Medicare Program; Graduate Medical Education (GME): Incentive Payments Under Plans for Voluntary Reduction in the Number of Residents

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Part 413

[HCFA-1001-IFC]

RIN 0938-AI27

Medicare Program; Graduate Medical Education (GME): Incentive

Payments Under Plans for Voluntary Reduction in the Number of Residents

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

ACTION: Interim final rule with comment period.

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SUMMARY: This interim final rule with comment period implements section

1886(h)(6) of the Social Security Act, as added by section 4626(a) of

the Balanced Budget Act (BBA) of 1997. Section 4626(a) of the BBA

allows qualifying hospitals to receive incentive payments over a 5-year

period for voluntarily reducing the size of their residency programs. A

hospital seeking incentive payments must submit, to HCFA and its

Medicare intermediary, an application that specifies reductions in its

number of residents by 20 to 25 percent.

DATES: Effective date: This interim final rule with comment period is

effective September 17, 1999.

Comment Period: Comments will be considered if we receive them at

the appropriate address, as provided in the ADDRESSES section, no later

than 5 p.m. on October 18, 1999.

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

following address: Health Care Financing Administration, Department of

Health and Human Services, Attention: HCFA-1001-IFC, P.O. Box 9010,

Baltimore, MD 21244-9010.

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

and three copies) to one of the following addresses:

Room 443-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW,

Washington, DC 20201, or

Room C5-16-03, Central Building, 7500 Security Boulevard, Baltimore,

Maryland 21244-1850.

For comments that relate to information collection and

recordkeeping requirements, mail copies of comments directly to the

following:

Health Care Financing Administration, Office of Information Services,

Security Standards Group, Division of HCFA Enterprise Standards, Room

N2-14-26, 7500 Security Boulevard, Baltimore, Maryland 21244-1850; and

the

Office of Information and Regulatory Affairs, Office of Management and

Budget, Room 10235, New Executive Building, Washington, DC 20503, Attn:

Allison Herron Eydt, HCFA Desk Officer.

FOR FURTHER INFORMATION CONTACT: Rebecca Hirshorn, (410) 786-3411.

SUPPLEMENTARY INFORMATION:

Comments

Because of staffing and resource limitations, we cannot accept

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

to file code HCFA-1001-IFC. Comments received timely will be available

for public inspection as they are received, generally beginning

approximately 3 weeks after publication of a document, in Room 443-G of

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

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

(phone: (202) 690-7890).

I. Background

Since the inception of Medicare in 1965, the program has shared in

the costs of educational activities incurred by participating

providers. Our regulations at 42 CFR 413.85(b) define approved

educational activities to mean formally organized or planned programs

of study usually engaged in by providers in order to enhance the

quality of patient care in an institution. These activities include

approved training programs for physicians, nurses, and certain allied

health professionals. Medicare makes payments for both the direct and

indirect costs of graduate medical education (GME). Under section

1886(h) of the Social Security Act (the Act) and 42 CFR 413.86,

Medicare pays hospitals for the costs of direct GME. Under

1886(d)(5)(B) of the Act and 42 CFR 412.105, Medicare pays hospitals

for the costs of indirect medical education (IME).

A. Direct Graduate Medical Education

Under sections 1886 (a)(4) and (d)(1)(A) of the Act and 42 CFR

412.113, direct GME costs are excluded from the definition of a

hospital's operating costs and, accordingly, are not included in the

calculation of payment rates under the hospital inpatient prospective

payment system or in the calculation of the rate-of-increase limit for

hospitals excluded from the prospective payment system. Under section

1886(h) of the Act and 42 CFR 413.86, hospitals are paid for direct GME

costs based on Medicare's share of a hospital-specific per resident

amount multiplied by the number of full-time equivalent (FTE)

residents.

B. Indirect Medical Education (IME)

Medicare has made payments to short-term acute care hospitals under

section 1886(d) of the Act on the basis of the prospective payment

system since 1983. Under the prospective payment system, hospitals

receive a predetermined payment for each Medicare discharge. Section

1886(d)(5)(B) of the Act specifically directs the Secretary to provide

an additional payment under the inpatient operating prospective payment

system to hospitals for IME costs. This additional payment, which

reflects the higher operating costs associated with GME, is based in

part on the applicable IME adjustment factor. The adjustment factor is

calculated by using a hospital's ratio of residents-to-beds in the

formula set forth at section 1886(d)(5)(B)(iii) and specified in

regulations at Sec. 412.105.

Psychiatric and rehabilitation hospitals and units as well as long-

term care, cancer, and children's hospitals are excluded from the

prospective payment system and are paid on a reasonable cost basis

under section 1861(v)(1)(A) of the Act, subject to a rate-of-increase

limit. Payments to excluded hospitals for their IME costs are included

in their payments for operating costs and are therefore subject to the

rate-of-increase limit.

Under section 1886(g) of the Act and Sec. 412.322 of the existing

regulations, we also make capital GME payments to hospitals on the

basis of each respective hospital's ratio of residents to average daily

census.

C. The Balanced Budget Act of 1997

Section 4626(a) of the Balanced Budget Act (BBA) of 1997, Public

Law 105-33 (enacted on August 5, 1997), added section 1886(h)(6) to the

Act to set forth provisions that allow Medicare participating hospitals

to receive incentive payments over a 5-year period under approved plans

for voluntarily reducing the number of residents that are in their

approved medical residency training programs. Section 1886(h)(6)(C) of

the Act defines the entities that may qualify for incentive payments

under a voluntary reduction plan and section 1886(h)(6)(B) of the Act

sets forth

[[Page 44842]]

participation and reduction criteria that the plan applications must

meet for approval.

Section 1886(h)(6)(B)(i) of the Act specifies that the application

for a voluntary resident reduction plan must be submitted in a form and

manner specified by the Secretary and must be received no later than

November 1, 1999. Section 1886(h)(6)(B)(ii) of the Act specifies that

the application must provide for the operation of a plan for reducing

the number of FTE residents in approved medical residency training

programs consistent with the requirements of section 1886(h)(6)(D) of

the Act.

Sections 1886(h)(6)(B)(iii) and (iv) of the Act provide that the

applying entity--

Must elect in the application the period of residency

training years (not greater than 5) over which the reduction will

occur; and

Must not reduce the proportion of its residents in primary

care (to the total number of residents) below such proportion in effect

as of the applicable time described in section 1886(h)(6)(D)(v) of the

Act.

The statute directs the Secretary to determine whether the

application, the entity, and plan meet such other requirements as the

Secretary specifies in regulations.

Sections 1886(h)(6) (D) and (E) of the Act specify the requirements

for percentage reductions in the number of residents and the manner in

which the reductions are to take place. Section 1886(h)(6)(F) provides

for a penalty for noncompliance with approved voluntary residency

reduction plans. Section 1886(h)(6)(G) specifies that the Secretary

shall establish rules regarding the treatment of rotating residents as

it relates to providers participating in the voluntary residency

reduction plan.

II. Provisions of the Interim Final Regulations

We are establishing interim final regulations under a new

Sec. 413.88 under 42 CFR Part 413, to incorporate requirements for

incentive payments under voluntary residency reduction plans to

implement section 1886(h)(6) of the Act, as added by section 4626(a) of

the BBA. The specific statutory provisions and the corresponding

regulatory provisions are described below.

A. Participation Criteria

Participation in the residency reduction program under section

1886(h)(6) of the Act is voluntary. Section 1886(h)(6)(A) of the Act

specifies that each hospital that is part of a ``qualifying entity''

may receive incentive payments. Section 1886(h)(6)(C) defines a

``qualifying entity'' as--

An individual hospital that operates one or more approved

residency training programs;

Two or more hospitals that operate one or more approved

residency training programs and apply for treatment as a single

qualifying entity; or

A qualifying consortium as described in section 4628 of

BBA. Section 4628(b) of the BBA defines a consortium as an entity that

consists of a teaching hospital with one or more approved medical

residency training programs and one or more of the following:

--A school of allopathic or osteopathic medicine.

--Another teaching hospital, which may be a children's hospital.

--A Federally qualified health center.

--A medical group practice.

--A managed care entity.

--An entity furnishing outpatient services.

--Any other entity that the Secretary determines to be appropriate.

The members of the consortium must have agreed to participate in

the GME programs that are operated by the entities in the consortium,

and have agreed on a method of allocating the payments among the

members. The consortium must meet such additional requirements as the

Secretary may establish as necessary.

We are incorporating the provision of section 1886(h)(6)(C) of the

Act in the regulations at Sec. 413.88(b). Any hospital that is entitled

to receive direct or indirect medical education payments, or both, from

Medicare may participate in the voluntary reduction plan as an

individual hospital. In addition, two or more hospitals that receive

direct or indirect medical education payments, or both, from Medicare

may participate as a single entity (joint applicant) and apply for a

collective annual resident reduction target.

