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

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Parts 400, 409, 410, 411, 412, 413, 424, 440, 485, 488, 489,

and 498

[BPD-878-FC]

RIN 0938-AH55

Medicare Program; Changes to the Hospital Inpatient Prospective

Payment Systems and Fiscal Year 1998 Rates

AGENCY: Health Care Financing Administration (HCFA), HHS.

ACTION: Final rule with comment period.

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SUMMARY: We are revising the Medicare hospital inpatient prospective

payment systems for operating costs and capital-related costs to

implement necessary changes resulting from the Balanced Budget Act of

1997, Pub. L. 105-33, and changes arising from our continuing

experience with the systems. In the addendum to this final rule with

comment period, we describe changes in the amounts and factors

necessary to determine prospective payment rates for Medicare hospital

inpatient services for operating costs and capital-related costs.

Generally, these changes are applicable to discharges occurring on or

after October 1, 1997. We also set forth rate-of-increase limits and

changes for hospitals and hospital units excluded from the prospective

payment systems.

DATES: Effective Date: This rule is a major rule as defined in Title

5, United States Code, section 804(2). Section 4644 of Pub. L. 105-33

provides that, with respect to this final rule, the reference in Title

5, United States Code, section 801(a)(3)(A) to a 60-day delay in the

effective date for major rules is deemed to be a reference to a 30-day

delay. In accordance with these provisions, the provisions of this

final rule with comment period are effective on October 1, 1997.

Comment Period: Comments on the provisions resulting from the

Balanced Budget Act of 1997 will be considered if received at the

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

28, 1997. We will not consider comments concerning provisions that

remain unchanged from the June 2, 1997 proposed rule or that were

revised based on public comment.

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

following address: Health Care Financing Administration, Department of

Health and Human Services, Attention: BPD-878-FC, P.O. Box 7517,

Baltimore, MD 21207-0517.

If you prefer, you may deliver your written comments (one 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-FC. 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

Health Care Financing Administration, Office of Information Services,

Information Technology Investment Management Group, Division of HCFA

Enterprise Standards, Room C2-26-17, 7500 Security Boulevard,

Baltimore, MD 21244-1850

Copies: To order copies of the Federal Register containing this

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

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

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

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

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

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

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

and photocopy the Federal Register document at most libraries

designated as Federal Depository Libraries and at many other public and

academic libraries throughout the country that receive the Federal

Register.

FOR FURTHER INFORMATION CONTACT: Nancy Edwards, (410) 786-4531,

Operating Prospective Payment, DRG, and Wage Index Issues. Tzvi Hefter,

(410) 786-4487, 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.

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

reporting periods beginning on or after October 1, 1991, we also have

implemented a prospective payment methodology for hospital inpatient

capital-related costs. Under the capital-related cost methodology, a

predetermined payment amount per discharge is made for Medicare

inpatient capital-related costs.

B. Summary of the Provisions of the June 2, 1997 Proposed Rule

On June 2, 1997, we published a proposed rule in the Federal

Register (62 FR 29902) setting forth proposed changes to the Medicare

hospital inpatient prospective payment systems for both operating costs

and capital-related costs, which would be effective for discharges

occurring on or after October 1, 1997. Subsequently, on August 5, 1997,

the Balanced Budget Act of 1997, Public Law 105-33, was enacted. This

Act made major changes to the Medicare hospital payment systems, rates,

and policies effective beginning with FY 1998. These legislative

changes are summarized under section I.D. of this preamble. More

specific details on individual provisions that we are implementing in

this final rule with comment period are included under the various

sections of this preamble.

Following is a summary of the major changes that we had proposed to

make in the June 2, 1997 proposed rule:

We proposed changes for FY 1998 DRG classifications and

relative weights, as required by section 1886(d)(4)(c) of the Act.

We proposed to update the hospital wage index for FY 1998.

We also

[[Page 45967]]

proposed revisions to the wage index based on hospital redesignations

and a revised process for wage data verification.

We proposed to use a revised hospital market basket in

developing the recommended FY 1998 update factor for the operating

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

limits.

We discussed 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.

We discussed several provisions of the regulations in 42

CFR parts 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.

We proposed changes to the application of the criteria for

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

payment system. We also proposed technical clarifications concerning

exclusion of rehabilitation units.

In the addendum to the 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 proposed 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.

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

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

entities.

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

technical appendix on the proposed FY 1998 capital cost model.

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

sources used to determine the market basket relative weights and choice

of price proxies.

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

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

in Appendix E, we provided our recommendation of the appropriate

percentage change for FY 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.

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

1997 recommendations made by the Prospective Payment Assessment

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

Act to make recommendations on the appropriate percentage change factor

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

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

regarding changes in each of the Medicare payment policies under which

payments to an institution are prospectively determined. In particular,

the recommendations relating to the hospital inpatient prospective

payment systems are to include recommendations concerning the number of

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

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

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

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

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

March 1 of each year.

We printed ProPAC's March 1, 1997 report, which included its

recommendations, as Appendix F to the proposed rule. The

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

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

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

to the proposed rule.

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

A total of 341 items of correspondence containing comments on the

proposed rule were received. The main areas of concern addressed by the

commenters were the changes in the DRG classifications related to

coronary stents and stereotactic radiosurgery, and the request for

comments on future changes for burn cases. Among other areas of concern

addressed by the commenters were implementation of the FY 1999 wage

index and the policy change related to hospitals and hospital units

excluded from the prospective payment system (specifically, hospital-

within-hospital policy).

Summaries of the public comments received and our responses to

those comments appear in the individual related sections of the

preamble.

D. Relevant Provisions of the Balanced Budget Act of 1997

As noted above, on August 5, 1997, after we had issued the proposed

rule for the FY 1998 prospective payment system changes, the Balanced

Budget Act of 1997 was enacted. This Act made major changes that affect

Medicare payments for hospital inpatient services under the prospective

payment systems and the cost limits applicable to excluded hospitals,

as well as the direct graduate medical education payments. Because most

of these changes are effective October 1, 1997, we have had to make

some revisions to the June 2 proposals as well as make additional

changes. The provisions of Public Law 105-33 that we are implementing

in this final rule with comment period are as follows:

1. Hospital Operating Payment Update. The applicable percentage

change in the standardized amounts is 0 percent for FY 1998, the market

basket percentage increase minus 1.9 percentage points for all

hospitals in all areas for FY 1999, the market basket percentage

increase minus 1.8 percentage points for hospitals in all areas for FY

2000, the market basket percentage increase minus 1.1 percentage points

for hospitals for all areas for FYs 2001 and 2002, and the market

basket percentage increase for hospitals in all areas for FY 2003 and

subsequent fiscal years. (Section 4401(a))

Hospitals that do not receive disproportionate share (DSH) or

indirect medical education (IME) payments and are (MDH) for FY 1998 or

1999 will receive a higher update for that year if--

The hospital is in a State in which the aggregate

prospective payment system operating payments to these types of

hospitals is less than the aggregate prospective payment system

operating costs (an overall State negative operating margin) for FY

1995 cost reporting periods; and

The hospital itself has a negative operating prospective

payment system margin in the payment year. (Section 4401(b))

2. Hospital Capital Rate Reduction. The Federal capital rate and

the hospital-specific rate are reduced by applying the budget

neutrality factor

[[Page 45968]]

that was in effect in FY 1995, which results in a 15.68 percent

reduction in the rates. In addition, for FY 1998 through FY 2002, both

rates will be reduced an additional 2.1 percent. These reductions

together result in an overall reduction of 17.78 percent in the

unadjusted rates for the next 5 years. (Section 4402)

3. Disproportionate Share Payments. The DSH payments to hospitals

are reduced by 1 percent in FY 1998, 2 percent in FY 1999, 3 percent in

FY 2000, 4 percent in FY 2001, and 5 percent in FY 2002. (Section 4403)

4. Outlier Payments. Beginning in FY 1998, IME and DSH payments

will be made only on the base DRG payment rates and not on outlier

payments. In determining outlier payments, the fixed loss cost outlier

threshold will encompass payments for IME and DSH. (Section 4405)

5. Base Payment Rate to Puerto Rico Hospitals. The national share

of the Puerto Rico payment rate is increased from 25 to 50 percent.

