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

SUMMARY: We are revising the Medicare hospital inpatient prospective

payment systems for operating costs and capital- related costs to

implement necessary changes arising from our continuing experience with

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

describing changes in the amounts and factors necessary to determine

prospective payment rates for Medicare hospital inpatient services for

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

to discharges occurring on or after October 1, 1996. We are also

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

hospitals and hospital units excluded from the prospective payment

systems.

EFFECTIVE DATE: This rule is a major rule as defined in Title 5, United

States Code, section 804(2). Pursuant to 5 U.S.C. section 801(a)(3),

this rule may not take effect until 60 days after the report required

by that section is submitted to the Congress, which is October 29,

1996. However, for purposes of the policy discussions in this document,

we have assumed that the effective date of this final rule will be

October 1, 1996, the earliest date by which this rule could take effect

under 5 U.S.C. section 801 and the Medicare statute.

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

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

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

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

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

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

calling the order desk at (202) 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, Direct

Graduate Medical Education, 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.

For cost reporting periods beginning before October 1, 1991,

hospital inpatient operating costs were the only costs covered under

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

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

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

from the definition of inpatient operating costs. However, section

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

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

hospitals paid under the prospective payment system for operating

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

payment system effective with cost reporting periods beginning on or

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

replaced the reasonable cost-based payment methodology with a

prospective payment methodology for hospital inpatient capital-related

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

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

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

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

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

system for hospital inpatient capital-related costs.)

B. Major Contents of the Provisions of the May 31, 1996 Proposed Rule

On May 31, 1996, we published a proposed rule in the Federal

Register (61 FR 27444) setting forth proposed changes to the Medicare

hospital inpatient prospective payment systems for both operating costs

and capital-related costs which would be effective for discharges

occurring on or after October 1, 1996. The following is a summary of

the major issues addressed and changes that we proposed to make:

We proposed changes for FY 1997 DRG classifications and

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

Act.

We proposed to update the wage index for FY 1997. We also

solicited comments on the possible expansion of the types of contract

labor costs included in the wage index and on possible revisions in

Puerto Rico labor market areas.

We proposed revisions to the regulations governing the

composition of the Medicare Geographic Classification Review Board

(MGCRB).

We proposed 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.

We discussed several provisions of the regulations in 42

CFR parts 412, 413, and 489 and set forth proposed changes concerning

the following:

--Sole community hospitals.

--Rural referral centers.

--Disproportionate share adjustment.

--Direct graduate medical education payments.

--Hospital distribution of ``An Important Message from Medicare.''

We discussed several provisions of the regulations in 42

CFR part 412 concerning the prospective payment system for capital-

related costs, including possible adjustments to the capital Federal

and hospital-specific rates, and set forth a proposed change concerning

the use of simplified cost accounting.

We discussed clarifications concerning the calculation of

payments to hospitals excluded from the prospective payment system.

In the addendum to the proposed rule, we set forth

proposed changes to the amounts and factors for determining

[[Page 46167]]

the FY 1997 prospective payment rates for operating costs and capital-

related costs. We also proposed new update factors for determining the

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

for hospitals and hospital units excluded from the prospective payment

system.

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

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

entities.

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

technical appendix on the proposed FY 1997 capital acquisition model.

In Appendix C to the proposed rule, we set forth the data

sources used to determine the market basket relative weights and choice

of price proxies.

In Appendix D to the proposed rule, we included our 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 as required by section 1886(e)(3)(B) of the Act.

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

in Appendix E we provided 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.

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

1996 recommendations made by the Prospective Payment Assessment

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

Act to make recommendations on the appropriate percentage change factor

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

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

regarding changes in each of the Medicare payment policies under which

payments to an institution are prospectively determined. In particular,

the recommendations relating to the hospital inpatient prospective

payment systems are to include recommendations concerning the number of

DRGs used to classify patients, adjustments to the DRGs to reflect

severity of illness, and changes in the methods under which hospitals

are paid for capital-related costs. Under section 1886(e)(3)(A) of the

Act, the recommendations required of ProPAC under sections 1886(e)(2)

(A) and (B) of the Act are to be reported to Congress not later than

March 1 of each year.

We printed ProPAC's March 1, 1996 report, which included its

recommendations, as Appendix F to the proposed rule. The

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

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

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

to the proposed rule.

Set forth below in this preamble, the addendum to this final rule,

and the appendices are detailed discussions of the May 31 proposed

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

and the responses to those comments, as well as the changes we are

making. In addition, in section V.E.3 of this preamble, we address a

recent statutory amendment to the Public Health Service Act that

prohibits certain abortion-related discrimination by the Federal

Government and State and local governments. The new statutory provision

requires the Federal Government to deem accredited for certain purposes

any postgraduate physician training program that would otherwise be

accredited, except for the accrediting agency's reliance on certain

standards concerning induced abortions.

C. Public Comments Received in Response to the May 31 Proposed Rule

A total of 511 items of correspondence containing comments on the

proposed rule were received timely. We received over 300 letters on

payments for direct graduate medical education programs. The main other

areas of concern addressed by the commenters were the following:

Requests for changes in DRG classification and relative

weights.

Issues related to the wage index.

Disproportionate share adjustment.

Possible adjustments to the capital Federal and hospital-

specific rates.

II. Changes to DRG Classifications and Relative Weights

A. Background

Under the prospective payment system, we pay for inpatient hospital

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

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

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

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

is assigned. Each DRG weight represents the average resources required

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

resources used to treat cases in all DRGs.

Congress recognized that it would be necessary to recalculate the

DRG relative weights periodically to account for changes in resource

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

that the Secretary adjust the DRG classifications and relative weights

annually. These adjustments are made to reflect changes in treatment

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

relative use of hospital resources. The changes to the DRG

classification system and the recalibration of the DRG weights for

discharges occurring on or after October 1, 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

[[Page 46168]]

classification changes and to recalibrate the DRG weights.

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

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

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

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

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

In general, principal diagnosis determines MDC assignment. However,

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

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

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

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

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

before classification to an MDC.

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

on a surgical hierarchy that orders individual procedures or groups of

procedures by resource intensity) and medical DRGs. Medical DRGs

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

surgical and medical DRGs are further differentiated based on the

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

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

nonsurgical procedures or minor surgical procedures generally not

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

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

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

diagnoses, such as extracorporeal shock wave lithotripsy for patients

with a principal diagnosis of urinary stones.

We proposed to make several changes to the DRG classification

system for FY 1997 and other decisions concerning DRGs. These proposed

changes and other revisions, the comments we received concerning them,

our responses to those comments, and the final DRG changes 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. 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.

Because we could not separately identify the stem cell transplant cases

from the other cases coded with 99.73 (the code previously used for

stem cell transplant) 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 MedPAR file is available for use in DRG

analysis and weight setting for FY 1997. Since the average resource use

associated with stem cell transplant is similar to that associated with

bone marrow transplant, we proposed to assign procedure code 41.04 to

DRG 481 effective with discharges occurring on or after October 1,

1996. In addition, we proposed to designate stem cell transplant as an

OR procedure. In the proposed rule, we noted that, 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).

We received five comments supporting our proposal to assign

procedure code 41.04 to DRG 481, and we will include this change in the

final DRG classifications. Two other commenters had specific questions

concerning the assignment of cases to DRG 481.

Comment: One commenter questioned the DRG assignment of cases in

which an autologous hematopoietic stem cell transplant is performed for

one of the noncovered conditions such as acute leukemia not in

remission or multiple myeloma. The commenter is unsure whether those

cases would be assigned to DRG 481 or retain their current DRG

assignment.

Response: When a stem cell transplant is performed for a noncovered

condition, the case will not be assigned to DRG 481. If the only reason

that the patient is admitted to the hospital is to receive the

noncovered procedure, then the case receives no Medicare payment

because the hospital stay is not covered. If a patient receives a

noncovered stem cell transplant during an otherwise Medicare-covered

stay, then the case is assigned to a DRG based on the patient's

principal and secondary diagnoses as well as any other covered

procedure the patient receives. The stem cell transplant will not be

considered in the DRG assignment.