Section 1886(h)(6)(C)(iii) of the Act cross refers the description

of a qualifying consortium for purposes of making voluntary residency

reduction incentive payments to the description specified in section

4628 of the BBA. Section 4628 requires the Secretary to establish a

demonstration project under which, instead of making GME payments to

individual teaching hospitals, under section 1886(h) of the Act, the

payments would be made to each consortium.

At this time, we are in the initial phase of developing the

demonstration project on the use of consortia and have not yet

established the criteria that a qualifying consortium will have to meet

beyond that described under section 4628(b) of the BBA. Therefore, we

have not included in this interim final regulation provisions related

to consortia and we will not be accepting applications for voluntary

residency reduction plans from entities that may be qualifying

consortia until we have established these additional criteria. If

qualifying entities express an interest in participating as a

consortia, when the criteria for consortia are finalized for the

demonstration project, we will publish a regulation outlining how

consortia qualify for the voluntary residency reduction plan. However,

until we have established these additional criteria, we are allowing a

multihospital entity, that may later qualify as a consortium, to apply

as a joint applicant. In addition, we are allowing an individual

hospital that may later qualify to participate as a member of a

consortium to apply as an individual applicant. In both cases,

participation of an individual hospital or a multihospital entity in

the voluntary reduction plan does not preclude the entity from later

applying to participate as a member(s) of a consortium once the

consortia demonstration criteria have been finalized. We are

considering whether to allow these applicants to modify their

applications so that they can be treated as a consortium for the

remainder of their individual or joint voluntary residency reduction

plans once the consortium definition is finalized. If we were to allow

this alternative, a qualifying entity that is interested in downsizing

its resident numbers in accordance with the percentages required under

section 1886(h)(6) of the Act would be able to participate and

establish its base number of residents prior to knowing whether it

would qualify as a consortium.

B. Submission of Applications and Effective Date of Plans

Section 1886(h)(6)(B)(i) of the Act, as added by the BBA, specifies

that the application must be submitted ``in a form and manner specified

by the Secretary and by not later than November 1, 1999.'' We are

requiring each qualifying entity to sign a statement indicating

voluntary participation in the residency reduction plan

(Sec. 413.88(d)(8)). We will accept applications from qualifying

entities at least one day prior to the first day of the period over

which voluntary reduction will occur but in no case later than the

November 1, 1999 application date specified in the statute

(Sec. 413.88(e)). We

[[Page 44843]]

believe that allowing plan applications to be submitted during this

period will ensure that qualifying entities can apply for incentive

payments for voluntary reduction plans applicable to residency training

programs that begin as early as July 1, 1999.

We also are specifying in Sec. 413.88(e) that each qualifying

entity must submit its application to its Medicare fiscal intermediary

for review. A copy of the application must also be sent to the HCFA

Central Office at the following address: Voluntary Residency Reduction

Plan, Health Care Financing Administration, Plan and Provider

Purchasing Policy Group, Division of Acute Care, Room C4-07-07, 7500

Security Boulevard, Baltimore, Maryland 21244-1850.

Interested entities may contact the Division of Acute Care at (410)

786-3411 for questions on the application process.

Accordingly, we are specifying under Sec. 413.88(f) that residency

reduction plans that are submitted to the fiscal intermediary on or

after September 17, 1999 but on or before November 1, 1999, may be

effective for portions of cost reporting periods beginning no earlier

than the day after the date of the application. In other words, as long

as the application is submitted on or before November 1, 1999, the

entity can choose the effective date of the plan to be as early as the

day after the date of application.

C. Contents and Format of Applications

In accordance with section 1886(h)(6)(B) of the Act, we are

specifying in Sec. 413.88(d) that the qualifying entity must submit an

application that contains the statutorily specified information and

agreements. In addition, under the authority of section

1886(h)(6)(B)(v) of the Act, we are establishing additional

requirements for submittal of data to enable verification of compliance

with the percentage reduction requirements of the statute by the fiscal

intermediary and for annual monitoring and audit purposes.

Under Sec. 413.88(d)(1), we require an application to include a

description of the operation of a plan for reducing the FTE residents

in the qualifying entity's approved medical residency training

programs, consistent with the percentage reduction requirements

specified in section 1886(h)(6)(D) of the Act and described under

section II.E. of this preamble. To ensure that we have sufficient data

and information to ascertain that the voluntary reduction plan meets

the percentage reductions specified in the statute, under

Sec. 413.88(d)(3) we further require the qualifying entity to submit

FTE counts for its base number of residents (as defined in section

II.D. of this preamble), with a breakdown of the number of primary care

residents compared to the total number of residents. A primary care

resident is defined in the existing Medicare regulations at

Sec. 413.86(b) as a resident enrolled in an approved medical residency

training program in family medicine, general internal medicine, general

pediatrics, preventive medicine, geriatric medicine or osteopathic

general practice. We also are requiring the entity to submit its direct

and indirect FTE counts as of June 30, 1997. For joint applicants,

these counts must be provided individually and collectively. This

information will be verified by the fiscal intermediary.

In addition, in Sec. 413.88(d)(4) we are requiring the qualifying

entity to submit, with the application, data on the annual and

cumulative targets for reducing the number of FTE residents and the

ratios of the number of primary care residents to the total number of

residents for the year used to determine the base number and for each

year in the 5-year reduction period. For joint applicants, these data

must be provided individually and collectively. In the case of joint

applicants, the group of participating hospitals will be held to a

collective target. None of the participating hospitals will receive

incentive payments unless the collective target is met.

In accordance with section 1886(h)(6)(D)(iii) of the Act, the

application must include an election of the period of residency

training years during which the reductions will occur

(Sec. 413.88(d)(2)). The reductions must be fully implemented by not

later than the fifth residency training year in which the plan is

effective.

Under Sec. 413.88(d)(5) and in accordance with section

1886(h)(6)(B)(iv) of the Act, we are requiring the qualifying entity in

its application to agree to not reduce the proportion of its primary

care residents to its total number of residents below the proportion

that exists in the residency training program year that the entity used

to determine the base number of residents, as described in section

II.D. of this preamble.

Under the Secretary's authority under section 1886(h)(6)(B)(v) of

the Act to determine other requirements for voluntary reduction plans

and entities as necessary, we are requiring under Sec. 413.88(d)(7)

that for a qualifying entity that is also member of an affiliated group

as defined in Sec. 413.86(b), a statement be submitted along with the

application that all members of the affiliated group (that are not a

part of the qualifying entity) agree to an aggregate FTE cap that

reflects the resident count during each year of the qualifying entity's

plan and the 1996 FTE count of the other hospital(s) in the affiliated

group. In addition, we are requiring under Sec. 413.88(d)(6) that the

qualifying entity, in its application, agree to comply with data

submission requirements deemed necessary by HCFA to make annual

incentive payments during the 5-year residency reduction plan, and to

fully cooperate with additional audit and monitoring activities deemed

necessary by HCFA.

D. Definition of the Base Number of Residents

Under section 1886(h)(6)(D), the residency reduction requirement

for a qualifying entity depends on the entity's base number of

residents. Section 1886(h)(6)(D)(vi) of the Act, as added by section

4626(a) of the BBA, defines the term ``base number of residents'' to

mean--

* * * with respect to a qualifying entity (or its participating

hospitals) operating approved medical residency training programs,

the number of full-time equivalent residents in such an entity's

programs (before application of weighting factors) of the entity as

of the most recent residency training year ending before June 30,

1997 or, if less, for any subsequent residency training year that

ends before the date the entity makes application under this

paragraph.

Under Sec. 413.88(g)(1) of these interim final regulations, we

define the base number of residents using the counting rules for

determining a hospital's direct GME FTE count under existing

Sec. 413.86 with two changes to reflect the provisions of section 4626

of the BBA. First, consistent with section 1886(h)(6)(D)(vi), we

specify that the base number of residents will be determined on the

basis of a July 1 to June 30 ``residency training year,'' rather than

the hospital's cost reporting period. Second, under existing

Sec. 413.86(g), a weighting factor is applied to each resident included

in a hospital's direct GME FTE count. Residents within an initial

residency period are weighted at 1.0 FTE and residents beyond the

initial residency period are weighted at 0.5 FTE. However, consistent

with section 1886(h)(6)(D)(vi) of the Act, in determining the base

number of residents for voluntary residency reduction plans, we are

requiring under Sec. 413.88(g)(1)(i) that FTEs be counted ``before

application of weighting factors,'' so that each resident will be

weighted at 1.0 FTE.

