinal infections due to yersinia enterocolitica

008.45 Intestinal infections due to clostridium difficile

008.46 Intestinal infections due to other anaerobes

008.47 Intestinal infections due to other gram-negative bacteria

These diagnoses would be considered CCs for any principal diagnosis

not shown in Table 6f, Additions to the CC Exclusions List (see

discussion of CC Exclusions list in section V of the Addendum below).

This same commenter also requested that we add the following codes

to the CC list:

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

Our analysis of these codes demonstrates that their presence as a

secondary diagnosis does not significantly add to the resource use of

the case. Therefore, we are not proposing to add them to the CC list.

Finally, the commenter suggested that the following diagnoses be

added as cardiovascular complications for DRG 121 (Circulatory

Disorders with AMI and Cardiovascular Complications, Discharged Alive):

434.xx Occlusion of cerebral arteries

436 Acute, but ill-defined, cerebrovascular disease

Using the 10 percent analysis file of the FY 1995 MedPAR data, we

analyzed the cases assigned to DRG 121 that had these diagnoses coded

as secondary conditions. The charges associated with those cases were

indeed comparable to the other cases assigned to DRG 121. When we

sought the advice of our medical specialists (physicians who work

directly for or under contract with HCFA), however, they strongly

opposed adding these codes to the list of conditions for DRG 121 based

on the fact that these are not cardiovascular complications. Therefore,

they are not clinically similar to other cases assigned to this DRG.

However, our analysis of this DRG did reveal a large variation in

the charges and lengths of stay within this DRG. We believe that a

close examination of the list of complicating conditions assigned to

DRG 121 is needed. Therefore, we plan to perform a thorough analysis of

the cases assigned to that DRG as part of our DRG analysis agenda for

FY 1998. In the meantime, we are not proposing any change to DRG 121.

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

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

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

be considered a valid CC in combination with a particular principal

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

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

preclude duplicative coding or inconsistent coding from being treated

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

the complicated and uncomplicated DRGs in a pair.

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

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

secondary diagnoses were established using the following five

principles:

Chronic and acute manifestations of the same condition

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

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

Specific and nonspecific (that is, not otherwise specified

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

one another.

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

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

should not be considered CCs for one another.

The same condition in anatomically proximal sites should

not be considered CCs for one another.

Closely related conditions should not be considered CCs

for one another.

The creation of the CC Exclusions List was a major project

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

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

[[Page 27450]]

criteria used for eliminating certain diagnoses from consideration as

CCs were intended to identify only the most obvious diagnoses that

should not be considered complications or comorbidities of another

diagnosis. For that reason, and in light of comments and questions on

the CC list, we have continued to review the remaining CCs to identify

additional exclusions and to remove diagnoses from the master list that

have been shown not to meet the definition of a CC. (See the September

30, 1988 final rule for the revision made for the discharges occurring

in FY 1989 (53 FR 38485); the September 1, 1989 final rule for the FY

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

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

FY 1992 revision (56 FR 43209); the September 1, 1992 final rule for

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

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

rule for the FY 1995 revisions (59 FR 45334); and the September 1, 1995

rule for the FY 1996 revisions (60 FR 45782).)

We are proposing a limited revision of the CC Exclusions List to

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

diagnosis coding system effective October 1, 1996, as well as the

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

discussion of ICD-9-CM changes.) These proposed changes are being made

in accordance with the principles established when we created the CC

Exclusions List in 1987.

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

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

proposed rule.

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

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

effective for discharges occurring on or after October 1, 1996. Each

table shows the principal diagnoses with proposed changes to the

excluded CCs. Each of these principal diagnoses is shown with an

asterisk and the additions or deletions to the CC Exclusions List are

provided in an indented column immediately following the affected

principal diagnosis.

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

Exclusions List. Beginning with discharges on or after October 1, 1996,

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

CCs for the asterisked principal diagnosis.

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

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

1, 1996, 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 $92.00

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

$4.00 for shipping and handling. A request for the FY 1988 CC

Exclusions List (which should include the identification accession

number, (PB) 88-133970) should be made to the following address:

National Technical Information Service; United States Department of

Commerce; 5285 Port Royal Road; Springfield, Virginia 22161; or by

calling (703) 487-4650.

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

Exclusions List (FYs 1989, 1990, 1991, 1992, 1993, 1994, 1995, and

1996) 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, 1996.

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, is available for $195.00,

which includes $15.00 for shipping and handling. Version 14.0 of this

manual, which will include the final FY 1997 DRG changes, will be

available in October 1996 for $195.00. These manuals may be obtained by

writing 3M/HIS at the following address: 100 Barnes Road; Wallingford,

Connecticut 06492; or by calling (203) 949-0303. Please specify the

revision or revisions requested.

8. 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

60.21 Transurethral prostatectomy

60.29 Other 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, September 1,

1994, and September 1, 1995, we moved several other procedures from DRG

468 to 477. (See 55 FR 36135, 56 FR 43212, 57 FR 23625, 58 FR 46279, 59

FR 45336, and 60 FR 45783, respectively.)

a. Adding Procedure Codes to MDCs

We annually conduct a review of procedures producing DRG 468 or 477

assignments on the basis of volume of cases in these DRGs with each

procedure. Our medical consultants then identify those procedures

occurring in conjunction with certain principal diagnoses with

sufficient frequency to justify adding them to one of the surgical DRGs

for the MDC in which the diagnosis falls. This year's review did not

identify any necessary changes; therefore, we are not proposing

[[Page 27451]]

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

DRGs 468, 476, and 477 to ascertain if any of those procedures should

be moved from one of these DRGs to another based on average charges and

length of stay. Generally, we move only those procedures for which we

have an adequate number of discharges to analyze the data. Based on our

review this year, we are proposing to move one procedure from DRG 468

to DRG 477.

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 one procedure--Closed endoscopic biopsy of lung

(code 33.27), a needle biopsy--that is significantly less resource

intensive than the other procedures assigned to DRG 468. Therefore, we

are proposing to move procedure code 33.27 to the list of procedures

that result in assignment to DRG 477.

In reviewing the list of procedures assigned to DRG 477, we did not

identify any procedures that should be assigned to either DRG 468 or

476. We did, however, identify the following procedures that we believe

should be reassigned from an OR to a non-OR designation:

08.81 Linear repair of laceration of eyelid or eyebrow

08.82 Repair of laceration involving lid margin, partial-thickness

08.83 Other repair of laceration of eyelid, partial thickness

08.84 Repair of laceration involving lid margin, full-thickness

08.85 Other repair of laceration of eyelid, full-thickness

08.86 Lower eyelid rhytidectomy

08.87 Upper eyelid rhytidectomy

08.89 Other eyelid repair

Our analysis of the data associated with these eyelid repair

procedures leads us to conclude that the procedures are performed

following accidental injury or falls, incurred while the patient is in

the hospital. These procedures, which are normally performed at bedside

and do not necessitate a trip to the operating room, are significantly

less resource intensive than other procedures designated as OR

procedures. Therefore, we are proposing to change the procedures from

OR to non-OR procedures. We note that these procedures are assigned to

surgical DRGs in MDCs 2, 9, 21, 22, and 24. With this proposed change,

cases in which procedure codes 08.81 through 08.89 are the only OR

procedure codes listed would no longer be assigned to a surgical DRG.

All of these proposed changes would be effective with discharges

occurring on or after October 1, 1996.

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

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

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

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

Coordination and Maintenance Committee was formed. This is a Federal

interdepartmental committee charged with the mission of maintaining and

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

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

to reflect newly developed procedures and technologies and newly

identified diseases. The Committee is also responsible for promoting

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

communication techniques with a view toward standardizing coding

applications and upgrading the quality of the classification system.

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

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

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

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

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

Procedures: Tabular List and Alphabetic Index.

The Committee encourages participation in the above process by

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

public meetings for discussion of educational issues and proposed

coding changes. These meetings provide an opportunity for

representatives of recognized organizations in the coding fields, such

as the American Health Information Management Association (AHIMA)

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

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

well as physicians, medical record administrators, health information

management professionals, and other members of the public to contribute

ideas on coding matters. After considering the opinions expressed at

the public meetings and in writing, the Committee formulates

recommendations, which then must be approved by the agencies.

The Committee presented proposals for coding changes at public

meetings held on May 5 and November 30, 1995, and finalized the coding

changes after consideration of comments received at the meetings and in

writing within 30 days following the November 1995 meeting. The initial

meeting for consideration of coding issues for implementation in FY

1998 will be held on June 6, 1996. 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: Donna

Pickett, Co-Chairperson; ICD-9-CM Coordination and Maintenance

Committee; NCHS; Room 1100; 6525 Belcrest Road; Hyattsville, Maryland

20782. Comments may be sent by E-mail to: [email protected].

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; C5-06-27; 7500 Security Boulevard;

Baltimore, Maryland 21244-1850. Comments may be sent by E-mail to:

[email protected].

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

effective October 1, 1996. The new ICD-9-CM codes are listed, along

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

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

the Addendum to this proposed rule. As we stated above, the code

numbers and their titles were presented for public comment in the ICD-

9-CM Coordination and Maintenance Committee meetings. Both oral and

written comments were considered before the codes were approved.

Therefore, we are soliciting comments only on the proposed DRG

classification.

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

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

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

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

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

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

diagnosis and procedure codes will not be recognized by the GROUPER

beginning with discharges occurring on or after October 1, 1996. The

[[Page 27452]]

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 proposed DRG assignments for these revised

codes.