Comment: One commenter was concerned about the assignment of a case

in which a kidney transplant patient receives an allogeneic bone marrow

transplant (procedure code 41.03) from the kidney donor to reduce the

incidence and magnitude of organ rejection. The commenter believes it

is inappropriate to assign such a case to DRG 481 rather than DRG 302

(Kidney Transplant) and that we should therefore revise the pre-MDC

surgical hierarchy.

Response: Allogeneic bone marrow transplants performed for purposes

of reducing rejection during a kidney transplant have not yet been

subject to a national coverage decision. Therefore, under HCFA policy,

the Medicare contractors (Part A fiscal intermediaries and Part B

carriers) determine, on a case-by-case basis, whether or not to cover

and pay for such claims. If a contractor did decide that one of these

claims should be covered, then it would be paid under DRG 481. If the

contractor determines that the bone marrow transplant is not covered,

the claim would be assigned to a DRG without considering the bone

marrow transplant. In most cases, this assignment would be DRG 302.

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

a. Sleep apnea. As discussed in the proposed rule, 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.

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

\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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[[Page 46169]]

Recently, new surgical interventions to correct sleep apnea have

been introduced. The procedures most frequently performed for this

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

condition are the following:

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

Code 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) or to DRG

477 (Nonextensive OR Procedure Unrelated to Principal Diagnosis),

depending on the procedure.

We proposed 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 proposed to include them in DRGs 7 and

8 (Peripheral and Cranial Nerve and Other Nervous System Procedures).

We received two comments in support of the addition of codes 27.69,

29.4 and 29.59 to DRGS 7 and 8. The commenters agree that these

procedures are frequently used as surgical interventions to correct

sleep apnea and are appropriately classified to DRGs 7 and 8. We also

received two comments that disagreed, as discussed below.

Comment: One commenter was opposed to moving the procedure codes to

DRGS 7 and 8. The commenter stated that if the patient had obstructive

sleep apnea, the more appropriate diagnosis code would be the

underlying cause of the obstruction, such as upper airway blockage

(diagnosis code 528.9, Other and Unspecified Diseases of the Oral Soft

Tissues) or diagnosis code 478.29, Other Diseases of Pharynx for

Redundant Pharyngeal Mucosa.

Response: We agree that if the medical record provides a precise

diagnosis for the obstruction, then that condition should be coded.

However, information supporting these codes is not always provided in

the medical record. Physicians frequently document obstructive sleep

apnea as the reason for the surgery. In these cases, medical record

coders are assigning code 780.57. As explained above, we believe that

it is inappropriate to continue to assign these cases to DRGS 468 and

477 and that the better policy is to assign the procedures to MDC 1.

Comment: We received one comment suggesting that obstructive sleep

apnea reported in conjunction with procedure codes 27.69, 29.4, or

29.59 would be more appropriately classified to DRGs 76 and 77 (Other

Respiratory System Procedures) in MDC 4 (Diseases of the Respiratory

System). In addition, the commenter recommended that obstructive sleep

apnea medical cases be assigned to DRGs 101 and 102 (Other Respiratory

Diagnoses).

Response: In order to properly classify each case, a diagnosis code

may be assigned to only one MDC. Diagnoses in each MDC correspond to a

single organ system or etiology and in general are associated with a

particular medical specialty. In order to classify cases of obstructive

sleep apnea to DRGs 76, 77, 101, and 102, code 780.57 would have to be

reassigned from MDC 1 to MDC 4. We believe that obstructive sleep apnea

is more appropriately classified to MDC 1; therefore, these cases

cannot be assigned to a DRG in MDC 4.

Comment: One commenter noted an error in the discussion of sleep

apnea in the proposed rule. The second time we referred to the codes to

be moved to MDC 1, we listed them as 25.59, 78.49, and 29.4 (see 61 FR

27447).

Response: In the proposed rule, we inadvertently referred to

procedures codes 25.59 and 78.49. The codes that will be added to DRGs

7 and 8 are 27.69, 29.4 and 29.59.

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).)

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 constitute approximately 20 percent of the

cases assigned to DRG 20. 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

virtually the same. Since we believe that DRG 20 is the appropriate

assignment clinically for Guillain-Barre cases, we reviewed the other

cases assigned to DRG 20 for possible change.

We found that herpes zoster of the nervous system, NOS (diagnosis

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

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

respectively. They also had lower average lengths of stay (6.2 and 6.1

days, respectively). (In the proposed rule, we mistakenly cited these

lengths of stay as 4.4 and 4.2, respectively (61 FR 27447).) Because

these two diagnoses 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. We proposed to reassign these

codes to DRGs 18 and 19.

Comment: We received two comments regarding our proposal to assign

diagnosis codes 053.10 and 053.19 to DRGs 18 and 19, both of which

supported the change. However, one commenter noted that even though

these cases obviously do not consume the amount of resources as other

cases assigned to DRG 20, clinically, they are more closely related to

cases in DRG 20 than those in DRGs 18 and 19. The commenter also

expressed an interest in the length of stay and charges for geniculate

herpes zoster (diagnosis code 053.11), which we did not propose to move

from DRG 20.

Response: We do not believe that reassigning these codes to DRGs 18

and 19 is clinically unsound. There are currently two other herpes

zoster diagnoses classified to those DRGs (Postherpetic trigeminal

neuralgia (code 053.12) and postherpetic polyneuropathy (code 053.13)).

Further, as the commenter noted, the charges and length of stay for

053.10 and 053.19 are very close to those for the cases assigned to

DRGs 18 and 19.

We had considered moving all three herpes diagnosis codes (035.10,

053.11, and 053.19) from DRG 20 to DRGs 18 and 19. However, the higher

charges associated with geniculate herpes zoster ($11,000) and slightly

higher length of stay (6.7 days) led us to decide instead to leave

053.11 in DRG 20 and to closely monitor these cases in upcoming years.

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

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

created a

[[Page 46170]]

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).

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 September 1, 1995 final rule (60 FR 45785), we

assigned procedure code 36.06 to DRG 112 (Percutaneous Cardiovascular

Procedures), the DRG to which PTCA is assigned. 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.

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 Medicare program that

cannot be verified remains a problem. Therefore, we did not propose any

DRG assignment change for implant of coronary artery stent.

Comment: We received five comments on this issue. One commenter

agreed that the strategy of not assigning new codes into different DRGs

until Medicare data have been collected and reviewed is appropriate.

Four commenters requested that we take action this year. The commenters

suggested various options for reassigning code 36.06: assign the code

to its own DRG; move the code to a higher-weighted DRG (DRG 116, Other

Permanent Cardiac Pacemaker Implant or AICD Lead or Generator Procedure

was suggested); or increase the weight for DRG 112 to recognize that

some of these cases involve stents.

One commenter believes that if we delay action, hospitals will not

be able to provide stent therapy to Medicare beneficiaries, thereby

depriving them of state-of-the-art technology and better outcomes. The

commenter noted that although the literature has reported higher costs

(for example, cost of the device itself, increased anticoagulation

therapy, more frequent monitoring) related to this procedure, there has

also been some offset noted because of the reduction in followup

medical costs. There is also the potential that further improvement in

stent design, implantation techniques, and other anticoagulant therapy

could further increase this offset by reducing vascular complications

or length of stay.

One commenter, the manufacturer of a coronary stent device, stated

that the assignment of coronary stent implant to DRG 112 is

inappropriate in light of the higher average lengths of stay and

charges associated with this procedure compared to traditional

angioplasty. The commenter argued that, given these differences, DRG

reclassification of procedure code 36.06 would be consistent with the

statutory mandate to adjust the DRG classifications and relative

weights to ``reflect changes in treatment patterns, technology, and

other factors which may change the relative use of hospital

resources.'' (Section 1886(d)(4)(C) of the Act.)

The commenter also cited 1,200 peer-reviewed clinical publications

that demonstrate superior clinical outcomes with coronary stent

implant. Finally, the commenter stated that the variation in hospital

standardized charges for coronary stent implant cases is less than the

variation in charges for all PTCA cases without stent implant.

