Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems for Acute Care Hospitals and Fiscal Year 2010 Rates; and Changes to the Long-Term Care Hospital Prospective Payment System and Rate Years 2010 and 2009 Rates

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 412, 413, 415, 485, and 489

[CMS-1406-F and IFC; CMS-1493-F; CMS-1337-F]

RIN 0938-AP33; RIN 0938-AP39; RIN 0938-AP76

Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems for Acute Care Hospitals and Fiscal Year 2010 Rates; and Changes to the Long-Term Care Hospital Prospective Payment System and Rate Years 2010 and 2009 Rates

AGENCY:

Centers for Medicare and Medicaid Services (CMS), HHS.

ACTION:

Final rules and interim final rule with comment period.

SUMMARY:

We are revising the Medicare hospital inpatient prospective payment systems (IPPS) for operating and capital-related costs of acute care hospitals to implement changes arising from our continuing experience with these systems, and to implement certain provisions made by the TMA, Abstinence Education, and QI Program Extension Act of 2007, the Medicare Improvements for Patients and Providers Act of 2008, and the American Recovery and Reinvestment Act of 2009. In addition, in the Addendum to this final rule, we describe the changes to the amounts and factors used to determine the rates for Medicare acute care hospital inpatient services for operating costs and capital-related costs. These changes are applicable to discharges occurring on or after October 1, 2009. We also are setting forth the update to the rate-of-increase limits for certain hospitals excluded from the IPPS that are paid on a reasonable cost basis subject to these limits. The updated rate-of-increase limits are effective for cost reporting periods beginning on or after October 1, 2009.

Second, we are updating the payment policy and the annual payment rates for the Medicare prospective payment system (PPS) for inpatient hospital services provided by long-term care hospitals (LTCHs) for rate year (RY) 2010, including responding to public comments received on a June 3, 2009 supplemental proposed rule relating to the proposed RY 2010 Medicare Severity Long-Term Care Diagnosis-Related Groups (MS-LTC-DRG) relative weights and the proposed RY 2010 high-cost outlier (HCO) fixed-loss amount. In the Addendum to this final rule, we also set forth the changes to the payment rates, factors, and other payment rate policies under the LTCH PPS for RY 2010. These changes are applicable to discharges occurring on or after October 1, 2009. In addition, we are responding to public comments received on and finalizing a June 3, 2009 interim final rule with comment period that revised the MS-LTC-DRG relative weights for payments under the LTCH PPS for the remainder of FY 2009 (that is, from June 3, 2009, through September 30, 2009).

Third, in this final rule, we are responding to public comments we received on, and finalizing, two May 2008 interim final rules with comment period that implemented certain provisions of section 114 of the Medicare, Medicaid, and SCHIP Extension Act of 2007 (MMSEA, Pub. L. 110-173) relating to payments to LTCHs and LTCH satellite facilities, the establishment of LTCHs and LTCH satellite facilities, and increases in beds in existing LTCHs and LTCH satellite facilities under the LTCH PPS.

Fourth, through an interim final rule with comment period as part of this document, we are implementing those provisions of the ARRA that amended certain provisions of section 114 of the MMSEA relating to payments to LTCHs and LTCH satellite facilities and increases in beds in existing LTCHs and LTCH satellite facilities under the LTCH PPS.

DATES:

Effective Dates:

These final rules are effective on October 1, 2009, with the following exceptions:

The provisions of §§ 412.534(c) through (e) and (h) and 412.536(a)(2) are effective for cost reporting periods beginning on or after July 1, 2007, or October 1, 2007, as applicable. In accordance with sections 1871(e)(1)(A)(i) and (ii) of the Social Security Act, the Secretary has determined that retroactive application of the provisions of §§ 412.534(c) through (e) and (h) and 412.5536(a)(2) is necessary to comply with the statute and that failure to apply the changes retroactively would be contrary to public interest.

Comment Period:

To be assured consideration, comments on the interim final rule with comment period (CMS-1406-IFC) that appears as section XI. of the preamble of this document must be received at one of the addresses provided below, no later than 5 p.m. E.S.T. on October 26, 2009.

ADDRESSES:

When commenting on issues presented in the interim final rule with comment period, please refer to file code CMS-1406-IFC. Because of staff and resource limitations, we cannot accept comments by facsimile (FAX) transmission.

You may submit comments in one of four ways (please choose only one of the ways listed):

1.

Electronically.

You may submit electronic comments on this regulation at

http://www.regulations.gov.

Follow the instructions for “Comment or Submission” and enter the file code CMS-1406-IFC to submit comments on this interim final rule.

2.

By regular mail.

You may mail written comments (one original and two copies) to the following address only: Centers for Medicare & Medicaid Services, Department of Health and Human Services,

Attention:

CMS-1406-IFC, P.O. Box 8011, Baltimore, MD 21244-1850.

Please allow sufficient time for mailed comments to be received before the close of the comment period.

3.

By express or overnight mail.

You may send written comments (one original and two copies) to the following address only: Centers for Medicare & Medicaid Services, Department of Health and Human Services,

Attention:

CMS-1406-IFC, Mail Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850.

4.

By hand or courier.

If you prefer, you may deliver (by hand or courier) your written comments (one original and two copies) before the close of the comment period to either of the following addresses: a. Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., Washington, DC 20201.

(Because access to the interior of the HHH Building is not readily available to persons without Federal Government identification, commenters are encouraged to leave their comments in the CMS drop slots located in the main lobby of the building. A stamp-in clock is available for persons wishing to retain a proof of filing by stamping in and retaining an extra copy of the comments being filed.) b. 7500 Security Boulevard, Baltimore, MD 21244-1850.

If you intend to deliver your comments to the Baltimore address, please call telephone number (410) 786-7195 in advance to schedule your arrival with one of our staff members.

Comments mailed to the addresses indicated as appropriate for hand or courier delivery may be delayed and received after the comment period.

For information on viewing public comments, see the beginning of the

SUPPLEMENTARY INFORMATION

section.

FOR FURTHER INFORMATION, CONTACT:

Tzvi Hefter, (410) 786-4487, and Ing-Jye Cheng, (410) 786-4548, Operating Prospective Payment, MS-DRGs, Wage Index, New Medical Service and Technology Add-On Payments, Hospital Geographic Reclassifications, Capital Prospective Payment, Excluded Hospitals, Direct and Indirect Graduate Medical Education Payments, Disproportionate Share Hospital (DSH), Critical Access Hospital (CAH), EMTALA Hospital Emergency Services, and Hospital-within-Hospital Issues.

Michele Hudson, (410) 786-4487, and Judith Richter, (410) 786-2590, Long-Term Care Hospital Prospective Payment System and MS-LTC-DRG Relative Weights for FYs 2009 and 2010 Issues.

Siddhartha Mazumdar, (410) 786-6673, Rural Community Hospital Demonstration Program Issues.

James Poyer, (410) 786-2261, Quality Data for Annual Payment Update Issues.

Lisa Grabert, (410) 786-6827, Hospital-Acquired Conditions.

SUPPLEMENTARY INFORMATION:

Inspection of Public Comments:

All comments received before the close of the comment period are available for viewing by the public, including any personally identifiable or confidential business information that is included in a comment. We post all comments received before the close of the comment period on the following Web site as soon as possible after they have been received:

http://www.regulations.gov.

Follow the search instructions at that Web site to view public comments.

Comments received timely will also be available for public inspection, generally beginning approximately 3 weeks after publication of a document, at the headquarters of the Centers for Medicare & Medicaid Services, 7500 Security Boulevard, Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 a.m. to 4 p.m. To schedule an appointment to view public comments, phone 1-800-743-3951.

Electronic Access

This

Federal Register

document is also available from the

Federal Register

online database through

GPO Access,

a service of the U.S. Government Printing Office. Free public access is available on a Wide Area Information Server (WAIS) through the Internet and via asynchronous dial-in. Internet users can access the database by using the World Wide Web, (the Superintendent of Documents' home Web page address is

http://www.gpoaccess.gov/

), by using local WAIS client software, or by telnet to

swais.access.gpo.gov,

then login as guest (no password required). Dial-in users should use communications software and modem to call (202) 512-1661; type swais, then login as guest (no password required).

Acronyms

3M 3M Health Information System

AAHKS American Association of Hip and Knee Surgeons

AAMC Association of American Medical Colleges

ACGME Accreditation Council for Graduate Medical Education

AHA American Hospital Association

AHIC American Health Information Community

AHIMA American Health Information Management Association

AHRQ Agency for Healthcare Research and Quality

ALOS Average length of stay

ALTHA Acute Long Term Hospital Association

AMA American Medical Association

AMGA American Medical Group Association

AOA American Osteopathic Association

APR DRG All Patient Refined Diagnosis Related Group System

ARRA American Recovery and Reinvestment Act of 2009, Public Law 111-5

ASC Ambulatory surgical center

ASCA Administrative Simplification Compliance Act of 2002, Public Law 107-105

ASITN American Society of Interventional and Therapeutic Neuroradiology

BBA Balanced Budget Act of 1997, Public Law 105-33

BBRA Medicare, Medicaid, and SCHIP [State Children's Health Insurance Program] Balanced Budget Refinement Act of 1999, Public Law 106-113

BIPA Medicare, Medicaid, and SCHIP [State Children's Health Insurance Program] Benefits Improvement and Protection Act of 2000, Public Law 106-554

BLS Bureau of Labor Statistics

CAH Critical access hospital

CARE [Medicare] Continuity Assessment Record & Evaluation [Instrument]

CART CMS Abstraction & Reporting Tool

CBSAs Core-based statistical areas

CC Complication or comorbidity

CCR Cost-to-charge ratio

CDAC [Medicare] Clinical Data Abstraction Center

CDAD

Clostridium difficile

-associated disease

CIPI Capital input price index

CMI Case-mix index

CMS Centers for Medicare & Medicaid Services

CMSA Consolidated Metropolitan Statistical Area

COBRA Consolidated Omnibus Reconciliation Act of 1985, Public Law 99-272

COLA Cost-of-living adjustment

CoP [Hospital] condition of participation

CPI Consumer price index

CY Calendar year

DPP Disproportionate patient percentage

DRA Deficit Reduction Act of 2005, Public Law 109-171

DRG Diagnosis-related group

DSH Disproportionate share hospital

ECI Employment cost index

EMR Electronic medical record

EMTALA Emergency Medical Treatment and Labor Act of 1986, Public Law 99-272

FAH Federation of Hospitals

FDA Food and Drug Administration

FFY Federal fiscal year

FHA Federal Health Architecture

FIPS Federal information processing standards

FQHC Federally qualified health center

FTE Full-time equivalent

FY Fiscal year

GAAP Generally Accepted Accounting Principles

GAF Geographic Adjustment Factor

GME Graduate medical education

HACs Hospital-acquired conditions

HCAHPS Hospital Consumer Assessment of Healthcare Providers and Systems

HCFA Health Care Financing Administration

HCO High-cost outlier

HCRIS Hospital Cost Report Information System

HHA Home health agency

HHS Department of Health and Human Services

HIPAA Health Insurance Portability and Accountability Act of 1996, Public Law 104-191

HIPC Health Information Policy Council

HIS Health information system

HIT Health information technology

HMO Health maintenance organization

HPMP Hospital Payment Monitoring Program

HSA Health savings account

HSCRC [Maryland] Health Services Cost Review Commission

HSRV Hospital-specific relative value

HSRVcc Hospital-specific relative value cost center

HQA Hospital Quality Alliance

HQI Hospital Quality Initiative

HwH Hospital-within-a-hospital

ICD-9-CM International Classification of Diseases, Ninth Revision, Clinical Modification

ICD-10-CM International Classification of Diseases, Tenth Revision, Clinical Modification

ICD-10-PCS International Classification of Diseases, Tenth Revision, Procedure Coding System

ICR Information collection requirement

IHS Indian Health Service

IME Indirect medical education

I-O Input-Output

IOM Institute of Medicine

IPF Inpatient psychiatric facility

IPPS [Acute care hospital] inpatient prospective payment system

IRF Inpatient rehabilitation facility

LAMCs Large area metropolitan counties

LOS Length of stay

LTC-DRG Long-term care diagnosis-related group

LTCH Long-term care hospital

MA Medicare Advantage

MAC Medicare Administrative Contractor

MCC Major complication or comorbidity

MCE Medicare Code Editor

MCO Managed care organization

MCV Major cardiovascular condition

MDC Major diagnostic category

MDH Medicare-dependent, small rural hospital

MedPAC Medicare Payment Advisory Commission

MedPAR Medicare Provider Analysis and Review File

MEI Medicare Economic Index

MGCRB Medicare Geographic Classification Review Board

MIEA-TRHCA Medicare Improvements and Extension Act, Division B of the Tax Relief and Health Care Act of 2006, Public Law 109-432

MIPPA Medicare Improvements for Patients and Providers Act of 2008, Public Law 110-275

MMA Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Public Law 108-173

MMSEA Medicare, Medicaid, and SCHIP Extension Act of 2007, Public Law 110-173

MPN Medicare provider number

MRHFP Medicare Rural Hospital Flexibility Program

MRSA Methicillin-resistant

Staphylococcus aureus

MSA Metropolitan Statistical Area

MS-DRG Medicare severity diagnosis-related group

MS-LTC-DRG Medicare severity long-term care diagnosis-related group

NAICS North American Industrial Classification System

NALTH National Association of Long Term Hospitals

NCD National coverage determination

NCHS National Center for Health Statistics

NCQA National Committee for Quality Assurance

NCVHS National Committee on Vital and Health Statistics

NECMA New England County Metropolitan Areas

NQF National Quality Forum

NTIS National Technical Information Service

NTTAA National Technology Transfer and Advancement Act of 1991 (Pub. L. 104-113)

NVHRI National Voluntary Hospital Reporting Initiative

OACT [CMS'] Office of the Actuary

OBRA 86 Omnibus Budget Reconciliation Act of 1996, Public Law 99-509

OES Occupational employment statistics

OIG Office of the Inspector General

OMB Executive Office of Management and Budget

OPM U.S. Office of Personnel Management

O.R. Operating room

OSCAR Online Survey Certification and Reporting [System]

PIP Periodic interim payment

PLI Professional liability insurance

PMSAs Primary metropolitan statistical areas

POA Present on admission

PPI Producer price index

PPS Prospective payment system

PRM Provider Reimbursement Manual

ProPAC Prospective Payment Assessment Commission

PRRB Provider Reimbursement Review Board

PSF Provider-Specific File

PS&R Provider Statistical and Reimbursement (System)

QIG Quality Improvement Group, CMS

QIO Quality Improvement Organization

RCE Reasonable compensation equivalent

RHC Rural health clinic

RHQDAPU Reporting hospital quality data for annual payment update

RNHCI Religious nonmedical health care institution

RPL Rehabilitation psychiatric long-term care (hospital)

RRC Rural referral center

RTI Research Triangle Institute, International

RUCAs Rural-urban commuting area codes

RY Rate year

SAF Standard Analytic File

SCH Sole community hospital

SFY State fiscal year

SIC Standard Industrial Classification

SNF Skilled nursing facility

SOCs Standard occupational classifications

SOM State Operations Manual

SSO Short-stay outlier

TEFRA Tax Equity and Fiscal Responsibility Act of 1982, Public Law 97-248

TEP Technical expert panel

TMA TMA [Transitional Medical Assistance], Abstinence Education, and QI [Qualifying Individuals] Programs Extension Act of 2007, Public Law 110-90

TJA Total joint arthroplasty

UHDDS Uniform hospital discharge data set

Table of Contents

I. Background

A. Summary

1. Acute Care Hospital Inpatient Prospective Payment System (IPPS)

2. Hospitals and Hospital Units Excluded From the IPPS

3. Long-Term Care Hospital Prospective Payment System (LTCH PPS)

4. Critical Access Hospitals (CAHs)

5. Payments for Graduate Medical Education (GME)

B. Provisions of the Medicare Improvements for Patients and Providers Act of 2008 (MIPPA)

C. Provisions of the American Recovery and Reinvestment Act of 2009 (ARRA)

D. Issuance of a Notice of Proposed Rulemaking

1. Proposed Changes to MS-DRG Classifications and Recalibrations of Relative Weights

2. Proposed Changes to the Hospital Wage Index for Acute Care Hospitals

3. Proposed Rebasing and Revision of the Hospital Market Baskets for Acute Care Hospitals

4. Other Decisions and Proposed Changes to the IPPS for Operating Costs and GME Costs

5. FY 2010 Policy Governing the IPPS for Capital-Related Costs

6. Proposed Changes to the Payment Rates for Certain Excluded Hospitals: Rate-of-Increase Percentages

7. Proposed Changes to the LTCH PPS

8. Determining Proposed Prospective Payment Operating and Capital Rates and Rate-of-Increase Limits for Acute Care Hospitals

9. Determining Proposed Prospective Payments Rates for LTCHs

10. Impact Analysis

11. Recommendation of Update Factors for Operating Cost Rates of Payment for Hospital Inpatient Services

12. Discussion of Medicare Payment Advisory Commission Recommendations

E. Finalization of an Interim Final Rule With Comment Period That Revised the MS-LTC-DRG Relative Weights for FY 2009 (for June 3, 2009 Through September 30, 2009)