C. Recalibration of DRG Weights

We are proposing to use the same basic methodology for the FY 1997

recalibration as we did for FY 1996. (See the September 1, 1995 final

rule (60 FR 45791).) That is, we would recalibrate the weights based on

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

current charge information available, the FY 1995 MedPAR file, rather

than the FY 1994 MedPAR file. The MedPAR file is based on fully-coded

diagnostic and surgical procedure data for all Medicare inpatient

hospital bills.

The proposed recalibrated DRG relative weights are constructed from

FY 1995 MedPAR data, based on bills received by HCFA through December

1995, from all hospitals subject to the prospective payment system and

short-term acute care hospitals in waiver States. The FY 1995 MedPAR

file includes data for approximately 10.6 million Medicare discharges.

The methodology used to calculate the proposed DRG relative weights

from the FY 1995 MedPAR file is as follows:

To the extent possible, all the claims were regrouped

using the proposed DRG classification revisions discussed above in

section II.B of this preamble. As noted in section II.B.6, due to the

unavailability of revised GROUPER software, we simulate most major

classification changes to approximate the placement of cases under the

proposed reclassification. However, there are some changes that cannot

be modeled.

Charges were standardized to remove the effects of

differences in area wage levels, indirect medical education costs,

disproportionate share payments, and, for hospitals in Alaska and

Hawaii, the applicable cost-of-living adjustment.

The average standardized charge per DRG was calculated by

summing the standardized charges for all cases in the DRG and dividing

that amount by the number of cases classified in the DRG.

We then eliminated statistical outliers, using the same

criteria as was used in computing the current weights. That is, all

cases that are outside of 3.0 standard deviations from the mean of the

log distribution of both the charges per case and the charges per day

for each DRG.

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.

A transfer case is counted as a fraction of a case based on the ratio

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

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

assigned to a DRG with a geometric mean length of stay of 10 days is

counted as 0.5 of a total case.

We established the relative weight for heart and heart-

lung, liver, and lung transplants (DRGs 103, 480, and 495) 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, heart-lung, liver, and lung

transplant centers that have cases in the FY 1995 MedPAR file.

(Medicare coverage for heart, heart-lung, liver, and lung transplants

is limited to those facilities that have received approval from HCFA as

transplant centers.)

Acquisition costs for kidney, heart, heart-lung, 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

for heart and heart-lung transplants); DRG 480 (Liver Transplant); and

DRG 495 (Lung Transplant)). Because these costs are paid separately

from the prospective payment rate, it is necessary to make an

adjustment to prevent the relative weights for these DRGs from

including the effect of the acquisition costs. Therefore, we subtracted

the acquisition charges from the total charges on each transplant bill

that showed acquisition charges before computing the average charge for

the DRG and before eliminating statistical outliers.

When we recalibrated the DRG weights for previous years, we set a

threshold of 10 cases as the minimum number of cases required to

compute a reasonable weight. We propose to use that same case threshold

in recalibrating the DRG weights for FY 1997. Using the FY 1995 MedPAR

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

computed the weights for the 37 low-volume DRGs by adjusting the FY

1996 weights of these DRGs by the percentage change in the average

weight of the cases in the other DRGs. We note that the FY 1996 weights

for the low-volume DRGs were recalculated based on non-Medicare data we

acquired from 19 States. This was the first update of the weights since

they were initially calculated for FY 1984 based on data from Maryland

and Michigan. For a complete description of this process, see the

September 1, 1995 final rule (60 FR 45781).

The weights developed according to the methodology described above,

using the proposed DRG classification changes, result in an average

case weight that is different from the average case weight before

recalibration. Therefore, the new weights are normalized by an

adjustment factor, so that the average case weight after recalibration

is equal to the average case weight before recalibration. This

adjustment is intended to ensure that recalibration by itself neither

increases nor decreases total payments under the prospective payment

system.

Section 1886(d)(4)(C)(iii) of the Act requires that beginning with

FY 1991, reclassification and recalibration changes be made in a manner

that assures that the aggregate payments are neither greater than nor

less than the aggregate payments that would have been made without the

changes. Although normalization is intended to achieve this effect,

equating the average case weight after recalibration to the average

case weight before recalibration does not necessarily achieve budget

neutrality with respect to aggregate payments to hospitals because

payment to hospitals is affected by factors other than average case

weight. Therefore, as we have done in past years and as discussed in

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

proposing to make a budget neutrality adjustment to assure that the

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

III. Proposed Changes to the Hospital Wage Index

A. Background

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

methodology for determining prospective payments to hospitals, the

Secretary must adjust the standardized amounts ``for area differences

in hospital wage levels by a factor (established by the Secretary)

reflecting the relative hospital wage level in the geographic area of

the hospital compared to the national average hospital wage level.'' In

accordance with the broad discretion conferred by this provision, we

currently define hospital labor market areas based on the definitions

of Metropolitan Statistical Areas (MSAs) (and New England County

Metropolitan Areas), issued by the Office of Management and Budget. In

addition, as discussed below, we adjust the wage

[[Page 27453]]

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. Furthermore, this

section 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 the

wages and wage-related costs incurred in furnishing skilled nursing

services.

B. FY 1997 Wage Index Update

The proposed FY 1997 wage index (effective for hospital discharges

occurring on or after October 1, 1996 and before October 1, 1997) is

based on the data collected from the Medicare cost reports submitted by

hospitals for cost reporting periods beginning in FY 1993 (the FY 1996

wage index is based on FY 1992 wage data). We propose to use the same

categories of data that were used in the FY 1996 wage index. Therefore,

the proposed FY 1997 wage index reflects the following:

Total salaries and hours from short-term, acute care

hospitals.

Home office costs and hours.

Fringe benefits associated with hospital and home office

salaries.

Direct patient care contract labor costs and hours.

The exclusion of salaries and hours for nonhospital type

services such as skilled nursing facility services, home health

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

prospective payment system.

Finally, we are also proposing to make a minor revision to

Sec. 412.63(s)(1) to state clearly that we update the wage index

annually as required by section 1886(d)(3)(E) of the Act.

1. Verification of Wage Data From the Medicare Cost Report

The data for the proposed FY 1997 wage index were obtained from

Worksheet S-3, Part II of the Medicare cost report. The data file used

to construct the proposed wage index includes FY 1993 data submitted to

the Hospital Cost Report Information System (HCRIS) file as of the end

of January 1996. As in past years, we performed an intensive review of

the wage data, mostly through the use of edits designed to identify

aberrant data.

Of the 5,222 hospitals in the data base, 2,814 hospitals had data

elements that failed an initial edit. In mid-February 1996,

intermediaries contacted hospitals to revise or verify data elements

that resulted in the edit failures. Next, to check any revisions since

the first edit, as well as to apply additional edits based on the

distribution of the data, we subjected all of the data to edits a

second time. The intermediaries were instructed to transmit any

revisions in hospitals' wage data made as a result of this second

review. As of March 14, 1996, only 21 hospitals still had unresolved

data elements. These unresolved data elements are included in the

calculation of the proposed FY 1997 wage index pending their resolution

before calculation of the final FY 1997 wage index. We have instructed

the intermediaries to complete their verification of questionable data

elements and to transmit any changes to the wage data (through HCRIS)

no later than June 17, 1996. We expect that all unresolved data

elements will be resolved by that date, and that the revised data will

be reflected in the final rule.

2. Computation of the Wage Index

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

Step 1--As noted above, we are proposing to base the FY 1997 wage

index on wage data reported on the FY 1993 cost reports. 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, 1992 and before October 1, 1993. In addition, we

included data from a few hospitals that had cost reporting periods

beginning in September 1992 and 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 1993 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 determine total salaries plus

fringe benefits, we added direct patient care contract labor costs,

hospital fringe benefits, and any home office salaries and fringe

benefits reported by the hospital, to the net hospital salaries.

Step 3--For each hospital, we adjusted the total salaries plus

fringe benefits resulting from Step 2 to a common period to determine

total adjusted salaries. To make the wage inflation adjustment, we used

the percentage change in average hourly earnings for each 30-day

increment from October 14, 1992 through September 15, 1994, for

hospital industry workers from Standard Industry Classification 806,

Bureau of Labor Statistics Employment and Earnings Bulletin. The annual

inflation rates used were 4.8 percent for FY 1992, 3.6 percent for FY

1993, and 2.7 percent for FY 1994. 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

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

After Before Adjustment factor

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

10/14/92............... 11/15/92 1.044482

11/14/92............... 12/15/92 1.041408

12/14/92............... 01/15/93 1.038343

01/14/93............... 02/15/93 1.035287

02/14/93............... 03/15/93 1.032240

03/14/93............... 04/15/93 1.029203

04/14/93............... 05/15/93 1.026174

05/14/93............... 06/15/93 1.023154

06/14/93............... 07/15/93 1.020143

07/14/93............... 08/15/93 1.017141

08/14/93............... 09/15/93 1.014147

09/14/93............... 10/15/93 1.011163

10/14/93............... 11/15/93 1.008920

11/14/93............... 12/15/93 1.006683

12/14/93............... 01/15/94 1.004450

01/14/94............... 02/15/94 1.002223

02/14/94............... 03/15/94 1.000000

03/14/94............... 04/15/94 0.997782

04/14/94............... 05/15/94 0.995570

05/14/94............... 06/15/94 0.993362

06/14/94............... 07/15/94 0.991159

07/14/94............... 08/15/94 0.988961

08/14/94............... 09/15/94 0.986767

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

For example, the midpoint of a cost reporting period beginning

January 1, 1993 and ending December 31, 1993 is June 30, 1993. An

inflation adjustment factor of 1.020143 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 1993 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

[[Page 27454]]

increased the net hours by the addition of any direct patient care

contract labor hours and home office hours to determine total hours.

