Medicare Program; Inpatient Rehabilitation Facility Prospective Payment System for Federal Fiscal Year 2011

AGENCY:

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

ACTION:

Notice.

SUMMARY:

This notice updates the payment rates for inpatient rehabilitation facilities (IRFs) for Federal fiscal year (FY) 2011 (for discharges occurring on or after October 1, 2010 and on or before September 30, 2011) as required under section 1886(j)(3)(C) of the Social Security Act (the Act). Section 1886(j)(5) of the Act requires the Secretary to publish in the Federal Register on or before the August 1 that precedes the start of each fiscal year, the classification and weighting factors for the IRF prospective payment system's (PPS) case-mix groups and a description of the methodology and data used in computing the prospective payment rates for that fiscal year.

DATES:

Effective Date: The updated IRF prospective payment rates are effective for IRF discharges occurring on or after October 1, 2010 and on or before September 30, 2011 (FY 2011).

FOR FURTHER INFORMATION CONTACT:

Julie Stankivic, (410) 786-5725.

Susanne Seagrave, (410) 786-0044.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background

A. Historical Overview of the Inpatient Rehabilitation Facility Prospective Payment System (IRF PPS)

B. Operational Overview of the Current IRF PPS

II. Summary of Provisions of the Notice

III. Update to the Case-Mix Group (CMG) Relative Weights and Average Length of Stay Values for FY 2011

IV. Updates to the Facility-Level Adjustment Factors

V. FY 2011 IRF PPS Federal Prospective Payment Rates

A. Adjustment to the FY 2010 IRF PPS Federal Prospective Payment Rates, Reflecting Adjustments to the Rehabilitation, Psychiatric, and Long-term Care Hospital (RPL) Market Basket Increase Factor in Accordance with Sections 3401(d) of the Patient Protection and Affordable Care Act (Affordable Care Act) as Amended by Section 10319 of the Same Act and by Section 1105(c) of the Health Care and Education Reconciliation Act of 2010

B. Market Basket Increase Factor and Labor-Related Share for FY 2011

C. Area Wage Adjustment

D. Description of the IRF Standard Payment Conversion Factor and Payment Rates for FY 2011

E. Example of the Methodology for Adjusting the Federal Prospective Payment Rates

VI. Update to Payments for High-Cost Outliers under the IRF PPS

A. Adjustment to the Outlier Threshold Amount for FY 2010, Reflecting Adjustments to the RPL Market Basket Increase Factor in Accordance with Sections 3401(d) of the Patient Protection and Affordable Care Act (Affordable Care Act) as Amended by Section 10319 of the Same Act and by Section 1105 of the Health Care and Education Reconciliation Act of 2010

B. Update to the Outlier Threshold Amount for FY 2011

C. Update to the IRF Cost-to-Charge Ratio Ceilings

VII. Collection of Information Requirements

VIII. Waiver of Proposed Rulemaking

IX. Regulatory Impact Analysis

A. Overall Impact

B. Anticipated Effects of the Notice

C. Alternatives Considered

D. Accounting Statement

E. Conclusion

Addendum

Acronyms

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

ADC Average Daily Census

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

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

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

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

CBSA Core-Based Statistical Area

CCR Cost-to-Charge Ratio

CFR Code of Federal Regulations

CMG Case-Mix Group

DRG Diagnostic Related Group

DSH Disproportionate Share Hospital

FI Fiscal Intermediary

FR Federal Register

FTE Full-time Equivalent

FY Federal Fiscal Year

HCFA Health Care Financing Administration

HHH Hubert H. Humphrey Building

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

IOM Internet Only Manual

IPF Inpatient Psychiatric Facility

IPPS Inpatient Prospective Payment System

IRF Inpatient Rehabilitation Facility

IRF-PAI Inpatient Rehabilitation Facility-Patient Assessment Instrument

IRF PPS Inpatient Rehabilitation Facility Prospective Payment System

IRVEN Inpatient Rehabilitation Validation and Entry

LTCH Long Term Care Hospital

LIP Low-Income Percentage

MA Medicare Advantage

MAC Medicare Administrative Contractor

MBPM Medicare Benefit Policy Manual

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

OMB Office of Management and Budget

PAI Patient Assessment Instrument

PPS Prospective Payment System

QIC Qualified Independent Contractors

RAC Recovery Audit Contractors

RAND RAND Corporation

RFA Regulatory Flexibility Act of 1980, Public Law 96-354

RIA Regulatory Impact Analysis

RIC Rehabilitation Impairment Category

RPL Rehabilitation, Psychiatric, and Long-Term Care Hospital

SCHIP State Children's Health Insurance Program

I. Background

A. Historical Overview of the Inpatient Rehabilitation Facility Prospective Payment System (IRF PPS)

Section 4421 of the Balanced Budget Act of 1997 (BBA, Pub. L. 105-33, enacted on August 5, 1997), as amended by section 125 of the Medicare, Medicaid, State Children's Health Insurance Program (SCHIP) Balanced Budget Refinement Act of 1999 (BBRA, Pub. L. 106-113, enacted November 29, 1999) and by section 305 of the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA, Pub. L. 106-554, enacted December 21, 2000) provides for the implementation of a per discharge prospective payment system (PPS) under section 1886(j) of the Social Security Act (the Act) for inpatient rehabilitation hospitals and inpatient rehabilitation units of a hospital (hereinafter referred to as IRFs).

Payments under the IRF PPS encompass inpatient operating and capital costs of furnishing covered rehabilitation services (that is, routine, ancillary, and capital costs) but not direct graduate medical education costs, costs of approved nursing and allied health education activities, bad debts, and other services or items outside the scope of the IRF PPS. Although a complete discussion of the IRF PPS provisions appears in the original FY 2002 IRF PPS final rule (66 FR 41316) and the FY 2006 IRF PPS final rule (70 FR 47880), we are providing below a general description of the IRF PPS for fiscal years (FYs) 2002 through 2010.

Under the IRF PPS from FY 2002 through FY 2005, as described in the FY 2002 IRF PPS final rule (66 FR 41316), the Federal prospective payment rates were computed across 100 distinct (Case-Mix Group) CMGs. We constructed 95 CMGs using rehabilitation impairment categories (RICs), functional status (both motor and cognitive), and age (in some cases, cognitive status and age may not be a factor in defining a CMG). In addition, we constructed five special CMGs to account for very short stays and for patients who expire in the IRF.

For each of the CMGs, we developed relative weighting factors to account for a patient's clinical characteristics and expected resource needs. Thus, the weighting factors accounted for the relative difference in resource use across all CMGs. Within each CMG, we created tiers based on the estimated effects that certain comorbidities would have on resource use.

We established the Federal PPS rates using a standardized payment conversion factor (formerly referred to as the budget neutral conversion factor). For a detailed discussion of the budget neutral conversion factor, please refer to our FY 2004 IRF PPS final rule (68 FR 45684 through 45685). In the FY 2006 IRF PPS final rule (70 FR 47880), we discussed in detail the methodology for determining the standard payment conversion factor.

We applied the relative weighting factors to the standard payment conversion factor to compute the unadjusted Federal prospective payment rates under the IRF PPS from FYs 2002 through 2005. Within the structure of the payment system, we then made adjustments to account for interrupted stays, transfers, short stays, and deaths. Finally, we applied the applicable adjustments to account for geographic variations in wages (wage index), the percentage of low-income patients, location in a rural area (if applicable), and outlier payments (if applicable) to the IRF's unadjusted Federal prospective payment rates.

For cost reporting periods that began on or after January 1, 2002 and before October 1, 2002, we determined the final prospective payment amounts using the transition methodology prescribed in section 1886(j)(1) of the Act. Under this provision, IRFs transitioning into the PPS were paid a blend of the Federal IRF PPS rate and the payment that the IRF would have received had the IRF PPS not been implemented. This provision also allowed IRFs to elect to bypass this blended payment and immediately be paid 100 percent of the Federal IRF PPS rate. The transition methodology expired as of cost reporting periods beginning on or after October 1, 2002 (FY 2003), and payments for all IRFs now consist of 100 percent of the Federal IRF PPS rate.

We established a CMS Web site as a primary information resource for the IRF PPS. The Web site URL is http://www.cms. gov/InpatientRehabFacPPS/ and may be accessed to download or view publications, software, data specifications, educational materials, and other information pertinent to the IRF PPS.