[[Page 44844]]

In summary, we are specifying in Sec. 413.88(g)(1)(i) that the base

number of residents means the lesser of (1) The number of FTE residents

in all approved medical residency training programs of the qualifying

entity (before application of weighting factors under Sec. 413.86(g))

for the most recent residency training year ending June 30, 1996; or

(2) the number of FTE residents in all approved medical residency

training programs of the qualifying entity (before application of

weighting factors under Sec. 413.86(g)) for any subsequent residency

training year that ends before the date the entity submits its plan to

the fiscal intermediary and HCFA. The residency training year used to

determine the base number of residents is the ``base year'' for

determining residency reduction requirements described under section

II.E. of this preamble.

E. Residency Reduction Requirements

Section 1886(h)(6)(D) of the Act, as added by the BBA, specifies

the methodology for determining the number of FTE residents in all of

the qualifying entity's approved medical residency training programs

that must be reduced in order for each type of qualifying entity to

receive incentive payments.

1. Qualifying Entities That Are Individual Hospitals

a. Hospitals with a base number of residents that is greater than

750. If an individual hospital's base number of residents exceeds 750

residents, the voluntary plan must specify a reduction in the base

number of residents by at least 20 percent.

b. Hospitals with a base number of residents between 601 and 750.

If an individual hospital's base number of residents exceeds 600 but is

not in excess of 750, the voluntary plan must specify a reduction in

the base number of residents by at least 150 residents. Alternatively,

the plan may specify a reduction of at least 20 percent if the base

number of residents in primary care is increased during the plan by at

least 20 percent.

c. Hospitals with a base number of residents that is 600 or fewer.

Hospitals with a base number of residents of 600 or less have the

option of reducing the base number of residents by at least 25 percent.

Alternatively, the plan may specify a reduction of at least 20 percent

if the number of primary care residents is increased by at least 20

percent.

We have incorporated these provisions at Sec. 413.88(g)(2).

2. Qualifying Entities With Two or More Hospitals (Joint Applicants)

Joint applicants must reduce their combined base number of

residents by 25 percent; or if there is an increase in the combined

base number of primary care residents of at least 20 percent, by at

least 20 percent. Section 413.88(g)(3) contains this provision.

3. Consortia Applicants

The statute specifies that consortia applicants must reduce the

combined base number of residents by at least 20 percent. As indicated

earlier, we are not accepting applications from consortia until we have

established criteria for consortia under section 4628 of the BBA and

have some experience with the demonstration project. Therefore, this

interim final rule does not contain provisions relating to consortia.

However, until we have issued these criteria, a qualifying entity that

may later qualify as a consortium may apply in the interim as an

individual hospital or multihospital joint applicant as described

above.

Under section 1886(h)(6)(B)(iv) of the Act, a qualifying entity

applicant may not reduce the base year proportion of its primary care

residents to its total number of residents below the proportion that

exists in the residency training program year used to determine the

base number of residents. In other words, the proportion of residents

in primary care at the end of the plan must be at least the same as or

greater than the proportion of total residents in primary care in the

base number of residents. We have incorporated these provisions at

Sec. 413.88(g)(2)(ii)(B), (g)(2)(iii)(B) and (g)(3)(ii).

Section 1886(h)(6)(D)(iv) of the Act specifies that voluntary

residency reductions in the base number of residents must be fully

effective no later than the fifth residency training year in which the

application is effective. The following table illustrates the resident

reduction options under the voluntary plans for the different types of

qualifying entity applicants:

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

Type of applicant Reduction option (5 year plan)

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

Individual Hospitals:

More than 750 Residents.... 20%.

601 to 750 Residents....... 150 Residents or 20% if primary care residents

increase by 20%.

600 or fewer Residents..... 25% or 20% if

number of primary care residents

increased by 20%.

Joint Applicants............. 25% or 20% if

number of primary care residents

increased by 20%.

Consortia Applicants......... 20%.

All Applicants............... May Not Reduce Primary Care/Total

Resident Ratio.

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

F. Incentive Payments

Sections 1886(h)(6)(A) and (E) of the Act prescribe the formula for

calculating the amount of incentive payments. Although hospitals may

participate as a joint applicant (or later as a consortium, as

discussed earlier in this preamble), incentive payments will be made to

individual hospitals through the regular Medicare payment process via

cost reports.

Incentive payments will be made on the basis of a cost reporting

period even though residency reductions under the plan are made on a

July 1 to June 30 medical residency program year. If a hospital cost

reporting period coincides with a residency program training year,

incentive payments may begin at the beginning of the first cost

reporting period in which resident reductions are made under the

voluntary residency reduction plan. For instance, if a hospital chooses

to participate in the voluntary residency reduction plan for the

residency training year July 1, 2000 to June 30, 2001 and the hospital

has a July 1 to June 30 cost reporting period, the first year in which

Medicare may make incentive payments for voluntary residency reductions

would be the hospital's July 1, 2000 to June 30, 2001 cost reporting

period. If a hospital's cost reporting period does not coincide with a

residency training year, the first year in which incentive payments may

be made under the voluntary residency reduction plan would be the

hospital's cost reporting period that overlaps the July 1, 2000

beginning date of the voluntary residency reduction plan. For instance,

if a hospital participates in the residency reduction plan effective

July 1, 2000, and the hospital has a January 1 to December 31 cost

reporting period, incentive payments may be made under the voluntary

residency plan beginning

[[Page 44845]]

in the hospital's January 1, 2000 to December 31, 2000 cost reporting

period. If the hospital's cost reporting period does not coincide with

a July 1 to June 30 residency training year, the applicable hold-

harmless percentages described earlier would be prorated accordingly

over the respective cost reporting period(s). In addition, if the

hospital's cost reporting period does not coincide with a July 1 to

June 30 residency training year, for purposes of calculating the number

of residents in each plan year, the number of FTE residents would be

prorated over the respective cost reporting periods.

In Sec. 413.88(j), we specify that annual incentive payments

through cost reports will only be made to hospitals that are or are

part of qualifying entities over the 5-year reduction period if the

qualifying entity meets specified annual residency reduction goals. An

incentive payment will be made for any given year only when the

participant meets or exceeds the cumulative annual target applicable to

that year. Consistent with section 1886(h)(6)(F) of the Act, if a

participating entity fails to comply with its residency reduction plan

by the end of the fifth residency training year, the hospitals that

comprise the qualifying entity will be liable for repayment of all

incentive payments.

We will allow an entity to update its annual targets as specified

in its plan only under limited circumstances. If the entity has failed

to meet any of its annual targets in a plan year, it will not receive

incentive payment for that particular plan year. To be eligible for

future incentive payments for the duration of the plan, the entity may

update future annual targets for the remaining years of the plan in

order to comply with its cumulative target. We would require the

updated plan to be submitted prior to the beginning of each July 1

medical residency training year during the plan years.

In accordance with section 1886(h)(6)(A) of the Act, each

individual entity participating in the plan will receive incentive

payments based on the following calculation (as specified under

Sec. 413.88(h)): The sum of the entity's direct and indirect GME

payment based on 95 percent of the total number of weighted residents

in the approved medical residency training programs of the qualifying

entity on June 30, 1997 subtracted by the sum of the qualifying

entity's direct and indirect GME payment based on 100 percent of the

number of weighted FTE residents in each of the 5 plan years. This

difference will be multiplied by a decreasing hold-harmless percentage

for the given plan year, to arrive at an individual hospital's

incentive payment.

In accordance with section 1886(h)(6)(E) of the Act, the applicable

hold-harmless percentages are as follows (as specified under

Sec. 413.88(i)):

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

Plan year Percentage

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

1........................................................... 100

2........................................................... 100

3........................................................... 75

4........................................................... 50

5........................................................... 25

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

As stated above, the applicable hold-harmless percentages must be

prorated over two hospital cost reporting periods if the hospital's

cost reporting period does not coincide with the residency training

program year. For instance, a hospital participating in the voluntary

plan will be making reductions on the basis of a July 1 to June 30

program year. If the hospital has a January 1 to December 31 cost

reporting period, the applicable hold-harmless percentages will change

on July 1 of each year, which is in the middle of the hospital's cost

reporting period. For this reason, the applicable hold-harmless

percentage for the cost reporting period will reflect a weighted

average of the residency reductions in each portion of the cost

reporting period. In addition, in calculating the incentive payments we

will apply weighting factors to the total resident count as of June 30,

1997 and for each plan year. This is consistent with our existing

policy under Sec. 413.86(g) of applying weighting factors to resident

FTE counts.

We are providing the following simplified example to illustrate

application of the incentive payment calculation.

