Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 1999 Rates

SUMMARY: We are revising the Medicare hospital inpatient prospective

payment systems for operating costs and capital-related costs to

implement applicable statutory requirements, including section 4407 of

the Balanced Budget Act of 1997 (BBA), as well as changes arising from

our continuing experience with the systems. In addition, in the

addendum to this final rule, we describe changes in the amounts and

factors necessary to determine rates for Medicare hospital inpatient

services for operating costs and capital-related costs. These changes

are applicable to discharges occurring on or after October 1, 1998. We

also set forth rate-of-increase limits as well as changes for hospitals

and hospital units excluded from the prospective payment systems.

Finally, we are implementing the provisions of section 4625 of the BBA

concerning payment for the direct costs of graduate medical education.

DATES: The provisions of this final rule are effective October 1, 1998.

This rule is a major rule as defined in Title 5, United States Code,

section 804(2). Pursuant to 5 U.S.C. section 801(a)(1)(A), we are

submitting a report to the Congress on this rule on July 31, 1998.

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

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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

Sections 1886(d) and (g) of the Social Security Act (the Act) set

forth a system of payment for the operating and capital costs of acute

care hospital inpatient stays under Medicare Part A (Hospital

Insurance) based on prospectively-set rates. Under these prospective

payment systems (PPS), Medicare payment for hospital inpatient

operating and capital-related costs is made at predetermined, specific

rates for each hospital discharge. Discharges are classified according

to a list of diagnosis-related groups (DRGs).

Certain specialty hospitals are excluded from the prospective

payment systems. Under section 1886(d)(1)(B) of the Act, the following

hospitals and units are excluded from PPS: psychiatric hospitals or

units, rehabilitation hospitals or units, children's hospitals, long

term care hospitals, and cancer hospitals. For these hospitals and

units, Medicare payment for operating costs is based on reasonable

costs subject to certain limits.

Under section 1886(a)(4) of the Act, costs incurred in connection

with approved graduate medical education (GME) programs are excluded

from the operating costs of inpatient hospital services. Hospitals with

approved GME programs are paid for the direct costs of GME in

accordance with section 1886(h) of the Act; the amount of payment for

direct GME costs for a cost reporting period is based on the number of

the hospital's residents in that period and the hospital's costs per

resident in a base year.

The regulations governing the hospital inpatient prospective

payment system are located in 42 CFR part 412. The regulations

governing excluded hospitals are located in both parts 412 and 413, and

the graduate medical education regulations are found in part 413.

B. Summary of the Provisions of the May 8, 1998 Proposed Rule

On May 8, 1998, we published a proposed rule in the Federal

Register (63 FR 25576) 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, 1998. We also proposed changes in

payments for excluded hospitals and payments for graduate medical

education costs. The following is a summary of the major issues

addressed and changes we proposed to make:

We proposed changes to the FY 1999 DRG classifications and

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

We proposed to update the hospital wage data for FY 1999.

We also proposed changes to the data categories included in the wage

index and revisions to the wage index based on hospital redesignations.

We discussed several provisions of the regulations in 42

CFR parts 412 and 413 and set forth certain proposed changes concerning

definition of transfer cases, rural referral centers, disproportionate

share adjustment, bad debts, and direct graduate medical education

programs.

We discussed several provisions of the regulations in 42

CFR Part 412 and set forth certain proposed changes and clarifications

concerning capital indirect medical education payments and payments to

new hospitals.

We discussed the criteria governing excluded hospitals

including caps on the target amounts for FY 1999 and exceptions.

In the addendum to the proposed rule, we set forth

proposed changes to the amounts and factors for determining the FY 1999

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

[[Page 40955]]

beginning in FY 1999 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 the

technical appendix on the proposed FY 1999 capital cost model.

In Appendix C, as required by section 1886(e)(3)(B) of the

Act, we set forth a report to Congress on our initial estimate of a

recommended update factor for FY 1999 for both hospitals included in

and hospitals excluded from the prospective payment systems.

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

recommendation of the appropriate percentage change for FY 1999 for the

large urban area and other area average standardized amounts (and

hospital-specific rates applicable to sole community and Medicare-

dependent, small rural hospitals) for hospital inpatient services paid

for under the prospective payment system for operating costs.

In Appendix D of the proposed rule, we also set forth our

recommendation of the appropriate percentage change for FY 1999 for

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,

1998 recommendations concerning hospital inpatient policies made by the

Medicare Payment Advisory Commission (MedPAC) as well as our responses

to those recommendations. Under section 1805(b) of the Act, MedPAC is

required to submit a report to Congress, not later than March 1 of each

year, that reviews and makes recommendations on Medicare payment

policies.

C. Public Comments Received in Response to the Proposed Rule

A total of 214 items of correspondence containing comments on the

proposed rule were received timely. The main areas of concern addressed

by the commenters were the change in the definition of transfer cases

and the revisions to the wage index. We also received a number of

comments on the proposal to pay qualified nonhospital providers for the

direct costs of graduate medical education.

Summaries of the public comments received and our responses to

those comments are set forth below under the appropriate section.

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, 1998 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 Revision, 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 496 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, cases are assigned to an MDC based on the principal

diagnosis, before assignment to a DRG. However, there are five DRGs to

which cases are directly assigned on the basis of procedure codes.

These are the DRGs for liver, bone marrow, and lung transplant (DRGs

480, 481, and 495, respectively) and the two DRGs for tracheostomies

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

classification to an MDC.

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

on a surgical hierarchy that orders individual procedures or groups of

procedures by resource intensity) and medical DRGs. Medical DRGs

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

surgical and medical DRGs are further differentiated based on the

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

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

nonsurgical procedures or minor surgical procedures generally not

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

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

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

diagnoses, such as extracorporeal shock wave lithotripsy for patients

with a principal diagnosis of urinary stones.

We proposed several changes to the DRG classification system for FY

1999. The proposed changes, the comments we received concerning them,

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

forth below. Unless otherwise noted, our DRG analysis is based on the

full (100 percent) FY 1997 MedPAR file based on

[[Page 40956]]

bills received through September 30, 1997.

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

In the August 29, 1997 hospital inpatient final rule with comment

period (62 FR 45974), we noted that, because of the many recent changes

in heart surgery, we were considering conducting a comprehensive review

of the MDC 5 surgical DRGs. We have begun that review, and based upon

our analysis thus far, we proposed the following DRG changes.

a. Coronary Bypass. There are two DRGs that capture coronary bypass

procedures: DRG 106 (Coronary Bypass with Cardiac Catheterization) and

DRG 107 (Coronary Bypass without Cardiac Catheterization). The

procedures that allow a coronary bypass case to be assigned to DRG 106

include percutaneous valvuloplasty, percutaneous transluminal coronary

angioplasty (PTCA), cardiac catheterization, coronary angiography, and

arteriography.

In analyzing the FY 1997 MedPAR file, we noted that, of cases

assigned to DRG 106, the average standardized charges for coronary

bypass cases with PTCA were significantly higher than those cases

without PTCA. There were approximately 4,400 cases in DRG 106 where

PTCA is performed as a secondary procedure. These cases had an average

standardized charge of approximately $69,000. The average charge of the

approximately 95,000 cases in DRG 106 without PTCA was approximately

$52,000.

Based on this analysis, we proposed to create a new DRG for

coronary bypass cases with PTCA. The cases currently in DRG 106 without

PTCA would be assigned to another DRG and the cases currently assigned

to DRG 107 would be unmodified. Because we would replace two DRGs with

three new DRGs, we proposed to revise the DRG numbers and titles

accordingly. The new DRGs and their titles are set forth below:

DRG 106 Coronary Bypass with PTCA

DRG 107 Coronary Bypass with Cardiac Catheterization

DRG 109 Coronary Bypass without Cardiac Catheterization

We note that DRG 109 has been an empty DRG for the last several years.

We received several comments regarding this proposal.

Comment: While the commenters supported the creation of a new DRG

to capture coronary bypass surgeries with PTCA, some of the commenters

were concerned about the renumbering of the current DRGs 106 and 107.

They believe splitting the cases currently assigned to DRG 106 into new

DRGs 106 and 107 and reassigning the cases currently assigned to DRG

107 to DRG 109 will make it difficult to conduct DRG trend analyses.

The commenters suggested that DRGs 106 and 107 should not be modified

and that DRG 109 be used to capture coronary bypass with PTCA. Two

commenters stated that a DRG that has been invalidated (109) should not

be reintroduced.

Response: Although we understand the commenters' concern, we also

believe that the sequencing of surgical DRGs in hierarchy order is

appropriate. In this case, our alternative to the proposed revision

would have been to delete DRGs 106 and 107 and create three new DRGs

that would have been placed at the end of the DRG table, that is, after

current DRG 503. Because we did have an empty surgical DRG in MDC 5 and

it was numerically close to DRGs 106 and 107, we believed our proposed

retitling was the best alternative.

We note that the surgical DRGs in MDC 5 have been renumbered and

retitled several times since they were first introduced in 1983. As

stated above, we are currently conducting a comprehensive review of the

MDC 5 surgical DRGs. If that review results in the reclassification of

procedures among the current DRGs, we will probably renumber and

retitle those DRGs.

Comment: We received one comment requesting clarification of the

DRG assignment for PTCA and cardiac catheterization procedures when

performed in conjunction with coronary bypass. The commenter suggested

that we add the phrase ``without PTCA'' to the titles of DRGs 107 and

109 to more aptly describe the cases assigned to those DRGs.

Response: Coronary bypass performed in conjunction with single or

multiple PTCA or percutaneous valvuloplasty will be assigned to DRG

106. The procedure codes for PTCA and percutaneous valvuloplasty are as

follows: 35.96, 36.01, 36.02, and 36.05. Procedures assigned to DRG 107

would include any coronary bypass with cardiac catheterization,

coronary angiography, or coronary arteriography, and DRG 109 is for

cases with the coronary bypass procedure only. We believe that the

proposed titles accurately describe the cases assigned to each of the

DRGs and that adding the phrase ``without PTCA'' to the titles of DRGs

107 and 109 is unnecessary. We are incorporating our proposed DRG

changes and DRG numbers and titles in the final DRG classifications.

b. Implantable heart assist system and annuloplasty. In the August

29, 1997 final rule with comment period, we moved implant of an

implantable, pulsatile heart assist system (procedure code 37.66) from

DRGs 110 and 111 (Major Cardiovascular Procedures) 1 to DRG

108 (Other Cardiothoracic Procedures). Although this move improved

payment for these procedures, they were still much more expensive than

the other cases in DRG 108 ($96,000 for heart assist versus an average

of $54,000 for all other cases in the FY 1996 MedPAR file). We stated

that we would continue to review the MDC 5 surgical DRGs in an attempt

to find a DRG placement for these cases that would be more similar in

terms of resource use.

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

\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 with patients who are age 0-17. Occasionally, a

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

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

As discussed in the proposed rule, in reviewing the FY 1997 MedPAR

file, we noted that heart assist system implant continues to be the

most expensive procedure in DRG 108. In fact, other than heart

transplant, heart assist system implant is the most expensive procedure

in MDC 5. The average FY 1997 charge for these cases, when assigned to

DRG 108, is over $150,000 compared to about $53,000 for all cases in

DRG 108. Obviously, the charges for heart assist implant are increasing

at a much greater rate than the average charges for DRG 108. In

addition, the length of stay for cases coded with 37.66 is

approximately 32 days compared to about 11 days for all other DRG 108

cases.

One possibility for improving payment for these cases is to move

them to DRGs 104 and 105 (Cardiac Valve Procedures). Those DRGs, which

split on the basis of the performance of cardiac catheterization, have

average charges of approximately $66,000 and $51,000, respectively.

While heart assist implant cases are still more expensive than the

average case in these DRGs, payment would be improved. Clinically,

placement of heart assist implant in DRGs 104 and 105 is not without

precedent. Effective with FY 1988, we placed implant of a total

automatic implantable cardioverter defibrillator (AICD) in these DRGs.

In addition, the vast majority of procedures assigned to DRG 108

involve surgically splitting open the sternum to perform the procedure.

However, implant of the heart assist device does not require this

approach.

While reviewing the DRG 108 cases, we also noted that procedure

code 35.33

[[Page 40957]]

(annuloplasty) is assigned to this DRG. Annuloplasty is a valve

procedure and is clinically more similar to the cases assigned to DRGs

104 and 105 than it is to the cases assigned to DRG 108. In addition,

the average standardized charge for annuloplasty cases assigned to DRG

108 is about $67,000, well above the overall average charge of

approximately $53,000 for cases in DRG 108. Therefore, we proposed to

move annuloplasty from DRG 108 to DRGs 104 and 105.