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

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 reflected the relative wage levels in

their labor market areas during their FY 1993 cost reporting period.

Step 6--Each hospital was assigned to its appropriate urban or

rural labor market area prior to any reclassifications under sections

1886(d)(8)(B) or 1886(d)(10) of the Act. 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 $19.5094.

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.

3. 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 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, as

provided in section 1886(d)(8)(C) of the Act, the wage index values

were determined by considering the following:

If including the wage data for the redesignated hospitals

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

wage index value determined exclusive of the wage data for the

redesignated hospitals applies to the redesignated hospitals.

If including the wage data for the redesignated hospitals

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

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

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

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

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

redesignated hospitals cannot be reduced below the wage index value for

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

If including the wage data for the redesignated hospitals

increases the MSA wage index value, the MSA and the redesignated

hospitals receive the combined wage index value.

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 values

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

have been redesignated to another area have their wage indexes

calculated exclusive of the redesignated hospitals.

The wage index value for an urban area is calculated

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

another area. However, geographic reclassification may not reduce the

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

provided the wage index prior to reclassification was greater than the

Statewide rural wage index value.

A change in classification of hospitals from one area to

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

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

provision also applies to any urban area that encompasses an entire

State.

We note that, except for those rural areas where redesignation

would reduce the rural wage index value, and those urban areas whose

wage index values are already below the rural wage index and would be

reduced by redesignations, the wage index value for each area is

computed exclusive of the data for hospitals that have been

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

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

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

have been reclassified to another area by the MGCRB. These areas

receive the prereclassified wage index value. The prereclassified wage

index value will apply as long as the MSA remains empty.

The proposed revised wage index values for FY 1997 are shown in

Tables 4a, 4b, and 4c in the Addendum to this proposed rule. Hospitals

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

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

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

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

higher Statewide rural wage index value than the wage index value

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

list the average hourly wage for each labor market area, prior to the

redesignation of hospitals, based on the FY 1993 wage data. (We note

that in Tables 4a, 4c, and 4d, we have revised several of the titles

for urban areas to be consistent with OMB titles. For example, the

title for urban area 1123 is changed from Boston-Brockton-Nashua, MA-NH

to Boston-Worcester-Lawrence-Lowell-Brockton, MA-NH. These are

nomenclature changes only.) In addition, Table 3C in the Addendum to

this proposed rule includes the adjusted average hourly wage for each

hospital based on the FY 1993 data. The MGCRB will use the average

hourly wage published in the final rule to evaluate a hospital's

application for reclassification, unless that average hourly wage is

later revised in accordance with the wage data correction policy

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

most recent revised data used for purposes of the hospital wage index.

Hospitals that choose to apply before publication of the final rule can

use the proposed wage data in applying to the MGCRB for wage index

reclassifications that would be effective for FY 1998. We note that in

[[Page 27455]]

adjudicating these wage reclassification requests during FY 1997, the

MGCRB will use the average hourly wages for each hospital and labor

market area that are reflected in the final FY 1997 wage index.

At the time this proposed wage index was constructed, the MGCRB had

completed its review. The proposed FY 1997 wage index values

incorporate all 391 hospitals redesignated for purposes of the wage

index (hospitals redesignated under section 1886(d)(8)(B) or

1886(d)(10) of the Act) for FY 1997. The final number of

reclassifications may be different because some MGCRB decisions are

still under review by the Administrator and because some hospitals may

withdraw their requests for reclassification.

Any changes to the wage index that result from withdrawals of

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

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

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

wage index value for specific geographic areas, but also whether

redesignated hospitals receive the wage index value for the area to

which they are redesignated, or a wage index that includes the data for

both the hospitals already in the area and the redesignated hospitals.

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

redesignated may be affected.

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

MGCRB are permitted to withdraw their applications within 45 days of

the publication of this Federal Register document. The request for

withdrawal of an application for reclassification that would be

effective in FY 1997 must be received by the MGCRB by July 15, 1996. A

hospital that requests to withdraw its application may not later

request that the MGCRB decision be reinstated.

C. Requests for Wage Data Corrections

To allow hospitals more time to evaluate the wage data used to

construct the proposed FY 1997 hospital wage index, we have made

available to the public a diskette containing the FY 1993 hospital wage

data. In a memorandum dated March 1, 1996, we instructed all Medicare

intermediaries to inform the prospective payment hospitals they serve

that the diskette would be available approximately mid-March 1996. The

intermediaries were also instructed to advise hospitals of the

alternative availability of these data either through their

representative hospital organizations or directly from HCFA (using

order forms provided by the intermediary). Additional details on

ordering this data file are discussed below in section VIII.B of this

preamble, ``Requests for Data from the Public.''

In addition, as discussed above in section III.B.3 of this

preamble, Table 3C, in the Addendum to this proposed rule, contains

each hospital's adjusted average hourly wage used to construct the

proposed wage index values. A hospital can verify its average hourly

wage as reflected on its cost report (after taking into account any

adjustments made by the intermediary) by dividing the adjusted average

hourly wage in Table 3C by the applicable wage inflation adjustment

factors as set forth above in Step 3 of the computation of the wage

index. An updated Table 3C (along with applicable wage inflation

adjustment factors) will be included in the final rule.

We believe hospitals have had ample time to ensure the accuracy of

their FY 1993 wage data. Moreover, the ultimate responsibility for

accurately completing the cost report rests with the hospital, which

must attest to the accuracy of the data at the time the cost report is

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

believes that its FY 1993 wage data have been incorrectly reported, the

hospital must submit corrections along with complete supporting

documentation to its intermediary by May 15, 1996. To be reflected in

the final wage index, any wage data corrections must be reviewed by the

intermediary and transmitted to HCFA (through HCRIS) on or before June

17, 1996. These deadlines, which correspond to the deadlines we used

last year for the FY 1996 wage index, are necessary to allow sufficient

time to review and process the data so that the final wage index

calculation can be completed for development of the final prospective

payment rates to be published by September 1, 1996. We cannot guarantee

that corrections transmitted to HCFA after June 17, 1996, will be

reflected in the final wage index.

After reviewing requested changes submitted by hospitals,

intermediaries will transmit any revised cost reports to HCRIS and

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

If requested changes are not accepted, fiscal intermediaries will

notify hospitals in writing of reasons why the changes were not

accepted. This procedure will ensure that hospitals have every

opportunity to verify the data that will be used to construct their

wage index values. We believe that fiscal intermediaries are generally

in the best position to make evaluations regarding the appropriateness

of a particular cost and whether it should be included in the wage

index data. However, if a hospital disagrees with the intermediary's

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

effort to resolve the dispute. We note that the June 17 deadline also

applies to these requested changes.

We have created the process described above to resolve all

substantive wage data correction disputes before we finalize the wage

data for the FY 1997 payment rates. Accordingly, hospitals that do not

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

later opportunity to submit wage corrections or to dispute the

intermediary's decision with respect to requested changes.

We intend to make another diskette available in mid-August that

will contain the wage data that will be used to construct the wage

index values in the final rule. As with the diskette made available in

March 1996, HCFA will make the August diskette available to hospital

associations and the public. This August diskette, however, is being

made available only for the limited purpose of identifying any

potential errors made by HCFA or the intermediary in the entry of the

final wage data that result from the process described above, not for

the initiation of new wage data correction requests. Hospitals are

encouraged to review their hospital wage data promptly after the

release of the second diskette.

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

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

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

letter to both its fiscal intermediary and HCFA. The letters to the

intermediary and HCFA should outline why the hospital believes an error

exists. These requests must be received by HCFA and the intermediaries

no later than September 16, 1996. We have set this year's deadline one

week earlier than last year's deadline because we found the later

deadline made it difficult to evaluate the requests and recalculate the

wage index values before the start of FY 1997 (that is, October 1,

1996). Requests should be sent to: Health Care Financing

Administration; Office of Hospital Policy; Attention: Stephen Phillips,

Technical Advisor; Division of Prospective Payment System; 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.

[[Page 27456]]

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, after that

point, neither the intermediary nor HCFA will accept the following

types of requests in conjunction with this 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 17, 1996;

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 1996 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 received timely (that is, by

September 16, 1996) will be effective October 1, 1996.

Again, we believe the wage data correction process described above

provides hospitals with sufficient opportunity to bring errors made

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

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

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

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

implementation of the FY 1997 wage index on October 1, 1996. If

hospitals avail themselves of this opportunity, the wage index

implemented on October 1 should be free of such errors. Nevertheless,

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

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

circumstances.

Specifically, in accordance with Sec. 412.63(s)(2), we may make

midyear corrections to the wage index only in those limited

circumstances where a hospital can show: (1) that the intermediary or

HCFA made an error in tabulating its data, and (2) that the hospital

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

correct the error, before the beginning of FY 1997 (that is, by the

September 16, 1996 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 effective prospectively from the date the

correction is made.

D. Contract Labor--Costs Included in the Hospital Wage Index

Our policy concerning inclusion of contract labor costs for

purposes of calculating the wage index has evolved over the past

several years. Primarily, this has occurred as we recognized the role

of contract labor in meeting special personnel needs of many hospitals.