Assume a hospital's resident program year is the same as its cost

reporting year, and that it receives $10 million for direct and

indirect GME based on 100 FTE residents as of June 30, 1997. Also

assume that the hospital's average payment per resident for indirect

and direct GME of $100,000 (derived from $10 million/100 residents)

does not change from June 30, 1997 to the end of the 5-year reduction

plan. If the hospital agrees to reduce its FTE count by 5 residents per

year and 25 residents over 5 years, it would be paid as follows:

BILLING CODE 4120-01-P

[[Page 44846]]

[GRAPHIC] [TIFF OMITTED] TR18AU99.001

BILLING CODE 4120-01-C

[[Page 44847]]

As depicted in the preceding chart, in any year of the residency

reduction plan, the hospital receives incentive payments based on 95

percent of its number of residents on June 30, 1997. In each year of

the plan, the incentive payment is based on a declining percentage

(hold-harmless percentage, line (i) in the preceding chart) of the

hospital's direct and indirect GME payment loss associated with

residency reduction below 95 percent of its base number of residents

line (h). In this example, the hospital's revenues for indirect and

direct GME would have declined by a total of $7.5 million ($50 million-

$42.5 million) over a 5-year period if the hospital did not reduce the

number of residents according to the plan. A hospital participating in

the voluntary plan, however, received $2.5 million in incentive

payments. Of the $5 million difference ($7.5 million-$2.5 million),

$2.5 million is due to the hold-harmless percentage (i) and the

remaining $2.5 million is due to the 5-percent adjustment to the number

of residents on June 30, 1997.

Under section 1886(h)(6)(A) of the Act, the determination of the

incentive payments for any year must be made on the basis of the

Medicare payment provisions ``in effect on the application deadline

date for the first calendar year to which the reduction plan applies.''

Thus, the amount of the incentive payment depends on the Medicare

provisions in effect on the application deadline date

(Sec. 413.88(h)(2)). As specified earlier, applications must be filed

at least one day prior to the effective date of the plan but no later

than November 1, 1999. For example, if a hospital wants the reduction

plan provision to go into effect on September 1, 1999, the deadline for

the application would be August 31, 1999. Therefore, the Medicare

payment provisions in effect on August 31, 1999, would be used to

calculate the amount of the incentive payment. The latest date for

applying for incentive payments is November 1, 1999.

G. Repayment Penalty Provision

Section 1886(h)(6)(F)(ii) of the Act, as added by the BBA, sets

forth a repayment penalty following a qualifying entity's completion of

a voluntary residency reduction plan in which the entity received

incentive payments if the entity exceeds the number of residents that

it has agreed to in its plan. We are specifying in Sec. 413.88(k) that

the entity is liable for repayment for the total amount of the

incentive payments if the number of FTE residents increases above the

number of such residents permitted under the reduction plan after the

completion of the plan. If the number of FTE residents increases above

the number of residents permitted under the voluntary reduction plan,

the following provisions of repayment apply:

In any postplan year, a qualifying entity that

successfully completed the reduction plan either as an individual

hospital or a member of a joint applicant is subject to the total

repayment provisions if its resident count exceeds the number of

residents specified in the voluntary residency reduction plan.

As contained in Sec. 413.88(l)(1), the end-of-plan

residency cap will equal the unweighted FTE count used for direct

medical education payments for the last residency training program year

in which a qualifying entity participates in a plan. For each

subsequent cost reporting year that ends after the end of the reduction

plan, the unweighted direct FTE resident count will be compared to the

unweighted direct GME FTE resident count for the last residency

training program year. If the unweighted direct GME FTE resident count

for a cost reporting period post plan exceeds the resident count

specified in the voluntary residency reduction plan, the qualifying

entity is subject to the total repayment provision.

The repayment provision applies until such time when a

full credit has been made against the total amount of incentive

payments made to the qualifying entity. For individual hospitals, the

total incentive payment amount equals all of the incentive payments

made to the hospital. For joint participants, the total payment amount

equals the sum of all incentive payments made to the individual

hospitals that make up the membership of the joint participant.

For the purpose of calculating the credit amount in each

postplan year to which the total repayment provision applies, an

individual hospital's direct and indirect GME payments will be

calculated based on the hospital's actual FTE resident counts in that

year. Payments are made to the hospital up to the amount that applies

to the end-of-plan FTE resident count. The remainder is credited

against the total repayment amount. The total repayment amount is equal

to the actual annual incentive payments made during the voluntary

reduction plan years. An example would be a hospital that had a base

number of 200 FTE residents and by the end of the plan reduces its FTE

count to its cumulative target of 160 FTE residents. If, at a later

date after the completion of the plan, the entity increases its FTE

count from 160 FTEs to 161 FTEs, the repayment penalty provision would

be in effect. The entity would be required to repay the entire amount

it received as incentive payments during the plan years. However, the

method of repayment is limited to the direct and indirect payments the

entity would have received for the 161st resident. These direct and

indirect GME payments are credited against the total repayment amount

the entity is required to repay.

Once the total penalty is repaid, the qualifying entity's

adjusted FTE cap reverts back to its original 1996 FTE cap, since

effectively all benefits of participating in the plan will have been

eliminated (Sec. 413.88(l)(2)(ii)).

H. Related BBA Provisions and Their Effect on Voluntary Plan Reduction

Provisions

Several other provisions of the BBA that were implemented in the

Federal Register on August 29, 1997 (62 FR 46003 through 46007), and on

May 12, 1998 (63 FR 26318) have an effect on incentive payments under

the voluntary residency reduction plan.

1. Reduction in the Indirect Medical Education Adjustment

Section 4621 of the BBA revised section 1886(d)(5)(B) of the Act to

reduce the level of the IME adjustment in effect prior to the enactment

of the BBA (approximately 7.7 percent for every 10-percent increase in

the resident-to-bed ratio) over several years. The schedule for the IME

adjustment is as follows: 7.0 percent for discharges during FY 1998;

6.5 percent during FY 1999; 6.0 percent during FY 2000; and 5.5 percent

during FY 2001 and thereafter. In determining the voluntary residency

reduction incentive payment calculation, the respective IME adjustment

factors will apply for the number of FTE residents in each of the 5

plan years and to the number of FTE residents as of June 30, 1997.

2. Caps on the Number of FTEs

Sections 4621 and 4623 of the BBA amended section 1886 of the Act

to limit the number of residents that a hospital can count for purposes

of determining payment for indirect and direct GME costs. For cost

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

number of allopathic and osteopathic medical residents that a hospital

may include in its FTE count in either a hospital or nonhospital

setting for IME payments is limited to the total number of such

resident FTEs included in the hospital's most recent cost reporting

period ending on or before December 31, 1996. Similarly, for direct GME

payments, the number of

[[Page 44848]]

allopathic and osteopathic medical residents that a hospital may

include in its unweighted direct medical education FTE count for cost

reporting periods beginning on or after October 1, 1997, is limited to

the number included in the hospital's most recent cost reporting period

ending on or before December 31, 1996. The August 29, 1997 final rule

with comment period and the May 12, 1998 final rule amended

Secs. 412.105 and 413.86 of the regulations to implement these

provisions for indirect and direct GME, respectively.

Since the counting rules for indirect and direct GME in hospital

cost reports ending on or before December 31, 1996 were different, the

FTE caps may also be different. Prior to enactment of the BBA, a

hospital's IME FTE count could only include residents working in

inpatient areas of the hospital subject to the prospective payment

system and hospital outpatient departments. Residents in nonhospital

settings and areas of the hospital not subject to the prospective

payment system could not be counted. For direct GME, a hospital could

include residents in all areas of the hospital complex (including areas

not subject to the prospective payment system) and nonhospital settings

(if the criteria of Sec. 413.86(f)(1)(iii) are met). However, residents

in subspecialty training and residents otherwise beyond the initial

residency period included in a hospital's direct GME FTE count are

weighted at 0.5 FTE under Sec. 413.86(g).

The BBA limits the FTE caps to allopathic and osteopathic medical

residents and does not apply FTE caps to podiatry and dentistry

residents. For purposes of the voluntary residency reduction plans, the

base number of residents under section 1886(h)(6)(D)(vi) of the Act

includes all of a hospital's residents (including residents in

dentistry and podiatry). Therefore, we will determine whether a

hospital is eligible for incentive payments under the voluntary

residency reduction plan by counting all residents participating in

approved medical residency training programs. Accordingly, a hospital

that receives incentive payments under the voluntary residency

reduction plan remains subject to the indirect and direct GME FTE caps

mandated under sections 1886(d)(5)(B) and 1886(h)(4)(H) of the Act and

Secs. 412.105 and 413.86 of the regulations.

