Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 1998 Rates

SUMMARY: We are proposing to revise the Medicare hospital inpatient

prospective payment systems for operating costs and capital-related

costs to implement necessary changes arising from our continuing

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

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

factors necessary to determine prospective payment rates for Medicare

hospital inpatient services for operating costs and capital-related

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

after October 1, 1997. We are also setting forth proposed rate-of-

increase limits as well as proposing changes for hospitals and hospital

units excluded from the prospective payment systems.

DATES: Comments will be considered if received at the appropriate

address, as provided below, no later than 5 p.m. on August 1, 1997.

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

following address:

Health Care Financing Administration, Department of Health and Human

Services, Attention: BPD-878-P, P.O. Box 7517, Baltimore, MD 21207-

0517.

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

and three copies) to one of the following addresses:

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

Washington, DC 20201, or

Room C5-09-26, Central Building, 7500 Security Boulevard, Baltimore, MD

21244-1850.

Because of staffing and resource limitations, we cannot accept

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

to file code BPD-878-P. Comments received timely will be available for

public inspection as they are received, generally beginning

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

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

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

5 p.m. (phone: (202) 690-7890).

For comments that relate to information collection requirements,

mail a copy of comments to:

Office of Information and Regulatory Affairs, Office of Management and

Budget, Room 10235, New Executive Office Building, Washington, DC

20503.

Attn: Allison Herron Eydt, HCFA Desk Officer; and Office of

Financial and Human Resources,

Management Planning and Analysis Staff, Room C2-26-17, 7500 Security

Boulevard, Baltimore, MD 21244-1850.

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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, and

Wage Index Issues.

Frank Emerson, (410) 786-4656, Capital Prospective Payment, Excluded

Hospitals, and Graduate Medical Education Issues.

SUPPLEMENTARY INFORMATION:

I. Background

A. Summary

Under section 1886(d) of the Social Security Act (the Act), a

system of payment for the operating costs of acute care hospital

inpatient stays under Medicare Part A (Hospital Insurance) based on

prospectively-set rates was established effective with hospital cost

reporting periods beginning on or after October 1, 1983. Under this

system, Medicare payment for hospital inpatient operating costs is made

at a predetermined, specific rate for each hospital discharge. All

discharges are classified according to a list of diagnosis-related

groups (DRGs). The regulations governing the hospital inpatient

prospective payment system are located in 42 CFR Part 412. On August

30, 1996, we published a final rule (61 FR 46166) to implement changes

to the prospective payment system for hospital operating costs

beginning with Federal fiscal year (FY) 1997.

As required by section 1886(g) of the Act, effective with cost

reporting periods beginning on or after October 1, 1991, we implemented

a prospective payment methodology for hospital inpatient capital-

related costs. Under the new methodology, a predetermined payment

amount per discharge is made for Medicare inpatient capital-related

costs.

B. Major Contents of This Proposed Rule

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

Medicare hospital inpatient prospective payment systems for both

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

effective for discharges occurring on or after October 1, 1997.

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

make:

1. Changes to the DRG Classifications and Relative Weights

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

DRG classifications and relative weights at least annually. Our

proposed changes for FY 1998 are set forth in section II. of this

preamble.

2. Changes to the Hospital Wage Index

In section III. of this preamble, we discuss proposed revisions to

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

addressed in this section include:

FY 1998 wage index update.

Revisions to the wage index based on hospital

redesignations.

Revised process for wage data verification.

3. Revision of the Operating Hospital Market Baskets

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

revised hospital market basket in developing the FY 1998 update factor

for the operating prospective payment rates and the excluded hospital

rate-of-increase limits.

[[Page 29903]]

4. Other Changes to the Prospective Payment System for Inpatient

Operating Costs

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

the regulations in 42 CFR Parts 412 and 413 and set forth certain

proposed changes concerning the following:

Elimination of day outlier payments.

Rural referral centers.

Indirect medical education.

Direct graduate medical education programs.

5. Changes to the Prospective Payment System for Capital-Related Costs

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

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

proposed changes and clarifications concerning the following:

Possible adjustments to capital minimum payment levels.

Special exceptions application process.

6. Changes for Hospitals and Hospital Units Excluded From the

Prospective Payment Systems

In section VII. of this preamble, we discuss the criteria for

``hospitals within hospitals'' seeking exclusion from the prospective

payment system. We also discuss technical clarifications concerning

exclusion of rehabilitation units.

7. Determining Prospective Payment Operating and Capital Rates and

Rate-of-Increase Limits

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

changes to the amounts and factors for determining the FY 1998

prospective payment rates for operating costs and capital-related

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

of-increase limits for cost reporting periods beginning in FY 1998 for

hospitals and hospital units excluded from the prospective payment

system.

8. Impact Analysis

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

proposed changes described in this proposed rule would have on affected

entities.

9. Capital Acquisition Model

Appendix B contains the technical appendix on the proposed FY 1998

capital cost model.

10. Revised Market Basket Data Sources

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

basket relative weights and choice of price proxies.

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

Hospitals and Hospitals Excluded From the Prospective Payment System

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

to Congress on our initial estimate of an update factor for FY 1998 for

both hospitals included in and hospitals excluded from the prospective

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

rule.

12. Proposed Recommendation of Update Factor for Hospital Inpatient

Operating Costs

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

E provides our recommendation of the appropriate percentage change for

FY 1998 for the following:

Large urban area and other area average standardized

amounts (and hospital-specific rates applicable to sole community

hospitals) for hospital inpatient services paid for under the

prospective payment system for operating costs.

Target rate-of-increase limits to the allowable

operating costs of hospital inpatient services furnished by

hospitals and hospital units excluded from the prospective payment

system.

13. Discussion of Prospective Payment Assessment Commission

Recommendations

The Prospective Payment Assessment Commission (ProPAC) is directed

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

appropriate percentage change factor to be used in updating the average

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

directs ProPAC to make recommendations regarding changes in each of the

Medicare payment policies under which payments to an institution are

prospectively determined. In particular, the recommendations relating

to the hospital inpatient prospective payment systems are to include

recommendations concerning the number of DRGs used to classify

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

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

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

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

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

each year.

We are printing ProPAC's March 1, 1997 report, which includes its

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

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

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

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

proposed rule. See section VIII. of this preamble for specific

information concerning where individual recommendations are addressed.

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

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

this proposed rule. For further information relating specifically to

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

II. Proposed Changes to DRG Classifications and Relative Weights

A. Background

Under the prospective payment system, we pay for inpatient hospital

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

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

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

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

is assigned. Each DRG weight represents the average resources required

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

resources used to treat cases in all DRGs.

Congress recognized that it would be necessary to recalculate the

DRG relative weights periodically to account for changes in resource

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

that the Secretary adjust the DRG classifications and relative weights

annually. These adjustments are made to reflect changes in treatment

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

relative use of hospital resources. The proposed changes to the DRG

classification system and the proposed recalibration of the DRG weights

for discharges occurring on or after October 1, 1997 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

[[Page 29904]]

series of automated screens called the Medicare Code Editor (MCE).

These screens are designed to identify cases that require further

review before classification into a DRG can be accomplished.

After screening through the MCE and any further development of the

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

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

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

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

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

measure relative hospital resource consumption to establish the DRG

weights and to classify current cases for purposes of determining

payment. The records for all Medicare hospital inpatient discharges are

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

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

changes and to recalibrate the DRG weights.

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

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

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

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

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

In general, principal diagnosis determines MDC assignment. However,

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

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

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

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

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

before classification to an MDC.

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

on a surgical hierarchy that orders individual procedures or groups of

procedures by resource intensity) and medical DRGs. Medical DRGs

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

surgical and medical DRGs are further differentiated based on the

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

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

nonsurgical procedures or minor surgical procedures generally not

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

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

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

diagnoses, such as extracorporeal shock wave lithotripsy for patients

with a principal diagnosis of urinary stones.

The changes we are proposing to make to the DRG classification

system for FY 1998 and other decisions concerning DRGs are set forth

below. Unless otherwise noted, our DRG analysis is based on a 10

percent random sample of the FY 1996 MedPAR file.

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

a. Stereotactic Radiosurgery. Effective October 1, 1995, procedure

code 92.3 (stereotactic radiosurgery) was created and classified as a

non-OR procedure. However, because this procedure had previously been

coded to procedure codes that are classified as operating room

procedures, we assigned procedure code 92.3 to the same surgical DRGs

as the predecessor codes. Therefore, in the following DRGs,

stereotactic radiosurgery is considered a non-OR procedure that affects

DRG assignment: In MDC 1, DRG 1 (Craniotomy Age >17 Except for Trauma),

DRG 2 (Craniotomy for Trauma Age >17), and DRG 3 (Craniotomy Age 0-17)

and, in MDC 10 (Endocrine, Nutritional and Metabolic Diseases and

Disorders), DRG 286 (Adrenal and Pituitary Procedures). In addition, in

MDC 17 (Myeloproliferative Diseases and Disorders and Poorly

Differentiated Neoplasms), procedure code 92.3 is considered a major OR

procedure for purposes of assignment to DRG 400 (Lymphoma and Leukemia

with Major OR Procedure) and DRGs 406 and 407 (Myeloproliferative

Disorders or Poorly Differentiated Neoplasms with Major OR

Procedure).1 We stated in the June 2, 1995 proposed rule (60

FR 29207) that we would analyze the stereotactic radiosurgery cases as

soon as the FY 1996 cases were available to ensure that these DRG

assignments were appropriate.

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

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

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

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

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

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In analyzing the FY 1996 MedPAR file, we find that there were

stereotactic radiosurgery cases assigned to DRGs 1, 286, 400, and 407.

In DRG 1, the average standardized charges for these cases is

approximately $16,400 compared to approximately $27,800 for DRG 1

overall and the lengths of stay are about 3 days and 10 days,

respectively. In DRG 286, the average charges for procedure code 92.3

are also much lower than all cases in that DRG, about $11,900 versus

$19,400. Again the length of stay is also much lower for stereotactic

radiosurgery, just over 1 day compared to almost 7 days for all DRG 286

cases.

Clearly, the cases associated with procedure code 92.3 are much

less resource intensive than the other cases in the DRGs to which it is

assigned. There are two courses of action that we could take. One, we

could continue to consider code 92.3 a non-OR procedure that affects

DRG assignment and reassign it to more appropriate surgical DRGs in MDC

1 and 11. On the other hand, we could consider it a non-OR code that

does not affect DRG assignment. In the latter situation, cases

currently assigned to surgical DRGs because of the performance of

stereotactic radiosurgery would be reassigned to medical DRGs in the

same MDC.

A review of the average charges for the medical DRGs in MDCs 1 and

11 to which these cases would be assigned reveals that these DRGs are

not as resource intensive as the stereotactic radiosurgery cases.

Therefore, due to the higher charges associated with these cases, we

are proposing to reassign procedure code 92.3 to DRGs 7 and 8

(Peripheral and Cranial Nerve and Other Nervous System Procedures) in

MDC 1 and DRGs 292 and 293 (Other Endocrine, Nutrition and Metabolic OR

Procedures).

We are also proposing to remove procedure code 92.3 from the list

of major OR procedures in MDC 17. Again the average charges of those

cases are lower than the other cases assigned to those DRGs. Therefore,

these cases would be assigned to DRGs 401 and 402 (Lymphoma and Non-

Acute Leukemia with Other OR Procedure) and DRG 408 (Myeloproliferative

Disorders or Poorly Differentiated Neoplasms with Other OR Procedure).

b. Sleep Apnea. In our August 30, 1996 final rule (61 FR 46168), we

discussed our review of the DRG assignment of cases in which surgery is

performed to correct obstructive sleep apnea (diagnosis code 780.57).

When coded as the principal diagnosis, sleep apnea is assigned to DRGs

34 and 35 (Other Disorders of the Nervous System) in MDC 1.

The result of our review was to assign several surgical procedures

used to correct sleep apnea to DRGs 7 and 8 (Peripheral and Cranial

Nerve and Other Nervous System Procedures). These procedures involved

repair of the palate

[[Page 29905]]

or pharynx (procedure codes 27.69, 29.4, and 29.59). Previously, since

none of these surgical procedures had been assigned to MDC 1, cases of

sleep apnea treated with one of these procedures had been assigned to

DRG 468 (Extensive OR Procedure Unrelated to Principal Diagnosis) or

DRG 477 (Nonextensive OR Procedure Unrelated to Principal Diagnosis).

An associated procedure that is also used to treat sleep apnea is

correction of cleft palate (procedure code 27.62). Currently,

correction of cleft palate is assigned only to DRG 52 (Cleft Lip and

Palate Repair) in MDC 3 (Diseases and Disorders of the Ear, Nose,

Mouth, and Throat). Thus, when this procedure is performed for sleep

apnea cases, the cases would be assigned to DRG 477. We are proposing

to add this surgical procedure to MDC 1. Like the palate and pharynx

repair procedures that were addressed last year, these cases are not

clinically similar to the other surgical DRGs in MDC 1; thus, we are

proposing to include them in DRGs 7 and 8.

c. Geniculate Herpes Zoster. Geniculate herpes zoster (diagnosis

code 053.11) is an acute viral disease characterized by inflammation of

spinal ganglia and by a vesicular eruption along the area of

distribution of a sensory nerve. In the August 30, 1996 final rule (61

FR 27447), we moved diagnosis codes 053.10 and 053.19 (Herpes zoster

with unspecified nervous system complication and Other herpes zoster,

respectively) from DRG 20 (Nervous System Infection Except Viral

Meningitis) to DRGs 18 and 19 (Cranial and Peripheral Nerve Disorders).