In addition, improvements in the wage data have allowed us to more

accurately identify contract labor costs and hours. As a result,

effective with the FY 1994 wage index, we included the costs of direct

patient care contract services in the wage index calculation. Effective

with the FY 1999 wage index, which will use data from FY 1995 cost

reports, we will begin to include the costs and hours of certain

management contract services.

In this proposed rule, we are soliciting comments from the public

regarding further expansion of the types of contract labor costs

included in the wage index. The following background discussion

provides a general overview of the issues related to including contract

labor costs in the wage index calculation. We also list nine specific

issues for which we are seeking public comment.

In the May 9, 1990 proposed rule (55 FR 19442), we reported the

results of the 1988 wage index survey which collected, among other

information, data on the costs and hours associated with direct patient

care contract labor. All prospective payment hospitals completed the

wage survey for their cost reporting periods ending in calendar year

1988. The survey data indicated that hospitals had difficulty in

tracking and recording the actual hours worked associated with the

contract labor. In addition, there were reporting inconsistencies. For

example, some hospitals inappropriately reported patient care services

furnished directly by physicians, which are not included in the wage

data because they are paid under Medicare Part B rather than Part A.

In the May 9, 1990 proposed rule, we also discussed public comments

we received in response to issues we raised related to including

contract labor costs in the wage index. Specifically, in the May 8,

1989 proposed rule (54 FR 19647), we requested comment on the following

issues:

Should the wage index include data on contract labor?

Should the definition of contract services in the wage

index survey be expanded to include services indirectly related to

patient care, such as billing or housekeeping services?

A majority of the commenters supported the inclusion of contract

services, and many argued for the expansion of contract labor services

to include indirect patient care services. Those opposed to including

contract services, in addition to some commenters who supported

including contract service costs, were concerned about the difficulty

of accurately tracking and recording hours worked for all types of

contract labor. Other commenters were also concerned that if a hospital

contracts for services from outside its labor market area, the contract

wages could artificially increase or decrease the hospital's area wage

index. Based on the comments and the overall poor quality of the 1988

survey data, we decided to exclude all contract labor from the FY 1991

wage index.

We stated that we would continue our analysis of contract labor. In

addition, we announced that we would develop a new wage index survey

with improved instructions and auditing criteria to facilitate the

inclusion of contract labor in future wage index updates. The new

survey, Worksheet S-3, Part II, was included in the hospital cost

report effective with cost reporting periods beginning on or after

October 1, 1989.

The Worksheet S-3, Part II consists of detailed information for use

in the hospital wage index including contract labor for direct patient

care services. In the instructions for completing this worksheet,

contract labor costs and hours were limited to labor-related payments

and hours attributable to direct patient care contract services, such

as nursing services. Specifically, we instructed hospitals to exclude

indirect patient care contract services (for example, management and

housekeeping services), nonlabor-related expenses (for example,

equipment and supplies), and any contract services for which labor-

related payments and hours could not be accurately determined.

In the September 4, 1990 final rule (55 FR 36036), we discussed

additional comments we received on the contract labor issue. Those

commenters who supported the inclusion of contract labor stated that

some hospitals, especially rural hospitals, are dependent on contract

labor for nursing services, and it would be unfair not to include these

wage data. Other commenters requested that the definition of contract

[[Page 27457]]

labor be expanded to include indirect patient care services.

We also received several comments requesting that we continue to

exclude contract labor from the wage index. These commenters stated

that the contract labor data are not reliable because of the difficulty

in tracking and reporting hours and the lack of consistency in the

reporting of contract labor. In addition, inclusion of nonlabor

contract costs would inappropriately drive up labor costs, and contract

labor brought in from outside the labor market area would artificially

increase or decrease the area wage index value. Finally, commenters

were concerned that contract labor costs are too variable, temporary,

and not reflective of true wage costs. Therefore, some suggested that

contract labor should not be included in the wage index.

The FY 1994 wage index, which was based on the data collected on

the Worksheet S-3, Part II, was the first to include direct patient

care contract labor costs. In making the decision to include these

costs, we analyzed hospitals' FY 1990 data to determine if it was

sufficiently complete for inclusion in the wage index calculation (see

the May 26, 1993 proposed rule (58 FR 30236)). We noted that, in most

labor market areas, including contract labor in the wage index

computation had little effect on the average hourly wage. We further

stated that, based on our analysis of the data, including direct

patient care contract labor would more accurately and fairly reflect

wage levels across hospitals and MSAs. In the September 1, 1993 final

rule, we also responded to comments from the hospital industry

expressing concern that we did not recognize the costs of certain

contract management services (58 FR 46296). In particular, many rural

hospitals stated they were either unable to recruit or afford top

managers such as hospital administrators and must contract for these

services.

In the September 1, 1994 final rule (59 FR 45355), we expanded the

definition of contract labor for purposes of determining the hospital

wage index to include the personnel costs and hours associated with

certain contract management personnel. Contract management services

would be limited to individuals working in the top four positions in

the hospital: the Chief Executive Officer/Hospital Administrator, Chief

Operating Officer, Chief Financial Officer, and Nursing Administrator.

We noted that while exact titles may vary, individuals should be

performing essentially the same duties as customarily assigned these

management positions.

We further noted that, since the cost report did not provide at

that time for the collection of management contract data, this revised

definition would not be effective until cost reporting periods

beginning on or after October 1, 1994 (FY 1995). Hospitals were

instructed to continue to exclude all management contract costs and

hours until the FY 1995 data were reported (these data will be used to

compute the FY 1999 wage index). In addition, we began requiring

hospitals to provide descriptions and aggregate totals for all

management contracts and complete details on all direct patient care

contracts on the Form HCFA-339 (the Provider Cost Report Reimbursement

Questionnaire). A hospital must file this form with its corresponding

cost report.

We continue to receive requests that we expand our contract labor

definition to include more types of contract services in the wage

index. In particular, we have been asked to include the costs for

pharmacy and laboratory services on the basis that these services are

consistent with our definition of direct patient care (see the

September 1, 1995 final rule (60 FR 45792)). Others have asked that we

expand our definition to include all contracted services, both direct

and indirect patient care services, in order to more appropriately

calculate relative hospital wage costs.

We have limited the contract services that are included in the wage

index to direct patient care services and specific management services

for several reasons. First, hospitals reported difficulty in accurately

tracking the hours associated with contract services, especially for

off-site facilities that serve more than one hospital. Second, we are

concerned about the contractor's ability to separate nonlabor costs

from labor costs. We believe that the generally higher costs for

contract labor compared to salaried labor, due at least in part to the

added costs of overhead and supplies not separately identified in most

contracts, may distort the wage index. Finally, we are concerned that

it is difficult to remove the costs and hours for services such as

legal and accounting from total management contracts.

Our goal is to ensure that our wage index policy continues to be

responsive to the changing need for contract labor, allowing those

hospitals that must depend on contract labor to supply needed services

to reflect those costs in their wage data. At the same time, however,

we wish to avoid providing an opportunity for hospitals to inflate

their average hourly wage inappropriately by including nonlabor

contract costs. The advantage of our approach of including only

contract labor costs and hours associated with direct patient care and

specific management services is that it minimizes distortions in the

wage index that are due to a hospital's inability to identify and

exclude nonlabor costs. While changes to the wage index values are made

in a budget neutral manner and are not expected to affect aggregate

payments, we strive for policies that are equitable for all hospitals.

Finally, due to the 4-year time lag between the cost reporting

period itself and the fiscal year when data for that period are used in

calculating the wage index, it is important that we anticipate any need

to change our policy on contract labor. Therefore, in order to

formulate the most responsive and responsible policy, we are soliciting

comments on the following issues:

To what extent do hospitals rely on the use of contract

services?

For which services are contracts typically used?

Can hospitals accurately determine hours related to

contract services?

Can hospitals accurately isolate labor-related costs from

nonlabor-related costs?

Should the contract labor definition be expanded to

include contract services indirectly related to patient care?

If contract labor remains limited to direct patient care,

what categories of services, if any, in addition to those identified

above, should be included?

Would the wage index more accurately reflect relative wage

levels if we did not limit contract labor to direct patient care

(generally high wage) services?

Would expanding the types of contract labor that are

included in the wage index provide less incentive to hospitals to keep

their labor costs low, as higher labor costs may result in a higher

wage index value for that hospital or allow it to reclassify to a labor

market with a higher wage index?

What other issues should be considered in revising the

policy for including contract labor in the wage index?

E. Puerto Rico Wage Index Values

For several years, hospitals in Puerto Rico have experienced large

swings in their wage index values. In the September 1, 1995 final rule,

we responded to two comments suggesting changes to the wage index for

hospitals in Puerto Rico (60 FR 45796). One suggestion was to establish

a floor for the wage index values of the Puerto Rico labor market areas

while the other was to eliminate the rural area classification in

Puerto Rico and classify the rural

[[Page 27458]]

hospitals to the nearest urban area. Although we did not adopt either

of these suggestions, we stated that we would continue to study the

issue of wage index values in Puerto Rico.

To evaluate the effect that these large changes in wage index

values have on hospitals in Puerto Rico, we examined the most recent

Medicare cost data for these hospitals. Of the 50 hospitals contained

in our data base, 64 percent had improved Medicare operating margins

from 1992 to 1993. Of the 26 hospitals with data available for 1994, we

found that 65 percent improved financially from 1993 to 1994. Based on

this analysis, we do not believe that the wage index changes have had a

detrimental effect on these hospitals as a group. However, there are

individual hospitals that are not faring as well.

