[Federal Register Volume 72, Number 162 (Wednesday, August 22, 2007)]
[Rules and Regulations]
[Pages 47568-48175]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 07-3820]



[[Page 47129]]

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Part II





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Parts 411, 412, 413, and 489



Medicare Program; Changes to the Hospital Inpatient Prospective Payment 
Systems and Fiscal Year 2008 Rates; Final Rule

Federal Register / Vol. 72, No. 162 / Wednesday, August 22, 2007 / 
Rules and Regulations

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 411, 412, 413, and 489

[CMS-1533-FC]
RIN 0938-AO70


Medicare Program; Changes to the Hospital Inpatient Prospective 
Payment Systems and Fiscal Year 2008 Rates

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

ACTION: Final rule with comment period.

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SUMMARY: We are revising the Medicare hospital inpatient prospective 
payment systems (IPPS) for operating and capital-related costs to 
implement changes arising from our continuing experience with these 
systems, and to implement certain provisions made by the Deficit 
Reduction Act of 2005 (Pub. L. 109-171), the Medicare Improvements and 
Extension Act under Division B, Title I of the Tax Relief and Health 
Care Act of 2006 (Pub. L. 109-432), and the Pandemic and All Hazards 
Preparedness Act (Pub. L. 109-417). In addition, in the Addendum to 
this final rule with comment period, we describe the changes to the 
amounts and factors used to determine the rates for Medicare hospital 
inpatient services for operating costs and capital-related costs. We 
also are setting forth the rate of increase limits for certain 
hospitals and hospital units excluded from the IPPS that are paid on a 
reasonable cost basis subject to these limits, or that have a portion 
of a prospective payment system payment based on reasonable cost 
principles. These changes are applicable to discharges occurring on or 
after October 1, 2007.
    In this final rule with comment period, as part of our efforts to 
further refine the diagnosis related group (DRG) system under the IPPS 
to better recognize severity of illness among patients, for FY 2008, we 
are adopting a Medicare Severity DRG (MS DRG) classification system for 
the IPPS. We are also adopting the structure of the MS-DRG system for 
the LTCH prospective payment system (referred to as MS-LTC-DRGs) for FY 
2008.
    Among the other policy decisions and changes that we are making, we 
are making changes related to: limited revisions of the 
reclassification of cases to MS-DRGs, the relative weights for the MS-
LTC-DRGs; applications for new technologies and medical services add-on 
payments; the wage data, including the occupational mix data, used to 
compute the FY 2008 wage indices; payments to hospitals for the 
indirect costs of graduate medical education; submission of hospital 
quality data; provisions governing the application of sanctions 
relating to the Emergency Medical Treatment and Labor Act of 1986 
(EMTALA); provisions governing the disclosure of physician ownership in 
hospitals and patient safety measures; and provisions relating to 
services furnished to beneficiaries in custody of penal authorities.

DATES: Effective Date: This final rule with comment period is effective 
October 1, 2007 and applies to discharges occurring on or after that 
date.
    Comment Date: We will consider public comments only on the 
provisions of section V., Changes to the IPPS for Capital Related 
Costs, of the preamble of this final rule with comment period, if we 
receive them at one of the addresses provided below, no later than 5 
p.m. on November 20, 2007.

ADDRESSES: In commenting on the provisions of section V. of the 
preamble of this final rule with comment period, please refer to file 
code CMS-1533-FC.
    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. Click 
on the link ``Submit electronic comments on CMS regulations with an 
open comment period''. (Attachments should be in Microsoft Word, 
WordPerfect, or Excel; however, we prefer Microsoft Word.)
    2. By regular mail. You may mail written comments (one original and 
two copies) to the following address ONLY: Centers for Medicare & 
Medicaid Services, Department of Health and Human Services, Attention: 
CMS-1533-FC, P.O. Box 8011, Baltimore, MD 21244-1850.
    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By express or overnight mail. You may send written comments (one 
original and two copies) to the following address ONLY: Centers for 
Medicare & Medicaid Services, Department of Health and Human Services, 
Attention: CMS-1533-FC, Mail Stop C4-26-05, 7500 Security Boulevard, 
Baltimore, MD 21244-1850.
    4. By hand or courier. If you prefer, you may deliver (by hand or 
courier) your written comments (one original and two copies) before the 
close of the comment period to one of the following addresses. If you 
intend to deliver your comments to the Baltimore address, please call 
telephone number (410) 786-7195 in advance to schedule your arrival 
with one of our staff members. 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 Hubert H. 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 proof of filing by 
stamping in and retaining an extra copy of the comments being filed.)
    Comments mailed to the addresses indicated as appropriately for 
hand or courier delivery may be delayed and received after the comment 
period.
    Submitting Comments: You can assist us by referencing the file code 
CMS-1533-FC and the specific ``issue identifier'' that precedes section 
V., Changes to the IPPS for Capital Related Costs.
    Inspection of Public Comments: All comments received before the 
close of the comment period are available for viewing by the public, 
including any personally identifiable or confidential business 
information that is included in a comment. We post all comments 
received before the close of the comment period on the following Web 
site as soon as possible after they have been received: http://
www.cms.hhs.gov/eRulemaking. Click on the link ``Electronic Comments on 
CMS Regulations'' on that Web site to view public comments.
    Comments received timely will also be available for public 
inspection, generally beginning approximately 3 weeks after publication 
of a document, at the headquarters of the Centers for Medicare & 
Medicaid Services, 7500 Security Boulevard, Baltimore, Maryland 21244, 
Monday through Friday of each week from 8:30 a.m. to 4:00 p.m. To 
schedule an appointment to view public comments, phone 1-800-743-3951.

FOR FURTHER INFORMATION CONTACT: Marc Hartstein, (410) 786-4548, 
Operating Prospective Payment, Diagnosis Related Groups (DRGs), Wage 
Index, New Medical Services and Technology Add-On Payments, and 
Hospital Geographic Reclassifications Issues.

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    Tzvi Hefter, (410) 786-4487, Capital Prospective Payment, Excluded 
Hospitals, Graduate Medical Education, Critical Access Hospitals, and 
Long-Term Care (LTC)-DRG Issues.
    Siddhartha Mazumdar, (410) 786-6673, Rural Community Hospital 
Demonstration Issues.
    Sheila Blackstock, (410) 786-3502, Quality Data for Annual Payment 
Update Issues.
    Thomas Valuck, (410) 786-7479, Hospital Value-Based Purchasing 
Issues.
    Jacqueline Proctor, (410) 786-8852, Disclosure of Physician 
Ownership in Hospitals.
    Marilyn Dahl, (410) 786-8665, Patient Safety Measures Issues.
    Fred Grabau, (410) 786-0206, Services to Beneficiaries in Custody 
of Penal Authorities Issues.

SUPPLEMENTARY INFORMATION:

Electronic Access

    This Federal Register document is also available from the Federal 
Register online database through GPO Access, a service of the U.S. 
Government Printing Office. Free public access is available on a Wide 
Area Information Server (WAIS) through the Internet and via 
asynchronous dial-in. Internet users can access the database by using 
the World Wide Web; the Superintendent of Documents' home page address 
is http://www.gpoaccess.gov/, by using local WAIS client software, or 
by telnet to swais.access.gpo.gov, then login as guest (no password 
required). Dial-in users should use communications software and modem 
to call (202) 512-1661; type swais, then login as guest (no password 
required).

Acronyms

ACGME--Accreditation Council for Graduate Medical Education
AMGA--American Medical Group Association
AHA--American Hospital Association
AHIMA--American Health Information Management Association
AHRQ--Agency for Health Care Research and Quality
AMI--Acute myocardial infarction
AOA--American Osteopathic Association
APR DRG--All Patient Refined Diagnosis Related Group System
ASC--Ambulatory surgical center
ASP--Average sales price
AWP--Average wholesale price
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
BLS--Bureau of Labor Statistics
CAH--Critical access hospital
CART--CMS Abstraction & Reporting Tool
CBSAs--Core-based statistical areas
CC--Complication or comorbidity
CCR--Cost-to-charge ratio
CDAC--Clinical Data Abstraction Center
CIPI--Capital input price index
CPI--Consumer price index
CMI--Case-mix index
CMS--Centers for Medicare & Medicaid Services
CMSA--Consolidated Metropolitan Statistical Area
COBRA--Consolidated Omnibus Reconciliation Act of 1985, Pub. L. 99-
272
CoP--[Hospital] Condition of participation
CPI--Consumer price index
CY--Calendar year
DRA--Deficit Reduction Act of 2005, Pub. L. 109-171
DRG--Diagnosis-related group
DSH--Disproportionate share hospital
ECI--Employment cost index
EMR--Electronic medical record
EMTALA--Emergency Medical Treatment and Labor Act of 1986, Pub. L. 
99-272
FDA--Food and Drug Administration
FIPS--Federal information processing standards
FQHC--Federally qualified health center
FTE--Full-time equivalent
FY--Fiscal year
GAAP--Generally Accepted Accounting Principles
GAF--Geographic Adjustment Factor
GME--Graduate medical education
GMEC--Graduate Medical Education Committee
HCAHPS--Hospital Consumer Assessment of Healthcare Providers and 
Systems
HCFA--Health Care Financing Administration
HCRIS--Hospital Cost Report Information System
HHA--Home health agency
HHS--Department of Health and Human Services
HIC--Health insurance card
HIPAA--Health Insurance Portability and Accountability Act of 1996, 
Pub. L. 104-191
HIPC--Health Information Policy Council
HIS--Health information system
HIT--Health information technology
HMO--Health maintenance organization
HSA--Health savings account
HSCRC--Maryland Health Services Cost Review Commission
HSRV--Hospital-specific relative value
HSRVcc--Hospital-specific relative value cost center
HQA--Hospital Quality Alliance
HQI--Hospital Quality Initiative
ICD-9-CM--International Classification of Diseases, Ninth Revision, 
Clinical Modification
ICD-10-PCS--International Classification of Diseases, Tenth Edition, 
Procedure Coding System
IHS--Indian Health Service
IME--Indirect medical education
IOM--Institute of Medicine
IPF--Inpatient psychiatric facility
IPPS--Acute care hospital inpatient prospective payment system
IRF--Inpatient rehabilitation facility
JCAHO--Joint Commission on Accreditation of Healthcare Organizations
LAMCs--Large area metropolitan counties
LTC-DRG--Long-term care diagnosis-related group
LTCH--Long-term care hospital
MAC--Medicare Administrative Contractor
MCC--Major complication or comorbidity
MCE--Medicare Code Editor
MCO--Managed care organization
MCV--Major cardiovascular condition
MDC--Major diagnostic category
MDH--Medicare-dependent, small rural hospital
MedPAC--Medicare Payment Advisory Commission
MedPAR--Medicare Provider Analysis and Review File
MEI--Medicare Economic Index
MGCRB--Medicare Geographic Classification Review Board
MIEA-TRHCA--Medicare Improvements and Extension Act, Division B of 
the Tax Relief and Health Care Act of 2006, Pub. L. 109-432
MMA--Medicare Prescription Drug, Improvement, and Modernization Act 
of 2003, Pub. L. 108-173
MPN--Medicare provider number
MRHFP--Medicare Rural Hospital Flexibility Program
MSA--Metropolitan Statistical Area
NAICS--North American Industrial Classification System
NCD--National coverage determination
NCHS--National Center for Health Statistics
NCQA--National Committee for Quality Assurance
NCVHS--National Committee on Vital and Health Statistics
NECMA--New England County Metropolitan Areas
NQF--National Quality Forum
NTIS--National Technical Information Service
NVHRI--National Voluntary Hospital Reporting Initiative
OES--Occupational employment statistics
OIG--Office of the Inspector General
OMB--Executive Office of Management and Budget
O.R.--Operating room
OSCAR--Online Survey Certification and Reporting (System)
PMSAs--Primary metropolitan statistical areas
PPI--Producer price index
PPS--Prospective payment system
PRA--Per resident amount
PRM--Provider Reimbursement Manual
ProPAC--Prospective Payment Assessment Commission
PRRB--Provider Reimbursement Review Board
PSF--Provider Specific File
PS&R--Provider Statistical and Reimbursement (System)
QIG--Quality Improvement Group, CMS
QIO--Quality Improvement Organization
RCE--Reasonable compensation equivalent
RHC--Rural health clinic
RHQDAPU--Reporting hospital quality data for annual payment update
RNHCI--Religious nonmedical health care institution

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RRC--Rural referral center
RUCAs--Rural-urban commuting area codes
RY--Rate year
SAF--Standard Analytic File
SCH--Sole community hospital
SFY--State fiscal year
SIC--Standard Industrial Classification
SNF--Skilled nursing facility
SOCs--Standard occupational classifications
SOM--State Operations Manual
SSA--Social Security Administration
SSI--Supplemental Security Income
TEFRA--Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-
248
UHDDS--Uniform hospital discharge data set
VBP--Value-based purchasing

Table of Contents

I. Background
    A. Summary
    1. Acute Care Hospital Inpatient Prospective Payment System 
(IPPS)
    2. Hospitals and Hospital Units Excluded from the IPPS a. 
Inpatient Rehabilitation Facilities (IRFs) b. Long-Term Care 
Hospitals (LTCHs) c. Inpatient Psychiatric Facilities (IPFs)
    3. Critical Access Hospitals (CAHs)
    4. Payments for Graduate Medical Education (GME)
    B. Provisions of the Deficit Reduction Act of 2005 (DRA)
    C. Provisions of the Medicare Improvements and Extension Act 
under Division B, Title I of the Tax Relief and Health Care Act of 
2006
    D. Provisions of the Pandemic and All-Hazards Preparedness Act
    E. Issuance of a Notice of Proposed Rulemaking
    1. DRG Reclassifications and Recalibrations of Relative Weights
    2. Proposed Changes to the Hospital Wage Index
    3. Other Decisions and Proposed Changes to the IPPS for 
Operating Costs and GME Costs
    4. Proposed Changes to the IPPS for Capital-Related Costs
    5. Proposed Changes to the Payment Rates for Excluded Hospitals 
and Hospital Units: Rate-of-Increase Percentages
    6. Services Furnished to Beneficiaries in Custody of Penal 
Authorities
    7. Determining Proposed Prospective Payment Operating and 
Capital Rates and Rate of Increase Limits
    8. Impact Analysis
    9. Recommendation of Update Factors for Operating Cost Rates of 
Payment for Inpatient Hospital Services
    10. Discussion of Medicare Payment Advisory Commission 
Recommendations
    F. Public Comments Received on the Proposed Rule
II. Changes to DRG Classifications and Relative Weights
    A. Background
    B. DRG Reclassifications
    1. General
    2. Yearly Review for Making DRG Changes
    C. MedPAC Recommendations for Revisions to the IPPS DRG System
    D. Refinement of DRGs Based on Severity of Illness
    1. Evaluation of Alternative Severity-Adjusted DRG Systems
    a. Overview of Alternative DRG Classification Systems
    b. Comparative Performance in Explaining Variation in Resource 
Use
    c. Payment Accuracy and Case-Mix Impact
    d. Other Issues for Consideration
    2. Development of the Medicare Severity DRGs (MS DRGs)
    a. Comprehensive Review of the CC List
    b. Chronic Diagnosis Codes
    c. Acute Diagnosis Codes
    d. Prior Research on Subdivisions of CCs into Multiple 
Categories
    e. Medicare Severity DRGs (MS-DRGs)
    3. Dividing MS DRGs on the Basis of the CCs and MCCs
    4. Conclusion
    5. Impact of the MS-DRGs
    6. Changes to Case-Mix Index (CMI) from the MS-DRGs
    7. Effect of the MS-DRGs on the Outlier Threshold
    8. Effect of the MS-DRGs on the Postacute Care Transfer Policy
    E. Refinement of the Relative Weight Calculation
    1. Summary of RTI's Report on Charge Compression
    2. RTI Recommendations
    a. Short-Term Recommendations
    b. Medium-Term Recommendations
    c. Long-Term Recommendations
    F. Hospital-Acquired Conditions, Including Infections
    1. General
    2. Legislative Requirement
    3. Public Input
    4. Collaborative Effort
    5. Criteria for Selection of the Hospital-Acquired Conditions
    6. Selection of Hospital-Acquired Conditions
    7. Other Issues
    G. Changes to Specific DRG Classifications
    1. Pre-MDCs: Intestinal Transplantation
    2. MDC 1 (Diseases and Disorders of the Nervous System)
    a. Implantable Neurostimulators
    b. Intracranial Stents
    3. MDC 3 (Diseases and Disorders of the Ear, Nose, Mouth, and 
Throat)--Cochlear Implants
    4. MDC 8 (Diseases and Disorders of the Musculoskeletal System 
and Connective Tissue)
    a. Hip and Knee Replacements
    b. Spinal Fusions
    c. Spinal Disc Devices
    d. Other Spinal DRGs
    5. MDC 17 (Myeloproliferative Diseases and Disorders, Poorly 
Differentiated Neoplasm): Endoscopic Procedures
    6. Medicare Code Editor (MCE) Changes
    a. Non-Covered Procedure Edit: Code 00.62 (Percutaneous 
angioplasty or atherectomy of intracranial vessel(s))
    b. Non-Specific Principal Diagnosis Edit 7 and Non-Specific O.R. 
Procedures Edit 10
    c. Limited Coverage Edit 17
    d. Revision to Part 1, Pancreas Transplant Edit A
    7. Surgical Hierarchies
    8. CC Exclusions List
    a. Background
    b. CC Exclusions List for FY 2008
    9. Review of Procedure Codes in CMS DRGs 468, 476, and 477
    a. Moving Procedure Codes from CMS DRG 468 (MS-DRGs 981 through 
983) or CMS DRG 477 (MS-DRGs 987 through 989) to MDCs
    b. Reassignment of Procedures Among CMS DRGs 468, 476, and 477 
(MS-DRGs 981 through 983, 984 through 986, and 987 through 989)
    c. Adding Diagnosis or Procedure Codes to MDCs
    10. Changes to the ICD-9-CM Coding System
    11. Other DRG Issues Addressed in the FY 2008 IPPS Proposed Rule
    a. Seizures and Headaches
    b. Devices That are Replaced Without Cost or Where Credit for a 
Replaced Device is Furnished to the Hospital
    12. Other MS-DRG Issues Raised in the Public Comments on the 
Proposed Rule
    a. Heart Transplants or Implants of Heart Assist System and 
Liver Transplants (Pre-MDC)
    b. Gliadel[reg] Wafer (MDC 1)
    c. Myasthenia Gravis and Acute and Chronic Inflammatory 
Demyelinating Neuropathies (AIDP-CIDP) (MDC 1)
    d. Peripheral and Spinal Neurostimulators (MDC 1 and MDC 8)
    e. Stroke and Administration of Tissue Plasminogen Activator 
(tPA) (MDC 1)
    f. Gliasite[reg] Radiation Therapy System (RTS) (MDC 1)
    g. Noninvasive Ventilation (MDC 4)
    h. Heart Assist Devices (MDC 5)
    i. Automatic Implantable Cardioverter-Defibrillators (ACID) Lead 
and Generator Procedures (MDC 5)
    j. Artificial Heart (MDC 5)
    k. Vascular Procedures (MDC 5)
    l. Coronary Artery Stents (MDC 5)
    m. Endovascular Repair of Aortic and Thoracic Aneurysms (MDC 5)
    n. O.R. Procedures for Obesity (MDC 10)
    o. Penile Restorative Procedures (MDC 12)
    p. Female Reproductive System Reconstruction Procedures (MDC 13)
    q. Urological and Gynecological Disorders with Grafts or 
Prosthesis (MDCs 13 and 14)
    r. High Dose Interleukin-2 (HD-IL-2) (MDC 17)
    s. Computer Assisted Surgery
    13. Changes to MS-DRG Logic As a Result of Public Comments
    H. Recalibration of DRG Weights
    I. MS-LTC-DRG Reclassifications and Relative Weights for LTCHs 
for FY 2008
    1. Background
    2. Changes in the LTC-DRG Classifications
    a. Background
    b. Patient Classifications into DRGs
    3. Development of the FY 2008 MS-LTC-DRG Relative Weights
    a. General Overview of Development of the MS-LTC-DRG Relative 
Weights
    b. Data
    c. Hospital-Specific Relative Value Methodology
    d. Treatment of Severity Levels in Developing Relative Weights
    e. Low-Volume MS-LTC-DRGs
    4. Steps for Determining the FY 2008 MS-LTC-DRG Relative Weights

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    J. Add-On Payments for New Services and Technologies
    1. Background
    2. Public Input Before Publication of a Notice of Proposed 
Rulemaking on Add-On Payments
    3. FY 2008 Status of Technologies Approved for FY 2007 Add-On 
Payments
    a. Endovascular Graft Repair of the Thoracic Aorta
    b. Restore[reg] Rechargeable Implantable Neurostimulators
    c. X STOP Interspinous Process Decompression System
    4. FY 2008 Application for New Technology Add-On Payments
    5. Technical Correction
III. Changes to the Hospital Wage Index
    A. Background
    B. Core-Based Statistical Areas for the Hospital Wage Index
    C. Occupational Mix Adjustment to the FY 2008 Wage Index
    1. Development of Data for the FY 2008 Occupational Mix 
Adjustment
    2. Timeline for the Collection, Review, and Correction of the 
Occupational Mix Data
    3. Calculation of the Occupational Mix Adjustment for FY 2008
    4. 2007-2008 Occupational Mix Survey for the FY 2010 Wage Index
    D. Worksheet S-3 Wage Data for the FY 2008 Wage Index
    1. Included Categories of Costs
    2. Contract Labor for Indirect Patient Care Services
    3. Excluded Categories of Costs
    4. Use of Wage Index Data by Providers Other Than Acute Care 
Hospitals under the IPPS
    E. Verification of Worksheet S-3 Wage Data
    F. Wage Index for Multicampus Hospitals
    G. Computation of the FY 2008 Unadjusted Wage Index
    1. Method for Computing the FY 2008 Unadjusted Wage Index
    2. Expiration of the Imputed Floor
    3. CAHs Reverting Back to IPPS Hospitals and Raising the Rural 
Floor
    4. Application of Rural Floor Budget Neutrality
    H. Analysis and Implementation of the Occupational Mix 
Adjustment and the FY 2008 Occupational Mix Adjusted Wage Index
    I. Revisions to the Wage Index Based on Hospital Redesignations
    1. General
    2. Effects of Reclassification/Redesignation
    3. FY 2008 MGCRB Reclassifications
    4. Hospitals That Applied for Reclassification Effective in FY 
2008 and Reinstating Reclassifications in FY 2008
    5. Clarification of Policy on Reinstating Reclassifications
    6. ``Fallback'' Reclassifications
    7. Geographic Reclassification Issues for Multicampus Hospitals
    8. Redesignations of Hospitals under Section 1886(d)(8)(B) of 
the Act
    9. Reclassifications under Section 1886(d)(8)(B) of the Act
    10. New England Deemed Counties
    11. Reclassifications under Section 508 of Pub. L. 108-173
    12. Other Issues
    J. FY 2008 Wage Index Adjustment Based on Commuting Patterns of 
Hospital Employees
    K. Process for Requests for Wage Index Data Corrections
    L. Labor-Related Share for the Wage Index for FY 2008
    M. Wage Index Study Required under Pub. L. 109-432
    N. Proxy for the Hospital Market Basket
IV. Other Decisions and Changes to the IPPS for Operating Costs and 
GME Costs
    A. Reporting of Hospital Quality Data for Annual Hospital 
Payment Update
    1. Background
    2. FY 2008 Quality Measures
    3. New Quality Measures and Program Requirements for FY 2009 and 
Subsequent Years
    a. New Quality Measures for FY 2009 and Subsequent Years
    b. Data Submission
    4. Retiring or Replacing RHQDAPU Program Quality Measures
    5. Procedures for the RHQDAPU Program for FY 2008 and FY 2009
    a. Procedures for Participating in the RHQDAPU Program
    b. Procedures for Participating in the RHQDAPU Program for FY 
2009
    c. Chart Validation Requirements
    d. Data Validation and Attestation
    e. Public Display
    f. Reconsideration and Appeal Procedures
    g. RHQDAPU Program Withdrawal Requirements
    6. Electronic Medical Records
    7. New Hospitals
    B. Development of the Medicare Hospital Value-Based Purchasing 
Plan
    C. Rural Referral Centers (RRCs)
    1. Annual Update of RRC Status Criteria
    a. Case-Mix Index
    b. Discharges
    2. Acquired Rural Status of RRCs
    D. Indirect Medical Education (IME) Adjustment
    1. Background
    2. IME Adjustment Factor for FY 2008
    3. Time Spent by Residents on Vacation or Sick Leave and in 
Orientation
    a. Background
    b. Vacation and Sick Leave Time
    c. Orientation Activities
    d. Regulation Changes
    E. Payments to Disproportionate Share Hospitals (DSHs): 
Technical Correction
    1. Background
    2. Technical Correction: Inclusion of Medicare Advantage Days in 
the Medicare Fraction of the Medicare DSH Calculation
    F. Hospital Emergency Services under EMTALA
    1. Background
    2. Recent Legislation Affecting EMTALA Implementation
    a. Secretary's Authority to Waive Requirements During National 
Emergencies
    b. Provisions of the Pandemic and All-Hazards Preparedness Act
    c. Revisions to the EMTALA Regulations
    G. Disclosure of Physician Ownership in Hospitals and Patient 
Safety Measures
    1. Disclosure of Physician Ownership in Hospitals
    2. Patient Safety Measures
    H. Rural Community Hospital Demonstration Program
V. Changes to the IPPS for Capital-Related Costs
    A. Background
    B. Policy Change
VI. Changes for Hospitals and Hospital Units Excluded from the IPPS
    A. Payments to Existing and New Excluded Hospitals and Hospital 
Units
    B. Separate PPS for IRFs
    C. Separate PPS for LTCHs
    D. Separate PPS for IPFs
    E. Determining LTCH Cost-to-Charge Ratios (CCRs) under the LTCH 
PPS
    F. Report of Adjustment (Exceptions) Payments
VII. Services Furnished to Beneficiaries in Custody of Penal 
Authorities
VIII. MedPAC Recommendations
IX. Other Required Information
    A. Requests for Data from the Public
    B. Collection of Information Requirements
    C. Waiver of Notice of Proposed Rulemaking

Regulation Text

Addendum--Schedule of Standardized Amounts, Update Factors, and Rate-
of-Increase Percentages Effective With Cost Reporting Periods Beginning 
On or After October 1, 2007

I. Summary and Background
II. Changes to the Prospective Payment Rates for Hospital Inpatient 
Operating Costs for FY 2008
    A. Calculation of the Adjusted Standardized Amount
    1. Standardization of Base-Year Costs or Target Amounts
    2. Computing the Average Standardized Amount
    3. Updating the Average Standardized Amount
    4. Other Adjustments to the Average Standardized Amount
    a. Recalibration of DRG Weights and Updated Wage Index Budget 
Neutrality Adjustment
    b. Reclassified Hospitals--Budget Neutrality Adjustment
    c. Imputed Rural Floor--Budget Neutrality Adjustment
    d. Case-Mix Budget Neutrality Adjustment
    e. Outliers
    f. Rural Community Hospital Demonstration Program Adjustment 
(Section 410A of Pub. L. 108-173)
    5. FY 2008 Standardized Amount
    B. Adjustments for Area Wage Levels and Cost-of-Living
    1. Adjustment for Area Wage Levels
    2. Adjustment for Cost-of-Living in Alaska and Hawaii
    C. DRG Relative Weights
    D. Calculation of the Prospective Payment Rates
    1. Federal Rate
    2. Hospital Specific Rate (Applicable Only to SCHs and MDHs)
    a. Calculation of Hospital Specific Rate

[[Page 47134]]

    b. Updating the FY 1982, FY 1987, FY 1996, and FY 2002 Hospital 
Specific Rates for FY 2008
    3. General Formula for Calculation of Prospective Payment Rates 
for Hospitals Located in Puerto Rico Beginning On or After October 
1, 2007 and Before October 1, 200
    a. Puerto Rico Rate
    b. National Rate
III. Changes to Payment Rates for Acute Care Hospital Inpatient 
Capital-Related Costs for FY 2008
    A. Determination of Federal Hospital Inpatient Capital Related 
Prospective Payment Rate Update
    1. Projected Capital Standard Federal Rate Update
    a. Description of the Update Framework
    b. MedPAC Update Recommendation
    2. Outlier Payment Adjustment Factor
    3. Budget Neutrality Adjustment Factor for Changes in DRG 
Classifications and Weights and the GAF
    4. Exceptions Payment Adjustment Factor
    5. Capital Standard Federal Rate for FY 2008
    6. Special Capital Rate for Puerto Rico Hospitals
    B. Calculation of the Inpatient Capital-Related Prospective 
Payments for FY 2008
    C. Capital Input Price Index
    1. Background
    2. Forecast of the CIPI for FY 2008
IV. Changes to Payment Rates for Excluded Hospitals and Hospital 
Units: Rate-of-Increase Percentages
V. Tables

Table 1A--National Adjusted Operating Standardized Amounts, Labor/
Nonlabor (69.7 Percent Labor Share/30.3 Percent Nonlabor Share If Wage 
Index Is Greater Than 1)

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

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

Table 1D--Capital Standard Federal Payment Rate

    Table 2--Hospital Case-Mix Indexes for Discharges Occurring in 
Federal Fiscal Year 2006; Hospital Wage Indexes for Federal Fiscal 
Year 2008; Hospital Average Hourly Wages for Federal Fiscal Years 
2006 (2002 Wage Data), 2007 (2003 Wage Data), and 2008 (2004 Wage 
Data); and 3-Year Average of Hospital Average Hourly Wages
    Table 3A--FY 2008 and 3-Year Average Hourly Wage for Urban Areas 
by CBSA
    Table 3B--FY 2008 and 3-Year Average Hourly Wage for Rural Areas 
by CBSA
    Table 4A--Wage Index and Capital Geographic Adjustment Factor 
(GAF) for Urban Areas by CBSA--FY 2008
    Table 4B--Wage Index and Capital Geographic Adjustment Factor 
(GAF) for Rural Areas by CBSA--FY 2008
    Table 4C--Wage Index and Capital Geographic Adjustment Factor 
(GAF) for Hospitals That Are Reclassified by CBSA--FY 2008
    Table 4F--Puerto Rico Wage Index and Capital Geographic 
Adjustment Factor (GAF) by CBSA--FY 2008
    Table 4J--Out-Migration Wage Adjustment--FY 2008
    Table 5--List of Medicare Severity Diagnosis-Related Groups (MS-
DRGs), Relative Weighting Factors, and Geometric and Arithmetic Mean 
Length of Stay
    Table 6A--New Diagnosis Codes
    Table 6B--New Procedure Codes
    Table 6C--Invalid Diagnosis Codes
    Table 6D--Invalid Procedure Codes
    Table 6E--Revised Diagnosis Code Titles
    Table 6F--Revised Procedure Code Titles
    Table 6G--Additions to the CC Exclusions List
    Table 6H--Deletions from the CC Exclusions List
    Table 6I--Complete List of Complication and Comorbidity (CC) 
Exclusions
    (Available only through the Internet on the CMS Web site at: 
http://www.cms.hhs.gov/ AcuteInpatientPPS/)
    Table 7A--Medicare Prospective Payment System Selected 
Percentile Lengths of Stay: FY 2006 MedPAR Update--March 2007 
GROUPER V24.0 CMS DRGs
    Table 7B--Medicare Prospective Payment System Selected 
Percentile Lengths of Stay: FY 2006 MedPAR Update--March 2007 
GROUPER V25.0 CMS DRGs
    Table 8A--Statewide Average Operating Cost-to-Charge Ratios--
July 2007
    Table 8B--Statewide Average Capital Cost-to-Charge Ratios--July 
2007
    Table 8C--Statewide Average Total Cost-to-Charge Ratios for 
LTCHs--July 2007
    Table 9A--Hospital Reclassifications and Redesignations--FY 2008
    Table 9C--Hospitals Redesignated as Rural under Section 
1886(d)(8)(E) of the Act--FY 2008
    Table 10--Geometric Mean Plus the Lesser of .75 of the National 
Adjusted Operating Standardized Payment Amount (Increased to Reflect 
the Difference Between Costs and Charges) or .75 of One Standard 
Deviation of Mean Charges by Medicare Severity Diagnosis-Related 
Groups (MS-DRGs)--July 2007
    Table 11--FY 2008 MS-LTC-DRGs, Relative Weights, Geometric 
Average Length of Stay, Short-Stay Outlier Threshold, and IPPS 
Comparable Threshold

Appendix A--Regulatory Impact Analysis

I. Overall Impact
II. Objectives
III. Limitations on Our Analysis
IV. Hospitals Included In and Excluded From the IPPS
V. Effects on Excluded Hospitals and Hospital Units
VI. Quantitative Effects of the Policy Changes Under the IPPS for 
Operating Costs
    A. Basis and Methodology of Estimates
    B. Analysis of Table I
    C. Effects of the Changes to the DRG Reclassifications and 
Relative Cost-Based Weights (Column 2)
    D. Effects of Wage Index Changes (Column 3)
    E. Combined Effects of DRG and Wage Index Changes (Column 4)
    F. Effects of the Expiration of the 3-Year Provision Allowing 
Urban Hospitals That Were Converted to Rural as a Result of the FY 
2005 Labor Market Area Changes to Maintain the Wage Index of the 
Urban Labor Market Area in Which They Were Formerly Located (Column 
5)
    G. Effects of MGCRB Reclassifications (Column 6)
    H. Effects of the Adjustment to the Application of the Rural 
Floor (Column 7)
    I. Effects of Application of the Imputed Floor (Column 8)
    J. Effects of the Expiration of Section 508 of Pub. L. 108-173 
(Column 9)
    K. Effects of the Wage Index Adjustment for Out-Migration 
(Column 10)
    L. Effects of All Changes with CMI Adjustment Prior to Estimated 
Growth (Column 11)
    M. Effects of All Changes with CMI Adjustment and Assumed 
Estimated (Column 12)
    N. Effects of Policy on Payment Adjustments for Low-Volume 
Hospitals
    O. Impact Analysis of Table II
VII. Effects of Other Policy Changes
    A. Effects of Policy on Hospital-Acquired Conditions, Including 
Infections
    B. Effects of MS-LTC-DRG Reclassifications and Relative Weights 
for LTCHs
    C. Effects of New Technology Add-On Payments
    D. Effects of Requirements for Hospital Reporting of Quality 
Data for Annual Hospital Payment Update
    E. Effects of Policy on Cancellation of Classification of 
Acquired Rural Status and Rural Referral Centers
    F. Effects of Policy Change on Payment for IME and Direct GME
    G. Effects of Policy Changes Relating to Emergency Services 
under EMTALA During an Emergency Period
    H. Effects of Policy on Disclosure of Physician Ownership in 
Hospitals and Patient Safety Measures
    I. Effects of Implementation of the Rural Community Hospital 
Demonstration Program
    J. Effects of Policy Changes on Services Furnished to 
Beneficiaries in Custody of Penal Authorities
VIII. Impact of Changes in the Capital IPPS
    A. General Considerations
    B. Results
IX. Alternatives Considered
X. Overall Conclusion
XI. Accounting Statement
XII. Executive Order 12866

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

I. Background
II. Inpatient Hospital Update for FY 2008
III. Secretary's Final Recommendation
IV. MedPAC Recommendation for Assessing Payment Adequacy and 
Updating Payments in Traditional Medicare

[[Page 47135]]

I. Background

A. Summary

1. Acute Care Hospital Inpatient Prospective Payment System (IPPS)
    Section 1886(d) of the Social Security Act (the Act) sets forth a 
system of payment for the operating costs of acute care hospital 
inpatient stays under Medicare Part A (Hospital Insurance) based on 
prospectively set rates. Section 1886(g) of the Act requires the 
Secretary to pay for the capital-related costs of hospital inpatient 
stays under a prospective payment system (PPS). Under these PPSs, 
Medicare payment for hospital inpatient operating and capital-related 
costs is made at predetermined, specific rates for each hospital 
discharge. Discharges are classified according to a list of diagnosis-
related groups (DRGs).
    The base payment rate is comprised of a standardized amount that is 
divided into a labor-related share and a nonlabor-related share. The 
labor-related share is adjusted by the wage index applicable to the 
area where the hospital is located; and if the hospital is located in 
Alaska or Hawaii, the nonlabor-related share is adjusted by a cost-of-
living adjustment factor. This base payment rate is multiplied by the 
DRG relative weight.
    If the hospital treats a high percentage of low-income patients, it 
receives a percentage add-on payment applied to the DRG-adjusted base 
payment rate. This add-on payment, known as the disproportionate share 
hospital (DSH) adjustment, provides for a percentage increase in 
Medicare payments to hospitals that qualify under either of two 
statutory formulas designed to identify hospitals that serve a 
disproportionate share of low-income patients. For qualifying 
hospitals, the amount of this adjustment may vary based on the outcome 
of the statutory calculations.
    If the hospital is an approved teaching hospital, it receives a 
percentage add-on payment for each case paid under the IPPS, known as 
the indirect medical education (IME) adjustment. This percentage 
varies, depending on the ratio of residents to beds.
    Additional payments may be made for cases that involve new 
technologies or medical services that have been approved for special 
add-on payments. To qualify, a new technology or medical service must 
demonstrate that it is a substantial clinical improvement over 
technologies or services otherwise available, and that, absent an add-
on payment, it would be inadequately paid under the regular DRG 
payment.
    The costs incurred by the hospital for a case are evaluated to 
determine whether the hospital is eligible for an additional payment as 
an outlier case. This additional payment is designed to protect the 
hospital from large financial losses due to unusually expensive cases. 
Any outlier payment due is added to the DRG-adjusted base payment rate, 
plus any DSH, IME, and new technology or medical service add-on 
adjustments.
    Although payments to most hospitals under the IPPS are made on the 
basis of the standardized amounts, some categories of hospitals are 
paid the higher of a hospital-specific rate based on their costs in a 
base year (the higher of FY 1982, FY 1987, FY 1996, or FY 2002) or the 
IPPS rate based on the standardized amount. For example, sole community 
hospitals (SCHs) are the sole source of care in their areas, and 
Medicare-dependent, small rural hospitals (MDHs) are a major source of 
care for Medicare beneficiaries in their areas. Both of these 
categories of hospitals are afforded this special payment protection in 
order to maintain access to services for beneficiaries. (Until FY 2007, 
an MDH has received the IPPS rate plus 50 percent of the difference 
between the IPPS rate and its hospital-specific rate if the hospital-
specific rate is higher than the IPPS rate. In addition, an MDH does 
not have the option of using FY 1996 as the base year for its hospital-
specific rate. As discussed below, for discharges occurring on or after 
October 1, 2007, but before October 1, 2011, an MDH will receive the 
IPPS rate plus 75 percent of the difference between the IPPS rate and 
its hospital-specific rate, if the hospital-specific rate is higher 
than the IPPS rate.)
    Section 1886(g) of the Act requires the Secretary to pay for the 
capital-related costs of inpatient hospital services ``in accordance 
with a prospective payment system established by the Secretary.'' The 
basic methodology for determining capital prospective payments is set 
forth in our regulations at 42 CFR 412.308 and 412.312. Under the 
capital IPPS, payments are adjusted by the same DRG for the case as 
they are under the operating IPPS. Capital IPPS payments are also 
adjusted for IME and DSH, similar to the adjustments made under the 
operating IPPS. In addition, hospitals may receive outlier payments for 
those cases that have unusually high costs.
    The existing regulations governing payments to hospitals under the 
IPPS are located in 42 CFR Part 412, Subparts A through M.
2. Hospitals and Hospital Units Excluded from the IPPS
    Under section 1886(d)(1)(B) of the Act, as amended, certain 
specialty hospitals and hospital units are excluded from the IPPS. 
These hospitals and units are: rehabilitation hospitals and units; 
long-term care hospitals (LTCHs); psychiatric hospitals and units; 
children's hospitals; and cancer hospitals. Religious nonmedical health 
care institutions (RNHCIs) are also excluded from the IPPS. Various 
sections of the Balanced Budget Act of 1997 (Pub. L. 105-33), the 
Medicare, Medicaid and SCHIP [State Children's Health Insurance 
Program] Balanced Budget Refinement Act of 1999 (Pub. L. 106-113), and 
the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection 
Act of 2000 (Pub. L. 106-554) provide for the implementation of PPSs 
for rehabilitation hospitals and units (referred to as inpatient 
rehabilitation facilities (IRFs)), LTCHs, and psychiatric hospitals and 
units (referred to as inpatient psychiatric facilities (IPFs)), as 
discussed below. Children's hospitals, cancer hospitals, and RNHCIs 
continue to be paid solely under a reasonable cost-based system.
    The existing regulations governing payments to excluded hospitals 
and hospital units are located in 42 CFR Parts 412 and 413.
a. Inpatient Rehabilitation Facilities (IRFs)
    Under section 1886(j) of the Act, as amended, rehabilitation 
hospitals and units (IRFs) have been transitioned from payment based on 
a blend of reasonable cost reimbursement subject to a hospital-specific 
annual limit under section 1886(b) of the Act and the adjusted facility 
Federal prospective payment rate for cost reporting periods beginning 
on or after January 1, 2002 through September 30, 2002, to payment at 
100 percent of the Federal rate effective for cost reporting periods 
beginning on or after October 1, 2002. IRFs subject to the blend were 
also permitted to elect payment based on 100 percent of the Federal 
rate. The existing regulations governing payments under the IRF PPS are 
located in 42 CFR Part 412, Subpart P.
b. Long-Term Care Hospitals (LTCHs)
    Under the authority of sections 123(a) and (c) of Pub. L. 106-113 
and section 307(b)(1) of Pub. L. 106-554, the LTCH PPS was effective 
for a LTCH's first cost reporting period beginning on or after October 
1, 2002. LTCHs that do not meet the definition of ``new'' under Sec.  
412.23(e)(4) are paid, during a 5-year

[[Page 47136]]

transition period, a LTCH prospective payment that is comprised of an 
increasing proportion of the LTCH Federal rate and a decreasing 
proportion based on reasonable cost principles. Those LTCHs that did 
not meet the definition of ``new'' under Sec.  412.23(e)(4) could elect 
to be paid based on 100 percent of the Federal prospective payment rate 
instead of a blended payment in any year during the 5-year transition. 
For cost reporting periods beginning on or after October 1, 2006, all 
LTCHs are paid 100 percent of the Federal rate. The existing 
regulations governing payment under the LTCH PPS are located in 42 CFR 
Part 412, Subpart O.
c. Inpatient Psychiatric Facilities (IPFs)
    Under the authority of sections 124(a) and (c) of Pub. L. 106-113, 
inpatient psychiatric facilities (IPFs) (formerly psychiatric hospitals 
and psychiatric units of acute care hospitals) are paid under the IPF 
PPS. Under the IPF PPS, some IPFs are transitioning from being paid for 
inpatient hospital services based on a blend of reasonable cost-based 
payment and a Federal per diem payment rate, effective for cost 
reporting periods beginning on or after January 1, 2005. For cost 
reporting periods beginning on or after January 1, 2008, all IPFs will 
be paid 100 percent of the Federal per diem payment amount. The 
existing regulations governing payment under the IPF PPS are located in 
42 CFR 412, Subpart N.
3. Critical Access Hospitals (CAHs)
    Under sections 1814, 1820, and 1834(g) of the Act, payments are 
made to critical access hospitals (CAHs) (that is, rural hospitals or 
facilities that meet certain statutory requirements) for inpatient and 
outpatient services based on 101 percent of reasonable cost. Reasonable 
cost is determined under the provisions of section 1861(v)(1)(A) of the 
Act and existing regulations under 42 CFR Parts 413 and 415.
4. Payments for Graduate Medical Education (GME)
    Under section 1886(a)(4) of the Act, costs of approved educational 
activities are excluded from the operating costs of inpatient hospital 
services. Hospitals with approved graduate medical education (GME) 
programs are paid for the direct costs of GME in accordance with 
section 1886(h) of the Act; the amount of payment for direct GME costs 
for a cost reporting period is based on the hospital's number of 
residents in that period and the hospital's costs per resident in a 
base year. The existing regulations governing payments to the various 
types of hospitals are located in 42 CFR Part 413.

B. Provisions of the Deficit Reduction Act of 2005 (DRA)

    The Deficit Reduction Act of 2005 (DRA), Pub. L. 109-171, made a 
number of changes to the Act relating to prospective payments to 
hospitals and other providers for inpatient services. The final rule 
implements amendments made by (1) section 5001(a), which, effective for 
FY 2007 and subsequent years, expands the requirements for hospital 
quality data reporting; and (2) section 5001(c), which requires the 
Secretary to select, by October 1, 2007, at least two hospital-acquired 
conditions that meet certain specified criteria that will be subject to 
a quality adjustment in DRG payments during FY 2008.
    In this final rule with comment period, we also discuss our 
development of a plan to implement, beginning with FY 2009, a value-
based purchasing plan for section 1886(d) hospitals, in accordance with 
the requirements of section 5001(b) of Pub. L. 109-171.

C. Provisions of the Medicare Improvements and Extension Act under 
Division B, Title I of the Tax Relief and Health Care Act of 2006

    In this final rule with comment period, we discuss the provisions 
of section 106(b)(1) of the Medicare Improvements and Extensions Act 
under Division B, Title I of the Tax Relief and Health Care Act of 2006 
(MIEA-TRHCA), Pub. L. 109-432, which requires MedPAC to submit to 
Congress, not later than June 30, 2007, a report on the Medicare wage 
index classification system applied under the Medicare Prospective 
Payment System. Section 106(b) of the MIEA-TRHCA requires the report to 
include any alternatives that MedPAC recommends to the method to 
compute the wage index under section 1886(d)(3)(E) of the Act.
    In addition, we discuss the provisions of section 106(b)(2) of the 
MIEA-TRHCA, which instructs the Secretary of Health and Human Services, 
taking into account MedPAC's recommendations on the Medicare wage index 
classification system, to include in the FY 2009 IPPS proposed rule one 
or more proposals to revise the wage index adjustment applied under 
section 1886(d)(3)(E) of the Act for purposes of the IPPS.
    We note that we published a notice in the Federal Register on March 
23, 2007 (72 FR 13799) that addressed the provisions of section 106(a) 
of the MIEA-TRHCA relating to the extension of geographic 
reclassifications of hospitals under section 508 of Pub. L. 108-173 
(that expired on March 31, 2007) through September 30, 2007.

D. Provisions of the Pandemic and All-Hazards Preparedness Act

    On December 19, 2006, Congress enacted the Pandemic and All-Hazards 
Preparedness Act, Pub. L. 109-417. Section 302(b) of Pub. L. 109-417 
makes two specific changes that affect EMTALA implementation in 
emergency areas during an emergency period. Specifically section 
302(b)(1)(A) of Pub. L. 109-417 amended section 1135(b)(3)(B) of the 
Act to state that sanctions may be waived for the direction or 
relocation of an individual for screening where, in the case of a 
public health emergency that involves a pandemic infectious disease, 
that direction or relocation occurs pursuant to a State pandemic 
preparedness plan. In addition, sections 302(b)(1)(B) and (b)(1)(C) of 
Pub. L. 109-417 amended section 1135(b)(3)(B) of the Act to state that, 
if a public health emergency involves a pandemic infectious disease 
(such as pandemic influenza) the duration of a waiver or modification 
under section 1135(b)(3) of the Act (relating to EMTALA) shall be 
determined in accordance with section 1135(e) of the Act as that 
subsection applies to public health emergencies.
    In this final rule with comment period, we are making changes to 
the EMTALA regulations to conform them to the sanction waiver 
provisions of section 302(b) of Pub. L. 109-417.

E. Issuance of a Notice of Proposed Rulemaking

    On May 3, 2007, we issued in the Federal Register (72 FR 24680) a 
notice of proposed rulemaking that set forth proposed changes to the 
Medicare IPPS for operating costs and for capital-related costs in FY 
2008. We also set forth proposed changes relating to payments for GME 
and IME costs and payments to certain hospitals and units that continue 
to be excluded from the IPPS and paid on a reasonable cost basis that 
would be effective for discharges occurring on or after October 1, 
2007. Below is a summary of the major changes that we proposed to make:
1. DRG Reclassifications and Recalibrations of Relative Weights
    We proposed to adopt a Medicare Severity DRG (MS-DRG) 
classification system for the IPPS to better recognize severity of 
illness. We presented the methodology we used to establish the MS-DRGs 
and discussed our efforts to

[[Page 47137]]

further analyze alternative severity-adjusted DRG systems and to refine 
the relative weight calculations for DRGs.
    We presented a proposed listing and discussion of hospital-acquired 
conditions, including infections, which were evaluated and proposed to 
be subject to the statutorily required quality adjustment in DRG 
payments for FY 2008.
    We proposed limited annual revisions to the DRG classification 
system in the following areas: Intestinal transplants, 
neurostimulators, intracranial stents, cochlear implants, knee and hip 
replacements, spinal fusions and spinal disc devices, and endoscopic 
procedures.
    We presented our reevaluation of certain FY 2007 applicants for 
add-on payments for high-cost new medical services and technologies, 
and our analysis of the FY 2008 applicant (including public input, as 
directed by Pub. L. 108-173, obtained in a town hall meeting).
    We proposed the annual update of the long-term care diagnosis-
related group (LTC-DRG) classifications and relative weights for use 
under the LTCH PPS for FY 2008. We proposed that the LTC-DRGs would be 
revised to mirror the proposed MS-DRGs for the IPPS.
2. Proposed Changes to the Hospital Wage Index
    In section III. of the preamble to the proposed rule, we proposed 
revisions to the wage index and the annual update of the wage data. 
Specific issues addressed included the following:
     The FY 2008 wage index update, using wage data from cost 
reporting periods that began during FY 2004.
     Analysis and implementation of the proposed FY 2008 
occupational mix adjustment to the wage index.
     Proposed changes relating to expiration of the imputed 
rural floor for the wage index and application of budget neutrality for 
the rural floor.
     Proposed changes in the determination of the wage index 
for multicampus hospitals.
     The proposed revisions to the wage index based on hospital 
redesignations and reclassifications, including reclassifications for 
multicampus hospitals.
     The proposed adjustment to the wage index for FY 2008 
based on commuting patterns of hospital employees who reside in a 
county and work in a different area with a higher wage index.
     The timetable for reviewing and verifying the wage data 
that were in effect for the FY 2008 wage index.
     The labor-related share for the FY 2008 wage index, 
including the labor-related share for Puerto Rico.
3. Other Decisions and Proposed Changes to the IPPS for Operating Costs 
and GME Costs
    In section IV. of the preamble to the proposed rule, we discussed a 
number of the provisions of the regulations in 42 CFR Parts 412, 413, 
and 489, including the following:
     The reporting of hospital quality data as a condition for 
receiving the full annual payment update increase.
     Development of the Medicare value-based purchasing plan 
and reports on the ``listening sessions'' held.
     The proposed updated national and regional case-mix values 
and discharges for purposes of determining RRC status and a proposed 
policy change relating to the acquired rural status of RRCs.
     The statutorily-required IME adjustment factor for FY 2008 
and a proposed policy change relating to determining counts of 
residents on vacation or sick leave and in orientation for IME and 
direct GME purposes.
     Proposed changes relating to the waiver of sanctions for 
requirements for emergency services for hospitals under EMTALA during 
national emergencies.
     Proposed policy changes relating to the disclosure to 
patients of physician ownership of hospitals and patient safety 
measures.
     Discussion of the fourth year of implementation of the 
Rural Community Hospital Demonstration Program.
4. Proposed Changes to the IPPS for Capital-Related Costs
    In section V. of the preamble to the proposed rule, we discussed 
the payment policy requirements for capital-related costs and capital 
payments to hospitals and proposed changes relating to adjustments to 
the Federal capital rate to address continuous large positive margins.
5. Proposed Changes to the Payment Rates for Excluded Hospitals and 
Hospital Units: Rate-of-Increase Percentages
    In section VI. of the preamble to the proposed rule, we discussed 
payments to excluded hospitals and hospital units, and proposed changes 
for determining LTCH CCRs under the LTCH PPS.
6. Services Furnished to Beneficiaries in Custody of Penal Authorities
    In section VII. of the preamble to the proposed rule, we clarified 
when individuals are considered to be in ``custody'' for purposes of 
Medicare payment for services furnished to beneficiaries who are under 
penal authorities.
7. Determining Proposed Prospective Payment Operating and Capital Rates 
and Rate-of-Increase Limits
    In the Addendum to the proposed rule, we set forth proposed changes 
to the amounts and factors for determining the FY 2008 prospective 
payment rates for operating costs and capital-related costs. We also 
established the proposed threshold amounts for outlier cases. In 
addition, we addressed the proposed update factors for determining the 
rate-of-increase limits for cost reporting periods beginning in FY 2008 
for hospitals and hospital units excluded from the PPS.
8. Impact Analysis
    In Appendix A of the proposed rule, we set forth an analysis of the 
impact that the proposed changes would have on affected hospitals.
9. Recommendation of Update Factors for Operating Cost Rates of Payment 
for Inpatient Hospital Services
    In Appendix B of the proposed rule, as required by sections 
1886(e)(4) and (e)(5) of the Act, we provided our recommendations of 
the appropriate percentage changes for FY 2008 for the following:
     A single average standardized amount for all areas for 
hospital inpatient services paid under the IPPS for operating costs 
(and hospital-specific rates applicable to SCHs and MDHs).
     Target rate-of-increase limits to the allowable operating 
costs of hospital inpatient services furnished by hospitals and 
hospital units excluded from the IPPS.
10. Discussion of Medicare Payment Advisory Commission Recommendations
    Under section 1805(b) of the Act, MedPAC is required to submit a 
report to Congress, no later than March 1 of each year, in which MedPAC 
reviews and makes recommendations on Medicare payment policies. 
MedPAC's March 2007 recommendations concerning hospital inpatient 
payment policies addressed the update factor for inpatient hospital 
operating costs and capital-related costs under the IPPS and for 
hospitals and distinct part hospital units excluded from the IPPS. We 
addressed these recommendations in Appendix B of the proposed rule. For 
further information relating specifically to the MedPAC March 2007 
reports or to obtain a copy of the reports, contact

[[Page 47138]]

MedPAC at (202) 220-3700 or visit MedPAC's Web site at: www.medpac.gov.

F. Public Comments Received on the Proposed Rule

    We received approximately 900 timely pieces of correspondence in 
response to the FY 2008 IPPS proposed rule issued in the Federal 
Register on May 3, 2007. These public comments addressed issues on 
multiple topics in the proposed rule. We present a summary of the 
public comments and our responses to them in the applicable subject 
matter sections of this final rule with comment period.

II. Changes to DRG Classifications and Relative Weights

A. Background

    Section 1886(d) of the Act specifies that the Secretary shall 
establish a classification system (referred to as DRGs) for inpatient 
discharges and adjust payments under the IPPS based on appropriate 
weighting factors assigned to each DRG. Therefore, under the IPPS, we 
pay for inpatient hospital services on a rate per discharge basis that 
varies according to the DRG to which a beneficiary's stay is assigned. 
The formula used to calculate payment for a specific case multiplies an 
individual hospital's payment rate per case by the weight of the DRG to 
which the case is assigned. Each DRG weight represents the average 
resources required to care for cases in that particular DRG, relative 
to the average resources used to treat cases in all DRGs.
    Congress recognized that it would be necessary to recalculate the 
DRG relative weights periodically to account for changes in resource 
consumption. Accordingly, section 1886(d)(4)(C) of the Act requires 
that the Secretary adjust the DRG classifications and relative weights 
at least annually. These adjustments are made to reflect changes in 
treatment patterns, technology, and any other factors that may change 
the relative use of hospital resources.

B. DRG Reclassifications

1. General
    As discussed in the preamble to the FY 2007 IPPS final rule (71 FR 
47881 through 47971), we are focusing our efforts in FY 2008 on making 
significant reforms to the IPPS consistent with the recommendations 
made by MedPAC in its ``Report to the Congress, Physician-Owned 
Specialty Hospitals'' in March 2005. MedPAC recommended that the 
Secretary refine the entire DRG system by taking into account severity 
of illness and applying hospital-specific relative value (HSRV) weights 
to DRGs.\1\ We began this reform process by adopting cost-based weights 
over a 3-year transition period beginning in FY 2007 and making interim 
changes to the DRG system for FY 2007 by creating 20 new CMS DRGs and 
modifying 32 others across 13 different clinical areas involving nearly 
1.7 million cases. As described below in more detail, these refinements 
were intermediate steps towards comprehensive reform of both the 
relative weights and the DRG system that is occurring as we undertook 
further study.
---------------------------------------------------------------------------

    \1\ Medicare Payment Advisory Commission: Report to the 
Congress, Physician-Owned Specialty Hospitals, March 2005, page 
viii.
---------------------------------------------------------------------------

    Currently, cases are classified into CMS DRGs for payment under the 
IPPS based on the principal diagnosis, up to eight additional 
diagnoses, and up to six procedures performed during the stay. In a 
small number of DRGs, classification is also based on the age, sex, and 
discharge status of the patient. The diagnosis and procedure 
information is reported by the hospital using codes from the 
International Classification of Diseases, Ninth Revision, Clinical 
Modification (ICD-9-CM).
    The process of forming the DRGs was begun by dividing all possible 
principal diagnoses into mutually exclusive principal diagnosis areas, 
referred to as Major Diagnostic Categories (MDCs). The MDCs were formed 
by physician panels to ensure that the DRGs would be clinically 
coherent. The diagnoses in each MDC correspond to a single organ system 
or etiology and, in general, are associated with a particular medical 
specialty. Thus, in order to maintain the requirement of clinical 
coherence, no final DRG could contain patients in different MDCs. Most 
MDCs are based on a particular organ system of the body. For example, 
MDC 6 is Diseases and Disorders of the Digestive System. This approach 
is used because clinical care is generally organized in accordance with 
the organ system affected. However, some MDCs are not constructed on 
this basis because they involve multiple organ systems (for example, 
MDC 22 (Burns)). For FY 2007, cases are assigned to one of 538 DRGs in 
25 MDCs. The table below lists the 25 MDCs.

                       Major Diagnostic Categories
                                 [MDCs]
------------------------------------------------------------------------
 
------------------------------------------------------------------------
1............................  Diseases and Disorders of the Nervous
                                System.
2............................  Diseases and Disorders of the Eye.
3............................  Diseases and Disorders of the Ear, Nose,
                                Mouth, and Throat.
4............................  Diseases and Disorders of the Respiratory
                                System.
5............................  Diseases and Disorders of the Circulatory
                                System.
6............................  Diseases and Disorders of the Digestive
                                System.
7............................  Diseases and Disorders of the
                                Hepatobiliary System and Pancreas.
8............................  Diseases and Disorders of the
                                Musculoskeletal System and Connective
                                Tissue.
9............................  Diseases and Disorders of the Skin,
                                Subcutaneous Tissue and Breast.
10...........................  Endocrine, Nutritional and Metabolic
                                Diseases and Disorders.
11...........................  Diseases and Disorders of the Kidney and
                                Urinary Tract.
12...........................  Diseases and Disorders of the Male
                                Reproductive System.
13...........................  Diseases and Disorders of the Female
                                Reproductive System.
14...........................  Pregnancy, Childbirth, and the
                                Puerperium.
15...........................  Newborns and Other Neonates with
                                Conditions Originating in the Perinatal
                                Period.
16...........................  Diseases and Disorders of the Blood and
                                Blood Forming Organs and Immunological
                                Disorders.
17...........................  Myeloproliferative Diseases and Disorders
                                and Poorly Differentiated Neoplasms.
18...........................  Infectious and Parasitic Diseases
                                (Systemic or Unspecified Sites).
19...........................  Mental Diseases and Disorders.
20...........................  Alcohol/Drug Use and Alcohol/Drug Induced
                                Organic Mental Disorders.

[[Page 47139]]

 
21...........................  Injuries, Poisonings, and Toxic Effects
                                of Drugs.
22...........................  Burns.
23...........................  Factors Influencing Health Status and
                                Other Contacts with Health Services.
24...........................  Multiple Significant Trauma.
25...........................  Human Immunodeficiency Virus Infections.
------------------------------------------------------------------------

    In general, cases are assigned to an MDC based on the patient's 
principal diagnosis before assignment to a DRG. However, under the most 
recent version of the CMS GROUPER (Version 24.0), there are 9 DRGs to 
which cases are directly assigned on the basis of ICD-9-CM procedure 
codes. These DRGs are for heart transplant or implant of heart assist 
systems, liver and/or intestinal transplants, bone marrow transplants, 
lung transplants, simultaneous pancreas/kidney transplants, pancreas 
transplants, and for tracheostomies. Cases are assigned to these DRGs 
before they are classified to an MDC. The table below lists the nine 
current pre-MDCs.

                     Pre-Major Diagnostic Categories
                               [Pre-MDCs]
------------------------------------------------------------------------
 
------------------------------------------------------------------------
DRG 103......................  Heart Transplant or Implant of Heart
                                Assist System.
DRG 480......................  Liver Transplant and/or Intestinal
                                Transplant.
DRG 481......................  Bone Marrow Transplant.
DRG 482......................  Tracheostomy for Face, Mouth, and Neck
                                Diagnoses.
DRG 495......................  Lung Transplant.
DRG 512......................  Simultaneous Pancreas/Kidney Transplant.
DRG 513......................  Pancreas Transplant.
DRG 541......................  ECMO or Tracheostomy with Mechanical
                                Ventilation 96+ Hours or Principal
                                Diagnosis Except for Face, Mouth, and
                                Neck Diagnosis with Major O.R.
DRG 542......................  Tracheostomy with Mechanical Ventilation
                                96+ Hours or Principal Diagnosis Except
                                for Face, Mouth, and Neck Diagnosis
                                without Major O.R.
------------------------------------------------------------------------

    Once the MDCs were defined, each MDC was evaluated to identify 
those additional patient characteristics that would have a consistent 
effect on the consumption of hospital resources. Because the presence 
of a surgical procedure that required the use of the operating room 
would have a significant effect on the type of hospital resources used 
by a patient, most MDCs were initially divided into surgical DRGs and 
medical DRGs. Surgical DRGs are based on a hierarchy that orders 
operating room (O.R.) procedures or groups of O.R. procedures by 
resource intensity. Medical DRGs generally are differentiated on the 
basis of diagnosis and age (0 to 17 years of age or greater than 17 
years of age). Some surgical and medical DRGs are further 
differentiated based on the presence or absence of a complication or 
comorbidity (CC).
    Generally, nonsurgical procedures and minor surgical procedures 
that are not usually performed in an operating room are not treated as 
O.R. procedures. However, there are a few non-O.R. procedures that do 
affect DRG assignment for certain principal diagnoses. An example is 
extracorporeal shock wave lithotripsy for patients with a principal 
diagnosis of urinary stones.
    Once the medical and surgical classes for an MDC were formed, each 
diagnosis class was evaluated to determine if complications, 
comorbidities, or the patient's age would consistently affect the 
consumption of hospital resources. Physician panels classified each 
diagnosis code based on whether the diagnosis, when present as a 
secondary condition, would be considered a substantial CC. A 
substantial CC was defined as a condition which, because of its 
presence with a specific principal diagnosis, would cause an increase 
in the length of stay by at least one day in at least 75 percent of the 
patients. Each medical and surgical class within an MDC was tested to 
determine if the presence of any substantial CC would consistently 
affect the consumption of hospital resources.
    A patient's diagnosis, procedure, discharge status, and demographic 
information is entered into the Medicare claims processing systems and 
subjected to a series of automated screens called the Medicare Code 
Editor (MCE). The MCE screens are designed to identify cases that 
require further review before classification into a DRG.
    After patient information is screened through the MCE and any 
further development of the claim is conducted, the cases are classified 
into the appropriate DRG by the Medicare GROUPER software program. The 
GROUPER program was developed as a means of classifying each case into 
a DRG on the basis of the diagnosis and procedure codes and, for a 
limited number of DRGs, demographic information (that is, sex, age, and 
discharge status).
    After cases are screened through the MCE and assigned to a DRG by 
the GROUPER, the PRICER software calculates a base DRG payment. The 
PRICER calculates the payment for each case covered by the IPPS based 
on the DRG relative weight and additional factors associated with each 
hospital, such as IME and DSH payment adjustments. These additional 
factors increase the payment amount to hospitals above the base DRG 
payment.
    The records for all Medicare hospital inpatient discharges are 
maintained in the Medicare Provider Analysis and Review (MedPAR) file. 
The data in this file are used to evaluate possible DRG classification 
changes and to recalibrate the DRG weights. However, in the FY 2000 
IPPS final rule (64 FR 41500), we discussed a process for considering 
non-MedPAR data in the recalibration process. In order for us to 
consider using particular non-MedPAR data, we must have sufficient time 
to evaluate and test the data. The time necessary to do so depends upon 
the nature and quality of the non-MedPAR data submitted. Generally, 
however, a significant sample of the non-MedPAR data should be 
submitted by mid-october for consideration in conjunction with the next 
year's proposed rule. This

[[Page 47140]]

date allows us time to test the data and make a preliminary assessment 
as to the feasibility of using the data. Subsequently, a complete 
database should be submitted by early December for consideration in 
conjunction with the next year's proposed rule.
    As we proposed in the FY 2008 IPPS proposed rule, for FY 2008, we 
are adopting significant changes to the current DRGs. As described in 
detail below, we proposed significant improvement in the DRG system to 
recognize severity of illness and resource usage by proposing to adopt 
Medicare Severity DRGs (MS-DRGs). The changes we proposed (and are 
adopting in this final rule with comment period) will be reflected in 
the FY 2008 GROUPER, Version 25.0, and will be effective for discharges 
occurring on or after October 1, 2007. As noted in the proposed rule, 
our DRG analysis was based on data from the December 2006 update of the 
FY 2006 MedPAR file, which contained hospital bills received through 
December 31, 2006, for discharges occurring in FY 2006. For this final 
rule with comment period, our analysis is based on more recent data 
from the March 2007 update of the FY 2006 MedPAR file, which contains 
hospital bills received through March 31, 2007, for discharges 
occurring in FY 2006.
2. Yearly Review for Making DRG Changes
    Many of the changes to the DRG classifications we make annually are 
the result of specific issues brought to our attention by interested 
parties. As we indicated in the proposed rule, we encourage individuals 
with concerns about DRG classifications to bring those concerns to our 
attention in a timely manner so they can be carefully considered for 
possible inclusion in the annual proposed rule and, if included, may be 
subjected to public review and comment. Therefore, similar to the 
timetable for interested parties to submit non MedPAR data for 
consideration in the DRG recalibration process, concerns about DRG 
classification issues should be brought to our attention no later than 
early December in order to be considered and possibly included in the 
next annual proposed rule updating the IPPS.
    The actual process of forming the DRGs was, and will likely 
continue to be, highly iterative, involving a combination of 
statistical results from test data combined with clinical judgment. We 
describe in detail below the process we used to develop the MS-DRGs 
that we proposed and are adopting in this final rule with comment 
period. In addition, in deciding whether to make further modification 
to the MS-DRGs for particular circumstances brought to our attention, 
we considered whether the resource consumption and clinical 
characteristics of the patients with a given set of conditions are 
significantly different than the remaining patients in the MS-DRG. We 
evaluated patient care costs using average charges and lengths of stay 
as proxies for costs and relied on the judgment of our medical advisors 
to decide whether patients are clinically distinct or similar to other 
patients in the MS-DRG. In evaluating resource costs, we considered 
both the absolute and percentage differences in average charges between 
the cases we selected for review and the remainder of cases in the MS-
DRG. We also considered variation in charges within these groups; that 
is, whether observed average differences were consistent across 
patients or attributable to cases that were extreme in terms of charges 
or length of stay, or both. Further, we considered the number of 
patients who will have a given set of characteristics and generally 
preferred not to create a new DRG unless it would include a substantial 
number of cases.

C. MedPAC Recommendations for Revisions to the IPPS DRG System

    In the FY 2006 and FY 2007 IPPS final rules, we discussed a number 
of recommendations made by MedPAC regarding revisions to the DRG system 
used under the IPPS (70 FR 47473 through 47482 and 71 FR 47881 through 
47939).
    In Recommendations 1-3 in the 2005 Report to Congress on Physician 
Owned Specialty Hospitals, MedPAC recommended that CMS:
     Refine the current DRGs to more fully capture differences 
in severity of illness among patients.
     Base the DRG relative weights on the estimated cost of 
providing care.
     Base the weights on the national average of the hospital-
specific relative values (HSRVs) for each DRG (using hospital-specific 
costs to derive the HSRVs).
     Adjust the DRG relative weights to account for differences 
in the prevalence of high-cost outlier cases.
     Implement the case-mix measurement and outlier policies 
over a transitional period.
    As we noted in the FY 2006 IPPS final rule, we had insufficient 
time to complete a thorough evaluation of these recommendations for 
full implementation in FY 2006. However, we did adopt severity-weighted 
cardiac DRGs in FY 2006 to address public comments on this issue and 
the specific concerns of MedPAC regarding cardiac surgery DRGs. We also 
indicated that we planned to further consider all of MedPAC's 
recommendations and thoroughly analyze options and their impacts on the 
various types of hospitals in the FY 2007 IPPS proposed rule.
    For FY 2007, we began this process. In the FY 2007 IPPS proposed 
rule, we proposed to adopt Consolidated Severity DRGs (CS DRGs) for FY 
2008 (if not earlier). However, based on public comments received on 
the FY 2007 IPPS proposed rule, we decided not to adopt the CS DRGs. 
Rather, we decided to make interim changes to the existing DRGs for FY 
2007 by creating 20 new DRGs involving 13 different clinical areas that 
would significantly improve the CMS DRG system's recognition of 
severity of illness. We also modified 32 DRGs to better capture 
differences in severity. The new and revised DRGs were selected from 40 
existing CMS DRGs that contained 1,666,476 cases and represent a number 
of body systems. In creating these 20 new DRGs, we deleted 8 and 
modified 32 existing DRGs. We indicated that these interim steps for FY 
2007 were being taken as a prelude to more comprehensive changes to 
better account for severity in the DRG system by FY 2008. In the FY 
2007 IPPS final rule, we indicated our intent to pursue further DRG 
reform through two initiatives. First, we announced that we were in the 
process of engaging a contractor to assist us with evaluating 
alternative DRG systems that were raised as potential alternatives to 
the CS DRGs in the public comments. Second, we indicated our intent to 
review over 13,000 ICD-9-CM diagnosis codes as part of making further 
refinements to the current CMS DRGs to better recognize severity of 
illness based on the work that CMS (then HCFA) did in the mid-1990's to 
adopt severity DRGs. We describe in detail below the progress we have 
made on these two initiatives, our actions for FY 2008, and our plans 
for continued analysis of reform of the DRG system for FY 2009. We note 
that revising the DRGs to better recognize severity of illness has 
implications for the outlier threshold, the application of the 
postacute care transfer policy, the measurement of real case-mix versus 
apparent case-mix, and the IME and DSH payment adjustments. We discuss 
these implications in more detail in the following sections.
    In the FY 2007 IPPS proposed rule, we discussed MedPAC's 
recommendations to move to a cost-based HSRV weighting methodology 
beginning with the FY 2007 IPPS

[[Page 47141]]

proposed rule. Although we proposed to adopt HSRV weights for FY 2007, 
we decided not to adopt the proposed methodology in the final rule 
after considering the public comments we received on the proposal. 
Instead, in the FY 2007 IPPS final rule, we adopted a cost-based 
weighting methodology without the hospital-specific portion of the 
methodology. The cost-based weights are being adopted over a 3-year 
transition period in \1/3\ increments between FY 2007 and FY 2009. In 
addition, in the FY 2007 IPPS final rule, we indicated our intent to 
further study the hospital-specific methodology as well as other issues 
brought to our attention with respect to the cost-based weights. There 
was significant concern in the public comments that we account for 
charge compression--the practice of applying a higher charge markup 
over costs to lower cost than higher cost items and services--if we are 
to develop relative weights based on cost. Further, public commenters 
expressed concern about potential inconsistencies between how costs and 
charges are reported on the Medicare cost reports and charges on the 
Medicare claims. In the FY 2007 IPPS final rule, we used costs and 
charges from the cost report to determine departmental level cost-to-
charge ratios (CCRs) to apply to charges on the Medicare claims to 
determine the cost-based weights. The commenters were concerned about 
potential distortions to the cost-based weights that would result from 
inconsistent reporting between the cost reports and the Medicare 
claims. After publication of the FY 2007 IPPS final rule, we entered 
into a contract with RTI International to study both charge compression 
and to what extent our methodology for calculating DRG relative weights 
is affected by inconsistencies between how hospitals report costs and 
charges on the cost report and how hospitals report charges on 
individual claims. Further, as part of its study of alternative DRG 
systems, the RAND Corporation is analyzing the HSRV cost-weighting 
methodology.
    As we present below, we believe that revisions to the DRG system to 
better recognize severity of illness and changes to the relative 
weights based on costs rather than charges are improving the accuracy 
of the payment rates in the IPPS. We agree with MedPAC that these 
refinements should be pursued. Although we continue to caution that any 
system that groups cases will always present some opportunities for 
providers to specialize in cases they believe to have higher margins, 
we believe that the changes we have adopted and the continuing reforms 
we proposed, and are adopting in this final rule with comment period, 
for FY 2008 will improve payment accuracy and reduce financial 
incentives to create specialty hospitals.

D. Refinement of DRGs Based on Severity of Illness

    For purposes of the following discussions, the term ``CMS DRGs'' 
means the DRG system we currently use under the IPPS; the term 
``Medicare-Severity DRGs (MS-DRGs)'' means the revisions that we 
proposed to make (and are adopting in this final rule with comment 
period) to the current CMS DRGs to better recognize severity of illness 
and resource use based on case complexity. Although we have found the 
terms ``CMS DRGs'' and ``MS-DRGs'' useful to distinguish the current 
DRG system from the DRGs that we proposed to adopt for FY 2008, we 
invited public comments on how to best refer to both the current DRGs 
and the proposed DRGs to avoid confusion and improve clarity.
    Comment: One commenter responded to our request for name 
suggestions for the new DRG system. The commenter agreed that the name 
should differentiate which DRG scheme is being referenced. The 
commenter did not provide an alternative suggestion.
    Response: We agree with the importance of being able to 
differentiate between the current and the revised DRG system. We 
believe the name ``Medicare Severity DRGs (MS-DRGs)'' is an appropriate 
name for this revised system. Therefore, we are adopting as final our 
reference to the revised DRG system as the ``Medicare Severity DRGs (MS 
DRGs).''
1. Evaluation of Alternative Severity-Adjusted DRG Systems
    In the FY 2007 IPPS final rule, we stated our intent to engage a 
contractor to assist us with an evaluation of alternative DRG systems 
that may better recognize severity than the current CMS DRGs. We noted 
it was possible that some of the alternative systems would better 
recognize severity of illness and are based on the current CMS DRGs. We 
further stated that if we were to develop a clinical severity concept 
using the current CMS DRGs as the starting point, it was possible that 
several of the issues raised by commenters (in response to the CS DRGs, 
which, in the FY 2007 IPPS proposed rule, we proposed to adopt for FY 
2008 or earlier) would no longer be a concern. We noted that if we were 
to propose adoption of severity DRGs for FY 2008, we would consider the 
issues raised by commenters on last year's proposed rule as we 
continued to make further refinements to account for complexity as well 
as severity to better reflect relative resource use. We stated that we 
believed it was likely that at least one of several alternative 
severity-adjusted DRG systems suggested for review (or potentially a 
system we would develop ourselves) would be suitable to achieve our 
goal of improving payment accuracy beginning in FY 2008.
    On September 1, 2006, we awarded a contract to the RAND Corporation 
to perform an evaluation of alternative severity-adjusted DRG 
classification systems. RAND is evaluating several alternative DRG 
systems based on how well they are suited to classifying and making 
payments for hospital inpatient services provided to Medicare patients. 
Each system is being assessed on its ability to differentiate among 
severity of illness. A final report is due on or before September 1, 
2007.
    RAND's draft interim report focused on the following criteria:
     Severity-adjusted DRG classification systems.
      How well does each classification system explain 
variation in resource use?
      How would the classification system affect a hospital's 
patient mix?
      Are the groupings manageable, administratively feasible 
and understandable?
     Payment accuracy--What are the payment implications of 
selected models?
    In response to our request, several vendors of DRG systems 
submitted their products for evaluation. The following products were 
evaluated by RAND:

3M/Health Information Systems (HIS)

     CMS DRGs modified for AP-DRG Logic (CMS+AP-DRGs)
     Consolidated Severity-Adjusted DRGs (CS DRGs)

Health Systems Consultants (HSC)

     Refined DRGs (HSC-DRGs)

HSS/Ingenix

     All-Payer Severity DRGs with Medicare modifications (MM-
APS-DRGs)

Solucient

     Solucient Refined DRGs (Sol-DRGs)

    Vendors submitted their commercial (off-the-shelf) software to RAND 
in late September 2006. The five systems were compared to the CMS DRGs 
that were in effect as of October 1, 2006 (FY 2007). RAND assigned FY 
2004 and FY 2005 Medicare discharges from acute care hospitals to the 
FY 2007 CMS DRGs and

[[Page 47142]]

to each of the alternative severity-adjusted DRG systems. RAND's 
initial analysis provided an overview of each alternative DRG 
classification system, their comparative performance in explaining 
variation in resource use, differences in DRG grouping logic, and case 
mix change.
    A Technical Expert Panel comprised of individuals representing 
academic institutions, hospital associations, and MedPAC was formed in 
October 2006. The members received the preliminary draft report of 
RAND's alternative severity-adjusted DRG systems evaluation in early 
January 2007. The panel met with RAND and CMS on January 18, 2007, to 
discuss the preliminary draft report and to provide additional 
comments. RAND incorporated items raised by the panel into its 
preliminary draft report and submitted a revised interim report to CMS 
in mid-March 2007. CMS posted RAND's interim report on the CMS Web site 
in late March 2007. Interested individuals can view RAND's interim 
report on the CMS Web site at: http://www.cms.hhs.gov/Reports/Reports/
itemdetail.asp?itemID=CMS1197292. The report may also be viewed on 
RAND's Web site at http://www.rand.org/pubs/online/health.
    At this time, RAND has completed its evaluation of the alternative 
severity adjusted DRG systems. RAND's interim report reflects its 
evaluation of five alternative DRG systems using the criteria described 
above. Since the proposed rule, RAND evaluated the Medicare Severity 
DRG (MS-DRG) system using the same criteria applied to the other DRG 
systems. We are continuing to work with RAND to evaluate alternate 
methodologies for establishing relative weights using the MS-DRGs. Once 
RAND completes its work on the alternate methodologies for establishing 
relative weights, we will be in a better position to evaluate the issue 
of charge compression and potential improvements to our methodology to 
determine cost-based relative weights. We plan to review RAND's 
analysis of these issues and determine if it will be appropriate to 
propose additional adjustments to the MS-DRGs or the relative weight 
methodology in the FY 2009 IPPS proposed rule.
    We instructed RAND to evaluate the MS-DRGs using the same criteria 
that it applied to the other DRG systems. Consistent with conclusions 
we made in the IPPS proposed rule, RAND's findings demonstrate that MS-
DRGs explain 43 percent of the cost variation; a 9.1 percent 
improvement over the CMS DRGs. RAND reports that the explanatory power 
of the MS-DRGs is higher than the CMS+AP-DRGs, but lower than the other 
systems analyzed. The MS-DRGs have the lowest adjusted R\2\ values 
among the severity-adjusted systems in seven MDCs. In three of these 
MDCs, the R\2\ values are actually lower than under the CMS DRGs: MDC 
19 (Mental Diseases and Disorders), MDC 20 (Alcohol/Drug Use and 
Alcohol/Drug Induced Organic Mental Disorders) and MDC 22 (Burns). RAND 
attributes the reduction in R\2\ values to how the CMS DRGs were 
collapsed to form the base DRGs and recommends future examination. We 
agree that RAND's findings provide us with potential issues to examine 
to further improve the MS-DRGs for FY 2009.
    Although RAND's findings related to R2 in certain MDCs 
are of concern, we believe the MS-DRGs remain an improvement over the 
current CMS DRGs and have significant advantages over the other DRG 
systems being evaluated. Specifically, they are more up-to-date because 
of our review of secondary diagnoses and classification into MCCs and 
CCs. Further, they are understandable, available in the public domain, 
and will have fewer transition issues than the other systems. As MS-
DRGs are a modification of the current CMS DRGs, they allow for updates 
and maintenance to continue using the same process as under the current 
CMS DRGs.
    Depending on the criteria being evaluated, the relative merits of 
each system being evaluated by RAND are different. For instance, the CS 
DRGs performed well in explaining resource variation but have the 
highest potential for case-mix growth. Other than the MS-DRGs, the 
CMS+AP-DRGs did the poorest among the systems evaluated in explaining 
variation in resource usage but did the best on producing reliable and 
stable results. The remaining systems generally performed somewhere in 
between on most of the measures that RAND used in its comparative 
analysis. The MS-DRGs are the result of modifications to the CMS DRGs 
to better account for severity. Unlike the other systems, the MS-DRGs 
are available in the public domain, and as a result, systems 
implementation and other costs are likely to be at a minimum. As 
suggested above, RAND found that the MS-DRGs are an improvement over 
the CMS DRGs and compare favorably to the alternative DRG systems being 
evaluated on some criteria and not as well on others.
    As RAND has completed its evaluation of the alternative DRG 
systems, including the MS-DRGs, consistent with RAND's findings, we 
believe it is appropriate at this time to adopt the MS-DRG system for 
the Medicare IPPS in FY 2008. While there will be an opportunity for 
the public to comment on RAND's findings, we expect to permanently 
adopt the MS-DRGs for the IPPS. We do not think it is likely that there 
will be persuasive public comments suggesting that one of the 
alternative DRG systems being evaluated by RAND is clearly superior. In 
our view, none of the systems appears to be clearly superior or 
inferior to the other systems based on the criteria RAND used for the 
evaluation. Given the strong support in the public comments for the MS-
DRGs and the fact they compare well overall to the alternative DRG 
systems being evaluated by RAND, we believe it is likely that the MS-
DRGs will be the system that Medicare uses permanently for the IPPS. 
However, because we are interested in public input on this issue, we 
are making RAND's final report available on the CMS Web Site at: http:/
/www.cms.hhs.gov/Reports/Reports/itemdetail.asp?itemID=CMS1197292. The 
report may also be viewed on RAND's Web site at http://www.rand.org/
pubs/online/health.
    Interested members of the public can write to the following address 
to make their views known to us about the RAND Report:
    Division of Acute Care, Center for Medicaid Management, 7500 
Security Boulevard, C4-08-06, Baltimore, MD 21244, Attn: Mady Hue.
    In the FY 2008 IPPS proposed rule, we proposed to adopt the MS-DRGs 
for FY 2008. We are providing the following update on RAND's progress 
in evaluating the MS-DRGs against the alternative DRG systems. In the 
proposed rule, we also invited public comment regarding RAND's 
preliminary analysis of each vendor-supplied alternative severity-
adjusted DRG system described below. A summary of any public comments 
that we received and our responses to those comments are presented 
under each subject area.
a. Overview of Alternative DRG Classification Systems
    Analysis of how each of the six severity adjusted DRG systems 
performs began by using the current CMS DRGs as a baseline. Two of the 
six systems (CS DRGs and MM-APS-DRGs) are derivatives of all-patient 
severity-adjusted DRG systems that have been modified by their 
developers for the Medicare population and two of the systems (HSC-DRGs 
and Sol-DRGs) are all-patient systems that incorporate severity levels 
into the CMS DRGs. The CMS+AP-DRGs are a combination of CMS DRGs and a 
modification for the Medicare population of the major CC

[[Page 47143]]

(MCC) severity groupings used in the AP-DRG system. (The AP-DRG system 
was developed by 3M/HIS specifically for the State of New York to 
capture the non-Medicare population.) The MS-DRG system modifies the 
current CMS DRGs by collapsing any paired DRGs (DRGs distinguished by 
the presence or absence of CCs and/or age) into base DRGs and then 
splits the base DRGs into MCC/CC-severity levels.
    Table A below shows how each of the six alternative severity-
adjusted systems classifies patients into base DRGs and their 
corresponding severity levels.

                               Table A.--Logic of CMS and Alternative DRG Systems
----------------------------------------------------------------------------------------------------------------
                                  CMS-DRG    CMS+AP-DRG   HSC-DRG    Sol-DRG    MM-APS-DRG    CS DRG     MS-DRG
----------------------------------------------------------------------------------------------------------------
Number of MDCs................  25          25           25         25         25           25         25
Number of base DRGs...........  379         379          391        393        328          270        335
Total number of DRGs..........  538         602          1,293      1,261      915          863        745
Number of DRGs <500 discharges  97 (18%)    97 (16%)     374 (29%)  474 (38%)  115 (13%)    113 (13%)  38 (5.2%)
Number of CC (severity)         2           3            3 (med)    3 (med)    3            4          3
 subclasses.                                              or 4       or 4
                                                          (surg)     (surg)
CC subclasses.................  With CC,    Without CC,  No CC,     Minor/no   Without CC,  Minor,     Without
                                 without     With CC      Class C    substant   With CC,     Moderate   CC, With
                                 CC for      for          CC,        ial CCs,   With Major   , Major,   CC, With
                                 selected    selected     Class B    Moderate   CC with      Severe     Major CC
                                 base DRGs   base DRGs    CC,        CCs,       some         with       with
                                             and Major    Class A    Major      collapsing   some       collapsi
                                             CC across    CC         CCs,       at base      collapsi   ng
                                             DRGs         (Surgica   Catastro   DRG level    ng at      between
                                             within MDC   l only)    phic CCs                DRG        severity
                                                                     (Surgica                level      levels
                                                                     l only)                            for same
                                                                                                        base
                                                                                                        DRG.
Multiple CCs recognized.......  No          No           No         No         Yes (in      Yes        No.
                                                                                computatio
                                                                                n of
                                                                                weight)
CC assignment logic...........  Presence/   Presence/    Presence/  Presence/  Presence/    18-step    Presence/
                                 absence     absence      absence    absence    absence      process    absence.
MDC assignment................  Principal   Principal    Principal  Principal  Principal    Principal  Principal
                                 diagnosis   diagnosis    diagnosi   diagnosi   diagnosis    diagnosi   diagnosi
                                                          s          s                       s with     s.
                                                                                             reroutin
                                                                                             g
Death used in DRG assignment..  Yes (in     Yes (in      Yes        Yes        Yes (in      No         Yes (in
                                 selected    selected     (``early   (``early   selected                selected
                                 DRGs)       DRGs)        death''    death''    DRGs)                   DRGs and
                                                          DRGs)      DRGs)                              CC
                                                                                                        assignme
                                                                                                        nts).
----------------------------------------------------------------------------------------------------------------

    RAND's evaluation of the logic for each system demonstrated the 
following:
     Four systems add severity levels to the base CMS DRGs; the 
CS DRGs add severity levels to the base APR DRGs, which are comparable 
but not identical to the base CMS DRGs. Both the CS DRGs and MM-APS-
DRGs collapse some base DRGs with low Medicare volume. The MS-DRGs 
collapse the current CMS DRG splits and either leave the base DRG 
undivided or divide it into two or three severity levels.
     The HSC-DRGs and the Sol-DRGs use uniform severity levels 
for each base DRG (three for medical and four for surgical). The 
general structure of the MS-DRG logic establishes three severity levels 
for each base DRG: With MCC, with CC, and without CC. However, CMS 
consolidated severity levels for the same base DRG if they do not meet 
specific statistical criteria. The general structure of the MM-APS-DRG 
logic includes three severity levels for each base DRG, but some 
severity levels for the same base DRG are consolidated to address 
Medicare low-volume DRGs and nonmonotonicity issues. Monotonicity is 
when the average costs for a severity group consistently rise as the 
severity level of the group increases. For example, in a monotonic 
system, if within a base DRG there are three severity groups and level 
1 severity is less than level 2 severity and level 2 severity is less 
than level 3 severity, the average costs for a level 3 case would be 
greater than the average costs for a level 2 case, which would be 
greater than the average costs for a level 1 case. When a DRG is 
nonmonotonic, the mean cost in the higher severity level is less than 
the mean cost in the lower severity level. The general structure of the 
CS DRGs includes four severity levels for each base DRG. However, 
severity level consolidations occur to address Medicare low-volume DRGs 
and nonmonotonicity. The CS DRGs consolidate both adjacent severity 
levels for the same base DRG and the same severity level across 
multiple base DRGs (especially for severity level 4).
     Under the CMS+AP-DRGs and MM-APS-DRGs, each diagnosis is 
assigned a uniform CC-severity level across all base DRGs (other than 
CCs on the exclusion list for specific principal diagnoses). The 
remaining systems assign diagnoses to CC-severity level classifications 
by groups of DRGs.
     Under the grouping logic used by all systems other than 
the CS DRGs, each discharge is assigned to the highest severity level 
of any secondary diagnosis. The MS-DRGs assign discharges with no CC 
but certain high cost devices to a higher severity level. The CS DRGs 
adjust the initial severity level assignment based on other factors, 
including the presence of additional CCs. None of the other systems 
adjusts the severity level classification for additional factors or 
CCs. However, the MM-APS-DRG system handles additional CCs through an 
enhanced relative weight.

[[Page 47144]]

     The HSC-DRGs and the Sol-DRGs have a medical ``early 
death'' DRG within each MDC. The CS DRGs do not use death in the 
grouping logic. In addition, most complications of care do not affect 
the DRG assignment. The MS-DRGs use death in making an assignment in 
selected DRGs and do not count certain conditions as MCCs and CCs (such 
as cardiac arrest) in patients who die during the inpatient stay.
b. Comparative Performance in Explaining Variation in Resource Use
    In evaluating the comparative performance of each alternative DRG 
system, RAND used MedPAR data from FY 2004 and FY 2005. RAND excluded 
data from CAHs, Indian Health Service hospitals, and hospitals that 
have all-inclusive rate charging practices. Consistent with CMS 
practice, RAND did not exclude data from Maryland hospitals, which 
operate under an IPPS waiver. Records that failed edits for data 
consistency or that had missing variables that were needed to determine 
standardized costs were also excluded.
    RAND reported that evaluation of each alternative severity-adjusted 
DRG system is a complex process due to differences in how each of the 
severity levels are applied, the number of severity-adjusted DRGs in 
each system, and the average number of discharges assigned to each DRG. 
In addition, the manner in which the DRGs for patients 0 to 17 years of 
age are assigned in the severity-adjusted systems affects the number of 
low volume DRGs using Medicare discharges. Low-volume, severity-
adjusted DRGs can affect the relative performance of a classification 
system. However, the percentage of Medicare discharges assigned to 
these DRGs is small--approximately 0.7 percent in the HSC-DRG and Sol-
DRG systems compared to 0.1 percent in the CMS DRGs.
    To facilitate compatrisons across the severity-adjusted DRG system, 
RAND assigned a severity level to each MS-DRG consistent with the 
method used for the other DRG systems. The severity level is based on 
the lowest severity level. If a base MS-DRG divided into two DRGs, one 
for both discharges with no CC and discharges with CCs and the other 
for discharges with MCCs, RAND assigned Level 0 to the DRG for 
discharges with no MCC and Level 2 to the DRG for discharges with MCCs. 
RAND also assigned Severity Level 0 to base DRGs that do not split by 
CC level. Table B summarizes the distribution of DRGs and discharges 
across severity levels by classification system, exclusive of MDC 15, 
ungroupable discharges, and statistical outliers. In comparison to the 
other severity-adjusted systems, the MS-DRGs have a much higher 
percentage of discharges assigned to the lowest severity level. This 
includes base DRGs that are not divided into severity subgroups, the no 
CC severity level, and the no MCC severity level in those base DRGs 
that are split based on the presence of a MCC only. Sixty percent of 
discharges are assigned to Severity Level 0 DRGs compared to only 20 
percent in the CS DRG system. There are several reasons for the higher 
percentage, including the reassessment of CC assignments, the 
collapsing of the no CC and CC severity levels in 43 base MS-DRGs, and 
no severity subgroups in 53 base MS-DRGs.