F. Finalization of Two LTCH PPS Interim Final Rules With Comment Period Issued in May 2008

G. Interim Final Rule With Comment Period That Implements Certain Provisions of the ARRA Relating to Payments to LTCHs and LTCH Satellite Facilities

II. Changes to Medicare Severity Diagnosis-Related Group (MS-DRG) Classifications and Relative Weights

A. Background

B. MS-DRG Reclassifications

1. General

2. Yearly Review for Making MS-DRG Changes

C. Adoption of the MS-DRGs in FY 2008

D. FY 2010 MS-DRG Documentation and Coding Adjustment, Including the Applicability to the Hospital-Specific Rates and the Puerto Rico-Specific Standardized Amount

1. Background on the Prospective MS-DRG Documentation and Coding Adjustments for FY 2008 and FY 2009 Authorized by Public Law 110-90

2. Prospective Adjustment to the Average Standardized Amounts Required by Section 7(b)(1)(A) of Public Law 110-90

3. Recoupment or Repayment Adjustments in FYs 2010 Through 2012 Required by Public Law 110-90

4. Retrospective Evaluation of FY 2008 Claims Data

5. Adjustments for FY 2010 and Subsequent Years Authorized by Section 7(b)(1)(A) of Public Law 110-90 and Section 1886(d)(3)(vi) of the Act

6. Additional Adjustment for FY 2010 Authorized by Section 7(b)(1)(B) of Public Law 110-90

7. Background on the Application of the Documentation and Coding Adjustment to the Hospital-Specific Rates

8. Documentation and Coding Adjustment to the Hospital-Specific Rates for FY 2010 and Subsequent Years

9. Background on the Application of the Documentation and Coding Adjustment to the Puerto Rico-Specific Standardized Amount

10. Documentation and Coding Adjustment to the Puerto Rico-Specific Standardized Amount

E. Refinement of the MS-DRG Relative Weight Calculation

1. Background

a. Summary of the RTI Study of Charge Compression and CCR Refinement

b. Summary of the Rand Corporation Study of Alternative Relative Weight Methodologies

2. Summary of FY 2009 Changes and Discussion for FY 2010

3. Timeline for Revising the Medicare Cost Report

F. Preventable Hospital-Acquired Conditions (HACs), Including Infections

1. Statutory Authority

2. HAC Selection Process

3. Collaborative Process

4. Selected HAC Categories

5. Public Input Regarding Selected and Potential Candidate HACs

6. POA Indicator Reporting

7. Additional Considerations Addressing the HAC and POA Payment Provision

G. Changes to Specific MS-DRG Classifications

1. MDC 5 (Diseases and Disorders of the Circulatory System): Intraoperative Fluorescence Vascular Angiography (IFVA)

2. MDC 8 (Diseases and Disorders of the Musculoskeletal System and Connective Tissue): Infected Hip and Knee Replacements

3. Medicare Code Editor (MCE) Changes

a. Diagnoses Allowed for Males Only Edit

b. Manifestation Codes as Principal Diagnosis Edit

c. Invalid Diagnosis or Procedure Code

d. Unacceptable Principal Diagnosis

e. Creation of New Edit Titled “Wrong Procedure Performed”

f. Procedures Allowed for Females Only Edit

4. Surgical Hierarchies

5. Complication or Comorbidity (CC) Exclusions List

a. Background

b. CC Exclusions List for FY 2010

6. Review of Procedure Codes in MS-DRGs 981 Through 983, 984 Through 986, and 987 Through 989

a. Moving Procedure Codes From MS-DRGs 981 Through 983 or MS-DRGs 987 Through 989 to MDCs

b. Reassignment of Procedures Among MS-DRGs 981 Through 983, 984 Through 986, and 987 Through 989

c. Adding Diagnosis or Procedure Codes to MDCs

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

8. Other Issues Not Addressed in the Proposed Rule

a. Administration of Tissue Plasminogen Activator (tPA) (rtPA)

b. Coronary Artery Bypass Graft (CABG) With Intraoperative Angiography

c. Insertion of Gastrointestinal Stent

H. Recalibration of MS-DRG Weights

I. Add-On Payments for New Services and Technologies

1. Background

2. Public Input Before Publication of a Notice of Proposed Rulemaking on Add-On Payments

3. FY 2010 Status of Technologies Approved for FY 2009 Add-On Payments

4. FY 2010 Applications for New Technology Add-On Payments

a. The AutoLITT

TM

System

b. CLOLAR® (clofarabine) Injection

c. LipiScan

TM

Coronary Imaging System

d. Spiration® IBV® Valve System

e. TherOx Downstream® System

5. Technical Correction

III. Changes to the Hospital Wage Index for Acute Care Hospitals

A. Background

B. Requirements of Section 106 of the MIEA-TRHCA

1. Wage Index Study Required Under the MIEA-TRHCA

a. Legislative Requirement

b. Interim and Final Reports on Results of Acumen's Study

2. FY 2009 Policy Changes in Response to Requirements Under Section 106(b) of the MIEA-TRHCA

a. Reclassification Average Hourly Wage Comparison Criteria

b. Within-State Budget Neutrality Adjustment for the Rural and Imputed Floors

C. Core-Based Statistical Areas for the Hospital Wage Index

D. Occupational Mix Adjustment to the FY 2010 Wage Index

1. Development of Data for the FY 2010 Occupational Mix Adjustment Based on the 2007-2008 Occupational Mix Survey

2. Calculation of the Occupational Mix Adjustment for FY 2010

E. Worksheet S-3 Wage Data for the FY 2010 Wage Index

1. Included Categories of Costs

2. Excluded Categories of Costs

3. Use of Wage Index Data by Providers Other Than Acute Care Hospitals Under the IPPS

F. Verification of Worksheet S-3 Wage Data

G. Method for Computing the FY 2010 Unadjusted Wage Index

H. Analysis and Implementation of the Occupational Mix Adjustment and the FY 2010 Occupational Mix Adjusted Wage Index

I. Revisions to the Wage Index Based on Hospital Redesignations

1. General

2. Effects of Reclassification/Redesignation

3. FY 2010 MGCRB Reclassifications

4. Redesignations of Hospitals Under Section 1886(d)(8)(B) of the Act

5. Reclassifications Under Section 1886(d)(8)(B) of the Act

6. Reclassifications Under Section 508 of Public Law 108-173

J. FY 2010 Wage Index Adjustment Based on Commuting Patterns of Hospital Employees

K. Process for Requests for Wage Index Data Corrections

IV. Rebasing and Revision of the Hospital Market Baskets for Acute Care Hospitals

A. Background

B. Rebasing and Revising the IPPS Market Basket

1. Development of Cost Categories and Weights

a. Medicare Cost Reports

b. Other Data Sources

2. Final Cost Category Computation

3. Selection of Price Proxies

a. Wages and Salaries

b. Employment Benefits

c. Fuel, Oil, and Gasoline

d. Electricity

e. Water and Sewage

f. Professional Liability Insurance

g. Pharmaceuticals

h. Food: Direct Purchase

i. Food: Contract Services

j. Chemicals

k. Blood and Blood Products

l. Medical Instruments

m. Photographic Supplies

n. Rubber and Plastics

o. Paper and Printing Products

p. Apparel

q. Machinery and Equipment

r. Miscellaneous Products

s. Professional Fees: Labor-Related

t. Administrative and Business Support Services

u. All Other: Labor-Related Services

v. Professional Fees: Nonlabor-Related

w. Financial Services

x. Telephone Services

y. Postage

z. All Other: Nonlabor-Related Services

4. Labor-Related Share

C. Separate Market Basket for Certain Hospitals Presently Excluded From the IPPS

D. Rebasing and Revising the Capital Input Price Index (CIPI)

V. Other Decisions and Changes to the IPPS for Operating Costs and GME Costs

A. Reporting of Hospital Quality Data for Annual Hospital Payment Update

1. Background

a. Overview

b. Hospital Quality Data Reporting Under Section 501(b) of Public Law 108-173

c. Hospital Quality Data Reporting Under Section 5001(a) of Public Law 109-171

2. Retirement of RHQDAPU Program Measures

3. Quality Measures for the FY 2011 Payment Determination and Subsequent Years

a. Considerations in Expanding and Updating Quality Measures Under the RHQDAPU Program

b. RHQDAPU Program Quality Measures for the FY 2011 Payment Determination

4. Possible New Quality Measures for the FY 2012 Payment Determination and Subsequent Years

5. Form, Manner, and Timing of Quality Data Submission

a. RHQDAPU Program Procedures for the FY 2011 Payment Determination

b. RHQDAPU Program Disaster Extensions and Waivers

c. HACHPS Requirements for the FY 2011 Payment Determination

6. Chart Validation Requirements

a. Chart Validation Requirements and Methods for the FY 2011 Payment Determination

b. Chart Validation Requirements and Methods for the FY 2012 Payment Determination and Subsequent Years

c. Possible Supplements to the Chart Validation Process for the FY 2013 Payment Determination and Subsequent Years

7. Data Accuracy and Completeness Acknowledgement Requirements for the FY 2011 Payment Determination and Subsequent Years

8. Public Display Requirements for the FY 2011 Payment Determination and Subsequent Years

9. Reconsideration and Appeal Procedures for the FY 2010 Payment Determination

10. RHQDAPU Program Withdrawal Deadlines

11. Electronic Health Records

a. Background

b. EHR Testing of Quality Measures Submission

c. HITECH Act EHR Provisions

B. Medicare-Dependent, Small Rural Hospitals (MDHs): Budget Neutrality Adjustment Factors for FY 2002-Based Hospital-Specific Rate

1. Background

2. FY 2002-Based Hospital-Specific Rate

C. Rural Referral Centers (RRCs)

1. Case-Mix Index

2. Discharges

D. Indirect Medical Education (IME) Adjustment

1. Background

2. IME Adjustment Factor for FY 2010

3. IME-Related Changes in Other Sections of this Final Rule

E. Payment Adjustment for Medicare Disproportionate Share Hospitals (DSHs)

1. Background

2. Policy Change Relating to the Inclusion of Labor and Delivery Patient Days in the Medicare DSH Calculation

a. Background

b. Proposed and Final Policy Change

3. Policy Change Relating to Calculation of Inpatient Days in the Medicaid Fraction in the Medicare DSH Calculation

a. Background

b. Proposed and Final Policy Change

4. Policy Change Relating to the Exclusion of Observation Beds and Patient Days from the Medicare DSH Calculation

a. Background

b. Proposed and Final Policy Change

5. Public Comments Received Out of the Scope of the Proposed Rule

F. Technical Correction to Regulations on Payments for Anesthesia Services Furnished by Hospital or CAH Employed Nonphysician Anesthetists or Obtained Under Arrangements

G. Payments for Direct Graduate Medical Education (GME) Costs

1. Background

2. Clarification of Definition of New Medical Residency Training Program

3. Participation of New Teaching Hospitals in Medicare GME Affiliated Groups

4. Technical Corrections to Regulations

H. Hospital Emergency Services Under EMTALA

1. Background

2. Changes Relating to Applicability of Sanctions Under EMTALA

I. Rural Community Hospital Demonstration Program

J. Technical Correction to Regulations Relating to Calculation of the Federal Rate Under the IPPS

VI. Changes to the IPPS for Capital-Related Costs

A. Overview

B. Exception Payments

C. New Hospitals

D. Hospitals Located in Puerto Rico

E. Proposed and Final Changes

1. FY 2010 MS-DRG Documentation and Coding Adjustment

a. Background on the Prospective MS-DRG Documentation and Coding Adjustments for FY 2008 and FY 2009

b. Prospective MS-DRG Documentation and Coding Adjustment to the National Capital Federal Rate for FY 2010 and Subsequent Years

c. Documentation and Coding Adjustment to the Puerto Rico-Specific Capital Rate

2. Revision to the FY 2009 IME Adjustment Factor

3. Other Changes for FY 2010

VII. Changes for Hospitals Excluded From the IPPS

A. Excluded Hospitals

B. Criteria for Satellite Facilities of Hospitals

C. Critical Access Hospitals (CAHs)

1. Background

2. Payment for Clinical Diagnostic Laboratory Tests Furnished by CAHs

3. CAH Optional Method of Payment for Outpatient Services

4. Continued Participation by CAHs in Counties Redesignated as Urban

D. Provider-Based Status of Facilities and Organizations: Policy Changes

1. Background

2. Changes to the Scope of the Provider-Based Status Regulations for CAHs

a. CAH-Based Clinical Diagnostic Laboratory Facilities

b. CAH-Based Ambulance Services

3. Technical Correction to Regulations

E. Report of Adjustment (Exceptions) Payments

VIII. Changes to the Long-Term Care Hospital Prospective Payment System (LTCH PPS) for RY 2010

A. Background of the LTCH PPS

1. Legislative and Regulatory Authority

2. Criteria for Classification as a LTCH

a. Classification as a LTCH

b. Hospitals Excluded From the LTCH PPS

3. Limitation on Charges to Beneficiaries

4. Administrative Simplification Compliance Act (ASCA) and Health Insurance Portability and Accountability Act (HIPAA) Compliance

B. Medicare Severity Long-Term Care Diagnosis-Related Group (MS-LTC-DRG) Classifications and Relative Weights

1. Background

2. Patient Classifications Into MS-LTC-DRGs

a. Background

b. Changes to the MS-LTC-DRGs for RY 2010

3. Development of the RY 2010 MS-LTC-DRG Relative Weights

a. General Overview of the Development of the MS-LTC-DRG Relative Weights

b. Data

c. Hospital-Specific Relative Value (HSRV) Methodology

d. Treatment of Severity Levels in Developing the MS-LTC-DRG Relative Weights

e. Low-Volume MS-LTC-DRGs

f. Steps for Determining the RY 2010 MS-LTC-DRG Relative Weights

C. Changes to the LTCH Payment Rates and Other Changes to the RY 2010 LTCH PPS

1. Overview of Development of the LTCH Payment Rates

2. Market Basket for LTCHs Reimbursed Under the LTCH PPS

a. Overview

b. Market Basket Under the LTCH PPS for RY 2010

c. Market Basket Update for LTCHs for RY 2010

d. Labor-Related Share Under the LTCH PPS for RY 2010

3. Adjustment for Changes in LTCHs' Case-Mix Due to Changes in Documentation and Coding Practices That Occurred in a Prior Period

a. Background

b. Evaluation of FY 2007 Claims Data

c. Evaluation of FY 2008 Claims Data

d. RY 2010 Documentation and Coding Adjustment

D. Technical Corrections of LTCH PPS Regulations

IX. Revisions to the FY 2009 Medicare Severity Long-Term Care Diagnosis-Related Group (MS-LTC-DRG) Relative Weights: Finalization of an Interim Final Rule With Comment Period

A. Overview

B. Changes to the FY 2009 MS-LTC-DRG Relative Weights

C. Summary of Public Comments Received on the June 3, 2009 Interim Final Rule With Comment Period and Our Responses

D. Finalization of the June 3, 2009 Interim Final Rule With Comment Period

E. Regulatory Impact Analysis for the June 3, 2009 Interim Final Rule With Comment Period

X. Finalization of Two Interim Final Rules With Comment Period That Implemented Certain Provisions of Section 114 of the Medicare, Medicaid, and SCHIP Extension Act of 2007 (Pub. L. 110-173) Relating to Payments to LTCHs and LTCH Satellite Facilities

A. Background

B. May 6, 2008 Interim Final Rule With Comment Period Provisions Implementing Section 114(c)(3) of the MMSEA Regarding Certain Short-Stay Outlier Cases

1. Background

2. Public Comments Received on the May 6, 2008 Interim Final Rule With Comment Period Provisions Implementing Section 114(c)(3) of the MMSEA

C. May 6, 2008 Interim Final Rule With Comment Period Provisions Implementing Sections 114(e)(1) and (e)(2) of the MMSEA Regarding the Standard Federal Rate for the 2008 LTCH PPS Rate Year

1. Background

2. Public Comments Received on the May 6, 2008 Interim Final Rule With Comment Period Provisions Implementing Sections 114(e)(1) and (e)(2) of the MMSEA

D. May 22, 2008 Interim Final Rule With Comment Period Provision Implementing Sections 114(c)(1) and (c)(2) of the MMSEA Regarding Payment Adjustment to LTCHs and LTCH Satellite Facilities

1. Background

2. Payment Adjustment to LTCHs and LTCH Satellite Facilities Specified by Section 114(c) of the MMSEA

3. Public Comments Received on the May 22, 2008 Interim Final Rule With Comment Period Implementing Section 114(c)(1) and (c)(2) of the MMSEA Regarding Payment Adjustment to LTCHs and LTCH Satellite Facilities

E. May 22, 2008 Interim Final Rule With Comment Period Provisions Implementing Section 114(b) of the MMSEA Regarding Moratorium on the Establishment of LTCHs, LTCH Satellite Facilities and on the Increase in Number of Beds in Existing LTCHs or LTCH Satellite Facilities

1. Background

2. Provisions of the May 22, 2008 Interim Final Rule With Comment Period Implementing Section 114(d) of the MMSEA That Established Moratoria on New LTCHs and LTCH Satellite Facilities and on Bed Increases in Existing LTCHs and LTCH Satellite Facilities