In order to more accurately reflect the cases assigned to DRGs 104

and 105, we proposed to retitle them as follows:

DRG 104 Cardiac Valve and Other Major Cardiothoracic Procedures

with Cardiac Catheterization

DRG 105 Cardiac Valve and Other Major Cardiothoracic Procedures

without Cardiac Catheterization.

We received only supportive comments for our proposal to move

annuloplasty to DRGs 104 and 105; therefore, that change is included in

the final DRGs.

Comment: Commenters generally appreciated any improvement in the

payment for heart assist devices. However, some of them continue to

urge HCFA to reclassify these cases to DRG 103 (Heart Transplant) or to

their own DRG. Two commenters were unsure if we had proposed a

classification change which was reflected in the proposed DRG weights

or had merely requested comment on such a change. Another commenter was

concerned that cases reassigned to DRG 105 (those in which there is no

cardiac catheterization performed) would receive a lower payment than

they currently do in DRG 108.

Response: First, we note that the proposed DRG weights did include

this change; that is, we moved over 2,000 heart assist implant cases

from DRG 108 to DRGs 104 and 105 before recalibrating the proposed

weights. In addition, although the final FY 1999 weight for DRG 105 is

slightly lower than the weight for DRG 108 (5.7099 and 5.9764,

respectively), the much higher DRG 104 weight (7.3690) results in an

overall improvement in payment for these cases when reclassified. Using

the FY 1997 MedPAR cases, we estimate that at least 40 percent of the

heart assist implant cases will be assigned to DRG 104. Thus, as long

as a hospital treats a mix of heart assist implant cases, with and

without the cardiac catheterization procedure, its overall payment

should be higher under the revised classification. We presume this will

be the case for virtually all hospitals.

With regard to the comments concerning reclassification of this

procedure to DRG 103 or a new DRG, we refer the reader to our response

to a similar comment in the August 29, 1997 final rule (62 FR 45967).

3. MDC 22 (Burns)

Under the current DRG system, burn cases are assigned to one of six

DRGs in MDC 22 (Burns), which have not been revised since 1986. In our

FY 1998 hospital inpatient proposed rule (June 2, 1997; 62 FR 29912),

in response to inquiries we had received, we indicated that we would

conduct a comprehensive review of MDC 22 to determine whether changes

in these DRGs could more appropriately capture the variation in

resource use associated with different classes of burn patients. We

solicited public comments on this issue, particularly asking for

recommendations on ways to categorize related diagnosis and procedure

codes to produce DRG groupings that would be more homogeneous in terms

of resource use.

In our May 8, 1998 proposed rule (63 FR 25579), we discussed in

detail the results of our review of MDC 22. We received a proposal

(endorsed by the American Burn Association (ABA)) for restructuring the

DRGs based on several statistical and clinical criteria, including age,

severity of the burn, and the presence of complications or

comorbidities. Subsequently, we worked closely with representatives of

the ABA and with the clinicians who developed the proposal in order to

refine it for Medicare purposes. Based on this work, we proposed to

replace the six existing DRGs in MDC 22 with eight new DRGs. For ease

of reference and classification, the current DRGs in MDC 22, DRGs 456

through 460 and 472, would no longer be valid, and we would establish

new DRGs 504 through 511 to contain all cases that currently group to

MDC 22. (The complete titles of the new DRGs are set forth below.)

In reviewing the Medicare burn cases, we found that the most

important distinguishing characteristic in terms of resource use was

the amount of body surface affected by the burn and how much of that

burn was a 3rd degree burn. The second most important factor was

whether or not the patient received a skin graft. Thus, a patient with

burns covering at least 20 percent of body area, with at least 10

percent of that a 3rd degree burn, consumed the most resources.

However, if a patient met these criteria and did not receive a skin

graft, then the case was much less expensive and the average length of

stay fell from over 30 days to 8 days. The first two proposed burn DRGs

reflect these distinctions (DRGs 504 and 505).

After classifying the most extensive burn cases, we found that the

patients with 3rd degree burns that did not meet the criteria to be

assigned to DRGs 504 and 505 were the most expensive of the remaining

cases (that is, those patients whose burns did not meet the at least 20

percent body area or at least 10 percent 3rd degree criteria). These

burns are referred to clinically as ``full-thickness burns.'' A subset

of these full-thickness burn cases, those with skin graft or an

inhalation injury, were much more expensive than the other cases. After

dividing these patients into two groups, with or without skin graft or

inhalation injury, we examined whether other factors had an influence

on resource use. We found that patients who had a CC (complication or

comorbidity) or a concomitant significant trauma consumed more

resources whether or not they had a skin graft or inhalation injury.

Thus, the next four proposed DRGs were defined as full-thickness burns

with skin graft or inhalation injury with or without CC or significant

trauma, or full-thickness burns without skin graft or inhalation injury

with or without CC or significant trauma (DRGs 506 through 509).

Finally, the last two proposed DRGs (510 and 511) were for cases

with nonextensive burns. These cases are also split on the basis of CCs

or concomitant significant trauma.

Consistent with the recommendations of several commenters on last

year's proposed rule, the new burn DRGs would no longer include a

separate DRG for cases in which burn patients were transferred to

another acute care facility.

The specific diagnosis and procedure codes that were included in

each of the eight proposed DRGs and their titles are as follows.

DRGs 504 and 505--Extensive 3rd Degree Burns with and without Skin

Graft. DRGs 504 and 505 include all cases with burns involving at least

20 percent of body surface area combined with a 3rd degree burn

covering at least 10 percent of body surface area. Thus, these cases

have diagnosis codes of 948.xx, with a fourth digit of 2 or higher

(indicating that burn extends over 20 percent or more of body surface)

and a fifth digit of 1 or higher (indicating a 3rd degree burn

extending over 10 percent or more of body surface). Cases with the

appropriate diagnosis codes are classified into DRG 504 if one of the

following skin graft procedure codes is present:

85.82 Split-thickness graft to breast

85.83 Full-thickness graft to breast

85.84 Pedicle graft to breast

86.60 Free skin graft, NOS

86.61 Full-thickness skin graft to hand

[[Page 40958]]

86.62 Other skin graft to hand

86.63 Full-thickness skin graft to other sites

86.65 Heterograft to skin

86.66 Homograft to skin

86.67 Dermal regenerative graft (new code in FY 1999--see Table 6A

in section VI. of the Addendum)

86.69 Other skin graft to other sites

86.70 Pedicle of flap graft, NOS

86.71 Cutting and preparation of pedicle grafts or flaps

86.72 Advancement of pedicle graft

86.73 Attachment of pedicle or flap graft to hand

86.74 Attachment of pedicle or flap graft to other sites

86.75 Revision of pedicle or flap graft

86.93 Insertion of tissue expander

DRGs 506 and 507--Full Thickness Burn with Skin Graft or Inhalation

Injury with or without CC or Significant Trauma. These DRGs include all

other cases of 3rd degree burns that also have either a skin graft or

an inhalation injury. Thus, these cases have diagnosis codes of 941.xx

through 946.xx, and 949.xx, with a fourth digit of 3 or higher, as well

as cases with codes of 948.xx that did not group into DRGs 504 or 505

(that is, 948.00, 948.01, and 948.1x through 948.9x with a fifth digit

of 0). In addition, cases classified into DRGs 506 and 507 must have

either one of the skin graft procedure codes listed above or one of the

following diagnosis codes for inhalation injuries:

518.5 Pulmonary insufficiency following trauma and surgery

518.81 Respiratory failure

518.84 Acute and chronic respiratory failure (new code in FY 1999--

see Table 6A in section VI. of the Addendum)

947.1 Burn of larynx, trachea, or lung

987.9 Toxic effect of gas, fume, or vapor, NOS

Cases that meet both of these coding criteria are assigned to DRG 506

if there is a diagnosis code indicating either a CC (based on the

standard DRG CC list) or concomitant significant trauma (based on the

significant trauma diagnosis codes, listed by body site, used for

classification in MDC 24).

DRGs 508 and 509--Full Thickness Burn without Skin Graft or

Inhalation Injury with or without CC or Significant Trauma. These DRGs

include all other cases of 3rd degree burns. Thus, these DRGs include

all cases without a skin graft or inhalation injury that have diagnosis

codes of 941.xx through 946.xx, and 949.xx, with a fourth digit of 3 or

higher, as well as cases with codes of 948.xx that did not group into

DRGs 504 or 505. DRG 508 also requires a secondary diagnosis from the

standard CC list or the trauma list based on the significant trauma

diagnosis codes, listed by body site, used for classification in MDC

24.

DRGs 510 and 511--Nonextensive Burns with and without CC or

Significant Trauma. The remaining burn cases would be classified into

one of these two proposed DRGs, depending on whether or not the claim

included a diagnosis code reflecting the presence of a CC or a

significant trauma, as explained above.

Comment: We received five comments on this proposed change. In

general, the commenters, including the ABA, strongly supported the

proposed restructuring of MDC 22. The commenters agreed that the new

burn DRGs should bring about meaningful improvements to the clinical

coherency and payment equity for the cases assigned to the MDC 22 DRGs.

One commenter noted that under the new DRGs, diagnosis codes in the

948.xx series (that is, the codes used to identify the extent of body

surface involved in a burn and the percentage of the body surface with

a 3rd degree burn) would take on added importance and emphasized the

need for coder education in this area. Another commenter submitted

several suggestions for additional procedure codes that should be added

to the list of procedure codes that would result in assignment to DRG

504 and to DRGs 506 and 507. These codes include both additional codes

that the commenter believes should be considered as skin grafts (such

as procedure codes 08.61 through 08.69, reconstruction of eyelid with

flaps or grafts) as well as codes for other procedures (for example,

limb reattachments or eyeball enucleations) that, as the commenter

pointed out, are now considered a related operating room procedure

under existing DRG 472, Extensive Burns with Operating Room Procedure.

This commenter also suggested that DRGs 506 and 507 be identified as

surgical DRGs in Table 5 of the addendum to the final rule.

Response: We appreciate the positive responses generated by this

proposal. We agree that our proposed changes will place greater

emphasis on the need for accurate use of the series 948.xx diagnosis

codes. We note that this issue has been addressed in the American

Hospital Association's quarterly publication, ``Coding Clinic for ICD-

9-CM.'' In the 1994, 4th quarter issue, Coding Clinic stated ``It is

advisable to use category 948 as additional coding when needed to

provide data for evaluating burn mortality, such as that needed by burn

units. It is also advisable to use category 948 as an additional code

for reporting purposes when there is mention of a third-degree burn

involving 20 percent or more of the body surface.'' We believe the vast

majority of burn cases already include the 948.xx coding if

appropriate, especially those treated in burn centers. However, we will

be pleased to work with other hospital groups that are interested in

developing educational materials related to the accurate coding of burn

cases.

In developing the coding classifications used to assign cases under

the burn DRGs, we worked closely with the ABA and its medical

consultants to identify the most significant distinguishing

characteristics in terms of resource use in burn cases. This process

involved both grouping cases that were clinically similar as well as

conducting a series of test runs to maximize the amount of variation in

resource use that could be explained using varying groups of diagnosis

and procedure codes. As stated in the May 8 proposed rule (63 FR

25579), we estimate that the proposed changes to the burn DRGs would

increase by more than 25 percent the amount of variation in resource

use explained by the DRGs in MDC 22, as well as improve the clinical

coherence of the cases within each DRG. As recommended by the ABA, the

procedure codes used to identify skin grafts coincide with the

procedure codes now in use under existing DRG 458, Non-Extensive Burns

with Skin Graft, and we believe that these codes represent the most

resource-intensive skin grafts. Therefore, we are not adding the codes

suggested by the commenter.

We recognize that some procedures now listed under DRG 472 will no

longer affect DRG assignment under the restructured burn DRGs. However,

we believe that the substantially increased ability of the new DRGs to

explain the variation in resource use among burn cases clearly

indicates the appropriateness of narrowing the focus of the

classification system to emphasize the extent and severity of the burn,

in conjunction with skin grafts or inhalation injury. Our analysis

indicated that the presence of skin grafts or inhalation injuries had a

much more consistent effect on the consumption of hospital resources

than the presence of one of the numerous operating room procedures now

listed under DRG 472. We also note that, since the skin graft

procedures now classified to DRG 504 were classified to former DRG 472,

many DRG 472 cases will now be assigned to DRG 504, which has a higher

weight than 472 did (14.1153 versus 10.2429). When the FY 1999 cases

become available, we will review them to assess the revisions to MDC 22

and the possible need for the type of changes suggested by the

commenter.

[[Page 40959]]

Finally, we note that we do not classify DRGs 506 and 507 as

surgical DRGs because they include not only cases involving skin

grafts, which are considered surgical procedures, but also cases

involving inhalation injuries, which would not necessarily involve any

surgical procedures. Thus, in this final rule, we are adopting the

changes to the burn DRGs as proposed.