Thus, these hospitals will be paid based on 50 percent of a national

payment amount (based on a discharge-weighted average of the large

urban and other urban national standardized amounts) and 50 percent of

the Puerto Rico payment amount. (Section 4406)

6. Special Reclassification. The Secretary is given discretionary

authority to deem Stanly County, North Carolina (a rural county) as a

part of the Charlotte-Gastonia-Rock Hill, North Carolina-South Carolina

MSA (a large urban area) for purposes of the prospective payment

system. (Section 4408)

7. New Guidelines for Geographic Reclassification. Public Law 105-

33 includes several provisions concerning geographic reclassification

under section 1886(d)(10) of the Act. For geographic reclassifications

for FY 1998 and subsequent years, the Secretary must establish and

publish alternative guidelines for a hospital that demonstrates that--

Its average hourly wage is at least 108 percent of the

average hourly wage of all other hospitals in its Metropolitan

Statistical Area (MSA) (or New England County Metropolitan Area

(NECMA));

It pays at least 40 percent of the adjusted uninflated

wages in the MSA; and

It submitted an application and was approved for

reclassification for the wage index for FYs 1992 through 1997. (Section

4409)

For reclassifications for FYs 1999, 2000, and 2001, a hospital may

seek reclassification to another area for purposes of DSH payment

whether or not the standardized amount is the same. (Section 4203(a))

For any hospital that has ever been classified as a rural referral

center (RRC), the Medicare Geographic Classification Review Board

(MGCRB) may not reject an application for reclassification for purposes

of the wage index on the basis of the 108 percent rule. (Section 4202)

For any hospital that is owned by a municipality and was

reclassified as an urban hospital for FY 1996, the Secretary must

exclude the overhead wages and hours associated with a skilled nursing

facility that is owned by the hospital and that is physically located

apart from the hospital in determining the hospital's average hourly

wage for purposes of qualifying for FY 1998 reclassification, if the

hospital had previously applied for and been denied reclassification

for FY 1998. (Section 4410(c))

8. Floor on Area Wage Index. Beginning with FY 1998, the wage index

for an urban hospital may not be lower than the Statewide area rural

wage index. (Section 4410 (a) and (b))

9. Indirect Medical Education. The IME formula is revised to reduce

the IME adjustment factor from 7.7 percent to 7.0 percent in FY 1998,

6.5 percent in FY 1999, 6.0 percent in FY 2000, and 5.5 percent in FY

2001 and subsequent fiscal years. (Section 4621(a))

For cost reporting periods beginning on or after October 1, 1997,

the total number of full-time equivalent residents in a hospital's

approved medical residency training program in the fields of allopathic

medicine and osteopathic medicine is limited to the hospital's full-

time equivalent count for the most recent cost reporting period ending

on or before December 31, 1996. For cost reporting periods beginning on

or after October 1, 1997, a hospital's indirect medical education full-

time equivalent count is based on the average full-time equivalent

count for the cost reporting period and the preceding two cost

reporting periods. For the first cost reporting period beginning on or

after October 1, 1997, the average is based on residents in that period

and the preceding period. The statute provides for adjustments for

short periods and a transition rule for FY 1998. Furthermore, the ratio

of residents-to- beds may not exceed the ratio calculated during the

prior cost reporting period (after accounting for the cap on the number

of resident FTEs).

For portions of cost reporting periods occurring on or after

January 1, 1998, the Secretary must make payments to teaching hospitals

for the indirect costs of graduate medical education associated with

Medicare managed care discharges. Payment is equal to the per discharge

amount that would have been made for that discharge if the beneficiary

were not enrolled in managed care, multiplied by an applicable

percentage. The applicable percentage is 20 percent in 1998, 40 percent

in 1999, 60 percent in 2000, 80 percent in 2001, and 100 percent in

2002 and subsequent years.

10. Rural Referral Centers. Any hospital classified as an RRC for

FY 1991 will be classified as an RRC for FY 1998 and subsequent fiscal

years. (Section 4202(b))

11. Medicare-Dependent, Small Rural Hospitals. The special

treatment of MDHs is reinstated for FYs 1998, 1999, and 2000. The

payment methodology is identical to the methodology applicable in FY

1993; that is, if the hospital's hospital-specific rate based on 1982

or 1987 costs is higher than the Federal rate, the hospital receives 50

percent of the difference between the Federal rate and the hospital-

specific rate. (Section 4204)

12. Reinstatement of the Add-On for Blood Clotting Factor. The add-

on payment for blood clotting factor provided to inpatients with

hemophilia is permanently reinstated beginning in FY 1998. (Section

4452)

13. Counting Residents for Direct Graduate Medical Education. For

cost reporting periods beginning on or after October 1, 1997, the total

number of unweighted full-time equivalent residents in a hospital's

approved medical residency training program in the fields of allopathic

medicine and osteopathic medicine is limited to the hospital's

unweighted full-time equivalent count for the most recent cost

reporting period ending on or before December 31, 1996. For cost

reporting periods beginning on or after October 1, 1997, a hospital's

direct medical education full-time equivalent count is based on the

average full-time equivalent count for the cost reporting period and

the preceding two cost reporting periods. For the first cost reporting

period beginning on or after October 1, 1997 the average is based on

residents in that period and the preceding period. The statute provides

for adjustments for short periods and a transition rule for FY 1998.

The Secretary is permitted to prescribe rules that allow

institutions that are members of the same affiliated group (as defined

by the Secretary) to elect to apply the FTE cap on an aggregate basis.

The Secretary must prescribe rules for providing exceptions to the

cap for

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medical residency training programs beginning on or after January 1,

1995.

The statute gives the Secretary authority to collect whatever data

are necessary to implement these provisions. (Section 4623)

14. Payments to Managed Care Plans for Graduate Medical Education.

For portions of cost reporting periods occurring on or after January 1,

1998, the Secretary must make payments to teaching hospitals for the

direct costs of graduate medical education associated with Medicare

managed care discharges. Payment is equal to the product of the per

resident amount, the total number of FTE residents working all areas of

the hospital, the fraction of the total number of inpatient bed days

that are attributable to Medicare managed care enrollees, and an

applicable percentage. The applicable percentage is 20 percent in 1998,

40 percent in 1999, 60 percent in 2000, 80 percent in 2001 and 100

percent in 2002 and subsequent years. (Section 4624)

15. Payment to Nonhospital Providers. For cost reporting periods

beginning on or after October 1, 1997, the Secretary may establish

rules for payment to qualified nonhospital providers for the direct

costs of medical education incurred in the operation of an approved

medical residency training program. Qualified nonhospital providers

include federally qualified health centers, rural health clinics,

Medicare Choice organizations, and any other nonhospital providers that

the Secretary determines to be appropriate. The rules established by

the Secretary must specify the amounts, form, and manner in which

payments will be made and the portion of the payments that will be made

from each of the Medicare Trust Funds. The Secretary must reduce the

aggregate amount paid to hospitals to the extent payment is made to

nonhospital providers for residents included in the hospital's full-

time equivalent count. (Section 4625)

16. Payment for Combined Medical Residency Training Programs. The

initial residency period for combined programs consisting only of

primary care training is the longest of the composite programs plus one

additional year. A resident enrolled in a combined medical residency

training program that includes an obstetrics and gynecology program

qualifies for this special rule if the other programs combined with the

obstetrics and gynecology program are for training a resident in

primary care. This provision is effective for residency training

programs beginning July 1, 1997. (Section 4627)

17. Payment Update for Excluded Hospitals and Hospital Units. For

FY 1998, the rate-of-increase limits for excluded hospitals and units

will be updated by 0 percent. For FYs 1999 through 2002, the update

factor is tied to the relationship between the hospital's target amount

and its operating costs. For hospitals with costs exceeding the target

amount by 10 percent or more, the update is the market basket

percentage increase; if costs exceed the target but by less than 10

percent, the update factor equals the market basket percentage increase

minus 0.25 percentage points for each percentage point by which costs

are less than 10 percent over the target (but in no case less than 0);

if costs are less than or equal to the target but not below \2/3\ of

the target amount, the update is the greater of 0 percent or the market

basket percentage increase minus 2.5 percentage points; and if costs do

not exceed \2/3\ of the target amount, the update factor is 0 percent.