Response: As we stated in the proposed rule (61 FR 27447) and in

the September 1, 1995 final rule (60 FR 45785), our practice is to

assign a new code to the same DRG or DRGs as its predecessor code. One

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

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

reclassification and recalibration process. Because the code is new, we

cannot identify the stent cases in DRG 112 to remove the charges from

that DRG, revise the relative weight accordingly, and move those cases

to another DRG and establish the revised weight of that DRG.

We do not disagree with the commenters that the stent implant cases

are more costly, on average, than other PTCA cases. We also do not

dispute the clinical superiority of this treatment for certain

patients. However, until we can review actual Medicare data to

determine exactly what the difference in charges is, we cannot make a

reasoned decision as to whether those cases should be moved to another

DRG or be assigned to a new DRG. We believe that waiting for

appropriate data is entirely consistent with our statutory duty to

adjust DRG classifications.

Regarding the comment on the variation in charges for stent versus

nonstent PTCA cases, we note that the charges for a specific procedure

should vary less than the charges for a set of cases that vary in

severity and for which many different treatments may be performed. That

is, the homogeneity of the patients who received a stent implant should

reflect a lower degree of variation.

Finally, analysis of data provided by the stent manufacturer

convinced us that Medicare beneficiaries have access to stent implants

that is at least equal to the general population. Moreover, we note

that it is a violation of a hospital's Medicare provider agreement to

place restrictions on the number of Medicare beneficiaries it will

accept for treatment unless it places the same restrictions on all

other patients. We will carefully examine the PTCA cases with and

without stent implant in the FY 1996 claims data file as soon as it is

available. Any DRG changes we determine are supported by the data will

be addressed in the FY 1998 proposed rule.

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

Connective Tissue)

In the proposed rule, we reviewed the DRG assignment in MDC 8 of

bipolar hip replacement cases as a follow-up to a comment received last

year. The commenter believed that the procedure for partial hip

replacement (code 81.52), currently assigned to DRG 209 (Major Joint

and Limb Reattachment Procedures of Lower Extremity), 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 (Hip and Femur Procedures Except Major Joint). Further, the

commenter noted that partial hip replacement patients are more frail

individuals than the population that elects total hip replacement and

need longer hospital stays to recover.

[[Page 46171]]

After reviewing the FY 1995 MedPAR file, we concluded that the

charges and lengths of stay for partial hip replacement cases assigned

to DRG 209 were very similar to the other cases assigned to DRG 209.

However, the average charge for cases in DRG 210 was significantly less

than the partial hip replacement charges. We note that the length of

stay for partial hip replacement cases was closer to the average length

of stay for DRG 210. However, the higher charges of the partial hip

replacement cases indicate that they are more resource-intensive than

the cases in DRG 210 and similar to the cases in DRG 209. Therefore, we

proposed to retain procedure code 81.52 in DRG 209.

We received three comments, all of which supported our proposal,

and we will continue to assign partial hip replacement cases to DRG

209.

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 relative 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 procedure'' surgical class is

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

it occurs, regardless of the fact that the relative weights 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

diagnosis in the MDC but are occasionally performed on patients with

these diagnoses. Therefore, these procedures should only be considered

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

has been performed.

A second example occurs when the difference between the average

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

small differences generally do not warrant reordering of the hierarchy

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

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

average weight than the class ordered below it.

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

modify the surgical hierarchy as set forth below. As we stated in the

September 1, 1989 final rule (54 FR 36457), we are unable to test the

effects of the proposed revisions to the surgical hierarchy and to

reflect these changes in the proposed relative weights due to the

unavailability of revised GROUPER software at the time the 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.

We proposed to 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 proposed to reorder Tracheostomy

Except for Face, Mouth and Neck diagnoses (DRG 483) above Liver

Transplant (DRG 480).

In MDC 3, we proposed to 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 proposed to reorder Adrenal and Pituitary

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

Nutritional, and Metabolic Disorders (DRG 285).

We received two comments in support of the three surgical hierarchy

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

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

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

changes are indicated. Therefore, we are incorporating these changes in

this final rule.

7. Refinement of Complications and Comorbidities List

a. Addition or Deletion of CCs. There is a standard list of

diagnoses that are considered complications or comorbidities (CCs). We

developed this list using physician panels to include those diagnoses

that, when present as a secondary condition, would be considered a

substantial complication or comorbidity. In previous years, we have

made changes to the standard list of CCs, either by adding new CCs or

deleting 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.

[[Page 46172]]

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 the category of 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 proposed 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 demonstrated that their presence as a

secondary diagnosis did not significantly add to the resource use of

the case. Therefore, we did not propose 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

Based on our analysis, charges associated with those cases were

indeed comparable to the other cases assigned to DRG 121. However, when

we sought the advice of our medical specialists (physicians who work

directly for or under contract with HCFA), 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.

Our analysis of DRG 121 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 did not propose any change to DRG 121.

We received three comments supporting the addition of the remainder

of the ``family'' of codes for intestinal infection due to bacteria to

the CC list. We received one comment in support of our decision not to

add 331.0, 423.9, 348.5, 333.4, 458.0, and 458.9 to the CC list.

Comment: Two commenters requested that we reconsider our decision

not to add codes 434.xx (Occlusion of cerebral arteries) and 436

(Acute, but ill-defined, cerebrovascular disease) to the list of

conditions that are designated cardiovascular complications for

assignment to DRG 121 (Circulatory Disorders with AMI and

Cardiovascular Complications, Discharged Alive). One commenter noted

that even though these diagnoses are not cardiac in nature, they are

vascular complications. The other commenter stated that there are other

conditions assigned to DRG 121, such as acute renal failure, that are

not strictly cardiovascular conditions. The commenter supports our

decisions to completely review DRG 121, but believes diagnosis codes

434.xx and 436 should be added this year.

Response: As explained in the proposed rule (61 FR 27449), in our

initial analysis, cases assigned to DRG 121 that had these diagnoses

coded as secondary conditions contained charges that were indeed

comparable to the other cases assigned to DRG 121. However, our

analysis of DRG 121 and the list of cardiovascular conditions revealed

large variations in the charges and lengths of stay for cases within

this DRG. Because the diagnoses associated with codes 434.xx and 436

are not strictly cardiovascular in nature, we believe the better course

would be to do a comprehensive review of DRG 121, including considering

adding additional diagnosis as complicating conditions. We will address

these issues as part of our DRG analysis agenda for FY 1998.

b. CC Exclusions List. In the September 1, 1987 final notice

concerning changes to the DRG classification system (52 FR 33143), we

modified the GROUPER logic so that certain diagnoses included on the

standard list of CCs would not be considered a valid CC in combination

with a particular principal diagnosis. Thus, we created the CC

Exclusions List. We made these changes to preclude duplicative coding

or inconsistent coding from being treated as CCs, and to ensure that

cases are appropriately classified between the complicated and

uncomplicated DRGs in a pair.

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

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

secondary diagnoses were established using the following five

principles:

Chronic and acute manifestations of the same condition

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

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

Specific and nonspecific (that is, not otherwise specified

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

one another.

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

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

should not be considered CCs for one another.

The same condition in anatomically proximal sites should

not be considered CCs for one another.

Closely related conditions should not be considered CCs

for one another.

The creation of the CC Exclusions List was a major project

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

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

used for eliminating certain diagnoses from consideration as CCS were

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

considered complications or comorbidities of another diagnosis. For

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

have continued to review the remaining CCs to identify additional

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

shown not to meet the definition a CC. (See the September 30, 1988

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

1989 (53 FR 38485); the September 1, 1989 final rule for the FY 1990

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

1991 revisions (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

[[Page 46173]]

FY 1993 revisions (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).)

The proposed rule reflected 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 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 final

rule.

Table 6g and 6h in section V of the addendum to this final rule

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

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

the principal diagnoses with final 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 for 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 did

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

the surgical DRGs.

b. Reassignment of Procedures Among DRGs 468, 476, and 477. We also

reviewed the list of procedures that produce assignments to 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 moved 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

[[Page 46174]]

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

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

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 proposed to change the procedures from OR to

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

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

Comment: We received two comments that generally supported our

proposal to move procedure code 33.27 to the list of procedures that

result in assignment to DRG 477. However, one of the commenters was

concerned because this code also includes transbronchial lung biopsy.