Section 1886(j) of the Act confers broad statutory authority upon the Secretary to propose refinements to the IRF PPS. In the FY 2006 IRF PPS final rule (70 FR 47880) and in correcting amendments to the FY 2006 IRF PPS final rule (70 FR 57166) that we published on September 30, 2005, we finalized a number of refinements to the IRF PPS case-mix classification system (the CMGs and the corresponding relative weights) and the case-level and facility-level adjustments. These refinements included the adoption of the Office of Management and Budget's (OMB) Core-Based Statistical Area (CBSA) market definitions, modifications to the CMGs, tier comorbidities, and CMG relative weights, implementation of a new teaching status adjustment for IRFs, revision and rebasing of the market basket index used to update IRF payments, and updates to the rural, low-income percentage (LIP), and high-cost outlier adjustments. Beginning with the FY 2006 IRF PPS final rule (70 FR 47908 through 47917), the market basket index used to update IRF payments is a 2002-based market basket reflecting the operating and capital cost structures for freestanding IRFs and long-term care hospitals (LTCHs) (hereafter referred to as the rehabilitation, psychiatric, and long-term care (RPL) market basket). Any reference to the FY 2006 IRF PPS final rule in this notice also includes the provisions effective in the correcting amendments. For a detailed discussion of the final key policy changes for FY 2006, please refer to the FY 2006 IRF PPS final rule (70 FR 47880 and 70 FR 57166).

In the FY 2007 IRF PPS final rule (71 FR 48354), we further refined the IRF PPS case-mix classification system (the CMG relative weights) and the case-level adjustments, to ensure that IRF PPS payments would continue to reflect as accurately as possible the costs of care. For a detailed discussion of the FY 2007 policy revisions, please refer to the FY 2007 IRF PPS final rule (71 FR 48354).

In the FY 2008 IRF PPS final rule (72 FR 44284), we updated the Federal prospective payment rates and the outlier threshold, revised the IRF wage index policy, and clarified how we determine high-cost outlier payments for transfer cases. For more information on the policy changes implemented for FY 2008, please refer to the FY 2008 IRF PPS final rule (72 FR 44284), in which we published the final FY 2008 IRF Federal prospective payment rates.

After publication of the FY 2008 IRF PPS final rule (72 FR 44284), section 115 of the Medicare, Medicaid, and SCHIP Extension Act of 2007 (MMSEA, Pub. L. 110-173, enacted December 29, 2007), amended section 1886(j)(3)(C) of the Act to apply a zero percent increase factor for FYs 2008 and 2009, effective for IRF discharges occurring on or after April 1, 2008. Section 1886(j)(3)(C) of the Act required the Secretary to develop an increase factor to update the IRF Federal prospective payment rates for each FY. Based on the legislative change to the increase factor, we revised the FY 2008 Federal prospective payment rates for IRF discharges occurring on or after April 1, 2008. Thus, the final FY 2008 IRF Federal prospective payment rates that were published in the FY 2008 IRF PPS final rule (72 FR 44284) were effective for discharges occurring on or after October 1, 2007 and on or before March 31, 2008; and the revised FY 2008 IRF Federal prospective payment rates were effective for discharges occurring on or after April 1, 2008 and on or before September 30, 2008. The revised FY 2008 Federal prospective payment rates are available on the CMS Web site at http://www.cms.gov/InpatientRehabFacPPS/07_DataFiles.asp#TopOfPage.

In the FY 2009 IRF PPS final rule (73 FR 46370), we updated the CMG relative weights, the average length of stay values, and the outlier threshold; clarified IRF wage index policies regarding the treatment of “New England deemed”counties and multi-campus hospitals; and revised the regulation text in response to section 115 of the MMSEA to set the IRF compliance percentage at 60 percent (“the 60 percent rule”) and continue the practice of including comorbidities in the calculation of compliance percentages. We also applied a zero percent market basket increase factor for FY 2009 in accordance with section 115 of the MMSEA. For more information on the policy changes implemented for FY 2009, please refer to the FY 2009 IRF PPS final rule (73 FR 46370), in which we published the final FY 2009 IRF Federal prospective payment rates.

In the FY 2010 IRF PPS final rule (74 FR 39762) and in correcting amendments to the FY 2010 IRF PPS final rule (74 FR 50712) that we published on October 1, 2009, we updated the Federal prospective payment rates, the CMG relative weights, the average length of stay values, the rural, LIP, and teaching status adjustment factors, and the outlier threshold; implemented new IRF coverage requirements for determining whether an IRF claim is reasonable and necessary; and revised the regulation text to require IRFs to submit patient assessments on Medicare Advantage (Medicare Part C) patients for use in the 60 percent rule calculations. Any reference to the FY 2010 IRF PPS final rule in this notice also includes the provisions effective in the correcting amendments. For more information on the policy changes implemented for FY 2010, please refer to the FY 2010 IRF PPS final rule (74 FR 39762 and 74 FR 50712), in which we published the final FY 2010 IRF Federal prospective payment rates.

After publication of the FY 2010 IRF PPS final rule (74 FR 39762), section 3401(d) of the Patient Protection and Affordable Care Act (Affordable Care Act, Pub. L. 111-148, enacted March 23, 2010), as amended by section 10319 of the same act and by section 1105 of the Health Care and Education Reconciliation Act of 2010, amended section 1886(j)(3)(C) of the Act and added section 1886(j)(3)(D). Section 1886(j)(3)(C) of the Act requires the Secretary to develop an adjusted market basket increase factor using applicable productivity and other adjustments as defined by the Act. This adjusted market basket increase factor is to be used to update the IRF Federal prospective payment rates for each FY from 2012 forward. Section 1886(j)(3)(D)(i)(1) defines the adjustment that is to be applied to the market basket increase factor in FYs 2010 and 2011. The Secretary is to reduce the market basket increase factor by 0.25 percentage point for FY 2010. Notwithstanding these provisions, in accordance with paragraph (p) of section 3401 of the Affordable Care Act, the adjusted FY 2010 rate is only to be applied to discharges occurring on or after April 1, 2010. Section 1886(j)(3)(D)(i)(I) of the Act also requires the Secretary to reduce the market basket increase factor by 0.25 percentage point for FY 2011. Based on these legislative changes to section 1886(j)(3), we adjust the FY 2010 Federal prospective payment rates, and apply these rates to IRF discharges occurring on or after April 1, 2010. Thus, the final FY 2010 IRF Federal prospective payment rates that were published in the FY 2010 IRF PPS final rule (74 FR 39762) were used for discharges occurring on or after October 1, 2009 and on or before March 31, 2010; and the adjusted FY 2010 IRF Federal prospective payment rates apply to discharges occurring on or after April 1, 2010. The adjusted FY 2010 Federal prospective payment rates are available on the CMS Web site at http://www.cms.gov/InpatientRehabFacPPS/07_DataFiles.asp#TopOfPage.

In addition, sections 1886(j)(3)(C) and (D) of the Act also affected the FY 2010 IRF outlier threshold amount because they required an adjustment to the FY 2010 RPL market basket increase factor, which changed the standard payment conversion factor for FY 2010. Specifically, the original FY 2010 IRF outlier threshold amount was determined based on the original estimated FY 2010 RPL market basket increase factor of 2.5 percent and the standard payment conversion factor of $13,661. However, as adjusted, the IRF prospective payments are based on the adjusted RPL market basket increase factor of 2.25 percent and the revised standard payment conversion factor of $13,627. In order to maintain estimated outlier payments for FY 2010 equal to the established standard of 3 percent of total estimated IRF PPS payments for FY 2010, we revised the IRF outlier threshold amount for FY 2010 for discharges occurring on or after April 1, 2010. The revised IRF outlier threshold amount for FY 2010 is discussed in more detail in section VI.A of this notice.

B. Operational Overview of the Current IRF PPS

As described in the FY 2002 IRF PPS final rule, upon the admission and discharge of a Medicare Part A fee-for-service patient, the IRF is required to complete the appropriate sections of a patient assessment instrument (PAI), designated as the Inpatient Rehabilitation Facility-Patient Assessment Instrument (IRF-PAI). In addition, beginning with IRF discharges occurring on or after October 1, 2009, the IRF is also required to complete the appropriate sections of the IRF-PAI upon the admission and discharge of each Medicare Part C (Medicare Advantage) patient, as described in the FY 2010 IRF PPS final rule. All required data must be electronically encoded into the IRF-PAI software product. Generally, the software product includes patient classification programming called the GROUPER software. The GROUPER software uses specific IRF-PAI data elements to classify (or group) patients into distinct CMGs and account for the existence of any relevant comorbidities.

The GROUPER software produces a five-digit CMG number. The first digit is an alpha-character that indicates the comorbidity tier. The last four digits represent the distinct CMG number. Free downloads of the Inpatient Rehabilitation Validation and Entry (IRVEN) software product, including the GROUPER software, are available on the CMS Web site at http://www.cms.gov/InpatientRehabFacPPS/06_Software.asp.