3. Public Comments Received on the on the May 22, 2008 Interim Final Rule With Comment Period Provisions Implementing the Exception to the Moratorium on the Increase in Number of LTCHs Beds in Existing LTCHs and LTCH Satellite Facilities

XI. Interim Final Rule with Comment Period Implementing Section 4302 of the American Recovery and Reinvestment Act of 2009 (Pub. L. 111-5) Relating to Payments to LTCHs and LTCH Satellite Facilities

A. Background

B. Amendments Relating to Payment Adjustment to LTCHs and LTCH Satellite Facilities Made by Section 4302 of the ARRA

C. Amendments to the Moratorium on the Increase in Number of Beds in Existing LTCHs or LTCH Satellite Facilities Made by Section 4302 of the ARRA

D. Response to Comments

E. Waiver of Proposed Rulemaking

F. Collection of Information Requirements

G. Regulatory Impact Analysis

XII. MedPAC Recommendations

XIII. Other Required Information

A. Requests for Data From the Public

B. Collection of Information Requirements

C. Additional Information Collection Requirements

1. Present on Admission (POA) Indicator Reporting

2. Add-On Payments for New Services and Technologies

3. Reporting of Hospital Quality Data for Annual Hospital Payment Update

4. Occupational Mix Adjustment to the FY 2010 Index (Hospital Wage Index Occupational Mix Survey)

5. Hospital Applications for Geographic Reclassifications by the MGCRB

Regulation Text

Addendum—Schedule of Standardized Amounts, Update Factors, and Rate-of-Increase Percentages Effective With Cost Reporting Periods Beginning on or after October 1, 2009

I. Summary and Background

II. Changes to the Prospective Payment Rates for Hospital Inpatient Operating Costs for Acute Care Hospitals for FY 2010

A. Calculation of the Adjusted Standardized Amount

B. Adjustments for Area Wage Levels and Cost-of-Living

C. MS-DRG Relative Weights

D. Calculation of the Prospective Payment Rates

III. Changes to Payment Rates for Acute Care Hospital Inpatient Capital-Related Costs for FY 2010

A. Determination of Federal Hospital Inpatient Capital-Related Prospective Payment Rate Update

B. Calculation of the Inpatient Capital-Related Prospective Payments for FY 2010

C. Capital Input Price Index

IV. Changes to Payment Rates for Certain Excluded Hospitals: Rate-of-Increase Percentages

V. Changes to the Payment Rates for the LTCH PPS for RY 2010

A. LTCH PPS Standard Federal Rate for RY 2010

B. Adjustment for Area Wage Levels Under the LTCH PPS for RY 2010

C. Adjustment for LTCH PPS High-Cost Outlier (HCO) Cases

D. Computing the Adjusted LTCH PPS Federal Prospective Payments for RY 2010

VI. Tables

Table 1A.—National Adjusted Operating Standardized Amounts, Labor/Nonlabor (68.8 Percent Labor Share/31.2 Percent Nonlabor Share If Wage Index Is Greater Than 1)

Table 1B.—National Adjusted Operating Standardized Amounts, Labor/Nonlabor (62 Percent Labor Share/38 Percent Nonlabor Share If Wage Index Is Less Than or Equal to 1)

Table 1C.—Adjusted Operating Standardized Amounts for Puerto Rico, Labor/Nonlabor

Table 1D.—Capital Standard Federal Payment Rate

Table 1E.—LTCH Standard Federal Prospective Payment Rate

Table 2.—Acute Care Hospitals Case-Mix Indexes for Discharges Occurring in Federal Fiscal Year 2008; Hospital Wage Indexes for Federal Fiscal Year 2010; Hospital Average Hourly Wages for Federal Fiscal Years 2008 (2004 Wage Data), 2009 (2005 Wage Data), and 2010 (2006 Wage Data); and 3-Year Average of Hospital Average Hourly Wages

Table 3A.—FY 2010 and 3-Year Average Hourly Wage for Acute Care Hospitals in Urban Areas by CBSA

Table 3B.—FY 2010 and 3-Year Average Hourly Wage for Acute Care Hospitals in Rural Areas by CBSA

Table 4A.—Wage Index and Capital Geographic Adjustment Factor (GAF) for Acute Care Hospitals in Urban Areas by CBSA and by State—FY 2010

Table 4B.—Wage Index and Capital Geographic Adjustment Factor (GAF) for Acute Care Hospitals in Rural Areas by CBSA and by State—FY 2010

Table 4C.—Wage Index and Capital Geographic Adjustment Factor (GAF) for Acute Care Hospitals That Are Reclassified by CBSA and by State—FY 2010

Table 4D-1.—Rural Floor Budget Neutrality Factors for Acute Care Hospitals—FY 2010

Table 4D-2.—Urban Areas With Acute Care Hospitals Receiving the Statewide Rural Floor or Imputed Floor Wage Index—FY 2010

Table 4E.—Urban CBSAs and Constituent Counties for Acute Care Hospitals—FY 2010

Table 4F.—Puerto Rico Wage Index and Capital Geographic Adjustment Factor (GAF) for Acute Care Hospitals by CBSA—FY 2010

Table 4J.—Out-Migration Adjustment for Acute Care Hospitals—FY 2010

Table 5.—List of Medicare Severity Diagnosis-Related Groups (MS-DRGs), Relative Weighting Factors, and Geometric and Arithmetic Mean Length of Stay—FY 2010

Table 6A.—New Diagnosis Codes

Table 6B.—New Procedure Codes

Table 6C.—Invalid Diagnosis Codes

Table 6D.—Invalid Procedure Codes

Table 6E.—Revised Diagnosis Code Titles

Table 6F.—Revised Procedure Code Titles

Table 6G.—Additions to the CC Exclusions List (Available Through the Internet on the CMS Web site at:

http://www.cms.hhs.gov/AcuteInpatientPPS/

)

Table 6H.—Deletions from the CC Exclusions List (Available through the Internet on the CMS Web site at:

http://www.cms.hhs.gov/AcuteInpatientPPS/

)

Table 6I.—Complete List of Complication and Comorbidity (CC) Exclusions (Available only through the Internet on the CMS Web site at:

http:/www.cms.hhs.gov/AcuteInpatientPPS/

)

Table 6J.—Major Complication and Comorbidity (MCC) List (Available through the Internet on the CMS Web site at:

http://www.cms.hhs.gov/AcuteInpatientPPS/

)

Table 6K.—Complication and Comorbidity (CC) List (Available through the Internet on the CMS Web site at:

http://www.cms.hhs.gov/AcuteInpatientPPS/

)

Table 7A.—Medicare Prospective Payment System Selected Percentile Lengths of Stay: FY 2008 MedPAR Update—March 2009 GROUPER V26.0 MS-DRGs

Table 7B.—Medicare Prospective Payment System Selected Percentile Lengths of Stay: FY 2008 MedPAR Update—March 2009 GROUPER V27.0 MS-DRGs

Table 8A.—Statewide Average Operating Cost-to-Charge Ratios (CCRs) for Acute Care Hospitals—July 2009

Table 8B.—Statewide Average Capital Cost-to-Charge Ratios (CCRs) for Acute Care Hospitals—July 2009

Table 8C.—Statewide Average Total Cost-to-Charge Ratios (CCRs) for LTCHs—July 2009

Table 9A.—Hospital Reclassifications and Redesignations—FY 2010

Table 9C.—Hospitals Redesignated as Rural Under Section 1886(d)(8)(E) of the Act—FY 2010

Table 10.—Geometric Mean Plus the Lesser of .75 of the National Adjusted Operating Standardized Payment Amount (Increased to Reflect the Difference Between Costs and Charges) or .75 of One Standard Deviation of Mean Charges by Medicare Severity Diagnosis-Related Groups (MS-DRGs)—July 2009

Table 11.—MS-LTC-DRGs, Relative Weights, Geometric Average Length of Stay, and Short-Stay Outlier Threshold for Discharges Occurring From October 1, 2009 Through September 30, 2010 under the LTCH PPS

Table 12A.—LTCH PPS Wage Index for Urban Areas for Discharges Occurring From October 1, 2009 Through September 30, 2010

Table 12B.—LTCH PPS Wage Index for Rural Ares for Discharges Occurring From October 1, 2009 Through September 30, 2010

Appendix A—Regulatory Impact Analysis

I. Overall Impact

II. Objectives of the IPPS

III. Limitations of Our Analysis

IV. Hospitals Included in and Excluded From the IPPS

V. Effects on Hospitals Excluded From the IPPS

VI. Quantitative Effects of the Policy Changes Under the IPPS for Operating Costs

A. Basis and Methodology of Estimates

B. Analysis of Table I

C. Effects of the Changes to the MS-DRG Reclassifications and Relative Cost-Based Weights (Column 1)

D. Effects of the Application of Recalibration Budget Neutrality (Column 2)

E. Effects of Wage Index Changes (Column 3)

F. Application of the Wage Budget Neutrality Factor (Column 4)

G. Combined Effects of MS-DRG and Wage Index Changes (Column 5)

H. Effects of MGCRB Reclassifications (Column 6)

I. Effects of the Rural Floor and Imputed Floor, Including the Transition to Apply Budget Neutrality at the State Level (Column 7)

J. Effects of the Wage Index Adjustment for Out-Migration (Column 8)

K. Effects of All Changes (Column 9)

L. Effects of Policy on Payment Adjustments for Low-Volume Hospitals

M. Impact Analysis of Table II

VII. Effects of Other Policy Changes

A. Effects of Policy on HACs, Including Infections

B. Effects of Policy Changes Relating to New Medical Service and Technology Add-On Payments

C. Effects of Requirements for Hospital Reporting of Quality Data for Annual Hospital Payment Update

D. Effects of Correcting the FY 2002-Based Hospital-Specific Rates for MDHs

E. Effects of Policy Changes Relating to the Payment Adjustment to Disproportionate Share Hospitals

F. Effects of Policy Revisions Related to Payments to Hospitals for Direct GME

G. Effects of Policy Changes Relating to Hospital Emergency Services under EMTALA

H. Effects of Implementation of Rural Community Hospital Demonstration Program

I. Effects of Policy Changes Relating to Payments to Satellite Facilities

J. Effects of Policy Changes Relating to Payments to CAHs

K. Effects of Policy Changes Relating to Provider-Based Status of Facilities and Organizations

VIII. Effects of Changes in the Capital IPPS

A. General Considerations

B. Results

IX. Effects of Payment Rate Changes and Policy Changes Under the LTCH PPS

A. Introduction and General Considerations

B. Impact on Rural Hospitals

C. Anticipated Effects of LTCH PPS Payment Rate Change and Policy Changes

D. Effect on the Medicare Program

E. Effect on Medicare Beneficiaries

X. Alternatives Considered

XI. Overall Conclusion

A. Acute Care Hospitals

B. LTCHs

XII. Accounting Statements

A. Acute Care Hospitals

B. LTCHs

XIII. Executive Order 12866

Appendix B—Recommendation of Update Factors for Operating Cost Rates of Payment for Inpatient Hospital Services

I. Background

II. Inpatient Hospital Update for FY 2010

III. Secretary's Final Recommendation

IV. MedPAC Recommendation for Assessing Payment Adequacy and Updating Payments in Traditional Medicare

I. Background

A. Summary

1. Acute Care Hospital Inpatient Prospective Payment System (IPPS)

Section 1886(d) of the Social Security Act (the Act) sets forth a system of payment for the operating costs of acute care hospital inpatient stays under Medicare Part A (Hospital Insurance) based on prospectively set rates. Section 1886(g) of the Act requires the Secretary to pay for the capital-related costs of hospital inpatient stays under a prospective payment system (PPS). Under these PPSs, 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).

The base payment rate is comprised of a standardized amount that is divided into a labor-related share and a nonlabor-related share. The labor-related share is adjusted by the wage index applicable to the area where the hospital is located. If the hospital is located in Alaska or Hawaii, the nonlabor-related share is adjusted by a cost-of-living adjustment factor. This base payment rate is multiplied by the DRG relative weight.

If the hospital treats a high percentage of low-income patients, it receives a percentage add-on payment applied to the DRG-adjusted base payment rate. This add-on payment, known as the disproportionate share hospital (DSH) adjustment, provides for a percentage increase in Medicare payments to hospitals that qualify under either of two statutory formulas designed to identify hospitals that serve a disproportionate share of low-income patients. For qualifying hospitals, the amount of this adjustment may vary based on the outcome of the statutory calculations.

If the hospital is an approved teaching hospital, it receives a percentage add-on payment for each case paid under the IPPS, known as the indirect medical education (IME) adjustment. This percentage varies, depending on the ratio of residents to beds.

Additional payments may be made for cases that involve new technologies or medical services that have been approved for special add-on payments. To qualify, a new technology or medical service must demonstrate that it is a substantial clinical improvement over technologies or services otherwise available, and that, absent an add-on payment, it would be inadequately paid under the regular DRG payment.

The costs incurred by the hospital for a case are evaluated to determine whether the hospital is eligible for an additional payment as an outlier case. This additional payment is designed to protect the hospital from large financial losses due to unusually expensive cases. Any eligible outlier payment is added to the DRG-adjusted base payment rate, plus any DSH, IME, and new technology or medical service add-on adjustments.

Although payments to most hospitals under the IPPS are made on the basis of the standardized amounts, some categories of hospitals are paid in whole or in part based on their hospital-specific rate based on their costs in a base year. For example, sole community hospitals (SCHs) receive the higher of a hospital-specific rate based on their costs in a base year (the highest of FY 1982, FY 1987, FY 1996, or FY 2006) or the IPPS Federal rate based on the

standardized amount. Through and including FY 2006, a Medicare-dependent, small rural hospital (MDH) received the higher of the Federal rate or the Federal rate plus 50 percent of the amount by which the Federal rate is exceeded by the higher of its FY 1982 or FY 1987 hospital-specific rate. As discussed below, for discharges occurring on or after October 1, 2007, but before October 1, 2011, an MDH will receive the higher of the Federal rate or the Federal rate plus 75 percent of the amount by which the Federal rate is exceeded by the highest of its FY 1982, FY 1987, or FY 2002 hospital-specific rate. SCHs are the sole source of care in their areas, and MDHs are a major source of care for Medicare beneficiaries in their areas. Specifically, section 1886(d)(5)(D)(iii) of the Act defines an SCH as a hospital that is located more than 35 road miles from another hospital or that, by reason of factors such as isolated location, weather conditions, travel conditions, or absence of other like hospitals (as determined by the Secretary), is the sole source of hospital inpatient services reasonably available to Medicare beneficiaries. In addition, certain rural hospitals previously designated by the Secretary as essential access community hospitals are considered SCHs. Section 1886(d)(5)(G)(iv) of the Act defines an MDH as a hospital that is located in a rural area, has not more than 100 beds, is not an SCH, and has a high percentage of Medicare discharges (not less than 60 percent of its inpatient days or discharges in its cost reporting year beginning in FY 1987 or in two of its three most recently settled Medicare cost reporting years). Both of these categories of hospitals are afforded this special payment protection in order to maintain access to services for beneficiaries.

Section 1886(g) of the Act requires the Secretary to pay for the capital-related costs of inpatient hospital services “in accordance with a prospective payment system established by the Secretary.” The basic methodology for determining capital prospective payments is set forth in our regulations at 42 CFR 412.308 and 412.312. Under the capital IPPS, payments are adjusted by the same DRG for the case as they are under the operating IPPS. Capital IPPS payments are also adjusted for IME and DSH, similar to the adjustments made under the operating IPPS. In addition, hospitals may receive outlier payments for those cases that have unusually high costs.

The existing regulations governing payments to hospitals under the IPPS are located in 42 CFR part 412, subparts A through M.

2. Hospitals and Hospital Units Excluded From the IPPS

Under section 1886(d)(1)(B) of the Act, as amended, certain hospitals and hospital units are excluded from the IPPS. These hospitals and units are: Rehabilitation hospitals and units; long-term care hospitals (LTCHs); psychiatric hospitals and units; children's hospitals; and cancer hospitals. Religious nonmedical health care institutions (RNHCIs) are also excluded from the IPPS. Various sections of the Balanced Budget Act of 1997 (BBA, Pub. L. 105-33), the Medicare, Medicaid and SCHIP [State Children's Health Insurance Program] Balanced Budget Refinement Act of 1999 (BBRA, Pub. L. 106-113), and the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA, Pub. L. 106-554) provide for the implementation of PPSs for rehabilitation hospitals and units (referred to as inpatient rehabilitation facilities (IRFs)), LTCHs, and psychiatric hospitals and units (referred to as inpatient psychiatric facilities (IPFs)). (We note that the annual updates to the LTCH PPS are now included as part of the IPPS annual update document (for RY 2010, in this final rule). Updates to the IRF PPS and IPF PPS are issued as separate documents.) Children's hospitals, cancer hospitals, and RNHCIs continue to be paid solely under a reasonable cost-based system subject to a rate-of-increase ceiling on inpatient operating costs per discharge.

The existing regulations governing payments to excluded hospitals and hospital units are located in 42 CFR parts 412 and 413.