(Section 4411)

18. Reductions to Capital Payments. Capital payment amounts for

certain excluded hospitals and hospital units are reduced by 15 percent

for FYs 1998 through 2002. (Section 4412)

19. Rebasing. A hospital that was excluded from the prospective

payment system before 1991 may apply to rebase its target amount for

its cost reporting period beginning in FY 1998. The rebased target

amount is determined by using the five latest settled cost reporting

periods as of August 5, 1997, updating for inflation, excluding the

highest and the lowest cost per discharge, and calculating an average

for the remaining three. Long-term care hospitals with costs exceeding

115 percent of their target amount and a 70- percent disproportionate

patient percentage may elect to use the cost reporting period beginning

during FY 1996 as their base year, updated for inflation. (Section

4413)

20. Cap on Target Amounts for Excluded Hospitals and Units. For FYs

1998 through 2002, the target amount will be capped at the 75th

percentile of the target amounts for similar facilities for cost

reporting periods ending during FY 1996, updated by inflation. This cap

applies to psychiatric hospitals and units, rehabilitation hospitals

and units, and long-term care hospitals.

21. Bonus and Relief Payments to Excluded Hospitals and Units.

Bonus payments to excluded hospitals and units are the lesser of--

15 percent of the amount by which the ceiling (target

amount times Medicare discharges) exceeds the amount of operating

costs; or

2 percent of the ceiling.

A continuous improvement bonus payment system is established

beginning FY 1998 for hospitals with at least 3 full cost reporting

periods whose operating costs for the payment period are less than the

least of its target amount, its trended costs (as defined by the

statute), or its expected costs (as defined by the statute). The bonus

under this system equals the lesser of--

50 percent of the amount by which operating costs are less

than expected costs; or

1 percent of the ceiling.

Hospitals with costs over 110 percent of their ceiling receive

relief payments equal to an additional 50 percent of the amount by

which costs exceed 110 percent of the ceiling, not to exceed 10 percent

of the ceiling. (Section 4415)

22. Change in Payment and Target Amount for New Providers.

Effective October 1, 1997, the new provider exemptions for excluded

hospitals are eliminated except for children's hospitals. The amount of

payment for a new provider will be the lesser of operating costs for

the period, or 110 percent of the national median of the target amount

for hospitals in the same class for cost reporting periods ending in FY

1996, wage adjusted and updated by the market basket percentage

increase to the fiscal year in which the hospital first received

payments. (Section 4416 and 4419)

23. Treatment of Certain Long-Term Care Hospitals. Long-term care

hospitals located in the same building or on the same campus as another

hospital and that were in existence on September 30, 1995, are

grandfathered in as hospitals excluded from the prospective payment

system. This amendment applies to discharges occurring on or after

October 1, 1995. (Section 4417(a))

A hospital that first received payment in 1986, has an average

inpatient length of stay greater than 20 days, and in its 12-month cost

reporting period ending in FY 1997, has 80 percent or more of its

annual Medicare discharges that reflect a finding of neoplastic

disease, is excluded from the prospective payment system as a long-term

care hospital.

This provision applies to cost reporting periods beginning on or

after August 5, 1997. (Section 4417(b))

24. Treatment of Certain Cancer Hospitals. A hospital recognized as

a comprehensive cancer research center by the National Cancer Institute

of the National Institutes of Health as of April 20, 1983; located in a

State which, as of December 19, 1989, was not operating a demonstration

project under section 1814(b); that applied for and was denied

classification on or before December 31, 1990; is licensed for less

than 50 acute

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care beds; and demonstrates that at least 50 percent of its total

discharge reflects a finding of neoplastic disease for the 4-year

period ending December 31, 1996, is excluded from the hospital

prospective payment system retroactively to 1991. The legislation

includes an option to rebase payments. Retroactive payments must be

made by August 5, 1998. (Section 4418)

25. Limited-Service Rural Hospital Program

A ``Medicare Rural Hospital Flexibility Program'' is established.

This program is a national limited-service hospital program that

replaces the existing Essential Access Community Hospital/Rural Primary

Care Hospital (EACH/RPCH) program which operates in seven States. The

program allows States to designate rural facilities as ``critical

access hospitals'' if they are located a sufficient distance from other

hospitals, make available 24-hour emergency care, maintain no more than

15 inpatient beds, and keep inpatients no longer than 96 hours (except

where weather or emergency conditions dictate, or a Peer Review

Organization waives the limit). In addition, critical access hospitals

do not have to meet all of the staffing requirements that apply to

hospitals under Medicare. Payment for inpatient and outpatient services

under this program is on the basis of reasonable cost.

States may receive grants for program activities, and are

authorized to provide for the creation of networks, which include at

least one critical access hospital and at least one acute care

hospital. Critical access hospitals with swing-bed agreements are

allowed to have up to 25 inpatient beds and to furnish both acute

(hospital-level) and SNF-level care, provided that no more than 15 of

those beds are used at any one time for acute care. Existing RPCHs,

otherwise eligible as CAHs, and existing medical assistance facilities

(MAFs) participating under the MAF demonstration project in Montana,

will be deemed as CAHs. Existing EACHs in rural areas will continue to

be paid as sole community hospitals but no new EACHs will be

designated. (Section 4201)

26. Change in Publication Dates. Beginning with the FY 1999 update,

the DRG prospective payment rate methodology and the recommended

hospital prospective payment updates must be published as a proposed

rule by April 1 and as a final rule by August 1 of each year. (Section

4644 (a)(1) and (b)(1))

As a conforming change, the deadline for applications for

geographic reclassification for years beginning with FY 2000 is moved

from October 1 to September 1. Because the FY 1999 applications are due

on October 1, 1997, the Secretary is directed to shorten the deadlines

for MGCRB decision making, so that a final decision for all

applications is made by June 15, 1998. (Section 4644(c))

Each of these provisions and the changes to the regulations

necessary to implement these provisions are described in greater detail

in sections III, IV, V, and VI of this preamble.

II. Changes to DRG Classifications and Relative Weights

A. Background

Under the prospective payment system, we pay for inpatient hospital

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

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

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

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

is assigned. Each DRG weight represents the average resources required

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

resources used to treat cases in all DRGs.

Congress recognized that it would be necessary to recalculate the

DRG relative weights periodically to account for changes in resource

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

that the Secretary adjust the DRG classifications and relative weights

annually. These adjustments are made to reflect changes in treatment

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

relative use of hospital resources. The changes to the DRG

classification system and the recalibration of the DRG weights for

discharges occurring on or after October 1, 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 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

[[Page 45971]]

assignment for certain principal diagnoses, such as extracorporeal

shock wave lithotripsy for patients with a principal diagnosis of

urinary stones.

We proposed several changes to the DRG classification system for FY

1998. The proposed changes, the comments we received concerning them,

our responses to those comments, and the final DRG changes are set

forth below.

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.

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

\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.

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

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

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

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

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.

Because the cases associated with procedure code 92.3 clearly are

much less resource-intensive than the other cases in the DRGs to which

it is assigned, we proposed 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) in MDC 10. We also proposed to remove

procedure code 92.3 from the list of major OR procedures in MDC 17.

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).

We received over 130 comments regarding our proposal to move

procedure code 92.3, including many from people who underwent

radiosurgery. Three commenters supported the proposal. One commenter

concurred that a revision of the DRG assignment and payment level for

radiosurgery is appropriate, but suggested that any change be delayed

until further analysis of industry data has been conducted. The

remaining commenters opposed our proposal and strongly recommended that

stereotactic radiosurgery cases continue to be assigned to DRG 1, or if

a change must be made, these cases should be assigned to their own DRG

with an appropriate relative weight. The specific comments we received

are discussed below.

Comment: Many commenters stated that stereotactic radiosurgery is

cost effective and is less expensive (by approximately \1/3\) than open

cranial surgery. The commenters were concerned that this proposal would

result in a 40 percent reduction in payment for these cases.

Response: Currently, stereotactic radiosurgery is being paid at the

same level as open cranial surgery, as the commenter noted. We believe

these comments support our decision to move the radiosurgery cases into

a DRG with cases of comparable utilization of resources, rather than

group them with open surgery procedures, which involve much greater

resource use. Our intent is not to discourage the utilization of this

advanced technology nor to reduce payment arbitrarily, but to make

appropriate payment for the procedure by assigning it to a DRG with

similar resource use.

Comment: There are several different approaches being used in

stereotactic radiosurgery. The two most prevalent are the gamma knife

and the linear accelerator. Some commenters believe that we should be

analyzing these cases separately and possibly making different DRG

assignments for them. Other commenters urged us not to distinguish

between approaches in radiosurgery, and one of these commenters

submitted data to demonstrate that there is no difference in patient

outcomes and that the different types of approach are clinically

similar.

