Medicare Program; Inpatient Psychiatric Facilities Prospective Payment System Payment Update for Rate Year Beginning July 1, 2006 (RY 2007)

AGENCY:

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

ACTION:

Proposed rule.

SUMMARY:

This proposed rule would update the prospective payment rates for Medicare inpatient hospital services provided by inpatient psychiatric facilities (IPFs). These changes are applicable to IPF discharges occurring during the rate year beginning July 1, 2006 through June 30, 2007. We are proposing to adopt the new Office of Management and Budget (OMB) labor market area definitions for the purpose of geographic classification and the wage index. In addition, we are proposing other new polices and making changes to existing policies.

DATES:

We will consider comments if we receive them at the appropriate address provided below, no later than 5 p.m. on March 14, 2006.

ADDRESSES:

In commenting, please refer to file code CMS-1306-P. Because of staff and resource limitations, we cannot accept comments by facsimile (FAX) transmission.

You may submit comments in one of three ways (no duplicates, please):

1. Electronically. You may submit electronic comments on specific issues in this regulation to http://www.cms.hhs.gov/eRulemaking. (Attachments should be in Microsoft Word, WordPerfect, or Excel; however, we prefer Microsoft Word.)

2. By 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-1306-P, P.O. Box 8010, Baltimore, MD 21244.

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

3. 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 one of the following addresses. If you intend to deliver your comments to the Baltimore address, please call telephone number (410) 786-9994 in advance to schedule your arrival with one of our staff members. Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., Washington, DC 20201; or 7500 Security Boulevard, Baltimore, MD 21244-1850.

(Because access to the interior of the Humphrey 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.)

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

Submission of comments on paperwork requirements. You may submit comments on this document's paperwork requirements by mailing your comments to the addresses provided at the end of the “Collection of Information Requirements” section in this document.

For information on viewing public comments, see the beginning of the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT:

Janet Samen, (410) 786-4533 for general information. Mary Lee Seifert, (410) 786-0030 for information regarding the market basket and labor-related share. Theresa Bean, (410) 786-2287 for impact. Matthew Quarrick, (410) 786-9867 for wage index.

SUPPLEMENTARY INFORMATION:

Submitting Comments: We welcome comments from the public on all issues set forth in this rule to assist us in fully considering issues and developing policies. You can assist us by referencing the file code CMS-1306-P and the specific “issue identifier” that precedes the section on which you choose to comment.

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. CMS posts all electronic comments received before the close of the comment period on its public Web site as soon as possible after they have been received. Hard copy comments received timely will be available for public inspection as they are received, 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.

Table of Contents

I. Background

A. General and Legislative History

B. Overview of the Establishment of the IPF PPS

C. Applicability of the IPF PPS

II. Overview for Updating the IPF PPS

A. Requirements for Updating the IPF PPS

B. Proposed Updates to the IPF PPS

C. Transition Period for Implementation of the IPF PPS

III. Proposed Updates to the IPF PPS for Rate Year beginning July 1, 2006

A. Calculation of the Average Per Diem Cost

B. Determining the Standardized Budget-Neutral Federal Per Diem Rate

1. Standardization of the Federal Per Diem Base Rate

2. Calculation of the Budget Neutrality Adjustment

a. Outlier Adjustment

b. Stop-Loss Provision Adjustment

c. Behavioral Offset

3. Revision of Standardization Factor

C. Update of the Federal Per Diem Base Rate

1. Market Basket for IPFs Reimbursed under the IPF PPS

a. Proposed IPF Market Basket Index

b. Overview of the Proposed RPL Market Basket

2. Proposed Methodology for Operating Portion of the RPL Market Basket

3. Proposed Methodology for Capital Portion of the RPL Market Basket

4. Proposed Labor-Related Share

IV. Update of the IPF PPS Adjustment Factors

A. Overview of the IPF PPS Adjustment Factors

B. Proposed Patient-Level Adjustments

1. Proposed Adjustment for DRG Assignment

2. Proposed Payment for Comorbid Conditions

3. Proposed Patient Age Adjustment

4. Proposed Variable Per Diem Adjustment

C. Facility-Level Adjustments

1. Wage Index Adjustment

a. Proposed Revisions of the IPF PPS Geographic Classifications

b. Current IPF PPS Labor Market Areas Based on MSAs

c. Core-Based Statistical Areas

d. Proposed Revision of the IPF PPS Labor Market Areas

i. New England MSAs

ii. Metropolitan Divisions

iii. Micropolitan Areas

e. Implementation of the Proposed Revised Labor Market Area under the IPF PPS

f. Wage Index Budget Neutrality

1. Proposed Adjustment for Rural Location

2. Proposed Teaching Adjustment

3. Proposed Cost of Living Adjustment for IPFs Located in Alaska and Hawaii

4. Proposed Adjustment for IPFs with a Qualifying Emergency Department

a. Proposed New Source of Admission Code to Implement the ED Adjustment

b. Applicability of the ED Adjustment to IPFs in Critical Access Hospitals

D. Other Payment Adjustments and Policies

1. Outlier Payments

a. Proposed Update to the Outlier Fixed Dollar Loss Amount

b. Proposed Statistical Accuracy of Cost-to-Charge Ratio

2. Proposed Stop-loss Provision

3. Patients who Receive Electroconvulsive Therapy

4. Physician Certification and Recertification Requirements

5. Provisions of Therapeutic Recreation in IPFs

6. Same Day Transfers

V. Provisions of the Proposed Rule

VI. Collection of Information Requirements

VII. Regulatory Impact Analysis

Acronyms

Because of the many terms to which we refer by acronym in this proposed rule, we are listing the acronyms used and their corresponding terms in alphabetical order below:

BBA Balanced Budget Act of 1997, (Pub. L. 105-33)

BBRA Medicare, Medicaid and SCHIP [State Children's Health Insurance Program] Balanced Budget Refinement Act of 1999, (Pub. L. 106-113)

BIPA Medicare, Medicaid, and SCHIP [State Children's Health Insurance Program] Benefits Improvement and Protection Act of 2000, (Pub. L. 106-554)

CBSA Core-Based Statistical Areas

CCR Cost-to-charge ratio

CMS Centers for Medicare & Medicaid Services

CMSA Consolidated Metropolitan Statistical Area

DSM-IV-TR Diagnostic and Statistical Manual of Mental Disorders Fourth Edition—Text Revision

DRGs Diagnosis-related groups

FY Federal fiscal year

HCRIS Hospital Cost Report Information System

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

IPFs Inpatient psychiatric facilities

IRFs Inpatient rehabilitation facilities

LTCHs Long-term care hospitals

MedPAR Medicare provider analysis and review file

MMA Medicare Prescription Drug, Improvement and Modernization Act of 2003, (Pub. L. 108-173)

MSA Metropolitan Statistical Area

NECMA New England County Metropolitan Area

OMB Office of Management and Budget

PIP Periodic interim payments

RY Rate Year (July 1 through June 30)

TEFRA Tax Equity and Fiscal Responsibility Act of 1982, (Pub. L. 97-248)

I. Background

[If you choose to comment on issues in this section, please include the caption “BACKGROUND” at the beginning of your comments.]

A. General and Legislative History

The Congress directed implementation of a prospective payment system (PPS) for acute care hospitals with the enactment of Public Law 98-21. Section 601 of the Social Security Amendments of 1983 (Pub. L. 98-21) added a new section 1886(d) to the Social Security Act (the Act) that replaced the reasonable cost-based payment system for most hospital inpatient services with a PPS.

Although most hospital inpatient services became subject to the PPS, certain hospitals, including IPFs, inpatient rehabilitation facilities (IRFs), long term care hospitals (LTCHs), and children's hospitals were excluded from the PPS for acute care hospitals. These hospitals and units were paid their reasonable costs for inpatient services, subject to a per discharge limitation or target amount under the authority of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Public Law 97-248. The regulations implementing the TEFRA (reasonable cost-based) payment provisions are located at 42 CFR part 413. Cancer hospitals were added to the list of excluded hospitals by section 6004(a) of the Omnibus Budget Reconciliation Act of 1989, (Pub. L. 101-239).

The Congress enacted various provisions in 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) to replace the reasonable cost-based method of reimbursement with a PPS for IRFs, LTCHs, and IPFs. Section 124 of the BBRA required implementation of the IPF PPS.

Section 124 of the BBRA mandated that the Secretary—(1) develop a per diem PPS for inpatient hospital services furnished in psychiatric hospitals and psychiatric units; (2) include in the PPS an adequate patient classification system that reflects the differences in patient resource use and costs among psychiatric hospitals and psychiatric units; (3) maintain budget neutrality; (4) permit the Secretary to require psychiatric hospitals and psychiatric units to submit information necessary for the development of the PPS; and (5) submit a report to the Congress describing the development of the PPS. Section 124 of the BBRA also required that the IPF PPS be implemented for cost reporting periods beginning on or after October 1, 2002.

Section 405(g)(2) of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) (Pub. L. 108-173) extended the IPF PPS to distinct part psychiatric units of critical access hospitals (CAHs).

B. Overview of the Establishment of the IPF PPS

On November 28, 2003, we published a proposed rule in the Federal Register (68 FR 66920) that proposed to implement section 124 of the BBRA. In the November 15, 2004 Federal Register (69 FR 66922) our final rule implemented the IPF PPS for cost reporting periods beginning on or after January 1, 2005. Although section 124 of the BBRA directed that the IPF PPS be implemented for cost reporting periods beginning on or after October 1, 2002, we explained in the proposed and final rules that the creation of a PPS requires an extraordinary amount of lead-time to create a completely new payment system and that we were unable to perform the analysis required in time for an October 1, 2002 implementation, to ensure that a system based on CMS administrative data would fulfill the statutory mandate of section 124 of the BBRA. We explained that despite our best efforts, we could not engage in notice and comment rulemaking and achieve implementation of the IPF PPS by October 1, 2002.

The November 2004 final rule (hereinafter referred to as the IPF PPS final rule) established regulations for the IPF PPS under 42 CFR 412, subpart N.

The IPF PPS established the Federal per diem base rate for each patient day in an IPF derived from the national average daily routine operating, ancillary, and capital costs in IPFs in FY 2002. The average per diem cost was updated to the midpoint of the first year under the IPF PPS, standardized to account for the overall positive effects of the IPF PPS payment adjustments, and adjusted for budget neutrality. The Federal per diem payment under the IPF PPS is comprised of the Federal per diem base rate described above and certain patient and facility payment adjustments that were found in the regression analysis to be associated with statistically significant per diem cost differences (see 69 FR 66933 through 66936 for a description of the regression analysis). The patient-level adjustments include age, DRG assignment, comorbidities, and variable per diem adjustments to reflect the higher cost incurred in the early days of a psychiatric stay. Facility-level adjustments include adjustments for the IPF's wage index, rural location, teaching status, a cost of living adjustment for IPFs located in Alaska and Hawaii, and presence of a qualifying emergency department (ED). The IPF PPS provides additional payments for outlier cases, stop-loss protection which is applicable only during the IPF PPS transition period, includes special payment provisions for interrupted stays, and a per treatment adjustment for patients who undergo electroconvulsive therapy (ECT). We refer readers to the IPF PPS final rule for a comprehensive discussion of the research and data that supported the establishment of the IPF PPS.

On April 1, 2005, we published a correction to the IPF PPS final rule in the Federal Register (70 FR 16724). Any reference to the IPF PPS final rule in this proposed rule includes the provisions in the correction notice. We established a CMS website that contains useful information regarding the IPF PPS including the proposed rule, final rule, and the correction notice. The website URL is http://www.cms.hhs.gov/InpatientPsychFacilPPS/ and may be accessed to download or view publications and other information pertinent to the IPF PPS.

C. Applicability of the IPF PPS

The IPF PPS is applicable to freestanding psychiatric hospitals, including government-operated psychiatric hospitals, and distinct part psychiatric units of acute care hospitals and CAHs.

The regulations at § 412.402 define an IPF as a hospital that meets the requirements specified in § 412.22, § 412.23(a), § 482.60, § 482.61, and § 482.62, and units that meet the requirements specified in § 412.22, § 412.25, and § 412.27.

However, the following hospitals are paid under a special payment provision, as described in § 412.22(c) and, therefore, are not subject to the IPF PPS rules:

• Veterans Administration hospitals.
• Hospitals that are reimbursed under State cost control systems approved under 42 CFR part 403.
• Hospitals that are reimbursed in accordance with demonstration projects specified in section 402(a) of Public Law 90-248 (42 U.S.C. 1395b-1) or section 222(a) of Public Law 92-603 (42 U.S.C. 1395b-1(note)).
• Non-participating hospitals furnishing emergency services to Medicare beneficiaries.

II. Overview for Updating the IPF PPS

[If you choose to comment on issues in this section, please include the caption “OVERVIEW FOR UPDATING THE IPF PPS” at the beginning of your comments.]

A. Requirements for Updating the IPF PPS

Section 124 of the BBRA does not specify an update strategy for the IPF PPS and is broadly written to give the Secretary discretion in establishing an update methodology. Therefore, we reviewed the update approach used in other hospital PPSs (specifically, the IRF and LTCH PPS update methodologies). As a result of this analysis, we stated in the IPF PPS final rule (69 FR 66966) that we would implement the IPF PPS using the following update strategy—(1) calculate the final Federal per diem base rate to be budget neutral for the 18-month period (that is, January 1, 2005 through June 30, 2006); (2) use a July 1 through June 30 annual update cycle; and (3) allow the IPF PPS first update to be effective for discharges July 1, 2006 through June 30, 2007. In this proposed rule, we are proposing updates to the IPF PPS for the period of July 1, 2006 through June 30, 2007.

As explained in the IPF PPS final rule, we believe it is important to delay updating the adjustment factors derived from the regression analysis until we have IPF PPS data that include as much information as possible regarding the patient-level characteristics of the population that each IPF serves. For this reason, we do not intend to update the regression analysis and recalculate the Federal per diem base rate until we have analyzed 1 year of IPF PPS claims and cost report data (that is, no earlier than FY 2008). Until that analysis is complete, we stated our intention to publish a notice in the Federal Register each spring to update the IPF PPS as specified in § 412.428 to include:

• A description of the methodology and data used to calculate the updated Federal per diem base payment amount.
• The rate of increase factor as described in § 412.424(a)(2)(iii), which is based on the excluded hospital with capital market basket under the update methodology of 1886(b)(3)(B)(ii) of the Act for each year.
• The best available hospital wage index and information regarding whether an adjustment to the Federal per diem base rate is needed to maintain budget neutrality.
• Updates to the fixed dollar loss amount in order to maintain the appropriate outlier percentage.
• Describe the ICD-9-CM coding and DRG classification changes discussed in the annual update to the hospital inpatient prospective payment system regulations.
• Update the ECT adjustment by a factor specified by CMS.

B. Proposed Updates to the IPF PPS

As discussed above, we intended to publish a notice in the Federal Register in the spring of 2006 that would announce the updates to the IPF PPS in accordance with § 412.428 rather than update through rulemaking (69 FR 66966). However, since the implementation of the IPF PPS, a new market basket index was announced in the August 2005 IPPS final rule. We believe that this new market basket should be implemented in the IPF PPS as well in order to update the system using the best data available. Therefore, rather than publish a notice to update the IPF PPS in 2006, we are proposing changes in this proposed rule to give interested parties the opportunity to comment.

Furthermore, we indicated in the IPF PPS final rule (69 FR 66952) that we were not adopting the new labor market definitions developed by the OMB and adopted under the IPPS. Rather, we explained that we intended to use the metropolitan statistical areas (MSAs) developed by OMB in 1993 for the wage index under the IPF PPS. At the time we published the proposed IPF PPS rule, the 2003 MSA definitions had not been implemented for any Medicare programs. In addition, we indicated that we believe that the adoption of the new labor market area definitions may have a significant impact on the wage index applied to IPFs and associated payments and that we would assess the implications of the new MSA definitions on IPFs before proposing to adopt them.

We believe that IPFs should be afforded an opportunity to comment on the use of the new labor market definitions before we adopt them under the IPF PPS. For this reason also, we are publishing this proposed rule, rather than a notice, in order to give interested parties an opportunity to comment on the new labor market definitions (see section III.C.1. of this proposed rule).

C. Transition Period for Implementation of the IPF PPS

In the IPF PPS final rule, we established § 412.426 to provide for a 3-year transition period from reasonable cost-based reimbursement to full prospective payment for IPFs. New IPFs are paid 100 percent of the Federal per diem rate. However, for those IPFs that are transitioning to a new system, during the 3-year period as specified in the IPF PPS final rule, payment is based on an increasing percentage of the PPS payment and a decreasing percentage of each IPF's facility-specific TEFRA reimbursement rate. The blend percentages are as follows:

Changes to the blend percentages occur at the beginning of an IPF's cost reporting period. As a result, for discharges occurring during IPF cost reporting periods beginning in CY 2006, IPFs would receive a blended payment consisting of 50 percent of the facility-specific TEFRA payment and 50 percent of the IPF PPS payment amount. However, regardless of when an IPF's cost reporting year begins, the payment update we are proposing would be effective for discharges occurring on or after July 1, 2006 through June 30, 2007. We are not proposing any changes to the transition approach established in the IPF PPS final rule.

III. Proposed Updates to the IPF PPS for Rate Year beginning July 1, 2006

The IPF PPS is based on a standardized Federal per diem base rate calculated from IPF average per diem costs and adjusted for budget-neutrality in the implementation year. The Federal per diem base rate is used as the standard payment per day under the IPF PPS and is adjusted by the applicable wage index factor and the patient-level and facility-level adjustments that are applicable to the IPF stay.

The following is an explanation of how we calculated the Federal per diem base rate and the standardization and budget neutrality factors as described in the IPF PPS final rule.

A. Calculation of the Average Per Diem Cost

[If you choose to comment on issues in this section, please include the caption “PER DIEM COST” at the beginning of your comments.]

As indicated in the IPF PPS final rule, to calculate the Federal per diem base rate, we estimated the average cost per day for—(1) routine services from FY 2002 cost reports (supplemented with FY 2001 cost reports if the FY 2002 cost report was missing); and (2) ancillary services using data from the FY 2002 Medicare claims and corresponding data from facility cost reports.

For routine services, the per diem operating and capital costs were used to develop the average per diem cost amount. The per diem routine costs were obtained from each facility's Medicare cost report. To estimate the costs for routine services included in the Federal per diem base rate calculation, we added the total routine costs (including costs for capital) submitted on the cost report for each provider and divided it by the total Medicare days.

Some average routine costs per day were determined to be aberrant, that is, the costs were extraordinarily high or low and most likely contained data errors. We provided a detailed discussion in the IPF PPS final rule (69 FR 66926 through 66927) of the method used to trim extraordinarily high or low cost values from the per diem rate development file in order to improve the accuracy of our results. For ancillary services, we calculated the costs by converting charges from the FY 2002 Medicare claims into costs using facility-specific, cost-center specific cost-to-charge ratios obtained from each provider's applicable cost reports. We matched each provider's departmental cost-to-charge ratios from their Medicare cost report to each charge on their claims reported in the MedPAR file. Multiplying the total charges for each type of ancillary service by the corresponding cost-to-charge ratio provided an estimate of the costs for all ancillary services received by the patient during the stay. We determined the average ancillary amount per day by dividing the total ancillary costs for all stays by the total number of covered Medicare days.

Adding the average ancillary costs per day and the average routine costs per day including capital costs provided the estimated average per diem cost for each patient day of inpatient psychiatric care in FY 2002.

B. Determining the Standardized Budget-Neutral Federal Per Diem Base Rate

[If you choose to comment on issues in this section, please include the caption “BUDGET NEUTRAL BASE RATE” at the beginning of your comments.]

Section 124(a)(1) of the BBRA requires that the implementing IPF PPS be budget neutral. In other words, the amount of total payments under the IPF PPS, including any payment adjustments, must be projected to be equal to the amount of total payments that would have been made if the IPF PPS were not implemented. Therefore, in the IPF PPS final rule, we calculated the budget-neutrality factor by setting the total estimated IPF PPS payments to be equal to the total estimated payments that would have been made under the TEFRA methodology had the IPF PPS not been implemented. The IPF PPS final rule includes a step-by-step description of the methodology we used to estimate payments under the TEFRA payment system (69 FR 66930). For the IPF PPS methodology, we calculated the final Federal per diem base rate to be budget neutral during the implementation period under the IPF PPS using a July 1 update cycle. Thus, the implementation period for the IPF PPS is the 18-month period January 1, 2005 through June 30, 2006.

We updated the average cost per day to the midpoint of the IPF PPS implementation period (that is, October 1, 2005). We used the most recent projection of the full percentage increase in the 1997-based excluded hospital with capital market basket index for FY 2003 and later in accordance with § 413.40(c)(3)(viii). The updated average cost per day of $724.43 was used in the payment model to establish the budget neutrality adjustment.

1. Standardization of the Federal Per Diem Base Rate

In the IPF PPS final rule, we standardized the IPF PPS Federal per diem base rate in order to account for the overall positive effects of the IPF PPS payment adjustment factors. To standardize the IPF PPS payments, we compared the IPF PPS payment amounts calculated from the psychiatric stays in the FY 2002 MedPAR file to the projected TEFRA payments from the FY 2002 cost report file updated to the midpoint of the IPF PPS implementation period (that is October 2005). The standardization factor was calculated by dividing total estimated payments under the TEFRA payment system by estimated payments under the IPF PPS. The standardization factor was calculated to be 0.8367. As a result, in the IPF PPS final rule, the $724.43 average cost per day was reduced by 16.33 percent (100 percent minus 83.67 percent).

2. Calculation of the Budget Neutrality Adjustment

To compute the budget neutrality adjustment for the IPF PPS, we separately identified each component of the adjustment, that is, the outlier adjustment, stop-loss adjustment, and behavioral offset.

a. Outlier Adjustment

Since the IPF PPS payment amount for each IPF includes applicable outlier amounts, we reduced the standardized Federal per diem base rate to account for aggregate IPF PPS payments estimated to be made as outlier payments. The appropriate outlier amount was determined by comparing the adjusted prospective payment for the entire stay to the computed cost per case. If costs were above the prospective payment plus the adjusted fixed dollar loss threshold amount, an outlier payment was computed using the applicable risk-sharing percentages, as explained in greater detail in section IV.D.1 of this proposed rule. The outlier amount was computed for all stays, and the total outlier amount was added to the final IPF PPS payment. The outlier adjustment was calculated to be 2 percent. As a result, the standardized Federal per diem base rate was reduced by 2 percent to account for projected outlier payments.

b. Stop-Loss Provision Adjustment

As explained in the IPF PPS final rule, we provide a stop-loss payment to ensure that an IPF's total PPS payments are no less than a minimum percentage of their TEFRA payment, had the IPF PPS not been implemented. We reduced the standardized Federal per diem base rate by the percentage of aggregate IPF PPS payments estimated to be made for stop-loss payments.