We considered moving diagnosis code 053.11 at that time, however, the

higher average charges associated with geniculate herpes zoster and

slightly higher length of stay led us to decide instead to leave 053.11

in DRG 20 and to reassess this decision in upcoming years.

We conducted an analysis of the cases assigned to DRG 20 using the

FY 1996 MedPAR file. The average standardized charges for these cases

is approximately $8,430, which is significantly lower than the average

charges for the DRG, approximately $21,180. The average length of stay

for the geniculate herpes zoster cases, approximately 6 days, is also

less than the average length of stay for the DRG, approximately 10

days. Based on these data, we are proposing to reassign diagnosis code

053.11 to DRGs 18 and 19, which have average charges of approximately

$8,460 and $5,460, respectively. The average length of stay for DRGs 18

and 19 are approximately 6 days and 4 days, respectively.

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

a. Heart Assist Devices. In November 1995, we amended our general

noncoverage decision concerning artificial hearts and related devices.

Section 65-15 of the Medicare Coverage Issues manual was revised to

allow coverage of the HeartMate Implantable Pneumatic Left Ventricular

Assist System (HeartMate IP LVAS) in accordance with its Food and Drug

Administration-approved use as a temporary mechanical circulation

support in nonreversible left ventricular failure as a bridge to

cardiac transplant. In order to receive Medicare coverage, all of the

following conditions must be met:

The patient is listed as an approved heart transplant

candidate by a Medicare-approved heart transplant center.

The implantation of the system is done in a Medicare-

approved heart transplant center. Written permission from the

listing center is needed if the patient has the implantation done at

another Medicare-approved center.

The patient is on inotropes.

The patient is on an intra-aortic balloon pump (if

possible).

The patient has left atrial pressure or pulmonary

capillary wedge pressure 20mm Hg with either--

--Systolic blood pressure 80 mm Hg; or

--Cardiac index of 2.0 1/min/m \2\.

A procedure code for implant of an implantable, pulsatile heart

assist system (37.66), which includes the HeartMate IP LVAS, was

created effective October 1, 1995. At that time, the procedure code was

assigned to DRGs 110 and 111 (Major Cardiovascular Procedures). Because

we now have a full year of cases coded with this procedure (FY 1996

MedPAR file), we have analyzed them to determine if this DRG assignment

remains appropriate.

In the full (100 percent) FY 1996 MedPAR file, there are 51 cases

of implant of an internal heart assist system (procedure code 37.66) in

MDC 5. Of these 51 cases, 18 were assigned to DRG 110 and none to DRG

111. The other 33 cases were assigned to DRG 103 (Heart Transplant),

DRG 104 (Cardiac Valve Procedures with Cardiac Cath), DRGs 106 and 107

(Coronary Bypass), and DRG 108 (Other Cardiothoracic Procedures). Of

the 18 cases assigned to DRG 110, the average charge is about $96,000

and the average length of stay is 22.5 days. The average charges for

all cases assigned to DRG 110 is about $36,500 and the average length

of stay is 10.1 days.

Thus, the cases coded with procedure code 37.66 are much more

resource intensive than the other cases assigned to DRG 110. In

reviewing the other surgical DRGs in MDC 5 for possible reassignment of

this procedure, we find there are two DRGs that contain cases that are

clinically similar to implant of heart assist device cases: DRG 103 and

DRG 108. For FY 1996, the average charge of cases in DRG 103 is

approximately $164,000 and the length of stay is 46 days. For DRG 108,

these statistics are about $54,000 and 12.1 days. Thus, the average

charge for DRG 103 is approximately $68,000 higher than the average

charge of the heart assist device cases and the average charge for DRG

108 is approximately $42,000 lower.

Because our general policy is to assign a procedure code to a DRG

with clinically similar cases that is the best match in terms of

resource use, we are proposing to assign procedure code 37.66 to DRG

108. We realize that there is still a large difference in the resource

use for DRG 108 and the heart assist device cases; however, there is

not a more appropriate assignment in MDC 5 for these cases. Our

proposal would improve the payment for these cases by approximately 46

percent. We note that because DRG 108 is ranked above DRGs 106 and 107

in the MDC 5 surgical hierarchy, the cases coded with 37.66 that would

have been classified to these DRGs would be assigned to DRG 108

beginning in FY 1998.

b. Automatic Implantable Cardioverter Defibrillators (AICD). For

several years, we have received correspondence concerning the

appropriate DRG assignment of procedures involving automatic

implantable cardioverter defibrillators (AICDs). These cases are

currently assigned to DRG 116 (Other Permanent Cardiac Pacemaker

Implant or AICD Generator or Lead Procedure), and are represented by

the following procedure codes:

37.95 Implantation of automatic cardioverter/defibrillator lead(s)

only

37.96 Implantation of automatic cardioverter/defibrillator pulse

generator only

37.97 Replacement of automatic cardioverter/defibrillator lead(s)

only

37.98 Replacement of automatic cardioverter/defibrillator pulse

generator only

As explained in detail in the September 1, 1992 final rule (57 FR

39749), the clinical composition and relative weights of the surgical

DRGs in MDC 5 do not offer a perfect match with the AICD cases.

However, review of those DRGs in terms of clinical coherence and

similar resource consumption led to the determination

[[Page 29906]]

that DRG 116 was the best possible fit. In that document, we stated

that we would continue to monitor these cases.

We last discussed this issue in the September 1, 1995 final rule

(60 FR 45780). At that time, we concluded that, although the average

charge for AICD cases was much higher than the average charge for DRG

116 overall, the AICD cases were clinically similar to the DRG 116

cases and should not be moved. In addition, a slight decrease in the

average charge for the cases between the FY 1993 and FY 1994 MedPAR

files led us to believe further reductions might be forthcoming since

there were new AICD devices entering the market that might lead to

increased price competition.

We reviewed the most current AICD cases as contained in the FY 1996

MedPAR file and found that the average standardized charge for AICD

cases assigned to DRG 116 was $28,777 compared to an average charge of

$21,330 for all cases in DRG 116. These data demonstrate that the

average charge for AICD cases continues to be much higher than the

average charge for all other DRG 116 cases. Therefore, in order to more

appropriately compensate hospitals for these cases, we are proposing to

move them to DRG 115 (Permanent Cardiac Pacemaker Implantation with

AMI, Heart Failure or Shock). Although the resource consumption of DRG

115 cases is similar to the AICD cases, they are not clinically

similar. In general, the patients classified to DRG 115 are seriously

ill and have a relatively long length of stay (10.2 days). However,

there are no other suitable DRGs in MDC 5 and we do not wish to create

a separate DRG for the AICD cases. As we have often stated in the past,

we are reluctant to create device-specific DRGs where the cost of the

device dominates the charges. We continue to believe that it is the

cost of the AICD device which is responsible for the high average

charge for these cases and not the intensity of hospital services

required to treat the patient. We are also proposing to revise the

title of DRG 115 to ``Permanent Cardiac Pacemaker Implant with AMI,

Heart Failure or Shock or AICD Lead or Generator Procedure.''

c. Coronary Artery Stent. Effective October 1, 1995, procedure code

36.06 (Insertion of coronary artery stent(s)) was introduced. As

dictated by our longstanding practice, we assigned this code to the

same DRG category as its predecessor codes. Therefore, procedure code

36.06 was assigned to DRG 112 (Percutaneous Cardiovascular Procedures),

as insertion of a stent is usually performed in conjunction with

percutaneous transluminal coronary angioplasty (PTCA).

We discussed this assignment and public comments we received in

both the September 1, 1995 final rule (60 FR 45785) and the August 30,

1996 final rule (61 FR 46171). Commenters protested the assignment of

procedure code 36.06 to DRG 112 because the hospital costs for

inserting coronary stents along with an angioplasty are significantly

greater than those for conventional angioplasty alone. The commenters

presented an analysis of the average charges and length of stay for

stent and nonstent cases assigned to DRG 112. Our response to these

commenters was that we would review the stent cases as soon as the FY

1996 MedPAR file was available, as these would be the first Medicare

data available for these cases.

Our analysis of the FY 1996 MedPAR data on coronary stent

implantation in Medicare beneficiaries has shown the following

findings:

The difference between the average length of stay for

the stent cases and the nonstent cases is 0.19 days (4.39 days

versus 4.20 days).

Charges for patients receiving a stent were

approximately $23,650, while charges for patients without stent

implant were approximately $17,480, for a difference of $6,170.

Of those beneficiaries who had a PTCA procedure in FY

1996, approximately 34 percent received a stent.

As review of stent cases in DRG 112 has shown a significant

variation in hospital charges, we are proposing to move these cases out

of that DRG. Although the coronary artery stent cases are not

clinically similar to the pacemaker cases in DRG 116, the resource

consumption of those cases is very similar. Therefore, absent any other

appropriate DRG, we are proposing to add cases including procedure

codes for PTCA in combination with insertion of coronary stent into DRG

116. Therefore, we are proposing to move into DRG 116 the following

procedure codes when performed in conjunction with procedure code

36.06:

35.96 Percutaneous valvuloplasty

36.01 Single vessel percutaneous transluminal coronary angioplasty

[PTCA] or coronary atherectomy without mention of thrombolytic agent

36.02 Single vessel percutaneous transluminal coronary angioplasty

[PTCA] or coronary atherectomy with mention of thrombolytic agent

36.05 Multiple vessel percutaneous transluminal coronary

angioplasty [PTCA] or coronary atherectomy performed during the same

operation, with or without mention of thrombolytic agent

36.09 Other removal of coronary artery obstruction

37.34 Catheter ablation of lesion or tissues of the heart

We further propose to change the title of DRG 116 to ``Other

Permanent Cardiac Pacemaker Implant or PTCA with Coronary Artery Stent

Implant.''

We will continue to monitor the stent cases and their assignment to

DRG 116. If PTCA cases with stent become a higher percentage of the

PTCA cases or the average charge for stent cases falls, we may

reconsider this assignment.

d. Circulatory Disorders (DRGs 121 and 122). In response to a

comment on the May 31, 1996 proposed rule, we stated in the August 30,

1996 final rule (61 FR 46172) that we would conduct a comprehensive

review of cases currently assigned to DRG 121 (Circulatory Disorders

with Acute Myocardial Infarction (AMI) and Cardiovascular

Complications, Discharged Alive) and DRG 122 (Circulatory Disorders

with AMI without Cardiovascular Complications, Discharged Alive) to

determine whether changes were needed to the list of complicating

conditions that can result in assignment to DRG 121. To carry out this

review, we analyzed the cases in the FY 1996 MedPAR file that were

assigned to either DRG 121 or 122. Through a variety of statistical

analyses of length of stay and standardized charge data, we assessed

the impact on resource use of all coded secondary diagnoses.

Our analysis of these secondary diagnosis codes revealed many cases

now assigned to DRG 122 in which certain secondary diagnoses are

associated with resource use comparable to cases assigned to DRG 121.

Although many of these cases involve secondary diagnoses that are not

strictly cardiovascular in nature, such as diagnosis code category 482

(Other bacterial pneumonia), we now believe that it is appropriate to

expand DRG 121 to include such major complications when they are

represented in significant volume among the cases in the DRG.

Continuing to limit DRG 121 only to cases involving the existing list

of cardiovascular complications would contribute to large variations in

the charges and lengths of stay for cases in DRG 122.

Therefore, we are proposing to change the title of DRG 121 to

``Circulatory Disorders with AMI and Major Complications, Discharged

Alive,'' and to add the following diagnosis codes to the list of

complications that would produce assignment to DRG 121 when present in

conjunction with the existing list of AMI diagnoses:

[[Page 29907]]

398.91 Rheumatic heart failure

416.0 Primary pulmonary hypertension

430 Subarachnoid hemorrhage

431 Intracerebral hemorrhage

432.0 Nontraumatic extradural hemorrhage

432.1 Subdural hemorrhage

432.9 Unspecified intracranial hemorrhage

433.01 Occluded basilar artery with cerebral infarction

433.11 Occluded carotid artery with cerebral infarction

433.21 Occluded vertebral artery with cerebral infarction

433.31 Occluded multiple and bilateral artery with cerebral

infarction

433.81 Occluded specified precerebral artery with cerebral

infarction

433.91 Occluded precerebral artery NOS with cerebral infarction

434.00 Cerebral thrombosis

434.01 Cerebral thrombosis with cerebral infarction

434.10 Cerebral embolism

434.11 Cerebral embolism with cerebral infarction

434.90 Cerebral artery occlusion

434.91 Cerebral artery occlusion with cerebral infarction

436 Acute, but ill-defined, cerebrovascular disease

481 Pneumococcal pneumonia

482.xx Other bacterial pneumonia (all 4th and 5th digits)

483.x Pneumonia due to other specified organism (all 4th digits)

484.x Pneumonia in infectious diseases classified elsewhere (all

4th digits)

485 Bronchopneumonia, organism unspecified

486 Pneumonia, organism unspecified

487.0 Influenza with pneumonia

507.x Pneumonitis due to solids and liquids (all 4th digits)

518.0 Pulmonary collapse

518.5 Pulmonary insufficiency following trauma and surgery

518.81 Respiratory failure

707.0 Decubitus ulcer

996.62 Infection and inflammatory reaction due to other vascular

device, implant, and graft

996.72 Other complications due to other cardiac device, implant,

and graft

In conjunction with these proposed changes, we note that the title

of DRG 122 would be revised to read ``Circulatory Disorders with AMI

without Major Complications, Discharged Alive.''