We recognize that large shifts in the wage index values can cause

shifts in the payment levels for a particular MSA. Because three of the

six MSAs in Puerto Rico (Aguadilla, Arecibo, and Caguas) as well as the

rural area have four or fewer hospitals, a large change in one

hospital's wage data can cause a large increase or decrease in the wage

index value for the entire MSA. One possible method to limit these

annual swings in wage index values would be to create a single labor

market area encompassing all the hospitals in Puerto Rico. That is, the

six MSAs and the rural area would be combined into one area with one

wage index value. A single labor market area would create a much larger

set of hospitals to develop aggregate wage amounts and would mitigate

situations where a change in the wage data of a single hospital has a

large effect on the wage index of an MSA.

Because creating one MSA for Puerto Rico would be implemented in a

budget neutral manner, the effect would be to raise wage index values

for some hospitals in Puerto Rico and to lower the values for others.

Using the FY 1993 wage data, the following table shows the effect this

change would have on the proposed wage index levels.

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

Number of Proposed One area Percent

Area hospitals wage index wage index change

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

Rural....................................................... 4 0.4182 0.4555 8.92

Aguadilla................................................... 2 0.4430 0.4555 2.82

Arecibo..................................................... 2 0.4661 0.4555 -2.27

Caguas...................................................... 4 0.4638 0.4555 -1.79

Mayaguez.................................................... 5 0.4186 0.4555 8.82

Ponce....................................................... 7 0.4500 0.4555 1.22

San Juan.................................................... 29 0.4616 0.4555 -1.32

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

Because of the negative effects on some hospitals, we are

soliciting comment on this approach for mitigating the fluctuations in

wage index values for hospitals in Puerto Rico. The potential change

would have no impact on hospitals outside Puerto Rico.

F. Proposed Changes to the MGCRB Composition and Criteria

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

applications by hospitals for geographic reclassification for purposes

of payment under the prospective payment system. Guidelines concerning

the criteria and conditions for hospital reclassification are located

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

provide direction, to both the MGCRB and those hospitals seeking

geographic reclassification, with respect to the situations that merit

an exception to the rules governing the geographic classification of

hospitals under the prospective payment system. The composition of the

MGCRB and the procedures it follows in making reclassification

determinations are set forth in Secs. 412.246 through 412.280.

As discussed in detail below, we are proposing to make one change

to the MGCRB regulations. In addition, we are soliciting comments on

sources of data that could be used to identify the occupational mix in

a given MSA.

1. MGCRB Composition (Sec. 412.246)

Section 1886(d)(10)(B)(i) of the Act provides that the MGCRB is

composed of five members appointed by the Secretary. This provision is

implemented in regulations at Sec. 412.246(a). Two of the members must

be representative of the concerns of rural hospitals and at least one

member must be knowledgeable in the field of analyzing costs of

providing inpatient hospital services. Under current Sec. 412.246(b),

the term of office for an MGCRB member is 3 years, and appointments are

limited to two consecutive 3-year terms. This section further provides

that to permit staggered terms of office, initial appointments may be

for shorter terms. Finally, the Secretary is permitted to terminate a

member's tenure before his or her full term has expired.

Since the establishment of the MGCRB 6 years ago, we have never

modified the regulations that govern the MGCRB's composition, which

were originally modeled after the procedural regulations of the

Provider Reimbursement Review Board (PRRB). We believe that it is now

appropriate to update the regulations that govern members' terms of

office in light of agency experience.

Appointments to the Board must comply with statutory requirements

concerning rural representatives and a hospital cost expert. Since the

appointment of the initial Board, the Secretary has had difficulty

recruiting additional, qualified persons to serve on the MGCRB. In

addition, we solicited comment in the June 2, 1995 proposed rule (60 FR

29218) on the idea of eliminating the MGCRB and transferring its

functions back to HCFA. This may have caused qualified members to lose

interest in becoming or remaining Board members. We no longer believe

that there needs to be a limitation on the number of terms a member may

serve. Deleting the term limit requirement would allow for increased

flexibility in appointing and recruiting qualified Board members.

Flexibility in this area will allow the Secretary to ensure that Board

members are in place to meet the tight statutory deadlines associated

with filing and adjudicating MGCRB applications. (Under sections

1886(d)(10)(C) (ii) and (iii) of the Act, a hospital requesting a

change in geographic classification must submit its application to the

Board not later than the first day of the preceding fiscal year. Once

the application is received the Board must render a decision within 180

days.) Therefore, we are proposing to eliminate the current requirement

at Sec. 412.246(b) that a Board member can serve for only two

consecutive 3-year terms.

We also considered eliminating any requirement on the length of an

individual term. However, we believe that maintaining a term of office

not to exceed 3 years is appropriate. If we

[[Page 27459]]

deleted this requirement, then the Secretary could not periodically

reevaluate membership of the Board. We would, however, propose that a

term of office would not be limited only to a term of exactly 3 years.

Specifically, we would revise Sec. 412.246(b) to provide that an

appointment to the MGCRB may be for any term not to exceed 3 years. We

believe that both of these proposed changes would allow the Secretary

maximum flexibility to recruit and retain qualified Board members.

Under the proposed revisions, the Secretary would continue to be

able to terminate a member's tenure before his or her full term has

expired. This provision was modeled after the provisions of the PRRB

under which the Secretary has the authority to terminate a Board member

for good cause. We believe that it is appropriate for the Secretary to

be able to exercise a similar termination authority over the MGCRB in

case a member of the MGCRB fails to carry out his or her duties under

the Act and regulations. Therefore, we would retain this provision. We

note that the Secretary has not invoked this authority to date with

either the PRRB or the MGCRB.

2. Occupational Mix Adjustment

Section 1886(d)(10)(D)(i) of the Act requires the Secretary to

publish guidelines to be utilized by the MGCRB in rendering decisions

on applications submitted for geographic reclassification. Those are to

include guidelines for ``comparing wages, taking into account (to the

extent the Secretary determines appropriate) occupational mix, in the

area in which the hospital is classified and the area in which the

hospital is applying to be classified.''

Section 412.230(e) describes the criteria for hospital

reclassification for purposes of the wage index. One of the criteria

relates to the relationship between the hospital's wages and those of

the area to which it seeks reclassification. Specifically,

Sec. 412.230(e)(1)(iv) provides that the hospital must demonstrate that

its wages are at least 84 percent of the average hourly wage of

hospitals in the area to which it seeks reclassification, or that the

hospital's average hourly wage weighted for occupational mix is at

least 90 percent of the average hourly wage of hospitals in the area to

which it seeks reclassification. Under Secs. 412.232(c) and 412.234(b),

a group of hospitals seeking to reclassify must demonstrate that its

aggregate average hourly wage is at least 85 percent of the average

hourly wage of the hospitals in the area to which it seeks

reclassification. These sections also provide that the threshold for

occupational-mix adjusted hourly wage for hospital groups is the same

as that for a single hospital, that is, 90 percent.

In the September 6, 1990 interim final rule (55 FR 36760), we

stated that the acceptable sources for occupational mix data were the

American Hospital Association (AHA) or the Bureau of Labor Statistics.

Since publication of that document, the Bureau of Labor has

discontinued its hospital wage surveys. Thus, the only currently

acceptable occupational mix data source is the AHA Survey Data. We have

been informed by the AHA that the survey for 1993 will be the last

survey to collect information on the Hospital Personnel by Occupational

Category. Therefore, requests filed on or before October 1, 1996 for FY

1998 reclassification, which use FY 1993 wage data, may be the last for

which we have an appropriate source of occupational mix data.

As we stated in the June 4, 1991 final rule with comment period (56

FR 25458), the reclassification process requires the use of

occupational mix data that are comparable across areas and can be

consistently applied. We are unaware of any sources other than the AHA

data that meet these criteria.

We have not proposed collecting occupational mix data ourselves in

light of past experience. We attempted to collect such data some time

ago. In the September 30, 1988 Federal Register (53 FR 38495), we

reported on our efforts to collect 1986 occupational mix data as part

of the Medicare National Uniform Reporting Demonstration project, to

determine the feasibility of developing a wage index that would take

into account occupational mix. The majority of hospitals (more than 60

percent) failed to complete or submit the survey. A number of surveys

that were submitted were not filled out completely and appeared to have

numerous errors. Moreover, we believe that collecting occupational mix

data from hospitals would be inappropriately burdensome to the

hospitals. In the past, we have received several comments from

hospitals opposing HCFA's collection of occupational mix data (56 FR

43222), citing the prohibitive cost to hospitals of furnishing

occupational mix data. Finally, even if we were to decide now to begin

collecting occupational mix data, it would be at least 6 years before

the data would be available for use.

In order to continue to allow the use of wage data weighted by

occupational mix in wage index reclassification, we are seeking

suggestions about any occupational mix data sources that are available

on a national basis. In addition, we are willing to consider

suggestions about other methods that would account for occupational mix

in the wage index reclassification process.

IV. Rebasing and Revising of the Hospital Market Baskets

A. Operating Costs

1. Background

Effective for cost reporting periods beginning on or after July 1,

1979, we developed and adopted a hospital input price index (that is,

the hospital ``market basket'') for operating costs. Although ``market

basket'' technically describes the mix of goods and services used to

produce hospital care, this term is also commonly used to denote the

input price index (that is, cost category weights and price proxies

combined) derived from that market basket. Accordingly, the term

``market basket'' as used in this document refers to the hospital input

price index.