The stop-loss payment amount was determined by comparing aggregate prospective payments that the provider would receive under the IPF PPS to aggregate TEFRA payments that the provider would have otherwise received without implementation of the IPF PPS. If an IPF's aggregate IPF PPS payments are less than 70 percent of its aggregate payments under TEFRA, a stop-loss payment was computed for that IPF. The stop-loss payment amounts were computed for those IPFs that were projected to receive the payments, and the total amount was added to the final IPF PPS payment amount. As a result, the standardized Federal per diem base rate was reduced by 0.39 percent in order to maintain budget neutrality in the IPF PPS.

c. Behavioral Offset

As explained in the IPF PPS final rule, implementation of the IPF PPS may result in certain changes in IPF practices especially with respect to coding for comorbid medical conditions. As a result, Medicare may incur higher payments than assumed in our calculations. Accounting for these effects through an adjustment is commonly known as a behavioral offset.

Based on accepted actuarial practices and consistent with the assumptions made in other prospective payment systems, we assumed in determining the behavioral offset that IPFs would regain 15 percent of potential “losses” and augment payment increases by 5 percent. We applied this actuarial assumption, which is based on our historical experience with new payment systems, to the estimated “losses” and “gains” among the IPFs. The behavioral offset for the IPF PPS was calculated to be 2.66 percent. As a result, we reduced the standardized Federal per diem base rate by 2.66 percent to maintain budget neutrality.

To summarize, the $724.43 updated average per diem cost was reduced by 16.33 percent to account for standardization to projected TEFRA per diem payments for the implementation period, by 2 percent to account for outlier payments, by 0.39 percent to account for stop-loss payments, and by 2.66 percent reduction to account for the behavioral offset. The final standardized budget-neutral Federal per diem base rate for the IPF PPS implementation year was calculated to be $575.95. We discuss the Federal per diem base rate for RY 2007 in section III B.3. of this proposed rule.

3. Revision of Standardization Factor

In reviewing the methodology used to simulate the IPF PPS payments used for the IPF PPS final rule, we discovered that the computer code incorrectly assigned non-teaching status to most teaching facilities. As a result, total IPF PPS payments were underestimated by about 1.36 percent. The IPF PPS estimated payment total was used in calculating the IPF PPS standardization factor. The standardization factor indicates the proportion by which the IPF PPS per diem payment rate and the ECT rate must be reduced in order to make total IPF PPS payments equal to estimated total TEFRA payments assuming IPFs continued to be paid solely under TEFRA for the first PPS payment year. The standardization factor is calculated as the ratio of estimated total TEFRA payments to estimated total IPF PPS payments assuming no reduction to the per diem and ECT payment rates. Since the IPF PPS payment total should have been larger than the estimated figure, the standardization factor should have been smaller (0.8254 vs. 0.8367). In turn, the per diem rate and the ECT rate should have been reduced by 0.8254 instead of 0.8367.

To resolve this issue, we are proposing to amend the Federal per diem base rate prospectively. Using the standardization factor of 0.8254, the base rate should have been $568.17 for the implementation year of the IPF PPS. It is this base rate that we propose to update using the market basket rate of increase of 4.5 percent and the budget-neutral wage index factor of 1.00156 (as discussed in section IV.C.1.f. of this proposed rule). Applying these factors yields a proposed Federal per diem base rate of $594.66 for the rate year (RY) beginning July 1, 2006 through June 30, 2007.

C. Update of the Federal Per Diem Base Rate

[If you choose to comment on issues in this section, please include the caption “UPDATE ON PER DIEM BASE RATE” at the beginning of your comments.]

1. Market Basket for IPFs Reimbursed under the IPF PPS

a. Proposed IPF Market Basket Index

The market basket index used to develop the IPF PPS is the excluded hospital with capital market basket. This market basket was based on 1997 Medicare cost report data and includes data for Medicare participating IPFs, IRFs, LTCHs, cancer, and children's hospitals.

We are presently unable to create a separate market basket specifically for psychiatric hospitals due to the small number of facilities and the limited data that are provided (for instance, approximately 4 percent of psychiatric facilities reported contract labor cost data for 2002). However, since all IRFs, LTCHs, and IPFs are now paid under a PPS, we are proposing to update PPS payments made under the IRF PPS, the LTCH PPS, and the IPF PPS, in their respective Federal Register updates, using a market basket reflecting the operating and capital cost structures for IRFs, IPFs, and LTCHs, hereafter referred to as the RPL (rehabilitation, psychiatric, long-term care) market basket. We are excluding children's and cancer hospitals from the RPL market basket because their payments are based entirely on reasonable costs subject to rate-of-increase limits established under the authority of section 1886(b) of the Act, which is implemented in § 413.40 of the regulations. They are not reimbursed under a PPS. Also, the FY 2002 cost structures for children's and cancer hospitals are noticeably different than the cost structures of the IRFs, IPFs, and LTCHs.

The services offered in IRFs, IPFs, and LTCHs are typically more labor-intensive than those offered in cancer and children's hospitals. Therefore, the compensation cost weights for IRFs, IPFs, and LTCHs are larger than those in cancer and children's hospitals. In addition, the depreciation cost weights for IRFs, IPFs, and LTCHs are noticeably smaller than those for children's and cancer hospitals.

In the following discussion, we provide an overview on the market basket and describe the methodologies we propose to use for purposes of determining the operating and capital portions of the proposed FY 2002-based RPL market basket.

b. Overview of the Proposed RPL Market Basket

The proposed RPL market basket is a fixed weight, Laspeyres-type price index that is constructed in three steps. First, a base period is selected (in this case, FY 2002) and total base period expenditures are estimated for a set of mutually exclusive and exhaustive spending categories based upon type of expenditure. Then the proportion of total costs that each category represents is determined. These proportions are called cost or expenditure weights. Second, each expenditure category is matched to an appropriate price or wage variable, referred to as a price proxy. In nearly every instance, these price proxies are price levels derived from publicly available statistical series that are published on a consistent schedule, preferably at least on a quarterly basis.

Finally, the expenditure weight for each cost category is multiplied by the level of its respective price proxy for a given period. The sum of these products (that is, the expenditure weights multiplied by their price levels) for all cost categories yields the composite index level of the market basket in a given period. Repeating this step for other periods produces a series of market basket levels over time. Dividing an index level for a given period by an index level for an earlier period produces a rate of growth in the input price index over that time period.

A market basket is described as a fixed-weight index because it answers the question of how much it would cost, at another time, to purchase the same mix of goods and services purchased to provide hospital services in a base period. The effects on total expenditures resulting from changes in the quantity or mix of goods and services (intensity) purchased subsequent to the base period are not measured. In this manner, the market basket measures only pure price change. Only when the index is rebased would the quantity and intensity effects be captured in the cost weights. Therefore, we rebase the market basket periodically so that cost weights reflect changes in the mix of goods and services that hospitals purchase (hospital inputs) to furnish patient care between base periods.

The terms rebasing and revising, while often used interchangeably, actually denote different activities. Rebasing means moving the base year for the structure of costs of an input price index (for example, shifting the base year cost structure from FY 1997 to FY 2002). Revising means changing data sources, methodology, or price proxies used in the input price index. We propose to rebase and revise the market basket used to update the IPF PPS.

2. Proposed Methodology for Operating Portion of the RPL Market Basket

The operating portion of the proposed FY 2002-based RPL market basket consists of several major cost categories derived from the FY 2002 Medicare cost reports for IRFs, IPFs, and LTCHs: wages, drugs, professional liability insurance, and a residual. We choose to use FY 2002 as the base year because we believe this is the most recent, complete year of Medicare cost report data and is consistent with the data year on which the IPF PPS is based. Due to insufficient Medicare cost report data for IRFs, IPFs, and LTCHs, we propose to develop cost weights for benefits, contract labor, and blood and blood products using the FY 2002-based IPPS market basket (70 FR 23384), which we explain in more detail later in this section. For example, less than 30 percent of IRFs, IPFs, and LTCHs reported benefit cost data in FY 2002. We have noticed an increase in cost data for these expense categories over the last 4 years. The next time we rebase the RPL market basket there may be sufficient IRFs, IPFs, and LTCHs cost report data to develop the weights for these expenditure categories.

Since the cost weights for the RPL market basket are based on facility costs, we are proposing to limit our sample to hospitals with a Medicare average length of stay (LOS) within a comparable range of the total facility average LOS. We believe this provides a more accurate reflection of the structure of costs for Medicare covered days. Our goal is to measure cost shares that are reflective of case mix and practice patterns associated with providing services to Medicare beneficiaries.

We propose to use those cost reports for IRFs and LTCHs whose Medicare average LOS is within 15 percent (that is, 15 percent higher or lower) of the total facility average LOS for the hospital. This is the same edit applied to the FY 1992-based and FY 1997-based excluded hospital with capital market basket. We are proposing 15 percent because it includes those LTCHs and IRFs whose Medicare LOS is within approximately 5 days of the facility LOS.

However, we are proposing to use a less stringent measure of Medicare LOS for IPFs whose average LOS is within 30 or 50 percent (depending on the total facility average LOS) of the total facility average LOS. Using this less stringent edit allows us to increase our sample size by over 150 cost reports and produce a cost weight more consistent with the overall facility. The edit we applied to IPFs when developing the FY 1997-based excluded hospital with capital market basket was based on the best available data at the time.

The detailed cost categories under the residual (that is, the remaining portion of the market basket after excluding wages and salaries, drugs, and professional liability cost weights) are derived from the FY 2002-based IPPS market basket and the 1997 Benchmark Input-Output (I-O) Tables published by the Bureau of Economic Analysis, U.S. Department of Commerce. The FY 2002-based IPPS market basket was developed using FY 2002 Medicare hospital cost reports with the most recent and detailed cost data (see the IPPS final rule in the August 12, 2005 Federal Register (70 FR 47388)). The 1997 Benchmark I-O is the most recent, comprehensive source of cost data for all hospitals. The proposed RPL cost weights for benefits, contract labor, and blood and blood products were derived using the FY 2002-based IPPS market basket. For example, the ratio of the benefit cost weight to the wages and salaries cost weight in the FY 2002-based IPPS market basket was applied to the RPL wages and salaries cost weight to derive a benefit cost weight for the RPL market basket. The remaining proposed RPL operating cost categories were derived using the 1997 Benchmark I-O Tables, aged to 2002 using relative price changes. (The methodology we used to age the data involves applying the annual price changes from the price proxies to the appropriate cost categories. We repeat this practice for each year.) Therefore, using this methodology, roughly 59 percent of the proposed RPL market basket is accounted for by wages, drugs, and professional liability insurance data from FY 2002 Medicare cost report data for IRFs, LTCHs, and IPFs.

Table 2 below sets forth the complete proposed 2002-based RPL market basket including cost categories, weights, and price proxies. For comparison purposes, the corresponding FY 1997-based excluded hospital with capital market basket is listed as well.

Wages and salaries are 52.895 percent of total costs in the proposed FY 2002-based RPL market basket compared to 47.335 percent for the FY 1997-based excluded hospital with capital market basket. Employee benefits are 12.982 percent in the proposed FY 2002-based RPL market basket compared to 10.244 percent for the FY 1997-based excluded hospital with capital market basket. As a result, compensation costs (wages and salaries plus employee benefits) for the proposed FY 2002-based RPL market basket are 65.877 percent of costs compared to 57.579 percent for the FY 1997-based excluded hospital with capital market basket. Of the 8 percentage-point difference between the compensation shares, approximately 3 percentage points are due to the proposed new base year (FY 2002 instead of FY 1997), 3 percentage points are due to revised length of stay edit, and the remaining 2 percentage points are due to the proposed exclusion of other hospitals (that is, only including IPFs, IRFs, and LTCHs in the market basket).

Following the table is a summary outlining the choice of the proxies we propose to use for the operating portion of the market basket. The price proxies for the capital portion are described in more detail in the capital methodology section (see section III.C.3 of this proposed rule).

Below we provide the proxies that we are proposing to use for the FY 2002-based RPL market basket. With the exception of the Professional Liability proxy, all the proposed price proxies for the operating portion of the proposed RPL market basket are based on Bureau of Labor Statistics (BLS) data and are grouped into one of the following BLS categories:

• Producer Price Indexes—Producer Price Indexes (PPIs) measure price changes for goods sold in other than retail markets. PPIs are preferable price proxies for goods that hospitals purchase as inputs in producing their outputs because the PPIs better reflect the prices faced by hospitals. For example, we use a special PPI for prescription drugs, rather than the Consumer Price Index (CPI) for prescription drugs because hospitals generally purchase drugs directly from the wholesaler. The PPIs that we use measure price change at the final stage of production.
• Consumer Price Indexes—Consumer Price Indexes (CPIs) measure change in the prices of final goods and services bought by the typical consumer. Because they may not represent the price faced by a producer, we use CPIs only if an appropriate PPI is not available, or if the expenditures are more similar to those of retail consumers in general rather than purchases at the wholesale level. For example, the CPI for food purchases away from home is used as a proxy for contracted food services.
• Employment Cost Indexes—Employment Cost Indexes (ECIs) measure the rate of change in employee wage rates and employer costs for employee benefits per hour worked. These indexes are fixed-weight indexes and strictly measure the change in wage rates and employee benefits per hour. Appropriately, they are not affected by shifts in employment mix.

We evaluated the price proxies using the criteria of reliability, timeliness, availability, and relevance. Reliability indicates that the index is based on valid statistical methods and has low sampling variability. Timeliness implies that the proxy is published regularly, preferably at least once a quarter. Availability means that the proxy is publicly available. Finally, relevance means that the proxy is applicable and representative of the cost category weight to which it is applied. The CPIs, PPIs, and ECIs selected by us to be proposed in this regulation meet these criteria.

We note that the proxies are the same as those used for the FY 1997-based excluded hospital with capital market basket. Because these proxies meet our criteria of reliability, timeliness, availability, and relevance, we believe they continue to be the best measure of price changes for the cost categories. For further discussion on the FY 1997-based excluded hospital with capital market basket, see the IPPS final rule published in the Federal Register on August 1, 2002 (67 FR at 50042).

Wages and Salaries

For measuring the price growth of wages in the proposed FY 2002-based RPL market basket, we propose to use the ECI for wages and salaries for civilian hospital workers as the proxy for wages in the RPL market basket.

Employee Benefits

The proposed FY 2002-based RPL market basket uses the ECI for employee benefits for civilian hospital workers.

Nonmedical Professional Fees

The ECI for compensation for professional and technical workers in private industry would be applied to this category since it includes occupations such as management and consulting, legal, accounting, and engineering services.

Fuel, Oil, and Gasoline

The percentage change in the price of gas fuels as measured by the PPI (Commodity Code #0552) would be applied to this component.

Electricity

The percentage change in the price of commercial electric power as measured by the PPI (Commodity Code #0542) would be applied to this component.

Water and Sewage

The percentage change in the price of water and sewage maintenance as measured by the Consumer Price Index (CPI) for all urban consumers (CPI Code #CUUR0000SEHG01) would be applied to this component.

Professional Liability Insurance

The proposed FY 2002-based RPL market basket would use the percentage change in hospital professional liability insurance (PLI) premiums as estimated by the CMS Hospital Professional Liability Index for the proxy of this category. In the FY 1997-based excluded hospital with capital market basket, the same proxy was used.

We continue to research options for improving our proxy for professional liability insurance. This research includes exploring various options for expanding our current survey, including the identification of another entity that would be willing to work with us to collect more complete and comprehensive data. We are also exploring other options such as third party or industry data that might assist us in creating a more precise measure of PLI premiums. At this time we have not identified a preferred option, therefore no change is proposed for the proxy in this proposed rule.

Pharmaceuticals

The percentage change in the price of prescription drugs as measured by the PPI (PPI Code #PPI32541DRX) would be used as a proxy for this cost category. This is a special index produced by BLS as a proxy in the 1997-based excluded hospital with capital market basket.

Food, Direct Purchases

The percentage change in the price of processed foods and feeds as measured by the PPI (Commodity Code #02) would be applied to this component.

Food, Contract Service

The percentage change in the price of food purchased away from home as measured by the CPI for all urban consumers (CPI Code #CUUR0000SEFV) would be applied to this component.

Chemicals

The percentage change in the price of industrial chemical products as measured by the PPI (Commodity Code #061) would be applied to this component. While the chemicals hospitals purchase include industrial as well as other types of chemicals, the industrial chemicals component constitutes the largest proportion by far. Thus we believe that Commodity Code #061 is the appropriate proxy.

Medical Instruments

The percentage change in the price of medical and surgical instruments as measured by the PPI (Commodity Code #1562) would be applied to this component.

Photographic Supplies

The percentage change in the price of photographic supplies as measured by the PPI Commodity Code #1542) would be applied to this component.

Rubber and Plastics

The percentage change in the price of rubber and plastic products as measured by the PPI (Commodity Code #07) would be applied to this component.

Paper Products

The percentage change in the price of converted paper and paperboard products as measured by the PPI (Commodity Code #0915) would be applied to this component.

Apparel

The percentage change in the price of apparel as measured by the PPI (Commodity Code #381) would be applied to this component.

Machinery and Equipment

The percentage change in the price of machinery and equipment as measured by the PPI (Commodity Code #11) would be applied to this component.

Miscellaneous Products

The percentage change in the price of all finished goods less food and energy as measured by the PPI (Commodity Code #SOP3500) would be applied to this component. Using this index would remove the double-counting of food and energy prices, which are captured elsewhere in the market basket. The weight for this cost category is higher, in part, than in the 1997-based index because the weight for blood and blood products (1.188) is added to it. In the 1997-based excluded hospital with capital market basket, we included a separate cost category for blood and blood products, using the BLS PPI for blood and derivatives as a price proxy. A review of recent trends in the PPI for blood and derivatives suggests that its movements may not be consistent with the trends in blood costs faced by hospitals. While this proxy did not match exactly with the product hospitals are buying, its trend over time appears to be reflective of the historical price changes of blood purchased by hospitals. However, an apparent divergence over recent years led us to reevaluate whether the PPI for blood and derivatives was an appropriate measure of the changing price of blood. We ran test market baskets classifying blood in three separate cost categories: blood and blood products, contained within chemicals as was done for the 1992-based excluded hospital with capital market basket, and within miscellaneous products. These categories use as proxies the following PPIs: The PPI for blood and blood products, the PPI for chemicals, and the PPI for finished goods less food and energy, respectively. Of these three proxies, the PPI for finished goods less food and energy moved most like the recent blood cost and price trends. In addition, the impact on the overall market basket by using different proxies for blood was negligible, mostly due to the relatively small weight for blood in the market basket.

Therefore, we are proposing to use the PPI for finished goods less food and energy for the blood proxy because we believe it more appropriately proxies the price changes (not quantities or required tests) associated with blood purchased by hospitals. We will continue to evaluate this proxy for its appropriateness and will explore the development of alternative price indexes to proxy the price changes associated with this cost.

Telephone

The percentage change in the price of telephone services as measured by the CPI for all urban consumers (CPI Code #CUUR0000SEED) would be applied to this component.

Postage

The percentage change in the price of postage as measured by the CPI for all urban consumers (CPI Code #CUUR0000SEEC01) would be applied to this component.

All Other Services, Labor Intensive

The percentage change in the ECI for compensation paid to service workers employed in private industry would be applied to this component.

All Other Services, Nonlabor Intensive

The percentage change in the all items component of the CPI for all urban consumers (CPI Code # CUUR0000SA0) would be applied to this component.

3. Proposed Methodology for Capital Portion of the RPL Market Basket

Unlike for the operating costs of the proposed FY 2002-based RPL market basket, we did not have IRF, IPF, and LTCH FY 2002 Medicare cost report data for the capital cost weights, due to a change in the FY 2002 reporting requirements. Rather, we used these hospitals' expenditure data for the capital cost categories of depreciation, interest, and other capital expenses for FY 2001, and aged the data to a FY 2002 base year using relevant price proxies.

We calculated weights for the proposed RPL market basket capital costs using the same set of Medicare cost reports used to develop the operating share for IRFs, IPFs, and LTCHs. The resulting proposed capital weight for the FY 2002 base year is 10.149 percent. This is based on FY 2001 Medicare cost report data for IRFs, IPFs, and LTCHs, aged to FY 2002 using relevant price proxies.

Lease expenses are not a separate cost category in the market basket, but are distributed among the cost categories of depreciation, interest, and other, reflecting the assumption that the underlying cost structure of leases is similar to capital costs in general. We assumed 10 percent of lease expenses are overhead and assigned them to the other capital expenses cost category as overhead. We base this assignment of 10 percent of lease expenses to overhead on the common assumption that overhead is 10 percent of costs. The remaining lease expenses were distributed to the three cost categories based on the weights of depreciation, interest, and other capital expenses not including lease expenses.

Depreciation contains two subcategories: building and fixed equipment and movable equipment. The split between building and fixed equipment and movable equipment was determined using the FY 2001 Medicare cost reports for IRFs, IPFs, and LTCHs. This methodology was also used to compute the 1997-based index (67 FR at 50044).

The total interest expense cost category is split between the government/nonprofit and for-profit hospitals. The 1997-based excluded hospital with capital market basket allocated 85 percent of the total interest cost weight to the government nonprofit interest, proxies by average yield on domestic municipal bonds, and 15 percent to for-profit interest, proxies by average yield on Moody's Aaa bonds.

We propose to derive the split using the relative FY 2001 Medicare cost report data for PPS hospitals on interest expenses for the government/nonprofit and for-profit hospitals. Due to insufficient Medicare cost report data for IPFs, IRFs, and LTCHs, we propose to use the same split used in the IPPS capital input price index. We believe it is important that this split reflect the latest relative cost structure of interest expenses for hospitals and, therefore, we propose to use a 75-25 split to allocate interest expenses to government/nonprofit and for-profit (70 FR at 47408).

Since capital is acquired and paid for over time, capital expenses in any given year are determined by both past and present purchases of physical and financial capital. The vintage-weighted capital index is intended to capture the long-term consumption of capital, using vintage weights for depreciation (physical capital) and interest (financial capital). These vintage weights reflect the purchase patterns of building and fixed equipment and movable equipment over time. Depreciation and interest expenses are determined by the amount of past and current capital purchases. Therefore we are proposing to use the vintage weights to compute vintage-weighted price changes associated with depreciation and interest expense.

Vintage weights are an integral part of the proposed FY 2002-based RPL market basket. Capital costs are inherently complicated and are determined by complex capital purchasing decisions, over time, based on such factors as interest rates and debt financing. In addition, capital is depreciated over time instead of being consumed in the same period it is purchased. The capital portion of the proposed FY 2002-based RPL market basket would reflect the annual price changes associated with capital costs, and would be a useful simplification of the actual capital investment process. By accounting for the vintage nature of capital, we are able to provide an accurate, stable annual measure of price changes. Annual non-vintage price changes for capital are unstable due to the volatility of interest rate changes and, therefore, do not reflect the actual annual price changes for Medicare capital-related costs. The capital component of the proposed FY 2002-based RPL market basket would reflect the underlying stability of the capital acquisition process and provide hospitals with the ability to plan for changes in capital payments.