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

Connective Tissue)

a. Introduction. As discussed in detail below, we are proposing to

create several new DRGs in MDC 8 effective for discharges on or after

October 1, 1997. Specifically, we would replace current DRGs 214 and

215 (Back and Neck Procedures) with the following new DRGs:

DRG 496 Combined Anterior/Posterior Spinal Fusion

DRG 497 Spinal Fusion with CC

DRG 498 Spinal Fusion without CC

DRG 499 Back and Neck Procedures Except Spinal Fusion with CC

DRG 500 Back and Neck Procedures Except Spinal Fusion without CC

In addition, we are proposing to replace existing DRGs 221 and 222

(Knee Procedures) with new DRGs 501 and 502 (Knee Procedures with

Principal Diagnosis of Infection) and DRG 503 (Knee Procedures without

Principal Diagnosis of Infection). We believe that both of these

proposals would improve payment equity by increasing the DRG system's

ability to capture variations in resource costs for these cases.

b. Back and Neck Procedures. Currently, hospital inpatient cases

involving back and neck procedures generally are assigned to DRGs 214

and 215 (assuming a principal diagnosis that groups the case to MDC 8).

We have received correspondence indicating that within these DRGs,

cases involving spinal fusion procedures represent a distinctly more

complex and resource-intensive subset, and that payment under DRGs 214

and 215 is inadequate to cover the costs of treating patients that

require spinal fusion. Therefore, we conducted an analysis of the cases

assigned to DRGs 214 and 215 using the FY 1996 MedPAR file.

Within our sample, cases involving fusion procedures (procedure

codes 81.00-81.09) constituted approximately 35 percent of cases in DRG

214 (Back and Neck Procedures with CC) and 23 percent of those in DRG

215 (Back and Neck Procedures without CC). In DRG 214, the average

standardized charges for the fusion cases were nearly double the

charges of the nonfusion cases (approximately $25,300 versus $12,900).

There were also significant differences in charges in DRG 215; $14,400

for fusion cases and $8,500 for nonfusion cases. Lengths of stay for

fusion cases were also longer, although not dramatically so; 7.1 days

for fusion cases versus 5.4 days for other cases in DRG 214, and 3.8

days versus 3.1 days in DRG 215. In view of the volume of cases

involved and the clear differences in resource use, we concluded that

it would be appropriate to create additional DRGs to separate spinal

fusion cases from the other back and neck procedures.

Next, we expanded our analysis to determine whether it would be

appropriate to subdivide the spinal fusion cases according to whether

both anterior and posterior spinal fusion were performed. This

combination of procedures, which involves fusing both the front and

rear of the vertebrae, typically is performed on patients who have had

previous fusions that have not bonded effectively or who have several

vertebrae that need extensive fusion on both sides of the spine. As the

table below illustrates, the average charges and lengths of stay for

the cases involving both anterior and posterior spinal fusion were

markedly greater than for the other spinal fusion cases in either DRG

214 or 215.

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

Avg.

Avg. length of

Type of case charges stay (in

days)

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

Anterior and Posterior Spinal Fusion............ $51,200 12.3

DRG 214--Other Spinal Fusion.................... 24,300 6.9

DRG 215--Other Spinal Fusion.................... 14,300 3.8

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

Even though the cases in which both anterior and posterior spinal

fusions were performed represented only about 3 percent of all spinal

fusion cases in our sample, we concluded that the magnitude of the

differences in both average charges and lengths of stay warranted a

further subdivision of the spinal fusion cases.

Based on this analysis, we are proposing to replace the two

existing DRGs for back and neck procedures with five new DRGs. For ease

of reference and classification, current DRGs 214 and 215 would be made

invalid and we would establish new DRGs 496 through 500 to contain all

the cases that are currently grouped in DRGs 214 and 215. We believe

that the division of these cases into the new DRGs would improve

clinical coherence and provide for more appropriate payment for both

spinal fusion cases and cases involving other back and neck procedures.

Discharges would be assigned to each of the five proposed DRGs as

follows:

DRG 496 Combined Anterior/Posterior Spinal Fusion

DRG 496 would include any combination of procedure codes as

follows:

One or more of the following procedure codes--

81.02 Other cervical fusion anterior

81.04 Dorsal/dorsulum fusion anterior

81.06 Lumbar/lumbosac fusion anterior

AND

One or more of the following procedure codes--

81.03 Other cervical fusion posterior

81.05 Dorsal/dorsulum fusion posterior

81.08 Lumbar/lumbosac fusion posterior

[[Page 29908]]

DRGs 497 and 498 Spinal Fusion With and Without CC

DRGs 497 and 498 would include any of the following procedure

codes, as long as any combination of procedure codes would not

otherwise result in assignment to proposed DRG 496--

81.00 Spinal fusion NOS

81.01 Atlas-axis fusion

81.02 Other cervical fusion anterior

81.03 Other cervical fusion posterior

81.04 Dorsal/dorsulum fusion anterior

81.05 Dorsal/dorsulum fusion posterior

81.06 Lumbar/lumbosac fusion anterior

81.07 Lumbar/lumbosac fusion lateral

81.08 Lumbar/lumbosac fusion posterior

81.09 Refusion of spine

DRGs 499 and 500 Back and Neck Procedures Except Spinal Fusion With

and Without CC

All procedure codes in current DRGs 214 and 215 other than

procedure codes 81.00 through 81.09 would be assigned to DRGs 499 and

500.

c. Knee Procedures. On several occasions, most recently in our

September 1, 1993 final rule (58 FR 46286), we have examined cases in

DRG 209 (Major Joint and Limb Reattachment of the Lower Extremity) to

see whether hip replacement cases that involve infections or other

complications should be classified separately from the less complicated

cases in DRG 209. We have found that the average charges and lengths of

stay for cases with principal diagnoses of infection or complications

were only slightly higher than for all cases in DRG 209. When we

limited our analysis to cases with a principal diagnosis of infection,

we found that the cases had significantly higher charges than for DRG

209 overall, but in view of the small volume of cases (less than 0.5

percent of the total DRG 209 cases), we decided that changes in the

classification of cases in DRG 209 were not warranted.

In recent months, we have received several letters asking that we

revisit the issue of whether DRG refinements are needed to address

differences in resource use associated with orthopedic procedures where

deep infections are present. Our correspondents stated that these cases

are extremely resource intensive, and, because these complex cases are

often referred to specialty hospitals, such hospitals routinely receive

DRG payments for these cases that are much lower than the costs

incurred by the hospital. They believe that we should investigate the

possibility of creating a separate DRG for orthopedic surgical cases

that have serious infections, specifically, a new DRG for cases

involving orthopedic procedures of the lower extremities or spine with

a principal diagnosis of deep orthopedic infection of the lower

extremity or spine.

To evaluate this issue, we analyzed various classifications of

cases in MDC 8. We began by identifying all cases with a principal

diagnosis indicating deep orthopedic infection of the lower extremities

or spine. The diagnosis codes used were as follows:

711.05 Pyogenic arthritis pelvic region and thigh

711.06 Pyogenic arthritis lower leg

711.07 Pyogenic arthritis ankle and foot

711.08 Pyogenic arthritis other specified sites

730.05 Acute osteomyelitis pelvic region and thigh

730.06 Acute osteomyelitis lower leg

730.07 Acute osteomyelitis ankle and foot

730.08 Acute osteomyelitis other specified sites

730.15 Chronic osteomyelitis pelvic region and thigh

730.16 Chronic osteomyelitis lower leg

730.17 Chronic osteomyelitis ankle and foot

730.18 Chronic osteomyelitis other specified sites

730.25 Unspecified osteomyelitis pelvic region and thigh

730.26 Unspecified osteomyelitis lower leg

730.27 Unspecified osteomyelitis ankle and foot

730.28 Unspecified osteomyelitis other specified sites

996.66 Infection and inflammatory reaction due to internal joint

prosthesis

996.67 Infection and inflammatory reaction due to other internal

orthopedic device

For each of the DRGs into which these cases grouped, we then

compared the average standardized charges and average length of stay

for cases with any of the infection diagnoses listed above with other

cases in the DRGs. Unlike in the past, we did not limit our analysis to

DRG 209 but examined all DRGs within MDC 8 that focus on surgical

procedures of the lower extremities or spine, including DRGs 209; 210,

211, and 212 (Hip and Femur Procedures Except Major Joint); 214 and 215

(Back and Neck Procedures); and 221 and 222 (Knee Procedures).

For the most part, we again found that these cases represented only

a very small proportion of the total cases in the DRGs in question. In

DRG 209, for example, cases with one of the above diagnosis codes as

the principal diagnosis continued to constitute less than 1 percent of

all cases in the DRG. Moreover, although the average standardized

charges for the deep infection cases ($24,834) were approximately 21

percent higher than the charges for the remaining cases in the DRG

($19,297), the differences are well within one standard deviation of

the average charge. Given the small volume of cases, we again conclude

that changes in DRG 209 are not justified.

The only DRGs that we examined in which cases with a principal

diagnosis of deep infection represented more than 1 percent of total

cases in our sample were DRGs 221 and 222. As illustrated in the chart

below, there are significant differences in both average charges and

average length of stay between infection cases in these DRGs and other

cases in the DRGs.

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

Average

Number of Average length of

Type of case cases * charges (in stay (in

dollars) days)

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

DRG 221 (All cases).............. 451 16,529 7.2

DRG 221 with infection........... 152 23,174 11.4

DRG 221 w/out infection.......... 299 13,151 5.1

DRG 222 (All cases).............. 340 9,149 3.9

DRG 222 with infection........... 37 14,452 7.0

DRG 222 w/out infection.......... 303 8,502 3.5

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

* Based on the 10-percent random sample of the FY 1996 MedPAR file.

Thus, more than one-third of cases in DRG 221 had a principal

diagnosis of deep infection, the average length of stay for these cases

was more than twice as long as for the remaining cases, and average

charges were approximately 76 percent higher. Similarly, for the 12

percent of total DRG 222 cases with infection as the principal

diagnosis, the average length of stay was double that for other cases,

with average charges approximately 70 percent higher. Given

[[Page 29909]]

the proportional volume of cases involved, and the significant

differences in both average charges and length of stay for infection

cases in these DRGs, we concluded that DRG refinements are appropriate.

Based on this analysis, we are proposing to replace the two

existing DRGs for knee procedures with three new DRGs. Again, for ease

of reference and classification, current DRGs 221 and 222 would be made

invalid and we would establish new DRGs 501 through 503 to contain all

the cases that are currently grouped in DRGs 221 and 222. Discharges

would be assigned to each of the 3 proposed DRGs as follows:

DRG 501 Knee Procedures With Principal Diagnosis of Infection With CC

DRG 502 Knee Procedures With Principal Diagnosis of Infection Without

CC

DRG 501 and 502 would include any of the operating room procedures

now assigned to DRGs 221 and 222, when the principal diagnosis is any

of the following:

711.06 Pyogenic arthritis lower leg

730.06 Acute osteomyelitis lower leg

730.16 Chronic osteomyelitis lower leg

730.26 Unspecified osteomyelitis lower leg

996.66 Infection and inflammatory reaction due to internal joint

prosthesis

996.67 Infection and inflammatory reaction due to other internal

orthopedic device

DRG 503 Knee Procedures Without Principal Diagnosis of Infection

DRG 503 would include any of the operating room procedures now

assigned to DRGs 221 and 222 when the principal diagnosis is not listed

above under DRGs 501 and 502.

5. MDC 11 (Diseases and Disorders of the Kidney and Urinary Tract)

Among the ICD-9-CM coding changes that took effect October 1, 1995

was the addition of new procedure code 59.72 (injection of implant into

urethra or bladder neck). Although this procedure is not routinely

performed in an operating room, the code was previously included within

codes classified as operating room procedures. Thus, as is our

practice, we assigned this procedure code to the surgical DRGs to which

the procedure had formerly been assigned as a non-OR procedure that

affects DRG assignment. Therefore, procedure code 59.72 was assigned to

DRGs 308 and 309 (Minor Bladder Procedures) and DRG 356 (Female

Reproductive System Reconstructive Procedures).