Once a patient is discharged, the IRF submits a Medicare claim as a Health Insurance Portability and Accountability Act of 1996 (HIPAA, Pub. L. 104-191, enacted August 21, 1996), compliant electronic claim or, if the Administrative Simplification Compliance Act of 2002 (ASCA, Pub. L. 107-105, enacted December 27, 2002) permits, a paper claim (a UB-04 or a CMS-1450 as appropriate) using the five-digit CMG number and sends it to the appropriate Medicare fiscal intermediary (FI) or Medicare Administrative Contractor (MAC). Claims submitted to Medicare must comply with both ASCA and HIPAA.

Section 3 of the ASCA amends section 1862(a) of the Act by adding paragraph (22) which requires the Medicare program, subject to section 1862(h) of the Act, to deny payment under Part A or Part B for any expenses for items or services “for which a claim is submitted other than in an electronic form specified by the Secretary.” Section 1862(h) of the Act, in turn, provides that the Secretary shall waive such denial in situations in which there is no method available for the submission of claims in an electronic form or the entity submitting the claim is a small provider. In addition, the Secretary also has the authority to waive such denial “in such unusual cases as the Secretary finds appropriate.” For more information we refer the reader to the final rule, “Medicare Program; Electronic Submission of Medicare Claims” (70 FR 71008, November 25, 2005). CMS instructions for the limited number of Medicare claims submitted on paper are available at: http://www.cms.gov/manuals/downloads/clm104c25.pdf .)

Section 3 of the ASCA operates in the context of the administrative simplification provisions of HIPAA, which include, among others, the requirements for transaction standards and code sets codified in 45 CFR, parts 160 and 162, subparts A and I through R (generally known as the Transactions Rule). The Transactions Rule requires covered entities, including covered healthcare providers, to conduct covered electronic transactions according to the applicable transaction standards. (See the program claim memoranda issued and published by CMS at: http://www.cms.gov/ElectronicBillingEDITrans/ and listed in the addenda to the Medicare Intermediary Manual, Part 3, section 3600).

The Medicare FI or MAC processes the claim through its software system. This software system includes pricing programming called the “PRICER” software. The PRICER software uses the CMG number, along with other specific claim data elements and provider-specific data, to adjust the IRF's prospective payment for interrupted stays, transfers, short stays, and deaths, and then applies the applicable adjustments to account for the IRF's wage index, percentage of low-income patients, rural location, and outlier payments. For discharges occurring on or after October 1, 2005, the IRF PPS payment also reflects the new teaching status adjustment that became effective as of FY 2006, as discussed in the FY 2006 IRF PPS final rule (70 FR 47880).

II. Summary of Provisions of the Notice

In this notice, we use the methods described in the FY 2010 IRF PPS final rule (74 FR 39762) to update the Federal prospective payment rates for FY 2011 using updated FY 2009 IRF claims and FY 2008 IRF cost report data. No policy changes are being proposed in this notice. Furthermore, we explain the self-implementing changes resulting from the provisions in section 1886(j)(3)(C) and (D) of the Act, as described above.

In summary, this notice:

• Describes the adjustments to the FY 2010 IRF PPS Federal prospective payment rates and outlier threshold amount for IRF discharges occurring on or after April 1, 2010, in accordance with Section 3401(d) of the Affordable Care Act as amended by Section 10319 of the Same Act and by section 1105(c) of the Health Care and Education Reconciliation Act of 2010, as discussed in more detail in sections V.A and VI.A of this notice.
• Updates the FY 2011 IRF PPS relative weights and average length of stay values using the most current and complete Medicare claims and cost report data in a budget neutral manner, as discussed in section III of this notice.
• Updates the FY 2011 IRF PPS payments rates by a market basket increase factor, based upon the most current data available, with a 0.25 percentage point reduction as required by section 1886(j)(3)(D)(i)(I) of the Act, as described in section V.B of this notice.
• Updates the FY 2011 IRF PPS payment rates by the FY 2011 wage index and the labor-related share in a budget neutral manner, as discussed in sections V.B and V.C of this notice.
• Describes the calculation of the IRF Standard Payment Conversion Factor for FY 2011, as discussed in section V.D of this notice.
• Updates the outlier threshold amount for FY 2011, as discussed in section VI.B of this notice.
• Updates the cost-to-charge ratio (CCR) ceilings for FY 2011, as discussed in section VI.C of this notice.

This notice does not contain any revisions to existing regulation text.

III. Update to the Case-Mix Group (CMG) Relative Weights and Average Length of Stay Values for FY 2011

As specified in 42 CFR 412.620(b)(1), we calculate a relative weight for each CMG that is proportional to the resources needed by an average inpatient rehabilitation case in that CMG. For example, cases in a CMG with a relative weight of 2, on average, will cost twice as much as cases in a CMG with a relative weight of 1. Relative weights account for the variance in cost per discharge due to the variance in resource utilization among the payment groups, and their use helps to ensure that IRF PPS payments support beneficiary access to care as well as provider efficiency.

As required by statute, we always use the most recent available data to update the CMG relative weights and average lengths of stay. For FY 2011, we used FY 2009 IRF claims and FY 2008 IRF cost report data. These data are the most current and complete data available at this time. Currently, less than 20 percent of the FY 2009 IRF cost report data are available for analysis, but the majority of the FY 2009 IRF claims data are available for analysis.

We will apply these data using the methodologies that were established in the FY 2002 IRF PPS final rule (66 FR 41316). In calculating the CMG relative weights, we use a hospital-specific relative value method to estimate operating (routine and ancillary services) and capital costs of IRFs. The process used to calculate the CMG relative weights for this notice is as follows:

Step 1. We calculate the CMG relative weights by estimating the effects that comorbidities have on costs.

Step 2. We adjust the cost of each Medicare discharge (case) to reflect the effects found in the first step.

Step 3. We use the adjusted costs from the second step to calculate CMG relative weights, using the hospital-specific relative value method.

Step 4. We normalize the FY 2011 CMG relative weights to the same average CMG relative weight from the CMG relative weights implemented in the FY 2010 IRF PPS final rule (74 FR 39762).

Consistent with the methodology that we have used to update the IRF classification system in each instance in the past, we are updating the CMG relative weights for FY 2011 in such a way that total estimated aggregate payments to IRFs for FY 2011 are the same with or without the changes (that is, in a budget neutral manner) by applying a budget neutrality factor to the standard payment amount. To calculate the appropriate budget neutrality factor for use in updating the FY 2011 CMG relative weights, we use the following steps:

Step 1. Calculate the estimated total amount of IRF PPS payments for FY 2011 (with no updates to the CMG relative weights).

Step 2. Apply the updates to the CMG relative weights (as discussed above) to calculate the estimated total amount of IRF PPS payments for FY 2011.

Step 3. Divide the amount calculated in step 1 by the amount calculated in step 2 to determine the budget neutrality factor (0.9942) that maintains the same total estimated aggregate payments in FY 2011 with and without the updates to the CMG relative weights.

Step 4. Apply the budget neutrality factor (0.9942) to the FY 2010 IRF PPS standard payment amount after the application of the budget-neutral wage adjustment factor.

In section V.D of this notice, we discuss the use of the existing methodology to calculate the standard payment conversion factor for FY 2011.

The CMG relative weights and average length of stay values for FY 2011 are presented below in Table 1.

Generally, updates to the CMG relative weights result in some increases and some decreases to the CMG relative weight values. Table 2 shows how the application of the revisions for FY 2011 will affect particular CMG relative weight values, which affect the overall distribution of payments within CMGs and tiers. Note that, because we are implementing the CMG relative weight revisions in a budget neutral manner (as described above), total estimated aggregate payments to IRFs for FY 2011 will not be affected as a result of the CMG relative weight revisions. However, the revisions will affect the distribution of payments within CMGs and tiers.

As Table 2 shows, over 98 percent of all IRF cases are in CMGs and tiers that will experience less than a 5 percent change (either increase or decrease) in the CMG relative weight value as a result of the revisions for FY 2011. The largest increase in the CMG relative weight values affecting the most cases is a 3.0 percent increase in the CMG relative weight value for CMG 0802—Replacement of Lower Extremity Joint, with a motor score between 37.05 and 49.55—in the “no comorbidity” tier. In the FY 2009 data, 12,149 IRF discharges were classified into this CMG and tier. We believe that the higher costs reported by IRFs for this CMG and tier in FY 2009, compared with the costs reported in FY 2008, may continue to reflect the IRF trend away from admitting lower-severity joint replacement cases in favor of higher-severity joint replacement cases. We believe that this may be evidence of a response, at least in part, to Medicare's “60 percent” rule, and the increased focus on the medical review of IRF cases. As we said in the FY 2009 IRF PPS proposed rule (73 FR 22680), these policies likely increase the complexity of patients being admitted to IRFs, especially among the lower-extremity joint replacement cases with no comorbidities, which often do not meet the 60 percent rule criteria and have been the focus of a lot of the medical review activities.