To calculate the vintage weights for depreciation and interest expenses, we needed a time series of capital purchases for building and fixed equipment and movable equipment. We found no single source that provides the best time series of capital purchases by hospitals for all of the above components of capital purchases. The early Medicare Cost Reports did not have sufficient capital data to meet this need. While the American Hospital Association (AHA) Panel Survey provided a consistent database back to 1963, it did not provide annual capital purchases. However, the AHA Panel Survey provided a time series of depreciation expenses through 1997 which could be used to infer capital purchases over time. From 1998 to 2001, hospital depreciation expenses were calculated by multiplying the AHA Annual Survey total hospital expenses by the ratio of depreciation to total hospital expenses from the Medicare cost reports. Beginning in 2001, the AHA Annual Survey began collecting depreciation expenses. We hope to be able to use these data in future rebasings.

In order to estimate capital purchases from AHA data on depreciation and interest expenses, the expected life for each cost category (building and fixed equipment, movable equipment, and debt instruments) is needed. Due to insufficient Medicare cost report data for IPFs, IRFs, and LTCHs, we propose to use FY 2001 Medicare Cost Reports for IPPS hospitals to determine the expected life of building and fixed equipment and movable equipment. We believe this data source reflects the latest relative cost structure of depreciation expenses for hospitals and is analogous to IPFs, IRFs, and LTCHs. The expected life of any piece of equipment can be determined by dividing the value of the asset (excluding fully depreciated assets) by its current year depreciation amount. This calculation yields the estimated useful life of an asset if depreciation were to continue at current year levels, assuming straight-line depreciation. From the FY 2001 Medicare cost reports for IPPS hospitals the expected life of building and fixed equipment was determined to be 23 years, and the expected life of movable equipment was determined to be 11 years.

We also propose to use the fixed and movable weights derived from FY 2001 Medicare cost reports for IPFs, IRFs, and LTCHs to separate the depreciation expenses into annual amounts of building and fixed equipment depreciation and movable equipment depreciation. By multiplying the annual depreciation amounts by the expected life calculations from the FY 2001 Medicare cost reports, year-end asset costs for building and fixed equipment and movable equipment were determined. We then calculated a time series back to 1963 of annual capital purchases by subtracting the previous year asset costs from the current year asset costs. From this capital purchase time series we were able to calculate the vintage weights for building and fixed equipment, movable equipment, and debt instruments. An explanation of each of these sets of vintage weights follows.

For proposed building and fixed equipment vintage weights, the real annual capital purchase amounts for building and fixed equipment derived from the AHA Panel Survey were used. The real annual purchase amount was used to capture the actual amount of the physical acquisition, net of the effect of price inflation. This real annual purchase amount for building and fixed equipment was produced by deflating the nominal annual purchase amount by the building and fixed equipment price proxy, the Boeckh Institutional Construction Index. This is the same proxy used for the FY 1997-based excluded hospital with capital market basket. We believe this proxy continues to meet our criteria of reliability, timeliness, availability, and relevance. Since building and fixed equipment has an expected life of 23 years, the vintage weights for building and fixed equipment are deemed to represent the average purchase pattern of building and fixed equipment over 23-year periods. With real building and fixed equipment purchase estimates back to 1963, sixteen 23-year periods could be averaged to determine the average vintage weights for building and fixed equipment that are representative of average building and fixed equipment purchase patterns over time. Vintage weights for each 23-year period are calculated by dividing the real building and fixed capital purchase amount in any given year by the total amount of purchases in the 23-year period. This calculation is done for each year in the 23-year period, and for each of the sixteen 23-year periods. The average of each year across the sixteen 23-year periods is used to determine the 2002 average building and fixed equipment vintage weights.

For proposed movable equipment vintage weights, the real annual capital purchase amounts for movable equipment derived from the AHA Panel Survey were used to capture the actual amount of the physical acquisition, net of price inflation. This real annual purchase amount for movable equipment was calculated by deflating the nominal annual purchase amount by the movable equipment price proxy, the PPI for Machinery and Equipment. This is the same proxy used for the FY 1997-based excluded hospital with capital market basket. We believe this proxy, which meets our criteria, is the best measure of price changes for this cost category. Since movable equipment has an expected life of 11 years, the vintage weights for movable equipment are deemed to represent the average purchase pattern of movable equipment over an 11-year period. With real movable equipment purchase estimates available back to 1963, twenty-eight 11-year periods could be averaged to determine the average vintage weights for movable equipment that are representative of average movable equipment purchase patterns over time. Vintage weights for each 11-year period would be calculated by dividing the real movable capital purchase amount for any given year by the total amount of purchases in the 11-year period. This calculation is done for each year in the 11-year period, and for each of the twenty-eight 11-year periods. The average of the twenty-eight 11-year periods would be used to determine the FY 2002 average movable equipment vintage weights.

For proposed interest vintage weights, the nominal annual capital purchase amounts for total equipment (building and fixed and movable) derived from the AHA Panel and Annual Surveys were used. Nominal annual purchase amounts were used to capture the value of the debt instrument. Since hospital debt instruments have an expected life of 23 years, the vintage weights for interest are deemed to represent the average purchase pattern of total equipment over 23-year periods. With nominal total equipment purchase estimates available back to 1963, sixteen 23-year periods could be averaged to determine the average vintage weights for interest that are representative of average capital purchase patterns over time. Vintage weights for each 23-year period would be calculated by dividing the nominal total capital purchase amount for any given year by the total amount of purchases in the 23-year period. This calculation would be done for each year in the 23-year period and for each of the sixteen 23-year periods. The average of the sixteen 23-year periods would be used to determine the FY 2002 average interest vintage weights. The vintage weights for the index are presented in Table 3 below.

In addition to the price proxies for depreciation and interest costs described above in the vintage weighted capital section, we propose to use the CPI-U for Residential Rent as a price proxy for other capital-related costs. The price proxies for each of the capital cost categories are the same as those used for the IPPS final rule (67 FR at 50044) capital input price index.

The proposed rate year (that is, beginning July 1, 2006) update for the IPF PPS using the proposed FY 2002-based RPL market basket and Global Insight's 3rd quarter 2005 forecast would be 4.5 percent. This reflects increases in both the operating and capital portions of the market basket from the 18-month period (that is, January 1, 2005 through June 30, 2006). Global Insight, Inc. is a nationally recognized economic and financial forecasting firm that contracts with CMS to forecast the components of the market baskets. Using the current FY 1997-based excluded hospital with capital market basket (66 FR 41427), Global Insight's 3rd quarter 2005 forecast for the proposed rate year beginning July 1, 2006 would be 4.5 percent. Table 4 below compares the proposed FY 2002-based RPL market basket and the FY 1997-based excluded hospital with capital market basket percent changes. For both the historical and forecasted periods between RY 2000 and RY 2008, the difference between the two market baskets is minor with the exception of RY 2002, where the proposed FY 2002-based RPL market basket increased three tenths of a percentage point higher than the FY 1997-based excluded hospital with capital market basket. This is primarily due to the proposed FY 2002-based RPL having a larger compensation (that is, the sum of wages and salaries and benefits) cost weight than the FY 1997-based index and the price changes associated with compensation costs increasing much faster than the prices of other market basket components. Also contributing is the “all other nonlabor intensive” cost weight, which is smaller in the proposed FY 2002-based RPL market basket than in the FY 1997-based index, as well as the slower price changes associated with these costs.

4. Proposed Labor-Related Share

As described in section IV.C.1 of this proposed rule, due to the variations in costs and geographic wage levels, we are proposing that payment rates under the IPF PPS continue to be adjusted by a geographic wage index. This wage index would apply to the labor-related portion of the proposed Federal per diem base rate, hereafter referred to as the labor-related share.

The labor-related share is determined by identifying the national average proportion of operating costs that are related to, influenced by, or vary with the local labor market. Using our current definition of labor-related, the labor-related share is the sum of the relative importance of wages and salaries, fringe benefits, professional fees, labor-intensive services, and a portion of the capital share from an appropriate market basket.

We are proposing to use the FY 2002-based RPL market basket costs to determine the proposed labor-related share for the IPF PPS. The proposed labor-related share for RY 2007 would be the sum of the proposed RY 2007 relative importance of each labor-related cost category, and would reflect the different rates of price change for these cost categories between the base year (FY 2002) and RY 2007. The sum of the proposed relative importance for RY 2007 for operating costs (wages and salaries, employee benefits, professional fees, and labor-intensive services) would be 71.845, as shown in Table 5 below. The portion of capital that is influenced by the local labor market would be estimated to be 46 percent, which is the same percentage used in the FY 1997-based IRF and IPF payment systems. Since the relative importance for capital would be 8.866 (RY 2007) percent of the proposed FY 2002-based RPL market basket in RY 2007, we are proposing to take 46 percent of 8.866 percent to determine the proposed labor-related share of capital for RY 2007. The result would be 4.078 percent, which we propose to add to 71.845 percent for the operating cost amount to determine the total proposed labor-related share for RY 2007. Thus, the labor-related share that we propose to use for IPF PPS in RY 2007 would be 75.923 percent. This proposed labor-related share is determined using the same methodology as employed in calculating all previous IPF labor-related shares (69 FR at 66952).

Table 5 below shows the proposed RY 2007 relative importance labor-related share using the proposed FY 2002-based RPL market basket and the FY 1997-based excluded hospital with capital market basket. We note that the revised and rebased labor-related share would benefit those hospitals with a wage index greater than or equal to 1.000.

IPFs Paid Based on a Blend of the Reasonable Cost-based Payments

Under the broad authority of sections 1886(b)(3)(A) and (b)(3)(B) of the Act and as stated in the FY 2006 IPPS final rule (70 FR 47399), for IPFs that are transitioning to the fully Federal prospective payment rate, we are now using the rebased and revised FY 2002-based excluded hospital market basket to update the reasonable cost-based portion of their payments. We rebase the market basket periodically so that the cost weights reflect changes in the mix of goods and services that hospitals purchase to furnish inpatient care between base periods. We chose FY 2002 as the base year for the excluded hospital market basket because we believe this is the most recent, complete year of Medicare cost report data.

The reasonable cost-based payments, subject to TEFRA limits, are determined on a FY basis. For purposes of the update factor for FY 2006, the portion of the IPF PPS transitional blend payment based on reasonable costs was determined by updating the IPF's TEFRA limit by the FY 2002-based excluded hospital market basket (or 3.8 percent) (70 FR 47691).

As discussed in section III.B.3 of this proposed rule, the proposed Federal per diem base rate is $594.66 for the RY beginning July 1, 2006 and ending June 30, 2007.

IV. Update of the IPF PPS Adjustment Factors

[If you choose to comment on issues in this section, please include the caption “ADJUSTMENT FACTORS” at the beginning of your comments.]

A. Overview of the IPF PPS Adjustment Factors

In developing the IPF PPS, in order to ensure that the IPF PPS would be able to account adequately for each IPF's case-mix, we performed an extensive regression analysis of the relationship between the per diem costs and certain patient and facility characteristics to determine those characteristics associated with statistically significant cost differences on a per diem basis. For characteristics with statistically significant cost differences, we used the regression coefficients of those variables to determine the size of the corresponding payment adjustments.

The IPF PPS payment adjustments were derived from a regression analysis of 100 percent of the FY 2002 MedPAR data file which contained 483,038 cases. We propose to use the same results of this regression analysis for this proposed rule. For a more detailed description of the data file used for the regression analysis, see the IPF PPS final rule.

We computed a per diem cost for each Medicare inpatient psychiatric stay, including routine operating, ancillary, and capital components using information from the FY 2002 MedPAR file and data from the FY 2002 Medicare cost reports. To calculate the cost per day for each inpatient psychiatric stay, routine costs were estimated by multiplying the routine cost per day from the IPF's FY 2002 Medicare cost report by the number of Medicare covered days on the FY 2002 MedPAR stay record. Ancillary costs were estimated by multiplying each departmental cost-to-charge ratio by the corresponding ancillary charges on the MedPAR stay record. The total cost per day was calculated by summing routine and ancillary costs for the stay and dividing it by the number of Medicare covered days for each day of the stay.

As discussed in more detail in section IV.C.5 of this proposed rule, the IPF PPS includes a payment adjustment for IPFs with qualifying Emergency Departments (EDs), and IPFs that are part of acute care hospitals and CAHs with qualifying EDs. As a result, ED costs were excluded from the dependent variable used in the cost regression in order to remove the effects of ED costs from other payment adjustment factors with which ED costs may be correlated and thus avoid overpaying ED costs.

The log of per diem cost, like most health care cost measures, appeared to be normally distributed. Therefore, the natural logarithm of the per diem cost was the dependent variable in the regression analysis. We included variables in the regression to control for psychiatric hospitals that do not bill ancillary costs and for ECT costs that we pay separately. The per diem cost was adjusted for differences in labor cost across geographic areas using the FY 2005 hospital wage index unadjusted for geographic reclassifications, in order to be consistent with our use of the market basket labor share in applying the wage index adjustment.

As discussed in the IPF PPS final rule (69 FR 66936), we computed a wage adjustment factor for each case by multiplying the Medicare 2005 hospital wage index based on MSA definitions defined by OMB in 1993 for each facility by the labor-related share and adding the non-labor share. We used the 1997-based excluded hospital with capital market basket to determine the labor-related share. The per diem cost for each case was divided by this factor before taking the natural logarithm. The payment adjustment for the wage index was computed consistently with the wage adjustment factor, which is equivalent to separating the per diem cost into a labor portion and a non-labor portion and adjusting the labor portion by the wage index.

With the exception of the teaching adjustment, the independent variables were specified as one or more categorical variables. Once the regression model was finalized based on the log normal variables, the regression coefficients for these variables were converted to payment adjustment factors by treating each coefficient as an exponent of the base “e” for natural logarithms, which is approximately equal to 2.718. The payment adjustment factors represent the proportional effect of each variable relative to a reference variable. As a result of the regression analysis, we established patient-level payment adjustments for age, DRG assignment based on patients' principal diagnoses, selected comorbidities, and a day of stay adjustment (the variable per diem adjustments) to reflect higher resource use in the early days of an IPF stay. We also established facility-level payment adjustments for wage area, rural location, teaching status, cost of living adjustment for IPFs located in Alaska and Hawaii, and an adjustment for IPFs with a qualifying ED. We do not intend to update the regression analysis until we can analyze 1 year of IPF PPS claims and cost report data (that is, no earlier than RY 2008). CMS plans to monitor claims and payment data independently from cost report data to assess issues, or whether changes in case-mix or payment shifts have occurred between free-standing governmental, non-profit, and private psychiatric hospitals, and/or psychiatric units of general hospital, and other impact issues of importance to psychiatric facilities.

B. Proposed Patient-Level Adjustments

[If you choose to comment on issues in this section, please include the caption “PATIENT-LEVEL ADJUSTMENTS” at the beginning of your comments.]

We provided payment adjustments for the following payment-level characteristics in the IPF PPS final rule: DRG assignment of the patient's principal diagnosis, selected comorbidities, patient age, and the variable per diem adjustments.

1. Proposed Adjustment for DRG Assignment

The IPF PPS includes payment adjustments for the psychiatric DRG assigned to the claim based on each patient's principal diagnosis. In the IPF PPS final rule, we explained that the IPF PPS includes 15 diagnosis-related group (DRG) adjustment factors (69 FR 66936). The adjustment factors were expressed relative to the most frequently reported DRG in FY 2002, that is, DRG 430. The coefficient values and adjustment factors were derived from the regression analysis.

In accordance with § 412.27, payment under the IPF PPS is made for claims with a principal diagnosis included in the Diagnostic and Statistical Manual of Mental Disorder—Fourth Edition—Text Revision (DSM-IV-TR) or Chapter Five of the International Classification of Diseases—9th Revision—Clinical Modifications (ICD-9-CM). The Standards for Electronic Transaction final rule published in the Federal Register on August 17, 2000 (65 FR 50312), adopted the ICD-9-CM as the designated code set for reporting diseases, injuries, impairments, other health related problems, their manifestations, and causes of injury, disease, impairment, or other health-related problems. As a result, the DSM-IV-TR, while essential for the diagnosis and treatment of mentally ill patients, may not be reported on Medicare claims. However, in order to recognize the importance of the DSM-IV-TR in mental health treatment, we updated the reference to the DSM in § 412.27 from DSM-III-TR to DSM-IV-TR in the IPF PPS final rule. As a result, under the revised § 412.27, IPFs that are distinct part psychiatric units of acute care hospitals and CAHs may only admit patients who have a principal diagnosis in the DSM-IV-TR or Chapter Five of the ICD-9-CM although DSM codes may not be reported on medical claims.

IPF claims with a principal diagnosis included in Chapter Five of the ICD-9-CM or the DSM-IV-TR will be paid the Federal per diem base rate payment under the IPF PPS. Psychiatric principal diagnoses that do not group to one of the 15 designated DRGs receive the Federal per diem base rate and all other applicable adjustments, but the payment does not include a DRG adjustment. Only those claims with diagnoses that group to one of these psychiatric DRGs would receive a DRG adjustment.

We believe it is vital to maintain the same diagnostic coding and DRG classification for IPFs that is used under the IPPS for providing the same psychiatric care. As we explained in the IPF PPS proposed rule (68 FR 66924), all changes to the ICD-9-CM coding system that would impact the IPF PPS are addressed annually in the IPPS proposed and final rules published each year. The updated codes are effective October 1 of each year and must be used to report diagnostic or procedure information. The official version of the ICD-9-CM is available on CD-ROM from the U.S. Government Printing Office. The FY 2005 version can be ordered by contacting the Superintendent of Documents, U.S. Government Printing Office, Department 50, Washington, D.C. 20402-9329, telephone number (202) 512-1800. The stock number is 017-022-01544-7, and the price is $25.00. In addition, private vendors publish the ICD-9-CM. Questions concerning the ICD-9-CM should be directed to Patricia E. Brooks, Co-Chairperson, ICD-9-CM Coordination and Maintenance Committee, CMS, Center for Medicare Management, Purchasing Policy Group, Division of Acute Care, Mailstop C4-08-06, 7500 Security Boulevard, Baltimore, Maryland 21244-1850. Questions and comments may be sent via e-mail to: Patricia.Brooks1@cms.hhs.gov.

Further information concerning the Official Version of the ICD-9-CM can be found in the IPPS final regulation, “Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2006 Rates; Final Rule,” in the August 12, 2005 Federal Register (70 FR 47278) and at http://www.cms.hhs.gov/QuarterlyProviderUpdates/downloads/cms1500f.pdf .

The following two tables below list the FY 2006 new ICD diagnosis codes and FY 2006 revised diagnosis code titles, respectively. These tables are only a listing of FY 2006 changes and do not reflect all of the currently valid and applicable ICD codes classified in the DRGs. Table 6 below lists the new FY 2006 ICD diagnosis codes that are classified to one of the 15 DRGs that are provided a DRG adjustment in the IPF PPS. When coded as a principal code or diagnosis, these codes would receive the correlating DRG adjustment.

Table 7 below lists ICD diagnosis codes whose titles have been modified in FY 2006. Title changes do not impact the DRG adjustment. When used as a principal diagnosis, these codes would still receive the correlating DRG adjustment.

In addition to the aforementioned, in the August 2005 IPPS final rule, we finalized ICD code 305.1, Tobacco Use Disorder, in order to designate this code as a noncovered Medicare service when reported as the principal diagnosis. Below we have republished the explanation that was included in the IPPS final rule (70 FR 47312) and published on the CMS website at http://www.cms.hhs.gov/ QuarterlyProviderUpdates/downloads/cms1500f.pdf.

We have become aware of the possible need to add code 305.1 (Tobacco use disorder) to the MCE in order to make admissions for tobacco use disorder a noncovered Medicare service when code 305.1 is reported as the principal diagnosis. On March 22, 2005, CMS published a final decision memorandum and related national coverage determination (NCD) on smoking cessation counseling services on its Web site: ( http://www.cms.hhs.gov/coverage/ ). Among other things, this NCD provides that: ‘Inpatient hospital stays with the principal diagnosis of 305.1, Tobacco Use Disorder, are not reasonable and necessary for the effective delivery of tobacco cessation counseling services. Therefore, we will not cover tobacco cessation services if tobacco cessation is the primary reason for the patient's hospital stay.’ Therefore, in order to maintain internal consistency with CMS programs and decisions, we proposed to add code 305.1 to the MCE edit “Questionable Admission—Principal Diagnosis Only” in order to make tobacco use disorder a noncovered admission. (70 FR 47312).

In order to maintain consistency with the IPPS, for discharges on or after October 1, 2005, ICD code 305.1, Tobacco Use Disorder, would not be a covered principal diagnosis under the IPF PPS.

Although we are updating the IPF PPS to reflect ICD-9-CM coding changes and DRG classification changes discussed in the annual update to the IPPS, we are proposing that the DRG adjustment factors currently being paid to IPFs would remain the same for discharges occurring during the rate year July 1, 2006 through June 30, 2007. As indicated in the IPF PPS final rule, we do not intend to update the regression analysis until we have analyzed 1 year of IPF PPS claims and cost report data. As a result, we are proposing to adopt the DRG adjustments that are currently being paid as indicated in Table 8 below.

Section § 412.424(d) separately identifies both “Diagnosis-related group assignment” and “Principal diagnosis” as patient level adjustments. Since publication of the IPF PPS final rule, we have received inquiries related to whether the IPF PPS includes two patient-level payment adjustments for principal diagnosis, an adjustment for the diagnosis-related group assignment and a separate adjustment for providing a principal diagnosis in general. We intended that the IPF PPS provide one patient-level adjustment for principal diagnosis, that is “Diagnosis-related group assignment.”

In order to clarify our policy, we are proposing to modify the language in section § 412.424(d). We are proposing to delete sub-paragraph § 412.424(d)(2)(iii).

2. Proposed Payment for Comorbid Conditions

In the IPF PPS final rule, we established 17 comorbidity categories and identified the ICD-9-CM diagnosis codes that generate a payment adjustment under the IPF PPS.

Comorbidities are specific patient conditions that are secondary to the patient's primary diagnosis, and that require treatment during the stay. Diagnoses that relate to an earlier episode of care and have no bearing on the current hospital stay are excluded and not reported on IPF claims. Comorbid conditions must co-exist at the time of admission, develop subsequently, affect the treatment received, affect the length of stay or affect both treatment and length of stay.

The intent of the comorbidity adjustments was to recognize the increased cost associated with comorbid conditions by providing additional payments for certain concurrent medical or psychiatric conditions that are expensive to treat. An IPF may receive only one comorbidity adjustment per comorbidity category, but it may receive an adjustment for more than one comorbidity category. Billing instructions require that IPFs must enter the full ICD-9-CM codes for up to 8 additional diagnoses if they co-exist at the time of admission or developed subsequently.