3. Counting Residents Based on a 3-Year Average in the Plan Year

Section 1886(d)(5)(B)(vi)(II) of the Act, as amended by section

4621 of the BBA, provides that a hospital's IME FTE resident count for

a cost reporting period beginning during FY 1998 will be based on the

average of the number of residents for the cost reporting period and

the prior cost reporting period. The hospital's IME FTE count for cost

reporting periods beginning in FY 1999 and subsequent years will be

based on an average of the FTE count for the cost reporting period and

the prior two cost reporting periods. Similarly, section 1886(h)(4)(G)

of the Act, as amended by section 4623 of the BBA, provides that a

hospital's direct GME FTE resident count for a cost reporting period

beginning during FY 1998 will be based on the average of number of

residents for the cost reporting period and the prior cost reporting

period. The hospital's direct GME FTE count for cost reporting periods

beginning in FY 1999 and subsequent years will be based on an average

of the FTE count for the cost reporting period and the prior two cost

reporting periods.

We determine the level of payments for the cost reporting period

using the number of residents as of June 30, 1997 without regard to

averaging rules. However, the averaging rules described above are

applicable when determining incentive payments for the hospital's

actual residents in a voluntary plan year.

4. Capital IME Payment

Section 1886(h)(6)(A) of the Act limits the incentive payments to

direct GME payments and operating IME payments. However, under section

1886(g) of the Act and Sec. 412.322 of the existing regulations, we

also make capital IME payments on the basis of the hospital's ratio of

residents to average daily census. Since capital IME payments are also

a function of the number of residents in approved programs, we believe

we have discretion to provide incentive payments for capital IME using

a methodology similar to the one used for determining operating IME

payments under this interim final rule. We are including language in

Sec. 413.88(h)(1)(iii) that will allow hospitals participating in

voluntary residency reduction plans to receive incentive payments for

capital IME.

5. Counting FTEs in Nonhospital Settings

Under Sec. 413.86(f)(1)(iii), on or after July 1, 1987 and before

January 1, 1999, a resident may be included in a hospital's direct GME

FTE count if the resident spends time in patient care activities

outside of the hospital and there is a written agreement between the

hospital and the nonhospital entity that the resident's compensation

for training time spent outside of the hospital setting is to be paid

by the hospital. Section 4621(b)(2) of the BBA amended section

1886(d)(5)(B)(v) of the Act to allow all the time spent by residents in

patient care activities under an approved medical residency training

program in a nonhospital setting to be counted towards the

determination of FTEs for IME, if the hospital incurs all, or

substantially all, of the costs for the training program in the

nonhospital setting. In accordance with section 1886(h)(4)(E) of the

Act, we are currently using the same criteria for determining whether a

hospital may include a resident in its FTE count for direct GME.

However, in the July 31, 1998 Federal Register (63 FR 41005), we

revised the definition of ``all or substantially all of the costs'' in

order to implement section 4625 of the BBA, which permits payment to

certain nonhospital providers. The revised rule requires the written

agreement to indicate that the hospital will incur the costs of the

resident's compensation in the nonhospital site and provide reasonable

compensation to the nonhospital site for supervisory teaching

activities. If a hospital includes residents in nonhospital settings in

its IME FTE count, consistent with section 1886(d)(5)(B)(v) of the Act,

the hospital must include those residents in determining whether it has

exceeded its IME FTE cap. In addition, if a hospital included residents

in nonhospital settings in its direct GME FTE count, the hospital must

include these residents in determining whether it has exceeded its

direct GME FTE cap.

A hospital that incurs ``all or substantially all of the costs''

and is counting the FTE for the time a resident spends in a nonhospital

site for purposes of direct and indirect GME payments must also include

the FTE in the nonhospital site for purposes of counting the FTE in

making the target reductions under the plan. In other words, qualifying

entities that include the FTE in nonhospital sites for GME payment must

also include it when making the target reductions.

6. New Medical Residency Training Programs

Section 1886(h)(5)(H) of the Act permits special rules in the case

of medical residency training programs established on or after January

1, 1995. Under a final rule published in the Federal Register on May

12, 1998 (63 FR 26333) such new medical residency training programs are

permitted to have an adjustment to the FTE cap. (We have proposed to

further clarify the requirements for receiving an adjustment to the FTE

cap for new medical residency training programs in

[[Page 44849]]

a notice of proposed rulemaking published in the Federal Register on

May 7, 1999 (64 FR 24735)).

For purposes of this interim final rule with comment period,

however, since section 1886(h)(6) of the Act does not provide for

adjustments to the FTE counts, we will not adjust a hospital's base

number of residents for adjustments that may be otherwise made to

hospital FTE caps for new medical residency training programs. For

example, a hospital that had a 100 FTE cap that qualifies for a new

medical residency training program adjustment to raise its FTE cap to

120 FTE residents would not be able to count the 20 FTE adjustment for

purposes of calculating the base number of residents for the voluntary

residency reduction plan.

7. Hospitals That Meet the Definition of Affiliated Groups

Section 1886(h)(5)(H)(ii) of the Act allows the Secretary to

prescribe rules that allow institutions that are members of the same

affiliated group to elect to apply the FTE caps on an aggregate basis.

In the May 12, 1998 final rule (63 FR 26358), an affiliated group is

defined as follows:

Two or more hospitals located in the same urban or rural

area (as those terms are defined in Sec. 412.62(f)) or in contiguous

areas if individual residents work at each of the hospitals during the

course of the program; or

If the hospitals are not located in the same or contiguous

rural and urban areas, hospitals that are jointly listed--

++ As sponsor, primary clinical site, or major participating

institution for one or more of the programs as those terms are used in

the Graduate Medical Education Directory, 1997-1998; or

++ As the sponsor or under affiliations and outside rotations for

one or more programs in operation in Opportunities, Directory of

Osteopathic Postdoctoral Education Programs; or

Hospitals that are under common ownership.

For purposes of this interim final rule with comment period, we

will permit applications from one or more hospitals that qualify as an

affiliated group under Sec. 413.86. A qualification that must be met

for affiliated groups that involve one or more member hospitals

participating in the voluntary residency reduction plan is that all

members of the affiliated group agree to an aggregate FTE cap that

reflects the resident count during each plan year of the hospital that

is in the voluntary reduction plan.

As stated earlier, section 1886(h)(6)(F)(ii) of the Act requires a

qualifying entity to refund all incentive payments if it has more

residents after the end of the plan than it was permitted under the

plan. Affiliated groups that include hospitals in the voluntary

residency reduction plan that have successfully completed the plan must

also agree to an aggregate cap based on the 1996 FTE count of each

hospital in the affiliated group, adjusted for the participating

hospital's final FTE count under the voluntary residency reduction

plan. However, in the event that a qualifying entity increases its FTE

count above its target reduction and has refunded all incentive

payments received under the plan (since effectively all benefits of

participation in the plan will have been eliminated), the aggregate FTE

cap would include that entity's FY 1996 FTE cap.

In accordance with the requirement established under

Sec. 413.88(g)(4), a hospital participating in the voluntary residency

reduction plan and is a member of an affiliated group, may not achieve

its residency reduction goals by rotating residents to other members of

the affiliated group that are not participating in the voluntary

residency reduction plan.

8. Payments to Hospitals for Indirect and Direct GME Costs Associated

with Medicare+Choice Enrollees

Section 4622 of the BBA added section 1886(d)(11) to the Act to

provide for IME payments to teaching hospitals for discharges

associated with Medicare+Choice enrollees for portions of cost

reporting periods occurring on or after January 1, 1998. The additional

payment is equal to an applicable percentage of the estimated average

per discharge amount that would have been made for the discharge for

IME if the beneficiary were not enrolled in managed care. The

applicable percentage set forth in section 1886(h)(3)(D)(ii) of the Act

is equal to 20 percent in 1998, 40 percent in 1999, 60 percent in 2000,

80 percent in 2001, and 100 percent in 2002 and subsequent years.

Section 4624 of the BBA amended section 1886(h)(3) of the Act to

provide a 5-year phase-in of the payments to teaching hospitals for

direct GME costs associated with services to Medicare+Choice discharges

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

1998. The amount of payment is equal to the product of the per resident

amount, the total weighted number of FTE residents working in all areas

of the hospital (and nonhospital settings in certain circumstances)

subject to the limit on the number of FTE residents under section

1886(h)(4)(F) of the Act and the averaging rules under section

1886(h)(4)(G) of the Act, the ratio of the total number of inpatient

bed days that are attributable to Medicare+Choice enrollees to total

inpatient days and an applicable percentage. The applicable percentages

are 20 percent in 1998, 40 percent in 1999, 60 percent in 2000, 80

percent in 2001, and 100 percent in 2002 and subsequent years.