In the June 2, 1995 proposed rule (60 FR 29209), we stated that we

would reevaluate the DRG classification of this code when data on its

use became available for analysis in 2 years, that is, in preparation

for the FY 1998 rulemaking process. We indicated that possible changes

would include moving the procedure code to a different surgical DRG or

classifying the code as a non-OR procedure that did not affect DRG

assignment.

In the FY 1996 MedPAR file, there were several cases with procedure

code 59.72 assigned to DRGs 308 and 309. The chart below compares

average charges and length of stay for cases in these DRGs with and

without the injection procedure.

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

Avg. charge Avg. length

Type of case Number of (in of stay

cases * dollars) (in days)

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

DRG 308 with procedure 59.72..... 5 6,978 4.2

DRG 308 w/out procedure 59.72.... 910 13,254 6.5

DRG 309 with procedure 59.72..... 7 5,879 1.4

DRG 309 w/out procedure 59.72.... 311 7,888 2.7

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

* Based on the 10-percent random sample of the FY 1996 MedPAR file.

As the table illustrates, cases in which injection of implant into

the urethra or bladder neck is the only relevant procedure for DRG

assignment purposes constitute a very small minority of the cases in

DRGs 308 and 309. However, these cases have lower average charges and

length of stay than other cases in the DRGs. Thus, we are proposing to

reclassify the procedure code as a non-OR procedure that does not

affect DRG assignment.

Under this proposal, cases currently assigned to DRGs 308 and 309

because of the performance of an implant injection would be reassigned

to medical DRGs in MDC 11. We believe that most of the cases involved

would be assigned to either DRGs 320, 321, and 322 (Kidney and Urinary

Tract Infections) or DRGs 331 and 332 (Other Kidney and Urinary Tract

Diagnoses). Both of these sets of DRGs have average charges closely in

line with the charges for cases in which procedure 59.72 now determines

DRG assignment.

We note that this change would also affect DRG 356 in MDC 13

(Diseases and Disorders of the Female Reproductive System). Within the

10 percent sample used for this analysis, only 2 of the 2,689 cases in

DRG 356 were assigned based on the presence of procedure code 59.72,

and as in DRGS 308 and 309, both the average charges and length of stay

were lower than for other cases.

6. Surgical Hierarchies

Some inpatient stays entail multiple surgical procedures, each one

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

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

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

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

ordering of surgical classes from most to least resource intensive,

performs that function. Its application ensures that cases involving

multiple surgical procedures are assigned to the DRG associated with

the most resource-intensive surgical class.

Because the relative resource intensity of surgical classes can

shift as a function of DRG reclassification and recalibration, we

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

reclassifications, to determine if the ordering of classes coincided

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

billing data used to compute the DRG relative weights.

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

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

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

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

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

most resource-intensive surgical class, therefore, involves weighting

each DRG for frequency to determine the average resources for each

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

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

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

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

determine whether surgical class A should be higher or lower than

[[Page 29910]]

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

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

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

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

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

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

This methodology may occasionally result in a case involving

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

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

alternatives. However, given that the logic underlying the surgical

hierarchy provides that the GROUPER searches for the procedure in the

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

cases involving multiple procedures, this result is unavoidable.

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

few instances when a surgical class with a lower average relative

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

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

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

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

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

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

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

diagnoses in the MDC but are occasionally performed on patients with

these diagnoses. Therefore, these procedures should only be considered

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

has been performed.

A second example occurs when the difference between the average

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

small differences generally do not warrant reordering of the hierarchy

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

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

average weight than the class ordered below it.

Based on the preliminary recalibration of the DRGs, we are

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

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

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

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

the unavailability of revised GROUPER software at the time this

proposed rule is prepared. Rather, we simulate most major

classification changes to approximate the placement of cases under the

proposed reclassification and then determine the average charge for

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

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

surgical hierarchy changes after the revised GROUPER is received and

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

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

anticipate that the final recalibrated weights will be somewhat

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

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

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

We propose to revise the surgical hierarchy for the Pre-MDC DRGs,

MDC 9 (Diseases and Disorders of the Skin, Subcutaneous Tissue and

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

Disorders), and MDC 12 (Diseases and Disorders of the Male Reproductive

System) as follows:

In the Pre-MDC DRGs, we would reorder Bone Marrow

Transplant (DRG 481) above Liver Transplant (DRG 480).

In MDC 9, we would reorder Perianal and Pilonidal

Procedures (DRG 267) above Breast Procedures (DRGs 257-262).

In MDC 10, we would reorder OR Procedures for Obesity

(DRG 288) above Skin Graft and Wound Debridement (DRG 287).

In MDC 12, we would reorder Circumcision (DRGs 342 and

343) above Transurethral Prostatectomy (DRGs 336 and 337).

7. Refinement of Complications and Comorbidities List

There is a standard list of diagnoses that are considered

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

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

secondary condition, would be considered a substantial complication or

comorbidity.

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

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

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

the CC list.

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

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

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

be considered a valid CC in combination with a particular principal

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

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

preclude duplicative coding or inconsistent coding from being treated

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

the complicated and uncomplicated DRGs in a pair.

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

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

secondary diagnoses were established using the following five

principles:

Chronic and acute manifestations of the same condition

should not be considered CCs for one another (as subsequently

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

Specific and nonspecific (that is, not otherwise

specified (NOS)) diagnosis codes for a condition should not be

considered CCs for one another.

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

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

malignant, should not be considered CCs for one another.

The same condition in anatomically proximal sites

should not be considered CCs for one another.

Closely related conditions should not be considered CCs

for one another.

The creation of the CC Exclusions List was a major project

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

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

used for eliminating certain diagnoses from consideration as CCs were

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

considered complications or comorbidities of another diagnosis. For

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

have continued to review the remaining CCs to identify additional

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

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

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

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

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

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

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

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

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

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

rule for the FY 1996 revisions (60 FR 45782); and the August 30, 1996

final rule for the FY 1997 revisions (61 FR 46171).

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

take into account the changes that will be made

[[Page 29911]]

in the ICD-9-CM diagnosis coding system effective October 1, 1997, as

well as the proposed CC changes described above. (See section II.B.9,

below, for a discussion of ICD-9-CM changes.) These proposed changes

are being made in accordance with the principles established when we

created the CC Exclusions List in 1987.

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

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

proposed rule.

Tables 6E and 6F in section V. of the Addendum to this proposed

rule contain the proposed revisions to the CC Exclusions List that

would be effective for discharges occurring on or after October 1,

1997. Each table shows the principal diagnoses with proposed changes to

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

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

provided in an indented column immediately following the affected

principal diagnosis.

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

Exclusions List. Beginning with discharges on or after October 1, 1997,

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 6F--Deletions from

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

1, 1997 the indented diagnoses will be recognized by the GROUPER as

valid CCs for the asterisked principal diagnosis.

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

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

the Department of Commerce. It is available in hard copy for $92.00

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

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

Exclusions List (which should include the identification accession

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

National Technical Information Service; United States Department of

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

calling (703) 487-4650.

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

Exclusions List (FYs 1989, 1990, 1991, 1992, 1993, 1994, 1995, 1996,

and 1997) and those in Tables 6E and 6F 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, 1997.

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 14.0, is available for $195.00,

which includes $15.00 for shipping and handling. Version 15.0 of this

manual, which will include the final FY 1998 DRG changes, will be

available in October 1997 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, September 1, 1995, and August 30, 1996, 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, 60 FR 45783, and 61 FR 46173,

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.

Based on this year's review, we are proposing to move procedure code

54.92 (Removal of foreign body from peritoneal cavity) to MDC 11 and

assign it to DRG 315 (Other Kidney and Urinary Tract OR Procedures). We

note that, under the current DRGs, when procedure code 54.92 is coded

in addition to a principal diagnosis code of 868.14 (injury with open

wound into retroperitoneum), the case is assigned to DRG 468.

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

reviewed the list of procedures that produce assignments to DRGs 468,

476, and 477 to ascertain if any of those procedures should be moved

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

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

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

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

477.

In reviewing the list of OR procedures that produce DRG 468

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

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

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

477. We identified two procedures--other surgical occlusion of

abdominal arteries (procedure code 38.86) and other arthrotomy of knee

(procedure code 80.16)--that are significantly less resource intensive

than the other procedures assigned to DRG 468.

[[Page 29912]]

Therefore, we are proposing to move procedure codes 38.86 and 80.16 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.

All of these proposed changes would be effective with discharges

occurring on or after October 1, 1997.

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

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

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

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

Coordination and Maintenance Committee was formed. This is a Federal

interdepartmental committee charged with the mission of maintaining and

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

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

to reflect newly developed procedures and technologies and newly

identified diseases. The Committee is also responsible for promoting

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

communication techniques with a view toward standardizing coding

applications and upgrading the quality of the classification system.

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

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

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

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

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

Procedures: Tabular List and Alphabetic Index.

The Committee encourages participation in the above process by

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

public meetings for discussion of educational issues and proposed

coding changes. These meetings provide an opportunity for

representatives of recognized organizations in the coding fields, such

as the American Health Information Management Association (AHIMA)

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

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

well as physicians, medical record administrators, health information

management professionals, and other members of the public to contribute

ideas on coding matters. After considering the opinions expressed at

the public meetings and in writing, the Committee formulates

recommendations, which then must be approved by the agencies.

The Committee presented proposals for coding changes at public

meetings held on June 6 and December 5 and 6, 1996, and finalized the

coding changes after consideration of comments received at the meetings

and in writing within 60 days following the December 1996 meeting. The

initial meeting for consideration of coding issues for implementation

in FY 1999 will be held on June 6, 1997. Copies of the minutes of the

June 1996 meeting may be obtained by writing to one of the co-

chairpersons representing NCHS and HCFA. The minutes of the December

1996 meeting can be obtained from the HCFA Home Page @ http://

www.hcfa.gov.pubaffr.htm. Paper copies of these minutes will no longer

be available and the mailing list will be discontinued. We encourage

commenters to address suggestions on coding issues involving diagnosis

codes to: Donna Pickett, Co-Chairperson; ICD-9-CM Coordination and

Maintenance Committee; NCHS; Room 1100; 6525 Belcrest Road;

Hyattsville, Maryland 20782. Comments may be sent by E-mail to:

[email protected].

Questions and comments concerning the procedure codes should be

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

and Maintenance Committee; HCFA, Office of Hospital Policy; Division of

Prospective Payment System; C5-06-27; 7500 Security Boulevard;

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

[email protected].

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

effective October 1, 1997. The new ICD-9-CM codes are listed, along

with their proposed DRG classifications, in Tables 6A and 6B (New

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

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

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

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

written comments were considered before the codes were approved.

Therefore, we are soliciting comments only on the proposed DRG

classification.

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

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

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

or have been deleted are in Table 6C (Invalid Diagnosis Codes). These

invalid diagnosis codes will not be recognized by the GROUPER beginning

with discharges occurring on or after October 1, 1997. The

corresponding new or expanded diagnosis codes are included in Table 6A.

Revisions to diagnosis code titles are in Table 6D (Revised Diagnosis

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

revised codes. For FY 1998, there are no procedure codes that have been

replaced or deleted nor are there any revisions to procedure code

titles.

10. Other Issues--MDC 22 (Burns)

Under the current DRG system, burn cases generally are assigned to

one of six DRGs in MDC 22 (Burns). These DRGs-- DRGs 456 through 460

and 472--have been in place without change since 1986. Recently, we

have received several letters from representatives of facilities that

specialize in treating burn cases asserting that the existing DRGs do

not adequately capture the variation in resource use associated with

different types of burn cases. Among these correspondents' concerns are

the following:

In general, burn centers are disadvantaged because these

facilities tend to treat the most complicated and costly burn cases,

which are not always adequately defined and compensated under the

existing burn DRGs. At the same time, less complicated cases (with

lower costs and shorter lengths of stay) in the same DRGs can be

treated by hospitals that do not specialize in the treatment of burn

cases. As a result, some burn centers are experiencing a net loss of

income on cases in each of the burn DRGs. In some cases, this has led

to coding decisions that result in burn patients being assigned to non-

burn DRGs because these DRGs result in higher payments to hospitals.

DRG 456 (Burns, Transferred to Another Acute Care

Facility) either should be revised to include only cases transferred to

hospitals with a burn center or should be eliminated. This DRG

originally was designed to encourage transfers of burn patients to

hospitals with burn centers. Although it provides appropriate payment

in these situations, problems arise when burn centers treat patients

with extensive burns and then transfer them to hospitals closer to the

patients' homes for the final stages of acute care. Burn centers might

be severely penalized financially for such transfers, even though the

transfers may be both cost-effective and in the best interests of the

patient.

DRG 472 (Extensive Burns with OR Procedure) does not

capture fully the universe of critically ill, high cost

[[Page 29913]]

patients with extensive burn injuries. Currently, a patient must have a

burn of at least 50 percent of the total body surface area (or a third

degree burn covering at least 10 percent of the body) to be assigned to

DRG 472, which is by far the highest-weighted burn DRG. However, some

patients not assigned to this DRG experience equally high rates of

mortality and morbidity, with concomitant high resource use and long

lengths of stay. To address this problem, a new critical care burn DRG

should be created that would define patients by age, burn size, and

presence of co-morbidities, such as the presence of smoke inhalation,

liver or renal failure, and others.