The comorbidity adjustments were determined based on regression analysis using the diagnoses reported by hospitals as other diagnoses in FY 2002. The principal diagnoses were used to establish the DRG adjustment and were not accounted for in establishing the comorbidity category adjustments, except where ICD-9-CM “code first” instructions apply. As we explained in the IPF PPS final rule, the code first rule applies when a condition has both an underlying etiology and a manifestation due to the underlying etiology. For these conditions, the ICD-9-CM has a coding convention that requires the underlying conditions to be sequenced first followed by the manifestation. Whenever a combination exists, there is a “use additional code” note at the etiology code and a “code first” note at the manifestation code.

Although we are updating the IPF PPS to reflect updates to the ICD-9-CM codes, we are proposing that the comorbidity adjustment factors currently in effect would remain in effect for the rate year beginning July 1, 2006. As we indicated in the IPF PPS final rule, we do not intend to update the regression analysis until we have analyzed 1 year of IPF PPS claims and cost report data. The proposed comorbidity adjustments are shown in Table 9 below.

As previously discussed in the DRG section, we believe it is essential to maintain the same diagnostic coding set for IPFs that is used under the IPPS for providing the same psychiatric care. Therefore, we are proposing to use the most current FY 2006 ICD codes. They are reflected in the FY 2006 GROUPER, version 23.0 and are effective for discharges occurring on or after October 1, 2005.

Table 9 lists the updated FY 2006 new ICD diagnosis codes that impact the comorbidity adjustment under the IPF PPS and Table 10 lists the invalid ICD codes no longer applicable for the comorbidity adjustment. Table 9 only lists the FY 2006 new codes and does not reflect all of the currently valid ICD codes applicable for the IPF PPS comorbidity adjustment.

We note that ICD diagnosis code 585 Chronic Renal Failure was modified in two ways—(1) by expanding the level of specificity to include seven new codes; and (2) by changing the original code of 585 to invalid, thereby leaving the remaining more specific codes reportable. Since diagnosis code 585 is no longer valid, we are proposing to eliminate this code from the comorbidity category “Renal Failure, Chronic.”

ICD diagnosis code 585 chronic Renal Failure is defined in the ICD-9-CM as “Progressive, persistent inadequate kidney function characterized by anuria, accumulation of urea and other nitrogenous bodies in the blood, nausea, vomiting, gastrointestinal bleeding, and yellowish-brown discoloration of the skin.” This code included the various stages of chronic kidney disease, but it is no longer valid. The new codes listed below reflect the various stages of chronic kidney failure. Since diagnosis code 585 is no longer valid, we are proposing to eliminate it from the comorbidity category, “Renal Failure, Chronic”.

We are proposing to provide comorbidity adjustments for 585.3, “Chronic kidney disease, Stage III (moderate),” 585.4, “Chronic kidney disease, Stage IV (severe),” 585.5, “Chronic kidney disease, Stage V,” 585.6, “End Stage renal disease,” and 585.9, “Chronic kidney disease, unspecified.” However, since the purpose of the comorbidity adjustment is to account for the higher resource costs associated with comorbid conditions that are expensive to treat on a per diem basis, we are not proposing a comorbidity adjustment for 585.1, “Chronic kidney disease, Stage I” and 585.2, “Chronic kidney disease, Stage II (mild).”

We believe that these conditions (585.1 and 585.2) are less costly to treat on a per diem basis because patients with these conditions are either asymptomatic or may have only mild symptoms. These conditions represent a minimal to mild decrease in kidney function that is almost completely compensated such that the only finding is typically an abnormal laboratory test. Unlike patients with more significant kidney dysfunction, these patients do not usually require more costly patient care interventions such as additional lab tests to monitor renal function, special pharmacy attention to reduced dosages or kidney-sparing medications, or fluid and electrolyte precautions with special diets, frequent weights, Input/Output balance, and fluid restriction. As such, the resources and costs that these patients require for staff time, medications and supplies, and administrative services are expected to be similar to other patients without these conditions.

In Table 10 below, we list the FY 2006 invalid ICD diagnosis code 585 that we are proposing to remove from the comorbidity adjustment under the IPF PPS. This table does not reflect all of the currently valid ICD codes applicable for the IPF PPS comorbidity adjustment.

We are aware that ICD code 404.03, Hypertensive Heart and Renal Disease, Malignant, with Heart Failure and Renal Failure, has caused confusion since this ICD code is currently used to code an adjustment in two separate IPF comorbidity categories, (that is, both “Renal Failure, Chronic” and “Cardiac Conditions”). After a careful review of this code, we believe that it more appropriately corresponds to the “Cardiac Conditions” comorbidity than to the “Renal Failure, Chronic” comorbidity. Therefore, to be more clinically cohesive and to eliminate confusion, we are proposing to remove ICD code 404.03 from the comorbidity adjustment category “Renal Failure, Chronic,” but retaining it in the “Cardiac Conditions” comorbidity category. Since both comorbidity categories have the same adjustment factor of 1.11, no negative payment consequence would result from this change.

The seventeen comorbidity categories for which we are proposing to provide an adjustment, their respective codes including the new FY 2006 ICD codes, and their respective adjustment factors are listed below in Table 11.

3. Proposed Patient Age Adjustments

As explained in the IPF PPS final rule, we analyzed the impact of age on per diem cost by examining the age variable (that is, the range of ages) for payment adjustments.

In general, we found that the cost per day increases with increasing age. The older age groups are more costly than the under 45 years of age group, the differences in per diem cost increase for each successive age group, and the differences are statistically significant.

Based on the results of the regression analysis, we established 8 adjustment factors for age beginning with age groupings, 45 and under 50, 50 and under 55, 55 and under 60, 60 and under 65, 65 and under 70, 70 and under 75, 75 and under 80, and 80 years of age and over. Patients under 45 years of age are assigned an age adjustment factor of 1.00. As we indicated in the IPF PPS final rule, we do not intend to update the regression analysis until we can analyze 1 year of IPF PPS claims and cost report data. As a result, in this proposed rule, we are proposing to adopt the patient age adjustments currently in effect and shown in Table 12 below.

4. Proposed Variable Per Diem Adjustments

We explained in the IPF PPS final rule that cost regressions indicated that per diem cost declines as the length of stay increases (69 FR 66947). The variable per diem adjustments to the Federal per diem base rate account for ancillary and administrative costs that occur disproportionately in the first days after admission to an IPF.

We used regression analysis to estimate the average differences in per diem cost among stays of different length. Regression analysis simultaneously controls for cost differences associated with the other variables (for example, age, DRG, and presence of specific comorbidities). The regression coefficients measure the relative average cost per day for stays of differing lengths compared to a reference group's length of stay. We analyzed through cost regression, the relative cost per day for day 1 through day 30. We determined that the average per diem cost declined smoothly until the 22nd day. As a result of this analysis, we established variable per diem adjustments that begin on day 1 and decline gradually until day 21 of a patient's stay. For day 22 and thereafter, the variable per diem adjustment remains the same each day for the remainder of the stay. However, the adjustment applied to day 1 depends upon whether the IPF has a qualifying Emergency Department (ED). If an IPF has a qualifying ED, it receives a 1.31 adjustment for day 1 of each patient stay. If an IPF does not have a qualifying ED, it receives a 1.19 adjustment for day 1 of the stay. The ED adjustment is explained in more detail in section IV.C.5. of this proposed rule.

As we indicated in the IPF PPS final rule, we do not intend to make changes to the regression analysis until we can analyze 1 year of IPF PPS claims and cost report data. As a result, for the rate year beginning July 1, 2006, we are proposing to adopt the variable per diem adjustment factors currently in effect. Table 13 below shows the variable per diem adjustments we are proposing for updating the IPF PPS. Higher payments for the early days of stay in IPFs are not fully compensated by the lower payments after day 10, but are paid for by the standardization portion which is applied to the federal per diem base rate.

C. Facility-Level Adjustments

[If you choose to comment on issues in this section, please include the caption “FACILITY-LEVEL ADJUSTMENTS” at the beginning of your comments.]

The IPF PPS includes facility-level adjustments for the wage index, IPFs located in rural areas, teaching IPFs, cost of living adjustments for IPFs located in Alaska and Hawaii, and IPFs with a qualifying ED.

1. Wage Index Adjustment

a. Proposed Revisions of IPF PPS Geographic Classifications

In the IPF PPS final rule, we explained that in establishing an adjustment for area wage levels, the labor-related portion of an IPF's Federal prospective payment is adjusted by using an appropriate wage index. We also explained that an IPF's wage index is determined based on the location of the IPF in an urban or rural area as defined in § 412.62(f)(1)(ii) and (f)(1)(iii), respectively. An urban area under the IPF PPS is defined at § 412.62(f)(1)(ii)(A) and (B). In general, an urban area is defined as a Metropolitan Statistical Area (MSA) or New England County Metropolitan Area (NECMA) as defined by the Office of Management and Budget (OMB). In addition, a few counties located outside of MSAs are considered urban as specified at § 412.62(f)(1)(ii)(B). Under § 412.62(f)(1)(iii), a rural area is defined as any area outside of an urban area. The geographic classifications defined in § 412.62(f)(1)(ii) and (f)(1)(iii), were used under the IPPS from FYs 1984 through 2004 (§ 412.62(f) and § 412.63(b)), and have been used under the IPF PPS since it was implemented for cost reporting periods beginning on or after January 1, 2005.

Under the IPPS, the wage index is calculated and assigned to hospitals on the basis of the labor market area in which the hospital is located or geographically reclassified to in accordance with sections 1886(d)(8) and (d)(10) of the Act. Under the IPF PPS, the wage index is calculated using IPPS wage index data (as discussed below in section IV C.1.d of this preamble) on the basis of the labor market area in which the IPF is located, without taking into account geographic reclassification under sections 1886(d)(8) and (d)(10) of the Act and without applying the “rural floor” established under section 4410 of the BBA. (Section 4410 of the BBA provides that for the purposes of section 1886(d)(3)(E) of the Act, the area wage index applicable to hospitals located in an urban area of a State may not be less than the area wage index applicable to hospitals located in rural areas in the State. This provision is commonly referred to as the “rural floor” under the IPPS.) However, when we established the IPF PPS, we did not apply the rural floor to IPFs. For this reason, the hospital wage index used for IPFs is commonly referred to as the “pre-floor” hospital wage index indicating that the “rural floor” provision of the BBA is not applied. As a result, the applicable IPF wage index value is assigned to the IPF on the basis of the labor market area in which the IPF is geographically located.

As noted above, the current IPF PPS labor market areas are defined based on the definitions of MSAs, Primary MSAs (PMSAs), and NECMAs issued by the OMB (commonly referred to collectively as “MSAs”). The MSA definitions, which are discussed in greater detail below, are currently used under the IPF PPS and other PPSs (that is, the IRF PPS, the LTCH PPS, and the PPSs for home health agencies (HHA PPS) and skilled nursing facilities (SNF PPS)). In the FY 2005 IPPS final rule (69 FR 49026 through 49034), revised labor market area definitions were adopted under the IPPS (§ 412.64(b)), which were effective October 1, 2004. These new standards, called Core-Based Statistical Areas (CBSAs), were announced by the OMB late in 2000 and are discussed in greater detail below.

b. Current IPF PPS Labor Market Areas Based on MSAs

When we published the IPF PPS final rule, we explained that we were not adopting the new statistical area definitions defined by OMB for the following reasons. First, the change in labor market areas under the IPPS had not changed at the time we published the IPF PPS proposed rule on November 28, 2003. As a result, IPFs and other interested parties were not afforded an opportunity to comment on the use of the new labor market area definitions under the IPF PPS. Second, we wanted to conduct a thorough analysis of the impact of the new labor market area definitions on payments under the IPF PPS. Finally, in the IPF PPS final rule, we indicated our intent to publish in a proposed rule any changes we were considering for new labor market definitions.

The analysis of the impact of the new labor market definitions has been completed and we are proposing to adopt new labor market area definitions under the IPF PPS. As a result, we believe it is helpful to provide a detailed description of the current IPF PPS labor market areas, in order to better understand the proposed changes to the IPF PPS labor market areas presented in this proposed rule.

As mentioned earlier, since the implementation of the IPF PPS, we have used labor market areas to further characterize urban and rural areas as determined under § 412.62(f)(1)(ii) and (iii). To this end, we have defined labor market areas under the IPF PPS based on the definitions of MSAs, PMSAs, and NECMAs issued by the OMB in 1993, which is consistent with the IPPS approach prior to FY 2005. We note that OMB also defines Consolidated MSAs (CMSAs). A CMSA is a metropolitan area with a population of 1 million or more, comprising two or more PMSAs (identified by their separate economic and social character). However, for purposes of the wage index, we use the PMSAs rather than CMSAs because they allow a more precise breakdown of labor costs. If a metropolitan area is not designated as part of a PMSA, we use the applicable MSA.

These different designations use counties as the building blocks upon which they are based. Therefore, under the IPF PPS, hospitals are assigned to either an MSA, PMSA, or NECMA based on whether the county in which the IPF is located is part of that area. All of the counties in a State outside a designated MSA, PMSA, or NECMA are designated as rural.

c. Core-Based Statistical Areas

The OMB reviews its Metropolitan Area definitions preceding each decennial census. As discussed in the FY 2005 IPPS final rule (69 FR 49026), in the fall of 1998, OMB chartered the Metropolitan Area Standards Review Committee to examine the Metropolitan Area standards and develop recommendations for possible changes to those standards. Three notices related to the review of the standards, providing an opportunity for public comment on the recommendations of the Committee, were published in the Federal Register on the following dates: December 21, 1998 (63 FR 70526); October 20, 1999 (64 FR 56628); and August 22, 2000 (65 FR 51060).

In the December 27, 2000 Federal Register (65 FR 82228 through 82238), OMB announced its new standards. In that notice, OMB defines a Core-Based Statistical Area (CBSA), beginning in 2003, as “a geographic entity associated with at least one core of 10,000 or more population, plus adjacent territory that has a high degree of social and economic integration with the core as measured by commuting ties. The standards designate and define two categories of CBSAs: Metropolitan Statistical Areas and Micropolitan Statistical Areas.” (65 FR 82236 through 82238).

According to the OMB, MSAs are based on urbanized areas of 50,000 or more population, and Micropolitan Statistical Areas (referred to in this discussion as Micropolitan Areas) are based on urban clusters of at least 10,000 population, but less than 50,000 population. Counties that do not fall within CBSAs (either MSAs or Micropolitan Areas) are deemed “Outside CBSAs.” In the past, OMB defined MSAs around areas with a minimum core population of 50,000, and smaller areas were “Outside MSAs.” On June 6, 2003, the OMB announced the new CBSAs, comprised of MSAs and the new Micropolitan Areas based on Census 2000 data. (A copy of the announcement may be obtained at the following Internet address: http://www.whitehouse.gov/omb/bulletins/fy04/b04-03.html.)

The new CBSA designations recognize 49 new MSAs and 565 new Micropolitan Areas, and extensively revise the composition of many of the existing MSAs. There are 1,090 counties in MSAs under the new CBSA designations (previously, there were 848 counties in MSAs). Of these 1,090 counties, 737 are in the same MSA as they were prior to the change in designations, 65 are in a different MSA, and 288 were not previously designated to any MSA. There are 674 counties in Micropolitan Areas. Of these, 41 were previously in an MSA, while 633 were not previously designated to an MSA. There are five counties that previously were designated to an MSA but are no longer designated to either an MSA or a new Micropolitan Area: Carter County, KY; St. James Parish, LA; Kane County, UT; Culpepper County, VA; and King George County, VA. For a more detailed discussion of the conceptual basis of the new CBSAs, refer to the FY 2005 IPPS final rule (67 FR 49026 through 49034).

d. Proposed Revision of the IPF PPS Labor Market Areas

In its June 6, 2003 announcement, OMB cautioned that these new definitions “should not be used to develop and implement Federal, State, and local nonstatistical programs and policies without full consideration of the effects of using these definitions for such purposes. These areas should not serve as a general-purpose geographic framework for nonstatistical activities, and they may or may not be suitable for use in program funding formulas.”

We currently use MSAs to define labor market areas for purposes of Medicare wage indices in the IPF PPS since its implementation for cost reporting periods beginning on or after January 1, 2005. Until recently, MSAs were used to define labor market areas for purposes of the wage index for many of the other Medicare payment systems (for example, IRF PPS, SNF PPS, HHA PPS, and Outpatient PPS). While we recognize MSAs are not designed specifically to define labor market areas, we believe they represent a useful proxy for this purpose, because they are based upon characteristics we believe also generally reflect the characteristics of unified labor market areas. For example, CBSAs consist of a core population plus an adjacent territory that reflects a high degree of social and economic integration. This integration is measured by commuting ties, thus demonstrating that these areas may draw workers from the same general areas. In addition, the most recent CBSAs reflect the most up-to-date information. Our analysis and discussion here are focused on issues related to adopting the new CBSA designations to define labor market areas for the purposes of the IPF PPS.

Historically, Medicare PPSs have utilized Metropolitan Area definitions developed by the OMB. As noted above, the labor market areas currently used under the IPF PPS are based on the Metropolitan Area definitions issued by the OMB and the OMB reviews its Metropolitan Area definitions preceding each decennial census to reflect more recent population changes. The CBSAs are OMB's latest Metropolitan Area definitions based on the Census 2000 data. Because we believe that the OMB's latest Metropolitan Area designations more accurately reflect the local economies and wage levels of the areas in which hospitals are currently located, we adopted revised labor market area designations based on the OMB's CBSA designations under the IPPS effective October 1, 2004. When we implemented the wage index adjustment at § 412.424(d)(1)(i) under the IPF PPS final rule (69 FR 66952 through 66954), we explained that the IPF PPS wage index adjustment was intended to reflect the relative hospital wage levels in the geographic area of the hospital as compared to the national average hospital wage level. The OMB's CBSA designations based on Census 2000 data reflect the most recent available geographic classifications (Metropolitan Area definitions). Therefore, we are proposing to revise the labor market area definitions used under the IPF PPS based on the OMB's CBSA designations. This change would ensure that the IPF PPS wage index adjustment most appropriately accounts for and reflects the relative hospital wage levels in the geographic area of the hospital as compared to the national average hospital wage level.

Specifically, we are proposing to revise the IPF PPS labor market definitions based on the OMB's new CBSA designations (as discussed in greater detail below) effective for IPF PPS discharges occurring on or after July 1, 2006. Accordingly, we are proposing to revise § 412.402, definitions for rural and urban areas, effective for discharges occurring on or after July 1, 2006 would be defined in § 412.64(b)(1)(ii)(A) through (C). These definitions are the labor market definitions based on OMB's CBSA designations. For clarity, we are proposing to revise the regulation text to explicitly reference urban and rural definitions for a cost reporting period beginning on or after January 1, 2005, with respect to discharges occurring during the period covered by such cost reports but before July 1, 2006 under § 412.62(f)(1)(ii) and § 412.62(f)(1)(iii).

We note that these are the same labor market area definitions (based on the OMB's new CBSA designations) implemented for acute care hospitals under the IPPS at § 412.64(b), which were effective for those hospitals beginning October 1, 2004 as discussed in the FY 2005 IPPS final rule (69 FR 49026-49034). The IPF PPS uses the acute care inpatient hospitals' wage data in calculating the IPF PPS wage index. However, unlike the IPPS, and similar to other Medicare payment systems (for example, SNF PPS and IRF PPS), the IPF PPS uses the pre-floor, pre-reclassified hospital wage index.

Below, we discuss the composition of the proposed IPF PPS labor market areas based on OMB's new CBSA designations. It should be noted that OMB's new CBSA designations are comprised of several county-based area definitions as explained above, which include Metropolitan Areas, Micropolitan Areas, and areas “outside CBSAs.” We implemented the IPF PPS using two types of labor market areas, that is, urban and rural. In this proposed rule, we are proposing to adopt the revised labor market areas based on OMB's new CBSA-based designations. We are also proposing to continue to have 2 types of labor market areas (urban and rural). In the discussion that follows, we explain our proposal to recognize Metropolitan Areas, which include New England MSAs and Metropolitan Divisions, as urban. We also explain our proposal to recognize Micropolitan Areas and areas “outside CBSAs” as rural. The following discussion describes the proposed methodology for mapping OMB's CBSA-based designations into the IPF PPS (urban area or rural area) format.

i. New England MSAs

As stated above, we currently use NECMAs to define labor market areas in New England, because these are county-based designations, rather than the 1990 MSA definitions for New England, which used minor civil divisions such as cities and towns. Under the current MSA definitions, NECMAs provided more consistency in labor market definitions for New England compared with the rest of the country, where MSAs are county-based. Under the new CBSAs, the OMB has now defined the MSAs and Micropolitan Areas in New England on the basis of counties. The OMB also established New England City and Town Areas, which are similar to the previous New England MSAs.

In order to create consistency across all IPF labor market areas, we are proposing to use the county-based areas for all MSAs in the nation, including those in New England. The OMB has now defined the New England area based on counties, creating a city- and town-based system as an alternative. We believe that adopting county-based labor market areas for the entire country except those in New England would lead to inconsistencies in our designations. Adopting county-based labor market areas for the entire country provides consistency and stability in Medicare program payment because all of the labor market areas throughout the country, including New England, would be defined using the same system (that is, counties) rather than different systems in different areas of the county, and minimizes programmatic complexity.

In addition, we have consistently employed a county-based system for New England for precisely that reason: to maintain consistency with the labor market definitions used throughout the country. Since we have never used cities and towns for defining IPF labor market areas, employing a county-based system in New England maintains that consistent practice. We note that this is consistent with the implementation of the CBSA-based designations under the IPPS for New England (69 FR 49028). Accordingly, for the IPF PPS, we are proposing to use the New England MSAs as determined under the proposed new CBSA-based labor market area definitions in defining the proposed revised IPF PPS labor market areas.

ii. Metropolitan Divisions

Under OMB's new CBSA designations, a Metropolitan Division is a county or group of counties within a CBSA that contains a core population of at least 2.5 million, representing an employment center, plus adjacent counties associated with the main county or counties through commuting ties. A county qualifies as a main county if 65 percent or more of its employed residents work within the county and the ratio of the number of jobs located in the county to the number of employed residents is at least 0.75. A county qualifies as a secondary county if 50 percent or more, but less than 65 percent, of its employed residents work within the county and the ratio of the number of jobs located in the county to the number of employed residents is at least 0.75. After all the main and secondary counties are identified and grouped, each additional county that already has qualified for inclusion in the MSA falls within the Metropolitan Division associated with the main/secondary county or counties with which the county at issue has the highest employment interchange measure. Counties in a Metropolitan Division must be contiguous (65 FR 82236).