4. Legionnaires' Disease

Effective with discharges occurring on or after October 1, 1997, a

new diagnosis code was created for pneumonia due to Legionnaires'

disease (code 482.84). In the August 29, 1997 final rule with comment

period, we assigned this code to DRGs 79, 80, and 81 (Respiratory

Infections and Inflammations) (62 FR 46090). However, we did not

include this code as a human immunodeficiency virus (HIV) major related

condition in MDC 25 (HIV Infections). Because pneumonia due to

Legionnaires' disease is a serious respiratory condition that has a

deleterious effect on patients with HIV, we proposed to assign

diagnosis code 482.84 to DRG 489 (HIV with Major Related Condition) as

a major related condition. In addition, we did not assign the code as a

major problem in DRGs 387 (Prematurity with Major Problems) and 389

(Full Term Neonate with Major Problems). These DRGs are assigned to MDC

15 (Newborns and Other Neonates with Conditions Originating in the

Perinatal Period). Again, as a part of the proposed rule, we assigned

diagnosis code 482.84 as a major problem in DRGs 387 and 389 because of

its effect on resource use in treating newborns.

Commenters supported these proposed revisions, and we are

incorporating them into the final DRGs.

5. Surgical Hierarchies

Some inpatient stays entail multiple surgical procedures, each one

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

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

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

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

ordering of surgical classes from most to least resource intensive,

performs that function. Its application ensures that cases involving

multiple surgical procedures are assigned to the DRG associated with

the most resource-intensive surgical class.

Because the relative resource intensity of surgical classes can

shift as a function of DRG reclassification and recalibration, we

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

reclassifications, to determine if the ordering of classes coincided

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

billing data used to compute the DRG relative weights.

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

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

DRG (DRG 103) and the class ``major cardiovascular procedures''

consists of two DRGs (DRGs 110 and 111). 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

involves weighing 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.

Assume also 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

weigh the average charge of each DRG by frequency (that is, by the

number of cases in the DRG) to determine average resource consumption

for the surgical class. The surgical classes would then be ordered from

the class with the highest average resource utilization to that with

the lowest, with the exception of ``other OR procedures'' as discussed

below.

This methodology may occasionally result in a case involving

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

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

alternatives. However, given that the logic underlying the surgical

hierarchy provides that the GROUPER searches for the procedure in the

most resource-intensive surgical class 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. However, in

developing the proposed rule, we were unable to test the effects of the

proposed revisions to the surgical hierarchy and to reflect these

changes in the proposed relative weights due to the unavailability of

revised GROUPER software at the time the proposed rule was prepared.

Rather, we simulated most major classification changes to approximate

the placement of cases under the proposed reclassification and then

determined 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 MDC 3 (Diseases

and Disorders of the Ear, Nose, Mouth and Throat) as follows:

We would reorder Sinus and Mastoid Procedures (DRGs 53-54)

above Myringotomy with Tube Insertion (DRGs 61-62).

We would reorder Mouth Procedures (DRGs 168-169) above

Tonsil and Adenoid Procedure Except Tonsillectomy and/or Adenoidectomy

Only (DRGs 57-58).

We received two comments in support of our surgical hierarchy

proposals. However, for this final rule, we tested the proposed changes

using the most recent MedPAR file and the revised GROUPER software, and

we found that the proposal to move Sinus and Mastoid Procedures (DRGs

53-54) above Myringotomy with Tube Insertion (DRGs 61-62) is not

supported. Therefore, this change will not be made in this final rule.

The proposed reordering of DRGs 53 and 54 above Cleft Lip and Palate

Repair (DRG 52) (DRG 52 is currently ordered below DRGs 61 and 62 but

above DRGs 53 and 54) is still supported and will be

[[Page 40960]]

incorporated in the final GROUPER, as will the proposed reordering of

DRGs 168 and 169 above DRGs 57 and 58.

6. Refinement of Complications and Comorbidities List

There is a standard list of diagnoses that are considered 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. We did not propose to delete any of

the diagnosis codes on the CC list.

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

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

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

be considered a valid CC in combination with a particular principal

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

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

preclude duplicative coding or inconsistent coding from being treated

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

the complicated and uncomplicated DRGs in a pair.

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

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

secondary diagnoses were established using the following five

principles:

Chronic and acute manifestations of the same condition

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

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

Specific and nonspecific (that is, not otherwise specified

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

one another.

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

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

should not be considered CCs for one another.

The same condition in anatomically proximal sites should

not be considered CCs for one another.

Closely related conditions should not be considered CCs

for one another.

The creation of the CC Exclusions List was a major project

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

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

used for eliminating certain diagnoses from consideration as CCs were

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

considered complications or comorbidities of another diagnosis. For

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

have continued to review the remaining CCs to identify additional

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

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

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

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

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

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

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

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

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

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

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

rule for the FY 1997 revisions (61 FR 46171); and the August 29, 1997

final rule for the FY 1998 revisions (62 FR 45966)).

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, 1998. (See section II.B.8, below,

for a discussion of ICD-9-CM changes.) These proposed changes were made

in accordance with the principles established when we created the CC

Exclusions List in 1987. We received no comments on these proposed

changes and we are incorporating them as final changes.

Tables 6F and 6G in section VI of the Addendum to this final rule

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

for discharges occurring on or after October 1, 1998. Each table shows

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

principal diagnoses is shown with an asterisk and the additions or

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

immediately following the affected principal diagnosis.

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

Exclusions List. Beginning with discharges on or after October 1, 1998,

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 6G--Deletions from

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

1, 1998 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,

1997, and 1998) and those in Tables 6F and 6G 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, 1998.

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. Version

16.0 of this manual, which will include the final FY 1999 DRG changes,

will be available in October 1998 for $225.00, which includes $15.00

for shipping and handling. This manual may be obtained by writing 3M/

HIS at the following address: 100 Barnes Road; Wallingford, Connecticut

06492; or by calling (203) 949-0303.

7. Review of Procedure Codes in DRGs 468, 476, and 477

Each year, we review cases assigned to DRG 468 (Extensive OR

Procedure Unrelated to Principal Diagnosis), DRG 476 (Prostatic OR

Procedure Unrelated to Principal Diagnosis), and DRG 477 (Nonextensive

OR Procedure Unrelated to Principal Diagnosis) in order to determine

whether it would be appropriate to change the procedures assigned among

these DRGs.

DRGs 468, 476, and 477 are reserved for those cases in which none

of the OR procedures performed is related to the principal diagnosis.

These DRGs are intended to capture atypical cases, that is, those cases

not occurring with sufficient frequency to represent a

[[Page 40961]]

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, August 30, 1996, and August 29, 1997, we moved

several other procedures from DRG 468 to 477, as well as moving some

procedures from DRG 477 to 468. (See 55 FR 36135, 56 FR 43212, 57 FR

23625, 58 FR 46279, 59 FR 45336, 60 FR 45783, 61 FR 46173, and 62 FR

45981, respectively.)

a. Adding procedure codes to MDCs. We annually conduct a review of

procedures producing DRG 468 or 477 assignments on the basis of volume

of cases in these DRGs with each procedure. Our medical consultants

then identify those procedures occurring in conjunction with certain

principal diagnoses with sufficient frequency to justify adding them to

one of the surgical DRGs for the MDC in which the diagnosis falls.

Based on this year's review, we did not identify any necessary changes;

therefore, we did not propose to move any procedures from DRGs 468 and

477 to one of the surgical DRGs.

b. Reassignment of procedures among DRGs 468, 476, and 477. We also

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

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

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

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

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

this year, we did not propose to move any procedures from DRG 468 to

DRGs 476 or 477, from DRG 476 to DRGs 468 or 477, or from DRG 477 to

DRGS 468 or 476.

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

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

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

procedures performed on a patient. 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 the Tabular List and Alphabetic

Index for Diseases while HCFA has lead responsibility for the ICD-9-CM

procedure codes included in the Tabular List and Alphabetic Index for

Procedures.

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 5 and December 4 and 5, 1997, and finalized the

coding changes after consideration of comments received at the meetings

and in writing within 30 days following the December 1997 meeting. The

initial meeting for consideration of coding issues for implementation

in FY 2000 was held on June 4, 1998. Copies of the minutes of the 1997

meetings can be obtained from the HCFA Home Page @ http://www.hcfa.gov/

pubaffr.htm, under the ``What's New'' listing. Paper copies of these

minutes are no longer available and the mailing list has been

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, Center for Health Plans and Providers,

Plan and Provider Purchasing Policy Group, Division of Acute Care; C4-

05-27; 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, 1998. The new ICD-9-CM codes are listed, along

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

Diagnosis Codes and New Procedure Codes, respectively) in section VI.

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

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

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

written comments were considered before the codes were approved.

Therefore, we solicited comments only on the proposed DRG

classifications.

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, 1998. The

[[Page 40962]]

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

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

or have been deleted are in Table 6D (Invalid Procedure Codes).

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

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

revised codes. For FY 1999, there are no revisions to procedure code

titles.

We received several comments about our proposed DRG assignments of

new and revised codes.

Comment: One commenter believes that revised diagnosis code 518.81

(acute respiratory failure) should be assigned as a ``major

complication'' in DRG 121 since it was classified in this manner prior

to the code revision. In addition, new diagnosis codes 518.83 (chronic

respiratory failure) and 518.84 (acute and chronic respiratory failure)

each should also be classified as a ``major complication'' in DRG 121.

Several commenters stated that new procedure code 37.67 (implantation

of cardiomyostimulation system) should not be classified to DRGs 442,

443, and 486 since the procedure is not performed for either injuries

or trauma. Commenters also noted that the DRG assignments as set forth

in Tables 6A through 6E in the May 8, 1998 proposed rule (63 FR 22576)

were not always aligned properly with the appropriate MDC number.

Response: We agree with the commenter that diagnosis codes 518.81,

518.83, and 518.84 should be included on the ``major complication''

list for DRG 121. As noted in the comment, code 518.81 is currently

designated as a major complication and the assignment remains valid. In

addition, the expanded codes 518.83 and 518.84 should be assigned to

the major complication list because these conditions were formerly

assigned to code 518.81. We also agree that procedure code 37.67 should

not have been assigned to DRGs 442, 443, and 486 for the reasons cited

by the commenter. We have revised Tables 6A, 6C, and 6E to reflect

these changes. In addition, we have reformatted the tables to correct

any alignment problems. Finally, we note that in Table 6B, the DRG

assignment of procedure code 86.67 should list only DRGs 504, 506, and

507 under MDC 22. DRGs 458 and 472, which were listed in the proposed

rule, have been deleted as a result of our restructuring of the burn

DRGs (see section II.B.3 of this preamble).

9. Other Issues

a. Palliative care. Effective October 1, 1996 (FY 1997), we

introduced a diagnosis code to allow the identification of those cases

in which palliative care was delivered to a hospital inpatient. This

code, V66.7 (Encounter for palliative care), was unusual in that there

had been no previous code assignment that included the concept of

palliative care. Since this was a new concept, instructional materials

were developed and distributed by the AHA as well as specialty groups

on the use of this new code. With new codes, it sometimes takes several

years for physician documentation to improve and for coders to become

accustomed to looking for this type of information in order to assign a

code. There is an inclusion note listed under V66.7 which indicates

that this code should be used as a secondary diagnosis only; the

patient's medical problem would always be listed first. Currently, use

of diagnosis code V66.7 does not have an impact on DRG assignment.

Consistent with prior practice, we have waited until the FY 1997 data

became available for analysis before considering any possible

modifications to the DRGs.

As discussed in the proposed rule, in analyzing the FY 1997 bills

received through September 1997, we found that 4,769 discharges

included V66.7 as a secondary diagnosis. These cases were widely

distributed throughout 199 DRGs. The vast majority of these DRGs

included five or fewer discharges with use of palliative care. Only 12

DRGs included more than 100 cases. These were the following:

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

Number of

DRG Title cases

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

10............................... Nervous System Neoplasms 144

with CC.

14............................... Specific Cerebrovascular 272

Disorders Except TIA.

79............................... Respiratory Infections 139

and Inflammations Age

>17 with CC.

82............................... Respiratory Neoplasms... 526

89............................... Simple Pneumonia and 200

Pleurisy Age >17 with

CC.

127.............................. Heart Failure and Shock. 184

172.............................. Digestive Malignancy 226

with CC.

203.............................. Malignancy of 285

Hepatobiliary System or

Pancreas.

239.............................. Pathological Fractures 218

and Musculosketal and

Connective Tissue

Malignancy.

296.............................. Nutritional and 173

Miscellaneous Metabolic

Disorders Age >17 with

CC.

403.............................. Lymphoma and Non-Acute 178

Leukemia with CC.