3. Long-Term Care Hospital Prospective Payment System (LTCH PPS)

The Medicare prospective payment system (PPS) for LTCHs applies to hospitals described in section 1886(d)(1)(B)(iv) effective for cost reporting periods beginning on or after October 1, 2002. The LTCH PPS was established under the authority of sections 123(a) and (c) of Public Law 106-113 and section 307(b)(1) of Public Law 106-554. During the 5-year (optional) transition period, a LTCH's payment under the PPS was based on an increasing proportion of the LTCH Federal rate with a corresponding decreasing proportion based on reasonable cost principles. Effective for cost reporting periods beginning on or after October 1, 2006, all LTCHs are paid 100 percent of the Federal rate. The existing regulations governing payment under the LTCH PPS are located in 42 CFR part 412, subpart O. Beginning with RY 2010, we are issuing the annual updates to the LTCH PPS in the same documents that update the IPPS (73 FR 26797 through 26798).

4. Critical Access Hospitals (CAHs)

Under sections 1814(l), 1820, and 1834(g) of the Act, payments are made to critical access hospitals (CAHs) (that is, rural hospitals or facilities that meet certain statutory requirements) for inpatient and outpatient services are generally based on 101 percent of reasonable cost. Reasonable cost is determined under the provisions of section 1861(v)(1)(A) of the Act and existing regulations under 42 CFR parts 413 and 415.

5. Payments for Graduate Medical Education (GME)

Under section 1886(a)(4) of the Act, costs of approved educational activities are excluded from the operating costs of inpatient hospital services. Hospitals with approved graduate medical education (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 hospital's number of residents in that period and the hospital's costs per resident in a base year. The existing regulations governing payments to the various types of hospitals are located in 42 CFR part 413.

B. Provisions of the Medicare Improvements for Patients and Providers Act of 2008 (MIPPA)

Section 148 of the MIPPA (Pub. L. 110-275) changes the payment rules regarding outpatient clinical diagnostic laboratory tests furnished by a CAH. The statutory change applies to services furnished on or after July 1, 2009. In section VII.C.2. of the preamble of the proposed rule, we discussed our proposal to codify policies in the Medicare regulations to implement this provision. In section VII.C.2. of this final rule, we finalize our policies in the Medicare regulations to implement this provision.

C. Provisions of the American Recovery and Reinvestment Act of 2009 (ARRA)

Section 4301(b) of the American Recovery and Reinvestment Act of 2009 (AARA), Pub. Law 111-5, enacted on February 17, 2009, requires that the phase-out of the capital IPPS teaching adjustment at § 412.322(c) (that is, the 50-percent reduction for FY 2009) shall be applied, as if such paragraph had not been in effect. That is, discharges occurring on or after October 1, 2008,

through September 30, 2009, receive the full capital IPPS teaching adjustment as determined under § 412.322(b) of the regulations. We note that, in this final rule, in response to public comments on our proposed implementation of section 4301(b) of the ARRA, we are deleting § 412.322(d) of the existing regulations which currently eliminates the teaching adjustment beginning in FY 2010. We discuss the implementation of these provisions in sections VI.A. and E.2. of the preamble of this final rule.

Section 4302 of the ARRA included several amendments to provisions of section 114 of the MMSEA relating to: (1) The 3-year delay in the application of certain provisions of the payment adjustments for short-stay outliers and revision to the RY 2008 standard Federal rate for LTCHs; and (2) the 3-year moratorium on the establishment of new LTCHs and LTCH satellite facilities and on increases in beds in existing LTCHs and LTCH satellite facilities. We discuss the final implementation of these provisions in sections I.E., VIII., and XI. of the preamble of this final rule.

D. Issuance of a Notice of Proposed Rulemaking

On May 22, 2009, we published in the

Federal Register

(74 FR 24080) a proposed rule that set forth proposed changes to the Medicare IPPS for operating costs and for capital-related costs of acute care hospitals in FY 2010. We also set forth proposed changes relating to payments for IME costs and payments to certain hospitals and units that continue to be excluded from the IPPS and paid on a reasonable cost basis. In addition, we set forth proposed changes to the payment rates, factors, and other payment rate policies under the LTCH PPS for RY 2010. On June 3, 2009, we published in the

Federal Register

(74 FR 26600) a supplemental proposed rule (hereafter referred to as the “RY 2010 LTCH PPS supplemental proposed rule”) that presented both proposed RY 2010 MS-LTC-DRG relative weights and a proposed RY 2010 high-cost outlier (HCO) fixed-loss amount based on the revised FY 2009 MS-LTC-DRG relative weights presented in an interim final rule with comment period published also on June 3, 2009 in the

Federal Register

(74 FR 26546).

Below is a summary of the major changes that we proposed to make:

1. Proposed Changes to MS-DRG Classifications and Recalibrations of Relative Weights

In section II. of the preamble of this final rule, we included—

• Proposed changes to MS-DRG classifications based on our yearly review.

• Proposed application of the documentation and coding adjustment to hospital-specific rates for FY 2010 resulting from implementation of the MS-DRG system.

• A discussion of the Research Triangle International, Inc. (RTI) and RAND Corporation reports and recommendations relating to charge compression, including a solicitation of public comments on the “over” standardization of hospital charges.

• Proposed recalibrations of the MS-DRG relative weights.

We also presented a listing and discussion of hospital-acquired conditions (HACs), including infections, that are subject to the statutorily required quality adjustment in MS-DRG payments for FY 2010.

We presented our evaluation and analysis of the FY 2010 applicants for add-on payments for high-cost new medical services and technologies (including public input, as directed by Pub. L. 108-173, obtained in a town hall meeting).

2. Proposed Changes to the Hospital Wage Index for Acute Care Hospitals

In section III. of the preamble to the proposed rule, we proposed revisions to the wage index for acute care hospitals and the annual update of the wage data. Specific issues addressed include the following:

• Second year of the 3-year transition from national to within-State budget neutrality for the rural floor and imputed floor.

• Final year of the 2-year transition for changes in the average hourly wage criterion for geographic reclassifications.

• Changes to the CBSA designations.

• The proposed FY 2010 wage index update using wage data from cost reporting periods that began during FY 2007.

• Analysis and implementation of the proposed FY 2010 occupational mix adjustment to the wage index for acute care hospitals, including the use of data from the 2007-2008 occupational mix survey.

• Proposed revisions to the wage index for acute care hospitals based on hospital redesignations and reclassifications.

• The proposed adjustment to the wage index for acute care hospitals for FY 2010 based on commuting patterns of hospital employees who reside in a county and work in a different area with a higher wage index.

• The timetable for reviewing and verifying the wage data used to compute the proposed FY 2010 wage index for acute care hospitals.

3. Proposed Rebasing and Revision of the Hospital Market Baskets for Acute Care Hospitals

In section IV. of the preamble of the proposed rule, we proposed to rebase and revise the acute care hospital operating and capital market baskets to be used in developing the FY 2010 update factor for the operating and capital prospective payment rates and the FY 2010 update factor for the excluded hospital rate-of-increase limits. We also set forth the data sources used to determine the proposed revised market basket relative weights.

4. Other Decisions and Proposed Changes to the IPPS for Operating Costs and GME Costs

In section V. of the preamble of the proposed rule, we discussed a number of the provisions of the regulations in 42 CFR parts 412, 413, and 489, including the following:

• The reporting of hospital quality data as a condition for receiving the full annual payment update increase.

• Discussion of applying the correct budget neutrality adjustment for the FY 2002-based hospital-specific rates for MDHs.

• The proposed updated national and regional case-mix values and discharges for purposes of determining RRC status.

• The statutorily-required IME adjustment factor for FY 2010.

• Proposed changes to the policies governing payments to Medicare disproportionate share hospitals, including proposed policies relating to the inclusion of labor and delivery patient days in the calculation of the DSH payment adjustment, calculation of inpatient days in the Medicaid fraction for the Medicare DSH calculation, and exclusion of observation beds and patient days from the Medicare DSH calculation and from the bed count for the IME adjustment.

• Proposed changes to the policies governing payment for direct GME.

• Proposed changes to policies on hospital emergency services under EMTALA relating to the applicability of sanctions under EMTALA.

• Discussion of the implementation of the Rural Community Hospital Demonstration Program in FY 2010.

• Proposed technical correction to the regulations governing the calculation of the Federal rate under the IPPS.

5. FY 2010 Policy Governing the IPPS for Capital-Related Costs

In section VI. of the preamble to the proposed rule, we discussed the payment policy requirements for capital-related costs and capital payments to hospitals for FY 2010. We also proposed to remove a section of the regulations relating to the phase-out of the capital IME adjustment for FY 2009 to implement the provisions of section 4301(b) of the ARRA.

6. Proposed Changes to the Payment Rates for Certain Excluded Hospitals: Rate-of-Increase Percentages

In section VII. of the preamble of the proposed rule, we discussed—

• Proposed changes to payments to excluded hospitals.

• Proposed changes to the regulations governing satellite facilities of hospitals.

• Proposed changes relating to payments to CAHs, including payment for clinical laboratory tests furnished by CAHs and payment for outpatient facility services when a CAH elects the optional payment method.

• Proposed changes to the rules governing provider-based status of facilities and a proposed technical correction to the regulations governing provider-based entities.

7. Proposed Changes to the LTCH PPS

In section VIII.A. through C. and F. of the preamble of the proposed rule, we set forth proposed changes to the payment rates, factors, and other payment rate policies under the LTCH PPS for RY 2010, including the annual update of the MS-LTC-DRG classifications and relative weights for use under the LTCH PPS for RY 2010, the proposed use of the FY 2002-based RPL market basket for LTCHs, and proposed technical corrections to the LTCH PPS regulations.

In section VIII.D. of the preamble of the proposed rule, we discussed our ongoing monitoring protocols under the LTCH PPS. In section VIII.E. of the preamble of the proposed rule, we discussed the Research Triangle Institute, International (RTI) Phase III Report on its evaluation of the feasibility of establishing facility and patient criteria for LTCHs, as recommended by MedPAC in its June 2004 Report to Congress.

We note that, because we did not propose any policy changes relating to our present activities in monitoring and updates on the RTI contract, we are not republishing these section discussions in this final rule. We did receive several public comments on specific aspects of the summary of RTI's most recent work. These commenters urged CMS not to finalize any proposals based on RTI's Phase III report until the public has had the opportunity to review the report and comment on its findings. We regret that RTI's Phase III report was not posted on the CMS Web site, as we had indicated in our proposed rule. The report will be available in the near future at

http://www.cms.hhs.gov/LongTermCareHopitalPPS/02a_RTIReports.asp#TopOfPage

. Although we did not propose any policies based on that report, we can assure the readers that any policies that we believe are appropriate for implementation would be subject to the notice-and-comment rulemaking process.

8. Determining Proposed Prospective Payment Operating and Capital Rates and Rate-of-Increase Limits for Acute Care Hospitals

In the Addendum to the proposed rule, we set forth proposed changes to the amounts and factors for determining the proposed FY 2010 prospective payment rates for operating costs and capital-related costs for acute care hospitals. We also established the proposed threshold amounts for outlier cases. In addition, we addressed the proposed update factors for determining the rate-of-increase limits for cost reporting periods beginning in FY 2010 for hospitals excluded from the IPPS.

9. Determining Proposed Prospective Payment Rates for LTCHs

In the Addendum to the proposed rule, we set forth proposed changes to the amounts and factors for determining the proposed RY 2010 prospective standard Federal rate. We also established the proposed adjustments for wage levels, the labor-related share, the cost-of-living adjustment, and high-cost outliers, including the fixed-loss amount, and the LTCH cost-to-charge ratios (CCRs) under the LTCH PPS.

10. Impact Analysis

In Appendix A of the proposed rule, we set forth an analysis of the impact that the proposed changes would have on affected acute care hospitals and LTCHs.

11. Recommendation of Update Factors for Operating Cost Rates of Payment for Hospital Inpatient Services

In Appendix B of the proposed rule, as required by sections 1886(e)(4) and (e)(5) of the Act, we provided our recommendations of the appropriate percentage changes for FY 2010 for the following:

• A single average standardized amount for all areas for hospital inpatient services paid under the IPPS for operating costs of acute care hospitals (and hospital-specific rates applicable to SCHs and MDHs).

• Target rate-of-increase limits to the allowable operating costs of hospital inpatient services furnished by certain hospitals excluded from the IPPS.

• The standard Federal rate for hospital inpatient services furnished by LTCHs.

12. Discussion of Medicare Payment Advisory Commission Recommendations

Under section 1805(b) of the Act, MedPAC is required to submit a report to Congress, no later than March 1 of each year, in which MedPAC reviews and makes recommendations on Medicare payment policies. MedPAC's March 2008 recommendations concerning hospital inpatient payment policies address the update factor for hospital inpatient operating costs and capital-related costs under the IPPS, for hospitals and distinct part hospital units excluded from the IPPS, and for LTCHs. We addressed these recommendations in Appendix B of the proposed rule. For further information relating specifically to the MedPAC March 2008 report or to obtain a copy of the report, contact MedPAC at (202) 220-3700 or visit MedPAC's Web site at:

http://www.medpac.gov

.

We received approximately 525 timely pieces of correspondence from the public in response to the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule and the supplemental proposed rule. We summarize these public comments and present our responses under the specific subject areas of this final rule.

E. Finalization of Interim Final Rule With Comment Period That Revised the FY 2009 MS-LTC-DRG Relative Weights

On June 3, 2009, we issued in the

Federal Register

an interim final rule with comment period that revised the MS-LTC-DRG relative weights for payments under the LTCH PPS. We revised the MS-LTC-DRG relative weights for FY 2009 due to the misapplication of our established methodology in the calculation of the budget neutrality factor. The revised relative weights are effective for the remainder of FY 2009 (that is, from June 3, 2009 through September 30, 2009). We received 11 timely pieces of correspondence from the public in response to this interim final rule with comment period. In section IX. of the preamble of this final rule, we summarize these public comments, present our responses, and finalize the

provisions of the interim final rule with comment period.

F. Finalization of Two LTCH PPS Interim Final Rules With Comment Period Issued in May 2008

On May 6, 2008 and May 22, 2008, we issued in the

Federal Register

two interim final rules with comment period relating to the LTCH PPS (73 FR 24871 and 73 FR 29699, respectively), which implement section 114 of Public Law 110-173 (MMSEA). The May 6, 2008 interim final rule with comment period implemented provisions of section 114 of Public Law 110-173 relating to a 3-year delay in the application of certain provisions of the payment adjustment for short-stay outliers and revisions to the RY 2008 standard Federal rate for LTCHs. The May 22, 2008 interim final rule with comment period implemented certain provisions of section 114 of Public Law 110-173 relating to a 3-year moratorium on the establishment of new LTCHs and LTCH satellite facilities and on increases in beds in existing LTCHs and LTCH satellite facilities. The May 22, 2008 interim final rule with comment period also implemented a 3-year delay in the application of certain payment policies that apply to payment adjustments for discharges from LTCHs and LTCH satellite facilities that were admitted from certain referring hospitals in excess of various percentage thresholds.

We received six timely pieces of correspondence from the public in response to the May 6, 2008 interim final rule with comment period. We received 30 timely pieces of correspondence from the public in response to the May 22, 2008 interim final rule with comment period. In section X. of the preamble of this final rule, we summarize these public comments, present our responses, and finalize the provisions of both interim final rules with comment period, as appropriate.

G. Interim Final Rule With Comment Period That Implements Certain Provisions of the ARRA Relating to Payments to LTCHs and LTCH Satellite Facilities

Section 4302 of the American Recovery and Reinvestment Act of 2009 (ARRA, Pub. L. 111-5) included several amendments to section 114 of Public Law 110-173 (MMSEA) relating to payments to LTCHs and LTCH satellite facilities that are discussed under section X. of the preamble of this final rule. These amendments are effective as if they were enacted as part of section 114 of Public Law 110-173 (MMSEA). We issued instructions to the fiscal intermediaries and Medicare administrative contractors (MACs) to interpret these amendments (Change Request 6444). In section XI. of this document, we implement the provisions of section 4302 of Public Law 111-5 through an interim final rule with comment period. Comments on this interim final rule with comment period may be submitted as specified in the

DATES

and Comment Period sections of this document.

II. Changes to Medicare Severity Diagnosis-Related Group (MS-DRG) Classifications and Relative Weights

A. Background

Section 1886(d) of the Act specifies that the Secretary shall establish a classification system (referred to as DRGs) for inpatient discharges and adjust payments under the IPPS based on appropriate weighting factors assigned to each DRG. Therefore, under the IPPS, we pay for inpatient hospital services on a rate per discharge basis that varies according to the DRG to which a beneficiary's stay is assigned. The formula used to calculate payment for a specific case multiplies an individual hospital's payment rate per case 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 at least 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.

B. MS-DRG Reclassifications

1. General

As discussed in the preamble to the FY 2008 IPPS final rule with comment period (72 FR 47138), we focused our efforts in FY 2008 on making significant reforms to the IPPS consistent with the recommendations made by MedPAC in its “Report to the Congress, Physician-Owned Specialty Hospitals” in March 2005. MedPAC recommended that the Secretary refine the entire DRG system by taking severity of illness into account and applying hospital-specific relative value (HSRV) weights to DRGs.