[[Page 47145]]

[GRAPHIC] [TIFF OMITTED] TR22AU07.001

    Severity-adjusted DRGs are designed to reduce the amount of cost 
variation within DRGs. To compare how much within-DRG variation occurs 
in each DRG system, RAND computed the mean standardized cost, standard 
deviation, and coefficient of variation (CV) for each DRG across the 
various systems. Each severity-adjusted system has a smaller proportion 
of DRGs with a CV >100 percent than the CMS DRGs. Seventeen percent of 
the 511 CMS DRGs to which Medicare patients were assigned in 2005 had a 
CV >100 percent. In contrast, 8 percent of the 736 MS-DRGs have a CV 
>100 percent. This is a slightly lower percentage than in the CMS+AP 
DRGs but slightly higher percentage than the other four severity-
adjusted DRG systems. Only 1.7 percent of discharges are assigned to 
MS-DRGs with a CV >100 percent, which is comparable to the percentage 
of discharges assigned to DRGs with a CV >100 percent in the CS DRGs 
and the CMS+AP DRGs. The MM-APS DRGs and CMS+AP DRGs have slightly 
lower and higher percentages, respectively, of discharges assigned to 
DRGs with a CV >100 percent.
    RAND utilized a general linear regression model to evaluate how 
well each severity-adjusted DRG system explains variation in costs per 
case. The initial results demonstrate that all six severity-adjusted 
DRG systems predict cost better than the CMS DRGs. The CS DRGs have 
higher adjusted R\2\ values (explanatory power) than the other 
severity-adjusted systems in nearly every MDC. In general, the adjusted 
R\2\ value for the CS DRGs is 0.4458, a 13-percent improvement over the 
adjusted R\2\ value for the CMS DRGs. The HSC-DRGs demonstrate an 11-
percent improvement, while the adjusted R\2\ values for the MM-APS-DRGs 
and Sol-DRGs are 10.0 percent and 9.7 percent higher, respectively, 
than the CMS DRG R\2\ value. The adjusted R\2\ value for the MS-DRGs is 
0.4300, a 9.1 percent improvement over the CMS DRGs. The CMS+AP-DRGs 
show the smallest improvement, nearly 8 percent.
    Another aspect of RAND's evaluation was to identify the validity of 
each alternative DRG system as a measurement for resource costs. For a 
base DRG, the severity levels should be monotonic; that is, the mean 
cost per discharge should increase simultaneously with an increase in 
the severity level. A distinction between patient groups and varying 
treatment costs should be accomplished by the severity levels. When a 
DRG is nonmonotonic, the mean cost in the higher severity level is less 
than the mean cost in the lower severity level. RAND studied the 
percentage differences and absolute differences in cost between the 
severity levels within the base DRGs for each system under evaluation. 
For the analysis, RAND assigned the severity levels for discharges 
assigned to the CMS+AP-

[[Page 47146]]

DRGs and CS DRGs that include several base DRGs to the base DRG to 
which they would have been assigned at a lower severity level.
    Table C shows the percentage difference between the mean 
standardized cost for discharges with severity levels 1 through 3 as 
applicable to the adjacent lower severity level within the base DRG 
(for example, Base DRG 1 Severity Level 1 compared with Base DRG 1 
Severity Level 0). The first column of the table shows the number of 
DRGs with severity level 0 and the proportion of discharges assigned to 
those DRGs. The ``Other DRGs'' column, which is not applicable to the 
MS-DRGs, includes DRGs for age 0 to 17 years and any DRGs for which 
there was no base DRG with severity level 0 that could be used in the 
comparison, for example, no Medicare discharges were assigned to the 
base DRG severity level 0. For severity level 1 and higher, RAND 
computed the ratio of the mean cost for that level to the mean cost for 
the adjacent lower level (for example, mean costDRG!Level!2/
mean costDRG!Level!1) and reported the results by the 
magnitude of the ratio. RAND used the number of discharges assigned to 
the higher severity level to calculate the percentage of discharges 
assigned to each ratio category.
    For the two systems (CMS+AP-DRGs and CS DRGs) that include several 
base DRGs, RAND assigned those discharges to the lower severity level 
base DRG. Following that methodology, RAND was able to calculate how 
much more costly the discharges assigned to the consolidated or lower 
severity levels were than the discharges in the base DRG assigned to 
the next higher severity level. Results demonstrate that, overall, 
nonmonotonicity is not a factor across the alternative DRG systems. 
There are only a small percentage of discharges that are assigned to 
nonmonotonic DRGs. Unlike the other systems, all severity level 1 or 
level 2 MS-DRGs were monotonic.
    Using the data from severity of illness levels 1 through 3 (except 
for the MM-APS-DRGs, which do not have a severity of illness level 3), 
RAND calculated the discharge-weighted mean cost difference between 
severity levels and the mean ratio of the cost per discharge for the 
higher severity level to the adjacent lower severity level. The 
greatest cost discrimination was present in the higher severity levels 
versus the lower severity levels across all the systems. Unlike the 
other systems, each MS-DRG was at least 20 percent more costly than the 
adjacent lower severity DRG. The remaining systems demonstrated 
equivalent percentage cost differences between the severity levels as 
shown in Table C below.

[[Page 47147]]

[GRAPHIC] [TIFF OMITTED] TR22AU07.002

    In examining whether each of the alternative DRG systems provided 
stability in the relative weights from year to year, RAND compared the 
relative weights derived from the MedPAR data in FY 2004 to the 
relative weights data from FY 2005. RAND's results demonstrate that 
generally, across all the systems, only a small percentage of DRGs had 
greater than a 5-percent change in relative weights. RAND did not 
repeat this analysis for the MS-DRGs. However, RAND had no reason to 
expect that the results would be substantially different for this 
system. For further details and discussion, we encourage readers to 
view RAND's full interim report on the CMS Web site at: http://
www.cms.hhs.gov/Reports/Reports/itemdetail.asp?itemID=CMS1197292. The 
report may also be viewed on RAND's Web site at http://www.rand.org/
pubs/online/health.
    c. Payment Accuracy and Case-Mix Impact
    Similar to how CMS established the relative weights in the FY 2007 
IPPS final rule, RAND used standardized costs as determined by the 
national CCR and the FY 2005 MedPAR data to construct relative weights 
for each of the DRG systems being evaluated. RAND analyzed the effect 
of variations in the explanatory power on the distribution of Medicare 
payments for each system under evaluation. The preliminary findings 
indicate payment accuracy is improved by each severity-adjusted system 
by redistributing payment from lower-cost discharges to higher-cost 
discharges. However, the total payment redistribution across systems 
differs and reflects the payment impact of improved explanatory power. 
Although these findings are estimates, the percent of total payment 
redistributed was the least under the CMS+AP-DRGs (7.1 percent) and the 
most under the CS DRGs (11.9 percent). The total payment redistribution 
under the MS-DRGs is 8.4 percent of the total payment. The 
redistribution is less than the CS DRG system, the same as the HSC-DRG 
system, and more than in the other systems, even though some of these 
systems have higher explanatory power.
    Table D shows changes in case-mix index (CMI) by hospital category 
across alternative severity-adjusted DRG

[[Page 47148]]

systems. Results demonstrate that, under the severity-adjusted systems, 
urban hospitals have a higher average CMI than under the CMS DRGs, and 
rural hospitals have a lower CMI. The analysis suggests that any system 
adopted to better recognize severity of illness with a budget 
neutrality constraint will result in payment redistribution that can be 
expected to benefit urban hospitals at the expense of rural hospitals. 
This impact occurs because patients treated in urban hospitals are 
generally more severely ill than patients in rural hospitals and the 
CMS DRGs are not currently recognizing the full extent of these 
differences. For purposes of the study, RAND assumed no behavioral 
changes in coding practice or the types of patients treated.
    On average, the CMI for urban hospitals increases under the 
severity-adjusted systems, and that for rural hospitals decreases. The 
change is greatest in the CS DRGs, where the CMI for rural hospitals is 
2.4 percent lower than that under the CMS DRGs. The CMI for large urban 
hospitals (those located in metropolitan areas with more than 1 million 
population) and other urban hospitals is 0.6 and 0.1 percent higher, 
respectively, under the CS DRGs. Under the MS-DRGs, there is a slightly 
larger increase in the average CMI for large urban hospitals, a 
reduction in the CMI for other urban hospitals, and a smaller reduction 
for rural hospitals.
    The CMI for larger hospitals increases, while that for smaller 
hospitals decreases across the systems. This result is consistent with 
a severity-adjusted DRG system shifting payment from less expensive 
cases to more expensive cases. Larger hospitals tend to have relatively 
more complex cases and severely ill patients than smaller hospitals do. 
Teaching hospitals also tend to treat more complex cases, but the 
impact on these facilities differs by severity-adjusted DRG system. 
Across all the severity-adjusted systems, nonteaching hospitals have a 
lower CMI, ranging from a 0.2 percent reduction under the HSC-DRGs and 
Sol-DRGs to a 0.5 percent reduction under the CS DRGs. In three of the 
systems (CMS+AP-DRG, HSC-DRG, and MM-APS-DRG), hospitals with large 
teaching programs (100 or more residents) would experience a larger 
increase than hospitals with smaller teaching programs. Under the Sol-
DRG system, hospitals with large teaching programs would have a 0.1 
percent increase, compared with a 0.2 percent increase for hospitals 
with smaller teaching programs. Under the CS DRG system, the CMI for 
hospitals with large teaching programs would be about the same, but 
that for hospitals with smaller teaching programs would increase 0.7 
percent relative to the CMS DRGs.

                                       Table D.--CMI Change in Alternative DRG Systems Relative to the CMS DRG CMI
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                       Percentage change from CMS-DRG CMI
                                                                                 CMS-  -----------------------------------------------------------------
                                                       Number of    Number of     DRG    CMS+AP-                          MM-APS-
                                                       hospitals    discharges    CMI      DRG      HSC-DRG    Sol-DRG      DRG       CSDRG      MS-DRG
                                                                                        (Percent)  (Percent)  (Percent)  (Percent)  (Percent)  (Percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
ALL.................................................        3,890   12,165,763    1.00       0.0        0.0        0.0        0.0        0.0        0.0
By Geographic Location:
    Large urban areas (pop>1 million)...............        1,485    5,715,356    1.02       0.5        0.4        0.3        0.6        0.6        0.7
    Other urban areas (pop<1 million )..............        1,186    4,578,447    1.04      -0.2       -0.2       -0.1       -0.2        0.1       -0.3
    Rural hospitals.................................        1,219    1,871,960    0.84      -1.3       -0.9       -1.0       -1.4       -2.4       -1.7
Bed Size (Urban):
    0--99 beds......................................          685      611,139    0.91      -1.0       -1.1       -1.1       -1.3       -1.6       -1.2
    100-199 beds....................................          875    2,346,922    0.93       0.0        0.1        0.0        0.1        0.0        0.0
    200-299 beds....................................          511    2,446,737    1.00       0.1        0.2        0.3        0.3        0.6        0.3
    300-499 beds....................................          433    2,965,216    1.08       0.3        0.3        0.3        0.4        0.8        0.4
    500 or more beds................................          167    1,923,789    1.17       0.6        0.3        0.2        0.4        0.4        0.5
Bed Size (Rural):
    0-49 beds.......................................          543      330,242    0.73      -2.5       -2.1       -2.2       -2.7       -5.0       -3.0
    50-99 beds......................................          398      595,599    0.80      -1.4       -1.0       -1.1       -1.6       -2.7       -2.0
    100-149 beds....................................          160      415,367    0.85      -1.1       -0.7       -0.8       -1.2       -2.0       -1.5
    150-199 beds....................................           69      260,910    0.91      -0.8       -0.6       -0.7       -0.8       -1.5       -1.0
    200 or more beds................................           49      269,842    0.99      -0.6       -0.1       -0.1       -0.6       -0.5       -0.9
Urban by Region:
    New England.....................................          129      541,471    0.99       0.1       -0.2       -0.5       -0.5       -0.6       -0.5
    Middle Atlantic.................................          370    1,621,488    1.00       0.0       -0.4       -0.5       -0.3       -1.5       -0.1
    South Atlantic..................................          432    2,208,336    1.04       0.5        0.7        0.7        0.7        1.4        0.7
    East North Central..............................          410    1,856,164    1.03       0.6        0.7        0.6        0.8        1.5        0.6
    East South Central..............................          168      696,943    1.06      -0.2       -0.2       -0.2       -0.2       -0.3       -0.4
    West North Central..............................          164      657,322    1.08      -0.3       -0.3        0.0       -0.3        0.3       -0.3
    West South Central..............................          369    1,115,411    1.05       0.1        0.0        0.1        0.3        0.5        0.3
    Mountain........................................          153      465,093    1.08       0.4        0.2        0.5        0.4        1.0        0.7
    Pacific.........................................          423    1,016,135    1.03       0.0       -0.2       -0.1       -0.1        0.2        0.3
    Puerto Rico.....................................           53      115,440    0.87      -1.1       -1.4       -0.1       -1.2       -5.1       -1.3
Rural by Region:
    New England.....................................           34       49,842    0.90      -0.6       -0.6       -0.5       -1.1       -0.6       -1.1
    Middle Atlantic.................................           68      139,639    0.85      -1.1       -0.7       -0.7       -1.3       -1.5       -1.4
    South Atlantic..................................          191      409,116    0.82      -0.8       -0.4       -0.5       -0.9       -1.8       -1.2
    East North Central..............................          163      290,069    0.87      -1.1       -0.7       -0.9       -1.3       -1.8       -1.6
    East South Central..............................          201      328,326    0.82      -1.5       -0.9       -1.1       -1.4       -3.2       -1.9
    West North Central..............................          184      240,449    0.87      -1.6       -1.2       -1.1       -1.8       -2.5       -2.0
    West South Central..............................          227      266,419    0.80      -2.1       -1.8       -1.9       -2.0       -4.3       -2.5
    Mountain........................................           91       80,219    0.85      -1.2       -1.0       -0.4       -1.3       -1.2       -1.1
    Pacific.........................................           60       67,881    0.86      -0.9       -1.0       -1.1       -1.4       -1.6       -1.6

[[Page 47149]]

 
By Payment Classification:
Teaching Status:
    Non-teaching....................................        2,791    6,115,193    0.92      -0.4       -0.2       -0.2       -0.4       -0.5       -0.4
    Fewer than 100 Residents........................          853    4,061,451    1.04       0.1        0.2        0.2        0.2        0.7        0.2
    100 or more Residents...........................          246    1,989,119    1.16       0.8        0.3        0.1        0.5        0.0        0.6
Urban DSH:
    Non-DSH.........................................          778    2,574,640    1.02      -0.1        0.0        0.1       -0.2        0.5        0.0
    100 or more beds................................        1,541    7,378,095    1.05       0.3        0.2        0.2        0.4        0.4        0.4
    Less than 100 beds..............................          352      341,068    0.82      -0.9       -0.8       -1.0       -1.1       -2.0       -1.1
Rural DSH:
    Non-DSH.........................................          238      300,747    0.87      -1.4       -1.0       -0.9       -1.7       -1.9       -1.7
    SCH.............................................          402      599,823    0.83      -1.3       -1.0       -1.0       -1.4       -2.4       -1.8
    RRC.............................................          132      466,395    0.92      -0.8       -0.3       -0.5       -0.7       -1.4       -1.1
Other Rural
    100 or more beds................................           60      135,146    0.80      -0.9       -0.8       -1.2       -1.3       -2.0       -1.5
    Less than 100 beds..............................          387      369,849    0.74      -2.1       -1.6       -1.7       -2.2       -4.3       -2.6
Urban teaching and DSH:
    Both teaching and DSH...........................          829    4,705,476    1.09       0.5        0.3        0.3        0.5        0.5        0.5
    Teaching and no DSH.............................          204    1,108,092    1.06       0.0        0.1        0.0       -0.1        0.4        0.1
    No teaching and DSH.............................        1,064    3,013,687    0.95      -0.1        0.1        0.0        0.1        0.1        0.1
    No teaching and no DSH..........................          574    1,466,548    1.00      -0.2       -0.1        0.1       -0.3        0.5        0.0
Rural Hospital Types:
    RRC.............................................          145      519,808    0.92      -0.8       -0.4       -0.5       -0.7       -1.4       -1.1
    SCH.............................................          423      457,119    0.79      -1.6       -1.2       -1.2       -1.7       -3.0       -2.1
    MDH.............................................          180      164,453    0.75      -2.1       -1.7       -1.7       -2.3       -4.1       -2.7
    SCH and RRC.....................................           76      266,027    0.92      -0.9       -0.7       -0.7       -1.1       -1.3       -1.3
    MDH and RRC.....................................            8       19,746    0.85      -1.4       -0.6       -0.8       -1.6       -1.9       -1.7
    Other Rural.....................................          387      444,807    0.77      -1.6       -1.2       -1.4       -1.8       -3.3       -2.1
--------------------------------------------------------------------------------------------------------------------------------------------------------

    RAND also noted that changes in documentation and coding that 
increase case mix will occur with each severity adjusted DRG system 
they evaluated. Increases in CMI after adopting the system could be the 
result of improved coding rather than increases in actual patient 
severity. RAND observed that the experience of Maryland hospitals using 
the APR DRG system provides some indication of the likely impact on 
case-mix of introducing a severity-adjusted system. RAND also noted 
that coding behaviors are expected to vary under alternative systems 
according to RAND. Therefore, the risk of case-mix growth due to 
improved documentation and coding exists with any system. However, RAND 
advises that the amount of risk can be assessed based on the logic of 
the DRG system and result in anticipated changes in coding behavior. 
For the analysis we presented in the proposed rule, RAND found that the 
CMS+AP-DRG system may have the lowest risk of case-mix increase, while 
the CS DRGs present the greatest risk. The remaining systems under 
evaluation demonstrated equivalent risk, based on the DRG logic and 
other features specific to each system.
    RAND did not repeat the analysis of the potential for documentation 
and coding improvements to increase case-mix using the MS-DRGs because 
it only worked with FY 2005 data to evaluate them. Further, CMS did a 
detailed analysis of the likely impact of documentation and coding 
improvements on case-mix using the MS-DRGs. Section II.D.6. of the 
preamble of this rule describes in detail the CMI impact under the MS-
DRGs using the State of Maryland's experience and data.
d. Other Issues for Consideration
    RAND was asked to examine whether each of the alternative severity-
adjusted DRG systems under evaluation appears to contain logic that is 
manageable, administratively feasible, and understandable. RAND's 
results describe the extent to which those features are present in the 
grouping logic of each system. A brief summary of these findings and 
other discussion points follow. For more complete details of the 
grouping logic for each system evaluated, we encourage readers to 
review RAND's interim report at the following CMS Web site: http://
www.cms.hhs.gov/Reports/Reports/itemdetail.asp?itemID=CMS1197292. The 
report may also be viewed on RAND's Web site at http://www.rand.org/
pubs/online/health.
    To increase and promote understanding of a DRG classification 
system, the grouping logic should include a uniform structure. With the 
exception of the CS DRGs, RAND found that there is uniformity in the 
hierarchical structure for assigning discharges to MDCs, DRGs, and 
severity levels for each system evaluated. The CS DRGs utilize a 
complex rerouting logic and severity of illness level assignment. 
However, the result is a higher explanatory power that accounts for 
limitations in the current system. Therefore, due to the complexities 
associated with that system, it may not easily be understood. However, 
if the results yield clinically coherent groups of patients with 
comparable costs, RAND concluded that the system may be worth exploring 
further. The HSC-DRG and Sol-DRG grouping logic uses a standard number 
of severity levels for each base DRG, although the result is an 
increase in the number of low-volume DRGs. The standard severity level 
structure provides increased understanding, although as mentioned

[[Page 47150]]

previously, low-volume, severity-adjusted DRGs can affect the relative 
performance of a classification system. The MM-APS-DRGs and CS DRGs use 
standard DRG severity levels. However, the method of collapsing DRGs 
varies due to the modifications made for Medicare use. The underlying 
logic of the MS-DRG system uses standard severity levels, but the 
criteria for establishing severity subgroups result in severity levels 
that vary by base DRG. Because the severity levels are often collapsed 
and the resulting subgroups depend on the particular DRG, it is a more 
complicated system to understand than those systems that uniformly 
define subgroups according to RAND. By only collapsing DRGs to 
determine relative weights, RAND notes it is possible to preserve the 
underlying DRG structure, which perhaps would lead to a more 
understandable system.
    As stated earlier, there are also several transition issues that 
require attention when evaluating alternative severity-adjusted DRG 
systems. In determining how manageable, administratively feasible, and 
understandable the systems being evaluated are, consideration should be 
given to how they crosswalk or map to the current CMS DRGs. Because 
four of the systems under evaluation are based on the underlying CMS 
DRG grouping logic to establish their base DRGs (CMS+AP-DRGs, HSC-DRGs, 
Sol-DRGs, and MM-APS-DRGs), the CMS DRGs are able to crosswalk smoothly 
to these severity-adjusted DRGs. Conversely, crosswalking in reverse or 
backward mapping from the CMS+AP DRGs to the CMS DRGs is problematic 
due to the discharges in one severity level of the CMS+AP-DRG system 
compared to several base CMS DRGs. As expected, the CS DRGs do not 
crosswalk easily to the CMS DRGs due to the complex grouping logic. The 
MM-APS-DRGs pose unique complications as well due to the large number 
(over 1,000) of DRGs. Although the MS-DRGs are based on the CMS DRGs, 
there are challenges in crosswalking discharges between the two systems 
because of the revisions in the CC list and the sequential renumbering 
of the DRGs.
    System updates are another important factor that may have serious 
implications. All of the DRG systems RAND evaluated were reported to 
make annual updates to reflect ICD-9-CM coding changes. However, the CC 
severity level assignments for each system have not routinely been 
reviewed and revised. The CC exclusion list and severity level 
assignments should be reviewed where appropriate to reflect current 
patterns of care, according to RAND. RAND found that the MS-DRGs are 
the most updated of the severity-adjusted DRG systems. CMS reviewed the 
CC list and severity-level assignments in developing the MS-DRGs. 
Further, the MS-DRGs incorporate recent refinements in the CMS DRGs to 
account for complexity as well as severity. According to RAND, the 
other CMS-based systems use CC lists and severity level assignments 
that are based on outdated analyses of the effect of a condition on 
treatment costs from either the 1988 Yale study or the 1994 CMS 
refinement study. The APR DRGs have not been reviewed for several years 
and are not as current as the severity-based systems according to RAND.
    Accessibility to each of the severity-adjusted DRG system's logic 
and software is also a concern. Each system RAND analyzed is currently 
maintained as a proprietary product. In general, all of the vendors 
indicated a willingness to place their product in the public domain, 
under certain terms. As such, CMS believes it is likely there would 
need to be discussion as to whether there would be any limitations 
(such as the source code as well as the DRG logic) on the availability 
of the DRG systems to hospitals or competing vendors. None of these 
concerns would be an issue with the MS-DRGs. RAND further noted that 
because the MS-DRGs are in the public domain, there should be less 
disruption to existing arrangements for acquiring and installing the 
GROUPER software and integrating that software with other hospital 
systems. The intent of each vendor to provide public access to its 
GROUPER logic and software is described in further detail in RAND's 
interim report.
    Comment: One commenter supported the efforts of CMS to evaluate 
several alternatives to the existing DRG system. The commenter 
expressed appreciation that CMS had incorporated comments submitted by 
the provider community in setting the criteria for evaluating the 
various DRG products. This commenter also stated it looked forward to 
reviewing the final recommendations when the RAND report is released.
    Response: We appreciate the commenter's support of our efforts. As 
we indicated in the proposed rule, we have focused our efforts in 
response to public comments regarding the refinement of the current DRG 
system. With the assistance of RAND in the evaluation of alternative 
severity-adjusted DRG systems, our objective has been to select a 
classification system that will better recognize severity of illness, 
utilization of resources, and complexity of services. The ultimate goal 
of these combined objectives is to greatly improve the payment accuracy 
of the IPPS.
    Comment: Several commenters supported the implementation of a 
severity-based system. However, they urged CMS to wait until RAND 
completes the final report before moving forward with a specific 
system. One commenter articulated its appreciation of the thorough 
analysis conducted on the other alternative severity-adjusted systems. 
However, the commenter remains concerned that CMS would consider moving 
forward with the MS-DRGs in the absence of completing an analysis of 
them using the same criteria applied to the other systems under review. 
Other commenters expressed concern that CMS may implement the proposed 
MS-DRGs for FY 2008 and then switch to a completely different severity-
based system in FY 2009, or phase in a different system in subsequent 
years. One commenter stated that, given the potential for heightened 
administrative burdens as well as financial consequences, it would seem 
prudent that CMS invest the needed time and energy to confirm whether 
its belief in the proposed MS-DRG system can be validated. This same 
commenter added that by stating it is not precluded from adopting 
another system for FY 2009, CMS is tacitly acknowledging that the MS-
DRG system may not be the best system. Another commenter stated that 
CMS' request for RAND to evaluate the proposed MS-DRGs indicates it is 
not satisfied that the MS DRGs are ready for long-term use in the IPPS.
    Response: In the proposed rule, we indicated that we asked RAND to 
evaluate the proposed MS-DRG system using the same criteria it is 
applying to the other alternative severity-adjusted DRG systems. Our 
intent in not committing permanently to the MS-DRGs was not to suggest 
that we were not satisfied with the long-term application of the MS-DRG 
system or that we had concerns about it being the best system. Rather, 
we were interested in an objective evaluation of the MS-DRGs by RAND 
using the same criteria applied to the other alternative severity-
adjusted systems. That is, before making a permanent commitment to the 
MS-DRGs, we were interested in knowing how well it demonstrates the 
ability to meet the objectives described previously--better recognition 
of severity of illness, utilization of resources, complexity of 
services and improved payment accuracy over the current CMS DRG system. 
While we proposed the MS-DRGs for

[[Page 47151]]

implementation in FY 2008, we were further interested in the public's 
response to the MS-DRGs and RAND's evaluation of them before making a 
final decision on a permanent DRG system to use for Medicare payment. 
Specifically, public comments on the FY 2007 IPPS proposed rule asked 
that CMS show evidence that the alternative system proposed results in 
an improved payment system compared to the current system, test the 
degree to which the variation in costs within cases at the DRG level is 
reduced, maintain the improvements made over the years to account for 
complexity of service and new technologies, and avoid a proprietary 
system that lacks transparency. We considered all these factors in the 
development of the MS-DRGs and had we not provided the proposed MS-DRG 
system to RAND for evaluation, we would not be able to make a fair 
comparison and final determination for the best course of action for 
Medicare long term. At the time of the proposed rule, we were unsure 
whether RAND would be able to complete its evaluation of the MS-DRGs by 
the time of this final rule with comment period. However, as summarized 
above, RAND has completed its analysis of the MS-DRG system and found 
that it compares favorably to the other DRG systems being evaluated on 
a number of criteria.
    As RAND has completed its evaluation of alternative DRG systems, 
including the MS-DRGs, consistent with RAND's findings, we believe it 
is appropriate at this time to adopt the MS-DRG system for Medicare in 
FY 2008. We believe the MS-DRGs represent an improvement over the 
current CMS DRGs. While there will be an opportunity for the public to 
comment on RAND's findings, we expect to permanently adopt the MS-DRGs 
for the IPPS. We do not believe it is likely that there will be 
persuasive public comments suggesting that one of the alternative DRG 
systems being evaluated by RAND is clearly superior. We plan on using 
RAND's report to continue to examine ways to improve and refine the 
Medicare inpatient payment system and expect that any future 
refinements will be based on the MS-DRGs. Therefore, as final policy 
for FY 2008, we are adopting the MS-DRGs as the new classification 
system for the IPPS.
    Comment: One commenter agreed that CMS should adopt a transparent 
and publicly available DRG system and applauded the proposed MS-DRGs. 
The commenter stated that the transparency of the current system has 
been a critical aspect of its success over the years, and this will be 
even more important to ensure the successful adoption of the new 
severity-adjusted system chosen.
    Response: We appreciate the commenter's support for the proposal to 
use MS DRGs. We agree that transparency is an important factor in the 
selection of a new severity-adjusted DRG system. We refer readers to 
sections II.D.2. and 3. of the preamble of this final rule with comment 
period for a complete discussion of the MS-DRGs.
    Comment: One commenter stated CMS should consider adopting a more 
robust severity-based DRG system than the proposed MS-DRGs. The 
commenter admitted that it regards the APR DRG system highly and 
indicated it should not be abandoned because it is more complicated to 
implement and because of the controversy surrounding its suggested 
implementation. The commenter also noted that, as RAND stated in its 
preliminary report, it is a more robust, accurate, and precise system, 
and it was reluctant to see CMS abandon this superior system entirely 
before receiving RAND's final report and recommendations. Further, the 
commenter stated that, while the MS-DRGs would unquestionably represent 
a major improvement over the current CMS DRGs, it believed CMS has the 
ability and should proceed with introducing a better and more robust 
system and continue exploring further options while waiting for RAND's 
final report.
    Response: In the FY 2007 proposed rule (71 FR 24015), we proposed 
to adopt the CS DRGs which were based on a consolidated version of the 
APR DRGs. We received a significant number of public comments strongly 
urging us not to move forward with the CS DRGs. These comments are 
described in detail in the FY 2007 final rule (71 FR 47906 through 
47912). Among other concerns, the public comments suggested that the 
system was overly complex and difficult to understand. Further, there 
was concern that the logic and source code would not be available in 
the public domain like the current CMS DRGs and that many of the 
improvements and refinements made to the CMS DRGs over the years would 
be abandoned. For these and other reasons, we decided not to adopt the 
CS DRGs for FY 2007. Our proposed adoption of MS-DRGs did not raise 
these same concerns in the public comments. Given that the MS-DRGs are 
a substantial improvement over the current CMS DRGs in their ability to 
recognize severity of illness and meet other objectives that we set for 
IPPS payment reform, we believe it is a better system to select for use 
by Medicare than the CS DRGs or APR DRGs.
    Comment: One commenter, a vendor, submitted its DRG product to RAND 
for evaluation. The commenter expressed its concern that CMS developed 
a completely new and untested severity system while there are several 
alternate systems currently under evaluation by RAND. The commenter 
noted that its product has been in continuous use for 18 years and is 
based on the original Yale University methodology and developed under 
contract with the Health Care Financing Administration, now CMS, 
between 1986 and 1989.
    The commenter urged CMS to continue with the current CMS DRGs for 
one more year. According to the commenter, introducing a new temporary 
severity system, the MS-DRGs, with the expectation that hospitals move 
to another system for FY 2009, will create unnecessary havoc for the 
hospital industry. The commenter noted that it is pleased with the work 
CMS has done in reviewing 13,549 secondary diagnosis codes to refine 
the CC list and believed the use of this new list will result in a 
greatly improved DRG GROUPER. However, the commenter stated it is not 
fair to compare the FY 2008 MS-DRGs (with the new CC list and new 
codes) with FY 2006 and FY 2007 alternative severity systems using the 
unrevised CC list. The commenter recommended that CMS create Version 
25.0 CMS DRGs with the new CC list and new codes to allow the vendors 
of the alternative systems until November or December to incorporate 
the information into updated versions of their systems. The commenter 
also suggested that the RAND report deadline could be extended beyond 
September 1, 2007, to allow the comparison of alternative DRG systems 
to occur with the revised CC list.
    In addition, the commenter believed the MS-DRGs have the following 
shortcomings:
     Although CMS' chief concern is Medicare patients, it is 
shortsighted to ignore non-Medicare patients in the proposed MS-DRG 
system, as the health care industry often focuses its attention on the 
Medicare relative value system for all of its hospital patients.
     The DRG system has always been comprehensive, including 
all possible ICD-9-CM diagnoses and procedures. Consolidating low-
volume procedures and procedures now performed primarily in an 
outpatient setting creates confusion in the MS-DRG classification 
system. Procedures such as tonsillectomies, carpal tunnel release, and 
cataract extractions are different MDCs and are treated by different 
medical specialists. They are similar

[[Page 47152]]

only with respect to historical cost data and only for the time being.
     Eliminating newborns, maternity, and congenital anomalies 
from the usual MS-DRG severity level approach does not provide a 
comprehensive severity system.
    Lastly, the commenter indicated that whatever software system is 
chosen for the public, it should be provided in a modern and accessible 
software language and format. The commenter recommended a ``C'' 
version, on CDs or DVDs, and suggested that continuing to place CMS 
software into the public domain written in IBM assembler and 
distributed through the National Technical Information Service (NTIS) 
on 9-track tapes or 3480 cartridges seems difficult to imagine, as this 
technology is over 40 years old.
    Response: We disagree that we are implementing a ``completely new 
and untested severity system.'' While the MS-DRGs constitute a major 
reform to better recognize severity of illness, they are a refinement 
of the current CMS DRGs that have been in use for Medicare payment for 
over 20 years. Further, our proposed rule analysis--subsequently 
validated by RAND--suggested that they are major improvement over the 
current CMS DRGs. Most of the other systems represent less updated 
refinements of the CMS DRGs. While these systems have been in use for 
other purposes, we note that (other than the APR DRGs that are used for 
payment in Maryland and the AP DRGs that were used in New York's all 
payer ratesetting system in the 1990s), the other systems being 
evaluated have never been used for Medicare payment.
    We stated in the FY 2008 IPPS proposed rule that we developed the 
MS-DRG system in response to public comments received as a result of 
the FY 2007 proposed rule (in response to the proposed CS DRGs). We 
also stated we submitted the MS-DRG system to RAND for evaluation and 
the final report was expected on or before September 1, 2007. At this 
time RAND has completed the evaluation of alternative severity-adjusted 
DRG systems, including the MS-DRGs. In the near future, we will post 
RAND's analysis of the MS-DRG system to the following CMS Web site: 
http://www.cms.hhs.gov/Reports/Reports/
itemdetail.asp?itemID=CMS1197292. The report may also be viewed on 
RAND's Web site at http://www.rand.org/pubs/online/health. This report 
is referred to as an Addendum to RAND's interim report that was 
released in March 2007. A completed final report incorporating the 
evaluation of all six severity adjusted DRG systems into one document 
will be posted to the CMS Web site after September 1, 2007.
    As noted above, we share the commenter's concern about adopting one 
DRG system this year and potentially another one next year. We believe 
the MS-DRGs should be the system that is adopted for long-term use by 
Medicare for IPPS payment. However, we are interested in obtaining 
further public input on RAND's findings. We do not believe it is likely 
that there will be persuasive public comments suggesting that one of 
the alternative DRG systems evaluated by RAND is clearly superior to 
the MS-DRGs.
    We appreciate the commenter's support of our efforts in the review 
of 13,549 secondary diagnosis codes. We agree that a new, updated CC 
list greatly improves the ability of a DRG GROUPER to reflect severity 
of illness and distribute payments more accurately. The intent of 
RAND's evaluation was to compare each of the alternative DRG systems in 
its current form. The fact that delays would be necessary to allow the 
other systems to adopt the improvements that CMS made to the CC list 
for the MS-DRGs suggests that the other systems would not be ready for 
implementation as soon. As noted elsewhere, we are interested in 
adopting comprehensive improvements to the DRG system for severity of 
illness at the earliest possible date. We do not believe it is in the 
public interest to delay adopting these improvements to wait for the 
alternative DRG systems to incorporate refinements to the CC list. 
Further, we note that CMS first discussed performing a comprehensive 
review of the CC list over 2 years ago. Each vendor could have 
undertaken a similar review of the CC list to improve its DRG product 
at any time.
    We disagree with the commenter's assertion that our decision should 
turn on how the MS-DRGs can be used for non-Medicare payers. As we have 
stated many times in the past, we encourage private insurers and other 
non-Medicare payers to make refinements to Medicare's DRG system to 
better suit the needs of the patients they serve. With respect to the 
maternity and newborn DRGs, we cannot adopt the same approach to refine 
these DRGs that we did with the rest of the MS-DRGs because of the 
extremely low volume of Medicare patients there are in these DRGs. 
Medicare simply does not have enough cases in these DRGs to apply the 
same approach we did in the other MDCs. Whether we made revisions to 
these DRGs or not, private insurers and other private payers would have 
to develop their own DRGs or relative weights to address the needs of 
these patients that are not well-represented in the Medicare 
population. With respect to other pediatric patients, in our view, a 
significant advantage of the MS-DRGs over the prior CMS DRGs is the 
fewer number of low volume DRGs. By eliminating pediatric (ages 0 to 17 
years) splits, the MS-DRGs will have fewer low-volume DRGs and less 
instability in the DRG relative weights for the cases paid using these 
DRGs.
    With regards to the software, undere CMS' agreement with its 
contractor, the software provided by NTIS is the same public domain 
software that is provided to CMS for use by our system maintainers, 
regional offices, and fiscal intermediaries.MAC. We will consider this 
comment as we make updates to our information systems and related 
contracts.
    As stated elsewhere in this final rule with comment period, we are 
adopting the MS-DRGs for implementation on October 1, 2007 (FY 2008). A 
detailed discussion summarizing the public comments received in 
response to the MS-DRG proposal is described in section II.D.2. of the 
preamble of this final rule with comment period.
2. Development of the Medicare Severity DRGs (MS-DRGs)
    As discussed previously, we are committed to continuing our efforts 
of making refinements to the current CMS DRGs to better recognize 
severity of illness. In the FY 2007 IPPS final rule, we stated that we 
had begun a comprehensive review of over 13,000 diagnosis codes to 
determine which codes should be classified as CCs when present as a 
secondary diagnosis. We stated that we would also build on the severity 
DRG work we performed in the mid-1990's. We received a number of public 
comments on last year's proposed rule that supported the refinement of 
the current CMS DRGs so that they better recognize severity of illness 
for FY 2007.
    We also committed to performing a more thorough reform of the 
entire DRG system to better recognize severity of illness for FY 2008. 
As a result of this broad based analysis, we developed the MS-DRGs that 
we proposed and are adopting in this final rule with comment period. 
The MS-DRGs represent a comprehensive approach to applying a severity 
of illness stratification for Medicare patients throughout the DRGs. As 
discussed in proposed rule and in section II.D.5. of the preamble of 
this final rule with comment period, the MS-DRGs maintain the 
significant advancements in identifying medical technology made

[[Page 47153]]

to the DRGs in past years. At the same time, they greatly improve our 
ability to identify groups of patients with varying levels of severity 
using secondary diagnoses. Further, they improve our ability to assign 
patients to different DRG severity levels based on resource use that is 
independent of the patient's secondary diagnosis--referred to in this 
discussion as ``complexity.'' We proposed to adopt the MS-DRGs for FY 
2008 and also submitted the system to RAND to be considered as part of 
its evaluation of alternative DRG systems. In the proposed rule, we 
encouraged comments on our proposed methodology to establish a severity 
DRG system and the resulting DRGs.
a. Comprehensive Review of the CC List
    Our efforts to better recognize severity of illness began with a 
comprehensive review of the CC list. Currently, 115 DRGs are split 
based on the presence or absence of a CC. For these DRGs, the presence 
of a CC assigns the discharge to a higher weighted DRG. The list of 
diagnoses designated as a CC was initially created at Yale University 
in 1980-1981 as part of the project to develop an ICD-9-CM version of 
the DRGs. The researchers at Yale University developed the ICD-9-CM 
DRGs using national hospital data with diagnoses and procedures coded 
in ICD-9-CM from the second half of 1979. Because hospitals only began 
reporting ICD-9-CM codes in 1979, discharge abstracts at that time were 
much less likely to fully report all secondary diagnoses. As a result, 
the Yale University researchers developed a liberal definition of a CC 
as any secondary diagnosis that ``would cause an increase in length of 
stay by at least 1 day in at least 75 percent of the patients.'' 
Because of the likely underreporting of secondary diagnoses in the 1979 
data, the Yale University researchers also used age as a surrogate for 
identifying patients with a CC. The original version of the ICD-9-CM 
DRGs assigned patients to a CC DRG if they had a secondary diagnosis on 
the CC list or if the patient was 70 years or older.
    With the implementation of the IPPS in FY 1984, the coding of 
secondary diagnoses by hospitals dramatically improved. During the 
first 4 years of the IPPS, the CC definition included the age 70 
criterion. With the improved coding and reporting of diagnoses 
associated with the implementation of the IPPS, the use of age as a 
surrogate for CCs was no longer necessary. Thus, beginning in FY 1988, 
the age 70 criterion was removed from the CC definition and a CC DRG 
was defined exclusively by the presence of a secondary diagnosis on the 
CC list.
    Except for new diagnosis codes that were added to ICD-9-CM after FY 
1984 (for example, HIV), the CC list of diagnoses currently used in the 
CMS DRGs is virtually identical to the CC list created at Yale 
University. However, there have been dramatic changes not only in the 
accuracy and completeness of the coding of secondary diagnoses but also 
in the characteristics of patients admitted to hospitals and the 
practice patterns within hospitals as well.
    Since the implementation of the IPPS, Medicare average length of 
stay has dropped dramatically from 9.8 days in 1983 to 5.7 days in 
2005. The economic incentives inherent in DRGs motivated a change in 
practice patterns to discharge patients earlier from the hospital. 
These changes were facilitated by the increased availability of 
postacute care services, such as nursing homes and home health 
services, which allowed problems previously requiring continued 
hospitalization to be effectively treated outside the acute care 
hospital. Furthermore, there has also been a dramatic shift to 
outpatient surgery that avoids costly inpatient stays. Many surgical 
procedures formerly performed in the hospital are now routinely 
performed on an outpatient basis. As a result, patients admitted to the 
hospital today are on average more likely to have a CC than when the 
IPPS was implemented. The net effect of better coding of secondary 
diagnoses, reductions in hospital length of stay, increased 
availability of postacute care services, and the shift to outpatient 
care is that most patients (nearly 80 percent) admitted to a hospital 
now have a CC. As a result of the changes that have occurred during the 
22 years since the implementation of the IPPS, the CC list as currently 
defined has lost much of its capacity to discriminate hospital resource 
use.
    Currently, 115 CMS DRGs have a CC subdivision. Up until FY 2002, 
the number of DRGs with a CC subdivision remained essentially unchanged 
from the original FY 1984 version of the DRGs. As a means of improving 
the payment accuracy of the DRGs, beginning with the FY 2002 DRG 
update, each base CMS DRG without a CC subdivision was evaluated to 
determine if a CC subdivision was warranted. Over the past five DRG 
updates, only seven base CMS DRGs have had a CC subdivision added. The 
primary constraint preventing a significant increase in the number of 
base CMS DRGs with a CC subdivision is the low number of patients who 
would be assigned to the non-CC group. Thus, the expansion of the 
number of CMS DRGs subdivided based on a CC is constrained because the 
vast majority of patients would be assigned to the CC group and few 
patients would be assigned to the non CC group. To remedy these 
problems, we reviewed each of the 13,549 secondary diagnosis codes to 
evaluate their assignment as a CC or non-CC using statistical 
information from the Medicare claims data and applying medical judgment 
based on current clinical practice. We refer to this list in this 
section as the ``revised CC list.''
    The need for a revised CC list prompted a reexamination of the 
secondary diagnoses that qualify as a CC. Our intent was to better 
distinguish cases that are likely to result in increased hospital 
resource use based on secondary diagnoses. Using a combination of 
mathematical data and the judgment of our medical advisors, we included 
the condition on the CC list if it could demonstrate that its presence 
would lead to substantially increased hospital resource use.
    Diagnoses may require increased hospital resource use because of a 
need for such services as:
     Intensive monitoring (for example, an intensive care unit 
(ICU) stay).
     Expensive and technically complex services (for example, 
heart transplant).
     Extensive care requiring a greater number of caregivers 
(for example, nursing care for a quadriplegic).
    There are 3,326 diagnosis codes on the current CC list. Our 2006 
review of the CC list reduced the number of diagnosis codes on the CC 
list to 2,583. Based on the current CC list, 77.66 percent of patients 
have at least one CC present. Based on the revised CC list from our 
2006 review, the percent of patients having at least one CC present 
would be reduced to 40.34 percent.
b. Chronic Diagnosis Codes
    The 1979 data used in the original formation of the CC list often 
did not have the manifestations of a chronic disease fully coded. As a 
result, the CC list included many chronic diseases with a broad range 
of manifestations. Such chronic illness diagnoses usually do not cause 
a significant increase in hospital resource use unless there is an 
acute exacerbation present or there is a significant deterioration in 
the underlying chronic condition. Therefore, in the revised CC list, we 
removed chronic diseases without a significant acute manifestation. 
Recognition of the impact of the chronic disease is accomplished by 
separately coding the acute manifestation. For example, the mitral 
valve disease codes

[[Page 47154]]

(codes 396.0 through 396.9) are assigned to the current CC list. 
However, unless the mitral valve abnormalities are associated with 
other diagnoses indicating acute deterioration, such as acute 
congestive heart failure, acute pulmonary edema, or respiratory 
failure, they would not be expected to significantly increase hospital 
resource use. Therefore, the revised CC list did not include the mitral 
valve codes. Recognition of the contribution of mitral valve disease to 
the complexity of hospital care would be accomplished by separately 
coding those diseases on the CC list that are associated with an acute 
exacerbation or deterioration of the mitral valve disease.
    The revised CC list applied the criterion that chronic diagnoses 
having a broad range of manifestations are not assigned to the CC list 
as long as there are codes available that allow the acute 
manifestations of the disease to be coded separately. For some 
diseases, there are ICD-9-CM codes that explicitly include a 
specification of the acute exacerbation of the underlying disease. For 
example, for congestive heart failure, the following codes specify an 
acute exacerbation of the congestive heart failure:
     428.21, Acute systolic heart failure
     428.41, Acute systolic and diastolic heart failure
     428.43, Acute on chronic systolic heart failure
     428.31, Acute diastolic heart failure
     428.33, Acute on chronic diastolic heart failure
    These congestive heart failure codes are included on the revised CC 
list. However, the following congestive heart failure codes do not 
indicate an acute exacerbation and are not included in the revised CC 
list:
     428.0, Congestive heart failure not otherwise specified
     428.1, Left heart failure
     428.20, Systolic heart failure not otherwise specified
     428.22, Chronic systolic heart failure
     428.32, Chronic diastolic heart failure
     428.40, Systolic and diastolic heart failure
     428.9, Heart failure not otherwise specified
    As a result of this approach, most chronic diseases were not 
assigned to the revised CC list. In general, a significant acute 
manifestation of the chronic disease must be present and coded for the 
patient to be assigned a CC. We made exceptions for diagnosis codes 
that indicate a chronic disease in which the underlying illness has 
reached an advanced stage or is associated with systemic physiologic 
decompensation and debility. The presence of such advanced chronic 
diseases, even in the absence of a separately coded acute 
manifestation, significantly adds to the treatment complexity of the 
patient. Thus, the presence of the advanced chronic disease inherently 
makes the reason for admission more difficult to treat. For example, 
under the revised CC list, stage IV, V, or end-stage chronic renal 
failure (codes 585.4 through 585.6) are designated as a CC, but stage I 
through III chronic renal failure (codes 585.1 through 585.3) are not. 
For obesity, a body mass index over 35 (codes V85.35 through V85.4) is 
a CC, but a body mass index between 19 and 35 is not. End-stage renal 
failure and extreme obesity are examples of chronic diseases for which 
the advanced stage of the disease is clearly specified.
    However, for most major chronic diseases, the stage of the disease 
is not clearly specified in the code. These codes were evaluated based 
on the consistency and intensity of the physiologic decompensation and 
debility associated with the chronic disease. For example, quadriplegia 
(codes 344.00 through 344.09) requires extensive care with a 
substantial increase in nursing services and more intensive monitoring. 
Therefore, quadriplegia is considered a CC in the revised CC list.
c. Acute Diagnosis Codes
    Examples of acute diseases included on the revised CC list included 
acute myocardial infarction (AMI), cerebrovascular accident (CVA) or 
stroke, acute respiratory failure, acute renal failure, pneumonia, and 
septicemia. These six diseases are representative of the types of 
illnesses we included on the revised CC list. Other acute diseases were 
designated as a CC if their impact on hospital resource use would be 
expected to be comparable to these representative acute diseases. For 
example, acute endocarditis was included on the CC list but urinary 
tract infection was not.
    The revised CC list is essentially comprised of significant acute 
disease, acute exacerbations of significant chronic diseases, advanced 
or end stage chronic diseases and chronic diseases associated with 
extensive debility. Compared to the existing CC list, the revised CC 
list requires a secondary diagnosis to have a consistently greater 
impact on hospital resource use.
    The following Table E compares the current CC list and the revised 
CC list. There are 3,326 diagnosis codes on the current CC list. The CC 
revisions reduce the number of diagnosis codes on the CC list to 2,583. 
Based on the current CC list, 77.66 percent of patients have at least 
one CC present, using FY 2006 MedPAR data. Based on the revised CC 
list, the percent of patients having at least one CC present is reduced 
to 40.34 percent. The revised CC list increases the difference in 
average charges between patients with and without a CC by 56 percent 
($15,236 versus $9,743).

       Table E.--Comparison of Current CC List and Revised CC List
------------------------------------------------------------------------
                                                 Current CC   Revised CC
                                                    list         list
------------------------------------------------------------------------
Codes designated as a CC......................        3,326        2,583
Percent of patients with one or more CCs......        77.66        40.34
Percent of patients with no CC................        22.34        59.66
Average charge of patients with one or more         $24,538      $31,451
 CCs..........................................
Average charge of patients with no CCs........      $14,795      $16,215
------------------------------------------------------------------------

    The analysis above suggests that merely reviewing and updating the 
CC list can lead to significant improvements in the ability of the CMS 
DRGs to recognize severity of illness. Although we could potentially 
adopt this one change to better recognize severity of illness in the 
CMS DRGs, we have undertaken additional analyses that further refine 
secondary diagnoses into MCCs, CCs and non-CCs as described below.
d. Prior Research on Subdivision of CCs into Multiple Categories
(1) Refined DRGs
    During the mid-1980s, CMS (then HCFA) funded a project at Yale 
University to revise the use of CCs in the CMS DRGs. The Yale 
University project mapped all secondary diagnoses that were considered 
a CC in the CMS DRGs into 136 secondary diagnosis groups, each of which 
was assigned a CC complexity level. For surgical patients, each of the 
136 secondary diagnosis groups was assigned to 1 of 4 CC complexity 
levels (non-CC, moderate CC, MCC, and catastrophic CC). For medical 
patients, each of the 136 secondary diagnosis groups was assigned to 1 
of 3 CC complexity levels (non-CC, moderate/MCC, and catastrophic CC). 
All age subdivisions and CC subdivisions in the DRGs were

[[Page 47155]]

eliminated and replaced by the four CC subgroups for surgical patients, 
or the three CC subgroups for medical patients. The Yale University 
project did not reevaluate the categorization of secondary diagnosis as 
a CC versus a non-CC. Only the diagnoses on the standard CC list were 
used to create the moderate, major, and catastrophic subgroups. All 
secondary diagnoses in a secondary diagnosis group were assigned the 
same level, and a patient was assigned to the subgroup corresponding to 
the highest level secondary diagnosis. The number of secondary 
diagnoses had no effect on the subgroup assigned to the patient (that 
is, multiple secondary diagnoses at one level did not cause a patient 
to be assigned to a higher subgroup). The DRG system developed by the 
Yale University project demonstrated that a subdivision of the CCs into 
multiple subclasses would improve the predictability of hospital costs.
(2) 1994 Severity DRGs
    We also examined the work we performed in the mid-1990's to revise 
the CMS DRGs to better recognize severity. In 1993, we reevaluated the 
use of CCs within the CMS DRGs. The reevaluation excluded the CMS DRGs 
associated with pregnancy, newborn, and pediatric patients (MDCs 14 and 
15 and DRGs defined based on age 0-17). The major CC list from the AP-
DRGs that are used for Medicaid payment by New York and other States 
was used to identify an initial list of MCCs. Using Medicare data, we 
reevaluated the categorization of each secondary diagnosis as a non-CC, 
CC, or an MCC. The end result was that 111 diagnoses that were non-CCs 
in the standard CMS DRGs were made a CC, 220 diagnoses that were a CC 
were made a non-CC, and 395 CCs were considered an MCC.
    All CC splits in the CMS DRGs were eliminated, and an additional 24 
DRGs were merged together. The resulting base CMS DRGs were then 
subdivided into three, two, or no subgroups based on an analysis of 
Medicare data. The result was 84 DRGs with no subgroups, 124 DRGs with 
two subgroups, and 85 DRGs with three subgroups. An additional 63 
pregnancy, newborn, and pediatric DRGs not evaluated resulted in a 
total of 652 DRGs.
    A patient was assigned to the CC subgroup corresponding to the 
highest level secondary diagnosis. Multiple secondary diagnoses at one 
level did not cause a patient to be assigned to a higher subgroup. The 
categorization of a diagnosis as non-CC, CC, or MCC was uniform across 
the CMS DRGs, and there were no modifications for specific DRGs. As 
part of the FY 1995 IPPS proposed rule, we made a complete file of the 
revised DRG descriptions available to the public. However, we never 
adopted the revised DRGs (55 FR 27756).
e. Medicare Severity DRGs (MS-DRGs)
    We had several options in developing a refinement to the current 
CMS DRGs to better recognize increased resource use due to severity of 
illness. One option would involve simply taking the work performed in 
1994 and then updating it with all the code changes that have taken 
place since then. We were reluctant to do this because of changes in 
medical practices as well as the substantial changes in ICD-9-CM codes 
since that time. Another option would have been to build on current CMS 
DRGs which include a number of advancements that better identify 
medical practices and technologies. Many commenters on the FY 2007 IPPS 
proposed rule urged us to take the latter approach because they 
believed the current base CMS DRGs clearly differentiate between the 
complexities of varying surgical procedures and medical devices. 
Therefore, we chose the option of developing a new severity DRG system 
based on the current CMS DRGs.
    The development of the 1994 Severity DRGs involved three steps:
     Consolidation of existing DRGs into base DRGs.
     Categorization of each diagnosis as an MCC, CC, or non-CC.
     Subdivision of each base DRG into subclasses based on CCs.
    We reviewed and revised each of the three steps and applied them to 
our current CMS DRGs to develop DRGs that better identify severity of 
illness among Medicare patients. We refer to this system that we 
proposed (and are adopting in this final rule with comment period) as 
the Medicare Severity DRGs (MS-DRGs). The purpose of the MS-DRGs is to 
more accurately stratify groups of Medicare patients with varying 
levels of severity.
    (1) Consolidation of Existing CMS DRGs into Base MS-DRGs
    The first step in our process was the consolidation of existing CMS 
DRGs into new proposed base MS-DRGs. We combined together the 115 pairs 
of CMS DRGs that are subdivided based on the presence of a CC. We 
further consolidated the CMS DRGs that are split on the basis of a 
major cardiovascular condition, AMI with and without major complication 
(CMS DRGs 121 and 122), and cardiac catheterization with and without 
complex diagnoses (CMS DRGs 124 and 125). We also consolidated the 
three pairs of burn CMS DRGs that were defined based on the presence of 
a CC or a significant trauma (CMS DRGs 506 and 507; 508 and 509; and 
510 and 511). Next, we consolidated the 43 pediatric CMS DRGs that are 
defined based on age less than or equal to 17. These pediatric CMS DRGs 
contain a very low volume of Medicare patients. As shown in Table 10 of 
the FY 2007 IPPS final rule (71 FR 48318), only two of these pediatric 
CMS DRGs contained more than 100 patients (CMS DRGs 298 and 333). 
Seventeen of these pediatric DRGs had no patients (CMS DRGs 30, 33, 41, 
48, 54, 58, 137, 252, 255, 282, 330, 340, 343, 393, 405, 446, and 448). 
As we have stated frequently, our primary focus in maintaining the CMS 
DRGs is to serve the Medicare population. We do not have the data or 
the expertise to maintain the DRGs in clinical areas that are not 
relevant to the Medicare population. We continue to encourage users of 
the CMS DRGs (or MS-DRGs that are being adopted) to make relevant 
adaptations if they are being used for a non-Medicare patient 
population.
    In addition to the pediatric CMS DRGs defined by the age of the 
patient, there are a number of CMS DRGs that relate primarily to the 
pediatric or adult population that have very low volume in the Medicare 
population, such as male sterilization, tubal interruptions, 
circumcisions, tonsillectomies, and myringotomies. These CMS DRGs were 
consolidated into the most clinically similar MS-DRG.
    Over the past two decades, the site of service for some elective 
procedures such as carpal tunnel release, cataract extraction, and 
laparoscopy has shifted from the inpatient to the outpatient setting, 
resulting in the CMS DRGs associated with these procedures having very 
low volume. These CMS DRGs were also consolidated into the most 
clinically similar MS-DRG. In addition, there were some clinically 
related CMS DRGs that had significant Medicare patient volume but had 
no significant difference in resource use. For example, thyroid (CMS 
DRG 290) and parathyroid (CMS DRG 289) procedures were virtually 
identical in terms of hospital resource use and were, therefore, 
consolidated. In total, 34 of these CMS DRGs were consolidated. The DRG 
consolidations are summarized in Table F below.
    Four pairs of MS-DRGs (223 and 224; 228 and 229; 323 and 324; and 
551 and 552) were defined based on the presence of a CC or some other 
condition. For example, MS-DRG 323 is defined based on the presence of 
a CC or the performance of extracorporeal shock

[[Page 47156]]

wave lithotripsy. For these MS-DRGs, the CC condition was removed and 
the pair of DRGs remains separate but defined based only on the other 
condition (that is, MS-DRG 323 became urinary stones with 
extracorporeal shock wave lithotripsy). As was done in the 1994 
severity DRG work, we did not consolidate any of the CMS DRGs for 
maternity or newborn cases.
    Before proceeding further, we made one additional change to a base 
DRG assignment after completing these consolidations. We assigned 
cranial-facial bone procedures to a new base DRG (Cranial/Facial Bone 
Procedures). These cases were previously assigned to DRGs 52 and 55 
through 63. We also created a new base DRG, MS-DRG 245 (Automatic 
Implantable Cardiac Defibrillator (ACID) Lead and Generator 
Procedures). This DRG was created by removing automatic implantable 
cardiac defibrillator leads and generator procedures from the pacemaker 
DRG (CMS DRG 551; now new MS-DRGs 242 through 244).
    Table F below shows how DRGs in the CMS DRGs (Version 24.0) were 
consolidated into new base MS DRGs. We refer readers to section II.D.2. 
of the preamble of the proposed rule and this final rule with comment 
period for a detailed discussion of CCs and MCCs under the MS-DRG 
system.

                                           Table F.--DRG Consolidation
----------------------------------------------------------------------------------------------------------------
                                                                        MS-DRGs
        CMS-DRG version 24.0                 DRG description         version 25.0    New base MS-DRG description
----------------------------------------------------------------------------------------------------------------
6...................................  Carpal Tunnel Release.......              40  Peripheral & Cranial Nerve &
                                                                                41   Other Nervous System
                                                                                42   Procedure with MCC, with
                                                                                     CC, and without CC/MCC.
7, 8................................  Peripheral & Cranial Nerve &
                                       Other Nervous System
                                       Procedure.
----------------------------------------------------------------------------------------------------------------
36..................................  Retinal Procedures..........             116  Intraocular Procedures with
                                                                               117   and without CC/MCC.
38..................................  Primary Iris Procedures.
39..................................  Lens Procedures with or
                                       without Vitrectomy.
42..................................  Intraocular Procedures
                                       Except Retina, Iris & Lens.
----------------------------------------------------------------------------------------------------------------
43..................................  Hyphema.....................             124  Other Disorders of the Eye
                                                                               125   with and without MCC.
46, 47, 48..........................  Other Disorders of the Eye.
----------------------------------------------------------------------------------------------------------------
50..................................  Sialoadenectomy.............             139  Salivary Gland Procedures.
51..................................  Salivary Gland Procedures
                                       Except Sialoadenectomy.
----------------------------------------------------------------------------------------------------------------
52..................................  Cleft Lip & Palate Repair...             133  Other Ear, Nose, Mouth &
                                                                                     Throat O.R. Procedures with
                                                                                     and without CC/MCC.
55..................................  Miscellaneous Ear, Nose,
                                       Mouth & Throat Procedures.
----------------------------------------------------------------------------------------------------------------
56..................................  Rhinoplasty.................             131  New DRG--Cranial/Facial Bone
                                                                               132   Procedures with and without
                                                                                     CC/MCC.
57, 58..............................  Tonsillectomy &
                                       Adenoidectomy Procedure,
                                       Except Tonsillectomy &/or
                                       Adenoidectomy Only.
59, 60..............................  Tonsillectomy &/or
                                       Adenoidectomy Only.
61, 62..............................  Myringotomy with Tube
                                       Insertion.
63..................................  Other Ear, Nose, Mouth &
                                       Throat O.R. Procedures.
----------------------------------------------------------------------------------------------------------------
67..................................  Epiglottitis................             152  Otitis Media & Upper
                                                                               153   Respiratory Infection with
                                                                                     and without MCC.
68, 69, 70..........................  Otitis Media & Upper
                                       Respiratory Infection.
71..................................  Laryngotracheitis.
----------------------------------------------------------------------------------------------------------------
72..................................  Nasal, Trauma & Deformity...             154  Other Ear, Nose, Mouth &
                                                                               155   Throat Diagnoses with MCC,
                                                                               156   with CC, without CC/MCC.
73, 74..............................  Other Ear, Nose, Mouth &
                                       Throat Diagnoses.
----------------------------------------------------------------------------------------------------------------
185, 186............................  Dental & Oral Diseases                   157  Dental & Oral Diseases with
                                       Except Extractions &                    158   MCC, with CC, without CC/
                                       Restorations.                           159   MCC.
187.................................  Dental Extractions &
                                       Restorations.
----------------------------------------------------------------------------------------------------------------
199.................................  Hepatobiliary Diagnostic                 420  Hepatobiliary Diagnostic
                                       Procedure for Malignancy.               421   Procedures with MCC, with
                                                                               422   CC, without CC/MCC.
200.................................  Hepatobiliary Diagnostic
                                       Procedure for Non-
                                       Malignancy.
----------------------------------------------------------------------------------------------------------------

[[Page 47157]]

 
244, 245............................  Bone diseases & Specific                 553  Bone Diseases &
                                       Arthropathies.                          554   Arthropathies with and
                                                                                     without MCC.
246.................................  Non-Specific Arthropathies.
----------------------------------------------------------------------------------------------------------------
259, 260............................  Subtotal Mastectomy for                  584  Breast Biopsy, Local
                                       Malignancy *.                           585   Excision & Other Breast
                                                                                     Procedures with and without
                                                                                     CC/MCC.
261.................................  Breast Procedures for Non-
                                       Malignancy Except Biopsy &
                                       Local Excision.
262.................................  Breast Biopsy & Local
                                       Excision for Non-
                                       Malignancy.
----------------------------------------------------------------------------------------------------------------
267.................................  Perianal & Pilonidal                     579  Other Skin, Subcutaneous
                                       Procedures.                             580   Tissue & Breast Procedures
                                                                               581   with MCC, with CC, without
                                                                                     CC/MCC.
268.................................  Skin, Subcutaneous Tissue &
                                       Breast Plastic Procedures.
269, 270............................  Other Skin, Subcutaneous
                                       Tissue & Breast Procedure.
----------------------------------------------------------------------------------------------------------------
289.................................  Parathyroid Procedures......             625  Thyroid, Parathyroid &
                                                                               626   Thyroglossal Procedures
                                                                               627   with MCC, with CC, without
                                                                                     CC/MCC.
290.................................  Thyroid Procedures.
291.................................  Thyroglossal Procedures.
----------------------------------------------------------------------------------------------------------------
294.................................  Diabetes > 35...............             637  Diabetes with MCC, with CC,
                                                                                     without CC/MCC.
295.................................  Diabetes < 35.
----------------------------------------------------------------------------------------------------------------
338.................................  Testes Procedures for                    711  Testes Procedures with and
                                       Malignancy.                             712   without CC/MCC.
339, 340............................  Testes Procedures, Non-
                                       Malignancy.
----------------------------------------------------------------------------------------------------------------
342, 343............................  Circumcision................  ..............  Procedure 64.0 changed to
                                                                                     non-O.R. Cases with only
                                                                                     this procedure will go to
                                                                                     medical DRGs.
----------------------------------------------------------------------------------------------------------------
351.................................  Sterilization, Male.........             729  Other Male Reproductive
                                                                               730   System Diagnoses with and
                                                                                     without CC/MCC
352.................................  Other Male Reproductive
                                       System Diagnoses.
----------------------------------------------------------------------------------------------------------------
361.................................  Laparoscopy & Incisional                 744  D&C, Conization, Laparascopy
                                       Tubal Interruption.                     745   & Tubal Interruption with
                                                                                     and without CC/MCC.
362.................................  Endoscopic Tubal
                                       Interruption.
363.................................  D&C, Conization & Radio-
                                       Implant, for Malignancy.
364.................................  D&C, Conization Except for
                                       Malignancy.
----------------------------------------------------------------------------------------------------------------
411.................................  History of Malignancy                    843  Other Myeloproliferative
                                       without Endoscopy.                      844   Disease or Poorly
                                                                               845   Differentiated Neoplasm
                                                                                     Diagnosis with MCC, with
                                                                                     CC, without CC/MCC.
412.................................  History of Malignancy with
                                       Endoscopy.
413, 414............................  Other Myeloproliferative
                                       Disease or Poorly
                                       Differentiated Neoplasm
                                       Diagnosis.
----------------------------------------------------------------------------------------------------------------
465.................................  Aftercare with History of                949  Aftercare with and without.
                                       Malignancy as Secondary
                                       Diagnosis.
----------------------------------------------------------------------------------------------------------------
466.................................  Aftercare without History of             950  CC/MCC.
                                       Malignancy as Secondary
                                       Diagnosis.
----------------------------------------------------------------------------------------------------------------
* Codes 85.22 and 85.23 in CMS DRGs 259 and 260 were moved to MS-DRG 582 and 583.

    As summarized in Table G, the consolidation resulted in the 
formation of 335 base MS-DRGs.

        Table G.--Consolidation of Current CMS DRGs Into MS DRGs
------------------------------------------------------------------------
                                                                 Number
------------------------------------------------------------------------
Current CMS DRGs.............................................        538
Elimination of CC subgroups..................................       -114
Elimination of MCC subgroups.................................         -7
Elimination of CC complexity subgroups.......................         -5

[[Page 47158]]

 
Elimination of age 0-17 subgroups............................        -43
Consolidation due to volume or resource similarity...........        -34
New DRG......................................................         +1
Revised Base DRGs............................................        311
Newborn, maternity and error DRGs............................        +24
Base DRGs for severity subdivision...........................        335
------------------------------------------------------------------------

    The end result of the consolidation of the CMS DRGs in the MS-DRGs 
was similar to the consolidation performed in the 1994 severity DRGs. 
The 1994 DRG consolidations resulted in 356 base DRGs plus 2 error 
DRGs. The number of the 1994 base DRGs is different because new CMS 
DRGs have been added since 1994, the 43 age 0-17 pediatric CMS DRGs 
were not consolidated, and some of the volume shifts to outpatient care 
had not yet occurred in 1994. In the 1994 severity DRGs, 24 DRGs were 
consolidated due to volume or resource similarity. Sixteen of these 
1994 DRG consolidations are included in the 34 consolidations done in 
the 2007 consolidations. However, due to concerns expressed by our 
physician consultants, 8 of the DRG consolidations from 1994 were not 
done. For example, interstitial lung disease (DRGs 92 and 93) was not 
consolidated with simple pneumonia and pleurisy (DRGs 89, 90, 91) as 
was done in the 1994 consolidations.
    Comment: One commenter expressed concern that the focus of MS-DRGs 
was on the Medicare population. As a result of this focus, many of the 
DRGs reflect severity and resource use only for the Medicare 
population. The commenter stated that certain diagnoses present 
differently at different ages or actually represent a different disease 
process. For instance, the commenter stated that hypertension in a 
child represents a very different disease than for adults. The 
commenter also stated that CMS DRGs 569 and 570 (Major Small and Large 
Bowel Procedures with CC and with or without Major Gastrointestinal 
Diagnosis, respectively) have different costs for a Medicare patient 
than a child. The commenter also indicated that CMS did not perform 
updates to MDC 14 (Obstetrics) and MDC 14 (Newborns and Other Neonates 
with Problems Arising in the Perinatal Period). The commenter stated 
that the MS-DRGs will not work well for other populations.
    Response: The MS-DRGs were specifically designed for purposes of 
Medicare hospital inpatient services payment. As we stated above, we 
generally use MedPAR data to evaluate possible DRG classification 
changes and recalibrate the DRG weights. The MedPAR data only represent 
hospital inpatient utilization by Medicare beneficiaries. We do not 
have comprehensive data from non-Medicare payers to use for this 
purpose. The Medicare program only provides health insurance benefits 
for people over the age of 65 or who are disabled or suffering from 
end-stage renal disease. Therefore, newborns, maternity, and pediatric 
patients are not well-represented in the MedPAR data that we used in 
the design of the MS-DRGs. We simply do not have enough data to 
establish stable and reliable DRGs and relative weights to address the 
needs of non-Medicare payers for pediatric, newborn, and maternity 
patients. For this reason, we encourage those who want to use MS-DRGs 
for patient populations other than Medicare make the relevant 
refinements to our system so it better serves the needs of those 
patients.
(2) Categorization of Diagnoses
    We decided to establish three different levels of CC severity into 
which we would subdivide the diagnosis codes. The proposed three levels 
are MCC, CC, and non-CC. Diagnosis codes classified as MCCs reflect the 
highest level of severity. The next level of severity includes 
diagnosis codes classified as CCs. The lowest level is for non-CCs. 
Non-CCs are diagnosis codes that do not significantly affect severity 
of illness and resource use. Therefore, secondary diagnoses that are 
non-CCs do not affect the DRG assignment under either the CMS DRGs or 
the MS-DRGs.
    The categorization of diagnoses as an MCC, CC, or non-CC was 
accomplished using an iterative approach in which each diagnosis was 
evaluated to determine the extent to which its presence as a secondary 
diagnosis resulted in increased hospital resource use. In order to 
begin this iterative process, we started with an initial categorization 
of each diagnosis as an MCC, CC, or non-CC. As noted previously, the 
1994 CC revision began by separating CCs into MCC and CC based on the 
AP-DRG major CCs. One way to begin this iterative process would have 
been to use the 1994 CC categorization. However, the 1994 CC 
categorization was based on FY 1992 data and ICD-9-CM diagnosis codes, 
which now are 15 years old. Since 1992, 1,897 new diagnosis codes have 
been added, and 346 diagnosis codes have been deleted. Because the 
revised CC list (explained in section II.C.2.a. of this preamble) was 
based on current ICD-9-CM codes and used recent data, we decided to 
utilize the revised CC list rather than the 1994 categorization as our 
starting point for determining whether each secondary diagnosis should 
be an MCC, a CC, or a non-CC.
    The revised CC list categorizes each diagnosis as a CC or a non-CC. 
We decided to use this list in combination with the categorization 
under the AP-DRGs and the APR DRGs. The AP-DRGs and the APR DRGs are 
updated annually with current codes and provide a good comparison 
source to use with the revised CC list. We designated as an MCC any 
diagnosis that was a CC in the revised CC list and was an AP-DRG major 
CC and was an APR DRG default severity level 3 (major) or 4 
(extensive). We designated as a non-CC any diagnosis that was a non-CC 
in the revised CC list and was an AP-DRG non-CC and was an APR DRG 
default severity level of 1 (minor). Any diagnoses that did not meet 
either of the above two criteria was designated as a CC.
    The only exception to our approach was for diagnoses related to 
newborns, maternity, and congenital anomalies. These diagnoses are very 
low volume in the Medicare population and were not reviewed for 
purposes of creating the revised CC list. We used the APR DRGs to 
categorize these diagnoses. For newborn, obstetric, and congenital 
anomaly diagnoses, we designated the APR DRG default severity level 3 
(major) and 4 (extreme) diagnoses as an MCC, the APR DRG default 
severity level 2 (moderate) diagnoses as a CC, and the APR DRG default 
severity 1 (minor) diagnoses as a non-CC. Table H summarizes the number 
of codes in each CC category.

              Table H.--Initial Categorization of CC Codes
------------------------------------------------------------------------
                                                               Number of
                                                                 codes
------------------------------------------------------------------------
MCC..........................................................      1,096
CC...........................................................      4,221
Non CC.......................................................      8,232
                                                              ----------
    Total....................................................     13,549
------------------------------------------------------------------------

    This initial CC categorization of diagnosis codes was used to begin 
the iterative process of determining the proposed final CC 
categorization for each diagnosis code.

[[Page 47159]]

(3) Additional CC Exclusions
    For some CMS DRGs, the presence of specific secondary diagnoses 
affects the base DRG assignment. For example, in MDC 5 (Diseases and 
Disorders of the Circulatory System), the presence of an AMI code as 
the principal diagnosis or as a secondary diagnosis will cause the 
patient to be assigned to the AMI DRGs (CMS DRGs 121 through 123). 
Therefore, if the AMI code is present as a secondary diagnosis, it 
should not be used to assign the CC category for a patient because it 
is redundant within the definition of the base DRG. Similarly, for MDC 
24 (Multiple Significant Trauma), specific combinations of significant 
trauma as principal or secondary diagnosis cause the assignment to the 
multiple trauma DRGs (CMS DRGs 484 through 487). Therefore, any 
secondary diagnosis of trauma is redundant with the definition of the 
multiple trauma DRGs and should not be used to determine the CC 
category for a patient. Any secondary diagnoses that are used to assign 
a specific proposed base MS-DRG were excluded from the determination of 
the CC category for patients assigned to that base MS-DRG.
    Comment: Several commenters asked that we make changes to the CC 
and exclusion list for codes associated with sepsis. The commenters 
stated that two Systemic Inflammatory Response Syndrome (SIRS) codes, 
995.91 (Sepsis) and 995.92 (Severe sepsis) are CCs under MS-DRGs. The 
commenters believed that if a patient has SIRS and pneumonia, both 
conditions should be coded, and that this coding would result in a 
patient admitted with SIRS being assigned to MS-DRG 871 (Septicemia 
without Mechanical Ventilation with MCC). The commenters stated that 
the pneumonia would count as a MCC in this case. The commenters 
requested that CMS exclude pneumonia from being a MCC when it occurs 
with sepsis. The commenters believed pneumonia should be excluded as an 
MCC for a patient with sepsis because it is an underlying and related 
condition, and that these patients should not be assigned to MS-DRG 
871. The commenters stated that the other SIRS codes, 995.93 (Systemic 
Inflammatory Response Syndrome due to noninfectious process without 
acute organ dysfunction) and 995.94 (Systemic Inflammatory Response 
Syndrome due to noninfectious process with acute organ dysfunction) are 
excluded from acting as a CC for pancreatitis (code 577.0). The 
commenters asked that CMS not exclude codes 995.93 and 995.94 with code 
577.0.
    Response: The commenters are mistaken about codes 995.91 and 
995.92. While these two codes are not CCs, they are on the MCC list. 
Our data and the judgment of our medical advisors support the 
assignment of these codes to the MCC list. Furthermore, we do not 
believe it is appropriate to exclude pneumonia as an MCC for sepsis and 
severe sepsis. These patients would be at an extremely high level of 
severity. SIRS is not always associated with pneumonia but when it is, 
the patient is at a higher severity level. Therefore, we are not making 
this change to the CC exclusion list by excluding pneumonia codes from 
acting as a MCC with code 995.91 and 995.92. On the second issue the 
commenters raised, they are incorrect that codes 995.91 and 995.92 are 
excluded from acting as a CC for code 577.0. These codes are not on the 
CC exclusion list for code 577.0. Therefore, both would act as a MCC 
for code 577.0. We are not making any changes to the CC exclusion list 
as a result of these comments.
    (4) Analysis of Secondary Diagnoses
    The 311 base MS-DRGs (335 total base DRGs minus the MDC 14, MDC 5, 
and error DRGs) were subdivided into three CC subgroups. Patients were 
assigned to the subgroup corresponding to the most extreme CC present. 
All but four of the base MS-DRGs had strictly monotonically increasing 
average charges across the three CC subgroups (that is, average charges 
progressively increased from the non-CC to the CC to the MCC 
subgroups). The four MS-DRGs that failed to have monotonically 
increasing charges all had at least one CC subgroup with very low 
volume. For example, the non CC subgroup for the pancreas transplant 
DRG (CMS DRG 513) had only 2 cases. The overall statistics by CC 
subgroup for the 311 base MS-DRG are contained in Table I. Patients in 
the MCC subgroup have average charges that are nearly double the 
average charges for patients in the CC subgroup. The CC subgroup with 
the largest number of patients is the non-CC subgroup with 41.1 percent 
of the patients.

 Table I.--Overall Statistics for MS-DRGs Excluding Those in MDCs 14 and
                                   15
------------------------------------------------------------------------
                                      Number of                Average
            CC subgroup                 cases      Percent     charges
------------------------------------------------------------------------
Major..............................    2,604,696       22.2      $44,246
CC.................................    4,293,744       36.6       24,131
Non-CC.............................    4,818,411       41.1       18,435
------------------------------------------------------------------------

    In order to evaluate the initial assignment of secondary diagnoses 
to the three CC subclasses, we devised a system that determined the 
impact on resource use of each secondary diagnosis. For each secondary 
diagnosis, we measured the impact in resource use for the following 
three subsets of patients:
    (a) Patients with no other secondary diagnosis or with all other 
secondary diagnoses that are non-CCs.
    (b) Patients with at least one other secondary diagnosis that is a 
CC but none that is an MCC.
    (c) Patients with at least one other secondary diagnosis that is an 
MCC.
    Numerical resource impact values were assigned for each diagnosis 
as follows:

------------------------------------------------------------------------
                   Value                               Meaning
------------------------------------------------------------------------
0.........................................  Significantly below expected
                                             value for the non-CC
                                             subgroup.
1.........................................  Approximately equal to
                                             expected value for the non-
                                             CC subgroup.
2.........................................  Approximately equal to
                                             expected value for the CC
                                             subgroup.
3.........................................  Approximately equal to
                                             expected value for the MCC
                                             subgroup.
4.........................................  Significantly above the
                                             expected value for the MCC
                                             subgroup.
------------------------------------------------------------------------

    Each diagnosis for which Medicare data were available was evaluated 
to determine its impact on resource use and to determine the most 
appropriate CC subclass (non-CC, CC, or MCC) assignment. In order to 
make this determination, the average charge for each subset of cases 
was compared to the expected charge for cases in that

[[Page 47160]]

subset. The following format was used to evaluate each diagnosis:

----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Code.....................................  Diagnosis..................   Cnt1     C1   Cnt2     C2   Cnt3     C3
----------------------------------------------------------------------------------------------------------------

    Count (Cnt) is the number of patients in each subset and C1, C2, 
and C3 are a measure of the impact on resource use of patients in each 
of the subsets. The C1, C2, and C3 values are a measure of the ratio of 
average charges for patients with these conditions to the expected 
average charge across all cases. The C1 value reflects a patient with 
no other secondary diagnosis or with all other secondary diagnoses that 
are non-CCs. The C2 value reflects a patient with at least one other 
secondary diagnosis that is a CC but none that is a major CC. The C3 
value reflects a patient with at least one other secondary diagnosis 
that is a major CC. A value close to 1.0 in the C1 field would suggest 
that the code produces the same expected value as a non-CC diagnosis. 
That is, average charges for the case are similar to the expected 
average charges for that subset and the diagnosis is not expected to 
increase resource usage. A higher value in the C1 (or C2 and C3) field 
suggests more resource usage is associated with the diagnosis and an 
increased likelihood that it is more like a CC or major CC than a non-
CC. Thus, a value close to 2.0 suggests the condition is more like a CC 
than a non-CC but not as significant in resource usage as an MCC. A 
value close to 3.0 suggests the condition is expected to consume 
resources more similar to an MCC than a CC or non-CC. For example, a C1 
value of 1.8 for a secondary diagnosis means that for the subset of 
patients who have the secondary diagnosis and have either no other 
secondary diagnosis present, or all the other secondary diagnoses 
present are non-CCs, the impact on resource use of the secondary 
diagnoses is greater than the expected value for a non-CC by an amount 
equal to 80 percent of the difference between the expected value of a 
CC and a non-CC (that is, the impact on resource use of the secondary 
diagnosis is closer to a CC than a non-CC).
    Table J below shows examples of the results.

                       Table J.--Examples of Impact on Resource Use of Secondary Diagnoses
----------------------------------------------------------------------------------------------------------------
             Code                  Cnt1        C1       CntC2        C2        Cnt3        C3      CC  subclass
----------------------------------------------------------------------------------------------------------------
401.1, Benign essential            12,308      0.955     40,113      1.715      5,297      2.384  Non CC.
 hypertension.
530.81, Esophageal reflux.....    294,673      0.986    917,058      1.639    122,076      2.302  Non CC.
560.1, Paralytic Ileus........     10,651      1.466     87,788      2.320     51,303      3.226  CC.
491.20, Obstructive chronic         7,003      1.416     32,276      2.193     13,355      3.035  CC.
 bronchitis.
410.71, Subendocardial              1,657      2.245     30,226      2.778     42,862      3.232  MCC.
 infarction initial episode.
518.81, Acute respiratory           5,332      2.096    118,937      2.936    223,054      3.337  MCC.
 failure.
----------------------------------------------------------------------------------------------------------------

    The resource use impact reports were produced for all diagnoses 
except obstetric, newborn, and congenital anomalies (10,690 diagnoses). 
These mathematical constructs were used as guides in conjunction with 
the judgment of our clinical staff to classify each secondary diagnosis 
reviewed as an MCC, CC or non-CC. Our clinical panel reviewed the 
resource use impact reports and modified 14.9 percent of the initial CC 
subclass assignments as summarized in Table K below. The rows in the 
table are the initial CC subclass categories and the columns are the 
final CC subclass categories.
    Comment: Several commenters acknowledged the detailed description 
of the methodology used in categorizing secondary diagnoses as MCCs, 
CCs, or non-CCs. While they were appreciative of the detailed iterative 
process outlined in the proposed rule (72 FR 24702), the commenters 
requested that CMS provide the numerical values (the C1 to C3 values) 
that were assigned to classify each diagnosis as an MCC, CC or non-CC.
    Response: We agree that it would be helpful to share the data we 
developed and used for each individual code as part of our CC 
evaluation process. We will post this data on the CMS Web site at: 
http://www.cms.hhs.gov/AcuteInpatientPPS/ under the Downloads section.

                                       Table K.--CC Subclass Modifications
----------------------------------------------------------------------------------------------------------------
                                                                             Final CC subclass
                   Initial CC subclass                    ------------------------------------------------------
                                                              MCC         CC       Non-CC     Total     Percent
----------------------------------------------------------------------------------------------------------------
MCC......................................................        847         62          0        909        8.5
CC.......................................................        542      2,579        737      3,858       36.1
Non-CC...................................................          0        272      5,651      5,923       55.4
----------------------------------------------------------------------------------------------------------------
    Total................................................      1,389      2,913      6,388     10,690  .........
    Percent..............................................       13.0       27.2       59.8  .........  .........
----------------------------------------------------------------------------------------------------------------

    Of the diagnoses initially designated as an MCC, 6.8 percent were 
made a CC (62/909), and of the diagnoses initially designated as non-
CC, 4.6 percent were made a CC (272/5,923). The major shift occurred in 
the diagnoses initially assigned to the CC subclass. Fourteen percent 
of the diagnoses initially designated as a CC were made an MCC (542/
3858), and 19.1 percent of the diagnoses initially designated a CC were 
made a non-CC (737/3,858). In determining the CC subclass assigned to a 
diagnosis, imprecise codes were, in general, not assigned to the MCC or 
CC

[[Page 47161]]

subclass. For example, the congestive heart failure codes have the 
following CC subclass assignments:

----------------------------------------------------------------------------------------------------------------
                    Code                                            CC subclass assignment
----------------------------------------------------------------------------------------------------------------
428.21, Acute systolic heart failure........  MCC.
428.41, Acute systolic & diastolic heart      MCC.
 failure.
428.43, Acute on chronic systolic heart       MCC.
 failure.
428.31, Acute diastolic heart failure.......  MCC.
428.33, Acute on chronic diastolic heart      MCC.
 failure.
428.1, Left heart failure...................  CC.
428.20, Systolic heart failure NOS..........  CC.
428.22, Chronic systolic heart failure......  CC.
428.32, Chronic diastolic heart failure.....  CC.
428.40, Systolic & diastolic heart failure..  CC.
428.0, Congestive heart failure NOS.........  Non-CC.
428.9, Heart failure NOS....................  Non-CC.
----------------------------------------------------------------------------------------------------------------

    The acute heart failure codes are MCCs, and the chronic heart 
failure codes are CCs. However, Not Otherwise Specified (NOS) heart 
failure codes are non-CCs. Thus, the precise type of heart failure must 
be specified in order for an MCC or CC to be assigned.
    There are currently 13,549 ICD-9-CM diagnosis codes. The external 
cause of injury and poisoning codes (E800 through E999) and congenital 
abnormality codes were not included in our current CC review for the 
MS-DRGs. We excluded the external cause of injury and poisoning codes 
from consideration as an MCC or a CC because they describe how an 
injury occurred, and not the exact nature of the injury. For instance, 
if a patient fell on the deck of a boat and fractured his or her skull, 
one would assign an E code to describe the fall on the boat. A separate 
diagnosis code would be assigned to describe the exact nature of any 
resulting injury such as a contusion, fractured bone, or skull fracture 
and concussion. A patient would be assigned to a severity level based 
on the exact nature of the injury and not the manner in which the 
injury occurred. Therefore, we decided not to classify any of the E 
codes as either an MCC or a CC. The congenital abnormality codes 
describe abnormalities when a baby is born. At times, a beneficiary may 
live with these congenital abnormalities for years without a problem. 
The congenital abnormalities may later lead to complications that 
require hospital admissions. Should these congenital abnormalities lead 
to medical problems that result in a hospital admission for a Medicare 
beneficiary, the exact nature of the condition being treated would also 
be assigned a code. This more precise code would be evaluated to 
determine whether or not it was an MCC or a CC. Therefore, we decided 
not to classify congenital abnormality codes as an MCC or a CC, but to 
instead use the other reported diagnosis codes that better describe the 
reason for the admission. Excluding the external cause of injury codes, 
we reviewed 10,690 diagnosis codes.
    As was done in our 1994 severity proposal, diagnoses that were 
closely associated with patient mortality were assigned different CC 
subclasses, depending on whether the patient lived or died. These 
diagnoses are:
     427.41, Ventricular fibrillation
     427.5, Cardiac arrest
     785.51, Cardiogenic shock
     785.59, Other shock without mention of trauma
     799.1, Respiratory arrest
    Resource use for patients with these diagnoses who were discharged 
alive was consistent with an MCC. Resource use for patients with these 
diagnoses who died was consistent with a non-CC. Further, most patients 
who died could legitimately have one of these diagnoses coded. As a 
result, these diagnoses are assigned an MCC subclass for patients who 
lived and a non-CC subclass for patients who died.
    For some secondary diagnoses assigned to the CC subclass, our 
medical advisors identified specific clinical situations in which the 
diagnosis should not be considered a CC. In such clinical situations, 
the CC exclusion list was used to exclude the secondary diagnosis from 
consideration in determining the CC subgroup, essentially making the 
secondary diagnosis a non-CC. For example, primary cardiomyopathy (code 
425.4) is designated as a CC. However, for patients admitted for 
congestive heart failure, our medical advisors believed that primary 
cardiomyopathy should be treated as a non-CC. In order to accomplish 
that, the congestive heart failure principal diagnoses were added to 
the CC exclusion list for primary cardiomyopathy as a secondary 
diagnosis.
    The list of diagnosis codes that we proposed to classify as an MCC 
(which we are adopting in this final rule with comment period) was 
included in Table 6J in the Addendum to FY 2008 IPPS proposed rule. The 
diagnosis codes that we proposed to classify as a CC (which are 
adopting in this final rule with comment period) were included in Table 
6K in the Addendum to the proposed rule. The E-codes, which are 
diagnosis codes used to classify external causes of injury and 
poisoning, are not included in this list. All E codes are designated as 
non-CCs under the current CMS DRG system and our evaluation supports 
this non-CC designation as appropriate. We are including a list of 
changes to the MCC and CC lists as a result of public comments on the 
proposed rule later in section II.G.13. of the preamble of this final 
rule with comment period. We will post a complete final list of the MCC 
and CC codes on the CMS Web site at: http://www/cms/hhs/gov/
AcuteInpatientPPS/ under the Files for Download section.
    Comment: One commenter supported the basic methodology used to 
identify MCCs and CCs. The commenter's analysis of discharge data 
generally confirms the notion that the presence of chronic disease does 
not usually have material impact on the expected cost of care. The 
commenter agreed that the emphasis on acute manifestations of chronic 
diseases is both clinically and financially appropriate. The commenter 
stated that the current CC list is nearly 25 years old and does not 
reflect the extent to which clinical practice has changed during that 
period, with concomitant changes in expected resource use. The 
commenter further stated that the current CC list also does not reflect 
the nature of changes in coding practices during that period, changes 
that have undermined the value of the current CC list. The commenter 
stated that the elimination of common secondary diagnoses such as code 
428.0 (Congestive heart failure, unspecified)

[[Page 47162]]

and code 427.31 (Atrial fibrillation) from the CC list will help to 
restore CC status as a meaningful indicator of differential expected 
resource use. The commenter also believed that elimination of these 
diagnosis codes will address the current situation in which nearly 80 
percent of Medicare discharges contain one or more CCs.
    Response: We agree that it was important to perform a careful 
review of the CC list to develop lists that more accurately identify 
patients with significantly different severity levels. We believe that 
by using both statistical data as well as input from our medical 
advisors, we were able to develop the MCCs and CCs that do a much 
better job of classifying Medicare patients with varying levels of 
severity. We also agree that is important to remove chronic diagnoses 
from the CC list that do not have a significant impact on severity. We 
also believe that nonspecific codes such as code 428.0 should not be 
included on the CC list. The ICD-9-CM coding system has more specific 
codes to identify the specific type of heart failure. These more 
specific codes have data supporting their inclusion on the MCC and CC 
list. Our medical advisors also supported the inclusion of the more 
specific heart failure codes on the MCC and CC list. We also agree that 
patients with atrial fibrillation (code 427.31) do not necessarily have 
a higher level of severity. The Medicare data suggest that when this 
condition appears on the claim and the patient has no other secondary 
diagnosis that is a CC, the charge data suggest the condition produces 
an expected value for a non-CC rather than a CC case. Further in the 
judgment of our medical advisors, the condition should not be on the CC 
list. When the atrial fibrillation leads to additional cardiac 
problems, the additional problems may be represented by codes that are 
on the MCC or CC list. We agree that by removing codes from the CC list 
that do not contribute to significantly higher levels of severity, we 
can better recognize severity of illness and more accurately reimburse 
hospitals.
    We spent extensive time carefully reviewing the ICD-9-CM diagnosis 
codes to develop the MCC and CC list. Our current CC list for Version 
24.0 of the CMS DRGs contains 3,326 codes. The MS-DRGs have 3,342 codes 
on the MCC list and 4,922 codes on CC list. While we did remove codes 
from the CC list and add others to the list, we believe that the end 
result is a better classification of conditions for identifying 
differences in severity of illness. We appreciate the commenter's 
support for our efforts.
    Comment: Several commenters supported the MCC and CC lists as a 
better means of identifying severity. The commenters recommended that 
CMS consider adopting the revised CC list in FY 2008 as an interim step 
toward IPPS reform. The commenters recommended that CMS delay 
implementation of the new severity system until FY 2009 but adopt the 
revised CC list in FY 2008. The commenters stated that by implementing 
the revised CC list in FY 2008, CMS could move forward in its goal of 
utilizing a system that more accurately recognizes the severity of 
illness of patients. The commenters believed this option would allow a 
more accurate DRG system to be in place while CMS is evaluating the 
final RAND report to determine which severity-based DRG system to 
propose for implementation in FY 2009.
    Another commenter who supported the move to MS-DRGS and CMS' 
efforts in creating the MCC and CC lists stated that it had been 
working with CMS for years to develop a mechanism to appropriately 
account for the resources involved in the care of patients with severe 
sepsis. The commenter believed that the MS-DRGs in which severe sepsis 
is recognized as a major complication, along with acute respiratory 
distress syndrome, organ failure, and other conditions where resource 
use is more intense, will go a long way towards better recognition of 
severity of illness.
    One commenter applauded CMS for the work it has put into developing 
a system that will consider complexity of care as well as severity of 
illness in determining Medicare payment for hospital inpatient 
services. The commenter particularly supported the recognition of 
hemophilia and end-stage renal disease as MCCs. The commenter stated 
that these conditions clearly meet the criteria for treatment as MCCs 
because they often require ``expensive and technologically complex'' 
services that lead to substantially increased resource use and reflect 
the highest level of severity. The commenter encouraged CMS to add 
other diagnoses as the evidence warrants.
    Response: Comments and responses on whether to implement MS-DRGs in 
FY 2008 or at a later date are discussed in detail in section II.D. of 
the preamble of this final rule with comment period. We appreciate the 
support for our efforts in creating the MCC and CC lists and agree that 
it is important to examine data using the system and continue to refine 
the MCC and CC lists.
    Comment: One commenter commended CMS on the systematic way it 
reviewed 13,549 secondary diagnosis codes to evaluate their assignment 
as a CC or non-CC using a combination of mathematical data and the 
judgment of its medical advisors. The commenter stated that, as part of 
the effort to better recognize severity of illness, CMS conducted the 
most comprehensive review of the CC list since the creation of the DRG 
classification. However, the commenter disagreed with the 
classification of many common secondary diagnoses as non-CCs. 
Specifically, the commenter questioned threshold levels that were used 
and at what point in the analysis CMS decided that a code was not a CC. 
For example, the commenter asked what was considered ``intensive 
monitoring,'' inquiring whether intensive monitoring refers to 
additional nursing care on a daily basis, additional testing, intensive 
care unit care, extended length of stay, all of these factors, or some 
other factor. In some instances, the commenter noted that similar or 
comparable codes within the same group have remained a CC/MCC, while 
other clinically similar codes or codes requiring similar resources may 
have been omitted. Without greater transparency, and a code-by-code 
explanation, the commenter was unable to determine why significant 
secondary diagnoses requiring additional resources have been removed 
from the CC list. For the most part, the commenter's analysis 
concentrated on reviewing current CCs that have been omitted from the 
revised CC list.
    The commenter made the following overall recommendations with 
regard to the CC list:
     CMS should make the final revised CC list publicly 
available as quickly as possible so that hospitals may focus on 
understanding the impact of the revised CC list, training and educating 
their coders, and working with physicians for any documentation 
improvements required to allow the reporting of more specific codes 
where applicable.
     CMS should consider additional refinements to the revised 
CC list and, in particular, address issues where the ICD-9-CM codes may 
need to be modified to provide the distinction between different levels 
of severity.
     In situations where a new code is required, CMS should 
default to leaving the codes as CCs until new codes can be created.
    Response: The process of evaluating both claims data and clinical 
issues is a challenging one. Our medical advisors performed an 
extensive evaluation of codes for the MCC and CC lists, combining their 
medical judgment and claims data. We have reviewed a number of specific 
codes raised by

[[Page 47163]]

commenters and considered whether or not the codes should be a MCC or 
CC. These numerous code requests are discussed below. Also, as 
mentioned earlier, we plan to post the data we used to evaluate each 
code on the CMS Web site. These data may assist the public in making 
recommendations for additional changes to the MCC and CC lists. Any 
revisions made to the MS-DRGs or the MCC and CC lists are being made 
available with this final rule with comment period. As suggested by the 
commenter, we plan to evaluate further refinements to the MCC and CC 
lists each year as we obtain additional recommendations and data under 
the MS-DRG system.
    Comment: One commenter acknowledged the significant effort and 
consideration CMS has given to developing both the mathematical and 
clinical judgment criteria in determining severity classifications. 
However, the commenter did not believe it was possible to fully assess 
the assignment of diagnosis codes in the severity classification 
because there was an incomplete description of the process in the 
proposed rule.
    Response: As stated earlier, we plan to post on the CMS Web site 
the data used in analyzing how to classify each ICD-9-CM code as an 
MCC, CC, or non-CC. Our process for making CC/MCC decisions was an 
iterative one involving data review and clinical analysis. In the FY 
2008 IPPS proposed rule (72 FR 24702 through 24705), we explained in 
detail our methodology for determining whether a secondary diagnosis 
qualified as an MCC, CC, or non-CC. Although posting these data results 
on the CMS Web site may be helpful in illustrating for commenters the 
data we used in classifying conditions as MCCs, CCs or non-CCs, we note 
that these data were combined with clinical judgment to make the final 
determinations. That is, the data were used as an adjunct to the 
judgment of our medical advisors. Clinical judgment may differ by 
individual physician. Thus, the data alone may be helpful but not 
definitive in helping commenters understand the reasons for some of our 
decisions. Nevertheless, we welcome further public input on potential 
revisions to the MCC and CC lists for FY 2009. We anticipate making 
updates to the MCC and CC lists each year as we receive additional 
recommendations and data. Again, below we respond to comments about 
specific codes.
    Comment: One commenter commended CMS for undertaking a long-overdue 
comprehensive review and revision of the CC list. However, the 
commenter stated that more industry input is needed regarding the 
revised CC and MCC designations in the MS-DRG system. The commenter 
stated that the brevity of the public comment period, in combination 
with insufficient detail associated with the process and rationale for 
categorization of diagnoses as MCCs, CCs, and non-CCs, made it very 
difficult to conduct a thorough analysis of all of the codes on the MCC 
and CC lists. Another commenter stated that its members have only had 
an opportunity to do a cursory comparison of the current CMS CC list to 
the MS-DRG MCC and CC lists. The commenter stated that it should have 
the ability to do a complete analysis prior to implementation. The 
commenter believed such a review would be time intensive and likely to 
take a number of months of information exchange before it could be 
completed. Although the commenter acknowledged that the MCC and CC 
lists were included in the Federal Register notice and posted on the 
CMS Web site, the commenter believed the review was hampered by a lack 
of GROUPER software and a GROUPER Definitions Manual from being able to 
complete their review. The commenter also expressed concern that the 
analysis of secondary diagnoses was based on charges instead of costs. 
The commenter stated that if CMS' intent is to convert to a cost-based 
structure, a determination of the impact of secondary diagnoses should 
not be based on charges. The commenter added that this analysis 
appeared to be inconsistent with the evolution to a cost-based DRG 
weight system.
    Response: We recognize the extensive time that is required by the 
public in order to perform a review of the MCC and CC lists. However, 
we note that a DRG Definitions Manual and GROUPER have never been made 
available until after completion of the final rule in past years and 
public commenters never before suggested that we need to delay 
implementation of proposed changes to the IPPS. While we acknowledge 
that the changes proposed for FY 2008 are significantly more 
comprehensive than the changes we propose in a typical year, the base 
DRG assignments under the MS-DRGs are largely unchanged from the prior 
CMS DRGs. The major changes result from assignment of a case to a DRG 
severity level using the new classification of secondary diagnoses as 
MCCs, CCs or non-CCs. For this reason, we made extensive information 
available to allow public commenters to perform a variety of analyses. 
The proposed rule included comprehensive lists of the codes that we 
classified as MCCs and CCs, and we made this information available 
electronically on the CMS Web site. The FY 2006 MedPAR data that were 
used to simulate proposed rule policies were made available 
simultaneous with public display of the FY 2008 proposed rule. This 
data file included both the CMS DRG assigned to the case using the 
Version 24.0 GROUPER and the proposed MS-DRG assignment. Further, we 
provided--at no extra cost to the purchaser--an FY 2005 version of the 
MedPAR that also included the CMS and MS-DRG assignment at the case 
level. For these reasons, we do not believe the lack of availability of 
a GROUPER or a DRG Definitions Manual should have precluded commenters 
from being able to analyze the revised MCC and CC lists. In fact, we 
note that a number of public commenters did provide suggestions for 
further revisions to these lists, suggesting there was ample time to be 
able to do these analyses.
    We have considered the suggestion that we analyze changes to the 
MCC and CC lists using average costs instead of charges. We adopted a 
cost-based weighting methodology because of our concern that 
differential markups among routine and ancillary services made charges 
a poor proxy for costs when setting relative weights for dissimilar 
types of cases. That is, different types of cases would use very 
different mixes of routine and ancillary services with variable markups 
and could create distortions in relative weights that are based on 
charges. However, we are less concerned about using charges when 
comparing cases that share the same primary diagnosis, which are likely 
to use similar mixes of services when deciding whether to make a DRG 
change. In these cases, we believe charges may provide a reasonable 
proxy for costs because the cases use similar services with similar 
markups.
    The methodology that we use to develop cost-based weights is very 
complex and works well to give us a measure of relative average 
resource use when combining a high number of cases together in a single 
DRG. We would need to analyze whether a methodology that tries to 
determine average costs at the case or code level would provide 
reliable results for making decisions about MCCs and CCs or DRG 
changes. Nevertheless, we appreciate this comment and will continue to 
give it further consideration as we evaluate alternative approaches to 
updating the MCC and CC lists and the MS-DRGs in the future.
    Comment: One commenter stated that CMS should address the 
inconsistencies

[[Page 47164]]

within the CC list identified by its physician and hospital reviewers. 
The commenter also recommended that, where necessary, CMS should obtain 
additional input from physicians in the appropriate specialties to 
determine the standard of care and consequent increased hospital 
resource use of some of the conditions. The commenter provided a list 
of conditions that were removed from the revised CC list and urged CMS 
to maintain them on the CC list.
    Response: We agree that the review of codes for the MCC and CC list 
was a daunting task requiring careful review by our panel of medical 
advisors. We used a number of physicians in this process, including 
internists and surgeons, to evaluate the effect of specific codes on a 
patient's severity levels. When necessary, our panel contacted other 
medical specialists, such as orthopedists and oncologists, to obtain 
additional input. We appreciate the CC issues brought to our attention. 
We reexamined specific codes brought to our attention below. We expect 
that we will continue to revise and update both the CC list and MCC 
list as we gain experience and data under the MS-DRG system. We 
anticipate making additional changes in the future with this added 
information.
    Comment: One commenter stated that, in some cases, the current ICD-
9-CM classification system does not adequately distinguish between 
acute and chronic forms of a condition. In the MS-DRG system, this 
distinction appears to be critical in predicting resources utilized at 
the patient level. The commenter recommended that CMS work with the 
NCHS to make ICD-9-CM code modifications to improve this acute and 
chronic distinction. Additionally, the commenter suggested that CMS and 
HHS should take immediate steps for the adoption of ICD-10-CM, as this 
system is much better than ICD-9-CM at distinguishing clinical 
severity, which is a key aspect of any severity-adjusted DRG system. 
The commenter believed that continued use of ICD-9-CM severely limits 
the ability of a severity-adjusted DRG system to recognize severity of 
illness.
    Response: We encourage anyone with specific recommendations for 
revisions to the ICD-9-CM diagnosis codes to contact Donna Pickett, 
National Center for Health Statistics, Centers for Disease Control and 
Prevention at: (301) 458-4434. Information on requesting changes to the 
ICD-9-CM diagnosis codes can be found on the Web site at: http://
www.cdc.gov/nchs/icd9.htm. The Department is continuing to evaluate 
whether to move to ICD-10.
    Comment: One comment disagreed with CMS' elimination of many 
chronic conditions from the CC list. The commenter stated that patient 
care resources are utilized to prevent acute exacerbation of a chronic 
condition. The commenter believed that to not include these conditions 
on a CC list is a major flaw in the logic. The commenter supported 
inclusion of chronic conditions on the CC list as means to recognize 
the resources utilized to manage these conditions effectively, whether 
they are currently in an acute phase. The commenter did not mention 
specific chronic conditions that should be added to the MCC and CC 
lists.
    Response: We address comments on specific conditions below. 
However, as a general matter, we found the Medicare data do not 
generally support that chronic or ``unspecified'' conditions are more 
resource intensive than conditions with an acute manifestation of a 
chronic disease that are described by specific codes. After carefully 
considering this issue, our medical advisors agreed that unspecified or 
chronic conditions generally are not suggestive of a higher level of 
severity of illness in and of themselves when there are more specific 
codes available to further describe the patient's specific condition or 
an acute manifestation of a chronic disease. We note that unspecified 
and chronic conditions are very commonly found in the Medicare patient 
population. The purpose of the MS-DRGs is to identify those conditions 
that lead to higher severity of illness and resource use relative to 
the average Medicare patient. These conditions suggest average or less 
than average resource use across the entire Medicare population. If we 
were to classify chronic and unspecified conditions as MCCs and CCs, 
the MS-DRGs ability to better recognize severity of illness would be 
significantly diminished.