The percentage change in the market basket reflects the average

change in the price of goods and services hospitals purchase in order

to furnish inpatient care. We first used the market basket to adjust

hospital cost limits by an amount that reflected the average increase

in the prices of the goods and services used to furnish hospital

inpatient care. This approach linked the increase in the cost limits to

the efficient utilization of resources.

With the inception of the hospital inpatient prospective payment

system on October 1, 1983, we continued to use the hospital market

basket to update each hospital's 1981 inpatient operating cost per

discharge used in establishing the FY 1984 standardized payment

amounts. In addition, the projected change in the hospital market

basket has been the integral component of the update factor by which

the prospective payment rates are updated every year. Under section

1886(b)(3)(B)(i)(XII) of the Act, the prospective payment rates will be

updated in FY 1997 by the projected increase in the hospital market

basket minus 0.5 percentage points. A detailed explanation of the

hospital market basket used to develop the prospective payment rates

was published in the Federal Register on September 3, 1986 (51 FR

31461). For additional background information on general development of

hospital input price indexes, we refer the reader to the article by

Freeland, Anderson, and Schendler, ``National Hospital Input Price

Index,'' Health Care Financing Review, Summer 1979, pp 37-61. We also

refer the reader to the September 4, 1990 Federal Register (55 FR

35990) in which we discussed the previous

[[Page 27460]]

rebasing of the hospital input price index.

The hospital market basket is a fixed-weight, Laspeyres-type price

index that is constructed in three steps. First, a base period is

selected and total base period expenditures are estimated for mutually

exclusive and exhaustive spending categories based upon type of

expenditure. Then, the proportion of total costs that each category

represents is determined. These proportions are called cost or

expenditure weights. Second, each expenditure category is matched to an

appropriate price/wage variable, referred to as a price proxy. These

price proxies are price levels derived from a publicly available

statistical series published on a consistent schedule, preferably at

least on a quarterly basis. Third and finally, the price level for each

spending category is multiplied by the expenditure weight for that

category. The sum of these products (that is, the expenditure weights

multiplied by the price levels) for all cost categories yields the

composite index level in the market basket in a given year. Repeating

this step for other years produces a series of market basket index

levels over time. Dividing one index level by an earlier index level

produces rates of growth in the input price index.

The market basket is described as a fixed-weight index because it

answers the question of how much it would cost, at another time, to

purchase the same mix of goods and services that was purchased in the

base period. The effects on total expenditures resulting from changes

in the quantity or mix of goods and services purchased subsequent to

the base period are not considered. For example, shifting a

traditionally inpatient type of care to an outpatient setting might

affect the volume of inpatient goods and services purchased by the

hospital, but would not be factored into the price change measured by a

fixed weight hospital market basket.

We believe that it is desirable to rebase the market basket

periodically so the cost weights reflect changes in the mix of goods

and services that hospitals purchase (hospital inputs) in furnishing

inpatient care. We last rebased the hospital market basket cost weights

effective for FY 1991. This market basket, still used through FY 1996,

reflected base year data from FY 1987 in the construction of the cost

weights.

In its April 1, 1985 report to the Secretary (Appendix C of the

June 10, 1985 proposed rule (50 FR 24446)), ProPAC supported HCFA's

position on periodic rebasing, stating that the market basket cost

weights should be recalculated or ``rebased'' at least every 5 years,

or more frequently if significant changes in the weights occur. We note

that there are separate market baskets for prospective payment

hospitals and hospitals and hospital units excluded from the

prospective payment system. The separate, excluded hospital market

basket is set forth in section IV.A.5 of this preamble.

2. Rebasing and Revising the Hospital Market Basket

The terms rebasing and revising, while often used interchangeably,

actually denote different activities. Rebasing means moving the base

year for the structure of costs of an input price index (for example,

we are proposing to move the base year cost structure from FY 1987 to

FY 1992). Revising means changing data sources, cost categories, or

price proxies used in the input price index.

We are proposing to use a rebased and revised hospital market

basket in developing the FY 1997 update factor for the prospective

payment rates. The new market basket would be rebased to reflect 1992,

rather than 1987, cost data.

In developing the rebased and revised market basket, we reviewed

hospital operating expenditure data for the market basket cost

categories. In a change from previous methodology, we are relying

primarily on Medicare hospital cost report data for the proposed

rebasing. For the proposed market baskets, we used data on hospital

expenditures for four major expense categories (wages and salaries,

employee benefits, pharmaceuticals, and a residual ``all other'') from

hospital cost reporting periods beginning in FY 1992 (that is, periods

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

refer to these as PPS-9 cost reports (the 9th year of the prospective

payment system (PPS)). The market basket was previously based on 1987

expense data from the 1988 American Hospital Association (AHA) Annual

Survey.

Expenses for wages and salaries, employee benefits, and

pharmaceuticals were determined using data from PPS-9 cost reports as

reported in the Hospital Cost Report Information System (HCRIS) files.

We determined total professional fees using AHA Annual Survey data.

Total professional fees include medical and nonmedical professional

fees. Since the medical professional fees included in the compensation

of provider-based physicians is paid under Medicare Part B, we analyzed

HCRIS data to determine the professional component of provider-based

physician compensation and subtracted it from total professional fees

to obtain an estimate of nonmedical professional fees. Malpractice

insurance costs were determined using the cost share for PPS-6 (cost

reporting periods beginning in FY 1989), the last year these costs had

to be treated separately from all other administrative and general

costs, trended forward to 1992 based on the relative importance of

malpractice costs found in the previous market basket. The All Other

Expenses category was calculated in two steps. First, from PPS-9 cost

reports, total operating expenses were tabulated by subtracting

capital-related expenses, direct medical education expenses, and the

medical professional fees from total expenses. Second, we subtracted

the total of the five cost category expenses already determined from

total operating expenses to obtain the All Other Expenses category.

After totals for these main cost categories (wages and salaries,

employee benefits, professional fees, pharmaceuticals, malpractice

insurance, and all other expenses) were calculated, we then determined

the proportion each category represents of the total costs. These

proportions represent the major rebased market basket weights. The

differences between the six major categories for the proposed 1992-

based index and the previous 1987-based index are summarized in Table 1

below.

Table 1.--Comparison of 1992 and 1987 Prospective Payment Hospital

Operating Cost Categories and Weights

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

Rebased 1992 1987-based

Expense categories hospital hospital

market basket market basket

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

Wages and Salaries...................... 50.244 52.2

Employee Benefits....................... 11.146 9.5

Nonmedical Professional Fees............ 2.127 1.6

[[Page 27461]]

Malpractice Insurance................... 1.189 1.4

Pharmaceuticals......................... 4.162 3.9

All Other............................... 31.132 31.4

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

Total............................... 100.000 100.0

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

Note: Although we rounded the weights to the tenths decimal position in

the 1987-based market basket as published in the September 4, 1990

final rule, we are presenting the 1992 weights in greater specificity.

Table 2 sets forth the proposed market basket cost categories,

weights, and price proxies. Weights for the ``Utilities'' and the ``All

Other'' cost categories, as well as the subcategories, were determined

using the 1987 Department of Commerce's Bureau of Economic Analysis

(BEA) Input-Output Table, from which data for the hospital industry

were extracted. The BEA Input-Output database, which is updated at 5-

year intervals, was most recently described in the Survey of Current

Business, ``Benchmark Input-Output Accounts for the U.S. Economy,

1987'' (April 1994). We anticipate that the Department of Commerce will

soon release 1992 cost data for use in determining the cost weights. If

the data are released in time to be analyzed, we will use them in the

final market basket for more refined estimates of cost expenditure

weights.

We aged the 1987 cost shares to 1992 using historical price changes

between 1987 and 1992 for each category. The aged shares were

normalized to be consistent with the 1992 hospital cost report data.

Relative weights for the new base year were then calculated for various

expenditure categories. This work resulted in the identification of 26

separate cost categories in the rebased hospital market basket, two

fewer categories than were included in the 1987-based market basket.

Detailed descriptions of each category and respective price proxy are

provided in Appendix C to this proposed rule.

Table 2.--Proposed 1992-Based Prospective Payment Hospital Operating Cost Categories, Weights, and Price Proxies

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

Rebased

1992

Expense categories hospital Price proxy

market

basket

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

1. Compensation............................. 61.390 .....................................................

A. Wages and Salaries\1\................ 50.244 HCFA Occupational Wage Index.

B. Employee Benefits\1\................. 11.146 HCFA Occupational Benefits Index.

2. Professional Fees\1\..................... 2.127 ECI--Compensation for Professional, Specialty &

Technical.

3. Utilities................................ 2.469 .....................................................

A. Fuel, Oil, and Gasoline.............. 0.345 PPI Refined Petroleum Products.

B. Electricity.......................... 1.349 PPI Commercial Electric Power.

C. Natural Gas.......................... 0.670 PPI Commercial Natural Gas.

D. Water and Sewerage................... 0.106 CPI-U Water & Sewerage Maintenance.

4. Professional Liability Insurance......... 1.189 HCFA Professional Liability Insurance Premium Index.

5. All Other................................ 32.824 .....................................................

A. All Other Products................... 24.033 .....................................................

(1.) Pharmaceuticals................ 4.162 PPI Ethical (Prescription) Drugs.