Response: Effective October 1, 1995, a new ICD-9-CM procedure code

was created to capture stereotactic radiosurgery. The new code 92.3

(Stereotactic radiosurgery) encompasses both gamma knife and linear

accelerator procedures. This topic was addressed at a public meeting of

the ICD-9-CM Coordination and Maintenance Committee in 1994 at which

representatives from the radiosurgery industry were in attendance.

Comments were accepted at the meeting and attendees were also invited

to submit written comments. At that time, we did not receive any

negative comments regarding the inclusion of all approaches to

radiosurgery in one code. Therefore, with only one code, we are unable

to distinguish the radiosurgery cases based on different approaches.

We note that one difference between the approaches is the initial

capital costs of the equipment. However, now that capital payments are

made to hospitals under a prospective payment system, there is no way

for us to specifically recognize these different costs.

Comment: Several commenters stated that because most radiosurgery

patients do not have complicating conditions, which are necessary to be

assigned to DRG 7, most cases will be assigned to DRG 8 and receive the

lower relative weight associated with less complicated cases. In any

event, the commenters believe that the payment for DRGs 7 and 8 is less

than the costs of providing the treatment. One commenter stated that

the average payment for radiosurgery cases assigned to DRG 1 in FY 1996

was $11,876.28, while payment for DRGs 7 and 8 in the same year

averaged $9,973.13 and $4,547.64, respectively. Therefore, this

proposal could reduce hospital payment for the average Medicare

radiosurgery cases in DRG 1 by as much as 62 percent.

Response: We have performed an analysis of the full FY 1996 MedPAR

file, updated through June 1997. Of the 1,275 cases coded with

procedure 93.2, 966 cases would have been assigned to

[[Page 45972]]

DRGs 7 and 8 under our proposal. Of those 966 cases, 406 classify to

DRG 7 and 560 cases classify to DRG 8. The average charges of these

reassigned cases are approximately $16,300 for DRG 7 and $13,700 for

DRG 8. The average standardized charges for DRG 7 and 8 overall are

approximately $20,250 and $9,950, respectively. Thus, the average

charges for radiosurgery cases assigned to DRG 7 (just over 40 percent

of the total) are approximately $4,000 less than the overall cases

assigned to that DRG and the average charges for the cases assigned to

DRG 8 are approximately $4,000 more than the overall cases.

Therefore, given a similar distribution at any hospital, the

payments for the DRG 7 and 8 cases should come close to balancing out;

that is, DRG 7 will result in payments in excess of costs and DRG 8

will result in approximately equal numbers of cases with costs in

excess of payments. This is consistent with the design of the

prospective payment system, which is intended to make an average,

predetermined payment for each case that encourages hospitals to

provide care efficiently and economically and treat a mix of patients

so that cases incurring payments in excess of costs are balanced by

cases incurring costs in excess of payments.

The difference between assignment to DRG 7 and DRG 8 is the

documentation of complications resulting from treatment or

comorbidities that are present upon admission and may affect treatment.

Examples of these secondary diagnoses that, in fact, many of the

patients who commented reported having are postoperative nausea (which

may prolong the patient's stay), diabetes, congestive heart failure,

and emphysema. In fact, commenters stated that one of the advantages of

radiosurgery over open surgery is that it can be performed on patients

with comorbidities who could not otherwise tolerate surgery for their

conditions.

We also note that DRGs 1 and 2 are not split on the basis of CCs;

rather, they are assigned based on whether the case is or is not a

trauma case. Therefore, hospitals might not have coded secondary

diagnoses for radiosurgery cases. Nonetheless, over 40 percent of the

reassigned cases in our analysis have CCs included on the bill. We

believe this will remain true in FY 1998 and the percentage may even

increase now that properly coding CCs will affect the amount of

payment.

In response to the commenter concerned about the low payment for

DRGs 7 and 8, we note that, based on the MedPAR file, the average

payment for radiosurgery cases assigned to DRG 1 in FY 1996 was

approximately $16,000. If those cases had been assigned to DRGs 7 and 8

in that year, we estimate that the average payment would have been

approximately $14,000 and $8,000, respectively. Thus, on average,

payment for radiosurgery cases will be reduced by approximately 30

percent. This is consistent with commenter's assertion that this

procedure costs approximately one-third less than an open cranial

procedure.

Comment: Commenters suggested that instead of continuing to assign

radiosurgery cases to DRG 1, it would be acceptable to assign these

cases to their own DRG and assign a weight of approximately 3.0.

Response: As we have stated in several previous documents,

including the June 2 proposed rule (in connection with the discussion

of automatic implantable cardioverter defibrillators (62 FR 29906)), we

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

device dominates the charges. Creating a separate DRG for radiosurgery,

where the costs of the device used to perform the procedure dominates

the charges, would be a similar issue. With such a procedure-specific

DRG, it would be relatively easy for hospitals and manufacturers of the

equipment to raise the charges for the cases until they create a

relative weight that consistently pays them more than their costs. We

believe that the resource consumption associated with cases in DRGs 7

and 8 is similar to that required by radiosurgery cases. However, we

will continue to monitor this technology to ensure that these DRGs

remain appropriate assignments.

Comment: Several commenters believe that the relatively low charges

of the radiosurgery cases result, in part, from incorrect use of

procedure code 92.3. These commenters requested that we either wait

until these issues are resolved to make a DRG change or that we adjust

the cases in the MedPAR file based on industry data.

Response: It is often the case with a new code, whether diagnosis

or procedure, that there is a period of time necessary to gain

experience and correctly use the code. We did notice some coding

discrepancies when we reviewed the radiosurgery cases. However, these

discrepancies are not in the cases that are assigned to DRGs 7 and 8,

but rather the cases that remain assigned to DRG 1. We note that coders

appear to be including improperly the approach to the radiosurgery

procedure, such as coding thalamotomy and pallidotomy separately in

addition to the stereotactic radiosurgery code. In addition, the coding

of some cases has included codes that represent the result of the

radiosurgery, that is, the destruction of the lesion of the brain.

Again this is an improper coding practice. Both of these coding

practices result in radiosurgery cases being assigned to DRG 1.

We will continue to monitor these cases to ensure that our decision

to reassign radiosurgery to DRGs 7 and 8 remains appropriate. We will

also work with the industry concerning the possibility of assigning

separate ICD-9-CM codes to the different types of radiosurgery.

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 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 468. We proposed 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

proposed to include them in DRGs 7 and 8.

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

supported the change; another registered no objection but pointed out

that the proposed rule stated procedure code 27.62 is currently

assigned to DRG 477 (Nonextensive OR Procedure Unrelated to Principal

Diagnosis) when the principal diagnosis

[[Page 45973]]

is sleep apnea. The commenter noted that under the current DRG

groupings, such a case would actually be assigned to DRG 468. The final

commenter stated that if a patient is admitted for cleft palate repair,

the principal diagnosis likely would be cleft palate (diagnosis code

749.xx) even if sleep apnea is also present, presumably resulting in

assignment to DRG 52. This commenter suggested that if cleft palate

repair is performed infrequently in conjunction with a principal

diagnosis of obstructive sleep apnea, it would be unnecessary to

reassign these cases to DRGs 7 and 8.

Response: In the proposed rule, we inadvertently stated that sleep

apnea cases involving the correction of cleft palate currently would be

assigned to DRG 477. The commenter is correct that such cases are

currently assigned to DRG 468.

Although a patient admitted for cleft palate repair would more

likely have a principal diagnosis of cleft palate than of sleep apnea,

cases do occur in which obstructive sleep apnea is the documented

reason for the surgery. Our rationale for the proposed change is based

not on the frequency of the cases but on whether or not these cases are

appropriately assigned to DRG 468, which by definition should encompass

only cases involving unrelated operating room procedures. Because we

believe that cleft palate repair is related to obstructive sleep apnea,

it would be inappropriate to continue to assign these cases to DRG 468;

the better policy is to assign the procedure to DRGs 7 and 8 in MDC 1.

Therefore, we are adopting this change in this final rule.

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.

For the proposed rule, we conducted an analysis of the cases

assigned to DRG 20 using the FY 1996 MedPAR file. The average

standardized charges for these cases were approximately $8,430,

significantly lower than the average charges for the DRG of

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

herpes zoster cases, approximately 6 days, was also less than the

average length of stay for DRG 20 of approximately 10 days. Based on

these data, we proposed 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 was

approximately 6 days and 4 days, respectively.

We received two comments supporting this change and we are

including it in the final DRG changes.

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

(FDA)- 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). In the

proposed rule, we presented our analysis of a full year of cases coded

with this procedure (FY 1996 MedPAR file, December update) to determine

if this DRG assignment remained appropriate.