1

We began this reform process by adopting cost-based weights over a 3-year transition period beginning in FY 2007 and making interim changes to the DRG system for FY 2007 by creating 20 new CMS DRGs and modifying 32 other DRGs across 13 different clinical areas involving nearly 1.7 million cases. As described in more detail below, these refinements were intermediate steps towards comprehensive reform of both the relative weights and the DRG system as we undertook further study. For FY 2008, we adopted 745 new Medicare Severity DRGs (MS-DRGs) to replace the CMS DRGs. We refer readers to section II.D. of the FY 2008 IPPS final rule with comment period for a full detailed discussion of how the MS-DRG system, based on severity levels of illness, was established (72 FR 47141).

1

Medicare Payment Advisory Commission:

Report to the Congress, Physician-Owned Specialty Hospitals,

March 2005, page viii.

Currently, cases are classified into MS-DRGs for payment under the IPPS based on the following information reported by the hospital: the principal diagnosis, up to eight additional diagnoses, and up to six procedures performed during the stay. In a small number of MS-DRGs, classification is also based on the 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 process of developing the MS-DRGs was begun by dividing all possible principal diagnoses into mutually exclusive principal diagnosis areas, referred to as Major Diagnostic Categories (MDCs). The MDCs were formulated by physician panels to ensure that the DRGs would be clinically coherent. The diagnoses in each MDC correspond to a single organ system or etiology and, in general, are associated with a particular medical specialty. Thus, in order to maintain the requirement of clinical coherence, no final MS-DRG could contain patients in different MDCs. For example, MDC 6 is Diseases and Disorders of the Digestive System. This approach is used because clinical care is generally organized in accordance with the organ system affected. However, some MDCs are not constructed on this basis because they involve multiple organ systems (for example, MDC 22 (Burns)). For FY 2009, cases are assigned to one of 746 MS-DRGs in 25 MDCs. The table below lists the 25 MDCs.

Major Diagnostic Categories (MDCs)

1

Diseases and Disorders of the Nervous System.

2

Diseases and Disorders of the Eye.

3

Diseases and Disorders of the Ear, Nose, Mouth, and Throat.

4

Diseases and Disorders of the Respiratory System.

5

Diseases and Disorders of the Circulatory System.

6

Diseases and Disorders of the Digestive System.

7

Diseases and Disorders of the Hepatobiliary System and Pancreas.

8

Diseases and Disorders of the Musculoskeletal System and Connective Tissue.

9

Diseases and Disorders of the Skin, Subcutaneous Tissue and Breast.

10

Endocrine, Nutritional and Metabolic Diseases and Disorders.

11

Diseases and Disorders of the Kidney and Urinary Tract.

12

Diseases and Disorders of the Male Reproductive System.

13

Diseases and Disorders of the Female Reproductive System.

14

Pregnancy, Childbirth, and the Puerperium.

15

Newborns and Other Neonates with Conditions Originating in the Perinatal Period.

16

Diseases and Disorders of the Blood and Blood Forming Organs and Immunological Disorders.

17

Myeloproliferative Diseases and Disorders and Poorly Differentiated Neoplasms.

18

Infectious and Parasitic Diseases (Systemic or Unspecified Sites).

19

Mental Diseases and Disorders.

20

Alcohol/Drug Use and Alcohol/Drug Induced Organic Mental Disorders.

21

Injuries, Poisonings, and Toxic Effects of Drugs.

22

Burns.

23

Factors Influencing Health Status and Other Contacts with Health Services.

24

Multiple Significant Trauma.

25

Human Immunodeficiency Virus Infections.

In general, cases are assigned to an MDC based on the patient's principal diagnosis before assignment to an MS-DRG. However, under the most recent version of the Medicare GROUPER (Version 26.0), there are 13 MS-DRGs to which cases are directly assigned on the basis of ICD-9-CM procedure codes. These MS-DRGs are for heart transplant or implant of heart assist systems; liver and/or intestinal transplants; bone marrow transplants; lung transplants; simultaneous pancreas/kidney transplants; pancreas transplants; and tracheostomies. Cases are assigned to these MS-DRGs before they are classified to an MDC. The table below lists the 13 current pre-MDCs.

Pre-Major Diagnostic Categories (Pre-MDCs)

MS-DRG 001

Heart Transplant or Implant of Heart Assist System with MCC.

MS-DRG 002

Heart Transplant or Implant of Heart Assist System without MCC.

MS-DRG 003

ECMO or Tracheostomy with Mechanical Ventilation 96+ Hours or Principal Diagnosis Except for Face, Mouth, and Neck Diagnosis with Major O.R.

MS-DRG 004

Tracheostomy with Mechanical Ventilation 96+ Hours or Principal Diagnosis Except for Face, Mouth, and Neck Diagnosis with Major O.R.

MS-DRG 005

Liver Transplant with MCC or Intestinal Transplant.

MS-DRG 006

Liver Transplant without MCC.

MS-DRG 007

Lung Transplant.

MS-DRG 008

Simultaneous Pancreas/Kidney Transplant.

MS-DRG 009

Bone Marrow Transplant.

MS-DRG 010

Pancreas Transplant.

MS-DRG 011

Tracheostomy for Face, Mouth, and Neck Diagnoses with MCC.

MS-DRG 012

Tracheostomy for Face, Mouth, and Neck Diagnoses with CC.

MS-DRG 013

Tracheostomy for Face, Mouth, and Neck Diagnoses without CC/MCC.

Once the MDCs were defined, each MDC was evaluated to identify those additional patient characteristics that would have a consistent effect on hospital resource consumption. Because the presence of a surgical procedure that required the use of the operating room would have a significant effect on the type of hospital resources used by a patient, most MDCs were initially divided into surgical DRGs and medical DRGs. Surgical DRGs are based on a hierarchy that orders operating room (O.R.) procedures or groups of O.R. procedures by resource intensity. Medical DRGs generally are differentiated on the basis of diagnosis and age (0 to 17 years of age or greater than 17 years of age). Some surgical and medical DRGs are further differentiated based on the presence or absence of a complication or comorbidity (CC) or a major complication or comorbidity (MCC).

Generally, nonsurgical procedures and minor surgical procedures that are not usually performed in an operating room are not treated as O.R. procedures. However, there are a few non-O.R. procedures that do affect MS-DRG assignment for certain principal diagnoses. An example is extracorporeal shock wave lithotripsy for patients with a principal diagnosis of urinary stones. Lithotripsy procedures are not routinely performed in an operating room. Therefore, lithotripsy codes are not classified as O.R. procedures. However, our clinical advisors believe that patients with urinary stones who undergo extracorporeal shock wave lithotripsy should be considered similar to other patients who undergo O.R. procedures. Therefore, we treat this group of patients similar to patients undergoing O.R. procedures.

Once the medical and surgical classes for an MDC were formed, each diagnosis class was evaluated to determine if complications or comorbidities would consistently affect hospital resource consumption. Each diagnosis was categorized into one of three severity levels. These three levels include a major complication or comorbidity (MCC), a complication or comorbidity (CC), or a non-CC. Physician panels classified each diagnosis code based on a highly iterative process involving a combination of statistical results from test data as well as clinical judgment. As stated earlier, we refer readers to section II.D. of the FY 2008 IPPS final rule with comment period for a full detailed discussion of how the MS-DRG system was established based on severity levels of illness (72 FR 47141).

A patient's diagnosis, procedure, discharge status, and demographic information is entered into the Medicare claims processing systems and subjected to a series of automated screens called

the Medicare Code Editor (MCE). The MCE screens are designed to identify cases that require further review before classification into an MS-DRG.

After patient information is screened through the MCE and any further development of the claim is conducted, the cases are classified into the appropriate MS-DRG by the Medicare GROUPER software program. The GROUPER program was developed as a means of classifying each case into an MS-DRG on the basis of the diagnosis and procedure codes and, for a limited number of MS-DRGs, demographic information (that is, sex, age, and discharge status).

After cases are screened through the MCE and assigned to an MS-DRG by the GROUPER, the PRICER software calculates a base MS-DRG payment. The PRICER calculates the payment for each case covered by the IPPS based on the MS-DRG relative weight and additional factors associated with each hospital, such as IME and DSH payment adjustments. These additional factors increase the payment amount to hospitals above the base MS-DRG 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 MS-DRG classification changes and to recalibrate the MS-DRG weights. However, in the FY 2000 IPPS final rule (64 FR 41500), we discussed a process for considering non-MedPAR data in the recalibration process. In order for us to consider using particular non-MedPAR data, we must have sufficient time to evaluate and test the data. The time necessary to do so depends upon the nature and quality of the non-MedPAR data submitted. Generally, however, a significant sample of the non-MedPAR data should be submitted by mid-October for consideration in conjunction with the next year's proposed rule. This date allows us time to test the data and make a preliminary assessment as to the feasibility of using the data. Subsequently, a complete database should be submitted by early December for consideration in conjunction with the next year's proposed rule.

As we indicated above, for FY 2008, we made significant improvements in the DRG system to recognize severity of illness and resource usage by adopting MS-DRGs that were reflected in the FY 2008 GROUPER, Version 25.0, and were effective for discharges occurring on or after October 1, 2007. Our MS-DRG analysis for the FY 2009 final rule was based on data from the March 2008 update of the FY 2007 MedPAR file, which contained hospital bills received through March 31, 2008, for discharges occurring through September 30, 2007. For this final rule, for FY 2010, our MS-DRG analysis is based on data from the March 2009 update of the FY 2008 MedPAR file, which contains hospital bills received through September 30, 2008, for discharges occurring through September 30, 2008.

2. Yearly Review for Making MS-DRG Changes

Many of the changes to the MS-DRG classifications we make annually are the result of specific issues brought to our attention by interested parties. We encourage individuals with comments about MS-DRG classifications to submit these comments no later than early December of each year so they can be carefully considered for possible inclusion in the annual proposed rule and, if included, may be subjected to public review and comment. Therefore, similar to the timetable for interested parties to submit non-MedPAR data for consideration in the MS-DRG recalibration process, comments about MS-DRG classification issues should be submitted no later than early December in order to be considered and possibly included in the next annual proposed rule updating the IPPS.

The actual process of forming the MS-DRGs was, and will likely continue to be, highly iterative, involving a combination of statistical results from test data combined with clinical judgment. In the FY 2008 IPPS final rule (72 FR 47140 through 47189), we described in detail the process we used to develop the MS-DRGs that we adopted for FY 2008. In addition, in deciding whether to make further modification to the MS-DRGs for particular circumstances brought to our attention, we considered whether the resource consumption and clinical characteristics of the patients with a given set of conditions are significantly different than the remaining patients in the MS-DRG. We evaluated patient care costs using average charges and lengths of stay as proxies for costs and relied on the judgment of our medical advisors to decide whether patients are clinically distinct or similar to other patients in the MS-DRG. In evaluating resource costs, we considered both the absolute and percentage differences in average charges between the cases we selected for review and the remainder of cases in the MS-DRG. We also considered variation in charges within these groups; that is, whether observed average differences were consistent across patients or attributable to cases that were extreme in terms of charges or length of stay, or both. Further, we considered the number of patients who will have a given set of characteristics and generally preferred not to create a new MS-DRG unless it would include a substantial number of cases.

C. Adoption of the MS-DRGs in FY 2008

In the FY 2006, FY 2007, and FY 2008 IPPS final rules, we discussed a number of recommendations made by MedPAC regarding revisions to the DRG system used under the IPPS (70 FR 47473 through 47482; 71 FR 47881 through 47939; and 72 FR 47140 through 47189). As we noted in the FY 2006 IPPS final rule, we had insufficient time to complete a thorough evaluation of these recommendations for full implementation in FY 2006. However, we did adopt severity-weighted cardiac DRGs in FY 2006 to address public comments on this issue and the specific concerns of MedPAC regarding cardiac surgery DRGs. We also indicated that we planned to further consider all of MedPAC's recommendations and thoroughly analyze options and their impacts on the various types of hospitals in the FY 2007 IPPS proposed rule.

For FY 2007, we began this process. In the FY 2007 IPPS proposed rule, we proposed to adopt Consolidated Severity DRGs (CS DRGs) for FY 2008 (if not earlier). Based on public comments received on the FY 2007 IPPS proposed rule, we decided not to adopt the CS DRGs. In the FY 2007 IPPS final rule (71 FR 47906 through 47912), we discussed several concerns raised by commenters regarding the proposal to adopt CS DRGs. We acknowledged the many comments suggesting the logic of Medicare's DRG system should continue to remain in the public domain as it has since the inception of the PPS. We also acknowledged concerns about the impact on hospitals and software vendors of moving to a proprietary system. Several commenters suggested that CMS refine the existing DRG classification system to preserve the many policy decisions that were made over the last 20 years and were already incorporated into the DRG system, such as complexity of services and new device technologies. Consistent with the concerns expressed in the public comments, this option had the advantage of using the existing DRGs as a starting point (which was already familiar to the public) and retained the benefit of many DRG decisions that were made in recent years. We stated our belief that the suggested approach of incorporating severity measures into the

existing DRG system was a viable option that would be evaluated.

Therefore, we decided to make interim changes to the existing DRGs for FY 2007 by creating 20 new DRGs involving 13 different clinical areas that would significantly improve the CMS DRG system's recognition of severity of illness. We also modified 32 DRGs to better capture differences in severity. The new and revised DRGs were selected from 40 existing CMS DRGs that contained 1,666,476 cases and represented a number of body systems. In creating these 20 new DRGs, we deleted 8 existing DRGs and modified 32 existing DRGs. We indicated that these interim steps for FY 2007 were being taken as a prelude to more comprehensive changes to better account for severity in the DRG system by FY 2008.

In the FY 2007 IPPS final rule (71 FR 47898), we indicated our intent to pursue further DRG reform through two initiatives. First, we announced that we were in the process of engaging a contractor to assist us with evaluating alternative DRG systems that were raised as potential alternatives to the CMS DRGs in the public comments. Second, we indicated our intent to review over 13,000 ICD-9-CM diagnosis codes as part of making further refinements to the current CMS DRGs to better recognize severity of illness based on the work that CMS (then HCFA) did in the mid-1990's in connection with adopting severity DRGs. We describe below the progress we have made on these two initiatives and our actions for FYs 2008, 2009, and 2010 based on our continued analysis of reform of the DRG system. We note that the adoption of the MS-DRGs to better recognize severity of illness has implications for the outlier threshold, the application of the postacute care transfer policy, the measurement of real case-mix versus apparent case-mix, and the IME and DSH payment adjustments. We discuss these implications for FY 2010 in other sections of this preamble and in the Addendum to this final rule.

In the FY 2007 IPPS proposed rule, we discussed MedPAC's recommendations to move to a cost-based HSRV weighting methodology using HSRVs beginning with the FY 2007 IPPS proposed rule for determining the DRG relative weights. Although we proposed to adopt the HSRV weighting methodology for FY 2007, we decided not to adopt the proposed methodology in the final rule after considering the public comments we received on the proposal. Instead, in the FY 2007 IPPS final rule, we adopted a cost-based weighting methodology without the HSRV portion of the proposed methodology. The cost-based weights were adopted over a 3-year transition period in

1/3

increments between FY 2007 and FY 2009. In addition, in the FY 2007 IPPS final rule, we indicated our intent to further study the HSRV-based methodology as well as other issues brought to our attention related to the cost-based weighting methodology adopted in the FY 2007 final rule. There was significant concern in the public comments that our cost-based weighting methodology does not adequately account for charge compression—the practice of applying a higher percentage charge markup over costs to lower cost items and services and a lower percentage charge markup over costs to higher cost items and services. Further, public commenters expressed concern about potential inconsistencies between how costs and charges are reported on the Medicare cost reports and charges on the Medicare claims. In the FY 2007 IPPS final rule, we used costs and charges from the cost report to determine departmental level cost-to-charge ratios (CCRs) which we then applied to charges on the Medicare claims to determine the cost-based weights. The commenters were concerned about potential distortions to the cost-based weights that would result from inconsistent reporting between the cost reports and the Medicare claims. After publication of the FY 2007 IPPS final rule, we entered into a contract with RTI International (RTI) to study both charge compression and to what extent our methodology for calculating DRG relative weights is affected by inconsistencies between how hospitals report costs and charges on the cost reports and how hospitals report charges on individual claims. Further, as part of its study of alternative DRG systems, the RAND Corporation analyzed the HSRV cost-weighting methodology. We refer readers to section II.E. of the preamble of this final rule for discussion of the issue of charge compression and the cost-weighting methodology for FY 2010.

We believe that revisions to the DRG system to better recognize severity of illness and changes to the relative weights based on costs rather than charges are improving the accuracy of the payment rates in the IPPS. We agree with MedPAC that these refinements should be pursued. Although we continue to caution that any prospective payment system based on grouping cases will always present some opportunities for providers to specialize in cases they believe have higher margins, we believe that the changes we have adopted and the continuing reforms we are adoptimg in this final rule for FY 2010 will improve payment accuracy and reduce financial incentives to create specialty hospitals.

We refer readers to section II.D. of the FY 2008 IPPS final rule with comment period for a full discussion of how the MS-DRG system was established based on severity levels of illness (72 FR 47141).