The construct of relatively large MSAs being comprised of Metropolitan Divisions is similar to the current construct of CMSAs comprised of PMSAs. As noted above, in the past, the OMB designated CMSAs as Metropolitan Areas with a population of 1 million or more and comprised of two or more PMSAs. Under the IPF PPS, we currently use the PMSAs rather than CMSAs to define labor market areas because they comprise a smaller geographic area with potentially varying labor costs due to different local economies. We believe that CMSAs may be too large of an area with a relatively large number of hospitals, to accurately reflect the local labor costs of all of the individual hospitals included in that relatively “large” area. A large market area designation increases the likelihood of including many hospitals located in areas with very different labor market conditions within the same market area designation. This variation could increase the difficulty in calculating a single wage index that would be relevant for all hospitals within the market area designation. Similarly, we believe that MSAs with a population of 2.5 million or greater may be too large of an area to accurately reflect the local labor costs of all of the individual hospitals included in that relatively “large” area. Furthermore, as indicated above, Metropolitan Divisions represent the closest approximation to PMSAs, the building block of the current IPF PPS labor market area definitions, and therefore, would most accurately maintain our current structuring of the IPF PPS labor market areas. Therefore, as implemented under the IPPS (69 FR 49029), we are proposing to use the Metropolitan Divisions where applicable (as described below) under the proposed new CBSA-based labor market area definitions.

In addition to being comparable to the organization of the labor market areas under current MSA designations (that is, the use of PMSAs rather than CMSAs), we believe that using Metropolitan Divisions where applicable (as described below) under the IPF PPS would result in a more accurate adjustment for the variation in local labor market areas for IPFs. Specifically, if we would recognize the relatively “larger” CBSA that comprises two or more Metropolitan Divisions as an independent labor market area for purposes of the wage index, it would be too large and would include the data from too many hospitals to compute a wage index that would accurately reflect the various local labor costs of all of the individual hospitals included in that relatively “large” CBSA. As mentioned earlier, a large market area designation increases the likelihood of including many hospitals located in areas with very different labor market conditions within the same market area designation. This variation could increase the difficulty in calculating a single wage index that would be relevant for all hospitals within the market area designation. Rather, by proposing to recognize Metropolitan Divisions where applicable (as described below) under the proposed new CBSA-based labor market area definitions under the IPF PPS, we believe that in addition to more accurately maintaining the current structuring of the IPF PPS labor market areas, the local labor costs would be more accurately reflected, thereby resulting in a wage index adjustment that better reflects the variation in the local labor costs of the local economies of the IPFs located in these relatively “smaller” areas.

Below we describe where Metropolitan Divisions would be applicable under the proposed new CBSA-based labor market area definitions under the IPF PPS.

Under OMB's new CBSA-based designations, there are 11 MSAs containing Metropolitan Divisions: Boston; Chicago; Dallas; Detroit; Los Angeles; Miami; New York; Philadelphia; San Francisco; Seattle; and Washington, DC. Although these MSAs were also CMSAs under the prior definitions, in some cases these areas have been significantly altered. Under the current IPF PPS MSA designations, Boston is a single NECMA. Under the proposed CBSA-based labor market area designations, it would be comprised of four Metropolitan Divisions. Los Angeles would go from four PMSAs under the current IPF PPS MSA designations to two Metropolitan Divisions under the proposed CBSA-based labor market area designations because two MSAs became separate MSAs. The New York CMSA would go from 15 PMSAs under the current IPF PPS MSA designations down to only four Metropolitan Divisions under the proposed CBSA-based labor market area designations. The five PMSAs in Connecticut under the current IPF PPS MSA designations would become separate MSAs under the proposed CBSA-based labor market area designations, and the number of PMSAs in New Jersey under the current IPF PPS MSA designations would go from five to two, with the consolidation of two New Jersey PMSAs (Bergen-Passaic and Jersey City) into the New York-Wayne-White Plains, NY-NJ Division, under the proposed CBSA-based labor market area designations. In San Francisco, under the proposed CBSA-based labor market area designations, there are only two Metropolitan Divisions. Currently, there are six PMSAs, some of which are now separate MSAs under the current IPF PPS labor market area designations.

Under the current IPF PPS labor market area designations, Cincinnati, Cleveland, Denver, Houston, Milwaukee, Portland, Sacramento, and San Juan are all designated as CMSAs, but would no longer be designated as CMSAs under the proposed CBSA-based labor market area designations. As noted previously, the population threshold to be designated as a CMSA under the current IPF PPS labor market area designations is 1 million. In most of these cases, counties currently in a PMSA under the current IPF PPS labor market area designations would become separate, independent MSAs under the proposed CBSA-based labor market area designations.

iii. Micropolitan Areas

Under OMB's new CBSA-based designations, Micropolitan Areas are essentially a third area definition consisting primarily of currently rural areas, but also include some or all of areas that are currently designated as an urban MSA. As discussed in greater detail in the FY 2005 IPPS final rule (69 FR 49029 through 49032), how these areas are treated would have significant impacts on the calculation and application of the wage index. Specifically, whether or not Micropolitan Areas are included as part of the respective statewide rural wage indices would impact the value of statewide rural wage index of any State that contains a Micropolitan Area because a hospital's classification as urban or rural affects which hospitals' wage data are included in the statewide rural wage index. As discussed above in section IV.C.1.b. we combine all of the counties in a State outside a designated urban area together to calculate the statewide rural wage index for each State.

Including Micropolitan Areas as part of the statewide rural labor market area would result in an increase to the statewide rural wage index because hospitals located in those Micropolitan Areas typically have higher labor costs than other rural hospitals in the State. Alternatively, if Micropolitan Areas would be recognized as independent labor market areas, because there would be so few hospitals in each labor market area, the wage indices for IPFs in those areas could become relatively unstable as they would change considerably from year to year.

We currently use MSAs to define urban labor market areas and group all the hospitals in counties within each State that are not assigned to an MSA together into a statewide rural labor market area. We have used the terms “urban” and “rural” wage indexes in the past for ease of reference. However, the introduction of Micropolitan Areas by the OMB potentially complicates this terminology because these areas include many hospitals that are currently included in the statewide rural labor market areas.

We are proposing to treat Micropolitan Areas as rural labor market areas under the IPF PPS for the reasons outlined below. That is, counties that are assigned to a Micropolitan Area under the CBSA-based designations would be treated the same as other “rural” counties that are not assigned to either an MSA (Metropolitan Statistical Area) or a Micropolitan Area. Therefore, in determining an IPF's applicable wage index (based on IPPS hospital wage index data), we are proposing that an IPF in a Micropolitan Area under OMB's CBSA-based designations would be classified as “rural” and would be assigned the statewide rural wage index for the State in which it resides.

In the FY 2005 IPPS final rule (69 FR 49029 through 49032), we discuss our evaluation of the impact of treating Micropolitan Areas as part of the statewide rural labor market area instead of treating Micropolitan Areas as independent labor market areas for hospitals paid under the IPPS. As discussed in that same final rule, one of the reasons Micropolitan Areas have such a dramatic impact on the wage index is because Micropolitan Areas encompass smaller populations than MSAs. In addition, they tend to include fewer hospitals per Micropolitan Area. Currently, there are only 25 MSAs with one hospital in the MSA. However, under the new proposed CBSA-based definitions, there are 373 Micropolitan Areas with one hospital, and 49 MSAs with only one hospital.

Since Micropolitan Areas encompass smaller populations than MSAs, they tend to include fewer hospitals per Micropolitan Area, recognizing Micropolitan Areas as independent labor market areas would generally increase the potential for dramatic shifts in those areas' wage indices from one year to the next because a single hospital (or group of hospitals) could have a disproportionate effect on the wage index of the area. The large number of labor market areas with only one hospital and the increased potential for dramatic shifts in the wage indexes from 1 year to the next is a problem for several reasons. First, it creates instability in the wage index from year to year for a large number of hospitals. Second, it reduces the averaging effect (averaging effect allows for more data points to be used to calculate a representative standard of measured labor costs within a market area.) lessening some of the incentive for hospitals to operate efficiently. This incentive is inherent in a system based on the average hourly wages for a large number of hospitals, as hospitals could profit more by operating below that average. In labor market areas with a single hospital, high wage costs are passed directly into the wage index with no counterbalancing averaging with lower wages paid at nearby competing hospitals. Third, it creates an arguably inequitable system when so many hospitals have wage indexes based solely on their own wages, while other hospitals' wage indexes are based on an average hourly wage across many hospitals.

For the reasons noted above, and consistent with the treatment of these areas under the IPPS, we are proposing not to adopt Micropolitan Areas as independent labor market areas under the IPF PPS. However, we are proposing that Micropolitan Areas, under the CBSA-based labor market area definitions, would be considered part of the statewide rural labor market area. Accordingly, we are proposing that the IPF PPS statewide rural wage index would be determined using acute-care IPPS hospital wage data (the rationale for using IPPS hospital wage data is discussed in greater detail above in section IV.C.1.d.iii of this proposed rule) from hospitals located in non-MSA areas (for example, rural areas, including Micropolitan Areas) and that statewide rural wage index would be assigned to IPFs located in those non-MSA areas.

e. Implementation of the Proposed Revised Labor Market Areas Under the IPF PPS

Section 124 of the BBRA, is broadly written and gives the Secretary discretion in developing and making adjustments to the IPF PPS.

When the revised labor market areas based on the OMB's new CBSA-based designations were adopted under the acute care hospital IPPS beginning on October 1, 2004, a transition to the new labor market area designations was established due to the scope and substantial implications of these new boundaries and to buffer the subsequent significant impacts it may have on payments to numerous hospitals. As discussed in the FY 2005 IPPS final rule (69 FR 49032), during FY 2005, a blend of wage indexes is calculated for those acute care IPPS hospitals experiencing a drop in their wage indexes because of the adoption of the new labor market areas.

While we recognize that, just like IPPS hospitals, some IPFs may experience decreases in their wage index as a result of the proposed labor market area changes, our analysis shows that a majority of IPFs either expect no change in wage index or an increase in wage index based on CBSA definitions. In addition, a very small number of IPFs (fewer than 3 percent) would experience a decline of 5 percent or more in the wage index based on CBSA designations. We also found that a very small number of IPFs (approximately 5 percent) would experience a change in either rural or urban designation under the CBSA-based definitions. Since a majority of IPFs would not be significantly impacted by the proposed labor market areas, we believe it is not necessary to propose a transition to the proposed new CBSA-based labor market area for the purposes of the IPF PPS wage index.

In addition, because we are in the midst of a transition to a full wage-index adjustment under the IPF PPS, we believe that the effects on the IPF PPS wage index from the proposed changes to the IPF PPS labor market areas definitions would be mitigated. Specifically, most IPFs would be in their FY 2006 cost reporting period and therefore would be in the second year of the 3-year phase-in of the IPF PPS wage index adjustment when the revised labor market area designations would be applied. During the second year of the transition to the IPF PPS, the applicable wage index value is one-half (50 percent) of the applicable full IPF PPS wage index adjustment. Since most IPFs would be in the second year of the 3-year phase-in of the wage index adjustment, for most IPFs, the labor-related portion of the standard Federal rate is only adjusted by 50 percent of the applicable full wage index (that is, one-half wage index value). As noted above, the IPF PPS wage index adjustment is made by multiplying the labor-related share of the IPF PPS standard Federal per diem base rate by the applicable wage index value, and the proposed IPF PPS labor related-share is 75.923 percent. Consequently, for most IPFs, only 38 percent of the standard Federal per diem base rate is affected by the wage index adjustment (75.923 percent × 0.50 = 37.9615 percent), and the proposed revision to the labor market area definitions based on OMB's new CBSA-based designations would only have a minimal impact on IPF PPS payments. Therefore, because the impact of the proposed revision to the labor market area definitions would only have a minimal impact on IPF PPS payments, we do not believe it is necessary to propose a transition policy for the proposed revision to the IPF PPS labor market area definitions.

For the reasons discussed above, we are not proposing a transition under the IPF PPS from the current MSA-based labor market areas designations to the new CBSA-based labor market area designations. Rather, we are proposing under the IPF PPS to adopt the new CBSA-based labor market area definitions beginning with the July 1, 2006 IPF PPS rate year without a transition period.

As discussed below, the IPPS adopted a hold-harmless policy and an “out-commuting” adjustment. We are also not proposing a hold harmless policy or an “out-commuting” adjustment under the IPF PPS from the current MSA-based labor market areas designations to the new CBSA-based labor market area designations as discussed below. We are proposing to adopt the new CBSA-based labor market area definitions beginning with the July 1, 2006 IPF PPS rate year without a hold harmless policy and without an “out-commuting” adjustment.

We believe that our proposed policies are appropriate for IPFs because, despite some similarities between the IPF PPS and the IPPS, there are clear distinctions between the payment systems, particularly regarding wage index issues. Where a wage index adjustment has been a stable feature of the acute care hospital IPPS since its 1983 implementation and had utilized the prior MSA-based labor market area designation for over 10 years, this is not the case for the IPF PPS, which has only been implemented since January 1, 2005.

The most significant distinction between acute care hospitals under the IPPS and IPFs under the IPF PPS, is that acute care hospitals have been paid using full wage index adjusted payments since 1983 and had used the previous IPPS MSA-based labor market area designations for over 10 years, whereas under the IPF PPS, a wage index adjustment is being phased-in over a 3-year period. As previously explained, the impact that the wage index can have on IPF PPS payments is limited at this point, since only a small percentage of the IPF PPS Federal per diem base rate is affected by the wage index (approximately 38 percent in most cases) because of the 3-year phase-in of the wage index adjustment. In contrast, a transition policy to the revised IPPS labor market area definitions under the IPPS was appropriate because there is no phase-in of a wage index adjustment under the IPPS and the full labor-related share of the IPPS standardized amount (that is, Federal rate) is affected by the IPPS wage index adjustment, which resulted in a more significant projected impact for acute care hospitals under the IPPS.

As discussed in the August 11, 2004 IPPS final rule (69 FR 49032), during FY 2005, a hold harmless policy was implemented to minimize the overall impact of hospitals that were in FY 2004 designated as urban under the MSA designations, but would become rural under the CBSA designations. In the same final rule, hospitals were afforded a 3-year hold harmless policy because the IPPS determined that acute-care hospitals that changed designations from urban to rural would be substantially impacted by the significant change in wage index. Currently, under the IPF PPS urban facilities that become rural would receive the rural facility adjustment (that is, 17 percent). As discussed in section IV.C.2 of this proposed rule, we are proposing to keep the rural adjustment at 17 percent. The rural facility adjustment would be applied in the same way to urban facilities that would become rural under the CBSA-based definitions, if we were to adopt them. Thus, we believe that the impact on any urban facilities that become rural under the new definitions would be mitigated by the rural adjustment. Therefore, we do not believe it is appropriate or necessary to adopt a hold harmless policy for facilities that would experience a change in designation under the CBSA-based definitions.

In addition, we note that section 505 of the MMA established new section 1886(d)(13) of the Act. The new section 1886(d)(13) of the Act requires that the Secretary establish a process to make adjustments to the hospital wage index based on commuting patterns of hospital employees. We believe that this requirement for an “out-commuting” or “out-migration” adjustment applies specifically to the IPPS. Therefore, we are not proposing an adjustment for the IPF PPS.

We note that for the CBSA designations, we identified some geographic areas where there were no hospitals, and thus no hospital wage index data on which to base the calculation of the July 1, 2006 rate year IPF PPS proposed wage index. In addressing this situation, we are proposing approaches that we believe serve as proxies for hospital wage data and would provide an appropriate standard that accounts for geographic variation in labor costs.

The first situation involves rural locations in Massachusetts and Puerto Rico. We have determined that there are no rural hospitals in those locations. Since there is no reasonable proxy for more recent rural data within those areas, we are proposing to use last year's wage index value for rural Massachusetts and rural Puerto Rico. This approach is consistent with other Medicare PPSs (for example, SNF PPS and IRF PPS).

The second situation has to do with the urban area of Hinesville, GA (CBSA 25980). Under the proposed new labor market areas there are no urban hospitals within this area. We propose to use all of the urban areas within the State to serve as a reasonable proxy for the urban areas without specific hospital wage index data in determining the IPF PPS wage index. Therefore, in this proposed rule, we are calculating the urban wage index value for purposes of the wage index for these areas without urban hospital data as the average wage index for all urban areas within the State. This approach is consistent with other Medicare PPSs (for example, SNF PPS and IRF PPS). We could not apply a similar averaging in rural areas because in the rural areas there are no State rural hospital wage data available for averaging on a State-wide basis. We solicit comments on these approaches to calculating the wage index values for areas without hospitals for RY 2007 and subsequent years.

To facilitate an understanding of the proposed policies related to the proposed change to the IPF PPS labor market areas discussed above, in the MSA/CBSA Crosswalk included as Addendum B of this proposed rule, we are providing a listing of each Social Security Administration (SSA) State and county location code; State and county name; existing MSA-based labor market area designation; MSA-based wage index value; CBSA-based labor market area; and the new CBSA-based wage index value. We are also providing in Addenda C1 and C2 the proposed wage index for urban and rural areas based on CBSA labor market areas.

f. Wage Index Budget Neutrality

Any proposed adjustment or update to the IPF wage index would be made in a budget neutral manner that assures that the estimated aggregated payments under this subsection in the RY beginning July 1, 2006 are not greater or less than those that would have been made in the year without such an adjustment. Therefore, we would calculate a budget-neutral wage index adjustment factor. We propose to calculate this factor using the following steps:

Steps 1: Determine the total amount of the estimated IPF PPS payments for the implementation year using the labor-related share and wage indices from FY 2005 (based on MSAs).

Step 2: Calculate the total amount of estimated IPF PPS payments for RY 2007 using the proposed labor-related share and wage indices from FY 2006 (based on CBSAs).

Step 3: Divide the amount calculated in Step 1 by the amount calculated in Step 2 which yields a RY 2007 budget-neutral wage adjustment of 1.00156.

This factor would be applied in the update of the Federal per diem base rate for RY 2007.

1. Proposed Adjustment for Rural Location

In the IPF PPS Final Rule (69 FR 66954), we provided a 17 percent payment adjustment for IPFs located in a rural area. This adjustment was based on the regression analysis which indicated that the per diem cost of rural facilities was 17 percent higher than that of urban facilities after accounting for the influence of the other variables included in the regression. Many rural IPFs are small psychiatric units within small general acute care hospitals. We also stated in the IPF PPS final rule that small-scale facilities are more costly on a per diem basis because there are minimum levels of fixed costs that cannot be avoided, and they do not have the economies of size advantage.

Based on the results of our regression analysis for the final rule using the most recent complete data available (that is, FY 2002 data), we provided a payment adjustment for IPFs located in rural areas of 17 percent. In this proposed rule, we are not proposing to change this adjustment factor. In addition, we stated that we do not intend to conduct another regression analysis until we are able to analyze 1 year of IPF PPS claims and cost report data. At that time, we can compare rural and urban IPFs to determine how much more costly rural facilities are on a per diem basis under the IPF PPS. In the meantime, we are proposing to apply a 17 percent payment adjustment for IPFs located in a rural area as defined at § 412.64(b)(1)(ii)(C).

2. Proposed Teaching Adjustment

In the IPF PPS final rule, we established a facility-level adjustment for IPFs that are, or are part of, teaching institutions. The teaching status adjustment accounts for the higher indirect operating costs experienced by facilities that participate in graduate medical education (GME) programs. We have received numerous requests for clarification of the IPF PPS teaching adjustment, especially with regard to comparisons with the IPPS IME adjustment that were included in the IPF PPS final rule. As a result, we are including an expanded explanation of the IPF PPS teaching status adjustment and are proposing clarifying changes to § 412.424(d)(1)(iii) regarding the teaching adjustment.

Medicare makes direct GME payments (for direct costs such as resident and teaching physician salaries, and other direct teaching costs) to all teaching hospitals including those paid under the IPPS, and those that were once paid under the TEFRA rate-of-increase limits but are now paid under other PPSs. These direct GME payments are made separately from payments for hospital operating costs and are not part of the PPSs. However, the direct GME payments do not address the higher indirect operating costs experienced by teaching hospitals. For teaching hospitals paid under the TEFRA rate-of-increase limits, Medicare did not make separate medical education payments because payments to these hospitals were based on the hospitals' reasonable costs. Since payments under TEFRA were based on hospitals' reasonable costs, the higher indirect costs that might be associated with teaching programs would automatically have been factored into the TEFRA payments.

As previously mentioned, we conducted regression analysis of FY 2002 IPF data as the basis for the payment adjustments included in the IPF PPS final rule. In conducting the analysis, we used the resident counts reported on hospital cost reports (worksheet S-3, Part 1, line 12, column 7 for freestanding psychiatric hospitals and worksheet S-3, Part 1, line 14 (or line 14.01 for subprovider 2), column 7 for psychiatric units of acute care hospitals). That is, for the freestanding psychiatric hospitals, we used the number of residents and interns reported for the entire hospital. For the psychiatric units of acute care hospitals, we used the number of residents and interns reported for the psychiatric unit, which are reported separately on the cost report from the number reported for the rest of the hospital.

The regression analysis (with the logarithm of costs as the dependent variable) showed that the indirect teaching cost variable is significant in explaining the higher costs of IPFs that have teaching programs. We calculated the teaching adjustment based on the IPF's “teaching variable,” which is one plus the ratio of the number of full-time equivalent (FTE) residents training in the IPF (subject to limitations described below) to the IPF's average daily census (ADC).

In the cost regressions conducted for the IPF PPS final rule, the logarithm of the teaching variable had a coefficient value of 0.5150. We converted this cost effect to a teaching payment adjustment by treating the regression coefficient as an exponent and raising the teaching variable to a power equal to the coefficient value. In other words, the teaching adjustment is calculated by raising the teaching variable (1 + FTE residents/ADC) to the 0.5150 power. To compute the percentage increase in the IPF PPS payment attributable to the teaching adjustment (that is, the amount to be reconciled at cost report settlement), raise the teaching variable (1 + FTE residents/ADC) to the 0.5150 power. For example, for an IPF with a teaching variable of 0.10 and using a coefficient value of 0.5150, the per diem payment would increase by 5.03 percent; for an IPF with a teaching variable of 0.05, the per diem payment would increase by 2.54 percent. We note that the coefficient value of 0.5150 was based on regression analysis holding all other components of the payment system constant.

In addition, we established the teaching adjustment in a manner that limited the incentives for IPFs to add FTE residents for the purpose of increasing their teaching adjustment. We imposed a cap on the number of FTE residents that may be counted for purposes of calculating the teaching adjustment, similar to that established by sections 4621 (IME FTE cap for IPPS hospitals) and 4623 (direct GME FTE cap for all hospitals) of the BBA. We emphasize that the cap limits the number of FTE residents that teaching IPFs may count for the purposes of calculating the IPF PPS teaching adjustment, not the number of residents teaching institutions can hire or train.