The commenter believes that transbronchial lung biopsy is a high-risk

procedure and questions whether this would be considered a nonextensive

procedure.

Response: In analyzing the procedures that produce assignments to

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

average charges and lengths of stay. The cases in DRG 468 with

procedure code 33.27 are significantly less resource-intensive than the

other procedures assigned to DRG 468, and more closely resemble the

average charge and length of stay for procedures classified to DRG 477.

Although transbronchial lung biopsy may be a more difficult procedure

to perform than other procedures assigned to 33.27, we do not know how

many of these cases are actually assigned to DRG 468, that is, how many

times this procedure is performed for an unrelated principal diagnosis.

It is possible that the lower charges associated with closed endoscopic

biopsy of lung cases in DRG 468 do not include many transbronchial lung

biopsy cases. We also note that in MDC 4, procedure code 33.27 is not

assigned to the major procedures DRG (DRG 75). In any case, our data

support the reclassification of these procedures to DRG 477. Therefore,

we are reassigning procedure code 33.27 from DRG 468 to DRG 477, as

proposed.

Comment: We received four comments regarding our proposal to

designate procedure code category ``other repair of eyelid'' (codes

08.81 through 08.89) as non-OR. Two commenters supported our decision,

although one of those commenters stated that even though these

procedures may not require an operating room, they may require a

specialist. One commenter requested that we consider designating these

eyelid repair codes as non-OR procedures that affect DRG assignment

when the procedure is the only one performed in connection with a

related principal diagnosis. The fourth commenter understood that our

reason for making this change had to do with our belief that many of

these injuries are sustained during hospital stays. That commenter

believes that the causes surrounding the injury are not necessarily

indicative of the nature of the services furnished or the procedures

performed and that we should not make this change unless we reviewed

the resources consumed delivering these services.

Response: Our proposal to change the OR designation for these

procedures was not based on where the injuries were incurred. Rather,

we based the decision on our analysis of claims data as part of our

annual review of procedures that result in assignment to DRGs 468, 476,

and 477, and on the clinical opinions of our physician consultants.

Cases in which 08.81 was coded as the only OR procedure, unrelated to

the principal diagnosis, were the second most frequently assigned to

DRG 477. Our evaluation of the average charges and length of stay for

these cases was the deciding factor in our proposal. Both of these

statistics were much lower for the eyelid repair cases than the average

case assigned to DRG 477. In addition, the opinion of our medical staff

was that these repairs would not normally necessitate a trip to the OR,

even if they are performed by a specialist. Because there are so many

cases of eyelid repair performed for unrelated diagnoses, we speculated

that they were the result of injuries sustained while the patient was

in the hospital.

Regarding the request to designate codes 08.81 through 08.89 as

non-OR procedures that affect DRG assignment in the MDCs to which they

were previously assigned, we analyzed the FY 1995 MedPAR file cases in

which one of these codes is assigned to DRG 40 and 41 (Extraocular

Procedures Except Orbit) in MDC 2 (Diseases and Disorders of the Eye)

and DRG 268 (Skin, Subcutaneous Tissue and Breast Plastic Procedures)

in MDC 9 (Disease and Disorders of the Skin, Subcutaneous Tissue and

Breast). In both DRGs 40 and 268 (no cases were assigned to DRG 41 in

FY 1995), there were no cases in which an eyelid repair was the only

related procedure coded. That is, in every case, there was another OR

procedure code present on the claim that would cause it to be assigned

to either DRG 40 or 268. This means that assignment of cases to these

DRGs will not be affected by changing the OR designation for the eyelid

repair codes.

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 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

[[Page 46175]]

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 field, 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 was 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 codes changes that have been approved will become

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

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

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

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

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

Coordination and Maintenance Committee meetings. Both oral and written

comments were considered before the codes were approved.

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, and 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

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

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

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

which also include the DRG assignments for these revised codes.

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

corrected a code title and added omitted secondary DRG assignments to

several codes in Tables 6a and 6b. The code title corrected is 995.59,

Other child abuse and neglect. The codes for which DRG changes have

been made are as follows:

In Table 6a, MDC 15 and DRG 391 were added to 752.51 and

752.52 because they are considered ``major problems'' in this DRG;

922.31, 922.32, and 922.33 were modified to add MDC 24 and DRGs 484,

485, 486, and 487; and MDC 15 and DRGs 387 and 389 were added to

998.11, 998.12, 998.13, 998.51 and 998.59 because they are considered

``major problems'' in these DRGs.

In Table 6b, DRG 303 was added to code 59.03.

Comment: One commenter supported the creation of new procedure

codes for partial cholecystectomies; however, the commenter disagreed

with their assignment to DRGs 193 and 194 (Biliary Tract Procedures

except only Cholecystectomy with or without C.D.E.). The commenter

believes that partial cholecystectomy (code 51.21) is similar to

cholecystectomy (code 51.22) and laparoscopic partial cholecystectomy

(51.23) is similar to laparoscopic cholecystectomy (51.24). Therefore,

procedure codes 51.21 and 51.23 should be assigned to the same DRGs as

51.22 and 51.24, respectively.

Response: We agree with the commenter. Partial cholecystectomies

are clinically similar to cholecystectomies and laparoscopic partial

cholecystectomies are clinically similar to laparoscopic

cholecystectomies, as well as being similar in terms of resource use.

Therefore, we have revised Table 6b to indicate that procedure code

51.21 is assigned to DRGs 195 and 196 (Cholecystectomy with C.D.E.) and

DRGs 197 and 198 (Cholecystectomy except by Laparoscope) and 51.23 is

assigned to DRGs 195 and 196 and DRGs 493 and 494 (Laparoscopic

Cholecystectomy).

Comment: We received one comment on modifications made to the ICD-

9-CM codes involving psychiatric diagnoses. The commenter had

participated in the ICD-9-CM Coordination and Maintenance Committee

meetings and had submitted written proposals for revisions. The

commenter stated that although the proposed rule listed all final code

revisions, it did not explain the final action on specific proposals or

why that action was taken. The commenter suggested that this

information be included in the final rule. The commenter also objected

to changing the title of category V61.1 from ``Marital Problems'' to

``Counseling for Marital and Partner Problems'' because it narrows the

use of the category.

Response: The National Center for Health Statistics (NCHS) has the

lead responsibility for maintaining the diagnosis part of ICD-9-CM. As

explained above, after receiving comments at the public meetings held

by the Coordination and Maintenance Committee and reviewing subsequent

written comments, NCHS proposes final revisions to ICD-9-CM diagnosis

codes. These revisions are then jointly approved by NCHS and HCFA. The

purpose of printing the final codes in the Federal Register is simply

to notify the public and solicit comment on the proposed DRG

classifications. We recommend that the commenter, or any other

interested party, contact NCHS directly to discuss the final codes. If

further revisions are sought, then these can be handled through future

meetings of the Coordination and Maintenance Committee. We will forward

the commenter's concerns on category V61.1 to NCHS for review.

Comment: One commenter supported the ICD-9-CM code revisions for

October 1, 1996, but suggested that rules relating to the sequencing of

the new code V66.7, Encounter for palliative care, should be developed

prior to its use beginning on October 1, 1996.

Response: We agree with the commenter that medical records

technicians and administrators will

[[Page 46176]]

need advice on coding this diagnosis. Specific directions in the form

of a note within the tabular section of the ICD-9-CM will direct the

coder to ``code first underlying disease'' when coding V66.7. The NCHS

has also developed an extensive set of V code guidelines that will also

clarify that V66.7 should be sequenced second. In addition, AHA

routinely includes advice on the use of new and modified codes in the

fourth quarter issue of their publication, Coding Clinic for ICD-9-CM

Coding. This year's issue will clarify that V66.7 will be used only as

a secondary diagnosis. The coding advice in Coding Clinic is a

collaborative effort among HCFA, NCHS, AHA, and AHIMA. Information on

ordering Coding Clinic can be obtained from the following: American

Hospital Association, Central Office on ICD-9-CM, One North Franklin,

Chicago, IL 60606, (312) 422-3366.