D. FY 2010 MS-DRG Documentation and Coding Adjustment, Including the Applicability to the Hospital-Specific Rates and the Puerto Rico-Specific Standardized Amount

1. Background on the Prospective MS-DRG Documentation and Coding Adjustments for FY 2008 and FY 2009 Authorized by Public Law 110-90

As we discussed earlier in this preamble, we adopted the MS-DRG patient classification system for the IPPS, effective October 1, 2007, to better recognize severity of illness in Medicare payment rates for acute care hospitals. The adoption of the MS-DRG system resulted in the expansion of the number of DRGs from 538 in FY 2007 to 745 in FY 2008 (currently, 746 DRGs, which include 1 additional MS-DRG created in FY 2009). By increasing the number of DRGs and more fully taking into account patients' severity of illness in Medicare payment rates for acute care hospitals, the use of MS-DRGs encourage hospitals to improve their documentation and coding of patient diagnoses. In the FY 2008 IPPS final rule with comment period (72 FR 47175 through 47186), we indicated that we believe the adoption of the MS-DRGs had the potential to lead to increases in aggregate payments without a corresponding increase in actual patient severity of illness due to the incentives for additional documentation and coding. In that final rule with comment period, we exercised our authority under section 1886(d)(3)(A)(vi) of the Act, which authorizes us to maintain budget neutrality by adjusting the national standardized amount to eliminate the estimated effect of changes in coding or classification that do not reflect real changes in case-mix. Our actuaries estimated that maintaining budget neutrality required an adjustment of −4.8 percent to the national standardized amount. We phased in this −4.8 percent adjustment over 3 years. Specifically, we established prospective documentation and coding adjustments of −1.2 percent for FY 2008, −1.8 percent for FY 2009, and −1.8 percent for FY 2010.

On September 29, 2007, Congress enacted the TMA [Transitional Medical Assistance], Abstinence Education, and QI [Qualifying Individuals] Programs Extension Act of 2007, Public Law 110-90. Section 7(a) of Public Law 110-90 reduced the documentation and coding adjustment made as a result of the MS-DRG system that we adopted in the FY 2008 IPPS final rule with comment period to −0.6 percent for FY 2008 and −0.9 percent for FY 2009. Section 7(a) of Public Law 110-90 did not adjust the FY 2010 −1.8 percent documentation and coding adjustment promulgated in the FY 2008 IPPS final rule with comment period. To comply with section 7(a) of Public Law 110-90, we promulgated a final rule on November 27, 2007 (72 FR 66886) that modified the IPPS documentation and coding adjustment for FY 2008 to −0.6 percent, and revised the FY 2008 payment rates, factors, and thresholds accordingly. These revisions were effective on October 1, 2007.

For FY 2009, section 7(a) of Public Law 110-90 required a documentation and coding adjustment of −0.9 percent instead of the −1.8 percent adjustment established in the FY 2008 IPPS final rule with comment period. As discussed in the FY 2009 IPPS final rule (73 FR 48447) and required by statute, we applied a documentation and coding adjustment of −0.9 percent to the FY 2009 IPPS national standardized amount. The documentation and coding adjustments established in the FY 2008 IPPS final rule with comment period, as amended by Public Law 110-90, are cumulative. As a result, the −0.9 percent documentation and coding adjustment for FY 2009 was in addition to the −0.6 percent adjustment for FY 2008, yielding a combined effect of −1.5 percent.

2. Prospective Adjustment to the Average Standardized Amounts Required by Section 7(b)(1)(A) of Public Law 110-90

Section 7(b)(1)(A) of Public Law 110-90 requires that if the Secretary determines that implementation of the MS-DRG system resulted in changes in documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2008 or FY 2009 that are different than the prospective documentation and coding adjustments applied under section 7(a) of Public Law 110-90, the Secretary shall make an appropriate adjustment under section 1886(d)(3)(A)(vi) of the Act. Section 1886(d)(3)(A)(vi) of the Act authorizes adjustments to the average standardized amounts for subsequent fiscal years in order to eliminate the effect of such coding or classification changes. These adjustments are intended to ensure that future annual aggregate IPPS payments are the same as the payments that otherwise would have been made had the prospective adjustments for documentation and coding applied in FY 2008 and FY 2009 reflected the change that occurred in those years.

3. Recoupment or Repayment Adjustments in FYs 2010 Through 2012 Required by Public Law 110-90

If, based on a retroactive evaluation of claims data, the Secretary determines that implementation of the MS-DRG system resulted in changes in documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2008 or FY 2009 that are different from the prospective documentation and coding adjustments applied under section 7(a) of Public Law 110-90, section 7(b)(1)(B) of Public Law 110-90 requires the Secretary to make an additional adjustment to the standardized amounts under section 1886(d) of the Act. This adjustment must offset the estimated increase or decrease in aggregate payments for FYs 2008 and 2009 (including interest) resulting from the difference between the estimated actual documentation and coding effect and the documentation and coding adjustment applied under section 7(a) of Public Law 110-90. This adjustment is in addition to making an appropriate adjustment to the standardized amounts under section 1886(d)(3)(A)(vi) of the Act as required by section 7(b)(1)(A) of Public Law 110-90. That is, these adjustments are intended to recoup (or repay) spending in excess of (or less than) spending that would have occurred had the prospective adjustments for changes in documentation and coding applied in FY 2008 and FY 2009 precisely matched the changes that occurred in those years. Public Law 110-90 requires that the Secretary make these recoupment or repayment adjustments for discharges occurring during FYs 2010, 2011, and 2012.

4. Retrospective Evaluation of FY 2008 Claims Data

In order to implement the requirements of section 7 of Public Law 110-90, we indicated in the FY 2009 IPPS final rule (73 FR 48450) that we planned a thorough retrospective evaluation of our claims data. We stated that the results of this evaluation would be used by our actuaries to determine any necessary payment adjustments to the standardized amounts under section 1886(d) of the Act beginning in FY 2010 to ensure the budget neutrality of the MS-DRGs implementation for FY 2008 and FY 2009, as required by law. In the FY 2009 IPPS proposed rule (73 FR 23541 through 23542), we described our preliminary plan for a retrospective analysis of inpatient hospital claims data and invited public input on our proposed methodology.

In that proposed rule, we indicated that we intended to measure and corroborate the extent of the overall national average changes in case-mix for FY 2008 and FY 2009. We expected that the two largest parts of this overall national average change would be attributable to underlying changes in actual patient severity and to documentation and coding improvements under the MS-DRG system. In order to separate the two effects, we planned to isolate the effect of shifts in cases among base DRGs from the effect of shifts in the types of cases within base DRGs.

The MS-DRGs divide the base DRGs into three severity levels (with MCC, with CC and without CC); the previously used CMS DRGs had only two severity levels (with CC and without CC). Under the CMS DRG system, the majority of hospital discharges had a secondary diagnosis which was on the CC list, which led to the higher severity level. The MS-DRGs significantly changed the code lists of what was classified as an MCC or a CC. Many codes that were previously classified as a CC are no longer included on the MS-DRG CC list because the data and clinical review showed these conditions did not lead to a significant increase in resource use. The addition of a new level of high severity conditions, the MCC list, also provided a new incentive to code more precisely in order to increase the severity level. We anticipated that hospitals would examine the MS-DRG MCC and CC code lists and then work with physicians and coders on documentation and coding practices so that coders could appropriately assign codes from the highest possible severity level. We note that there have been numerous seminars and training sessions on this particular coding issue. The topic of improving documentation practices in order to code conditions on the MCC list was also discussed extensively by participants at the March 11-12, 2009 ICD-9-CM Coordination and Maintenance Committee meeting. Participants discussed their hospitals' efforts to encourage physicians to provide more precise documentation so that coders could appropriately assign codes that would lead to a higher

severity level. Because we expected most of the documentation and coding changes under the MS-DRG system would occur in the secondary diagnoses, we believed that the shifts among base DRGs were less likely to be the result of the MS-DRG system and the shifts within base DRGs were more likely to be the result of the MS-DRG system. We also anticipated evaluating data to identify the specific MS-DRGs and diagnoses that contributed significantly to the documentation and coding payment effect and to quantify their impact. This step entailed analysis of the secondary diagnoses driving the shifts in severity within specific base DRGs.

In that same proposed rule, we also stated that, while we believe that the data analysis plan described previously will produce an appropriate estimate of the extent of case-mix changes resulting from documentation and coding changes, we might decide, if feasible, to use historical data from our Hospital Payment Monitoring Program (HPMP) to corroborate the within-base DRG shift analysis. The HPMP is supported by the Medicare Clinical Data Abstraction Center (CDAC).

In the FY 2009 IPPS proposed rule, we solicited public comments on the analysis plans described above, as well as suggestions on other possible approaches for performing a retrospective analysis to identify the amount of case-mix changes that occurred in FY 2008 and FY 2009 that did not reflect real increases in patients' severity of illness.

A few commenters, including MedPAC, expressed support for the analytic approach described in the FY 2009 IPPS proposed rule. A number of other commenters expressed concerns about certain aspects of the approach and/or suggested alternate analyses or study designs. In addition, one commenter recommended that any determination or retrospective evaluation by the actuaries of the impact of the MS-DRGs on case-mix be open to public scrutiny prior to the implementation of the payment adjustments beginning in FY 2010.

We took these comments into consideration as we developed our proposed analysis plan (described in greater detail below) and in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24092 through 24101) solicited public comment on our methodology and analysis. For the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we performed a retrospective evaluation of the FY 2008 data for claims paid through December 2008. Based on this evaluation, our actuaries determined that implementation of the MS-DRG system resulted in a 2.5 percent change due to documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2008. In the FY 2010 IPPS/RY 2010 LTCH proposed rule, we also stated that we would update the results from the proposed analysis plan with data extracted from FY 2008 Medicare claims that were paid through March 2008 [sic] for the FY 2010 IPPS final rule. (We note that the March 2008 date for the updated data that appeared in the proposed rule should have been March 2009.)

In performing the analysis for the proposed rule, we first divided the case-mix index (CMI) obtained by grouping the FY 2008 claims data through the FY 2008 GROUPER (Version 25.0) by the CMI obtained by grouping these same FY 2008 claims through the FY 2007 GROUPER (Version 24.0). This resulted in a value of 1.028. Because these cases are the same FY 2008 cases grouped using Versions 24.0 and 25.0 of the GROUPER, we attribute this increase primarily to two factors: (1) The effect of changes in documentation and coding under the MS-DRG system; and (2) the measurement effect from the calibration of the GROUPER. We estimated the measurement effect from the calibration of the GROUPER by dividing the CMI obtained by grouping cases in the FY 2007 claims data through the FY 2008 GROUPER by the CMI obtained by grouping cases in these same claims through the FY 2007 GROUPER. This resulted in a value of 1.003. In order to isolate the documentation and coding effect, we then divided the combined effect of the changes in documentation and coding and measurement (1.028) by the measurement effect (1.003) to yield 1.025. Therefore, our estimate of the documentation and coding increase was 2.5 percent.

We then sought to corroborate this 2.5 percent estimate by examining the increases in the within-base DRGs as compared to the increases in the across base DRGs as described earlier in our analysis plan. In other words, we looked for improvements in code selection that would lead to a secondary diagnosis increasing the severity level to either a CC or an MCC level.

In the analysis of data for the proposed rule, we found that the within-base DRG increases were almost entirely responsible for the case-mix change, supporting our conclusion that the 2.5 percent estimate was an accurate reflection of the FY 2008 effect of changes in documentation and coding under the MS-DRG system. In fact, almost every base DRG that was split into different severity levels under the MS-DRG system experienced increases in the within-base DRGs.

We then further analyzed the changes in the within-base DRGs to determine which MS-DRGs had the highest contributions to this increase. Consistent with the expectations of our medical coding experts concerning areas with potential for documentation and coding improvements, the top contributors were heart failure, chronic obstructive pulmonary disease, and simple pneumonia and pleurisy. In fact, the coding of heart failure was discussed extensively at the March 11-12, 2009 ICD-9-CM Coordination and Maintenance Committee meeting. Heart failure is a very common secondary diagnosis among Medicare hospital admissions. The heart failure codes are assigned to all three severity levels. Some codes are classified as non-CCs, while other codes are on the CC and MCC lists. By changing physician documentation to more precisely identify the type of heart failure, coders are able to appropriately change the severity level of cases from the lowest level (non-CC) to a higher severity level (CC or MCC). This point was stressed repeatedly at the March 11-12, 2009 ICD-9-CM Coordination and Maintenance Committee meeting as coders discussed their work with physicians on this coding issue. Many of the participants indicated that additional work was still needed with their physicians in order to document conditions in the medical record more precisely.

The results of the analysis for the proposed rule provided additional support for our conclusion that the proposed 2.5 percent estimate accurately reflected the FY 2008 increases in documentation and coding under the MS-DRG system.

While we attempted to use the CDAC data to distinguish real increase in case-mix growth from documentation and coding in the overall case-mix number, we found aberrant data and significant variation across the FY 1999-FY 2007 analysis period. It was not possible to distinguish changes in documentation and coding from changes in real case-mix in the CDAC data. Therefore, we concluded that the CDAC data would not support analysis of real case-mix growth that could be used in our retrospective evaluation of the FY 2008 claims data.

Although we could not use the CDAC data, we did examine the overall growth in case-mix using the FY 2007 claims data in which we grouped cases using the FY 2007 GROUPER and the FY 2008 data in which we grouped cases using

the FY 2008 GROUPER. We found the overall growth in case-mix was 1.9 percent. The implication of overall FY 2008 case-mix growth of 1.9 percent relative to our estimate of the FY 2008 documentation and coding effect and the GROUPER measurement effect is that real case-mix declined between FY 2007 and FY 2008. After additional data analysis, our actuaries determined that the 1.9 percent growth in overall case-mix was consistent with our 2.5 percent estimate of the FY 2008 documentation and coding effect for reasons that included: (1) Our mathematical model for determining the 2.5 percent documentation and coding effect was corroborated by the amount of case-mix growth attributed to within-DRG improvements in secondary coding of MCCs and CCs; (2) our data analysis confirmed the substitution of specified diagnosis for unspecified diagnoses for such common conditions as heart failure and chronic obstructive pulmonary disease; and (3) there was a relative decline in above average cost short-stay surgical cases that can be performed on an outpatient basis, such as certain high volume pacemaker procedures.

We also examined the differences in case-mix between the FY 2008 claims data in which cases were grouped through the FY 2008 GROUPER (Version 25.0) and the FY 2009 GROUPER (Version 26.0). This was to help inform analysis of the potential for increase in the documentation and coding effect in FY 2009. In FY 2008, we were transitioning to the fully implemented MS-DRG relative weights and the fully implemented cost-based weights. We found that the use of the transition weights mitigated the FY 2008 documentation and coding effect on expenditures. Using the FY 2009 relative weights, the documentation and coding effect would have been an estimated 3.2 percent in FY 2008 instead of our estimated 2.5 percent. Even assuming no continued improvement in documentation and coding in FY 2009, we estimated that the use of the FY 2009 relative weights would result in an additional 0.7 percent documentation and coding effect in FY 2009. After taking into account the results of our FY 2008 analysis and the expertise of our coding staff, our actuaries continue to estimate that the cumulative overall effect of documentation and coding improvements under the MS-DRG system will be 4.8 percent. However, our actuaries estimate that these improvements will be substantially complete by the end of FY 2009. Therefore, our estimate of the FY 2009 MS-DRG documentation and coding effect for the proposed rule was 2.3 percent.

As in prior years, the FY 2008 MedPAR files were available to the public to allow independent analysis of the FY 2008 documentation and coding effect. Interested individuals may still order these files by going to the Web site at

http://www.cms.hhs.gov/LimitedDataSets/

and clicking on MedPAR Limited Data Set (LDS)-Hospital (National). This Web page describes the file and provides directions and further detailed instructions for how to order.

Persons placing an order must send the following: a Letter of Request, the LDS Data Use Agreement and Research Protocol (refer to the Web site for further instructions), the LDS Form, and a check for $3,655 to:

Mailing address if using the U.S. Postal Service: Centers for Medicare & Medicaid Services, RDDC Account, Accounting Division, P.O. Box 7520, Baltimore, MD 21207-0520.

Mailing address if using express mail: Centers for Medicare & Medicaid Services, OFM/Division of Accounting—RDDC, 7500 Security Boulevard, C3-07-11, Baltimore, MD 21244-1850.

Comment:

MedPAC commented that its analysis of 2008 claims confirmed the CMS finding that documentation and coding improvements increased case-mix by 2.5 percent in 2008, which resulted in overpayments of 1.9 percent. With regard to CMS' projection that by the end of 2009, hospitals' documentation and coding improvements will have increased case-mix by a cumulative total of 4.8 percent, MedPAC stated that, while all documentation and coding improvement projections are subject to uncertainty, 4.8 percent appears to be a reasonable estimate, given MedPAC's own examination of recent experience in Maryland.

Response:

We agree with MedPAC's comment that changes in documentation and coding increased case-mix by 2.5 percent in FY 2008. Using more recent FY 2008 claims data updated through March 2009, our actuaries' estimate of the effect of changes in documentation and coding continues to be 2.5 percent. Our actuaries also continue to estimate that by the end of FY 2009, changes in documentation and coding will have increased case-mix by 4.8 percent, consistent with MedPAC's comment.