(2.) Food........................... 3.459 .....................................................

a. Direct Purchase.............. 2.363 PPI Processed Foods & Feeds.

b. Contract Service............. 1.096 CPI-U Food Away From Home.

(3.) Chemicals...................... 3.795 PPI Industrial Chemicals.

(4.) Medical Instruments............ 3.128 PPI Medical Instruments & Equipment.

(5.) Photographic Supplies.......... 0.399 PPI Photographic Supplies.

(6.) Rubber and Plastics............ 4.868 PPI Rubber & Plastic Products.

(7.) Paper Products................. 2.062 PPI Converted Paper & Paperboard Products.

(8.) Apparel........................ 0.875 PPI Apparel.

(9.) Machinery and Equipment........ 0.211 PPI Machinery & Equipment.

(10.) Miscellaneous Products........ 1.074 PPI Finished Goods.

B. All Other Services................... 8.792 .....................................................

(1.) Business Services\1\........... 3.823 ECI--Compensation for Private Workers in Business

Services.

(2.) Computer Services\1\........... 1.927 AHE Computer & Data Processing Services.

(3.) Transportation Services........ 0.188 CPI-U Transportation.

(4.) Telephone Services............. 0.531 CPI-U Telephone Services.

(5.) Postage\1\..................... 0.272 CPI-U Postage.

(6.) All Other: Labor Intensive*.... 1.707 ECI--Compensation for Private Service Occupations.

(7.) All Other: Nonlabor Intensive.. 0.344 CPI-U All Items.

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

Total.......................... 100.000

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

\1\ Labor-related.

Note: Due to rounding, weights may not sum to total.

[[Page 27462]]

The 1987-based market basket included a separate Blood Services

cost category. In the 1992-based market basket, Blood Services is

contained within the Chemicals cost category. In addition, the 1987-

based cost category for Fuel Oil, Coal, etc. has been combined with the

1987-based Motor Gasoline cost category to form the 1992-based Fuel,

Oil and Gasoline cost category. Both of these changes are based on

revised cost categories from BEA. For comparison purposes, the 1987-

based cost categories are set forth in Table 3.

Table 3.--1987-Based Prospective Payment Hospital Operating Cost Categories, Weights, and Price Proxies

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

1987

hospital

Expense categories market Price proxy

basket

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

1. Compensation............................. 61.7 .....................................................

A. Wages and Salaries1.................. 52.2 HCFA Occupational Wage Index.

B. Employee Benefits1................... 9.5 HCFA Occupational Benefits Index.

2. Professional Fees1....................... 1.6 ECI--Wages & Salaries for Professional, Specialty &

Technical.

3. Utilities................................ 2.4 .....................................................

A. Fuel, Oil, Coal, etc................. 0.6 WPI Light Fuel Oils.

B. Electricity.......................... 1.1 WPI Industrial Power.

C. Natural Gas.......................... 0.3 WPI Natural Gas.

D. Motor Gasoline....................... 0.2 WPI Gasoline.

E. Water and Sewerage................... 0.0 CPI-U Water & Sewerage Maintenance.

4. Professional Liability Insurance......... 1.4 HCFA Professional Liability Insurance Premiums.

5. All Other................................ 32.8 .....................................................

A. All Other Products................... 21.8 .....................................................

(1.)Pharmaceuticals................. 3.9 WPI Prescription Drugs.

(2.) Food........................... 3.3 .....................................................

a. Direct Purchase.............. 2.1 WPI Processed Foods.

b. Contract Service............. 1.2 CPI-U Food Away From Home.

(3.) Chemicals...................... 3.1 WPI Industrial Chemicals.

(4.) Medical Instruments............ 2.7 WPI Medical Instruments & Equipment.

(5.) Photographic Supplies.......... 2.6 WPI Photographic Supplies.

(6.) Rubber and Plastics............ 2.3 WPI Rubber & Plastic Products.

(7.) Paper Products................. 1.4 PPI Converted Paper & Paperboard Products.

(8.) Apparel........................ 1.1 WPI Textile House furnishings.

(9.) Machinery and Equipment........ 0.4 WPI Machinery & Equipment.

(10.) Miscellaneous Products........ 0.8 WPI Finished Goods.

B. All Other Services................... 11.1 .....................................................

(1.) Business Services1............. 3.8 AHE Business Services.

(2.) Computer Services1............. 2.0 AHE Computer & Data Processing Services.

(3.)Transportation Services......... 1.2 CPI-U Transportation.

(4.) Telephone Services............. 1.0 CPI-U Telephone Services.

(5.) Blood Services1................ 0.6 WPI Blood & Derivatives.

(6.) Postage1....................... 0.4 CPI-U Postage.

(7.) All Other: Labor Intensive1.... 1.2 ECI--Wages and Salaries for Private Service

Occupations.

(8.) All Other: Nonlabor Intensive.. 0.8 CPI-U All Items.

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

Total........................... 100.0

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

\1\ Labor-related.

Note: Due to rounding, weights may not sum to total.

In the September 4, 1990 final rule, for purposes of determining

the labor-related portion of the standardized amounts, we summed the

percentages of the labor-related items (that is, wages and salaries,

employee benefits, professional fees, business services, computer and

data processing, blood services, postage, and all other labor-intensive

services) in the hospital market basket. This summation resulted in a

labor-related portion of the hospital market basket of 71.4 percent and

nonlabor-related portion of 28.6 percent. Under sections 1886 (d)(2)(H)

and (d)(3)(E) of the Act, in making payments under the prospective

payment system, the Secretary estimates from time to time the

proportion of payments that are labor-related. Since October 1, 1990,

then, we have considered 71.4 percent of costs to be labor-related for

purposes of the prospective payment system.

In connection with the rebasing of the hospital market basket, we

have re-estimated the labor-related share of the standardized amounts.

Based on the relative weights described in Table 2, the labor-related

portion that is subject to hospital wage index adjustments (based on

wages and salaries, employee benefits, professional fees, business

services, computer and data processing, postage, and all other labor-

intensive services) is 71.246 percent and the nonlabor-related portion

is 28.754 percent. To implement this change, effective with discharges

occurring on or after October 1, 1996, we are proposing to recompute

the labor-related and nonlabor-related shares of the large urban and

other areas' standardized amounts used to establish the prospective

payment rates.

The amounts in Table 4 reflect the revised labor-related and

nonlabor-related portions. Due to the Bureau of Economic Analysis'

reclassification of Blood Services to Chemicals, we now allocate Blood

Services to a nonlabor cost category. We note that, although there are

revisions of the labor and nonlabor portions, due to both weight

changes and the Blood Services category change, the labor-related

portions of the rates published in Table 4 have remained essentially

the same. The

[[Page 27463]]

labor-related portion has decreased by 0.146 percentage points.

Table 4.--Labor-Related Share

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

Cost category Weight

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

Wages and Salaries............................................ 50.244

Employee Benefits............................................. 11.146

Professional Fees............................................. 2.127

Business Services............................................. 3.823

Computer Services............................................. 1.927

Postal Services............................................... 0.272

All Other Labor Intensive..................................... 1.707

---------

Total Labor-Related....................................... 71.246

---------

Total Nonlabor Related.................................... 28.754

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

3. Selection of Price Proxies

After computing the 1992 cost weights for the rebased hospital

market basket, it is necessary to select appropriate wage and price

proxies to monitor the rate of increase for each expenditure category.

Most of the indicators are based on Bureau of Labor Statistics (BLS)

data and are grouped into one of the following BLS categories:

Producer Price Indexes--Producer Price Indexes (PPIs)

measure price changes for goods sold in other than retail markets. For

example, we used the PPI for ethical drugs, rather than the Consumer

Price Index (CPI) for prescription drugs. PPIs are preferable price

proxies for goods that hospitals purchase as inputs in producing their

outputs. The PPIs we used measure price change at the final stage of

production.

Consumer Price Indexes--Consumer Price Indexes (CPIs)

measure change in the prices of final goods and services bought by the

typical consumer. Because they may not represent the price faced by the

producer, the consumer price indexes were used if no appropriate PPI

was available, or if the expenditure was more similar to that of retail

consumers in general rather than a purchase at the wholesale level. For

example, the CPI for food purchased away from home was used as a proxy

for contracted food services.

Employment Cost Indexes--Employment Cost Indexes (ECIs)

measure the rate of change in employee wage rates and employer costs

for employee benefits per hour worked. These indexes are fixed-weight

indexes and strictly measure the change in wage rates and employee

benefits per hour. They are not affected by shifts in employment mix.

Average Hourly Earnings--Average Hourly Earnings (AHEs)

measure the rate of change of hourly earnings for various occupations

within a given industry, and, therefore, reflect a weighted

occupational mix within a particular industry. The AHE series is

calculated by dividing gross payrolls by total hours and measures

actual earnings rather than pure wage rates. It is a current-weight

series rather than a fixed-weight index and thus reflects shifts in

employment mix. An AHE rather than an ECI is used when there is no

corresponding ECI category that is an appropriate measure of growth for

a given labor category or when the ECI does not have sufficient length

of history to be useful for our purpose.

Our proposed price proxies for the rebased prospective payment

hospital market basket are shown in Table 2 above and are summarized in

Appendix C to this proposed rule.

4. The HCFA Blended Compensation Index

Compensation includes the two largest categories of the rebased

hospital market basket. Wages and salaries account for 50.244 percent

and employee benefits account for 11.146 percent of the total weight in

the prospective payment hospital market basket.