Condition-Specific Comments

    We received a number of recommendations of codes to be added to the 
CC list and the MCC list. We have divided these recommendations into 
three general categories and will address them accordingly. The three 
categories are:
     Nonspecific codes
     Symptoms, chronic conditions, and low severity conditions
     High severity codes that were erroneously left off of the 
CC or MCC list.
    The first category of recommendations includes a number of codes 
that are nonspecific. For instance, one frequent recommendation for 
addition to the CC list is the nonspecific code 428.0 (Congestive heart 
failure, unspecified). This code is one of several codes that identify 
patients who have heart failure. Depending on the degree of certainty 
by the physician of the exact nature of the heart failure, a code can 
be assigned to indicate a very specific and acute form of heart 
failure, or a more general, nonspecific code can be assigned to 
represent a patient with heart failure, but the exact nature of the 
heart failure is unknown. Other nonspecific conditions include 
disorders of a heart valve. If the exact nature of the disorder of a 
heart valve is known, a specific code can be assigned. If the exact 
nature or degree of the disorder of the valve is not known, a more 
general, nonspecific code can be assigned. As discussed earlier in this 
final rule with comment period, our claims data and the clinical 
analysis of our medical advisors indicate that patients described by 
the more general, nonspecific codes are not at a higher severity level. 
If a patient's condition worsens and develops additional diagnoses or 
complications, these more specific conditions may be on the CC list or 
MCC list. The most frequently mentioned, nonspecific code by commenters 
was code 428.0. Therefore, we will provide a detailed summary of these 
comments and our response. There were a number of other nonspecific 
conditions suggested for additions to the CC list. We will address 
these conditions after summarizing the comments on congestive heart 
failure.
    The second category includes a variety of codes representing 
symptoms, chronic conditions, and other conditions that do not describe 
a high level of severity. These conditions do not themselves indicate a 
high severity level using our mathematical analysis of the claims data 
combined with the clinical analysis by our medical advisors. As stated 
earlier, we did not include most chronic conditions on the CC list or 
the MCC list unless the code also indicates an acute exacerbation that 
would raise the severity level. If a patient has a chronic condition 
that deteriorates or develops into an acute complication, the more 
acute condition or complication may be on the CC list or the MCC list.
    The third category of codes includes codes that commenters 
suggested should have been included on the CC list or the MCC list 
because they clearly describe a high level of severity. Upon further 
review, we agree that this third group of codes meet the criteria for 
being included on the CC list or MCC list. The claims data and our 
medical advisors' clinical analysis clearly support the addition of 
these codes to the CC list or the MCC list.

[[Page 47165]]

(a) Codes Representing Nonspecific Conditions
     Congestive Heart Failure--Code 428.0
    Comment: One commenter endorsed the implementation of the revised 
CC list. The commenter stated that CMS used new criteria for refining 
the CC and MCC lists, which led to the removal of codes currently on 
the CC list. The commenter compared the old and revised CC lists and 
found that the revision added 2,002 codes and dropped 425 codes, for a 
net increase of 1,577 codes. The commenter stated that, even though the 
number of added codes far exceeds the number of dropped codes, in the 
last three MedPAR files, the dropped codes were used an average of 
40,864 times, while the added codes were used an average of only 887 
times. The commenter stated that many of the dropped codes pertain to 
unspecified conditions for which more specific codes are available and 
included on the revised CC list. The highest volume code, code 428.0, 
was applied to an average of 2.3 million Medicare fee-for-service cases 
a year during the past 3 years. This code is the most widely used 
secondary diagnosis code, despite the fact that 12 more specific codes 
were added in FY 2003. The additional codes are shown in the Table L 
below.

 Table L.--Incidence of Secondary Diagnosis Coding for Heart Failure FY
                              2004-FY 2006
------------------------------------------------------------------------
                                                                 New in
           ICD-9-CM code                   Description          FY 2003
------------------------------------------------------------------------
428.0.............................  Congestive heart failure,
                                     unspecified.
428.1.............................  Left heart failure.......
428.20............................  Systolic heart failure;            x
                                     unspecified.
428.21............................  Systolic heart failure;            x
                                     acute.
428.22............................  Systolic heart failure;            x
                                     chronic.
428.23............................  Systolic heart failure;            x
                                     acute on chronic.
428.30............................  Diastolic heart failure;           x
                                     unspecified.
428.31............................  Diastolic heart failure;           x
                                     acute.
428.32............................  Diastolic heart failure;           x
                                     chronic.
428.33............................  Diastolic heart failure;           x
                                     acute on chronic.
428.40............................  Combined systolic and              x
                                     diastolic heart failure;
                                     unspecified.
428.41............................  Combined systolic and              x
                                     diastolic heart failure;
                                     acute.
428.42............................  Combined systolic and              x
                                     diastolic heart failure;
                                     chronic.
428.43............................  Combined systolic and              x
                                     diastolic heart failure;
                                     acute on chronic.
428.9.............................  Heart failure,
                                     unspecified.
------------------------------------------------------------------------

    The commenter stated that, by making code 428.0 a non-CC, hospitals 
will react by coding more precisely using the more definitive heart 
failure codes, raising the CMI, which results in documentation and 
coding-related overpayments. The commenter argued that, if the revised 
CC list were implemented before hospitals had a chance to improve their 
coding to accommodate the revisions, ``case-mix creep and IPPS 
overpayments would ensure.''
    Response: This commenter suggests reasons why Medicare should adopt 
the MS-DRGs over a transition period and does not appear to be opposed 
to our decision not to classify congestive heart failure as either an 
MCC or a CC. The commenter also suggests how hospitals will respond to 
the coding incentives that will be presented by revisions to the MCC 
and CC lists as well as the MS-DRGs. The issue of adopting the MS-DRGs 
over a transition is addressed in detail in section II.E. of the 
preamble of this final rule with comment period. We further address the 
implications of the coding incentives raised in this public comment in 
section II.D.6. of the preamble of this final rule with comment period 
that discusses an adjustment to IPPS rates for improvements in 
documentation and coding.
    Comment: A number of other commenters urged CMS to classify the 
condition under code 428.0 as a CC. The commenters indicated that code 
428.0 identifies an acute condition, not a benign or a chronic 
condition. Some commenters stated that any inpatient with congestive 
heart failure requires increased nursing care to closely monitor and 
assess physical symptoms and vital signs for indications of increased 
congestion. Patients often need to undergo repeated laboratory studies.
    Another commenter stated that the proposed rule incorrectly 
characterized the diastolic and systolic heart failure codes as 
congestive heart failure. The commenter pointed out that according to 
the Fourth Quarter 2002 issue of Coding Clinic for ICD-9-CM, congestive 
heart failure is not an inherent component of the codes in category 428 
for systolic and diastolic heart failure. Therefore, according to 
Coding Clinic, the commenter stated that code 428.0 should be assigned 
as an additional code when the patient has systolic or diastolic 
congestive heart failure. The commenter added that code 428.0 may 
appropriately be assigned by itself when congestive heart failure is 
documented, but there is no documentation of systolic or diastolic 
heart failure. The commenter stated that, in ICD-9-CM, there is no 
distinction between an acute exacerbation of congestive heart failure 
and chronic congestive heart failure. Code 428.0 is assigned for both. 
The commenter added that codes 402.11 (Benign hypertensive heart 
disease with congestive heart failure) and 402.91 (Unspecified 
hypertensive heart disease with congestive heart failure) are on the CC 
list. The commenter suggested that code 428.0 be included on the 
revised CC list as well.
    Another commenter who objected to the removal of code 428.0 from 
the CC list stated that, currently, ICD-9-CM codes do not distinguish 
between acute, chronic, or acute exacerbation of chronic congestive 
heart failure. All forms of this condition are assigned to code 428.0. 
The commenter indicated that medical record documentation may not 
typically include information on whether the congestive heart failure 
is systolic or diastolic (acute versions of heart failure with this 
specificity are considered MCCs). The commenter requested that code 
428.0 be added as an MCC until a new code can be created to identify 
acute exacerbation of congestive heart failure. The commenter stated 
that the fact that there is ``congestion'' is medically more 
problematic and more resource intensive and may necessitate care in the 
intensive care unit and a prolonged

[[Page 47166]]

hospital stay. The commenter stated that coding guidelines necessitate 
that acute pulmonary edema of cardiac origin be assigned code 428.0.
    Response: Given the number of public comments on this one 
condition, our medical advisors reviewed the data and clinical issues 
surrounding code 428.0 again. They strongly recommend that we not 
change this code to a CC. There are three reasons for this 
recommendation. First, as stated earlier, we developed a policy of 
classifying nonspecific codes as non-CCs when a more specific code was 
available that identified the more specific nature of the patient's 
illness. Second, data for this and other nonspecific codes do not 
support assigning it to a higher severity level. Third, in the clinical 
judgment of our medical advisors, the use of a nonspecific code means 
that the physician had not identified a medical condition that 
indicates the patient is at a higher severity level or requires greater 
resources. This code is vague and does not provide any description of 
the exact nature of the heart failure. Data for this very commonly 
reported code clearly indicate that these patients are at a low 
severity level. However, claims data and our general policy of 
assigning nonspecific codes to a lower severity level were not the only 
factors that we used to classify a code as an MCC, CC, or non-CC. As 
stated above, the data were only used as an adjunct to the judgment of 
our medical advisors. In the judgment of our medical advisors, the 
condition described by code 428.0 does not suggest an increase in 
patient severity of illness. In this case, 12 more specific codes are 
available to indicate the more severe forms of heart failure. If the 
physician includes more precise information in the medical record that 
would allow the coder to identify a more specific code to describe the 
type of heart failure, the documentation will reflect that the hospital 
treated a more severely ill patient and the case will be assigned to a 
higher severity level.
    While we decided to classify code 428.0 as a non-CC based on our 
policy concerning nonspecific codes, the data, and the judgment of our 
medical advisors, we note that heart failure is an important national 
health issue. We believe it is very important for hospitals and 
physicians to use the most specific codes that describe the incidence 
of heart failure in their patients. In order to accurately and 
completely evaluate health care outcomes for the treatment of heart 
failure, detailed and accurate information is needed on patients with 
this condition. Physicians and hospitals will undermine efforts to 
obtain more information on patients with this disease when they use a 
nonspecific code when there is a more detailed code to describe their 
patient. We highly encourage physicians and hospitals to work together 
to use the most specific codes that describe their patients'' 
conditions. Such an effort will not only result in more accurate 
payment by Medicare but will provide better information on the 
incidence of this disease in the Medicare patient population.
    Comment: As stated earlier, a number of commenters requested CMS to 
add additional nonspecific codes to the CC list. These codes represent 
a variety of nonspecific conditions affecting multiple body systems. 
The commenters stated that the following nonspecific codes may increase 
the severity level for a patient, and should, therefore, be added to 
the CC list.
     070.70, Unspecified viral hepatitis C
     287.30, Primary thrombocytopenia, unspecified
     287.5, Thrombocytopenia, unspecified
     303.00, Acute alcohol intoxication, unspecified
     345.90, Epilepsy, unspecified, without intractable 
epilepsy
     403.90, Hypertensive chronic kidney disease, unspecified, 
with chronic kidney disease stage I through stage IV, or unspecified
     424.0, Mitral valve disorders
     424.1, Aortic valve disorders
     426.13, Other second degree atrioventricular block
     426.6, Other heart block
     426.9, Conduction disorder, unspecified
     447.6, Arteritis, unspecified
     458.9, Hypotension, unspecified
     451.2, Thrombophlebitis of lower extremities, unspecified
     459.0, Hemorrhage, unspecified
     585.5, Chronic kidney disease, unspecified
     707.0, Decubitus ulcer, unspecified
     780.39, Other convulsions
    Response: As previously stated, we did not classify nonspecific 
codes to the MCC list or the CC list when more specific codes were 
available to identify the condition of the patient. In general, we 
found that the data did not support classifying unspecified codes as 
either MCCs or CCs. Further, after detailed discussions of potential 
clinical scenarios among our medical advisors, there was a consensus 
that a specified condition for the patient generally signals higher 
degree of severity of illness. If the physician was to diagnose 
additional information about the patient's condition or should the 
patient's condition worsen, a more precise code would be assigned that 
may be a CC or an MCC. As a result of these comments, our medical 
advisors again reviewed these codes and determined that their original 
decisions were correct. That is, they do not believe that these 
nonspecific codes should be classified as MCCs or CCs when more 
specific codes are available that provide more information about 
patient severity of illness. For these reasons, we are not adding the 
codes listed above to the CC list.
(b) Symptoms, Chronic Conditions, and Low Severity Conditions
    Comment: Commenters requested that we add a number of codes to the 
CC list that describe symptoms, chronic conditions, and low severity 
conditions. These conditions include the following codes:
     070.54, Chronic viral hepatitis C
     250.4x, Diabetes mellitus with renal manifestations
     250.5x, Diabetes mellitus with ophthalmic manifestations
     250.6x, Diabetes mellitus with neurological manifestations
     250.7x, Diabetes mellitus with peripheral circulatory 
disorders
     250.8x, Diabetes mellitus with other specified 
manifestations
     263.0, Moderate Malnutrition
     263.1, Mild malnutrition
     276.51, Dehydration
     276.52, Hypovolemia
     276.6, Fluid overload
     276.7, Hyperpotassemia
     276.9, Electrolyte and fluid disorders
     280.0, Iron deficiency anemias, secondary to blood loss 
(chronic)
     284.8, Aplastic anemias, not elsewhere classified
     287.39 Other primary thrombocytopenia
     287.4 Secondary thrombocytopenia
     303.01 Acute alcohol intoxication, continuous
     303.02 Acute alcohol intoxication, episodic
     306.00, Blindness
     389.9, Deafness
     413.9, Angina pectoris
     427.31, Atrial fibrillation
     428.1, Left heart failure (change from CC to MCC)
     451.0, Thrombophlebitis of superficial vessels of lower 
extremities;
     492.8, Other emphysema
     496, Chronic airway obstruction, not elsewhere classified
     585.3, Chronic kidney disease, stage III (moderate)
     599.7, Hematuria
     710.0, Systemic lupus erythematosus
     731.3, Major osseous defects

[[Page 47167]]

     786.03, Apnea
     788.20, Urinary retention
     799.02, Hypoxemia
     V45.1, Renal dialysis status
    Response: As discussed earlier, we did not assign chronic 
conditions to the CC list or the MCC list. These conditions do not 
themselves indicate a high severity level using our mathematical 
analysis of the claims data combined with the clinical judgment by our 
medical advisors. As stated earlier, we did not include most chronic 
conditions on the CC list or the MCC list unless the code also 
indicates an acute exacerbation that would raise the severity level. If 
the chronic condition worsens and the patient develops an acute 
complication, the more specific code for the acute exacerbation would 
identify the increased level of severity of illness and, if warranted, 
would be on the CC or the MCC list. We also did not include general 
symptoms on the CC list because, alone, they do not suggest a high 
level of severity of illness. Codes identifying symptoms such as 
hematuria, apnea, or hypoxemia that are found in many patients may 
indicate a wide range of patient severity and describe a transient 
finding. Should the physician diagnose a more specific condition that 
led to the symptoms, more information about the patient and their 
severity of illness would be known. The specific diagnosis may indicate 
higher severity of illness and the code that describes it may be 
included on the CC list or the MCC list. We also did not include 
conditions on the CC list or the MCC list that do not generally raise 
the severity level of a patient. If the code describes patients who 
range from mild to severe, we believe it is best to use additional 
secondary diagnosis codes that would be reported to better describe the 
true nature of the patient's condition. These more precise codes may be 
on the CC list or the MCC list.
    Our clinical advisors reviewed claims data and the clinical issues 
surrounding patients who had the symptoms, chronic diagnoses, and less 
severe conditions listed above. They recommend that we not add the 
codes listed above to the CC list because these conditions do not 
significantly increase a patient's severity of illness. Therefore, we 
are not adding the codes listed above to the CC list.
(c) High Severity Codes That Were Erroneously Left Off of the CC List 
or the MCC List
    As stated earlier, a number of commenters recommended the addition 
of codes to the CC list or the MCC list for conditions that the 
commenters stated clearly represented a high severity level. The 
commenters provided information on the degree to which these conditions 
are life threatening and require extensive amounts of resources. The 
commenters questioned why these conditions were left off of the CC and 
MCC lists. Commenters recommended the removal of two codes from the CC 
list because the commenters believed they do not increase the patient's 
severity level or lead to more resource use. We discuss these 
conditions below.
    Comment: Commenters requested that we add the following five codes 
to the CC list. The commenters stated that these conditions clearly 
increase the severity level and lead to more resource use.
     285.1, Acute posthemorrhagic anemia
     403.91, Hypertensive chronic kidney disease, unspecified, 
with chronic kidney disease stage V or end stage renal disease
     426.53, Other bilateral bundle branch block
     426.54, Trifascicular block
     451.11, Phlebitis and thrombophlebitis, femoral vein 
(deep) (superficial)
    Response: We agree with the commenters that the five codes listed 
above should have been included on the CC list. Upon further review of 
our data and discussions among our medical advisors, there was 
consensus that these codes describe patients with a higher severity 
level. Therefore, we are adding them to the CC list.
    Comment: Commenters requested that we remove the following two 
codes from the CC list and make them non-CCs. The commenters indicated 
that there are more specific heart failure codes that would be assigned 
along with these codes that would indicate whether or not the patient 
had a severe form of heart failure. The commenters stated that these 
two codes do not indicate the exact nature of the heart failure and 
therefore should not be on the CC list.
     402.11, Hypertensive heart disease, benign, with heart 
failure
     402.91, Hypertensive heart disease, unspecified, with 
heart failure
    Response: We agree with the commenters. Upon further review, we do 
not believe the codes meet the criteria to be considered CCs. The codes 
do not describe the exact nature of the heart failure. The more 
specific heart failure codes that would be reported along with these 
codes would be used to justify the assignment to a high severity level. 
Therefore, we are removing the two codes from the CC list.
    Comment: Commenters requested that we add the following four codes 
to the MCC list. The commenters indicated that these four codes 
describe patients at the highest level of severity. Patients with these 
conditions would use an extensive amount of resources. Furthermore, the 
commenters added, codes that describe similar conditions are currently 
on the MCC list. The commenters believed these codes were erroneously 
excluded from the MCC list.
     282.69, Other sickle-cell disease with crisis
     345.2, Petit mal status
     345.71, Epilepsia partialis continua, with intractable 
epilepsy
     780.01, Coma
    Response: We agree that we made an error in excluding these four 
codes from the MCC list. Therefore, we are adding the four codes to the 
MCC list. We provide a summary of all the additions and deletions to 
the CC list and the MCC list at the end of this section.
Additional Comments on CC List
    We received several additional comments concerning the CC and MCC 
lists which we summarize below. Some of the comments involved the 
commenter's confusion about our proposed CC and MCC lists. Others 
involved a disagreement with our proposal of not making significant 
changes to the DRGs to better distinguish severity of illness in 
pregnancies and newborns, even though they are not a significant part 
of the Medicare population. We also received recommendations for 
alternative ways to classify conditions as CCs that do not meet our 
current criteria. In addition, we received comments on our proposal of 
not classifying specific conditions as a CC/MCC when the patient dies. 
We discuss these issues below.
     Other Myelopathy--Code 336.8
    Comment: One commenter requested that we add code 336.8 (Other 
myelopathy) to the CC list.
    Response: Code 336.8 is already on the CC list. Therefore, we are 
not making any further change for code 336.8.
     Ascites--Code 789.5
    Comment: One commenter requested that we add the code 789.5 
(Ascites) to the CC list
    Response: We note that code 789.5 is being deleted as of October 1, 
2007, when two new codes are being created, code 789.51 (Malignant 
ascites) and code 789.59 (Other ascites). Both of these new codes are 
on the CC list. Therefore no additional change is required for ascites.
     Aplastic Anemias, Not Elsewhere Classified--Code 284.8

[[Page 47168]]

    Comment: One commenter objected to the removal of code 284.8 
(Aplastic anemias, not elsewhere classified (NEC)) from the CC list.
    Response: Code 284.8 was placed on the MCC list. Thus, while it is 
not classified as a CC as the comment suggested, it is an MCC. We are 
maintaining code 284.8 on the MCC list, as we agree that this is a 
condition that places a patient at a high severity level.
     Complications of Pregnancy, Childbirth and Puerperium--
Codes 630 through 677
    Comment: One commenter objected to the removal of codes from 
category 630 through 677 (Complications of pregnancy, childbirth and 
puerperium) of the CC list. The commenter was concerned about the 
number and wide breadth of codes from Chapter 11 of the ICD-9-CM, 
Complications of pregnancy, childbirth and puerperium (categories 630-
677), that are being removed from the CC list . The commenter 
acknowledged CMS'' position that, due to the low volume in the Medicare 
population, diagnoses related to newborns, maternity and congenital 
anomalies codes in this section were not reviewed. Of special concern 
to the commenter were conditions such as infections, acute renal 
failure, air and pulmonary embolism, cardiac arrest, shock, among 
others, that are MCCs or CCs and would be coded as such if not for the 
fact that the ICD-9-CM classification considers problems associated 
with pregnancy, childbirth and the puerperium to be so clinically 
significant that they require special combination codes. The 
combination codes are intended to identify that the presence of the 
pregnancy complicates the condition. For example, code 415.19 (Other 
pulmonary embolism and infarction) is an MCC, while code 673.20 
(Obstetrical blood-clot embolism, unspecified) is not even a CC.
    The commenter recommended that codes in Chapter 11 be carefully 
evaluated and validated with clinical experts, similar to the process 
to which the codes in other chapters were submitted. The commenter 
believed that combination codes should be treated consistently. If the 
condition is considered a CC or MCC in a nonpregnant patient, the 
corresponding pregnancy-related combination code also should be a CC or 
MCC.
    Response: As we stated in our proposed rule and elsewhere in this 
final rule with comment period, we focused our attention in developing 
the MS-DRGs for the Medicare population. We did not conduct a detailed 
review of Chapter 11 codes. We encourage other payers who want to use 
MS-DRG to update the system for their own population. Diagnoses related 
to newborns, maternity, and congenital anomalies are very low volume in 
the Medicare population and were not reviewed for purposes of creating 
the MCC and CC lists. We used the APR DRGs to categorize these 
diagnoses. This DRG system is used for the all payer ratesetting system 
in Maryland and will be based on data that better reflects the newborn 
and maternity population than Medicare. For newborn, obstetric, and 
congenital anomaly diagnosis, we classified severity level 3 (major) 
and 4 (extreme) diagnoses as an MCC. We designated default severity 
level 2 (moderate) diagnoses as a CC and all other diagnoses as a non-
CC. We encourage the commenter to review the MCC and CC lists in on the 
CMS Web site. Many codes in the 630 to 677 range appear on the MCC 
list.
     Extreme Immaturity--Code 765.0
    Comment: One commenter objected to codes in category 765.0 (Extreme 
immaturity) not being classified as CCs. The commenter stated that 
codes in category 765.0 represent infants with a birth weight of less 
than 1000 gm. The commenter indicated that common problems with very 
low birthweight babies are low oxygen levels at birth; inability to 
maintain body temperature; difficulty feeding and gaining weight; 
infection; breathing problems, such as respiratory distress syndrome; 
neurological problems, such as intraventricular hemorrhage; 
gastrointestinal problems, such as necrotizing enterocolitis; and 
sudden infant death syndrome (SIDS). The commenter stated that while 
some of these problems have unique ICD-9-CM codes that could be 
reported, not all of them do (for example, inability to maintain body 
temperature).
    Response: While we appreciate the commenter's concern about the CC 
classifications for newborns, we state again that we did not examine 
these newborn codes as part of our development of the MS-DRGs. We 
focused our efforts on the Medicare population and used the APR DRG 
classification for newborn diagnoses for Medicare. If the APR DRG 
classification of this condition were to change, we would also adopt 
the same designation for Medicare.
     Exclusion of MCCs and CC When a Patient Dies
    Comment: Several commenters addressed codes that represent 
diagnoses associated with patient mortality. The commenter indicated 
that, in the proposed rule, CMS noted that diagnoses that were closely 
associated with patient mortality were assigned different CC 
subclasses, depending on whether the patient lived or died.
    These diagnoses are:
     427.41, Ventricular fibrillation;
     427.5, Cardiac arrest;
     785.51, Cardiogenic shock;
     785.59, Other shock without mention of trauma; and
     799.1, Respiratory arrest.
    The commenters agreed that these diagnoses should be considered 
MCCs for patients who are discharged alive. However, the commenters 
disagree with CMS'' proposal to make these diagnoses non-CCs when a 
patient dies. The commenters urged CMS to consider the patient's length 
of stay or other factors when these codes are reported and count them 
as an MCC when a patient dies during the admission. The commenters 
agreed that a patient who expires soon after admission may not have 
significant resources associated with these conditions. However, the 
commenters believed that this is not true when a patient has been 
hospitalized longer, such as for a week.
    Response: Our medical advisors examined this issue again and 
continue to believe it is not appropriate to classify a case as an MCC 
based on one of the codes above if the patient dies. While we 
understand the concern of the commenters, we do not believe that a long 
length of stay patient will necessarily lead to the conclusion that it 
is appropriate to code these conditions in a patient that dies in the 
hospital. It is a possible that a terminally ill patient with a long 
length of stay required no special resuscitation efforts that would 
suggest higher resource use associated with coding of these conditions. 
We are concerned that changing our policy to allow use of these codes 
for a patient that died in the hospital could lead to accurate and 
widespread coding of the conditions when they are not indicative of a 
higher patient resource costs. Therefore, we are continuing our policy 
of classifying the diagnoses listed above as MCCs only if the patient 
is discharged alive. We will evaluate alternative approaches such as 
looking at the length of stay and other factors for these patients and 
make future DRG revisions, as needed.
     Selected Conditions in Joint Replacement Patients
    Comment: One commenter asked that we classify certain codes as MCCs 
or CCs for patients having a joint replacement. The commenter 
specifically requested that the following codes be made either MCCs or 
CCs when occurring in a joint replacement patient:

[[Page 47169]]

     731.3, Major osseous defect
     278.0, Obesity
     278.01, Morbid obesity
     V85.35, Body mass index 35.0-35.9, adult
     V85.37, Body mass index 37.0-37.9, adult
    Response: We do not believe that we should make further changes to 
the MS-DRG assignments based on combinations of selected diagnoses. 
These types of analyses could be done with virtually any MS-DRG and 
would add significant complexity to the DRG system that we do not 
believe is warranted at this time. Our medical advisors reviewed both 
the data and clinical issues surrounding these codes and determined 
that they would not significantly increase the severity level for 
Medicare patients on average across all patients. Therefore, they are 
not CCs. We are not changing these codes to CCs. They will remain non-
CC for all cases.
    The following table summarizes changes to the proposed MCC (Table 
6J) and CC (Table 6K) lists published in the proposed rule. These 
changes are a result of review of comments and were discussed in detail 
above. A complete, updated CC and MCC list will be posted on the CMS 
Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/ under Downloads. 
We will continue to evaluate our criteria for the development of the CC 
and MCC list to determine if refinements to these criteria are needed. 
As we gain data and experience under MS-DRGs, we believe that there may 
be refinements to these criteria.

           Changes to MCC and CC List as a Result of Comments
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Add to CC list:
    285.1..............................  Acute posthemorrhagic anemia.
    403.91.............................  Hypertensive chronic kidney
                                          disease, unspecified, with
                                          chronic kidney disease stage V
                                          or end stage renal disease.
    426.53.............................  Other bilateral bundle branch
                                          block.
    426.54.............................  Trifascicular block.
    451.11.............................  Phlebitis and thrombophlebitis,
                                          femoral vein (deep)
                                          (superficial).
Remove from CC list:
    345.2..............................  Petit mal status.
    345.71.............................  Epilepsia partialis continua,
                                          with intractable epilepsy.
    402.11.............................  Hypertensive heart disease,
                                          benign, with heart failure.
    402.91.............................  Hypertensive heart disease,
                                          unspecified, with heart
                                          failure.
    780.01.............................  Coma.
Add to MCC list:
    282.69.............................  Other sickle-cell disease with
                                          crisis.
    345.2..............................  Petit mal status.
    345.71.............................  Epilepsia partialis continua,
                                          with intractable epilepsy.
    780.01.............................  Coma.
Remove from MCC list:
    None...............................
------------------------------------------------------------------------

3. Dividing MS-DRGs on the Basis of the CCs and MCCs
    In developing the MS-DRGs, two of our major goals were to create 
DRGs that would more accurately reflect the severity of the cases 
assigned to them and to create groups that would have sufficient volume 
so that meaningful and stable payment weights could be developed. As 
noted above, we excluded the CMS DRGs in MDCs 14 and 15 from 
consideration because these DRGs are low volume. As stated previously, 
we do not have the expertise or data to maintain the CMS DRGs for 
newborns, pediatric, and maternity patients. We continue to maintain 
MDCs 14 and 15 without modification in order to have MS-DRGs available 
for these patients in the rare instance where there is a Medicare 
beneficiary admitted for maternity or newborn care.
    In designating an MS-DRG as one that will be subdivided into 
subgroups based on the presence of a CC or MCC, we developed a set of 
criteria to facilitate our decision-making process. In order to warrant 
creation of a CC or major CC subgroup within a base MS-DRG, the 
subgroup had to meet all of the following five criteria:
     A reduction in variance of charges of at least 3 percent.
     At least 5 percent of the patients in the MS-DRG fall 
within the CC or MCC subgroup.
     At least 500 cases are in the CC or MCC subgroup.
     There is at least a 20-percent difference in average 
charges between subgroups.
     There is a $4,000 difference in average charges between 
subgroups.
    Our objective in developing these criteria was to create 
homogeneous subgroups that are significantly different from one another 
in terms of resource use, that have enough volume to be meaningful, and 
that improve our ability to explain variance in resource use. These 
criteria are essentially the same criteria we used in our 1994 severity 
analysis. In developing the MS-DRGs, we continued to apply our 
longstanding policy that each DRG should contain patients who are 
similar from a clinical perspective.
    To begin our analysis, we subdivided each of the base MS-DRGs into 
three subgroups: non-CC, CC, and MCC. Each subgroup was then analyzed 
in relation to the other two subgroups using the volume, charge, and 
reduction in variance criteria. The criteria were applied in the 
following hierarchical manner:
     If a three-way subdivision met the criteria, we subdivided 
the base MS-DRG into three CC subgroups.
     If only one type of two-way subdivisions met the criteria, 
we subdivided the base MS-DRG into two CC subgroups based on the type 
of two-way subdivision that met the criteria.
     If both types of two-way subdivisions met the criteria, we 
subdivided the base MS- DRG into two CC subgroups based on the type of 
two-way subdivision with the highest R\2\ (most explanatory power to 
explain the difference in average charges).
     Otherwise, we did not subdivide the base MS-DRG into CC 
subgroups.
    For any given base MS-DRG, our evaluation in some cases showed that 
a subdivision between a non-CC and a combined CC/MCC subgroup was all 
that was warranted (that is, there was not a great enough difference 
between the CC and MCC subgroups to justify separate CC and MCC 
subgroups). Conversely, in some cases, even though an MCC subgroup was 
warranted, there was not a sufficient difference between the non-CC and 
CC subgroups to justify separate non-CC and CC subgroups.
    Based on this methodology, a base MS-DRG may be subdivided 
according to the following three alternatives, rather than the current 
``with CC'' and ``without CC'' division.
     DRGs with three subgroups (MCC, CC, and non-CC).
     DRGs with two subgroups consisting of an MCC subgroup but 
with the CC and non-CC subgroups combined. We refer to these groups as 
``with MCC'' and ``without MCC.''
     DRGs with two subgroups consisting of a non-CC subgroup 
but with the CC and MCC subgroups combined. We refer to these two 
groups as ``with CC/MCC'' and ``without CC/MCC.''
    As a result of the application of these criteria, 745 MS-DRGs were 
created as shown in the following table.

[[Page 47170]]



                    Table M.--Number of CC Subgroups
------------------------------------------------------------------------
                                                 Number of
                   Subgroups                      base MS-    Number of
                                                    DRGs       MS-DRGs
------------------------------------------------------------------------
No subgroups..................................           53           53
Three subgroups...............................          152          456
Two subgroups: CC and major CC; non-CC........           43           86
Two subgroups: non-CC and CC; major CC........           63          126
                                               -------------------------
    Subtotal..................................          311          721
------------------------------------------------------------------------
MDC 14........................................           22           22
Error DRGs....................................            2            2
                                               -------------------------
        Total.................................          335          745
------------------------------------------------------------------------

    The 745 MS-DRGs represent an increase over the 652 DRGs we proposed 
in our 1994 CC revision analysis. The increase in the number of DRGs is 
primarily the result of an increase in the number of proposed base MS-
DRGs that are subdivided into three CC subgroups. The distribution of 
patients across the different types of CC subdivisions is contained in 
Table N below. The table shows that 51.7 percent of the patients are 
assigned to base MS-DRGs with three CC subgroups, and only 11.8 percent 
of the patients are assigned to base MS-DRGs with no CC subgroups.

      Table N.--Distribution of Patients by Type of CC Subdivision
------------------------------------------------------------------------
                CC subdivision                     Count       Percent
------------------------------------------------------------------------
None..........................................    1,382,810         11.8
(MCC and CC), Non-CC..........................      629,639          5.4
MCC, (CC and Non-CC)..........................    3,650,321         31.2
MCC, CC, and Non-CC...........................    6,054,081         51.7
------------------------------------------------------------------------

    Using Medicare charge data (without applying any criteria to remove 
statistical outlier cases), the reduction in variance (R\2\) was 
computed for current CMS DRGs, the MS-DRGs with all 311 base MS-DRGs 
subdivided into 3 CC subgroups, and the MS-DRGs collapsed into 745 
DRGs. Table O below shows that the R\2\ for the MS-DRGs with all 311 
base MS-DRGs subdivided into 3 CC subgroups (957 DRGs composed of 311 
base MS-DRGs subdivided into 3 CC subgroups plus an additional 22 MDC 
14 and MDC 15 DRGs as well as 2 error DRGs) is 10.62 percent higher 
than the current CMS DRGs. Collapsing the 957 MS-DRGs down to 745 MS-
DRGs lowers this increase in R\2\ slightly to 9.41 percent. Although 
adopting a 3-way split for each base MS-DRG would produce a DRG system 
with higher explanatory power, the 957 MS-DRGs would not meet the 
criteria we specified above for subdividing each base DRG. The criteria 
we specified above would create a monotonic DRG system. We believe that 
the value of having a monotonic DRG system outweighs the slight 
decrease in explanatory power. For this reason, we proposed to adopt 
the 745 MS-DRGs.

             Table O.--Explanatory Power (R\2\) for MS-DRGs
------------------------------------------------------------------------
                                                                Percent
                                                       R\2\      change
------------------------------------------------------------------------
Current CMS DRG...................................      36.19  .........
2007 CMS Severity DRGs with 3 CC Subgroups........      40.03      10.62
2007 CMS Severity DRGs Collapsed to 714 DRGs......      39.59       9.41
------------------------------------------------------------------------

    Comment: One commenter supported our five criteria for establishing 
severity subgroups. The commenter believed the use of specific 
quantitative criteria to determine how specific base DRGs are divided 
into terminal categories that reflect severity levels is logical and 
designed to ensure that only substantively important differences in 
resource requirements are recognized by the MS-DRG system. The 
commenter did note that CMS had not explicitly included statistical 
significance in these criteria and urged CMS to consider CC or MCC 
splits only when they meet minimal standards of both size and 
statistical significance.
    Response: We appreciate the commenter's support for our five 
criteria for establishing severity subgroups. We will consider the 
commenter's other suggestion as we make further refinements to the MS-
DRGs.
    Comment: One commenter disagreed with our five criteria for 
establishing severity subgroups. The commenter stated that these 
criteria are too restrictive, lack face validity, and create perverse 
admission selection incentives for hospitals by significantly 
overpaying for cases without a CC and underpaying for cases with a CC. 
The commenter recommended that the existing five criteria be modified 
for low-volume subgroups to assure materiality. For higher volume MS-
DRG subgroups, they recommended that two other criteria be considered, 
particularly for nonemergency, elective admissions. These two criteria 
are:
     Is the per-case underpayment amount significant enough to 
affect admission vs. referral decisions on a case-by-case basis?
     Is the total level of underpayments sufficient to 
encourage systematic admission vs. referral policies, procedures, and 
marketing strategies?
    The commenters also recommended refining the five existing criteria 
for MCC/CC/without subgroups as follows:
     Create subgroups if they meet the five existing criteria, 
with cost difference between subgroups ($1,350) substituted for charge 
difference between subgroups ($4,000).
     If a proposed subgroup meets criteria  2 and 
 3 (at least 5 percent of discharges in the subgroup and at 
least 500 cases) but fails one of the others, create the subgroup if 
either of the following criteria is met:

--At least $1,000 cost difference per case between subgroups; or
--At least $1,000,000 overall cost should be shifted to cases with a CC 
(or MCC) within the base DRG for payment weight calculations.

    The commenter stated that this approach would affect DRGs where the 
total dollars under consideration may be quite high (for example, in 
the hundreds of millions), due to large numbers of procedures, but the 
percentage difference in average charges falls short of the 20 percent 
difference in average charges between subgroups.
    Response: We disagree that the five criteria for establishing 
severity subgroups are too restrictive and will lead to overpayments 
for cases without a CC and underpay for cases with a CC. Relative to 
the current CMS DRGs, the statistical data above suggest that the 
construction of the MS-DRGs using these criteria will improve payment 
accuracy. The explanatory of the MS-DRGs to predict resource use is 
more than 9 percent greater than under the current CMS DRGs. Further, 
under the current CMS DRGs, nearly 78 percent of patients are in the 
highest severity level, while only 22.2 percent are in the

[[Page 47171]]

highest severity level under the MS-DRGs. In addition to having a 
better distribution of cases among severity levels, the MS-DRGs have 
more significant difference in average charges over the different 
severity levels compared to the current CMS DRGs (72 FR 24706).
    The commenter does not appear to disagree with these statistics 
suggesting that improvements will result from the MS-DRGs. Rather, the 
commenter is suggesting that we should create more subgroups with 
smaller differences in average charges (or costs). We do not believe 
the first two alternative criteria are practical or necessary to apply. 
They would require us to make subjective judgments about whether a 
hospital would treat patients or refer them elsewhere solely based on 
payment incentives. We do not believe it is possible or appropriate for 
us to make judgments about whether a hospital would decide to treat or 
not treat a patient based on how much they are paid. Further, with the 
exception of cardiac specialty hospitals, we have no evidence hospitals 
are selectively treating or avoiding particular types of patients 
because of incentives present in Medicare's IPPS payments. The reforms 
we are making are intended to pay hospitals more accurately for the 
patients they are already treating and avoid incentives for more 
specialty hospitals to form. Therefore, we do not believe it is 
practical or necessary to use the first two criteria suggested by the 
commenter.
    With respect to the last criteria, we note that the MS-DRGs 
represent a significant expansion in the number of DRGs from 538 in FY 
2007 to 745 in FY 2008. The commenter is suggesting that we create 
additional subgroups with less variation between the subgroups. 
Payments under a prospective payment system are predicated on averages. 
Thus, most individual cases within any DRG system will have costs that 
are either higher or lower than the average for that group. While 
creating groups that have lower differences in average charges or costs 
between the groups may lessen variation around the average and improve 
explanatory power, it will also create more low-volume groups and 
increase the likelihood that the relative weights will be nonmonotonic 
and have instability in their values from year to year. We believe the 
value of a lower number of DRGs outweighs the benefit we would obtain 
from a slight increase in R\2\ and the risk of having nonmonotonic DRGs 
that would come from adopting the commenter's suggestions.
4. Conclusion
    We believe the MS-DRGs represent a substantial improvement over the 
current CMS DRGs in their ability to differentiate cases based on 
severity of illness and resource consumption. As developed, the MS-DRGs 
increase the number of DRGs by 207, while maintaining a reasonable 
patient volume in each DRG. The MS-DRGs increase the explanation of 
variance in hospital resource use relative to the current CMS DRGs by 
9.41 percent. Further, the data shown below in Table P and Table Q 
illustrate how assignment of cases to different severity of illness 
subclasses improves in the MS-DRGs relative to the CMS DRGs.

                Table P.--Overall Statistics for CMS DRGs
------------------------------------------------------------------------
                                                                Average
           CC subclass--current CMS DRG              Percent    charges
------------------------------------------------------------------------
One or more CCs...................................      77.66    $24,538
Non-CC............................................      22.34     14,795
------------------------------------------------------------------------


                Table Q.--Overall Statistics for MS-DRGs
------------------------------------------------------------------------
                                    Number of                  Average
           CC subgroup                cases       Percent      charges
------------------------------------------------------------------------
MCC..............................    2,607,351         22.2      $44,219
CC...............................    4,298,362         36.6       24,115
Non-CC...........................    4,826,980         41.1       18,416
------------------------------------------------------------------------

    Under the current CMS DRGs, 78 percent of cases are assigned to the 
highest severity levels (CC) and the remaining 22 percent are assigned 
to the lowest severity level (non-CC). Applying the three severity 
subclasses to FY 2006 data would result in approximately 22 percent of 
patients being assigned to the severity subgroup with the highest level 
of severity (MCC), 41 percent being assigned to the lowest severity 
subclass (non-CC), and the remaining 37 percent being assigned to the 
middle severity subclass (CC). Adding the new MCC subgroup greatly 
enhances our ability to identify and pay hospitals for treating 
patients with high levels of severity. As Table Q above shows, the new 
subgroups also have significantly different resource requirements. The 
MCC subgroup contains patients with average charges almost twice as 
large as for those in the CC group ($44,219 compared to $24,115).
    In addition to resulting in improvements in the DRG system's 
recognition of severity of illness, we believe the MS-DRGs are 
responsive to the public comments that were made on last year's IPPS 
proposed rule with respect to how we should undertake further DRG 
reform. In the FY 2007 IPPS final rule, we identified three major 
concerns in the public comments about our proposed adoption of CS DRGs:
    We received comments after the FY 2007 IPPS final rule suggesting 
that further adjustments were needed to the proposed DRG system. The 
commenters believed that the CS DRGs did not incorporate many of the 
changes to the DRG assignments that have been made over the years to 
the CMS DRGs. There was significant interest in the public comments in 
either revising the CS DRGs to reflect these changes or using the CMS 
DRGs as the starting point to better recognize severity.
    We believe that the MS-DRGs are responsive to these suggestions. 
The MS-DRGs use the CMS DRGs as the starting point for revising the 
DRGs to better recognize resource complexity and severity of illness. 
We are generally retaining all of the refinements and improvements that 
have been made to the base DRGs over the years that recognize the 
significant advancements in medical technology and changes to medical 
practice. At the same time, the MS-DRGs greatly improve our ability to 
identify groups of patients with varying levels of severity. They 
retain all of the improvements made to the DRGs over the years, while 
providing a more equitable basis for hospital payment.
    We received many comments on the FY 2007 IPPS rule about the 
potential use of a proprietary DRG system. The comments about the CS 
DRGs raised compelling issues about the potential government use of a 
proprietary system, including concerns about the availability, price, 
and transparency of the source code, logic and documentation of the DRG 
system. The commenters noted that CMS makes available these resources 
in the public

[[Page 47172]]

domain for purchase through the National Technical Information Service 
at nominal fees to cover costs. The commenters urged CMS not to adopt a 
proprietary DRG system that would not be available on the same terms as 
the current CMS DRGs.
    There are no proprietary issues associated with the MS-DRGs. The 
MS-DRGs will be available on the same terms as the current CMS DRGs 
through the National Technical Information Service.
    We also received other comments on the FY 2007 IPPS rule concerning 
the use of CS DRGs. The commenters stated that no alternatives to CS 
DRGs had been evaluated. The commenters suggested that alternative DRG 
systems can better recognize severity than the CS DRGs and should be 
evaluated before CMS decides which system to adopt. In response to 
these concerns, we contracted with RAND Corporation to evaluate several 
alternative DRG systems, including the MS-DRGs that we proposed and are 
finalizing in this final rule with comment period for FY 2008.
    As indicated above, we believe the MS-DRGs offer significant 
improvements to the DRG system without many of the liabilities the 
public commenters on the FY 2007 IPPS rule identified with the CS DRGs. 
Thus, we believe the MS-DRGs offer significant improvements in 
recognition of severity of illness and complexity of resources and are 
adopting them for FY 2008.
    Comment: Many commenters supported the MS-DRGs. One commenter 
stated that ``your proposal showcases the best of CMS, evidenced, for 
example, by an elegant and reasonable framework for severity-adjusted 
DRGs.'' Another commenter stated that it was ``about time that Medicare 
adopted a DRG system that allows for more equitable reimbursement for 
cases of severe illness with high risk of death or significant 
morbidity.'' Other commenters stated that it was very apparent that CMS 
dedicated an extensive amount of thought, planning, and resources 
toward the development of the MS DRGs, and that the system appears to 
be a very reasonable approach toward stratifying the patient grouping 
system more distinctly based on the severity of the patient's illness.
    Many commenters found the MS-DRGs to represent a reasonable 
approach to DRG refinement, stating they are, in principle, a positive 
advancement and will create a more equitable and accurate payment 
system. Other commenters stated that the MS DRGs are an effective 
method for incorporating greater refinements to reflect variations in 
patient severity. Other commenters stated that hospitals providing 
services to more complex patients should be paid in a manner that 
reflects the nature of that care. These commenters stated that they do 
not want to see a payment system that rewards hospital inefficiency and 
it is reasonable that Medicare reimbursement policy assures that 
services are appropriately compensated. Other commenters stated that, 
over time, some DRGs have become more profitable than others. The 
commenters stated that making adjustments in rates helps to restore 
balance to the entire hospital inpatient payment system. These 
commenters endorsed CMS' efforts to achieve these goals through the 
adoption of the MS-DRGs.
    Other commenters expressed their appreciation for CMS' recognition 
and consideration of issues raised in the public comments on last 
year's proposal to adopt CS DRGs. The commenters indicated that CMS 
took account of the public comments in crafting this year's MS-DRG 
proposal. The commenter applauded CMS for addressing many concerns that 
were expressed regarding CS DRGs. One of these commenters stated that 
MS-DRGs are significantly superior to the CS DRGs that were proposed 
last year. One commenter indicated that it had asked CMS to do the 
following when considering adoption of a new DRG system:
     Show evidence that the alternative resulted in an improved 
hospital payment system compared to the existing DRG system;
     Test the degree to which the variation in costs within 
cases at the DRG level is reduced;
     Consider whether there were easier ways to adjust for 
severity similar to the differentiation of patients in FY 2006 based on 
the absence or existence of a major cardiovascular diagnosis;
     Maintain the improvements made to differentiate cases 
based on complexity in the existing system; and
     Avoid creating a system that is proprietary and lacks 
transparency.
    The commenter indicated that CMS made a concerted effort to develop 
a system that incorporates all of these goals and indicated their 
support for these meaningful improvements to the IPPS. Like this 
commenter, several other commenters were also in agreement that the 
proposed DRG system should not be proprietary to avoid limiting public 
access to the system. Another commenter who expressed appreciation for 
CMS' responsiveness to issues raised in last year's IPPS rule indicated 
that the MS-DRGs are logical, transparent, and nonproprietary, which 
well suits the needs of the health care community. Other commenters 
also expressed support for CMS' decision to make the MS-DRGs 
nonproprietary, open, and accessible, and available on the same terms 
as the current DRGs.
    Another commenter stated that it had decades of experience doing 
work with DRG systems and believe that there has been a need for a 
severity adjustment mechanism in the CMS DRGs to facilitate more 
accurate payment under the IPPS. In its view, the MS-DRG methodology is 
an appropriate mechanism to add severity adjustments to IPPS for FY 
2008. According to the commenter, the MS-DRGs' advantages include:
     They are based on the current CMS DRGs, whose technical 
features, data structures, and program algorithms have been fine-tuned 
over the years to accommodate the insertion and deletion of DRGs, 
changes in code/criteria lists, changes to CC and CC exclusion lists, 
changes in hierarchy, addition or deletion of DRG criteria, among 
others.
     Additional severity adjustments will not require 
substantial modifications to this basic, extensible, and highly 
efficient architecture. The architecture will facilitate the addition 
of new categories necessitated by the introduction of new technologies 
or the application of the methodology to non-Medicare populations.
    The commenter recommended that CMS plan for a more flexible, four-
character nomenclature in the severity DRG system as soon as reasonably 
possible. The commenter noted that all commercially available severity-
adjusted DRG systems have adopted a nomenclature that employs an 
initial 3-digit base DRG designation followed by a 1-digit severity 
score. This approach is far more flexible and transparent. More 
importantly, the approach lends itself more readily to the addition of 
new base DRGs and the evolution of more granular severity-adjustment.
    Many commenters were supportive of the MS-DRGs because they were 
derived from the existing system and, therefore, preserve the numerous 
policy decisions made over the years and embodied in the CMS DRGs. 
These commenters appreciated that severity stratifications were created 
from the existing base DRGs with the result of redistribution within, 
rather than across, the DRGs. Commenters also stated that the MS-DRGs 
provide CMS with the flexibility of making DRG reassignments within a 
base MS-DRG by moving more complex services up a severity level. Other 
commenters stated that the MS-

[[Page 47173]]

DRG system does a better job than last year's proposed CS DRGs or the 
current CMS DRGs of reflecting advancements in medical technology and 
other improvements in medical care.
    Some commenters stated that, with the development and proposal of 
MS-DRGs, they saw little reason for CMS to continue assessing and 
considering alternative patient classification systems in the 
foreseeable future. These commenters stated that the MS-DRG system is 
more transparent, accessible, and understandable than the alternative 
systems being evaluated by RAND.
    Some commenters stated that the MS-DRGs provide more accurate 
grouping for severity of illness while retaining the CMS-DRG 
refinements to account for more accurate payment of resource 
utilization. However, these commenters recommended that the 
implementation of MS-DRGs be delayed for one year to wait for the final 
RAND report and the availability of a GROUPER. One commenter stated 
that the MS-DRGs are an excellent attempt to define severity of illness 
based on DRGs for the Medicare population but urged us not to implement 
them in FY 2008 unless it is deemed to be the final system adopted from 
the ones being studied by RAND. Several commenters stated that 
hospitals will undergo enormous costs to ``educationally gear up'' for 
the MS-DRGs. The commenter stated that the hospital community must 
expend educational dollars in its attempt to improve coding to optimize 
each case's DRG assignment. These comments were concerned about the 
burden and expense that would be imposed on hospitals from adopting one 
significant DRG reform this year and another one next year. A number of 
other similar comments urged CMS not to move to MS-DRGs if it plans to 
implement another new severity system in FY 2009.
    Response: We appreciate the support for MS-DRGs. We agree that, 
building on the current DRG system, we have maintained the best aspects 
of our past efforts while adding additional refinements to better 
identify severity. We also agree that it is beneficial to consider 
moving to a four-character nomenclature for MS-DRGs. We have already 
developed an internal version with four characters, with the fourth 
character indicating the severity levels. Systems restrictions prevent 
us from using this four-character numbering system in Medicare's data 
systems at this time. However, we will continue to evaluate the 
possibility of moving to such a numbering system.
    With respect to the comments about the RAND project and the concern 
about adopting two different DRG reforms in succeeding years, we note 
that RAND has completed its evaluation of alternative DRG systems, 
including the MS-DRGs. Consistent with RAND's findings, we believe it 
is appropriate at this time to adopt the MS-DRG system for Medicare in 
FY 2008. While there will be an opportunity for the public to comment 
on RAND's findings, we expect to permanently adopt the MS-DRGs for the 
IPPS. We do not believe it is likely that there will be persuasive 
public comments suggesting that one of the alternative DRG systems 
being evaluated by RAND is clearly superior.
    Comment: One commenter fully endorsed the move to MS-DRGs, but 
stressed the need of maintaining the current level of transparency in 
the DRG system, regardless of the chosen methodology. The commenter 
stated that many companies offer software that hospitals and health 
plans utilize in managing the billing, coding, and payment for hospital 
inpatient services under the DRGs. The development of this software is 
possible only because the current DRG methodology is a transparent 
system. By that, they mean that members of the public can obtain full 
access to the details underlying the system by purchasing information 
and software from the National Technical Information Service (NTIS) at 
a nominal charge in a timely manner (well in advance of the 
implementation of changes). The commenter appreciated the agency's 
commitment in the FY 2007 final rule to ``continue to strive to promote 
transparency in our decision making as well as in future payment and 
classification systems, as we have done in the past.'' The commenter 
commended CMS for its continued attention to the transparency issue and 
appreciates CMS' proposal to make the MS-DRGs available on the same 
terms as they currently do CMS DRGs through NTIS.
    Response: We agree that it is important to provide updates and 
modifications to the DRG system in a transparent manner. We intend to 
continue our efforts to do so by providing the necessary information 
through our regulations, Web sites, and through NTIS. The MS-DRGs will 
be available to the public on the same terms as the CMS DRGs.
    Comment: MedPAC reviewed the MS-DRGs and commended CMS for its 
commitment to improve the accuracy of Medicare payments for hospital 
acute inpatient services. MedPAC stated that CMS staff had made 
significant progress toward achieving this goal with the development of 
MS-DRGs coupled with cost-based weights. MedPAC's analysis showed that 
MS-DRGs will result in a substantial improvement in payment accuracy. 
MedPAC took several steps to evaluate the proposed MS-DRGs. First, they 
examined their face validity. An effective patient classification 
system, in the context of a payment system, should group together 
clinically similar cases that have similar costs. In addition, MedPAC 
stated that relative weights calculated for the classification groups 
(MS-DRGs) generally should exhibit a consistent hierarchy of values 
across levels of severity of illness for different conditions. 
Therefore, one issue is how much costs vary around the mean cost per 
case for cases grouped within MS-DRGs. Another issue is whether 
relative weights for different severity levels show the expected 
hierarchy across most clinical conditions. For comparison, MedPAC also 
looked at the cost variation and relationships among relative weights 
for cases grouped in the current DRGs and in the severity categories of 
the APR DRGs. MedPAC also examined how the MS-DRGs would affect payment 
accuracy in the IPPS, measured by how closely payments would track 
costs for different types of cases. MedPAC compared payment accuracy 
under the MS-DRGs with the results under the current CMS DRGs and the 
severity categories of the APR DRGs.
    MedPAC found that MS-DRGs did a better job of grouping cases with 
similar costs into the same category. This was expected because the MS-
DRGs break out high severity (and high cost) cases with MCCs into 
separate DRGs. For comparison, MedPAC also calculated the amount of 
variation in costs among cases within the severity classes of APR DRGs 
(Version 23). The average absolute difference for the APR DRGs, in 
turn, was 7.4 percent lower than the value for DRGs. MedPAC stated that 
this suggests that at least some opportunities are available for 
further refinement of the MS-DRGs. Although MedPAC found the MS-DRGs 
were not perfect, and may need to be further refined over time, it 
believed they represent a significant improvement over the current CMS 
DRGs. MedPAC's analysis showed that payment accuracy increased 
substantially when moving from the current DRGs to one based on the MS-
DRGs.
    Response: We agree with MedPAC that the MS-DRGs represent a 
significant improvement over the current CMS DRGs. As suggested above, 
we intend to use RAND's evaluation of the MS-DRGs to make further 
improvements to it. We appreciate MedPAC's suggestion to use the APR 
DRGs to also help us identify potential

[[Page 47174]]

areas where further improvements can be made to the MS-DRGs.
    Comment: One comment stated that the ``Crosswalk from CMS DRGs to 
MS-DRGs'' was somewhat misleading. The commenter was concerned that 
some entities are interpreting it as a one-to-one mapping. The 
commenter suggested that it be clarified that an individual DRG code 
cannot be mapped directly to a MS-DRG. The commenter recommended that 
MS-DRG implementation be delayed so that CMS can release the MS-DRG 
GROUPER and allow hospitals time to analyze the impact prior to 
implementation.
    Response: After public display of the proposed rule, we were asked 
to provide additional information on the CMS Web site showing how the 
current CMS DRGs map to the new MS-DRGs. Although we provided this 
information, we were concerned about its usefulness because of the very 
issue raised in this public comment. That is, there is not a one-to-one 
crosswalk between the 538 DRGs that exist under the CMS DRGs and the 
745 MS-DRGs. While this information may not have been as useful as 
originally anticipated by members of the public that requested it, we 
believe the fact that there is not a one-to-one crosswalk between the 
CMS DRGs and the MS-DRGs was well understood by the public based on the 
description of each system in the proposed rule. In addition, we made 
other information available to the public that would allow for a 
detailed analysis of the MS-DRG proposal as well as the continuing 
transition to cost-based weights. We made available two MedPAR files 
(FY 2005 and FY 2006) that included the CMS DRG and MS-DRG assignment 
for each case. In addition, we made available charge-based, cost-based, 
and blended weights under the CMS DRGs and the blended weights under 
the MS-DRGs. With this information, we believe the public had detailed 
information to be able to do a comprehensive analysis of our proposal 
to adopt MS-DRGs. We do not believe that there should have been any 
confusion associated with the publicly requested CMS DRG to MS-DRG 
crosswalk on the CMS Web site, and we do not see this comment as a 
reason to delay implementation of the MS-DRGs.
    Comment: A number of commenters urged CMS to process more than nine 
diagnosis and six procedure codes. The commenters stated that this 
particular concern is more acute with MS-DRGs where a hospital needs to 
make sure that CMS processes codes that are MCCs and CCs because they 
determine DRG assignment. The commenters also stated that vendors and 
health care groups make decisions about quality of care based upon the 
CMS claim file. The commenters asked CMS to commit to a timeframe when 
it will revise its systems to accept all 25 diagnosis and procedure 
codes provided via electronic transmissions.
    Response: We recognize the importance of using and analyzing as 
much clinical data from claims as possible. Unfortunately, current 
system limitations preclude CMS from processing more than nine 
diagnoses and six procedures at this time. We will continue to review 
this matter in conjunction with our other information systems 
priorities.
    Comment: Several commenters stated that ICD-10-CM and ICD-10-PCS 
would provide a much better foundation for a severity-adjusted DRG 
system than ICD-9-CM. The value of MS-DRGs or any other severity-
adjusted DRG system that relies on claims data will be limited by the 
continued use of an obsolete, non-specific classification system. ICD-
10-CM and ICD-10-PCS would provide greater clinical detail, and up-to-
date clinical information for capturing information on disease 
severity, including complications, comorbidities and risk factors, as 
well as more detailed information on the use of medical technology and 
its impact on resource utilization and outcomes. The longer adoptions 
of contemporary classifications are delayed, the more CMS must develop 
alternatives that become costly to administer and for providers costly 
to continually implement.
    One commenter stated that, in previous years, the commenter's 
recognition of the industry's need for consistency in medical coding, 
improved data integrity, and more precise and contemporary data 
reflecting 21st century medicine has led it to advocate for adoption 
and coordinated implementation of ICD-10-CM and ICD-10-PCS in their 
previous comments on the IPPS. The commenter stated that it is 
unfortunate that, as new initiatives that rely heavily on coded data 
gain momentum (such as present on admission reporting, pay-for-
performance, and DRG refinements to better recognize severity of 
illness), ICD-10-CM and ICD-10-PCS still have not been implemented as 
replacements for ICD-9-CM.
    One commenter stated that if the obsolete ICD-9-CM coding system 
had been replaced earlier, claims data that would significantly add to 
the knowledge needed to measure severity, quality, and other factors 
under consideration would now be available. The commenter stated that 
the proposed MS-DRG system and other proposals in this year's proposed 
rule are excellent examples of how ICD-10-CM and ICD-10-PCS could 
improve the ability to refine reimbursement systems in order to better 
reflect severity of illness. The commenter urged CMS and HHS to take 
immediate action to secure the adoption and implementation of these two 
classification systems, and supporting transaction standards as early 
as possible.
    Response: We are continuing to carefully analyze issues associated 
with implementing ICD-10.
    Comment: Several commenters opposed the reuse of the current CMS 
DRG numbers in the MS-DRG system. Although one commenter acknowledged 
the advantages of maintaining the current 3-digit numerical scheme, it 
believed the use of the same DRG numbers in both the CMS DRG and MS-DRG 
systems will create confusion when analyzing longitudinal data, given 
the same DRG number will have a different meaning in the two systems. 
The commenter suggested that delaying implementation of a severity-
adjusted DRG system until FY 2009 would allow additional time for 
making more extensive systems modifications, such as adopting an 
alphanumeric or 4-digit numerical structure for the new DRG system. 
Another commenter suggested that CMS begin numbering with a 4-digit 
number so that there will not be confusion about which system is being 
used.
    Response: We agree that it is beneficial to consider moving to a 4-
character nomenclature for MS-DRGs. We have already developed an 
internal version with four characters, with the fourth character 
indicating the severity levels. Systems restrictions prevent us from 
using this 4-character numbering system in Medicare's data systems at 
this time. However, we will continue to evaluate the possibility of 
moving to such a numbering system in the future. We do not expect the 
changes to our data systems that would be necessary to adopt a 4-digit 
DRG numbering system will occur with a year's delay of the MS-DRGs. 
Therefore, we do not believe that we should delay the improvements in 
recognition of severity of illness in our payment system for this 
reason. If there is public interest, we will make our internal 4-digit 
numbering system available on the CMS Web site to assist the public in 
understanding the future numbering system we would be likely to adopt. 
Such information may also be useful to the public to engage in the 
types of analysis suggested by this public comment.

[[Page 47175]]

    Comment: One commenter stated that the Medicare CMS DRG GROUPER is 
used by some payers for their commercial, non-Medicare business. The 
commenter understands that CMS may want to move to MS-DRGs for Medicare 
patients, but is concerned about its continued access to the current 
GROUPER program, should Medicare decide to replace CMS DRGs with MS-
DRGs. The commenter requested that the existing CMS GROUPER remain 
intact for commercial insurers to utilize for their non-Medicare 
contracts. The commenter suggested this could be done by keeping the 
GROUPER in the CMS database with the title ``CMS GROUPER.'' The 
commenter stated CMS would not need to update the weights of the CMS 
GROUPER or make any other adjustments.
    Response: The focus of CMS' efforts is in developing and 
maintaining a DRG system that is appropriate for its Medicare 
population. We have, and will continue to, encourage other payers to 
make any necessary modifications to this program to meet their needs. 
The current versions of the CMS DRGs will remain in the public domain. 
However, we do not intend to make any updates to them once we move to 
the MS-DRGs or another severity DRG system. We do not believe that 
Medicare should undertake the effort and expense to maintain and update 
a DRG system that will have no application for Medicare beneficiaries. 
We encourage other payers to avail themselves of any DRG logic in our 
nonproprietary system from past years and use this information as 
appropriate to develop updates and refinements annually to suit the 
needs of their own patient populations.
5. Impact of the MS-DRGs
    Unlike the CS DRGs we proposed last year for FY 2008, the payment 
impacts from the MS-DRGs we proposed to adopt (and are finalizing in 
this final rule with comment period) for FY 2008 would largely be 
redistributive within each base MS-DRG. Such a result occurs because we 
collapse the current CC/non-CC, age and other distinctions that exist 
in the CMS DRGs and redivide them based on MCCs, CCs, and non-CCs. 
Thus, within each base MS-DRG, some cases will be paid more and some 
less, but the base MS-DRGs are retained so there is no redistribution 
between types of cases as would have occurred under the proposed CS 
DRGs. In the proposed rule, we encouraged readers to review Table 5 in 
the Addendum to the proposed rule for a list of the proposed MS-DRGs 
and the proposed respective relative weight from the revisions we 
proposed to better recognize severity of illness to better understand 
how payment for cases within each base MS-DRG will be affected.
    As indicated above, all of the severity DRG systems being evaluated 
by RAND can be expected to result in similar redistributions in case-
mix among hospitals. The payment models used by RAND and CMS (and RTI 
as well) all assume static utilization. That is, payment impact models 
simulate the effects of a change in policy, assuming no change to 
Medicare utilization. Any system adopted to better recognize severity 
of illness with a budget neutrality constraint will result in case-mix 
changes that can be expected to benefit urban hospitals at the expense 
of rural hospitals. This impact occurs because patients treated in 
urban hospitals are generally more severely ill than patients in rural 
hospitals and the CMS DRGs are not currently recognizing the full 
extent of these differences. Similarly, there will be differential 
impacts among other categories of hospitals (for example, teaching, 
disproportionate share, large urban, and other urban hospitals) 
depending on the mix of cases that each hospital treats. The impact of 
the MS-DRGs can be expected to have similar effects on case-mix as the 
DRG systems being analyzed by RAND. These conclusions are confirmed by 
RAND's analysis earlier in this final rule with comment period as well 
as the payment impacts we illustrated in the proposed rule and again in 
this final rule with comment period.
    Comment: One commenter believed that a ``stop loss'' provision 
should be instituted as part of the transition. Similar to that under 
the IPF PPS, no hospital can receive less than 70 percent of what they 
would otherwise have been paid under the old system. Another commenter 
asked that CMS investigate mechanisms for dampening large payment rate 
fluctuations.
    Response: Changes in payments from MS-DRGs will be mitigated in any 
single year by adopting them over a 2-year transition period. We 
believe a 2-year transition period for implementation of the MS-DRGs 
addresses the concern of these commenters. Further information is 
provided in section II.E. of the preamble of this final rule with 
comment period about how MS-DRG relative weights are being determined 
to reflect implementation over a 2-year period.
6. Changes to Case-Mix Index (CMI) From the MS-DRGs
    After the 1983 implementation of the IPPS DRG classification 
system, CMS observed unanticipated growth in inpatient hospital case-
mix (the average relative weight of all inpatient hospital cases), 
which we use as a proxy measurement for severity of illness. We had 
projected the rate of growth in case-mix for the period 1981 to 1984 to 
be 3.4 percent. The realized rate of growth during this period, which 
included the introduction of the IPPS, was 8.4 percent, a variance in 
excess of 1.6 percent per year. The unexpected growth in payments was 
due to increases in the hospital case-mix index (CMI) beyond the 
previously projected trend. Hospitals' CMI values measure the expected 
treatment cost of the mix of patients treated by a particular hospital. 
There are three factors that determine changes in a hospital's CMI:
    (a) Admitting and treating a more resource intensive patient-mix 
(due, for example, to technical changes that allow treatment of 
previously untreatable conditions and/or an aging population);
    (b) Providing services (such as higher cost surgical treatments, 
medical devices, and imaging services) on an inpatient basis that 
previously were more commonly furnished in an outpatient setting; and
    (c) Changes in documentation (more complete medical records) and 
coding practice (more accurate and complete coding of the information 
contained in the medical record).
    We note that changes in patient-mix and medical practice signal 
real changes in underlying resource utilization and cost of treatment. 
While these changes may have occurred in response to incentives from 
IPPS policies, they represent real changes in resource needs. In 
contrast, changes in CMI as a result of improved documentation and 
coding do not represent real increases in underlying resource demands. 
For the implementation of the IPPS in 1983, improved documentation and 
coding were found to be the primary cause in the underprojection of CMI 
increases, accounting for as much as 2 percent in the annual rate of 
CMI growth observed post-PPS.\2\
---------------------------------------------------------------------------

    \2\ Carter, Grace M. and Ginsburg, Paul: The Medicare Case Mix 
Index Increase, Medical Practice Changes, Aging and DRG Creep, Rand, 
1985.
---------------------------------------------------------------------------

    The Medicare Trustees Technical Review Panel \3\ has previously 
determined the annual measured change in CMI for inpatient hospital 
services to oscillate around an underlying real trend of 1 percent 
annual growth. In 1991 the Medicare-specific trend in real CMI growth 
was found in a then-HCFA

[[Page 47176]]

funded study \4\ to be within a range of 1 to 1.4 percent. In the 
annual study conducted by CMS, there has been no evidence to support a 
real case-mix increase in excess of the annually projected 1 percent 
upper bound in the period. MedPAC findings have echoed this with its 
recent study of real case-mix change finding growth rates for years 
2002, 2003, and 2004 of 1 percent, 0.6 percent, and 0.4 percent, 
respectively.\5\
---------------------------------------------------------------------------

    \3\ Review of Assumptions and Methods of The Medicare Trustees' 
Financial Projections; Technical Review Panel on the Medicare 
Trustees Reports, December 2000.
    \4\ ``Has DRG Creep Crept Up? Decomposing the Case Mix Index 
Change Between 1987 and 1988''; Carter, Newhouse, Relles; R-4098-
HCFA/ProPAC (1991).
    \5\ Medicare Payment Advisory Commission: Report to the 
Congress, March 2006 (p. 52).
---------------------------------------------------------------------------

    In the proposed rule, we indicated that we believe that adoption of 
the proposed MS-DRGs would create a risk of increased aggregate levels 
of payment as a result of increased documentation and coding. MedPAC 
notes that ``refinements in DRG definitions have sometimes led to 
substantial unwarranted increase in payments to hospitals, reflecting 
more complete reporting of patients' diagnoses and procedures.'' MedPAC 
further notes that ``refinements to the DRG definitions and weights 
would substantially strengthen providers' incentives to accurately 
report patients' comorbidities and complications.'' To address this 
issue, MedPAC recommended that the Secretary ``project the likely 
effect of reporting improvements on total payments and make an 
offsetting adjustment to the national average base payment amounts.'' 
\6\
---------------------------------------------------------------------------

    \6\ Medicare Payment Advisory Commission: Report to Congress on 
Physician-Owned Specialty Hospitals, March 2005, p. 42.
---------------------------------------------------------------------------

    The Secretary has broad discretion under section 1886(d)(3)(A)(vi) 
of the Act to adjust the standardized amount so as to eliminate the 
effect of changes in coding or classification of discharges that do not 
reflect real changes in case-mix. While we modeled the changes to the 
DRG system and relative weights to ensure budget neutrality, we are 
concerned that the large increase in the number of DRGs will provide 
opportunities for hospitals to do more accurate documentation and 
coding of information contained in the medical record. Coding that has 
no effect on payment under the current CMS-DRGs may result in a case 
being assigned to a higher paid DRG under the proposed MS-DRGs. Thus, 
more accurate and complete documentation and coding may occur because 
it will result in higher payments under the MS-DRG system. For the 
proposed rule, we stated that the potential for more accurate and 
complete documentation and coding will apply equally under the acute 
IPPS as well as under the LTCH PPS because the same DRGs are used for 
both payment systems. However, for reasons explained elsewhere in this 
final rule with comment period, we are limiting this analysis to the 
IPPS.
    CMS in the past has adjusted standardized amounts under the IRF PPS 
to account for case-mix increases due to improvements in documentation 
and coding. In 2004, RAND \7\ published a technical report as part of 
the follow-up to the implementation of the IRF PPS. The initial weights 
used within the IRF PPS were based on a mix of CY 1999 and CY 1998 
data. The study reviewed the changes between this base data set and the 
IRF PPS implementation year of 2002. The report found that the weight 
per discharge for IRFs had grown by 3.4 percent between the CY 1999 
data set and the CY 2002 data set. In a detailed analysis of both 
statistical patterns in acute stay records and directly measured coding 
practices, RAND found that the level of case-mix increase associated 
with documentation and coding-induced changes in the transition year 
ranged between 1.9 and 5.8 percent, with the upper end of the estimate 
associated with real declines in resource use. (We note that RAND 
revised its report in late 2005 to reflect an upper bound of 5.9 
percent, instead of the 5.8 percent that we reported in the FY 2006 IRF 
PPS proposed and final rules.)
---------------------------------------------------------------------------

    \7\ Carter, Paddock: Preliminary Analyses of Changes in Coding 
and Case Mix Under the Inpatient Rehabilitation Facility Prospective 
Payment System, RAND, 2004.
---------------------------------------------------------------------------

    We used the results of this analysis to justify a 1.9 percent 
adjustment to payment rates for IRFs in FY 2006 (70 FR 47904) and a 2.6 
percent adjustment to payment rates for IRFs in FY 2007 (71 FR 48370), 
for a combined total adjustment of 4.5 percent. The implementation year 
was marked by the transitioning of hospitals to the IRF PPS payment 
based on cost reports beginning January 1, 2002, and staggered to 
October 1, 2002. A combination of increased familiarity with the system 
by providers and the staggered transition could mean that documentation 
and coding-induced case-mix change continued as hospitals experienced 
ongoing changes in the early years of the IRF PPS and as the incentives 
within the system were more widely recognized. We also recognize that 
significant changes in IRF patient populations may be occurring as a 
result of recent regulatory changes, such as the phase-in of the 75-
percent rule compliance percentage. We intend to continue analyzing 
changes in coding and case-mix closely, using the most current 
available data, as part of our ongoing monitoring of the IRF PPS and, 
based on this analysis, we intend to propose additional payment 
refinements for IRFs in the future as the analysis indicates such 
adjustments are warranted.
    Furthermore, as part of our analysis of this issue, we considered 
the recent experience of the State of Maryland with adopting the APR 
DRG system. Maryland introduced APR DRGs for payment for three teaching 
hospitals in 2000. Between State fiscal years (SFYs) 2001 and 2005,\8\ 
the remaining hospitals continued to be paid using modified CMS DRGs. 
In June 2004, the remaining hospitals were notified that Maryland would 
expand the use of APR DRGs throughout its all payer charge-per-case 
system beginning in July 2005. Hospitals in Maryland improved coding 
and documentation in response to the adoption of APR DRGs. As a result 
of this improved documentation and coding, reported CMI increased at a 
greater rate than real CMI. Given the similarity between coding 
incentives using the APR DRGs in Maryland and the MS-DRGs that are 
being proposed for Medicare, we analyzed Maryland data to develop an 
adjustment for improved documentation and coding.
---------------------------------------------------------------------------

    \8\ Maryland uses a July 1 to June 30 State fiscal year. Prior 
to FY 2003, Maryland had a 6-month lag in the data used to calculate 
the hospital base case-mix index and case-mix change. Maryland used 
12 months data ending December even though the hospitals' rate year 
was July 1 to June 30. In FY 2003, Maryland moved to what it calls 
``Real Time Case-Mix'' and started using 12 months data ending June 
30 to calculate case-mix index and case-mix change for a rate year 
beginning July 1.
---------------------------------------------------------------------------

    For the Maryland analysis, we assume that, in SFY 2005, those 
hospitals not already being paid under the APR DRG system began acting 
as if the transition to the new DRG logic had already taken place. This 
assumption is supported by the following facts: (a) Maryland hospitals 
were reporting to the Health Services and Cost Review Commission 
(HSCRC), Maryland's governing body of its all-payer ratesetting system 
using the APR DRG GROUPER in 2005; (b) hospitals were provided training 
in coding under the APR DRG GROUPER; (c) hospitals had access to 
reports based on APR DRG logic; and (d) hospitals were given large 
amounts of feedback as to their performance under the GROUPER by the 
HSCRC relative to peer hospitals.
    The incentives for Maryland hospitals are to code as completely and 
accurately as possible because, beginning in July 2005, all Maryland 
hospitals were paid using APR DRGs. SFY 2005 was an

[[Page 47177]]

important year in Maryland, as it marked the beginning of the 2-year 
period of transition after which a hospital's revenues were reduced if 
coding was not as complete as a peer hospital. Under the current CMS 
DRGs, each secondary diagnosis code is recognized as either a CC or 
non-CC. Hospitals in Maryland and nationally for Medicare only needed 
to code one secondary diagnosis as a CC when paid using CMS DRGs for 
the patient to be assigned to a higher-weighted DRG split based on the 
presence or absence of a CC. Under the APR DRGs, each secondary 
diagnosis is designated as minor, moderate, major, or extreme. Under 
the MS-DRGs, each secondary diagnosis is designated as a non-CC, CC, or 
MCC. Hospitals in Maryland have incentives under the APR DRGs to code 
until a case is assigned to the highest of the four severity levels 
within a base DRG. Under the MS-DRGs, hospitals will have incentives to 
code until a case is assigned to one of up to three severity levels 
within a base DRG. Although the APR DRGs and the MS-DRGs may be 
different, we believe that hospitals have the same incentive under both 
systems to code as completely as possible. For this reason, we believe 
that the Maryland experience is a reasonable basis for projecting 
changes in coding practices for the wider national hospital population 
for the first 2 years of the MS-DRGs.
    We believe the analysis presented below provides a reasonable 
analysis of the potential growth in CMI due to improved documentation 
and coding. In addition to the similarity between coding incentives 
under the proposed MS-DRGs and the APR DRGs, we note that Maryland is 
an all-payer State; therefore, hospitals are paid by all third party 
payers--not just the State's Medicaid program--using the APR DRGs. 
Coding has been very important for each hospital's overall revenue for 
many years, and the incentives are uniform across all third party 
payers. The transition to APR DRGs was known well in advance of the 
actual date and, as stated above, hospitals were provided training in 
coding under the APR DRGs. It is reasonable to expect that hospitals' 
experience with improved documentation and coding will occur over a 
period of at least 2 years. Thus, the experience in Maryland may be 
similar to expectations for case-mix growth for the nation as a whole. 
Finally, in reviewing the results from Maryland, we note that three 
large teaching hospitals began using APR DRGs prior to SFY 2005. These 
facilities generally treat a wider variety of patients with higher 
acuity that gives them a greater potential for increasing coding under 
the APR DRG system than other hospitals throughout Maryland. Because 
these hospitals were paid using the APR DRGs earlier than other 
Maryland hospitals, we believe data for these hospitals need to be 
analyzed from an earlier time period. However, based on the 
consultations with the HSCRC, we believe there were special issues with 
one of these hospitals that may have made its case-mix growth during 
the early years of the transition to the APR DRGs atypical of the other 
teaching hospitals.\9\ Therefore, we did not separately analyze the 
data for this hospital from the earlier time period and, as stated 
below, included its data with the rest of the Maryland hospitals.
---------------------------------------------------------------------------

    \9\ The HSCRC informed us that it began using APR DRGs for this 
hospital to calculate the CMI and case-mix change to set the 
hospital's charge per case target (CPC) that is used in Maryland's 
all-payer ratesetting system for payment. However the HSCRC also 
compared the reasonableness of hospital rates and costs for this 
hospital relative to peer institutions using modified CMS DRGs to 
calculate CMI and case-mix change. This use of dual systems to 
calculate CMI and case-mix change made it difficult for the hospital 
to code aggressively in the first few years of using APR DRGs.
---------------------------------------------------------------------------

    As part of its contract with CMS, 3M Health Information Systems 
reviewed the Maryland data in the context of our proposed changes to 
adopt MS-DRGs. 3M grouped Medicare cases in Maryland through both the 
CMS DRGs Version 24.0 and the proposed MS-DRGs for FY 2008. At our 
request, 3M deleted two of the three early transition hospitals from 
the data. It compared the results of the observed growth in case-mix 
from these data to the same process applied to Medicare data, excluding 
Maryland hospitals.
    The MedPAR data file for Federal fiscal year (FFY) 2006 (October 
2005 through September 2006) was used to create relative weights for 
both CMS DRG Version 24.0 and the MS-DRGs. The MedPAR data file 
contained 12,794,280 records. In constructing the weights, the 
following edits were used:
     Cases with zero covered charges or length of stay were 
excluded.
     Cases with length of stay greater than 2 years were 
excluded.
     Only hospitals contained in the impact file for the FY 
2007 IPPS final rule were included.
    The latter criterion excluded providers reimbursed outside of the 
IPPS, including Maryland hospitals, from the weight calculation. 3M 
employed standardized charge-based relative weights developed in 
accordance with the CMS methodology. Cost-based weights were not used 
and no adjustment to the charge weights was made for application of CMS 
transfer and postacute care transfer payment policy.
    3M further grouped 2 years of MedPAR data from FY 2004 and FY 2005, 
using CMS DRG Version 24.0 and the MS-DRGs for hospitals nationally. 
Using 2 years of MedPAR data with one version of each DRG system 
further required 3M to make adjustments to the data to reflect 
revisions to ICD-9-CM codes that are made each year. MedPAR data for 
Maryland IPPS acute care providers within the IPPS data set were 
similarly assigned to the MS-DRGs and CMS DRGs for FYs 2004 through 
2006.
    Each Maryland record, exclusive of the two early transition 
teaching hospitals for the 3 observed years (SFY 2004 to SFY 2006), was 
assigned to a proposed MS-DRG based on the ICD-9-CM codes the hospital 
submitted. The same results were obtained from data at the national 
level using the MS-DRGs. Further, we obtained data from the HSCRC 
showing the weighted average increase in case-mix for calendar years 
2001 to 2003 for the two large academic medical centers that began an 
early transition to the APR DRGs. In addition, we also obtained case-
mix increases under the CMS DRGs for FYs 2004 through 2006. The 
Medicare Actuary examined the data below:

[[Page 47178]]



    Table R.--Maryland and National Data Used for Case-Mix Adjustment
                                Analysis
------------------------------------------------------------------------
                                 FY 2004 to   FY 2005 to    FY 2004 to
                                    2005         2006          2006
                                 (percent)    (percent)      (percent)
------------------------------------------------------------------------
Rest of Maryland MS-DRG CMI            2.30         2.57  4.93
 [Delta].
------------------------------------------------------------------------
                                                           CY 2000 to FY
                                                                2003
------------------------------------------------------------------------
Early Transition Hospitals....          4.4          6.7  11.4
National MS-DRG CMI [Delta]...         0.47         2.65  3.13
National CMS DRG CMI [Delta]..        -0.04         1.20  1.16
Blend of MS-DRG & CMS DRG       ...........  ...........  1.68
 [Delta] using 0.47 Percent
 for 2005 and 1.2 Percent for
 2006.
Difference between Maryland     ...........  ...........  9.58
 Early Transition Hospitals
 and National Data.
Difference between Rest of      ...........  ...........  3.20
 Maryland and National Data.
Medicare Actuary Estimate (75%/ ...........  ...........  4.8
 25%) [Delta] between Early
 Transition and Rest of
 Maryland.
------------------------------------------------------------------------