Comment: Although the Committee made no revisions to the pacemaker

codes, a commenter noted that there have been advances in pacemaker

technology that may have an effect on coding and DRG classification.

One new pacemaker device functions as a dual-chamber pacemaker

(procedure code 37.83) but has only a single lead (procedure code 37.71

or 37.73). If these pairs of codes are reported on a claim, the case is

assigned to a medical DRG rather than DRG 115 or 116 (Permanent Cardiac

Pacemaker Implant).

Response: This coding issue was addressed recently by the Editorial

Advisory Board of the Coding Clinic for ICD-9-CM. After consultation

with the manufacturer of the new pacemaker device, the Board decided

that, although this pacemaker has a single lead, it functions as dual

electrodes. Therefore, the insertion of this pacemaker should be coded

with procedure codes 37.83 and 37.72 (dual lead insertion). If a

hospital follows this coding advice, the case will be classified to DRG

115 or 116. This advice will be included in an upcoming issue of Coding

Clinic. We will monitor this situation to determine if hospitals are

following this coding advice or if a change in the DRG software is

necessary.

C. Recalibration of DRG Weights

We used 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 recalibrated the weights based on charge data for

Medicare discharges. However, we used 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 recalibrated DRG relative weights are constructed from FY 1995

MedPAR data, based on bills received by HCFA through June 1996, 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 11.1 million Medicare discharges.

The methodology used to calculate the DRG relative weights from the

FY 1995 MedPAR file is as follows:

All the claims were regrouped using the final DRG

classification revisions discussed above in section II.B of this

preamble.

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 were used in computing the current weights. That is, we

eliminated 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 cost 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 proposed to use that same case

threshold in recalibrating the DRG weights for FY 1997. For this final

rule, using the June 1996 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 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

[[Page 46177]]

achieve this effect, equating the average case weight after

recalibration to the average case weight before recalibration does not

necessarily achieve budget neutrality with respect to aggregate

payments to hospitals because payment to hospitals is affected by

factors other than average case weight. Therefore, as we have done in

past years and as discussed in section II.A.4.b. of the addendum to

this final rule, we are making a budget neutrality adjustment to assure

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

III. Changes to the Hospital Wage Index

A. Background

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

methodology for determining prospective payments to hospitals, the

Secretary must adjust the standardized amounts ``for area differences

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

reflecting the relative hospital wage level in the geographic area of

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

accordance with the broad discretion conferred by this provision, we

currently define hospital labor market areas based on the definitions

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

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

(OMB). In addition, as discussed below, we adjust the wage index to

take into account the geographic reclassification of hospitals in

accordance with sections 1886(d)(8)(B) and 1886(d)(10) of the Act.

Section 1886(d)(3)(E) of the Act 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 final 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 used the same categories

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

Although we did not propose any changes in the reporting of

hospital wage index data, we received comments regarding our current

policies. (Comments specifically related to our policy on contract

labor are addressed below in section III.D of this preamble.)

Comment: We received several comments concerning the treatment of

Medicare Part A physician salaries in the wage index calculation. One

commenter stated that we should immediately exclude all of these costs,

using Worksheet A-8-2 of the Medicare cost report to identify physician

Part A costs. Alternatively, the commenter suggested that we should

include contracted Part A physician salaries in those States where

hospitals are prohibited from employing physicians. Two other

commenters suggested we should prepare an impact analysis of the

effects of the exclusion of Part A physician salaries.

Response: As stated in the September 1, 1994 final rule (59 FR

45355), effective with cost reporting periods beginning on or after

October 1, 1994, we revised the Medicare cost report to provide for the

separate reporting of all salary costs for physicians (including

teaching physicians), interns and residents, and certified registered

nurse anesthetists. After evaluating these data, we will consider

appropriate changes in developing the FY 1999 wage index update.

In response to the suggestion that we should use Worksheet A-8-2 to

expedite our evaluation of excluding physician Part A salaries, we will

explore the technical feasibility of using the data from that

worksheet. Regarding the suggestion that we should allow contracted

Part A physician salaries to be included in the wage index calculation

in those States that do not allow hospitals to employ physicians

directly, we note that, if we were to adopt such a policy it would not

be effective until hospitals' FY 1997 cost reporting periods.

Therefore, the data would not be available until the FY 2001 wage

index. Because we are already collecting data that would allow us to

exclude all physician Part A salaries by the FY 1999 wage index, we are

not adopting this comment.

With respect to the comments that we should prepare an analysis of

the impact on the wage index of excluding Part A physician salaries,

any such analysis is, of course, contingent upon having reliable data

to analyze. At this point, we do not foresee having such data prior to

the availability of hospitals' FY 1995 cost reports.

Comment: A commenter stated that the wage index value of rural

hospitals with swing-bed programs is unfairly deflated by the inclusion

of the lower salaries related to skilled nursing level care provided to

patients in swing-beds. The commenter indicated that since hospitals

can separately identify these salaries, they should be excluded from

total salaries to be consistent with the way salaries are reported for

hospitals without a swing-bed program.

Response: Salaries related to skilled nursing level care provided

to patients in swing-beds are not reported separately on the Medicare

cost report. Salary costs for swing-beds are combined with those for

general adult and pediatric care on the cost report at line 25 of

Worksheet A. Therefore, it would not be possible under the current cost

report format to remove from the wage index calculation these costs as

we do for direct salaries associated with distinct part skilled nursing

facilities and units. Furthermore, given the nature of the swing-bed

program, we do not believe it would be appropriate to impose on

hospitals the additional recordkeeping requirements that would be

necessary to report these salaries.

1. Verification of Wage Data from the Medicare Cost Report

The data for the FY 1997 wage index were obtained from Worksheet S-

3, Part II of the Medicare cost report. The data file used to construct

the wage index includes FY 1993 data submitted to the Hospital Cost

Report Information System (HCRIS). As in past years, we performed an

intensive review of the wage data, mostly through the use of edits

designed to identify aberrant data.

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

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

wage data and submit requests for corrections if necessary (61 FR

27455). To be reflected in the final wage index, wage data corrections

had

[[Page 46178]]

to be reviewed, verified, and transmitted to HCFA through HCRIS by June

17, 1996 (any changes after this date are limited to errors related to

handling the data, as described below in section III.C of this

preamble). All data elements that failed edits have been resolved and

are reflected in this final rule.

2. Computation of the Wage Index

As noted above, we are basing the FY 1997 wage index on wage data

reported on the FY 1993 cost reports. The final wage index is based on

data from 5,231 hospitals paid under the prospective payment system and

short-term acute care hospitals in waiver States. The method used to

compute the final wage index is as follows:

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

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

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

periods beginning on or after October 1, 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 wages. 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

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 wages obtained in Step 3

for all hospitals in that area to determine the total adjusted wages

for the labor market area.

Step 7--We divided the total adjusted wages 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 wages 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 $19.5533.

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.

We note that on June 28, 1996, OMB announced the designation of the

Pocatello, Idaho MSA comprising Bannock County, Idaho and the

Jonesboro, Arkansas MSA comprising Craighead County, Arkansas and the

addition of Chester County, Tennessee to the Jackson, Tennessee MSA.

These changes are reflected in the final wage index.

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

[[Page 46179]]

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 final wage index values for FY 1997 are shown in Tables 4a, 4b,

and 4c in the Addendum to this final rule. The FY 1997 wage index

values incorporate all hospital redesignations for FY 1997, withdrawals

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

the Administrator's review process. For FY 1997, 385 hospitals are

redesignated for purposes of the wage index (hospitals redesignated

under section 1886(d)(8)(B) or 1886(d)(10) of the Act). For hospitals

that are redesignated, the wage index values are shown in Table 4c. For

some areas, Table 4c shows more than one wage index value. 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. In addition, Table 3C in the addendum to this final rule

includes the adjusted average hourly wage for each hospital based on

the FY 1993 data. Hospitals should use the average hourly wage

published in this final rule in applying to the MGCRB for wage index

reclassifications that would be effective for FY 1998. 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.