416.............................. Septicemia Age >17...... 147

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

Six of these DRGs are cancer-related; however, the other DRGs are

quite diverse. Upon further analysis, we found that, for the most part,

discharges with code V66.7 do not significantly differ in length of

stay from the discharges in the same DRG without code V66.7. The length

of stay for discharges with code V66.7 are sometimes longer and

sometimes shorter and the comparative length of stay for a given DRG

tends to vary by only one day. In general, the average charges for a

palliative care case discharge with a secondary code of V66.7 were

lower than the charges for other discharges within the DRG. However,

these differences were relatively small and were well within the

standard variation of charges for cases in the DRG.

One approach we could take to revise the DRGs would be to divide

those DRGs with a large number of cases coded with V66.7 into two

different DRGs, with and without palliative care. However, the

relatively small proportion of cases in each DRG argues against this

approach; no DRG has more than 1 percent of its cases coded with

palliative care and, in most cases, the percentage is well under 1

percent. An alternative approach would be to group all palliative care

cases, regardless of the underlying disease or condition, into one new

DRG. However, the charges of these cases are so varied that this is not

a logical choice. In addition, there is a lack of clinical coherence in

such an approach. The underlying diagnoses of these cases range from

respiratory conditions to heart failure to septicemia.

[[Page 40963]]

Because there are so few cases in the FY 1997 data and they are so

widely dispersed among different DRGs, we did not propose any DRG

modification. We will make a more detailed analysis of these cases over

the next year based on a more complete FY 1997 data file as well as

review of the FY 1998 cases that will be available later this year. As

time goes by, hospital coders and physicians should become more aware

of this code and we hope that more complete data will assist our

decision-making process.

We received a few comments supporting our decision to make no DRG

changes at this time for palliative care cases. One commenter agreed

with our statement that it may take several years for use of this code

to spread through the medical community.

b. PTCA. Effective with discharges occurring on or after October 1,

1997, we reassigned cases of PTCA with coronary artery stent implant

from DRG 112 (Percutaneous Cardiovascular Procedures) to DRG 116 (Other

Permanent Cardiac Pacemaker Implant or PTCA with Coronary Artery Stent

Implant). In the August 29, 1997 final rule with comment period, we

responded to several commenters who contended that PTCA cases treated

with platelet inhibitors were as resource intensive as the PTCA with

stent implant cases and that these cases should also be moved to DRG

116. However, there is currently no code that describes the infusion of

platelet inhibitors. Therefore, we were unable to make any changes in

the DRGs for FY 1998.

As set forth in Table 6B, New Procedure Codes in section VI. of the

addendum to this final rule, a new procedure code for injection or

infusion of platelet inhibitors (code 99.20) will be effective with

discharges occurring on or after October 1, 1998. Our usual policy on

new codes is to assign them to the same DRG or DRGs as their

predecessor code. Because infusion of platelet inhibitors is currently

assigned to a non-OR procedure code, we followed our usual practice and

designated code 99.20 as a non-OR code that does not affect DRG

assignment.

We will not have any data on this new code until we receive bills

for FY 1999. Thus, we would be unable to make any changes in DRG

assignment until FY 2001. We note, however, that the Conference Report

that accompanied the Balanced Budget Act of 1997 contained language

stating that ``* * * in order to ensure that Medicare beneficiaries

have access to innovative new drug therapies, the Conferees believe

that HCFA should consider, to the extent feasible, reliable, validated

data other than MedPAR data in annually recalibrating and reclassifying

the DRGs.'' (H.R. Rep. No. 105-217 at 734 (1997)). At the time the

proposed rule was published, we had received no data that would have

allowed us to make an appropriate modification of DRG 112 for PTCA

cases with platelet infusion therapy. In that rule, we stated that we

would review and analyze any data we received during the comment period

about the use of platelet inhibitors for Medicare beneficiaries.

Since publication of the proposed rule, we received some data

concerning the use of GPIIb/IIIa platelet inhibitor drug therapy as

well as some comments on the issue. A discussion of the data and the

comments and our responses are set forth below.

Comment: The data we received were provided by the pharmaceutical

company that manufactures a GPIIb/IIIa platelet inhibitor. In its

comment accompanying the data, the company states its belief that the

data conclusively demonstrate that procedure code 99.20 should be

assigned to DRG 116 effective for discharges occurring on or after

October 1, 1998. We received two other comments from hospitals

supporting this reassignment in order to improve payment for a

beneficial drug therapy. Another hospital urged HCFA not to make the

reassignment because the commenter believes that there is no evidence

that use of the drug decreases mortality or the risk of need for

emergency coronary bypass in patients undergoing stent implantation. In

addition, this commenter believes that the price charged for platelet

inhibitor is exorbitant and that HCFA should not directly subsidize a

pharmaceutical company through a DRG change. Finally, two commenters, a

drug company and a pharmaceutical association, were encouraged by

HCFA's willingness to consider data other than MedPAR data for

analyzing possible DRG changes.

The data we received comprise two different sets of Medicare

beneficiaries who received PTCA, PTCA with implant of a coronary stent,

PTCA with platelet inhibitor therapy, or PTCA with both implant of a

stent and platelet inhibitor therapy. One set of data consists of just

under 500 patients who received treatment in seven hospitals during a

clinical trial conducted between January 1, 1996 and June 15, 1997. The

other set consists of just over 6,200 patients treated in 83 hospitals

between October 1, 1995 and December 31, 1996 (this is data from a

health care information company that, among other products and

services, performs clinical and financial analysis of data under

contract with hospitals). For the first set of data, the hospitals are

identified; however, for the second set of data, the hospital

identifying information is confidential and was not released to HCFA.

In order to provide HCFA with standardized charges, the information

company obtained the HCFA provider-specific file and standardized the

charges before providing them to HCFA.

According to the commenter, based on the data provided the

approximate average standardized charges for the different classes of

patients are as follows:

PTCA alone--$17,000.

PTCA and stent--$22,000.

PTCA and platelet inhibitor--$24,000.

PTCA and both stent and platelet inhibitor--$29,000.

Based on these data, the drug's manufacturer urges us to reassign

procedure code 99.20 to DRG 116. The commenter also argues that failure

to improve the payment for these cases may result in Medicare

beneficiaries being denied equal access to potentially life-saving

treatment.

Response: We have reviewed the data submitted as well as considered

the comments we have received. Based on the data provided, it appears

that the cost of a PTCA case with platelet inhibitor drug therapy is at

least as expensive as a PTCA case with stent implant. However, the vast

majority of the cases (over 90 percent) cannot be linked to a hospital.

In addition, although the large data set does constitute a sample of

cases, as claimed by the commenter, it is not a random sample, but

rather a sample of those hospitals that contract with the health

information company. The pharmaceutical company states that the 83

hospitals are representative of all hospitals in the country, but we

have no way to verify that claim. Because the data cannot be verified,

and do not reflect a complete data set or a random sample, HCFA cannot

use the data to make a change in the DRG assignment.

The language that Congress included in the Conference Report that

accompanied the Balanced Budget Act of 1997 stated that HCFA should ``*

* * consider, to the extent feasible, reliable, validated data other

than MedPAR data in annually recalibrating and reclassifying the

DRGs.'' The data we have been given does not meet these requirements.

We cannot validate whether the data are Medicare beneficiaries nor can

we verify which hospitals provided the treatment or the amount of

charges reported to Medicare. In addition, we do not believe that we

[[Page 40964]]

should base any DRG reclassification decisions that will increase

payment for a set of cases on data that would not meet HCFA's strict

requirements for making a DRG change that would lower the relative

weight for a set of cases (see discussion below concerning radiosurgery

procedures).

As we have stated in several proposed and final rules (most

recently in the August 30, 1996 final rule in a discussion of the

coronary artery stent implant (61 FR 46170) and the August 29, 1997

final rule in response to a comment on the DRG assignment for new

diagnosis code 686.01) (62 FR 45982), our longstanding practice is to

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

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

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

reclassification and recalibration process. Consequently, our policy is

to wait until we have a full year of Medicare data upon which to base

an analysis of what the most appropriate DRG assignment would be. We

can then move any cases that we would reassign so we can revise the DRG

relative weights accordingly. If we were to assign procedure code 99.20

to DRG 116 at this time, we would be unable to move the cases

associated with that code from DRG 112 into DRG 116 based on the data

provided. Thus, the relative weight of DRG 112 would still reflect the

cases with procedure code 99.20. Since these cases presumably have much

higher charges than the other PTCA cases, the relative weight for DRG

112 would be overstated, which means the payments to those cases would

be overstated. In addition, the charges for PTCA cases with platelet

inhibitor drug therapy would not be reflected in the DRG 116 relative

weight.

Our practice of waiting until we have identifiable MedPAR data

applies to all DRG changes, that is, both those changes that would

enhance payment for a particular diagnosis or procedure, as well as,

those that would decrease payment for a particular diagnosis or

procedure. We note that, in FY 1996, when we created a new procedure

code for stereotactic radiosurgery (92.3), we assigned the code to DRGs

1, 2, and 3, because that is where the predecessor procedure code was

assigned. However, since code 92.3 is a nonoperating room procedure, we

were relatively sure that the code would not remain assigned to DRG 1,

2, and 3 (which are the highest weighted surgical DRGs in MDC 1) once

we had the actual charge data. As discussed in the August 29, 1997

final rule (62 FR 45971), procedure code 92.3 was reassigned to DRGs 7

and 8 once we had the FY 1996 data to analyze. Therefore, we

``overpaid'' those cases for 2 years; that is, their charges were much

less than the average charges for DRGs 1, 2, and 3.

We believe that any data we use to reclassify and recalibrate DRGs

must be comprehensive and valid, as well as verifiable by HCFA.

Concerning the commenter's argument that failure to change the DRG

assignment for infusion of platelet inhibitor will compromise the

availability of this treatment for Medicare beneficiaries, we note, as

we have in several previous documents, that it is a violation of a

hospital's 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.

c. Implantation of Muscle Stimulator

Comment: We received one comment arguing that the current DRG

assignment for the implantation of a muscle stimulator and the

associated tendon transfer for quadriplegics is inappropriate. The

specific muscle stimulator device (an implanted neuroprosthesis that

restores functional hand motion in people with quadriplegia who are 24

months post-injury) was approved by the Food and Drug Administration in

August 1996. The device is designed to provide neuromuscular

stimulation for certain patients with quadriplegia so that they can

grasp with their hand and perform tasks such as holding eating utensils

and pens and brushing their teeth. In many cases, the patient also

undergoes a tendon transfer to the hand during the same admission or

during a prior admission. The commenter notes that when the tendon

transfer (procedure code 82.56 (other hand tendon transfer or

transplantation)) and the insertion of the muscle stimulator (procedure

code 83.92 (insertion or replacement of skeletal muscle stimulator))

are performed during the same admission, the case is assigned to DRG 7

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

However, when the procedures are performed during two separate

admissions, the tendon transfer is assigned to DRGs 7 and 8 and the

insertion of the muscle stimulator is assigned to DRG 468 (Extensive OR

Procedure Unrelated to Principal Diagnosis). The commenter stated that

although payment for DRGs 7, 8, and 468 are all significantly less than

the cost of the hospital stay and the device, DRG 468 pays more and

results in the hospital losing less money. The commenter noted that the

device alone costs $24,500 and hospitals report losses of $11,000 to

$26,000 when the device is inserted and a tendon transfer is performed

during the same admission (resulting in assignment to DRGs 7 and 8).

However, when the insertion of the device is performed in a separate

admission, the cases are assigned to DRG 468 and hospitals' losses are

limited to $4,000 to $18,000.

The commenter believes that hospitals will refuse to perform this

very useful surgery unless the DRG assignment is revised. If the

insertion of the muscle stimulator were assigned to a surgical DRG in

MDC 1 where the diagnosis codes for quadriplegia are assigned, the

highest paying DRG assignment would be DRGs 1, 2, and 3 (Craniotomy).

Besides being clinically inappropriate, the commenter believes the

weights for these DRGs are too low to adequately pay for this

procedure.

The commenter recommended both a short and a long-term solution for

this problem. For now, all cases with insertion of muscle stimulators

performed in conjunction with tendon transfer should be assigned to DRG

468. In the long term, HCFA should establish a new DRG for the

implantation of muscle stimulation devices and other stimulation

devices as they become available.

Response: In examining the latest FY 1997 MedPAR file (bills

received through March 1998), we found only three cases for

implantation of muscle stimulators for quadriplegics. One case was

assigned to DRG 7 and the other two to DRG 8. The standardized charge

and length of stay for each case is set forth below.

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

Length of

DRG Standardized stay

charge (days)

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

7.............................................. $25,227 7

8.............................................. 8,849 2

8.............................................. 42,183 2

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

The average charge for all cases assigned to DRG 7 is approximately

$21,000 and the average charge for DRG 8 cases is about $11,500.