The largest decrease in a CMG relative weight value affecting the most cases is a 0.5 percent decrease in the CMG relative weight for CMG A0110—Stroke, with motor score less than 22.35 and patient age less than 84.5 years—in the “no comorbidity” tier. In the FY 2009 IRF claims data, this change affects 16,829 cases. The decrease in the relative weight for CMG A0110 follows the same trend that is occurring in all 10 of the CMGs for stroke in the FY 2008 IRF cost report data and the FY 2009 IRF claims data that were used to update the CMG relative weights in this notice. That is, IRFs are reporting slightly lower costs for stroke patients that are classified into the “no comorbidity” tier and the next-lowest paying tier 3, with the relative weight values for CMG 0110 for FY 2011 decreasing by 0.5 percent in the “no comorbidity” tier and decreasing by 0.4 percent in tier 3, compared with FY 2010. At the same time, however, IRFs are reporting higher costs for stroke patients that are classified into the 2 highest-paying tiers—tiers 1 and 2—with the relative weight values for CMG 0110 for FY 2011 increasing by 6.5 percent and 1.8 percent in tiers 1 and 2, respectively, compared with FY 2010.

The changes in the average length of stay values for FY 2011, compared with the FY 2010 average length of stay values, are small and do not show any particular trends in IRF length of stay patterns.

IV. Updates to the Facility-Level Adjustment Factors

Section 1886(j)(3)(A)(v) of the Act confers broad authority upon the Secretary to adjust the per unit payment rate “by such * * * factors as the Secretary determines are necessary to properly reflect variations in necessary costs of treatment among rehabilitation facilities.” For example, we adjust the Federal prospective payment amount associated with a CMG to account for facility-level characteristics such as an IRF's LIP percentage, teaching status, and location in a rural area, if applicable, as described in § 412.624(e). In the FY 2010 IRF PPS final rule (74 FR 39762), we updated the adjustment factors for calculating the rural, LIP, and teaching status adjustments based on the most recent three years worth of IRF claims data (at that time, FY 2006, FY 2007, and FY 2008) and the most recent available corresponding IRF cost report data. As discussed in the FY 2010 IRF PPS proposed rule (74 FR 21060 through 21061), we observed relatively large year-to-year fluctuations in the underlying data used to compute the adjustment factors, especially the teaching status adjustment factor. Therefore, we implemented a three-year moving average approach to updating the facility-level adjustment factors in the FY 2010 IRF PPS final rule (74 FR 39762) to provide greater stability and predictability of Medicare payments for IRFs. Each year, we review the major components of the IRF PPS to maintain and enhance the accuracy of the payment system. For FY 2010, we implemented a change to our methodology that was designed to decrease the IRF PPS volatility by using a three-year moving average to calculate the facility-level adjustment factors. This year, we are evaluating the effectiveness of the new methodology in stabilizing the IRF PPS rate structure. We plan to then, if necessary, propose further adjustments through a future rulemaking process.

V. FY 2011 IRF PPS Federal Prospective Payment Rates

A. Adjustment to the FY 2010 IRF PPS Federal Prospective Payment Rates, Reflecting Adjustments to the Rehabilitation, Psychiatric, and Long-Term Care Hospital (RPL) Market Basket Increase Factor in Accordance With Sections 3401(d) of the Patient Protection and Affordable Care Act (Affordable Care Act) as Amended by Section 10319 of the Same Act and by Section 1105(c) of the Health Care and Education Reconciliation Act of 2010

As discussed previously in this notice, sections 1886(j)(3)(C) and (D) of the Act require the increase factor to be reduced by 0.25 percentage point for FY 2010 and FY 2011. In accordance with paragraph (p) of section 3401 of the Affordable Care Act, the adjusted FY 2010 market basket increase factor is only applied to discharges on or after April 1, 2010. Thus, we revised the FY 2010 IRF Federal prospective payment rates for all IRF discharges occurring on or after April 1, 2010 to reflect an adjusted market basket increase factor of 2.25 percent, instead of the 2.5 percent market basket increase factor for FY 2010 that was published in the FY 2010 IRF PPS final rule (74 FR 39778). Revising the market basket increase factor for FY 2010 from 2.5 percent to 2.25 percent changes the FY 2010 standard payment conversion factor from the $13,661 that was published in the FY 2010 IRF PPS final rule (74 FR 39780) to $13,627. This change also affects the outlier threshold amount for FY 2010, as discussed further in section VI.A of this notice. The revised FY 2010 Federal prospective payment rates are available on the CMS Web site at http://www.cms.gov/InpatientRehabFacPPS/07_DataFiles.asp#TopOfPage .

B. Market Basket Increase Factor and Labor-Related Share for FY 2011

Section 1886(j)(3)(C) of the Act requires the Secretary to establish an increase factor that reflects changes over time in the prices of an appropriate mix of goods and services included in the covered IRF services, which is referred to as a market basket index. According to section 1886(j)(3)(A)(i) of the Act, the increase factor shall be used to update the IRF Federal prospective payment rates for each FY. Sections 1886(j)(3)(C) and (D) of the Act require the application of a 0.25 percentage point reduction to the market basket increase factor for FYs 2010 and 2011. Thus, in this notice, we are updating the IRF PPS payments for FY 2011 by a market basket increase factor based upon the most current data available, with a 0.25 percentage point reduction as required by section 1886(j)(3)(D)(i)(I) of the Act.

For this notice, we have used the same methodology described in the FY 2006 IRF PPS final rule (70 FR 47880 at 47908 through 47917) to compute the FY 2011 market basket increase factor and labor-related share. Using this method and the IHS Global Insight, Inc. forecast for the second quarter of 2010 of the 2002-based RPL market basket, the FY 2011 RPL market basket increase factor is 2.5 percent. IHS Global Insight is an economic and financial forecasting firm that contracts with CMS to forecast the components of providers' market baskets.

In accordance with sections 1886(j)(3)(C) and (D) of the Act, a reduction of 0.25 percentage point is then applied to the FY 2011 RPL market basket increase factor of 2.5 percent. Thus, the adjusted RPL market basket increase factor is 2.25 percent for FY 2011.

Also, using the methodology described in the FY 2006 IRF PPS final rule (70 FR 47880, 47908 through 47917), we are updating the IRF labor-related share for FY 2011. Using this method and the IHS Global Insight, Inc. forecast for the second quarter of 2010 of the 2002-based RPL market basket, the IRF labor-related share for FY 2011 is the sum of the FY 2011 relative importance of each labor-related cost category. This figure reflects the different rates of price change for these cost categories between the base year (FY 2002) and FY 2011. As shown in Table 3, the FY 2011 labor-related share is 75.271 percent.

C. Area Wage Adjustment

Section 1886(j)(6) of the Act requires the Secretary to adjust the proportion of rehabilitation facilities' costs attributable to wages and wage-related costs (as estimated by the Secretary from time to time) by a factor (established by the Secretary) reflecting the relative hospital wage level in the geographic area of the rehabilitation facility compared to the national average wage level for those facilities. The Secretary is required to update the IRF PPS wage index on the basis of information available to the Secretary on the wages and wage-related costs to furnish rehabilitation services. Any adjustments or updates made under section 1886(j)(6) of the Act for a FY are made in a budget neutral manner.

In the FY 2009 IRF PPS final rule (73 FR 46378), we maintained the methodology described in the FY 2006 IRF PPS final rule to determine the wage index, labor market area definitions, and hold harmless policy consistent with the rationale outlined in the FY 2006 IRF PPS final rule (70 FR 47880, 47917 through 47933).

For FY 2011, we are maintaining the policies and methodologies described in the FY 2009 IRF PPS final rule relating to the labor market area definitions and the wage index methodology for areas with wage data. Thus, we are using the Core-Based Statistical area (CBSA) labor market area definitions and the FY 2010 pre-reclassification and pre-floor hospital wage index data. In accordance with section 1886(d)(3)(E) of the Act, the FY 2010 pre-reclassification and pre-floor hospital wage index is based on data submitted for hospital cost reporting periods beginning on or after October 1, 2005 and before October 1, 2006 (that is, 2006 cost report data).

The labor market designations made by the OMB include some geographic areas where there are no hospitals and, thus, no hospital wage index data on which to base the calculation of the IRF PPS wage index. We have used the same methodology discussed in the FY 2008 IRF PPS final rule (72 FR 44299) to address those geographic areas where there are no hospitals and, thus, no hospital wage index data on which to base the calculation of the FY 2011 IRF PPS wage index.