C. Requests for Wage Data Corrections

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

available in mid-August that contained the wage data used to construct

the wage index values in this final rule. As with the diskette made

available in March 1996, HCFA made the August diskette available to

hospital associations and the public. (Please note that this data file

is also available on HCFA's World-Wide Web page, public use files

address (http://www.hcfa.gov/stats/stats.html).) This file is made

available only for the purpose of identifying any potential errors made

by HCFA or the intermediary in the handling of the final wage data that

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

wage data correction requests.

In addition, as noted above, Table 3C in the Addendum to this final

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

construct the 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.

As noted in the proposed rule, after mid-August, we will make

changes to the hospital wage data only in those very limited situations

involving an error by the intermediary or HCFA that the hospital could

not have known about before its review of the August diskette.

Specifically, 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.

Requests to revisit factual determinations or policy

interpretations made by the intermediary or HCFA during the wage data

correction process.

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

rule, a hospital believes that its wage data are incorrect due to a

fiscal intermediary or HCFA error in the entry or tabulation of the

final wage data, it should send a letter to both its fiscal

intermediary and HCFA. The letters should outline why the hospital

believes an error exists and provide all supporting information. 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

[[Page 46180]]

the start of FY 1997 (that is, October 1, 1996). Requests sent to HCFA

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. Each request must also be

sent to the hospital's fiscal intermediary. 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.

We believe the wage data correction process described above and in

the proposed rule 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 had access to the

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

any data entry or tabulation errors made by the intermediary or HCFA

before the implementation of the 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 had 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.

Comment: One commenter commended us for making the wage data file

available on the HCFA home page. The commenter also suggested that the

file be updated frequently and include such additional information as

the MSA name where the hospital is located, the applicable inflation

adjustment factors, and the MSA to which each hospital has been

reclassified by the MGCRB, if applicable.

Response: The wage data file is currently updated twice a year, in

mid-March and mid-August, in conjunction with the issuances of the

proposed and final rules for the hospital inpatient prospective payment

systems. This effort is very labor intensive, and since hospitals are

able to submit cost reports throughout the year, it is impractical to

update the wage data file more frequently. In addition, we would point

out that the intent of making these data available is primarily to

provide hospitals the opportunity to verify the data used in the

calculation of their wage index. Updating this file more frequently is

not necessary to fulfill this primary objective.

Regarding the suggestion to include additional information on the

wage data file that we make available to the public, we note that the

suggested data elements are not necessary for the purpose of allowing

an opportunity for providers to verify the accuracy of their wage data.

We note that we publish the MSA names and inflation adjustment factors

in the proposed and final rules, and the MSAs to which hospitals are

reclassified can be found on the PPS Payment Impact Public Use File,

available shortly after publication of the proposed and final rules.

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 the proposed rule, we provided a general overview of the issues

related to including contract labor costs in the wage index calculation

and solicited comments from the public regarding further expansion of

the types of contract labor costs included in the wage index. We also

listed nine specific issues on which we were seeking public comment.

The following background material is identical to the overview included

in the proposed rule, but we believe it is useful as a reference for

responding to many of the comments we received.

1. Background

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

[[Page 46181]]

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

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 solicited

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

[[Page 46182]]

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?

2. Discussion of Comments

We received 27 individual letters addressing the issue of contract

labor in the wage index. We appreciate the time and attention of all of

the commenters. The information provided has already increased our

understanding of the issue, and we intend to include in our future

analyses an evaluation of many of the points made by commenters. The

remainder of this section discusses the comments--first by responding

to the general comments we received and some specific policy questions,

then summarizing all of the responses we received to the questions

listed above. Although we do not respond directly to these latter

comments, they will aid us in our future consideration of this issue.

Comment: One commenter who represents a national association of

health systems noted that most of the issues raised by us in the

proposed rule were addressed by a special wage index Medicare Technical

Advisory Group (MTAG) work group. The commenter stated that ``(a)fter

considering all these issues in the MTAG work group, HCFA decided to

limit the inclusion of contract labor to direct patient care services.

This was because, in general, these services are in revenue producing

cost centers that have higher personnel costs (such as nursing

services) where the treatment of contract labor in determining the wage

index would have the greatest impact on hospitals. Also, these areas

generally have had fewer problems than contract services provided in

the overhead departments where average personnel costs are lower.

Patient care contract labor is more often billed on an hourly rate, and

because these are direct patient care services, they are generally

performed by personnel working on the hospital premises and therefore

include less indirect overhead cost from the contract organization. On

the other hand, contract labor costs related to overhead departments

normally has lower average cost, often includes more indirect overhead,

and often the related hours are not available.''

Response: We appreciate this commenter's past contributions into

the development of our contract labor policies and believe that the

commenter has presented a generally correct characterization of our

rationale for our current policy on contract labor costs. However, as

noted above, we are concerned that our policy continue to accurately

measure wage costs in a rapidly changing hospital environment and,

therefore, have solicited public input into our future policy

considerations.

Comment: Several commenters, including ProPAC, supported the

principle that all contract labor costs should be included in

calculating the wage index if they would have been included had the

contract workers been employees of the hospital; but the commenters

recognized the problems of accurately collecting contract labor costs.

The Commission suggested that, in light of the increasing importance of

adjusting payments to reflect input price variations in multiple

settings with the accelerating integration of health care delivery, a

need exists for a more comprehensive strategy for obtaining geographic

input price data. Finally, ProPAC indicated it would ``be pleased to

work with HCFA staff to develop and explore feasible approaches to a

solution.''

Response: We agree that, in principle, the wage index should

measure labor costs across hospitals without regard to who employs the

workers if such costs reflect relative wage levels and can be

identified. We also agree that, as health care delivery becomes more

integrated, so do the labor costs. Of course, we have increasingly been

concerned with this issue as we have worked to develop prospective

payment systems for various provider types. Therefore, we appreciate

ProPAC's offer of cooperation in this regard and look forward to

working together to address these issues.

Comment: Several commenters disagreed with our definition of direct

patient care contract labor, specifically, the exclusion of the costs

of contracted laboratory and pharmacy services. One commenter stated

that a preferable definition would include services that are directly

identifiable and billable to individual patients. Laboratory and

pharmacy services would be included in this definition. Another

commenter called our exclusion discriminatory toward rural hospitals as

rural hospitals are more likely to contract for a pharmacist than are

urban facilities. This commenter stated that pharmacists do have direct

patient care contact, noting that they dispense drugs to patients,

provide patient education, and are required to participate on

``interdisciplinary patient care'' teams.

Response: While there may be some direct patient care contact in

providing laboratory and pharmacy services, the amount varies across

hospitals and is only a portion of the total time spent providing

service to a hospital. As we noted in the proposed rule, one of the

reasons we have limited the types of contract services included in the

wage index calculation is that hospitals reported difficulty tracking

the hours associated with off-site facilities that serve more than one

hospital. Our experience and other comments we received indicate this

is also the case for contracted laboratory and pharmacy services. For

example, it is possible that a contracted pharmacist would spend part

of an hour preparing medications for patients in more than one

hospital.

We recognize the necessity for many hospitals, particularly small

and rural hospitals, to contract for pharmacy and laboratory services,

which are likely to be relatively costly. In fact, this is one of the

issues that led us to solicit public input into how our contract labor

policy may be improved. We believe that the insight from the comments

we received, as well as continuing communication with the hospital

industry, will ultimately help to resolve these difficult issues.

Comment: Several commenters representing hospital associations

recommended that we reinstitute an MTAG to ``assist in developing the

materials and definitions needed to implement these changes in

collecting contract labor data * * *'' Other commenters recommended the

initiation of a pilot study in selected regions to determine whether

``using (contract labor) costs in the wage index methodology are worth

the collection effort.''

Response: Again, we appreciate the volume of the responses we

received. Over the next few weeks, we will review our options for

pursuing the reinstitution of an MTAG to evaluate the need to revise

our policy on contract labor. We will also contact many of the national

and State hospital associations that responded to our solicitation for

further input.