    The data above show that case-mix for hospitals increased by 4.93 
percent from SFYs 2004 to 2006, during which Maryland adopted the APR 
DRGs for most hospitals. Case-mix for the two large teaching hospitals 
that were paid using the APR DRGs earlier than other hospitals in the 
State increased by 11.4 percent from SFYs 2001 to 2003. The weighted 
average increase in Maryland from these two categories of hospitals is 
5.58 percent. Case-mix using the MS-DRGs would have increased 0.47 
percent in FY 2005 and 2.65 percent in FY 2006. Nationally, Medicare 
case-mix using the CMS DRGs decreased by 0.04 percent in FY 2005 and 
increased by 1.2 percent in FY 2006. The Actuary calculated a Medicare 
case-mix increase nationally over 2 years using a blend of these data 
from the MS-DRGs for FY 2005 and national Medicare data for FY 2006 
from the CMS DRGs. The Actuary did not use either the -0.04 percent for 
the CMS DRGs or the 2.65 percent for the MS-DRGs to create this blended 
case-mix because these figures appeared atypical to national trends. 
Therefore, the Actuary dropped one atypically high and low number from 
each of the 2 years of data and calculated an average increase of 1.68 
percent from FY 2004 to FY 2006. These data demonstrate that the 
measure of average CMI for Medicare cases is growing more rapidly 
within Maryland than nationally. Case-mix for the Maryland teaching 
hospitals and the rest of Maryland increased 9.58 percent and 3.20 
percent more, respectively, than the national average over 2 years, 
suggesting that improved documentation and coding lead to perceived, 
but not real, changes in case-mix.
    The Actuary noted that the case-mix increase in Maryland for two 
large teaching hospitals over a 2-year period was much higher in the 
early years of the APR DRGs than other Maryland hospitals (11.4 percent 
compared to 4.93 percent for the rest of Maryland). Further, teaching 
hospitals generally treat cases with higher acuity than other hospitals 
and have more opportunity to improve coding and documentation to 
increase case-mix than other hospitals. Teaching hospitals also 
represent a higher proportion of national Medicare data than they do of 
the data in Maryland. The two early transition teaching hospitals in 
Maryland account for approximately 10 percent of the Medicare 
discharges in Maryland. Nationally, teaching hospitals account for 
approximately 50 percent of Medicare discharges. Therefore, the Actuary 
believes that the teaching hospitals should be given a higher weight in 
the national data than they represent in Maryland. However, like other 
hospitals, teaching hospitals vary in size and patient mix and not all 
have the same opportunity to improve documentation and coding. 
Therefore, we believe the weight given to teaching hospitals should be 
higher than the 10 percent for the two early transition hospitals in 
Maryland but lower than the 50 percent of discharges that they account 
for in Maryland. The Actuary gave a weight of 25 percent for teaching 
hospitals and 75 percent for the rest of Maryland to the excess growth 
in case-mix over the national average and estimates that an adjustment 
of 4.8 percent will be necessary to maintain budget neutrality for the 
transition to the MS-DRGs. This analysis reflects our current estimate 
of the necessary adjustment needed to maintain budget neutrality for 
improvements in documentation and coding that lead to increases in 
case-mix. Consistent with the statute, we will compare the actual 
increase in case-mix due to documentation and coding to our projection 
once we have actual data to revise the Actuary's estimate and the 
adjustment we make to the standardized amounts.
    Based on the Actuary's analysis, using the Secretary's authority 
under section 1886(d)(3)(A)(vi) of the Act to adjust the standardized 
amount to eliminate the effect of changes in coding or classification 
of discharges that do not reflect real changes in case mix, we proposed 
to reduce the IPPS standardized amounts by 2.4 percent each year for FY 
2008 and FY 2009. We indicated that we were considering proposing a 4.8 
percent adjustment for FY 2008. However, we believed it would be 
appropriate to provide a transition because we would be making a 
significant adjustment to the standardized amounts. In the proposed 
rule, we expressed interest in receiving public comments on whether we 
should apply the proposed adjustment in a single year, over 2 years, or 
in different increments than \1/2\ of the adjustment each year. Section 
1886(d)(3)(A)(vi) of the Act further gives the Secretary authority to 
revisit adjustments to the standardized amounts for changes in coding 
or classification of discharges that were based on estimates in a 
future year. Consistent with the statute, we will compare the actual 
increase in case mix due to documentation and coding to our projection 
once we have actual data for FY 2008 and FY 2009 for the FY 2010 and FY 
2011 IPPS rules. At that time, if necessary, we may make a further 
adjustment to the standardized amounts to account for the difference 
between our projection and actual data.
    Comment: Many commenters opposed the documentation and coding 
adjustment, which they believed would reduce payments to hospitals by 
$24 billion over the next 5 years. The commenters did not believe this 
reduction is warranted. They suggested the adjustment for documentation 
and coding is a ``backdoor attempt'' to reduce Medicare's inpatient 
hospital payments. One commenter stated that the documentation and 
coding

[[Page 47179]]

adjustment would result in a total estimated reduction in payment for 
Pennsylvania hospitals of $67.5 million in FY 2008, and an estimated 
$1.6 billion over the next 5 years. The commenter stated that such 
reductions and attempts at backdoor budget cuts would only further 
erode scarce resources and challenge hospitals in their ability to care 
for patients. The commenter stated that until MS-DRGs are fully 
implemented, and CMS can document and demonstrate that any increase in 
case-mix results from changes in coding practices rather than real 
changes in patient severity, there should be no documentation and 
coding adjustment.
    Response: We stress that there are no savings attached to this 
adjustment. This adjustment is not a ``backdoor'' attempt to reduce 
Medicare inpatient hospital payments. Without a documentation and 
coding adjustment, the changes to MS-DRGs would not be budget neutral. 
Substantial evidence supports our conclusion that the CMI will increase 
as a result of adoption of MS-DRGs without corresponding growth in 
patient severity. We have provided evidence from studies going back 
over 20 years that show that hospitals respond to incentives when 
payment classifications are changed to improve documentation and coding 
to receive higher payments. Maryland provides a recent example 
demonstrating the validity of the finding that hospitals respond to 
changes in payment classification groups by changing documentation and 
coding practices. Furthermore, we are not aware of a situation in which 
a new or revised payment system provided a payment incentive to improve 
documentation and coding, yet hospitals did not improve documentation 
and coding.
    Comment: Many commenters stated that the documentation and coding 
adjustment is based on assumptions made with little to no data or 
experience about how medical record documentation and coding practices 
will change as a result of the implementation of MS-DRGs. One commenter 
stated that the proposed adjustment has no basis in actual data or 
research pertaining to inpatient hospital coding practices. One 
commenter objected to the -2.4 percent adjustment for documentation and 
coding stating it could not understand the proposal and noted that the 
hospitals are utilizing the coding system that the Department of Health 
and Human Services has created. The commenter stated that if, in fact, 
the new severity DRGs were designed to better recognize the resources 
needed to treat the various DRG conditions, the argument can be made 
that CMS has been underpaying institutions for over 20 years. Other 
commenters objecting to the documentation and coding adjustment further 
indicated that hospitals have operated under the current DRG system for 
23 years and hospitals are already expert in their ability to maximize 
coding for payment. These commenters stated that not even in the 
initial years of the IPPS was coding change found to be in the 
magnitude of CMS' proposed FY 2008 and FY 2009 cuts. The commenters 
stated that the proposed MS-DRGs would be a refinement of the existing 
system; the underlying classification of patients and ``rules of 
thumb'' for coding would be the same. They stated that there is no 
evidence that an adjustment of 4.8 percent over 2 years is warranted 
when studies by RAND, cited in the preamble, are looking at claims 
between 1986 and 1987 at the beginning of the IPPS that showed only a 
0.8 percent growth in case-mix due to coding. The commenters stated 
that even moving from the original reasonable cost-based system to a 
new patient classification-based PPS did not generate the type of 
coding changes CMS contends will occur under the MS-DRGs.
    Many commenters disagreed with the applicability of generalizing 
from the experience in Maryland to Medicare. One commenter indicated 
that MS-DRGs and APR DRGs are two completely different ways to classify 
patients, and generalizing from one system to the other cannot be done. 
The existing classification rules will change only marginally with the 
introduction of MS-DRGs, whereas they are very different under the APR 
DRG system. Differences include:
     APR DRGs consider multiple CCs in determining the 
placement of the patient and, ultimately, the payment. In fact, to be 
placed in the highest severity level, more than one high-severity 
secondary diagnosis is required.
     APR DRGs consider interactions among primary and secondary 
diagnoses. Thus, factors that increase the severity level for a case 
under the APR DRGs will not occur under the MS-DRGs.
     APR DRGs consider interactions among procedures and 
diagnoses as well. MS-DRGs do not.
     APR DRGs have four severity subclasses for each base DRG, 
while MS-DRGs have three tiers, and this is only for 152 base DRGs--106 
base DRGs only have two tiers and 77 base DRGs are not split at all.
     Less than half the number of patient classifications in 
the MS-DRG system are dependent on the presence or absence of a CC--410 
for MS-DRGs versus 863 for APR DRGs.
    The commenters believed that all of these differences make the 
Maryland experience an invalid comparison. They suggested there is 
significantly less possibility for changes in coding to affect payment 
under the MS-DRGs.
    Another commenter indicated that the CMS analysis is not applicable 
to Medicare because Maryland hospitals were not paid using a DRG system 
prior to APR DRG implementation. DRG data were collected for 
statistical purposes, but DRGs were not used for reimbursement. The 
commenter added that coding practices under APR DRGs are not 
necessarily comparable to MS-DRGs because they were not designed for 
reimbursement purposes. Further, the commenter found that the system 
logic is not always consistent with nationally recognized coding rules 
and guidelines, resulting in possible changes in coding practices that 
do not necessarily represent improved coding. The commenter stated that 
hospitals have little ability to change their classification and coding 
practices. Another commenter stated that Maryland's hospitals were paid 
prior to the APR DRGs under a State ratesetting system where an 
incentive to code accurately did not significantly affect what a 
hospital was paid. The commenter stated that APR DRGs are also much 
more complicated than MS-DRGs. The commenter stated that generalizing 
the Maryland experience to the rest of the nation's hospitals is an 
``apples to oranges'' comparison.
    One commenter also disagreed with CMS' use of the example of the 
IRF PPS to justify the coding adjustment. The commenter believed that 
the IRF experience is an inappropriate comparison. The commenter stated 
that coding changes seen under the IRF PPS were the result of moving 
from a cost-based system to a PPS, not the marginal difference of 
moving from the existing CMS DRGs to the refined MS-DRGs. In addition, 
coding under the IRF PPS is driven by the Inpatient Rehabilitation 
Patient Assessment Instrument (IRF-PAI). This tool provides an 
incentive for IRFs to code in a way that differs from the IPPS, which 
does not utilize a patient assessment instrument. The commenter 
believed that coding for the IRF-PAI differs significantly from the 
longstanding coding rules that inpatient PPS hospitals have followed 
for the following reasons:
     The IRF-PAI introduced a new data item into coding--
namely, ``etiological

[[Page 47180]]

diagnosis.'' The definition of this new diagnosis and the applicable 
coding rules are significantly different than the ``principal 
diagnosis'' used to determine the DRG. More importantly, the Official 
Coding Guidelines that apply to all other diagnostic coding do not 
apply to the selection of the ICD-9-CM etiologic diagnoses codes.
     The Official Coding Guidelines do not consistently apply 
to the coding of secondary diagnoses on the IRF-PAI. Several different 
exceptions to the guidelines have been developed by CMS for the 
completion of the IRF-PAI.
     The definition of what secondary diagnoses may be 
appropriately reported differs under the IRF-PAI from the definition 
used by other inpatient coders.
     Most hospitals are already coding as carefully and 
accurately as possible because of other incentives in the system to do 
so, such as risk adjustment in various quality reporting systems. 
Analysis of Medicare claims from 2001 to 2005 suggests that hospitals 
have been coding CCs at high rates for many years. More than 70 percent 
of claims already include CCs, and more than 50 percent of claims have 
at least eight secondary diagnoses (the maximum number accepted in 
Medicare's DRG GROUPER). Hospitals'' assumed ability to use even more 
CCs under MS-DRGs is very low.
    The commenter also indicated that according to an article in the 
magazine Healthcare Financial Management, the level of coding on claims 
suggests that the presence of a CC on a bill is not strongly influenced 
by financial gain. The proportion of surgical cases with a CC code is 
higher for cases where there is no CC split and, thus, no financial 
benefit, than on those cases where there is a CC split and a 
corresponding higher payment. Thus, coding is driven primarily by 
coding guidelines and what is in the medical record rather than by 
financial incentives according to this commenter. In addition, the 
commenter believed that many cases simply do not have additional CCs to 
be coded. For many claims, additional codes are simply not warranted 
and not supported by the medical record. Therefore, there is no 
opportunity for a coding change to increase payment.
    The commenter analyzed the all-payer health care claims databases 
from California, Connecticut, Florida, and Michigan because, unlike the 
MedPAR files, these databases include all 25 diagnoses reported on the 
claims. This analysis showed that only 0.25 percent of claims had an 
MCC or CC appear for the first time in positions 10 through 25. The 
commenter believed this strongly suggests that hospitals will not be 
able to ``re-order'' their secondary diagnoses to appear higher on the 
claim so that Medicare will pay a higher rate. The commenter's coding 
experts note that most hospitals use software that automatically re-
sorts the secondary diagnoses to ensure that those pertinent to payment 
are included in positions two through nine.
    The commenter also examined secondary diagnosis codes and found 
that there were relatively few non-specific codes listed among the 
common secondary diagnoses of discharges without a MCC/CC. The 
commenter believed that this means hospitals cannot shift large numbers 
of discharges to MCCs or CCs based on coding a more specific code to 
replace a nonspecific code.
    The commenter further indicated that there is no opportunity for 
increased payment due to a change in coding for 77 base DRGs under the 
MS-DRG system, as there is only one severity class and no 
differentiation in payment. Additionally, there are MS-DRGs that are 
now split between ``with MCC'' and ``without MCC'' (a combined non-CC 
and CC MS-DRG) that have historically contained a single CC/non-CC 
split. These DRGs already required secondary diagnosis coding; thus, 
the codes to qualify the case as an MCC already would have been 
present. In these cases, it is very unlikely that the medical record 
would justify an MCC that is not already present in the medical record. 
Coders must code strictly based on what the physician notes in the 
chart. Therefore, the commenter believed it is highly unlikely that a 
coder will be able to select an MCC that was not previously present in 
the medical record.
    One commenter stated that case-mix will and should increase from 
adoption of the MS-DRGs. According to the comment, changes in case-mix 
due to improved accuracy in documentation and coding have been observed 
since the introduction of DRG payments in 1983. These changes have 
occurred in every refinement of every classification system across 
every care setting. The commenter stated that changes are driven 
primarily by the fact that documentation and numbers of diagnoses coded 
is inevitably incomplete due to time pressures for completion of 
paperwork and limitations of computer systems to identify this 
information. If an item is not used and/or not important, it is less 
well documented. Refinements in patient classification make certain 
paperwork more important, encouraging providers to improve their 
documentation and reporting accuracy. This, in turn, increases apparent 
case mix that depends on these codes according to this commenter. The 
commenter stated that coding changes that affect CMI are desirable in 
the long run, since they represent more accurate data and evidence-
based care, payments, quality measurement, management decisions, and 
policy are all enhanced. This increase in accuracy is not only desired, 
it is necessary to truly reform health care (severity adjusted 
payments, quality measurement and reporting, value based-purchasing, 
among others), where ``bad data'' is frequently cited as an excuse to 
defer reform efforts. This commenter stated that it is impossible to 
accurately predict the total magnitude and timing of case-mix changes. 
Every hospital will have their own documentation and coding accuracy 
baseline, and their own real CMI based on accurate data for their 
patient mix. Each will have a different commitment to increasing their 
accuracy, resources to do so, and learning curve for implementation. 
The commenter believed that, like any prediction of the future, it will 
inevitably be wrong, particularly due to its complexity.
    Response: Many of the commenters ascribed the term ``behavioral 
offset'' to our proposed rule and believed that CMS was pejoratively 
describing hospital motives. We note that we did not use the term 
``behavioral offset'' to describe the proposed -2.4 percent adjustment 
to IPPS rates for FYs 2008 and 2009 for changes in documentation and 
coding. We regret that the term ``behavioral offset'' has been 
attributed to us. The proposed rule uses the phrase ``documentation and 
coding adjustment'' to refer to the proposed -4.8 percent (-2.4 percent 
each year for FYs 2008 and 2009) adjustment to the IPPS standardized 
amounts to maintain budget neutrality for the MS-DRGs consistent with 
the statute. Further, we believe it is important to address the notion 
in some of the public comments that CMS believes changes in how 
services are documented or coded that is consistent with the medical 
record is inappropriate or otherwise unethical. We do not believe there 
is anything inappropriate, unethical or otherwise wrong with hospitals 
taking full advantage of coding opportunities to maximize Medicare 
payment that is supported by documentation in the medical record. In 
its public comments, MedPAC recommended an adjustment for improvements 
in documentation and coding and also noted that hospitals' efforts to 
improve the specificity and

[[Page 47181]]

accuracy of documentation and coding are perfectly legitimate.\10\
---------------------------------------------------------------------------

    \10\ Medicare Payment Advisory Commission: Letter to Acting 
Administrator Leslie Norwalk, June 11, 2007, page 12.
---------------------------------------------------------------------------

    We encourage hospitals to engage in complete and accurate coding. 
Section 1886(d)(3)(A)(vi) of the Act authorizes the Secretary to adjust 
the standardized amount so as to eliminate the effect of changes in 
coding or classification of discharges that do not reflect real changes 
in case-mix. In its public comments, MedPAC indicated that the 
increases in payments that result from improvements in documentation 
and coding are not warranted because the increase in measured case-mix 
does not reflect any real change in illness severity or the cost of 
care for the patients being treated. Therefore, offsetting adjustments 
to the PPS payment rates are needed to protect the Medicare program and 
those who support it through taxes and premiums from unwarranted 
increases in spending.\11\
---------------------------------------------------------------------------

    \11\ Medicare Payment Advisory Commission: Letter to Acting 
Administrator Leslie Norwalk, June 11, 2007, page 12.
---------------------------------------------------------------------------

    In response to the comment that stated, ``moving from the original 
reasonable cost-based system to a new patient classification-based PPS 
did not generate the type of coding changes CMS contends will occur 
under the MS-DRGs,'' we believe the estimates for improvements in 
documentation and coding are within the range of those projected under 
the original IPPS. As stated above, for the implementation of the IPPS 
in 1983, RAND found that improved documentation and coding were found 
to be the primary cause in the underprojection of CMI increases, 
accounting for as much as 2 percent in the annual rate of CMI growth 
observed post-PPS.\12\ This study found a 2 percent annual change in 
case-mix from improvements in documentation and coding during the 
original adoption of the IPPS, while we are forecasting a 4.8 percent 
total increase due to the MS-DRGs. MedPAC's public comments citing a 
study in Health Affairs found that the original adjustment for 
anticipated increases in case mix due to documentation and coding 
``were substantially smaller than the actual change in case mix which 
increased more than 7 percent from the pre-PPS period to the first full 
year of the PPS system.'' \13\ MedPAC further noted that CMI increases 
due to improvements in documentation can be expected to occur over many 
years. It stated that the Prospective Payment Assessment Commission (a 
predecessor of MedPAC) considered case-mix change in developing its 
annual update recommendations to the Congress and made offsetting 
adjustments for continuing coding improvements for 10 consecutive years 
from 1986 to 1995. \14\ For these reasons, we disagree with the comment 
that our forecast of changes in case-mix from improvements in 
documentation and coding are not within the range of those projected 
when the original IPPS was implemented.
---------------------------------------------------------------------------

    \12\ Carter, Grace M. and Ginsburg, Paul: The Medicare Case Mix 
Index Increase, Medical Practice Changes, Aging and DRG Creep, Rand, 
1985.
    \13\ Medicare Payment Advisory Comission: Letter to Acting 
Administrator Leslie Norwalk, June 11, 2007, page 12 citing 
Steinwald, B. and L. Dummit. 1989. ``Hospital Case-mix change: 
Sicker patient or DRG Creep?'' Health Affairs. Summer, 1989.
    \14\ Medicare Payment Advisory Commission: Letter to Acting 
Administrator Leslie Norwalk, June 11, 2007, page 11.
---------------------------------------------------------------------------

    With respect to comments about the use of the APR DRG system in 
Maryland to forecast an adjustment for improvements in documentation 
and coding for Medicare, we agree that there are differences between 
the APR DRGs being used in Maryland and the MS-DRGs being proposed for 
use by Medicare. We believe that coding incentives in Maryland under 
the APR DRGs and nationally under the MS-DRGs are similar, not 
identical. The Maryland experience provides a useful example to 
forecast the potential increase in case mix from improvements in 
documentation because it is a recent and similar change to what we plan 
to adopt for Medicare. Although the APR DRGs and the MS DRGs may be 
different, we believe that hospitals have the same incentive under both 
systems to code as completely as possible. Moreover, as explained 
above, we estimated CMI growth using the MS DRG and CMS DRG GROUPERs, 
not APR DRG GROUPER. We used Medicare claims from Maryland hospitals 
for our analysis, but we grouped the claims under the CMS DRG GROUPER 
and proposed MS DRG GROUPER.
    For these reasons, we continue to believe that the Maryland 
experience is a reasonable basis for projecting increased case mix in 
the wider national hospital population for the first 2 years of the MS-
DRGs. MedPAC supported using the Maryland experience to forecast 
potential increases in case mix by stating: ``The case-mix reporting 
changes that occurred in Maryland-when that state adopted APR DRGs in 
its all payer rate-setting system--provide one of the few recent 
benchmarks for comparison outside of Medicare's historical 
experience.'' \15\
---------------------------------------------------------------------------

    \15\ Medicare Payment Advisory Commission: Letter to Acting 
Administrator Leslie Norwalk, June 11, 2007, page 12.
---------------------------------------------------------------------------

    The reference to the IRF PPS was not intended to suggest that we 
used the experience with that system to forecast a potential adjustment 
under the IPPS. Rather, we were merely noting that the adoption of a 
PPS system for IRFs also produced an increase in case-mix as a result 
of the new incentives presented by going to a different payment system. 
The example suggests that there is strong evidence that hospitals--
whether they are IRFs, acute care IPPS hospitals, or LTCHs--respond to 
coding incentives presented by their respective payment systems and 
will react accordingly. MedPAC's public comments also supported this 
point. In its public comments on the FY 2008 IPPS proposed rule, MedPAC 
stated that there were increases in case mix with the introduction of 
prospective payment systems for IRFs and LTCHs.\16\
---------------------------------------------------------------------------

    \16\ Medicare Payment Advisory Commission: Letter to Acting 
Administrator Leslie Norwalk, June 11, 2007, page 11.
---------------------------------------------------------------------------

    The comments about reordering of codes and substituting specific 
codes for nonspecific codes suggests that hospitals are already 
maximizing coding opportunities and there is no further changes they 
can make that would result in an increase in Medicare payment. With 
respect to reordering of codes, the commenter argues that MCCs and CCs 
will already be found in the first 9 fields on the Medicare claim and 
the codes that are stored or processed from fields 10 to 25 cannot be 
moved up higher on the claim to increase payment. While this public 
comment suggests that there will be no opportunity to increase case mix 
by moving secondary diagnoses higher on a claim, another public comment 
provided a specific estimate of how much this practice could increase 
case-mix. The commenter examined data from New York State discharges 
and indicated that if MCC and CC codes that are currently provided 
beyond the original 9 diagnoses on the claim that are used by Medicare 
are moved to the first 9 positions, case mix would increase by 0.5 
percent. This reaffirms CMS' views that hospitals focus their 
documentation and coding efforts to maximize reimbursement. Again, we 
believe these examples provide evidence from the public comments 
supporting the necessity for us to apply an adjustment for 
documentation and coding to meet the requirements of the law.

[[Page 47182]]

    We believe increases in case-mix do not only have to come from 
moving codes higher on the claim. A hospital can merely change the 
order of a principal and secondary diagnosis for closely related 
conditions to affect payment. The selection of a principal diagnosis 
that was previously coded as secondary can increase hospital payment. 
Again, we found a public comment suggesting that reordering of 
principal and secondary diagnoses can increase case mix. The commenter 
stated some DRG groups only count a code in ``the primary position 
while others only count a code in a secondary position.'' The commenter 
is noting that many DRGs are split based on the presence or absence of 
an MCC or CC as a secondary diagnosis. According to the commenter, many 
Medicare patients have multiple conditions occasioning their admission, 
suggesting that reordering the principal and secondary diagnosis codes 
can result in an increase in case-mix.
    We also disagree with the comments suggesting that hospitals do not 
have the opportunity to substitute a specified for an unspecified code 
to increase case mix. In fact, we believe these incentives will be very 
strong under the MS-DRGs with the reclassification of many unspecified 
codes as non-CCs. Again, we found statements in the public comments 
that support the notion that hospitals will have opportunities to 
substitute a specified for an unspecified condition to increase case-
mix under the MS DRGs. One commenter indicated that the CC list 
revisions encourage coding of more detailed codes and estimates that 
switching from ``not otherwise specified'' codes to detailed codes 
could increase case mix by 0.5 percent. Another commenter states: ``The 
most dramatic example is ICD-9-CM code 428.0, Congestive heart failure, 
unspecified, which was applied to an average of 2.3 million Medicare 
fee-for-service cases a year during the past three years. This was the 
most widely used secondary diagnosis code, despite the fact that 12 
more specific codes were added in FY 2003 * * * if the revised CC list 
were implemented before hospitals had a chance to improve their coding 
to accommodate the revisions, then case-mix creep and inpatient 
prospective payment system (IPPS) overpayments would ensue.''
    We further note that many of the public comments arguing against 
the documentation and coding adjustment also request a year's delay in 
implementation of the MS-DRGs so ``hospitals may focus on understanding 
the impact of the revised CC list, training and educating their coders, 
and working with their physicians for any documentation improvements 
required to allow the reporting of more specific codes where 
applicable.'' We believe this comment provides a strong indication 
that, even though many public commenters themselves argue against the 
need for the documentation and coding adjustment, the same commenters 
would like a year's delay to take the very actions that they say make 
an adjustment unnecessary. The MS-DRGs are not making any changes to 
ICD-9-CM codes. While the MS-DRGs do include some consolidations of 
base DRGs, the major changes from the current DRGs simply involve 
adding severity levels to many of the new MS-DRGs. The move to MS-DRGs 
will not necessitate additional data elements or changes in reporting 
practices. Therefore, hospitals may continue to document and code as 
they do currently to be paid by Medicare under the MS-DRGs. The only 
reason hospitals would need a delay in the MS-DRGs is to have more time 
to understand how their revenues are affected by coding under the new 
DRG system. In our view, there is a clear indication in these comments 
that hospitals will change their documentation and coding practices and 
increase case mix consistent with the payment incentives that are 
provided by the MS-DRG system.
    As further evidence that documentation and coding practices are 
affected by payment, we note a recent article in the Journal of AHIMA 
(American Health Information Management Association) which discusses 
methods for improving clinical documentation in order to increase 
reimbursement. The article describes a program at a hospital utilizing 
clinical documentation specialists that work on the hospital treatment 
floors to encourage improvements in clinical documentation. The article 
states that one year after implementing the program, the hospital 
gained an additional $1.5 million in reimbursement. In the second year, 
the hospital gained $900,000. The article reports a similar program at 
another hospital where the ``the academic hospital was overly 
conservative in its coding practices and ``leaving money on the table.' 
'' \17\ These examples provide strong support for concluding that there 
were opportunities under the current CMS DRGs to improve coding and 
increase payment. With incentives changing under the MS-DRGs, we 
believe there will be additional opportunities to improve documentation 
and coding. We believe this article supports our contention that 
hospital coders and physicians will respond to incentives available 
under MS-DRGs by improving documentation and coding to increase case-
mix.
---------------------------------------------------------------------------

    \17\ Dimick, Chris ``Clinical Documentation Specialists,'' 
Journal of AHIMA, July-August 2007, pages 44-50.
---------------------------------------------------------------------------

    Comment: One commenter stated that the ICD-9-CM Official Guidelines 
for Coding and Reporting and the American Hospital Association's Coding 
Clinic for ICD 9-CM provide official industry guidance on complete, 
accurate ICD-9-CM coding, without regard to the impact of code 
assignment on reimbursement. AHIMA's Standards of Ethical Coding 
stipulate that ``coding professionals are expected to support the 
importance of accurate, complete, and consistent coding practices for 
the production of quality healthcare data.'' The commenter believed 
that all diagnoses and procedures should be coded and reported in 
accordance with the official coding rules and guidelines and does not 
advocate the practice of only coding enough diagnoses and procedures 
for correct DRG assignment. The commenter stated that increased 
attention to the quality of coding and documentation as a result of the 
role coding plays in DRG assignment has led to much-improved coding 
practices since the adoption of the IPPS in 1983. The commenter further 
noted that hospitals code more completely so CMS has more complete data 
to make DRG modifications that would recognize the resource-
intensiveness of a diagnosis or procedure.
    Response: We believe the commenter's assertion supports our point 
that improvements in documentation and coding occurred as a result of 
the payment incentives provided by the IPPS. That is, the commenter is 
saying that the adoption of the original IPPS in 1983 led hospitals to 
improve documentation and coding practices because ``of the role coding 
plays in DRG assignment.'' The commenter believed that MS-DRGs will not 
lead to changes in documentation and coding practices and cites--among 
other sources--AHIMA's Standards of Ethical Coding. AHIMA is a 
professional association representing more than 51,000 health 
information professionals who work throughout the healthcare industry 
whose work is closely engaged with the diagnosis and procedure 
classification systems that serve to create the DRGs. The article cited 
above from the July-August issue of the Journal of AHIMA provided 
documented examples of how hospitals can change coding practices to 
maximize payments. Thus, there is an

[[Page 47183]]

assertion in this comment that official coding rules and guidelines 
require all diagnoses and procedures to be reported on the claim 
minimizing opportunities for changes in documentation and coding to 
increase case mix. However, AHIMA's own professional journal provides 
strong evidence of opportunities that exist for improvements in coding 
to increase payment. As we stated previously and suggested by the 
article in the Journal of AHIMA, we believe that payment incentives 
lead hospital staff to carefully examine documentation and coding 
practices, work with physicians to improve the precision of clinical 
documentation in order to make subsequent changes in coding.
    Comment: A number of commenters requested that CMS not make the 
documentation and coding adjustment until hospitals have had experience 
with the MS-DRGs. Once the MS-DRGs are fully implemented, the 
commenters indicated that CMS can investigate whether payments have 
increased due to coding rather than the severity of patients and 
determine if an adjustment is necessary. Several commenters stated that 
CMS is not required to make a prospective adjustment to IPPS rates to 
account for improvements in documentation and coding and should not do 
so without an understanding of whether there will even be coding 
changes in the first few years of the refined system. Another commenter 
stated that CMS should retrospectively determine the national rate 
reduction to offset increases in case-mix from improvements in 
documentation and coding even though the reduction would be made to 
future rates and would not account for potential increases in payment 
that would occur until the adjustment is made. The commenter indicated 
that section 1886(d)(3)(A)(vi) of the Act authorizes just such an 
adjustment and it is the only way to ensure that the level of the 
reduction is accurate. All of these commenters argued that CMS can 
always correct for additional payments made as a result of coding 
changes in a later year when there is sufficient evidence and an 
understanding of the magnitude.
    One commenter suggested that CMS defer (but not eliminate) 
adjustments for improvements in documentation and coding. This 
commenter suggested that CMS make the adjustment at a later time when 
there is actual data suggesting how much improvements in documentation 
have increased case mix but that we consider a ``stop loss'' if initial 
coding changes appear to far exceed the current 4.8 percent estimate. 
The commenter indicated that CMS should encourage facilities to improve 
their documentation and coding accuracy sooner (that is, prior to 
adjusting for documentation and coding), and not do any MCC/CC 
consolidations until after coding improvements have occurred (that is, 
have 3 severity levels for all DRGs).
    Another commenter noted that RAND's evaluation of alternative 
severity DRG systems included an assessment of how coding behaviors are 
expected to vary under each system. However, RAND did not evaluate the 
MS-DRGs and further noted that it was not able to empirically assess 
the relative risk the alternative severity-adjusted systems pose for 
case mix increases attributable to coding improvement without having 
the opportunity to observe actual changes in coding behavior when a DRG 
system is used for payment. The commenter did not believe any payment 
adjustment to account for case mix increases, which are attributable to 
coding improvements, should be made until CMS has conducted appropriate 
research to determine the extent to which improvements in coding 
becomes an issue under the proposed MS-DRG system. While the design of 
the MS-DRG system may encourage an increased level of coding 
specificity, the commenter stated that it is unknown what effect, if 
any, this might have on the CMI.
    Response: RAND did not repeat the analysis of the potential for 
documentation and coding improvements to increase case mix using the 
MS-DRGs because it only worked with FY 2005 data to evaluate them. The 
RAND report refers readers to the analysis CMS did of the likely impact 
of documentation and coding improvements on case mix using the MS-
DRGs.\18\
---------------------------------------------------------------------------

    \18\ Wynn, Barbara O., Beckett, Megan, et al., ``Evaluation of 
Severity Adjusted DRG System: Draft Interim Report,'' RAND HEALTH, 
August, 2007, Addendum, page 27.
---------------------------------------------------------------------------

    With respect to delaying making any adjustments for documentation 
and coding, the commenters are correct that section 1886(d)(3)(A)(vi) 
of the Act gives the Secretary authority to revisit adjustments to the 
standardized amounts for changes in coding or classification of 
discharges that were based on estimates in a future year. We also note 
that section 1886(d)(4)(C) of the Act requires that ``changes in 
classifications or weighting factors'' not increase or decrease 
aggregate inpatient hospital payments. We believe that Congress has 
expressed its clear preference that all changes to DRG 
reclassifications be budget neutral. Substantial evidence indicates 
that, unless we make an adjustment to account for improvements in 
documentation and coding, aggregate payments under the IPPS will 
increase when we adopt MS-DRGs as a result of these improvements in 
documentation and coding. Further, as discussed above, the independent 
Office of the Actuary validated the -1.2 percent adjustment to the 
standardized amount to ensure that improvements in documentation and 
coding do not increase case-mix and IPPS payments.
    In addition, by revisiting the adjustment at a later date when we 
have actual data, we can ensure that the standardized amounts are 
permanently set at the level they otherwise would have been had the 
increase in case mix due to improvements in documentation and coding 
been known. That is, any overestimate or underestimate of the 
adjustment for improvements in documentation would not be permanently 
embedded in the IPPS standardized amount for subsequent years. While 
any differences between projected and actual data could result in 
higher or lower payments to hospitals for the intervening years, MedPAC 
believes that CMS should provide an adjustment that lies somewhere in 
the middle of its own estimate of 2.0 percent and CMS' estimate of 4.8 
percent. In its comments, MedPAC recommended that CMS should adopt an 
adjustment for improvements in documentation and coding between 1.6 and 
1.8 percent per year that would ``put both Medicare and the hospital 
industry at some risk that the actual value will turn out to be higher 
or lower than the adjustment that is applied.'' \19\
---------------------------------------------------------------------------

    \19\ Medicare Payment Advisory Commission: Letter to Acting 
Administrator Leslie Norwalk, June 11, 2007, page 13.
---------------------------------------------------------------------------

    Comment: Several commenters agreed with RAND's assertion that the 
magnitude of coding improvement is likely to vary across hospitals, 
depending on how strong their current coding practices are and the 
resources they are able to devote to improving them. One commenter 
stated that the hospitals that already use the more specific codes and 
those with a low proportion of cases in split DRGs would receive fewer, 
if any, overpayments because their case mix indices would not increase 
as much, or at all. The commenter stated that New York hospitals, in 
particular, would have less opportunity for coding improvement than 
other hospitals because the union of the Medicare CC list and the New

[[Page 47184]]

York State CC list has 279 more codes than the Medicare CC list alone. 
Thus, moving from the union of the CC list to the revised CC list would 
add only 1,298 codes, 279 fewer codes than in the rest of the country. 
Furthermore, New York hospitals are well-practiced in using specific 
codes because the New York State AP-DRG grouper differentiates between 
CCs and major CCs, as the MS-DRG grouper would do. This commenter and 
others that cited the RAND study agree that CMS' practice of making an 
across-the-board adjustment to PPS payments to address case mix 
increases attributable to coding improvements raises an equity issue 
that CMS needs to consider. The adjustment to the standardized amount 
for documentation and coding for hospitals that have already improved 
coding would result in significant payment losses according to the 
commenter rather than offsetting higher case mix indices. The commenter 
stated that these changes are not uniform, creating unintended 
distributional impacts. The commenter stated that the process to make 
adjustments for documentation and coding is an across the board 
adjustment to the standardized amount, while actual changes will vary 
widely. This will create unintended distributional impacts across 
patient types, providers, and states that will in turn, according to 
the commenter, create push-back in providers, states, Congress, and 
potentially the courts.
    One of these commenters acknowledged that CMS may not have the 
option to recoup overpayments on a hospital-specific basis, as is done 
in New York. The commenter suspected that the proposed documentation 
and coding adjustment is too high because hospitals in other states--
particularly New York--have more experience with secondary diagnosis 
coding than the Maryland hospitals had before their change to APR DRGs. 
Therefore, hospitals in other states probably have less opportunity to 
generate documentation and coding improvements that increase case mix.
    Response: We agree that completeness of hospital coding practices 
may well vary across hospitals. Although we recognize this variability, 
we believe there will be potential for coding improvements to increase 
case mix for all hospitals. For instance, as noted above, a hospital 
can change the order of a principal and secondary diagnosis for closely 
related conditions to affect payment. The selection of a principal 
diagnosis that was previously coded as secondary can increase hospital 
payment. This type of potential coding change to increase case mix 
could be available to all hospitals irrespective of whether or not they 
maximized coding in the past. As noted above, a commenter examined data 
from New York State discharges and indicated that if MCC and CC codes 
that are currently provided beyond the original 9 diagnoses on the 
claim that are used by Medicare are moved to the first 9 positions, 
case mix would increase by 0.5 percent. Thus, this comment indicates 
that there will be at least some opportunity to increase case mix 
through improvements in documentation and coding in States like New 
York that have used sophisticated DRG systems in the past for payment. 
Similarly, there are public comments suggesting hospitals can select a 
specified condition in place of an unspecified one to increase payment 
under the MS-DRGs but that this change in documentation and coding 
practice will not be applicable in areas of the country where a DRG 
system is in use that distinguishes between MCCs and CCs. As noted 
above, congestive heart failure, unspecified appears on an average of 
2.3 million cases per year from FY 2004 to FY 2006 or on over 20 
percent of the Medicare claims. In our view, billing of an unspecified 
code on this magnitude of claims suggests potential improvements in 
coding from substituting a specified for an unspecified code are 
widespread. While improvements in documentation and coding that 
increase case mix may be variable, section 1886(d)(3)(A)(vi) of the Act 
only allows us to apply the adjustments that are a result of changes in 
the coding or classification of discharges that do not reflect real 
changes in case mix to the standardized amounts.
    Comment: Several commenters indicated that there should be a 
transition to the MS-DRGs. A number of commenters supported a 4-year 
transition period for implementing the MS-DRGs. The commenters stated 
that such a transition would allow hospitals the opportunity to educate 
their employees and physicians to assure proper, accurate coding, along 
with allocation of required resources through their budgetary process. 
The commenters recommended that FY 2008 be used to prepare for and test 
the MS-DRGs. In FY 2009 through 2011, the DRG weights would be computed 
as a blend of the MS-DRGs and the current DRGs. These commenters 
believed a 1-year delay would provide hospitals adequate time to 
implement and test the new system and adjust operations and staffing 
for predicted revenues. They also suggested that the 1-year delay would 
provide CMS adequate time to finalize data and a CC list, introduce and 
test software for case classification and payment, and train its fiscal 
agents. It would also allow vendors and State agencies time to 
incorporate such changes into their respective software and information 
systems. Other commenters were concerned that CMS would implement the 
MS-DRGs in FY 2008 and then, as a result of the final RAND report, move 
to another new system for FY 2009. These commenters urged CMS to delay 
the implementation of the MS-DRGs if there was a possibility for 
another completely new system in FY 2009. These commenters stated that 
hospitals will expend a large number of hours educating their coding 
staff about the MS-DRGs so that they can attempt to legitimately 
optimize their payment. Some commenters recommended that CMS implement 
the MS-DRGs effective October 1, 2007, with a 3-year phase-in approach 
of the relative weights.
    One commenter indicated that CMS should phase in the revised CC 
list and MS-DRGs to reduce the amount of documentation and coding 
related overpayments that would be made ``in the first place.'' The 
commenter recommended that the MS-DRGs not be implemented in FY 2008. 
Instead, they recommend that the revised CC list be used with a Version 
25.0 of the current CMS DRGs and allow vendors of the alternative 
severity systems being evaluated by RAND to incorporate this 
information into an updated version of their systems. The commenter 
stated that the updated version of the CMS DRGs using the revised CC 
list would produce a greatly improved DRG GROUPER. The commenter 
recommended a 5-year phase-in during which the old CC list/CMS-DRG 
weights and the new CC list/MS-DRG weights would be blended in the 
following proportions: 80/20 percent in FY 2008, 60/40 percent in FY 
2009, 40/60 percent in FY 2010, 20/80 percent in FY 2011, and 0/100 
percent in FY 2012. The commenter stated that CMS should release the 
MS-DRG grouper software as soon as possible and should also encourage 
vendors to release products as soon as possible that ensure that both 
old and new CCs are listed among the first eight secondary diagnoses, 
as these are the only ones that can be used for payment purposes. With 
respect to the phase-in, the commenter believed it is prudent to begin 
to use the new CC list/MS-DRGs in FY 2008 so that hospitals are 
compelled as soon as possible (1) to improve their coding, and (2) to 
educate

[[Page 47185]]

their physicians about complete documentation. However, the commenter 
would not want the new DRG weights to represent a majority of the blend 
until they can be based on the first year of corrected data. The FY 
2010 weights would be based on the FY 2008 cases, so they would reflect 
the first year's coding corrections and would presumably be more 
accurate. Because it can take several years for hospitals and 
physicians to adjust to new documentation and coding requirements, 
continuing blended payments in FY 2011 would be important to minimize 
documentation and coding related overpayments, according to the 
commenter.
    The commenter stated that the goal is to minimize the aggregate 
level of documentation and coding related overpayments so that 
hospitals not generating increases in case mix are not unfairly 
penalized by an across-the-board reduction. If overpayments could be 
recouped on a hospital-specific basis, the commenter stated that an 
attenuated phase-in would not be necessary. The commenter stated that 
they realized that their recommended phase in would be cumbersome 
because each case would have to be grouped twice to determine the DRG 
assignment under the CMS DRG and MS-DRG GROUPERS. However, the 
commenter believed this is the better policy option since the 
alternative for good-coding hospitals and those with relatively few 
patients in split DRGs would be to effectively eliminate the IPPS 
update for 2 years.
    Response: We received many comments in support of the MS-DRGs, 
particularly because they are so structurally similar to the current 
DRGs, and therefore, we believe that a full year's delay is 
unwarranted. While the MS-DRGs include some consolidations of base 
DRGs, the major changes from the current DRGs simply involve adding 
severity levels to many of the new MS-DRGs. The move to MS-DRGs will 
not necessitate additional data elements or changes in reporting 
practices. Providers will be submitting the same clinical information 
on their claims. In our view, the issues in the comments concerning the 
need to examine the new system in detail do not justify delaying the 
move to this new system. We have provided detailed information in both 
the proposed and final rule as well as on our Web site on the formation 
of the MS-DRGs. We believe the significant benefits of the new system 
outweigh concerns by the provider community that they have not had time 
to analyze the details of the new system. We are confident that once 
they start working with the new system, they will find it simple to 
understand and far better at identifying and paying for more costly and 
severely ill patients. Accordingly, we do not believe that extensive 
preparation for implementation of the MS DRGs is necessary, and 
therefore, we are not delaying adoption of the MS-DRGs until FY 2009.
    MedPAC also carefully evaluated the options of implementing MS-DRGs 
in FY 2008 versus deferring the implementation until FY 2009 and agrees 
with our assessment that there is not sufficient cause to delay the 
proposed adoption of MS-DRGs beyond FY 2008. While MedPAC agreed that 
MS-DRGs should be implemented in FY 2008, it also stated that the 
transition should coincide with the transition to cost-based weights--
that is, implement the MS-DRGs over a 2-year period beginning in FY 
2008.\20\ We agree with MedPAC that the MS-DRGs should be implemented 
over a 2-year transition period that coincides with the phase-in of 
cost-based weights. Therefore, we will implement MS-DRGs beginning in 
FY 2008 over a 2-year transition period where the DRG relative weights 
will be a blend of 50 percent each of the CMS DRG and MS DRG weights. 
We have provided more detail in section II.D.2. of the preamble of this 
final rule with comment period about the DRG relative weight 
calculations over this 2-year transition period.
---------------------------------------------------------------------------

    \20\ Medicare Payment Advisory Commission: Letter to Acting 
Administrator Leslie Norwalk, June 11, 2007, page 10.
---------------------------------------------------------------------------

    There appears to be a suggestion in many of the public comments 
both here and above that delaying implementation of MS-DRGs will allow 
the improvements in documentation and coding to occur before they have 
any financial impact on the Medicare program because hospitals would 
know and be encouraged to code using the incentives provided under the 
MS-DRGs, while Medicare would continue to be using the current CMS DRGs 
for payment. As discussed, one comment suggested that we could lessen 
the need for the documentation and coding adjustment by minimizing the 
financial impact of improvements in documentation and coding through a 
long transition period (5 years). We believe hospitals will not improve 
documentation and coding consistent with the incentives provided under 
the MS-DRGs unless they have a financial incentive to do so. As 
indicated in one public comment, ``Documentation and numbers of 
diagnosis codes is inevitably incomplete due to time pressures for 
completion of `paperwork' and limitation of computer systems to capture 
this information. If an item is not used and/or not important, it is 
less well documented.''
    If there is a delay in MS-DRGs, the coding incentives that would 
come with its adoption would not be present and, therefore, likely 
would not occur. While we appreciate the suggestion for adopting a long 
transition period to provide an incentive to improve coding but 
minimize its financial impact on Medicare, such an idea may well just 
extend the period of time that documentation and coding improvements 
occur while delaying the improvements in recognition of severity of 
illness that would result from adopting MS DRGs. Again, we do not 
believe that either delaying or adopting MS-DRGs over a long period of 
time will reduce the need to apply a documentation and coding 
adjustment of the magnitude we estimated. We believe that adopting 
either of the ideas would only result in us needing to delay or extend 
the period of time over which the documentation and coding adjustment 
is applied.
    Comment: MedPAC indicated that case-mix might increase more or less 
than the 4.8 percent we estimated from Maryland's experience. MedPAC 
recommended an adjustment between 1.6 and 1.8 percent a year for 2 
years. This adjustment is based on a comparison between the MS-DRGs in 
Maryland and nationally (2.0 percent over 2 years) increased:
     To reflect their view that many hospitals do not respond 
quickly to improve reporting after major changes in the DRG 
definitions; and
     The estimated change in case-mix for hospitals in the rest 
of the nation may reflect some improvements in documentation and coding 
in response to changes in the DRG definitions that were adopted in 2006 
(such as the refinements to the cardiac care DRGs among others).
    MedPAC recommended that we apply an adjustment that is somewhere in 
the middle between their estimate of 2.0 and the CMS figure of 4.8 
percent. According to MedPAC, a middle point in the range of 1.6 to 1.8 
percent per year would put both Medicare and the hospital industry at 
some risk that the actual value will turn out to be higher or lower 
than the adjustment that is applied. If the actual increase due to 
improvements in case-mix reporting turns out to be higher, the Medicare 
program will have paid more than it should have. If the actual increase 
is lower, the hospitals will have been paid less than they should have. 
MedPAC noted that we have already stated a willingness to correct for 
any difference

[[Page 47186]]

between our forecast and the actual increase in case mix due to 
improved coding when data become available in 2009 when we prepare the 
proposed rule for fiscal year 2010. MedPAC further suggested that CMS 
plan on taking coding adjustments for longer than two years. CMS may 
want to adopt a series of adjustments that takes somewhat higher 
adjustments in the first few years of the MS-DRG changes, on the 
assumption that history has shown that previous coding adjustments have 
underestimated the impact of the changes.
    Response: We proposed to adjust the IPPS standardized amounts by -
2.4 percent each year for FYs 2008 and 2009 for improvements in 
documentation and coding that will increase case-mix. As we are 
adopting the MS-DRGs over a 2-year transition period, we do not believe 
that the incentives to improve documentation and coding will be as 
strong in the first year as we previously estimated. Further, as 
suggested above by the evidence when the IPPS was first implemented, 
MedPAC, and other public comments, it can take several years for 
hospitals and physicians to adjust their documentation and coding 
practices in response to payment incentives. For these reasons, we 
believe the documentation and coding adjustment should be applied over 
a period of 3 rather than 2 years. We do not agree with MedPAC that a 
larger adjustment ``should be taken in the first few years of the MS-
DRGs on the assumption that history has shown that previous coding 
adjustments have underestimated the impact of changes.'' Rather, as 
stated above, we believe that the coding incentives during the first 
year of MS-DRGs will be lessened because we are adopting them over a 2-
year transition period. Therefore, we believe a smaller adjustment 
should be applied in the initial year. We continue to believe that our 
analysis justifies a -4.8 percent adjustment for improvements in 
documentation and coding at this time. Therefore, we are applying an 
adjustment of -1.2 percent in this final rule with comment period to 
the IPPS standardized amounts for FY 2008 and based on current 
projections will apply adjustments of -1.8 percent each year to the 
IPPS standardized amounts for FYs 2009 and 2010.
    Consistent with the statute, we will compare the actual increase in 
case-mix due to documentation and coding to our projection once we have 
actual data to revise the Actuary's estimate and the adjustment we make 
to the standardized amounts. With these adjustments occurring over 3 
rather than 2 years, we will have information in 2009 as we prepare the 
IPPS rule for FY 2010 to reevaluate how the actual increase in case mix 
compares to our estimate. We may also have partial year information in 
2008 to inform any proposal for FY 2009. Therefore, we will consider 
revising the planned adjustments for FY 2009 and FY 2010 if information 
in the Medicare billing data suggests that our projections are either 
too high or low compared to actual experience.
    Based on the Actuary's analysis, using the Secretary's authority 
under section 1886(d)(3)(A)(vi) of the Act to adjust the standardized 
amount to eliminate the effect of changes in coding or classification 
of discharges that do not reflect real changes in case-mix, we are 
reducing the IPPS standardized amount by -1.2 percent for FY 2008. 
Section 1886(d)(3)(A)(vi) of the Act further gives the Secretary 
authority to revisit adjustments to the standardized amounts for 
changes in coding or classification of discharges that were based on 
estimates in a future year. Consistent with the statute, we will 
compare the actual increase in case-mix due to documentation and coding 
to our projection once we have actual data for FY 2008. At that time, 
if necessary, we may make a further adjustment to the standardized 
amounts to account for the difference between our projection and actual 
data.
7. Effect of the MS-DRGs on the Outlier Threshold
    To qualify for outlier payments, a case must have costs greater 
than Medicare's payment rate for the case plus a ``fixed loss'' or cost 
threshold. The statute requires that the Secretary set the cost 
threshold so that outlier payments for any year are projected to be not 
less than 5 percent or more than 6 percent of total operating DRG 
payments plus outlier payments. The Secretary is required by statute to 
reduce the average standardized amount by a factor to account for the 
estimated proportion of total DRG payments made to outlier cases. 
Historically, the Secretary has set the cost threshold so that 5.1 
percent of estimated IPPS payments are paid as outliers. The FY 2007 
cost outlier threshold is $24,485. Therefore, for any given case, a 
hospital's charge adjusted to cost by its hospital-specific CCR must 
exceed Medicare's DRG payment by $24,485 for the case to receive cost 
outlier payments.
    Adoption of the MS-DRGs will have an effect on calculation of the 
outlier threshold. For the proposed rule and this final rule with 
comment period, we analyzed how the outlier threshold would be affected 
by adopting the MS-DRGs. Using FY 2005 MedPAR data, we have simulated 
the effect of the MS-DRGs on the outlier threshold. By increasing the 
number of DRGs from 538 to 745 to better recognize severity of illness, 
the MS-DRGs would be providing increased payment that better recognizes 
complexity and severity of illness for cases that are currently paid as 
outliers. That is, many cases that are high-cost outlier cases under 
the current CMS DRG system would be paid using an MCC DRG under the MS-
DRGs and could potentially be paid as nonoutlier cases. For this 
reason, we expected the FY 2008 outlier threshold to decline from its 
FY 2007 level of $24,485. We proposed an FY 2008 outlier threshold of 
$23,015. In this final rule with comment period, we are establishing an 
FY 2008 outlier threshold of $22,650. In section II.A.4. of the 
Addendum to this final rule with comment period, we provide a more 
detailed explanation of how we determined the final FY 2008 cost 
outlier threshold. We address any comments received on the FY 2008 
proposed outlier threshold in section II.A.4. of the Addendum to this 
final rule with comment period.
8. Effect of the MS-DRGs on the Postacute Care Transfer Policy
    Existing regulations at Sec.  412.4(a) define discharges under the 
IPPS as situations in which a patient is formally released from an 
acute care hospital or dies in the hospital. Section 412.4(b) defines 
transfers from one acute care hospital to another. Section 412.4(c) 
establishes the conditions under which we consider a discharge to be a 
transfer for purposes of our postacute care transfer policy. In 
transfer situations, each transferring hospital is paid a per diem rate 
for each day of the stay, not to exceed the full DRG payment that would 
have been made if the patient had been discharged without being 
transferred.
    The per diem rate paid to a transferring hospital is calculated by 
dividing the full DRG payment by the geometric mean length of stay for 
the DRG. Based on an analysis that showed that the first day of 
hospitalization is the most expensive (60 FR 45804), our policy 
provides for payment that is double the per diem amount for the first 
day (Sec.  412.4(f)(1)). Transfer cases are also eligible for outlier 
payments. The outlier threshold for transfer cases is equal to the 
fixed-loss outlier threshold for nontransfer cases, divided by the 
geometric mean length of stay for the DRG, multiplied by the length of 
stay for the case, plus one day. The purpose of the IPPS postacute care 
transfer payment policy is to avoid providing an incentive for a 
hospital to transfer

[[Page 47187]]

patients to another hospital early in the patients' stay in order to 
minimize costs while still receiving the full DRG payment. The transfer 
policy adjusts the payments to approximate the reduced costs of 
transfer cases.
    Beginning with the FY 2006 IPPS, the regulations at Sec.  412.4 
specified that, effective October 1, 2005, we make a DRG subject to the 
postacute care transfer policy if, based on Version 23.0 of the DRG 
Definitions Manual (FY 2006), using data from the March 2005 update of 
FY 2004 MedPAR file, the DRG meets the following criteria:
     The DRG had a geometric mean length of stay of at least 3 
days;
     The DRG had at least 2,050 postacute care transfer cases; 
and
     At least 5.5 percent of the cases in the DRG were 
discharged to postacute care prior to the geometric mean length of stay 
for the DRG.
    In addition, if the DRG was one of a paired set of DRGs based on 
the presence or absence of a CC or major cardiovascular condition 
(MCV), both paired DRGs would be included if either one met the three 
criteria above.
    If a DRG met the above criteria based on the Version 23.0 DRG 
Definitions Manual and FY 2004 MedPAR data, we made the DRG subject to 
the postacute care transfer policy. We noted in the FY 2006 final rule 
that we would not revise the list of DRGs subject to the postacute care 
transfer policy annually unless we make a change to a specific CMS DRG. 
We established this policy to promote certainty and stability in the 
postacute care transfer payment policy. Annual reviews of the list of 
CMS DRGs subject to the policy would likely lead to great volatility in 
the payment methodology with certain DRGs qualifying for the policy in 
one year, deleted the next year, only to be reinstated the following 
year. However, we noted that, over time, as treatment practices change, 
it was possible that some CMS DRGs that qualified for the policy will 
no longer be discharged with great frequency to postacute care. 
Similarly, we explained that there may be other CMS DRGs that at that 
time had a low rate of discharges to postacute care, but which might 
have very high rates in the future.
    The regulations at Sec.  412.4 further specify that if a DRG did 
not exist in Version 23.0 of the DRG Definitions Manual or a DRG 
included in Version 23.0 of the DRG Definitions Manual is revised, the 
DRG will be a qualifying DRG if it meets the following criteria based 
on the version of the DRG Definitions Manual in use when the new or 
revised DRG first became effective, using the most recent complete year 
of MedPAR data:
     The total number of discharges to postacute care in the 
DRG must equal or exceed the 55th percentile for all DRGs; and
     The proportion of short-stay discharges to postacute care 
to total discharges in the DRG exceeds the 55th percentile for all 
DRGs. A short-stay discharge is a discharge before the geometric mean 
length of stay for the DRG.
    A DRG also is a qualifying DRG if it is paired with another DRG 
based on the presence or absence of a CC or MCV that meets either of 
the above two criteria.
    The MS-DRGs that we proposed to adopt (and are finalizing in this 
final rule with comment period) for FY 2008 are a significant revision 
to the current CMS DRG system. Because the new MS-DRGs are not 
reflected in Version 23.0 of the DRG Definitions Manual, consistent 
with Sec.  412.4, we proposed to recalculate the 55th percentile 
thresholds in order to determine which MS-DRGs would be subject to the 
postacute care transfer policy. Further, under the MS-DRGs, the 
subdivisions within the base DRGs will be different than those under 
the current CMS DRGs. Unlike the current CMS DRGs, the MS-DRGs are not 
divided based on the presence or absence of a CC or MCV. Rather, the 
MS-DRGs have up to three subdivisions based on: (1) The presence of a 
MCC; (2) the presence of a CC; or (3) the absence of either an MCC or 
CC. Consistent with our existing policy under which both DRGs in a CC/
non-CC pair are qualifying DRGs if one of the pair qualifies, we 
proposed that each MS-DRG that shared a base MS-DRG would be a 
qualifying DRG if one of the MS-DRGs that shared the base DRG 
qualified. We proposed to revise Sec.  412.4(d)(3)(ii) to codify this 
policy.
    Similarly, we believe that the changes to adopt MS-DRGs also 
necessitate a revision to one of the criteria used in Sec.  412.4(f)(5) 
of the regulations to determine whether a DRG meets the criteria for 
payment under the ``special payment methodology.'' Under the special 
payment methodology, a case subject to the special payment methodology 
that is transferred early to a postacute care setting will be paid 50 
percent of the total IPPS payment plus the average per diem for the 
first day of the stay. Fifty percent of the per diem amount will be 
paid for each subsequent day of the stay, up to the full MS-DRG payment 
amount. A CMS DRG is currently subject to the special payment 
methodology if it meets the criteria of Sec.  412.4(f)(5). Section 
412.4(f)(5)(iv) specifies that if a DRG meets the criteria specified 
under Sec.  412.4(f)(5)(i) through (f)(5)(iii), any DRG that is paired 
with it based on the presence or absence of a CC or MCV is also subject 
to the special payment methodology. Given that this criterion would no 
longer be applicable under the MS-DRGs, we proposed to add a new Sec.  
412.4(f)(6) that includes a DRG in the special payment methodology if 
it is part of a CC/non-CC or MCV/non-MCV pair. We proposed to update 
this criterion so that it conforms to the proposed changes to adopt MS-
DRGs for FY 2008. The revision would make an MS-DRG subject to the 
special payment methodology if it shares a base MS-DRG with an MS-DRG 
that meets the criteria for receiving the special payment methodology.
    Comment: One commenter urged CMS to ``suspend application of the 
postacute care transfer policy for one year, until sufficient data is 
available, and then apply the criteria anew to the MS-DRGs.'' As an 
alternative to ceasing the application of the postacute care transfer 
policy for one year, the commenter recommended that CMS limit the 
application of the postacute care transfer policy as much as possible 
until better data are available and not to increase the average length 
of stay for less complicated DRGs over their current levels.
    Response: Under both the CMS DRGs and MS-DRGs, there were two 
criteria for making a DRG subject to the postacute care transfer 
policy. These criteria are:
     The total number of discharges to postacute care in the 
DRG must equal or exceed the 55th percentile for all DRGs; and
     The proportion of short-stay discharges to postacute care 
to total discharges in the DRG must equal or exceed the 55th percentile 
for all DRGs.
    While these criteria are identical under the CMS DRGs and the MS-
DRGs, we needed to recalculate the 55th percentile thresholds in order 
to determine which MS-DRGs would be subject to the postacute care 
transfer policy to conform the existing policy to the new DRG system. 
Further, we also needed to make a conforming change to our policy that 
a DRG is subject to the postacute care transfer policy if it is one of 
a paired set of DRGs based on the presence or absence of a CC or MCV 
where one of the DRGs in the set meets the numerical criteria specified 
above. As the MS-DRGs have subdivisions based on MCC, CCs and non-CCs 
rather than MCVs, CCs and non-CCs, we needed to amend the regulatory 
text to reflect the nomenclature of the MS-DRG system. Therefore, our 
policy for making a DRG subject to the postacute care transfer policy 
under the MS-DRGs is unchanged other than to make it

[[Page 47188]]

conform to the new DRG system. As our policy is unchanged, we do not 
believe that either suspending or limiting application of the postacute 
care transfer policy under the MS-DRGs is warranted.
    Comment: One commenter opposed CMS' ``proposal to significantly 
expand the list of the DRGs subject to the postacute care transfer 
policy.'' The commenter, a hospital, noted that ``manual processes'' 
would have to take place in order to identify patients meeting the home 
health criteria. Specifically, the commenter stated that, ``hospitals 
[would] either have to contact patients to determine if they have 
received home health services within 3 days after discharge or wait for 
the fiscal intermediary to let the hospital know that a patient 
received home care that was not planned at the time of discharge which 
requires coders to review and correct the disposition and for the 
Business Office to resubmit the claim.''
    Response: We note that we did not propose to change or expand the 
postacute care transfer policy provision in this year's proposed rule. 
Rather, we applied existing post-acute transfer policy to the new MS-
DRG system. Thus, the criteria that would have made a CMS-DRG subject 
to the postacute care transfer policy last year were the same as those 
applied to the MS-DRGs for FY 2008. We note that in FY 2007, 190 CMS 
DRGs of 538 CMS DRGs were subject to the postacute care transfer 
policy, or about 35 percent. For FY 2008, 273 out of 745 MS-DRGs are 
subject to the postacute care transfer policy or about 36 percent. 
Therefore, the proportion of postacute care transfer MS-DRGs subject to 
the policy is very similar to what it was last year under the CMS DRGs. 
Thus, we disagree there has been a ``significant expansion'' of DRGs 
subject to the postacute care transfer policy. Rather, we are simply 
conforming the existing postacute care transfer policy to the new MS-
DRGs.
    In response to the commenter's concern about it being 
administratively burdensome to identify patients who received home 
health care services subsequent to discharge from the acute care 
hospital, we note that, under section 1886(d)(5)(J)(ii)(III) of the 
Act, the term ``qualified discharge'' includes a discharge from an IPPS 
hospital upon which the patient is provided home health services from a 
home health agency if such services relate to the condition or 
diagnosis for which the patient received hospital inpatient services. 
The proposed rule did not make any change to application of the 
postacute care transfer policy in this circumstance. We note that, in 
most instances, patients are discharged from the acute hospital with a 
written plan of care for the provision of home health services, so 
hospitals would usually know if a patient was going to receive home 
health care services at the time of discharge. Additionally, we do not 
expect that the administrative burden of identifying patients 
discharged to home for the provision of home health services within 3 
days will be any greater under the MS-DRG system than it was under the 
CMS DRG system because the proportion of DRGs subject to the postacute 
care transfer policy is very similar under both systems.
    Comment: One commenter stated that it is unreasonable to categorize 
all three MS-DRGs in the same base DRG as subject to the postacute care 
transfer policy if only one of the three meets the criteria. The 
commenter suggested that, for base MS-DRGs where there are three base-
DRGs, two of the three base-DRGs should meet the postacute care 
transfer criteria (on their own) for all of them to be subject to the 
postacute care transfer policy and that if only one meets the criteria, 
none should be subject to the postacute care transfer policy.
    Response: Under the CMS DRG system, some DRGs were paired with 
others (with CC or without CC). Under that system, if one DRG qualified 
for the postacute care transfer policy, we included its paired DRG so 
as not to create an incentive for hospitals not to include any code 
that would identify a complicating or comorbid condition. The same 
logic applies under the MS-DRG system: If one DRG in a set meets the 
postacute care transfer criteria, we believe that it is appropriate to 
include the paired or grouped DRGs so as not to create any coding 
incentives to bypass the postacute care transfer payment. Therefore, we 
disagree with the commenter that it is ``unreasonable'' to include a 
group of MS-DRGs where only one MS-DRG in the group meets the postacute 
care transfer criteria on its own. We also note that we apply the same 
logic to the special-pay MS-DRGs. That is, if an MS-DRG qualifies to 
receive the special payment methodology, any other MS-DRGs that share 
the same base MS-DRG also qualify to receive the special payment 
methodology.
    In this final rule with comment period, we are adopting the 
proposed postacute care transfer policy conforming changes as final.
    In addition, Sec.  412.4(f)(3) states that the postacute care 
transfer policy does not apply to CMS DRG 385 for newborns who die or 
are transferred. We proposed to make a conforming change to this 
paragraph to reflect that this CMS DRG would become MS-DRG 789 
(Neonates, Died or Transferred to Another Acute Care Facility) under 
our proposed DRG changes for FY 2008. We did not receive any comments 
on this proposal and, therefore, are finalizing this conforming change 
as proposed.
    These revisions do not constitute a change to the application of 
the postacute care transfer policy. Therefore, any savings attributed 
to the postacute care transfer policy will be unchanged as a result of 
adopting the MS-DRGs. Consistent with section 1886(d)(4)(C)(iii) of the 
Act, aggregate payments from adoption of the MS-DRGs cannot be greater 
or less than those that would have been made had we not made any DRG 
changes.
    We also proposed and are adopting as final technical changes to 
Sec. Sec.  412.4(f)(5)(i) and (f)(5)(iv) to correct a cross-reference 
and a typographical error, respectively.

E. Refinement of the Relative Weight Calculation

    In the FY 2007 IPPS final rule (71 FR 47882), effective for FY 
2007, we began to implement significant revisions to Medicare's 
inpatient hospital rates by basing the relative weights on hospitals' 
estimated costs rather than on charges. This reform was one of several 
measured steps to improve the accuracy of Medicare's payment for 
inpatient stays that include using costs rather than charges to set the 
relative weights and making refinements to the current CMS-DRGs so they 
better account for the severity of the patient's condition. Prior to FY 
2007, we used hospital charges as a proxy for hospital resource use in 
setting the relative weights. Both MedPAC and CMS have found that the 
limitations of charges as a measure of resource use include the fact 
that hospitals cross-subsidize departmental services in many different 
ways that bear little relation to cost, frequently applying a lower 
charge markup to routine and special care services than to ancillary 
services. In MedPAC's 2005 Report to the Congress on Physician-Owned 
Specialty Hospitals, MedPAC found that hospitals charge much more than 
their costs for some types of services (such as operating room time, 
imaging services and supplies) than others (such as room and board and 
routine nursing care).\21\ Our analysis of the MedPAC report in the FY 
2007 IPPS

[[Page 47189]]

proposed rule (71 FR 24006) produced consistent findings.
---------------------------------------------------------------------------

    \21\ Medicare Payment Advisory Commission:Report to the 
Congress: Physician-Owned Specialty Hospitals, March 2005, p. 26.
---------------------------------------------------------------------------

    In the FY 2007 IPPS proposed rule, we proposed to implement cost-
based weights incorporating aspects of a methodology recommended by 
MedPAC, which we called the hospital-specific relative value cost 
center (HSRVcc) methodology. MedPAC indicated that an HSRVcc 
methodology would reduce the effect of cost differences among hospitals 
that may be present in the national relative weights due to differences 
in case mix adjusted costs. After studying Medicare cost report data, 
we proposed to establish 10 national cost center categories from which 
to compute 10 national CCRs based upon broad hospital accounting 
definitions. We made several important changes to the HSRVcc 
methodology that MedPAC recommended using in its March 2005 Report to 
the Congress on Physician-Owned Specialty Hospitals. We refer readers 
to the FY 2007 IPPS proposed rule (71 FR 24007 through 24011) for an 
explanation and our reasons for the modification to MedPAC's 
methodology. In its public comments on the FY 2007 IPPS proposed rule, 
MedPAC generally agreed with the adaptations we made to its 
methodology. MedPAC further recommended that we expand the number of 
distinct hospital department CCRs being used from 10 to 13, which we 
subsequently adopted in the FY 2007 IPPS final rule.
    We did not finalize the HSRVcc methodology for FY 2007 because of 
concerns raised in the public comments on the FY 2007 IPPS proposed 
rule (71 FR 47882 through 47898). Rather, we adopted a cost-based 
weighting methodology without the hospital-specific relative weight 
feature. In response to a comment from MedPAC, we also expanded the 
number of distinct hospital departments with CCRs from 10 to 13. We 
indicated our intent to study whether to adopt the HSRVcc methodology 
after we had the opportunity to further consider some of the issues 
raised in the public comments. In the interim, we adopted a cost-based 
weighting methodology over a 3-year transition period, substantially 
mitigating the redistributive payment impacts illustrated in the 
proposed rule, while we engaged a contractor to assist us with 
evaluating the HSRVcc methodology.
    Some commenters raised concerns about potential bias in cost-based 
weights due to ``charge compression,'' which is the practice of 
applying a lower percentage markup to higher cost services and a higher 
percentage markup to lower cost services. These commenters were 
concerned that our proposed weighting methodology may undervalue high 
cost items and overvalue low cost items if a single CCR is applied to 
items of widely varying costs in the same cost center. The commenters 
suggested that the HSRVcc methodology would exacerbate the effect of 
charge compression on the final relative weights. One of the commenters 
suggested an analytic technique of using regression analysis to 
identify adjustments that could be made to the CCRs to better account 
for charge compression. We indicated our interest in researching 
whether a rigorous model should allow an adjustment for charge 
compression to the extent that it exists. We engaged a contractor, RTI 
International (RTI), to study several issues with respect to the cost-
based weights, including charge compression, and to review the 
statistical model provided to us by the commenter for adjusting the 
weights to account for it. We discuss RTI's findings in detail below.
    Commenters also suggested that the cost report data used in the 
cost methodology are outdated, not consistent across hospitals, and do 
not account for the costs of newer technologies such as medical 
devices. However, the relationship between costs and charges (not costs 
alone) is the important variable in setting the relative weights under 
this new system. Older cost reports also do not include the hospital's 
higher charges for these same medical devices. Therefore, it cannot be 
known whether the CCR for the more recent technologies will differ from 
those we are using to set the relative weights. The use of national 
average cost center CCRs rather than hospital-specific CCRs may 
mitigate potential inconsistencies in hospital cost reporting. 
Nevertheless, in the FY 2007 IPPS final rule, we agreed that it was 
important to review how hospitals report costs and charges on the cost 
reports and on the Medicare claims and asked RTI to further study this 
issue as well.
    In summary, we proposed to adopt HSRVcc relative weights for FY 
2007 using national average CCRs for 10 hospital departments. Based on 
public comments concerned about charge compression and the accuracy of 
cost reporting, we decided not to finalize the HSRVcc methodology, but 
adopted cost-based weights without the hospital specific feature. In 
response to comments from MedPAC, we expanded the number of hospital 
cost centers used in calculating the national CCRs from 10 to 13. 
Finally, we decided to implement the cost-based weighting methodology 
gradually, by blending the cost-based and charge-based weights over a 
3-year transition period beginning with FY 2007, while we further 
studied many of the issues raised in the public comments. We refer 
readers to the FY 2007 IPPS final rule (71 FR 47882) for more details 
on our final policy for calculating the cost-based DRG relative 
weights.
1. Summary of RTI's Report on Charge Compression
    In August 2006, we awarded a contract to RTI to study the effects 
of charge compression in calculating DRG relative weights. The purpose 
of the study was to develop more accurate estimates of the costs of 
Medicare inpatient hospital stays that can be used in calculating the 
relative weights per DRG. RTI was asked to assess the potential for 
bias in relative weights due to CCR differences within the 13 CCR 
groups used in calculating the cost-based DRG relative weights and to 
develop an analysis plan that explored alternative methods of 
estimating costs with the objective of better aligning the charges and 
costs used in those calculations. RTI was asked to consider methods of 
reducing the variation in CCRs across services within cost centers by:
     Modifying existing cost centers and/or creating new 
centers.
     Using statistical methods, such as the regression 
adjustment for charge compression. Some commenters on the FY 2007 IPPS 
proposed rule suggested that we use a regression adjustment to account 
for charge compression.
    As part of its contract, RTI convened a Technical Expert Panel 
composed of individuals representing academic institutions, hospital 
associations, medical device manufacturers, and MedPAC. The members of 
the panel met on October 27, 2006, to evaluate RTI's analytic plan, to 
identify other areas that are likely to be affected by compression or 
aggregation problems, and to propose suggestions for adjustments for 
charge compression. We posted RTI's draft interim report on the CMS Web 
site in March 2007. For more information, interested individuals can 
view RTI's report at the following Web site: http://www.cms.hhs.gov/
Reports/Reports/itemdetail.asp?itemID=CMS1197292. The report may also 
be viewed on RAND's Web site at http://www.rand.org/pubs/online/health.
    As the first step in its analysis, RTI compared the reported 
Medicare program charge amounts from the cost reports to the total 
Medicare charges summed across all claims filed by providers. Using 
cost and charge data

[[Page 47190]]

from the most recent available Medicare cost reports and inpatient 
claims from IPPS hospitals, RTI was charged with performing an analysis 
to determine how well the MedPAR charges matched the cost report 
charges used to compute CCRs. The accuracy of the DRG cost estimates is 
directly affected by this match because MedPAR charges are multiplied 
by CCRs to estimate cost. RTI found consistent matching of charges from 
the Medicare cost report to charges grouped in the MedPAR claims for 
some cost centers but there appeared to be problems with others. For 
example, RTI found that the data between the cost report and the claims 
matched well for total discharges, days, covered charges, nursing unit 
charges, pharmacy, and laboratory. However, there appeared to be 
inconsistent reporting between the cost reports and the claims data for 
charges in several ancillary departments (medical supplies, operating 
room, cardiology, and radiology). For example, the data suggested that 
hospitals often include costs and charges for devices and other medical 
supplies within the Medicare cost report cost centers for Operating 
Room, Radiology or Cardiology, while other hospitals include them in 
the Medical Supplies cost center.
    RTI found that some charge mismatching results from the way in 
which charges are grouped in the MedPAR file. Examples include the 
intermediate care nursing charges being grouped with intensive care 
nursing charges and electroencephalography (EEG) charges being grouped 
with laboratory charges. RTI suggested that reclassifying intermediate 
care charges from the intensive care unit to the routine cost center 
could address the former problem.
    As the second step in its analysis, RTI reviewed the existing cost 
centers that are combined into the 13 groups used in calculating the 
national average CCRs. RTI identified CCRs with potential aggregation 
problems and considered whether separating the charge groups could 
result in more accurate cost conversion at the DRG level. The analysis 
led RTI to calculate separate CCRs for Emergency Room and Blood and 
Blood Administration, both of which had been included in ``Other 
Services'' in FY 2007.
    During this second step, RTI noted that a variation of charge 
compression is also present in inpatient nursing services because most 
patients are charged a single type of accommodation rate per day that 
is linked to the type of nursing unit (routine, intermediate, or 
intensive), but not to the hours of nursing services given to 
individual patients. Unlike the situation with charge compression in 
ancillary service areas, there are virtually no detailed charge codes 
that can distinguish patient nursing care use. Therefore, any potential 
bias cannot be empirically evaluated or adjustments made without 
additional data.
    Next, RTI examined individual revenue codes within the cost centers 
and used regression analysis to determine whether certain revenue codes 
in the same cost center had significantly different markup rates. Those 
revenue codes include devices, prosthetics, implants within the Medical 
Supplies cost center, IV Solutions within the Drugs cost center, CT 
scanning and MRI within the Radiology cost center, Cardiac 
Catheterization within the Cardiology cost center, and Intermediate 
Care Units within the Routine Nursing Care cost center. Devices, 
prosthetics, and implants within the Medical Supplies cost center have 
a lower markup and, as a result, a higher CCR than the remainder of the 
medical supplies group according to RTI's analysis. Within the Drugs 
CCR, IV Solutions have a much higher markup and much lower CCR than the 
other drugs included in the category. Within the Radiology CCR, CT 
scanning and MRI have higher markups and lower CCRs than the remaining 
radiology services. RTI's results for Cardiac Catheterization and 
Intermediate Care Units were ambiguous due to data problems.
    RTI's analysis also determined the impact of the disaggregated CCRs 
on the relative weights. Differences in CCRs alone do not necessarily 
alter the DRG relative weights. The impact on the relative weights is 
the result of the interaction of CCR differences and DRG differences in 
the proportions of the services with different CCRs. In FY 2007, we 
calculated relative weights using CCRs for 13 hospital departments. The 
RTI analysis suggests expanding the number of distinct hospital 
department CCRs from 13 to 19. Of the additional six CCRs, two would 
result from separating the Emergency Department and Blood (Products and 
Administration) from the residual ``Other Services'' category. Four 
additional CCRs would result from applying a regression method similar 
to a method suggested in last year's public comments to three existing 
categories: supplies, radiology, and drugs. This method, as adapted by 
RTI, used detailed coding of charges to disaggregate hospital cost 
centers and derive separate, predicted alternative CCRs for the 
disaggregated services. RTI's analysis suggests splitting Medical 
Supplies into one CCR for Devices, Implants, and Prosthetics and one 
CCR for Other Supplies; splitting Radiology into one CCR for MRIs, one 
CCR for CT scans, and one CCR for Other Radiology; and splitting Drugs 
into one CCR for IV Solutions and one CCR for Other Drugs.
    RTI's draft report provides the potential impacts of adopting these 
changes to the CCRs. We note that RTI's analysis was based on Version 
24.0 of the CMS DRGs. Because the proposed MS-DRGs were under 
development for the FY 2008 IPPS proposed rule, they were unavailable 
to RTI for their analysis. The results of RTI's analysis may be 
different if applied to the MS-DRGs. However, it seems reasonable to 
believe that the impact of RTI's suggestions will be consistent using 
Version 24.0 of the CMS DRGs and the MS-DRGs, as both systems generally 
use the same base DRGs while applying different subdivisions to 
recognize severity of illness. Of all the adjusted CCRs, the largest 
impact on weights came from accounting for charge compression in 
medical supplies for devices and implants. The impact on weights from 
accounting for CCR differences among drugs was modest. The impact of 
splitting MRI and CT scanning from the radiology CCR was greater than 
the impact of modifying the Drugs CCRs, but less than the impact of 
splitting the Medical supplies group. Separating Emergency Department 
and Blood Products and Administration from the ``Other Services'' 
category would raise the CCR for other services in the group.
    RTI found that disaggregating cost centers may have a mitigating 
effect on the impact of transitioning from charge-based weights to 
cost-based weights. That is, the changes being suggested by RTI will 
generally offset (fully or more than fully in some cases or in part in 
other cases) the impacts of fully implemented cost-based weights that 
we are adopting over the FY 2007-FY 2009 transition period. Thus, RTI's 
analysis suggests that expanding the number of distinct hospital 
department CCRs used to calculate cost-based weights from 13 to 19 will 
generally increase the relative weights for surgical DRGs and decrease 
them for the medical DRGs compared to the fully implemented cost-based 
weights to which we began transitioning in FY 2007.
2. RTI Recommendations
    In its report, RTI provides recommendations for the short term, 
medium term, and long term, to mitigate aggregation bias in the 
calculation of relative weights. We summarize RTI's

[[Page 47191]]

recommendations below and respond to each of them.
a. Short-Term Recommendations
    Most of RTI's short-term recommendations have already been 
described above. The most immediate changes that RTI recommends 
implementing include expanding from 13 distinct hospital department 
CCRs to 19 by:
     Disaggregating ``Emergency Room'' and ``Blood and Blood 
Products'' from the ``Other Services'' cost center;
     Establishing regression-based estimates as a temporary or 
permanent method for disaggregating the Medical Supplies, Drugs, and 
Radiology cost centers; and
     Reclassifying intermediate care charges from the intensive 
care unit cost center to the routine cost center.
    We believe these recommendations have significant potential to 
address issues of charge compression and potential mismatches between 
how costs and charges are reported in the cost reports and on the 
Medicare claims.
    RTI's recommendations show significant promise in the short term 
for addressing issues raised in the public comments on the cost-based 
weights in the FY 2007 IPPS proposed rule. However, in the time 
available for the development of the proposed rule, we were unable to 
investigate how RTI's recommended changes may interact with other 
potential changes to the DRGs and to the method of calculating the DRG 
relative weights. As we noted above, RTI's analysis was done on the 
Version 24.0 of the CMS DRGs and not the MS-DRGs we proposed for FY 
2008. For the proposed rule and this final rule with comment period, we 
were not able to examine the combined impacts of the MS-DRGs and RTI's 
recommendations. In addition, we believe it is also important to 
consider that, in the FY 2007 IPPS final rule (71 FR 47897), we 
anticipated undertaking further analysis of the HSRVcc methodology over 
the next year in conjunction with the research we were to do on charge 
compression. Analysis of the HSRVcc methodology will be part of the 
second phase of the RAND study of alternative DRG systems to be 
completed by September 1, 2007, that has not been completed in time for 
this final rule with comment period. As a result, we have also been 
unable to consider the effects of the HSRVcc methodology together with 
the MS-DRGs and RTI's recommendations. Finally, we note that in order 
to complete the analysis in time for the proposed rule or this final 
rule with comment period, RTI's study used only hospital inpatient 
claims. However, hospital ancillary departments typically include both 
inpatient and outpatient services within the same department and only a 
single CCR covering both inpatient and outpatient services can be 
calculated from Medicare cost reports. Although we believe that 
applying the regression method used by RTI to only inpatient services 
is unlikely to have had much impact for the adjustments recommended by 
RTI, the preferred approach would be to apply the regression method to 
the combined inpatient and outpatient services. The latter approach 
would ensure that any potential CCR adjustments in the IPPS would be 
consistent with potential CCR adjustments in the OPPS. We hope to 
expand their analysis to incorporate outpatient services during the 
coming year.
    Although we did not propose to adopt RTI's recommendations for FY 
2008, we solicited public comments on expanding from 13 CCRs to 19 
CCRs. Again, we noted that RTI's analysis suggests significant 
improvements that could result in the cost-based weights from adopting 
its recommendations to adjust for charge compression. Therefore, we 
also expressed interest in public comments on whether we should proceed 
to adopt the RTI recommended changes for FY 2008 in the absence of a 
detailed analysis of how the relative weights would change if we were 
to address charge compression while simultaneously adopting an HSRVcc 
methodology together with the MS-DRGs. Given the change in the impacts 
that were illustrated in last year's FY 2007 IPPS final rule (71 FR 
47915-47916), going from a hospital-specific to a nonhospital-specific 
cost-weighting methodology, we believe that sequentially adjusting for 
charge compression and later adopting an HSRVcc methodology could 
create the potential for instability in IPPS payments over the next 2 
years (that is, payments for surgical DRGs would increase and payment 
for medical DRGs would decrease if we were to adopt the RTI recommended 
changes for FY 2008, but could potentially reverse direction if we were 
to adopt an HSRVcc methodology for FY 2009). Again, we solicited public 
comments on all of these issues before making a final decision as to 
whether to proceed with the RTI's short-term recommendations in the 
final rule for FY 2008.
    Comment: Many commenters commented on whether we should proceed in 
adopting the recommendations made by RTI in its January 2007 report, 
particularly concerning changes in cost reporting practices and the 
additional, regression-based CCRs. Several commenters focused on 
problems highlighted by RTI with the inconsistent and varying methods 
in which hospitals group their charges in MedPAR and report costs and 
charges on the Medicare cost report, which can result in distortions in 
the DRG weights. Some commenters asserted that mismatching is not 
caused by the failure of hospitals to prepare their cost reports 
correctly, as appeared to be suggested by the RTI study. Other 
commenters noted that RTI recommends the incorporation of edits to 
reject cost reports or require more intensive review by auditors to 
resolve the lack of uniformity in cost reporting. However, the 
commenters believed that such edits or audits will not solve the 
mismatch problem because hospitals' reporting is consistent with the 
cost reporting instructions. The commenters described that, currently, 
cost report instructions included with the CMS Form-339 allow for three 
methods of reporting Medicare charges. The method selected by each 
hospital is specific to its information systems and based on the method 
that most accurately aligns Medicare program charges on Cost Report 
Worksheet D-4 (inpatient) and/or Worksheet D, Part IV (outpatient) with 
the overall cost and charges reported on Worksheets A and C. Many 
hospitals elect to allocate some or all of the Medicare program charges 
from the Medicare Provider Statistical and Reimbursement (PS&R) data to 
various lines in the cost report based on hospital-specific financial 
system needs. Under this scenario, total hospital CCRs are aligned with 
the hospital's program charges, but would not match the charge 
groupings used in MedPAR.
    Instead of increased edits or cost report rejections, the 
commenters believed that hospitals must be educated to report costs and 
charges, particularly for supplies, in a way that is consistent with 
how MedPAR groups charges. The commenters are launching such an 
educational campaign, which would encourage consistent reporting that 
they believe would, in turn, produce consistent groupings of 
departments within the 13 cost center groups that are currently used to 
create the cost-based weights, or any future expansion of the 
categories that may occur. The commenters stated that their educational 
efforts will take time and CMS should recognize that some hospitals 
will be in a better position to adopt certain cost report changes more 
rapidly because the changes may be more expensive and time-consuming 
for some hospitals to adopt relative to

[[Page 47192]]

others. The commenters requested that CMS communicate with its fiscal 
intermediaries/MAC that such action is appropriate and encouraged for 
improvements in Medicare's cost-based weights. The commenters were 
concerned that, without direction from CMS, the fiscal intermediaries/
MAC may not allow hospitals to change how they report costs.
    Although one commenter supported the education of hospitals in 
better cost reporting, this commenter opposed mandating hospitals to 
make these cost reporting changes. One commenter stated that ``it is 
important to note that charge compression results from hospitals' 
markup practices,'' and that the problem would be eliminated if 
hospitals would use a single markup for all items and services included 
within all revenue centers. Another commenter asserted that hospitals 
are not consistent in their cost reporting and the first step should be 
to issue cost report instructions. The next step would be to allocate 
audit resources to the fiscal intermediary/MAC in order to determine 
whether these instructions are properly implemented because reporting 
of costs and charges does have an indirect effect on payments to 
hospitals. Another commenter stated that CMS needs to place more 
emphasis and audit resources toward ensuring that hospitals properly 
complete their cost reports. However, while another commenter supported 
scrutiny and auditing for extreme CCRs, the commenter also appreciated 
that CMS has limited audit resources. One commenter stated that 
adjustments to revenue codes reported on the standard UB-04 claims 
forms may also be appropriate to better match charges on claims forms 
with the charges (and costs) reported on the Medicare cost report. 
Other commenters stated that the costing of the weights should be done 
at the UB revenue code level. Given the variety of ways in which 
hospitals report their costs and charges, it is impossible to make 
assumptions related to revenue codes across all hospitals without the 
assistance of the PS&R crosswalk, which is submitted with the filed 
cost report as an attachment to the CMS-339 form. The commenters noted 
that if CMS is going to continue a transition to cost-based weights, 
hospitals will need time to align their mapping of cost centers into 
departments or cost categories for purposes of cost reporting and 
claims reporting. The accurate costing of claims would be in line with 
the original MedPAC recommendations.
    In light of the cost reporting and MedPAR mismatch problems, the 
commenters did not believe that a temporary, regression-based 
adjustment that does not fix the underlying concerns with cost 
reporting is appropriate. The commenters are concerned that, for the 
sake of expediency, the use of estimates (a regression analysis 
approach), as opposed to efforts to collect accurate data at the 
appropriate cost center level, would be insufficient. In addition, the 
commenters expressed doubt that a regression model can be easily 
validated, as the DRG weights are modified on an annual basis. One 
commenter argued that CMS did not include details of the regression-
based adjustment in the proposed rule and, consequently, the commenter 
could not assess the impact of implementing the adjustment. The 
commenter agreed with CMS' assessment that RTI's adjustments might 
change if they are implemented jointly with MS-DRGs, and if estimated 
using both inpatient and outpatient costs and charges. This commenter, 
along with others, believed that, at the very least, implementation of 
the regression-based CCRs should be delayed, and once short-term 
educational efforts and CMS' long-term cost report evaluation are 
underway, it would be more appropriate to have an informed discussion 
on which cost report changes are needed to alleviate the issue of 
charge compression.
    Response: In the FY 2008 IPPS proposed rule (72 FR 24715), we 
stated that because we did not have sufficient time to investigate how 
RTI's recommended changes might interact with other possible changes to 
the DRGs and the DRG relative weights, and because RTI's regression 
method was only applied to inpatient services and not also outpatient 
services, we decided not to propose implementing RTI's recommendations 
for FY 2008. However, we also stated that, despite these concerns, we 
believe RTI's recommendations have the potential to significantly 
address the issues of charge compression and potential mismatches 
between how costs and charges are reported in the cost reports and on 
the Medicare claims. Therefore, we solicited comments on whether we 
should expand the 13 CCRs to 19 CCRs for FY 2008.
    We have carefully considered all comments, ranging from those 
urging us to adopt all 19 CCRs in FY 2008, to those believing that the 
regression-based CCRs should be delayed for at least a year, if used at 
all. Because of concerns that we and some commenters continue to have 
about premature adoption of the regression-based CCRs without the 
benefit of knowing how they will interact with other DRG changes, and 
the arguments in the comments summarized above concerning cost and 
claims reporting, we have decided to finalize our proposal to not 
implement the four regression-based CCRs for medical supplies and 
devices, IV drugs, and radiology (MRI and CT scans) for FY 2008. 
However, as we explain in more detail in response to comments below, we 
are adopting the two cost report-based CCRs for ``Emergency Room'' and 
``Blood and Blood Products'' for a total of 15 national average CCRs 
for FY 2008. We believe these changes to the relative weight 
methodology do not have the disadvantages that are of concern to the 
commenters. That is, recognizing these additional departments will 
allow us to use information that is already being reported by hospitals 
in their cost reports and adopt some of the changes being recommended 
by RTI without going to a regression-based model at this time.
    Many of the concerns in the comments summarized above related to 
how hospitals' report costs and charges on the cost report and how 
hospitals include charges on their bills for inpatient services or the 
way the charges are grouped in the MedPAR. RTI indicated that more 
precise cost reporting is the best solution to address the issue of 
charge compression in the long term. Many commenters believed that 
rather than rely on increased edits and audits to resolve the lack of 
uniformity in cost reporting, hospitals must be educated to report 
costs and charges in a manner that is consistent with the way in which 
MedPAR groups charge, and the commenters were launching an educational 
campaign accordingly. We agree with the educational initiative of these 
commenters. Participation in these educational initiatives by hospitals 
is voluntary. Hospitals are not required to change how they report 
costs and charges if their current cost reporting practices are 
consistent with rules and regulations and applicable instructions. 
However, to the extent allowed under current regulations and cost 
report instructions, we encourage hospitals to report costs and charges 
consistently with how the data are used to determine relative weights. 
We believe achieving this goal is of mutual benefit to both Medicare 
and hospitals.
    The commenters also suggested that CMS should inform the fiscal 
intermediary/MAC that hospitals may be changing their cost reporting 
and allocation methodologies in response to the educational initiative, 
that such action is encouraged, and that more