Comment:

Most commenters questioned CMS' methodology for the retrospective evaluation of FY 2008 claims data and CMS' finding that real case-mix growth in FY 2008 was negative. These comments were generally similar to the comments from the AHA, which read:

“In its analysis of documentation and coding changes, CMS concludes that from FY 2007 to FY 2008, there was a decline in real case mix; in contrast, our analysis found that there is a historical pattern of steady annual increases of 1.2 to 1.3 percent in real case mix and we are concerned that CMS' conclusion is incorrect. Further, because CMS' conclusion that real case-mix declined is an inference based on its analysis of documentation and coding-related increases, we are concerned that the 1.9 percent proposed cut also is inaccurate and overstated.”

The commenters also raised concerns that CMS' estimate did not fully consider other potential causes of increased case-mix, such as patients requiring less complex services receiving care in other settings and “healthier” patients enrolling in Medicare Advantage plans in increasing numbers. Other commenters indicated that factors such as the changes in the CC/MCC definitions, limitations on the number of codes used by CMS for payment and ratesetting, resequencing of secondary diagnoses, the transition to the cost-based weights, less use of “not otherwise specified” codes, and increases in real case-mix due to health reform efforts also resulted in an inaccurate documentation and coding analysis. One commenter indicated that, of the overall case-mix increase, 1.0 percent to 1.5 percent is “real” case-mix increase, while 1.0 percent to 1.5 percent is due to documentation and coding or other increases.

Response:

The assertion that there is a historical pattern of steady annual increases of 1.2 to 1.3 percent in real case-mix is predicated on the assumption that there was little documentation and coding effect in those historical years. In considering these comments concerning historical real case-mix, we calculated overall increases in case-mix for the period from FY 2000 to FY 2007 using the cases from each year and the GROUPER and relative weights applicable for each year. The results are shown in the following chart:

Overall Case-Mix Increases for FY 2000 to FY 2007

Year

Overall case-mix change from prior year

(in percent)

FY 2000

−0.7

FY 2001

−0.4

FY 2002

1.0

FY 2003

1.4

FY 2004

1.0

FY 2005

0.9

FY 2006

1.2

FY 2007

−0.2

Overall case-mix growth is predominately comprised of three factors: real case-mix growth; a documentation and coding effect; and a measurement effect. Under the reasonable assumption that there has been a relatively small measurement effect in those years, the assertion that there is a historical pattern of steady annual increases of 1.2 to 1.3 percent in real case-mix implies that the documentation and coding effect in many of those years was negative. For example, as described earlier, we estimated a recent measurement effect of +0.3 percent. The overall case-mix growth of −0.2 percent in FY 2007 net of a measurement effect of +0.3 percent results in growth of +0.1 percent. A real case-mix growth of +1.2 percent in FY 2007, therefore, implies a negative documentation and coding effect of approximately −1.1 percent. It is not obvious why documentation and coding would have had such a large negative effect in FY 2007, or in any other year where the overall case-mix change is significantly less than the commenter's claimed average annual trend, calling into question the assertion that real case-mix growth is a steady 1.2 to 1.3 percent per year.

Our current estimate of the overall case-mix growth for FY 2008 based on more recent data than the data used in the proposed rule is 2.0 percent, still less than our actuaries' estimate of a 2.5 percent documentation and coding increase. With respect to the concerns raised by commenters about our finding of negative real case-mix growth in FY 2008, a finding of negative real case-mix growth is consistent with the fact that, in some years, overall case-mix growth has been negative, as shown in the chart presented above in this response. Some commenters were particularly focused on our statement in the proposed rule regarding a relative decline in above average cost short-stay surgical cases. We did not state that the decline in real case-mix was entirely attributable to the relative decline in above average cost short-stay outliers. We stated that—

“After additional data analysis, our actuaries determined that the 1.9 percent growth in overall case-mix was consistent with our 2.5 percent estimate of the FY 2008 documentation and coding effect for reasons that included: (1) Our mathematical model for determining the 2.5 percent documentation and coding effect was corroborated by the amount of case-mix growth attributed to within-DRG improvements in secondary coding of MCCs and CCs; (2) our data analysis confirmed the substitution of specified diagnosis for unspecified diagnoses for such common conditions as heart failure and chronic obstructive pulmonary disease; and (3) there was a relative decline in above average cost short-stay surgical cases that can be performed on an outpatient basis, such as certain high-volume pacemaker procedures.”

The decline in above average cost short-stay surgical cases was one factor in our actuaries' determination that the 1.9 percent growth in overall case-mix was consistent with our 2.5 percent documentation and coding estimate. It was not the only factor. Our current estimate of the overall case-mix growth between FY 2007 and FY 2008 based on more recent data than the data used in the proposed rule is 2.0 percent. We observed numerous small changes for a number of base DRGs that drive the difference between this overall case mix growth estimate of 2.0 percent and our documentation and coding estimate of 2.5 percent, including the relative decline in above average cost surgical stay cases that can be performed on an outpatient basis that we cited in the proposed rule. These other base DRGs include MS-DRGs 193, 194, and 195 (Simple Pneumonia and Pleurisy with MCC, with CC, and without CC or MCC, respectively); MS-DRGs 246 and 247 (Percutaneous Cardiovascular Procedure with Drug-Eluting Stent with MCC or Four or More (4+) Vessels/Stents and without MCC, respectively); MS-DRGs 233 and 234 (Coronary Bypass with Cardiac Catheterization with MCC and without MCC, respectively); MS-DRGs 235 and 236 (Coronary Bypass without Cardiac Catheterization with MCC and without MCC, respectively); MS-DRGs 252, 253, and 254 (Other Vascular Procedures with MCC, with CC, and without CC or MCC, respectively); MS-DRGs 291, 292, and 293 (Heart Failure and Shock with MCC, with CC, and without CC or MCC, respectively); MS-DRG 313 (Chest Pain); and MS-DRGs 391 and 392 (Esophagitis, Gastroenteritis and Miscellaneous Digestive Disorders with MCC and without MCC, respectively). It is reasonable that the cumulative impact of small changes across a number of base DRGs could result in a difference of 0.5 percentage points between the overall growth in case-mix and our documentation and coding estimate.

With respect to the commenters who raised concerns that our estimate did not fully consider other potential causes of increased real case-mix, such as patients requiring less-complex services receiving care in other settings, “healthier” patients enrolling in MA plans in increasing numbers, and health reform efforts, we note that our methodology for estimating documentation and coding does not, by definition, include real case-mix, regardless of the actual real case-mix level. As MedPAC stated in its comment:

“Our analysis of hospital claims for fiscal year 2008 confirms CMS's findings. To see how much the aggregate CMI and payments increased in 2008 due solely to hospitals' DCI, we used fiscal year 2008 claims—from the December 2008 update of the 2008 MedPAR file—to calculate the national aggregate CMI based on the 2008 MS-DRGs and weights. Using the same claims, we also calculated the aggregate CMI based on the 2007 DRGs and weights. The difference between the two CMIs is 2.8 percent. By definition, this change in reported case mix is not real because the cases are the same.”

The question is how much of the 2.8 percent increase is due to a documentation and coding effect and how much is due to a measurement effect. Both MedPAC and our actuaries, based on prior year data, estimate the measurement effect to be 0.3 percent, yielding our 2.5 percent FY 2008 documentation and coding effect.

With respect to the commenter who indicated that real case-mix growth was 1.0 percent to 1.5 percent, the primary reason cited was the interaction of the resequencing of secondary diagnoses, changes in MS-DRG definitions, and limitations on the number of codes used by CMS for payment and ratesetting. There is a yearly review for making MS-DRG changes. As we note in section II.B.2. of this preamble, the actual process of forming MS-DRGs is highly iterative and involves statistical results from test data and clinical judgment. In addition, while hospitals may submit up to 25 diagnosis codes and 25 procedure codes on the claim, our payment system uses only the first 9 diagnosis code positions and the first 6 procedure code positions for payment purposes. The commenter observed that the

combination of this system limitation with the yearly review of MS-DRGs has a sequencing effect. The commenter did not believe that the resequencing of secondary diagnoses was a documentation and coding effect. We disagree. Resequencing is merely a change in the hospital's ordering of the codes that will be used for payment purposes. It causes a payment change unrelated to any change in the underlying condition of a patient. As we have stated on numerous occasions, we do not believe that these types of documentation and coding changes are the result of inappropriate behavior on the part of hospitals. However, to the extent resequencing occurs, it is appropriately included in our documentation and coding increase.

Comment:

Multiple commenters were disappointed that CMS was unable to obtain relevant findings based on CDAC data to quantify real case-mix change.

Response:

As we stated in the proposed rule, when we attempted to use the CDAC data to distinguish increase in real case-mix growth from increases due to documentation and coding in the overall case-mix number, we found aberrant data and significant inconsistency across the FY 1999-FY 2007 analysis period. It was not possible to distinguish changes in documentation and coding from changes in real case-mix in the CDAC data. Therefore, we concluded that the CDAC data would not support analysis of real case-mix growth that could be used in our retrospective evaluation of the FY 2008 claims data. While we acknowledge the disappointment of the commenters, we note that we did not receive any alternative analysis directly measuring real case-mix growth that did not rely on assumptions with respect to the other factors that influence overall case-mix growth.

Comment:

Some commenters suggested that rural providers are typically presented with less complex cases and have fewer opportunities to benefit from improved coding opportunities.

Response:

As MedPAC stated in its comment, “In addition, we estimated the 2008 DCI effect using the same methods for various subgroups of hospitals. Although the DCI estimates varied somewhat among the groups, the variation was generally small. Thus, the DCI response appears to be widely consistent among all types of hospitals.” Our own analyses confirm MedPAC's finding that the documentation and coding response appears to be generally consistent among different types of hospitals, including urban and rural hospitals. Using the same methodology described earlier, the difference in the DCI response between urban and rural hospitals was not significant, similar to our findings discussed elsewhere that the differences for MDHs and SCHs were not significant.

We also note that we discussed the issue of a uniform adjustment for DCI response in the FY 2008 IPPS final rule (72 FR 47184), published prior to the TMA, Abstinence Education, and QI Programs Extension Act of 2007. In that discussion, we noted that “While improvements in documentation and coding that increase case mix may be variable, section 1886(d)(3)(A)(vi) of the Act only allows us to apply the adjustments that are a result of changes in the coding or classification of discharges that do not reflect real changes in case mix to the standardized amounts.”

Section 7 of the TMA, Abstinence Education, and QI Programs Extension Act of 2007 specifically references section 1886(d)(3)(A)(vi), stating that the Secretary shall “make an appropriate adjustment under paragraph (3)(A)(vi) of such section 1886(d).” Section 1886(d)(3)(A)(iv)(II) of the Act directed CMS to eliminate separate standardized amounts for large urban areas and other areas beginning in FY 2004, creating the current uniform standardized amount that is applicable to all hospitals. Therefore, even if the data did indicate a different DCI response for urban and rural hospitals, the law continues to only allow us to apply the prospective adjustments that are a result of changes in the coding or classification of discharges that do not reflect real changes in case-mix to the standardized amount.

5. Adjustments for FY 2010 and Subsequent Years Authorized by Section 7(b)(1)(A) of Public Law 110-90 and Section 1886(d)(3)(vi) of the Act

Based on our most current evaluation of FY 2008 Medicare claims data, the estimated 2.5 percent change in FY 2008 case-mix due to changes in documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2008 exceeds the −0.6 percent prospective documentation and coding adjustment applied under section 7(a) of Public Law 110-90 by 1.9 percentage points. Under section 7(b)(1)(A) of Public Law 119-90, the Secretary is required to make an appropriate adjustment under section 1886(d)(3)(A)(vi) of the Act to the average standardized amounts for subsequent fiscal years in order to eliminate the full effect of the documentation and coding changes on future payments. In addition, we note that the Secretary has the authority to make this prospective adjustment in FY 2010 under section 1886(d)(3)(A)(vi) of the Act. As we have consistently stated since the initial implementation of the MS-DRG system, we do not believe it is appropriate for expenditures to increase due to MS-DRG-related changes in documentation and coding that do not reflect real changes in case-mix.

We also estimate that the additional change in case-mix due to changes in documentation and coding that do not reflect real changes in case-mix for discharges occurring during FY 2009 will be 2.3 percent, which would exceed by 1.4 percentage points the −0.9 percent prospective documentation and coding adjustment for FY 2009 applied under section 7(a) of Public Law 100-90. We have the statutory authority to adjust the FY 2010 rates for this estimated 1.4 percentage point increase. However, given that Public Law 100-90 requires a retrospective claims evaluation for the additional adjustments described in section II.D.6. of this preamble, we stated in the proposed rule that we believed our evaluation of the extent of the overall national average changes in case-mix for FY 2009 should also be based on a retrospective evaluation of all FY 2009 claims data. Because we do not receive all FY 2009 claims data prior to publication of this final rule, we indicated we would address any difference between the additional increase in FY 2009 case-mix due to changes in documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2009 and the −0.9 percent prospective documentation and coding adjustment applied under section 7(a) of Public Law 110-90 in the FY 2011 rulemaking cycle.

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24096), we solicited public comment on the proposed −1.9 percent prospective adjustment to the standardized amounts under section 1886(d) of the Act to address the effects of documentation and coding changes unrelated to changes in real case-mix in FY 2008. In addition, we solicited public comments on addressing in the FY 2011 rulemaking cycle any differences between the increase in FY 2009 case-mix due to changes in documentation and coding changes that do not reflect real changes in case-mix for discharges occurring during FY 2009 and the −0.9 percent prospective documentation and coding adjustment applied under section 7(a) of Public Law 110-90. We present below a summation of the

public comments we received on these issues and our responses.

Comment:

MedPAC summarized its comments on when CMS should reduce payment rates to prevent further overpayments and to recover overpayments occurring in 2008 and 2009 as follows: “We support CMS's proposal to reduce IPPS payments in 2010 by 1.9 percent to prevent further overpayments. While we and the CMS actuaries believe that a 1.9 percent reduction will not fully prevent overpayments from continuing in 2010, this is a reasonable first step toward reducing overpayments.”

Response:

While we agree with MedPAC's comment that our proposed −1.9 percent adjustment would be a reasonable first step with respect to the documentation and coding increases associated with the implementation of the MS-DRGs, nevertheless, as discussed below, we believe that it would be more prudent to delay implementation of the documentation and coding adjustment to allow for a more complete analysis of FY 2009 claims data. If the estimated documentation and coding effect determined based on a full analysis of FY 2009 claims data is more or less than our current estimates, it would change, possibly lessen, the anticipated cumulative adjustments that we currently estimate we would have to make for FY 2008 and FY 2009 combined adjustment.

Comment:

Most commenters opposed the proposed −1.9 percent prospective FY 2010 adjustment for FY 2008 documentation and coding increases, but supported the proposal not to apply a FY 2010 prospective adjustment for estimated FY 2009 documentation and coding increases. The commenters expressed concern over the financial impact of the proposed −1.9 percent adjustment and the methodology for calculating the adjustment. The comments on the financial impact were generally similar to those contained in the comment from the AHA, which stated that “The proposed rule includes a 1.9 percent cut to both operating and capital payments in FY 2010 and beyond—$23 billion over 10 years—to correct the base rate for payments made in FY 2008 that CMS claims are the effect of documentation and coding changes that do not reflect real changes in case mix. In combination with other policy changes, this cut results in hospitals being paid $1 billion less in FY 2010 than in FY 2009 * * * We recognize that CMS could have taken action to reduce payments more than proposed in this rule. We appreciate that CMS did not propose cuts for documentation and coding changes in FY 2009 or cuts to recoup the estimated documentation and coding overpayments in FY 2008. However, given the severity of the 1.9 percent proposed cut, and in light of the fact that our analysis shows real increases in patient severity, we ask that the agency significantly mitigate its proposed documentation and coding cut.”

Other commenters recommended that CMS seek to extend the timeframe beyond 2 years to phase in the estimated −6.6 percent adjustment to the standardized amount.

Response:

Our actuaries have determined, and MedPAC has confirmed, that the implementation of the MS-DRG system resulted in changes in documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2008. The impact of these changes exceeds the −0.6 percent prospective documentation and coding adjustments applied under section 7(a) of Public Law 110-90. As described earlier, analysis of more recent claims data confirms that the difference is −1.9 percent. We addressed the comments on our methodology in the section II.D.4. of this preamble.

We fully understand that our proposed adjustment of −1.9 percent would reduce the increase in payments that affected hospitals would have received in FY 2009 in the absence of the adjustment. Although we are required to make a prospective adjustment to eliminate the full effect of coding or classification changes that did not reflect real changes in case-mix for discharges occurring during FY 2008, we believe we have some discretion regarding when to implement this adjustment. Section 7(b)(1)(A) of Public Law 110-90 requires that if the Secretary determines that implementation of the MS-DRG system resulted in changes in documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2008 or FY 2009 that are different than the prospective documentation and coding adjustments applied under section 7(a) of Public Law 110-90, the Secretary shall make an “appropriate” adjustment under section 1886(d)(3)(A)(vi) of the Act.