The effect of this provision for qualifying entities participating

in voluntary residency reduction plans is that the level of payments

for the cost reporting period will be determined using the actual

number of residents reflective of the additional indirect and direct

GME payments associated with Medicare+Choice discharges. The difference

between the hospital's payments using the number of residents as of

June 30, 1997, and the actual number of residents in a voluntary

residency reduction plan year, including the effect of adjustments for

payments associated with Medicare+Choice discharges, will be the basis

for the incentive payment calculation.

I. Other Issues

1. Mergers, Acquisitions, and Related Changes

We recognize that hospitals participating in an approved voluntary

residency reduction plan may undergo hospital mergers, acquisitions, or

related changes (for example, system dissolution) that may affect the

qualifying entity. We invite comments on how we can most appropriately

address such situations.

2. Evaluation

We do not have specific plans to evaluate the impact of the

voluntary residency reduction plans at this time. However, we may

request information from entities approved for participation in a

voluntary residency reduction plan. If a full evaluation is conducted,

cooperation will be voluntary.

III. Collection of Information Requirements

Under the Paperwork Reduction Act of 1995, we are required to

provide 60-day notice in the Federal Register and solicit public

comment before a collection of information requirement is submitted to

the Office of Management and Budget (OMB) for review and approval. In

order to fairly evaluate whether an information collection should be

approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act

(PRA) of 1995 requires that we solicit comment on the following issues:

[[Page 44850]]

The need for the information collection and its usefulness

in carrying out the proper functions of our agency.

The accuracy of our estimate of the information collection

burden.

The quality, utility, and clarity of the information to be

collected.

Recommendations to minimize the information collection

burden on the affected public, including automated collection

techniques.

Section 413.88(d) of this document contains information collection

requirements. However, given that we anticipate the submission of less

than 10 applications on an annual basis, these collection requirements

are not subject to the PRA. Therefore, at this time we are not

submitting a copy of this document to OMB for its review of these

information collection requirements. If we determine, at a later date,

that we will receive more than 10 applications prior to the November 1,

1999 application submission deadline, we will submit these information

collection requirements to the OMB, as required by section 3504(h) of

the PRA.

Although we believe that these information collection requirements

are not subject to the PRA, we still welcome public comment on each of

the following issues for the section of this document that contains

information collection requirements:

Section 413.88(d) requires that a qualified entity must submit a

voluntary residency reduction plan application that contains the

following information or documents:

(1) A description of the operation of a plan for reducing the FTE

residents in its approved medical residency training programs,

consistent with the percentage reduction requirements described under

section II.E. of this preamble.

(2) An election of the period of residency training years during

which the reductions will occur;

(3) FTE counts for the base number of residents, with a breakdown

of the number of primary care residents compared to the total number of

residents; and the direct and indirect GME FTE counts for the entity on

June 30, 1997. For joint applicants, these counts must be provided

individually and collectively;

(4) Data on the annual and cumulative targets for reducing the

number of FTE residents and the ratios of the number of primary care

residents to the total number of residents for the base year and for

each year in the 5-year reduction period. For joint applicants, these

data must be provided individually and collectively;

(5) An agreement to not reduce the proportion of its primary care

residents to its total number of residents below the proportion that

exists in the base year;

(6) An agreement to comply with data submission requirements deemed

necessary by HCFA to make annual incentive payments during the 5-year

residency reduction plan, and to fully cooperate with additional audit

and monitoring activities deemed necessary by HCFA; and

(7) For a qualifying entity that is also member of an affiliated

group as defined in Sec. 413.86(b), a statement that all members of the

affiliated group--that are not part of the qualifying entity-- agree to

an aggregate FTE cap that reflects the resident count during each year

of the qualifying entity's plan and the 1996 FTE count of the other

hospital(s) in the affiliated group; and

(8) A statement indicating voluntary participation in the plan

under the terms of this section, signed by each hospital that is part

of the applying entity.

Each applicant will determine its own annual and cumulative targets

for the number of FTE reductions. Annual and collective targets must be

included in the application. In the case of a joint applicant, the

group of participating hospitals will be held to a collective target.

None of the participating hospitals will receive incentive payments

unless the collective target is met.

Qualifying entities with approved voluntary resident reduction

plans will be required to submit data on annual and cumulative targets

deemed necessary by HCFA. Qualifying entities will also be required to

submit update plan if annual targets are not met and if the qualifying

entities wish to request that future annual targets be adjusted to

comply with their cumulative targets.

We anticipate that on average it will require 15 hours for an

applicant to complete and submit the required information.

Organizations and individuals that wish to submit comments on the

information collection and recordkeeping requirements set forth in this

interim final rule should direct them to HCFA and OMB officials whose

names appear in the ADDRESSEES section of this preamble.

IV. Waiver of Proposed Rulemaking

We ordinarily publish a notice of proposed rulemaking in the

Federal Register and invite public comment on the proposed rule. Under

the Administrative Procedure Act (APA), however, this procedure can be

waived if an agency finds good cause that prior notice-and-comment

procedures are impracticable, unnecessary, or contrary to the public

interest, and incorporates a statement of the finding and its reasons

in the rule. As explained below, we find for good cause that it would

be impracticable to undertake prior notice-and-comment procedures with

respect to this rule before the provisions of the rule take effect.

The BBA was enacted on August 5, 1997. In section 4626(c), the

Congress specifically authorized (but did not require) the Secretary to

promulgate interim final rules ``by not later than 6 months after the

date of the enactment of [the BBA].'' Thus, if the Secretary had

published this document by February 5, 1998, the Secretary could have

issued this rule on an interim final basis by exercising the specific

authority in section 4626(c) of the BBA, rather than waiving notice-

and-comment procedures in accordance with the APA.

Because of the numerous obligations imposed by the BBA, we were not

able to promulgate this rule by February 5, 1998. The BBA required

development of complex regulations establishing, among other things:

hospital specific FTE caps; aggregate FTE caps in affiliated group

arrangements; GME payments to nonhospital providers; and adjustment to

FTE caps for new residency programs. Each of these represented a

significant and complex change affecting Medicare payment for indirect

and direct GME.

Nevertheless, we believe that the Congress' grant of specific

authority to issue interim final rules evinces an intent to allow

hospitals to begin participating in the voluntary residency reduction

plans at the earliest practicable date; if we undertook prior notice-

and-comment procedures now, we would have to allow for a 60 day comment

period before publishing final regulations, and this would further

delay the effective date of this rule.

We also find good cause to waive the prior notice of proposed

rulemaking with respect to the provisions of this document concerning

capital IME. Capital IME payments--like operating IME and direct GME

payment--are a function of the number of residents in approved

programs. Consistent with our broad authority to implement the capital

prospective payment system, this interim final rule with comment period

provides that the amount of incentive payments reflects the effect of

the residency reduction on capital IME. Given that we find good cause

to waive prior notice and comment procedures with respect to the other

provisions of this rule, and given our interest in

[[Page 44851]]

promoting uniformity and consistency, we believe it would be

impracticable to conduct prior notice and comment procedures for the

provisions of this document concerning capital IME payments.

For all these reasons, as well as the statutory requirement that

applications for incentive payments must be received no later than

November 1, 1999, we find good cause to waive the prior notice of

proposed rulemaking and to issue this final rule on an interim basis.

We invite written comments on this interim final rule and will consider

comments we receive by the date and time specified in the DATES section

of this preamble.

V. Response to Comments

Because of the large number of items of correspondence we normally

receive on Federal Register documents published for comment, we are not

able to acknowledge or respond to them individually. We will consider

all comments we receive by the date and time specified in the DATES

section of this preamble, and, if we proceed with a subsequent

document, we will respond to the comments in the preamble to that

document.

VI. Impact Analysis

A. Background

We have examined the impacts of this interim final rule with

comment period as required by Executive Order 12866 and the Regulatory

Flexibility Act (RFA) (Public Law 96-354). Executive Order 12866

directs agencies to assess all costs and benefits of available

regulatory alternatives and, when regulation is necessary, to select

regulatory approaches that maximize net benefits (including potential

economic, environmental, public health and safety effects; distributive

impacts; and equity). The RFA requires agencies to analyze options for

regulatory relief for small businesses. For purposes of the RFA, most

hospitals, and most other providers, physicians, and health care

suppliers are small entities, either by nonprofit status or by having

revenues of $5 million or less annually.