The FTE resident cap is applied the same way in freestanding teaching psychiatric hospitals and in distinct part psychiatric units with GME programs. Similar to the regulations for counting FTE residents under the IPPS as described in § 412.105(f), we calculated the number of FTE residents that trained in the IPF during a “base year” and use that FTE resident number as the cap. An IPF's FTE resident cap would ultimately be determined based on the final settlement of the IPF's most recent cost report filed before November 15, 2004 (that is, the publication date of the IPF PPS final rule).

Similar to teaching hospitals under the IPPS, IPFs that first begin training residents after November 15, 2004 initially receive an FTE cap of “0”. The FTE caps for teaching IPFs (whether they are new or existing IPFs) that start training residents in a new GME program (may be subsequently adjusted in accordance with the IPPS policies described in § 412.105(f)(1)(vii) and GME policies described in § 413.79(e)(1)(i) and (ii). For purposes of this section, a new medical residency training program means a medical residency that receives initial accreditation by the appropriate accrediting body or begins training residents on or after November 15, 2004. However, contrary to the policy for IME FTE resident caps under the IPPS, we do not allow IPFs to aggregate the FTE resident caps used to compute the IPF PPS teaching adjustment through affiliation agreements. We included these policies because we believe it is important to limit the total pool of resident FTE cap positions within the IPF community and avoid incentives for IPFs to add FTE residents in order to increase their payments.

Residents with less than full-time status and residents rotating through the psychiatric hospital or unit for less than a full year are counted in proportion to the time they spend in their assignment with the IPF (for example, a resident on a full-time, 3-month rotation to the IPF would be counted as 0.25 FTE for purposes of counting residents to calculate the ratio). No FTE resident time counted for purposes of the IPPS IME adjustment is counted for purposes of the teaching status adjustment for the IPF PPS.

As noted previously, the denominator used to calculate the teaching adjustment under the IPF PPS is the IPF's average daily census (ADC) from the current cost reporting period. We chose to use the ADC because it is closely related to the IPF's patient load, which affects the number of interns and residents the IPF can train. We also believe the ADC is a measure that can be defined precisely and is difficult to manipulate. Although the IPPS IME adjustment uses the hospital's number of beds as the denominator, the capital PPS (as specified at § 412.322) and the IRF PPS (as specified at § 412.624(e)(4) both use the ADC as the denominator for the indirect medical education and teaching adjustments, respectively.

If a psychiatric hospital's or unit's FTE count of residents in a given year is higher than the FTE count in the base year (the base year being used to establish the cap), we base payments in that year on the lower number (the cap amount). This approach is consistent with the IME adjustment under the IPPS and the teaching adjustment under the IRF PPS. The IPF remains free to add FTE residents above the cap amount, but it cannot count the number of FTE residents above the cap for purposes of calculating the teaching adjustment. This means that the cap serves as an upper limit on the number of FTE residents that may be counted for purposes of calculating the teaching status adjustment. IPFs can adjust their number of FTE residents counted for purposes of calculating the teaching adjustment as long as they remain under the cap. On the other hand, if a psychiatric hospital or unit were to have fewer FTE residents in a given year than in the base year (that is, fewer residents than its FTE resident cap), teaching adjustment payments in that year would be based on the lower number (that is, the current year's FTE count of resident).

In response to inquiries about how the teaching adjustment is applied under the IPF PPS, we are proposing to add a new paragraph § 412.424(d)(1)(iii)(E) to clarify that the teaching adjustment is made on a claim basis as an interim payment and the final payment for the claim would be made in full during the final settlement of the cost report. The difference between those interim payments and the actual teaching adjustment amount computed in the cost report would be adjusted through lump sum payments/recoupments when the cost report is filed and later settled.

As noted in section III.B.3 of this proposed rule, in reviewing the methodology used to simulate the IPF PPS payments used for the IPF PPS final rule, we discovered that the computer code incorrectly assigned non-teaching status to most teaching facilities. As a result, total IPF PPS payments were underestimated by about 1.36 percent. To resolve the issue, as discussed in section III.B.3 of this proposed rule, we are proposing to amend the Federal per diem base rate prospectively for all IPFs.

As with other adjustment factors derived through the regression analysis, we do not intend to rerun the regression analysis until we can analyze 1 year of IPF PPS claims and cost report data. Until then, we are proposing to retain the 0.5150 teaching adjustment to the Federal per diem base rate.

3. Proposed Cost of Living Adjustment for IPFs Located in Alaska and Hawaii

The IPF PPS includes a payment adjustment for IPFs located in Alaska and Hawaii based upon the county in which the IPF is located. As we explained in the IPF PPS final rule, the FY 2002 data demonstrated that IPFs in Alaska and Hawaii had per diem costs that were disproportionately higher than other IPFs. Other Medicare prospective payment systems (for example, IPPS and IRF PPS) have adopted a cost of living adjustment (COLA) to account for the cost differential of care furnished in Alaska and Hawaii. We analyzed the effect of applying a COLA to payments for IPFs located in Alaska and Hawaii. The results of our analysis demonstrated that a COLA for IPFs located in Alaska and Hawaii would improve payment equity for these facilities. As a result of this analysis, we provided a COLA adjustment in the IPF PPS final rule.

In general, the COLA would account for the higher costs in the IPF and eliminate the projected loss that IPFs in Alaska and Hawaii would experience absent the COLA. A COLA adjustment for IPFs located in Alaska and Hawaii is made by multiplying the non-labor share of the Federal per diem base rate by the applicable COLA factor based on the county in which the IPF is located.

Table 14 lists the specific COLA for Alaska and Hawaii IPFs. The COLA factors were obtained from the U.S. Office of Personnel Management (OPM). The COLA factors are published on the U.S. Office of Personnel Management (OPM) website ( http://www.opm.gov/oca/cola/rates.asp ). We are proposing to adopt the COLA adjustments obtained from OPM. We propose to update the COLA factors if OPM updates them and as updated by OPM. Any change in the COLA factors would be made in one of our IPF PPS RY update documents. We are proposing to amend § 412.428 to update the COLA factors if appropriate.

4. Proposed Adjustment for IPFs With a Qualifying Emergency Department (ED)

Currently, the IPF PPS includes a facility-level adjustment for IPFs with qualifying EDs. As explained in the IPF PPS final rule, we provide an adjustment to the standardized Federal per diem base rate to account for the costs associated with maintaining a full-service ED. The adjustment is intended to account for ED costs allocated to the hospital's distinct part psychiatric unit for preadmission services otherwise payable under Medicare Part B furnished to a beneficiary during the day immediately preceding the date of admission to the IPF (see § 413.40(c)) and the overhead cost of maintaining the ED. This payment is a facility-level adjustment that applies to all IPF admissions (with the one exception as described below), regardless of whether a particular patient receives preadmission services in the hospital's ED.

The ED adjustment is incorporated into the variable per diem adjustment for the first day of each stay for IPFs with a qualifying ED. That is, IPFs with a qualifying ED receive a 31 percent adjustment as the variable per diem adjustment for day 1 of each stay. If an IPF does not have a qualifying ED, it receives a 19 percent adjustment as the variable per diem adjustment for day 1 of each patient stay.

While any IPF with a qualifying ED receives the adjustment, the adjustment is paid most often to IPFs that are psychiatric units of acute care hospitals or CAHs because these providers are more likely to have an ED that meets the definition of a qualified ED in § 412.424(d)(1)(v). We defined a qualifying ED in order to avoid providing the ED adjustment to an intake unit that is not comparable to a full-service ED with respect to the array of emergency services available or cost. We defined a qualifying ED as one that is staffed and equipped to furnish a comprehensive array of emergency services and that meets the definition of a “dedicated emergency department” as specified in § 489.24(b) and the definition of “provider-based status” as specified in § 413.65. We intended that a qualifying ED provide a comprehensive array of medical and psychiatric services.

Therefore, in order to clarify that a comprehensive array of emergency services includes medical as well as psychiatric services, we are proposing to amend § 412.424(d)(1)(V)(A).

As specified in § 489.24, a dedicated ED means “any department or facility of the hospital, regardless of whether it is located on or off the main hospital campus, that meets at least one of the following requirements:

• It is licensed by the State in which it is located under applicable State law as an emergency room or emergency department;
• It is held out to the public (by name, posted signs, advertising, or other means) as a place that provides care for emergency medical conditions on an urgent basis without requiring a previously scheduled appointment; or
• During the calendar year immediately preceding the calendar year in which a determination under this section is being made, based on a representative sample of patient visits that occurred during the calendar year, it provides at least one-third of all its outpatient visits for the treatment of emergency medical conditions on an urgent basis without requiring a previously scheduled appointment.”

As specified in § 413.65, provider-based status means “the relationship between a main provider and a provider-based entity or a department of a provider, remote location of a hospital, or satellite facility that complies with the provisions.” Including provider-based status in the definition of a qualifying ED reflects the common ownership of the hospital and the distinct part psychiatric unit.

As discussed in the IPF PPS final rule, three steps were involved in the calculation of the ED adjustment factor.

Step 1: We estimated the proportion by which the ED costs of a case would increase the cost of the first day of the stay. Using the IPFs with ED admissions in FY 2002, we divided their average ED cost per stay admitted through the ED ($198) by their average cost per day ($715), which equals 0.28.

Step 2: We adjusted the factor estimated in Step 1 to account for the fact that we would pay the higher first day adjustment for all cases in the qualifying IPFs, not just the cases admitted through the ED. Since on average, 44 percent of the cases in IPFs with ED admissions are admitted through the ED, we multiplied 0.28 by 0.44, which equals 0.12.

Step 3: We added the adjusted factor calculated in the previous 2 steps to the variable per diem adjustment derived from the regression equation that we used to derive our other payment adjustment factors. The first day payment factor from this regression is 1.19. Adding the 0.12, we obtained a first day variable per diem adjustment for IPFs with a qualifying ED equal to 1.31.

The ED adjustment is made on every qualifying claim except as described below. As specified in § 412.424(d)(1)(V)(B), the ED adjustment is not made where a patient is discharged from an acute care hospital or CAH and admitted to the same hospital's or CAH's psychiatric unit. An ED adjustment is not made in this case because the costs associated with ED services are reflected in the DRG payment to the acute care hospital or through the reasonable cost payment made to the CAH. As we explained in the IPF PPS final rule, if we provided the ED adjustment in these cases, the hospital would be paid twice for the overhead costs of the ED (69 FR 66960).

Therefore, when patients are discharged from an acute care hospital or CAH and admitted to the same hospital's or CAH's psychiatric unit, the IPF receives the 1.19 adjustment factor as the variable per diem adjustment for the first day of the patient's stay in the IPF. As with other adjustment factors under the IPF PPS, we do not intend to conduct a new regression analysis for this IPF PPS update. Rather, we intend to wait until we can analyze 1 year of IPF PPS claims and cost report data. Therefore, we are proposing to retain the 1.31 adjustment factor for IPFs with qualifying EDs for the rate year beginning July 1, 2006. As we indicated in the final rule, in FY 2002, one third of the IPFs admissions were through the ED. Commenters on the IPF PPS proposed rule indicated that the percentage of admissions through the ED were understated. We plan to monitor claims data to determine the number of IPF admissions admitted through the ED.

a. Proposed New Source of Admission Code To Implement the ED Adjustment

In order to ensure that the ED adjustment is not paid for patients who are discharged from an acute care hospital or CAH and admitted to the same hospital's or CAH's psychiatric unit, we directed IPFs to enter source of admission code 4 (transfers from hospital inpatient) on those claims. The source of admission code is a required field on Medicare claims and indicates the source of the patient admissions. However, as we have implemented the IPF PPS, we have realized that admission code 4 is too broad to distinguish these claims because it reflects transfers from any acute care hospital or CAH. Currently, where admission code 4 is entered on a claim, the ED adjustment is not paid, even if the patient is transferred from a different acute hospital or CAH.

In order to pay these IPF claims appropriately, CMS requested a new source of admission code from the National Uniform Billing Committee to identify transfers from the same hospital or CAH. On June 7, 2005, the National Uniform Billing Committee granted our request to establish a new source of admission code to indicate transfers from the same hospital or CAH. The new source of admission code “D” is effective April 1, 2006. We are proposing that the new code would be used by IPFs to identify IPF patients who have been transferred to the IPF from the same hospital or CAH. Claims with source of admission code “D” would not receive the ED adjustment.

b. Applicability of the ED Adjustment to IPFs in Critical Access Hospitals

The BBA created the CAH program, designed to represent a separate provider type to provide acute care services in rural areas. Generally, in order to qualify as a CAH, a hospital must be located in a rural area, provide 24-hour emergency care services, have an average length of stay of 96 hours or less, operate up to 25 beds for inpatient critical access care, be located more than 35 miles from a hospital or another CAH or more than 15 miles in mountainous terrain or only secondary roads, or be certified by the State as of December 31, 2005 as being a “necessary provider” of health care services to residents in the area.

Section 405(g) of the MMA authorizes CAHs to establish distinct part psychiatric and rehabilitation units of up to 10 beds effective for cost reporting periods beginning on or after October 1, 2004. Services in these units are paid under the payment methodology that would apply if such services were provided in a distinct part psychiatric or rehabilitation unit of a hospital. As a result, IPFs that are distinct part units of CAHs are paid the same as if they were a distinct part unit of a hospital. Otherwise, the CAH is paid on a reasonable cost basis for inpatient critical access services.

In the IPF PPS final rule, we amended §413.70(e) to clarify that payments for services of distinct part psychiatric units in CAHs are made in accordance with the IPF PPS. In order to pay CAHs the same as other IPFs, CAHs would be subject to the 1-day preadmission services bundling provision specified in § 413.40(c)(2) for patients who are admitted to the CAH's IPF. As a result, the cost of preadmission services, including ED services furnished to CAH IPF patients would be allocated to the IPF.

D. Other Payment Adjustments and Policies

[If you choose to comment on issues in this section, please include the caption “OTHER ADJUSTMENTS AND POLICIES” at the beginning of your comments.]

The IPF PPS includes the following payment adjustments: (1) An outlier policy to promote access to IPF care for those patients who require expensive care and to limit the financial risk of IPFs treating unusually costly patients; (2) a stop-loss provision, applicable during the transition period, to reduce financial risk to IPFs projected to experience substantial reductions in Medicare payments under the IPF PPS; (3) an interrupted stay policy to avoid overpaying stays that include a brief absence from the IPF followed by readmission to the IPF; and (4) a payment for patients who receive ECT. We are proposing to update those policies in this proposed rule. We are also proposing clarifications to the physician certification and recertification requirements in order to ensure consistent practices across IPFs. In addition, we are clarifying coverage of recreation therapy.

1. Outlier Payments

In the IPF PPS final rule, we implemented regulations at § 412.424(d)(3)(i) to provide a payment adjustment for IPF stays that have extraordinarily high costs. Providing additional payments for outlier cases to IPFs that are beyond the IPF's control strongly improves the accuracy of the IPF PPS in determining resource costs at the patient and facility level because facilities receive additional compensation over and above the adjusted Federal prospective payment amount for uniquely high-cost cases. These additional payments reduce the financial losses that would otherwise be caused by treating patients who require more costly care and, therefore, reduce the incentives to under-serve these patients.

Under the IPF PPS, outlier payments are made on a per case basis rather than on a per diem basis because it is the overall financial “gain” or “loss” of the case, and not of individual days, that determines an IPF's financial risk. In addition, because patient-level charges (from which costs are estimated) are typically aggregated for the entire IPF stay, they are not reported in a manner that would permit accurate accounting on a daily basis.

Currently, we make outlier payments for discharges in which an IPF's estimated total cost for a case exceeds a fixed dollar loss threshold amount (multiplied by the IPF's facility-level adjustments) plus the Federal per diem payment amount for the case.

In instances when the case qualifies for an outlier payment, we pay 80 percent of the difference between the estimated cost for the case and the adjusted threshold amount for days 1 through 9 of the stay (consistent with the median length of stay for IPFs in FY 2002), and 60 percent of the difference for day 10 and thereafter. We established the 80 percent and 60 percent loss sharing ratios because we were concerned that a single ratio established at 80 percent (like other Medicare hospital PPSs) might provide an incentive under the IPF per diem payment system to increase length of stay in order to receive additional payments. After establishing the loss sharing ratios, we determined the current fixed dollar loss threshold amount of $5,700 through payment simulations designed to compute a dollar loss beyond which payments are estimated to meet the 2 percent outlier spending target.

a. Proposed Update to the Outlier Fixed Dollar Loss Threshold Amount

As indicated in section II.A of this proposed rule, in accordance with the update methodology described in § 412.428(d), we are proposing to update the fixed dollar loss threshold amount used under the IPF PPS outlier policy. Based on the regression analysis and payment simulations used to develop the IPF PPS, we established a 2 percent outlier policy to make an appropriate balance between protecting IPFs from extraordinarily costly cases while ensuring the adequacy of the Federal per diem base rate for all other cases that are not outlier cases.

We continue to believe a 2 percent outlier policy is an appropriate target percentage and are proposing to retain the 2 percent outlier policy. However, we believe it is necessary to update the fixed dollar loss threshold amount because analysis of the latest available data indicates adjusting the fixed dollar loss amount is necessary in order to maintain an outlier percentage that equals 2 percent of total estimated IPF PPS payments. We intend to continue to analyze estimated outlier payments for subsequent years using the best available data in order to maintain estimated outlier payments at 2 percent of total estimated IPF PPS payments.

We have determined that in certain sections of the IPF PPS final rule, we used the phrase “Fixed-dollar loss threshold” and, in other sections, we used the phrase “Fixed-dollar loss amount” to describe the dollar amount by which the costs of a case exceed payment in order to qualify for an outlier payment. In order to avoid confusion regarding these phrases, we are proposing to use the term “fixed-dollar loss threshold amount” when we are referring to the dollar amount by which the costs of a case exceed payment in order to qualify for an outlier payment.

As a result of this clarification, in § 412.402, we are proposing to revise the term “Fixed dollar loss threshold” to “Fixed dollar loss threshold amount.” We are also proposing clarifying changes to § 412.424(d)(3)(i) and § 412.424(d)(3)(i)(A) to state that we would provide an outlier payment if an IPF's estimated total cost for a case exceeds a “fixed dollar loss threshold amount” plus the total IPF adjusted payment amount for the stay, and that it is the fixed dollar loss threshold amount that is adjusted by the IPF's facility-level adjustments.

Aside from updating the terminology “fixed dollar loss threshold amount” and making the conforming changes to the regulation text described above, we are not proposing any other changes to the outlier policy. Therefore, we would continue to adjust the fixed dollar loss threshold amount by the applicable facility-level payment adjustments and add this amount to the IPF PPS payment amount in order to determine if a case qualifies for an outlier payment. For cases that meet the threshold amount, we would pay 80 percent for days 1 through 9 and 60 percent for day 10 and thereafter.

In the IPF PPS final rule, we described the process by which we calculate the outlier fixed dollar loss threshold amount. We are proposing to continue to use this process in this proposed rule. We begin by simulating aggregate payments with and without an outlier policy, and applying an iterative process to a fixed dollar loss amount that would result in outlier payments being equal to 2 percent of total simulated payments under the simulation. Based on this process, we are proposing $6200 as the fixed dollar loss threshold amount in the outlier calculation in order to maintain the proposed 2 percent outlier policy.

We note that the simulation analysis used to calculate the proposed $6200 fixed dollar loss threshold amount includes all of the proposed changes to the IPF PPS discussed in this proposed rule. As a result, for the RY beginning July 1, 2006, the final fixed dollar loss threshold amount is subject to change in the final rule depending on the policies contained in the final rule.

b. Proposed Statistical Accuracy of Cost-to-Charge Ratios

As stated previously, under the IPF PPS, an outlier payment is made if an IPF's cost for a stay exceeds a fixed dollar loss threshold amount. In order to establish an IPF's cost for a particular case, we multiply the IPF's reported charges on the discharge bill by their overall cost to charge ratio (CCR). This approach to determining a provider's cost is consistent with the approach used under the IPPS and other prospective payment systems. In FY 2004, we implemented changes to the IPPS outlier policy used to determine CCRs for acute care hospitals because we became aware that payment vulnerabilities resulted in inappropriate outlier payments. Under the IPPS, we established a statistical measure of accuracy for CCRs in order to ensure that aberrant CCR data did not result in inappropriate outlier payments. As we indicated in the IPF PPS final rule, because we believe the IPF outlier policy is susceptible to the same payment vulnerabilities as the IPPS, we adopted an approach to ensure the statistical accuracy of CCRs under the IPF PPS. Therefore, we adopted the following two procedures in the IPF PPS final rule:

• We calculated two national ceilings, one for IPFs located in rural areas and one for IPFs located in urban areas. We computed the ceilings by first calculating the national average and the standard deviation of the CCR for both urban and rural IPFs.

To determine the rural and urban ceilings, we multiplied each of the standard deviations by 3 and added the result to the appropriate national CCR average (either rural or urban). The current upper threshold CCR for IPFs is 1.8853 for rural IPFs, and 1.8040 for urban IPFs, based upon MSA-based geographic designations. If an IPF's CCR is above the applicable ceiling, the ratio is considered statistically inaccurate and we assign the appropriate national (either rural or urban) median CCR to the IPF.

Additional information regarding the national median CCRs is included in the IPF PPS final rule (69 FR 66961).

• We do not apply the applicable national median CCR when an IPF's CCR falls below a floor. We made this decision because using the national median CCR in place of the provider's actual CCR would overstate the IPF's costs. We are proposing to apply the national CCRs to the following situations:

++ New IPFs that have not yet submitted their first Medicare cost report.

++ IPFs whose operating or capital CCR is in excess of 3 standard deviations above the corresponding national geometric mean (that is, above the ceiling).

++ Other IPFs for whom the fiscal intermediary obtains inaccurate or incomplete data with which to calculate either an operating or capital CCR or both.

The current national CCRs were estimated to be 0.7115 for rural IPFs and 0.5658 for urban IPFs and would be used in each of the three situations cited above. These estimates were based on the IPF's location (either urban or rural) using the MSA-based geographic designations. For new facilities, we are proposing to use these national ratios until the facility's actual CCR can be computed using the first tentatively settled or final settled cost report, which would then be used for the subsequent cost report period.

We are not proposing any changes to the procedures for ensuring the statistical accuracy of CCRs in RY 2007. However, we are proposing to update the national urban and rural CCRs (ceilings and medians) for IPFs for RY 2007 based on the full calendar year 2005 CCRs entered in the Provider-Specific File. In addition, we are proposing that the updated ceilings and national median CCRs would be based on CBSA-based geographic designations because the CBSAs are the geographic designations we are proposing to adopt for purposes of computing the proposed wage index adjustment to IPF payments beginning July 1, 2006. We would include the updated ceiling and national median CCRs in the final RY 2007 regulations.