In the full (100 percent) FY 1996 MedPAR file, there were 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 was about $96,000

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

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

of stay was 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 identified two DRGs that contained cases 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 was approximately

$164,000 and the length of stay was 46 days. For DRG 108, these

statistics were about $54,000 and 12.1 days. Thus, the average charge

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

the heart assist device cases and the average charge for DRG 108 was

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 proposed to assign procedure code 37.66 to DRG 108.

Comment: We received two comments supporting this proposal.

However, several other commenters believe that the only solution that

would be appropriate is to assign procedure code 37.66 either to DRG

103 or to its own DRG. In support of this comment, they cite the very

high resource utilization associated with the procedure. In addition,

one commenter believed that failure to revise our proposal could limit

Medicare beneficiaries' access to this procedure.

Response: As noted in the proposed rule, although reassignment of

these cases to DRG 108 does not place them in a DRG with identical

resource use, it is the best alternative we have at this time. As we

discuss above in section II.B.2.a. of this preamble concerning

radiosurgery, it has not been our

[[Page 45974]]

practice to create device-specific DRGs. Assignment of these cases to

DRG 103 would be no more appropriate in terms of resource use than

reassignment to DRG 108. In addition, we believe that only transplant

cases should be assigned to that DRG. We will continue to monitor these

cases in future years. We are also contemplating the feasibility of

conducting a comprehensive review of the current surgical DRGs in MDC

5. We last did this effective for FY 1991. Because there have been so

many changes in approach to heart surgery in the past few years as well

as the development of new devices and techniques, we believe such a

review could help realign these cases in terms of both clinical and

resource use homogeneity.

With regard to the statement that failure to revise our proposal

could result in denial of heart assist devices to Medicare

beneficiaries, we note, as we have in many previous documents, that it

is a violation of a hospitals Medicare provider agreement to place

restrictions on the number of Medicare beneficiaries it accepts for

treatment unless it places the same restrictions on all other patients.

We also note that, effective May 5, 1997, the coverage instructions

concerning heart assist devices were revised to delete the specific

product names and the hemodynamic criteria (Transmittal No. 94; April

1997). As revised, section 65-15 of the Medicare Coverage Issues Manual

allows coverage of a ventricular assist device used for support of

blood circulation postcardiotomy if the device has received approval

from the FDA for that purpose and the device is used according to FDA-

approved labeling instructions or as a bridge to heart transplant if

all of the following conditions are met:

The device is used as a temporary mechanical circulatory

support as a bridge to cardiac transplant.

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. If the patient is listed with another

center, written permission is needed from that center.

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 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.

For the proposed rule, 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.

Because the average charge for AICD cases continued to be much higher

than the average charge for all other DRG 116 cases, we proposed to

move them to DRG 115 (Permanent Cardiac Pacemaker Implantation with

AMI, Heart Failure or Shock). We also proposed to revise the title of

DRG 115 to ``Permanent Cardiac Pacemaker Implant with AMI, Heart

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

We received several comments commending us on this decision and we

are adopting it as final.

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). We stated 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.

As discussed in the proposed rule, our analysis of the FY 1996

MedPAR data on coronary stent implantation in Medicare beneficiaries

revealed the following:

The difference between the average length of stay for the

stent cases and the nonstent cases was 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.

Based on the significant variation in hospital charges between

stent and nonstent cases in DRG 112, we proposed 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 proposed to add to DRG 116 those cases including

procedure codes for PTCA in combination with insertion of coronary

stent. Specifically, we proposed 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

[[Page 45975]]

36.09 Other removal of coronary artery obstruction

37.34 Catheter ablation of lesion or tissues of the heart

We also proposed to change the title of DRG 116 to ``Other

Permanent Cardiac Pacemaker Implant or PTCA with Coronary Artery Stent

Implant.''

Comment: We received many comments in support of this move.

Commenters cited increased payment for use of coronary stenting in

appropriate patients as a rational response to an economic dilemma. One

commenter requested that consideration be given to increased payment

for the cost of the stents themselves within DRG 116 for those cases in

which multiple stents are implanted in the same operative episode.

Response: We appreciate the positive responses generated by this

proposal. With regard to the request for modification of DRG 116 to

take into account the use of more than one stent per patient, we would

remind the commenter that one of the parameters of the prospective

payment system is predetermined, identical payments for each discharge

in a DRG. To arbitrarily begin to increase payment based on the number

of stents used in a procedure would undermine the system. We will

continue to monitor the stent cases and the 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.

Comment: There were several commenters who, while supporting the

proposal to increase increasing stent payment, also chided us for our

lack of foresight in neglecting to consider new drug therapies in

conjunction with PTCA. The pharmaceutical referenced in these comments

is a category of drugs called glycoprotein (GP) IIb/IIIa inhibitors,

which act to reduce platelet aggregation, thereby reducing death rate,

recurrent heart attack, and further surgery.

Commenters suggested that HCFA take immediate steps to establish a

procedure code describing infusion of GPIIb/IIIa therapy. They further

suggested that if the agency's required lead time for revising an

existing ICD-9-CM code, or creating a new code for platelet inhibitor

therapy, precluded a new code from being effective this October 1, then

HCFA should create a temporary code that hospitals could use until a

new ICD-9-CM code could become effective. It was suggested that such a

temporary code would allow the reclassification of angioplasty with

GPIIb/IIIa usage into DRG 116 to be effective October 1, 1997.

Response: We appreciate the suggestion that the category of GPIIb/

IIIa platelet inhibitor drugs be uniquely identified in the ICD-9-CM

coding system, but would also note that a write-in campaign during a

proposed rule comment period does not permit us to respond to this

request in a responsible manner. To quickly produce a temporary code

would be the equivalent of producing a permanent code, but would not

include due process in order to make it a meaningful addition to the

ICD-9-CM coding system.

We would point out that, effective October 1, 1986, code 36.04

(intracoronary artery thrombolytic infusion) was added to the procedure

coding system based on a proposal made by a major pharmaceutical

company. As we rely heavily on information from the public to make the

ICD-9-CM coding system responsive to the coding needs of the hospital

industry, we anticipated that the guidance, language, and suggestions

received from this pharmaceutical company were current and timely. In

the interim, there has been no public protest or demand for an ICD-9-CM

platelet inhibitor therapy code that would better meet the needs of the

industry.

In retrospect, we regret that we integrated this code as it does

not appear to have been an appropriate addition to the coding system.

We will work with the drug and hospital industry representatives to

provide us with more insight and better language as we bring the topic

of platelet inhibitors before the ICD-9-CM Coordination and Maintenance

Committee on December 4, 1997. We would anticipate, therefore, having

an appropriate code describing GPIIb/IIIa drug therapy early next year.

This code would be effective for discharges on or after October 1,

1998.

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.

Accordingly, for the FY 1998 proposed rule, 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 proposed 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:

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

[[Page 45976]]

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

We note that, in conjunction with the proposed changes, we also

proposed to revise the title of DRG 122 to read ``Circulatory Disorders

with AMI without Major Complications, Discharged Alive.''

We received four comments fully supporting these proposed changes

and are including them in the final DRG changes.

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

Connective Tissue)

a. Introduction

As discussed in detail below, we proposed to create several new

DRGs in MDC 8 effective for discharges on or after October 1, 1997.

Specifically, we proposed to 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 proposed 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).

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, for the proposed rule 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.

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

Average

length

Type of case Avg. of stay

charges (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 proposed 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

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

[[Page 45977]]

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.

We received five comments in support of this proposal. We are

adopting the proposed changes as final.

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 the proposed rule, at the request of several correspondents, we

revisited the issue of whether DRG refinements are needed to address

differences in resource use associated with orthopedic procedures where

deep infections are present. 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 are 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 Average length

Type of case of cases charges of stay

\1\ (in (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

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

\1\ 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 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 proposed 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 three proposed DRGs as follows:

DRG 501 Knee Procedures with Principal Diagnosis of Infection with CC

[[Page 45978]]

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.

Comment: We received four comments in support of this proposed

change. One of the commenters suggested that we also consider splitting

proposed DRG 503 into two DRGs to distinguish between cases with and

without CCs.

Response: As shown in the table above, based on the FY 1996 MedPAR

10 percent sample, the average charges associated with cases in new DRG

503 are $13,151 for cases with CC and $8,502 for cases without CC. The

average lengths of stay for DRG 503 cases with and without CC are 5.1

and 3.5 days, respectively. We note that the mean standardized charges

for this DRG are approximately $10,100. Given the similar lengths of

stay for these two sets of cases and the relatively small magnitude of

difference in average charges (much less than one standard deviation),

we do not believe that further division of the new DRG is warranted.