To begin to examine these assertions, we have conducted a

preliminary analysis of cases assigned to the burn DRGs. Although the

overall volume of cases assigned to the burn DRGs is relatively small

(a combined total of about 5,000 Medicare cases in FY 1996), there is

clearly a large degree of heterogeneity in both charges and lengths of

stay for burn cases. For example, although approximately 75 percent of

cases in DRG 456 show lengths of stay below the mean of 7.3 days, a

small but significant group of cases have lengths of stay of 21 days or

more, resulting in DRG 456 having the largest length of stay

coefficient of variation of all DRGs (The coefficient of variation is a

statistical measure used to evaluate relative dispersions among all

values in a set of data.) Other DRGs in MDC 22 also have above-average

coefficients of variation. Although indications of statistical

heterogeneity are not uncommon in small volume DRGs, we believe that a

more in-depth analysis of the burn DRGs is appropriate.

Therefore, as part of our FY 1999 rulemaking agenda, we intend to

conduct a comprehensive review of MDC 22 to determine whether changes

in these DRGs can increase their ability to explain the variation in

resource use among burn cases. We welcome public comments on this

issue, particularly specific suggestions on the most appropriate ways

to categorize related diagnosis and procedure codes to produce DRG

groupings that would reflect more homogeneous resource use. We note

that any suggestions involving other types of payment adjustments for

hospitals designated as burn centers would require legislative action.

We intend to discuss our findings and, if appropriate, propose

modifications to MDC 22, in the FY 1999 proposed rule.

C. Recalibration of DRG Weights

We are proposing to use the same basic methodology for the FY 1998

recalibration as we did for FY 1997. (See the August 30, 1996 final

rule (61 FR 46176).) That is, we would recalibrate the weights based on

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

current charge information available, the FY 1996 MedPAR file, rather

than the FY 1995 MedPAR file. The MedPAR file is based on fully-coded

diagnostic and surgical procedure data for all Medicare inpatient

hospital bills.

The proposed recalibrated DRG relative weights are constructed from

FY 1996 MedPAR data, based on bills received by HCFA through December

1996, from all hospitals subject to the prospective payment system and

short-term acute care hospitals in waiver States. The FY 1996 MedPAR

file includes data for approximately 11.1 million Medicare discharges.

The methodology used to calculate the proposed DRG relative weights

from the FY 1996 MedPAR file is as follows:

To the extent possible, all the claims were regrouped

using the proposed DRG classification revisions discussed above in

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

unavailability of revised GROUPER software, we simulate most major

classification changes to approximate the placement of cases under the

proposed reclassification. However, there are some changes that cannot

be modeled.

Charges were standardized to remove the effects of

differences in area wage levels, indirect medical education costs,

disproportionate share payments, and, for hospitals in Alaska and

Hawaii, the applicable cost-of-living adjustment.

The average standardized charge per DRG was calculated by

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

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

We then eliminated statistical outliers, using the same

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

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

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

for each DRG.

The average charge for each DRG was then recomputed

(excluding the statistical outliers) and divided by the national

average standardized charge per case to determine the relative weight.

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

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

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

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

counted as 0.5 of a total case.

We established the relative weight for heart and heart-

lung, liver, and lung transplants (DRGs 103, 480, and 495) in a manner

consistent with the methodology for all other DRGs except that the

transplant cases that were used to establish the weights were limited

to those Medicare-approved heart, heart-lung, liver, and lung

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

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

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

transplant centers.)

Acquisition costs for kidney, heart, heart-lung, liver,

and lung transplants continue to be paid on a reasonable cost basis.

Unlike other excluded costs, the acquisition costs are concentrated in

specific DRGs (DRG 302 (Kidney Transplant); DRG 103 (Heart Transplant

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

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

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

adjustment to prevent the relative weights for these DRGs from

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

the acquisition charges from the total charges on each transplant bill

that showed acquisition charges before computing the average charge for

the DRG and before eliminating statistical outliers.

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

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

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

in recalibrating the DRG weights for FY 1998. Using the FY 1996 MedPAR

data set, there are 36 DRGs that contain fewer than 10 cases. We

computed the weights for the 36 low-volume DRGs by adjusting the FY

1997 weights of these DRGs by the percentage change in the average

weight of the cases in the other DRGs.

The weights developed according to the methodology described above,

using the proposed DRG classification changes, result in an average

case weight that is different from the average case weight before

recalibration. Therefore, the new weights are normalized by an

adjustment factor, so that the average case weight after recalibration

is equal to the average case weight before recalibration. This

adjustment is intended to ensure that recalibration by itself neither

increases

[[Page 29914]]

nor decreases total payments under the prospective payment system.

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

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

that assures that the aggregate payments are neither greater than nor

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

changes. Although normalization is intended to achieve this effect,

equating the average case weight after recalibration to the average

case weight before recalibration does not necessarily achieve budget

neutrality with respect to aggregate payments to hospitals because

payment to hospitals is affected by factors other than average case

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

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

proposing to make a budget neutrality adjustment to assure that the

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

III. Proposed Changes to the Hospital Wage Index

A. Background

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

methodology for determining prospective payments to hospitals, the

Secretary must adjust the standardized amounts ``for area differences

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

reflecting the relative hospital wage level in the geographic area of

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

accordance with the broad discretion conferred under the Act, we

currently define hospital labor market areas based on the definitions

of Metropolitan Statistical Areas (MSAs), Primary MSAs (PMSAs), and New

England County Metropolitan Areas (NECMAs) issued by the Office of

Management and Budget (OMB). OMB also designates Consolidated MSAs

(CMSAs). A CMSA is a metropolitan area with a population of one million

or more, comprised of two or more PMSAs (identified by their separate

economic and social character). For purposes of the hospital wage

index, we use the PMSAs rather than CMSAs since they allow a more

precise breakdown of labor costs. If a metropolitan area is not

designated as part of a PMSA, we use the applicable MSA. Rural areas

are areas outside a designated MSA, PMSA, or NECMA.

We note that effective April 1, 1990, the term Metropolitan Area

(MA) replaced the term Metropolitan Statistical Area (MSA) (which had

been used since June 30, 1983) to describe the set of metropolitan

areas comprised of MSAs, PMSAs, and CMSAs. The terminology was changed

by OMB in the March 30, 1990 Federal Register to distinguish between

the individual metropolitan areas known as MSAs and the set of all

metropolitan areas (MSAs, PMSAs, and CMSAs) (55 FR 12154). For purposes

of the prospective payment system, we will continue to refer to these

areas as MSAs.

Section 1886(d)(3)(E) of the Act also requires that the wage index

be updated annually beginning October 1, 1993. Furthermore, this

section provides that the Secretary base the update on a survey of

wages and wage-related costs of short-term, acute care hospitals. The

survey should measure, to the extent feasible, the earnings and paid

hours of employment by occupational category, and must exclude the

wages and wage-related costs incurred in furnishing skilled nursing

services. We also adjust the wage index, as discussed below in section

III.B.3, to take into account the geographic reclassification of

hospitals in accordance with sections 1886(d)(8)(B) and 1886(d)(10) of

the Act.

B. FY 1998 Wage Index Update

The proposed FY 1998 wage index in section V. of the Addendum

(effective for hospital discharges occurring on or after October 1,

1997 and before October 1, 1998) is based on the data collected from

the Medicare cost reports submitted by hospitals for cost reporting

periods beginning in FY 1994 (the FY 1997 wage index was based on FY

1993 wage data). We propose to use the same categories of data that

were used in the FY 1997 wage index. Therefore, the proposed FY 1998

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.

We are proposing to calculate a separate Puerto Rico-specific wage

index to be applied to the Puerto Rico standardized amount. This wage

index will be calculated in the same manner as the national wage index

described below, but will be based solely on Puerto Rico's data. For

further explanation, see sections II.B.5 and III.A.6 of the Addendum to

this proposed rule.

Also, in response to a comment in the August 30, 1996 final rule,

we considered using data from Worksheet A-8-2 for the purpose of

excluding physician Part A salaries from the FY 1998 wage index

calculation (61 FR 46177). We stated that we would explore the

technical feasibility of using the data from that worksheet. However,

primarily because the intermediaries had already begun reviewing the FY

1994 cost report data and finalizing the Worksheet S-3 data, we did not

believe it would be appropriate to revise their instructions and

require them to make a change to their procedure. Therefore, we will

wait for the data from cost reporting periods beginning on or after

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

provide for the separate reporting of physician salaries. As we have

stated previously, we will review and evaluate these salary cost data

when considering appropriate changes to the FY 1999 wage index.

1. Verification of Wage Data From the Medicare Cost Report

The data for the proposed FY 1998 wage index were obtained from

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

to construct the proposed wage index includes FY 1994 data submitted to

the Health Care Provider Cost Report Information System (HCRIS) as of

the end of January 1997. As in past years, we performed an intensive

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

identify aberrant data.

Of the 5,197 hospitals in the database, 2,652 hospitals had data

elements that failed an initial edit. From mid-February 1997 through

early March 1997, intermediaries contacted hospitals to revise or

verify data elements that resulted in the edit failures. In addition,

intermediaries reviewed the database to ensure that no hospitals had

been inadvertently excluded from the database. As a result of that

review, data for two hospitals were added to the database.

Next, to check any revisions since the first edit, as well as to

apply additional edits based on the distribution of the data, we

subjected all of the data to edits a second time. As of March 14, 1997,

70 hospitals still had unresolved data elements. These unresolved data

elements are included in the calculation of the proposed FY 1998 wage

index pending their resolution before calculation of the final FY 1998

wage index. We have instructed the intermediaries to complete their

verification of questionable data elements and to transmit any changes

to the wage data (through HCRIS) no later

[[Page 29915]]

than June 16, 1997. We expect that all unresolved data elements will be

resolved by that date, and that the revised data will be reflected in

the final rule.

2. Computation of the Wage Index

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

Step 1--As noted above, we are proposing to base the FY 1998 wage

index on wage data reported on the FY 1994 Medicare cost reports. We

gathered data from each of the non-Federal, short-term, acute care

hospitals for which data were reported on the Worksheet S-3, Part II of

the Medicare cost report for the hospital's cost reporting period

beginning on or after October 1, 1993 and before October 1, 1994. In

addition, we included data from a few hospitals that had cost reporting

periods beginning in September 1993 and reported a cost reporting

period exceeding 52 weeks. These 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 1994 data.

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

(that is, direct salaries attributable to skilled nursing facility

services, home health services, and other subprovider components not

subject to the prospective payment system) from gross hospital salaries

to determine net hospital salaries. To determine total salaries plus

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

hospital fringe benefits, and any home office salaries and fringe

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

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

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

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

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

day increment from October 14, 1993 through April 15, 1995, for

hospital industry workers from Standard Industry Classification 806,

Bureau of Labor Statistics Employment and Earnings Bulletin. The annual

inflation rates used were 3.6 percent for FY 1993, 2.7 percent for FY

1994, and 3.3 percent for FY 1995. 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

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

10/14/93............... 11/15/93 1.038679

11/14/93............... 12/15/93 1.036376

12/14/93............... 01/15/94 1.034077

01/14/94............... 02/15/94 1.031784

02/14/94............... 03/15/94 1.029496

03/14/94............... 04/15/94 1.027213

04/14/94............... 05/15/94 1.024935

05/14/94............... 06/15/94 1.022662

06/14/94............... 07/15/94 1.020394

07/14/94............... 08/15/94 1.018131

08/14/94............... 09/15/94 1.015873

09/14/94............... 10/15/94 1.013620

10/14/94............... 11/15/94 1.010881

11/14/94............... 12/15/94 1.008150

12/14/94............... 01/15/95 1.005426

01/14/95............... 02/15/95 1.002709

02/14/95............... 03/15/95 1.000000

03/14/95............... 04/15/95 0.997298

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

For example, the midpoint of a cost reporting period beginning

January 1, 1994 and ending December 31, 1994 is June 30, 1994. An

inflation adjustment factor of 1.020394 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 1994 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 17

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 1994 cost reporting period.

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

rural labor market area prior to any reclassifications under sections

1886(d)(8)(B) or 1886(d)(10) of the Act. Within each urban or rural

labor market area, we added the total adjusted salaries plus fringe

benefits obtained in Step 3 for all hospitals in that area to determine

the total adjusted salaries plus fringe benefits for the labor market

area.

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

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

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

for the area.

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

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

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

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

national average hourly wage is $20.0804.

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.

Step 10--Following the process set forth above, we developed a

separate Puerto Rico-specific wage index for purposes of adjusting the

Puerto Rico standardized amounts. We added the total adjusted salaries

plus fringe benefits (as calculated in Step 3) for all hospitals in

Puerto Rico and divided the sum by the total hours for Puerto Rico (as

calculated in Step 4) to arrive at an overall average hourly wage of

$9.1956 for Puerto Rico. For each labor market area in Puerto Rico, we

calculated the hospital wage index value by dividing the area average

hourly wage (as calculated in Step 7) by the overall Puerto Rico

average hourly wage.