B. Executive Order 12866 and RFA Analysis

Without knowing the number of applications that we will receive and

the characteristics of the hospitals that will apply, we believe it is

difficult to assess the impact of this interim final rule with comment

period. However, we do believe that few hospitals will apply for the

voluntary residency reduction plan. As stated earlier, section 4623 of

the BBA requires the Secretary to determine incentive payment based on

an average of the hospital's FTE count for the cost reporting period

and the prior two cost reporting periods (the prior one cost reporting

period for the hospital's first cost reporting period beginning on or

after October 1, 1997). Using the 3-year averaging rule, Medicare makes

a partial payment for each resident eliminated and no longer included

in a hospital's resident FTE counts by phasing in the reduction over 3

years. Therefore, the 3-year averaging rule provides similar incentives

to those available under the voluntary residency reduction plan without

requiring a permanent minimum reduction of either at least 25 percent

or, with an increase in primary care residents of at least 20 percent,

at least 20 percent. Further, under the 3-year averaging rules, the

regulations do not mandate the hospital to maintain the proportion or

increase the number of residents in primary care. Finally, hospitals

participating in the voluntary plan will be subject to repayment of all

incentive funds if they subsequently increase the number of residents.

Hospitals that receive additional payments by downsizing residents

under the 3-year averaging rules are not subject to a similar refund

provision. We are providing the following hypothetical examples that

illustrate how hospitals could potentially be affected under the

voluntary residency reduction plan.

BILLING CODE 4120-01-P

[[Page 44852]]

[GRAPHIC] [TIFF OMITTED] TR18AU99.002

[[Page 44853]]

[GRAPHIC] [TIFF OMITTED] TR18AU99.003

BILLING CODE 4120-01-C

[[Page 44854]]

These examples are simplified but do illustrate the impact on

hospital revenues from various reduction options assuming fixed

Medicare per resident payment amounts under several reduction options.

The examples do not take into account any changes in IME payments,

updates to the per resident amounts, changes in Medicare utilization or

other factors that affect Medicare payment for direct and indirect GME.

However, generally IME payments are twice the amount of direct GME

payments for the average hospital. In each of these examples, the

hospital's payments under current law are based on a 3-year average of

the FTEs. The hospital's Medicare direct GME payments are equal to the

product of the average FTEs and the Medicare per resident payment

amount. The difference between the payments based on the number of

residents on June 30, 1997 and plan year payments are multiplied by the

hold-harmless percentage to determine incentive payments. The incentive

payments are added to the hospital's Medicare direct GME payments to

determine total payments.

In example 1, the hospital participates in the voluntary residency

reduction plan under the 20-percent option (this option would also

require an increase in the number of primary care residents by 20

percent which is not illustrated). The hospital achieves its residency

reduction under the plan by reducing 4 percent per year from the base

number of residents. The incentive payments are based on the difference

in payments using 95 percent of the count of residents as of June 30,

1997, and rate year payments using the 3-year average count of

residents. In example 1, the hospital does not receive an incentive

payment during the first 2 years of the plan because its average count

of FTEs is more than 95 percent of its number of residents as of June

30, 1997. The hospital receives incentive payments for the remaining 3

years of the voluntary plan and its total incentive payments are

$850,000. Its total direct GME payments over the 5 plan years are

$46.72 million. If the hospital increases residents above the level it

has at the end of the plan, the hospital will be required to refund

$850,000. Although the hospital could receive higher incentive payments

by making larger reductions in year 1 and year 2 of the plan, our

experience indicates that hospitals are actually planning smaller

reductions in the first 2 years of the plan because of prior

commitments made to residents. In fact, we believe this example may

actually present a larger resident reduction in the first 2 years of

the plan than hospitals are likely to make.

In example 2, all of the variables are the same as example 1 except

the hospital does not participate in the voluntary plan. Since the

hospital does not participate in the voluntary plan, it does not

receive incentive payments and its total payments are $850,000 less

over 5 years than the hospital in example 1. This hospital can

subsequently increase its residents to its FTE caps and will not be

liable for any refunds.

In example 3, all of the variables are the same as example 2 except

the hospital reduces its number of residents from the count as of June

30, 1997 by 19 percent. In this example, the hospital receives slightly

higher payments than the hospital in example 2 because it has more

residents over 5 years. Its payments are $816,500 lower than the

hospital that participated in the voluntary plan. Again, this hospital

can increase its residents to its FTE cap level without being liable

for refunds of incentive payments to Medicare.

In example 4, the hospital does not participate in the voluntary

plan and reduces its number of residents from the count on June 30,

1997 by 15 percent. In this example, the hospital actually receives

higher total payments than the hospital in any of the previous

examples, including the hospital participating in the voluntary

residency reduction plan because of Medicare revenues associated with a

higher count of residents.

We recognize that there are many factors that may induce a hospital

to participate in the voluntary residency reduction plan. Medicare

direct and indirect medical education revenues are only one factor in

deciding whether to participate. We urge hospitals to carefully

consider all factors before deciding whether to participate in the

voluntary plans. However, we believe Medicare incentive payments for

resident reductions made under this provision may not provide a strong

incentive to participate in the voluntary plan unless a hospital is

already planning permanent residency reductions of 20 to 25 percent

even in the absence of the voluntary residency reduction plan. Even if

the hospital is planning residency reductions of 20 to 25 percent, it

may be reluctant to participate in the plan because of the requirement

that the hospital refund all incentive funds if the hospital increases

its residents higher than the level permitted under its voluntary

residency reduction plan.

In summary, we do not believe many hospitals are likely to

participate in the voluntary residency reduction plans because the 3-

year average count provides similar incentives without mandating

reductions of 20 to 25 percent, non-receipt of incentive payments for

the first 5 percent of resident reduction, and full refund of all

incentive payments if a hospital ever increases its number of residents

in training. We believe that only hospitals that anticipate making

reductions of 20 to 25 percent over the next 5 years are likely to

consider participating.

C. Rural Hospital Impact

Section 1102(b) of the Social Security Act requires us to prepare a

regulatory impact analysis for any interim final rule with comment

period that may have a significant impact on the operations of a

substantial number of small rural hospitals. Such an analysis must

conform to the provisions of section 603 of the R.F.A. For purposes of

section 1102(b) of the Act, we define a small rural hospital as a

hospital that is located outside a Metropolitan Statistical Area and

has fewer than 50 beds.

We are not preparing a rural hospital impact statement since we

have determined, and certify, that this interim final rule with comment

period will not have a significant economic impact on a substantial

number of small entities or a significant impact on the operations of a

substantial number of small rural hospitals.

In accordance with the provisions of Executive Order 12866, this

interim final rule with comment period was reviewed by the Office of

Management and Budget.

We have reviewed this interim final rule with comment period under

the threshold criteria of Executive Order 12612. We have determined

that it does not significantly affect States' rights, roles, and

responsibilities.

List of Subjects in 42 CFR Part 413

Health facilities, Kidney diseases, Medicare, Puerto Rico,

Reporting and recordkeeping requirements.

42 CFR Part 413 is amended as set forth below:

[[Page 44855]]

PART 413--PRINCIPLES OF REASONABLE COST REIMBURSEMENT; PAYMENT FOR

END-STAGE RENAL DISEASE SERVICES; OPTIONAL PROSPECTIVELY DETERMINED

PAYMENT RATES FOR SKILLED NURSING FACILITIES

1. The authority citation for part 413 continues to read as

follows:

Authority: Secs. 1102, 1861(v)(1)(A), and 1871 of the Social

Security Act (42 U.S.C. 1302, 1395x(v)(1)(A), and 1395hh).

2. A new Sec. 413.88 is added to subpart F to read as follows:

Sec. 413.88 Incentive payments under plans for voluntary reduction in

number of medical residents.

(a) Statutory basis. This section implements section 1886(h)(6) of

the Act, which establishes a program under which incentive payments may

be made to qualifying entities that develop and implement approved

plans to voluntarily reduce the number of residents in medical

residency training.

(b) Qualifying entity defined. ``Qualifying entity'' means:

(1) An individual hospital that is operating one or more approved

medical residency training programs as defined in Sec. 413.86(b) of

this chapter; or

(2) Two or more hospitals that are operating approved medical

residency training programs as defined in Sec. 413.86(b) of this

chapter and that submit a residency reduction application as a single

entity.

(c) Conditions for payments. (1) A qualifying entity must submit an

application for a voluntary residency reduction plan that meets the

requirements and conditions of this section in order to receive

incentive payments for reducing the number of residents in its medical

residency training programs.

(2) The incentive payments will be determined as specified under

paragraph (g) of this section.