[[Page 47193]]

audit resources should be allocated to fiscal intermediaries/MAC to 
ensure that any new cost reporting instructions are being implemented 
properly. First, we intend to notify the fiscal intermediaries/MAC of 
this cost reporting educational initiative subsequent to the issuance 
of this final rule with comment period, and provide both fiscal 
intermediaries/MAC and hospitals with guidance on how to address 
requests for changes in cost reporting practices from hospitals. 
Second, each hospital that wishes to change its cost reporting 
practices must follow the directives at Sec.  413.53(a)(1) of our 
regulations and PRM-1, section 2203, regarding matching the charges to 
the costs reported in each cost center. We recommend that the hospital 
also disclose the changes made in a cover letter with the submission of 
the cost report.
    Commenters submitted suggestions about how MedPAR could be modified 
to further distinguish categories of charges. As we stated in the 
proposed rule, we will consider suggestions for adding additional 
revenue codes to MedPAR in conjunction with other competing priorities 
for our information systems. We cannot create additional revenue codes. 
Requests for new revenue codes on hospital bills have to be made to and 
approved by the National Uniform Billing Committee (NUBC).
    Comment: Some commenters were uncertain whether RTI's 
recommendations to expand certain cost categories through regression 
analysis is the appropriate solution to address the issue of charge 
compression and potential inconsistencies in how hospitals report costs 
and charges. The commenters supported the expansion of categories to 
include CCRs based on cost centers that already exist on the cost 
report, such as emergency department and blood products, and possibly 
others after further examination. Another commenter stated that 
creating a CCR for blood and blood products will reflect more 
accurately the cost of blood and will help ensure future IPPS updates 
will account more adequately for these products. Although one commenter 
understood that CMS has not been able to analyze the effect of 
implementing the regression adjustments with the proposed MS-DRGs, the 
commenter believed that CMS should adopt RTI's adjustment to the CCRs 
for drugs and IV solutions for FY 2008, and subsequently analyze and 
report on the effects of this adjustment on MS-DRGs. Another commenter 
noted that while the RTI regression estimates provide a practical 
short-term approach to address charge compression for drugs, supplies, 
and radiology revenue cost centers, this method does not identify all 
of the charge compression that occurs at each hospital in these revenue 
centers, nor does it address charge compression that may be occurring 
in other revenue centers such as cardiology, or the routine and 
intensive care revenue cost centers where nursing costs per day are 
currently treated as if they were uniform across patient categories.
    Another commenter also asked that CMS remember that the primary use 
of the cost report is to determine a hospital's costs of treating 
Medicare patients. The commenter noted that the cost report is still 
used for cost-based payment for many hospitals, such as CAHs, SCHs, and 
MDHs, and many State Medicaid plans and other payers also rely on data 
from the cost report to determine payment rates. Because of these uses, 
the commenters asked CMS to proceed cautiously with changing the cost 
report to avoid unintended consequences for hospitals where the cost 
report determines a significant portion of current payment. The 
commenter offered its services in reviewing and discussing cost report 
changes that Medicare may propose. Another commenter recommended that 
CMS work with hospital finance experts so the most appropriate and 
accurate instructions are issued, with very specific instructions as to 
where services are to be classified on the cost report and that 
subcategories should be eliminated.
    Another commenter did not support RTI's recommendations for 
revising the cost reports to reduce cost and charge misalignment and to 
create new cost centers because of ``the enormous amount of work 
hospitals would have to perform'' to change internal operations and 
data collection to accommodate the revisions. The commenter expressed 
concern that this would lead to ``rising inefficiency and 
administrative costs.'' This commenter, and others, believed that 
``clear, detailed instructions from CMS'' would be needed to 
differentiate between a ``device,'' ``implant,'' or ``IV solution,'' 
and other ``new nomenclature that distinguishes and separates tens of 
thousands of items and drugs, for instance, implantable spinal screws, 
bandages and bone cement, into specific cost centers'' would be 
necessary.
    Response: As we noted in the proposed rule and in response to 
comments above, we believe that RTI's regression-based CCRs may be a 
promising means for addressing charge compression in the short term. 
However, because we do not yet know how the additional regression-based 
CCRs would interact with the MS-DRGs or with the HSRV methodology, and 
the significant concerns raised by a number of commenters about 
adopting regression-based CCRs, we are not adopting the adjustments to 
address charge compression in the FY 2008 IPPS final rule. We note 
RTI's long-term recommendations suggest addressing charge compression 
through adding new cost centers to the cost report and undertaking 
additional activities such as improvements in how hospitals report 
costs and charges. Thus, we believe that RTI and many of the public 
comments conclude that ultimately improved and more precise cost 
reporting is the best way to minimize charge compression. While we are 
not adopting the regression-based adjustments to address charge 
compression, we believe that the FY 2008 IPPS final rule relative 
weights should take advantage of additional information that is already 
reported on the cost report. Because the cost report currently allows 
for the creation of specific CCRs for Emergency Room and Blood and 
Blood Products, and some commenters expressed explicit support for 
expanding the number of CCRs based on cost centers that already exist 
on the cost report, we have decided to separate Emergency Room costs 
and charges and Blood and Blood Products costs and charges from the 
current ``Other Services'' CCR for the purposes of calculating the 
cost-based portion of the FY 2008 relative weights. That is, in 
accordance with RTI's short-term recommendation, for FY 2008, we are 
adding two additional CCRs to the current list of 13 CCRs, for a total 
of 15 CCRs. We are using line 61 on Worksheets C, Part I and D-4 to 
create the Emergency Room CCR and lines 46 and 47 on Worksheets C, Part 
I and D-4 to create a CCR for Blood and Blood Products. We are 
modifying the table listing the 15 cost center groupings in section 
II.H. of the preamble of this final rule with comment period 
accordingly.
    With respect to the commenters that asked CMS to remember that the 
primary use of the cost report is to determine a hospital's costs of 
treating Medicare patients, we intend to proceed cautiously as the 
commenters suggest. To the extent that the cost report changes that we 
make improve consistency and accuracy of cost reporting, these benefits 
will extend to providers whose payments are based on reasonable costs 
(CAHs) or otherwise use the cost report to determine hospital-specific 
rates (SCHs and MDHs). As we stated above, we intend to work with 
finance and cost report experts in the hospital community if we

[[Page 47194]]

decide to modify the cost report or its instructions to address issues 
with the DRG relative weights. We also understand that hospitals may be 
concerned about the resources that may be required to adapt to 
potential cost report changes. Any changes that would be made to the 
Medicare cost report would be done under the Paperwork Reduction Act 
and, by law, could not be undertaken without considering the burden 
that would be imposed on all hospitals.
    Comment: Some commenters supported making adjustments to address 
charge compression. These commenters noted that charge compression was 
first identified in 2000 and MedPAC and other researchers have also 
recognized this issue. The commenters recommended implementation of a 
regression-based adjustment in the FY 2007 final rule and stated that 
this methodology has been evaluated and validated through RTI's study. 
Many commenters believe that RTI's results provide ample evidence of 
charge compression that justifies the implementation of their 
recommendations for the FY 2008 final rule. Furthermore, commenters 
stated that RTI's regression-based adjustment is appropriate and can be 
implemented immediately without any administrative burdens to the 
hospital. Several commenters emphasized that CMS should make it a 
priority to apply the regression methodology to the Medical supplies 
CCR. These commenters noted that in the proposed rule, CMS stated: ``of 
all the adjusted CCRs, the largest impact on weights came from 
accounting for charge compression in medical supplies for devices and 
implants,'' which demonstrates that a regression approach should be 
applied at least to disaggregate the medical supplies category into one 
CCR for ``Devices and Implants'' and a separate CCR for ``Other 
Supplies.''
    One commenter disagreed with the reasons CMS expressed in the 
proposed rule for delaying implementation of RTI's recommendations, and 
found them to be ``rather insubstantial.'' The commenter did not 
believe that the combined impact of RTI's recommendations and the 
proposed MS-DRGs need to be studied before CMS could proceed with 
implementing the regression-based CCRs. The commenter noted that the 
relative independence of RTI's recommendations from the proposed MS-DRG 
changes was confirmed by a study commissioned by AdvaMed. The commenter 
also stated that the fact that RTI's analysis only included inpatient 
claims is relatively insignificant. The commenter believed that if 
further adjustments need to be made to incorporate outpatient claims 
into the regression estimate next year, they can be done with a fairly 
minor impact. This commenter, and others, urged CMS to implement a 
regression that uses both inpatient and outpatient claims when making 
an adjustment for charge compression for the CY 2008 OPPS, and use the 
same regression in subsequent years for both the IPPS and OPPS.
    Another commenter stated that, although it understood that CMS 
wishes to understand the various interactions of regression-based CCRs 
with other aspects of the IPPS, the effect of charge compression is 
``demonstrable and measurable'' and should be implemented in FY 2008 
for the ``sake of payment accuracy.'' Another commenter stated that 
CMS' concern about the interaction between addressing charge 
compression and other proposed changes appeared ``disingenuous, as CMS 
is proposing so many changes that the interaction of the various 
components cannot be estimated.'' The commenter also questioned CMS' 
hesitation to make changes to the cost report to accommodate RTI's 
recommendation due to limited information system resources, time 
constraints, and inconvenience. The commenter asserted that ``hospitals 
find the defense of scarce resources, compressed implementation lead 
times and cost justification vis-a-vis outcomes an interesting option 
for CMS given the fact that it is manifestly unavailable to hospitals 
who have similar issues.''
    Response: We disagree with the notion of the commenter that found 
us to be ``disingenuous'' because the ``interaction of various 
components [of the IPPS] cannot be estimated.'' We refer the commenter 
to the payment impact section of the IPPS proposed rule (72 FR 25119) 
and this final rule with comment period as well as the FY 2007 IPPS 
proposed rule (71 FR 24025) where we simulate the interaction of a 
number of different payment reforms including the adoption of cost-
based weights, severity DRGs, and other changes. We note that for some 
categories of hospitals, the impact of adopting MS-DRGs is significant. 
The RTI work suggests that further changes to the relative weights will 
also be significant and potentially result in additional 
redistributions of Medicare payment. In our view, the ``interactions of 
various components'' can be determined and before we adopt potential 
policy options in a final rule, the public should be fully informed on 
the potential impacts. As we discussed in the FY 2008 proposed rule, we 
have concerns about implementing regression-based CCRs in the final 
rule without specifically proposing them because of concerns about how 
these changes would interact with the transition to MS-DRGs, the 
calculation of cost-based relative weights, and possibly the HSRV 
method.
    Despite the commenters' support for the regression-based CCRs, we 
are still concerned about the accuracy of using regression-based 
estimates to determine relative weights rather than the Medicare cost 
report. Many public commenters, including several national hospital 
associations, shared these same concerns. However, we believe that more 
specific CCRs will improve payment accuracy for several DRGs. 
Therefore, as we stated above, we are implementing RTI's recommendation 
to expand the current 13 CCRs to 15 CCRs without the use of a 
regression-based adjustment.
    In the proposed rule, we indicated there was insufficient time to 
assess how RTI's recommendations may interact with other potential 
changes to the DRGs and to the method of calculating the DRG relative 
weights. We noted that RTI's study examined charge compression within 
Version 24.0 of the CMS DRGs, and we could not examine their 
interactive effects with the MS-DRGs and be able to timely publish the 
FY 2008 proposed rule. For this reason, we requested public comment on 
whether to adopt these changes in the final rule without having fully 
analyzed them for the proposed rule. While there was strong support for 
adopting the regression-based charge adjustments in these comments, 
many other commenters believed that we should provide the public with 
modeled payment impacts and an opportunity to comment before 
implementing regression-based CCRs.
    We are also continuing to consider whether to adopt an HSRV payment 
methodology for FY 2009. We anticipate undertaking further analysis of 
the HSRV methodology and would like to incorporate RTI's 
recommendations into that analysis. Although its evaluation of 
alternative severity DRG systems is complete, we are currently working 
with RAND to study the HSRV methodology. Furthermore, we continue to 
believe that adjusting for charge compression and later adopting the 
HSRV methodology could create payment instability over the next 2 years 
and it would be preferable to consider simultaneously adopting these 
changes.
    Finally, if we were to adopt adjustments for charge compression, 
the preferred approach would be to apply

[[Page 47195]]

the regression method to the combined inpatient and outpatient 
services. The RTI report discussed the notion that separating services 
that are generally delivered in outpatient settings might improve the 
accuracy of CCRs for inpatient services, and these areas include 
therapeutic radiology, nuclear medicine, chemotherapy, 
electroconvulsive therapy and outpatient surgery. RTI noted that while 
these charges are not significant under the IPPS, aggregation bias may 
be present in these outpatient services which would affect the overall 
department CCR. Therefore, we will consider expanding our analysis to 
include outpatient services.
    Comment: One commenter urged CMS to separately distinguish 
intermediate (step-down) level nursing care costs. Another commenter 
argued that it is illogical that nursing costs are reflected in the 
relative weights only through flat room and board charges, given that 
nursing care is a variable, rather than a fixed cost. The commenter 
asserted that, as a result, a significant amount of money is being 
misallocated across hospitals for required nursing care. The commenter 
urged CMS to give serious consideration to the RTI report's 
recommendation to establish study groups and research options for 
improving patient-level charging within nursing units, as the outcomes 
could improve precision in relative resource weights without adding 
substantial administrative costs to either Medicare or to hospitals. 
Specifically, the commenter strongly supported the creation of a 
separate direct and indirect cost center at each hospital and the 
inclusion of these data in the annual Medicare cost report, the 
reporting and collection of nursing intensity data, and adjustment of 
the Medicare payment for severity of illness by modifying the proposed 
APR DRG severity adjustment formula to incorporate nursing intensity 
and cost within each diagnosis and severity category. The commenter 
also mentioned the New York State Medicaid model, which was the first 
prospective payment system to recognize and reimburse for relative 
nursing resource consumption levels among DRGs through the use of 
Nursing Intensity Weights (NIWs). The NIWs, which were developed by an 
expert panel, have been reevaluated and updated periodically to 
maintain consistency with changes in the DRG definitions. The commenter 
recommended that, because this program has been successfully 
implemented in a large state for a number of years, a Medicare 
demonstration project based on this model should be launched.
    Response: The commenters' raise interesting concerns related to 
nursing costs that are variable but are reflected in the DRG weights 
only as fixed costs through flat room and board charges. There are 
currently no detailed charge codes that can be used to distinguish the 
intensity in nursing services provided by type of patient. In its 
report, RTI noted ``because intensity of nursing is likely correlated 
with DRG assignment, this could be a significant source of bias in DRG 
weights.'' Particularly because nursing comprises such a significant 
portion of hospital costs and charges, we agree that this issue should 
be further studied. We are interested in knowing whether the public has 
any ideas for how the relative weight methodology can systematically 
recognize and reimburse for differences in nursing resource consumption 
provided across hospital inpatients. We will consider whether we should 
study the possibility of using NIWs to recognize nursing intensity in 
the DRG relative weights.
    Comment: Commenters supported adopting the regression CCRs to 
alleviate charge compression, but some commenters were concerned that 
the application of this adjustment methodology to capital intensive 
radiology services is premature and requires additional analysis. The 
commenters noted that the RTI report found that within the Radiology 
CCR, CT scanning and MRI have higher markups and lower CCRs than the 
remaining radiology services. Implementing RTI's recommendation to 
apply a regression method to split Radiology into one CCR each for 
MRIs, CT scans and Other Radiology could potentially result in lower 
CCRs for the CT and MRI categories. One commenter cited an analysis 
conducted by Direct Research, LLC, that found that the majority of 
hospitals do not allocate the capital costs of MRI and CT scan machines 
to the radiology cost center. Rather, the capital costs could be 
allocated more broadly across hospital services on a square footage 
basis. However, the commenter noted that RTI's analysis for radiology 
services assumes a detailed capital allocation for these services that 
results in differential CCRs found in MRIs and CT scans, which the 
commenter suggested is actually not found in the data. Therefore, the 
commenters requested that the regression-based CCRs for radiology not 
be adopted at this time.
    Response: We appreciate the comment on the limitations of the 
regression-based CCR on radiology. This is another example of how 
changes to cost reporting can potentially improve the accuracy of CCRs 
for radiology and other departments. In our view, the commenter raises 
another issue that requires additional analysis before we adopt 
regression-based adjustments to address charge compression.
    Comment: One comment addressed our proposal to move cost report 
line 54 for EEG out of the Cardiology cost center group into the 
Laboratory cost center group. The commenter noted that where providers 
elect to report EEG separately on line 54, this seems appropriate. 
However, some providers combine EEG with EKG on line 53 (usually 
because the EEG services are purchased as outside services and not a 
separate cost center for the hospital). In those instances, moving only 
the EEG costs would be impossible. The commenter noted that CMS did not 
indicate what portion of providers separately report EEG services on 
line 54, but the commenter was concerned that there will be continued 
mismatching under either grouping. The commenter encouraged CMS to 
consider expanding the MedPAR database to include separate fields for 
all revenue codes so that detailed analyses and accurate matching of 
costs and charges can be performed. The commenter also concurred with 
CMS' recommendation to move radioisotope costs to the radiology 
services grouping and out of ``other services.''
    Response: We responded earlier that suggestions for adding 
additional revenue codes to MedPAR will be considered in conjunction 
with other competing priorities for our information systems. In the FY 
2008 proposed rule, we decided to move the costs for cases involving 
EEG from the Cardiology cost center group to the Laboratory Cost center 
group to maintain consistency with their corresponding EEG MedPAR 
claims, which are categorized under Laboratory charges. Although the 
commenter indicated that hospitals may be combining EEG costs with EKG 
costs on line 53 instead of reporting it as a separate cost on line 54, 
we believe the MedPAR is clear in categorizing EEG claims under revenue 
codes 0740 and 0749, and therefore, costs for EEG should be reported on 
line 54 of the cost report as well. For this reason, we are finalizing 
our proposal to move the costs for cases involving EEG from the 
Cardiology cost center group to the Laboratory Cost center for purposes 
of calculating the DRG relative weights. As described in the FY 2008 
IPPS proposed rule, we will also calculate the DRG relative weights for 
FY 2008 by moving radioisotype costs from the Other

[[Page 47196]]

Services CCR to the Radiology Services CCR.
    Comment: One commenter was concerned that hospitals do not have 
consistent charging and billing practices on an inpatient and 
outpatient basis for the administration of medications by injection 
and/or infusion at the bedside.
    Response: We did not propose any changes on this issue. However, we 
will consider this issue as we research potential improvements that can 
be made to how hospitals report costs and charges.
    Comment: One commenter stated that it believed it is important for 
CMS to explicitly recognize the ``limitations'' of the cost-based 
weighting methodology and its applicability to non-Medicare patients 
because this is a ``major precedent setting change for the entire 
hospital field.'' The commenter stated that in studies that it 
conducted, it found that the use of departmental CCRs presents a bias 
in that the higher unit costs of services provided to children that are 
labor intensive in terms of nursing and respiratory therapy are not 
reflected in the department-wide CCRs. The commenter requested that, at 
a minimum, CMS recognize in the final rule that there are cost issues 
in the Medicare CCR methodology that have implications for non-Medicare 
patient populations.
    Response: The cost-based relative weights were developed solely 
using Medicare data. We do not have non-Medicare data that can be used 
to set DRG relative weights. For this reason, we are concerned that 
non-Medicare payers may be using our payment systems and rates without 
making refinements to address the needs of their own populations. As 
stated earlier, we encourage non-Medicare payers to adapt the MS-DRGs 
and the relative weight methodology to better serve their needs.
    Among its other short-term recommendations, RTI also suggested that 
we incorporate edits to reject or require more intensive review of cost 
reports from hospitals with extreme CCRs. This action would reduce the 
number of hospitals with excluded data in the national CCR 
computations, and would also improve the accuracy of all departmental 
CCRs within problem cost reports by forcing hospitals to review and 
correct the assignment of costs and charges before the cost report is 
filed. Although we do not have a substantive disagreement with the 
recommendation, we generally focus our audit resources on areas in 
which cost report information directly affects payments to individual 
providers.
    RTI further suggested revising cost report instructions to reduce 
cost and charge mismatching and program charge misalignment in its 
short-term recommendations. Although RTI suggests such an action could 
be immediately effective for correcting the reporting of costs and 
charges for medical supply items that are now distributed across 
multiple cost centers, we note that changes to improve cost reporting 
now will not become part of the relative weights for several years 
because of lags between the submission of hospital reports and our 
ability to use them in setting the relative weights. Currently, we 
expect there will continue to be a 3-year lag between a hospital's cost 
report fiscal year and the year it is used to set the relative weights. 
Thus, even if it were possible to issue instructions immediately 
beginning for FY 2008, revised reporting would not affect the relative 
weights until at least FY 2011. Nevertheless, we agree with this 
recommendation, and in the proposed rule, we welcomed public input on 
potential changes to cost reporting instructions to improve consistency 
between how charges are reported on cost reports and in the Medicare 
claims. We indicated that we would consider these changes to the cost 
reporting instructions as we consider further changes to the cost 
report below.
    In the summary of the comments above, we stated that some 
commenters believed that RTI's recommendation to incoporate edits to 
reject cost reports or require more intensive audits will not solve the 
mismatch problem because hospitals' reporting is consistent with cost 
reporting instructions. The commenters instead recommended that 
hospitals be educated to report costs and charges in a manner that is 
consistent with how MedPAR groups charges. However, other commenters 
supported more intensive auditiing of cost reports. In response to 
these comments, we stated above that we agree with the initiative to 
educate hospitals to improve cost reporting and that we intend to 
inform the fiscal intermediaries/MAC of this educational initiative. We 
also stated that we intend to provide the fiscal intermediaries/MAC of 
this educational initiative. We also stated that we intend to provide 
fiscal intermediaries/MAC and hospitals with guidance on how to address 
requests for changes in cost reporting practices from hospitals.
    Comment: Some commenters supported the use of the Standard Analytic 
File (SAF) to calculate CCRs, as used by RTI in its study, as the SAF 
provides more detailed charge data on supplies, drugs and radiology 
services, which would improve the payment accuracy for those revenue 
centers with significant charges.
    Response: We appreciate the comment on the use of the SAF to 
calculate national CCRs. The RTI study used the SAF to extract detailed 
charge information for selected revenue codes with potential 
aggregation bias and used this information in the creation of the 
synthetic CCRs. However, because we are not expanding the CCRs using 
regression adjustments for FY 2008, it is not necessary to use the SAF 
to compute the relative weights in this final rule with comment period. 
Rather, we are using the FY 2006 MedPAR file and FY 2005 hospital cost 
reports to calculate the national CCRs.
    Comment: Many commenters noted that, while the proposed rule seems 
to suggest that methods of addressing charge compression should be 
considered together with implementation of an HSRV methodology, these 
two issues (charge compression and HSRV) need not and should not be 
linked. The commenters reiterated their opposition to implementation of 
the HSRV methodology, as previously expressed in comments on the FY 
2007 proposed rule, arguing that the method is flawed and may even 
introduce more bias into the relative weight calculations. Another 
commenter (who also opposed implementation of the HSRV methodology) 
stated that should the HSRV method be implemented, many DRG weights 
could move in one direction if the charge compression adjustments were 
implemented in FY 2008, and then move in the other direction if the 
HSRV method were to be implemented in FY 2009. This commenter requested 
that CMS delay both changes for at least one year, and implement the 
HSRV method and the regression-based CCRs only after issuing a formal 
proposal with a thorough analysis that is made available to the public 
for review and comment. One commenter stated that the RTI revisions 
should be reviewed in combination with the severity-based system 
recommended by RAND and should not be adopted in FY 2008. The commenter 
stated that CMS and the provider community should evaluate these 
recommendations and implement them together in FY 2009. One commenter 
stated that the combined use of hospital-specific charges and a 
national CCR will result in a distortion of the DRG weights and a 
shifting of Medicare payments among hospitals, not based on resource 
utilization, but rather on a mathematical calculation. This commenter 
recommended that CMS review the impact of using hospital-specific

[[Page 47197]]

charges and costs to determine whether the national CCR has created 
inaccurate DRG weights.
    MedPAC commented that adopting cost-based HSRV weights would result 
in substantial additional improvements in payment accuracy. MedPAC 
believed that the HSRV methodology removes all of the differences in 
the level of costs across hospitals, and is preferable to CMS' current 
method used for standardization, which is incomplete and introduces 
avoidable errors into the computation of payment weights. Two other 
commenters supported the adoption of the HSRV methodology and strongly 
opposed the current methodology and believed it is flawed for the 
following reasons: (1) The proposed formula derives a national average 
charge based on all hospitals being weighted equally, which 
disadvantages hospitals located in historically ``low charge'' States, 
and results in small, rural hospitals carrying the same weight as 
large, urban hospitals; (2) The data being used are outdated and do not 
reflect the cost of new technology; (3) Costs in excess of 25 percent 
are omitted by CMS from ``high cost'' hospitals in the cost base, while 
leaving in all of the charges from those same ``high cost'' hospitals 
and assigning a relative value on reduced costs. Since the costs are 
being excluded, but not the charges, there is a corresponding 
mismatching of revenues and costs; (4) The data contain only audited 
data, and hospitals that have not been audited would not be included in 
the data.
    These two commenters stated that CMS should test the sensitivity of 
weights using various methodological assumptions and share the 
resulting data with the public. The commenters requested that CMS 
should ``strive'' to create a system that improves payments and does 
not include the ``obvious flaws'' listed above.
    Response: Many commenters expressed their concerns and opposition 
to the HSRV methodology last year. As we explained in response to those 
comments in the FY 2007 IPPS final rule, we decided not to adopt the 
HSRV methodology to standardize charges for FY 2007 but stated that we 
would undertake further analysis of the method. As we indicated in the 
FY 2008 IPPS proposed rule, we engaged RAND as the contractor to study 
alternative DRG systems. The second phase of the RAND study will 
include evaluating the HSRV methodology; the evaluation report will not 
be available until after the issuance of this final rule with comment 
period. Therefore, we will consider those results as we plan changes as 
part of the FY 2009 IPPS rulemaking process. We intend to carefully 
analyze how the relative weights would change if we were to adopt 
regression-based CCRs to address charge compression while 
simultaneously adopting an HSRV methodology using fully phased-in MS-
DRGs. Although many commenters do not believe that the HSRV methodology 
and addressing charge compression should be linked, we believe, as did 
one commenter, that sequentially adjusting for charge compression and 
later adopting the HSRV methodology could create instability in IPPS 
payments over the next 2 years. Accordingly, we intend to include a 
detailed description and discussion of RAND's and any other analyses 
that we may undertake on these issues in the FY 2009 IPPS proposed 
rule.
    In response to the commenters who supported adopting the HSRV 
methodology and believed it superior to the method used by CMS 
currently, in the FY 2007 IPPS final rule (71 FR 47883), we stated that 
there are certain administrative difficulties with adjusting charges to 
costs using hospital-specific CCRs. Therefore, at least until we have 
the opportunity to analyze the results of RAND's analysis, we are 
utilizing national average CCRs to determine cost. We also do not 
believe that the use of hospital-specific charges together with 
national average CCRs redistributes Medicare payments among hospitals 
merely based on a mathematical calculation, as one commenter indicated. 
On the contrary, a system that improves payment accuracy and moderates 
the influence of individual hospital reporting practices on a national 
payment system is not one which haphazardly redistributes payments. We 
note that, in a report issued in July 2006, the GAO found that CMS's 
system of national CCRs shows promise to improve payment accuracy 
because it reduces the impact that individual hospital-reporting 
practices has on the DRG relative weights (GAO-06-880, ``CMS's Proposed 
Approach to Set Hospital Inpatient Payments Appears Promising''). With 
respect to the commenters' concerns regarding inappropriate ``equal 
weighting'' of hospitals, under CMS' current methodology for computing 
national CCRs, these concerns were addressed in last year's IPPS final 
rule. The national CCRs are the sum of all costs divided by the sum of 
all charges. Thus, all hospitals are not weighted equally. Larger 
hospitals will have more weight than smaller hospitals in the final CCR 
calculation.
    In response to the commenters' concerns that the data are outdated 
and do not reflect the costs of new technology, there is an inevitable 
lag between the availability of information from hospital claims or 
cost reports and the time it can be used to determine relative weights. 
We always use the most recent data available to set relative weights. 
Furthermore, as we noted in the FY 2007 IPPS final rule, CMS' current 
method of using national average CCRs eliminates the need to match 
claims (for FY 2008, the 2006 MedPAR) to the time period of the CCRs 
(for FY 2008, FY 2005 HCRIS), which would be necessary under an HSRV 
method that uses hospital-specific CCRs. Thus, we can use claims data 
from one year later under our cost-based weighting methodology. We also 
note that add-on payments made for the latest advancements in medical 
technologies may not be included in the 2-year-old hospital claims data 
that are used to set the relative weights.
    Regarding the comments stating that CMS mismatches revenues and 
costs by omitting excessive costs from ``high cost'' hospitals in the 
cost base, while leaving in the charges from those same ``high cost'' 
hospitals, we note that this is not actually the case. If a hospital's 
costs are dropped from the national average CCR calculations, the 
hospital's charges are also dropped from the national average CCR 
calculations. Lastly, the commenters' assertion that the cost report 
data used for CCRs include only audited data is incorrect. If the 
commenters are referring to the cost report data that CMS uses to 
calculate the national average CCRs, we note that in accessing data for 
IPPS hospitals from HCRIS, we select all IPPS hospitals, and do not 
only select hospitals whose cost reports are audited.
    Comment: MedPAC submited comments on the method we use to calculate 
the national CCRs for the cost-based relative weights. The methodology 
to calculate the national CCRs is described in section II.H. of the 
preamble of this final rule with comment period. MedPAC suggested that 
we standardize the Medicare charges and costs used to calculate the 
national CCRs from the Medicare cost reports to adjust for differences 
in local wage levels, IME, and DSH. The standardization would be 
consistent with the use of national standardized charges by revenue 
center also used in the calculation of cost-based relative weights from 
the MedPAR.
    Response: While we did not propose any changes to the cost-based 
relative weights methodology, we appreciate the comment on maintaining 
consistency

[[Page 47198]]

among our data sources. Although we currently standardize charges from 
the MedPAR file when calculating relative weights, we do not 
standardize costs and charges from hospital cost reports, as MedPAC 
recommended. We may consider this recommendation as we continue to 
refine our methodology for calculating relative weights. However, we 
note that there would be no need to standarize costs and charges from 
hospital cost reports under an HSRV methodology.
b. Medium-Term Recommendations
    RTI recommended that we expand the MedPAR file to include separate 
fields that disaggregate several existing charge departments. For 
compatibility with prior years' data, the new fields should partition 
the existing ones rather than recombine charges. RTI recommended 
including additional fields in the MedPAR file for the hospital 
departments that it statistically disaggregated in its report, as well 
as intermediate care, observation beds, other special nursing codes, 
therapeutic radiation and EEG, and possibly others. As with some of 
RTI's earlier recommendations with respect to cost reports, we will 
examine this suggestion in conjunction with other competing priorities 
CMS has been given for our information systems. We have limited 
information systems resources, and we will need to consider whether the 
time constraints we have to develop the IPPS final rule, in conjunction 
with the inconvenience of using the SAF and accounting for charge 
compression through regression, will justify the infrastructure cost to 
our information systems of incorporating these variables into the 
MedPAR.
    Finally, RTI's medium-term recommendations include encouraging 
providers to use existing standard cost centers, particularly those for 
Blood and Blood Administration and for Therapeutic Radiology, in the 
current Medicare cost report. We believe this is closely related to the 
recommendation for improved cost reporting instructions. Therefore, we 
will consider this recommendation as part of any further effort we may 
undertake to revise cost reporting instructions or change the cost 
report.
    Comment: Some commenters supported expanding the MedPAR file to 
include separate fields to disaggregate additional cost centers. One 
commenter supported this recommendation and suggested that the 
assignment of revenue codes and charges to revenue centers in MedPAR 
should be reviewed and changed to better reflect hospital accounting 
practices as reflected on the Medicare cost report.
    Response: We will consider suggestions for modifying MedPAR in 
conjunction with other competing priorities we have for our information 
systems. Further, while we support the efforts of the national hospital 
associations to streamline hospital's reporting practices, we note that 
CMS does not instruct hospitals in the appropriate revenue codes to use 
because hospitals have discretion as to where and how they allocate 
charges based on their own financial system needs.
c. Long-Term Recommendations
    RTI's long-term recommendations include adding new cost centers to 
the Medicare cost report and/or undertaking the following activities:
     Add ``Devices, Implants and Prosthetics'' under the line 
for ``Medical Supplies Charged to Patients.'' Consider also adding a 
similar line for IV Solutions as a subscripted line under the line for 
``Drugs Charged to Patients.''
     Add CT Scanning and MRI as subscripted lines under the 
line for ``Radiology-Diagnostic.'' About one-third of hospitals that 
offer CT Scanning and/or MRI services are already reporting these 
services on nonstandard line numbers. More consistent reporting for 
both cost centers would eliminate the need for statistical estimation 
on the radiology CCRs.
     In consultation with hospital industry representatives, 
determine the best way to separate cardiology cost centers and add a 
new standard cost center for cardiac catheterization and/or for all 
other cardiac diagnostic laboratory services. About 20 percent of 
hospitals already include a nonstandard line on their cost reports for 
catheterization. Creating a new standard cost center could improve 
consistency in reporting and substantially improve the program charge 
mismatching that now occurs.
     In consultation with hospital industry representatives, 
consider establishing a new cost center to capture intermediate care 
units as distinct from routine or intensive care.
     Establish expert study groups or other research vehicles 
to study options for improving patient-level charging within nursing 
units. Nursing accounts for one-fourth of IPPS charges and 41 percent 
of the computed costs from our claims analysis file. Historically, 
nursing charges and costs have been assigned to patients without 
relying on individual measures of service use. Consideration should be 
given to finding ways to improve precision in nursing cost finding that 
will improve relative resource weights without adding substantial 
administrative costs to either the Medicare program or to hospitals.
    We agree with RTI that attention should be paid to these issues as 
we consider changes to the Medicare cost report. The cost report has 
not been revised in nearly 10 years. During this time, there have been 
significant changes to the Medicare statute and regulations that have 
affected the Medicare payment policies. Necessary incremental changes 
have been made to the Medicare cost report over the years to 
accommodate the Medicare wage index, disproportionate share payments, 
indirect and direct graduate medical education payments, reporting of 
uncompensated care costs, among others. The adoption of cost-based 
weights for the IPPS beginning in FY 2007 has brought further attention 
to the importance of the Medicare cost report and how hospitals report 
costs and charges. We recently began doing a comprehensive review of 
the Medicare cost report and plan to make updates that will consider 
its many uses. As we update the cost report, we will give strong 
consideration to RTI's recommendations and potential long-term 
improvements that could be made to the IPPS cost-based relative 
weighting methodology.
    Comment: Several commenters made recommendations for how the 
relative weights would be calculated under a 3-year transition from the 
current DRGs to the new MS-DRGs. Some commenters suggested three 
options as follows:
    (1) Use two GROUPERs (CMS DRGs and MS-DRGs) and then blend the 
weights for each individual case.
    (2) Blending current DRG weights with MS-DRG weights: To calculate 
a blended cost-based weight, CMS could first calculate cost-based 
weights using the current DRGs. CMS could then calculate cost-based 
weights using the MS-DRGs. The blended weight for each MS-DRG would be 
based on the weighted average relative weights (based on the current 
DRGs from which cases group into the new MS-DRGs) and the MS-DRG 
weight. Under this approach, CMS would continue to calculate cost-based 
weights for the current DRGs during the first 2 years of the transition 
period. This approach recognizes that a case has different relative 
weights in the new system versus the current DRG system.
    (3) Blending MS-DRG base and severity level weights: CMS would 
blend the actual MS-DRG weight with the weight of the base MS-DRG. The 
base MS-DRG weight is determined by

[[Page 47199]]

using expected case mix volume among severity levels. For example, if 
an MS-DRG was subdivided into two subgroups: with the non-CC DRG 
accounting for 90 percent of the cases and the other 10 percent in the 
CC DRG, these ratios would be used to blend the base and the DRG-
specific weight. Under this approach, CMS would not have to calculate 
weights using two different DRG systems. On the other hand, this 
approach does not use the current system when calculating the blended 
rates.
    The commenters noted that while option 1 would provide the most 
accurate blended weights, it is the most burdensome to implement 
because it would require use of two GROUPERs, whereas under options 2 
and 3, CMS would only use the blended relative weights, allowing 
hospitals and Medicare contractors to use only one grouping software.
    MedPAC suggested that CMS adopt a 2-year transition period for MS-
DRGs to coincide with the remainder of the current transition period 
for implementing cost-based weights, so as to ``balance the payment 
impacts of implementing severity refinements and cost-based weights.'' 
MedPAC suggested that a 2-year transition might work as follows: CMS 
could group cases using the MS-DRG grouper beginning in FY 2008, but 
then use a blended weight for each category. The blended weight for an 
MS-DRG would reflect partly the weight that would have been assigned 
under an MS-DRG system with fully implemented cost-based weights. The 
weight for each MS-DRG in FY 2008 would be a blend of two parts:
     50 percent of the average DRG weight that would have been 
attached to cases in the MS-DRG from the 2006 MedPAR file under a 
policy of \1/3\ charge-based weights and \2/3\ cost-based weights. 
These DRG weights are the ones that would have applied to the same 
cases under the FY 2008 policy if CMS simply continued the transition 
to cost-based weights without changing the DRG definitions.
     50 percent of the CMS refined weights for the MS-DRG for 
FY 2008. In FY 2009, cases would be grouped in the MS-DRGs and the 
weight for each MS-DRG would be a 100 percent cost-based weight.
    Response: We have carefully considered each comment in determining 
whether there should be a transition period for the relative weights 
computed using MS-DRGs, the length of the transition and how to compute 
weights during the transition. We also considered how to accommodate a 
transition to MS-DRG relative weights with the continuing transition to 
cost-based weights. Although we received strong general support for 
adopting the MS-DRGs, we do believe that some transition is warranted 
to mitigate the magnitude of potential changes in payment to hospitals 
that could occur in one year. Furthermore, we agree with MedPAC that a 
two-year transition period that coincides with the remainder of the 
transition period for implementing cost-based weights is appropriate. 
By having these changes occur simultaneously over the same transition 
period, we can avoid having large changes in payment that would occur 
with sequential implementation. Further, we can also accomplish all of 
the payment reforms according to the same schedule. Accordingly, we are 
implementing a 2-year transition to MS-DRGs. For FY 2008, the first 
year of the transition, 50 percent of the relative weight for each MS-
DRG will be based on the CMS DRG relative weight and 50 percent will be 
based on the MS-DRG relative weight. In FY 2009, the relative weights 
will be based entirely on the MS-DRG relative weight. The blended 
relative weights for FY 2008 are computed as follows:
    First, using the Version 24.0 GROUPER, relative weights are 
calculated based on 100 percent costs and 100 percent charges, 
respectively (see section II.H. of the preamble of this final rule with 
comment period for a description of the cost- and charge-based 
calculations). Then these weights are blended using two-thirds of the 
cost-based weights and one-third charge-based weights to establish the 
CMS DRG portion of the transition weights.
    Second, using the Version 25.0 GROUPER, relative weights are 
calculated based on 100 percent costs and 100 percent charges, 
respectively (see section II.H. of the preamble of this final rule with 
comment period for a description of how we compute cost-based and 
charge-based weights). These weights are then blended using two-thirds 
of the cost-based weights and one-third charge-based weights to 
establish the MS-DRG portion of the transition weights.
    Under the transition blend we are adopting in this final rule with 
comment period, we group cases to MS-DRGs (using the Version 25.0 
GROUPER), but the payment weight for each DRG is a 50/50 blend of the 
MS-DRG weight and the CMS DRG weight. Thus, we had to determine a 
blended weight for each DRG. Using the claims in the FY 2006 MedPAR 
database that we used to compute cost-based weights under the Version 
24.0 GROUPER, we grouped each case to a CMS DRG (using the Version 24.0 
GROUPER) and an MS-DRG (using the Version 25.0 GROUPER). Commonly, a 
set of cases that grouped to a single MS-DRG grouped to two or more CMS 
DRGs. Therefore, we determined an average CMS DRG weight for all cases 
that grouped to each MS-DRG. Specifically, we summed the CMS DRG 
weights of all the cases that grouped to each MS-DRG and then divided 
that number by the transfer-adjusted case count. To establish the final 
blended weight for each DRG, we added 50 percent of the MS-DRG weight 
to 50 percent of the average CMS DRG weight for that MS-DRG. These 
final blended relative weights are listed in Table 5 of this final rule 
with comment period.
    Comment: Some commenters expressed concern about the continued 
transition from charge-based weights to cost-based weights, in light of 
RTI's recommendations to alleviate charge compression on the relative 
weights and the proposal to introduce MS-DRGs. For FY 2008, we proposed 
that the relative weights would be based on one-third charges and two-
third costs. Some commenters suggested that this transition should be 
delayed until the public comments associated with cost reporting and 
charge compression can be addressed. We have also received comments 
expressing concern on the potential fluctuations in hospital payment if 
we were to implement both RTI's recommendations on charge compression 
along with the MS-DRG system. In both cases, commenters suggested 
delaying the transition from charge-based to cost-based weights by 
maintaining the relative weights at two-third charges and one-third 
costs. MedPAC also expressed concern about continuing the transition to 
cost-based weights. However, unlike the commenter above, MedPAC 
suggested that CMS discontinue the transition period to cost-based 
weights and implement 100 percent cost-based weights in FY 2008. 
MedPAC's recommendation to discontinue the transition to cost-based 
weights presumed full introduction of the MS-DRGs in FY 2008. The 
commenters believed the payment fluctuations that will occur with full 
implementation of MS-DRGs can be mitigated by fully adopting cost 
weights. However, as suggested above, MedPAC also suggested as an 
alternative adopting MS-DRG weights according to the same schedule as 
the cost-based weights.
    Response: We appreciate the commenters' expressing concerns about 
the continued transition to cost-based relative weights and the 
potential changes in payment from the

[[Page 47200]]

application of this methodology. In the FY 2007 IPPS final rule, we 
discussed our rationale for implementing cost-based weights over a 3-
year transition period. We stated that the 3-year transition would 
mitigate the annual payment effects from the changes to the relative 
weights while we further study whether to make adjustments to account 
for charge compression. We believe that the cost-based methodology 
reduces bias in the relative weights and makes Medicare's payments more 
accurate for both medical and surgical DRGs. Therefore, any delays in 
the transition would not further our goal of payment accuracy. We 
believe that current efforts to improve cost reporting and our decision 
not to implement regression-based CCRs will alleviate concerns about 
additional fluctuations in hospital payments from further changes to 
the relative weight methodology. Furthermore, we believe that, for some 
types of hospitals (such as rural hospitals), the payment changes from 
MS-DRGs are the opposite of those that will occur from the transition 
to cost-based weights. For this reason, we believe a 2-year transition 
of the MS-DRG system that coincides with the remaining two years of the 
transition to cost-based weights will reduce the magnitude of annual 
payment changes and achieve our long-term goal of improvements in 
payment accuracy. Therefore, we are continuing with the 3-year 
transition to cost-based weights. For FY 2008, the DRG relative weights 
will be a blend of 33 percent of charge-based weights and 67 percent of 
cost-based weights. For the first year of the MS-DRG transition, the 
relative weights will be a blend of 50 percent of the CMS-DRG weight 
and 50 percent of the MS-DRG weight.

F. Hospital-Acquired Conditions, Including Infections

1. General
    Medicare's IPPS encourages hospitals to treat patients efficiently. 
Hospitals receive the same DRG payment for stays that vary in length. 
In many cases, complications acquired in the hospital do not generate 
higher payments than the hospital would otherwise receive for other 
cases in the same DRG. To this extent, the IPPS does encourage 
hospitals to manage their patients well and to avoid complications, 
when possible. However, complications, such as infections, acquired in 
the hospital can lead to higher Medicare payments in two ways. First, 
the treatment of complications can increase the cost of hospital stays 
enough to generate outlier payments. However, the outlier payment 
methodology requires that hospitals experience large losses on outlier 
cases (for example, in FY 2007, the fixed-loss amount was $24,485 
before a case qualified for outlier payments, and the hospital then 
only received 80 percent of its estimated costs above the fixed-loss 
cost threshold). Second, under the MS-DRGs we are adopting in this 
final rule with comment period, there are 258 sets of DRGs that are 
split into 2 or 3 subgroups based on the presence or absence of a major 
CC (MCC) or CC. If a condition acquired during the beneficiary's 
hospital stay is one of the conditions on the MCC or CC list, the 
result may be a higher payment to the hospital under the MS-DRGs. (We 
refer readers to section II.D. of this final rule with comment period 
for a detailed discussion of DRG reforms.)
2. Legislative Requirement
    Section 5001(c) of Pub. L. 109-171 requires the Secretary to 
select, by October 1, 2007, at least two conditions that are (a) high 
cost or high volume or both, (b) result in the assignment of a case to 
a DRG that has a higher payment when present as a secondary diagnosis, 
and (c) could reasonably have been prevented through the application of 
evidence-based guidelines. For discharges occurring on or after October 
1, 2008, hospitals will not receive additional payment for cases in 
which one of the selected conditions was not present on admission. That 
is, the case will be paid as though the secondary diagnosis was not 
present. Section 5001(c) provides that we can revise the list of 
conditions from time to time, as long as the list contains at least two 
conditions. Section 5001(c) also requires hospitals to submit the 
secondary diagnoses that are present at admission when reporting 
payment information for discharges on or after October 1, 2007.
3. Public Input
    In the FY 2007 IPPS proposed rule (71 FR 24100), we sought input 
from the public regarding conditions with evidence-based guidelines 
that should be selected in order to implement section 5001(c) of Pub. 
L. 109-171. The comments that we received were summarized in the FY 
2007 IPPS final rule (71 FR 48051 through 48053). In the FY 2008 IPPS 
proposed rule (72 FR 24716), we again sought formal public comment on 
conditions that we proposed to select under section 5001(c). As 
discussed below, in this final rule with comment period, we first 
summarize the comments we received on the FY 2007 IPPS proposed rule. 
We then explain our detailed proposals included in the FY 2008 proposed 
rule, followed by a summary of the public comments on each condition 
proposed and our responses to those public comments.
    In summary, the majority of the comments that we received in 
response on the FY 2007 IPPS proposed rule addressed conceptual issues 
concerning the selection, measurement, and prevention of hospital-
acquired infections. Many commenters encouraged CMS to engage in a 
collaborative discussion with relevant experts in designing, 
evaluating, and implementing this section. The commenters urged CMS to 
include individuals with expertise in infection control and prevention, 
as well as representatives from the provider community, in the 
discussions.
    Many commenters supported the statutory requirement for hospitals 
to submit information regarding secondary diagnoses present on 
admission beginning in FY 2008, and suggested that it would better 
enable CMS and health care providers to more accurately differentiate 
between comorbidities and hospital-acquired complications. MedPAC, in 
particular, noted that this requirement was recommended in its March 
2005 Report to Congress and indicated that this information is 
important to Medicare's value-based purchasing efforts. Other 
commenters cautioned us about potential problems with relying on 
secondary diagnosis codes to identify hospital-acquired complications, 
and indicated that secondary diagnosis codes may be an inaccurate 
method for identifying true hospital-acquired complications.
    A number of commenters expressed concerns about the data coding 
requirement for this payment change and asked for detailed guidance 
from CMS to help them identify and document hospital-acquired 
complications. Other commenters expressed concern that not all 
hospital-acquired infections are preventable and noted that sicker and 
more complex patients are at greater risk for hospital-acquired 
infections and complications. Commenters suggested that CMS include 
standardized infection-prevention process measures, in addition to 
outcome measures of hospital-acquired infections.
    Some commenters proposed that CMS expand the scope of the payment 
changes beyond the statutory minimum of two conditions. They noted that 
the death, injury, and cost of hospital-acquired infections are too 
high to limit this provision to only two conditions. Commenters also 
recommended that CMS annually select additional hospital

[[Page 47201]]

acquired complications for the payment change. Conversely, a number of 
commenters proposed that CMS initially begin with limited 
demonstrations to test CMS' methodology before nationwide 
implementation. One commenter recommended that CMS include appropriate 
consumer protections to prevent providers from billing patients for the 
nonreimbursed costs of the hospital-acquired complications and to 
prevent hospitals from selectively avoiding patients perceived at risk 
of complications.
    In addition to the broad conceptual suggestions, some commenters 
recommended specific conditions for possible inclusion in the payment 
changes, which we discussed in detail in the preamble of the proposed 
rule and in section II.D.4. of this final rule with comment period. We 
also discuss throughout section II.D. of the preamble of this final 
rule with comment period other comments that we have considered in 
developing hospital-acquired conditions that would be subject to 
reporting.
    As it is not addressed elsewhere, we are responding here to the 
comment about hospitals billing patients for costs of hospital-acquired 
complications that are not counted as MCCs and CCs. Section 5001(c) 
does not make the additional cost of a hospital acquired complication a 
noncovered cost. The additional costs that a hospital would incur as a 
result of a hospital-acquired complication remains a covered Medicare 
cost that is included in the hospital's IPPS payment. Medicare's 
payment to the hospital is for all inpatient hospital services provided 
during the stay. The hospital cannot bill the beneficiary for any 
charges associated with the hospital-acquired complication. With 
respect to the concern about a hospital avoiding patients that are at 
high risk of complications, we note that the policy is selecting only 
those conditions that are ``reasonably preventable.'' Thus, we are only 
selecting those conditions where, if hospital personnel are engaging in 
good medical practice, the additional costs of the hospital-acquired 
condition will, in most cases, be avoided and the risk of selectively 
avoiding patients at high risk of complications will be minimized. We 
further note that Medicare's high cost outlier policy is unaffected by 
section 5001(c). The hospital's total charges for all inpatient 
services provided during the stay will continue to be used to determine 
whether the case qualifies for an outlier payment. Thus, there will 
continue to be limitations on a hospital's financial risk of treating 
high cost cases even if, despite the hospital maintaining good medical 
practice to avoid complications, a reasonably preventable condition 
occurs after admission. Finally, as stated further below, we are 
continuing to work to identify exclusions for situations where the 
policy should not apply for the selected condition.
4. Collaborative Effort
    CMS worked with public health and infectious disease experts from 
the Centers for Disease Control and Prevention (CDC) to identify a list 
of hospital-acquired conditions, including infections, as required by 
section 5001(c) of Pub. L. 109-171. As previously stated, the selected 
conditions must meet the following three criteria: (a) high cost or 
high volume or both; (b) result in the assignment of the case to a DRG 
that has a higher payment when present as a secondary diagnosis; and 
(c) could reasonably have been prevented through the application of 
evidence-based guidelines. CMS and CDC staff also collaborated on 
developing a process for hospitals to submit a Present on Admission 
(POA) indicator with each secondary condition. The statute requires the 
Secretary to begin collecting this information as of October 1, 2007. 
The POA indicator is required in order for us to determine which of the 
selected conditions developed during a hospital stay. The current 
electronic format used by hospitals to obtain this information (ASC 
X12N 837, Version 4010) does not provide a field to obtain the POA 
information. We issued instructions requiring acute care IPPS hospitals 
to submit the POA indicator for all diagnosis codes, effective October 
1, 2007, through Change Request No. 5499, with a release date of May 
11, 2007. The instructions specify how hospitals under the IPPS submit 
this information in segment K3 in the 2300 loop, data element K301 on 
the ASC X12N 837, Version 4010 claim. Specific instructions on how to 
select the correct POA indicator for a diagnosis code are included in 
the ICD-9-CM Official Guidelines for Coding and Reporting. These 
guidelines can be found at the following Web site: http://www.cdc.gov/
nchs/datawh/ftpserv/ftpicd9/ftpicd9.htm.
    CMS and CDC staff also received input from a number of groups and 
organizations on hospital-acquired conditions, including infections. 
Many of these groups and organizations recommended the selection of 
conditions mentioned in the FY 2007 IPPS final rule, including the 
following because of the high cost or high volume (frequency) of the 
condition, or both, and because in some cases preventable guidelines 
already exist:
     Surgical site infections. The groups and organizations 
stated that there were evidence-based measures to prevent the 
occurrence of these infections which are currently measured and 
reported as part of the Surgical Care Improvement Program (SCIP).
     Ventilator-associated pneumonias. The groups and 
organizations indicated that these conditions are currently measured 
and reported through SCIP. However, other organizations counseled 
against selecting these conditions because they believed it was 
difficult to obtain good definitions and that it was not always clear 
which ones are hospital acquired.
     Catheter associated bloodstream infections.
     Pressure ulcers.
     Hospital falls. The injury prevention groups included this 
condition among a group referred to as ``serious preventable events,'' 
also commonly referred to as ``never events'' or ``serious reportable 
events.'' A serious preventable event is defined as a condition which 
should not occur during an inpatient stay.
     Bloodstream infections/septicemia. Some commenters 
suggested that we focus on one specific organism, such as staph aureus 
septicemia.
     Pneumonia. Some commenters recommended the inclusion of a 
broader group of pneumonia patients, instead of restricting cases to 
ventilator-associated pneumonias. Some commenters mentioned that while 
prevention guidelines exist for pneumonia, it is not clear how 
effective these guidelines may be in preventing pneumonia.
     Vascular catheter associated infections. Commenters 
indicated that there are CDC guidelines for these infections. Other 
commenters stated that while this condition certainly deserves focused 
attention by health care providers, there is not a unique ICD 9 CM code 
that identifies vascular catheter-associated infections. Therefore, 
these commenters suggested that there would be difficulty separately 
identifying these conditions.
     Clostridium difficile-associated disease (CDAD). Several 
commenters identified this condition as a significant public health 
issue. Other commenters indicated that, while prevalence of this 
condition is emerging as a public health problem, there is not 
currently a strategy for reasonably preventing these infections.
     Methicillin-resistant staphylococcus aureus (MRSA). 
Several commenters indicated that MRSA has

[[Page 47202]]

become a very common bacteria occurring both in and outside the 
hospital environment. However, other organizations stated that the code 
for MRSA (V09.0, Infection with microorganism resistant to penicillins 
Methicillin-resistant staphylococcus aureus) is not currently 
classified as a CC. Therefore, the commenters stated that MRSA does not 
lead to a higher reimbursement when the code is reported.
     Serious preventable events. As stated earlier, some 
commenters representing injury prevention groups suggested including a 
broader group of conditions than hospital falls which should not be 
expected to occur during a hospital admission. They noted that these 
conditions are referred to as ``serious preventable events,'' and 
include events such as the following: (a) leaving an object in during 
surgery; (b) operating on the wrong body part or patient, or performing 
the wrong surgery; (c) air embolism as a result of surgery; and (d) 
providing incompatible blood or blood products. Other commenters 
indicated serious preventable events are so rare that they should not 
be selected as a hospital condition that cannot result in a case being 
assigned to a higher paying DRG.
5. Criteria for Selection of the Hospital-Acquired Conditions
    CMS and CDC staff greatly appreciate the many comments and 
suggestions offered by organizations and groups that were interested in 
providing input into the selection of the initial hospital-acquired 
conditions.
    CMS and CDC staff evaluated each recommended condition under the 
three criteria established by section 1886(d)(4)(D)(iv) of the Act. In 
order to meet the higher payment criterion, the condition selected must 
have an ICD-9-CM diagnosis code that clearly identifies the condition 
and is classified as a CC, or as an MCC (as proposed for the MS DRGs in 
the proposed rule). Some conditions recommended for inclusion among the 
initial hospital-acquired conditions did not have codes that clearly 
identified the conditions. Because there has not been national 
reporting of a POA indicator for each diagnosis, there are no Medicare 
data to determine the incidence of the reported secondary diagnoses 
occurring after admission. To the extent possible, we used information 
from the CDC on the incidence of these conditions. CDC's data reflect 
the incidence of hospital-acquired conditions in 2002. We also examined 
FY 2006 Medicare data on the frequency that these conditions were 
reported as secondary diagnoses. We developed the following criteria to 
assist in our analysis of the conditions. The conditions described were 
those recommended for inclusion in the initial hospital-acquired 
infection provision.
     Coding--Under section 1886(d)(4)(D)(ii)(I) of the Act, a 
discharge is subject to the payment adjustment if ``the discharge 
includes a condition identified by a diagnosis code'' selected by the 
Secretary under section 1886(d)(4)(D)(iv) of the Act. We only selected 
conditions that have (or could have) a unique ICD-9-CM code that 
clearly describes the condition. Some conditions recommended by the 
commenters would require the use of two or more ICD-9-CM codes to 
clearly identify the conditions. Although we did not exclude these 
conditions from further consideration, the need to utilize multiple 
ICD-9-CM codes to identify them may present operational issues. For 
instance, the complexities associated with selecting septicemia as a 
hospital-acquired condition subject to section 5001(c) of the DRA may 
present operational issues in identifying whether or not the condition 
was present upon admission. The vast number of clinical scenarios that 
we would have to account for could complicate implementation of the 
provision.
     Burden (High Cost/High Volume)--Under section 
1886(d)(4)(D)(iv)(I) of the Act, we must select cases that have 
conditions that are high cost or high volume, or both.
     Prevention guidelines--Under section 1886(d)(4)(D)(iv)(II) 
of the Act, we must select codes that describe conditions that could 
reasonably have been prevented through application of evidence-based 
guidelines. We evaluated whether there is information available for 
hospitals to follow to prevent the condition from occurring.
     MCC or CC--Under section 1886(d)(4)(D)(iv)(III) of the 
Act, we must select codes that result in assignment of the case to a 
DRG that has a higher payment when the code is present as a secondary 
diagnosis. The condition must be an MCC or a CC that would, in the 
absence of this provision, result in assignment to a higher paying DRG.
     Considerations--We evaluated each condition above 
according to how it meets the statutory criteria in light of the 
potential difficulties that we would face if the condition were 
selected.
6. Selection of Hospital-Acquired Conditions
    We discuss below our analysis of each of the conditions that were 
raised as possible candidates for selection under section 5001(c) of 
Pub. L. 109-171 according to the criteria described above in section 
II.D.5. of the preamble of this final rule with comment period. We also 
discuss any considerations, which would include any administrative 
issues surrounding the selection of a proposed condition. For example, 
the condition may only be able to be identified by multiple codes, 
thereby requiring the development of special GROUPER logic to also 
exclude similar or related ICD-9-CM codes from being classified as a 
CC. Similarly, a condition acquired during a hospital stay may arise 
from another condition that the patient had prior to admission, making 
it difficult to determine whether the condition was reasonably 
preventable. Following a discussion of each condition, we provide a 
summary that describes how each condition was considered for the 
proposed rule, whether we are selecting it to be subject to the 
provision in this FY 2008 IPPS final rule or if it will continue to be 
considered for the future. In the proposed rule, we presented 13 
conditions. The summary discussion and table reflect changes to the 
order of the conditions. The summary presents the conditions that best 
meet the statutory criteria and which conditions we are selecting to be 
subject to the payment adjustment for hospital-acquired conditions 
beginning in FY 2009. In the proposed rule, we encouraged comments on 
these conditions. We asked commenters to recommend how many and which 
conditions should be selected in the FY 2008 IPPS final rule along with 
justifications for these selections. We also encouraged additional 
comments on clinical, coding, and prevention issues that may affect the 
conditions selected. While, in this final rule with comment period, we 
present these 13 conditions in the order they were proposed, we have 
re-ranked these conditions based on how well they meet the statutory 
criteria according to compelling public health reasons in addition to 
public comment and internal analysis.
    We received approximately 127 timely public comments on this 
section from hospitals and health care systems, provider associations, 
consumer groups, purchasers, medical device manufacturers, 
pharmaceutical companies, information technology companies, and health 
care research organizations.
    Comment: Some commenters urged CMS to use discretion in selecting 
hospital-acquired conditions that will be subject to the statutory 
provision and suggested that CMS limit the number of conditions 
selected. A large majority of

[[Page 47203]]

commenters strongly supported the inclusion of three of the serious 
preventable events (object left in surgery, air embolism and blood 
incompatibility) and generally commented that the remaining conditions 
are not always preventable or may not have unique codes established.
    A number of commenters both supported and opposed the conditions 
other than the three serious preventable events mentioned above. The 
commenters were generally optimistic about considering proposed 
conditions for the future upon resolution of suggested issues. A few 
commenters proposed that CMS initially begin with limited 
demonstrations to test CMS' methodology before nationwide 
implementation. These commenters specifically mentioned the Michigan 
Hospital Association Keystone Center.
    The commenters who suggested not including conditions other than 
the three serious preventable events mentioned above noted that sicker 
and more complex patients are at greater risk for hospital-acquired 
infections and complications. In particular, the commenters believed 
some of the conditions proposed are a biological inevitability at a 
certain predictable rate regardless of safe practice. In addition, the 
commenters expressed concern about the difficulty of distinguishing 
between hospital-acquired and community-acquired infections. The 
commenters also believed that CMS should use incentives to allow 
hospitals to adopt innovative infection prevention technologies and 
provide necessary treatments for infections. Finally, a few commenters 
submitted additional conditions that were not included in the 13 
conditions we considered in the proposed rule.
    Response: In general, we discuss our responses to each of these 
comments below in the context of the specific conditions they 
reference. With respect to the general comment that we should only 
select the three serious preventable events, we believe there is a 
significant public health interest in selecting more than just these 
conditions. According to the commenters, many of the other conditions 
we considered are not always preventable and, therefore, should not be 
selected. The statute indicates that the provision should apply to 
conditions that ``could reasonably have been prevented through the 
application of evidence-based guidelines.'' Therefore, for this reason, 
we are selecting other conditions in addition to the serious 
preventable events to be subject to this provision in this final rule 
with comment period. We discuss the application of the statutory 
criteria to each of the conditions we considered below and why we 
believe the condition is ``reasonably preventable.''
(a) Catheter-Associated Urinary Tract Infections
    Coding--ICD-9-CM code 996.64 (Infection and inflammatory reaction 
due to indwelling urinary catheter) clearly identifies this condition. 
The hospital would also report the code for the specific type of 
urinary infection. For instance, when a patient develops a catheter 
associated urinary tract infection during the inpatient stay, the 
hospital would report code 996.64 and 599.0 (Urinary tract infection, 
site not specified) to clearly identify the condition. There are also a 
number of other more specific urinary tract infection codes that could 
also be coded with code 996.64. These codes are classified as CCs. If 
we were to select catheter-associated urinary tract infections, we 
would implement the decision by not counting code 996.64 and any of the 
urinary tract infection codes listed below when both codes are present 
and the condition was acquired after admission. If only code 966.64 
were coded on the claim as a secondary diagnosis, we would not count it 
as a CC.
    Burden (High Cost/High Volume)--CDC reports that there are 561,667 
catheter-associated urinary tract infections per year. For FY 2006, 
there were 11,780 reported cases of Medicare patients who had a 
catheter associated urinary tract infection as a secondary diagnosis. 
The cases had average charges of $40,347 for the entire hospital stay. 
According to a study in the American Journal of Medicine, catheter-
associated urinary tract infection is the most common nosocomial 
infection, accounting for more than 1 million cases in hospitals and 
nursing homes nationwide.\22\ Approximately 11.3 million women in the 
United States had at least one presumed acute community-acquired 
urinary tract infection resulting in antimicrobial therapy in 1995, 
with direct costs estimated at $659 million and indirect costs totaling 
$936 million. Nosocomial urinary tract infection necessitates one extra 
hospital day per patient, or nearly 1 million extra hospital days per 
year. It is estimated that each episode of symptomatic urinary tract 
infection adds $676 to a hospital bill. In total, according to the 
study, the estimated annual cost of nosocomial urinary tract infection 
in the United States ranges between $424 and $451 million.
    Prevention guidelines--There are widely recognized guidelines for 
the prevention of catheter-associated urinary tract infections. 
Guidelines can be found at the following Web site: http://www.cdc.gov/
ncidod/dhqp/gl_catheter_assoc.html.
---------------------------------------------------------------------------

    \22\ Foxman, B.: ``Epidemiology of urinary tract infections: 
incidence, morbidity, and economic costs,'' The American Journal of 
Medicine, 113 Suppl 1A, pp. 5s-13s, 2002.
---------------------------------------------------------------------------

    CC--Codes 996.64 and 599.0 are classified as CCs in the CMS DRGs as 
well as in the MS-DRGs.
    Considerations--The primary prevention intervention would be not 
using catheters or removing catheters as soon as possible, both of 
which are worthy goals because once catheters are in place for 3 to 4 
days, most clinicians and infectious disease/infection control experts 
do not believe urinary tract infections are preventable. While there 
may be some concern about the selection of catheter associated urinary 
tract infections, it is an important public health goal to encourage 
practices that will reduce urinary tract infections. Approximately 40 
percent of Medicare beneficiaries have a urinary catheter during 
hospitalization based on Medicare Patient Safety Monitoring System 
(MPSMS) data.
    As stated above in the Coding section, this condition is clearly 
identified through ICD-9-CM code 996.64. Code 996.64 is classified as a 
CC. The hospital would also report the code for the specific type of 
urinary infection. For instance, when a patient develops a catheter 
associated urinary tract infection during the inpatient stay, the 
hospital would report codes 996.64 and 599.0 or another more specific 
code that clearly identifies the condition. These codes are classified 
as CCs under the CMS DRGs as well as the MS-DRGs. To select catheter-
associated urinary tract infections as one of the hospital-acquired 
conditions that would not be counted as a CC, we would not classify 
code 996.64 as a CC if the condition occurred after admission. 
Furthermore, we would also not classify any of the codes listed below 
as CCs if present on the claim with code 996.64 because these 
additional codes identify the same condition. The following codes 
represent specific types of urinary infections. We did not include 
codes for conditions that could be considered chronic urinary 
infections, such as code 590.00 (Chronic pyelonephritis, without lesion 
or renal medullary necrosis). Chronic conditions may indicate that the 
condition was not acquired during the current stay. We would not count 
code 996.64 or any of the following codes representing acute urinary

[[Page 47204]]

infections if they developed after admission and were coded together on 
the same claim.
     112.2 (Candidiasis of other urogenital sites)
     590.10 (Acute pyelonephritis, without lesion of renal 
medullary necrosis)
     590.11 (Acute pyelonephritis, with lesion of renal 
medullary necrosis)
     590.2 (Renal and perinephric abscess)
     590.3 (Pyeloureteritis cystica)
     590.80 (Pyelonephritis, unspecified)
     590.81 (Pyelitis or pyelonephritis in diseases classified 
elsewhere)
     590.9 (Infection of kidney, unspecified)
     595.0 (Acute cystitis)
     595.3 (Trigonitis)
     595.4 (Cystitis in diseases classified elsewhere)
     595.81 (Cystitis cystica)
     595.89 (Other specified type of cystitis, other)
     595.9 (Cystitis, unspecified)
     597.0 (Urethral abscess)
     597.80 (Urethritis, unspecified)
     599.0 (Urinary tract infection, site not specified)
    We believe the condition of catheter-associated urinary tract 
infection meets all of our criteria for selection as one of the initial 
hospital-acquired conditions. We can easily identify the cases with 
ICD-9-CM codes. The condition is a CC under both the CMS DRGs and the 
MS-DRGs. The condition meets our burden criterion with its high cost 
and high frequency. There are prevention guidelines on which the 
medical community agrees to avoid catheter-associated urinary tract 
infections. We believe this condition best meets the criteria 
discussed. Therefore, we proposed the selection of catheter-associated 
urinary tract infections as one of the initial hospital-acquired 
conditions.
    We encouraged comments on both the selection of this condition and 
the related conditions that we proposed to exclude from being counted 
as CCs.
    Comment: Most commenters suggested that a large number of 
physicians believe urinary tract infections may not be preventable 
after several days of catheter placement. A few commenters submitted 
the following statement from the proposed rule (72 FR 24719): ``once 
catheters are in place for 3-4 days, most clinicians and infection 
control experts do not believe UTIs are preventable.'' The commenters 
also noted the potential difficulty in identifying this condition at 
admission.
    Still other commenters believed this condition is difficult to code 
because the ICD-9-CM codes do not distinguish between catheter-
associated inflammation and infection. The commenters asked CMS to 
consider a new code for ``inflammatory reaction from indwelling 
catheter'' distinct from ``catheter associated urinary tract 
infection.''
    In addition, the commenters noted that prevention guidelines are 
still being debated. The commenters referenced the prevention guideline 
published in 1981 and posted on the Web site at: http://www.cdc.gov/
ncidod/dhqp/gl_catheter_assoc.html.
    A few commenters also recommended exceptions for this condition, 
including patients with immunosuppression, patients who have a catheter 
placed for therapeutic installation of antimicrobial/chemotherapy 
agent, patients with sustained urinary tract trauma, and patients in 
need of permanent use of a catheter.
    Commenters stated that Medicare reimbursement does not cover the 
increased cost of antibiotic-coated catheters which have been shown to 
reduce the incidence of catheter infections. These same commenters 
asked CMS to change Medicare payment policy to encourage the 
application of proven existing technology.
    Commenters provided two potential examples of unintended 
consequences if this condition is to be implemented. First, the 
commenters believed that physicians and hospitals will increase 
urinalysis testing to identify urinary tract infections prior to 
admission. Second, the commenters suggested that physicians and 
hospitals will use more antibiotics to ``clean'' the urine of bacteria 
upon admission.
    Response: CMS seeks to reduce the incidence of preventable catheter 
associated urinary tract infections by reducing unnecessary and 
inappropriate use of indwelling urinary catheters in hospitalized 
Medicare patients. There is widespread evidence that catheters may lead 
to an increased risk of infection if they are in place for several 
days. In addition, there are prevention guidelines to assist physicians 
in determining how long a urinary catheter should be left in place that 
can prevent catheter-associated urinary tract infections. Therefore, we 
believe that catheter-associated urinary tract infections are 
reasonably preventable by following well-established prevention 
guidelines, and we are selecting this condition.
    Concerning the request for the creation of a new code for 
``inflammatory reaction from indwelling catheter,'' we recommend the 
commenter contact the CDC. The CDC is responsible for maintaining the 
diagnosis part of the ICD-9-CM codes. We encourage commenters to send 
specific requests for new or revised ICD-9-CM diagnosis codes to Donna 
Pickett, CDC, at 3311 Toledo Road, Room 2402, Hyattsville, MD 20782, or 
via e-mail to dfp4@cdc.gov. Additional information on requesting a new 
ICD-9-CM diagnosis code may be obtained from the Web site at: http://
www.cdc.gov/nchs/icd9.htm.
    The commenters are correct that prevention guidelines for avoiding 
catheter-associated urinary tract infections are scheduled to be 
updated by CDC's Healthcare Infection Control Practices Committee 
(HICPAC). The National Quality Forum (NQF) is currently working to 
update hospital-acquired infection definitions. The effort currently 
underway will update prevention guidelines that have been in place 
since 1981. We believe the ongoing effort to update prevention 
guidelines for avoiding catheter-associated urinary tract infections 
provides further evidence that this condition is a strong candidate to 
be selected because of how well it meets the statutory criteria.
    We appreciate the many comments urging CMS to consider implementing 
exceptions for catheter-associated urinary tract infections when it is 
a hospital-acquired condition but is not preventable. We will carefully 
consider these suggestions as we plan for the implementation of this 
new requirement in FY 2009.
    With respect to the comment about encouraging the use antibiotic-
coated catheters, we continue to work in cooperation with device 
companies and other associations to ensure that Medicare beneficiaries 
receive the most current therapeutic modalities. We annually update 
Medicare inpatient hospital payment rates to reflect hospital resource 
use for the latest medical technology and other innovations in how care 
is delivered.
    We do not agree there will be significant unintended consequences 
of selecting catheter-associated urinary tract infections. As stated 
earlier, we believe this condition is generally avoidable if medical 
professionals carefully follow longstanding prevention guidelines. We 
believe hospitals, physicians, and others that treat Medicare patients 
will focus on taking medically appropriate steps to determine the 
length of time a catheter is in place. We do not believe it is 
inappropriate to perform a urinalysis upon admission to the hospital if 
clinically indicated. We would not

[[Page 47205]]

consider doing so an unintended consequence.
    We appreciate all the public comments on this condition, and have 
considered all of these points of view. We believe this condition meets 
the criteria of the DRA:
     There are unique codes that identify catheter-associated 
urinary tract infections that are currently considered to be a CC under 
the MS-DRGs;
     Prevention guidelines currently exist and will be updated 
prior to the October 1, 2008 implementation date of this provision; and
     As shown above, catheter-associated urinary tract 
infections are high cost/high volume conditions.
    Therefore, in this final rule with comment period, we are selecting 
the condition of catheter-associated urinary tract infections to be 
subject to the provision beginning October 1, 2008.
(b) Pressure Ulcers
    Coding--Pressure ulcers are also referred to as decubitus ulcers. 
The following codes clearly identify pressure ulcers.
     707.00 (Decubitus ulcer, unspecified site)
     707.01 (Decubitus ulcer, elbow)
     707.02 (Decubitus ulcer, upper back)
     707.03 (Decubitus ulcer, lower back)
     707.04 (Decubitus ulcer, hip)
     707.05 (Decubitus ulcer, buttock)
     707.06 (Decubitus ulcer, ankle)
     707.07 (Decubitus ulcer, heel)
     707.09 (Decubitus ulcer, other site)
    Burden (High Cost/High Volume)--This condition is both high-cost 
and high volume. For FY 2006, there were 322,946 reported cases of 
Medicare patients who had a pressure ulcer as a secondary diagnosis. 
These cases had average charges for the hospital stay of $40,381.
    Prevention guidelines--Prevention guidelines can be found at the 
following Web sites: http://www.npuap.org/positn1.html and http://
www.ncbi.nlm.nih.gov/books/bv.fcgi?rid=hstat2.chapter.4409.
    CC--Decubitus ulcer codes are classified as CCs under the CMS DRGs. 
Codes 707.00, 707.01, and 707.09 are CCs under the MS-DRGs. Codes 
707.02 through 707.07 are considered MCCs under the MS-DRGs. As 
discussed earlier, MCCs result in even larger payments than CCs.
    Considerations--Pressure ulcers are an important hospital acquired 
complication. Prevention guidelines exist (non-CDC) and can be 
implemented by hospitals. Clinicians may state that some pressure 
ulcers present on admission cannot be identified (skin is not yet 
broken (Stage I) but damage to tissue is already done and skin will 
eventually break down). However, by selecting this condition, we would 
provide hospitals the incentive to perform careful examination of the 
skin of patients on admission to identify decubitus ulcers. If the 
condition is present on admission, the provision will not apply. In the 
proposed rule, we proposed to include pressure ulcers as one of our 
initial hospital-acquired conditions. This condition can be clearly 
identified through ICD-9-CM codes. These codes are classified as a CC 
under the CMS DRGs and as a CC or MCC under the MS-DRGs. Pressure 
ulcers meet the burden criteria because they are both high cost and 
high frequency cases. There are clear prevention guidelines. While 
there is some question as to whether all cases with developing pressure 
ulcers can be identified on admission, we believe the selection of this 
condition will result in a closer examination of the patient's skin on 
admission and better quality of care. We welcomed comments on the 
proposed inclusion of this condition.
    Comment: A majority of commenters supported the intent of selecting 
the condition of pressure ulcers, but had concerns about how the 
provision would be implemented in practice. A large majority of 
commenters believed hospitals will more carefully examine the skin of 
patients if this condition is selected. However, many commenters cited 
difficulty in detecting stage 1 pressure ulcers on admission, 
particularly in certain patient populations.
    The commenters cited the Guidance to Surveyors for Long-Term Care 
Facilities (CMS Manual System Pub. 100-07, State Operations Provider 
Certification issued November 2004, page 5), noting CMS'' previous 
acknowledgment that some pressure ulcers are ``unavoidable.'' The 
commenters cited evidence of an increased risk of pressure ulcer 
reoccurrence after a patient has had at least one stage IV ulcer.
    The commenters expressed concern about how this condition will be 
coded upon admission. The commenters also suggested that present-on-
admission coding of pressure ulcers will rely solely on physicians' 
notes and diagnoses, according to Medicare coding rules. The commenters 
were concerned that the current ICD-9-CM codes for pressure ulcers are 
not precise enough to delineate differences in wound depth, which is an 
important factor for determining the severity of an ulcer.
    The commenters recommended that CMS supplement ICD-9-CM codes for 
pressure ulcers with severity adjustments for complications and 
comorbidities that are present on admission. Because patients with 
pressure ulcers often have other complicating conditions, the 
commenters stated that it is unlikely that pressure ulcers would 
potentially be the only secondary diagnosis that would change the DRG 
assignment from one without a CC to one with a CC. Lastly, the 
commenters noted that accurate identification of a pressure ulcer 
requires the education and expertise of a trained physician.
    The commenters suggested that CMS should exclude patients enrolled 
in the Medicare hospice benefit and patients with certain diagnoses 
that make them more highly prone to pressure ulcers such as hemiplegia, 
quadriplegia, wasting syndrome, with advanced AIDS and/or protein 
malnutrition associated with a variety of serious end stage illnesses.
    Response: We appreciate the overwhelming public support for the 
intent of selecting this condition, provided we can address the 
concerns raised in the public comments. We acknowledge the commenters' 
concern that CMS previously stated some pressure ulcers are 
``unavoidable.'' However, we believe improved screening to identify 
pressure ulcers upon admission for inpatient care will increase the 
quality of care. By screening patients entering the hospital for 
pressure ulcers, the ulcers will be discovered earlier and improve 
treatment of this preventable condition. We agree that the POA coding 
of pressure ulcers will rely on the attending physician, who has 
primary responsibility for documenting and diagnosing a patient's 
clinical conditions. Pressure ulcers that are identified through 
screening upon admission that are documented properly will continue to 
be assigned to a higher paying DRG.
    With respect to the comment about patients with pressure ulcers 
having other complications and comorbidities, we note that many of the 
new MS-DRGs are subdivided into two or more severity levels. We will 
continue to evaluate the need for additional severity levels within 
base MS-DRGs. On the specific issue of the MS-DRGs that include 
pressure ulcers, we note that these MS-DRGs are already divided into 
three severity levels as follows:
     MS-DRG 573 (Skin Graft &/or Debridement for Skin Ulcer or 
Cellulitis with MCC)

[[Page 47206]]

     MS-DRG 574 (Skin Graft &/or Debridement for Skin Ulcer or 
Cellulitis with CC)
     MS-DRG 575 (Skin Graft &/or Debridement for Skin Ulcer or 
Cellulitis without CC/MCC)
    We are aware that many patients with pressure ulcers may also have 
other comorbid and complicating conditions that will continue to assign 
the patient to a higher paying DRG. We do not believe this fact should 
preclude physicians and hospitals from screening patients for pressure 
ulcers upon admission. As we indicated in the proposed rule (72 FR 
24726), we believe only a minority of cases will have one of the 
selected conditions as the only CC or MCC present on the claim. 
However, we believe it will continue to lead to improvements in the 
quality of care. We believe the selection of this condition will lead 
the physician and hospital to perform a proper skin exam upon 
admission, leading to earlier identification and treatment of pressure 
ulcers.
    With respect to the comment that accurate identification of a 
pressure ulcer requires the education and expertise of a trained 
physician, we agree. Hospitals should be using properly educated and 
trained physicians to identify and treat pressure ulcers (as well as 
all other medical conditions).
    We appreciate all the public comment on this condition, and have 
considered all of these points of view. We believe the condition of 
pressure ulcers meets the criteria of the DRA:
     There are unique codes that identify pressure ulcers that 
are currently considered to be a CC or an MCC under the MS-DRGs;
     Prevention guidelines to avoid pressure ulcers currently 
exist; and
     As shown above, pressure ulcers are high-cost/high-volume 
conditions. Therefore, in this final rule with comment period, we are 
selecting the condition of pressure ulcers to be subject to the payment 
adjustment for hospital acquired conditions beginning October 1, 2008. 
We referred the matter concerning the need for additional, detailed 
ICD-9-CM codes to the CDC. We believe further specificity in the ICD-9-
CM codes will aid in distinguishing early from late stage pressure 
ulcers prior to the implementation date of this provision on October 1, 
2008.
Serious Preventable Events
    Serious preventable events are events that should not occur in 
health care. The injury prevention community has developed information 
on serious preventable events. CMS reviewed the list of serious 
preventable events and identified those events for which there was an 
ICD-9-CM code that would assist in identifying them. We identified four 
types of serious preventable events to include in our evaluation. These 
include leaving an object in a patient; performing the wrong surgery 
(surgery on the wrong body part, wrong patient, or the wrong surgery); 
air embolism following surgery; and providing incompatible blood or 
blood products. Three of these serious preventable events have unique 
ICD-9-CM codes to identify them. There is not a clear and unique code 
for surgery performed on the wrong body part, wrong patient, or the 
wrong surgery. Each of these events is discussed separately.
(c) Serious Preventable Event--Object Left in during Surgery
    Coding Retention of a foreign object in a patient after surgery is 
identified through ICD-9-CM code 998.4 (Foreign body accidentally left 
during a procedure).
    Burden (High Cost/High Volume)--For FY 2006, there were 764 cases 
reported of Medicare patients who had an object left in during surgery 
reported as a secondary diagnosis. The average charges for the hospital 
stay were $61,962. This is a rare event. Therefore, it is not high 
volume. However, an individual case will likely have high costs, given 
that the patient will need additional surgery to remove the foreign 
body. Potential adverse events stemming from the foreign body could 
further raise costs for an individual case.
    Prevention guidelines--There are widely accepted and clear 
guidelines for the prevention of this event. This event should not 
occur. Prevention guidelines for avoiding leaving objects in during 
surgery are located at the following Web site: http://
www.qualityindicators.ahrq.gov/psi_download.htm.
    CC--This code is a CC under the CMS DRGs as well as under the MS 
DRGs.
    Considerations--There are no significant considerations for this 
condition. There is a unique ICD-9-CM code and wide agreement on the 
prevention guidelines. We proposed to include this condition as one of 
our initial hospital-acquired conditions. The cases can be clearly 
identified through an ICD-9-CM code. This code is a CC under both the 
CMS DRGs and the MS-DRGs. There are clear prevention guidelines. While 
the cases may not meet the high frequency criterion, they do meet the 
high-cost criterion. Individual cases can be high cost. In the proposed 
rule, we welcomed comments on including this condition as one of our 
initial hospital-acquired conditions.
    Comment: A large majority of commenters supported CMS' efforts to 
identify the condition of ``object left in surgery'' as one that should 
not occur in the hospital setting. The commenters supported selecting 
this condition in this year's IPPS rule.
    The commenters applauded CMS for identifying a hospital acquired 
condition that has discrete ICD-9-CM codes and known methods of 
prevention. In addition, a few commenters noted that prevention 
guidelines for this condition are fully identified and endorsed by the 
NQF. MedPAC also complimented CMS for its efforts to identify ``object 
left in surgery'' and stated that CMS should not allow a case to be 
classified as a CC/MCC if this ``never event'' occurs during a 
patient's stay.
    The commenters urged CMS to make exceptions for objects 
deliberately left in place in surgery as opposed to accidental retained 
foreign objects. The commenters noted that a patient may return to the 
hospital months or years after an object was left in during surgery, 
and it is necessary to have POA codes to identify patients that return 
to a different hospital to have the object removed. All of the 
commenters recognized that this event can cause great harm to patients.
    Response: We believe exceptions for this condition are not 
necessary. The code that identifies this event, 998.4 (Foreign body 
accidentally left during a procedure) specifically states that the 
object was accidentally left in during the surgery. This code would not 
be assigned if a device or implant was deliberately implanted into a 
patient. In addition, as stated earlier, we recognize the important 
role of the attending physician in designating whether or not the 
serious preventable event occurred during the current admission. We 
agree with the commenters that a patient may return to the hospital 
months or years after the surgery to have the foreign object removed. 
In this circumstance, the hospital would code the condition as present 
on admission and the provision would not apply. By documenting the 
event early, the correct POA code can be applied. We agree with the 
commenters that this serious preventable event should be selected as a 
hospital-acquired condition in this final rule with comment period. 
Therefore, we are including this condition in the list of those to be 
implemented in FY 2009.

[[Page 47207]]

(d) Serious Preventable Event--Air Embolism
    Coding--An air embolism is identified through ICD-9-CM code 999.1 
(Complications of medical care, NOS, air embolism).
    Burden (High Cost/High Volume)--This event is rare. For FY 2006, 
there were 45 reported cases of air embolism for Medicare patients. The 
average charges for the hospital stay were $66,007.
    Prevention guidelines--there are clear prevention guidelines for 
air embolisms. This event should not occur. Serious preventable event 
guidelines can be found at the following Web site: http://
www.qualityindicators.ahrq.gov/psi_download.htm.
    CC--This code is a CC under the CMS DRGs and is an MCC under the 
MS-DRGs.
    Considerations--There are no significant considerations for this 
condition. There is a unique ICD-9-CM code and wide agreement on the 
prevention guidelines. In addition, as stated earlier, the condition is 
a CC under the CMS DRGs and an MCC under the MS-DRGs. While the 
condition is rare, it does meet the cost burden criterion because 
individual cases can be expensive. Therefore, air embolism is a high-
cost condition because average charges per case are high. In the 
proposed rule, we welcomed comments on the proposal to include this 
condition.
    Comment: A large number of commenters supported CMS' efforts to 
select this condition as one that should not occur in the hospital 
setting. The commenters considered this an appropriate condition to 
include for the final rule. The commenters applauded CMS for 
identifying a hospital acquired condition that has discrete ICD-9-CM 
codes and known methods of prevention.
    In addition, the commenters noted that prevention guidelines for 
this condition are fully identified and endorsed by the NQF. MedPAC 
also complimented CMS for its efforts to identify ``air embolism'' and 
stated that CMS should not allow a case to be classified as a CC/MCC if 
this ``never event'' occurs during a patient's stay.
    The commenters urged CMS to make exceptions for situations when air 
embolism is technically unavoidable because of a special surgical 
procedure. All of the commenters recognized that this event can cause 
great harm to patients.
    Response: We appreciate the support for the selection of this 
condition. We also welcome specific recommendations that would clearly 
define an appropriate exception to this condition, including any 
appropriate ICD-9-CM diagnosis and procedure codes which the commenter 
believes clearly define such an occurrence and the justification for an 
exception. At this point, we do not believe such an exception is 
necessary.
    We agree with commenters that this serious preventable event should 
be included in the FY 2008 final rule. Therefore, we are including the 
condition of air embolism in the list of those to be implemented in FY 
2009.
(e) Serious Preventable Event--Blood Incompatibility
    Coding--Delivering ABO-incompatible blood or blood products is 
identified by ICM-9-CM code 999.6 (Complications of medical care, NOS, 
ABO incompatibility reaction).
    Burden (High Cost/High Volume)--This event is rare. Therefore, it 
is not high volume. For FY 2006, there were 33 reported cases of blood 
incompatibility among Medicare patients, with average charges of 
$46,492 for the hospital stay. Therefore, individual cases have high 
costs.
    Prevention guidelines--There are prevention guidelines for avoiding 
the delivery of incompatible blood or blood products. The event should 
not occur. Serious preventable event guidelines can be found at the 
following Web site: http://www.qualityindicators.ahrq.gov/psi_
download.htm
    CC--This code is a CC under the CMS DRGs as well as the MS-DRGs.
    Considerations--There are no significant considerations for this 
condition. There is a unique ICD-9-CM code which is classified as a CC 
under the CMS DRGs as well as the MS-DRGs. There is wide agreement on 
the prevention guidelines. While this may not be a high-volume 
condition, average charges per case are high. Therefore, we believe 
this condition is a high-cost condition and, therefore, meets our 
burden criterion. We proposed to include this condition as one of our 
initial hospital acquired conditions.
    Comment: A large number of commenters supported CMS' efforts to 
identify ``blood incompatibility'' as one condition that should not 
occur in the hospital setting. The commenters considered this an 
appropriate condition to include for FY 2009. The commenters applauded 
CMS for identifying a hospital acquired condition that has discrete 
ICD-9-CM codes and known methods of prevention. In addition, the 
commenters noted that prevention guidelines for this condition are 
fully identified and endorsed by the NQF. MedPAC also complimented CMS 
for its efforts to identify ``blood incompatibility'' and stated that 
CMS should not allow a case to be classified as a CC/MCC if this 
``never event'' occurs during a patient's stay.
    The commenters urged CMS to make exceptions for situations when 
blood incompatibility is technically unavoidable in emergencies when 
patients deliberately receive unmatched blood. All of the commenters 
recognized that this event can cause great harm to patients.
    Response: As suggested by commenters, hospitals should not be 
transfusing incompatible blood. The condition meets the criteria for 
being selected. It is a potential hospital acquired condition that has 
discrete ICD-9-CM codes and known methods of prevention. Prevention 
guidelines for this condition are fully identified and endorsed by the 
NQF. We acknowledge that there may a rare emergency where a hospital 
does not have compatible blood available for transfusion. We welcome 
specific recommendations that would define circumstances where blood 
incompatibility is unavoidable, including any appropriate ICD-9-CM 
diagnosis and procedure codes, which the commenters believe clearly 
define such an occurrence. If providers can provide such a clinical 
scenario that can be identified by existing or new ICD-9-CM codes, we 
will consider excluding this situation from the provision. We agree 
with the commenters that this serious preventable event should be 
included in the FY 2008 final rule. Therefore, we are including the 
condition of blood incompatibility in the list of those to be 
implemented in FY 2009.
(f) Staphylococcus Aureus Bloodstream Infection/Septicemia
    Coding--ICD-9-CM Code 038.11 (Staphylococcus aureus septicemia) 
identifies this condition. However, the codes selected to identify 
septicemia are somewhat complex. The following ICD-9-CM codes may also 
be reported to identify septicemia:
     995.91 (Sepsis) and 995.92 (Severe sepsis). These codes 
are reported as secondary codes and further define cases with 
septicemia.
     998.59 (Other postoperative infections). This code 
includes septicemia that develops postoperatively.
     999.3 (Other infection). This code includes but is not 
limited to sepsis/septicemia resulting from infusion, injection, 
transfusion, and vaccination (ventilator-associated pneumonia is also 
included here).