3. Revisions to the Wage Index Based on Hospital Redesignation

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

counties adjacent to one or more MSAs are considered to be located in

one of the adjacent MSAs if certain standards are met. Under section

1886(d)(10) of the Act, the Medicare Geographic Classification Review

Board (MGCRB) considers applications by hospitals for geographic

reclassification for purposes of payment under the prospective payment

system.

The methodology for determining the wage index values for

redesignated hospitals is applied jointly to the hospitals located in

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

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

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

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

index to redesignated hospitals is dependent on the hypothetical impact

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

value for the area to

[[Page 29916]]

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

would reduce the wage index value for the area to which the hospitals

are redesignated by 1 percentage point or less, the area 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 that combined wage index value.

If including the wage data for the redesignated hospitals

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

redesignated, both the area and the redesignated hospitals receive the

combined wage index value.

The wage index value for a redesignated rural hospital

cannot be reduced below the wage index value for the rural areas of the

State in which the hospital is located.

Rural areas whose wage index values would be reduced by

excluding the wage data for hospitals that have been redesignated to

another area continue to have their wage index values calculated as if

no redesignation had occurred.

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 index values calculated

exclusive of the wage data 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 value for an urban area below the statewide rural wage index

value, provided the urban area's wage index value prior to

reclassification was greater than the statewide rural wage index value.

Reclassification of hospitals may not result in the

reduction of the wage index value for any urban area whose wage index

value is below the statewide rural wage index value. 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 statewide rural wage index

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

each area is computed exclusive of the wage data for hospitals that

have been redesignated from the area for purposes of their wage index.

As a result, several urban areas listed in Table 4a have no hospitals

remaining in the area. This is because all the hospitals originally in

these urban areas have been reclassified to another area by the MGCRB.

These areas with no remaining hospitals receive the prereclassified

wage index value. The prereclassified wage index value will apply as

long as the area remains empty.

The proposed revised wage index values for FY 1998 are shown in

Tables 4A, 4B, 4C, and 4F in the Addendum to this proposed rule.

Hospitals that are redesignated should use the wage index values shown

in Table 4C. Areas in Table 4C may have more than one wage index value

because the wage index value for a redesignated rural hospital cannot

be reduced below the wage index value for the rural areas of the State

in which the hospital is located. When the wage index value of the area

to which a rural hospital is redesignated is lower than the wage index

value for the rural areas of the State in which the rural hospital is

located, the redesignated rural hospital receives the higher wage index

value, that is, the wage index value for the rural areas of the State

in which it is located, rather 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 1994 wage data. In

addition, Table 3C in the Addendum to this proposed rule includes the

adjusted (inflated) average hourly wage for each hospital based on the

FY 1994 data. The MGCRB will use the average hourly wage published in

the final rule to evaluate a hospital's application for

reclassification, unless that average hourly wage is later revised in

accordance with the wage data correction policy described in

Sec. 412.63(s)(2). In such cases, the MGCRB will use the most recent

revised data used for purposes of the hospital wage index. Hospitals

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

proposed wage data in applying to the MGCRB for wage index

reclassifications that would be effective for FY 1999. We note that in

adjudicating these wage index reclassification requests during FY 1998,

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

market area that are reflected in the final FY 1998 wage index.

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

completed its review. The proposed FY 1998 wage index values

incorporate all 364 hospitals redesignated for purposes of the wage

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

1886(d)(10) of the Act) for FY 1998. The final number of

reclassifications may be different because some MGCRB decisions are

still under review by the Administrator and because some hospitals may

withdraw their requests for reclassification.

Any changes to the wage index that result from withdrawals of

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

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

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

wage index value for specific geographic areas, but also whether

redesignated hospitals receive the wage index value for the area to

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

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

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

hospitals are redesignated may be affected.

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

MGCRB are permitted to withdraw their applications within 45 days of

the publication of this Federal Register document. The request for

withdrawal of an application for reclassification that would be

effective in FY 1998 must be received by the MGCRB by July 17, 1997. A

hospital that requests to withdraw its application may not later

request that the MGCRB decision be reinstated.

C. Requests for Wage Data Corrections

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

construct the proposed FY 1998 hospital wage index, we have made

available to the public a data file containing the FY 1994 hospital

wage data. In a memorandum dated February 28, 1997, we instructed all

Medicare intermediaries to inform the prospective payment hospitals

they serve that the wage data file would be available approximately

mid-March 1997. The intermediaries were also instructed to advise

hospitals of the alternative availability of these data through the

Internet at HCFA's home page (http://www.hcfa.gov), their

representative hospital organizations, or directly from HCFA (using

order forms provided by the intermediary). Additional details on

ordering this data file are discussed in

[[Page 29917]]

section IX.A. of this preamble, ``Requests for Data from the Public.''

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

Table 3C in the Addendum to this proposed rule contains each hospital's

adjusted average hourly wage used to construct the proposed wage index

values. A hospital can verify its average hourly wage as reflected on

its cost report (after taking into account any adjustments made by the

intermediary) by dividing the adjusted average hourly wage in Table 3C

by the applicable wage inflation adjustment factors as set forth above

in Step 3 of the computation of the wage index. An updated Table 3C

(along with applicable wage inflation adjustment factors) will be

included in the final rule.

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

their FY 1994 wage data. Moreover, the ultimate responsibility for

accurately completing the cost report rests with the hospital, which

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

filed. However, if after review of the wage data file or Table 3C, a

hospital believes that its FY 1994 wage data have been incorrectly

reported, the hospital must submit corrections along with complete,

detailed supporting documentation to its intermediary by May 15, 1997.

To be reflected in the final wage index, any wage data corrections must

be reviewed and verified by the intermediary and transmitted to HCFA

(through HCRIS) on or before June 16, 1997. These deadlines, which

correspond to the deadlines we used last year for developing the FY

1997 wage index, are necessary to allow sufficient time to review and

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

completed for development of the final prospective payment rates to be

published by August 29, 1997. We cannot guarantee that corrections

transmitted to HCFA after June 16, 1997, will be reflected in the final

wage index.

After reviewing requested changes submitted by hospitals,

intermediaries will transmit any revised cost reports to HCRIS and

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

If requested changes are not accepted, fiscal intermediaries will

notify hospitals in writing of reasons why the changes were not

accepted. This procedure will ensure that hospitals have every

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

wage index values. We believe that fiscal intermediaries are generally

in the best position to make evaluations regarding the appropriateness

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

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

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

effort to resolve the dispute. We note that the June 16 deadline also

applies to these requested changes, and we will not consider requests

to resolve such disputes that are not received by June 16.

We have created the process described above to resolve all

substantive wage data correction disputes before we finalize the wage

data for the FY 1998 payment rates. Accordingly, hospitals that do not

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

later opportunity to submit wage corrections or to dispute the

intermediary's decision with respect to requested changes.

We intend to make another file available in mid-August that will

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

values in the final rule. As with the file made available in March

1997, HCFA will make the August wage data file available to hospital

associations and the public. This August file, however, is being made

available only for the limited purpose of identifying any potential

errors made by HCFA or the intermediary in the entry of the final wage

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

initiation of new wage data correction requests. Hospitals are

encouraged to review their hospital wage data promptly after the

release of the second file.

If, after reviewing the August file, 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, including dates. These requests must be received by HCFA

and the intermediaries no later than September 15, 1997. Requests

mailed 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, MD 21244-1850. Each request also must be

sent to the hospital's fiscal intermediary. The intermediary will

review requests upon receipt and contact HCFA immediately to discuss

its findings.

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 wage data file. 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 HCRIS on or

before June 16, 1997.

Requests for correction of errors that were not, but

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

March 1997 data.

Requests to revisit factual determinations or policy

interpretations made by the intermediary or HCFA during the wage

data correction process.

Verified corrections to the wage index received timely (that is, by

September 15, 1997) will be effective October 1, 1997.

Again, we believe the wage data correction process described above

provides hospitals with sufficient opportunity to bring errors in their

wage data to the intermediary's attention. Moreover, because hospitals

will have access to the wage data in mid-August, they will have the

opportunity to detect any data entry or tabulation errors made by the

intermediary or HCFA before the implementation of the FY 1998 wage

index on October 1, 1997. 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 1998 (that is, by the

September 15, 1997 deadline). As indicated earlier, since a hospital

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

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

circumstances under which midyear corrections would be made. However,

should a midyear correction be necessary, the wage index change for the

affected area will be effective prospectively from the date the

correction is made.

[[Page 29918]]

D. Modification of the Process and Timetable for Updating the Wage

Index

Although the wage data correction process described above has

proven successful in the past for ensuring that the wage data used each

year to calculate the wage indexes are generally reliable and accurate,

we are concerned that there have been an excessive number of wage data

revisions occurring after the release of the wage data in mid-March.

Last year, in developing the FY 1997 wage index, the wage data were

revised between the proposed and the final rules for more than 13

percent of the hospitals (approximately 700 of 5,200). Since hospitals

are expected to submit complete and accurate data, and the data are

reviewed and edited by the intermediaries and HCFA, we believe that we

should be making few revisions after the release of the March wage data

file. According to information received from the intermediaries, these

late revisions are partly due to the lack of responsiveness of

hospitals in providing sufficient information to the intermediaries

during the desk reviews (that is, during the intermediary's review of

the hospital's cost report).

Our analysis of last year's wage data also shows that, although the

volume of revisions was high, the effect of the changes on the wage

index was minimal. Of the 368 labor market areas affected, only 4 (1.1

percent) experienced a change of 5 percent or more in their wage index

value and 39 (10.6 percent) experienced a change of 1 percent or more.

Thus, the intensity of work that must be performed in order to

incorporate these revisions in the 1 month available between the mid-

June date for revision requests and the mid-July date by which we must

begin calculation of the final wage index is not warranted in light of

the minimal changes to the actual wage index values.

Another problem with the current process is that it results in

corrections to the final wage index after the September 1 final rule

publication and before the October 1 effective date of the wage index.

Immediately following the development of the final wage index, a second

wage data file is made available in mid-August so that hospitals may

again verify the accuracy of their wage data. If a hospital detects an

error made by the intermediary or HCFA in the handling (entry or

transmission) of the wage data, the hospital may request a correction

(this year, by September 15). The corrections are published in the

Federal Register after the October 1 implementation date in a

correction notice to the final rule. We would prefer to eliminate the

need to republish certain wage index values after the final rule is in

effect.

Finally, hospitals base their geographic reclassification decisions

(whether or not to withdraw their applications) on the wage index

published in the proposed rule. Although the FY 1997 proposed and final

wage indexes were quite similar, we cannot ensure this will happen each

year if increasing numbers of hospitals delay the submittal to their

intermediaries of wage data supporting documentation until the May 15

deadline. We believe that a more informed reclassification decision

could be made if the proposed wage index more closely resembles the

final wage index. Therefore, we are proposing to revise the wage data

verification process beginning with the FY 1999 wage index.

1. Proposed Process and Timetable

The major change we are proposing to the current process would be

the requirement that wage data revisions be requested (and resolved)

earlier, before publication of the proposed rule. Subsequent

corrections would be allowed only for errors in handling the data (our

current timetable allows for such corrections after the final rule is

published). For example, the FY 1999 wage index will use FY 1995 cost

report data (that is, cost reports beginning in FY 1995) and become

effective October 1, 1998. Under the proposed timetable, hospitals

would be required to submit all requests for wage data revisions to

their intermediary by mid-December 1997. This would provide ample

opportunity for hospitals to evaluate the results of intermediaries'

desk reviews and prepare any requests for corrections. We note that the

desk reviews are performed on an ongoing basis as cost reports are

received from hospitals and, for the FY 1995 wage data, must be

completed prior to the mid-November 1997 deadline for submitting all FY

1995 wage data to HCRIS.

As under the current process, after reviewing requests for wage

data revisions submitted by hospitals, fiscal intermediaries will

transmit any revised cost report to HCRIS and forward a copy of the

revised Worksheet S-3, Part II to the hospital. If requested revisions

are not accepted, the fiscal intermediaries will notify the hospital in

writing of reasons why the changes were not accepted. We believe that

fiscal intermediaries are generally in the best position to make

evaluations regarding the appropriateness of a particular cost and

whether it should be included in the wage index data. However, if a

hospital disagrees with the intermediary's resolution of a requested

change, the hospital may contact HCFA in an effort to resolve the

dispute. All policy issues must be resolved by mid-January.

The proposed timetable for developing the annual update to the wage

index is as follows (an asterisk indicates no change from prior years):

Mid-November *

All desk reviews for hospital wage data are completed and revised

data transmitted by intermediaries to HCRIS.

Mid-December

Deadline for hospitals to request wage data revisions and provide

adequate documentation to support the request.

Mid-January

Deadline for intermediaries to submit to HCRIS all revisions

resulting from hospitals' requests for adjustments (as of mid-December)

(and verification of data submitted to HCRIS (as of mid-November)).

Early April

Edited wage data are available for release to the public.