Additionally, we are incorporating the CBSA changes published in the most recent OMB bulletin that applies to the hospital wage data used to determine the current IRF PPS wage index. The changes were nominal and did not represent substantive changes to the CBSA-based designations. Specifically, OMB added or deleted certain CBSA numbers and revised certain titles. The OMB bulletins are available online at http://www.whitehouse.gov/omb/bulletins/index.html.

To calculate the wage-adjusted facility payment for the payment rates set forth in this notice, we multiply the unadjusted Federal payment rate for IRFs by the FY 2011 RPL labor-related share (75.271 percent) to determine the labor-related portion of the standard payment amount. We then multiply the labor-related portion by the applicable IRF wage index from the tables in the addendum to this notice. Table 1 is for urban areas, and Table 2 is for rural areas.

Adjustments or updates to the IRF wage index made under section 1886(j)(6) of the Act must be made in a budget neutral manner. We calculate a budget neutral wage adjustment factor as established in the FY 2004 IRF PPS final rule (68 FR 45689), codified at § 412.624(e)(1), as described in the steps below. We use the listed steps to ensure that the FY 2011 IRF standard payment conversion factor reflects the update to the wage indexes (based on the FY 2006 hospital cost report data) and the labor-related share in a budget neutral manner:

Step 1. Determine the total amount of the estimated FY 2010 IRF PPS rates, using the FY 2010 standard payment conversion factor and the labor-related share and the wage indexes from FY 2010 (as published in the FY 2010 IRF PPS final rule (74 FR 39762)).

Step 2. Calculate the total amount of estimated IRF PPS payments using the FY 2010 standard payment conversion factor and the FY 2011 labor-related share and CBSA urban and rural wage indexes.

Step 3. Divide the amount calculated in step 1 by the amount calculated in step 2. The resulting quotient is the FY 2011 budget neutral wage adjustment factor of 1.0005.

Step 4. Apply the FY 2011 budget neutral wage adjustment factor from step 3 to the FY 2010 IRF PPS standard payment conversion factor after the application of the adjusted market basket update to determine the FY 2011 standard payment conversion factor.

We discuss the calculation of the standard payment conversion factor for FY 2011 in section V.D. of this notice.

D. Description of the IRF Standard Payment Conversion Factor and Payment Rates for FY 2011

To calculate the standard payment conversion factor for FY 2011, as illustrated in Table 4 below, we begin by applying the adjusted market basket increase factor for FY 2011 that was adjusted in accordance with sections 1886(j)(3)(C) and (D) of the Act (2.25 percent, or 2.5 percent less 0.25 percentage point), to the standard payment conversion factor for FY 2010 ($13,627). As described in section V.A of this notice, the adjusted standard payment conversion factor of $13,627 for FY 2010 differs from the original FY 2010 standard payment conversion factor that was published in the FY 2010 IRF PPS final rule (74 FR 39778) because of the requirements of sections 1886(j)(3)(C) and (D) of the Act. Applying the 2.25 percent adjusted market basket increase factor for FY 2011 to the revised standard payment conversion factor for FY 2010 of $13,627 yields a standard payment amount of $13,934. Then, we apply the budget neutrality factor for the FY 2011 wage index and labor related share of 1.0005, which results in a standard payment amount of $13,941. Then, we apply the budget neutrality factor for the revised CMG relative weights of 0.9942, which results in a standard payment amount of $13,860 for FY 2011.

After the application of the CMG relative weights described in section III of this notice, the resulting unadjusted IRF prospective payment rates for FY 2011 are shown below in Table 5, “FY 2011 Payment Rates.”

E. Example of the Methodology for Adjusting the Federal Prospective Payment Rates

Table 6 illustrates the methodology for adjusting the Federal prospective payments (as described in sections V.B through V.D of this notice). The examples below are based on two hypothetical Medicare beneficiaries, both classified into CMG 0110 (without comorbidities). The unadjusted Federal prospective payment rate for CMG 0110 (without comorbidities) appears in Table 5 above.

One beneficiary is in Facility A, an IRF located in rural Spencer County, Indiana, and another beneficiary is in Facility B, an IRF located in urban Harrison County, Indiana. Facility A, a rural non-teaching hospital has a disproportionate share hospital (DSH) percentage of 5 percent (which would result in a LIP adjustment of 1.0228), a wage index of 0.8529, and a rural adjustment of 18.4 percent. Facility B, an urban teaching hospital, has a DSH percentage of 15 percent (which would result in a LIP adjustment of 1.0666), a wage index of 0.8964, and a teaching status adjustment of 0.0610.

To calculate each IRF's labor and non-labor portion of the Federal prospective payment, we begin by taking the unadjusted Federal prospective payment rate for CMG 0110 (without comorbidities) from Table 5 above. Then, we multiply the estimated labor-related share (75.271) described in section V.B of this notice by the unadjusted Federal prospective payment rate. To determine the non-labor portion of the Federal prospective payment rate, we subtract the labor portion of the Federal payment from the unadjusted Federal prospective payment.

To compute the wage-adjusted Federal prospective payment, we multiply the labor portion of the Federal payment by the appropriate wage index found in the addendum in Tables 1 and 2. The resulting figure is the wage-adjusted labor amount. Next, we compute the wage-adjusted Federal payment by adding the wage-adjusted labor amount to the non-labor portion.

Adjusting the wage-adjusted Federal payment by the facility-level adjustments involves several steps. First, we take the wage-adjusted Federal prospective payment and multiply it by the appropriate rural and LIP adjustments (if applicable). Second, to determine the appropriate amount of additional payment for the teaching status adjustment (if applicable), we multiply the teaching status adjustment (0.0610, in this example) by the wage-adjusted and rural-adjusted amount (if applicable). Finally, we add the additional teaching status payments (if applicable) to the wage, rural, and LIP-adjusted Federal prospective payment rates. Table 6 illustrates the components of the adjusted payment calculation.

Thus, the adjusted payment for Facility A would be $31,532.60 and the adjusted payment for Facility B would be $30,442.17.

VI. Update to Payments for High-Cost Outliers Under the IRF PPS

A. Adjustment to the Outlier Threshold Amount for FY 2010, Reflecting the Adjustment to the FY 2010 RPL Market Basket in Accordance With Sections 3401(d) of the Patient Protection and Affordable Care Act (Affordable Care Act), as Amended by Section 10319 of the Same Act and by Section 1105(c) of the Health Care and Education Reconciliation Act of 2010

As discussed in section I.A of this notice, after publication of the FY 2010 IRF PPS final rule (74 FR 39762), Affordable Care Act amended section 1886(j)(3)(C) of the Act and added section 1886(j)(3)(D) which, in concert, required the application of a 0.25 percentage point reduction to the market basket increase factor for FY 2010. Notwithstanding these provisions, paragraph (p) of section 3401 of the Affordable Care Act provides that the adjusted FY 2010 rate is only to be applied to discharges occurring on or after April 1, 2010. Thus, based on the legislative change to the increase factor, we revised the FY 2010 Federal prospective payment rates for IRF discharges occurring on or after April 1, 2010.

In addition, the legislative change to the market basket increase factor for FY 2010 also affects the FY 2010 IRF outlier threshold amount because it reduces the FY 2010 RPL market basket increase factor, which changes the standard payment conversion factor for FY 2010. Specifically, the FY 2010 IRF outlier threshold amount was determined based on the estimated FY 2010 RPL market basket increase factor of 2.5 percent and the standard payment conversion factor of $13,661. However, for FY 2010 IRF discharges occurring on or after April 1, 2010, IRF prospective payments are based on the adjusted RPL market basket increase factor of 2.25 percent and the revised standard payment conversion factor of $13,627. In order to maintain estimated outlier payments in FY 2010 at the percentage adopted in our FY 2010 final rule, we revise the IRF outlier threshold amount for FY 2010 from $10,652 that was published in the FY 2010 IRF PPS final rule (74 FR 39788) to $10,721 for FY 2010 IRF discharges occurring on or after April 1, 2010. The outlier threshold amount of $10,652 continues to apply for IRF discharges occurring on or after October 1, 2009 through March 31, 2010. The revised IRF outlier threshold amount was computed using the same data and the same methodology as was used to compute the FY 2010 outlier threshold amount for the FY 2010 IRF PPS final rule (74 FR 39762).

B. Update to the Outlier Threshold Amount for FY 2011

Section 1886(j)(4) of the Act provides the Secretary with the authority to make payments in addition to the basic IRF prospective payments for cases incurring extraordinarily high costs. A case qualifies for an outlier payment if the estimated cost of the case exceeds the adjusted outlier threshold. We calculate the adjusted outlier threshold by adding the IRF PPS payment for the case (that is, the CMG payment adjusted by all of the relevant facility-level adjustments) and the adjusted threshold amount (also, adjusted by all of the relevant facility-level adjustments). Then, we calculate the estimated cost of a case by multiplying the IRF's overall cost-to-charge (CCR) by the Medicare allowable covered charge. If the estimated cost of the case is higher than the adjusted outlier threshold, we make an outlier payment for the case equal to 80 percent of the difference between the estimated cost of the case and the outlier threshold.