[[Page 46183]]

Comment: Several commenters pointed to the need for greater clarity

regarding our definition of contract labor. There was a call for a

``universal model and criteria'' for fiscal intermediaries to follow in

determining allowable contract labor costs. One commenter submitted an

example of what such a model could look like.

Response: We have provided more detailed cost report instructions

for reporting contract labor in periods beginning on or after October

1, 1995. We will also include these more detailed instructions in the

desk reviews of the FY 1995 cost reports. In addition, on FORM HCFA-339

(the Provider Cost Report Reimbursement Questionnaire), we require

hospitals to provide detailed information on contract labor costs

currently included in the wage index calculation. This information

consists of descriptions and aggregate costs and hours for top

management contracts and costs and hours for each type of direct

patient care contract.

We will, however, continue to pursue opportunities for policy

improvement. In that regard, we welcome the suggestions we received in

response to the proposed rule, and encourage further input from

interested parties in the future.

Below, we summarize the comments we received in response to the

specific questions listed in the proposed rule. Again, we note that

while we are not responding to these comments here, we intend to take

them into consideration in our future analysis of this issue.

To what extent do hospitals rely on the use of contract

services?

According to the comments received, hospitals, particularly those

in rural areas and smaller cities, rely on contract labor for a variety

of services. In general, hospitals have begun to reduce ongoing labor

costs by employing contract personnel in many operational areas.

Because of fluctuating patient volumes, contract labor is a more cost

effective alternative to direct hiring. Furthermore, some States

prohibit the direct hiring of certain health care personnel; thus,

these positions must be contracted. Hospitals located in areas

experiencing shortages in health care personnel such as nurses and

pharmacists also rely heavily on contract labor.

For which services are contracts typically used? Virtually

all of those who commented stated that hospitals contract for nursing

and therapy (occupational, physical, respiratory, speech) services.

Most commenters mentioned the following as services for which hospitals

contract: radiology (including mammography and ultrasound); anesthesia;

dietary (including therapeutic); psychological and social; pharmacy;

laboratory and pathology; emergency room; medical records;

housekeeping, laundry, and central supply; clerical; legal; accounting

and audit; facility and equipment maintenance; and environmental. The

following services were also mentioned by at least one commenter:

surgery (technicians); air ambulance; management (e.g., medical

director); information systems management; education; and biomedical

engineering. Based on these comments, hospitals contract for every

category of labor.

Can hospitals accurately determine hours related to

contract services?

Most commenters stated that hospitals could accurately determine

hours related to contract services, particularly for contracts billed

on an hourly basis and for services such as laboratory, pharmacy, and

management. Some commenters explained that their hospitals have

established methods for tracking hours, such as time sheets maintained

for hourly workers, or invoices that include the hours worked and the

hourly rate. Others commented that, if necessary, systems to track

hours (for example, log-in sheets) could easily be instituted. Several

others suggested that hospitals could more accurately report hours

associated with contract services if HCFA clarified the contract labor

definition, developed acceptable methods for tracking hours and

associated costs, and developed a universal model and criteria for the

fiscal intermediaries to follow in auditing contract labor costs and

hours.

A few commenters stated concerns that hospitals may not be able to

accurately report contract labor hours. One suggested there may be

difficulty in reporting hours in situations where the contractor serves

more than one client. One hospital explained that for some services, it

does not report hours, or it relies on the contractor to supply the

hours. For services such as physical therapy, this hospital pays

contractors based on a percentage of revenue generated. One hospital

association stated that hospitals may not be able to accurately

determine the hours for services such as laundry, dietary,

housekeeping, and maintenance. Another association explained that,

while hospitals in its area are required to report contract hourly

rates and hours for nonpatient care cost centers, evidence suggests

that the data for many hospitals may not be completely accurate,

reflecting the difficulty of capturing such detailed information.

Can hospitals accurately isolate labor-related costs from

nonlabor-related costs?

Several commenters stated that hospitals can accurately isolate

labor-related costs from nonlabor-related costs using invoices. One

commenter explained that for services with little or no nonlabor costs,

such as laboratory, pharmacy, and management, there is no need to

identify and isolate these costs.

On the other hand, one commenter suggested there may be difficulty

in reporting hours in situations where the contractor serves more than

one client. One hospital stated that it does not separate labor and

nonlabor costs. One association stated that contracts for services such

as laundry, dietary, housekeeping, and maintenance may include more

nonlabor costs and may be more difficult for hospitals to isolate

nonlabor costs. Another association believes that intermediaries are

inconsistent in handling nonlabor costs and that HCFA needs to develop

better guidelines.

Should the contract labor definition be expanded to

include contract services indirectly related to patient care?

The majority of the commenters support expanding the definition of

contract labor to include services indirectly related to patient care.

Two commenters stated that, in principle, all contract labor costs and

hours should be included if they would have been included had the

workers been employed by the hospital. Two commenters responded that

excluding contract labor services understates the cost of providing

patient services and puts hospitals at a disadvantage. Two others

commented that HCFA's definition of direct patient care is too

restrictive and should be revised to include services that can be

identified and billed separately and are not included in the routine

care charge. One commenter, although in support of including indirect

patient care contract services, recognized that considerable review

would be necessary to determine which labor costs should be included as

contract labor. Another commenter noted that reporting additional types

of contract labor should not be considered an unnecessary burden. Two

associations expressed concern that excluding large labor expenses, for

services such as dietary and housekeeping, may create inconsistencies

across labor market areas. Some commenters also suggested that we

include the following services (that we consider indirectly related to

patient care) in the definition of contract labor: pharmacy, dietary,

clerical,

[[Page 46184]]

housekeeping and environmental, accounting and audit, legal,

consultant, and medical director.

Some commenters, including five large hospital associations,

expressed concern over expanding the definition of contract labor to

include indirect patient care services. Two commented it would add

considerably to the complexity of tracking costs and determining which

services should be included or excluded. One commenter added that,

based on its analyses, it would be difficult to collect reliable data

and that including contracted indirect patient care costs would have

only a minor impact on the wage index. Another commented that problems

that exist with contract labor data are more prevalent in nonrevenue

producing areas.

If contract labor remains limited to direct patient care,

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

above, should be included?

Commenters named the following services as those that should be

included in the direct patient care definition of contract labor:

dietary, anesthesia, social, pharmacy, laboratory, pathology, medical

records, equipment maintenance, environmental management, central

supply, and all clinical services.

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)?

Five hospitals and ProPAC commented that the wage index would more

accurately reflect relative wage levels if we did not limit contract

labor to direct patient care. One stated that failure to include all

contract labor could result in major biases in the wage index because

contract services may vary substantially among types of hospitals and

across labor market areas. Two rural hospitals argued that the current

policy discriminates against rural hospitals because they are more

likely to have to contract pharmacists and other personnel because of

employee shortages in their wage areas.

Three associations and a hospital commented that the wage index

would not more accurately reflect relative wage levels if we did not

limit contract labor to direct patient care. One explained that the

results would not be more accurate by adding or subtracting categories

of care; rather, the key to an accurate calculation is that the

components are consistent for all hospitals, not how many components

are included. Another added that, based on its analyses, including

contracted indirect patient care costs would have only a minor impact

on the wage index. A third commenter expressed concern that the time

necessary at the hospital level to obtain this information and the time

necessary for the intermediary to review such information would not be

cost effective.

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?

Commenters were unanimous in their belief that expanding the types

of contract labor that are included in the wage index would not provide

less incentive to hospitals to keep their labor costs low. Several

commenters explained that hospitals in today's environment have every

incentive to keep their costs down. Because Medicare is only one payer,

allowing labor costs to increase for improved Medicare payment would

put hospitals in an uncompetitive position as far as other payers are

concerned. Also, it would take 4 years for those costs to be reflected

in the wage index. One of them added that it is difficult to conceive

of any situation in which a hospital would benefit from paying higher

labor rates than necessary.

What other issues should be considered in revising the

policy for including contract labor in the wage index?

An association, located in a mostly rural State, suggested that

changes to expand contract labor should be made as soon as possible to

provide a more accurate and equitable wage index for all hospitals.