In subsequent years, we are proposing to update the national urban and rural CCRs (median and ceilings) based on the previous full calendar year's Provider-Specific File. These CCRs would be announced in each year's annual notice of prospective payment rates published in the Federal Register. We are proposing to add a new paragraph (g) to § 412.428 to clarify that we intend to update the national urban and rural ceilings and medians as part of the annual update of the IPF PPS and to specify when the national median urban and rural CCRs would be used.

1. Proposed Stop-Loss Provision

In the IPF PPS final rule, we implemented a stop-loss policy to reduce financial risk for those facilities expected to experience substantial reductions in Medicare payments during the IPF PPS transition period. This stop-loss policy guarantees that each facility receives total IPF PPS payments that are no less than 70 percent of its TEFRA payments, had the IPF PPS not been implemented.

This policy is applied to the IPF PPS portion of Medicare payments during the 3-year transition. Hence, during year 1, three-quarters of the payment were based on TEFRA and one-quarter on the IPF PPS. Under the 70 percent policy, 75 percent of total payment is TEFRA payments, and the 25 percent is IPF PPS payments, which are at least 70 percent of the TEFRA payments. The resulting 92.5 percent of TEFRA payments in year 1 is the sum of 75 percent and 25 percent times 70 percent.

In year 2, one-half of the payment will be based on TEFRA and one-half on the IPF PPS. In year 3, one-quarter of the payment will be based on TEFRA and three-quarters on the IPF PPS. In year 4 of the IPF PPS, Medicare payments are based 100 percent on the IPF PPS.

The combined effects of the transition and the stop-loss policies will be to ensure that the total estimated IPF PPS payments were no less than 92.5 percent in year 1, 85 percent in year 2, and 77.5 percent in year 3.

The 70 percent of TEFRA payment stop-loss policy will require a reduction in the Federal per diem and ECT base rates of 0.39 percent in order to make the stop-loss payments budget neutral. We estimate that about 10 percent of IPFs would receive stop-loss payments under the 70 percent policy.

We are not proposing to make any changes to the stop-loss policy.

2. Patients Who Receive Electroconvulsive Therapy (ECT)

In developing the IPF PPS, we received numerous public comments recommending that we include a payment adjustment for patients who receive ECT treatments during their IPF stay because furnishing ECT treatment, either directly or under arrangements, adds significantly to the cost of these stays. When we analyzed the FY 2002 MedPAR data, we found that ECT cases comprised about 6 percent of all cases and that almost 95 percent of ECT cases were treated in IPFs that are psychiatric units of acute care hospitals. Even among psychiatric units, ECT cases are concentrated among a relatively small number of facilities. Overall, approximately 450 facilities had cases with ECT. Among these facilities, we estimated the mean number of ECT cases per facility to be approximately 25. In addition, approximately one-half of the IPFs providing ECT had no more than 15 cases in FY 2002.

Our analysis confirmed that cases with ECT are substantially more costly than cases without ECT. We found that on a per case basis, ECT cases are approximately twice as expensive as non-ECT cases ($16,287 compared to $7,684). Most of this difference is due to variation in length of stay (20.5 days for ECT cases compared to 11.6 days for non-ECT cases). In addition, the ancillary costs per case for ECT cases are $2,740 higher than those for non-ECT cases.

Although we are able to determine the cost of stays with ECT, we are unable to develop an ECT cost per treatment using the FY 2002 IPF claims data because the claims do not include the number of treatments. As a result, in the IPF PPS final rule, we established the following methodology for calculating the IPF PPS ECT payment adjustment.

We established an ECT base rate using the pre-scaled and pre-adjusted median hospital cost for CPT procedure code 90870 used for payment under hospital outpatient PPS (OPPS), based on hospital claims data. The median cost for all OPPS services are posted after publication of the OPPS proposed rule at the following address: http://www.cms.hhs.gov/hospitaloutpatientPPS. We used unadjusted hospital claims data under the OPPS, that is, the pre-scaled and pre-adjusted median hospital cost per treatment, to establish the ECT base rate because we did not want the ECT payment under the IPF PPS to be affected by factors that are relevant to OPPS but not specifically applicable to IPFs. The median cost ($311.88) was then standardized and adjusted for budget neutrality, resulting in an ECT payment adjustment of $247.96 per treatment. The ECT base rate is adjusted for wage and COLA differences in the same manner that we adjust the Federal per diem base rate.

In order to receive the payment adjustment, IPFs must indicate on their claims the revenue code for ECT (901), along with the total number of units (ECT treatments) provided to the patient during their IPF stay. In addition, IPFs must include the ICD-9-CM procedure code for ECT (94.27) and the date of the last ECT treatment the patient received.

As we stated in the IPF PPS final rule, although we established the ECT adjustment as a distinct payment under the IPF PPS, our preferred approach would be to include a patient level adjustment as a component of the model (for example, determined through the regression analyses) to account for the higher costs associated with ECT (69 FR 66951). Although our analysis will continue, we do not intend to redo the regression analysis until we are able to analyze 1 year of IPF PPS claims and cost report data. However, we believe the data currently being submitted by IPFs may permit development of an IPF-specific ECT base rate, rather than using hospital outpatient claims data.

It is important to note that since ECT treatment is a specialized procedure, not all providers are equipped to provide the treatment. Therefore, many patients who need ECT treatment during their IPF stay must be referred to other providers to receive the ECT treatments, and then return to the IPF. In accordance with § 412.404(d)(3), in these cases where the IPF is not able to furnish necessary treatment directly, the IPF would furnish ECT under arrangements with another provider. While a patient is an inpatient of the IPF, the IPF is responsible for all services furnished, including those furnished under arrangements by another provider. As a result, the IPF claim for these cases should reflect the services furnished under arrangements by other providers.

Therefore, in accordance with the update methodology specified in § 412.428(f), we are proposing to update the ECT base rate using the pre-scaled pre-adjusted hospital median cost for ECT used for the CY 2006 update of the OPPS. The median cost would then be standardized, adjusted for budget neutrality, and adjusted for wage and COLA differences in the same manner that we adjust the per diem rate.

We are proposing to pay the median cost for an ECT treatment, posted as part of the calendar year (CY) 2006 OPPS update, which is based on CY 2004 outpatient hospital claims. The median cost is $324.44. After applying the standardization factor and the wage index budget neutrality factor (as described in section III.C.1.f. of this proposed rule), the adjusted proposed ECT payment for RY 2007 is $268.21.

We would monitor this area to ensure that the increased payments for ECT do not lead to changes in the frequency of utilization by reviewing the CY 2005 MedPAR claims data.

3. Physician Certification and Recertification Requirements

Since the publication of the IPF PPS final rule, we have received inquiries related to physician certification and recertification. It appears that some psychiatric units in acute care hospitals have been following the timeframes that are applicable to the acute care hospital of which they are a part (as specified in § 424.13) rather than those that apply to psychiatric hospitals (as specified in § 424.14).

To eliminate the confusion that we believe may be caused by the titles of § 424.13 and § 424.14, to ensure consistency in compliance of the requirements among all IPFs, we are proposing to revise the title of § 424.14 from “Requirements for inpatient services of psychiatric hospitals” to “Requirements for inpatient services of inpatient psychiatric facilities.” We are proposing that for the purposes of payment under the IPF PPS, all IPFs would follow the physician certification and recertification requirements as specified in § 424.14.

In the IPF proposed rule published on November 28, 2003 (68 FR 66920), we proposed to—(1) amend § 424.14 to state that in recertifying a patient's need for continued inpatient care in an IPF, a physician must indicate that the patient continues to need, on a daily basis, inpatient psychiatric care (furnished directly by or requiring the supervision of IPF personnel) or other professional services that, as a practical matter, can be provided only on an inpatient basis; and (2) revise § 424.14(d) to require that a physician recertify a patient's continued need for inpatient psychiatric care on the 10th day following admission to the IPF rather than the 18th day following admission to the IPF (68 FR 66939).

However, in the IPF PPS final rule, we did not include the proposed physician recertification requirement changes because most of the public comments we received on this issue did not support the proposed changes and indicated that there are inconsistencies in the timeframes currently required for IPFs that warranted additional analysis. Instead, we stated that we would continue to require that a physician recertify a patient's continued need for inpatient psychiatric care on the 18th day following admission to the IPF.

Since publication of the final rule, we have received additional inquiries related to the physician certification and recertification timeframes that currently apply to IPFs. As noted above, it appears that some psychiatric units in acute care hospitals have been following the timeframes that are applicable to the acute care hospital of which they are a part (as specified in § 424.13) rather than those that apply to psychiatric hospitals (as specified in § 424.14). Section 424.13(d) requires the initial certification no later than as of the 12th day of hospitalization and the first recertification is required no later than as of the 18th day of hospitalization. Section § 424.14(d) requires certification at the time of admission or as soon thereafter as is reasonable and practicable and the first recertification is required as of the 18th day of hospitalization.

We are proposing that, for purposes of payment under the IPF PPS, all IPFs (distinct part units of acute care hospitals and CAHs and psychiatric hospitals) would meet the following physician certification and recertification timeframes. We would revise § 424.14(d) to provide that the initial physician certification would be required at the time of admission or as soon thereafter as is reasonable and practicable and the first recertification would be required as of the 12th day of hospitalization. Subsequent recertifications would be required at intervals established by the hospital's UR committee (on a case-by-case basis if desired), but no less frequently than every 30 days. We chose the 12th day because it is more in line with the average LOS and it is current practice for certification in psychiatric units.

We have also received inquiries from Fiscal Intermediaries requesting guidance on the content requirement of physician certifications at § 424.14(c), relating to the medical necessity of continued inpatient psychiatric care. As a result, we are proposing to add language to clarify that for purposes of payment under the IPF PPS, the physician would also recertify that the patient continues to need, on a daily basis, active treatment furnished directly by or requiring the supervision of inpatient psychiatric facility personnel.

4. Provision of Therapeutic Recreation in IPFs

Before the implementation of the IPPS payment methodology, Medicare coverage guidelines gave specific recognition to therapeutic recreation in inpatient psychiatric hospitals. The guidelines in § 3102.1.A of the Medicare Intermediary Manual, Part 3 (MIM-3), and in § 212.1 of the Medicare Hospital Manual (which now appear in the CMS Internet Online Manual at Pub. 100-02, Chapter 2, §§ 20.1ff.) specifically identify therapeutic recreation as one of the services that can constitute “active treatment” in this setting when they are—

• Provided under an individualized treatment or diagnostic plan;
• Reasonably expected to improve the patient's condition or for the purpose of diagnosis; and
• Supervised and evaluated by a physician.

However, these guidelines refer to therapeutic recreation in terms of being an “adjunctive” therapy, indicating that even in this setting, it would not independently serve as a patient's sole or primary form of therapeutic treatment, but rather, would be furnished in support of (but subordinate to) some other, primary form of therapy.

When the IPPS was developed in 1983, to the extent that therapeutic recreation and other services had been furnished during the IPPS base period, the bundled IPPS payment for that setting would reflect these costs. However, during the IPPS rulemaking process, we received public comments stating “* * * concern that the cost-saving incentives of the prospective payment system would lead hospitals paid under the system to stop providing recreational therapy services.” In response, in the January 3, 1984 IPPS final rule (49 FR 242) we indicated that implementation of the IPPS would not, in fact, prohibit the provision of recreational therapy services, and that “* * * these services will continue to be covered to the same extent they always have been under existing Medicare policies”.

In implementing the IPPS regulations, we included criteria for identifying certain types of institutions (for example, psychiatric hospitals) that would be excluded from the IPPS and, thus, would continue to be paid under some other methodology. The regulations also introduced criteria for identifying an IPPS-excluded inpatient psychiatric unit housed within a larger acute-care hospital that would itself be subject to the IPPS. One of these identifying criteria at 42 CFR 405.471(c)(4)(ii)(B) (later recodified at 42 CFR 412.27(b)) was the provision, through the use of qualified personnel, of a number of specified types of services, including psychological services, social work services, psychiatric nursing, occupational therapy, and recreational therapy.

As we explained in the IPPS interim final rule published on September 1, 1983 (48 FR 39758), the regulations designated these particular services because their provision “* * * is typical of units which treat patients whose characteristics are like those in psychiatric hospitals. Consequently, the provision of these services is an identifier of such a patient population”. We note that the designation of these particular services in this context did not serve to define the scope of their coverage under Medicare, nor to mandate their provision in this setting, but merely to identify them as being characteristic of the type of psychiatric unit that would qualify for exclusion from the IPPS.

At the same time the IPPS was being developed, a parallel evolution was taking place in the certification requirements that facilities must meet in order to participate in the Medicare program: A shift from primarily “process-oriented” requirements to more “outcome-oriented” requirements, which focus more on direct indicators of the quality of care actually being furnished to the facility's patients (as reflected in the presence of positive results and the absence of negative ones), and less on the specific “process” through which the facility achieves the desired outcome.

In order to participate in the Medicare program, psychiatric hospitals not only had to meet the conditions of participation (COPs) that apply to general, acute-care hospitals, but additionally had to meet special conditions related to medical records and staffing. Consistent with the recognition of therapeutic recreation as constituting active treatment in this one particular setting (as discussed above), the original COPs for psychiatric hospitals at 42 CFR 405.1038(g) mandated the presence of qualified therapists, assistants, or aides “* * * sufficient in number to provide comprehensive therapeutic activities, including at least occupational, recreational and physical therapy, as needed, to assure that appropriate treatment is rendered for each patient, and to establish and maintain a therapeutic milieu.” Furthermore, 42 CFR 405.1038(g)(3) further specified that “recreational or activity therapy services are available under the direct supervision of a member of the staff who has demonstrated competence in therapeutic recreation programs,” and §§ 405.1038(g)(4) and (5) went on to prescribe additional standards regarding therapy assistants or aides and overall staffing for recreational and activity therapy.

However, when the special medical record and staffing COPs for psychiatric hospitals were subsequently recodified at 42 CFR 482.62(g), the specific references to recreation therapy were deleted and replaced with a more general requirement to provide a therapeutic activities program. In response to public comments that recommended us to restore the deleted requirements, we indicated that we believe that the deleted requirements concerning therapeutic activities were overly and unnecessarily prescriptive and that the hospital should have the flexibility to determine which activities are most appropriate to its patient population and to determine the criteria to be met by employees providing these services. (see the IPPS PPS rule published on June 17, 1986 (51 FR 22032)).

When the 1986 COP changes applicable to psychiatric hospitals were made, we inadvertently retained specific references to recreation therapy in § 412.27. Since the intent of § 412.27(b) is to identify services provided in psychiatric units that are characteristic of services furnished in psychiatric hospitals, we believe it is no longer appropriate to include references to specific therapies in § 412.27. In order to have consistent requirements among IPFs, we are proposing to remove recreational therapy from § 412.27(b).

Although we are proposing to remove the specific reference to recreation therapy, we want to emphasize that recreation therapy is, and would continue to be, an accepted therapeutic intervention in psychiatric treatment. In addition, we believe the IPF PPS base rate which was developed using FY 2002 data, reflects the provision of recreation therapy.

5. Same Day Transfers

Currently, when a transfer, discharge, or death occurs on the same day as an admission to an IPF, the IPF PPS PRICER does not recognize any covered IPF days and the IPF claims are suspended. Based on review of a limited sample of the IPF and subsequent IPPS claims, it appears that many of these patients are first seen in a hospital's ED, are admitted to the hospital's psychiatric unit and, later the same day, determined to be too medically compromised to be managed in the psychiatric unit. This scenario may occur because the patient presents at the ED and is admitted to the psychiatric unit in the middle of the night, and when the patient's admission to the unit is reviewed by a psychiatrist the next morning, the physician determines that the patient should be discharged for acute care. In other cases, a patient may have been admitted to a freestanding psychiatric hospital based on the information furnished by an ED of an acute care hospital. However, after admission, the psychiatric hospital staff evaluates the patient and determines that the patient has medical needs that they are not staffed or equipped to meet.

The Provider Reimbursement Manual addresses the same day transfer issue from the perspective of counting Medicare days for the purpose of Medicare cost reporting. Section 2205 indicates that only full patient days may be used to apportion inpatient routine care service costs and that a day begins at midnight and ends 24 hours later. However, section 2205.1 explains how to count a day if the day of admission and the day of discharge are the same. Section 2205.1 indicates that when a patient is admitted and then transferred from one participating provider to another before midnight of the same day, a day (except for utilization purposes) is counted at both providers. A day of Medicare utilization is charged only for the admission to the second provider. This distinction is important for psychiatric admissions because IPF stays are subject to the 190-day lifetime limit on inpatient psychiatric care.

Section 1812(b) of the Act and 42 CFR 409.62 indicate that payment is not available for inpatient psychiatric hospital services furnished beyond the 190-day lifetime limit. Thus, Medicare coverage of IPF services, specifically IPF services furnished in freestanding psychiatric hospitals is limited to 190 days. In consideration of the limit on coverage of IPF services, where there is a same day transfer between Medicare participating providers, we only count the second admission for utilization purposes. Therefore, the initial admission to the IPF does not count against a beneficiary's lifetime psychiatric services limit.

We have some concerns regarding same day transfers from an IPF. Under TEFRA, a hospital receives its cost up to the hospital's TEFRA limit. The TEFRA limit is based on the hospital's average cost per discharge in a base period. When an admission and discharge occur on the same day, the hospital's cost is unlikely to exceed the TEFRA limit, so the hospital receives its cost for the day. These same day transfers also improve the hospital's payment under TEFRA by slightly reducing its cost per discharge. We are also concerned that when the transfer occurs in the same hospital, this practice circumvents bundling rules under the IPPS, in that it unbundles the ED charges from the IPPS claim and allocates the ED costs to the psychiatric unit even though the patient may have been inappropriately admitted to the unit.

Based on the review of IPF PPS claims we conducted, it did not appear that the admissions to the IPF were medically reasonable and necessary. However, we believe it is important to base a decision regarding coverage of these days on a comprehensive review of the claims. Therefore, we are not proposing a change in payment policy in this proposed rule. However, we are considering several alternative methods for addressing same day transfers under the IPF PPS which are described below. Any change to treatment of same day transfers would be made prospectively.

We could treat these days as covered days under the IPF PPS. However, under the IPF PPS, a 19 percent adjustment to the base rate is applied to day 1 of the stay to reflect the additional administrative and clinical costs associated with admission and the day 1 adjustment is increased to 31 percent when the IPF has a qualifying ED. The IPF may also receive, for example, a teaching adjustment or rural adjustment, for these partial days of care. Several of the claims in our analysis indicate a stay of 2 hours. We are concerned that this approach would overpay IPFs and encourage inappropriate admissions and transfers.

Another option would be to make no PPS payment, but continue making TEFRA payments during the IPF PPS transition period. For example, for cost reporting periods beginning in 2006, IPFs will receive a blended payment consisting of 50 percent PPS and 50 percent TEFRA. Therefore, under this approach we would allow some payment for these days for cost reporting periods in 2006 and 2007, but once the IPF PPS transition period is over, the IPFs would receive no payment for these days. We think this approach would encourage changes in admission practices in order to avoid the need to transfer patients. However, once the IPF PPS transition is over, there would be no payment mechanism to pay IPFs for stays in which there is a circumstance, not reasonably foreseeable by the admitting IPF such as a serious change in health status on the day of admission.

We could treat these same day transfer cases as covered days under the IPF PPS but limit payment to the Federal per diem base rate or some other payment amount, for example, half the Federal per diem base rate. This approach would limit payment to IPFs in order to provide an incentive for IPFs to make medical clearance determinations as early in the IPF stay as possible. However, we are concerned that this approach would not lead to changes in admission practices to avoid inappropriate admissions and the need for subsequent transfers.

It is important to note that the cost for these days was included in the cost reports used to develop the IPF PPS, and, as a result, the average cost per day that was used to establish the Federal per diem base rate is higher than it would otherwise have been had those days not been included.

We specifically request public comment from IPFs on this issue to help us to develop a payment policy that pays IPFs appropriately for these days and provides an incentive to avoid same day transfers wherever possible.

V. Provisions of the Proposed Rule

[If you choose to comment on issues in this section, please include the caption “PROVISIONS” at the beginning of your comments.]

We are proposing to make revisions to the regulation in order to implement the proposed prospective payment for IPFs for discharges occurring during the RY beginning July 1, 2006. As part of the update, we are proposing to incorporate OMB's revised definitions for MSAs and its new definitions of Micropolitan Statistical Areas and Core-Based Statistical Areas. In addition, we are proposing the following—

• Update payments for IPF facilities using a market basket reflecting the operating and capital cost structures for the RPL market basket.
• Develop cost weights for benefits, contract labor, and blood and blood products using the FY 2002-based IPPS market.
• Provide weights and proxies for the FY 2002-based RPL market basket.
• Indicate the methodology for the capital portion of the FY 2002-based RPL market basket.
• Update the outlier threshold amount to maintain total outlier payments at 2 percent of total estimated payments.
• Use source code “D” to identify IPF patients who have been transferred to the IPF from the same hospital or CAH.
• Retain the 17 percent adjustment for IPFs located in rural areas, the 1.31 adjustment for IPFs with a qualifying ED, the 0.5150 teaching adjustment to the Federal per diem base rate, and the DRG adjustment factor currently being paid to IPFs for discharges occurring during RY 2007.
• Update the payment rate for ECT.
• Update the DRG listing and comorbidity categories to reflect the ICD-9-CM revisions effective October 1, 2005.

In addition to discussing these general issues in the IPF PPS 2007 RY, we also proposed making the following specific revisions to the existing text of the regulations. Specifically, we are proposing to make conforming changes in 42 CFR part 412 and 424 as discussed through out this preamble.

In § 412.27, we are proposing to revise paragraph (b) to remove the reference to recreational therapy.

In § 412.402, we are proposing to revise the heading of “Fixed dollar loss-threshold” to “Fixed dollar loss threshold amount” and revise the definitions of “Fixed dollar loss threshold amount”, “Qualifying emergency department”, “Rural area” and “Urban area.” For consistency, we are proposing to make conforming changes to these terminologies wherever they appear in the regulations text.

In § 412.424, we are also proposing to add paragraph (d)(1)(iii)(E) to clarify that the teaching adjustment is made on a claim basis as an interim payment and the final payment in full is made during the final settlement of the cost report. For clarity, we are proposing to revise paragraph (d)(2) introductory text. The current language in (d)(2)(iii) would become the introductory text for paragraph (d)(2) and paragraph (d)(2)(iii) would be removed. In addition, we are proposing to revise § 412.424(d)(3)(i)(A) to clarify that an outlier payment is made if an IPF's estimated total cost for a case exceeds a fixed dollar loss threshold amount plus the Federal payment amount for the case.

In § 412.426(a), we are proposing to correct the cross reference to the Federal per diem payment amount. We incorrectly referenced the Federal per diem base rate at § 424.424(c). The correct cross reference to the Federal per diem payment amount is § 424.424(d).