In the FY 2002 IRF PPS final rule (66 FR 41362 through 41363), we discussed our rationale for setting the outlier threshold amount for the IRF PPS so that estimated outlier payments would equal 3 percent of total estimated payments. For the 2002 IRF PPS final rule, we analyzed various outlier policies using 3, 4, and 5 percent of the total estimated payments, and we concluded that an outlier policy set at 3 percent of total estimated payments would optimize the extent to which we could reduce the financial risk to IRFs of caring for high-cost patients, while still providing for adequate payments for all other (non-high cost outlier) cases.

Subsequently, we updated the IRF outlier threshold amount in the FYs 2006 through 2010 IRF PPS final rules (70 FR 47880, 70 FR 57166, 71 FR 48354, 72 FR 44284, 73 FR 46370, 74 FR 39762, respectively) to maintain estimated outlier payments at 3 percent of total estimated payments. We also stated in the FY 2009 final rule (FR 73 46287) that we would continue to analyze the estimated outlier payments for subsequent years and adjust the outlier threshold amount as appropriate to maintain the 3 percent target.

To update the IRF outlier threshold amount for FY 2011 in this notice, we are using FY 2009 claims data and the same methodology that we used to set the initial outlier threshold amount in the FY 2002 IRF PPS final rule (66 FR 41362 through 41363), which is also the same methodology that we used to update the outlier threshold amounts for FYs 2006 through 2010. Based on an analysis of this updated data, we estimate that IRF outlier payments as a percentage of total estimated payments are approximately 3.1 percent in FY 2010. Although we are still analyzing the reasons for this unexpected increase in outlier payments in the FY 2009 IRF claims data, we note that IPPS hospitals experienced about the same magnitude increase in outlier payments in FY 2009 (from 5.1 percent to 5.3 percent). Based on this updated analysis, we will update the FY 2011 outlier threshold amount to ensure that estimated FY 2011 outlier payments are approximately 3 percent of total estimated IRF payments. The outlier threshold amount of $10,721 for discharges occurring on or after April 1, 2010 will be changed to $11,410 in FY 2011 to reduce estimated outlier payments and thereby maintain estimated outlier payments at 3 percent of total estimated aggregate IRF payments for FY 2011.

C. Update to the IRF Cost-to-Charge Ratio Ceilings

In accordance with the methodology stated in the FY 2004 IRF PPS final rule (68 FR 45674, 45692 through 45694), we apply a ceiling to IRFs' CCRs. Using the methodology described in that final rule, we are updating the national urban and rural CCRs for IRFs, as well as the national CCR ceiling for FY 2011, in this notice based on analysis of the most recent data that is available. We apply the national urban and rural CCRs in the following situations:

• New IRFs that have not yet submitted their first Medicare cost report.
• IRFs whose overall CCR is in excess of the national CCR ceiling for FY 2011, as discussed below.
• Other IRFs for which accurate data to calculate an overall CCR are not available.

Specifically, for FY 2011, we estimate a national average CCR of 0.620 for rural IRFs, which we calculate by taking an average of the CCRs for all rural IRFs using their most recently submitted cost report data. Similarly, we estimate a national average CCR of 0.489 for urban IRFs, which we calculate by taking an average of the CCRs for all urban IRFs using their most recently submitted cost report data. We apply weights to both of these averages using the IRFs' estimated costs, meaning that the CCRs of IRFs with higher costs factor more heavily into the averages than the CCRs of IRFs with lower costs. For this notice, we have used the most recent available cost report data (FY 2008). This includes all IRFs whose cost reporting periods began on or after October 1, 2007, and before October 1, 2008. If, for any IRF, the FY 2008 cost report was missing or had an “as submitted” status, we used data from a previous fiscal year's (that is, FY 2004 through FY 2007) settled cost report for that IRF. We do not use cost report data from before FY 2004 for any IRF because changes in IRF utilization since FY 2004 resulting from the 60 percent rule and IRF medical review activities suggest that these older data do not adequately reflect the current cost of care.

In addition, in accordance with past practice, we set the national CCR ceiling at 3 standard deviations above the mean CCR. Using this method, the national CCR ceiling is set at 2.94 for FY 2011. This means that, if an individual IRF's CCR exceeds this ceiling of 2.94 for FY 2011, we would replace the IRF's CCR with the appropriate national average CCR (either rural or urban, depending on the geographic location of the IRF). We calculate the national CCR ceiling by:

Step 1. Taking the national average CCR (weighted by each IRF's total costs, as discussed above) of all IRFs for which we have sufficient cost report data (both rural and urban IRFs combined).

Step 2. Estimating the standard deviation of the national average CCR computed in step 1.

Step 3. Multiplying the standard deviation of the national average CCR computed in step 2 by a factor of 3 to compute a statistically significant reliable ceiling.

Step 4. Adding the result from step 3 to the national average CCR of all IRFs for which we have sufficient cost report data, from step 1.

VII. Collection of Information Requirements

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.

VIII. Waiver of Proposed Rulemaking

We ordinarily publish a notice of proposed rulemaking in the Federal Register to provide a period for public comment before the provisions of a rule take effect. We can waive this procedure, however, if we find good cause that notice and comment procedures are impracticable, unnecessary, or contrary to the public interest and we incorporate a statement of finding and its reasons in the notice. We find that it is unnecessary to undertake notice and comment rulemaking for the updates in this notice because the update does not make any substantive changes in policy, but merely reflects the application of previously established methodologies. In addition, new sections 1886(j)(3)(C) and (D) of the Act require the application of an “Other Adjustment” to the update to the IRF PPS increase factor in FYs 2010 and 2011. We applied the statutorily-required adjustments in this notice. We find that notice and comment rulemaking is unnecessary to implement those statutory provisions because they are self-implementing provisions of law, not requiring the exercise of any discretion on the part of the Secretary. Therefore, under 5 U.S.C. 553(b)(3)(B), for good cause, we waive notice and comment procedures.

IX. Regulatory Impact Analysis

A. Overall Impact

We have examined the impacts of this notice as required by Executive Order 12866 (September 30, 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, section 202 of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4), Executive Order 13132 on Federalism (August 4, 1999), and the Congressional Review Act (5 U.S.C. 804(2)).

Executive Order 12866 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 a major notice with economically significant effects ($100 million or more in any one year). We estimate that this notice is economically significant, as measured by the $100 million threshold and hence also a major rule under the Congressional Review Act. To estimate the total impact of the updates described in this notice, we compare the FY 2011 estimated payments with the revised FY 2010 estimated payments. The revised FY 2010 estimated payments reflect the revised Federal prospective payment rates and outlier threshold amount that applied to IRF discharges occurring on or after April 1, 2010, in accordance with sections 1886(j)(3)(C) and (D) of the Act, as described in sections V.A and VI.A of this notice. Based on this analysis, we estimate that the total impact of these updates on FY 2011 IRF PPS payments will be an increase of approximately $135 million.

The Regulatory Flexibility Act (RFA) requires agencies to analyze options for regulatory relief of small entities, if a rule has a significant impact on a substantial number of small entities. For purposes of the RFA, small entities include small businesses, nonprofit organizations, and small governmental jurisdictions. Most IRFs and most other providers and suppliers are small entities, either by nonprofit status or by having revenues of $7 million to $34.5 million in any one year. (For details, see the Small Business Administration's final rule that set forth size standards for health care industries, at 65 FR 69432 at http://www.sba.gov/idc/groups/public/documents/sba_homepage/serv_sstd_tablepdf.pdf,, November 17, 2000.) Because we lack data on individual hospital receipts, we cannot determine the number of small proprietary IRFs or the proportion of IRFs' revenue that is derived from Medicare payments. Therefore, we assume that all IRFs (an approximate total of 1,200 IRFs, of which approximately 60 percent are nonprofit facilities) are considered small entities and that Medicare payment constitutes the majority of their revenues. The Department of Health and Human Services generally uses a revenue impact of 3 to 5 percent as a significance threshold under the RFA. As shown in Table 7, we estimate that the net revenue impact of this notice on all IRFs is to increase estimated payments by approximately 2.16 percent, with only one category of IRFs (32 urban IRFs in the New England region) estimated to receive an increase in estimated payments of greater than 3 percent (3.19 percent). Thus, we do not anticipate that this notice would have a significant impact on a substantial number of small entities. Medicare fiscal intermediaries, Medicare Administrative Contractors, and carriers are not considered to be small entities. Individuals and States are not included in the definition of a small entity.