After consideration of the public comments we received on these issues, we have determined that it would be appropriate to postpone adopting documentation and coding adjustments as authorized under section 7(a) of Public Law 110-90 and section 1886(d)(3)(A)(vi) of the Act until a full analysis of case-mix changes can be completed. While we have the statutory authority to make this 1.9 percent prospective adjustment entirely in FY 2010, we believe it would be prudent to wait until we have complete data on the magnitude of the documentation and coding effect in FY 2009. If the documentation and coding effect were less in FY 2009 than our current estimates, it could lessen the anticipated adjustment that we currently estimate we would have to make for FY 2008 and FY 2009 combined. In future rulemaking, we will consider applying a prospective adjustment based upon a complete analysis of FY 2008 and FY 2009 claims data over an extended time period, such as 5 years, beginning in FY 2011. During this phase-in period, we intend to address any difference between the increase in FY 2009 case-mix due to changes in documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2009 and the −0.9 percent prospective documentation and coding adjustment applied under section 7(a) of Public Law 110-90 in the FY 2011 rulemaking cycle.

We appreciate the commenters' support of our decision not to apply a FY 2010 prospective adjustment for estimated FY 2009 documentation and coding increases until we have performed a retrospective evaluation of the FY 2009 claims data.

6. Additional Adjustment for FY 2010 Authorized by Section 7(b)(1)(B) of Public Law 110-90

As indicated above, the estimated 2.5 percent change (estimated from analysis of more recent data than the data used for the proposed rule) due to documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2008 exceeds the −0.6 percent prospective documentation and coding adjustment applied under section 7(a) of Public Law 110-90 by 1.9 percentage points. Our actuaries currently estimate that this 1.9 percentage point increase resulted in an increase in aggregate payments of approximately $2.2 billion. As described earlier, section 7(b)(1)(B) of Public Law 110-90 requires an additional adjustment for discharges occurring in FYs 2010, 2011, and/or 2012 to offset the estimated amount of this increase in aggregate payments (including interest).

Although section 7(b)(1)(B) of Public Law 110-90 requires us to make this adjustment in FYs 2010, 2011, and/or 2012, we have discretion as to when during this 3 year period we will apply the adjustment. For example, we could make adjustments to the standardized amounts under section 1886(d) of the

Act in FY 2010, 2011, and 2012. Alternatively, we could delay offsetting the increase in FY 2008 aggregate payments by applying the adjustment required under section 7(b)(1)(B) of Public Law 110-90 only to FYs 2011 and 2012.

We did not propose to make an adjustment to the FY 2010 average standardized amounts to offset, in whole or in part, the estimated increase in aggregate payments for discharges occurring in FY 2008, but stated in the proposed rule that we intended to address this issue in future rulemaking for FYs 2011 and 2012. That is, we stated we would address recouping the additional expenditures that occurred in FY 2008 as a result of the 1.9 percentage point difference between the actual changes in documentation and coding that do not reflect real changes in case-mix, or 2.5 percent, and the −0.6 percent adjustment applied under Public Law 110-90 in FY 2011 and/or FY 2012, as required by law. We indicated that, while we have the statutory authority to make this −1.9 percent recoupment adjustment entirely in FY 2010, we are delaying the adjustment until FY 2011 and FY 2012 because we do not have any data yet on the magnitude of the documentation and coding effect in FY 2009. If the documentation and coding effect were less in FY 2009 than our current estimates, it could lessen the anticipated recoupment adjustment that we currently estimate we would have to make for FY 2008 and FY 2009 combined. As we have the authority to recoup the aggregate effect of this 1.9 percentage point difference in FY 2008 IPPS payments in FY 2011 or FY 2012 (with interest), delaying this adjustment would have no effect on Federal budget outlays. In the proposed rule, we indicated that we intended to wait until we have a complete year of data on the FY 2009 documentation and coding effect before applying a recoupment adjustment for IPPS spending that occurred in FY 2008 or we estimate will occur in FY 2009.

As discussed above, section 7(b)(1)(B) of Public Law 110-90 requires the Secretary to make an additional adjustment to the standardized amounts under section 1886(d) of the Act to offset the estimated increase or decrease in aggregate payments for FY 2009 (including interest) resulting from the difference between the estimated actual documentation and coding effect and the documentation and coding adjustments applied under section 7(a) of Public Law 110-90. This determination must be based on a retrospective evaluation of claims data. Because we will not receive all FY 2009 claims data prior to publication of this final rule, as we indicate in the proposed rule, we intend to address any increase or decrease in FY 2009 payments in future rulemaking for FY 2011 and 2012 after we perform a retrospective evaluation of the FY 2009 claims data. Our actuaries currently estimate that this adjustment will be approximately −3.3 percent. This reflects the difference between the estimated 4.8 percent cumulative actual documentation and coding changes for FY 2009 (2.5 percent for FY 2008 and an additional 2.3 percent for FY 2009) and the cumulative −1.5 percent documentation and coding adjustments applied under section 7(a) of Public Law 110-90 (−0.6 percent in FY 2008 and −0.9 percent in FY 2009). We note that the actual adjustments are multiplicative and not additive. This more recent estimated 4.8 percent cumulative actual documentation and coding changes for FY 2009 includes the impact of the changes in documentation and coding first occurring in FY 2008 because we believe hospitals will continue these changes in documentation and coding in subsequent fiscal years. Consequently, these documentation and coding changes will continue to impact payments under the IPPS absent a prospective adjustment to account for the effect of these changes.

We note that, unlike the −1.9 adjustment to the standardized amounts under section 7(b)(1)(A) of Public Law 110-90 described earlier, any adjustment to the standardized amounts under section 7(b)(1)(B) of Public Law 110-90 would not be cumulative, but would be removed for subsequent fiscal years once we have offset the increase in aggregate payments for discharges for FY 2008 expenditures and FY 2009 expenditures, if any.

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24096), we solicited public comment on our proposal not to offset the 1.9 percent increase in aggregate payments (including interest) for discharges occurring in FY 2008 resulting from the adoption of the MS-DRGs, but to instead address this issue in future rulemaking for FYs 2011 and 2012.

Comment:

MedPAC stated in its comments on the adjustment to the standardized amounts under section 7(b)(1)(B) of Public Law 110-90: “In addition, it would be desirable for CMS to minimize year-to-year changes in payment adjustments it must make to recover overpayments that were made in 2008 and 2009. To achieve this goal, CMS should consider spreading the recovery of 2008 overpayments over 3 years, beginning in 2010.”

Response:

We appreciate MedPAC's comment that it would be desirable to minimize year-to-year changes in payment adjustments due to the recoupment adjustments. However, as we stated in the proposed rule, we continue to believe it would be more appropriate to examine the FY 2009 claims data fully before making a determination as to the appropriate timing of the FY 2008 recoupment adjustment. Postponing this adjustment until a retrospective evaluation of the claims data from both FY 2008 and FY 2009 are available would allow us to make annual adjustments more appropriately in FY 2011 and FY 2012.

Comment:

As noted above, some commenters recommended that CMS seek to extend the timeframe beyond 2 years to phase in the estimated −6.6 percent adjustment to the standardized amount. The commenters asked CMS to seek necessary legislative action to accommodate such a policy.

Response:

As discussed in the proposed rule, we are required under section 7(b)(1)(B) of Public Law 110-90 to recapture the difference of actual documentation and coding effect in FY 2008 and FY 2009 that is greater than the prior adjustments. This retrospective recoupment process must be completed by the end of FY 2012. The large majority of the remaining adjustment to the standardized amount reflects retrospective adjustment. At this time, we have no plans to seek legislative action to change the time period for this adjustment.

Comment:

Most commenters expressed concern with the significant negative financial impacts that would be incurred by providers if CMS adopted that proposed −1.9 percent documentation and coding adjustment in FY 2010. The commenters cited providers' already small or negative margins for Medicare payments, and requested that CMS not further reduce payments during the current period of economic instability and reduced State funding. Other commenters indicated that it would be appropriate to delay any adjustment to the standardized amounts under section 7(b)(1)(B) of Public Law 110-90 until after CMS has the opportunity to fully examine the FY 2009 claims data.

Response:

We recognize that any adjustment to account for the documentation and coding effect observed in the FY 2008 and FY 2009 claims data may result in significant future payment reduction for providers. However, as discussed in the proposed rule, we are required under section

7(b)(1)(B) of Public Law 110-90 to recapture the difference of actual documentation and coding effect in FY 2008 and FY 2009 that is greater than the prior adjustments. We agree with the commenters who requested that CMS delay any adjustment and, for the reasons stated above, expect to address this issue through the FY 2011 rulemaking.

7. Background on the Application of the Documentation and Coding Adjustment to the Hospital-Specific Rates

Under section 1886(d)(5)(D)(i) of the Act, SCHs are paid based on whichever of the following rates yields the greatest aggregate payment: The Federal rate; the updated hospital-specific rate based on FY 1982 costs per discharge; the updated hospital-specific rate based on FY 1987 costs per discharge; the updated hospital-specific rate based on FY 1996 costs per discharge; or the updated hospital-specific rate based on FY 2006 costs per discharge. Under section 1886(d)(5)(G) of the Act, MDHs are paid based on the Federal national rate or, if higher, the Federal national rate plus 75 percent of the difference between the Federal national rate and the updated hospital-specific rate based on the greatest of the FY 1982, FY 1987, or FY 2002 costs per discharge. In the FY 2008 IPPS final rule with comment period (72 FR 47152 through 47188), we established a policy of applying the documentation and coding adjustment to the hospital-specific rates. In that final rule with comment period, we indicated that because SCHs and MDHs use the same DRG system as all other hospitals, we believe they should be equally subject to the budget neutrality adjustment that we are applying for adoption of the MS-DRGs to all other hospitals. In establishing this policy, we relied on section 1886(d)(3)(A)(vi) of the Act, which provides us with the authority to adjust “the standardized amount” to eliminate the effect of changes in coding or classification that do not reflect real change in case-mix.

However, in the final rule that appeared in the

Federal Register

on November 27, 2007 (72 FR 66886), we rescinded the application of the documentation and coding adjustment to the hospital-specific rates retroactive to October 1, 2007. In that final rule, we indicated that, while we still believe it would be appropriate to apply the documentation and coding adjustment to the hospital-specific rates, upon further review, we decided that the application of the documentation and coding adjustment to the hospital-specific rates is not consistent with the plain meaning of section 1886(d)(3)(A)(vi) of the Act, which only mentions adjusting “the standardized amount” under section 1886(d) of the Act and does not mention adjusting the hospital-specific rates.

In the FY 2009 IPPS proposed rule (73 FR 23540), we indicated that we continued to have concerns about this issue. Because hospitals paid based on the hospital-specific rate use the same MS-DRG system as other hospitals, we believe they have the potential to realize increased payments from documentation and coding changes that do not reflect real increases in patients' severity of illness. In section 1886(d)(3)(A)(vi) of the Act, Congress stipulated that hospitals paid based on the standardized amount should not receive additional payments based on the effect of documentation and coding changes that do not reflect real changes in case-mix. Similarly, we believe that hospitals paid based on the hospital-specific rates should not have the potential to realize increased payments due to documentation and coding changes that do not reflect real increases in patients' severity of illness. While we continue to believe that section 1886(d)(3)(A)(vi) of the Act does not provide explicit authority for application of the documentation and coding adjustment to the hospital-specific rates, we believe that we have the authority to apply the documentation and coding adjustment to the hospital-specific rates using our special exceptions and adjustment authority under section 1886(d)(5)(I)(i) of the Act. The special exceptions and adjustment provision authorizes us to provide “for such other exceptions and adjustments to [IPPS] payment amounts * * * as the Secretary deems appropriate.” In the FY 2009 IPPS final rule (73 FR 48448 through 48449), we indicated that, for the FY 2010 rulemaking, we planned to examine our FY 2008 claims data for hospitals paid based on the hospital-specific rate. We further indicated that if we found evidence of significant increases in case-mix for patients treated in these hospitals that do not reflect real changes in case-mix, we would consider proposing application of the documentation and coding adjustments to the FY 2010 hospital-specific rates under our authority in section 1886(d)(5)(I)(i) of the Act.

In response to public comments received on the FY 2009 IPPS proposed rule, we stated in the FY 2009 IPPS final rule that we would consider whether such a proposal is warranted for FY 2010. To gather information to evaluate these considerations, we indicated that we planned to perform analyses on FY 2008 claims data to examine whether there has been a significant increase in case-mix for hospitals paid based on the hospital-specific rate. If we found that application of the documentation and coding adjustment to the hospital-specific rates for FY 2010 is warranted, we indicated that we would include a proposal to do so in the FY 2010 IPPS proposed rule.

8. Documentation and Coding Adjustment to the Hospital-Specific Rates for FY 2010 and Subsequent Fiscal Years

In the FY 2010 IPPS/RY 2010 LTCH proposed rule (74 FR 24098 through 24100), we discussed our performance of a retrospective evaluation of the FY 2008 claims data for SCHs and MDHs using the same methodology described earlier for other IPPS hospitals. We found that, independently for both SCHs and MDHs, the change due to documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2008 slightly exceeded the proposed 2.5 percent result discussed earlier, but did not significantly differ from that result.

Again, for the proposed rule, we found that the within-base DRG increases were almost entirely responsible for the case-mix change. In the proposed rule, we presented two Figures to display our results.

Therefore, consistent with our statements in prior IPPS rules, we proposed to use our authority under section 1886(d)(5)(I)(i) of the Act to prospectively adjust the hospital-specific rates by the proposed −2.5 percent in FY 2010 to account for our estimated documentation and coding effect in FY 2008 that does not reflect real changes in case-mix. We proposed to leave this adjustment in place for subsequent fiscal years in order to ensure that changes in documentation and coding resulting from the adoption of the MS-DRGs do not lead to an increase in aggregate payments for SCHs and MDHs not reflective of an increase in real case-mix. The proposed −2.5 percent adjustment to the hospital-specific rates exceeded the −1.9 percent adjustment to the national standardized amount under section 7(b)(1)(A) of Public Law 110-90 because, unlike the national standardized rates, the FY 2008 hospital-specific rates were not previously reduced in order to account for anticipated changes in documentation and coding that do not reflect real changes in case-mix resulting from the adoption of the MS-DRGs.

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24100), we

solicited public comment on the proposed −2.5 percent prospective adjustment to the hospital-specific rates under section 1886(d)(5)(I)(i) of the Act and our proposal to address in the FY 2011 rulemaking cycle any changes in FY 2009 case-mix due to changes in documentation and coding that do not reflect real changes in case-mix for discharges occurring during FY 2009. We also indicated that we intended to update our analysis with FY 2008 data on claims paid through March 2008 [sic] for the FY 2010 IPPS final rule. (We note that the March 2008 update claims paid data date in the proposed rule should have been March 2009.)

Consistent with our approach for IPPS hospitals discussed earlier, we are also delaying adoption of a documentation and coding adjustment to the hospital-specific rate until FY 2011. Similar to our approach for IPPS hospitals, we will consider, through future rulemaking, phasing in the documentation and coding adjustment over an appropriate period. As we indicated earlier, we also will address, through future rulemaking, any changes in documentation and coding that do not reflect real changes in case-mix for discharges occurring during FY 2009. We noted that, unlike the national standardized rates, the FY 2009 hospital-specific rates were not previously reduced in order to account for anticipated changes in documentation and coding that do not reflect real changes in case-mix resulting from the adoption of the MS-DRGs. However, as we note earlier with regard to IPPS hospitals, if the estimated documentation and coding effect determined based on a full analysis of FY 2009 claims data is more or less than our current estimates, it would change, possibly lessen, the anticipated cumulative adjustments that we currently estimate we would have to make for the FY 2008 and FY 2009 combined adjustment. Therefore, we believe that it would be more prudent to delay implementation of the documentation and coding adjustment to allow for a more complete analysis of FY 2009 claims data for hospitals receiving hospital-specific rates.

Comment:

One commenter request that CMS rescind the documentation and coding adjustment for SCHs and MDHs. The commenter contended that, due to the special recognition and protection afforded to these provider types by the Medicare program, CMS should more closely reexamine any negative payment adjustment that may threaten the viability of these providers. Commenters also questioned the statutory authority to apply this adjustment to SCHs and MDHs. The commenters argued that because Congress included specific statutory authority to adjust the standardized amount in section 1886(d)(3)(A)(vi) of the Act, CMS is precluded from using the broader “adjustments” language in section 1886(d)(5)(I)(i) of the Act to apply those same adjustments to the hospital-specific rate.

Response:

We disagree with the commenter that the Secretary's broad authority to make exceptions and adjustment to payment amounts under section 1886(d)(3)(A)(vi) of the Act cannot be applied in this instance. We have discussed the basis for applying such an adjustment in prior rules (in the FY 2009 proposed rule (73 FR 23540), the FY 2009 final rule (73 FR 48448), and the FY 2010 proposed rule (74 FR 24098)) and do not agree that the language in section 1886(d)(3)(A)(vi) of the Act limits our authority under section 1886(d)(5)(I)(i) of the Act to make such an adjustment. We recognize that SCHs and MDHs are entitled through legislation to receive the hospital-specific rate in order to compensate for their unique service requirements in the provider community. Similar to our approach with IPPS hospitals, through future rulemaking, we will consider a phase-in of the documentation and coding adjustment over an appropriate period, beginning in FY 2011, and will continue to separately analyze SCH and MDH claims data to assure that any future adjustment is appropriate for these provider types.

9. Background on the Application of the Documentation and Codin

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