(d) Requirements for voluntary plans. In order for a qualifying

entity to receive incentive payments under a voluntary residency

reduction plan, the qualifying entity must submit an application that

contains the following information, documents, and agreements--

(1) A description of the operation of a plan for reducing the full-

time equivalent (FTE) residents in its approved medical residency

training programs, consistent with the percentage reduction

requirements specified in paragraphs (g)(2) and (g)(3) of this section;

(2) An election of the period of residency training years during

which the reductions will occur. The reductions must be fully

implemented by not later than the fifth residency training year in

which the plan is effective;

(3) FTE counts for the base number of residents, as defined in

paragraph (g)(1) of this section, with a breakdown of the number of

primary care residents compared to the total number of residents; and

the direct and indirect FTE counts of the entity on June 30, 1997. For

joint applicants, these counts must be provided individually and

collectively;

(4) Data on the annual and cumulative targets for reducing the

number of FTE residents and the ratios of the number of primary care

residents to the total number of residents for the base year and for

each year in the 5-year reduction period. For joint applicants, these

data must be provided individually and collectively;

(5) An agreement to not reduce the proportion of its primary care

residents to its total number of residents below the proportion that

exists in the base year, as specified in paragraph (g)(1) of this

section;

(6) An agreement to comply with data submission requirements deemed

necessary by HCFA to make annual incentive payments during the 5-year

residency reduction plan, and to fully cooperate with additional audit

and monitoring activities deemed necessary by HCFA;

(7) For a qualifying entity that is a member of an affiliated group

as defined in Sec. 413.86(b), a statement that all members of the group

agree to an aggregate FTE cap that reflects--

(i) The reduction in the qualifying entity's FTE count as specified

in the plan during each year of the plan; and

(ii) The 1996 FTE count of the other hospital(s) in the affiliated

group.

(8) A statement indicating voluntary participation in the plan

under the terms of this section, signed by each hospital that is part

of the applying entity.

(e) Deadline for applications. A qualifying entity must submit an

application that meets the requirements of paragraph (d) of this

section at least one day prior to the first day of the period to which

the plan would be effective but no later than November 1, 1999. The

application must be submitted to the fiscal intermediary, with a copy

to HCFA.

(f) Effective dates of plans. Residency reduction plans that are

submitted to the fiscal intermediary on or after September 17, 1999 but

on or before November 1, 1999, may be effective for portions of cost

reporting periods beginning no earlier than the day after the date of

the application.

(g) Residency reduction requirements--(1) Base number of residents

defined. (i) ``Base number of residents'' means the lesser of--

(A) The number of FTE residents in all approved medical residency

training programs of the qualifying entity (before application of

weighting factors under Sec. 413.86(g)) for the most recent residency

training year ending June 30, 1996; or

(B) The number of FTE residents in all approved medical residency

training programs of the qualifying entity (before application of

weighting factors under Sec. 413.86(g)) for any subsequent residency

training year that ends before the date the entity submits its plan to

the fiscal intermediary and HCFA.

(ii) The residency training year used to determine the base number

of residents is the ``base year'' for determining reduction

requirements.

(iii) The qualifying entity's base number of residents may not be

adjusted to reflect adjustments that may otherwise be made to the

entity's FTE caps for new medical residency training programs.

(2) Qualifying entity consisting of individual hospital. The base

number of FTE residents in all the approved medical residency training

programs operated by or through a qualifying entity consisting of an

individual hospital must be reduced as follows:

(i) If the base number of residents exceeds 750, residents, by at

least 20 percent of the base number.

(ii) If the base number of residents exceeds 600 but is less than

or equal to 750 residents--

(A) By 150 residents; or

(B) By 20 percent, if the qualifying entity increases the number of

primary care residents included in the base number by at least 20

percent.

(iii) If the base number of residents is 600 or less residents--

(A) By 25 percent; or

(B) By 20 percent, if the qualifying entity increases the number of

primary care residents included in the base number of residents by at

least 20 percent.

(3) Qualifying entity consisting of two or more hospitals. The base

number of FTE residents in the aggregate for all the approved medical

residency training programs operated by or through a qualifying entity

consisting of two or more hospitals must be reduced--

(i) By 25 percent; or

(ii) By 20 percent, if the qualifying entity increases the number

of primary care residents included in the base number of residents by

at least 20 percent.

[[Page 44856]]

(4) Treatment of rotating residents. A qualifying entity will not

be eligible for incentive payments for a reduction in the base number

of residents if the reduction is a result of the entity rotating

residents to another hospital that is not a part of its voluntary

residency reduction plan.

(5) Updates to annual and cumulative targets.--(i) Except as

provided in paragraph (g)(5)(ii) of this section an entity with an

approved voluntary residency reduction plan may not change the annual

and cumulative reduction targets that are specified in its plan in

accordance with paragraphs (g)(2) and (g)(3) of this section.

(ii) An entity may update annual reduction targets specified in its

plan only if--

(A) It has failed to meet a specified annual target for a plan year

in the 5-year period; and

(B) It wishes to adjust future annual targets for the remaining

years of the plan in order to comply with its cumulative target.

(iii) An updated plan allowed under paragraph (g)(5)(ii) of this

section must be submitted prior to the beginning of each July 1 medical

residency training year during the plan years.

(h) Computation of incentive payment amount. (1) Incentive payments

to qualifying entities that meets the requirements and conditions of

paragraphs (d) and (g) of this section will be computed as follows:

(i) Step 1. Determine the amount (if any) by which the payment

amount that would have been made under Sec. 413.86(d) if there had been

a 5-percent reduction in the number of FTE residents in the approved

medical education training programs of the hospital as of June 30,

1997, exceeds the amount of payment that would have been made under

Sec. 413.86(d) in each year under the voluntary residency reduction

plan, taking into account the reduction in the number of FTE residents

under the plan.

(ii) Step 2. Determine the amount (if any) by which the payment

amount that would have been made under Sec. 412.105 of this chapter if

there had been a 5-percent reduction in the number of FTE residents in

the approved medical education training programs of the hospital as of

June 30, 1997, exceeds the payment amount made under Sec. 412.105 of

this chapter in each year under the voluntary residency reduction plan,

taking into account the actual reduction in the number of FTE

residents.

(iii) Step 3. Determine the amount (if any) by which the payment

amount that would have been made under Sec. 412.322 of this chapter if

there had been a 5-percent reduction in the number of FTE residents in

the approved medical education training programs of the hospital as of

June 30, 1997, exceeds the payment amount made under Sec. 412.322 of

this chapter in each year under the voluntary residency reduction plan,

taking into account the actual reduction in the number of FTE

residents.

(iv) Step 4. Multiply the sum of the amounts determined under

paragraph (h)(i), (ii), and (iii) of this section by the applicable

hold harmless percentages specified in paragraph (i) of this section.

(2) The determination of the amounts under paragraph (h)(1) of this

section for any year is based on the applicable Medicare statutory

provisions in effect on the application deadline date for the voluntary

reduction plan specified under paragraph (e) of this section.

(i) Applicable hold-harmless percentage. The applicable hold-

harmless percentages for each year in which the residency reduction

plan is in effect are as follows:

(1) 100 percent for the first and second residency training years;

(2) 75 percent for the third year;

(3) 50 percent for the fourth year; and

(4) 25 percent for the fifth year.

(j) Payments to qualifying entities. Annual incentive payments

through cost reports will be made to each hospital that is or is part

of a qualifying entity over the 5-year reduction period if the

qualifying entity meets the annual and cumulative reduction targets

specified in its voluntary reduction plan.

(k) Penalty for noncompliance--(1) Nonpayment. No incentive payment

may be made to a qualifying entity for a residency training year if the

qualifying entity has failed to reduce the number of FTE residents

according to its voluntary residency reduction plan.

(2) Repayment of incentive amounts. The qualifying entity is liable

for repayment of the total amount of incentive payments it has received

if the qualifying entity--

(i) Fails to reduce the base number of residents by the percentages

specified in paragraphs (g)(2) and (g)(3) of this section by the end of

the fifth residency training year; or

(ii) Increases the number of FTE residents above the number of

residents permitted under the voluntary residency reduction plan as of

the completion date of the plan.

(l) Postplan determination of FTE caps for qualifying entities--(1)

No penalty imposed. Upon completion of a voluntary residency reduction

plan, if no penalty is imposed, the qualifying entity's 1996 FTE count

is permanently adjusted to equal the unweighted FTE count used for

direct GME payments for the last residency training year in which a

qualifying entity participates.

(2) Penalty imposed. Upon completion of the voluntary residency

reduction plan--

(i) During repayment period. If a penalty is imposed under

paragraph (k)(2) of this section, during the period of repayment, the

qualifying entity's FTE count is as specified in paragraph (l)(1) of

this section.

(ii) After repayment period. Once the penalty repayment is

completed, the qualifying entity's FTE reverts back to its original

1996 FTE cap.

(Catalog of Federal Domestic Assistance Program No. 93.773,

Medicare--Hospital Insurance)

Dated: July 7, 1999.

Nancy-Ann Min DeParle,

Administrator, Health Care Financing Administration.

Dated: July 27, 1999.

Donna E. Shalala,

Secretary.

[FR Doc. 99-21322 Filed 8-17-99; 8:45 am]

BILLING CODE 4120-01-P