In addition, section 1102(b) of the Act requires us to prepare a regulatory impact analysis if a 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 604 of the RFA. For purposes of section 1102(b) of the Act, we define a small rural hospital as a hospital that is located outside of a Metropolitan Statistical Area and has fewer than 100 beds. As discussed in detail below, the rates and policies set forth in this notice will not have an adverse impact on rural hospitals based on the data of the 182 rural units and 21 rural hospitals in our database of 1,171 IRFs for which data were available.

Section 202 of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-04, enacted on March 22, 1995) also requires that agencies assess anticipated costs and benefits before issuing any rule whose mandates require spending in any one year of $100 million in 1995 dollars, updated annually for inflation. In 2010, that threshold level is approximately $135 million. This notice will not impose spending costs on State, local, or tribal governments, in the aggregate, or by the private sector, of $135 million.

Executive Order 13132 establishes certain requirements that an agency must meet when it promulgates a final rule that imposes substantial direct requirement costs on State and local governments, preempts State law, or otherwise has Federalism implications. As stated above, this notice will not have a substantial effect on State and local governments, preempt State law, or otherwise have a Federalism implication.

B. Anticipated Effects of the Notice

1. Basis and Methodology of Estimates

This notice sets forth updates to the IRF PPS rates contained in the FY 2010 final rule, as revised by sections 1886(j)(3)(C) and (D) of the Act for IRF discharges occurring on or after April 1, 2010, as described in sections V.A and VI.A of this notice. Specifically, this notice sets forth updates to the CMG relative weights and length of stay values, the wage index, and the outlier threshold for high-cost cases. This notice also implements a 0.25 percentage point reduction to the FY 2011 RPL market basket increase factor in accordance with sections 1886(j)(3)(C) and (D) of the Act.

We estimate that the FY 2011 impact will be a net increase of $135 million in payments to IRF providers. The impact analysis in Table 7 of this notice represents the projected effects of the updates to IRF PPS payments for FY 2011 compared with the revised estimated IRF PPS payments in FY 2010. The revised FY 2010 estimated payments reflect the revised Federal prospective payment rates and outlier threshold amount that applied to IRF discharges occurring on or after April 1, 2010, in accordance with sections 1886(j)(3)(C) and (D) of the Act, as described in sections V.A and VI.A of this notice. We determine the effects by estimating payments while holding all other payment variables constant. We use the best data available, but we do not attempt to predict behavioral responses to these changes, and we do not make adjustments for future changes in such variables as number of discharges or case-mix.

We note that certain events may combine to limit the scope or accuracy of our impact analysis, because such an analysis is future-oriented and, thus, susceptible to forecasting errors because of other changes in the forecasted impact time period. Some examples could be legislative changes made by the Congress to the Medicare program that would impact program funding, or changes specifically related to IRFs. Although some of these changes may not necessarily be specific to the IRF PPS, the nature of the Medicare program is such that the changes may interact, and the complexity of the interaction of these changes could make it difficult to predict accurately the full scope of the impact upon IRFs.

In updating the rates for FY 2011, we are implementing standard annual revisions described in this notice (for example, the update to the wage and market basket indexes used to adjust the Federal rates). We are also implementing a 0.25 percentage point reduction to the FY 2011 RPL market basket increase factor in accordance with sections 1886(j)(3)(C) and (D) of the Act. We estimate that these revisions will increase payments to IRFs by approximately $140 million.

The aggregate change in estimated payments associated with this notice is an increase in payments to IRFs of $135 million for FY 2011. We estimate that the application of the FY 2011 RPL market basket increase factor, as reduced by 0.25 percentage point in accordance with sections 1886(j)(3)(C) and (D) of the Act, will increase aggregate payments to IRFs by $140 million. However, we estimate a $5 million decrease in aggregate payments to IRFs due to the update to the outlier threshold amount to decrease estimated outlier payments from approximately 3.1 percent in FY 2010 to 3.0 percent in FY 2011. Taken together, these updates will result in a net change in estimated payments from FY 2010 to FY 2011 of $135 million.

The effects of the changes that impact IRF PPS payment rates are shown in Table 7. The following changes that affect the IRF PPS payment rates are discussed separately below:

• The effects of the update to the outlier threshold amount, from approximately 3.1 percent to 3.0 percent of total estimated payments for FY 2011, consistent with section 1886(j)(4) of the Act.
• The effects of the annual market basket update (using the RPL market basket) to IRF PPS payment rates, as required by section 1886(j)(3)(A)(i) and section 1886(j)(3)(C) of the Act, including the 0.25 percentage point reduction for FY 2011 in accordance with sections 1886(j)(3)(C) and (D) of the Act.
• The effects of applying the budget-neutral labor-related share and wage index adjustment, as required under section 1886(j)(6) of the Act.
• The effects of the budget-neutral changes to the CMG relative weights and average length of stay values, under the authority of section 1886(j)(2)(C)(i) of the Act.
• The total change in estimated payments based on the FY 2011 payment updates relative to the revised estimated FY 2010 payments. The revised FY 2010 estimated payments reflect the adjusted Federal prospective payment rates and outlier threshold amount that apply to IRF discharges occurring on or after April 1, 2010, in accordance with sections 1886(j)(3)(C) and (D) of the Act.

2. Description of Table 7

The table below categorizes IRFs by geographic location, including urban or rural location, and location with respect to CMS's nine census divisions (as defined on the cost report) of the country. In addition, the table divides IRFs into those that are separate rehabilitation hospitals (otherwise called freestanding hospitals in this section), those that are rehabilitation units of a hospital (otherwise called hospital units in this section), rural or urban facilities, ownership (otherwise called for-profit, non-profit, and government), and by teaching status. The top row of the table shows the overall impact on the 1,171 IRFs included in the analysis.

The next 12 rows of Table 7 contain IRFs categorized according to their geographic location, designation as either a freestanding hospital or a unit of a hospital, and by type of ownership; all urban, which is further divided into urban units of a hospital, urban freestanding hospitals, and by type of ownership; and all rural, which is further divided into rural units of a hospital, rural freestanding hospitals, and by type of ownership. There are 968 IRFs located in urban areas included in our analysis. Among these, there are 768 IRF units of hospitals located in urban areas and 200 freestanding IRF hospitals located in urban areas. There are 203 IRFs located in rural areas included in our analysis. Among these, there are 182 IRF units of hospitals located in rural areas and 21 freestanding IRF hospitals located in rural areas. There are 382 for-profit IRFs. Among these, there are 317 IRFs in urban areas and 65 IRFs in rural areas. There are 721 non-profit IRFs. Among these, there are 597 urban IRFs and 124 rural IRFs. There are 68 government-owned IRFs. Among these, there are 54 urban IRFs and 14 rural IRFs.

The remaining three parts of Table 7 show IRFs grouped by their geographic location within a region and by teaching status. First, IRFs located in urban areas are categorized with respect to their location within a particular one of the nine CMS geographic regions. Second, IRFs located in rural areas are categorized with respect to their location within a particular one of the nine CMS geographic regions. In some cases, especially for rural IRFs located in the New England, Mountain, and Pacific regions, the number of IRFs represented is small. Finally, IRFs are grouped by teaching status, including non-teaching IRFs, IRFs with an intern and resident to average daily census (ADC) ratio less than 10 percent, IRFs with an intern and resident to ADC ratio greater than or equal to 10 percent and less than or equal to 19 percent, and IRFs with an intern and resident to ADC ratio greater than 19 percent.

The estimated impacts of each payment update described in this notice to the facility categories listed above are shown in the columns of Table 7. The description of each column is as follows:

Column (1) shows the facility classification categories described above.

Column (2) shows the number of IRFs in each category in our FY 2009 analysis file.

Column (3) shows the number of cases in each category in our FY 2009 analysis file.

Column (4) shows the estimated effect of the adjustment to the outlier threshold amount.

Column (5) shows the estimated effect of the update to the IRF PPS payment rates, which includes a 2.5 percent market basket increase factor with the 0.25 percentage point reduction in accordance with sections 1886(f)(3)(C) and (D) of the Act.

Column (6) shows the estimated effect of the update to the IRF labor-related share and wage index, in a budget neutral manner.

Column (7) shows the estimated effect of the update to the CMG relative weights and average length of stay values, in a budget neutral manner.

Column (8) compares our estimates of the payments per discharge, incorporating all of the payment updates reflected in this notice for FY 2011 to our estimates of the revised payments per discharge in FY 2010. The revised FY 2010 estimated payments reflect the revised Federal prospective payment rates and outlier threshold amount that became effective for IRF discharges occurring on or after April 1, 2010, in accordance with sections 1886(j)(3)(C) and (d) of the Act, as described in sections V.A and VI.A of this notice.