With so few cases, we would prefer to review the data in the FY

1998 MedPAR file before making any reclassification. Therefore, we will

add these cases to our FY 2000 DRG reclassification analysis agenda. We

note that the charges reported for two of the three cases are

significantly less than the costs that the commenter believes would be

incurred for this surgery (approximately $35,000).

It would be inappropriate to assign the muscle stimulator

insertions solely

[[Page 40965]]

to DRG 468. This DRG was created to capture a set of clinically

unrelated cases where the only operating room procedures performed are

unrelated to the patient's principal diagnosis. To permanently assign a

procedure code only to DRG 468 would be contrary to the basic design

and precepts of the DRG system.

C. Recalibration of DRG Weights

We proposed to use the same basic methodology for the FY 1999

recalibration as we did for FY 1998. (See the August 29, 1997 final

rule with comment (62 FR 45982).) That is, we recalibrated the weights

based on charge data for Medicare discharges. However, we used the most

current charge information available, the FY 1997 MedPAR file, rather

than the FY 1996 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

1997 MedPAR data, based on bills received by HCFA through March 1998,

from all hospitals subject to the prospective payment system and short-

term acute care hospitals in waiver States. The FY 1997 MedPAR file

includes data for approximately 11.3 million Medicare discharges.

The methodology used to calculate the DRG relative weights from the

FY 1997 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 (including a postacute care transfer case as discussed

in section IV.A of this preamble) is counted as a fraction of a case

based on the ratio of its length of stay (plus one day to account for

the double per diem payment for the first day) 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 0.6 of a total case. Transfers

from DRGs 209, 210, or 211 to postacute care are counted as a fraction

of a discharge based on the ratio determined by dividing the geometric

mean length of stay for the DRG by the sum of half the geometric mean

and half the length of stay for the case, plus one.

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 1999. Using the FY

1997 MedPAR data set, there are 37 DRGs that contain fewer than 10

cases. We computed the weights for the 37 low-volume DRGs by adjusting

the FY 1998 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 final 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.

Comment: One commenter was concerned about the general trend in the

relative weights. This commenter calculated average relative weights

for each MDC as well as the overall average DRG weight. Based upon this

calculation, the commenter noted that the average weight for the pre-

MDC DRGs and MDCs 8 (Diseases and Disorders of the Musculoskeletal

system and Connective Tissue) and 24 (Multiple Significant Trauma) are

decreasing. Concerning MDC 8, the commenter believes the average weight

is decreasing because of the use of postacute care for these DRGs,

noting that 4 of them are included in the list of 10 DRGs affected by

the transfer to postacute care provision (see section IV.A of this

preamble for a discussion of this provision). The commenter suggested

that we leave the FY 1998 weights intact for MDC 8 until we can assess

the effect of postacute care transfers on average standardized amounts.

For the pre-MDCs and MDC 24, the commenter believes that the cases

assigned to these categories are extremely resource-intensive and that

the average weights should not be decreasing. Finally, the commenter

noted that, although the total weight increased for MDC 22 (Burns), the

average weight decreased. The commenter believes this is inconsistent

with the statement in the proposed rule that the changes being made to

MDC 22 would improve the explanation of variation in resource use in

those DRGs (63 FR 25579).

Response: We reviewed the table of average DRG weights presented in

the comment, both overall and within MDCs, and we found that the

commenter has mistakenly used a simple averaging methodology to

determine the mean weight rather than a weighted averaging methodology,

which is how the DRG relative weights are calculated. For example,

suppose an MDC has three DRGs and there are 3 cases assigned to DRG 1,

6 cases assigned to DRG 2, and 7 cases assigned to DRG 3. The weights

for the DRGs are

[[Page 40966]]

1.000, 2.000, and 3.000, respectively. The simple average weight for

the three DRGs would be calculated by adding the weights and dividing

by the number of DRGs as follows:

[GRAPHIC] [TIFF OMITTED] TR31JY98.051

However, the weighted average would be calculated by first multiplying

the weights of each DRG by the number of cases in that DRG and dividing

by the number of cases as follows:

[GRAPHIC] [TIFF OMITTED] TR31JY98.052

Because of this mistake in average weight calculation, the

commenter has made some incorrect conclusions. For example, the

commenter states that the average DRG weight for FY 1998 is 1.3681 and

the average of the proposed FY 1999 weights is 1.3895. In reality, the

average FY 1998 weight is 1.4606 and the average of the proposed FY

1999 weights is 1.4673.

(Note: These average weights are based on the MedPAR cases used

to recalibrate the weights; that is, the FY 1998 weights are based

on FY 1996 cases reclassified into the FY 1998 DRGs and the proposed

FY 1999 weights are based on FY 1997 cases reclassified into the FY

1999 DRGS).

The average weight of the final FY 1999 weights is 1.4679.

Contrary to the commenter's assertion, the average weight of the

proposed FY 1999 MDC 22 DRGs did not decrease compared to the FY 1998

MDC 22 weights (4.6663 and 4.5234, respectively). In addition, although

all of the FY 1999 proposed pre-MDC DRG weights except DRG 483

decreased relative to FY 1998, the increase in DRG 483 was large enough

(coupled with an increase in cases) to result in an overall higher

average weight for the pre-MDC DRGs. We note that the weights for DRGs

481, 482, and 483 have increased between the proposed and final FY 1999

recalibrations. As we have noted in the past, the weights for the

transplant DRGs (481, 482, and 495) have gradually decreased over the

years. In addition, the transplant DRGs have a relatively small number

of cases with a large range of reported charges. A few very low or high

charge cases can make a relatively dramatic difference in the weights

from year to year (August 29, 1997; 62 FR 45983).

Finally, with regard to the commenter's request that we set the FY

1999 MDC 8 weights equal to the FY 1998 weights, we could refer the

commenter to the discussion above concerning the steps we take in

recalibrating the weights. Each year, when we recalibrate the DRG

weights, we use charge data from the most recent Medicare cases

available. That is, we use the charges reported by hospitals to

establish the weights. In this way, we ensure that we are using the

most recent hospital charging practices and patterns to set the new

relative weights. Because each DRG weight is ``relative'' to all other

DRG weights, we cannot arbitrarily freeze a set of those DRGs at the

previous year's weights. In a relative system such as this, if some

weights increase, others must decrease. Finally, as discussed above,

when we recalibrate the weights, a transfer case is counted as a

fraction of a case rather than a whole case.

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

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

that assures that the aggregate payments are neither greater than nor

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

changes. Although normalization is intended to achieve this effect,

equating the average case weight after recalibration to the average

case weight before recalibration does not necessarily achieve budget

neutrality with respect to aggregate payments to hospitals because

payment to hospitals is affected by factors other than average case

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

section II.A.4.b of the Addendum to this final rule, we make a budget

neutrality adjustment to assure that the requirement of section

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

III. Changes to the Hospital Wage Index

A. Background

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

methodology for determining prospective payments to hospitals, the

Secretary must adjust the standardized amounts ``for area differences

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

reflecting the relative hospital wage level in the geographic area of

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

accordance with the broad discretion conferred 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.

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.F, 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 1999 Wage Index Update

The final FY 1999 wage index (effective for hospital discharges

occurring on or after October 1, 1998 and before October 1, 1999) is

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

hospitals for cost reporting periods beginning in FY 1995 (the FY 1998

wage index was

[[Page 40967]]

based on FY 1994 wage data). The FY 1999 wage index includes the

following categories of data, which were also included in the FY 1998

wage index:

Total salaries and hours from short-term, acute care

hospitals.

Home office costs and hours.

Direct patient care contract labor costs and hours.

The wage index also continues to exclude the direct salaries and hours

for nonhospital services such as skilled nursing facility services,

home health services, or other subprovider components that are not

subject to the prospective payment system. Finally, as discussed in

detail in the August 29, 1997 final rule with comment period, we

calculate a separate Puerto Rico-specific wage index and apply it to

the Puerto Rico standardized amount. (See 62 FR 45984 and 46041) This

wage index is based solely on Puerto Rico's data.

For FY 1999 we proposed two changes to the categories of data

included in the wage index: adding contract labor costs and hours for

top management positions and replacing the fringe benefit category with

the wage-related costs associated with hospital and home office

salaries category. These two changes reflect changes to the Medicare

cost report that were discussed in the September 1, 1994 final rule

with comment period (59 FR 45355). The changes were made to the cost

report for cost reporting periods beginning during FY 1995. Because we

are using wage data from the FY 1995 cost report for the FY 1999 wage

index, these two changes will be reflected in the wage index for the

first time in FY 1999.

As discussed in detail in the September 1, 1994 final rule with

comment period (59 FR 45355), we expanded the definition of contract

services reported on the Worksheet S-3 to include the labor-related

costs associated with contract personnel in a hospital's top four

management positions: Chief Executive Officer/Hospital Administrator,

Chief Operating Officer, Chief Financial Officer, and Nursing

Administrator. We also revised the cost report to reflect a change in

terminology from ``fringe benefits'' to ``wage-related costs,'' to

promote the consistent reporting of these costs. (See September 1, 1994

final rule with comment period (59 FR 45356-45359).) We made this

change in terminology because we believed it would eliminate confusion

regarding those wage-related costs that are incorporated in the wage

index versus the broader definition of fringe benefits recognized under

the Medicare cost reimbursement principles. Wage-related costs, which

include core and other wage-related costs, are reported on the Form

HCFA-339, the Provider Cost Report Reimbursement Questionnaire.

Finally, we analyzed the wage data for the following costs, which

were separately reported for the first time on the FY 1995 cost

reports:

Physician Part A costs.

Resident and Certified Registered Nurse Anesthetist (CRNA)

Part A costs.

Overhead cost and hours by cost center.

Our analyses and proposals concerning these data are set forth below in

section III.C.

Comment: MedPAC submitted a general comment on the wage index.

First, the Commission stated that several of the issues raised in the

proposed rule stem from the failure of the wage index to account for

the mix of occupational categories employed by each hospital and that

if the wage index reflected this mix it would be more accurate. In

addition, MedPAC, noted that new measures are needed to implement each

new prospective system as well as for Medicare+Choice plans and

suggested that attention should be given to alternative strategies for

obtaining labor prices that could eliminate the need to collect data

separately for each type of provider affected. MedPac intends to

examine this issue during the upcoming year.

Response: We have addressed the issue of occupational mix in the

past. In the May 27, 1994 Federal Register, we indicated we were not

proposing to collect occupational mix data due to a lack of support

from the hospital industry for an additional reporting burden with

uncertain impact (59 FR 27724). However, certain segments of the

industry continue to insist that an occupational mix would make the

wage index fairer. We will continue to evaluate all the data and

evidence that we receive on this issue. With respect to MedPAC's

interest in examining alternative data collection strategies, we look

forward to the results of its examination, and will provide whatever

assistance we can.

C. Issues Relating to the FY 1999 Wage Index

1. Physician Part A Costs

Currently, if a hospital directly employs a physician, the Part A

portion of the physician's salary and wage-related costs (that is,

administrative and teaching services) is included in the calculation of

the wage index. However, the costs for contract physician Part A

services are not included. Our policy has been that, to be included in

the wage index calculation, a contracted service must be direct patient

care, or, beginning with the FY 1999 wage index, top level management

(see discussion above). Because some States have laws that prohibit

hospitals from directly hiring physicians, the hospitals in those

States have claimed that they are disadvantaged by the wage index's

exclusion of contract physician Part A costs. We began collecting

separate wage data for both direct and contract physician Part A

services on the FY 1995 cost report in order to analyze this issue. As

we discussed in the September 1, 1994 final rule with comment period

(59 FR 45354), our original purpose in collecting these data was to

exclude all physician Part A costs from the wage index.

When we made the change to the cost report, there were five States

in which hospitals were prohibited from directly employing physicians.

We understand that only two States currently maintain this prohibition:

Texas and California. Thus, the number of hospitals affected by our

current policy has decreased. Nevertheless, the fact that hospitals in

these two States are still prohibited from directly employing

physicians for Part A services and, therefore, must enter into

contractual agreements with physicians for these services, perpetuates

the perceived inequity.

The main reason we planned to exclude all Part A physician costs

rather than include the contract costs was our concern that it would be

difficult to accurately attribute the Part A costs and hours of these

contract physicians. In addition, we were concerned that including

these costs could inappropriately inflate the hospitals' average hourly

wages. That is, we anticipated that average costs for contract

physicians would be significantly higher than the costs for those

physicians directly employed by the hospital. However, our analysis of

the data shows that the average hourly wages for contract physician

Part A costs are very similar to, and, in fact slightly lower than, the

costs for salaried physician Part A services.

Based on this result, we believe that continuing to include the

directly employed physician Part A costs and adding the costs for

contract physicians is the better policy. Thus, we proposed to

calculate the FY 1999 wage index including both direct and contract

physician Part A costs.

Of the 5,070 hospitals included in the FY 1995 wage data file,

approximately 32 percent reported contract physician Part A costs.