Thus, we are adopting the new proposed DRGs for Knee Procedures as

final.

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.

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

Average

Average length

Type of case Number charge of stay

of cases (in (in

dollars) 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

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

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 proposed 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, primarily 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.

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.

We received two comments in support of this proposal and are

including it in the final DRG changes.

6. Surgical Hierarchies

Some inpatient stays entail multiple surgical procedures, each one

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

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

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

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

ordering of surgical classes from most to least resource intensive,

performs that function. Its application ensures that cases involving

multiple surgical procedures are assigned to the DRG associated with

the most resource-intensive surgical class.

Because the relative resource intensity of surgical classes can

shift as a function of DRG reclassification and recalibration, we

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

reclassifications, to determine if the ordering of classes coincided

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

billing data used to compute the DRG relative weights.

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

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

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

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

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

most resource-intensive surgical class, therefore, involves weighting

each DRG for frequency to determine the average resources for each

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

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

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

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

determine whether surgical class A should be higher or lower than

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

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

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

The surgical classes would then be ordered

[[Page 45979]]

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, this result is unavoidable.

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

few instances when a surgical class with a lower average relative

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

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

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

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

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

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

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

diagnoses in the MDC but are occasionally performed on patients with

these diagnoses. Therefore, these procedures should only be considered

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

has been performed.

A second example occurs when the difference between the average

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

small differences generally do not warrant reordering of the hierarchy

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

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

average weight than the class ordered below it.

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

modify the surgical hierarchy as set forth below. 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.

We proposed 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).

Based on a test of the proposed changes using the most recent

MedPAR file and the revised GROUPER software, we found that the

proposed change to the Pre-MDC DRGs, Bone Marrow Transplant (DRG 481)

above Liver Transplant (DRG 480) is not supported and this change will

not be incorporated in this final rule. The Pre-MDC DRGs hierarchy will

remain the same as in FY 1997.

We received one comment in support of our surgical hierarchy

proposals. We also received one comment that disagreed, as discussed

below.

Comment: One commenter was opposed to reordering Circumcision (DRGs

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

commenter stated that circumcision (procedure code 64.0) is the only

procedure in DRGs 342 and 343, and the commenter believes that this

procedure is not as resource intensive or complex as the procedures

assigned to DRGs 336 and 337. The commenter suggested the more

appropriate assignment for a case involving both a transurethral

prostatectomy and a circumcision would be DRGs 336 and 337.

Response: Based on the Medicare cases, the average standardized

charges for cases assigned to DRGs 342 and 343 is almost $7,000, which

is higher than the average standardized charges of cases assigned to

DRGs 336 and 337, approximately $6,500. Thus, if a case involves both a

circumcision and a prostatectomy, we believe it should be assigned to

the higher-weighted DRG category. Although circumcision can be a

relatively simple surgery for infants, when it is performed for

Medicare beneficiaries, it appears to be a more complicated procedure

and might involve the use of significant resources.

The other proposed changes to the surgical hierarchy are still

supported by the data and no additional changes are indicated.

Therefore, we are incorporating these changes in this final rule.

7. Refinement of Complications and Comorbidities List

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.

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

[[Page 45980]]

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 proposed a limited revision of the CC Exclusions List to take

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

coding system effective October 1, 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 changes were proposed in accordance with

the principles established when we created the CC Exclusions List in

1987. We received one comment, which supported our changes to the CC

lists.

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

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

rule.

Tables 6E and 6F in section V of the Addendum to this final rule

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

for discharges occurring on or after October 1, 1997. Each table shows

the principal diagnoses with final changes to the excluded CCs. Each of

these principal diagnoses is shown with an asterisk and the additions

or deletions to the CC Exclusions List are provided in an indented

column immediately following the affected principal diagnosis.

CCs that are added to the list are in Table 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

[[Page 45981]]

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 proposed 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.

Comment: We received two comments on this proposed change. One

commenter fully supported the proposal. The other commenter noted that

moving procedure code 54.92 from DRG 468 to DRG 315 in MDC 11 would

result in a 43 percent reduction in the DRG relative weight associated

with the case. Although the change makes sense clinically, the

commenter questioned the financial impact involved.

Response: The purpose of DRG 468 is to accommodate cases in which

an OR procedure that is unrelated to the principal diagnosis is

performed. As the commenter acknowledges, the clinical relationship

between procedure code 54.92 (Removal of foreign body from peritoneal

cavity) and a principal diagnosis code of 868.14 (injury with open

wound into retroperitoneum) is clear. We note that this change would

have resulted in the reassignment of only one case in FY 1996;

therefore, the financial impact involved is minimal. We are adopting

this change as proposed.

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.

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. Therefore, we proposed

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.

Comment: We received two comments on this proposal. Both commenters

supported moving procedure code 80.16, but one of the commenters

believes that procedure code 38.86 represents cases that are very

complicated and require a high level of resources.

Response: Our review of the average resource use associated with

DRG 468 cases with procedure code 38.86 support this change. The

average charge associated with this case is approximately $13,150. The

average charges for cases in DRG 468 and 477 are approximately $30,000

and $14,300, respectively. Thus, moving procedure code 38.86 to DRG 477

appears appropriate in terms of resource use. We will review the cases

in the FY 1997 MedPAR file when it becomes available to ensure that

this remains true for those cases.

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 was held on June 6, 1997. The minutes of the 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 DRG classifications, in Tables 6A and 6B (New Diagnosis

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

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

[[Page 45982]]

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

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

written comments were considered before the codes were approved.

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

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

Diagnosis codes that have been replaced by expanded codes, 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 includes the 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. We received three comments concerning our assignment of new

ICD-9-CM codes.

Comment: One commenter wrote in support of the creation of a new

diagnosis code for pyoderma gangrenosum (code 686.01) in order to

distinguish this condition from infectious pyoderma. The commenter

stated that pyoderma gangrenosum is not infectious, but instead is a

manifestation of other disease such as ulcerative colitis or Crohn's

disease. Pyoderma gangrenosum is characterized by ulcers with extensive

necrosis around the edges and are generally found on the lower

extremities. Therefore, the commenter believes that this code should be

assigned to DRG 271 (Skin Ulcers) rather than DRGs 277, 278, and 279

(Cellulitis).

Response: When a new code is introduced, our longstanding practice

is to assign it to the same DRG category as its predecessor code or

codes. Therefore, we proposed to assign diagnosis code 686.01 to DRGs

277, 278, and 279, the DRGs to which its predecessor code, 686.0

(pyoderma), had been assigned. The resource use and other data

associated with this diagnosis code will be available in the FY 1998

MedPAR file, which will be used for analysis as part of the FY 2000 DRG

changes. We will evaluate the DRG assignment of code 686.01 at that

time.

Comment: In the proposed rule, we announced a new diagnosis code

(031.2) for disease due to disseminated mycobacterium avium-

intracellulare complex (DMAC). We proposed that this code be classified

to DRG 423 (Other Infectious and Parasitic Disease Diagnoses) in MDC 18

(Infectious and Parasitic Diseases, Systemic or Unspecified Sites) as

well as be designated as an HIV major related condition in DRG 489 (HIV

with Major Related Condition). A commenter disagreed with our decision

to classify this code as a non-CC; that is, diagnosis code 031.2 would

not be included on the CC list. The commenter believes that when DMAC

is present as a secondary diagnosis, it would be considered a

substantial complication or comorbidity.

Response: DMAC is the most common disseminated bacterial infection

in patients with advanced acquired immunodeficiency syndrome (AIDS). As

such, cases coded with 031.2 will also be coded with a principal or

secondary diagnosis of 042, Human immunodeficiency virus (HIV) disease

and will be assigned to DRG 489. DRG 489 is not divided based on the

presence or absence of CCs. We believe that the vast majority of

patients with DMAC, if not all, will be assigned to this DRG, thus

negating the need to add this disease to the CC list. As noted above,

it is our practice to assign new codes to the same category as their

predecessor code was assigned. We note that cases coded 031.2 would

have been coded to 031.8 (other specified mycobacterial diseases),

which is not a CC. We will review the assignment of cases in which DMAC

is coded as a secondary condition when the FY 1998 MedPAR file becomes

available and re-evaluate our decision.