[[Page 47208]]

    Burden (High Cost/High Volume)--CDC reports that there are 290,000 
cases of staphylococcus aureus infection annually in hospitalized 
patients of which approximately 25 percent are bloodstream infections 
or sepsis. For FY 2006, there were 29,500 cases of Medicare patients 
who had staphylococcus aureus infection reported as a secondary 
diagnosis. The average charges for the hospital stay were $82,678. 
Inpatient staphylococcus aureus result in an estimated 2.7 million days 
in excess length of stay, $9.5 billion in excess charges, and 
approximately 12,000 inpatient deaths per year.
    Prevention guidelines--CDC guidelines are located at the following 
Web site: http://www.cdc.gov/ncidod/dhqp/gl_intravascular.html.
    CC--Codes 038.11, 995.91, 998.59, and 999.3 are classified as CCs 
under the CMS DRGs and as MCCs under the MS-DRGs.
    Considerations--Preventive health care associated bloodstream 
infections/septicemia that are preventable are primarily those that are 
related to a central venous/vascular catheter, a surgical procedure 
(postoperative sepsis) or those that are secondary to another 
preventable infection (for example, sepsis due to catheter-associated 
urinary tract infection). Otherwise, physicians and other public health 
experts may argue whether septicemia is reasonably preventable. The 
septicemia may not be simply a hospital acquired infection. It may 
simply be a progression of an infection that occurred prior to 
admission. Furthermore, physicians cannot always tell whether the 
condition was hospital-acquired. We examined whether it might be better 
to limit the septicemia cases to a specific organism (for example, code 
038.11 (Staphylococcus aureus septicemia)). CDC staff recommended that 
we focus on staphylococcus aureus septicemia because this condition is 
a significant public health issue. As stated earlier, there is a 
specific code for staphylococcus aureus septicemia, code 038.11. 
Therefore, the cases would be easy to identify. However, as stated 
earlier, while this type of septicemia is identified through code 
038.11, coders may also provide sepsis code 995.91 or 995.92 to more 
fully describe the staphylococcus aureus septicemia. Codes 995.91 and 
995.92 are reported as secondary codes and further define cases with 
septicemia. Codes 995.91 and 995.92 are CCs under the CMS DRGs and MCCs 
under the MS-DRGs.
     998.59 (Other postoperative infections). This code 
includes septicemia that develops postoperatively.
     999.3 (Other infection). This code includes but is not 
limited to sepsis/septicemia resulting from infusion, injection, 
transfusion, and vaccination (ventilator-associated pneumonia is also 
indexed here).
    To implement this condition as one of our initial ones, we would 
have to exclude the specific code for staphylococcus aureus septicemia, 
038.11, and the additional septicemia codes, 995.91, 995.92, 998.59, 
and 999.3.
    We acknowledge that there are additional issues involved with the 
selection of this condition that may involve developing an exclusion 
list of conditions present on admission for which we would not apply a 
CC exclusion to staphylococcus aureus septicemia. For example, a 
patient may come into the hospital with a staphylococcus aureus 
infection such as pneumonia. The pneumonia might develop into 
staphylococcus aureus septicemia during the admission. It may be 
appropriate to consider excluding cases such as those of patients 
admitted with staphylococcus aureus pneumonia that subsequently develop 
staphylococcus aureus septicemia from the provision. In order to 
exclude cases that did not have a staphylococcus aureus infection prior 
to admission, we would have to develop a list of specific codes that 
identified all types of staphylococcus aureus infections such as code 
482.41 (Pneumonia due to staphylococcus aureus). We likely would not 
apply the new provision to cases of staphylococcus aureus septicemia if 
a patient were admitted with staphylococcus aureus pneumonia. However, 
if the patient had other types of infections, not classified as being 
staphylococcus aureus, and then developed staphylococcus aureus 
septicemia during the admission, we would apply the provision and 
exclude the staphylococcus aureus septicemia as a CC. We were not able 
to identify any other specific ICD-9-CM codes that identify specific 
infections as being due to staphylococcus aureus.
    Other types of infections, such as urinary tract infections, would 
require the reporting of an additional code, 041.11 (Staphylococcus 
aureus), to identify the staphylococcus aureus infection. This 
additional coding presents administrative issues because it will not 
always be clear which condition code 041.11 (Staphylococcus aureus) is 
describing. We do not believe it would be appropriate to make code 
041.11, in combination with other codes, subject to the hospital-
acquired conditions provision until we better understand how to address 
the administrative issues that would be associated with their 
selection. Therefore, we would exclude staphylococcus aureus septicemia 
cases with code 482.41 reported as being subject to the hospital-
acquired conditions provision. Stated conversely, we would allow 
staphylococcus aureus septicemia to count as a CC if the patient was 
admitted with staphylococcus aureus pneumonia.
    We recognize that there may be other conditions which we should 
consider for this type of exclusion. We proposed to include 
staphylococcus aureus bloodstream infection/septicemia (code 038.11) as 
one of our initial hospital-acquired conditions. We also proposed to 
exclude codes 995.91, 998.59, and 999.3 from counting as an MCC/CC when 
they were reported with code 038.11. The condition can be clearly 
identified through ICD 9 CM codes that are classified as CC under the 
CMS DRGs and MCCs under the MS-DRGs. The condition meets our burden 
criterion by being both high cost and high volume. There are prevention 
guidelines which we acknowledge are subject to some debate among the 
medical community. We also acknowledge that we would have to exclude 
this condition if a patient were admitted with a staphylococcus aureus 
infection of a more limited location, such as pneumonia. In the 
proposed rule, we encouraged commenters to make suggestions on this 
issue and to recommend any other appropriate exclusion for 
staphylococcus aureus septicemia. We also encouraged comments on the 
appropriateness of selecting staphylococcus aureus septicemia as one of 
our proposed initial hospital acquired conditions.
    Comment: Many commenters opposed CMS' proposed selection of this 
condition as part of the FY 2008 final rule. There were a minority of 
commenters who strongly supported the selection of this condition. 
These commenters noted the existence of technologies that allow the 
physician to determine the presence of Staphylococcus Aureus upon 
admission. Many more commenters stated that accurately identifying 
staphylococcus aureus septicemia on admission will be difficult, 
particularly in patients who may have a staphylococcus aureus infection 
in a limited location. Several commenters referenced the FY 2008 IPPS 
proposed rule, which stated ``physicians cannot always tell whether the 
condition was hospital acquired.'' Other commenters also noted that 
there is still debate

[[Page 47209]]

among physicians regarding the prevention guidelines for staphylococcus 
aureus septicemia. The proliferation of changes in coding guidelines 
presents coding problems for hospitals to accurately identify present-
on-admission status according to some comments. Specifically, the 
commenters noted that codes to identify sepsis are very complex and 
have had recent changes. For instance, there is a code that currently 
includes septicemia that develops postoperatively, but does not clearly 
distinguish between intravascular and catheter-associated sources of 
septicemia. The commenters also suggested that additional coding may be 
necessary to accurately identify this condition in the many forms it 
often presents upon admission. Some commenters suggested that the 
addition of codes may create a challenge for coding staff to identify 
the correct code.
    A large majority of commenters urged CMS to narrow the category for 
staphylococcus aureus septicemia to include only patients for whom it 
is reasonably clear that the hospital was the source of the infection 
and that it could have been reasonably prevented.
    Response: We appreciate the plethora of comments regarding 
staphylococcus aureus septicemia. The commenters were very insightful 
and presented the challenges of selecting this condition in the FY 2008 
final rule.
    We agree that the recent proliferation of ICD-9-CM codes for this 
condition will make it difficult to code and could present an 
administrative burden on hospitals. In addition, we are sensitive to 
the difficulty of identifying when a disease has progressed to sepsis 
or septicemia. Given the course of progression to septicemia, it can be 
very difficult for a clinician to appropriately diagnose staphylococcus 
aureus septicemia as present on admission.
    While we acknowledge the many concerns raised by the commenters, we 
continue to believe that hospital acquired staphylococcus aureus 
septicemia remains a significant public health issue. We are aware of 
the continued need to prevent Staphylococcus Aureus septicemia in the 
hospital setting. Therefore, we plan to engage in a collaborative 
discussion with relevant experts to identify the circumstances when 
staphylococcus aureus septicemia is preventable. If we can identify 
when staphylococcus aureus septicemia is a reasonably preventable 
condition and have codes to distinguish those situations, we will 
consider this condition for future years. We appreciate the many 
comments and suggestions as we consider staphylococcus aureus 
septicemia for selection in the future, and look forward to receiving 
more public input to identify only instances when this condition is 
preventable.
    Therefore, we are not selecting this condition in this final rule 
with comment period. We plan to collaborate with the public on this 
important public health issue and continue to consider the condition 
for selection in the FY 2009 final rule. We encourage and welcome 
public comment to further evaluate this condition.
(g) Ventilator Associated Pneumonia (VAP) and Other Types of Pneumonia
    Coding--Pneumonia is identified through the following codes:
     073.0 (Ornithosis with pneumonia)
     112.4 (Candidiasis of lung)
     136.3 (Pneumocystosis)
     480.0 (Pneumonia due to adenovirus)
     480.1 (Pneumonia due to respiratory syncytial virus)
     480.2 (Pneumonia due to parainfluenza virus)
     480.3 (Pneumonia due to SARS-associated coronavirus)
     480.8 (Pneumonia due to other virus not elsewhere 
classified)
     480.9 (Viral pneumonia, unspecified)
     481 (Pneumococcal pneumonia [Streptococcus pneumoniae 
pneumonia])
     482.0 (Pneumonia due to Klebsiella pneumoniae)
     482.1 (Pneumonia due to Pseudomonas)
     482.2 (Pneumonia due to Hemophilus influenzae [H. 
influenzae])
     482.30 (Pneumonia due to Streptococcus, unspecified)
     482.31 (Pneumonia due to Streptococcus, Group A)
     482.32 (Pneumonia due to Streptococcus, Group B)
     482.39 (Pneumonia due to other Streptococcus)
     482.40 (Pneumonia due to Staphylococcus, unspecified)
     482.41 (Pneumonia due to Staphylococcus aureus)
     482.49 (Other Staphylococcus pneumonia)
     482.81 (Pneumonia due to Anaerobes)
     482.82 (Pneumonia due to Escherichia coli [E. coli])
     482.83 (Pneumonia due to other gram-negative bacteria)
     482.84 (Pneumonia due to Legionnaires' disease)
     482.89 (Pneumonia due to other specified bacteria)
     482.9 (Bacterial pneumonia unspecified)
     483.0 (Pneumonia due to Mycoplasma pneumoniae)
    There is not a unique code that identifies ventilator-associated 
pneumonia. The creation of a code for ventilator-associated pneumonia 
was discussed at the September 29, 2006 meeting of the ICD-9-CM 
Coordination and Maintenance Committee meeting. Many issues and 
concerns were raised at the meeting concerning the creation of this 
proposed new code. It has been difficult to define ventilator-
associated pneumonia. We plan to continue working closely with the CDC 
to develop a code that can accurately describe this condition for 
implementation in FY 2009. CDC will address the creation of a unique 
code for this condition at the September 28-29, 2007 ICD-9-CM 
Coordination and Maintenance Committee meeting.
    While we list 27 pneumonia codes above, our clinical advisors do 
not believe that all of the codes mentioned could possibly be 
associated with ventilator-associated pneumonia. Our clinical advisors 
specifically question whether the following codes would ever represent 
cases of ventilator-associated pneumonia: 073.0, 480.0, 480.1, 480.2, 
480.3, 480.8, 480.9, and 483.0. Therefore, we have a range of pneumonia 
codes, all of which may not represent cases that could involve 
ventilator-associated pneumonia. In addition, we do not have a specific 
code that uniquely identifies cases of ventilator-associated pneumonia.
    Burden (High Cost/High Volume)--CDC reports that there are 250,205 
ventilator-associated pneumonias per year. Because there is not a 
unique ICD-9-CM code for ventilator-associated pneumonia, there is not 
accurate data for FY 2006 on the number of Medicare patients who had 
this condition as a secondary diagnosis. However, we did examine data 
for FY 2006 on the number of Medicare patients who listed pneumonia as 
a secondary diagnosis. There were 92,586 cases with a secondary 
diagnosis of pneumonia, with average charges of $88,781. According to 
the journal Critical Care Medicine, patients with ventilator-associated 
pneumonia have statistically significantly longer intensive care 
lengths of stay (mean = 6.10 days) than those who do not (mean = 5.32-
6.87 days). In addition, patients who develop ventilator-associated 
pneumonia incur, on average, greater than or equal to $10,019 in 
additional hospital costs compared to those who do not.\23\

[[Page 47210]]

Therefore, we believe that this is a high-volume condition.
---------------------------------------------------------------------------

    \23\ Safdar N.: Clinical and Economic Consequences of 
Ventilator-Associated Pneumonia: a Systematic Review, Critical Care 
Medicine, 2005, 33(10), pp. 2184-2193.
---------------------------------------------------------------------------

    Prevention guidelines--Prevention guidelines are located at the 
following Web site: http://www.cdc.gov/ncidod/dhqp/gl_
hcpneumonia.html. However, it is not clear how effective these 
guidelines are in preventing pneumonia. Ventilator-associated pneumonia 
may be particularly difficult to prevent.
    CC--All of the pneumonia codes listed above are CCs under the CMS 
DRGs and under the MS-DRGs, except for the following pneumonia codes 
which are non-CCs: 073.0, 480.0, 480.1, 480.2, 480.3, 480.8, 480.9, 
483.0. However, as mentioned earlier, there is not a unique ICD-9-CM 
code for ventilator-associated pneumonia. Therefore, this condition 
does not currently meet the statutory criteria for being selected.
    Considerations--Hospital-acquired pneumonias, and specifically 
ventilator-associated pneumonias, are an important problem. However, 
based on our work with the medical community to develop specific codes 
for this condition, we have learned that it is difficult to define what 
constitutes ventilator-associated pneumonia. Although prevention 
guidelines exist, it is not clear how effective these are in preventing 
pneumonia. Clinicians cannot always tell which pneumonias are acquired 
in a hospital. In addition, as mentioned above, there is not a unique 
code that identifies ventilator-associated pneumonia. There are a 
number of codes that capture a range of pneumonia cases. It is not 
possible to specifically identify if these pneumonia cases are 
ventilator-associated or arose from other sources. Because we cannot 
identify cases with ventilator-associated pneumonia and there are 
questions about its preventability, we did not propose to select this 
condition as one of our initial hospital-acquired conditions. However, 
we welcomed public comments on how to create an ICD-9-CM code that 
identifies ventilator-associated pneumonia, and we encouraged 
participation in our September 28-29, 2007 ICD-9-CM Coordination and 
Maintenance Committee meeting where this issue will be discussed. We 
indicated that we would reevaluate the selection of this condition in 
FY 2009.
    Comment: Some commenters urged CMS to select ventilator-associated 
pneumonia at this time. Most commenters recommended that CMS delay 
selecting this condition until a unique code is established.
    Some commenters submitted an evidence-based peer-reviewed American 
Association for Respiratory Care (AARC) Clinical Practice Guideline 
(CPG) on strategies that should be disseminated and available to 
hospitals for the prevention of ventilator associated pneumonia. The 
CPG can be found at http://www.rcjournal.com/cpgs/09.03.0869.html. 
Concurrently, the AARC acknowledges that more research needs to be done 
in this area.
    A majority of commenters believed this condition can be reasonably 
prevented through evidence-based medicine guidelines. These commenters 
noted that current unique codes for this condition are absent. These 
commenters urged CMS to consider the development of an explicit ICD-9-
CM code for this ventilator-associated pneumonia and to select it at a 
later date.
    Response: At the time of publication of this final rule with 
comment period, there is not a code associated with ventilator-
associated pneumonia. Therefore, this condition does not currently meet 
the statutory criteria for being selected. However, the ICD-9-CM 
Coordination and Maintenance Committee will meet September 27-28, 2007, 
to discuss the creation of a unique ICD-9-CM code for this condition. 
Further information of the Committee's activities on diagnosis code 
issues can be found at the Web site: http://www.cdc.gov/nchs/icd9.htm. 
We believe that once this condition has a unique code, it should be 
further considered for selection beginning in FY 2009.
    We believe that ventilator-associated pneumonia meets some of the 
criteria for being selected. There are guidelines for prevention of 
ventilator-associated pneumonia within CDC evidence based guidelines 
for healthcare associated pneumonia. More information can be found at: 
http://www.cdc.gov/ncidod/dhqp/gl_hcpneumonia.html. Furthermore, we 
are aware that the American Thoracic Society and the Infectious Disease 
Society of America collaborated to produce guidelines on the prevention 
of ventilator-associated pneumonia. As indicated above, most pneumonias 
are CCs. Therefore, it is reasonable to believe that ventilator-
associated pneumonia will also be classified as a CC once a new code is 
created to identify it. At that time, we can further consider whether 
the condition is reasonably preventable and should be subject to this 
provision.
    We appreciate all the public comment on this condition, and 
considered all of the respondents' point of view. While we acknowledge 
the clinical challenge of clearly identifying ventilator-associated 
pneumonia, we believe that once this condition has a unique ICD-9-CM 
code, coupled with well-known prevention guidelines that are the result 
of evidence-based medicine, we will give strong consideration for 
selecting this condition for FY 2009, and including it in the FY 2009 
IPPS proposed rule.
(h) Vascular Catheter-Associated Infections
    Coding--The proposed rule noted that the code used to identify 
vascular catheter associated infections is ICD-9-CM code 996.62 
(Infection due to other vascular device, implant, and graft). This code 
includes infections associated with all vascular devices, implants, and 
grafts. It does not uniquely identify vascular catheter associated 
infections. Therefore, there was not a unique ICD-9-CM code for this 
infection at the time of the proposed rule. CDC and CMS staff requested 
that the ICD-9-CM Coordination and Maintenance Committee discuss the 
creation of a unique ICD-9-CM code for vascular catheter associated 
infections because the issue is important for public health. The 
proposal to create a new ICD-9-CM was discussed at the March 22 23, 
2007 meeting of the ICD-9-CM Coordination and Maintenance Committee. A 
summary of this meeting can be found at: http://www.cdc.gov/nchs/
icd9.htm. In the proposed rule, we indicated that coders would have to 
assign code 996.62 plus an additional code for the infection such as 
septicemia to identify vascular catheter-associated infections. 
Therefore, a list of specific infection codes would have to be 
developed to go along with code 996.62 if CDC did not create a code for 
vascular catheter-associated infections. If the vascular catheter-
associated infection was hospital-acquired, the DRG logic would have to 
be modified so that neither the code for the vascular catheter 
associated infection along with the specific infection code would count 
as a CC. However, even if these actions were taken, we were concerned 
that code 996.62 is not specific to vascular catheter-associated 
infections.
    Burden (High Cost/High Volume)--CDC reports that there are 248,678 
central line associated bloodstream infections per year. It appears to 
be both high cost and high volume. However, we were not able to 
identify Medicare data on these cases because there is no existing 
unique ICD-9-CM code.
    Prevention guidelines--CDC guidelines are located at the following 
Web site: http://www.cdc.gov/ncidod/dhqp/gl_intravascular.html.
    CC--Code 996.62 is a CC under the CMS DRGs and the MS-DRGs. 
However, as stated earlier, this code is broader than vascular catheter 
associated infections. Therefore, at the time of the

[[Page 47211]]

proposed rule, there was not a unique ICD-9-CM code to identify the 
condition, and it did not meet the statutory criteria to be selected. 
However, the proposed rule indicated that we will be seeking to create 
a code(s) to identify this condition and may select it as a condition 
under the provision beginning in FY 2009.
    Considerations--There was not yet a unique ICD-9-CM code to 
identify this condition at the time of the proposed rule. In the 
proposed rule, we indicated that if a code were created prior to 
October 1, 2007, we would be able to specifically identify these cases. 
Some patients require long-term indwelling catheters, which are more 
prone to infections. Ideally catheters should be changed at certain 
time intervals. However, circumstances might prevent such practice (for 
example, the patient has a bleeding diathesis). In addition, a patient 
may acquire an infection from another source which can colonize the 
catheter. As mentioned earlier, coders would also assign an additional 
code for the infection, such as septicemia. Therefore, a list of 
specific infection codes would have to be developed to go along with 
code 996.62. If the vascular catheter-associated infection was 
hospital-acquired, the DRG logic would have to be modified so that 
neither the code for the vascular catheter-associated infection along 
with the specific infection code would count as a CC. Without a 
specific code for infections due to a catheter, it would be difficult 
to identify these patients. Given the current lack of an ICD-9-CM code 
for this condition, we did not propose to include it as one of our 
initial hospital-acquired conditions. However, we believed it showed 
merit for inclusion in future lists of hospital acquired conditions 
once we had resolved the coding issues and were able to better identify 
the condition in the Medicare data. We indicated that we would 
reevaluate the selection of this condition in FY 2009.
    We encouraged comments on this condition which was identified as an 
important public health issue by several organizations that provided 
recommendations on hospital-acquired conditions. We indicated that we 
were particularly interested in receiving comments on how we should 
handle additional associated infections that might develop along with 
the vascular catheter-associated infection.
    Comment: Some commenters stated there was not a unique ICD-9-CM 
code for vascular catheter-associated infection. Therefore, the 
condition does not meet the criteria for being selected. These 
commenters requested that CMS consider creating an explicit code for 
catheter-associated infections and selecting the condition at that 
time. One commenter recommended that CMS examine selecting vascular-
catheter associated infections and identify the condition using the CPT 
codes for insertion of a central venous catheter. Other commenters 
recommend selecting the condition and rely on the use of specific codes 
for the insertion of catheters to supplement the existing code 996.62 
(Infection and inflammatory reaction due to other vascular device, 
implant, and graft). The commenters believed that this alternative 
approach may reduce the need to rely on a unique code for catheter 
associated blood stream infection (CA-BSI). Some commenters noted that 
it is possible to screen for bloodstream infections upon admission. 
Other commenters suggested that CMS exempt vascular surgery, 
implantable device codes, and other obvious sources of existing 
conditions that cause blood stream infection prior to catheter 
placement. Finally, the commenters suggested that CMS exclude long-term 
catheter insertions such as the tunneled central venous catheter using 
codes 365.57 through 365.66.
    Response: Since the publication of the FY 2008 IPPS proposed rule, 
CDC has created a new code for vascular catheter-associated infection. 
The new code 999.31, (Infection due to central venous catheter) will 
become effective on October 1, 2007. It is available for public viewing 
along with other new codes listed on the CMS Web site at: http://
www.cms.hhs.gov/ICD9ProviderDiagnosticCodes/Downloads/new_diagnosis_
codes_2007.pdf. This new code will address commenters concerns 
regarding coding for this condition.
    We appreciate all the public comment on this condition, and have 
considered all of these points of view. For the proposed rule, our only 
barrier to selecting vascular catheter-associated infections was the 
absence of a unique code to identify the condition. As CDC has since 
created a code to identify vascular catheter-associated infections, we 
believe the condition meets the criteria for being selected:
     There are unique codes that identify vascular catheter-
associated infections as a CC under the MS-DRGs;
     Prevention guidelines exist to avoid vascular catheter-
associated infections; and
     As shown above, vascular catheter-associated infections 
are high-volume conditions.
    At this time, we have not decided whether there are specific 
clinical situations where a vascular catheter associated infection 
would not be considered preventable. We will consider exceptions to the 
policy in the circumstances provided in the public comments. We will 
consider these suggestions before the provision becomes effective in FY 
2009.
(i) Clostridium Difficile-Associated Disease (CDAD)
    Coding--This condition is identified by ICD-9-CM code 008.45 
(Clostridium difficile).
    Burden (High Cost/High Volume)--CDC reports that there are 178,000 
cases per year in U.S. hospitals. For FY 2006, there were 110,761 
reported cases of Medicare patients with CDAD as a secondary diagnosis, 
with average charges for the hospital stay of $52,464. Therefore, this 
is a high-cost and high-volume condition.
    Prevention guidelines--Prevention guidelines are not available. 
Therefore, we do not believe this condition can reasonably be prevented 
through the application of evidence-based guidelines.
    CC--Code 008.45 is a CC under the CMS DRGs and the MS-DRGs.
    Considerations--CDAD is an emerging problem with significant public 
health importance. If found early CDAD cases can easily be treated. 
However, cases not diagnosed early can be expensive and difficult to 
treat. CDAD occurs in patients on a variety of antibiotic regiments, 
many of which are unavoidable, and therefore preventability is an 
issue. We did not propose to include CDAD as one of our initial 
hospital acquired conditions at this time, given the lack of prevention 
guidelines. We welcomed public comments on CDAD, specifically on its 
preventability and whether there is potential to develop guidelines to 
identify it early in the disease process and/or diminish its incidence. 
We indicated that we would reevaluate the selection of this condition 
in FY 2009.
    Comment: Commenters noted the current clinical debate surrounding 
this condition reveals that it is very difficult to prevent in all 
cases; it can be prevalent within the hospital setting. In addition, 
some commenters noted this condition may be caused by the treatment 
protocol prescribed for a principal diagnosis; it can also occur if the 
patient is immune-compromised. Finally, some commenters stated that a 
significant percentage of CDAD is unavoidable, and it is difficult to 
distinguish community acquired from hospital acquired CDAD. Commenters

[[Page 47212]]

also urged CMS to delay selection of this condition because there is a 
lack of unique codes, complication codes, and guidelines for prevention 
of this condition.
    Response: This condition meets two of the three statutory criteria. 
There is an ICD-9-CM code for CDAD. The code is 008.45 (Clostridium 
difficile). Therefore, the condition can be clearly identified through 
the use of ICD-9-CM codes. Code 008.45 is also a CC under the CMS DRGs 
and the MS-DRGs. Also, as shown above, CDAD occurs with significant 
frequency in the Medicare population and is a high cost condition. 
However, prevention guidelines for this condition are currently 
unavailable. As suggested by the commenters, leading clinicians believe 
this condition may not be reasonably preventable because it can occur 
as a result of broad spectrum antibiotic administration, which is often 
unavoidable. Although we agree with these commenters, we are also aware 
of the public interest in this issue and will continue to be interested 
in selecting this condition if treatment protocols evolve to the point 
where CDAD is a preventable condition and prevention guidelines are 
developed.
    We are not selecting this condition for implementation in the FY 
2008 final rule. It does not currently meet the statutory guidelines 
for being selected because there are no prevention guidelines. 
Nevertheless, we will consider adopting this condition in the future if 
prevention guidelines to avoid CDAD are developed.
(j) Methicillin-Resistant Staphylococcus Aureus (MRSA)
    Coding--MRSA is identified by ICD-9-CM code V09.0 (Infection with 
microorganisms resistant to penicillins). One would also assign a 
code(s) to describe the exact nature of the infection.
    Burden (High Cost/High Volume)--For FY 2006, there were 95,103 
reported cases of Medicare patients who had MRSA as a secondary 
diagnosis. The average charges for these cases were $31,088. This 
condition is a high-cost and high-volume infection. MRSA has become a 
very common bacterium occurring both in and outside of the hospital 
environment.
    Prevention guidelines--CDC guidelines are located at the following 
Web site: http://www.cdc.gov/ncidod/dhqp/pdf/ar/mdroGuideline2006.pdf.
    CC--Code V09.0 is not a CC under the CMS DRGs and the MS-DRGs. The 
specific infection would be identified in a code describing the exact 
nature of the infection, which may be a CC.
    Considerations--As stated earlier, preventability may be hard to 
ascertain since the bacteria have become so common both inside and 
outside the hospital. There are also considerations in identifying MRSA 
infections because hospitals would report the code for MRSA along with 
additional codes that would describe the exact nature of the infection. 
We would have to develop a list of specific infections that could be 
the result of MRSA. We did not propose to include MRSA as one of our 
initial hospital-acquired conditions because the condition is not a CC. 
We recognize that associated conditions may be a CC. In the proposed 
rule, we welcomed comments on the proposal not to include this 
condition. Should there be support for including this condition, we 
requested recommendations on what codes might be selected to identify 
the specific types of infections associated with MRSA.
    Comment: Commenters displayed a high level of interest in this 
condition, not only as a hospital-acquired condition, but also as a 
broader public health problem that continues to affect Medicare 
beneficiaries. Commenters noted that MRSA is both high volume and high 
cost, referring to the language in the proposed rule. For this reason, 
many commenters believed this condition should be given a unique ICD-9-
CM code to be tracked in FY 2008. Furthermore, the commenters urged CMS 
to include it on the list of conditions for FY 2009 for which 
reimbursement may be withheld. Medical device companies that provide 
products to screen for MRSA commented in support of selecting the 
condition.
    However, a large number of commenters had reservations about 
selecting this condition because MRSA is not a CC or MCC under the new 
MS-DRGs. Most commenters acknowledged the clear prevention guidelines 
for MRSA. However, they contend that there remains debate on whether 
MRSA is reasonably preventable. These commenters indicated MRSA is 
ubiquitous and may be colonizing in so many potential patients that it 
is difficult to determine if it is acquired in a hospital. The 
commenters also noted current literature reveals a strain of community 
acquired MRSA that may be difficult to detect upon admission to the 
hospital.
    Response: We acknowledge the strong public health interest in 
reducing the number of MRSA related infections. However, MRSA does not 
currently meet the statutory criteria to be selected. Although there is 
an ICD-9-CM code to identify MRSA and CDC has prevention guidelines to 
reduce its incidence, we do not believe that there is a consensus among 
public health experts that MRSA is preventable. The public comments and 
the literature on this condition reveal a vigorous debate over whether 
MRSA is really community-acquired rather than hospital acquired given 
the significant potential number of patients that can be colonized with 
MRSA prior to admission. While this concern may be possible to address 
through screening patients for MRSA upon admission, the condition is 
not currently identified as a CC or MCC under the MS-DRGs. If present 
as a secondary diagnosis, the presence of MRSA alone does not lead to 
higher Medicare payment. Our data do not suggest that presence of MRSA 
alone will lead to higher hospital costs that would justify classifying 
it as a CC or MCC. Therefore, as the condition is not an MCC or CC, it 
does not meet the statutory criteria for being selected at this time.
    Although we are not selecting MRSA at this time, we believe it is a 
precursor to several other conditions that we have selected. MRSA may 
be a precursor to catheter associated urinary tract infections, 
vascular catheter-associated infections, and mediastinitis after 
coronary artery bypass graft (CABG) surgery--a surgical site infection 
that we have selected and is discussed in more detail below.
(k) Surgical Site Infections
    Coding--Surgical site infections are identified by ICD-9-CM code 
998.59 (Other postoperative infection). The code does not tell the 
exact location or nature of the postoperative wound infection. The code 
includes wound infections and additional types of postoperative 
infections such as septicemia. The coding guidelines instruct the coder 
to add an additional code to identify the type of infection. To 
implement this condition we would have to remove both code 998.59 and 
the specific infection from counting as a CC if they occurred after the 
admission. We would have to develop an extensive list of possible 
infections that would be subject to the provision. We may also need to 
recommend the creation of a series of new ICD-9-CM codes to identify 
various types of surgical site infections, should this condition merit 
inclusion among those that are subject to the proposed hospital-
acquired conditions provision.
    Burden (High Cost/High Volume)--CDC reports that there are 290,485 
surgical site infections each year. As stated earlier, there is not a 
unique code for surgical site infection. Therefore, we examined 
Medicare data on patients

[[Page 47213]]

with any type of postoperative infection. For FY 2006, there were 
38,763 reported cases of Medicare patients who had a postoperative 
infection. These patients had average charges for the hospital stay of 
$79,504. We are unable to determine how many of these patients had 
surgical site infections.
    Prevention guidelines--CDC guidelines are available at the 
following Web site: http://www.cdc.gov/ncidod/dhqp/gl_
surgicalsite.html.
    CC--Code 998.59 is a CC under the CMS DRGs and the MS-DRGs.
    Considerations--As mentioned earlier, code 998.59 is not exclusive 
to surgical site infections. It includes other types of postoperative 
infections. Therefore, code 998.59 does not currently meet the 
statutory criteria for being subject to the provision because it does 
not uniquely identify surgical site infections. To identify surgical 
site infections, we would need new codes that provide more detail about 
the type of postoperative infection as well as the site of the 
infection. In addition, one would report both code 998.59 as well a 
more specific code for the specific type of infection, making 
implementation difficult. While there are prevention guidelines, it is 
not always possible to identify the specific types of surgical 
infections that are preventable. Therefore, we did not propose to 
select surgical site infections as one of our proposed hospital-
acquired conditions at this time. However, we welcomed public comments 
on whether we can develop criteria and codes to identify preventable 
surgical site infections that would assist us in reducing their 
incidence. We indicated that we were exploring ways to identify 
surgical site infections and would reevaluate this condition in FY 
2009.
    Comment: A number of commenters specifically requested that CMS 
consider selecting mediastinitis after coronary artery bypass graft 
(CABG) surgery. Commenters noted that mediastinitis is a postoperative 
infection that can arise after CABG.
    Commenters stated that the condition meets the criteria set forth 
in the DRA. According to the comments, mediastinitis is a frequently 
occurring and costly infection that will develop after CABG surgery. 
The commenters noted that there are unique codes to identify 
mediastinitis and prevention guidelines that are backed by evidence 
based medicine have been developed.
    Response: We agree that mediastinitis meets the statutory criteria 
for being selected.
    Coding--There are unique ICD-9-CM codes to identify the condition. 
The ICD-9-CM code for mediastinitis is 519.2.
    Burden (High Cost/High Volume)--We examined Medicare data on 
patients who received a CABG operation (with codes 36.10-36.19) and 
also had mediastinitis (ICD-9-CM code 519.2) as a secondary diagnosis. 
For FY 2006, there were 108 reported cases of Medicare patients who had 
this postoperative infection after CABG. These patients had average 
charges for the hospital stay of $304,747. Therefore, mediastinitis is 
a high-cost condition.
    Prevention guidelines--The CDC surgical site infection prevention 
guidelines are backed by evidence based medicine. Further information 
can be found at: http://www.cdc.gov/ncidod/dhqp/gl_surgicalsite.html.
    We are selecting this condition because it meets the statutory 
criteria and was suggested in the public comments. We would identify 
the coronary artery bypass graft procedures through procedure codes 
36.10 through 36.19. Therefore, when a patient has a coronary artery 
bypass graft performed (code 36.10 through 36.19), and a secondary 
diagnosis of mediastinitis (code 519.2) is reported that was not 
present on admission, we will not count mediastinitis as an MCC 
beginning October 1, 2009.
    ``Surgical site infections'' is a broad category, and we were 
looking for assistance from the public for ways to identify specific 
surgical site infections. We appreciate the suggestion to select 
mediastinitis after CABG surgery when it is a hospital acquired 
condition. We are selecting this condition for implementation in this 
FY 2008 final rule. We welcome additional recommendations for other 
types of surgical site infections that could also be selected and look 
forward to working with stakeholders and the public as we consider 
additional surgical site infections in the future.
(l) Serious Preventable Event--Surgery on Wrong Body Part, Patient, or 
Wrong Surgery
    Coding--Surgery performed on the wrong body part, wrong patient, or 
the wrong surgery would be identified by ICD-9-CM code E876.5 
(Performance of inappropriate operation). This diagnosis code does not 
specifically identify which of these events has occurred.
    Burden (High Cost/High Volume)--As stated earlier, there are not 
unique ICD-9-CM codes which capture surgery performed on the wrong body 
part or the wrong patient, or the wrong surgery. Therefore, we examined 
Medicare data on the code for performance of an inappropriate 
operation. For FY 2006, there was one Medicare case reported with this 
code, and the patient had average charges for the hospital stay of 
$24,962. This event is rare. Therefore, it is not high volume. 
Individual cases could have high costs. However, we were unable to 
determine the impact with our limited data.
    Prevention guidelines--There are guidelines to ensure that the 
correct surgery was performed on the correct patient or correct 
patient's body part. This event should not occur. Further information 
and prevention guidelines can be found at: http://www.ahrq.gov/clinic/
ptsafety/.
    CC--This code is not a CC under the CMS DRGs and the MS-DRGs. 
Therefore, it does not meet the criteria for selection under section 
1886(d)(4)(D)(iv) of the Act. However, Medicare does not pay for 
performing surgery on the wrong body part or patient, or performing the 
wrong surgery. These services are not considered to be reasonable and 
necessary and are excluded from Medicare coverage.
    Considerations--There are significant considerations for the 
selection of this condition. There is not a unique ICD-9-CM code that 
would describe the nature of the inappropriate operation. All types of 
inappropriate operations are included in code E876.5. Unlike other 
conditions, performance of an inappropriate operation is not a 
complication of a prior medical event that was medically necessary. 
Rather, in this case, there was a needed intervention but it was done 
to either the wrong body part or the wrong patient, or was not the 
correct operation. Thus, a service was completed that was not 
reasonable and necessary and Medicare does not pay for any inpatient 
service associated with the wrong surgery. It is not necessary for us 
to select this condition because Medicare does not pay for it under any 
circumstances.
    Comment: A majority of commenters agreed that there are not unique 
codes to identify wrong surgery. In addition, these commenters pointed 
out that there are guidelines to ensure that the correct surgery is 
being performed on the correct patient or correct patient's body part. 
These commenters stated that wrong surgery is a serious preventable 
event that should not occur.
    One commenter urged CMS to rank the condition--surgery on wrong 
body part, wrong patient, or wrong surgery (wrong site surgery)--higher 
in our list of hospital-acquired conditions. This commenter stated that 
wrong site surgery may not be rare, but rather may be quite prevalent. 
The commenter disagreed with CMS' belief that wrong

[[Page 47214]]

site surgery should not be considered as a complication because it is a 
risk of being in a hospital. The commenter recommended the development 
of specific codes for wrong site surgery.
    Response: With respect to this latter comment, the commenter may 
have misunderstood our discussion of this issue in the proposed rule. 
We never asserted wrong site surgery is not a complication because it 
is a risk of being in a hospital. Rather, we stated the event itself is 
wrong and should never occur. Unlike CCs and MCCs, wrong surgery is not 
a complication of a prior medical event that was medically necessary. 
Wrong surgery is not a CC or an MCC because the entire event itself 
should never occur, is not reasonable and necessary and should not 
result in any payment to the hospital or physician. We are not 
selecting wrong surgery because it is not an event for which Medicare 
should pay less; it is an event for which Medicare should pay nothing 
at all.
    As stated in the proposed rule, there is not a unique ICD-9-CM code 
that identifies surgery performed on the wrong body part or the wrong 
patient, or the wrong surgery. Code E876.5 (Performance of 
inappropriate operation) does not describe what specifically was wrong 
with the surgery, such as whether it was performed on the wrong side, 
the wrong patient, or if the wrong surgery were performed. In examining 
Medicare data on the code for performance of an inappropriate 
operation, we found only one case reported in FY 2006. We agree this is 
a serious issue that requires close examination and monitoring.
    The proposed rule indicated that wrong surgery (right patient, 
wrong surgery, right surgery, wrong patient, etc.) is not a reasonable 
and necessary service. Therefore, it is not covered by Medicare and 
should not be paid. Wrong surgery is not a CC and does not meet the 
criteria of the statute. As stated above, there are generally 
recognized guidelines hospitals and physicians must follow to ensure 
that the correct surgery was performed on the correct patient or 
correct patient's body part. This event should not occur. If hospitals 
fail to ensure the correct surgery is performed, there are other 
provisions in the regulations to address this alarming event. For 
instance, a hospital must meet the CoPs in order to participate in 
Medicare. If wrong surgery was performed, the hospital could be out of 
compliance with the Surgical Services CoP, the Quality Assessment and 
Performance Improvement CoP, or potentially others. Performance of 
wrong surgery may suggest a systems failure or systems that do not 
comply with the CoPs that should be further investigated. We are 
interested in promoting a culture of safety and are interested in 
helping hospitals improve their performance. The hospital would have an 
opportunity to develop and present a plan of correction to avoid 
termination of its participation in Medicare by addressing the 
deficiencies that resulted in an incorrect surgery being performed. The 
final action that would be taken would depend on the individual 
circumstances and whether the hospital has addressed the problem to 
reduce the chance of a similar occurrence in the future. In any event, 
we reiterate that the way for Medicare to address wrong surgery is not 
through this provision that does not pay extra for preventable hospital 
complications when we should be paying nothing at all, but instead 
through Medicare's regulations that ensure that every Medicare provider 
meets basic quality of care standards.
(m) Falls and Fractures, Dislocations, Intracranial Injury, Crushing 
Injury, and Burns
    Coding--There is no single code that shows that a patient has 
suffered a fall in the hospital. Codes would be assigned to identify 
the nature of any resulting injury from the fall such as a fracture, 
contusion, concussion, etc. There is a code to indicate that a patient 
fell from bed, code E884.4 (Fall from bed). One would then assign a 
code that identifies the external cause of the injury (the fall from 
the bed) and an additional code(s) for any resulting injury (a 
fractured bone).
    Burden (High Cost/High Volume)--As stated earlier, there is not a 
code to identify all types of falls. Therefore, in the FY 2008 IPPS 
proposed rule, we examined Medicare data on the number of Medicare 
beneficiaries who fell out of bed. For FY 2006, there were 2,591 cases 
reported of Medicare patients who fell out of bed. These patients had 
average charges of the hospital stay of $24,962. However, depending on 
the nature of the injury, costs may vary in specific cases.
    Prevention guidelines--Falls may or may not be preventable. Serious 
preventable event guidelines can be found at the following Web site: 
http://www.qualityindicators.ahrq.gov/psi_download.htm.
    CC--Code E884.4 is not a CC under the CMS DRGs or the MS-DRGs.
    Considerations--There are not clear codes that identify all types 
of falls. Hospitals would also have to use additional codes for 
fractures and other injuries that result from the fall. In addition, 
depending on the circumstances, the falls may or may not be 
preventable. We did not propose the inclusion of falls as one of our 
initial hospital-acquired conditions because we could only identify a 
limited number of these cases, and they were not classified as CCs. 
However, we welcomed public comments on how to develop codes or coding 
logic that would allow us to identify injuries that result from falls 
in the hospital so that Medicare would not recognize the higher costs 
associated with treating patients who acquire these conditions in the 
hospital.
    Comment: Several commenters stated that the category of falls is 
not appropriate for inclusion as one of the hospital-acquired 
conditions. Specifically, the commenters noted that it is impossible to 
prevent all falls, and the definition of what constitutes a 
``preventable fall'' is not well-defined. Several commenters strongly 
recommended the inclusion of falls for the final rule because falls and 
their resulting injuries are an important public health safety issue. 
However, these commenters did not give further details or 
recommendations to CMS regarding how to identify falls and related 
injuries as a hospital-acquired condition that would be subject to this 
provision.
    Response: With respect to the comment that not all falls are 
preventable, we reiterate that the statutory provision authorizes the 
Secretary to select conditions that ``could reasonably have been 
prevented through the application of evidence based guidelines.'' We 
believe that injuries that occur in the hospital due to falls are 
preventable. As discussed earlier, we received a couple of comments 
urging us to include falls as one of our hospital acquired conditions. 
We recognize that preventable injuries are an important patient safety 
issue. Therefore, we considered additional ways to identify patients 
who had preventable injuries that occurred in the hospital. We examined 
the use of a combination of External cause of injury codes and the 
specific injury to identify these cases. We identified five external 
causes of injury codes that would identify falls in a hospital. These 
include:
     E884.2 Fall from chair
     E884.3 Fall from wheelchair
     E884.4 Fall from bed
     E884.5 Fall from other furniture
     E884.6 Fall from commode
    These codes clearly identify certain types of falls. If coded for 
an inpatient, they could identify that the fall occurred in the 
hospital. If these codes appeared

[[Page 47215]]

on a claim along with a fracture or trauma code that did not reflect 
that the condition was present on admission, we could conclude that the 
injury was a result of a fall in the hospital that should not be 
counted as an MCC or CC. However, we identified potential problems in 
using the external cause of injury codes. There is a separate field on 
the electronic claim to report one external cause of injury code. 
However, hospitals do not report the POA indicator with this field. 
Therefore, we will not be able to tell if the external cause of injury 
code is identifying an event that occurred before or after admission.
    Hospitals can also report external cause of injury codes as a 
secondary diagnosis. If the hospital lists the external cause of injury 
code among the secondary diagnoses, the hospital would be assigning a 
Present on Admission indicator to the external cause of injury code. In 
these cases, we would be able to identify that one of the five types of 
falls indicated above occurred after admission. We could use this 
information along with the ICD-9-CM diagnosis code for the specific 
type of injury, such as a fracture, to not allow the specific injury to 
count as a MCC or CC, since it would be the result of a preventable 
injury. In our analysis of the use of an external cause of injury code, 
we believe this approach is too complicated to identify preventable 
injuries. Therefore, we focused on simply identifying injuries that 
should not occur during a hospitalization. If a preventable injury 
occurs during a hospitalization, it should be included on our list of 
hospital acquired conditions.
    We reviewed diagnosis codes contained in the Injury and Poisoning 
Chapter of ICD-9-CM and attempted to develop a list of codes that could 
identify potential adverse events that may or may not have been the 
result of a fall occurring in the hospital setting. After reviewing 
each category of diagnosis codes, we identified the following injuries 
that should not occur during a patient's hospitalization. The generic 
categories of injuries are as follows:
     Fractures--ICD-9-CM code range 800 through 829
     Dislocations--ICD-9-CM code range 830 through 839
     Intracranial injury--ICD-9-CM code range 850 through 854
     Crushing injury--ICD-9-CM code range 925 through 929
     Burns--ICD-9-CM code range 940 through 949
     Other and unspecified effects of external causes--ICD-9-CM 
code range 991 through 994
    In our view, the above conditions should not occur after admission 
to the hospital. That is, if the patient is admitted to the hospital 
without a crushing injury, a burn, fracture, dislocation, among others, 
we can see no reason why such an event would not be preventable while 
the patient is in the hospital. None of these injuries should occur 
after admission. We believe this range of conditions offers a 
relatively uncomplicated method to determine if an injury or trauma is 
acquired in the hospital. This range of conditions meets the statutory 
criteria for being selected when they are MCCs or CCs. First, they are 
identifiable with ICD-9-CM codes. Second, injuries that occur as a 
result of a fall in the hospital complicate the care and treatment of 
the patient. Fractures and dislocations and other injuries are common 
in the Medicare population. There were more than 175,000 fractures and 
other traumatic injuries in the above range of codes for FY 2006. 
Third, hospital acquired injuries included in this range of codes 
should not occur and are preventable. Although we have not identified 
specific prevention guidelines for the conditions described by the 
above range of codes, we believe these types of injuries and trauma 
should not occur in the hospital, and we look forward to working with 
CDC and the public in identifying research that has or will occur that 
will assist hospitals in following the appropriate steps to prevent 
these conditions from occurring after admission.
    We welcome public comments on additions and deletions to this 
injury list as well as our findings on the use of a combination of 
external cause of injury codes and injury codes to identify patients 
that acquired an injury in the hospital due to a fall. We also welcome 
any additional suggestions to identify cases where preventable 
injuries, such as falls, occur during hospitalization. We will review 
all recommendations in the FY 2009 IPPS rule in order to further refine 
our policy to identify preventable injuries and ensure that Medicare 
does not pay extra by counting them as MCC or CCs.
(n) Other Conditions Suggested Through Comment: Deep Vein Thrombosis 
(DVT)/ Pulmonary Embolism (PE)
    Comment: A number of commenters encouraged CMS to select Venous 
Thromboembolism (VTE), which includes both Deep Vein Thrombosis (DVT) 
and Pulmonary Embolism (PE), as a preventable condition. The commenters 
noted that prophylactic measures exist to avoid these conditions and 
they are preventable if these steps are followed.
    The commenters asserted that this condition meets the DRA criteria 
requirements for a condition eligible for a payment adjustment in that 
it involves high cost and high volume (according to the 2006 MedPAR 
data, DVT resulted in more than 180,000 discharges with a mean 
standardization cost of $17,410 and PE in more than 100,000 discharges 
with a mean standardization cost of $20,742), and results in assignment 
to a higher paying DRG if present as a secondary diagnosis. The 
commenters also noted that both DVT and PE have ICD-9-CM codes that are 
on the MCC and CC lists. In addition, this condition can be prevented 
in accordance with evidence-based guidelines. These commenters cited 
Geerts, et al., Prevention of Venous Thromboembolism: The Seventh ACCP 
Conference on Antithrombotic and Thrombolytic Therapy, Chest, 126: 
338S-400S (2004). The commenters acknowledged DVT and PE are identified 
by multiple codes, but asserted that administrative issues surrounding 
the selection of this condition could be resolved. They requested that 
CMS consider selecting DVT and PE as preventable complications for 
which hospitals will not receive additional payments.
    Response: We appreciate these comments suggesting that we add DVT 
and PE to our list of conditions that would be subject to the hospital 
acquired conditions provision. A DVT is a blood clot that forms in a 
vein, most commonly in the lower extremity. It can arise secondary to a 
number of clinical circumstances, including prolonged inactivity or 
bedrest, or from extended periods of time with the lower extremity in a 
bent position. It can also arise in the setting of a hypercoagulable 
state such as that which occurs with a number of malignancies, where 
the blood has an increased propensity to form clots, and it is also 
more common in patients taking oral contraceptives, particularly in 
conjunction with regular tobacco use. A PE is a clot that occurs in one 
of the pulmonary arteries that supplies a portion of the lung, most 
commonly when part or all of a DVT migrates to the pulmonary vessels 
from its original location, although it can also occur in the absence 
of a DVT, and it is a particularly serious event that is often life 
threatening. We refer readers to the current medical literature to 
further define DVT and PE.
    We agree that there are circumstances where these conditions are 
preventable,

[[Page 47216]]

and where the condition meets the statutory criteria to be selected. 
These conditions can be identified by unique ICD-9-CM codes. DVT can be 
identified through codes 453.40 (Venous embolism and thrombosis of 
unspecified deep vessels of lower extremity), 453.41 (Venous embolism 
and thrombosis of deep vessels of proximal lower extremity), and 453.42 
(Venous embolism and thrombosis of deep vessels of distal lower 
extremity). All three codes are on the CC list. PE is identified 
through codes 415.10 (Iatrogenic pulmonary embolism and infarction) and 
415.19 (Other pulmonary embolism and infarction). Both of these codes 
are on the MCC list. The commenters provided Medicare data showing that 
these conditions are both frequent and high cost in the Medicare 
population. Finally, the commenters have identified prevention 
guidelines backed by evidence based medicine to avoid DVTs and PEs. 
Therefore, at least in some circumstances, these conditions meet the 
statutory criteria for being selected.
    We appreciate the collaborative efforts of other organizations to 
further define the prevention guidelines for this condition. We 
recognize that routine admission physical examinations should include 
efforts to detect a DVT. Although we believe DVTs and PEs may be 
preventable in certain circumstances (such as when an otherwise healthy 
patient is having elective surgery on a lower extremity), it is 
possible that a patient may have a DVT upon admission that goes 
unidentified, and it is also possible that DVT may occur because of 
other circumstances, such as an occult malignancy. If a DVT is 
clinically suspected upon admission to the hospital, the definitive 
diagnosis of a DVT can be made with a Doppler ultrasound examination or 
intravenous venogram, or both. We anticipate that it is not feasible to 
perform these studies on every hospitalized patient. In the case of a 
patient who is admitted with a clinically unapparent DVT that is not 
detected, the hospital will have followed all typical patient care 
protocols yet the DVT went undiagnosed upon admission. It may remain 
undetected until the patient exhibits symptoms of either the DVT or a 
PE that is unrelated to the patient's principal diagnosis. In these 
circumstances, we believe the DVT or PE should continue to be counted 
as an MCC or CC because, in our view, the condition either was 
unidentifiable prior to admission or did not likely occur as a result 
of poor management of the patient while they were in the hospital. We 
believe it is very important to select DVTs and PEs only when they are 
preventable through following standard prevention guidelines. We will 
seek to identify clearly defined instances of preventable DVT and PE 
that should not occur in the hospital setting which will help to 
further increase hospital quality of care.
    We appreciate suggestions on how to identify DVTs and PEs that are 
preventable hospital acquired conditions. If we can identify only those 
circumstances where DVTs and PEs are preventable and meet the statutory 
criteria for being selected, we likely would make them subject to the 
provision in the FY 2009 IPPS final rule. We welcome comments on this 
issue and look forward to working with stakeholders to identify 
instances of preventable DVTs and PEs prior to implementation of this 
provision on October 1, 2008.
(o) Other Conditions Suggested Through Public Comment: Legionnaires' 
Disease
    Comment: One commenter suggested that CMS select Legionnaire's 
disease. The commenter asserted that this condition is high cost/high 
volume: CDC estimates between 8,000 and 18,000 cases per year. Due to 
underreporting and underdiagnosis, only 2 to 10 percent of cases are 
reported. Death occurs in 10 to 15 percent of cases. In addition, the 
commenter cited established prevention guidelines: CDC prevention 
guidelines are available and widely distributed. Finally, the commenter 
stated that Legionnaires' disease is identified by ICD-9-CM code 
482.84.
    Response: While there may be a discrete ICD-9-CM code to identify 
Legionnaires' disease, it is not typically a hospital acquired 
condition. Legionnaires' disease is usually acquired outside of a 
hospital from a contaminated water supply that may or may not have any 
relation to a particular institution. Any outbreak of Legionnaires' 
disease suggests a significant public health emergency that should be 
addressed by public health resources rather than by a particular 
Medicare payment policy.
(p) CMS Response to Additional Comments
    We welcomed any comments on the clinical aspects of the conditions 
and on which conditions should be selected for implementation on 
October 1, 2008. We also solicited comments on any problematic issues 
for specific conditions that may support not selecting them as one of 
the initial conditions. We encouraged comments on how some of the 
administrative problems can be overcome if there is support for a 
particular condition.
    Commenters did not raise any general administrative concerns. 
Rather, a number of commenters addressed the potential for an appeals 
process and POA coding issues. We have included the comment and 
response for each issue below:
     Appeals Process:
    Comment: A large number of commenters requested clarification from 
CMS on how hospitals appeal CMS decisions that a particular patient may 
fall under the hospital-acquired conditions policy and, therefore, is 
not eligible for higher payment through assignment to the higher CC/MCC 
level of the MS-DRG. They asked CMS to provide specific instructions 
for hospitals to follow for appealing a decision.
    Response: We do not believe a separate appeals process is necessary 
for the payment adjustment for hospital-acquired conditions because 
existing procedures provide adequate opportunity for review. Under 42 
CFR Sec.  412.60(d), a hospital has 60 days after the date of the 
notice of the initial assignment of a discharge to a DRG to request a 
review of that assignment. The hospital may submit additional 
information as a part of its request. A hospital that believes a 
discharge was assigned to the incorrect DRG as a result of the payment 
adjustment for hospital-acquired conditions may request review of the 
DRG assignment by its fiscal intermediary or MAC.
    However, we note that section 1886(d)(7)(B) of the Act, as amended 
by section 5001(c)(2) of the DRA, provides that there shall be no 
administrative or judicial review of the establishment of DRGs, 
including the selection and revision of codes under the payment 
adjustment for hospital acquired conditions. Therefore, although a 
hospital may request review of a DRG assignment in a particular case, 
the statute does not provide for review of the codes we select to be 
subject to the payment adjustment for hospital-acquired conditions.
     POA Coding
    Comment: Commenters suggested that all secondary diagnoses coded as 
present on admission be used to support the development of new 
complication rate measures and other quality indicators in the future. 
They suggested that CMS should develop special Grouper logic to exclude 
similar ICD-9-CM codes. The commenters stated that reducing hospital 
payments for a condition present upon admission, but not documented, is 
too punitive.

[[Page 47217]]

    Many commenters submitted the experiences of two States that 
already use present-on-admission coding. They believed it takes several 
years and intense educational efforts to achieve reliable data and 
therefore there must be a strong clinical training component.
    The commenters recommended that CMS implement the collection of the 
POA indicator but delay the implementation of any conditions that are 
dependent on its use until physicians and hospitals have an appropriate 
level of experience.
    Response: We refer commenters to the Change Request No. 5499 
released on May 11, 2007, for answers to additional questions regarding 
present-on-admission coding. We remind commenters that the DRG payment 
adjustment based on the POA indicator is not applicable until October 
1, 2008. It is important to note that hospitals will gain experience in 
reporting POA information during FY 2008 prior to it having a payment 
impact in FY 2009.
     Prevention Guidelines
    Comment: A small number of commenters questioned the feasibility 
and reliability of current prevention guidelines. The commenters 
supported CMS' goal of encouraging improvements in health care and 
reducing the number of preventable infections, but believed that 
hospitals must be reimbursed appropriately for providing the care 
patients need. The commenters believed that CMS should be sure that 
hospitals are not penalized for infections that originated outside the 
hospital or that are caused by factors beyond the hospital's control.
    The commenters suggested that CMS should recognize that, even with 
the best infection control practices, some infections will occur 
anyway. They added that reducing payments for all cases in which those 
infections occur could harm hospitals' ability to purchase and provide 
advanced drugs and treatment modalities or invest in other infection 
control technologies.
    Response: We address each concern regarding prevention guidelines 
in the respective response for each condition. We are committed to 
improving quality and decreasing the number of hospital-acquired 
conditions. In that goal, we have chosen these specific conditions 
because they fulfill the criteria outlined in the DRA: the conditions 
have unique codes that are MCCs or CCs; the conditions are high volume, 
high cost or both; and the conditions can be reasonably prevented 
through the application of evidence-based guidelines.
     Academic Centers/Hospitals with high risk patients:
    Comment: Commenters representing academic centers and hospitals 
with high risk patient populations urged CMS to consider excluding 
patients considered to be high risk such as those that are more 
susceptible to infections.
    Response: As indicated above, we are selecting conditions that are 
``reasonably preventable'' through application of evidence-based 
guidelines and meet the other statutory criteria. In response to 
comments on each of the conditions considered, we indicated that we are 
researching whether to establish exceptions to the conditions for 
specific clinical circumstances where the condition may not be 
preventable. The determination of whether a patient is ``high risk'' 
will depend on the specific circumstances of the patient and the 
condition under consideration. We do not believe it is possible to 
classify a patient generally as ``high risk'' in all the circumstances 
where the provision could potentially apply. As we indicated above, we 
welcome public comments on clinical scenarios where a specific 
condition may not be reasonably preventable in the hospital and how to 
identify and distinguish those circumstances from other situations 
where the condition is preventable.
7. Other Issues
    Under section 1886(d)(4)(D)(vi) of the Act, ``[a]ny change 
resulting from the application of this subparagraph shall not be taken 
into account in adjusting the weighting factors under subparagraph 
(C)(i) or in applying budget neutrality under subparagraph (C)(iii).'' 
Subparagraph (C)(i) refers to DRG classifications and relative weights. 
Therefore, the statute requires the Secretary to continue counting the 
conditions selected under section 5001(c) of the DRA as MCCs or CCs 
when updating the relative weights annually. Thus, the higher costs 
associated with a case with a hospital-acquired MCC or CC will continue 
to be assigned to the MCC or CC DRG when calculating the relative 
weight but payment will not be made to the hospital at one of these 
higher-paying DRGs. Further, subparagraph (C)(iii) refers to the budget 
neutrality calculations that are done so aggregate payments do not 
increase as a result of changes to DRG classifications and relative 
weights. Again, the higher costs associated with the cases that have a 
hospital-acquired MCC or CC will be included in the budget neutrality 
calculation but Medicare will make a lower payment to the hospital for 
the specific cases that includes a hospital-acquired MCC or CC. Thus, 
to the extent that the provision applies and cases with an MCC or CC 
are assigned to a lower-paying DRG, section 5001(c) of the DRA will 
result in cost savings to the Medicare program. We note that the 
provision will only apply when the selected conditions are the only 
MCCs and CCs present on the claim. Therefore, if a nonselected MCC or 
CC is on the claim, the case will continue to be assigned to the higher 
paying MCC or CC DRG, and there will be no savings to Medicare from the 
case. We believe the provision will apply in a small minority of cases 
because it is rare that one of the selected conditions will be the only 
MCC or CC present on the claim.
    To summarize, we appreciate all of the comments on hospital-
acquired conditions and look forward to continued input as we plan to 
implement these hospital-acquired conditions. Below is the list of 
conditions that we are selecting in this FY 2008 final rule. These 
conditions will be made subject to the provision beginning on October 
1, 2008 (FY 2009).
     Serious Preventable Event--Object Left in Surgery
     Serious Preventable Event--Air Embolism
     Serious Preventable Event--Blood incompatibility
     Catheter-Associated Urinary Tract Infections
     Pressure Ulcers (Decubitus Ulcers)
     Vascular Catheter-Associated Infection
     Surgical Site Infection--Mediastinitis After Coronary 
Artery Bypass Graft (CABG) Surgery
     Hospital Acquired Injuries--Fractures, Dislocations, 
Intracranial Injury, Crushing Injury, Burn, and Other Unspecified 
Effects of External Causes
    We will also propose the following conditions for consideration in 
the FY 2009 IPPS proposed rule. We will work diligently to address 
issues surrounding these conditions and propose to select these 
conditions in the FY 2009 IPPS final rule.
     Ventilator Associated Pneumonia (VAP)
     Staphylococcus Aureus Septicemia
     Deep Vein Thrombosis (DVT)/ Pulmonary Embolism (PE)
    Finally, we list below the set of conditions that signal further 
analysis for future implementation.
     Methicillin Resistant Staphylococcus Aureus (MRSA)
     Clostridium Difficile-Associated Disease (CDAD)
     Wrong Surgery--Provision not applicable because Medicare 
should not pay less; it should not pay at all.

[[Page 47218]]



                                     Table 1.--Hospital-Acquired Conditions
                                                 (in rank order)
----------------------------------------------------------------------------------------------------------------
                                                                                               May be considered
            Condition             Considered in NPRM   Proposed in NPRM     Selected in FY         in future
                                                                            2008 final rule       rulemaking
----------------------------------------------------------------------------------------------------------------
1. Serious Preventable Event--    Yes...............  Yes...............  Yes...............  N/A.
 Object left in surgery.
2. Serious Preventable Event--    Yes...............  Yes...............  Yes...............  N/A.
 Air embolism.
3. Serious Preventable Event--    Yes...............  Yes...............  Yes...............  N/A.
 Blood incompatibility.
4. Catheter-Associated Urinary    Yes...............  Yes...............  Yes...............  N/A.
 Tract Infections.
5. Pressure Ulcers (Decubitus     Yes...............  Yes...............  Yes...............  N/A.
 Ulcers).
6. Vascular Catheter-Associated   Yes...............  No (No FY 2008      Yes (Code Created   N/A.
 Infection.                                            code).              for FY 2008).
7. Surgical Site Infection--      Yes (All surgical   No (No unique       Yes (Comments       N/A.
 Mediastinitis after Coronary      site infections,    codes).             suggested
 Artery Bypass Graft (CABG)        not just                                Mediastinitis
 surgery.                          Mediastinitis).                         which has unique
                                                                           code).
8. Falls........................  Yes...............  No (Coding not      Yes (Operational    Expand to all
                                                       unique).            difficulties will   hospital acquired
                                                                           be overcome by FY   injuries, adverse
                                                                           2009).              events.
9. Ventilator Associated          Yes...............  No (Coding not      No (Coding not      Yes--FY 2009 IPPS
 Pneumonia (VAP).                                      unique).            unique).            final rule
                                                                                               (Pursuing code
                                                                                               with CDC).
10. Staphylococcus Aureus         Yes...............  Yes...............  No (Must identify   Yes--FY 2009 IPPS
 Septicemia.                                                               subset where        final rule.
                                                                           preventable).
11. Deep Vein Thrombosis (DVT)/   No................  No................  No................  Yes--FY 2009 IPPS
 Pulmonary Embolism (PE).                                                                      final rule (Work
                                                                                               to identify
                                                                                               situations where
                                                                                               it should be
                                                                                               preventable).
12. Methicillin Resistant         Yes...............  No................  No................  Yes.
 Staphylococcus Aureus (MRSA).
13. Clostridium Difficile--       Yes...............  No................  No................  Yes.
 Associated Disease (CDAD).
Other: Medicare Does not Pay
 For:
14. Wrong Surgery...............  Yes...............  No................  No................  Provision not
                                                                                               Applicable.
                                                                                               Medicare should
                                                                                               not pay at all.
----------------------------------------------------------------------------------------------------------------

G. Changes to Specific DRG Classifications

1. Pre-MDCs: Intestinal Transplantation
    In the FY 2005 IPPS final rule (69 FR 48976), we reassigned 
intestinal transplant cases from CMS DRG 148 (Major Small and Large 
Bowel Procedures with CC) and CMS DRG 149 (Major Small and Large Bowel 
Procedures without CC) to CMS DRG 480 (Liver Transplant and/or 
Intestinal Transplantation). In the FY 2006 IPPS final rule (70 FR 
47286), we continued to evaluate these cases to see if a further DRG 
change was warranted. While we found that intestinal only transplants 
and combination liver-intestine transplants have higher average charges 
than other cases in CMS DRG 480, these cases are extremely rare (there 
were only 4 cases in FY 2004) and the insufficient number of cases did 
not warrant creating a separate DRG.
    For FY 2008, we examined the September 2006 update of the FY 2006 
MedPAR file and found 1,208 cases assigned to CMS DRG 480. In section 
II.C. of the preamble of the FY 2008 IPPS proposed rule, we proposed to 
split CMS DRG 480 into two severity levels: MS-DRG 005 (Liver 
Transplant and/or Intestinal Transplant with MCC) and MS-DRG 006 (Liver 
Transplant and/or Intestinal Transplant without MCC). The following 
table displays our results:

------------------------------------------------------------------------
                                                  Average
              MS-DRG                Number of    length of     Average
                                      cases         stay       charges
------------------------------------------------------------------------
MS-DRG 006--All cases............          446        10.05     $129,519
MS-DRG 006--Intestinal transplant            3           34      354,793
 cases only......................
MS-DRG 005--All cases............          762        22.25      243,271
MS-DRG 005--Intestinal transplant            9        40.22      460,089
 cases only......................
MS-DRG 005--Intestinal and liver             1           56    1,179,425
 transplant......................
------------------------------------------------------------------------

    Under the MS-DRGs, 10 of 13 intestinal transplant cases are 
assigned to proposed MS-DRG 005 based on the secondary diagnosis of the 
patient. The three remaining intestinal transplant cases do not have an 
MCC and would

[[Page 47219]]

be assigned to MS-DRG 006, absent further changes to the DRG logic. 
These three intestinal transplants have average charges of 
approximately $354,793 and an average length of stay of 34 days. 
Average charges and length of stay for these three cases are more 
comparable to the average charges of approximately $243,271 and average 
length of stay of 22.25 days for all cases assigned to proposed MS-DRG 
005. For this reason, we proposed to move all intestinal transplant 
cases to MS-DRG 005. As part of the proposal, we proposed to redefine 
proposed MS-DRG 005 as ``Liver Transplant with MCC or Intestinal 
Transplant.'' The presence of a liver transplant with MCC or an 
intestinal transplant would assign a case to the higher severity level. 
We also proposed to redefine proposed MS-DRG 006 as ``Liver Transplant 
without MCC''.
    Comment: Two commenters supported the proposed reassignment of 
intestinal transplants to MS-DRG 005. One commenter stated that CMS 
should continue to evaluate the frequency of this procedure and 
reassign it to an appropriate DRG reflective of its high resource 
utilization.
    Response: We appreciate the support of the commenters and agree 
that when we receive sufficient data, we will again consider a separate 
intestinal transplant DRG.
    Comment: One commenter supported separate MS-DRGs for intestinal 
transplants and combination liver-intestine transplants. The commenter 
cited that the data from the Milliman 2005 U.S. Organ and Tissue 
Transplant Cost Estimates and Discussion Research Report supports 
separate MS-DRGs. This report provided data for 58 intestine only 
transplants with estimated first year billed charges of $813,600 and 47 
liver-intestine transplants with estimated first year billed charges of 
$830,200.
    Response: The report submitted by the commenter does not indicate 
whether the patients cited in the study were Medicare. Further, it is 
not clear whether the identified costs were hospital inpatient only or 
total. For these reasons, we are not using these data to make an MS-DRG 
assignment. However, we are open to considering, to the extent 
feasible, reliable, validated data other than MedPAR data in annually 
recalibrating and reclassifying the DRGs.
    In this final rule with comment period, we are adopting as final 
our proposal to reassign intestinal transplantation cases to MS-DRG 
005. We are also redefining MS-DRG 005 as ``Liver Transplant with MCC 
or Intestinal Transplant'' and MS-DRG 006 as ``Liver Transplant without 
CC''.
2. MDC 1 (Diseases and Disorders of the Nervous System)
a. Implantable Neurostimulators
    We received a joint request from three manufacturers to review the 
DRG assignment for cases involving neurostimulators. The commenters are 
concerned that:
     Neurostimulator cases may be assigned to 30 different DRGs 
in 12 different MDCs depending upon the patient's principal diagnosis.
     Neurostimulator cases represent a small proportion of the 
total cases in their assigned DRG and have higher costs.
     The 11 new ICD-9-CM codes created beginning in FY 2007 
that identify pain are assigned to MDC 23 (Factors Influencing Health 
Status and Other Contacts With Health Services) rather than MDC 1 
(Diseases and Disorders of the Nervous System). The manufacturers were 
concerned that these pain codes will be a common principal diagnosis 
for patients who receive a neurostimulator and will be assigned to MDC 
23, which contains a wide variety of dissimilar diagnoses. The new ICD-
9-CM codes are: 338.0 (Central pain syndrome), 338.11 (Acute pain due 
to trauma), 338.12 (Acute post-thoracotomy pain), 338.18 (Other acute 
postoperative pain), 338.19 (Other acute pain), 338.21 (Chronic pain 
due to trauma), 338.22 (Chronic post-thoracotomy pain), 338.28 (Other 
chronic postoperative pain), 338.29 (Other chronic pain), 338.3 
(Neoplasm related pain (acute)(chronic)), and 338.4 (Chronic pain 
syndrome).
    The manufacturers recommended that we:
     Reroute all spinal and peripheral neurostimulator cases 
into a common set of base DRGs.
     Reclassify ICD-9-CM pain codes 338.0 through 338.4 
currently assigned to MDC 23 into MDC 1 when reported as the principal 
diagnosis.
     Revise surgical CMS DRGs in MDC 1 based on whether the 
patient received a major device.
     Split the single surgical CMS DRG in MDC 19 (Mental 
Diseases and Disorders) and MDC 23 into two CMS DRGs: one CMS DRG for 
minor procedures as defined by CMS DRGs 477 (Non-Extensive O.R. 
Procedure Unrelated to Principal Diagnosis) and CMS DRG 468 (Extensive 
O.R. Procedure Unrelated to Principal Diagnosis) and one CMS DRG for 
major procedures.
     Create a new CMS DRG in MDC 1 for major devices.
    The manufacturers recognized that implementing a re-routing feature 
in the CMS DRG system would be a major undertaking and, alternatively, 
suggested reassigning the pain codes to MDC 1 as an interim step. In 
the FY 2008 IPPS proposed rule, we noted that we agreed with this 
suggestion. With respect to the suggestion to split the single surgical 
CMS DRG in MDCs 19 and 23 into two CMS DRGs and create a major device 
CMS DRG within MDC 1, in the FY 2008 IPPS proposed rule, we encouraged 
commenters to examine the assignment of neurostimulator cases under the 
MS-DRGs to determine whether the changes we proposed to adopt to better 
recognize severity in the CMS DRG system would address these concerns.
    The implantation of a neurostimulator requires two types of 
procedures. First, the surgeons implant leads containing electrodes 
into the targeted section of the brain, spine, or peripheral nervous 
system. Second, a neurostimulator pulse generator is implanted into the 
pectoral region and extensions from the neurostimulator pulse generator 
are tunneled under the skin and connected with the proximal ends of the 
leads. Hospitals stage the two procedures required for a full system 
neurostimulator implant.
    There are separate ICD-9-CM procedure codes that identify the 
implant of the leads and the insertion of the pulse generator. The 
three codes for the leads insertion are: 02.93 (Implantation or 
replacement of intracranial neurostimulator lead(s)); 03.93 
(Implantation or replacement of spinal neurostimulator lead(s)); and 
code 04.92 (Implantation or replacement of peripheral neurostimulator 
lead(s). The five codes for the insertion of the pulse generator are: 
86.94 (Insertion or replacement of single array neurostimulator pulse 
generator, not specified as rechargeable); 86.95 (Insertion or 
replacement of dual array neurostimulator pulse generator, not 
specified as rechargeable); 86.96 (Insertion or replacement of other 
neurostimulator pulse generator); 86.97 (Insertion or replacement of 
single array rechargeable neurostimulator pulse generator); and 86.98 
(Insertion or replacement of dual array rechargeable neurostimulator 
pulse generator).
    The patient's principal diagnosis determines the MDC assignment. 
Implant of a cranial, spinal or peripheral neurostimulator will result 
in assignment of the case to a surgical DRG within that MDC. Although 
the manufacturers are correct that neurostimulator cases can 
potentially be assigned to many different CMS DRGs

[[Page 47220]]

based on the patient's principal diagnosis, they also provided data 
that showed that nearly 90 percent are assigned to 6 different CMS DRGs 
that cross two MDCs. In MDC 1, neurostimulator cases are assigned to 
four CMS DRGs: CMS DRG 7 (Peripheral and Cranial Nerve and Other 
Nervous System Procedures with CC); CMS DRG 8 (Peripheral and Cranial 
Nerve and Other Nervous System Procedures without CC); CMS DRG 531 
(Spinal Procedures with CC); and CMS DRG 532 (Spinal Procedures without 
CC). In MDC 8 (Disease and Disorders of the Musculoskeletal System and 
Connective Tissue), neurostimulator cases are assigned to two CMS DRGs: 
CMS DRG 499 (Back and Neck Procedures Except Spinal Fusion with CC); 
and CMS DRG 500 (Back and Neck Procedures Except Spinal Fusion without 
CC).
    With very limited exceptions, such as tracheostomies and certain 
types of transplants, the principal diagnosis is fundamental to the 
assignment of a case to an MDC within the DRG system. By relying on the 
patient's principal diagnosis, the DRG system will group together 
patients who are clinically similar. As indicated in the proposed rule, 
for this reason, we were concerned about adopting the suggestion that 
all neurostimulator cases be rerouted to a common DRG irrespective of 
the patient's principal diagnosis. We believe such a step would be 
fundamentally inconsistent with the idea of creating common groups of 
patients who are clinically similar based on diagnosis and procedures. 
For this reason, we do not believe that a rerouting step should be 
adopted that would group together all neurostimulator cases.
    However, in the FY 2008 IPPS proposed rule, we agreed with the 
manufacturers' suggestion that the new ICD-9-CM codes created in FY 
2007 for central and chronic pain syndrome and chronic pain (codes 
338.0, 338.21 through 338.29, and 338.4) should be assigned to MDC 1 
when present as the principal diagnosis. The manufacturers requested 
that we reclassify the pain codes (338.0 through 338.4) from MDC 23 to 
MDC 1. Our medical consultants advised that the acute pain codes (codes 
338.11 through 338.19) should remain in MDC 23 because the acute pain 
is not a neurological condition. According to the manufacturers, the 
National Center for Health Statistics' (NCHS) choice in locating the 
pain codes within ICD-9-CM's Nervous System chapter has much clinical 
validity, particularly for chronic pain. The manufacturers further 
noted that acute pain is typically self-limited, a symptomatic response 
to an immediate insult that serves the body as a warning sign. However, 
chronic pain is unrelenting and serves no warning or protective 
function. It is a disease process of its own accord, according to the 
commenters.
    The manufacturers described pain as follows. Broadly, there are two 
main categories of pain: Nociceptive and neuropathic. Nociceptive pain 
is caused by sensory neurons, called nociceptors, responding to tissue 
damage. This type of pain is the body's normal response to injury. The 
pain is usually localized and time-limited. That is, when the tissue 
damage heals, the pain typically resolves. Acute pain is typically 
nociceptive. In general, nociceptive pain is typically treated with 
anti-inflammatories and, in more severe cases, with opioids via a 
morphine pump for example.
    In contrast, neuropathic pain is caused by malfunctioning or 
pathologically altered nervous pathways stemming from injury to the 
nervous system, either as a direct result of trauma to a nerve (phantom 
limb syndrome, reflex sympathetic dystrophy/complex regional pain 
syndrome after injury) or due to other medical conditions that cause 
damage to the nerve such as herpes (postherpetic neuralgia), diabetes 
(diabetic neuropathy), and peripheral vascular disease (critical limb 
ischemia). Failed back surgery syndrome (FBSS) is another common source 
of neuropathic pain. Typically, neuropathic pain is chronic and may 
persist for months or years beyond the healing of damaged tissue. 
Because the nerves themselves have been damaged, neuropathic pain can 
be considered its own disease process. Neuropathic pain may be more 
difficult to treat than nociceptive pain and has been shown to be more 
responsive to neurostimulation.
    The pain codes, created effective October 1, 2006, are currently 
assigned to MDC 23. The neurostimulator cases with a principal 
diagnosis using the pain codes were assigned to CMS DRG 461 (O.R. 
Procedure with Diagnoses of Other Contact with Health Services) for the 
first time in FY 2007. As explained above, prior to our adoption of the 
new pain codes in FY 2007, these cases had historically been assigned 
to CMS DRGs 7 and 8 (Peripheral and Cranial Nerve and Other Nervous 
System Procedure with and without CC, respectively) in MDC 1. Adopting 
the commenters' recommendation would result in the neurostimulator 
cases being assigned to their historic CMS DRGs.
    Our medical officers agreed that cases that use the new pain 
diagnosis codes for central and chronic pain syndrome and chronic pain 
(codes 338.0, 338.21 through 338.29, and 338.4) as a principal 
diagnosis should be assigned to MDC 1. For this reason, in the FY 2008 
IPPS proposed rule, we proposed to assign cases with a principal 
diagnosis of central pain syndrome (code 338.0), chronic pain due to 
trauma (code 338.21), chronic post-thoracotomy pain (code 338.22), 
other chronic postoperative pain (code 338.28), other chronic pain 
(code 338.29), or chronic pain syndrome (code 338.4) to MDC 1, although 
we explained that we planned to monitor their use and may reassign them 
if needed.
    Comment: Several commenters supported our proposal to assign 
diagnosis codes for central and chronic pain syndrome and chronic pain 
as a principal diagnosis to MDC 1. One commenter stated that this 
proposal recognizes the fundamentally neurologic nature of these cases.
    Response: We appreciate the support of the commenters. Accordingly, 
in this final rule with comment period, we are adding diagnosis codes 
338.0, 338.21, 338.22, 338.28, 338.29, and 338.4 when assigned as a 
principal diagnosis to MDC 1.
b. Intracranial Stents
    Effective October 1, 2004, the ICD-9-CM Coordination and 
Maintenance Committee created procedure code 00.62 (Percutaneous 
angioplasty or atherectomy of intracranial vessel(s)). At the same 
time, we created code 00.65 (Percutaneous insertion of intracranial 
vascular stent(s)). It is our customary practice to assign new codes to 
the same DRG as their predecessor codes. The service described by code 
00.62 was removed from code 39.50 (Angioplasty or atherectomy of other 
noncoronary vessel(s)), which is assigned to CMS DRG 533 (Extracranial 
Procedures with CC) and CMS-DRG 534 (Extracranial Procedures without 
CC) (MS-DRGs 37, 38, and 39 (Extracranial Procedures with MCC, with CC, 
and without CC/MCC, respectively, in this final rule with comment 
period) when the patient has a principal diagnosis in MDC 1. Therefore, 
we assigned code 00.62 to CMS DRGs 533 and 534 in MDC 1 beginning in FY 
2005. In addition, we made code 00.65 a non-O.R. procedure for DRG 
assignment. We also assigned code 00.62 to the Non-Covered Procedure 
edit of the MCE, as Medicare had a national non-coverage determination 
for intracranial angioplasty and atherectomy with stenting.
    Effective November 6, 2006, Medicare covers percutaneous 
transluminal angioplasty (PTA) and stenting of intracranial arteries 
for the treatment of

[[Page 47221]]

cerebral artery stenosis in cases in which stenosis is 50 percent or 
greater in patients with intracranial atherosclerotic disease when 
furnished in accordance with FDA-approved protocols governing Category 
B Investigational Device Exemption (IDE) clinical trials. CMS 
determined that coverage of intracranial PTA and stenting is reasonable 
and necessary under these circumstances. All other indications for PTA 
without stenting to treat obstructive lesions of the vertebral and 
cerebral arteries remain noncovered. This decision can be found online 
in the CMS Coverage Manual (Publication 100.3): http://www.cms.hhs.gov/
Manuals/IOM/itemdetail.asp at section 20.7.B.5.
    A manufacturer recently met with CMS to request that code 00.62 be 
reassigned to CMS DRGs 1 and 2 (Craniotomy Age > 17 with and without 
CC, respectively) (MS-DRGs 025 (Craniotomy and Endovascular 
Intracranial Procedures with MCC), 026 (Craniotomy and Endovascular 
Intracranial Procedures with CC), and 027 (Craniotomy and Endovascular 
Intracranial Procedures without CC/MCC) in this final rule with comment 
period) and CMS-DRG 543 (Craniotomy with Major Device Implant or Acute 
Complex Central Nervous System Principal Diagnosis) (MS-DRGs 023 and 
024 (Craniotomy with Major Device Implant or Acute Complex Central 
Nervous System Principal Diagnosis with MCC and without MCC, 
respectively, in this final rule with comment period). The manufacturer 
noted that other similar endovascular intracranial procedures that 
treat a cerebrovascular blockage are currently assigned to the 
craniotomy CMS DRGs. These endovascular-approach cases already assigned 
to the craniotomy CMS DRGs are identified by procedure codes 39.72 
(Endovascular repair or occlusion of head and neck vessels), 39.74 
(Endovascular removal of obstruction from head and neck vessel(s)), and 
39.79 (Other endovascular repair (of aneurysm) of other vessels). Under 
the MS-DRGs in the FY 2008 IPPS proposed rule, we proposed the 
assignment of procedure codes 39.72, 39.74, and 39.79 to MS-DRGs 025, 
026, and 027 and MS-DRGs 023 and 024. Although we have concerns about 
the assignment of additional endovascular procedures to an open 
surgical DRG, we agreed that there is clinical consistency between 
procedure codes 39.72, 39.74, and 39.79 and procedure code 00.62. For 
this reason, we agreed that procedure code 00.62 should be assigned to 
MS-DRGs 025, 026, and 027, and MS-DRGs 023 and 024, which are divided 
by the presence or absence of specific CCs.
    In order to assure appropriate DRG assignment as described above, 
we proposed to make conforming changes to the MCE by removing code 
00.62 from the Non-Covered Procedure edit. However, as intracranial PTA 
is only covered when performed in conjunction with insertion of a 
stent, we proposed to redefine the edit by specifying that code 00.62 
must be accompanied by code 00.65 (Percutaneous insertion of 
intracranial vascular stent(s)). Should code 00.65 not be reported on 
the claim, the case would fail the MCE edit. For a full discussion of 
this change, we refer readers to the MCE discussion in section II.F.6. 
of the preamble of this final rule with comment period.
    Although we proposed to assign endovascular intracranial procedures 
to the same MS-DRGs as craniotomy, we remained concerned that 
endovascular intracranial procedures are clinically different than open 
craniotomy surgical procedures and may have very different resource 
requirements. At the current time, there are an insufficient number of 
cases to warrant creation of a separate base DRG for endovascular 
intracranial procedures. However, as we indicated in the proposed rule, 
we intend to revisit the assignment of intracranial endovascular 
procedures at a later date when more data are available to analyze 
these cases.
    Comment: Several commenters supported the proposal to assign 
endovascular procedure codes to open surgical DRGs. One commenter 
commended CMS for the proposal and stated that the reassignment places 
these cases in DRGs of more appropriate clinical and resource 
homogeneity (than their previous assignments to the extracranial 
procedure DRGs).
    Response: We continue to have reservations about the classification 
of open craniotomy surgeries and endovascular cranial procedures within 
the same DRGs. However, we note that there is clinical consistency 
between procedure codes 39.72, 39.74, 39.79 (endovascular procedures on 
the head and neck), which are assigned to open surgical DRGs, and code 
00.62 (an intracranial endovascular procedure). We will continue to 
monitor these DRGs for uniformity both from a clinical as well as a 
resource-consumption standpoint as more data become available.
    In this final rule with comment period, for FY 2008, we are 
assigning code 00.62 to MS-DRGs 25, 26, and 27 as well as MS-DRGs 23 
and 24, as we proposed and describe above. We note that the claims 
containing code 00.62 must be accompanied by code 00.65 in order to 
qualify as a covered procedure. As previously stated, the lack of code 
00.65 on the claim will cause the claim to fail the MCE edit, and the 
claim will be denied.
3. MDC 3 (Diseases and Disorders of the Ear, Nose, Mouth, and Throat)--
Cochlear Implants
    Cochlear implants were first covered by Medicare in 1986 and were 
assigned to CMS DRG 49 (Major Head and Neck Procedures) in MDC 3 
(Diseases and Disorders of the Ear, Nose, Mouth, and Throat). CMS DRG 
49 is the highest weighted DRG in that MDC. However, two manufacturers 
of cochlear implants contend that this DRG assignment is clinically and 
economically inappropriate and have requested that cochlear implant 
cases be reassigned from CMS DRG 49 to CMS DRG 543 (Craniotomy with 
Major Device Implant or Acute Complex Central Nervous System Principal 
Diagnosis).
    The manufacturers stated that procedures assigned to CMS DRG 49 are 
performed mostly for diseases such as head and neck cancers, while 
procedures in CMS DRG 543 include operations on and inside the skull 
and implantation of complex devices, including intracranial 
neurostimulators. The manufacturers described the cochlear implant 
procedure as requiring incisions behind the ear to remove a section of 
the temporal bone, followed by microscopic neurotologic surgery under 
general anesthesia, and is typically completed in 2 to 4 hours to 
restore hearing to the profoundly deaf. For these reasons, these 
manufacturers believe cochlear implant procedures are similar to open 
craniotomies.
    Based on their analysis of the FY 2005 MedPAR data, the 
manufacturers identified a total of 139 cochlear implant cases using 
ICD-9-CM procedure codes 20.96 (Implantation or replacement of cochlear 
prosthetic device NOS), 20.97 (Implantation or replacement of cochlear 
prosthetic device, single channel), and 20.98 (Implantation or 
replacement of cochlear prosthetic device, multiple channel). The 
manufacturers reported 121 out of 139 cochlear implant cases were 
assigned to CMS DRG 49 with average standardized charges of 
approximately $58,078.
    When we reviewed the FY 2006 MedPAR data, we identified 104 
cochlear implant cases assigned to CMS DRG 49. In the MS-DRGs in the FY 
2008 IPPS proposed rule, CMS-DRG 49 is subdivided into two severity 
levels: MS-DRG 129 (Major Head and Neck

[[Page 47222]]

Procedures with CC or MCC) and MS DRG 130 (Major Head and Neck 
Procedures without CC). The following table displays our results:

------------------------------------------------------------------------
                                                  Average
              MS-DRG                Number of    length of     Average
                                      cases         stay       charges
------------------------------------------------------------------------
MS-DRG 130--All cases............        1,095         3.04      $23,928
MS-DRG 130--Code 20.96 cases only           38         1.63       51,740
MS-DRG 130--Code 20.97 cases only            2         1.50       38,855
MS-DRG 130--Code 20.98 cases only           45         1.24       50,219
MS-DRG 129--All cases............        1,244         5.35       34,169
MS-DRG 129--Code 20.96 cases only           10         2.70       81,351
MS-DRG 129--Code 20.97 cases only            1         5.00       95,441
MS-DRG 129--Code 20.98 cases only            8         3.13       53.510
------------------------------------------------------------------------

    Under the proposed MS-DRGs, 19 out of 104 cochlear implant cases 
are assigned to MS-DRG 129 based on the secondary diagnosis of the 
patient. The 85 remaining cochlear implant cases do not have a CC or 
MCC and were proposed to be assigned to MS-DRG 130, absent further 
changes to the DRG logic.
    The average charges of approximately $54,238 for cochlear implant 
cases are higher than the average charges of approximately $29,375 for 
the other cases in CMS DRG 49. However, the average charges are not as 
high as the average charges of approximately $78,118 for cases assigned 
to CMS DRG 543. Further, our medical advisors do not believe that 
surgery to implant a cochlear implant is clinically similar to an open 
craniotomy in MDC 1 because typically a craniotomy involves removing 
and then replacing a section of the skull in order to perform a 
procedure on or within the brain, whereas a cochlear implant involves 
drilling a hole in the mastoid bone in order to insert the implant into 
the inner ear.
    We have been unable to address this issue under the current DRGs 
because there are not enough inpatient cochlear implant cases to 
warrant creation of a separate DRG. Although these cases will continue 
to have higher charges than other cases in their assigned DRG, in the 
FY 2008 proposed rule, we proposed to move the cochlear implant cases 
to the higher DRG severity level within CMS DRG-49. As part of this 
proposal, we indicated that we would redefine MS-DRG 129 as ``Major 
Head and Neck Procedures with CC or MCC or Major Device.'' The presence 
of a major head and neck procedure with a CC or MCC or major device 
would assign the case to the higher severity level within CMS-DRG 49.
    Comment: Some commenters supported the proposed reassignment of 
cochlear implant cases to MS-DRG 129.
    Response: We appreciate the commenters' support for the proposed 
MS-DRG assignment for these cases.
    Comment: Two commenters expressed appreciation for CMS's 
recognition of the payment issues facing cochlear implants by proposing 
to classify these cases to MS-DRG 129. However, one of the commenters 
stated that, even with the proposed reassignment, the costs of these 
cases are nearly 60 percent higher than all cases within MS-DRG 129.
    The commenters contended that these procedures should be assigned 
to MS-DRG 24 (Craniotomy with Major Device Implant or Acute Complex 
Central Nervous System Principal Diagnosis with MCC). They pointed out 
that cases that have been assigned to DRG 543 in the CMS-DRGs are 
assigned to MS-DRGs 23 and 24 (Craniotomy with Major Device Implant or 
Acute Complex Central Nervous System Principal Diagnosis with and 
without MCC) in the MS-DRGs. The commenters stated that cochlear 
implant procedures are clinically and resource coherent with other 
craniotomy procedures such as Kinetra[supreg] dual array deep brain 
stimulator and should be assigned to MS-DRG 024. One of the commenters 
indicated that the principal diagnosis codes for hearing loss are 
currently assigned to MDC 3, not MDC 1. They believed that this MDC 
assignment prevents cochlear implants from being assigned to MS-DRG 
024. The commenters suggested that sensorineural hearing loss (codes 
389.10-389.18) is a nervous system disorder that should be assigned to 
MDC 1. One commenter stated that cochlear implantation cases should be 
assigned as a pre-MDC based on complexity and should be assigned to a 
separate or different DRG that involves implantation of a complex 
neural stimulation device. Another commenter recommended that CMS 
develop a third level of complexity for major head and neck procedures 
and assign cochlear implants to the highest severity level.
    Response: Our medical advisors do not believe that surgery to 
implant a cochlear implant is clinically similar to an open craniotomy 
in MDC 1. Typically, a craniotomy involves removing and then replacing 
a section of the skull in order to perform a procedure on or within the 
brain, whereas a cochlear implant involves entering the mastoid bone, 
not the intracranial space.
    With regard to the MDC assignment, we believe that sensorineural 
hearing loss is due to a defect in the inner ear or the acoustic nerve 
and is a disorder of the ear that is appropriately assigned to MDC 3.
    As the low volume of cochlear implant cases does not justify a new 
MS-DRG, the current base DRG assignment for cochlear implants is 
appropriate. In addition, MS-DRG 129 does not meet the criteria for a 
three-level split. Therefore, we do not believe there is a better 
alternative to the policy we proposed. Accordingly, in this final rule 
with comment period, we are assigning all cochlear implant cases to MS-
DRG 129. MS-DRG 129 is redefined as ``Major Head and Neck Procedures 
with CC or MCC or Major Device.''
4. MDC 8 (Diseases and Disorders of the Musculoskeletal System and 
Connective Tissue)
a. Hip and Knee Replacements
    In the FY 2006 IPPS final rule (70 FR 47303), we deleted DRG 209 
(Major Joint and Limb Reattachment Procedures of Lower Extremity) and 
created two new DRGs: 544 (Major Joint Replacement or Reattachment of 
Lower Extremity) and 545 (Revision of Hip or Knee Replacement). The two 
new DRGs were created because revisions of joint replacement procedures 
are significantly more resource intensive than original hip and knee 
replacement procedures. DRG 544 includes the following procedure code 
assignments:
     81.51, Total hip replacement
     81.52, Partial hip replacement
     81.54, Total knee replacement

[[Page 47223]]

     81.56, Total ankle replacement
     84.26, Foot reattachment
     84.27, Lower leg or ankle reattachment
     84.28, Thigh reattachment
    DRG 545 includes the following procedure code assignments:
     00.70, Revision of hip replacement, both acetabular and 
femoral components
     00.71, Revision of hip replacement, acetabular component
     00.72, Revision of hip replacement, femoral component
     00.73, Revision of hip replacement, acetabular liner and/
or femoral head only
     00.80, Revision of knee replacement, total (all 
components)
     00.81, Revision of knee replacement, tibial component
     00.82, Revision of knee replacement, femoral component
     00.83, Revision of knee replacement, patellar component
     00.84, Revision of knee replacement, tibial insert (liner)
     81.53, Revision of hip replacement, not otherwise 
specified
     81.55, Revision of knee replacement, not otherwise 
specified
    Further, we created a number of new ICD-9-CM procedure codes 
effective October 1, 2005, that better distinguish the many different 
types of joint replacement procedures that are currently being 
performed. In the FY 2006 IPPS final rule (70 FR 47305), we indicated a 
commenter had requested that, once we receive claims data using the new 
procedure codes, we closely examine data from the use of the codes 
under the two new DRGs to determine if future additional DRG 
modifications are needed.
    Further, the American Association of Hip & Knee Surgeons (AAHKS) 
recommended that we make further refinements to the DRGs for knee and 
hip arthroplasty procedures. AAHKS previously presented data to CMS on 
the important differences in clinical characteristics and resource 
utilization between primary and revision total joint arthroplasty 
procedures. AAHKS stated that CMS' decision to create a separate DRG 
for revision of total joint arthroplasty (TJA) in October 2005 resulted 
in more equitable reimbursement for hospitals that perform a 
disproportionate share of complex revision of TJA procedures, 
recognizing the higher resource utilization associated with these 
cases. AAHKS stated that this important payment policy change led to 
increased access to care for patients with failed total joint 
arthroplasties, and ensured that high volume TJA centers could continue 
to provide a high standard of care for these challenging patients.
    AAHKS further stated that the addition of new, more descriptive 
ICD-9-CM diagnosis and procedure codes for TJA in October 2005 gave it 
the opportunity to further analyze differences in clinical 
characteristics and resource intensity among TJA patients and 
procedures. Inclusive of the preparatory work to submit its 
recommendations, the AAHKS compiled, analyzed, and reviewed detailed 
clinical and resource utilization data from over 6,000 primary and 
revision TJA procedure codes from 4 high volume joint arthroplasty 
centers located within different geographic regions of the United 
States: University of California, San Francisco, CA; Mayo Clinic, 
Rochester, MN; Massachusetts General Hospital, Boston, MA; and the 
Hospital for Special Surgery, New York, NY. Based on its analysis, 
AAHKS recommended that CMS examine Medicare claims data and consider 
the creation of separate DRGs for total hip and total knee arthroplasty 
procedures. CMS DRG 545 currently contains revisions of both hip and 
knee replacement procedures. AAHKS stated that based on the differences 
between patient characteristics, procedure characteristics, resource 
utilization, and procedure code payment rates between total hip and 
total knee replacements, separate DRGs were warranted. Furthermore, 
AAHKS recommended that CMS create separate base DRGs for routine versus 
complex joint revision or replacement procedures as shown below.

Routine Hip Replacements

     00.73, Revision of hip replacement, acetabular liner and/
or femoral heal only
     00.85, Resurfacing hip, total, acetabulum and femoral head
     00.86, Resurfacing hip, partial, femoral head
     00.87, Resurfacing hip, partial, acetabulum
     81.51, Total hip replacement
     81.52, Partial hip replacement
     81.53, Revision of hip replacement, not otherwise 
specified

Complex Hip Replacements

     00.70, Revision of hip replacement, both acetabular and 
femoral components
     00.71, Revision of hip replacement, acetabular component
     00.72, Revision of hip replacement, femoral component

Routine Knee Replacements and Ankle Procedures

     00.83, Revision of knee replacement, patellar component
     00.84, Revision of knee replacement, tibial insert (liner)
     81.54, Revision of knee replacement, not otherwise 
specified
     81.55, Revision of knee replacement, not otherwise 
specified
     81.56, Total ankle replacement

Complex Knee Replacements and Other Reattachments

     00.80, Revision of knee replacement, total (all 
components)
     00.81, Revision of knee replacement, tibial component
     00.82, Revision of knee replacement, femoral component
     84.26, Foot reattachment
     84.27, Lower leg or ankle reattachment
     84.28, Thigh reattachment
    AAHKS also recommended the continuation of CMS DRG 471 (Bilateral 
or Multiple Major Joint Procedures of Lower Extremity) without 
modifications. CMS DRG 471 includes any combination of two or more of 
the following procedure codes:
     00.70, Revision of hip replacement, both acetabular and 
femoral components
     00.80, Revision of knee replacement, total (all 
components)
     00.85, Resurfacing hip, total, acetabulum and femoral head
     00.86, Resurfacing hip, partial, femoral head
     00.87, Resurfacing hip, partial, acetabulum
     81.51, Total hip replacement
     81.52, Partial hip replacement
     81.54, Total knee replacement
     81.56, Total ankle replacement
    As discussed in section II.C. of the preamble of this final rule 
with comment period, we proposed, and are adopting in this final rule 
with comment period, MS-DRGs to better recognize severity of illness 
for FY 2008. The MS-DRGs include two new severity of illness levels 
under the current base DRG 544. We also proposed to add three new 
severity of illness levels to the base DRG for Revision of Hip or Knee 
Replacement (currently DRG 545). The new MS-DRGs are as follows:
     MS-DRG 466 (Revision of Hip or Knee Replacement with MCC)
     MS-DRG 467 (Revision of Hip or Knee Replacement with CC)
     MS-DRG 468 (Revision of Hip or Knee Replacement without 
CC/MCC)
     MS-DRG 469 (Major Joint Replacement or Reattachment of 
Lower Extremity with MCC)

[[Page 47224]]

     MS-DRG 470 (Major Joint Replacement or Reattachment of 
Lower Extremity without MCC)
    We found that the MS-DRGs greatly improved our ability to identify 
joint procedures with higher resource costs. The following table 
indicates the average charges for each new MS-DRG for the joint 
procedures.