In § 412.428, we are proposing to revise paragraph (b) to specify that for discharges occurring on or after January 1, 2005 but before July 1, 2006 the rate of increase factor for the Federal portion of the payment is based on the FY 1997-based excluded hospital with capital market basket and for discharges occurring on or after July 1, 2006, the rate of increase factor for the Federal portion of the payment is based on the FY 2002-based RPL market basket.

In addition, we are proposing to add a new paragraph (g) to state that we would update the national urban and rural cost to charge ratio median and ceiling. Paragraph (1) through (3) would specify the types of IPFs in which to apply the national cost to charge ratio. Furthermore, we are proposing to add a new paragraph (h) to update the cost of living adjustment factors if appropriate.

In § 424.14, we are proposing to revise the title to read, “Requirements for inpatient services of inpatient psychiatric facilities,” to ensure consistency in compliance with the requirements among all IPFs. We are proposing to add a new paragraph (c)(3) to clarify for purposes of payment under the IPF PPS, that the physician would also recertify that the patient continues to need, on a daily basis, active inpatient psychiatric care (furnished directly by or requiring the supervision of inpatient psychiatric facility personnel) or other professional services that can only be provided on an inpatient basis.

In addition, we are revising paragraph (d)(2) to state that the first recertification is required as of the 12th day of hospitalization. Subsequent recertifications are required at intervals established by the UR committee (on a case-by-case basis if it so chooses), but no less frequently than every 30 days.

VI. Collection of Information Requirement

[If you choose to comment on issues in this section, please include the caption “INFORMATION COLLECTION” at the beginning of your comments.]

This document does not impose information collection and recordkeeping requirements. Consequently, it need not be reviewed by the Office of Management and Budget under the authority of the Paperwork Reduction Act of 1995.

VII. Regulatory Impact Analysis

[If you choose to comment on issues in this section, please include the caption “IMPACT” at the beginning of your comments.]

A. Overall Impact

We have examined the impact of this proposed rule as required by Executive Order 12866 (September 1993, Regulatory Planning and Review), the Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L. 96-354), section 1102(b) of the Social Security Act, the Unfunded Mandates Reform Act of 1995 (UMRA) (Pub. L. 104-4), and Executive Order 13132.

Executive Order 12866 (as amended by Executive Order 13258, which merely reassigns responsibility of duties) directs agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). A regulatory impact analysis (RIA) must be prepared for major rules with economically significant effects ($100 million or more in any 1 year).

Based on the impact analysis, we estimate the expenditures from the IPF PPS implementation year to the 2007 IPF PPS RY will be increased by $180 million. The updates to the IPF labor-related share and wage indices are made in a budget neutral manner and thus have no effect on estimated costs to the Medicare program. Therefore, the estimated increased cost to the Medicare program is the result of a combination of the updated IPF market baskets, which is offset by the transition blend and the revision of the standardization factor.

CMS notes that aspects of the transition, including the stop-loss policy and the transition to the 50/50 percent blend in the 2007 IPF PPS RY and the transition to the 75/25 percent blend in the 2008 IPF PPS RY, were included in the 2004 final rule and are thus not incremental to this rulemaking. Nevertheless, it is essential to analyze the impact of the transition blend in order to calculate the increase in cost to the Medicare program.

The impact of the transition blend is an approximately .2 percent (about $10 million) decrease in overall payments for the 2007 IPF PPS RY and the distribution of that impact is summarized in Table 15. Therefore, the impact attributable to the policy changes proposed in this rulemaking, primarily the market basket update and the standardization correction, is approximately $180 million in the 2007 IPF PPS RY.

Since costs to the Medicare program are estimated to be greater than $100 million, this proposed rule is considered a major economic rule, as defined in 5 U.S.C. 40(2).

The RFA requires agencies to analyze options for regulatory relief of small businesses. For purposes of the RFA, small entities include small businesses, nonprofit organizations, and governmental jurisdictions. Most IPFs and most other providers and suppliers are considered small entities, either by nonprofit status or by having revenues of $6 million to $29 million in any 1 year. (For details, see the Small Business Administration's regulation that set forth size standards for health care industries at 65 FR 69432.)

HHS considers that a substantial number of entities are affected if the rule impacts more than 5 percent of the total number of small entities as it does in this rule. We included all freestanding psychiatric hospitals (79 are non-profit hospitals) in the analysis since their total revenues do not exceed the $29 million threshold. We also included psychiatric units of small hospitals, that is, those hospitals with fewer than 100 beds. We did not include psychiatric units within larger hospitals in the analysis because we believe this proposed rule would not significantly impact total revenues of the entire hospital that supports the unit. We have provided the following RFA analysis in section B to emphasize that, although the proposed rule would impact a substantial number of IPFs that were identified as small entities, we do not believe it would have a significant economic impact. Based on the analysis of the 1063 psychiatric facilities that were classified as small entities as described above, we estimate the combined impact of the IPF PPS will be a 4.6-percent increase in payments in RY 2007 relative to their payments in the implementation year of the IPF PPS. Based on the information available, we believe that Medicare payments may constitute a small portion of governmental IPF's revenue stream. We have prepared the impact analysis in section VI.B.2 to describe the impact of the proposed rule in order to provide a factual basis for our conclusions regarding small business impact.

In addition, section 1102(b) of the Act requires us to prepare a regulatory impact analysis if a proposed rule may have a significant impact on the operations of a substantial number of small rural hospitals. This analysis must conform to the provisions of section 603 of the RFA. With the exception of hospitals located in certain New England counties, for purposes of section 1102(b) of the Act, we previously defined a small rural hospital as a hospital with fewer than 100 beds that is located outside of a Metropolitan Statistical Area (MSA) or New England County Metropolitan Area (NECMA). However, under the new labor market definitions that we are proposing to adopt, we would no longer employ NECMAs to define urban areas in New England. Therefore, for purposes of this analysis, we now define a small rural hospital as a hospital with fewer than 100 beds that is located outside of an MSA. We have determined that this proposed rule would have a substantial impact on hospitals classified as located in rural areas. As discussed earlier in this preamble, we are proposing to continue to provide a payment adjustment of 17 percent for IPFs located in rural areas. In addition, we have established a 3-year transition to the new system to allow IPFs an opportunity to adjust to the new system. Therefore, the impacts shown in Table 15 below reflect the adjustments that are designed to minimize or eliminate any potentially significant negative impact that the IPF PPS may otherwise have on small rural IPFs.

Section 202 of the Unfunded Mandates Reform Act of 1995 also requires that agencies assess anticipated costs and benefits before issuing any proposed rule whose mandates require spending in any 1 year of $100 million in 1995 dollars, updated annually for inflation. That threshold level is currently approximately $120 million. This proposed rule would not mandate any requirements for State, local, or tribal governments, nor would it affect private sector costs.

Executive Order 13132 establishes certain requirements that an agency must meet when it promulgates a proposed rule that imposes substantial direct requirement costs on State and local governments, preempts State law, or otherwise has Federalism implications.

We have reviewed this proposed rule under the criteria set forth in Executive Order 13132 and have determined that the proposed rule would not have any substantial impact on the rights, roles, and responsibilities of State, local, or tribal governments.

B. Anticipated Effects of the Proposed Rule

We discuss below the impact of this proposed rule on the Federal Medicare budget and on IPFs.

1. Budgetary Impact

As discussed in detail in the IPF PPS final rule and summarized in section III.B. of this proposed rule, we applied a budget neutrality factor to the Federal per diem and ECT base rates to ensure that total payments under the IPF PPS in the implementation period would equal the amount that would have been paid if the IPF PPS had not been implemented. In addition, as discussed in section IV.C.1 of this proposed rule, we are proposing to adopt the new CBSAs and labor market share in a budget neutral manner by applying a wage index budget neutrality factor to the Federal per diem and ECT base rates. Thus, the budgetary impact to the Medicare program by the update of the IPF PPS will be the combination of the proposed market basket updates (see section III.C of this proposed rule), the proposed revision of the standardization factor (see section III.B.3 of this proposed rule), and the planned update of the payment blend discussed below.

2. Impacts on Providers

To understand the impact of the changes to the IPF PPS discussed in this proposed rule on providers, it is necessary to compare estimated payments under the IPF PPS rates and factors for the 2007 IPF rate year to estimated payments under the IPF PPS rates and factors for the IPF PPS implementation year. The estimated payments for the IPF implementation year are a blend of: 75 percent of the facility-specific TEFRA payment and 25 percent of the IPF PPS payment with stop loss payment. The estimated payments for the 2007 IPF rate year are a blend of: 50 percent of the facility-specific TEFRA payment and 50 percent of the IPF PPS payment with stop loss payment. We determined the percent change of estimated 2007 IPF PPS rate year payments to estimated IPF PPS implementation year payments for each category of IPFs. In addition, for each category of IPFs, we have included the estimated percent change in payments resulting from the revision of the standardization factor (as discussed in section III.B.3 of this proposed rule, the ratio of estimated total TEFRA payments to estimated total PPS payments in the implementation year was overestimated and therefore needed to be reduced. We are proposing to apply the revised standardization factor prospectively to the Federal per diem base rate and ECT amount), the wage index changes for the 2007 IPF PPS rate year, the proposed market basket update to IPF PPS payments, and the transition blend for the 2007 rate year of the IPF PPS payment and the facility-specific TEFRA payment.

To illustrate the impacts of the proposed RY 2007 changes, our analysis begins with an implementation year baseline simulation model based on FY 2002 IPF payments inflated to 2005 with market baskets; the estimated outlier payments in 2005; the estimated stop-loss payments in 2005; the MSA designations for IPFs based on OMB's MSA definitions before June 2003; the 2005 MSA wage index; the implementation year labor-market share; and the implementation year percentage amount of the rural adjustment. During the simulation, the outlier payment is maintained at the target of 2 percent of total PPS payments.

Each of the following proposed changes is added incrementally to this baseline model in order for us to isolate the effects of each change:

• IPF PPS payments adjusted by the revised standardization factor.
• The new CBSAs based on new geographic area definitions announced by OMB in June 2003 and the RY 2007 proposed budget-neutral labor-related share and wage index adjustment.
• A blended market basket update of 4.7 percent resulting in an update to the hospital-specific TEFRA target amount and an update to the IPF PPS base rates as discussed below.

++ As discussed in section III.C.4 of this proposed rule and in the IPPS final rule published August 12, 2005 (70 FR 47707), we established an update factor of 3.8 percent effective for cost reporting periods beginning on or after October 1, 2005 using the 2002-based excluded hospital market basket. The 3.8 percent update is applied to the IPF's target cost per discharge established under TEFRA for cost reporting periods beginning on or after October 1, 2005. However, since the midpoints of the 2007 rate year and the IPF PPS implementation period are 15 months apart, the TEFRA payment increase is projected to be 4.8 percent.

++ An update to the Federal per diem base rate of 4.5 percent based on the 2002-based RPL market basket (see section III.C.1.b of this proposed rule). The market basket update is based on a 15-month time period (from the midpoint of the IPF PPS implementation period to the midpoint of the 2007 rate year).

• The transition to 50 percent IPF PPS payment and 50 percent facility-specific TEFRA payment.

Our final comparison illustrates the percent change in payments from the IPF PPS implementation year (that is, January 1, 2005 to June 30, 2006) to RY 2007 (that is, July 1, 2006 to June 30, 2007).

3. Results

Table 15 above displays the results of our analysis. The table groups IPFs into the categories listed below based on characteristics provided in the Online Survey and Certification and Reporting (OSCAR) file and the 2002 cost report data from HCRIS:

• Facility Type
• Location
• Teaching Status Adjustment
• Census Region
• Size

The top row of the table shows the overall impact on the 1,806 IPFs included in the analysis.

In column 3, we present the effects of the revised standardization factor (refer to section III.B.3 of this proposed rule for a discussion of this revision). This is defined to be the comparison of the simulated implementation year payment under the revised budget neutral factor to the simulated implementation year payment under the original budget neutral factor. In aggregate, the proposed revision would result in a 0.3 percent decrease in overall payments to IPFs. There are small distributional effects among different categories of IPFs. For example, rural government psychiatric hospitals would receive the largest decrease of 0.5 percent while rural for-profit psychiatric hospitals would receive a 0.2 percent decrease. Also psychiatric hospitals with over 75 beds would receive a decrease of 0.4 percent while psychiatric hospitals with fewer than 12 beds would receive the smallest decrease of 0.1 percent.

In column 4, we present the effects of the budget-neutral update to the labor-related share and the wage index adjustment under the new CBSA geographic area definitions announced by OMB in June 2003. This is a comparison of the simulated implementation year payment under revised budget neutral factor and labor-related share and wage index under CBSA classification to the simulated implementation year payment under revised budget neutral factor and labor-related share and wage index under current MSA classification. There is no change in aggregate payments to IPFs as indicated in the first row of column 4. There would, however, be small distributional effects among different categories of IPFs. For example, rural IPFs would experience a 0.2 percent decrease in payments while urban IPFs would experience no change in payments. Rural government hospitals would receive the largest decrease of 0.3 percent while rural non-profit hospitals would receive the largest increase of 0.3 percent.

In column 5, we present the effects of the proposed market basket update to the IPF PPS payments by applying the TEFRA and PPS updates to payments under revised budget neutral factor and labor-related share and wage index under CBSA classification. In the aggregate the proposed update would result in a 4.7 percent increase in overall payments to IPFs. This 4.7 percent reflects the current blend of the 4.8 percent update for IPF TEFRA payments and the 4.5 percent update for the IPF PPS payments.

In column 6, we present the effects of the payment change in transition blend percentages to transition year 2 (TEFRA Rate Percentage = 50 percent, IPF PPS Federal Rate Percentage = 50 percent) from transition year 1 (TEFRA Rate Percentage = 75 percent, IPF PPS Federal Rate Percentage = 25 percent) of the IPF PPS under revised budget neutral factor, labor-related share and wage index under CBSA classification, and TEFRA and PPS updates to RY 2007. The overall aggregate effect, across all hospital groups, would be a 0.2 percent decrease in payments to IPFs. There are distributional effects of these changes among different categories of IPFs. The largest increases would be among government psychiatric hospitals, with rural government hospitals receiving an 11.8 percent increase and urban government hospitals receiving a 10.8 percent increase. Alternatively, psychiatric hospitals and units with fewer than 12 beds would receive the largest decreases of 3.8 percent and 4.5 percent respectively.

Column 7 compares our estimates of proposed changes reflected in this proposed rule for RY 2007, to our estimates of payments in the implementation year (without these proposed changes). This column reflects all RY 2007 proposed changes relative to the implementation year, shown in columns 3 through 6. The average increase for all IPFs is approximately 4.2 percent. This increase includes the effects of the market basket updates resulting in a 4.7 percent increase in total RY 2007 payments. It also includes a 0.3 percent decrease in RY 2007 payments for the standardization factor revision and a 0.2 percent decrease in RY 2007 payments for the transition blend.

Overall, the largest payment increase would be among government IPFs. Urban government psychiatric hospitals would receive a 15.6 percent increase and rural government psychiatric hospitals would receive a 16.1 percent increase. Psychiatric hospitals with fewer than 12 beds would receive a 0.8 percent increase and psychiatric units with fewer than 12 beds would receive a 0.2 percent decrease.

4. Effect on the Medicare Program

Based on actuarial projections resulting from our experience with other PPSs, we estimate that Medicare spending (total Medicare program payments) for IPF services over the next 5 years would be as follows:

These estimates are based on the current estimate of increases in the excluded hospital with capital market basket as follows:

• 3.6 percent for RY 2007;
• 3.5 percent for RY 2008;
• 3.1 percent for RY 2009;
• 2.6 percent for RY 2010; and
• 3.0 percent for RY 2011.

We estimate that there would be a change in fee-for-service Medicare beneficiary enrollment as follows:

• −2.3 percent in RY 2007;
• −1.0 percent in RY 2008;
• 0.3 percent in RY 2009;
• 0.3 percent in RY 2010; and
• 0.6 percent in RY 2011.

In the implementation year we estimated aggregate payments under the IPF PPS to equal the estimated aggregate payments that would be made if the IPF PPS were not implemented. Our methodology for estimating payments for purposes of the budget-neutrality calculations uses the best available data.

We will evaluate the accuracy of the assumptions used to compute the budget-neutrality calculation in the implementation year. We intend to analyze claims and cost report data from the implementation year of the IPF PPS to determine whether the factors used to develop the Federal per diem base rate are not significantly different from the actual results experienced in that year. We are planning to compare payments under the final IPF PPS (which relies on an estimate of cost-based TEFRA payments using historical data from a base year and assumptions that trend the data to the initial implementation period) to estimated cost-based TEFRA payments based on actual data from the first year of the IPF PPS. If we find that an adjustment is necessary, the percent difference (either positive or negative) would be applied prospectively to the established prospective payment rates to ensure the rates accurately reflect the payment levels intended by the statute.

Section 124 of Public Law 106-113 provides the Secretary broad authority to make an adjustment. We intend to perform this analysis within the first 5 years of the implementation of the IPF PPS.

5. Effect on Beneficiaries

Under the IPF PPS, IPFs would receive payment based on the average resources consumed by patients for each day. We do not expect changes in the quality of care or access to services for Medicare beneficiaries under the IPF PPS. In fact, we believe that access to IPF services would be enhanced due to the patient and facility level adjustment factors, all of which are intended to adequately reimburse IPFs for expensive cases. Finally, the stop-loss policy is intended to assist IPFs during the transition. In addition, we expect that paying prospectively for IPF services would enhance the efficiency of the Medicare program.

6. Computer Hardware and Software

We do not anticipate that IPFs would incur additional systems operating costs in order to effectively participate in the IPF PPS. We believe that IPFs and CAHs possess the computer hardware capability to handle the billing requirements under the IPF PPS. Our belief is based on indications that approximately 99 percent of hospital inpatient claims are submitted electronically. In addition, we are not adopting significant changes in claims processing (see section IV.C of this proposed rule).

C. Accounting Statement

As required by OMB Circular A-4 (available at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf), in Table 17 below, we have prepared an accounting statement showing the classification of the expenditures associated with the provisions of this proposed rule. This table provides our best estimate of the increase in Medicare payments under the IPF PPS as a result of the changes presented in this proposed rule based on the data for 1,806 IPFs in our database. All expenditures are classified as transfers to Medicare providers (that is, IPFs).

D. Alternatives Considered

We considered the following alternatives in developing the update to the IPF PPS:

One option we considered was incorporating a transition from MSA-based labor market definitions to CBSA-based labor market definitions for the purpose of applying the area wage index. As stated in section IV.C.1.e of this proposed rule, we are not adopting a transition policy here because IPFs are already in a transition from reasonable cost based reimbursement to IPF PPS payments. In addition, as evident in Table 15 above, the wage index change does not appear to have a large impact on IPFs.

We also considered increasing our outlier percentage so that outlier payments would be projected to be 3 percent (or higher) of total PPS payments. However, this approach would not target the truly costly cases. Instead, implementing such a policy would have the effect of lowering the fixed dollar loss amount, therefore spreading outlier payments across more IPFs. In addition, the Federal per diem base rate would have to be reduced by another percentage point.

It is also worth noting that in this proposed rule, we used the best available complete data set (that is, FY 2002 claims and cost report data) to assess the impact of the various policy changes. As previously stated, we won't know the true impact of the wage index changes, the transition blend period, or the market basket increases until we are able to analyze 1 year of IPF PPS claims and cost report data.

We considered alternative policies in order to reduce financial risk to facilities in the event that they experience substantial reductions in Medicare payments during the period of transition to the IPF PPS. As discussed previously in this proposed rule, we have adopted a provision that would guarantee each facility an average payment per case under the IPF PPS that is estimated to be no less than a minimum proportion of its average payment per case under TEFRA. We analyzed the impact on losses if we were to make a payment adjustment to ensure that the minimum IPF PPS per case payment to an IPF is at least 70 percent of its TEFRA payment.

The stop-loss adjustment is applied to the IPF PPS portion of Medicare payments during the transition. For example, during year 2 of the 3-year transition period, half of the payment is based on TEFRA, and half of the payment is based on the Federal rate. We apply the stop-loss adjustment to the portion of the IPF's payments during the transition based on the Federal rate. We estimate that the combined effects of the transition and the stop-loss policies will ensure that per case payments relative to pre-IPF PPS TEFRA per case payments are no less than 92.5 percent in year 1, 85 percent in year 2, and 77.5 percent in year 3. We estimate that about 10 percent of IPFs would receive additional payments under the stop-loss policy.

The 70 percent of TEFRA stop-loss policy required a reduction in the per diem rate to make the stop-loss policy budget neutral during the implementation year. As a result, in the IPF PPS final rule, we made a reduction to the Federal per diem base rate of 0.4 percent in order to maintain budget neutrality.

In the IPF PPS final rule, we considered an 80 percent stop-loss policy as well as a 70 percent policy. In order to target the stop-loss policy to the IPFs that experience the greatest impact relative to current payments and to limit the size of the reduction to the Federal per diem base rate, we adopted the 70 percent policy. In developing this proposed rule, we again considered an 80 percent stop-loss policy for RY 2007. Adopting an 80 percent policy would require a reduction in the Federal per diem base rate of over 2.5 percent, and we estimate that about 29 percent of IPFs would receive additional payments. We chose to stay with the 70 percent policy for the same reasons discussed in the IPF PPS final rule. Specifically, the 70 percent stop-loss policy targets the IPFs that experience the greatest impact relative to current payments, and it limits the size of the reduction to the Federal per diem base rate.

In accordance with the provisions of Executive Order 12866, this rule was previously reviewed by OMB.

List of Subjects

42 CFR Part 412

• Administrative practice and procedure
• Health facilities
• Medicare
• Puerto Rico
• Reporting and recordkeeping requirements

42 CFR Part 424

• Emergency medical services
• Health facilities
• Health professions
• Medicare
• Reporting and recordkeeping requirements

For the reasons set forth in the preamble, the Centers for Medicare & Medicaid Services proposes to amend 42 CFR chapter IV as follows:

PART 412—PROSPECTIVE PAYMENT SYSTEMS FOR HOSPITAL SERVICES

1. The authority citation for part 412 is revised to read as follows:

Authority: Secs. 1102 and 1871 of the Social Security Act (42 U.S.C. 1302 and 1395hh), Sec. 124 of Pub. L. 106-113, 113 Stat. 1515, and Sec. 405 of Pub. L. of 108-173, 117 Stat. 2266.

2. Amend § 412.27 by revising paragraph (b) to read as follows:

PART 424—CONDITIONS FOR MEDICARE PAYMENT

1. The authority citation for part 424 continues to read as follows:

Authority: Secs. 1102 and 1871 of the Social Security Act (42 U.S.C. 1302 and 1395hh).

2. Section 424.14 is amended by—

A. Revising the heading.

B. Adding a new paragraph (c)(3).

C. Revising paragraph (d)(2).

The addition and revisions read as follows:

Note:

The following addenda will not appear in the Code of Federal Regulations.

Addendum A—Rate and Adjustment Factors

Addendum B—RY 2007 IPF PPS Wage Index Table