Comment: Commenters noted what they believed to be a typographical

error concerning new code V42.83 (organ or tissue replaced by

transplant, pancreas). In Table 6A, New Diagnosis Codes, this code was

recorded as being assigned to MDC 7, DRG 467 (Other Factors Influencing

Health Status). Since DRG 467 is assigned to MDC 23, the commenters

assumed this was a typographical error.

Response: The commenters are correct; diagnosis code V42.83 is

assigned to DRG 204 (Disorders of Pancreas Except Malignancy) in MDC 7.

10. Other Issues

a. 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. In the proposed rule (62 FR 29912), we

discussed the concerns of these correspondents and solicited public

comments on whether changes in these DRGs can increase their ability to

explain the variation in resource use among burn cases.

We received approximately 15 public comments on this issue, all of

which supported our efforts to identify DRG groupings that would

reflect more homogeneous resource use. These comments included a

proposal for restructuring the DRG classifications in MDC 22 that has

been endorsed by the American Burn Association. Several commenters also

suggested the need for a special facility category to make possible

payment differences for designated burn care facilities. As noted in

the proposed rule, however, any suggestions involving payment

adjustments for hospitals designated as burn centers would require

legislative action. We intend to conduct a full review of the comments

and proposals we have received as part of the FY 1999 DRG analysis

agenda. We will discuss our findings and, if appropriate, propose

modifications to MDC 22 in the FY 1999 proposed rule.

b. Marfan Syndrome (DRG 390)

We are making a minor DRG classification change for FY 1998 that we

inadvertently did not include in the June 2 proposed rule. Based on

correspondence we have received, we reviewed the assignment of

diagnosis code 759.82 (Marfan syndrome) to DRG 390 (Neonate with Other

Significant Problems) in MDC 15 (Newborns and Other Neonates with

Conditions Originating in the Perinatal Period). While Marfan syndrome

is a congenital disorder, cardiovascular abnormalities associated with

the disorder are most likely to manifest in adults. Because the current

classification system often results in adult patients being classified

to the MDC for newborns, we agree that, from a clinical coherence

standpoint, it is appropriate that these cases be reclassified.

Therefore, we are reassigning code 759.82 from DRG 390 into MDC 5, DRGs

135, 136, and 137 (Cardiac Congenital & Valvular Disorders). There were

no cases with a principal diagnosis code of 759.82 in the FY 1996

MedPAR file.

C. Recalibration of DRG Weights

We proposed 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

[[Page 45983]]

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 final recalibrated DRG relative weights are constructed from FY

1996 MedPAR data, based on bills received by HCFA through June 1997,

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 11.2 million Medicare discharges.

The methodology used to calculate the DRG relative weights from the

FY 1996 MedPAR file is as follows:

All the claims were regrouped using the DRG classification

revisions discussed above in section II.B of this preamble.

Charges were standardized to remove the effects of

differences in area wage levels, indirect medical education costs,

disproportionate share payments, and, for hospitals in Alaska and

Hawaii, the applicable cost-of-living adjustment.

The average standardized charge per DRG was calculated by

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

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

We then eliminated statistical outliers, using the same

criteria as 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 proposed to use that same case

threshold in recalibrating the DRG weights for FY 1998. For this final

rule, using the FY 1996 MedPAR data set, there are 34 DRGs that contain

fewer than 10 cases. We computed the weights for the 34 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 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.a of the Addendum to this final rule, we are making a

budget neutrality adjustment to assure that the requirement of section

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

Although we received no comments on the recalibration of the DRG

weights, we did receive one comment that relates to that process.

Comment: One commenter was concerned about the reduction in the

proposed FY 1998 relative weight for DRG 480 (Liver Transplant),

compared to the FY 1997 weight. The commenter noted that Table 5 of the

proposed rule (62 FR 29990) indicated approximately an 8-day reduction

in length of stay from FY 1995 to FY 1996 and asked that we review the

MedPAR data for this DRG to verify the accuracy of the data and the

consequent change in the relative weight.

Response: Every year when the relative weights are recalibrated, we

use charge information from the most recent Medicare data available.

That is, we use the charges reported by hospitals for the cases under

each DRG to establish the relative weights. As the commenter requested,

we have re-examined the FY 1996 MedPAR data that are used in

establishing the DRG relative weights for FY 1998. We have not

identified any problems or anomalies related to the cases in DRG 480

and are confident that the relative weight and length of stay data set

forth in Table 5 of this final rule are accurate. We note that the

final FY 1996 MedPAR data result in a slightly higher relative weight

and average length of stay for DRG 480 than shown in the proposed rule,

although the data still indicate close to a 7-day reduction in average

length of stay for these cases. (Data for the final rule are taken from

the June 1997 update of the FY 1996 MedPAR data, rather than the

December 1996 file used for the proposed rule.)

Both the relative weight and the length of stay for liver

transplant cases have exhibited continuing declines since the early

1990's. Although the decline between FY 1995 and FY 1996 was more

pronounced than in some other years, this change is not unusual for a

relatively low volume DRG (fewer than 400 cases) with a large range of

reported charges and lengths of stay. A few very low or very high

charge cases can make a dramatic difference in the DRG weight.

[[Page 45984]]

III. Changes to the Hospital Wage Index and Medicare Geographic

Reclassification Guidelines

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.

In the proposed rule, we noted 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 final 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 used the same categories of data that were used in

the FY 1997 wage index. Therefore, the 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 proposed to calculate a separate Puerto Rico-specific wage index

to be applied to the Puerto Rico standardized amount. We stated that

this wage index would be calculated in the same manner as the national

wage index described below, but will be based solely on Puerto Rico's

data. We received several comments supporting the new Puerto Rico-

specific wage index. We are implementing that change and revising

Sec. 412.210(e) accordingly.

We did not propose any changes in the reporting of hospital wage

index data, but we received numerous comments regarding the FY 1995

wage data, which will not be used until we develop the FY 1999 wage

index. The Medicare cost report for reporting periods beginning during

FY 1995 included several changes to the Worksheet S-3 that will allow

us to analyze further refinements to the wage index. Among those

changes are the separate reporting of all salary costs for physicians

(including teaching physicians), residents, and certified registered

nurse anesthetists (CRNAs). In addition, we collected overhead cost

data by cost center in order to analyze the possibility of excluding

overhead costs attributable to skilled nursing facilities and other

excluded areas from the wage index. These comments are discussed in

detail below.

Comment: Two commenters stated that we should exclude physician

salaries (as recommended by the Medicare Technical Advisory Group); one

suggested that we should immediately exclude these costs using

information from the Worksheet A-8-2 of the Medicare cost report.

Alternatively, a few commenters suggested that we should include

contracted Part A physician salaries for those States in which

hospitals are prohibited from employing physicians. Several commenters

are concerned that the removal of teaching physician and resident

salaries would redistribute revenues from large metropolitan areas with

large teaching programs to areas that support medical education to a

lesser extent. The commenters noted that recent legislation revising

the payments for disproportionate share and the indirect medical

education adjustments (sections 4403 and 4621 of Public Law 105-33)

will further reduce payment for hospitals in major metropolitan areas.

Other commenters suggested that we analyze the impact of excluding

the data before making a final decision. Some commenters specifically

recommended that we determine whether hospitals that are prohibited

from employing physicians are disadvantaged by our current policy, and,

if so, that we develop a policy that minimizes the redistribution of

revenue and the concentration of losses in particular geographic areas.

Response: These comments relate to the FY 1995 wage data, which we

are not using in developing the FY 1998 wage index. We will consider

these comments in developing the FY 1999 wage index. Although the

deadline for fiscal intermediaries to submit all of the reviewed FY

1995 wage data to HCFA is mid-November 1997, we intend to begin our

analysis of these data prior to that time, based on the data that have

already been submitted to the Health Care Provider Cost Report

Information System (HCRIS). We note that our fundamental objective in

administering the wage index is to ensure that it is accurate and fair,

and we will evaluate the use of the FY 1995 wage data with that

objective in mind.

Regarding the suggestion that we use Worksheet A-8-2 to exclude

Part A physician salaries, we noted in the proposed rule (62 FR 29914)

that, because the intermediaries had already begun reviewing the FY

1994 cost report 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

review and evaluate for the FY 1995 data, which provides for the

separate

[[Page 45985]]

reporting of physician salaries when considering appropriate changes in

the FY 1999 wage index.