The proposed HCFA Blended Compensation Index groups hospital

occupations into nine broad categories. For eight of those occupational

groups, we believe that hospitals compete for labor generally with

employers outside the health care sector. Accordingly, we use economy-

wide employment cost indexes (ECI) as price proxies for these eight

occupational groups. In the case of compensation for nurses, as well as

for certain other health care technicians and professionals, the

hospital labor market may be predominant. However, hospitals do compete

with other industries to obtain certain skilled professional and

technical staff (for example, computer programmers). Therefore, for

professional and technical workers, we believe a price proxy that

reflects an equal blend of internal and external compensation variables

is appropriate.

Similar to the methodology used for the previous rebasing, the

weights for the nine cost categories in the occupational blend index

were derived from the 1992 Current Population Survey (CPS) produced by

BLS. Using the CPS, private hospital workers were classified into the

nine occupational categories. Private hospitals better reflect the mix

of occupations used to produce acute care services for the prospective

payment hospital input price index. Government hospitals were excluded

because their occupational mix reflects the subset of nonacute care

hospitals. Once private hospital workers were sorted by occupation into

one of the nine occupational groups, weights were estimated using the

share of wages and salaries for each of the nine occupations. These

shares formed the basis of the weights that were used for the market

basket of occupational categories.

An additional adjustment was made for contract labor costs. Rather

than treat contract labor as a distinct noncompensation cost category,

it was integrated into the occupational blend as a component of

hospitals' compensation costs for purposes of the market basket index.

Thus, contract labor is treated the same as other labor expenses.

Contract labor was allocated to the professional and technical and

service occupation categories. After adjusting the professional and

technical and service workers' shares to account for contract labor,

the weights for the nine occupational blend categories were

renormalized to equal 100.00 percent. The weights and proxies for the

nine cost categories of the HCFA Blended Wages and Salaries Index are

shown in Table 5.

Table 5.--HCFA Blended Wages and Salaries Index (Wages and Salaries Component of the 1992-Based Market Basket)

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

Cost category Weight Price proxy

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

Professional and Technical.............................................. 65.729 Equal blend of ECI for

wages and salaries of

civilian hospital workers

and ECI for wages and

salaries of professional,

specialty and technical

workers.

Managers and Administrators............................................. 9.554 ECI for wages and salaries

for executive,

administrative and

managerial workers.

Sales................................................................... 0.402 ECI for wages and salaries

for sales workers.

Clerical Workers........................................................ 12.379 ECI for wages and salaries

for administrative support

including clerical

workers.

Craft and Kindred....................................................... 1.689 ECI for wages and salaries

for precision production,

craft and repair workers.

[[Page 27464]]

Operatives Except Transport............................................. 0.437 ECI for wages and salaries

for machine operators,

assemblers and inspectors.

Transport Equipment Operatives.......................................... 0.122 ECI for wages and salaries

for transportation and

material moving workers.

Nonfarm Laborers........................................................ 0.084 ECI for wages and salaries

for handlers, equipment

cleaners, helpers and

laborers.

Service Workers......................................................... 9.606 ECI for wages and salaries

for service occupations.

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

Total Wages and Salaries................................................ 100.000 Total Weight for Wages and

Salaries is 50.2.

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

Note: Due to rounding, weights may not sum to total.

5. Separate Market Basket for Hospitals and Hospital Units Excluded

From the Prospective Payment System

In its March 1, 1990 report, ProPAC recommended that we establish a

separate market basket for hospitals and hospital units excluded from

the prospective payment system. Effective with FY 1991, HCFA adopted

ProPAC's recommendation to implement separate market baskets. (See the

September 4, 1990 final rule (55 FR 36044).) Prospective payment and

excluded hospitals tend to have different case mixes, practice

patterns, and composition of inputs. The fact that these hospitals are

not included under the prospective payment system in part reflects

these differences.

Studies completed by HCFA, ProPAC, and the hospital industry have

documented different weights for excluded hospitals and prospective

payment hospitals. Table 7 compares major weights in the rebased 1992

market basket for excluded hospitals with weights in the rebased 1992

market basket for prospective payment system hospitals. Wages and

salaries are 52.152 percent of total operating costs for excluded

hospitals compared to 50.244 percent for prospective payment hospitals.

Employee benefits are 11.569 percent for excluded hospitals compared to

11.146 percent for prospective payment hospitals. As a result,

compensation costs (wages and salaries plus employee benefits) for

excluded hospitals are 63.721 percent of costs compared to 61.390

percent for prospective payment hospitals. Noncompensation costs are

36.279 percent for excluded hospitals and 38.610 of costs for

prospective payment hospitals.

Two significant differences in the category weights occur in

Pharmaceuticals and Business Services. Pharmaceuticals represent 4.162

percent of costs for prospective payment hospitals and 3.070 percent

for excluded hospitals. Business services represent 3.823 percent of

costs for prospective payment hospitals and 2.337 percent for excluded

hospitals. The weights for the excluded hospital market basket were

derived using the same data sources and methods as for the prospective

payment market basket (see Appendix C to this proposed rule).

Differences in weights between the proposed excluded hospital and

prospective payment hospital market baskets do not necessarily lead to

significant differences in the rate of price growth for the two market

baskets. If the individual wages and prices move at the approximately

same annual rate, both market baskets may have about the same price

growth even though weights may differ substantially because both market

baskets use the same wages and prices. Also, offsetting price increases

for various cost components can result in similar composite price

growth in both market baskets.

The wage and price proxies are the same for the excluded hospital

and prospective payment hospital market baskets. As discussed in

section IV.A.2 of this preamble, all of the cost expenditure weights

for both the prospective payment and excluded hospital market baskets

are subject to refinement if the U.S. Department of Commerce data are

released in time to be analyzed and incorporated in the final market

basket.

The excluded hospital market basket is a composite set of weights

for Medicare participating psychiatric, long-term care, rehabilitation,

and children's hospitals. We are proposing to use cost report data for

excluded hospitals and units whose Medicare average length of stay is

within 15 percent (that is, 15 percent higher or lower) of the total

facility average length of stay. This is a change from the 1987-based

market basket, for which data for all excluded hospitals and units were

used. We believe that limiting our sample to hospitals with a Medicare

average length of stay within 15 percent of the total facility average

length of stay provides a more accurate reflection of the structure of

costs for Medicare. We note that the proposed forecast for FY 1997

would be the same even if we had included all excluded hospitals in the

calculation of weights. The forecast for both the limited and full set

of excluded hospitals yields a rate of change for FY 1997 of 2.7

percent.

Table 6.--Comparison of Significant Weights for 1992-Based Excluded

Hospital and Prospective Payment Hospital Market Baskets

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

Prospective

Category Excluded payment

hospitals hospitals

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

Wages and Salaries............................ 52.152 50.244

Employee Benefits............................. 11.569 11.146

Professional Fees............................. 2.098 2.127

Pharmaceuticals............................... 3.070 4.162

All Other..................................... 31.111 32.321

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

Total..................................... 100.000 100.000

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

[[Page 27465]]

Table 7.--Proposed 1992-Based Excluded Hospital Operating Cost Categories, Weights, and Price Proxies

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

Rebased

1992

excluded

Expense categories hospital Price proxy

market

basket

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

1. Compensation............................................................ 63.721

A. Wages and Salaries.................................................. 52.152 HCFA Occupational Wage

Index.

B. Employee Benefits................................................... 11.569 HCFA Occupational

Benefits Index.

2. Professional Fees....................................................... 2.098 ECI--Compensation for

Professional, Specialty

& Technical.

3. Utilities............................................................... 2.557

A. Fuel, Oil, and Gasoline............................................. 0.357 PPI Refined Petroleum

Products.

B. Electricity......................................................... 1.396 PPI Commercial Electric

Power.

C. Natural Gas......................................................... 0.694 PPI Commercial Natural

Gas.

D. Water and Sewerage.................................................. 0.110 CPI-U Water & Sewerage

Maintenance.

4. Professional Liability Insurance........................................ 1.081 HCFA Professional

Liability Insurance

Premiums Index.

5. All Other............................................................... 30.543

A. All Other Products.................................................. 23.642

(1.) Pharmaceuticals............................................... 3.070 PPI Ethical

(Prescription) Drugs.

(2.) Food.......................................................... 3.581

a. Direct Purchase............................................. 2.446 PPI Processed Foods &

Feeds.

b. Contract Service............................................ 1.135 CPI-U Food Away From

Home.

(3.) Chemicals..................................................... 3.929 PPI Industrial

Chemicals.

(4.) Medical Instruments........................................... 3.238 PPI Medical Instruments

& Equipment.

(5.) Photographic Supplies......................................... 0.413 PPI Photographic

Supplies.

(6.) Rubber and Plastics........................................... 5.039 PPI Rubber & Plastic

Products.

(7.) Paper Products................................................ 2.134 PPI Converted Paper &

Paperboard Products.

(8.) Apparel....................................................... 0.906 PPI Apparel.

(9.) Machinery and Equipment....................................... 0.218 PPI Machinery &

Equipment.

(10.) Miscellaneous Products....................................... 1.112 PPI Finished Goods.

B. All Other Services.................................................. 6.901

(1.) Business Services............................................. 2.337 ECI--Compensation for

Private Workers in

Business Services.

(2.) Computer Services............................................. 1.415 AHE Computer & Data

Processing Services.

(3.) Transportation Services....................................... 0.195 CPI-U Transportation.

(4.) Telephone Services............................................ 0.549 CPI-U Telephone

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