The average estimated increase for all IRFs is approximately 2.16 percent. This estimated net increase includes the effects of the RPL market basket increase factor for FY 2011 of 2.5 percent, reduced by 0.25 percentage point in accordance with sections 1886(j)(3)(C) and (D) of the Act. It also includes the approximate 0.1 percent overall estimated decrease in estimated IRF outlier payments from the update to the outlier threshold amount. Since we are making the updates to the IRF wage index and the CMG relative weights in a budget-neutral manner, they will not affect total estimated IRF payments in the aggregate. However, as described in more detail in each section, they will affect the estimated distribution of payments among providers.

3. Impact of the Update to the Outlier Threshold Amount

The outlier threshold adjustment is presented in column 4 of Table 7. In the FY 2010 IRF PPS final rule (74 FR 39786 through 39788), we used FY 2008 IRF claims data (the best, most complete data available at that time) to set the outlier threshold amount for FY 2010 so that estimated outlier payments would equal 3 percent of total estimated payments for FY 2010. As discussed in section VI.A of this notice, we revised the outlier threshold amount for IRF discharges occurring on or after April 1, 2010 to reflect the reduction to the RPL market basket that was made in accordance with sections 1886(J)(3)(C) and (D) of the Act and to ensure that estimated IRF outlier payments for FY 2010 would continue to equal 3 percent of total estimated payments for FY 2010. This revised analysis was done using the same data and the same methodology that was used to set the FY 2010 outlier threshold amount for the FY 2010 IRF PPS final rule (74 FR 39786 through 39788).

However, for this notice, we are updating our analysis using FY 2009 IRF claims data and, based on this updated analysis, we estimate that IRF outlier payments as a percentage of total estimated IRF payments are 3.1 percent in FY 2010. Thus, we are adjusting the outlier threshold amount in this notice to set total estimated outlier payments equal to 3 percent of total estimated payments in FY 2011. The estimated change in total IRF payments for FY 2011, therefore, includes an approximate 0.1 percent decrease in payments because the estimated outlier portion of total payments is estimated to decrease from approximately 3.1 percent to 3 percent.

The impact of this outlier adjustment update (as shown in column 4 of Table 7) is to decrease estimated overall payments to IRFs by about 0.09 percent. We do not estimate that any group of IRFs will experience an increase in payments from this update. We estimate the largest decrease in payments to be a 0.41 percent decrease in estimated payments to rural IRFs in the Pacific region, which is due to the small number of IRFs in that region (5) and the high volume of outlier payments paid to those IRFs.

4. Impact of the Market Basket Update to the IRF PPS Payment Rates, Including the 0.25 Percentage Point Reduction to the RPL Market Basket Increase Factor in Accordance with Sections 1886(j)(3)(C) and (D) of the Act

The adjusted market basket update to the IRF PPS payment rates is presented in column 5 of Table 7. In the aggregate the update would result in a net 2.25 percent increase in overall estimated payments to IRFs. This net increase reflects the estimated RPL market basket increase factor for FY 2011 of 2.5 percent, and the 0.25 percentage point reduction to the RPL market basket increase factor in accordance with sections 1886(j)(3)(C) and (D) of the Act.

5. Impact of the CBSA Wage Index and Labor-Related Share

In column 6 of Table 7, we present the effects of the budget neutral update of the wage index and labor-related share. The changes to the wage index and the labor-related share are discussed together because the wage index is applied to the labor-related share portion of payments, so the changes in the two have a combined effect on payments to providers. As discussed in section V.B of this notice, the labor-related share decreased from 75.779 percent in FY 2010 to 75.271 percent in FY 2011.

In the aggregate, since these updates to the wage index and the labor-related share are applied in a budget-neutral manner as required under section 1886(j)(6) of the Act, we do not estimate that these updates will affect overall estimated payments to IRFs. However, we estimate that these updates will have small distributional effects. For example, we estimate the largest increase in estimated payments from the update to the CBSA wage index and labor-related share to be a 0.94 percent increase for urban IRFs in the New England region. In addition, we estimate a 0.17 percent decrease in overall payments to rural IRFs, with the largest decrease in estimated payments of 1.22 percent for rural IRFs in the New England region.

6. Impact of the Update to the CMG Relative Weights and Average Length of Stay Values

In column 7 of Table 7, we present the effects of the budget neutral update of the CMG relative weights and average length of stay values. In the aggregate we do not estimate that these updates will affect overall estimated payments to IRFs. However, we estimate that these updates will have small distributional effects, with the largest decrease in payments as a result of these updates being a 0.30 percent decrease to rural IRFs in the Pacific region and the largest increase in payments as a result of these updates being a 0.20 percent increase to rural IRFs in the West North Central region.

C. Alternatives Considered

Because we have determined that this notice would have a significant economic impact on IRFs and on a substantial number of small entities, we will discuss the alternative changes to the IRF PPS that we considered.

Section 1886(j)(3)(C) of the Act requires the Secretary to update the IRF PPS payment rates by an increase factor that reflects changes over time in the prices of an appropriate mix of goods and services included in the covered IRF services. Thus, we did not consider alternatives to updating payments using the estimated RPL market basket increase factor for FY 2011. However, as noted previously in this notice, sections 1886(j)(3)(C) and (D) of the Act require the Secretary to apply a 0.25 percentage point reduction to the market basket increase factor for FY 2011. Thus, in accordance with the recently amended section 1886(j)(3)(C) of the Act, we are updating IRF Federal prospective payments in this notice by 2.25 percent (which equals the 2.5 percent estimated RPL market basket increase factor for FY 2011 reduced by 0.25 percentage points, as required by sections 1886(f)(3)(C) and (D) of the Act).

We considered maintaining the existing CMG relative weights and average length of stay values for FY 2011. However, in light of recently available data and our desire to ensure that the CMG relative weights and average length of stay values are as reflective as possible of recent changes in IRF utilization and case mix, we believe that it is appropriate to update the CMG relative weights and average length of stay values at this time to ensure that IRF PPS payments continue to reflect as accurately as possible the current costs of care in IRFs.

We considered maintaining the existing outlier threshold amount for FY 2011 because updating the outlier threshold amount has an estimated negative effect on IRF payments and, therefore, on small entities. If we were to maintain the FY 2010 outlier threshold amount, more outlier cases would have qualified for the additional outlier payments in FY 2011. However, analysis of updated FY 2009 data indicates that estimated outlier payments would exceed 3 percent of total estimated payments for FY 2011 unless we updated the outlier threshold amount. Also, we estimate that the overall effect of this update on estimated payments to IRFs is small (less than 1 percent).

D. Accounting Statement

As required by OMB Circular A-4 (available at http://www.whitehouse.gov/omb/circ ulars/a004/a-4.pdf), in Table 8 below, we have prepared an accounting statement showing the classification of the expenditures associated with the provisions of this notice. This table provides our best estimate of the increase in Medicare payments under the IRF PPS as a result of the updates presented in this notice based on the data for 1,171 IRFs in our database. All estimated expenditures are classified as transfers to Medicare providers (that is, IRFs).

E. Conclusion

Overall, the estimated payments per discharge for IRFs in FY 2011 are projected to increase by 2.16 percent, compared with the revised estimated payments in FY 2010, as reflected in column 8 of Table 7. As noted previously, the revised FY 2010 estimated payments reflect the revised Federal prospective payment rates and outlier threshold amount that became effective for IRF discharges occurring on or after April 1, 2010, in accordance with sections 1886(j)(3)(C) and (D) of the Act, as described in sections V.A and VI.A of this notice. IRF payments per discharge are estimated to increase 2.17 percent in urban areas and 2.05 percent in rural areas, compared with the revised estimated FY 2010 payments. Payments to rehabilitation units in rural areas are estimated to increase by 2.03 percent per discharge, and payments to rehabilitation units in urban areas are estimated to increase by 2.20 percent per discharge. Payments to rehabilitation freestanding hospitals in rural and urban areas are estimated to increase 2.15 percent per discharge.

Overall, no IRFs are estimated to experience a net decrease in payments as a result of the updates in this notice. The largest payment increase is estimated at 3.19 percent for urban IRFs located in the New England region. This is due to the larger than average positive effect of the FY 2011 CBSA wage index and labor-related share updates for urban IRFs in this region.

In accordance with the provisions of Executive Order 12866, this Notice was reviewed by the Office of Management and Budget.

Authority: Catalog of Federal Domestic Assistance Program No. 93.773, Medicare—Hospital Insurance; and Program No. 93.774, Medicare—Supplementary Medical Insurance Program.