Including these costs would raise the wage index values for

[[Page 40968]]

2 MSAs (4 hospitals) by more than 5 percent and 7 MSAs (43 hospitals)

by between 2 and 5 percent. Two MSAs and one Statewide rural area (74

hospitals) would experience a decrease between 2 and 5 percent. The

wage index values for the remaining 365 areas (4,949 hospitals) would

be relatively unaffected, experiencing changes of between -2 and 2

percent.

We received several comments regarding the inclusion of contract

physician costs, and physician Part A costs generally. The specific

comments and our responses are set forth below.

Comment: A national hospital association noted its concern about

the inclusion of teaching-related costs in the wage index because

Medicare pays separately for the salaries of teaching physicians

through direct graduate medical education (GME) payments. Nevertheless,

the commenter supports the inclusion of contract physician costs in the

FY 1999 wage index. The commenter indicated that it would work to

develop a consensus among hospital and health system representatives on

which physician salaries, if any, should be included in future wage

indexes. Another commenter supported the inclusion of contract

physician costs but recommended that HCFA take swift action to remove

teaching physician costs ``to achieve geographic equity in payments.''

Several commenters believe that all physician Part A costs,

including teaching physician costs, should be recognized in calculating

the wage index. The commenters asserted that these are costs of doing

business, and including them in the wage index appropriately measures

the geographic variations in what hospitals pay for labor. However,

numerous commenters argued that it is inappropriate to include teaching

physician costs in the wage index because, in effect, it results in

double payment to teaching hospitals for these costs. Recognizing that

HCFA does not have the data available to separately identify the

portion of physician costs attributable to teaching physicians, these

commenters believe it would be preferable to remove all Part A

physician costs from the wage index calculation.

Response: As a conceptual matter, we believe that physician Part A

costs other than teaching physician costs should be included in the

wage index because these costs are paid under the prospective payment

system. Further, in light of the data now available, we believe

including contract physician Part A costs improves equity in the wage

index by allowing hospitals that are prohibited by State law from

directly employing physicians to include their costs of contracted

physicians.

With regard to teaching physician costs, the 1995 cost report does

not separate teaching physician costs from other physician Part A

costs. Consequently, we are unable to exclude teaching physician costs

from the FY 1999 wage index. We believe the optimal approach is to

consider this issue directly in developing the FY 2000 wage index. To

facilitate evaluation of this issue, we will instruct the fiscal

intermediaries to separate teaching physician costs from hospitals' FY

1996 wage data. We will carefully analyze those data, and any changes

we propose to make based on that analysis will be included in the FY

2000 proposed rule.

We do not agree with the commenters' suggestion that, in lieu of

collecting data that would allow us to separately identify teaching

physician costs, we should remove all physician salaries from the wage

index. These physician Part A costs are incurred by the hospital for

services related to such positions as medical director and clinical

department heads. As such, they are legitimate labor costs included

under the prospective payment system. Based on our analysis of the FY

1995 cost reports, we believe that the data reported for physician Part

A costs are sufficiently reliable and complete that inclusion of

physician Part A costs (direct as well as contract costs) for FY 1999

results in a wage index that better reflects relative hospital labor

costs than a wage index that excludes all physician Part A costs.

Moreover, as stated above, we believe the addition of contract

physician Part A costs in the FY 1999 wage index improves the fairness

and accuracy of the wage index relative to the FY 1998 wage index

(which included direct physician Part A costs (salaries) but not

contract physician Part A costs). Thus, rather than excluding all

physician Part A costs, we believe the more responsible approach is to

collect the necessary data as expeditiously as possible in order to

analyze whether it is feasible to separate teaching physician costs

from other physician Part A costs.

Comment: Several commenters favored not only including physician

salaries in the wage index, but also continuing to include teaching

physician salaries. Commenters believe that if Congress had known about

the payment redistributions that would result from eliminating teaching

physician salaries from the wage index before it had enacted the

reductions applicable to teaching hospitals in the Balanced Budget Act

of 1997, it may not have enacted such deep cuts. One commenter also

suggested that if we excluded physician salaries, we would need to

restandardize the large urban standardized amount to reflect the new

wage index.

Another commenter stated that the costs of teaching physicians and

residents should be included in the wage index because Medicare

payments for GME are not sufficient to compensate hospitals for their

GME costs. This commenter compared hospitals' direct GME costs on the

Medicare cost report with the payments they receive and estimated a

shortfall of $900 million. The commenter further noted that reductions

in Medicare disproportionate share payments as a result of the Balanced

Budget Act would have the effect of increasing the empirical estimate

for the indirect graduate medical education adjustment, leading to a

further shortfall in payments for GME.

Response: We cannot know what Congress would or would not have done

if it had known about the impacts of future changes to wage index

policy. Rather, refinements to the wage data should be evaluated on

their individual merits in terms of whether they contribute to or

detract from the fairness and accuracy of the wage index. We disagree

that changes to the wage index may require restandardization of the

large urban standardized amount. The large urban standardized amount

was not created by a separate standardization of the costs of hospitals

in large urban areas, but by applying differential update factors

established by Congress.

We also disagree with the comment that the wage index should

continue to include costs related to teaching physicians and residents

because current and future GME payments are not fully compensating

hospitals for their GME costs. The adequacy of direct GME payments is a

separate issue by virtue of the fact that these costs are recognized

separately and paid for through Medicare outside the prospective

payment system. The amount Medicare pays for direct GME is based on

policy considerations related to the nature of GME, and reflects

Medicare's fair share of those costs. Similarly, indirect GME costs are

distinct from hospitals' labor costs, and the level of IME payments is

not relevant to the wage index.

Comment: Many commenters referred to an analysis done by one

commenter showing the projected payment impacts by State of our

proposed policy of including physician (both direct and contract),

resident, and CRNA costs in the wage index. These commenters

[[Page 40969]]

referred to the large losses that, according to this analysis, certain

States will allegedly suffer because of this policy (California: $79

million; Florida: $36 million; Texas: $10 million). Corresponding gains

were cited among northeast hospitals. The suggestion of these comments

was that we should revise our proposed policy and exclude all of these

costs to redistribute these losses and gains.

Response: We disagree with the characterization of this analysis.

With the exception of contract physician costs, all of these costs have

been included in prior wage indexes. Therefore, the commenter's

analysis does not reflect the impact of the proposed wage index

relative to the current wage index. With respect to the losses in

certain States cited by the commenter, our analysis indicates that, the

projected payment impacts of including contract physician costs

relative to a wage index without these costs are, respectively: a $13

million decrease, a $15 million decrease, and an $18 million increase.

We note that these figures do not reflect the impact of changes to the

wage indexes in these areas resulting from updating from the 1994 wage

data to 1995 wage data, or the exclusion of allocated overhead. They

do, however, present a clearer picture of the impacts in these States

of including contract physician costs relative to current policy.

Comment: One commenter vigorously opposes the inclusion of contract

physician Part A costs, arguing we should instead exclude all physician

Part A costs. The commenter, a national association of health systems,

argued that this proposal contradicts the objectives we identified in

the May 27, 1994 proposed rule (59 FR 27720) and the September 1, 1994

final rule (59 FR 45354), where we discussed the need to separately

collect physician Part A costs. The commenter raises the following

points and ultimately recommends excluding all physician Part A costs

from the calculation of the wage index.

First, the commenter contends that, by choosing to include

physician Part A contract costs rather than exclude all physician Part

A costs, we ``have expanded the unfair and unjustifiable policy tilt

enjoyed by teaching hospitals.'' To emphasize this point, the commenter

notes that over 70 percent of all contract physician costs stem from

teaching hospitals (90 percent of salaried physician costs are also

from teaching hospitals).

Second, the commenter states that our rationale for proposing to

include contract physician costs focused narrowly on whether these

costs would inappropriately inflate the wage data. This narrow focus,

according to the commenter, left out any explanation of why it is

better to include contract physician costs rather than to exclude all

Part A physician costs.

Third, the commenter quotes liberally from our discussion in the

proposed and final rules published in 1994, particularly our rationale

for providing for separate reporting of physician Part A costs on the

cost report. Referenced specifically are the three reasons why HCFA

believed at that time that eliminating physician Part A costs would be

preferable to including contracted physician costs. These reasons were:

(1) Physician costs are not driven by normal labor market situations;

(2) many hospitals indicated difficulties in accurately determining

hours for these physicians' services; and (3) some hospitals have

difficulty separating costs related to Part A from those related to

Part B. The commenter specifically asks HCFA why it has changed its

beliefs.

Finally, the commenter surmises that one reason we proposed to

include contract physician costs is that few areas would experience a

significant change in their wage index values. To refute this, the

commenter describes the results of analysis of the impacts of the

proposed policy. The analysis found ``a dramatic and damaging impact on

California, the largest state in the nation in terms of hospitals and

number of Medicare discharges.'' The commenter believes that ``HCFA's

wage index policy should be based not on whether the outcome will

result in little change, but on whether it is the right policy in the

first place.''

Response: We appreciate the considered arguments and detailed

analysis presented by the commenter and understand the importance of

this issue to the hospitals represented by the association. We agree

with the commenter that the primary consideration in developing and

refining the hospital wage index should be the ``right policy.'' In the

context of the hospital wage index, we believe we should promote the

fair and accurate measurement of relative hospital wage levels across

geographic areas. At the same time, we believe it is appropriate to

consider the potential impact of possible courses of action, though we

agree with the commenter that the potential impact should not be the

driving force in policy decisions.

In the context of the hospital wage index, it is also critical to

keep in mind that developing the ``right policy'' is a function not

only of conceptual issues but also of data issues. If, for example, we

believe as a conceptual matter that a certain type of cost should be

included in the wage index, but the data on those costs are incomplete

and unreliable, then including the costs in the wage index (which are

conceptually right) could (because of the data problems) distort the

measure of relative wage levels across geographic areas, and thus

detract from the fairness and accuracy of the wage index; similarly, if

we believe as a conceptual matter that a certain type of cost should be

excluded from the wage index, but there is incomplete and unreliable

data to separate those costs from other costs, then excluding the costs

based on bad data could detract from the equity of the wage index.

Thus, our ability to implement a ``conceptually right'' policy depends

on the availability of reliable and complete data.

As indicated above in the response to another comment, we believe

there is good reason to include all physician Part A costs, rather than

exclude all physician Part A costs as the commenter recommends. Among

other things, with the exception of teaching physician costs, physician

Part A costs are Part A costs that are paid under the prospective

payment system. In addition, physician Part A costs represent above-

average costs, although only a small percentage of the total for most

hospitals; therefore, excluding all physician Part A costs might

understate the relative wages of some hospitals. Based on our analysis

of the FY 1995 cost reports, we believe that data reported for

physician Part A costs are sufficiently reliable and complete that

inclusion of the costs results in a wage index that is more fair and

accurate, relative to a wage index which would exclude all physician

Part A costs, even if the data are not perfect.

As discussed above, although we have decided to adopt our proposal

to include contract physician Part A costs in the wage index, we intend

to direct the fiscal intermediaries to separately identify physician

Part A costs (salaried and contracted) related to teaching for cost

reports beginning during FY 1996. Although this information will not be

reported separately on the Worksheet S, Part III until FY 1997 cost

reports, we believe this issue merits undertaking a special auditing

effort of the FY 1996 cost reports.

With regard to the high proportion of physician costs attributable

to teaching hospitals, although the distribution of costs seems

disproportionate (and this is a large part of the reason we are

expediting our efforts to separate teaching physician costs from other

physician costs), our analysis of these

[[Page 40970]]

data indicates that, among hospitals reporting these costs, there is

little difference between teaching and nonteaching hospitals in terms

of the relative impact of these costs on hospitals' average hourly

wages. That is, among both teaching and nonteaching hospitals reporting

physician Part A costs, these costs make up between 3 and 4 percent of

their total wage costs. Therefore, although more teaching hospitals

report these costs than nonteaching hospitals (47 percent of teaching

hospitals versus 30 percent of nonteaching hospitals), the average

hourly wages of teaching hospitals are not more heavily weighted by

these costs than they are for nonteaching hospitals.

In fact, two of the MSAs that would be most negatively affected by

excluding all physician costs from the wage data, Pittsburgh, PA and

Rochester, NY, both have more nonteaching hospitals reporting physician

costs than teaching hospitals. We believe the commenter's perception

that we are tilting the wage index policy toward teaching hospitals is

misguided and reflects an oversimplification of the issue. Based on our

analysis of this issue, we are convinced the most prudent course is to

focus on specifically developing data to further improve the fairness

and accuracy of the wage index.