Comment: One hospital association commented that it had analyzed

unedited preliminary FY 1995 HCRIS data and concluded that revising our

policy to include contracted Part A physician salaries would

redistribute current payments by only half of what would result if we

changed our policy to exclude all Part A physician and resident

salaries. (Currently, we exclude contracted Part A physician salaries,

but include similar salaries if the physician is employed by the

hospital.) Other commenters noted other data issues that arise using

the preliminary FY 1995 HCRIS wage data.

Response: In response to these comments, we would emphasize that

the cost report data analyzed by these commenters are very preliminary,

and in many cases, have not yet been reviewed by the intermediaries.

The data were extracted from the HCRIS Minimum Data Set, which is

updated quarterly and becomes more accurate and complete after the

deadline for completion of the wage data desk reviews by the

intermediaries. We are aware of the need to carefully review these data

due to the changes discussed above, and we will work with those in the

hospital industry that have taken the initiative to begin to examine

the data in order to draw upon their findings while proceeding with our

analysis.

Comment: Two commenters stated that wages and wage-related costs

for physicians, residents, and CRNAs are not reported separately for FY

1995, but are reported separately for FY 1996. They requested that HCFA

postpone its evaluation of the exclusion of these data until the FY

1996 data are available, and that HCFA announce this 1-year delay in

the FY 1998 final rule.

Response: We are aware that for the FY 1995 cost reports some

hospitals may have reported teaching physicians' salaries with

residents' wages, and also did not separately report wage-related costs

for physicians, residents, and CRNAs. To address this situation we

revised the FY 1996 cost reporting instructions. We will consider the

impact of this problem in our FY 1995 data analysis.

Comment: Four commenters disputed the rationale that Part A

physician and resident salaries should be excluded from the wage index

because these costs are largely paid through Medicare direct graduate

medical education payments. They stated that other costs, such as

outpatient and general service costs that are allocated to excluded

cost centers, are similarly paid outside the prospective payment

system, but are included in the wage index calculation.

Response: The FY 1995 revised Worksheet S-3 allows for the separate

reporting of direct salaries and hours by general service cost centers

as well as physician salaries. We plan to analyze these data to

determine the feasibility of allocating general service costs and

removing those costs that are associated with excluded areas. Regarding

outpatient costs, hospital staff frequently provide services in both

the outpatient and inpatient departments, and we believe that the

inclusion of outpatient salaries causes little or no distortion to the

wage index.

1. Verification of Wage Data From the Medicare Cost Report

The data for the FY 1998 wage index were obtained from Worksheet S-

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

the final wage index includes FY 1994 data submitted to HCRIS. As in

past years, we performed an intensive review of the wage data, mostly

through the use of edits designed to identify aberrant data.

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

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

wage data and submit requests for corrections if necessary (62 FR

29914). To be reflected in the final wage index, wage data corrections

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

June 16, 1997. (Any changes after this date are limited to errors

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

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

and are reflected in the final wage index.

2. Computation of the Wage Index

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

Step 1--As noted above, we based 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

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

Adjustment

After Before 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

[[Page 45986]]

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 18

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 $20.0950.

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

$9.1364 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.

Step 11--Section 4410(a) Public Law 105-33 provides that, for

discharges on or after October 1, 1997, the area wage index applicable

to any hospital that is not located in a rural area may not be less

than the area wage index applicable to hospitals located in rural areas

in the State in which the hospital is located. For FY 1998, this change

affects 128 hospitals in 32 MSAs. The MSAs affected by this provision

are identified in Table 4A by a footnote. Furthermore, this wage index

floor is to be implemented in such a manner as to assure that aggregate

prospective payment system payments are not greater or less than those

which would have been made in the year if this section did not apply.

We note that the Secretary has exercised the authority granted to her

by section 4408 of Public Law 105- 33 to include Stanly County in the

Charlotte-Gastonia-Rock Hill, North Carolina-South Carolina MSA. This

change is reflected in the final wage index.

3. Revisions to the Wage Index Based on Hospital Redesignation

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

counties adjacent to one or more MSAs are considered to be located in

one of the adjacent MSAs if certain standards are met. Under section

1886(d)(10) of the Act, the Medicare Geographic Classification Review

Board (MGCRB) considers applications by hospitals for geographic

reclassification for purposes of payment under the prospective payment

system.

The methodology for determining the wage index values for

redesignated hospitals is applied jointly to the hospitals located in

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

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

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

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

index to redesignated hospitals is dependent on the hypothetical impact

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

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

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

were determined by considering the following:

If including the wage data for the redesignated hospitals

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 urban or 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.

We note that, except for those rural areas where redesignation

would reduce the rural wage index value, 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 final wage index values for FY 1998 are shown in Tables 4A, 4B,

4C, and 4F in the Addendum to this final rule. Subject to the

provisions of Public

[[Page 45987]]

Law 105-33, the FY 1998 wage index values incorporate all hospital

redesignations for FY 1998, withdrawals of requests for

reclassification, wage index corrections, appeals, and the

Administrator's review process. For FY 1998, 357 hospitals are

redesignated for purposes of the wage index (hospitals redesignated

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

C. Changes to the Medicare Geographic Classification Review Board

(MGCRB) Guidelines and Timeframes

Various provisions of Public Law 105-33 address the guidelines the

MGCRB uses to reclassify hospitals to other geographic areas as well as

the timetable under which hospitals must submit applications for

reclassification and the MGCRB and the Secretary must make decisions on

those applications.

1. Revised Application and MGCRB Timeframes

Currently, a hospital must submit an application to the MGCRB for

geographic reclassification for a fiscal year by the first day of the

preceding fiscal year (that is, October 1, 1997 for reclassification

effective in FY 1999). The MGCRB has 180 days to make a decision on

that application (no later than March 31 of the fiscal year), the

hospital has 15 days to request a review of that decision by the

Administrator of HCFA (by April 15), and the Administrator has up to 90

days to issue a final decision (July 15). Under our current publication

schedule, the July 15 deadline allows the final geographic

reclassification decisions to be incorporated in the wage index and

payment rates that are published in the final rule on or about

September 1.

Sections 4644 (a)(1) and (b)(1) of Public Law 105-33 amend section

1886 (d)(6) and (e) of the Act to provide that the final rule setting

the payment rates for years beginning with FY 1999 must be published by

August 1. Because this change in publication dates would conflict with

the timetable for geographic reclassification decisions, section

4644(c) of Public Law 105-33 amended section 1886(d)(10)(C)(ii) of the

Act to require a hospital to submit an application for reclassification

no later than the first day of the month preceding the beginning of the

Federal fiscal year (that is, by September 1) beginning with

applications filed for reclassification for FY 2000. Under this

timetable, the amount of time the MGCRB and the Administrator have to

make decisions will not change from the current schedule.

In addition, because applications filed for reclassification

effective in FY 1999 are not due until October 1, 1997, section

4644(c)(2) requires us to shorten the deadlines under section

1886(d)(10)(C) of the Act so that all final decisions on MGCRB

applications will be completed by June 15, 1998. We have consulted with

the staff of the MGCRB and the reclassification decisions will be made

by the MGCRB by February 28, 1998. This will allow final decisions of

the Secretary to be completed by June 15, 1998.

We are revising Secs. 412.256 and 412.274 to implement the change

in the application deadline.

2. Alternative Wage Index Reclassification Guidelines for Individual

Hospitals

a. In the September 1, 1992 final rule, we revised the wage index

guidelines at Sec. 412.230(e) to add the requirement that a hospital

cannot be reclassified unless its average hourly wage is at least 108

percent of the average hourly wage of the area in which it is located.

For FY 1998 reclassification, section 4409 of Public Law 105-33

requires the Secretary to establish alternative wage index guidelines

for geographic reclassification. As provided in the statute, a hospital

may reclassify for wage index purposes if it demonstrates that:

Its average hourly wage is at least 108 percent of the

average hourly wage of all other hospitals in its MSA, that is, not

including its own wage data.

It pays at least 40 percent of the adjusted uninflated

wages in the MSA.

It reclassified for the wage index for each of the fiscal

years 1992 through 1997.

The hospital must also meet all other applicable guidelines (for

example, proximity).

As noted above, this provision is effective for FY 1998

reclassifications. Because the application and decision making process

for FY 1998 reclassification is already completed, we must provide

special guidelines for hospitals to apply for reclassification under

this provision for FY 1998.

A hospital seeking reclassification for FY 1998 under this

provision must submit its application to the MGCRB by September 15,

1997. In addition, the hospital must submit 7 copies of a completed

application to the MGCRB. The MGCRB will dismiss a

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