May 1 *

Proposed rule published with 60-day comment period and 45-day

withdrawal deadline for geographic reclassification.

June 16, 1997

Deadline for hospitals to notify HCFA and intermediary that wage

data are incorrect due to mishandling of data (that is, error in data

entry or transmission) by intermediary or HCFA.

June 30, 1997

Deadline for intermediaries to transmit all revisions to HCRIS.

September 1 *

Publication of the final rule.

October 1 *

Effective date of updated wage index.

2. Cost Reporting Timetable

This proposed change will not significantly alter the time

hospitals have to ensure the accuracy of their data. In developing the

wage index for a given fiscal year, we use the most recent, reviewed

wage data, that is, wage data from cost reports that began in the

fiscal year 4 years earlier. For example, for the FY 1999 wage index,

we will use data from cost reporting periods beginning in FY 1995.

Hospitals must submit cost reports to their intermediaries within 150

days of the end of their cost reporting periods. Once the cost report

is received, the intermediary has 12 months to review and settle it.

As part of the settlement process, we require intermediaries to

conduct a desk

[[Page 29919]]

review of the wage data. The desk review program for hospital wage data

targets potentially aberrant data and checks the completeness and

accuracy of the data, including verifying that reported costs are in

conformance with our policy, before it is used in calculating the wage

index. The intermediary checks the wage data and supporting

documentation submitted by the hospital and contacts the hospital if

additional information is needed to verify the accuracy of the data.

When it is necessary for the intermediary to adjust a hospital's wage

data, the intermediary notifies the hospital in writing of the change

to the cost report and hospitals then have the opportunity to request

adjustments. This would continue to be the case.

Since intermediaries must settle cost reports within 12 months of

their receipt, most of the cost reports are settled by the time we

compile the data to calculate the wage index. We note, however, that

the annual update of the wage index is not tied directly to the cost

report settlement process since extensions or reopenings of settled

cost reports may be granted.

The following is an illustration of the process for settling a

typical cost report beginning in FY 1995. Of course, hospitals' cost

reporting periods may begin at any time during the year.

January 1, 1995

Cost reporting period begins.

December 31, 1995

Cost reporting period ends.

May 31, 1996

Cost report must be submitted by the hospital to the intermediary.

July 31, 1996

Cost report must be transmitted by the intermediary to HCRIS.

May 31, 1997

Cost report must be settled by the intermediary. (Desk review of

hospital wage data is performed on an ongoing basis by the intermediary

before the cost report is settled.)

July 31, 1997

Settled cost report must be transmitted by the intermediary to

HCRIS.

3. Impact of the Proposed Revised Timetable for Finalizing Wage Data

The most significant change from our current process is that we

would no longer release a preliminary wage data file prior to

hospitals' final opportunity to request corrections. We would instead

release a single data file in early April for the limited purpose of

identifying errors made by the intermediaries or HCFA in handling the

data. We no longer believe that the benefit of releasing the

preliminary data file outweighs the disadvantages in terms of increased

workload for the intermediaries. Under the current process,

intermediaries are required to verify the inclusion and accuracy of all

hospitals' wage data twice during the wage index development.

Verification is done in December and in July before the wage data

public use files are released in mid-March and mid-August.

Therefore, hospitals would no longer have until mid-May to request

wage data revisions. Instead, hospitals would have to request revisions

and provide supporting documentation by mid-December of the previous

year, and all policy issues would have to be resolved by mid-January.

We believe this proposed timetable for finalizing the wage data used in

the hospital wage index gives hospitals ample opportunity to ensure the

accuracy of the data and at the same time addresses the concerns we

have discussed (the number of revisions, the necessity of making

numerous corrections after the final rule, and the differences between

the proposed and final wage indexes). Moreover, we do not believe the

timetable change would impose any increased burden. Hospitals are

required to certify the completeness and the accuracy of the wage data

when they submit their cost reports, and the intermediaries complete

desk reviews before we begin to develop the wage index for a given

year. Hospitals would still have an opportunity to request revisions to

the cost report data. Although those requests would have to be made

earlier, hospitals would continue to have ample time to request

appropriate revisions given the timetable for cost report submission

and review.

We believe the proposed timetable is a logical step in the

evolution of the process for compiling the wage data used to calculate

the hospital wage index. For a number of years, the hospital wage index

was based on a wage survey that was not updated every year. Applicable

policies permitted hospitals to request and receive mid-year

corrections to the data on the wage survey. Beginning with FY 1994

(beginning on October 1, 1993), we used wage data submitted by

hospitals on Worksheet S-3, Part II of the hospital cost report, and we

update the wage data every year. We revised our wage data process

accordingly--we stopped making mid-year corrections to the wage data,

and instead attempted to finalize the wage data by the final rule.

The proposed timetable would shorten the time for revisions

somewhat further, in order to finalize wage data as much as possible

before publication of the proposed rule. Because we have used cost

report data for 5 years now, hospitals should be well aware of the

importance of submitting accurate wage data on the worksheet S-3, Part

II. And as intermediaries and hospitals have become increasingly

familiar with the data collection and verification process, handling

the data has become more routine and streamlined. For instance, over

the past year, we have greatly improved the overall efficiency of our

communications with the intermediaries through greater reliance on

electronic transmission of wage data. In short, then, there should be

less need for revising wage data after desk reviews, and we believe it

is reasonable and appropriate to revise the timetable for requesting

and resolving wage data revisions.

We would continue to make midyear corrections to the wage index in

accordance with Sec. 412.63(s)(2), 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 the fiscal year. Although we do not anticipate

that such situations would arise, this regulatory authority would

remain unchanged.

E. Proposed Wage Index Workgroup

We are concerned that the rapid and dramatic changes occurring in

hospitals' operating environments, combined with the current time lag

in the data used to construct the wage index, is leading to a situation

where the wage index may be becoming less representative of hospitals'

current labor costs. Hospitals' increasing reliance on contract labor

for a broadening array of functions, hospital mergers and the

development of integrated delivery systems, and the probable expansion

of the prospective payment system to other sites of care are factors

that indicate a need for a concerted effort to ensure that the data

required for calculating the wage index are available and reliable.

Furthermore, despite the improvements that resulted from the work of

the special Medicare Technical Advisory Group (MTAG) several years ago,

technical questions about the treatment of certain types of labor costs

continue to arise.

For these reasons, we believe there is a need for an ongoing

workgroup to address wage index related issues periodically. We are

interested in receiving input from representatives of the hospital

industry (and other provider types interested in the collection of wage

data) regarding the

[[Page 29920]]

need for such a workgroup and their willingness to participate. We are

also seeking public input regarding the structure and scope of such a

workgroup. In particular, we welcome comments on whether the workgroup

should be formally established (for example, a special MTAG), encompass

other provider types, or operate on an ongoing basis. We will respond

to comments we receive on this issue in the final rule.

IV. Revising the Hospital Operating Market Baskets

A. General Discussion

We use a hospital input price index (that is, the hospital ``market

basket'') to develop the inflation component update factors 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 terms rebasing and revising, although often used

interchangeably, actually denote different activities. Rebasing moves

the base year for the structure of costs of an input price index (for

example, 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 for a given base year. In the August 30,

1996 final rule, effective for FY 1997, we both rebased and revised the

hospital operating market baskets (61 FR 46186).

B. Revising the Hospital Market Basket

We propose this year to use a revised hospital market basket in

developing the FY 1998 update factor for the operating prospective

payment rates. In the August 30, 1996 final rule, we discussed the

possibility of revising the market basket when additional data became

available (61 FR 46187). Consistent with that discussion, we propose to

use a revised market basket which would still have a base year of FY

1992, but would incorporate additional data, specifically the Asset and

Expenditure Survey, 1992 Census of Service Industries, by the Bureau of

the Census, Economics and Statistics Administration, U.S. Department of

Commerce, which did not become available until after the FY 1997 final

rule was published. (For further discussion of the differences between

the proposed revised market basket and the current market basket, see

Appendix C of this proposed rule.)

In the current market basket, data for four major expense

categories (wages and salaries, employee benefits, pharmaceuticals, and

a residual category) are from Medicare hospital cost reports for

periods beginning in FY 1992 (that is, periods beginning on or after

October 1, 1991 and before October 1, 1992). These cost reports, which

we refer to as PPS-9 cost reports (the 9th year of PPS), are reported

in the Health Care Provider Cost Report Information System (HCRIS). In

the proposed hospital market basket, we still use the cost report data,

and categories and weights are unchanged from the current market

basket. Within the residual category, the categories and weights for

nonmedical professional fees and professional liability insurance are

also unchanged. (For a detailed discussion of the determination of

weights, see the August 30, 1996 final rule (61 FR 46187)).

Table 1 shows a comparison of the current and the proposed revised

operating market basket cost categories, weights, and price proxies.

For the proposed market basket, weights for the ``Utilities'' and ``All

Other'' cost categories, as well as most subcategories, were derived

using the Asset and Expenditure Survey, published by the Bureau of the

Census, Economics and Statistics Administration, U.S. Department of

Commerce, in conjunction with the latest available (1987) Input-Output

Table, produced by the Bureau of Economic Analysis (BEA), U.S.

Department of Commerce. The 1987 input-output cost shares, aged to 1992

using historical price changes between 1987 and 1992 for each category,

were allocated to be consistent with the newly available 1992 asset and

expenditure data.

The resulting combined data were allocated to be consistent with

the 1992 hospital cost report data. Revised relative weights for the

base year were then calculated for various expenditure categories. This

work resulted in the identification of 22 separate cost categories in

the revised market basket. Four categories previously separate were

combined with existing categories. Specifically, Business Services, and

Computer and Data Processing Services were combined with All Other

Labor-Intensive Services. Transportation Services was combined with All

Other Nonlabor-Intensive Services, and the Fuel, Oil, Coal etc.

category was split between Fuels (nonhighway) and Miscellaneous

Products. We combined these categories so that the market basket would

conform more closely with the 1992 Asset and Expenditure Survey.

Detailed descriptions of each of the four categories and their

respective price proxies can be found in the August 30, 1996 final rule

(61 FR 46323). Changing the structure of the market basket using the

1992 Asset and Expenditure Survey allows for a more accurate reflection

of the cost structures faced by hospitals. When the Bureau of the

Census or the BEA improves methodologies for the collection and

categorization of data, it is likely the weights will also change.

Table 1.--Comparison of Current 1992-Based Prospective Payment Hospital Market Basket With Proposed Revised 1992-

Based Prospective Payment Hospital Market Basket

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

Proposed

Current revised

1992-based 1992-based

Expense categories Price proxy excluded excluded

market market

basket \1\ basket

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

1. Compensation............................... ...................................... 61.390 61.390

A. Wages and Salaries..................... HCFA Occupational Wage Index.......... 50.244 50.244

B. Employee Benefits...................... HCFA Occupational Benefits Index...... 11.146 11.146

2. Nonmedical Professional Fees............... ECI-Compensation for Professional, 2.127 2.127

Specialty, and Technical.

3. Utilities.................................. ...................................... 2.470 1.542

A. Electricity............................ PPI Commercial Electric Power......... 1.349 0.927

B. Fuels (Nonhighway)..................... PPI Commercial Natural Gas............ 1.015 0.369

C. Water and Sewerage..................... CPI-U Water and Sewerage Maintenance.. 0.106 0.246

[[Page 29921]]

4. Professional Liability Insurance........... HCFA Professional Liability Insurance 1.189 1.189

Premium Index.

5. All Other Expenses......................... ...................................... 32.825 33.752

A. All Other Products..................... ...................................... 24.033 24.825

(1) Pharmaceuticals................... PPI Ethical (Prescription) Drugs...... 4.162 4.162

(2) Food.............................. ...................................... 3.459 3.386

(a) Direct Purchase............... PPI Processed Foods and Feeds......... 2.363 2.314

(b) Contract Service.............. CPI Food Away From Home............... 1.096 1.072

(3) Chemicals......................... PPI Industrial Chemicals.............. 3.795 3.666

(4) Medical Instruments............... PPI Medical Instruments and Equipment. 3.128 3.080

(5) Photographic Supplies............. PPI Photographic Supplies............. 0.399 0.391

(6) Rubber and Plastics............... PPI Rubber and Plastic Products....... 4.868 4.750

(7) Paper Products.................... PPI Converted Paper and Paperboard 2.062 2.078

Products.

(8) Apparel........................... PPI Apparel........................... 0.875 0.869

(9) Machinery and Equipment........... PPI Machinery and Equipment........... 0.211 0.207

(10) Miscellaneous Products........... PPI Finished Goods.................... 1.074 2.236

B. All Other Services..................... ...................................... 8.792 8.927

(1) Postage........................... CPI-U Postage......................... 0.272 0.272

(2) Telephone Services................ CPI-U Telephone Services.............. 0.531 0.581

(3) All Other: Labor Intensive........ ECI Compensation for Private Service 7.457 7.277

Occupations.

(4) All Other: Nonlabor Intensive..... CPI-U All Items....................... 0.532 0.796

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

Total............................. ...................................... 100.000 100.000

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

Note: Due to rounding, weights may not sum to total.