In describing the perceived problems from our discussion of the

physician cost data in the May 27, 1994 proposed rule, the commenter

fails to acknowledge that the discussion was in relation to a proposed

change. In fact, it was in response to public comments on this proposed

change where we agreed to revise the cost report to collect data on

contract physician costs. In addition, the September 1, 1994 final rule

clearly stated that HCFA intended to evaluate the physician cost data

prior to proposing any changes for the FY 1999 wage index.

Regarding the problems associated with contract labor discussed in

the FY 1995 proposed and final rules, we note that the separate

physician cost data were not available at that time, and therefore the

discussion was based on information provided from fiscal intermediaries

and industry sources. Based on our analysis of the data available now,

we believe that the problems are not as widespread as initially feared.

Rather, these costs are similar to those reported for contracted

medical providers that we do include, such as therapists and nursing

staff. The commenter did not allege that there were widespread problems

reporting these data.

The commenter's characterization of the impact of this change on

California's hospitals is inaccurate. No California MSA experiences a

decrease in their wage index of more than 0.6 percent as a result of

this change. The dramatic impacts referenced by the commenter occur

only under the assumption that the comparative baseline excludes all

physician Part A costs, the course recommended by the commenter. While

excluding all physician Part A costs would result in a significant

redistribution of payments to certain States such as California, other

areas would experience dramatic payment decreases relative to last

year.

Comment: One commenter believes that, because the hospital wage

index is used to adjust payments for various other types of providers,

the wage data should be expanded to be as comprehensive as possible.

Specifically, the commenter recommended that wage data related to

excluded distinct part units, as well as all physician data, be

included.

Response: We have convened workgroups, both internally and

externally, to focus on future wage index policies, and we anticipate

that we will continue to focus on the appropriate scope of the wage

data in those workgroups. In addition, any significant changes in the

types of data to be included in the wage index will be implemented

through the annual rulemaking process with opportunity for public

comment, as has been our policy in the past. For the record, we believe

that the hospital wage index should reflect, to the greatest degree

possible, the wage costs associated with the prospective payment areas

of the hospital.

Comment: One commenter believes that there are ``evident problems

with the quality and consistency of the physician contract labor

data,'' which is evidenced by California's ranking as the 7th lowest

State in terms of contract physician average hourly wage. This

commenter also recommended that we begin a more rigorous audit

mechanism of the wage data, stating that data reliability is still a

problem.

Response: We do not include hospitals' data (other than wage-

related costs) if either the salaries or hours reported for contract

labor are zero. Applying this edit to the wage data, California ranks

as the 12th highest State in terms of contract physician average hourly

wages. The analysis provided by the commenters did not include such an

edit; therefore, their results are different. We disagree with the

general point of this comment that there are quality problems with

these data. These data have been subjected to the same review and edit

process as are all wage data. We will continue to monitor the process

for collecting wage data in the future, and make improvements as

necessary. We also encourage hospitals and their associations to feel

free to provide specific recommendations for potential improvements.

Comment: One commenter noted that hospitals that acquire their

physician Part A services through related organizations do not have an

appropriate line on Worksheet S-3 to record these wage costs.

Therefore, these hospitals are disadvantaged by the inclusion of costs

only for directly employed and contract physician Part A services in

the wage index calculation. The commenter recommended that we adjust

the FY 1999 wage index to include related organization physician Part A

costs for hospitals that were unable to include the costs on their

Worksheet S-3s.

Response: The commenter's statements about Worksheet S-3 are

incorrect. The cost report instructions at section 2806.3 of the

Provider Reimbursement Manual, Part II, allow hospitals to include the

costs for physician Part A services from related organizations on line

33 of Worksheet S-3. These costs are also included on the trial

balance, Worksheet A, in column 2 (with any adjustments in column 6).

Regarding the commenter's recommendation, we cannot adjust the final FY

1999 wage index to include costs that hospitals did not properly report

on their cost reports.

2. Resident and CRNA Part A Costs

The wage index presently includes salaries and wage-related costs

for residents in approved medical education programs and for CRNAs

employed by hospitals under the rural pass-through provision. However,

Medicare pays for these costs outside the prospective payment system.

Removing these costs from the wage index calculation would be

consistent with our general policy to exclude costs that are not paid

through the prospective payment system, but, because they were not

separately reported, we could not remove them.

In the September 1, 1994 final rule with comment period (59 FR

45355), we stated that we would begin collecting the resident and CRNA

wage data separately and would evaluate the data before proposing a

change in computing the wage index. However, there were data reporting

problems associated with these costs on the FY 1995 cost report. The

original instructions for reporting

[[Page 40971]]

resident costs on Line 6 of Worksheet S-3, Part III, erroneously

included teaching physician salaries and other teaching program costs

from Worksheet A of the cost report. Although we issued revised

instructions to correct this error, we understand these revisions may

not have been uniformly instituted. Another issue relating to

residents' salaries stems from apparent underreporting of these costs

by hospitals and inconsistent treatment of the associated wage-related

costs.

In addition, the original Worksheet S-3 and reporting

instructions did not provide for the separate reporting of CRNA wage-

related costs. We believe that much of the CRNA Part A costs are

reported under contract labor, rather than under salaried employee

costs, due to the heavy use of contract labor by rural hospitals. We do

not believe that it would be feasible at this time to try to remove

these CRNA Part A costs from the contract labor costs in the FY 1995

cost report data. We improved the reporting instructions for CRNA costs

on the FY 1996 cost report.

Our analysis of the CRNA and resident wage data submitted on the FY

1995 cost report convinces us that these data are inaccurately and

incompletely reported by hospitals. For example, although there are

over 900 teaching hospitals receiving graduate medical education

payments, only about 800 hospitals reported resident cost data. Because

we do not want to make a relatively significant change in the wage

index data calculation without complete and accurate data upon which to

base our decision, we proposed to delay any decision regarding

excluding resident and CRNA costs from the wage index until at least

next year. In the May 8 proposed rule, we announced our intention to

review the FY 1996 data when it becomes available later this year and

present our analysis and any proposals in next year's proposed rule.

Comment: Several commenters believe that HCFA should immediately

exclude intern and resident and CRNA wage costs for the same reasons

the commenters cited for excluding the teaching physician costs. One

commenter objected to our statement that problems with the reporting of

these data (stemming from inconsistent instructions) warranted a one-

year delay. The commenter stated that ``it is better to exclude all

clearly identified costs now rather than waiting some indeterminate

time for all costs to be identified before excluding any of it.''

Analysis purporting to show a negative impact of $24 million on

California due to including these data in the wage index was cited.

Response: As we stated above, the instructions to the FY 1995 cost

report Worksheet S-3 for reporting resident costs did not specifically

separate teaching physician salaries and other GME program costs from

residents' costs. This may have inappropriately inflated resident costs

on Line 6 of Worksheet S-3. As a result, removing the costs reported on

Line 6 from the FY 1999 wage index calculation would distort the wage

index. Our reasoning with respect to retaining the CRNA costs is

similar; that is, if Line 2 was removed, it would result in distortions

since these costs were reported inconsistently. Therefore, because the

data for these costs are not sufficiently reliable and complete, we

maintain our position that the more responsible approach is to delay

removing these costs until more accurate data are available for the FY

2000 wage index. With regard to the negative impact on California, any

analysis based on this data will be skewed by the reporting flaws

noted. The FY 1999 wage index calculation will continue to include

intern and resident and CRNA wage costs.

We also believe that several of the commenters are confused about

the issue of CRNA costs. Currently, only the Part A portion of these

costs are included in the wage index, and the only hospitals paid for

these costs are small rural hospitals who employ the equivalent of no

more than one full-time CRNA and are paid on the basis of reasonable

costs. Therefore, they do not contribute to the concentration of

physician costs in teaching hospitals.

Comment: One commenter noted that the hourly wage rates for

residents are lower than the overall average hourly wage of the

hospitals that pay their salaries, and that the inclusion of residents'

salaries and wage-related costs actually results in a decrease in

teaching hospitals' average hourly wages rather than an increase, as

suggested by most other commenters. The commenter suggested that

removing residents from the data used to calculate the wage index would

increase the wage index values in areas with a high concentration of

teaching hospitals.

Response: The FY 1995 data do not permit us to evaluate the

accuracy of this comment because residents' salaries are commingled

with teaching physicians' salaries for many hospitals. As with all

changes to the wage data, the impacts cannot be evaluated properly

until accurate data are available for all hospitals nationally.

3. Overhead Allocation

In the proposed rule, we discussed in detail our proposal to remove

from the calculation of the FY 1999 wage index the overhead costs

associated with certain subprovider components that are excluded from

the prospective payment system (63 FR 25586). Although the overall

impact on hospitals of this change is relatively small, we believe it

is an appropriate step toward improving the overall consistency of the

wage index. In addition, we believe this change will significantly

increase the accuracy of the wage data for individual hospitals,

especially hospitals that have a relatively small portion of their

facility devoted to acute inpatient care.

We received several comments supporting this change, and none

expressing opposition to it. One commenter referred to it as a step

toward improving uniformity and overall consistency in the wage index

process. We have, therefore, incorporated our proposal in the final

wage index.

D. Verification of Wage Data From the Medicare Cost Report

The data for the FY 1999 wage index were obtained from Worksheet S-

3, Parts III and IV of the FY 1995 Medicare cost reports. The data file

used to construct the final wage index includes FY 1995 data submitted

to the Health Care Provider Cost Report Information System (HCRIS). As

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

mostly through the use of edits designed to identify aberrant data.

As a part of the August 29, 1997 final rule with comment period, we

implemented a new timetable for requesting wage data corrections (62 FR

45990). We notified hospitals again of these changes through a February

1998 memorandum to the fiscal intermediaries and in the proposed rule.

As noted in the proposed rule, beginning this year with the FY 1999

wage index, the wage index published in the final rule incorporates all

corrections, including those to correct data entry or tabulation errors

of the final wage data by the intermediary or HCFA.

To allow hospitals an opportunity to evaluate the wage data to be

used to construct the proposed and the final FY 1999 hospital wage

index, we made available to the public data files containing the FY

1995 hospital wage data. In memoranda dated February 2 and April 21,

1998, we instructed all Medicare intermediaries to inform the

prospective payment hospitals they serve of the availability of the

wage data files and the process and timeframe for requesting revisions.

The proposed and the final wage data files were made available February

6 and May 14, 1998,

[[Page 40972]]

through the Internet at HCFA's home page (http://www.hcfa.gov). The

intermediaries were also instructed to advise hospitals of the

alternative availability of these data through their representative

hospital organizations or directly from HCFA.

Table 3C in the Addendum to this final rule, as in the proposed

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

construct the wage index values. A hospital can verify its adjusted

average hourly wage, as calculated from Steps 4 and 5 of the

computation of the wage index (see section III.E of this preamble)

based on the wage data on the hospital's cost report (after taking into

account any adjustments made by the intermediary), by dividing the

adjusted average hourly wage in Table 3C by the applicable wage

adjustment factors as set forth in Step 5 of the computation of the

wage index. However, a hospital's average hourly wage using this

calculation will vary from the average hourly wage shown on Line 32 of

Worksheet S-3, Part III. (See Step 5 for a complete explanation.)

We created the correction process, as detailed in the proposed

rule, to resolve all substantive wage data correction disputes before

finalizing the wage data for the FY 1999 payment rates. Hospitals had

until June 5, 1998, to submit requests to correct errors in the final

wage data (released May 14, 1998) due to data entry or tabulation

errors by the intermediary or HCFA. The correction requests considered

were limited to errors in the final wage data that the hospital could

not have known about prior to the availability of the final wage data

public use file. If hospitals availed themselves of these opportunities

to timely identify and bring errors in their wage data to their

intermediaries' attention, the wage index implemented on October 1

should be free of such errors. Nevertheless, in the unlikely event that

errors should arise after that date, we retain the right to make

midyear changes to the wage index under very limited circumstances.

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

midyear corrections to the wage index only in those limited

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

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

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

correct the error, before the beginning of FY 1999 (that is, by the

June 5, 1998 deadline). As indicated earlier, since a hospital will

have had the opportunity to verify its data, and the intermediary will

notify the hospital of any changes, we do not foresee any specific

circumstances under which midyear corrections would be made. However,

should a midyear correction be necessary, the wage index change for the

affected area will be effective prospectively from the date the

correction is made.

E. 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 1999 wage index on wage

data reported on the FY 1995 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, Parts III and IV of the

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

on or after October 1, 1994 and before October 1, 1995. In addition, we

included data from a few hospitals that had cost reporting periods

beginning in September 1994 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 1995 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

wage-related costs, we added the costs of contract labor for direct

patient care, certain top management, and physician Part A services;

hospital wage-related costs, and any home office salaries and wage-

related costs reported by the hospital, to the net hospital salaries.

The actual calculation is the sum of lines 2, 4, 6, 32, and 33 of

Worksheet S-3, Part III. This calculation differs from the one computed

on line 32 of Worksheet S-3, Part III. Therefore, a hospital's average

hourly wage calculated under this step will be different from the

average hourly wage shown on line 32, column 5.