     MS-DRGs That Replace DRGs 544 and 535 With New Severity Levels
------------------------------------------------------------------------
                                                  Average
              MS-DRG                Number of    length of     Average
                                      cases         stay       charges
------------------------------------------------------------------------
MS-DRG 466.......................        3,886         9.55   $69,649.08
MS-DRG 467.......................       10,078         6.06    48,575.01
MS-DRG 468.......................       26,718         4.06    38,720.28
MS-DRG 483.......................       28,211         8.46    53,676.09
MS-DRG 484.......................      390,344         4.03    33,465.85
------------------------------------------------------------------------

    AAHKS analyzed Medicare data under the CMS DRG system and was 
unaware of how its analysis would change under the proposed MS-DRGs. 
Under the CMS DRGs, the AAHKS recommendation would replace 2 DRGs with 
4 new ones. However, under the proposed MS- DRGs, the AAHKS 
recommendation would result in 5 DRGs becoming 12. Because AAHKS is 
recommending four new joint replacement DRGs (two for knees and two for 
hips), each would need to be subdivided into severity levels under our 
proposed MS-DRG system. Therefore, the four new joint DRGs could be 
subdivided into three levels each, leading to 12 new DRGs. For the 
proposed rule, we indicated that the changes we proposed to adopt are 
sufficiently better for recognizing severity of illness among the hip 
and knee replacement cases. We did not believe that there would be 
significant improvements in the proposed MS-DRGs' recognition of 
severity of illness from creating an additional 7 DRGs. However, we 
acknowledged the valuable assistance the AAHKS had provided to CMS in 
creating the new joint replacement procedure codes and modifying the 
joint replacement DRGs beginning in FY 2006. These efforts greatly 
improved our ability to categorize significantly different groups of 
patients according to severity of illness. In the proposed rule, we 
welcomed comments from AAHKS on whether the proposed MS-DRGs recognize 
patient complexity and severity of illness in the hip and knee 
replacement DRGs consistent with the concerns it expressed to us in 
previous comments. We also welcomed public comments from others on 
whether the proposed changes to the hip and knee replacement DRGs 
better recognize severity of illness and complexity of these operations 
in the Medicare patient population.
    Comment: Two commenters supported CMSs' efforts to refine the DRG 
system to better identify costs associated with different joint 
procedures. The commenters encouraged CMS to continue working with the 
orthopedic community, including AAHKS, to monitor the need for 
additional new DRGs. The commenters stated that proposed MS-DRGs 466 
through 470 are a good first step. However, they stated that CMS should 
continue to evaluate the data for these procedures and consider 
additional refinements to the MS-DRGs, including the need for 
additional severity levels.
    Response: We agree that MS-DRGs better identify resource costs for 
joint procedures than do the CMS DRGs. The AAHKS and others are welcome 
to suggest additional refinements to us if they believe further 
improvements are needed.
    Comment: One commenter (AAHKS) stated that it was pleased that CMS 
decided to recognize both surgical complexity and medical severity of 
illness in the MS-DRGs. The commenter stated that MS-DRGs are more 
reflective of procedural complexity than the CS-DRGs proposed last 
year. In addition, the commenter believed that the process is fairly 
straightforward, making it easier to understand, with the grouping 
logic available in the public domain. However, the commenter raised 
several concerns about the proposed joint replacement and revision MS-
DRGs. AAHKS stated that its data suggest that all three base DRGs 
(primary replacement, revision of major joint replacement, and 
bilateral joint replacement) should be separated into three severity 
levels (that is, MCC, CC, and non-CC). We proposed three severity 
levels for revision of hip and knee replacement (MS-DRGs 466, 467, and 
468). The commenter agreed with this 3-level subdivision.
    The commenter recommended that the base DRG for the proposed two 
severity subdivision MS-DRGs for major joint replacement or 
reattachment of lower extremity with and without CC/MCC (MS-DRGs 483 
and 484) be subdivided into three severity levels, as was the case for 
the revision of hip and knee replacement MS-DRGs. The commenter also 
recommended that the two severity subdivision MS-DRGs for bilateral or 
multiple major joint procedures of lower extremity with and without MCC 
(MS-DRGs 461 and 462) be subdivided three ways for this base DRG. The 
commenter acknowledged that the three-way split would not meet all five 
of the criteria for establishing a subgroup, and stated that these 
criteria were too restrictive, lack face validity, and create perverse 
admission selection incentives for hospitals by significantly 
overpaying for cases without a CC and underpaying for cases with a CC. 
The commenter recommended that the existing five criteria be modified 
for low volume subgroups to assure materiality. For higher volume MS-
DRG subgroups, the commenter recommended that two other criteria be 
considered, particularly for nonemergency, elective admissions:
     Is the per-case underpayment amount significant enough to 
affect admission vs. referral decisions on a case-by-case basis?
     Is the total level of underpayments sufficient to 
encourage systematic admission vs. referral policies, procedures, and 
marketing strategies?
    The commenter also recommended refining the five existing criteria 
for MCC/CC without subgroups as follows:
     Create subgroups if they meet the five existing criteria, 
with cost difference between subgroups ($1,350) substituted for charge 
difference between subgroups ($4,000);
     If a proposed subgroup meets criteria number 2 and 3 (at 
least 5 percent and at least 500 cases) but fails one of the others, 
then create the subgroup if either of the following criteria are met:
     At least $1,000 cost difference per case between 
subgroups; or
     At least $1 million overall cost should be shifted to 
cases with a CC (or

[[Page 47225]]

MCC) within the base DRG for payment weight calculations.
    Response: In section II.B.3. of this preamble, we respond to the 
recommendation that we modify our five criteria for creating severity 
subgroups and state we do not believe it is appropriate to do so at 
this time. At this time, we believe the criteria we established to 
create subdivisions within a base DRG are reasonable and establish the 
appropriate balance between better recognition of severity of illness, 
sufficient differences between the groups, and a reasonable number of 
cases in each subgroup. However, we may consider further modifications 
to the criteria at a later date once we have had some experience with 
MS-DRGs created using the proposed criteria. We examined data for the 
base DRGs for MS-DRGs 461 and 462 (Bilateral or Multiple Major Joint 
Procedures of Lower Extremity with MCC and without MCC, respectively) 
as well as the base DRGs for MS-DRGs 469 and 470 (Major Joint 
Replacement or Reattachment of Lower Extremity with CC and without CC, 
respectively) for the proposed rule.
    Our data did not support creating additional subdivisions based on 
the criteria we proposed.
    Comment: Another commenter (AAHKS) continued to support the 
separation of routine and complex joint procedures. The commenter 
believed that certain joint replacement procedures have significantly 
lower average charges than do other joint replacements. The commenter's 
data suggest that more routine joint replacements are associated with 
substantially less resource utilization than other more complex 
revision procedures. The commenter stated that leaving these procedures 
in the revision MS-DRGs results in substantial overpayment for these 
relatively simple, less costly revision procedures, which in turn 
results in a relative underpayment for the more complex revision 
procedures.
    Response: We examined data on this issue and identified two 
procedure codes for partial knee revisions that had significantly lower 
average charges than did other joint revisions. The two codes are as 
follows:
     00.83 Revision of knee replacement, patellar component
     00.84 Revision of total knee replacement, tibial insert 
(liner)
    The following table illustrates our findings for MS-DRG 466 
(Revision of Hip or Knee Replacement with MCC), MS-DRG 467 (Revision of 
Hip or Knee replacement with CC), and MS-DRG 468 (Revision of Hip or 
Knee Replacement without CC/MCC):

------------------------------------------------------------------------
                                                  Average
              MS-DRG                Number of    length of     Average
                                      cases         stay       charges
------------------------------------------------------------------------
MS-DRG 466--All cases............        3,886         9.55   $69,649.08
MS-DRG 466 with code 00.83 or              258        10.53    54,141.72
 00.84 only......................
MS-DRG 467--All cases............       10,078         6.06    48,575.01
MS-DRG 467 with code 00.83 or              955         5.47    31,191.04
 00.84 only......................
MS-DRG 468--All cases............       26,718         4.06    38,720.28
MS-DRG 468 with code 00.83 or            2,718         3.45    22,799.31
 00.84 only......................
------------------------------------------------------------------------

    Cases with codes 00.83 and 00.84 have significantly lower charges 
than do other cases in these DRGs. For cases in MS-DRG 466, those with 
codes 00.83 or 00.84 have average charges of $54,141.72 compared to 
average charges of $69,646.08 for all cases within the DRG, a 
difference of $15,507.36. There is a difference of $17,383.97 for MS-
DRG 467 and $15,920.97 for MS-DRG 468. The data suggest that these less 
complex partial knee revisions are less resource intensive than other 
cases assigned to MS-DRGs 466, 467, or 468. We examined other 
orthopedic DRGs to which these two codes could be assigned. As can be 
seen in the table below, these cases have very similar average charges 
to those in MS-DRG 485 (Knee Procedures with Principal Diagnosis of 
Infection with MCC), MS-DRG 486 (Knee Procedures with Principal 
Diagnosis of Infection with CC), MS-DRG 487 (Knee Procedures with 
Principal Diagnosis of Infection without CC), MS-DRG 488 (Knee 
Procedures without Principal Diagnosis of Infection with CC or MCC), 
and MS-DRG 489 (Knee Procedures without Principal Diagnosis of 
Infection without CC).

------------------------------------------------------------------------
                                                  Average
              MS-DRG                Number of    length of     Average
                                      cases         stay       charges
------------------------------------------------------------------------
MS-DRG 485--All cases............          916        12.69   $59,722.69
MS-DRG 485 with code 00.83 or              174        11.71    57,649.86
 00.84 only......................
MS-DRG 486--All cases............        1,461         8.39    37,730.19
MS-DRG 486 with code 00.83 or              336         7.73    37,315.10
 00.84 only......................
MS-DRG 487--All cases............        1,139         5.84    27,184.41
MS-DRG 487 with code 00.83 or              262         7.73    29,142.35
 00.84 only......................
MS-DRG 488--All cases............        1,462         5.66    30,073.21
MS-DRG 488 with code 00.83 or              703         4.24    30,138.06
 00.84 only......................
MS-DRG 489--All cases............        3,687         3.11    18,865.79
MS-DRG 489 with code 00.83 or            2,456         3.18    22,122.64
 00.84 only......................
------------------------------------------------------------------------

    Given the very similar resource requirements of MS-DRG 485 and the 
fact that these DRGs also contain knee procedures, we will move codes 
00.83 and 00.84 out of MS-DRGs 466, 467, and 468 and into MS-DRGs 485, 
486, 487, 488, and 489. We will continue to monitor the revision DRGs 
to determine if additional modifications are needed.
    Comment: One commenter expressed concern about the grouper logic 
for assigning cases to MS-DRG 471 (Bilateral or Multiple Major Joint 
Procedures of Lower Extremity (current CMS-DRG 471)). Specifically, the 
commenter stated that the following bilateral joint replacements should 
be,

[[Page 47226]]

but are not, assigned to MS-DRGs 461 and 462.
     A patient receives identical acetabular revisions of both 
hips (00.71 and 00.71).
     A patient receives a total revision of one hip (00.70) and 
an acetabular revision of the other hip (00.71).
     A patient receives both a total hip replacement (81.51) 
and a total knee replacement (81.54).
     A patient receives both a total revision of one hip 
(00.70) and a total replacement of the other hip (81.51).
    Response: We addressed this issue in the FY 2007 final rule and do 
not believe additional modifications are needed. We are providing the 
following summary of the previous action. After publication of the FY 
2006 IPPS final rule, a number of hospitals and coding personnel 
advised us that the DRG logic for CMS DRG 471 (Bilateral or Multiple 
Major Joint Procedures of Lower Extremity), which utilizes the new and 
revised hip and knee procedure codes under CMS DRGs 544 and 545, also 
includes codes that describe procedures that are not bilateral or that 
do not involve multiple major joints. CMS DRG 471 was developed to 
include cases where major joint procedures such as revisions or 
replacements were performed either bilaterally or on two joints of one 
lower extremity. We changed the logic for CMS DRG 471 in FY 2006 for 
the first time when we added the new and revised codes. The commenters 
indicated that, by adding the more detailed codes that do not include 
total revisions or replacements to the list of major joint procedures 
to CMS DRG 471, we were assigning cases to CMS DRG 471 that did not 
have bilateral or multiple joint procedures. For example, when a 
hospital reported a code for revision of the tibial component (code 
00.81) and patellar component of the right knee (code 00.83), the FY 
2006 DRG logic assigned the case to CMS DRG 471. The commenters 
indicated that this code assignment was incorrect because only one 
joint has undergone surgery, but two components were used. One 
commenter indicated that ICD-9-CM did not identify left/right 
laterality. Therefore, it was difficult to use the current coding 
structure to determine if procedures were performed on the same leg or 
on both legs. The commenters raised concern about whether CMS intended 
to pay hospitals using CMS DRG 471 for procedures performed on one 
joint. The commenters indicated that the DRG assignments for these 
codes would also make future data analysis misleading. The commenters 
recommended removing codes from CMS DRG 471 that do not specifically 
identify bilateral or multiple joint procedures so that it would only 
include cases involving the more resource intensive cases of bilateral 
or multiple total joint replacements and revisions.
    We agreed that the new and revised joint procedure codes should not 
be assigned to CMS DRG 471 unless they include bilateral and multiple 
joints. Therefore, in the FY 2007 IPPS final rule, we removed the 
following codes from CMS DRG 471 that did not identify bilateral and 
multiple joint revisions or replacements:
     00.71, Revision of hip replacement, acetabular component
     00.72, Revision of hip replacement, femoral component
     00.73, Revision of hip replacement, acetabular liner and/
or femoral head only
     00.81, Revision of knee replacement, tibial component
     00.82, Revision of knee replacement, femoral component
     00.83, Revision of knee replacement, patellar component
     00.84, Revision of total knee replacement, tibial insert 
(liner)
     81.53, Revision of hip replacement, not otherwise 
specified
     81.55, Revision of knee replacement, not otherwise 
specified
    DRG 471 contains the following codes:
     00.70, Revision of hip replacement, both acetabular and 
femoral components
     00.80, Revision of knee replacement, total (all 
components)
     00.85, Resurfacing hip, total, acetabulum and femoral head
     00.86, Resurfacing hip, partial, femoral head
     00.87, Resurfacing hip, partial, acetabulum
     81.51, Total hip replacement
     81.52, Partial hip replacement
     81.54, Total knee replacement
     81.56, Total ankle replacement
    As a result of the removal of the identified codes from CMS DRG 471 
in FY 2007, the reporting of one or more of the following hip or knee 
revision codes would be assigned to DRG 545: 00.71, 00.72, 00.73, 
00.81, 00.82, 00.83, 00.84, 81.53, and 81.55. This list included 
partial revisions of the knee and hip as well as unspecified joint 
procedures such as code 81.55 where it was not clear if the revision is 
total or partial.
    Given this historical information of the changes we made in FY 
2007, we will address the current commenter's concerns. The commenter's 
first scenario in which a patient received identical acetabular 
revisions of both hips 00.71 and 00.71 would not be assigned to CMS DRG 
471 (Bilateral or Multiple Major Joint Procedures of Lower Extremity), 
which becomes MS-DRGs 461 and 462. Even though this scenario identified 
revisions to two joints, they were both partial revisions that were 
less resource intensive than full bilateral or multiple joint revisions 
or replacements. In our view, the decision not to assign these cases to 
CMS DRG 471 was consistent with the public comments we received on the 
FY 2007 IPPS rule to ensure that CMS DRG 471 includes only full 
bilateral or multiple joint replacements or revisions. Similarly, the 
second scenario in which a patient receives a total revision of one hip 
(00.70) and a partial acetabular revision of the other hip (00.71) 
would not lead to the assignment of CMS DRG 471 for the same reason. As 
with the first scenario, code 00.71 was not included in CMS DRG 471. 
There was only one total and one partial joint revision in this 
scenario. Again, we believe that our decision not to assign these cases 
to CMS DRG 471 was consistent with the public comments to only include 
bilateral or multiple full revisions or replacements in this DRG. The 
third and fourth scenarios in which a patient received both a total hip 
replacement (81.51) and a total knee replacement (81.54) and another 
patient received both a total revision of one hip (00.70) and a total 
replacement of the other hip (81.51) would be assigned to CMS DRG 471. 
These are either full replacements or revisions on multiple joints. As 
we adopted the same logic to assign cases under the MS-DRGs as under 
the CMS DRGs, only full replacements or revisions of multiple joints 
will be included in MS-DRGs 461 and 462 (the MS-DRG analog to CMS DRG 
471). Therefore, we are not making any revisions to the bilateral or 
multiple major joint procedures of lower extremity DRGs, MS DRG 461 and 
462. The same procedure code DRG logic used in CMS DRG 471 will be 
applied to MS DRGs 461 and 462.
b. Spinal Fusions
    In the FY 2007 IPPS final rule (71 FR 47947), we discussed a 
request that urged CMS to consider applying a severity concept to all 
of the back and spine surgical cases, similar to the approach that was 
used in the FY 2006 final rule in refining the cardiac DRGs with an 
MCV. Specifically, the commenter recommended that the use of spinal 
devices be uniquely identified within the spine DRGs. The commenter's 
suggestion involved the development of 10 new spine DRGs as

[[Page 47227]]

well as additional modifications. One of these modifications included 
revising CMS DRG 546 (Spinal Fusions Except Cervical with Curvature of 
the Spine or Malignancy). The commenter stated CMS DRG 546 did not 
adequately recognize clinical severity or the resource differences 
among spinal fusion patients whose surgeries include fusing multiple 
levels of their spinal vertebrae.
    We agreed with the commenter that it was important to recognize 
severity when classifying groups of patients into specific DRGs. In 
addition, in response to recommendations from MedPAC's March 2005 
Report to Congress, we stated that we were conducting a comprehensive 
analysis of the entire DRG system to determine if we could better 
identify severity of illness. We further stated that until results from 
our analysis were available, it would be premature to implement a 
severity concept for the spine DRGs. Therefore, we did not make any 
adjustments to those DRGs at that time.
    Under the MS-DRGs described in section II.D. of the preamble of the 
proposed rule, we proposed a number of refinements that would better 
recognize severity for FY 2008. The proposed MS-DRGs, which we are 
adopting in this final rule with comment period, included several 
refinements to the spine DRGs. These refinements are described in 
detail below.
    In the FY 2006 IPPS final rule, we noted that there are numerous 
innovations occurring in spinal surgery such as artificial spinal disc 
prostheses, kyphoplasty, vertebroplasty and the use of spine 
decompression devices. As part of our analysis of the DRG system for 
the proposed rule, we did a comprehensive review of the DRGs for spinal 
fusion and other back and neck procedures to determine whether 
additional refinements beyond the proposed MS-DRGs were necessary. We 
studied data from the FY 2006 MedPAR file for the entire group of spine 
DRGs. This group included DRG 496 (Combined Anterior/Posterior Spinal 
Fusion), DRGs 497 and 498 (Spinal Fusion Except Cervical with and 
without CC, respectively), DRGs 499 and 500 (Back and Neck Procedures 
Except Spinal Fusion with and without CC, respectively), DRGs 519 and 
520 (Cervical Spinal Fusion with and without CC, respectively), and DRG 
546 (Spinal Fusion Except Cervical with Curvature of the Spine or 
Malignancy).
    As indicated earlier, we proposed a two or three-way split for each 
of these spine DRGs to better recognize severity of illness, complexity 
of service, and resource utilization. In addition, we examined the 
procedure codes that identify multiple fusion or refusion of the 
vertebrae (codes 81.62 through 81.64) to determine if the data 
supported further refinement when a greater number of vertebrae are 
fused.
    In applying the proposed MS-DRG logic, CMS DRG 497 and 498 were 
collapsed and the result was a split with two severity levels: proposed 
MS-DRG 459 (Spinal Fusion Except Cervical with MCC) and proposed MS-DRG 
460 (Spinal Fusion Except Cervical without MCC). There were a total of 
51,667 cases in proposed MS-DRGs 459 and 460. We identified 288 cases 
where nine or more (T1-S1) vertebrae were fused (code 81.64) that we 
proposed to assign to MS-DRGs 459 and 460. The average charges and 
length of stay for cases in these MS-DRGs were closer to the average 
charges and length of stay for cases in proposed MS-DRGs 456 through 
458 (Spinal Fusion Except Cervical with Curvature of the Spine or 
Malignancy with MCC, with CC, and without CC, respectively). For 
example, in proposed MS-DRG 460, there were 238 cases with an average 
length of stay of 6.20 days and average charges of $110,908 when nine 
or more noncervical (T1-S1) vertebrae are fused. There were an 
additional 50 cases in which nine or more vertebrae were fused in 
proposed MS-DRG 459 with average charges of $171,839. Without any 
further modification to the proposed MS-DRGs, these cases would be 
assigned to proposed MS-DRGs 459 and 460 that have average charges of 
$59,698 and $99,298, respectively. However, we believe that the average 
charges for these cases ($142,871, $95,489, and $77,528, respectively) 
are more comparable to the average charges for cases in proposed MS-
DRGs 456 through 458. We believe these data support assigning cases 
where nine or more noncervical (T1-S1) vertebrae are fused from MS-DRG 
459 and 460 into MS-DRG 456 through 458. The table below represents our 
findings.

------------------------------------------------------------------------
                                                  Average
              MS-DRG                Number of    length of     Average
                                      cases         stay       charges
------------------------------------------------------------------------
MS-DRG 459 (Spinal Fusion Except         3,186        10.10      $99,298
 Cervical with MCC)--All Cases...
MS-DRG 459 (Spinal Fusion Except            50        13.00      171,839
 Cervical with MCC)--Cases with
 Procedure Code 81.64 (Fusion or
 refusion of 9 or more vertebrae)
MS-DRG 460 (Spinal Fusion Except        48,481         4.36       59,698
 Cervical without MCC)--All Cases
MS-DRG 460 (Spinal Fusion Except           238         6.20      110,908
 Cervical without MCC)--Cases
 with Procedure Code 81.64
 (Fusion or refusion of 9 or more
 vertebrae)......................
MS-DRG 456 (Spinal Fusion Except           548        14.79      142,871
 Cervical with Curvature of the
 Spine or Malignancy with MCC)--
 All Cases.......................
MS-DRG 456 (Spinal Fusion Except            61        13.34      170,655
 Cervical with Curvature of the
 Spine or Malignancy with MCC)--
 Cases with Procedure Code 81.64
 (Fusion or refusion of 9 or more
 vertebrae)......................
MS-DRG 457 (Spinal Fusion Except         1,500         8.14       95,489
 Cervical with Curvature of the
 Spine or Malignancy with CC)--
 All Cases.......................
MS-DRG 457 (Spinal Fusion Except           146         8.88      125,722
 Cervical with Curvature of the
 Spine or Malignancy with CC)--
 Cases With Procedure Code 81.64
 (Fusion or refusion of 9 or more
 vertebrae)......................
MS-DRG 458 (Spinal Fusion Except         1,340         4.58       77,528
 Cervical with Curvature of the
 Spine or Malignancy without CC)--
 All Cases.......................
MS-DRG 458 (Spinal Fusion Except            81         6.21      123,823
 Cervical with Curvature of the
 Spine or Malignancy without CC)--
 Cases with Procedure Code 81.64
 (Fusion or refusion of 9 or more
 vertebrae)......................
------------------------------------------------------------------------

    Therefore, we proposed to move those cases that include fusing or 
refusing nine or more noncervical (T1-S1) vertebrae from MS-DRGs 459 
and 460 into MS DRGs 456 though 458. This modification would include 
revising the MS-DRG title to reflect the fusion or refusion of nine or 
more noncervical (T1-S1) vertebrae. The revised titles for proposed MS-
DRGs 456 through 458 would be as follows:

[[Page 47228]]

     MS-DRG 456 (Spinal Fusion Except Cervical with Spinal 
Curvature or Malignancy or 9+ Fusions with MCC)
     MS-DRG 457 (Spinal Fusion Except Cervical with Spinal 
Curvature or Malignancy or 9+ Fusions with CC)
     MS-DRG 458 (Spinal Fusion Except Cervical with Spinal 
Curvature or Malignancy or 9+ Fusions without CC/MCC)
    In the FY 2008 IPPS proposed rule, we invited public comment on 
this topic as well as on the additional changes we proposed to the 
spine MS-DRGs discussed below.
    Further analysis demonstrated that spinal fusion cases with a 
principal diagnosis of tuberculosis or osteomyelitis also have higher 
average charges than other cases in CMS DRG 497 (MS-DRGs 459 and 460 in 
this final rule with comment period) that were more similar to the 
cases assigned to CMS DRG 546 (MS-DRGs 456 through 458 in this final 
rule with comment period). Although the volume of cases is relatively 
low, the data show very high average charges for these patients. The 
following tables display our results:

------------------------------------------------------------------------
                                                  Average
             MS-DRGs                Number of    length of     Average
                                      cases         stay       charges
------------------------------------------------------------------------
MS-DRG 459 (Spinal Fusion Except         3,186        10.10      $99,298
 Cervical with MCC)..............
MS-DRG 460 (Spinal Fusion Except        48,481         4.36       59,698
 Cervical without MCC)...........
MS-DRG 456 (Spinal Fusion Except           548        14.79      142,870
 Cervical with Spinal Curvature
 or Malignancy or 9+ Fusions with
 MCC)............................
MS-DRG 457 (Spinal Fusion Except         1,500         8.14       95,489
 Cervical with Spinal Curvature
 or Malignancy or 9+ Fusions with
 CC).............................
MS-DRG 458 (Spinal Fusion Except         1,340         4.58       77,528
 Cervical with Spinal Curvature
 or Malignancy or 9+ Fusions
 without CC/MCC).................
------------------------------------------------------------------------


                     Tuberculosis and Osteomyelitis
------------------------------------------------------------------------
                                                  Average
       Principal diagnosis          Number of    length of     Average
                                      cases         stay       charges
------------------------------------------------------------------------
Codes 015.02, 015.04, 015.05,              194         24.8     $128,073
 730.08, 730.18 and 730.28.......
------------------------------------------------------------------------

    For this reason, we proposed to add the following diagnoses to the 
principal diagnosis list for MS-DRGs 456 through 458:
     015.02, Tuberculosis of bones and joints, vertebral 
column, bacteriological or histological examination unknown (at 
present)
     015.04, Tuberculosis of bones and joints, vertebral 
column, tubercle bacilli not found (in sputum) by microscopy, but found 
by bacterial culture
     015.05, Tuberculosis of bones and joints, vertebral 
column, tubercle bacilli not found by bacteriological examination, but 
tuberculosis confirmed histologically
     730.08, Acute osteomyelitis of other specified sites
     730.18, Chronic osteomyelitis of other specified sites
     730.28, Unspecified osteomyelitis of other specified 
sites.
    For the complete list of principal diagnosis codes that lead to 
assignment of CMS DRG 546 (MS-DRGs 496 through 498 in this final rule 
with comment period), we refer readers to section II.D.4.b. of the 
preamble of the FY 2007 IPPS final rule (71 FR 47947).
    Comment: One commenter expressed support of CMS' refinement of the 
DRGs for spinal procedures, and noted that it had made several 
recommendations in the past. Specifically, this commenter was pleased 
with the refinements to address multiple level procedures such as those 
in proposed MS-DRGs 456-458 (Spinal Fusion Except Cervical with Spinal 
Curvature or Malignancy or 9+ Fusions with MCC/with CC/and without CC/
MCC, respectively), as well as the proposal to add specified diagnoses 
of tuberculosis and osteomyelitis to the list of principal diagnoses 
for MS-DRGs 456-458. The commenter also supported the proposal to move 
cases involving the use of motion-preserving spine devices into the 
higher severity level of MS-DRG 490.
    This commenter suggested that MS-DRG 460 (Spinal Fusion Except 
Cervical without MCC) should include severity levels that distinguish 
with CC and without CC cases. The commenter urged CMS to create a CC 
split for this MS-DRG.
    Response: We appreciate the commenter's support for the refinements 
proposed to the spine DRGs. The data analysis conducted in developing 
the MS-DRGs did not support a CC split for proposed MS-DRG 460. As 
stated in the FY 2008 proposed rule, in order to warrant creation of a 
CC or major CC subgroup within a base MS-DRG, the subgroup had to meet 
all five criteria. We refer readers to the FY 2008 proposed rule (72 FR 
24705) and section II.D.3 of this final rule with comment period for a 
complete listing of the criteria. As stated in the proposed rule, the 
data did support a split for proposed MS-DRG 460 with two severity 
levels of with MCC and without MCC. Therefore, in this final rule with 
comment period we are implementing MS-DRG 460 as final policy.
    Comment: One manufacturer requested that CMS reassign newly created 
procedure code 84.82 (Insertion or replacement of pedicle-based dynamic 
stabilization device(s)), effective October 1, 2007, from proposed MS-
DRG 490 to MS-DRG 460. The commenter stated the surgical procedure 
requirements for code 84.82 are very similar to other procedures that 
were proposed for assignment to MS-DRG 460 as a result of the 
complexity and resources utilized. The commenter further noted that in 
the FY 2008 proposed rule (72 FR 24734) CMS reported a total of 83 
cases identified by code 84.59 (Insertion of other spinal devices) a 
predecessor code to 84.82 and it is unknown whether the cases reported 
with code 84.59 truly reflect dynamic stabilization procedures.
    Response: In developing the MS-DRGs, we conducted a comprehensive 
review of the entire group of spine DRGs and proposed a number of 
revisions to account for differences in level of severity, complexity, 
and resource utilization. We believe the proposed spinal MS-DRGs more 
appropriately classify the variety of emerging spinal technologies. In 
response to the uncertainty of correct coding and

[[Page 47229]]

accurate charge information for the reporting of pedicle-based dynamic 
stabilization devices by code 84.59, we refer the commenter to the ICD-
9-CM Coordination and Maintenance Committee Meeting's September 28-29, 
2006 and March 22-23, 2007 interim coding advice regarding these 
devices, which was to continue using code 84.59 to describe this 
technology.
    Effective October 1, 2007, new code 84.82 will be available to 
identify and describe procedures using pedicle-based dynamic 
stabilization devices more accurately. Our practice has been to assign 
a new code to the same MS-DRG as its predecessor code unless we have 
clinical information or cost data that demonstrates a different MS-DRG 
assignment is warranted. At this time, we have no information to 
suggest that ICD-9-CM code 84.82 should be reassigned from MS-DRG 490. 
As final policy for FY 2008, code 84.82 will be assigned to MS-DRG 490.
    Comment: Two commenters indicated that they supported the 
reassignment of spinal fusion cases with a principal diagnosis of 
tuberculosis or osteomyelitis to MS-DRGs 456-458 (Spinal Fusion Except 
Cervical with Spinal Curvature or Malignancy or 9+ Fusions with MCC/
with CC/and Without CC/MCC, respectively) to better recognize the 
utilization of resources involved with these cases, however they 
recommended that the MS-DRG titles be modified to reflect these 
conditions. One of the commenters suggested the following title 
modifications:
     MS-DRG 456 (Spinal Fusion Except Cervical with Spinal 
Curvature, Malignancy, Tuberculosis, or Osteomyelitis or 9+ Fusions 
with MCC)
     MS-DRG 457 (Spinal Fusion Except Cervical with Spinal 
Curvature, Malignancy, Tuberculosis, or Osteomyelitis or 9+ Fusions 
with CC)
     MS-DRG 458 (Spinal Fusion Except Cervical with Spinal 
Curvature, Malignancy, Tuberculosis, or Osteomyelitis or 9+ Fusions 
without CC/MCC)
    Response: We appreciate the commenter's support of the proposal to 
reassign cases with a principal diagnosis of tuberculosis or 
osteomyelitis to MS-DRGs 456-458. We also appreciate the suggestion for 
revising the DRG titles to better classify these patients. While we 
recognize the creative approach to modifying the code titles, we must 
limit the DRG titles to 68 characters.
    We have reviewed the MS-DRG titles and are revising them as 
follows:
     MS-DRG 456 (Spinal Fusion Except Cervical with Spinal 
Curvature or Malignancy or 9+ Fusions with MCC)
     MS-DRG 457 (Spinal Fusion Except Cervical with Spinal 
Curvature or Malignancy or 9+ Fusions with CC)
     MS-DRG 458 (Spinal Fusion Except Cervical with Spinal 
Curvature or Malignancy or 9+ Fusions without CC/MCC)
    Therefore, effective October 1, 2007, the new titles for MS-DRGs 
456-458 will be implemented as above.
c. Spinal Disc Devices
    Over the past several years, manufacturers of spinal disc devices 
have requested reassignment of DRGs for their products and applied for 
new technology add-on payment. CHARITETM is one of these 
devices. CHARITETM is a prosthetic intervertebral disc. On 
October 26, 2004, the FDA approved the CHARITETM Artificial 
Disc for single level spinal arthroplasty in skeletally mature patients 
with degenerative disc disease between L4 and S1. On October 1, 2004, 
we created new procedure codes for the insertion of spinal disc 
prostheses (codes 84.60 through 84.69). We provided the CMS DRG 
assignments for these new codes in Table 6B of the FY 2005 IPPS 
proposed rule (69 FR 28673). We received comments on the FY 2005 
proposed rule recommending that we change the assignments for these 
codes from CMS DRG 499 (Back and Neck Procedures Except Spinal Fusion 
with CC) and CMS DRG 500 (Back and Neck Procedures Except Spinal Fusion 
without CC) to the CMS DRGs for spinal fusion, CMS DRG 497 (Spinal 
Fusion Except Cervical with CC) and CMS DRG 498 (Spinal Fusion Except 
Cervical without CC), for procedures on the lumbar spine and to CMS 
DRGs 519 and 520 for procedures on the cervical spine. In the FY 2005 
IPPS final rule (69 FR 48938), we indicated that CMS DRGs 497 and 498 
are limited to spinal fusion procedures. Because the surgery involving 
the CHARITETM Artificial Disc is not a spinal fusion, we 
decided not to include this procedure in these CMS DRGs. However, we 
stated that we would continue to analyze this issue and solicited 
further public comments on the DRG assignment for spinal disc 
prostheses.
    In the FY 2006 final rule (70 FR 47353), we noted that, if a 
product meets all of the criteria for Medicare to pay for the product 
as a new technology under section 1886(d)(5)(K) of the Act, there is a 
clear preference expressed in the statute for us to assign the 
technology to a DRG based on similar clinical or anatomical 
characteristics or costs. However, for FY 2006, we did not find that 
the CHARITETM Artificial Disc met the substantial clinical 
improvement criterion and, thus, did not qualify as a new technology. 
Consequently, we did not address the DRG classification request made 
under the authority of this provision of the Act.
    We did evaluate whether to reassign the CHARITETM 
Artificial Disc to different CMS DRGs using the Secretary's authority 
under section 1886(d)(4) of the Act (70 FR 47308). We indicated that we 
did not have Medicare charge information to evaluate CMS DRG changes 
for cases involving an implant of a prosthetic intervertebral disc like 
the CHARITETM and did not make a change in its CMS DRG 
assignments. We stated that we would consider whether changes to the 
CMS DRG assignments for the CHARITETM Artificial Disc were 
warranted for FY 2007, once we had information from Medicare's data 
system that would assist us in evaluating the costs of these patients.
    As we discussed in the FY 2007 IPPS proposed rule (71 FR 24036), we 
received correspondence regarding the CMS DRG assignments for the 
CHARITETM Artificial Disc, code 84.65 (Insertion of total 
spinal disc prosthesis, lumbosacral). The commenter had previously 
submitted an application for the CHARITETM Artificial Disc 
for new technology add-on payments for FY 2006 and had requested a 
reassignment of cases involving CHARITETM implantation to 
CMS DRGs 497 and 498. The commenter asked that we examine claims data 
for FY 2005 and reassign procedure code 84.65 from CMS DRGs 499 and 500 
into CMS DRGs 497 and 498. The commenter again stated the view that 
cases with the CHARITETM Artificial Disc reflect comparable 
resource use and similar clinical indications as do those in CMS DRGs 
497 and 498. If CMS were to reject reassignment of the 
CHARITETM Artificial Disc to CMS DRGs 497 and 498, the 
commenter suggested creating two separate DRGs for lumbar disc 
replacements.
    On February 15, 2006, we posted a proposed national coverage 
determination (NCD) on the CMS Web site seeking public comment on our 
proposed finding that the evidence is not adequate to conclude that 
lumbar artificial disc replacement with the CHARITETM 
Artificial Disc is reasonable and necessary. The proposed NCD stated 
that lumbar artificial disc replacement with the CHARITETM 
Artificial Disc is generally not indicated in patients over 60 years 
old. Further, it stated that there is insufficient evidence among 
either the aged or disabled Medicare population to make a

[[Page 47230]]

reasonable and necessary determination for coverage. With an NCD 
pending to make spinal arthroplasty with the CHARITETM 
Artificial Disc noncovered, we indicated in the FY 2007 IPPS proposed 
rule that we did not believe it was appropriate at that time to 
reassign procedure code 84.65 from CMS DRGs 499 and 500 to CMS DRGs 497 
and 498.
    After considering the public comments and additional evidence 
received, we made a final NCD on May 16, 2006, that Medicare would not 
cover the CHARITETM Artificial Disc for the Medicare 
population over 60 years of age. For Medicare beneficiaries 60 years of 
age and under, local Medicare contractors have the discretion to 
determine coverage for lumbar artificial disc replacement procedures 
involving the CHARITETM Artificial Disc. The final NCD can 
be found on the CMS Web site at: http://www.cms.hhs.gov/mcd/
viewncd.asp:ncd--id-150.10&ncd--
version1&basket=ncd%3A150%2E10%3A1%3ALumbar+Artificial+Disc+Replacement%
280ADR%29.
    We agreed with a commenter on the FY 2007 IPPS proposed rule that 
it was not appropriate to consider a DRG revision at that time for the 
CHARITETM Artificial Disc, given the recent decision to 
limit coverage for surgical procedures involving this device. Although 
we had reviewed the Medicare charge data, we were concerned that there 
were a very small number of cases for patients under 60 years of age 
who had received the CHARITETM Artificial Disc. We believed 
it appropriate to base the decision of a DRG change on charge data only 
on the population for which the procedure is covered. We had an 
extremely small number of cases for Medicare beneficiaries under 60 on 
which to base such a decision. For this reason, we did not believe it 
was appropriate to modify the CMS DRGs in FY 2007 for 
CHARITETM cases.
    For FY 2008, we proposed to collapse CMS DRGs 499 and 500 (Back and 
Neck Procedures Except Spinal Fusion With and Without CC, respectively) 
and identified a total of 74,989 cases. Under the proposed MS-DRGs 
(which we are adopting in this final rule with comment period), the 
result of the analysis of the data supports that these CMS DRGs split 
into two severity levels: MS-DRG 490 (Back and Neck Procedures Except 
Spinal Fusion with CC or MCC) and MS-DRG 491 (Back and Neck Procedures 
Except Spinal Fusion Without CC or MCC). We found a total of 53 cases 
that used the CHARITETM Artificial Disc. Without any further 
modification to the proposed MS-DRGs, average charges are $26,481 for 6 
cases with a CC or MCC and $37,324 for 47 CHARITETM cases 
without a CC or MCC. (We find it counterintuitive that average charges 
for cases in the higher severity level are lower but checked our data 
and found it to be correct).
    We also analyzed data for other spinal disc devices. Average 
charges for the X Stop Interspinous Process Decompression Device (code 
84.58) are $31,400 for cases with a CC or MCC and $28,821 for cases 
without a CC or MCC. Average charges for other specified spinal devices 
described by code 84.59 (Coflex, Dynesys, M-Brace) are $34,002 for 18 
cases with a CC or MCC and $33,873 for 65 cases without a CC or MCC. We 
compared these average charges to data in the proposed spinal fusion 
MS-DRGs 453 (Combined Anterior/Posterior Spinal Fusion With MCC), 454 
(Combined Anterior/Posterior Spinal Fusion with CC), 455 (Combined 
Anterior/Posterior Spinal Fusion without CC/MCC), 459 (Spinal Fusion 
Except Cervical with MCC), and 460 (Spinal Fusion Except Cervical 
without MCC). These cases have lower average charges than the spinal 
fusion MS-DRGs. The following tables display the results:

------------------------------------------------------------------------
                                                  Average
       MS-DRGs 490 and 491          Number of    length of     Average
                                      cases         stay       charges
------------------------------------------------------------------------
MS-DRG 490--All Cases............       17,493         5.13      $29,656
MS-DRG 490--Cases with Procedure             6         3.33       26,481
 Code 84.65 (CHARITE\TM\)........
MS-DRG 491--All Cases............       57,496         2.27       17,789
MS-DRG 491--Cases with Procedure            47         2.43       37,324
 Code 84.65 (CHARITE\TM\)........
MS-DRG 491--Cases without               57,449         2.27       17,773
 Procedure Code 84.65
 (CHARITE\TM\)...................
MS-DRG 490--All Cases............       17,493         5.13       29,656
MS-DRG 490--Cases with Procedure           179         2.65       31,400
 Code 84.58 (X Stop).............
MS-DRG 490--Cases without               17,314         5.15       29,638
 Procedure Code 84.58 (X Stop)...
MS-DRG 491--All Cases............       57,496         2.27       17,789
MS-DRG 491--Cases with Procedure         1,174         1.34       28,821
 Code 84.58 (X Stop).............
MS-DRG 491--Cases without               56,322         2.29       17,559
 Procedure Code 84.58 (X-Stop)...
MS-DRG 490--All Cases............       17,493         5.13       29,656
MS-DRG 490--Cases with Procedure            18         5.56       34,002
 Code 84.59 (Coflex/Dynesys/M-
 Brace)..........................
MS-DRG 490--Cases without               17,475         5.13       29,651
 Procedure Code 84.59 (Coflex/
 Dynesys/M-Brace)................
MS-DRG 491--All Cases............       57,496         2.27       17,789
MS-DRG 491--Cases with Procedure            65         2.35       33,873
 Code 84.59 (Coflex/Dynesys/M-
 Brace)..........................
MS-DRG 491--Cases without               57,431         2.27       17,770
 Procedure Code 84.59 (Coflex/
 Dynesys/M-Brace)................
------------------------------------------------------------------------


------------------------------------------------------------------------
                                                  Average
  MS-DRGs 453, 454, 455, 459 and    Number of    length of     Average
               460                    cases         stay       charges
------------------------------------------------------------------------
MS-DRG 453--Combined Anterior/             792        15.84     $180,658
 Posterior Spinal Fusion With MCC
MS-DRG 454--Combined Anterior/           1,411         8.69      116,402
 Posterior Spinal Fusion With CC.
MS-DRG 455--Combined Anterior/           1,794         4.84       85,927
 Posterior Spinal Fusion Without
 CC/MCC..........................
MS-DRG 459--Spinal Fusion Except         3,186        10.10       99,298
 Cervical with MCC...............
MS-DRG 460--Spinal Fusion Except        48,481         4.36       59,698
 Cervical without MCC............
------------------------------------------------------------------------

    The data demonstrate that the average charges for 
CHARITETM and the other devices are higher than other cases 
in proposed MS-DRGs 490 and 491 but lower than proposed MS-DRGs 453 
through 455 and 459 and 460. For this reason, we do not believe that 
any of the cases that use these spine devices should be assigned to the 
spinal fusion

[[Page 47231]]

MS-DRGs. However, we do believe that the average charges for cases 
using these spine devices are more similar to the higher severity level 
in MS-DRG 490.
    As such, in the FY 2008 IPPS proposed rule, we proposed to move 
cases with procedure codes 84.58, 84.59, and 84.65 into proposed MS-DRG 
490 and revise the title to reflect disc devices. The proposed modified 
MS-DRG title would be: MS-DRG 490 (Back and Neck Procedures Except 
Spinal Fusion with CC or MCC or Disc Devices).
    We believe these proposed changes to the spine DRGs are appropriate 
to recognize the similar utilization of resources, differences in 
levels of severity, and complexity of the services performed for 
various types of spinal procedures described above. We encouraged 
commenters to provide input on this approach to better recognize the 
types of patients these procedures are being performed upon and their 
outcomes.
    Comment: Several commenters supported our proposal to recognize 
utilization of resources, differences in levels of severity, and the 
complexity of spinal procedures in proposed MS-DRGs 490 and 491. The 
commenters were pleased with the proposal to reassign cases identified 
by procedure codes 84.58 \24\, 84.59 and 84.65 to proposed MS-DRG 490 
(Back and Neck Procedures Except Spinal Fusion with CC or MCC or Disc 
Devices). One commenter stated that the proposed refinements to MS-DRG 
490 result in Medicare payment that better recognizes patient 
conditions and procedural complexity. Another commenter believed that 
the proposals will provide more appropriate payment and ensure patient 
access to spine technologies. This commenter commended CMS for its 
responsiveness in considering resource use associated with new 
technologies, such as spine motion preservation devices, and stated the 
proposal to assign higher payment rates will enable hospitals to 
provide Medicare patients with access to these technologies.
---------------------------------------------------------------------------

    \24\ Effective October 1, 2007, procedure code 84.58 
(Implantation of interspinous process decompression device) has been 
deleted and replaced by new procedure code 84.80 (Insertion or 
replacement of interspinous process device(s)).
---------------------------------------------------------------------------

    Two commenters suggested CMS also consider moving cases with 
procedure code 84.62 (Insertion of total spinal disc prosthesis, 
cervical) into MS-DRG 490. The commenters stated that this procedure is 
clinically coherent with the other cases proposed for reassignment to 
this DRG. Many commenters also recommended that CMS continue analyzing 
claims data in the future to ensure appropriate DRG assignment for all 
spinal related procedures.
    Response: We greatly appreciate the commenters' support of our 
proposal. We analyzed data for procedure code 84.62 and found 23 cases 
with an average length of stay of 1.48 days and average charges of 
$30,114 in MS-DRG 491. We also identified 4 cases in MS-DRG 490 with an 
average length of stay of 10.5 days and average charges of $104,313. 
The table below displays our results.

------------------------------------------------------------------------
                                                  Average
              MS-DRG                Number of    length of     Average
                                      cases         stay       charges
------------------------------------------------------------------------
MS-DRG 490--All cases............       17,493         5.13      $29,655
MS-DRG 490--Cases with code 84.62            4        10.50      104,313
MS-DRG 490--Cases without code          17,484         5.13       29,633
 84.62...........................
MS-DRG 491--All cases............       57,496         2.27       17,788
MS-DRG 491--Cases with code 84.62           23         1.48       30,114
MS-DRG 491--Cases without code          57,470         2.27       17,783
 84.62...........................
------------------------------------------------------------------------

    We agree that cases with procedure code 84.62 appear to require 
greater utilization of resources than other cases in MS-DRG 491 and 
they are clinically similar to other spine disc prostheses cases we are 
assigning to MS-DRG 490. Therefore, in this FY 2008 final rule, we are 
moving cases identified by procedure code 84.62 from MS-DRG 491 to MS-
DRG 490.
    Comment: One commenter urged CMS to reconsider the placement of 
procedure code 84.65 (Insertion of total spinal disc prosthesis, 
lumbosacral) into MS-DRG 490. The commenter indicated this code 
represents technology that is a significant alternative to spinal 
fusion for a number of patients diagnosed with degenerative disc 
disease. The commenter noted that a total disc replacement is different 
from the other procedures included in MS-DRG 490 and is more complex. 
For example, excision of an intervertebral disc (code 80.51) represents 
only one component of a total disc replacement surgery; however, both 
procedures are assigned to the same DRG and receive the same payment. 
The commenter further noted that other procedures included in MS-DRG 
490 do not involve the removal of a disc and including all of these 
procedures together is not an accurate reflection of clinical 
coherence.
    According to the commenter, a variety of new artificial discs are 
leading to improvements in the area of total disc replacement 
procedures, including the ProDisc-L\TM\ Total Disc Arthroplasty. In 
addition, the commenter stated, ``appropriate Medicare payment is 
essential to ensure access to this alternative treatment and the 
diffusion of an innovative new technology.'' The commenter believed 
that the most appropriate MS-DRG assignment for code 84.65 is MS-DRG 
460 (Spinal Fusion Except Cervical without MCC) and requested that CMS 
reassign procedure code 84.65 to MS-DRG 460 and modify the title to 
``Spinal Fusion Except Cervical without MCC and Artificial Disc 
Replacement.''
    Response: We disagree with the commenter that cases identified by 
procedure code 84.65 should be reassigned to MS-DRG 460 with a revised 
title. We provided the analysis in the FY 2008 IPPS proposed rule that 
demonstrated the average charges for code 84.65 were substantially 
lower than the average charges for the spinal fusion MS-DRGs but higher 
than the average charges for other cases in proposed MS-DRGs 490 and 
491. As a result, we proposed to move cases identified by procedure 
code 84.65 into the higher severity level and modify the proposed title 
to reflect disc devices. We agree with the above statement, 
``appropriate Medicare payment is essential to ensure access to this 
alternative treatment and the diffusion of an innovative new 
technology'' made by the commenter. The charge data do not support 
moving cases with procedure code 84.65 into the spinal fusion DRGs at 
this time. As a result, effective October 1, 2007, cases

[[Page 47232]]

identified by procedure code 84.65 will remain assigned to MS-DRG 490 
(Back and Neck Procedures Except Spinal Fusion with CC or MCC or Disc 
Devices) with the modified title as proposed.
d. Other Spinal DRGs
    We did not identify any data to support moving cases in or out of 
CMS DRGs 496 (Combined Anterior/Posterior Spinal Fusion), 519 (Cervical 
Spinal Fusion with CC), or 520 (Cervical Spinal Fusion without CC)). 
Under the proposed MS-DRG system, we proposed to split CMS DRG 496 into 
three severity levels: MS-DRG 453 (Combined Anterior/Posterior Spinal 
Fusion with MCC), MS-DRG 454 (Combined Anterior/Posterior Spinal Fusion 
with CC), and proposed MS-DRG 455 (Combined Anterior/Posterior Spinal 
Fusion without CC). We also proposed to split CMS DRG 519 into three 
severity levels: MS-DRG 471 (Cervical Fusion with MCC), MS-DRG 472 
(Cervical Fusion with CC), and MS-DRG 473 (Cervical Fusion without CC). 
In the FY 2008 IPPS proposed rule, we did not propose changes to these 
DRGs.
    We did not receive any public comments on the above proposals to 
refine the remaining spinal DRGs. Therefore, in this final rule with 
comment period, we are adopting as final MS-DRGs 453, 454, 455, 471, 
472, and 473.
5. MDC 17 (Myeloproliferative Diseases and Disorders, Poorly 
Differentiated Neoplasm): Endoscopic Procedures
    Between last year's final rule and this year's proposed rule, we 
received a request from a manufacturer to review the DRG assignment of 
codes 33.71 (Endoscopic insertion or replacement of bronchial 
valve(s)), 33.78 (Endoscopic removal of bronchial device(s) or 
substances), and 33.79 (Endoscopic insertion of other bronchial device 
or substances) with the intent of moving these three codes out of CMS 
DRG 412 (History of Malignancy With Endoscopy) (MS-DRGs 843, 844, and 
845 in this final rule with comment period). The requestor noted that 
CMS DRG 412 is titled to be a DRG for cases with a history of 
malignancy, and none of the three codes (33.71, 33.78, or 33.79) 
necessarily involve treatment for malignancies. In addition, the 
requestor believed the integrity of the DRG is compromised because the 
other endoscopy codes assigned to CMS DRG 412 are all diagnostic in 
nature, while codes 33.71, 33.78, and 33.79 represent therapeutic 
procedures.
    The requestor also stated that while the diagnostic endoscopies in 
CMS DRG 412 do not have significant costs for equipment or 
pharmaceutical agents beyond the basic endoscopy, the therapeutic 
procedures described by codes 33.71, 33.78, and 33.79 involve 
substantial costs for devices or substances in relation to the cost of 
the endoscopic procedure itself. The requestor was concerned that, if 
these three codes continue to be assigned to CMS DRG 412, payment will 
be so inadequate as to constitute a substantial barrier to Medicare 
beneficiaries for these treatments.
    ICD-9-CM procedure codes 33.71, 33.78, and 33.79 were all created 
for use beginning October 1, 2006. In the proposed rule, we stated that 
these codes have been in use only for a few months, and we had no data 
to make a different DRG assignment. We assigned these codes based on 
the advice of our medical officers to a DRG that included similar 
clinical procedures.
    On the matter of codes 33.71, 33.78, and 33.79 being therapeutic in 
nature while all other endoscopies assigned to CMS DRG 412 are 
diagnostic, we disagreed with the commenter in the proposed rule. CMS 
DRG 412 includes procedure codes for therapeutic endoscopic destruction 
of lesions of the bronchus, lung, stomach, anus, and duodenum, as well 
as codes for polypectomy of the intestine and rectum. In addition, we 
note that there are codes for insertion of therapeutic devices 
currently located in this DRG.
    In the proposed rule, we stated that it would be premature to 
assign these codes to another DRG without any supporting data. We 
indicated that we would reconsider our decision for these codes if we 
had data suggesting that a DRG reassignment was warranted. Therefore, 
aside from the proposed changes to the MS-DRGs, in the FY 2008 IPPS 
proposed rule, we did not propose to change the current DRG assignment 
for codes 33.71, 33.78, and 33.79.
    Comment: We did not receive any specific comments addressing the 
published proposal. We did receive comments asking CMS to use external 
data to make DRG assignments until Medicare data are available.
    Response: We reiterate that the new codes under discussion were 
created for use beginning October 1, 2006. Commenters did not provide 
any external data for us to evaluate. We have no data that would 
support a different DRG assignment for these codes. Therefore, codes 
33.71 (Endoscopic insertion or replacement of bronchial valve(s)), 
33.78 (Endoscopic removal of bronchial device(s) or substances), and 
33.79 (Endoscopic insertion of other bronchial device or substances) 
will remain assigned to MS-DRGs 843, 844, and 845 (Other 
Myeloproliferative Disease or Poorly Differentiated Neoplasm Diagnosis 
w/MCC, w/CC or w/o CC/MCC respectively) until we have data that suggest 
a different DRG assignment would be warranted.
6. Medicare Code Editor (MCE) Changes
    As explained under section II.B.1. of the preamble of this final 
rule with comment period, the Medicare Code Editor (MCE) is a software 
program that detects and reports errors in the coding of Medicare 
claims data. Patient diagnoses, procedure(s), and demographic 
information are entered into the Medicare claims processing systems and 
are subjected to a series of automated screens. The MCE screens are 
designed to identify cases that require further review before 
classification into a DRG. For FY 2008, we proposed to make the 
following changes to the MCE edits.
a. Non-Covered Procedure Edit: Code 00.62 (Percutaneous angioplasty or 
atherectomy of intracranial vessel(s))
    As discussed in II.G.2. of the preamble of this final rule with 
comment period, under MDC 1, code 00.62 is a covered service when 
performed in conjunction with code 00.65 (Percutaneous insertion of 
intracranial vascular stent(s)). Effective November 6, 2006, Medicare 
covers PTA and stenting of intracranial arteries for the treatment of 
cerebral artery stenosis in cases in which stenosis is 50 percent or 
greater in patients with intracranial atherosclerotic disease when 
furnished in accordance with the FDA-approved protocols governing 
Category B Investigational Device Exemption (IDE) clinical trials. CMS 
determined that coverage of intracranial PTA and stenting is reasonable 
and necessary under these circumstances. Therefore, we proposed to make 
a conforming change and to add the following language to this edit: 
Procedure code 00.62 (PTA of intracranial vessel(s)) is identified as a 
noncovered procedure except when it is accompanied by procedure code 
00.65 (Intracranial stent).
    We did not receive any public comments on this proposal. Therefore, 
for FY 2008, we are adopting as final our proposed revision of the 
coverage edit, recognizing procedure code 00.62 (Percutaneous 
angioplasty or atherectomy of intracranial vessel(s)) as a covered 
procedure when reported in conjunction with procedure code 00.65 
(Intracranial stent).

[[Page 47233]]

b. Non-Specific Principal Diagnosis Edit 7 and Non-Specific O.R. 
Procedures Edit 10
    When MCE Non-Specific Principal Diagnosis Edit 7 and Non-Specific 
O.R. Procedures Edit 10 were created at the beginning of the IPPS, it 
was with the intent that they were to encourage hospitals to code as 
specifically as possible. While the codes on both edits are valid 
according to the ICD-9-CM coding scheme, more precise codes are 
preferable to give a more complete understanding of the services 
provided on the Medicare claims. When the MCE was created, we had 
intended that these specific edits would allow educational contact 
between the provider and the contractor. It was never the intention 
that these edits would be used to deny/reject or return-to-provider 
those claims submitted with non-specific codes. However, we found these 
two edits to be misunderstood, and found that claims were erroneously 
being denied, rejected, or returned. On November 11, 2006, CMS issued a 
Joint Signature Memorandum that instructed all fiscal intermediaries 
and all Part A and Part B Medicare Administrative Contractors (A/B 
MACs) to deactivate the Fiscal Intermediary Shared System Edits W1436 
through W1439 and W1489 through W1491 which edited for Non-Specific 
Diagnoses and the Non-Specific Procedures.
    Therefore, in the FY 2008 IPPS proposed rule, we proposed to make a 
conforming change to the MCE by removing the following codes from Edit 
7:
00320
01590
01591
01592
01593
01594
01596
0369
0399
0528
05310
0538
05440
0548
0558
05600
0568
06640
07070
07071
0728
0738
07420
08240
0979
09810
09830
09950
0999
1009
1109
1129
1149
1279
129
1309
13100
1319
1329
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1372
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138
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1391
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1579
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1649
1709
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1739
1749
1769
179
1809
1839
1874
1879
1889
1899
1909
1929
1949
1969
1991
20490
20491
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20691
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2129
2139
2149
2159
2169
2189
2199
2229
2239
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2279
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2349
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2399
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2519
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28950
3239
3249
326
32700
32710
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3309
3319
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[[Page 47234]]

3419
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[[Page 47235]]

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[[Page 47236]]

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[[Page 47237]]

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[[Page 47238]]

9989

    In addition, we proposed to make a conforming change to the MCE by 
removing the following codes from Edit 10:

0650
0700
3500
3510
3520
3550
3560
3570
3610
3710
3770
3800
3810
3830
3840
3850
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4050
4100
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4240
4400
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4500
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0763
0769
4610
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5300
5310
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7550
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7700
7720
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7800
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7830
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7850
7870
7880
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0780
2630
7910
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7950
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7990
8000
8010
8020
8040
8070
8080
8090
8100
8120
8130
8153
8155
8400
8440
8460
8469
8660
8670

    Comment: Several commenters commended CMS for simplifying what they 
considered to be a burdensome edit that has ceased to serve its 
intended purpose.
    Response: We appreciate the commenters' support for the removal of 
the specified codes from Edit 7 and Edit 10.
    Comment: One commenter pointed out that code 015.95 (Tuberculosis 
of unspecified bones and joints, tubercle bacilli not found by 
bacteriological examination, but tuberculosis confirmed histologically) 
was included on the list of nonspecific principal diagnoses in the MCE, 
but was not included in the list of codes to be deleted in the proposed 
rule.
    Response: The commenter is correct; code 015.95 should have been 
included in the list of codes to be deleted from Edit 7. We have 
modified the list to include deletion of this code as part of the 
deletion of the edit in the MCE software.
    After consideration of the public comments received, in this final 
rule with comment period, we are finalizing our deletion of the 
specified listed codes in Edit 7 (Non-Specific Principal Diagnosis) 
(including code 015.95) and in Edit 10 (Non-Specific O.R. Procedures) 
of the MCE.
c. Limited Coverage Edit 17
    Edit 17 in the MCE contains ICD-9-CM procedure codes describing 
medically complex procedures, including lung volume reduction surgery, 
organ transplants, and implantable heart assist devices which are to be 
performed only in certain pre-approved medical centers. CMS has 
established, through regulation (CMS-3835-F: Medicare Conditions of 
Participation: Requirements for Approval and Reapproval of Transplant 
Centers to Perform Organ Transplants, published in the Federal Register 
on March 30, 2007 (72 FR 15198)), a survey and certification process 
for organ transplant programs. The organs covered in this transplant 
regulation are heart, heart and lung combined, intestine, kidney, 
liver, lung, pancreas, and multivisceral. Historically, kidney 
transplants have been regulated under the End-Stage Renal Disease 
(ESRD) conditions for coverage. Other types of organ transplant 
facilities have been regulated under various NCDs.
    The regulation becomes effective on June 28, 2007. Organ transplant 
programs will have 180 days from the June 28, 2007 effective date of 
the regulation to apply for participation in the Medicare program under 
the new survey and certification process. After these programs apply, 
we will survey and approve programs that meet the new Medicare 
conditions of participation. Until transplant facilities are surveyed 
and approved, kidney transplant facilities will continue to be 
regulated under the ESRD conditions for coverage, and other types of 
organ transplant facilities will continue to be regulated under the 
NCDs.
    In the FY 2008 IPPS proposed rule, we proposed to add conforming 
Medicare Part A payment edits to the MCE, consistent with the 
requirements of the organ transplant regulation (CMS-3835-F), to ensure 
that Medicare covers only those organ transplants performed in Medicare 
approved facilities. We proposed to add the following procedure codes 
to the existing list of limited coverage procedures under Edit 17:
     55.69, Other kidney transplantation
     52.80, Pancreatic transplant, not otherwise specified
     52.82, Homotransplant of pancreas
    We did not receive any public comments on this portion of the 
proposed MCE revisions. Therefore, we will implement the changes as 
stated above by adding procedure codes 55.69, 52.80, and 52.82 to the 
list of limited coverage procedures in the MCE.
d. Revision to Part 1, Pancreas Transplant Edit A
    Effective for services performed on or after April 26, 2006, we 
published an NCD for Pancreas Transplants in section 260.3 of the 
Coverage Manual, stating that pancreas alone transplants are reasonable 
and necessary for Medicare beneficiaries in facilities that are 
Medicare-approved for kidney transplantation. In addition, patients 
must have a diagnosis of Type I diabetes mellitus. The complete NCD can 
be found at the following CMS Web site: http://www.cms.hhs.gov/mcd/ viewncd

[[Page 47239]]

.asp?ncd--id=260.3&ncd--version= 
3&basket=ncd%3A260%2E3%3A3%3APancreas+Transplants.
    Edit A in the MCE currently includes the following language and 
codes.
    Procedure codes 52.80 (Pancreatic transplant, not otherwise 
specified) and 52.82 (Homotransplant of pancreas) are identified as 
non-covered procedures except for the following two conditions:
    When either 52.80 or 52.82 are combined with the procedure code in 
Procedure list 2 and there is at least one principal or secondary 
diagnosis code present from both Diagnosis List 1 and Diagnosis List 2.

Procedure List 1:
    Code 52.80
    Code 52.82
Procedure List 2: 
    Code 55.69
Diagnosis List 1:
    Codes 250.00 through 250.93

Diagnosis List 2:
    Code 403.01
    Code 403.11
    Code 403.91
    Code 404.02
    Code 404.03
    Code 404.12
    Code 404.13
    Code 404.92
    Code 404.93
    Codes 585.1 through 585.6
    Code 585.9
    Code V42.0
    Code V43.89''

    This technical correction was not included in the FY 2008 IPPS 
proposed rule because of the timing of the release of the NCD. However, 
we need to make a revision to Edit A in the MCE to conform to the 
changes in our national coverage of the pancreas alone (PA) procedure. 
This NCD was implemented on July 3, 2006, which prevented us from 
addressing the MCE edit in the FY 2007 IPPS final rule. However, 
because the MCE changes for FY 2007 are retroactive to April 26, 2006, 
both procedure codes 52.80 and 52.82 will still trigger a limited 
coverage edit when coverage criteria have been met. Therefore, we are 
removing Edit A in its entirety from the MCE.
7. Surgical Hierarchies
    Some inpatient stays entail multiple surgical procedures, each one 
of which, occurring by itself, could result in assignment of the case 
to a different DRG within the MDC to which the principal diagnosis is 
assigned. Therefore, it is necessary to have a decision rule within the 
GROUPER by which these cases are assigned to a single DRG. The surgical 
hierarchy, an ordering of surgical classes from most resource intensive 
to least resource intensive, performs that function. Application of 
this hierarchy ensures that cases involving multiple surgical 
procedures are assigned to the DRG associated with the most resource 
intensive surgical class.
    Because the relative resource intensity of surgical classes can 
shift as a function of DRG reclassification and recalibrations, we 
reviewed the surgical hierarchy of each MDC, as we have for previous 
reclassifications and recalibrations, to determine if the ordering of 
classes coincides with the intensity of resource utilization.
    A surgical class can be composed of one or more DRGs. For example, 
in MDC 11, the surgical class ``kidney transplant'' consists of a 
single DRG (DRG 302) and the class ``kidney, ureter and major bladder 
procedures'' consists of three DRGs (DRGs 303, 304, and 305). 
Consequently, in many cases, the surgical hierarchy has an impact on 
more than one DRG. The methodology for determining the most resource 
intensive surgical class involves weighting the average resources for 
each DRG by frequency to determine the weighted average resources for 
each surgical class. For example, assume surgical class A includes DRGs 
1 and 2 and surgical class B includes DRGs 3, 4, and 5. Assume also 
that the average charge of DRG 1 is higher than that of DRG 3, but the 
average charges of DRGs 4 and 5 are higher than the average charge of 
DRG 2. To determine whether surgical class A should be higher or lower 
than surgical class B in the surgical hierarchy, we would weight the 
average charge of each DRG in the class by frequency (that is, by the 
number of cases in the DRG) to determine average resource consumption 
for the surgical class. The surgical classes would then be ordered from 
the class with the highest average resource utilization to that with 
the lowest, with the exception of ``other O.R. procedures'' as 
discussed below.
    This methodology may occasionally result in assignment of a case 
involving multiple procedures to the lower weighted DRG (in the 
highest, most resource intensive surgical class) of the available 
alternatives. However, given that the logic underlying the surgical 
hierarchy provides that the GROUPER search for the procedure in the 
most resource intensive surgical class, in cases involving multiple 
procedures, this result is sometimes unavoidable.
    We note that, notwithstanding the foregoing discussion, there are a 
few instances when a surgical class with a lower average charge is 
ordered above a surgical class with a higher average charge. For 
example, the ``other O.R. procedures'' surgical class is uniformly 
ordered last in the surgical hierarchy of each MDC in which it occurs, 
regardless of the fact that the average charge for the DRG or DRGs in 
that surgical class may be higher than that for other surgical classes 
in the MDC. The ``other O.R. procedures'' class is a group of 
procedures that are only infrequently related to the diagnoses in the 
MDC, but are still occasionally performed on patients in the MDC with 
these diagnoses. Therefore, assignment to these surgical classes should 
only occur if no other surgical class more closely related to the 
diagnoses in the MDC is appropriate.
    A second example occurs when the difference between the average 
charges for two surgical classes is very small. We have found that 
small differences generally do not warrant reordering of the hierarchy 
because, as a result of reassigning cases on the basis of the hierarchy 
change, the average charges are likely to shift such that the higher 
ordered surgical class has a lower average charge than the class 
ordered below it.
    For FY 2008, we did not propose any revisions of the surgical 
hierarchy for any MDC. In general, the MS DRGs that we proposed (and 
are adopting in this final rule with comment period) for use in FY 2008 
and discussed in section II.D. of the preamble of this final rule with 
comment period follow the same hierarchical order as the CMS DRGs they 
are replacing, except for DRGs that were deleted and consolidated.
    Comment: Two commenters supported no changes in the surgical 
hierarchy for FY 2008. However, one commenter stated that CMS should 
continue to revisit this issue on an annual basis.
    Response: We will continue to conduct annual analysis of the 
surgical hierarchy in the MS-DRGs as we have with the CMS-DRGs and 
propose revisions when necessary. For FY 2008, there will no changes to 
the surgical hierarchy.
8. CC Exclusions List
a. Background
    As indicated earlier in the preamble of this final rule with 
comment period, under the IPPS DRG classification system, we have 
developed a standard list of diagnoses that are considered CCs. 
Historically, we developed this list using physician panels that 
classified each diagnosis code based on whether the diagnosis, when 
present as a secondary condition, would be considered a substantial 
complication or

[[Page 47240]]

comorbidity. A substantial complication or comorbidity was defined as a 
condition that, because of its presence with a specific principal 
diagnosis, would cause an increase in the length of stay by at least 1 
day in at least 75 percent of the patients. We refer readers to section 
II.D.2. and 3. of the preamble of this final rule with comment period 
for a discussion of the refinement of CCs in relation to the MS-DRGs we 
proposed and are adopting in this final rule with comment period for FY 
2008.
b. CC Exclusions List for FY 2008
    In the September 1, 1987 final notice (52 FR 33143) concerning 
changes to the DRG classification system, we modified the GROUPER logic 
so that certain diagnoses included on the standard list of CCs would 
not be considered valid CCs in combination with a particular principal 
diagnosis. We created the CC Exclusions List for the following reasons: 
(1) to preclude coding of CCs for closely related conditions; (2) to 
preclude duplicative or inconsistent coding from being treated as CCs; 
and (3) to ensure that cases are appropriately classified between the 
complicated and uncomplicated DRGs in a pair. As we indicated above, we 
developed a list of diagnoses, using physician panels, to include those 
diagnoses that, when present as a secondary condition, would be 
considered a substantial complication or comorbidity. In previous 
years, we have made changes to the list of CCs, either by adding new 
CCs or deleting CCs already on the list.
    In the May 19, 1987 proposed notice (52 FR 18877) and the September 
1, 1987 final notice (52 FR 33154), we explained that the excluded 
secondary diagnoses were established using the following five 
principles:
     Chronic and acute manifestations of the same condition 
should not be considered CCs for one another.
     Specific and nonspecific (that is, not otherwise specified 
(NOS)) diagnosis codes for the same condition should not be considered 
CCs for one another.
     Codes for the same condition that cannot coexist, such as 
partial/total, unilateral/bilateral, obstructed/unobstructed, and 
benign/malignant, should not be considered CCs for one another.
     Codes for the same condition in anatomically proximal 
sites should not be considered CCs for one another.
     Closely related conditions should not be considered CCs 
for one another.
    The creation of the CC Exclusions List was a major project 
involving hundreds of codes. We have continued to review the remaining 
CCs to identify additional exclusions and to remove diagnoses from the 
master list that have been shown not to meet the definition of a 
CC.\25\
---------------------------------------------------------------------------

    \25\ See the FY 1989 final rule (53 FR 38485, September 30, 
1988), for the revision made for the discharges occurring in FY 
1989; the FY 1990 final rule (54 FR 36552, September 1, 1989), for 
the FY 1990 revision; the FY 1991 final rule (55 FR 36126, September 
4, 1990), for the FY 1991 revision; the FY 1992 final rule (56 FR 
43209, August 30, 1991) for the FY 1992 revision; the FY 1993 final 
rule (57 FR 39753, September 1, 1992), for the FY 1993 revision; the 
FY 1994 final rule (58 FR 46278, September 1, 1993), for the FY 1994 
revisions; the FY 1995 final rule (59 FR 45334, September 1, 1994), 
for the FY 1995 revisions; the FY 1996 final rule (60 FR 45782, 
September 1, 1995), for the FY 1996 revisions; the FY 1997 final 
rule (61 FR 46171, August 30, 1996), for the FY 1997 revisions; the 
FY 1998 final rule (62 FR 45966, August 29, 1997) for the FY 1998 
revisions; the FY 1999 final rule (63 FR 40954, July 31, 1998), for 
the FY 1999 revisions; the FY 2001 final rule (65 FR 47064, August 
1, 2000), for the FY 2001 revisions; the FY 2002 final rule (66 FR 
39851, August 1, 2001), for the FY 2002 revisions; the FY 2003 final 
rule (67 FR 49998, August 1, 2002), for the FY 2003 revisions; the 
FY 2004 final rule (68 FR 45364, August 1, 2003), for the FY 2004 
revisions; the FY 2005 final rule (69 FR 49848, August 11, 2004), 
for the FY 2005 revisions; the FY 2006 final rule (70 FR 47640, 
August 12, 2005), for the FY 2006 revisions; and the FY 2007 final 
rule (71 FR 47870) for the FY 2007 revisions. In the FY 2000 final 
rule (64 FR 41490, July 30, 1999, we did not modify the CC 
Exclusions List because we did not make any changes to the ICD-9-CM 
codes for FY 2000.
---------------------------------------------------------------------------

    For FY 2008, as we proposed, we are making limited revisions to the 
CC Exclusions List to take into account the changes that will be made 
in the ICD-9-CM diagnosis coding system effective October 1, 2007. (See 
section II.G.10. of the preamble of this final rule with comment period 
for a discussion of ICD-9-CM changes.) We are making these changes in 
accordance with the principles established when we created the CC 
Exclusions List in 1987. In addition, as discussed in section II.D.3. 
of the preamble of this final rule with comment period, we are 
indicating on the CC exclusion list some updates to reflect the 
exclusion of a few codes from being an MCC under the MS-DRG system that 
we are adopting for FY 2008.
    Tables 6G and 6H, Additions to and Deletions from the CC Exclusion 
List, respectively, which are included in the Addendum to this final 
rule with comment period, will be effective for discharges occurring on 
or after October 1, 2007. Each of these principal diagnoses for which 
there is a CC exclusion is shown with an asterisk, and the conditions 
that will not count as a CC are provided in an indented column 
immediately following the affected principal diagnosis.
    A complete updated MCC, CC, and Non-CC Exclusions List is available 
through the Internet on the CMS Web site at: http:/www.cms.hhs.gov/
AcuteInpatientPPS. Beginning with discharges on or after October 1, 
2007, the indented diagnoses will not be recognized by the GROUPER as 
valid CCs for the asterisked principal diagnosis.
    Alternatively, the complete documentation of the GROUPER logic, 
including the current CC Exclusions List, is available from 3M/Health 
Information Systems (HIS), which, under contract with CMS, is 
responsible for updating and maintaining the GROUPER program. The 
current DRG Definitions Manual, Version 24.0, is available for $225.00, 
which includes $15.00 for shipping and handling. Version 25.0 of this 
manual, which will include the final FY 2008 DRG changes, will be 
available in hard copy for $250.00. Version 25.0 of the manual is also 
available on a CD for $200.00; a combination hard copy and CD is 
available for $400.00. These manuals may be obtained by writing 3M/HIS 
at the following address: 100 Barnes Road, Wallingford, CT 06492; or by 
calling (203) 949-0303. Please specify the revision or revisions 
requested.
9. Review of Procedure Codes in CMS DRGs 468, 476, and 477
    Each year, we review cases assigned to CMS DRG 468 (Extensive O.R. 
Procedure Unrelated to Principal Diagnosis), CMS DRG 476 (Prostatic 
O.R. Procedure Unrelated to Principal Diagnosis), and CMS DRG 477 
(Nonextensive O.R. Procedure Unrelated to Principal Diagnosis) to 
determine whether it would be appropriate to change the procedures 
assigned among these CMS DRGs. Under the MS-DRGs that we are adopting 
for FY 2008, discussed in section II.D. of the preamble of this final 
rule with comment period, CMS DRG 468 has a three-way split and becomes 
MS-DRGs 981, 982, and 983 (Extensive O.R. Procedure Unrelated to 
Principal Diagnosis with MCC, with CC, and without CC/MCC). CMS DRG 476 
becomes proposed MS-DRGs 984, 985, and 986 (Prostatic O.R. Procedure 
Unrelated to Principal Diagnosis with MCC, with CC, and without CC/
MCC). CMS DRG 477 becomes MS-DRGs 987, 988, and 989 (Nonextensive O.R. 
Procedure Unrelated to Principal Diagnosis with MCC, with CC, and 
without CC/MCC).
    MS-DRGs 981 through 983, 984 through 986, and 987 through 989 
(formerly CMS DRGs 468, 476, and 477, respectively) are reserved for 
those cases in which none of the O.R. procedures performed are related 
to the principal diagnosis. These CMS DRGs are

[[Page 47241]]

intended to capture atypical cases, that is, those cases not occurring 
with sufficient frequency to represent a distinct, recognizable 
clinical group. MS-DRGs 984 through 986 (previously CMS DRG 476) are 
assigned to those discharges in which one or more of the following 
prostatic procedures are performed and are unrelated to the principal 
diagnosis:
     60.0, Incision of prostate.
     60.12, Open biopsy of prostate.
     60.15, Biopsy of periprostatic tissue.
     60.18, Other diagnostic procedures on prostate and 
periprostatic tissue.
     60.21, Transurethral prostatectomy.
     60.29, Other transurethral prostatectomy.
     60.61, Local excision of lesion of prostate.
     60.69, Prostatectomy, not elsewhere classified.
     60.81, Incision of periprostatic tissue.
     60.82, Excision of periprostatic tissue.
     60.93, Repair of prostate.
     60.94, Control of (postoperative) hemorrhage of prostate.
     60.95, Transurethral balloon dilation of the prostatic 
urethra.
     60.96, Transurethral destruction of prostate tissue by 
microwave thermotherapy.
     60.97, Other transurethral destruction of prostate tissue 
by other thermotherapy.
     60.99, Other operations on prostate.
    All remaining O.R. procedures are assigned to MS-DRGs 981 through 
983 and 987 through 989 (previously CMS DRGs 468 and 477), with MS-DRGs 
987 through 989 (previously CMS DRG 477) assigned to those discharges 
in which the only procedures performed are nonextensive procedures that 
are unrelated to the principal diagnosis.\26\
---------------------------------------------------------------------------

    \26\ The original list of the ICD-9-CM procedure codes for the 
procedures we consider nonextensive procedures, if performed with an 
unrelated principal diagnosis, was published in Table 6C in section 
IV. of the Addendum to the FY 1989 final rule (53 FR 38591). As part 
of the FY 1991 final rule (55 FR 36135), the FY 1992 final rule (56 
FR 43212), the FY 1993 final rule (57 FR 23625), the FY 1994 final 
rule (58 FR 46279), the FY 1995 final rule (59 FR 45336), the FY 
1996 final rule (60 FR 45783), the FY 1997 final rule (61 FR 46173), 
and the FY 1998 final rule (62 FR 45981), we moved several other 
procedures from DRG 468 to DRG 477, and some procedures from DRG 477 
to DRG 468. No procedures were moved in FY 1999, as noted in the 
final rule (63 FR 40962); in FY 2000 (64 FR 41496); in FY 2001 (65 
FR 47064); or in FY 2002 (66 FR 39852). In the FY 2003 final rule 
(67 FR 49999) we did not move any procedures from DRG 477. However, 
we did move procedure codes from DRG 468 and placed them in more 
clinically coherent DRGs. In the FY 2004 final rule (68 FR 45365), 
we moved several procedures from DRG 468 to DRGs 476 and 477 because 
the procedures are nonextensive. In the FY 2005 final rule (69 FR 
48950), we moved one procedure from DRG 468 to 477. In addition, we 
added several existing procedures to DRGs 476 and 477. In the FY 
2006 (70 FR 47317), we moved one procedure from DRG 468 and assigned 
it to DRG 477. In FY 2007, we moved one procedure from DRG 468 and 
assigned it to DRGs 479, 553, and 554.
---------------------------------------------------------------------------

    In the FY 2008 IPPS proposed rule, we did not propose to change the 
procedures assigned among these DRGs. We did not receive any public 
comments on this subject. Therefore, for FY 2008, we are not changing 
the procedures assigned among these DRGs.
a. Moving Procedure Codes From CMS DRG 468 (MS-DRGs 981 Through 983) or 
CMS DRG 477 (MS-DRGs 987 through 989) to MDCs
    We annually conduct a review of procedures producing assignment to 
CMS DRG 468 (MS-DRGs 981 through 983 in this final rule with comment 
period) or CMS DRG 477 (MS-DRGs 987 through 989 in this final rule with 
comment period) on the basis of volume, by procedure, to see if it 
would be appropriate to move procedure codes out of these DRGs into one 
of the surgical DRGs for the MDC into which the principal diagnosis 
falls. The data are arrayed in two ways for comparison purposes. We 
look at a frequency count of each major operative procedure code. We 
also compare procedures across MDCs by volume of procedure codes within 
each MDC.
    We identify those procedures occurring in conjunction with certain 
principal diagnoses with sufficient frequency to justify adding them to 
one of the surgical DRGs for the MDC in which the diagnosis falls. In 
the FY 2008 IPPS proposed rule, we did not propose to remove any 
procedures from CMS DRG 468 (MS-DRGs 981 through 983 in this final rule 
with comment period) or CMS DRG 477 (MS-DRGs 987 through 989). We did 
not receive any public comments on this subject. Therefore, based on 
this year's review, we are not removing any procedures from these DRGs.
b. Reassignment of Procedures Among CMS DRGs 468, 476, and 477 (MS-DRGs 
981 through 983, 984 through 986, and 987 through 989)
    We also annually review the list of ICD-9-CM procedures that, when 
in combination with their principal diagnosis code, result in 
assignment to CMS DRGs 468, 476, and 477 (MS-DRGs 981 through 983, 984 
through 986, and 987 through 989, respectively, in this final rule with 
comment period), to ascertain whether any of those procedures should be 
reassigned from one of these three DRGs to another of the three DRGs 
based on average charges and the length of stay. We look at the data 
for trends such as shifts in treatment practice or reporting practice 
that would make the resulting DRG assignment illogical. If we find 
these shifts, we would propose to move cases to keep the DRGs 
clinically similar or to provide payment for the cases in a similar 
manner. Generally, we move only those procedures for which we have an 
adequate number of discharges to analyze the data.
    We did not propose to move any procedure codes among these DRGs. We 
did not receive any public comments on this subject. Therefore, we are 
not moving any procedure codes from CMS DRG 476 (MS-DRGs 984, 985, and 
986 in this final rule with comment period) to CMS DRG 468 (MS-DRGs 
981, 982, and 983 in this final rule with comment period) or to CMS DRG 
477 (MS-DRGs 987, 988, and 989 in this final rule with comment period), 
or from CMS DRG 477 (MS-DRGs 987, 988, and 989 in this final rule with 
comment period) to CMS DRGs 468 (MS-DRGs 981, 982, and 983 in this 
final rule with comment period) or to CMS DRG 476 (MS-DRGs 984, 985, 
and 986 in this final rule with comment period) for FY 2008.
c. Adding Diagnosis or Procedure Codes to MDCs
    Based on our review this year, as we proposed, we are not adding 
any diagnosis codes to MDCs for FY 2008. We did not receive any public 
comments on this subject.
10. Changes to the ICD-9-CM Coding System
    As described in section II.B.1. of the preamble of this final rule 
with comment period, the ICD-9-CM is a coding system used for the 
reporting of diagnoses and procedures performed on a patient. In 
September 1985, the ICD-9-CM Coordination and Maintenance Committee was 
formed. This is a Federal interdepartmental committee, co chaired by 
the National Center for Health Statistics (NCHS), the Centers for 
Disease Control and Prevention, and CMS, charged with maintaining and 
updating the ICD-9-CM system. The Committee is jointly responsible for 
approving coding changes, and developing errata, addenda, and other 
modifications to the ICD-9-CM to reflect newly developed procedures and 
technologies and newly identified diseases. The Committee is also 
responsible for promoting the use of Federal and non Federal 
educational programs and other communication techniques with a view 
toward

[[Page 47242]]

standardizing coding applications and upgrading the quality of the 
classification system.
    The Official Version of the ICD-9-CM contains the list of valid 
diagnosis and procedure codes. (The Official Version of the ICD-9-CM is 
available from the Government Printing Office on CD-ROM for $25.00 by 
calling (202) 512-1800.) The Official Version of the ICD-9-CM is no 
longer available in printed manual form from the Federal Government; it 
is only available on CD-ROM. Users who need a paper version are 
referred to one of the many products available from publishing houses.
    The NCHS has lead responsibility for the ICD-9-CM diagnosis codes 
included in the Tabular List and Alphabetic Index for Diseases, while 
CMS has lead responsibility for the ICD-9-CM procedure codes included 
in the Tabular List and Alphabetic Index for Procedures.
    The Committee encourages participation in the above process by 
health-related organizations. In this regard, the Committee holds 
public meetings for discussion of educational issues and proposed 
coding changes. These meetings provide an opportunity for 
representatives of recognized organizations in the coding field, such 
as the American Health Information Management Association (AHIMA), the 
American Hospital Association (AHA), and various physician specialty 
groups, as well as individual physicians, health information management 
professionals, and other members of the public, to contribute ideas on 
coding matters. After considering the opinions expressed at the public 
meetings and in writing, the Committee formulates recommendations, 
which then must be approved by the agencies.
    The Committee presented proposals for coding changes for 
implementation in FY 2008 at a public meeting held on September 28-29, 
2006, and finalized the coding changes after consideration of comments 
received at the meetings and in writing by December 4, 2006. Those 
coding changes are announced in Tables 6A through 6F in the Addendum to 
this proposed rule. The Committee held its 2007 meeting on March 22-23, 
2007. Proposed new codes for which there was a consensus of public 
support and for which complete tabular and indexing changes can be made 
by May 2007 will be included in the October 1, 2007 update to ICD-9-CM. 
Code revisions that were discussed at the March 22-23, 2007 Committee 
meeting could not be finalized in time to include them in the Addendum 
to the proposed rule. These additional codes are included in Tables 6A 
through 6F of this final rule with comment period and are marked with 
an asterisk (*).
    Copies of the minutes of the procedure codes discussions at the 
Committee's September 28-29, 2006 meeting can be obtained from the CMS 
Web site at: http://cms.hhs.gov/ICD9ProviderDiagnosticCodes/03_
meetings.asp. The minutes of the diagnosis codes discussions at the 
September 28-29, 2006 meeting are found at: http://www.cdc.gov/nchs/
icd9.htm. Paper copies of these minutes are no longer available and the 
mailing list has been discontinued. These Web sites also provide 
detailed information about the Committee, including information on 
requesting a new code, attending a Committee meeting, and timeline 
requirements and meeting dates.
    We encourage commenters to address suggestions on coding issues 
involving diagnosis codes to: Donna Pickett, Co Chairperson, ICD-9-CM 
Coordination and Maintenance Committee, NCHS, Room 2402, 3311 Toledo 
Road, Hyattsville, MD 20782. Comments may be sent by E mail to: 
dfp4@cdc.gov.
    Questions and comments concerning the procedure codes should be 
addressed to: Patricia E. Brooks, Co Chairperson, ICD-9-CM Coordination 
and Maintenance Committee, CMS, Center for Medicare Management, 
Hospital and Ambulatory Policy Group, Division of Acute Care, C4-08-06, 
7500 Security Boulevard, Baltimore, MD 21244 1850. Comments may be sent 
by E mail to: patricia.brooks2@cms.hhs.gov.
    The ICD-9-CM code changes that have been approved will become 
effective October 1, 2007. The new ICD-9-CM codes are listed, along 
with their DRG classifications, in Tables 6A and 6B (New Diagnosis 
Codes and New Procedure Codes, respectively) in the Addendum to this 
final rule with comment period. As we stated above, the code numbers 
and their titles were presented for public comment at the ICD-9-CM 
Coordination and Maintenance Committee meetings. Both oral and written 
comments were considered before the codes were approved. In the FY 2008 
IPPS proposed rule, we only solicited comments on the proposed 
classification of these new codes.
    Comment: One commenter expressed concern that the 2-month timeframe 
between adoption of new ICD-9-CM codes and the effective date of new 
codes creates a disadvantage for the coding community because updating 
of facility-specific and industry information, such as education/
training materials and code books, is based on the final codes. The 
commenter noted that ICD-9-CM code changes discussed at the March 22-
23, 2007 ICD-9-CM Coordination and Maintenance Committee meeting were 
not listed in the FY 2008 IPPS proposed rule, so the coding community 
has 2 months, rather than 5 months, to update its coding products. The 
commenter recommended that CMS consider implementation of codes 
discussed at the spring meeting in April of the following year, rather 
than forcing the new codes into the October release.
    Response: We are sympathetic to the commenter's concern that the 
short timeframe between adoption of new codes and the effective date of 
new codes may make it challenging to update coding products. However, 
this short time period has proven to be invaluable for collecting 
MedPAR data on new technologies as soon as possible. Therefore, we will 
continue our current process of attempting to expedite the creation of 
new ICD-9-CM codes.
    For codes that have been replaced by new or expanded codes, and the 
corresponding new or expanded diagnosis codes are included in Table 6A. 
New procedure codes are shown in Table 6B. Diagnosis codes that have 
been replaced by expanded codes or other codes or have been deleted are 
in Table 6C (Invalid Diagnosis Codes). These invalid diagnosis codes 
will not be recognized by the GROUPER beginning with discharges 
occurring on or after October 1, 2007. Table 6D contains invalid 
procedure codes. These invalid procedure codes will not be recognized 
by the GROUPER beginning with discharges occurring on or after October 
1, 2007. Revisions to diagnosis code titles are in Table 6E (Revised 
Diagnosis Code Titles), which also includes the DRG assignments for 
these revised codes. Table 6F includes revised procedure code titles 
for FY 2008.
    In the September 7, 2001 final rule implementing the IPPS new 
technology add on payments (66 FR 46906), we indicated we would attempt 
to include proposals for procedure codes that would describe new 
technology discussed and approved at the Spring meeting as part of the 
code revisions effective the following October. As stated previously, 
ICD -9-CM codes discussed at the March 22-23, 2007 Committee meeting 
that received consensus and that were finalized by May 2007, are 
included in Tables 6A through 6F of the Addendum to this final rule 
with comment period.
    Section 503(a) of Pub. L. 108-173 included a requirement for 
updating ICD-9-CM codes twice a year instead of a single update on 
October 1 of each

[[Page 47243]]

year. This requirement was included as part of the amendments to the 
Act relating to recognition of new technology under the IPPS. Section 
503(a) amended section 1886(d)(5)(K) of the Act by adding a clause 
(vii) which states that the ``Secretary shall provide for the addition 
of new diagnosis and procedure codes on April 1 of each year, but the 
addition of such codes shall not require the Secretary to adjust the 
payment (or diagnosis related group classification) * * * until the 
fiscal year that begins after such date.'' This requirement improves 
the recognition of new technologies under the IPPS system by providing 
information on these new technologies at an earlier date. Data will be 
available 6 months earlier than would be possible with updates 
occurring only once a year on October 1.
    While section 1886(d)(5)(K)(vii) of the Act states that the 
addition of new diagnosis and procedure codes on April 1 of each year 
shall not require the Secretary to adjust the payment, or DRG 
classification, under section 1886(d) of the Act until the fiscal year 
that begins after such date, we have to update the DRG software and 
other systems in order to recognize and accept the new codes. We also 
publicize the code changes and the need for a mid year systems update 
by providers to identify the new codes. Hospitals also have to obtain 
the new code books and encoder updates, and make other system changes 
in order to identify and report the new codes.
    The ICD-9-CM Coordination and Maintenance Committee holds its 
meetings in the spring and fall in order to update the codes and the 
applicable payment and reporting systems by October 1 of each year. 
Items are placed on the agenda for the ICD-9-CM Coordination and 
Maintenance Committee meeting if the request is received at least 2 
months prior to the meeting. This requirement allows time for staff to 
review and research the coding issues and prepare material for 
discussion at the meeting. It also allows time for the topic to be 
publicized in meeting announcements in the Federal Register as well as 
on the CMS Web site. The public decides whether or not to attend the 
meeting based on the topics listed on the agenda. Final decisions on 
code title revisions are currently made by March 1 so that these titles 
can be included in the IPPS proposed rule. A complete addendum 
describing details of all changes to ICD-9-CM, both tabular and index, 
is published on the CMS and NCHS Web sites in May of each year. 
Publishers of coding books and software use this information to modify 
their products that are used by health care providers. This 5 month 
time period has proved to be necessary for hospitals and other 
providers to update their systems.
    A discussion of this timeline and the need for changes are included 
in the December 4-5, 2005 ICD-9-CM Coordination and Maintenance 
Committee minutes. The public agreed that there was a need to hold the 
fall meetings earlier, in September or October, in order to meet the 
new implementation dates. The public provided comment that additional 
time would be needed to update hospital systems and obtain new code 
books and coding software. There was considerable concern expressed 
about the impact this new April update would have on providers.
    In the FY 2005 IPPS final rule, we implemented section 
1886(d)(5)(K)(vii) of the Act, as added by section 503(a) of Pub. L. 
108-173, by developing a mechanism for approving, in time for the April 
update, diagnosis and procedure code revisions needed to describe new 
technologies and medical services for purposes of the new technology 
add-on payment process. We also established the following process for 
making these determinations. Topics considered during the Fall ICD-9-CM 
Coordination and Maintenance Committee meeting are considered for an 
April 1 update if a strong and convincing case is made by the requester 
at the Committee's public meeting. The request must identify the reason 
why a new code is needed in April for purposes of the new technology 
process. The participants at the meeting and those reviewing the 
Committee meeting summary report are provided the opportunity to 
comment on this expedited request. All other topics are considered for 
the October 1 update. Participants at the Committee meeting are 
encouraged to comment on all such requests. There were no requests for 
an expedited April l, 2007 implementation of an ICD-9-CM code at the 
September 28-29, 2006 Committee meeting. Therefore, there were no new 
ICD-9-CM codes implemented on April 1, 2007.
    We believe that this process captures the intent of section 
1886(d)(5)(K)(vii) of the Act. This requirement was included in the 
provision revising the standards and process for recognizing new 
technology under the IPPS. In addition, the need for approval of new 
codes outside the existing cycle (October 1) arises most frequently and 
most acutely where the new codes will identify new technologies that 
are (or will be) under consideration for new technology add-on 
payments. Thus, we believe this provision was intended to expedite data 
collection through the assignment of new ICD-9-CM codes for new 
technologies seeking higher payments.
    Current addendum and code title information is published on the CMS 
Web site at: www.cms.hhs.gov/icd9ProviderDiagnosticCodes/01_
overview.asp#TopofPage. Information on ICD-9-CM diagnosis codes, along 
with the Official ICD-9-CM Coding Guidelines, can be found on the Web 
site at: www.cdc.gov/nchs/icd9.htm. Information on new, revised, and 
deleted ICD-9-CM codes is also provided to the AHA for publication in 
the Coding Clinic for ICD-9-CM. AHA also distributes information to 
publishers and software vendors.
    CMS also sends copies of all ICD-9-CM coding changes to its 
contractors for use in updating their systems and providing education 
to providers.
    These same means of disseminating information on new, revised, and 
deleted ICD-9-CM codes will be used to notify providers, publishers, 
software vendors, contractors, and others of any changes to the ICD-9-
CM codes that are implemented in April. The code titles are adopted as 
part of the ICD-9-CM Coordination and Maintenance Committee process. 
Thus, although we publish the code titles in the IPPS proposed and 
final rules, they are not subject to comment in the proposed or final 
rules. We will continue to publish the October code updates in this 
manner within the IPPS proposed and final rules. For codes that are 
implemented in April, we will assign the new procedure code to the same 
DRG in which its predecessor code was assigned so there will be no DRG 
impact as far as DRG assignment. Any midyear coding updates will be 
available through the Web sites indicated above and through the Coding 
Clinic for ICD-9-CM. Publishers and software vendors currently obtain 
code changes through these sources in order to update their code books 
and software systems. We will strive to have the April 1 updates 
available through these Web sites 5 months prior to implementation 
(that is, early November of the previous year), as is the case for the 
October 1 updates.
11. Other DRG Issues Addressed in the FY 2008 IPPS Proposed Rule
a. Seizures and Headaches
    After publication of the FY 2007 IPPS final rule (71 FR 47928), we 
received correspondence expressing concerns about the revisions we made 
to the seizure and headache DRGs effective on October 1, 2006. We 
created new DRGs

[[Page 47244]]

562 (Seizure Age > 17 With CC), DRG 563 (Seizure Age > 17 Without CC), 
and DRG 564 (Headaches Age > 17) as an interim step to better recognize 
severity of illness among seizure and headache patients for FY 2007. 
Although national Medicare utilization data supported the revised DRGs, 
the commenter indicated that the change did not appropriately recognize 
hospital resources associated with the patients treated in the 
hospital's inpatient headache program. The commenter stated that 
patients who are admitted to the hospital's inpatient headache program 
suffer from chronic headache pain and require inpatient treatment that 
can last up to 12 days. The commenter noted that these patients are 
referred from around the country after several months of unsuccessful 
pain relief and treatment. The commenter indicated that the majority of 
patients treated at the hospital's inpatient headache program are drug 
dependent from being administered increasing dosages of pain relievers 
that have been unsuccessful in resolving chronic headache pain. 
Further, the commenter noted that the patients require detoxification 
before any headache treatment begins. The commenter urged CMS to 
subdivide the headache DRG to better recognize the higher level of 
severity associated with treating chronic headache patients in the 
hospital's program.
    Although we are sympathetic to the commenter, it is not feasible to 
design a DRG system that addresses concerns that may be unique to one 
facility. Other than this one commenter, we did not receive any concern 
about our decision to create separate DRGs for seizures and headaches. 
However, we agreed to review this issue as part of our effort to 
redesign the DRG system to better recognize severity of illness for FY 
2008.
    As discussed in section II.C. of the preamble of this final rule 
with comment period, we are adopting MS-DRGs for FY 2008. While the CMS 
DRG structure did not support splitting the headache DRG based on the 
presence or absence of a CC, the MS-DRGs support the creation of a 
split for the headache DRGs based on whether the patient has a MCC as 
shown below:

------------------------------------------------------------------------
                                                  Average
              MS-DRG                Number of    length of     Average
                                      cases         stay       charges
------------------------------------------------------------------------
MS-DRG 102 (Headaches with MCC)..        1,268         5.04      $19,077
MS-DRG 103 (Headaches without           14,277         3.22       11,989
 MCC)............................
------------------------------------------------------------------------

    (The criteria for determining whether to subdivide a DRG are 
described in detail earlier in section II.D. of the preamble of this 
final rule with comment period.) Thus, we proposed to create two MS-
DRGs for headaches under the MS-DRGs as shown below:
     MS-DRG 102 (Headaches with MCC).
     MS-DRG 103 (Headaches without MCC).
    We believe this proposed structure would better recognize those 
headache patients who are severely ill and require more resources as 
described by the commenter. We refer the readers to section II.D. of 
the preamble of this final rule with comment period for a detailed 
discussion of the MS-DRGs.
    Comment: Three commenters supported a DRG system that accounts for 
the severity of illness, intensity of service, and differences in the 
cost of care in treating headache patients. They strongly support CMS' 
proposal to revise its current headache classification, CMS DRG 564 
(Headaches Age > 17), that was effective as of October 1, 2006 (FY 
2007). One of the commenters stated that CMS DRG 564 does not 
adequately classify headache cases based on the presence or absence of 
complicating conditions and assumes a relatively short length of stay, 
resulting in inadequate payments to cover the costs of treating 
severely complex chronic headache patients that are referred to 
specialized treatment centers such as theirs. The commenters also 
agreed with the use of secondary diagnoses to improve payments and 
better account for severity within a DRG that is defined by the 
diagnosis of headache. However, the commenters indicated that certain 
secondary diagnoses related to medication overuse and dependency are 
not considered MCCs for headache cases. According to one of the 
commenters, the common secondary diagnosis codes used for patients with 
medication overuse and dependency are identified by the following ICD-
9-CM codes (a fifth digit representing the drug dependence as 
unspecified (0), continuous (1), episodic (2), or in remission (3) 
would be applied according to the physician documentation):
     304.0x, Opioid type dependence.
     304.1x, Sedative, hypnotic or anxiolytic dependence.
     304.2x, Cocaine dependence.
     304.3x, Cannabis dependence.
     304.4x, Amphetamine and other psychostimulant dependence.
     304.5x, Hallucinogen dependence.
     304.6x, Other specified drug dependence.
     304.7x, Combinations of opioid type drug with any other.
     304.8x, Combinations of drug dependence excluding opioid 
type drug.
     304.9x, Unspecified drug dependence.
    The commenters recognize that most of the above listed conditions 
were included on the proposed CC list; however, none of them were 
included on the proposed MCC list. Therefore, the majority of patients 
treated in the commenter's specialized headache program will not 
qualify to be assigned to proposed MS-DRG 102 (Headache with MCC) and 
will be paid using proposed MS-DRG 103 (Headache without MCC)--the 
lower severity level. The commenter further noted that, in contrast to 
patients who primarily exhibit substance abuse, the headache patient 
does not primarily exhibit addictive disease, but is a desperate 
individual who takes increasing amounts of medication to control pain 
that has not successfully been controlled. In addition, the patient 
experiences withdrawal phenomena (sweating, shaking, crawling skin, 
sleeplessness, changes to blood pressure and pulse) as he or she 
attempts to reduce the drugs at the recommendation of the physician. 
The commenter noted that a chronic headache patient with a narcotics 
addiction is more costly to treat because, to ensure a successful 
treatment outcome, the patient must be effectively withdrawn from the 
offending medication, while simultaneously addressing the escalating 
pain and controlling it which requires inpatient hospitalization that 
can last up to 2 weeks.
    Another commenter suggested that according to the MCCs identified, 
there appeared to be a significant variance in cost for headache 
patients whose stay involved an additional two days. This commenter 
encouraged CMS to examine the creation of a CC split under the current 
CMS DRG classification if the adoption of the MS-DRG system does not 
take place. The commenter stated the determination should consider 
whether the MCCs used in the MS-DRG

[[Page 47245]]

analysis are on the current CMS DRG CC list.
    One of the commenters provided several suggestions for how the 
proposed MS-DRG classification could more accurately identify case 
complexity for inpatient headache cases. The suggestions are described 
below.
    1. Include the ICD-9-CM codes (304.00-304.93) on the list of MCCs. 
These conditions are true indicators of case complexity and patients 
with these complications should be paid at the higher severity level if 
there are only these two adult headache DRGs.
    2. If the above suggestion of moving those codes to the MCC list 
has unintended consequences for a large number of the other (non-
headache) DRGs, another approach would be to add a modifier to the CC 
list recognizing these codes as MCCs for cases in which the principal 
diagnosis is headache.
    3. Add a third headache MS-DRG specifically for the opioid and 
other medication overuse codes.
    The commenter indicated a preference for the third option stating 
that based on the data available and medical judgment, this MS-DRG 
would be the most clinically appropriate method to better recognize 
severity among headache cases. In addition, the commenter noted it is 
most consistent with efforts already underway in the ICD-10 
classification system to identify medication overuse in patients with a 
principal diagnosis of headache, although ICD-10 is not yet available.
    Response: We appreciate the commenter's support of the proposed MS-
DRG classification system to better recognize severity of illness, 
intensity of service, and differences in the cost of care in treating 
headache patients. The commenters are correct that the drug dependency 
diagnosis codes (304.0x-304.9x) are not considered MCCs in the proposed 
MS-DRG system. As we discussed in the proposed rule (72 FR 24702), we 
categorized diagnoses as MCCs, CCs, and non-CC based on an iterative 
approach in which each diagnosis was evaluated to determine the extent 
to which its presence as a secondary diagnosis resulted in increased 
hospital resources.
    We examined the MedPAR data for headache patients with drug 
dependency (codes 304.00-304.93). Our medical advisors also analyzed 
clinical issues surrounding patients who have these codes reported as a 
secondary diagnosis. After evaluation of the data and clinical issues, 
our medical advisors recommend that we not change the CC status for the 
drug dependency codes. Our analysis demonstrated approximately 254 
cases in MS DRG 103 with an average length of stay of 4.9 days and 
average charges approximately $2,500 higher than without drug 
dependency. There were 25 cases in MS DRG 102 with an average length of 
stay of 7 days and average charges approximately $5,000 higher than all 
cases in MS-DRG 102. The results are shown in the table below.