\1\ Expense categories based on proposed 1992-based hospital market basket for comparison purposes.

In calculating payments to hospitals, the labor-related portion of

the standardized amounts is adjusted by the hospital wage index. As

discussed in the August 30, 1996 final rule (61 FR 46189), for purposes

of determining the labor-related portion of the standardized amounts,

we sum the percentages of the labor-related items (that is, wages and

salaries, employee benefits, professional fees, business services,

computer and data processing services, postage, and all other labor-

intensive services) in the operating hospital market basket. Effective

for FY 1997, this summation resulted in a labor-related portion of the

hospital market basket of 71.246 percent, and a nonlabor-related

portion of 28.754 percent. Thus, since October 1, 1996, we have

considered 71.2 percent of operating costs to be labor-related for

purposes of the prospective payment system (we rounded to the nearest

tenth).

In connection with the revisions to the hospital market basket, we

have reestimated the labor-related share of the standardized amounts.

Based on the relative weights described in Table 2, the labor-related

portion (wages and salaries, employee benefits, professional fees,

postage, and all other labor-intensive services) is 71.066 percent, and

the nonlabor-related portion is 28.934 percent. Accordingly, effective

with discharges occurring on or after October 1, 1997, we are proposing

to revise the labor-related and nonlabor-related shares of the large

urban and other areas' standardized amounts used to establish the

prospective payment rates to 71.1 and 28.9, respectively. The amounts

in Table 2 reflect the revised labor-related and nonlabor-related

portions. We note that the labor-related portions of the rates

published in Table 2 have remained approximately the same. The labor-

related portion has decreased from 71.246 percent to 71.066 percent.

Table 2.--Labor-Related Share of Proposed 1992-Based Prospective Payment

Hospital Market Basket

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

Cost category Weight

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

Wages and salaries........................................... 50.244

Employee benefits............................................ 11.146

Professional fees............................................ 2.127

Postal services.............................................. 0.272

All other labor intensive.................................... 7.277

----------

Total labor-related...................................... 71.066

==========

Total nonlabor-related................................... 28.934

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

C. Selection of Price Proxies

Only four categories that are part of the current hospital market

basket do not appear in the proposed revised hospital market basket. Of

the 22 categories that are part of both the current and the proposed

revised market baskets, only the weights might differ. The wage and

price proxies selected for these cost categories are the same as those

selected last year. A description and discussion of each price proxy

are set forth in the August 30, 1996 final rule (61 FR 46324). The

price proxies are shown in Table 1, above. The makeup of the HCFA

Blended Occupational Wage Index and the HCFA Blended Occupational

Benefits Index used as proxies for Wages and Salaries and Employee

Benefits, respectively, remain the same as last year. (See 61 FR

27463.)

To examine the impact of the changes to the weights and the

reduction of the number of cost categories, we developed a comparison

for the period FY 1994 through FY 1999. Using historical data for FY

1994 through FY 1996, and forecasts for FY 1997 through FY 1999 for the

prospective payment market basket, we compared the percentage changes

for the current and the proposed revised market baskets.

[[Page 29922]]

Table 3.--Comparison of the Proposed Prospective Payment Hospital Market

Basket and the Current Prospective Payment Hospital Market Basket

Percent Change, FY 1994-1999

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

Current Proposed

hospital hospital

Federal fiscal year market market Difference

basket basket

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

Historical:

1994.................................. 2.6 2.6 0.0

1995.................................. 3.2 3.2 0.0

1996.................................. 2.5 2.4 -0.1

Forecasted:

1997.................................. 2.4 2.3 -0.1

1998.................................. 2.7 2.8 0.1

1999.................................. 3.0 2.9 -0.1

Historical Average:

1994-1996............................. 2.8 2.7 -0.1

Forecasted Average:

1997-1999............................. 2.7 2.7 0.0

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

Note that the historical average rate of growth for 1994 through

1996 for the improved proposed revised prospective payment hospital

market basket is almost equal to that of the current market basket. The

0.1 percentage point difference is less than the +/-0.25 percent

threshold for corrections for forecast error. The forecasted average

rate of growth for 1997 through 1999 for the revised market basket is

equal to that of the current market basket.

D. Separate Market Basket for Hospitals and Hospital Units Excluded

From the Prospective Payment System

As in the prospective payment hospital market basket, weights for

the six main cost categories contained in the excluded hospital market

basket (that is, weights for wages and salaries, employee benefits,

professional fees, malpractice insurance, pharmaceuticals, and the

residual category) remain the same. Only the weights for ``Utilities''

and the categories within ``All Other'' have been revised. Table 4

below shows weights for the current and proposed excluded hospital

market basket.

Table 4.--Comparison of Current 1992-Based Excluded Hospital Market Basket With Proposed Revised 1992-Based

Excluded Hospital Market Basket

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

Proposed

Current revised

1992-based 1992-based

Expense categories Price proxy excluded excluded

market market

basket \1\ basket

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

1. Compensation............................... ...................................... 63.721 63.721

A. Wages and Salaries..................... HCFA Occupational Wage Index.......... 52.152 52.152

B. Employee Benefits...................... HCFA Occupational Benefits Index...... 11.569 11.569

2. Nonmedical Professional Fees............... ECI-Compensation for Professional, 2.098 2.098

Specialty, and Technical.

3. Utilities.................................. ...................................... 2.557 1.675

A. Electricity............................ WPI Commercial Electric Power......... 1.396 1.007

B. Fuels (Nonhighway)..................... WPI Commercial Natural Gas............ 1.051 0.401

C. Water and Sewerage..................... CPI-U Water and Sewerage Maintenance.. 0.110 0.267

4. Professional Liability Insurance........... HCFA Professional Liability Insurance 1.081 1.081

Premium Index.

5. All Other Expenses......................... ...................................... 30.541 31.425

A. All Other Products..................... ...................................... 23.640 24.227

(1) Pharmaceuticals................... PPI Ethical (Prescription) Drugs...... 3.070 3.070

(2) Food.............................. ...................................... 3.581 3.468

(a) Direct Purchase............... PPI Processed Foods and Feeds......... 2.446 2.370

(b) Contract Service.............. CPI Food Away From Home............... 1.135 1.098

(3) Chemicals......................... PPI Industrial Chemicals.............. 3.929 3.754

(4) Medical Instruments............... PPI Medical Instruments and Equipment. 3.238 3.154

(5) Photographic Supplies............. PPI Photographic Supplies............. 0.413 0.400

(6) Rubber and Plastics............... PPI Rubber and Plastic Products....... 5.039 4.865

(7) Paper Products.................... PPI Converted Paper and Paperboard 2.134 2.182

Products.

(8) Apparel........................... PPI Apparel........................... 0.906 0.890

(9) Machinery and Equipment........... PPI Machinery and Equipment........... 0.218 0.212

(10) Miscellaneous Products........... PPI Finished Goods.................... 1.112 2.232

B. All Other Services..................... ...................................... 6.901 7.198

(1) Postage........................... CPI-U Postage......................... 0.282 0.295

(2) Telephone Services................ CPI-U Telephone Services.............. 0.549 0.631

(3) All Other: Labor Intensive........ ECI Compensation for Private Service 5.519 5.439

Occupations.

(4) All Other: Nonlabor Intensive..... CPI-U All Items....................... 0.551 0.833

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

Total............................. ...................................... 100.000 100.000

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

Note: Due to rounding, weights may not sum to total.

\1\ Expense categories based on proposed 1992-based hospital market basket for comparison purposes.

[[Page 29923]]

V. Other Decisions and Changes to the Prospective Payment System

for Inpatient Operating Costs

A. Elimination of Day Outlier Payments (Secs. 412.80 and 412.82)

Section 1886(d)(5)(A) of the Act provides for payments in addition

to the basic prospective payments for ``outlier'' cases, that is, cases

involving extraordinarily high costs (cost outliers) or long lengths of

stay (day outliers). That section also provides that, beginning with FY

1995, payments for day outliers will be phased out over 3 years. We

have discussed this phase out and its implementation in detail in the

September 1, 1994, September 1, 1995, and August 30, 1996 final rules

(59 FR 45366, 60 FR 45854, and 61 FR 46228, respectively). Since

payment for day outliers will be eliminated effective with discharges

occurring in FY 1998, we are proposing to make conforming revisions to

the regulations at Secs. 412.80, 412.82, 412.84, and 412.86. At the

same time, we are making a technical change to the provision concerning

outlier payments for transfer cases to conform the regulations text to

policies that we have stated in previous prospective payment system

rules but did not codify. See the final rules published September 1,

1995 (60 FR 45804) and September 1, 1993 (58 FR 46306-07).

B. Rural Referral Centers (Sec. 412.96)

Under section 1886(d) of the Act, hospitals generally are paid by

the Medicare program for inpatient hospital services covered by

Medicare in accordance with the prospective payment system. Certain

hospitals, however, receive special treatment under that system.

Section 1886(d)(5)(C)(i) of the Act specifically provides for

exceptions and adjustments to prospective payment amounts, as the

Secretary deems appropriate, to take into account the special needs of

rural referral centers.

Section 412.96(d) of the regulations provides that, for discharges

occurring before October 1, 1994, rural referral centers received the

benefit of payment for inpatient operating costs per discharge based on

the other urban payment amount rather than the rural standardized

amount. As of October 1, 1994, the other urban and rural standardized

amounts are the same. However, rural referral centers continue to

receive special treatment under both the disproportionate share

hospital payment adjustment and the criteria for geographic

reclassification. One of the ways that a rural hospital may qualify as

a rural referral center is to meet two mandatory criteria (specifying a

minimum case-mix index and a minimum number of discharges) and at least

one of three optional criteria (relating to specialty composition of

medical staff, source of inpatients, or volume of referrals). These

criteria are described in detail in 42 CFR 412.96(c).

1. Case-Mix Index Criteria

Section 412.96(c)(1) sets forth the case-mix index criteria and

provides that, for cost reporting periods beginning on or after October

1, 1986, a hospital's case-mix index for discharges ``during the

Federal fiscal year that ended 1 year prior to the beginning of the

cost reporting period for which the hospital is seeking referral center

status'' must be at least equal to the national case-mix index value as

established by HCFA or the median case-mix value for urban hospitals in

the region in which the hospital is located (excluding hospitals

receiving indirect medical education payments), whichever is lower. It

has come to our attention that the language in Sec. 412.96(c)(1) does

not clearly address situations in which the Federal fiscal year does

not end exactly 1 year prior to the beginning of the cost reporting

period for which the hospitals are seeking referral center status. In

order to minimize any confusion, we propose to clarify which case-mix

index values are used to determine referral center status.

Our policy, which we have applied consistently since 1986, is that

the case-mix index used for an individual hospital in the determination

of whether it meets the case-mix index criterion is the case-mix index

for discharges during the most recent Federal fiscal year that ended at

least 1 year prior to the beginning of the cost reporting period for

which the hospital is seeking referral center status.

In this proposed rule, we would revise Sec. 412.96(c)(1) to clarify

the time period used to calculate the case-mix index. We emphasize that

this clarification represents no substantive change in policy.

2. Updated Case-Mix and Discharge Criteria

As noted above, a rural hospital can qualify as a rural referral

center if the hospital meets two mandatory criteria (case-mix index and

number of discharges) and at least one of three optional criteria

(medical staff, source of inpatients, or volume of referrals). With

respect to the two mandatory criteria, a hospital may be classified as

a rural referral center if its--

Case-mix index is at least equal to the lower of the

median case-mix index for urban hospitals in its census region,

excluding hospitals with approved teaching programs, or the median

case-mix index for all urban hospitals nationally; and

Number of discharges is at least 5,000 discharges per year

or, if fewer, the median number of discharges for urban hospitals in

the census region in which the hospital is located. (The number of

discharges criterion for an osteopathic hospital is at least 3,000

discharges per year.)

a. Case-Mix Index. Section 412.96(c)(1) provides that HCFA will

establish updated national and regional case-mix index values in each

year's annual notice of prospective payment rates for purposes of

determining rural referral center status. In determining the proposed

national and regional case-mix index values, we follow the same

methodology we used in the November 24, 1986 final rule, as set forth

in regulations at Sec. 412.96(c)(1)(ii). Therefore, the proposed

national case-mix index value includes all urban hospitals nationwide,

and the proposed regional values are the median values of urban

hospitals within each census region, excluding those with approved

teaching programs (that is, those hospitals receiving indirect medical

education payments as provided in Sec. 412.105).

These values are based on discharges occurring during FY 1996

(October 1, 1995 through September 30, 1996) and include bills posted

to HCFA's records through December 1996. Therefore, in addition to

meeting other criteria, we are proposing that to qualify for initial

rural referral center status or to meet the triennial review standards

for cost reporting periods beginning on or after October 1, 1997, a

hospital's case-mix index value for FY 1996 would have to be at least--

1.3525; or

Equal to the median case-mix index value for urban

hospitals (excluding hospitals with approved teaching programs as

identified in Sec. 412.105) calculated by HCFA for the census region in

which the hospital is located.

The median case-mix values by region are set forth in the table

below:

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

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