Step 3--For each hospital, we subtracted the reported excluded

hours from the gross hospital hours to determine net hospital hours. To

determine total hours, we increased the net hours by the addition of

home office hours and hours for contract labor attributable to direct

patient care, certain top management, and physician Part A salaries.

Step 4--For each hospital reporting both total overhead salaries

and total overhead hours greater than zero, we then allocated overhead

costs. First, we determined the ratio of excluded area hours (Line 24

of Worksheet S-3, Part III) to revised total hours (Line 9 of Worksheet

S-3, Part III, adding back CRNA Part A, physician Part A, and resident

hours). Second, we computed the amounts of overhead salaries and hours

to be allocated to excluded areas by multiplying the above ratio by the

total overhead salaries and hours reported on Line 16 of Worksheet S-3,

Part IV. Finally, we subtracted the computed overhead salaries and

hours associated with excluded areas from the total salaries and hours

derived in Steps 2 and 3.

Step 5--For each hospital, we adjusted the total salaries plus

wage-related costs to a common period to determine total adjusted

salaries plus wage-related costs. To make the wage inflation

adjustment, we estimated the percentage change in the employment cost

index (ECI) for compensation for each 30-day increment from October 14,

1994 through April 15, 1996, for private industry hospital workers from

the Bureau of Labor Statistics Compensation and Working Conditions. For

previous wage indexes, we used the percentage change in average hourly

earnings for hospital industry workers to make the wage inflation

adjustment. For FY 1999 we used the ECI for compensation for private

industry hospital workers because it reflects the price increase

associated with total compensation (salaries plus fringes) rather than

just the increase in salaries, which is what the average hourly

earnings category reflected. In addition, the ECI includes managers as

well as other hospital workers. We changed the methodology used to

compute the monthly update factors. This new methodology uses actual

quarterly ECI data to determine the monthly update factors. The

methodology assures that the update factors match the actual quarterly

and annual percent changes. 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

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

10/14/94...................................... 11/15/94 1.032882

11/14/94...................................... 12/15/94 1.030771

12/14/94...................................... 01/15/95 1.028721

[[Page 40973]]

01/14/95...................................... 02/15/95 1.026731

02/14/95...................................... 03/15/95 1.024776

03/14/95...................................... 04/15/95 1.022827

04/14/95...................................... 05/15/95 1.020886

05/14/95...................................... 06/15/95 1.018901

06/14/95...................................... 07/15/95 1.016822

07/14/95...................................... 08/15/95 1.014649

08/14/95...................................... 09/15/95 1.012446

09/14/95...................................... 10/15/95 1.010279

10/14/95...................................... 11/15/95 1.008146

11/14/95...................................... 12/15/95 1.006047

12/14/95...................................... 01/15/96 1.003981

01/14/96...................................... 02/15/96 1.001950

02/14/96...................................... 03/15/96 1.000000

03/14/96...................................... 04/15/96 0.998181

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

For example, the midpoint of a cost reporting period beginning January

1, 1995 and ending December 31, 1995 is June 30, 1995. An inflation

adjustment factor of 1.016822 would be applied to the wages of a

hospital with such a cost reporting period. In addition, for the data

for any cost reporting period that began in FY 1995 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 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 wage-

related costs obtained in Step 5 for all hospitals in that area to

determine the total adjusted salaries plus wage-related costs for the

labor market area.

Step 7--We divided the total adjusted salaries plus wage-related

costs 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 wage-related

costs obtained in Step 5 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 $20.7325.

Step 9--For each urban or rural labor market area, we calculated

the hospital wage index value by dividing the area average hourly wage

obtained in Step 7 by the national average hourly wage computed in Step

8. We note that in June, 1998, OMB announced the designation of the

Missoula, Montana MSA comprising Missoula, Montana.

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 wage-related costs (as calculated in Step 5) 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

$9.5025 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 of 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 that State. Furthermore, this wage index floor is to be implemented

in such a manner as to assure that aggregate prospective payments are

not greater or less than those which would have been made in the year

if this section did not apply. For FY 1999, this change affects 118

hospitals in 32 MSAs. The MSAs affected by this provision are

identified in Table 4A by a footnote.

F. 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 1999 are shown in Tables 4A, 4B,

4C,

[[Page 40974]]

and 4F in the Addendum to this final rule. Hospitals that are

redesignated should use the wage index values shown in Table 4C. Areas

in Table 4C may have more than one wage index value because the wage

index value for a redesignated 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. When the wage index value of the area to

which a hospital is redesignated is lower than the wage index value for

the rural areas of the State in which the hospital is located, the

redesignated 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 1995

wage data. In addition, Table 3C in the Addendum to this final rule

includes the adjusted average hourly wage for each hospital based on

the FY 1995 data (as calculated from Steps 4 and 5, above). The MGCRB

will use the average hourly wage published in the final rule to

evaluate a hospital's application for reclassification for FY 2000,

unless that average hourly wage is later revised in accordance with the

wage data correction policy described in Sec. 412.63(w)(2). In such

cases, the MGCRB will use the most recent revised data used for

purposes of the hospital wage index.

Although we did not propose any changes to the reclassification

guidelines, we received two comments on that issue.

Comment: One commenter was concerned that the number of hospitals

participating in countywide reclassifications has declined over the

years. The commenter believes that this is an indication that the

criteria for hospitals in an urban county seeking reclassification to

another urban county should be adjusted.

Response: When we implemented the MGCRB process, we anticipated

that, over the years, the number of hospitals that would continue to

qualify for reclassification would decrease due to better data

reporting and efforts by hospitals to constrain costs. The

reclassification process is an annual process in which a hospital or

group of hospitals must meet the defined criteria on an annual basis in

order to remain reclassified to an alternative area for either the wage

index, the standardized amount, or both. We note that hospitals that do

not meet the countywide criteria under Sec. 412.234 may apply on an

individual basis.

Comment: One commenter supports the policy that allows rural

hospitals to reclassify to another area for purposes of the

disproportionate share adjustment even if the standardized amount is

the same for both areas. However, this commenter is also concerned that

separate criteria have not been developed for this type of

reclassification and that we continue to rely on the criteria set forth

in Sec. 412.230(d), which is the criteria for reclassification to

another area for purposes of the standardized amount.

Response: Section 4203(a) of the Balanced Budget Act of 1997

provided that, for a limited period of time, a rural hospital may apply

for reclassification to another area for purposes of receiving

disproportionate share payments whether or not the standardized amount

is the same for both areas. Section 4203(b) provides that the MGCRB

will apply the guidelines for reclassification for purposes of the

standardized amount until the Secretary establishes other guidelines.

We believe that the criteria in place for standardized amount

reclassification are appropriate for determining whether hospitals

should be reclassified for purposes of the disproportionate share

payment. The criteria address the extent to which a hospital warrants

reclassification by comparing the hospital's costs to its payments with

and without reclassification. Nevertheless, we welcome specific

suggestions for revising the DSH reclassification criteria.

IV. Other Decisions and Changes to the Prospective Payment System

for Inpatient Operating Costs

A. Definition of Transfers (Sec. 412.4)

Pursuant to section 1886(d)(5)(I) of the Act, the prospective

payment system distinguishes between ``discharges,'' situations in

which a patient leaves an acute care (prospective payment) hospital

after receiving complete acute care treatment, and ``transfers,''

situations in which the patient is transferred to another acute care

hospital for related care. If a full DRG payment were made to each

hospital involved in a transfer situation, irrespective of the length

of time the patient spent in the ``sending'' hospital prior to

transfer, a strong incentive to increase transfers would be created,

thereby unnecessarily endangering patients' health. Therefore, our

policy, which is set forth in the regulations at Sec. 412.4, provides

that, in a transfer situation, full payment is made to the final

discharging hospital and each transferring hospital is paid a per diem

rate for each day of the stay, not to exceed the full DRG payment that

would have been made if the patient had been discharged without being

transferred.

Currently, the per diem rate paid to a transferring hospital is

determined by dividing the full DRG payment that would have been paid

in a nontransfer situation by the geometric mean length of stay for the

DRG into which the case falls. Hospitals receive twice the per diem for

the first day of the stay and the per diem for every following day up

to the full DRG amount. Transferring hospitals are also eligible for

outlier payments. Two exceptions to the current transfer payment policy

are transfer cases classified into DRG 385 (Neonates, Died or

Transferred to Another Acute Care Facility) and DRG 456 (Burns,

Transferred to Another Acute Care Facility), which receive the full DRG

payment instead of being paid on a per diem basis.

Under section 1886(d)(5)(J) of the Act, which was added by section

4407 of the Balanced Budget Act of 1997, a ``qualified discharge'' from

one of 10 DRGs selected by the Secretary to a postacute care provider

will be treated as a transfer case beginning with discharges on or

after October 1, 1998. Section 1886(d)(5)(J)(iii) confers broad

authority on the Secretary to select 10 DRGs ``based upon a high volume

of discharges classified within such group and a disproportionate use

of'' certain postdischarge services. Section 1886(d)(5)(J)(ii) defines

a ``qualified discharge'' as a discharge from a prospective payment

hospital of an individual whose hospital stay is classified in one of

the 10 selected DRGs if, upon such discharge, the individual--

Is admitted to a hospital or hospital unit that is not a

prospective payment system hospital;

Is admitted to a skilled nursing facility; or

Is provided home health services by a home health agency

if the services relate to the condition or diagnosis for which the

individual received inpatient hospital services and if these services

are provided within an appropriate period as determined by the

Secretary.

The Conference Agreement that accompanied the law noted that

``(t)he Conferees are concerned that Medicare may in some cases be

overpaying hospitals for patients who are transferred to a post acute

care setting after a very short acute care hospital stay. The Conferees

believe that Medicare's payment system should

[[Page 40975]]

continue to provide hospitals with strong incentives to treat patients

in the most effective and efficient manner, while at the same time,

adjust PPS [prospective payment system] payments in a manner that

accounts for reduced hospital lengths of stay because of a discharge to

another setting.'' (H.R. Rep. No. 105-217, 740.) In its March 1, 1997

report, ProPAC expressed similar concerns: ``* * * length of stay

declines have been greater in DRGs associated with substantial

postacute care use, suggesting a shift in care from hospital inpatient

to postacute settings' (pp. 21-22).

In fact, based on the latest available data, overall Medicare

hospital costs per case have decreased during FYs 1994 and 1995. This

unprecedented real decline in costs per case has led to historically

high Medicare operating margins (over 10 percent on average). Along

with these declining lengths of stay and costs per case, there has been

an increase in the utilization of postacute care. In 1990, the rate of

skilled nursing facility services per 1,000 Medicare enrollees was 19.

By 1995, it had grown to 33. Corresponding numbers for home health

agency services are 58 per 1,000 Medicare enrollees during 1990 and 93

per 1,000 enrollees during 1995. Although home health services are not

always directly related to a hospitalization episode, there does appear

to be a trend toward increased use of home health for the provision of

postacute care rehabilitation services. Previous analysis of the

percentage of hospital discharges that receive postacute home health

care showed a 10.3 percent increase in 1994 compared to 1992.

In the May 8, 1998 proposed rule, we discussed our proposals to

implement section 1886(d)(5)(J) of the Act. These proposals are set

forth below.

1. Selection of 10 DRGs

Section 1886(d)(5)(J)(iii)(I) of the Act provides that the

Secretary select 10 DRGs based on a high volume of discharges to

postacute care and a disproportionate use of postacute care services.

Therefore, in order to select the DRGs to be paid as transfers, we

first identified those DRGs with the highest percentage of postacute

care.

We used the FY 1996 MedPAR file because the complete FY 1997 MedPAR

file was not available at the time we conducted our analysis. To

identify postacute care utilization, we merged hospital inpatient bill

files with postacute care bill files matching beneficiary

identification numbers and discharge and admission dates. We created

this file rather than depend on information concerning discharge

destination on the inpatient bill because we have found that the

discharge destination codes included on the hospital bills are often

inaccurate in identifying discharges to a facility other than another

prospective payment hospital.

Section 1886(d)(5)(J)(ii)(III) of the Act requires the Secretary to

choose an appropriate window of days in which the home health services

start in order for the discharge to meet the definition of a transfer.

In order to include postdischarge home health utilization in our

analysis, we identified all hospital discharges for patients who

received any home health care within 7 days after the date of

discharge. (As described below in section IV.A.2., we ultimately

decided to propose 3 days as the window for home health services.)

Starting with the DRG with the highest percentage of postacute care

discharges and continuing in descending order, we selected the first 20

DRG's that had a relatively large number of discharges to postacute

care (our lower limit was 14,000 cases). In order to select 10 DRG's

from the 20 DRG's on our list, for each of the DR

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