E. Puerto Rico Wage Index Values

For several years, hospitals in Puerto Rico have experienced large

swings in their wage index values. 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

could 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.

If we created a single labor market area for Puerto Rico, we would

do so in a budget neutral manner; therefore, the effect would be to

raise wage index values for some hospitals in Puerto Rico and to lower

the values for others. Because of the negative effect on some

hospitals, rather than propose such a change, we solicited comment on

this approach for mitigating the fluctuations in wage index values for

hospitals in Puerto Rico. We noted that the potential change would have

no impact on hospitals outside Puerto Rico. We received five comments

in response to our solicitation. These comments and our responses are

set forth below.

Comment: All of the commenters expressed grave concern regarding

the creation of a single MSA in Puerto Rico for purposes of the wage

index. Most commenters objected to the negative impact this proposal

would have on the wage index values of high wage areas. One commenter

protested the elimination of large urban status for the San Juan MSA.

Two commenters were concerned about the effect this change would have

on hospitals that are able to reclassify through the MGCRB. One

commenter noted that HCFA relies on OMB for MSA designations and OMB

has not approved this change. Finally, a commenter stated that a single

labor market area would not recognize the difference between tertiary

and secondary hospitals.

Response: We solicited comment on consolidating Puerto Rico into

one labor market area because it was one method for addressing swings

in wage index values within Puerto Rico without adversely affecting

hospitals outside Puerto Rico. Since commenters do not favor this

approach, we will not pursue the option. We note that this approach

would not have eliminated large urban status of the San Juan MSA for

standardized amount purposes. Puerto Rico would have been treated as

one labor market area solely for wage index purposes.

We have recently met with representatives of the Puerto Rico

Hospital Association to explore other solutions to the problems faced

by hospitals in the Commonwealth. In reviewing the latest Medicare cost

report data available, we find that hospitals in Puerto Rico continue

to demonstrate average Medicare operating margins comparable to all

other prospective payment hospitals.

Comment: One commenter urged an add-on adjustment of not less than

7

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percent to the Puerto Rico standardized amounts to account for the

penalty resulting from the use of temporary cost allocation methods by

government hospitals with a noncharge structure in Puerto Rico.

Response: We do not believe it is appropriate to adjust the

standardized amounts of Puerto Rico for those government hospitals with

a noncharge structure when we have not adjusted the national

standardized amounts applicable to all other hospitals to account for

government hospitals with noncharge structures that are located in the

50 States and the District of Columbia. We believe the prospective

payment system should be fair and equitable to all hospitals, no matter

where they are located.

Comment: A commenter requested that we establish a wage index floor

for the labor market areas in Puerto Rico.

Response: The wage index measures relative wage levels across labor

market areas. Since Puerto Rico labor market areas have not increased

wages at the same average rate as all other hospitals, their wage index

values have decreased accordingly. If we were to create a floor, it

would improperly benefit labor market areas whose wages are not in line

with the national experience. The hospitals receiving the floor wage

index would receive artificially high DRG payments.

In addition, we note that, if such a change were to ever be

adopted, it would be implemented in a budget neutral manner. Thus, a

wage index floor for hospitals in Puerto Rico would result in lower

payments to other hospitals.

Comment: Two commenters suggested that we eliminate the Puerto Rico

rural area classification and classify those hospitals to the nearest

MSA.

Response: We do not believe it is appropriate to offer special

treatment to hospitals located in the rural area of Puerto Rico. While

we acknowledge certain limitations in the current geographic

classification system, we have yet to find a system that is

demonstrably better. (See the discussion on labor market area research

in the June 2, 1995 proposed rule (60 FR 29218).) Unless we decide to

adopt a new method for defining labor market areas, we will continue to

use rural areas for hospitals in counties that are not designated as

part of MSAs. We note that rural hospitals in Puerto Rico may apply for

geographic redesignation under the same criteria as all other hospitals

and that some hospitals in rural Puerto Rico have been approved for

reclassification.

Comment: One commenter suggested that OMB review the San Juan MSA

for possible redesignation of certain San Juan municipalities to other

urban areas.

Response: As acknowledged by the commenter, it is OMB that makes

the determination of which municipalities are included in a particular

MSA. We believe that OMB uses the same criteria to create the San Juan

MSA as it does for all other MSAs. We urge the commenter to forward any

suggestions directly to OMB for its consideration.

F. 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.

In the May 31, 1996 proposed rule, we proposed one change to the

MGCRB regulations. In addition, we requested 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.

In the proposed rule, in order to allow the Secretary maximum

flexibility to recruit and retain qualified Board members, we proposed

to eliminate the current requirement at Sec. 412.246(b) that a Board

member can serve for only two consecutive 3-year terms and to provide

that an appointment to the MGCRB may be for any term not to exceed 3

years.

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.

We received no comments on this proposal, and we have incorporated

it as final in this document.

2. Occupational Mix Adjustment

Section 1886(d)(10)(D)(i) of the Act requires the Secretary to

publish guidelines to be used 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,

[[Page 46186]]

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.

As noted in the proposed rule (61 FR 27459), we did not propose

collecting occupational mix data ourselves in light of past experience.

Instead, we solicited suggestions about any occupational mix data

sources that are available on a national basis. In addition, we

indicated that we were willing to consider suggestions about other

methods that would account for occupational mix in the wage index

reclassification process.

Comment: We received three comments on this issue. One commenter

believes that collection of the occupational mix data is burdensome,

that the data are unreliable, and that we should therefore eliminate

the use of such data. One commenter urged that the AHA continue to

collect the data for HCFA. The final commenter suggested that we

consider using the Geographic Reference Report to obtain occupational

mix information. That commenter noted, however, that this collection

effort would have to be expanded for our use.

Response: The AHA has notified us that it does not have enough

demand for these data to warrant continued collection. Generally, the

AHA, as well as HCFA, have found that hospitals do not want to provide

occupational breakdowns in a survey format. The Geographic Reference

Report would have to be expanded and tailored to fit our needs, which

means that it would be unavailable for at least several years as a data

source for this purpose. As there is no readily available data source

that can be used immediately to represent occupational mix data for the

purposes of reclassification applications, it appears that we will be

unable to continue to use such data as an alternative for hospital

reclassification applications. However, since the 1993 AHA data are

available for reclassification requests for FY 1998, we will not make a

final decision in this rule. If a suitable source of occupational mix

data becomes available in the next year, we will consider using it

beginning with reclassifications for FY 1999.

Comment: We received one comment from a hospital that was concerned

that it might not qualify for reclassification for purposes of using

the wage index of a proximate area because it could not meet the 108

percent qualifying criteria. This commenter noted that the hospital is

located in an area where it materially influences the average hourly

wage in its area, but it does not dominate the area. The commenter

believes that the current criteria disadvantages such a hospital,

because it can no longer meet the 108 percent threshold for

reclassification.

Response: We have addressed similar comments a number of times. The

purpose of the reclassification wage criteria is to identify situations

in which a hospital would receive more appropriate payments if it were

redesignated to another area. The 108 percent criterion in particular

is designed to identify situations in which a hospital is significantly

disadvantaged by its current geographic classification. If a hospital's

wages are less than 8 percent higher than the average hourly wage in

the hospital's labor market area, we believe the hospital is not

significantly disadvantaged by the payments it would receive and,

therefore, geographic reclassification is not appropriate.

Comment: One commenter requested confirmation of the process by

which a group of hospitals withdraw its application for

reclassification. The commenter believes that all the hospitals must be

a party to the withdrawal request.

Response: The commenter is correct. The regulations at

Sec. 412.273(b) clearly state that all hospitals that are party to the

application must request the withdrawal in writing. Therefore, a

request to withdraw an approved application by the MGCRB must be agreed

upon and requested in writing by the entire group.

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 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

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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 moving 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 adopting a rebased and revised hospital market basket in

developing the FY 1997 update factor for the prospective payment rates.

The new market basket has been 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 the previous methodology, we relied

primarily on Medicare hospital cost report data for the rebasing. For

the rebased 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 are paid under Medicare Part B, we

analyzed HCRIS data to determine the professional component of

prov

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