                                Headaches
------------------------------------------------------------------------
                                                  Average
               DRG                  Number of    length of     Average
                                      cases         stay       charges
------------------------------------------------------------------------
MS-DRG 102 with MCC--All cases...        1,268         5.04      $19,077
MS-DRG 102 with MCC--With                   25            7       24,061
 secondary diagnosis of drug
 dependency codes 304.00-304.93..
MS-DRG 103 without MCC--all cases       14,277         3.22       11,989
MS-DRG 103 with MCC--With                  254          4.9       14,447
 secondary diagnosis of drug
 dependency codes 304.00-304.93..
------------------------------------------------------------------------

    The process used to subdivide a MS-DRG into severity levels based 
upon the presence of a CC or MCC included five criteria. All five 
criteria had to be met to satisfy the requirement of creating severity 
levels. We refer readers to section II.D.3. of the preamble to this 
final rule with comment period for a complete discussion of these 
criteria.
    In studying the data for headaches, the number of cases that 
include secondary diagnoses of drug dependency does not meet the 
minimum requirement of 500 cases to create another subdivision. 
Therefore, only the ``with MCC'' and ``without MCC'' severity levels 
were established and proposed for headache cases.
    We agree with the commenter that headache patients who suffer from 
medication overuse are not identical to substance abuse patients. 
However, if a headache patient presents to the hospital with withdrawal 
phenomena and it is the drug withdrawal symptoms that require attention 
and resolution prior to directing treatment towards the headache 
symptoms, the reason for the patient's admission (or principal 
diagnosis) appears to be the drug withdrawal. The Official ICD-9-CM 
Guidelines for Coding and Reporting instruct that the principal 
diagnosis is defined in the Uniform Hospital Discharge Data Set (UHDDS) 
as ``that condition established after study to be chiefly responsible 
for occasioning the admission of the patient to the hospital for 
care.'' Therefore, these headache patients are being admitted to 
address their drug dependency and drug withdrawal before any headache 
treatment can begin.
    As discussed above, at this time, analysis of the data does not 
support assigning the drug dependency codes as MCCs. Secondly, there is 
not justification to warrant adding modifiers to the drug dependency 
codes that are currently on the CC list to consider those diagnoses as 
MCCs for headache cases only. (Further, modifiers are not used in ICD-
9-CM.) Lastly, the data does not support subdividing the proposed MS-
DRGs for headaches into another severity level.
    In this FY 2008 final rule, we are adopting the MS-DRGs. Therefore, 
effective October 1, 2007, the MS-DRGs for headache cases will be as 
follows:
     MS-DRG 102 (Headaches with MCC)
     MS-DRG 103 (Headaches without MCC).
    Comment: One commenter applauded CMS for the changes in the DRG 
structure to better recognize differences in patient severity. This 
commenter recommended further refinements to proposed MS-DRG 100 
(Seizures with MCC) and MS-DRG 101 (Seizures without MCC). According to 
the commenter, most Medicare patients who are assigned to the seizure 
DRGs are admitted to receive acute treatment that is typically provided 
in the general medical setting. Alternatively, the commenter stated 
that patients who suffer from uncontrolled seizures or intractable 
epilepsy are admitted to an epilepsy center for a comprehensive 
evaluation to identify the epilepsy seizure type, the cause of the 
seizure, and the location of the seizure. The commenter added that 
these patients are admitted to the hospital for 4 to 6 days with 24-
hour monitoring that includes the use of EEG video monitoring along 
with cognitive testing and brain imaging procedures. The commenter 
noted that

[[Page 47246]]

patients treated in an epilepsy center receive highly technical care 
that is comparable to the care received in a hospital's intensive care 
unit, and these patients are more costly to treat.
    With the assistance of an outside reviewer, the commenter analyzed 
cost data for proposed MS-DRGs 100 and 101, which focused on a target 
group of patients identified with a diagnosis of epilepsy (diagnosis 
codes 345.0 through 345.9) or convulsions (diagnosis code 780.39) and 
the presence of EEG video monitoring (vEEG) (procedure code 89.10) or a 
Wada test (procedure code 89.19). The commenter stated that the 
patients identified with those codes are treated in specialized 
epilepsy centers. The commenter recommended that CMS further refine 
proposed MS-DRGs 100 and 101 by subdividing cases with the combination 
of a diagnosis of epilepsy and one of the diagnostic tests performed 
into separate DRGs defined as follows:
     MS-DRG XXX (Epilepsy Evaluation with MCC)
     MS-DRG XXX (Epilepsy Evaluation without MCC)
    The commenter acknowledged that the target group of cases 
constitutes a small portion of the total cases found in MS-DRGs 100 and 
101. However, the commenter noted that the diagnostic procedures 
described above (codes 89.10 and 89.19) are performed by a small 
minority of hospitals in the United States. The commenter believed that 
the recommendation to refine these DRGs would result in a minimal 
impact on other hospitals, while substantially improving the accuracy 
of payment to those hospitals specializing in epilepsy treatment.
    Response: We appreciate the commenter's support of our efforts to 
better recognize severity in the DRG system and its recommendation to 
further refine the proposed seizure DRGs. Epilepsy is currently 
identified by ICD-9-CM diagnosis codes 345.0x through 345.9x. There are 
two fifth-digits that may be assigned to a subset of the epilepsy 
codes, depending on the physician documentation:
     0--without mention of intractable epilepsy.
     1--with intractable epilepsy.
    According to the commenter, the specialized epilepsy centers focus 
on treating patients who suffer from intractable epilepsy. The data 
that the commenter reviewed included the range of epilepsy codes (345.0 
through 345.9), the code for convulsions (780.39) and the codes for the 
diagnostic tests (89.10 and 89.19). The data that were submitted by the 
commenter did not clearly identify the specific epilepsy codes reviewed 
or the combination of the diagnostic procedures performed along with 
specified epilepsy codes. It was also unclear what secondary codes were 
reviewed in the analysis. As a result, we were unable to conduct our 
own analysis to evaluate the commenter's recommendation. In addition, 
we do not believe that we should make further changes to the MS-DRG 
assignments based on combinations of selected diagnoses. These types of 
analyses could be done with virtually any MS-DRG and would add 
significant complexity to the DRG system that we do not believe is 
warranted at this time. We encourage the commenter to provide the 
specific codes used in its analysis so we can examine this issue as we 
continue to make further refinements to the DRGs for FY 2009.
    We also note that the topic of epilepsy has been discussed over the 
last couple of years at the ICD-9-CM Coordination and Maintenance 
Committee meetings due to confusion with physician documentation and 
the implications of coding a patient as having a one-time seizure 
versus ``labeling'' the patient as having the diagnosis of epilepsy. It 
is unclear if the data identifying these conditions are accurate and 
reliable as a result of this confusion.
    In conclusion, as final policy for FY 2008, effective October 1, 
2007, the following seizure DRGs are adopted as proposed:
     MS-DRG 100 (Seizures with MCC).
     MS-DRG 101 (Seizures without MCC).
b. Devices That Are Replaced Without Cost or Where Credit for a 
Replaced Device Is Furnished to the Hospital
(1) Background
    We addressed the topic of Medicare payment for devices that are 
replaced without costs or where credit for a replaced device is 
furnished to the hospital in the FY 2007 IPPS final rule (71 FR 47962). 
In that final rule, we included the following background information:
    In recent years, there have been several field actions and recalls 
with regard to failure of implantable cardiac defibrillators (ICDs) and 
pacemakers. In many of these cases, the manufacturers have offered 
replacement devices without cost to the hospital or credit for the 
device being replaced if the patient required a more expensive device. 
In some circumstances, manufacturers have also offered, through a 
warranty package, to pay specified amounts for unreimbursed expenses to 
persons who had replacement devices implanted. Nonetheless, we believe 
that incidental device failures that are covered by manufacturer 
warranties occur routinely. While we understand that some device 
malfunctions may be inevitable as medical technology grows increasingly 
sophisticated, we believe that early recognition of problems would 
reduce the number of people who would be potentially adversely affected 
by these device problems. The medical community needs heightened and 
early awareness of patterns of device failures, voluntary field 
actions, and recalls so that it can take appropriate corrective action 
to care for patients. Systematic efforts must be undertaken by all 
interested and involved parties, including manufacturers, insurers, and 
the medical community, to ensure that device problems are recognized, 
and are addressed as early as possible so that patients' quality of 
health care is protected and high quality medical care, equipment, and 
technologies are provided. We are taking several steps to assist in the 
early recognition and analysis of patterns of device problems to 
minimize the potential for harm from device related defects to Medicare 
beneficiaries and the public in general.
    In recent years, CMS has recognized the importance of data 
collection as a condition of Medicare coverage for selected services. 
In 2005, we issued an NCD that expanded coverage of ICDs and also 
required registry participation when the devices were implanted for 
certain clinical indications. The NCD included this requirement in 
order to ensure that the medical care received by Medicare 
beneficiaries was reasonable and necessary and, therefore, that the 
provider or supplier would be appropriately paid. Presently, the 
American College of Cardiology [mu] National Cardiovascular Data 
Registry (ACC NCDR) collects these data and maintains the registry.
    In addition to ensuring appropriate payment of claims, collection, 
and ongoing analysis of ICD implantation, registry data can facilitate 
public response to the quality of health care issues in the event of 
future device recalls. Analysis of registry data may uncover patterns 
of device malfunction, device related infection, or early battery 
depletion that would trigger a more specific investigation. Patterns 
found in registry data may identify problems in patient outcomes 
earlier than the currently available mechanisms, which do not 
systematically collect detailed information about each patient who 
receives an ICD.
    We encourage the medical community to work to develop additional 
registries

[[Page 47247]]

for implantable devices, so that timely and comprehensive information 
is available regarding devices, recipients of those devices, and 
patients' quality of health care status and medical outcomes. While 
participation in an ICD registry is required as a Medicare condition of 
coverage for ICD implantation for certain clinical conditions, we 
believe that the potential benefits of other data collection extend 
well beyond their application in Medicare's specific NCDs. As medical 
technology continues to advance swiftly, data collection regarding the 
short term and long term medical outcomes of new technologies, 
especially concerning implanted devices that may remain in the bodies 
of patients for their lifetimes, will be essential to the timely 
recognition of any specific device related problems, patterns of 
complications, and health-related outcomes. This information will 
facilitate early interventions to mitigate any harm potentially imposed 
upon Medicare beneficiaries and the public, and to improve the quality 
and efficiency of health care services provided.
    Moreover, published data from registries may further help the 
development of high quality, evidence based clinical practice 
guidelines for the care of patients who may receive device implants. In 
turn, widespread use of evidence based guidelines may reduce variation 
in medical practice, leading to improved personal care and overall 
public health. Registry information may also contribute to the 
development of more comprehensive and refined quality metrics that may 
be used to systematically assess the collected data, and then improve 
the safety and quality of health care provided to Medicare 
beneficiaries. Such improvements in the quality of care that result in 
better personal health will require the sustained commitment of 
industry, payers, health care providers, and others to progressively 
work towards that goal, and to ensure excellent and open communication 
and rapid system wide responses.
    One strategy for this data collection involves adding information 
to the claims forms. CMS has a long history of collecting hemoglobin or 
hematocrit data from ESRD patients on the claims form. Modification of 
claims forms was necessary to do that. CMS is exploring the use of 
claims data to collect other types of clinical or technical data such 
as device manufacturer and model number. The systematic recording of 
model numbers can enhance knowledge of device-related outcomes and 
complications. We look forward to further discussions with the public 
about new strategies to both recognize device related problems early as 
well as recognize health-related outcomes of new technologies.
    In addition, we believe that the routine identification of Medicare 
claims for certain device implantation procedures in situations where a 
payment adjustment is appropriate may enhance the medical community's 
recognition of device related problems, potentially leading to more 
timely improvements in medical device technologies. This systematic 
approach, which enables hospitals to identify and then appropriately 
report selected services when devices are replaced without cost to the 
hospital, or with full or partial credit to the hospital for the cost 
of the replaced device, should provide comprehensive information 
regarding the hospitals' experiences with Medicare beneficiaries who 
have specific medical devices that are being replaced. Because Medicare 
beneficiaries are common recipients of implanted devices, the claims 
information may be particularly helpful in identifying patterns of 
device related problems early in their natural history, so that 
appropriate strategies to reduce future problems may be developed. One 
possible strategy would be for the Medicare program to use information 
obtained through the use of bar coding of medical devices. The FDA 
issued a final rule in the Federal Register on February 26, 2004 (69 FR 
9119), that required bar codes for human drugs and biological product 
labels effective April 26, 2006. In the final rule, FDA deferred action 
on requiring bar codes for medical devices, noting the difficulty in 
standardizing medical devices, as compared to drugs and biologicals, 
which have the unique NDC numbering system. This rule can be reviewed 
on the Federal Register's Web site at: http://
www.docket.access.gpo.gov/2004/04-4249.htm.
    We intend to monitor FDA's work in this area to determine how this 
technology could help CMS promote higher quality through better 
clinical decision making and, as discussed below, assist in improving 
the accuracy of the Medicare payment system.
    In addition to our concern for overall public health, we also have 
a fiduciary responsibility to the Medicare Trust Fund to ensure that 
Medicare pays only for covered services. Therefore, in the FY 2007 IPPS 
final rule, we indicated that we believe we need to consider whether it 
is appropriate to reduce the Medicare payment in cases in which an 
implanted device is replaced at reduced or no cost to the hospital or 
with partial or full credit for the removed device. Such consideration 
could cover certain devices for which credit for the replaced medical 
device is given, or medical devices that are replaced as a result of or 
pursuant to a warranty, field action, voluntary recall, or involuntary 
recall, and medical devices that are provided free of charge. We 
indicated that conveying this information to the Medicare beneficiary 
could provide for a reduction in the IPPS payment if we determine that 
the device is replaced without cost to the provider or beneficiary or 
when the provider receives full credit for the cost of a replaced 
device.
    In FY 2007 IPPS final rule, we indicated a need to develop a 
methodology to determine the amount of the reduction to the otherwise 
payable IPPS payment for medical devices furnished to Medicare 
beneficiaries. We believe that this policy is appropriate because, in 
these cases, the full cost of the replaced device is not incurred and, 
therefore, an adjustment to the payment is necessary to remove the cost 
of the device.
(2) Current and Proposed Policies
    In the CY 2007 OPPS final rule (71 FR 68071 through 68077), we 
adopted a policy that requires a reduced payment to a hospital or 
ambulatory surgical center when a device is provided to them at no 
cost. From our experience with the OPPS, we understand that a 
manufacturer will often provide a credit or partial credit for the 
recalled device rather than a free replacement. In other situations, a 
manufacturer will provide either a full or partial credit for a device 
that needs to be replaced only during the manufacturer's warranty 
period. In either of these situations, the original implantation of the 
device was paid for either by Medicare, another third party on behalf 
of the beneficiary by making payment directly to the hospital, or the 
implantation was paid for directly by the beneficiary. Therefore, we 
believe that Medicare should not pay the hospital for the full cost of 
the replacement if the hospital is receiving a partial or full credit, 
either due to a recall or service during the warranty period. The 
device was already paid for at the time of initial implantation, and 
Medicare should retain the credit that is being provided to the 
hospital for service to a Medicare beneficiary.
    Moreover, we also believe that a proposed adjustment is consistent 
with section 1862(a)(2) of the Act, which excludes from Medicare 
coverage an item or service for which neither the beneficiary, nor 
anyone on his or her behalf, has an obligation to pay.

[[Page 47248]]

Payment of the full IPPS payment amount in cases in which the device 
was replaced under warranty or in which there was a full or partial 
credit for the price of the recalled or failed device effectively 
results in Medicare payment for a noncovered item. Therefore, in the FY 
2008 IPPS proposed rule, we proposed to adjust the IPPS payment amount 
in these circumstances under the authority of section 1886(d)(5)(I) of 
the Act, which permits the Secretary to make ``exceptions and 
adjustments to such payment amounts * * * as the Secretary deems 
appropriate.''
    Under the OPPS, we currently only apply the reduced payment amount 
in situations where the hospital received a replacement device at no 
cost or at full credit for the replacement device. Unlike the current 
OPPS policy, we proposed for purposes of the IPPS to apply the policy 
for partial as well as full credit for a replacement device. As we 
indicated above, our experience with the OPPS suggests that the policy 
should be applied beyond full replacement of a recalled device. We 
proposed to reduce the amount of the Medicare IPPS payment when a full 
or partial credit towards a replacement device is made or the device is 
replaced without cost to the hospital or with full credit for the 
removed device. However, we do not believe that the IPPS policy should 
apply to all DRGs and all situations in which a device is replaced 
without cost to the hospital for the device or with full or partial 
credit for the removed device. We recognize that, in many cases, the 
cost of the device is a relatively modest part of the IPPS payment. In 
other situations, we believe the amount of the credit will also be 
nominal. In these cases, we believe that the averaging nature of 
payments under the IPPS would incorporate any significant savings from 
a warranty replacement, field action, or recall into the payment rate 
for the associated DRG, and that no specific adjustment would be 
necessary or appropriate. For this reason, we proposed to apply the 
policy only to those DRGs under the IPPS where the implantation of the 
device determines the base DRG assignment and situations where the 
hospital received a credit equal to 20 percent or more of the cost of 
the device. We believe a credit that is equal to or more than this 
percentage is substantial, and Medicare should not pay for the full 
cost of these replacement devices because hospitals have received 
significant savings from the manufacturer for its replacement costs. In 
the proposed rule, we sought comment on the application of this 
percentage amount. We further believe that it is appropriate to limit 
application of the policy only to those DRGs where implantation of the 
device determines the DRG assignment. In making a decision to assign a 
case based on whether a device was implanted, we recognized that the 
device cost was a significant portion of the overall costs faced by the 
hospital that treats the case. Therefore, we believe that Medicare 
should not make full payment for those DRGs where the assignment of the 
case is made based on implantation of the device when the hospital is 
receiving either a full or significant partial credit for the device. 
In the proposed rule, we included a listing of the CMS DRGs (including 
the proposed new MS-DRG title) that would be subject to this policy.
    CMS has requested and received new condition codes from the 
National Uniform Billing Committee (NUBC) to describe claims where a 
provider has received a device or product without cost. We will use 
these condition codes to reduce payment when the hospital used a device 
for which full or partial credit is given, or the item was replaced as 
a result of or under a warranty, field action, voluntary recall, 
involuntary recall, or otherwise provided free of charge. On November 
4, 2005, we issued Change Request 4058, Transmittal 741, in the 
Medicare Claims Processing Manual. The effective date of this 
transmittal was April 1, 2006, and the implementation date was April 3, 
2006. This transmittal specifies that the following two new condition 
codes have been created. They are defined below:
     Condition Code 49--Product Replacement within Product 
Lifecycle. Replacement of a product earlier than the anticipated 
lifecycle due to an indication that the product is not functioning 
properly.
     Condition Code 50--Product Replacement for Known Recall of 
a Product. The manufacturer or the FDA has identified the product for 
recall and therefore replacement.
    This transmittal can be accessed at the following Web site: http://
www.cms.hhs.gov/Transmittals/downloads/R741CP.pdf.
    Hospitals must report these codes on any claim for IPPS services 
that includes a replacement device or product for which they received 
full or partial credit. Hospital billing offices would report one of 
these condition codes in addition to the specific code for the type of 
procedure performed (for example, replacement of a defibrillator). We 
proposed to require the hospital to provide invoices or other 
information indicating its normal cost of the device and the amount of 
the credit it received.
    Under our policy, the fiscal intermediary (or, if applicable, the 
MAC) would process claims involving DRGs that are subject to this 
policy that include a device that is replaced without cost to the 
hospital for the device or with full or partial credit for the removed 
device as identified by condition codes 49 or 50. For a device provided 
to the hospital without cost, the fiscal intermediary (or, if 
applicable, the MAC) would subtract the cost of the device from the DRG 
payment. For a device for which the hospital received a full or partial 
credit, the fiscal intermediary (or, if applicable, the MAC) would 
subtract the amount credited from the DRG payment. CMS will issue 
specific claims processing instructions to Medicare contractors and 
hospitals on implementing this policy. We proposed to require the 
hospital to provide invoices or other information indicating the cost 
of the device and the amount of credit it received. In the proposed 
rule, we sought comment on the best approach to making this payment 
adjustment and what types of documentation hospitals should provide to 
the fiscal intermediary or MAC.
    We proposed to invoke our special exceptions and adjustment 
authority under section 1886(d)(5)(I)(i) of the Act to make this 
adjustment. The special exceptions and adjustment authority authorizes 
us to provide ``for such other exceptions and adjustments to [IPPS] 
payment amountsm * * * as the Secretary deems appropriate.'' We believe 
it would be appropriate to adjust payments for surgical procedures to 
replace certain devices by providing payments to hospitals only for the 
non-device-related procedural costs when such a device is replaced 
without cost to the hospital for the device or with full credit for the 
removed device.
    Comment: Many commenters addressed this proposal. Some commenters 
suggested that CMS rescind the implementation of the proposed policy. 
Other commenters supported ``the goal of accurate payment for services 
provided and * * * the concept of a payment offset for devices that are 
replaced without cost or where a credit is furnished to the hospital 
for a replaced device.'' However, most commenters also suggested that, 
if CMS were to implement the policy, CMS reconsider the process.
    The commenters believed that blanket implementation of the proposal 
ignores the underlying concept of the DRG payment system. They stated 
that DRG payments are fundamentally based on averages of historical 
costs and charges.

[[Page 47249]]

They added that to reduce the payment for cases involving replacement 
of a medical device assumes that either these types of cases have not 
occurred in the past or are occurring at such a dramatic increase as to 
materially skew the averages used to develop the DRG weights. The 
commenters reiterated that CMS has stated that we believe device 
failures that are covered by manufacturers' warranties occur routinely. 
The commenter noted that this statement acknowledges that incidental 
device failure has occurred in the past and was likely covered by the 
manufacturer warranty. The commenter stated that, if so, this practice 
is part of the historical cost and charge data used to develop the 
current DRG weights for cases involving implantation, and that 
reduction of payment of certain cases involving a reimplantation would 
ignore the average DRG weight for those cases that already implicitly 
include this reduction.
    Another commenter suggested that CMS develop a proxy to the full 
cost of the device by using a percentage of the DRG, based on 
historical data because Medicare does not reimburse providers at full 
cost. One commenter recommended that, if adopted, CMS include in this 
policy that these claims will not be included in the calculation of 
relative weights, as this will reduce payment of services for 
procedures with non-replacement devices.
    Several commenters suggested that CMS should consider raising the 
proposed threshold from 20 percent to greater than 50 percent of the 
cost of the device. Given the administrative burden of manually 
processing these claims, the commenters believed that it is not worth 
the burden on the hospitals' or fiscal intermediaries' part if only a 
nominal portion of the cost of the device is at issue. Commenters 
further suggested that if CMS implements this policy, estimated costs 
should be calculated from the charges on the claims and the DRG payment 
only reduced by the device cost if the payment is greater than the cost 
of the case less the cost of the device.
    Several commenters cited the administrative burden that would 
result with implementation of this policy. One commenter stated that 
the proposal would result in significant operational burden and would 
essentially delay payment for otherwise clean claims. The commenter 
encouraged CMS to obtain invoice cost information from hospitals by 
having the hospitals report returned devices with a specific code 
similar to the use of HCPCS code C9399 (outpatient reporting for new 
drugs without HCPCS codes). The commenter indicated that hospitals are 
able to report the HCPCS code and the NCD number for drugs in the 
remarks section of the claim form in form locator field 84. The 
commenter believed a similar approach can be used in the inpatient 
setting when either Condition Code 49 or 50 is present on the claim. 
This would trigger the hospital to report the percentage of the device 
credit in the remarks field. The commenter suggested that this approach 
would provide CMS with the data it needs while eliminating the need for 
hard copy invoices, which will significantly reduce the hospital 
reporting burden. Another commenter suggested using a similar 
approach--applying an average adjustment based on the previous year's 
experience with credits to arrive at an aggregate method for making 
payment adjustments rather than a claim-by-claim approach.
    Some commenters raised concerns about the use of condition code 49 
with devices that are returned within the warranty period. These 
commenters explained that the time from explant of a device, receipt of 
the device by the manufacturer, subsequent device analysis and issuance 
of the warranty results can often be eight weeks or longer. According 
to the commenters, a hospital will be unaware during this time whether 
a full, partial, or even zero credit will be made. The commenter 
suggested that hospitals be either: (1) Allowed to submit the claims 
immediately without condition code 49 and submit a claim adjustment 
with condition code 49 at a later date once the credit determination is 
made; or (2) allow hospitals to hold the claim until a determination is 
made on the level of the credit. Another commenter who suggested that 
CMS adopt this approach raised a concern about ``unintended 
consequences.'' The commenter expressed a concern that hospitals may 
not return a nonworking device to avoid the payment offset resulting in 
the manufacturer being unable to identify defects that need to be 
corrected. This commenter suggested that ``discouraging device return 
from hospitals'' would be ``detrimental to industry efforts at 
identifying trends and improving the long-term reliability of current 
and future products.'' The commenter suggested that allowing hospitals 
to submit a bill without Condition Code 49 and later submitting an 
adjustment claim with the code could avoid discouraging hospitals from 
returning devices that are replaced.
    Other commenters raised concerns about the nomenclature that is 
used to describe Condition Code 49. These commenters were concerned 
that Condition Code 49 describes ``replacement of a product earlier 
than the anticipated lifecycle due to an indication that the product is 
not functioning properly.'' One commenter was concerned that submitting 
a bill immediately with Condition Code 49 would indicate a premature 
determination that a device was replaced due to improper functioning. 
Like the commenter above, this commenter was concerned that the 
manufacturer may make a later determination that the device was 
functioning properly or the warranty period had expired and hospital 
will have already billed using Condition Code 49. Another commenter 
suggested that a device may be replaced during a warranty period even 
though it is functioning properly (for example, the patient depleted a 
battery prematurely because of higher than normal energy needs). In 
this case, the commenter was concerned that Condition Code 49 will 
label the replacement as being due to a malfunction when it actually 
results from higher than normal use but proper functioning of the 
device. The commenter suggested alternative nomenclature for Condition 
Code 49 that focuses on the product being replaced earlier than its 
anticipated lifecycle as a result of either a product malfunction or 
higher than normal use.
    Finally, some commenters raised concerns about the use of invoices 
to determine the level of the reduction in Medicare's payment. One 
commenter indicated that credits are derived using the original and 
current contract prices for the device being explained and the product 
price for the replacement device. According to this commenter, 
manufacturers can provide hospitals with the credit dollar amount and 
the percentage the credit represents of the full cost of the device. 
Based on that information, hospitals will easily be able to determine 
whether they need to submit a claim with Condition Code 49 (that is, 
the credit is equal to or greater than the threshold reduction where 
the policy applies) and can furnish Medicare without the dollar amount 
of the credit that is due.
    Response: We disagree with the commenters who suggested that our 
proposal assumes that either device recalls or replacements have not 
occurred in the past or are occurring at such a dramatic increase as to 
materially skew the averages used to develop the DRG weights. Our 
policy assumes that hospital charges include the full cost of the 
device. Although the relative weights are based on estimated costs, 
charges are an important element of the relative weight methodology. We 
apply hospital cost-to-charge ratios to hospital

[[Page 47250]]

charges to determine the DRG relative weight. If hospitals have uniform 
charging practices for all cases irrespective of whether they receive a 
device at no cost or with a partial credit, the CCR will be applied to 
a hospital charge that does not reflect that the hospital did not pay 
the full cost of the device. Under these circumstances, we believe it 
is appropriate that Medicare's payment should recognize a hospital's 
reduced cost for a device that it receives either at no or a 
substantially reduced cost.
    We agree with the commenters who suggested that the proposed 
threshold should be raised from 20 percent to 50 percent or greater of 
the cost of the device. The commenters have raised valid issues about 
potential administrative burden and delays that could occur when 
determining whether a device was replaced due to a malfunction or due 
to higher than normal use. We agree that the policy should not apply if 
only a nominal portion of the cost of the device is at issue.
    With respect to the suggestion that the policy should only apply if 
Medicare's payment is greater than estimated costs of the case (less 
the device) calculated from the charges on the claims, we believe the 
policy we have adopted to recognize the lower costs of replaced devices 
that are either replaced at no cost or partial cost is reasonable. 
However, we may consider this idea in the future as we continue to make 
refinements to our policy for full or partial credit devices.
    We understand the commenters' concerns about potential delays that 
could occur while a returned device is being evaluated during a 
warranty service period. Of the suggestions we received to address this 
concern, we agree that hospitals should have the options of either: (1) 
Submitting the claims immediately without Condition Code 49 and a claim 
adjustment with Condition Code 49 at a later date once the credit 
determination is made or (2) holding the claim until a determination is 
made on the level of the credit. We believe that giving hospitals these 
options would address the concern of the commenter that hospitals may 
not return a non-working device for a replacement. Further, these ideas 
would facilitate more efficient administration of the policy by 
allowing the hospital to be provided with all of the information it 
needs to be paid correctly by Medicare without the need to suspend 
claims or delay payment. However, hospitals should note that if 
choosing option 1 above, the rules for submitting adjustment claims 
still apply and can be found at: http://www.cms.hhs.gov/manuals/
downloads/clm104c01.pdf, section 130.2.
    The commenters raise a valid point concerning the nomenclature for 
Condition Code 49 that only describes device malfunctions when the 
policy may apply to other situations. We will bring the concerns of the 
commenter to the National Uniform Billing Committee (NUBC) for further 
consideration. The NUBC is a committee brought together by the American 
Hospital Association and includes the participation of all major 
national provider and payer organizations. Their major role is to 
maintain the integrity of the UB 92 and (now UB 04) data set and to be 
a forum for discussions that lead to mutually agreed data elements for 
the claim as well as the data elements for other claim-related 
transactions.
    With respect to the comments about using invoice information as 
documentation for the credit due to Medicare, we provided invoices as 
an example of the type of documentation a fiscal intermediary or MAC 
may require to determine the percentage credit. Our fiscal 
intermediaries (or MAC if applicable) are in the best position to 
evaluate and determine matters regarding the adequacy of documentation 
to determine Medicare payment. In this final rule with comment period, 
we are not requiring any specific documentation to determine whether 
the percentage credit will apply. Invoices or the documentation 
(including those suggested in the public comments) would be at the 
discretion of the fiscal intermediary or MAC.
    Therefore, after consideration of the public comments received, for 
FY 2008, we are implementing the following decisions regarding returned 
devices. We are applying the policy to the MS-DRGs listed in the chart 
below; those cases being MS-DRGs where the implantation of the device 
determines the base DRG assignment. Further, we are applying the policy 
in situations where the hospital received a credit equal to 50 percent 
or more of the cost of the device. Hospitals have the option of either: 
(1) Submitting the claims immediately without condition code 49 and a 
claim adjustment with condition code 49 at a later date once the credit 
determination is made or (2) holding the claim until a determination is 
made on the level of the credit. Should hospitals choose option 1, we 
note that the rules for submitting adjustment claims do apply, and can 
be found at the Web site noted above. CMS will issue specific claims 
processing instructions to Medicare contractors and hospitals on 
implementing this policy.

                                          DRGs Subject to Final Policy
----------------------------------------------------------------------------------------------------------------
                 MDC                            MS-DRG                    Narrative description of DRG
----------------------------------------------------------------------------------------------------------------
PRE..................................   1 and 2...............  Heart Transplant or Implant of Heart Assist
                                                                 System with and without MCC, respectively
                                                                 (former CMS-DRG 103, Heart Transplant or
                                                                 Implant of Heart Assist System).
1....................................   25 and 26.............   Craniotomy and Endovascular Intracranial
                                                                 Procedure with MCC or with CC, respectively
                                                                 (former CMS-DRG 1, Craniotomy Age > 17 with
                                                                 CC).
1....................................   26 and 27.............   Craniotomy and Endovascular Intracranial
                                                                 Procedure with CC or without CC/MCC,
                                                                 respectively (former CMS-DRGs 2, Craniotomy Age
                                                                 > 17 without CC).
1....................................   40 and 41.............   Peripheral & Cranial Nerve & Other Nervous
                                                                 System Procedure with MCC; or with CC or
                                                                 Peripheral Neurostimulator, respectively
                                                                 (former CMS-DRG, 7 Peripheral & Cranial Nerve &
                                                                 Other Nervous System Procedures with CC).
1....................................   42....................   Peripheral & Cranial Nerve & Other Nervous
                                                                 System Procedure without CC/MCC (former CMS-DRG
                                                                 8, Peripheral & Cranial Nerve & Other Nervous
                                                                 System Procedures without CC).
1....................................   23 and 24.............   Craniotomy with Major Device Implant or Acute
                                                                 Complex Central Nervous System Principal
                                                                 Diagnosis with MCC or Chemotherapy Implant; and
                                                                 without MCC [or Chemotherapy Implant],
                                                                 respectively (former CMS-DRG 543, Craniotomy
                                                                 with Major Device Implant or Acute Complex
                                                                 Central Nervous System Principal Diagnosis).
3....................................   129 and 130...........   Major Head & Neck Procedures with CC/MCC or
                                                                 Major Device; or without CC/MCC, respectively
                                                                 (former CMS-DRG 49, Major Head & Neck
                                                                 Procedures).

[[Page 47251]]

 
5....................................   216, 217, and 218.....   Cardiac Valve & Other Major Cardiothoracic
                                                                 Procedure with Cardiac Catheterization With
                                                                 MCC; or with CC; or without CC/MCC,
                                                                 respectively (former CMS-DRG 104, Cardiac Valve
                                                                 & Other Major Cardiothoracic Procedures with
                                                                 Cardiac Catheterization).
5....................................   219, 220, and 221.....   Cardiac Valve & Other Major Cardiothoracic
                                                                 Procedure without Cardiac Catheterization with
                                                                 MCC; or with CC, or without CC/MCC,
                                                                 respectively (former CMS-DRG 105, Cardiac Valve
                                                                 & Other Major Cardiothoracic Procedures without
                                                                 Cardiac Catheterization).
5....................................   237...................   Major Cardiovascular Procedures with MCC or
                                                                 Thoracic Aortic Aneurysm Repair (former CMS-DRG
                                                                 110, Major Cardiovascular Procedures with CC).
5....................................   238...................   Major Cardiovascular Procedures without MCC
                                                                 (former CMS-DRG 111, Major Cardiovascular
                                                                 Procedures without CC).
5....................................   260, 261, and 262.....   Cardiac Pacemaker Revision Except Device
                                                                 Replacement with MCC, or with CC, or without CC/
                                                                 MCC, respectively (former CMS-DRGs 117, Cardiac
                                                                 Pacemaker Revision Except Device Replacement).
5....................................   258 and 259...........   Cardiac Pacemaker Device Replacement with MCC,
                                                                 and Without MCC, respectively (former CMS-DRG
                                                                 118, Cardiac Pacemaker Device Replacement).
5....................................   226 and 227...........   Cardiac Defibrillator Implant without Cardiac
                                                                 Catheterization with MCC and without MCC,
                                                                 respectively (former CMS-DRG 515, Cardiac
                                                                 Defibrillator Implant without Cardiac
                                                                 Catheterization).
5....................................   215...................   Other Heart Assist System Implant (former CMS-
                                                                 DRG 525, Other Heart Assist System Implant).
5....................................   222 and 223...........   Cardiac Defibrillator Implant with Cardiac
                                                                 Catheterization with Acute Myocardial
                                                                 Infarction/Heart Failure/Shock with MCC and
                                                                 without MCC, respectively (former CMS-DRGs 535,
                                                                 Cardiac Defibrillator Implant with Cardiac
                                                                 Catheterization with Acute Myocardial
                                                                 Infarction/Heart Failure/Shock).
5....................................   224 and 225...........   Cardiac Defibrillator Implant with Cardiac
                                                                 Catheterization without Acute Myocardial
                                                                 Infarction/Heart Failure/Shock with MCC and
                                                                 without MCC, respectively (former CMS-DRG 536,
                                                                 Cardiac Defibrillator Implant with Cardiac
                                                                 Catheterization without Acute Myocardial
                                                                 Infarction/Heart Failure/Shock).
5....................................   242, 243, and 244.....   Permanent Cardiac Pacemaker Implant with MCC,
                                                                 with CC, and without CC/MCC, respectively (MS-
                                                                 DRG 551, Permanent Cardiac Pacemaker Implant
                                                                 with Major Cardiovascular Diagnosis or AICD
                                                                 Lead or Generator.
5....................................   242, 243, and 244.....   Permanent Cardiac Pacemaker Implant with MCC,
                                                                 with CC, and without CC/MCC, respectively
                                                                 (former CMS-DRG 552, Other Permanent Cardiac
                                                                 Pacemaker Implant without Major Cardiovascular
                                                                 Diagnosis).
8....................................   461 and 462...........   Bilateral or Multiple Major Joint Procedures of
                                                                 Lower Extremity with MCC, or without MCC,
                                                                 respectively (former CMS-DRG 471, Bilateral or
                                                                 Multiple Major Joint Procedures of Lower
                                                                 Extremity).
8....................................   469 and 470...........   Major Joint Replacement or Reattachment of
                                                                 Lower Extremity with MCC or without MCC,
                                                                 respectively (former CMS-DRG 544, Major Joint
                                                                 Replacement or Reattachment of Lower
                                                                 Extremity).
8....................................   466, 467, and 468.....   Revision of Hip or Knee Replacement with MCC,
                                                                 with CC, or without CC/MCC, respectively
                                                                 (former CMS-DRG 545, Revision of Hip or Knee
                                                                 Replacement).
----------------------------------------------------------------------------------------------------------------

    To codify in regulations the policies for the IPPS discussed above, 
we are adding a new paragraph (g) to Sec.  412.2 and a new Sec.  412.89 
to 42 CFR part 412, Subpart F. We are also making a technical, 
conforming change to the heading of Subpart F and adding an uncoded 
center heading before the proposed new Sec.  412.89.
12. Other MS-DRG Issues Raised in the Public Comments on the Proposed 
Rule
a. Heart Transplants or Implants of Heart Assist System and Liver 
Transplants (Pre-MDC)
    In our analysis of heart transplant or implant of heart assist 
system base DRGs and liver transplant base DRGs, we found that each 
warranted two subdivisions based on our five criteria for establishing 
the MS-DRGs discussed in section II.D. of this final rule with comment 
period. We proposed two MS-DRGs for heart transplant or implant of 
heart assist system: MS-DRG 001 (Heart Transplant or Implant of Heart 
Assist System with MCC) and MS-DRG 002 (Heart Transplant or Implant of 
Heart Assist System without MCC). We also proposed two MS-DRGs for 
liver transplant: MS DRG 005 (Liver Transplant with MCC or Intestinal 
Transplant) and MS-DRG 006 (Liver Transplant without MCC).
    Comment: Two commenters responded to our proposal on the 
subdivision of heart transplant or implant of heart assist system. One 
commenter representing one of the manufacturers of left ventricular 
assist devices (LVAD) stated that this change seems to appropriately 
identify severity of illness based upon mean length of stay days and 
charges associated with implantable LVADs as long as hospitals 
accurately report and document complications.
    Another commenter representing transplant surgeons recommended that 
CMS defer implementation of separate severity levels for heart 
transplant and liver transplants pending further study. The commenter 
stated that payment for the uncomplicated procedures--the without MCC 
group--are too low, resulting in financial instability for many centers 
and the creation of inappropriate patient selection incentives. The 
commenter submitted an analysis showing that of the 37 heart transplant 
centers for which data were available, 10 (27 percent) would undergo 
DRG payment reductions of more than 10 percent while, of the 52 liver 
transplant centers, 11 (19 percent) would experience reductions of more 
than 10 percent, with many experiencing reductions over 20 percent. The 
commenter indicated that transplant cases are relatively low volume 
which makes these DRGs more vulnerable to fluctuations.
    The commenter stated that while the concept of dividing DRGs based 
on severity is conceptually sound in the context of admissions for many 
medical conditions and perhaps for certain surgical admissions, 
transplantation as a whole is an extremely complex process that 
generally involves patients with life threatening conditions. The 
commenter stated that the presence or absence of a condition on the MCC 
list is not a good predictor of inpatient hospital costs for liver and 
heart transplants. The commenter stated that one factor that

[[Page 47252]]

influences hospital costs and lengths of stay is the characteristics of 
the donor organ. The commenter stated that the donor risk index and the 
model for end-stage liver disease (MELD) system which prioritizes 
patients waiting for liver transplants by severity of illness are two 
important factors for any severity index for transplant DRGs. This 
information is not identified in the MedPAR data.
    Several commenters also stated that the use of certain donor organs 
increase in hospital costs for transplantation. A category of donor 
called DCD (donor after cardiac death) generally represents a donor 
with a severe brain injury who is taken to the operating room, removed 
from the ventilator, and who dies a cardiac, rather than a brain, 
death. Another category of donor called ECD (extended or expanded 
criteria donor) is generally older and sicker than a standard donor. 
Use of organs from DCD or ECD donors permits transplantations that may 
be more expensive, as the organs may not be optimal. The commenters 
suggested that we take these issues into consideration when making DRG 
assignments.
    In addition, two commenters stated that a separate DRG may be 
needed to address the significantly higher costs associated with 
combined liver/kidney transplants. One of the commenters stated that 
the recent increases in volume justify creation of a separate DRG. 
Another commenter stated that the Milliman 2005 U.S. Organ and Tissue 
Transplant Cost Estimates and Discussion Research Report indicates a 
separate MS-DRG is warranted at a higher level. However, the commenter 
did not provide data on combined liver/kidney transplants from the 
report.
    Response: We cannot use the factors suggested in the commenters to 
subdivide the transplant DRGs because they are not distinctly 
identified in the current ICD-9-CM coding system. The National Center 
for Health Statistics is responsible for the maintenance of the 
diagnosis codes. We have advised representatives from the transplant 
industry to approach the National Center for Health Statistics in order 
to request unique codes to identify cases that include factors such as 
a DCD or ECD donor or the patient's MELD score. Without specific data 
that show how these factors affect patient costs, we cannot use them to 
subdivide the transplant DRGs. Suggestions on coding issues involving 
diagnosis codes should be directed to: Donna Pickett, Co-chairperson, 
ICD-9-CM Coordination and Maintenance Committee, NCHS, Room 2402, 3311 
Toledo Road, Hyattsville, MD 20782. Comments may be sent by E-mail to: 
dfp4@CDC.gov.
    The table below illustrates our findings on heart and liver 
transplant MS-DRGs:

----------------------------------------------------------------------------------------------------------------
                                                                     Number of    Average length      Average
                             MS-DRG                                    cases          of stay         charges
----------------------------------------------------------------------------------------------------------------
MS-DRG 001 (Heart transplant or implant of heart assist system               572           41.03       $442, 339
 with MCC)......................................................
MS-DRG 002 (Heart transplant or implant of heart assist system               304           22.81         250,693
 without MCC)...................................................
MS-DRG 005 (Liver transplant with MCC or intestinal transplant).             762           22.25        243, 271
MS-DRG 006 (Liver transplant without MCC).......................             446           10.05         129,519
----------------------------------------------------------------------------------------------------------------

    The data support the current MCC split for heart and liver 
transplants. Therefore, we disagree with the commenter who suggested 
that diagnosis codes do not explain patient resource cost for these 
DRGs. In addition, the MCC split was supported by another commenter 
that manufactures LVADs. In response to the comments about the impact 
on transplant centers, we note that the change to the MS-DRGs is 
redistributive within each base DRG. Payment for the high severity 
cases will increase, and it will decrease for other cases. In total, 
Medicare payments for transplants likely will be unchanged. Rather, 
Medicare's payment will be better directed to reflect patient severity 
of illness. In response to the comment about combined liver/kidney 
transplants, we believe these patients would have a secondary diagnosis 
that is an MCC that would result in the patient being assigned to MS-
DRG 005. For instance, a common cause of combined liver and kidney 
failure is hepatorenal syndrome, in which the liver failure actually 
causes the kidney failure. In this case, the principal diagnosis is 
liver failure. The second diagnosis--kidney failure--is an MCC. 
Patients with combined liver/kidney failure are very sick patients, and 
we believe it is highly likely that if they are properly coded, all 
patients would be assigned to MS-DRG 005 and be paid the maximum amount 
for a patient receiving a liver transplant. At this time, we do not 
believe that a separate MS-DRG is needed for combined liver-kidney 
transplants.
    With respect to the Milliman 2005 US Organ and Tissue Transplant 
Cost Estimates and Discussion Research Report discussed by the 
commenter, we are open to considering, to the extent feasible, 
reliable, validated data other than MedPAR data in annually 
recalibrating and reclassifying the DRGs. Because the commenter did not 
provide data on combined liver/kidney transplants from the report, we 
could not fully evaluate the commenter's claims.
b. Gliadel[supreg] Wafer (MDC 1)
    Gliadel[supreg] Wafer is the only implantable chemotherapy agent 
approved by FDA for the treatment of malignant brain tumors. This 
treatment is approved for newly diagnosed patients with high-grade 
malignant glioma and for patients with recurrent glioblastoma 
multiforme, which is the most fatal form of primary brain tumor. ICD-9-
CM procedure code 00.10 (Implantation of chemotherapeutic agent) was 
created October 1, 2002 to uniquely identify this technology. In the FY 
2008 IPPS proposed rule, we proposed to assign the technology to MS-DRG 
23 (Craniotomy with Major Device Implant or Acute Complex Central 
Nervous System Principal Diagnosis with MCC) and MS-DRG 24 (Craniotomy 
with Major Device Implant or Acute Complex Central Nervous System 
Principal Diagnosis without MCC).
    Comment: One commenter, the manufacturer of the Gliadel[supreg] 
Wafer technology, recommended that CMS recognize the complexity and 
costs associated with implantation of Gliadel[supreg] Wafer and 
reassign all cases that use it to MS-DRG 23. The commenter also 
recommended that the MS-DRG titles for MS-DRG 23 and 24 be revised to:
     MS-DRG 023, ``Craniotomy with Acute Complex Central 
Nervous System Principal Diagnosis with MCC or Major Device Implant''; 
and
     MS-DRG 024, ``Craniotomy with Acute Complex Central 
Nervous System Principal Diagnosis without MCC.''
    The commenter provided data showing a total of 502 cases receiving 
the Gliadel[supreg] Wafer. The majority of the patients, 84 percent 
(423 cases), were assigned to MS-DRG 24. For MS-DRG

[[Page 47253]]

24, the commenter reported that the standardized average charges for 
Gliadel[supreg] cases were approximately $74,069, which is 27 percent 
greater than the average charges for non-Gliadel cases in MS-DRG 24 of 
approximately $58,181. Many commenters encouraged CMS to reassign these 
cases to MS-DRG 23.
    Response: Based on our review on the FY 2006 MedPAR data, we found 
73 Gliadel[supreg] cases assigned to MS-DRG 23 and 398 cases assigned 
to MS-DRG 24. The following table displays our results:

----------------------------------------------------------------------------------------------------------------
                                                                     Number of    Average length      Average
                             MS-DRG                                    cases          of stay         charges
----------------------------------------------------------------------------------------------------------------
MS-DRG 23--All cases............................................           2,950           13.63         $91,518
MS-DRG 23--Gliadel cases........................................              73           12.44         104,975
MS-DRG 24--All cases............................................           2,432            8.63          61,865
MS-DRG 24--Gliadel cases........................................             398            7.03          75,482
----------------------------------------------------------------------------------------------------------------

    Under the MS-DRGs, 73 out of 471 Gliadel[supreg] cases are assigned 
to MS-DRG 023. The 398 remaining Gliadel[supreg] cases do not have an 
MCC and would be assigned to MS-DRG 024, absent further changes to the 
DRG logic.
    The average charges of approximately $75,482 for Gliadel[supreg] 
cases are higher than the average charges of approximately $61,865 for 
the overall cases in MS-DRG 024 and are approximately midway between 
the with and without MCC severity levels. In this final rule with 
comment period, we are assigning all Gliadel[supreg] cases to MS-DRG 
23. The title for MS-DRG 023 is changed to ``Craniotomy with Major 
Device Implant or Acute Complex Central Nervous System Principal 
Diagnosis with MCC or Chemo Agent Implant''. The presence of craniotomy 
with major device implant or acute complex central nervous system 
principal diagnosis with MCC or implantation of chemotherapeutic agent 
would assign a case to the higher severity level.
c. Myasthenia Gravis and Acute and Chronic Inflammatory Demyelinating 
Neuropathies (AIDP-CIDP) (MDC 1)
    Comment: One comment, a national association that represents 
neurologists and neuroscience professionals, was concerned that there 
are no separate DRGs for Myasthenia Gravis and Acute and Chronic 
Inflammatory Demyelinating Neuropathies (AIDP-CIDP). Myasthenia gravis 
is an autoimmune disease caused by antibodies that block receptors at 
the neuromuscular junction resulting in decreased activation of muscles 
by nerves, leading to varying degrees of muscle weakness. Acute 
inflammatory demyelinating neuropathy, also known as Guillain-Barre 
Syndrome, is caused by an autoimmune process that attacks the myelin 
sheaths around nerves, causing defective nerve transmission that leads 
to sensory loss and muscle weakness. Chronic inflammatory demyelinating 
neuropathy is a chronic, relapsing form of the acute syndrome.
    We proposed to assign these conditions to MS-DRGs 56 and 57 
(Degenerative Nervous System Disorders With and Without MCC, 
respectively). According to the commenter, cases with these conditions 
should not be assigned to an MS-DRG for degenerative nervous system 
disorders.
    The commenter stated that a separate DRG needs to be established to 
recognize the substantially higher costs of treating patients with an 
acute exacerbation of myasthenia gravis. There are two ICD-9-CM 
diagnosis codes for myasthenia gravis: code 358.00 (Myasthenia gravis 
without (acute) exacerbation) and code 358.01 (Myasthenia gravis with 
exacerbation). According to the commenter, in addition to 
plasmapheresis, acute myasthenia gravis patients often require 
respiratory support, intensive care unit stays, and IVIG 
administration. The commenter requested that CMS review cost data for 
admissions under this diagnosis and determine whether these cases had 
costs that were substantially higher than other cases assigned to the 
same DRG.
    The commenter stated that, similar to myasthenia gravis, AIDP and 
CIDP are highly likely to require respiratory support and intensive 
care unit stays with plasmapheresis or IVIG administration, or both, 
when presenting acutely or in acute exacerbation. The ICD-9-CM 
diagnosis code that is reported for AIDP is code 357.0 (Acute infective 
polyneuritis), and the appropriate diagnosis code for CIDP is code 
357.81 (Chronic inflammatory demyelinatng polyneuritis). The commenter 
stated that the data on AIDP and CIDP are unavailable at this time. 
Therefore, the commenter requested that CMS track these cases in 
consideration of a separate DRG for AIDP/CIDP for next year.
    Response: The commenter raised a concern that myasthenia gravis 
cases are being assigned to the degenerative nervous system disorders 
DRG, and did not believe that the condition should be assigned to that 
DRG. However, we would point out that myasthenia gravis cases are 
currently assigned to CMS-DRG 12 (Degenerative Nervous System 
Disorders). Moving to the MS-DRGs did not alter this DRG logic. We 
simply subdivided this DRG into two severity levels. Given the 
extensive changes we are making in moving to MS-DRGs we believe it is 
premature to consider refinements to this base DRG for myasthenia 
gravis cases. Rather, we will wait to gain experience under the MS-DRGs 
and determine whether further refinements are needed to the base DRGs.
d. Peripheral and Spinal Neurostimulators (MDC 1 and MDC 8)
    In our analysis of spinal procedures and peripheral and cranial 
nerve and other nervous system procedures based DRGs in MDC 1, we found 
that each warranted three subdivisions based on our five criteria. 
There are three MS-DRGs for spinal procedures: MS-DRG 28 (Spinal 
Procedures with MCC), MS-DRG 29 (Spinal Procedures with CC), and MS-DRG 
30 (Spinal Procedures without CC). There are three MS-DRGs for 
peripheral and cranial nerve and other nervous system procedures: MS-
DRG 40 (Peripheral and Cranial Nerve and Other Nervous System 
Procedures with MCC), MS-DRG 41 (Peripheral and Cranial Nerve and Other 
Nervous System Procedures with CC), and MS-DRG 42 (Peripheral and 
Cranial Nerve and Other Nervous System Procedures without CC).
    For back and neck procedures based DRGs in MDC 8, we found that the 
base DRG warranted two subdivisions based on our five criteria. There 
are two MS-DRGs for back and neck procedures except spinal fusion: MS-
DRG 490 (Back and Neck Procedures Except Spinal Fusion with CC/MCC or 
Disc Devices) and MS-DRG 491 (Back and Neck Procedures Except Spinal 
Fusion without CC/MCC).
    Comment: Several commenters analyzed the effects of the MS-DRGs and 
contended that the payment levels for cases with implantable

[[Page 47254]]

neurostimulator devices are, in many instances, inadequate to cover the 
cost of the device and the hospital procedure to implant it. The 
commenters stated that most neurostimulator cases are assigned to the 
lowest severity level in these DRGs and concluded that the average 
charges of these cases are more similar to the higher severity levels. 
The commenters recommended that CMS:
     For spinal cord nonrechargeable stimulator cases in MDC 1: 
Reassign all full system implants which includes cases reported with 
ICD-9-CM procedure codes 03.93 (Implantation or replacement of spinal 
neurostimulator lead(s)) and 86.94 (Insertion or replacement of single 
array neurostimulator pulse generator, not specified as rechargeable), 
or 86.95 (Insertion or replacement of dual array neurostimulator pulse 
generator, not specified as rechargeable), to MS-DRG 29 and revise the 
title to ``Spinal Procedure with CC or Major Device Implant.''
     For spinal cord rechargeable neurostimulator cases in MDC 
1: Reassign all full-system implant cases reported with ICD-9-CM 
procedure codes 03.93 and 86.97 (Insertion or replacement of single 
array rechargeable neurostimulator pulse generator) or 86.98 (Insertion 
or replacement of dual array rechargeable neurostimulator pulse 
generator) to MS-DRG 28, and revise the title to ``Spinal Procedure 
with MCC or Major Device Implant.''
     For spinal cord rechargeable neurostimulator cases in MDC 
8: Reassign all full-system implant cases reported with ICD-9-CM 
procedure codes 03.93 and 86.97 (Insertion or replacement of single 
array rechargeable neurostimulator pulse generator) or 86.98 (Insertion 
or replacement of dual array rechargeable neurostimulator pulse 
generator) to MS-DRG 490.
     For peripheral nonrechargeable neurostimulator cases in 
MDC 1: Reassign all full-system implant cases reported with ICD-9-CM 
procedure codes 04.92 (Implantation or replacement of peripheral 
neurostimulator lead(s)) and 86.94 or 86.95 to MS-DRG 041 and revise 
the title to ``Peripheral and Cranial Nerve and Other Nervous System 
Procedures with CC or Major Device Implant.''
     For peripheral rechargeable neurostimulator cases in MDC 
01: Reassign all full-system implant cases reported with ICD-9-CM 
procedure codes 04.92 and 86.97 or 86.98 to MS-DRG 040 and revise the 
title to ``Peripheral and Cranial Nerve and Other Nervous System 
Procedures with MCC or Major Device Implant.''
    Two commenters recommended device-dependent surgical DRGs for these 
cases. Several commenters also provided an alternative option to the 
recommendations listed above:
     Assign all full-system spinal cord stimulator cases 
(rechargeable and non-rechargeable) in MDC 1 to MS-DRG 029.
     Assign all full-system Spinal cord stimulator cases 
(rechargeable and non-rechargeable) in MDC 8 to MS-DRG 490.
     Assign all full-system peripheral neurostimulator cases 
(rechargeable and non-rechargeable) in MDC 1 to MS-DRG 041.
     Maintain the new-technology add-on payment for 
rechargeable neurostimulators for one additional year because of 
limited data.
    Response: We analyzed the FY 2006 MedPAR data for full system 
spinal and peripheral neurostimulators, both nonrechargeable and 
rechargeable, using the procedure codes listed above. We found that the 
majority of spinal neurostimulator cases in MDC 1 (113 cases) were 
assigned to MS-DRG 030. The majority of the peripheral neurostimulator 
cases (44 cases) were assigned to MS-DRG 042. The majority of the 
spinal neurostimulator cases (253 cases) in MDC 8 were assigned to MS-
DRG 491. The following table displays our results:

----------------------------------------------------------------------------------------------------------------
                                                                     Number of    Average length      Average
                             MS-DRG                                    cases          of stay         charges
----------------------------------------------------------------------------------------------------------------
                                                Spinal Procedures
----------------------------------------------------------------------------------------------------------------
MS-DRG 028--With MCC............................................           1,531           14.67      $88,392.05
MS-DRG 029--With CC.............................................           2,699            7.63       46,223.20
MS-DRG 030--Without MCC or CC...................................           3,540            3.67       27,081.14
----------------------------------------------------------------------------------------------------------------
                                             Spinal Neurostimulators
----------------------------------------------------------------------------------------------------------------
MS-DRG 028--With MCC............................................               7            2.57       81,208.14
MS-DRG 029--With CC.............................................              29            3.10       68,090.03
MS-DRG 030--Without MCC/CC......................................             113            1.81       57,399.84
----------------------------------------------------------------------------------------------------------------

    The average charges for the 113 spinal neurostimulator cases 
assigned to MS DRG 030 of approximately $57,400 are much higher than 
the average charges of approximately $27,081 for the overall charges in 
MS-DRG 030. The charges for these cases more closely approximate the 
charges for the other cases in the CC level, MS-DRG 029.

----------------------------------------------------------------------------------------------------------------
                                                                     Number of    Average length      Average
                             MS-DRG                                    cases          of stay         charges
----------------------------------------------------------------------------------------------------------------
                                     Peripheral and Cranial Nerve Procedures
----------------------------------------------------------------------------------------------------------------
MS--DRG 040-With MCC............................................           4,300           13.59      $64,354.13
MS-DRG 041--With CC.............................................           7,388            7.53       37,421.99
MS-DRG 042--Without MCC/CC......................................           5,112            3.65       30,600.18
----------------------------------------------------------------------------------------------------------------
                                           Peripheral Neurostimulators
----------------------------------------------------------------------------------------------------------------
MS-DRG 040--With MCC............................................              12            8.92       63,170.42
MS-DRG 041--With CC.............................................              24            4.96       45,118.04
MS-DRG 042--Without MCC/CC......................................              44            1.71       50,716.25
----------------------------------------------------------------------------------------------------------------


[[Page 47255]]

    The average charges for the 44 peripheral neurostimulator cases 
assigned to MS-DRG 042 of approximately $50,716 are much higher than 
the average charges of approximately $30,600 for the overall charges in 
MS-DRG 042. Further, they are even higher than the 24 MS-DRG 041 cases 
with a peripheral neurostimulator and a CC. The relationship between 
average charges for neurostimulator cases and the MS-DRG where they are 
assigned does not appear to be monotonic in this case. We believe the 
low volume of cases for this technology may explain this unusual 
pattern in average charges. One or a few cases with aberrant charges 
could potentially be skewing the data. Nevertheless, we do believe the 
data for the MS-DRG 042 peripheral neurostimulator cases does 
illustrate that their average charges should be reassigned to a higher 
severity level. Although average charges for peripheral neurostimulator 
cases without an MCC or CC appear to be midway between average charges 
for cases in MS-DRGs 040 and 041, we do not believe these cases should 
be assigned to the ``with MCC'' MS-DRG at this time. Before deciding 
whether further MS-DRG assignment is warranted, we prefer to have more 
data that demonstrates monotonicity in the average charges.

----------------------------------------------------------------------------------------------------------------
                                                                     Number of    Average length      Average
                         MS-DRG in MDC 8                               cases          of stay         charges
----------------------------------------------------------------------------------------------------------------
MS-DRG 490--All cases...........................................          17,493            5.13      $29,656.66
MS-DRG 490--Spinal neurostimulator cases........................              49            3.69       62,385.33
MS-DRG 491--All cases...........................................          57,496            2.27       17,788.59
MS-DRG 491--Spinal neurostimulator cases........................             253            1.62       56,238.72
----------------------------------------------------------------------------------------------------------------

    The average charges for the 253 spinal neurostimulator cases 
assigned to MS-DRG 491 in MDC 8 of approximately $56,239 are much 
higher than the average charges of approximately $17,789 for the 
overall charges in MS-DRG 491. The charges for these cases are also 
higher than the average charges of $29,656 for MS-DRG 490. We believe 
these cases should be assigned to MS-DRG 490 at this time.
    In this final rule with comment period, we are assigning full 
system spinal cord nonrechargeable and rechargeable neurostimulator 
cases in MS-DRG 030 to MS-DRG 029 in MDC 1. ICD 9 CM procedure codes 
03.93 and 86.94 or 86.95 or 86.97 or 86.98 must be reported in order 
for the spinal neurostimulator cases to be assigned to MS-DRG 029. We 
are defining MS-DRG 029 as ``Spinal Procedures with CC or 
Neurostimulator.'' The presence of a spinal procedure with CC or 
neurostimulator would assign the case to the second severity level.
    We are also assigning full system peripheral nonrechargeable and 
rechargeable neurostimulator cases in MS-DRG 042 to MS-DRG 041 in MDC 
1. ICD-9-CM procedure codes 04.92 and 86.94 or 86.95 or 86.97 or 86.98 
must be reported in order for the peripheral neurostimulator cases to 
be assigned to MS-DRG 041. We are defining MS-DRG 041 as ``Peripheral 
and Cranial Nerve and Other Nervous System Procedures with CC or 
Neurostimulator.'' The presence of a peripheral and cranial nerve 
procedure with CC or neurostimulator would assign the case to the 
second severity level.
    The full system spinal cord nonrechargeable and rechargeable 
neurostimulator cases in MS-DRG 491 are being assigned to MS-DRG 490. 
ICD-9-CM procedure codes 03.93 and 86.94 or 86.95 or 86.97 or 86.98 
must be reported in order for the spinal neurostimulator cases to be 
assigned to MS-DRG 490. We are defining MS-DRG 490 as ``Back and Neck 
Procedures Except Spinal Fusion with CC/MCC or Disc Devices or 
Neurostimulator.'' The presence of a back and neck except spinal fusion 
procedure with CC/MCC or disc devices or neurostimulator would assign 
the case to the second severity level.
    We refer readers to section II.J. of the preamble to this final 
rule with comment period for new technology discussions about 
rechargeable neurostimulators. We will continue to monitor these low 
volume full system neurostimulator cases for further refinements if 
warranted.
e. Stroke and Administration of Tissue Plasminogen Activator (tPA) (MDC 
1)
    In FY 2006, CMS created CMS DRG 559 (Acute Ischemic Stroke with Use 
of Thrombolytic Agent) by assigning diagnosis codes for embolic stroke 
codes plus procedure code 99.10 (Injection or infusion of thrombolytic 
agent) to this new CMS DRG. The coding content of CMS DRGs 14 
(Intracranial Hemorrhage or Cerebral Infarction) was not modified--
cases that included a diagnosis code for embolic stroke but the patient 
was not administered a thrombolytic agent continued to be assigned to 
this DRG. CMS DRG 15 (Nonspecific CVA and Precerebral Occlusion without 
Infarct) also remained unchanged. Under the new MS-DRGs, the former CMS 
DRG 559 will have three severity levels: MS-DRG 061 (Acute Ischemic 
Stroke with Use of Thrombolytic Agent with MCC), MS-DRG 062 (Acute 
Ischemic Stroke with Use of Thrombolytic Agent with CC), and MS-DRG 063 
(Acute Ischemic Stroke with Use of Thrombolytic Agent w/o CC/MCC).
    Comment: One commenter agreed with CMS' proposal to take the 
severity of a patient's illness into account when establishing payment 
rates. The commenter noted that severely ill or complex patients 
require more intensive evaluation, treatment, and monitoring, resulting 
in higher costs. The commenter added that it is logical to reimburse 
hospitals at a higher rate for those patients who require more care.
    However, the commenter expressed some concerns with the proposed 
payment rates for stroke patients with a CC or without a CC/MCC who are 
treated with tPA, noting that according to its calculations, 
reimbursement rates for MS-DRGs 062 and 063 will decrease. The 
commenter believed that this decrease could create a financial 
disincentive for hospitals if payment for MS-DRGs 062 and 063 fails to 
provide adequate reimbursement for those costs incurred by facilities 
that administer tPA.
    Response: The cost of treating patients with tPA continues to be 
represented in MS-DRGs 061, 062, and 063, but the cases have been 
distributed according to the presence of an MCC, or a CC, or the lack 
of either an MCC or CC in MS-DRG 063 according to the historical data 
represented by MedPAR. Medicare likely will continue to pay the same 
amount for all patients treated with tPA. However, our payments will 
better reflect patient severity of illness by paying higher amounts for 
those cases where the patient has an MCC or CC than if they do not.
    Comment: One commenter urged CMS to create a process that allows 
for periodic evaluation and updating of the MCC and CC lists, noting 
that CMS must

[[Page 47256]]

institute a process that allows for the addition of other conditions 
that create a special concern for one set of patients, including stroke 
patients, to the MCC and CC lists.
    Response: As described in section II.D.3. of this preamble, we 
reviewed more than 13,000 diagnosis codes in order to establish the MCC 
and CC lists. This review activity is an ongoing, annual process, as 
CMS has reviewed portions of the diagnosis codes every year with regard 
to placement on the CC list. The difference is that this year more than 
13,000 diagnosis codes were reviewed, and the designation has changed 
from simply ``CC'' to major comorbidity or complication (MCC) or 
comorbidity or complication (CC). We believe these lists to be 
comprehensive and we will continue to evaluate their content with 
regard to all patients.
    Comment: One commenter expressed concern about the so-called ``drip 
and ship'' cases where tPA is administered in the emergency department 
at Hospital A, but the patient is immediately transferred to Hospital 
B, which has a stroke center. The commenter pointed out that many 
community hospitals do not have the necessary resources, including 
neurology expertise, to care for the critically ill stroke patient. 
However, the commenter added, with the support of a nearby stroke 
center, they are able to diagnose ischemic stroke and institute 
reperfusion (tPA) treatment within the critical three hour window. The 
commenter stated that transfer after administration of tPA is required 
by the need to closely monitor patients after reperfusion treatment. 
Given the critical need to minimize brain damage by immediately 
administering the tPA when indicated, the commenter stated that the 
original hospital where the patient presented with stroke symptoms must 
not delay treatment until after the patient is transferred.
    When a patient is treated with reperfusion therapy in a local 
emergency department, but transferred and admitted to another hospital 
with the necessary stroke services, it is the understanding of the 
commenter that CMS' current policy, as implemented through the DRG 
GROUPER, requires that those cases be assigned to a stroke DRG that 
does not recognize the reperfusion therapy. The hospital to which the 
patient was ultimately admitted did not administer the reperfusion 
therapy, and the hospital which administered the thrombolytic drug did 
not admit the patient. The commenter noted that these patients are in 
the severely ill category and require the same high level of resources 
as any other patient who receives reperfusion therapy and who would 
normally be assigned to CMS DRG 559.
    The commenter made the following suggestion: ``When a patient has 
been started on reperfusion therapy [tPA] at another hospital, as an 
outpatient, and is transferred to a hospital with a stroke center, the 
case should be assigned to one of the ``stroke-with-thrombolytic agent 
DRGs'' (MS-DRGs 061, 062, or 063).
    Response: We previously considered this situation in 2005 when we 
created DRG 559 that separately distinguished stroke patients 
administered a thrombolytic agent. The commenter is suggesting that it 
is not the thrombolytic agent itself that raises the hospital's costs 
(although in our view, it is certainly an element of higher costs) but 
all of the other services that are provided by the receiving hospital 
to such a patient. Although we recognize the concerns of the commenter, 
the emergency room is already being compensated for the administration 
of the tPA. Therefore, we do not believe it would be appropriate for 
Medicare to pay for the same service at another facility.
f. Gliasite [supreg] Radiation Therapy System (RTS) (MDC 1)
    Comment: One commenter, the manufacturer of Gliasite [reg] 
Radiation Therapy System (RTS), wrote that this technology is used in 
the treatment of malignant brain cancer. The commenter indicated that 
patients who undergo this treatment require two admissions. The first 
admission includes tumor debulking and a special catheter is implanted. 
The following ICD-9-CM procedures are assigned to report the procedures 
performed: Code 01.59 (Other excision or destruction of lesion or 
tissue of brain) and code 01.27 (Insertion of catheter(s) into cranial 
cavity or tissue). Under the proposed MS-DRGs, the case for this 
admission with a principal diagnosis of glioblastoma and procedure 
codes 01.59 and 01.27 would be assigned to MS-DRGs 26 and 27 
(Craniotomy and Endovascular Intracranial Procedures with and without 
MCC/CC, respectively).
    The commenter added that the second admission usually occurs in a 
week or 10 days and entails liquid radioisotope infused into the 
special catheter. The patient is monitored for a few days and then the 
radioisotope is removed. ICD-9-CM procedure code 92.20 (Infusion of 
liquid brachytherapy radioisotope) and code 01.27 (Removal of 
catheter(s) from cranial cavity or tissue) would be assigned to 
identify the procedures performed in the second admission. Under the 
proposed MS-DRGs, for the second admission, the case with a principal 
diagnosis of glioblastoma and procedure codes 92.20 and 01.27 would be 
assigned to medical MS-DRGs 54 and 55 (Nervous System Neoplasm with and 
without MCC, respectively).
    The commenter requested that CMS recognize the resources associated 
with infusion of radioisotope and establish two new surgical MS-DRGs 
for these admissions/treatments:
     Liquid radiotherapy infusion for glioblastoma without 
tumor debulking.
     Liquid radiotherapy infusion for glioblastoma with 
craniotomy, tumor debulking, and implantation of infusion catheter.
    The commenter stated that the costs of the implant can be 
considered equivalent to the cost of an MCC and should be recognized in 
a surgical MS-DRG descriptor.
    Response: The refinement of the DRGs is not based on the creation 
of any new logic under the MS-DRGs. We believe that it is not 
appropriate to make DRG revisions of this nature as part of the final 
rule since the base DRG has not changed for these cases. However, we 
will examine the need for further DRG refinements as we gain experience 
under the MS DRGs.
g. Noninvasive Ventilation (MDC 4)
    Comment: One commenter representing a national association 
requested the creation of a new DRG for noninvasive positive pressure 
ventilation (NPPV). According to the commenter, NPPV is an effective 
and preferred treatment in the management of patients with acute 
exacerbations of chronic obstructive pulmonary disease and other forms 
of respiratory failure.
    Currently, this treatment is identified in ICD-9-CM by procedure 
code 93.90 (Continuous positive airway pressure (CPAP)) and does not 
require the use of mechanical ventilation via an endotracheal tube or 
tracheotomy. The commenter indicated that NPPV is a valuable and 
clinically appropriate option for patients who may require short term 
(<96 hours) ventilatory support when presenting with an acute 
respiratory failure condition. The commenter noted that results have 
demonstrated improved outcomes and less risk associated with less 
invasive devices. Therefore, the commenter stated, the selection of 
treatment for ventilatory support does not solely rely on patient 
acuity. To better recognize NPPV as an appropriate treatment in acute 
respiratory conditions and ensure proper reimbursement, the commenter 
also proposed that CMS consider

[[Page 47257]]

including NPPV (code 93.90) in proposed MS-DRG 207 (Respiratory System 
Diagnosis with Ventilatory Support 96+hours) if the creation of a new 
MS-DRG was not a viable option.
    Response: We met with the commenter on June 13, 2007, regarding the 
above requests to create a new MS-DRG for patients who receive NPPV or 
reassign cases to a different MS-DRG. After discussing the clinical and 
coding issues surrounding NPPV, we advised the commenter to request a 
new procedure code to distinguish between the various treatments that 
are currently included in code 93.90. We informed the commenter about 
the ICD-9-CM Coordination and Maintenance Committee and the process for 
requesting a new procedure code.
h. Heart Assist Devices (MDC 5)
    Comment: One commenter requested that CMS create an additional 
severity level in MS-DRG 215 that would be titled ``Other Heart Assist 
Implant without Major Complications.'' The commenter indicated that CMS 
should have a consistent number of severity levels between this MS-DRG 
and MS-DRGs 001 or 002 (Heart Transplant or Implant of Heart Assist 
System with MCC or without MCC, respectively). In the proposed rule, 
MS-DRG 215 (formerly CMS DRG 525, and still titled ``Other Heart Assist 
System Implant'') had no severity levels. The commenter stated that, by 
capturing the severity of the cases with devices coded to 37.65 
(Implant of external heart assist system), hospitals will be more 
appropriately reimbursed and CMS will be consistent in its policy.
    The commenter added that without a severity breakdown in MS-DRG 
215, it feared the integrity of the MS-DRG will be distorted, causing 
an unwarranted financial windfall for some cases. The commenter 
indicated that Medicare will be overpaying less severe cases and 
underpaying cases with major complications if MS-DRG 215 is not 
subdivided into with MCC and without MCC severity levels.
    Response: We reviewed the following data specifically in light of 
this comment. Our findings are represented in the table below.

----------------------------------------------------------------------------------------------------------------
                                                                     Number of    Average length      Average
                             MS-DRG                                    cases          of stay         charges
----------------------------------------------------------------------------------------------------------------
MS-DRG 215--All cases...........................................             142           11.32     $204,885.12
MS-DRG 215--Cases with insertion of nonimplantable heart assist               63           10.95      134,669.43
 system (code 37.62)............................................
MS-DRG 215--Cases with repaid heart assist and system (code                   29           14.07      225,962.07
 37.63).........................................................
MS-DRG 215--Cases with implant of external heart assist (VAD)                 59           11.80      286,953.90
 (code 37.65)...................................................
----------------------------------------------------------------------------------------------------------------

    In the proposed rule (72 FR 24705), we explained that we developed 
a set of criteria to facilitate the decision-making process surrounding 
the subdivision of a DRG into subgroups based on the presence of a CC 
or MCC. We specified that in order to warrant creation of a CC or MCC 
subgroup within a base MS-DRG, the subgroup had to meet all of the five 
criteria listed. One of the criteria was that the subgroup contained at 
least 500 cases. In this instance, there are only 142 cases in the 
MedPAR data. Therefore, there are too few cases to warrant a 
subdivision of the base DRG into severity levels. We will continue to 
monitor this DRG, and should future data prove that a subdivision of 
MS-DRG 215 is warranted, we will consider revision of its structure.
i. Automatic Implantable Cardioverter-Defibrillators (ACID) Lead and 
Generator Procedures (MDC 5)
    Comment: One commenter commended CMS for creating a separate, stand 
alone DRG for automatic implantable cardioverter-defibrillator (AICD) 
generator replacements and defibrillator lead replacements. The new DRG 
is MS-DRG 245 (AICD lead and generator procedures). The MS-DRG contains 
the following codes:
     00.52, Implantation or replacement of transvenous lead 
[electrode] into left ventricular coronary venous system.
     00.54, Implantation or replacement of cardiac 
resynchronization defibrillator pulse generator device only [CRT-D].
     37.95, Implantation of automatic cardioverter/
defibrillator leads(s) only.
     37.96, Implantation of automatic cardioverter/
defibrillator pulse generator only.
     37.97, Replacement of automatic cardioverter/defibrillator 
leads(s) only.
     37.98, Replacement of automatic cardioverter/defibrillator 
pulse generator only.
    The commenter indicated that under the current CMS DRGs, the 
defibrillator generator and defibrillator lead replacements were 
included in DRG 551 with pacemaker implants. The commenter supported 
this new MS-DRG, which recognizes the distinct differences in resource 
utilization between pacemaker and defibrillator generators and leads. 
The commenter stated that CMS should consider additional refinements 
for the defibrillator generator and leads. In reviewing the 
standardized charges for the AICD leads, the commenter believed that 
the leads may be more appropriately assigned to another DRG such as MS-
DRG 243 (Permanent Cardiac Pacemaker Implant with CC) or MS-DRG 258 
(Cardiac Pacemaker Device Replacement with MCC). The commenter 
recommended that CMS consider moving the defibrillator leads back into 
a pacemaker DRG, either MS-DRG 243 or MS-DRG 258.
    Response: We appreciate the commenter's support for the refinements 
made through the MS-DRGs to better identify differences in patient care 
costs associated with pacemakers and defibrillators. In our view, the 
data support separate DRGs for these very different devices. The 
commenter supported the proposed DRG change we made that removed both 
the defibrillator generators and leads from the pacemaker MS DRG and 
then recommended that we move the defibrillator leads only back into a 
pacemaker DRG. The commenter, as stated, had supported this change 
because the commenter believed that it better identified devices that 
were quite different. We proposed separating defibrillator and 
pacemaker devices because they are such different devices. Moving the 
defibrillator leads back into a pacemaker MS-DRG defeats the purpose of 
creating separate MS-DRGs for defibrillators and pacemakers. Therefore, 
we are finalizing MS DRG 245 as proposed with the leads and generator 
codes listed above.
j. Artificial Heart (MDC 5)
    Comment: One commenter requested that ICD-9-CM code 37.52 
(Implantation of total replacement heart system) [which includes 
artificial heart] be moved from CMS DRG 525 (Other Heart Assist System 
Implant) to CMS DRG 103 (Heart Transplant or Implant of Heart Assist 
System). These CMS DRGs would be renumbered and renamed in the proposed 
MS-DRG system, with CMS DRG 525 becoming

[[Page 47258]]

MS-DRG 215 (Other Heart Assist System Implant) and CMS DRG 103 becoming 
MS-DRGs 001 (Heart Transplant or Implant of Heart Assist System with 
MCC) and 002 (Heart Transplant or Implant of Heart Assist System 
without MCC). The commenter stated that the change of MS-DRG assignment 
from MS-DRG 215 to MS-DRGs 001 or 002 will more accurately reflect the 
grouping of procedures for the implantation of a total replacement 
heart system with heart transplantation and other heart assist systems 
intended as destination therapy to more accurately recognize hospital 
resources for the treatment of end-stage heart failure. We received a 
similar comment from another manufacturer.
    Response: Medicare does not currently cover artificial heart 
implants. ICD-9-CM procedure code 37.52 (Implantation of total 
replacement heart system) was created for potential use for discharges 
on or after October 1, 2003. However, code 37.52 was immediately put on 
the noncovered procedure list of the MCE as no device then existed that 
was deemed safe and effective as an artificial heart. The technology 
remains noncovered by Medicare. For this reason, we currently have no 
data to suggest that the DRG assignment for procedure code 37.52 needs 
to be changed.
    Our review of the second manufacturer's product shows it to be a 
bi-ventricular device, not an artificial heart as described in their 
marketing literature. This commenter also is currently in the process 
of requesting coverage for its device. We recommend that the 
manufacturer of this device request to be added to the agenda of the 
ICD-9-CM Coordination and Maintenance Committee meeting of September 
27, 2007. An ICD-9-CM procedure code will help us to determine whether 
a Medicare patient treated with this new technology should be assigned 
to a DRG other than the one that includes the predecessor code used to 
describe the service.
    Comment: One commenter suggested that CMS reevaluate the 
appropriateness of including ICD-9-CM procedure code 37.62 (Insertion 
of nonimplantable heart assist system) in CMS DRG 525 (Other Heart 
Assist System Implant), which will become MS-DRG 215 (Other Heart 
Assist System Implant), and reassign code 37.62 to more accurately 
reflect hospital resource consumption of services involving mechanical 
support for cardiovascular failure. The commenter suggested that 
patients treated with a nonimplantable heart assist system are less 
costly than other patients in MS-DRG 215 and should be reassigned to a 
different DRG that would reflect its lower costs. Further, the 
commenter suggested that hospitals may not be using code 37.62 
consistent with its intended purpose.
    Response: The commenter has not provided a compelling justification 
for changing the placement of code 37.62. Our understanding is that 
this code describes use of a nonimplantable heart assist system to 
temporarily replace the heart's function. The function of the device to 
replace the heart means that there are only three potential MS-DRGs 
where code 37.62 could be assigned: MS-DRG 215 (Other Heart Assist 
System Implant) and MS-DRGs 001 and 002 (Heart Transplant or Implant of 
Heart Assist System with and without MCC, respectively). The commenter 
suggested that the code should be assigned to a lower paying MS-DRG 
than MS-DRG 215. However, the only other MS-DRGs to which the code 
could be assigned have even higher payment weights. Therefore, we are 
making no changes to the DRG assignment for code 37.62 for FY 2008. 
Although the commenter suggested potential problems with use of the 
code, the commenter did not suggest any potential solutions for how to 
address this problem. Therefore, we have no information upon which to 
take further action to address the commenter's concern.
k. Vascular Procedures (MDC 5)
    We proposed three MS-DRGs for vascular procedures: MS-DRG 252 
(Other Vascular Procedures with MCC), MS-DRG 253 (Other Vascular 
Procedures with CC) and MS-DRG 254 (Other Vascular Procedures without 
CC/MCC).
    Comment: One commenter evaluated the diagnoses associated with MS-
DRGs 252, 253, and 254 to assess whether patients with diagnoses not on 
the CC or MCC lists were more costly to treat. The commenter selected 
the following 30 diagnosis codes:

 
 
 
250.70, Diabetes with peripheral circulatory disorders, type II or
 unspecified type, not stated as uncontrolled.
263.9, Unspecified protein-calorie malnutrition.
276.1, Hyposmolality and/or hyponatremia.
276.2, Acidosis.
276.51, Dehydration.
276.7, Hyperpotassemia.
276.8, Hypopotassemia.
280.0, Secondary to blood loss (chronic).
285.1, Acute posthemorrhagic anemia.
287.5, Thrombocytopenia, unspecified.
410.71, Subendocardial infarction, initial episode of care.
427.1, Paroxysmal ventricular tachycardia.
427.31, Atrial fibrillation.
440.1, Atherosclerosis of renal artery.
440.24, Atherosclerosis of the extremities with gangrene.
444.22, Arterial embolism and thrombosis, lower extremity.
458.9, Hypotension, unspecified.
491.21, Obstructive chronic bronchitis with (acute) exacerbation.
496, Chronic airway obstruction, not elsewhere classified.
511.9, Unspecified pleural effusion.
518.0, Pulmonary collapse.
599.0, Urinary tract infection, site not specified.
682.6, Other cellulitis and abscess, leg, except foot.
682.7, Other cellulitis and abscess, foot, except toes.
707.15, Ulcer of other part of foot.
785.4, Gangrene.
790.7, Bacteremia.
996.62, Infection and inflammatory reaction due to vascular device,
 implant and graft.
997.1, Cardiac complications.
998.11, Hemorrhage complicating a procedure.
 


[[Page 47259]]

    The commenter recommended that CMS should:
     Reassign vascular procedure cases containing two or more 
of the identified diagnosis codes from MS-DRG 253 to MS-DRG 252.
     Reassign vascular procedure cases containing two or more 
of the identified diagnosis codes from MS-DRG 254 to MS-DRG 253.
    Response: In our proposed rule analysis, we found that the vascular 
procedures DRG warranted three subdivisions according to our five 
criteria. Nineteen of the 30 diagnosis codes suggested by the commenter 
already appear on the CC or MCC list and will result in a patient being 
assigned to either MS-DRG 252 or MS-DRG 253. The remaining 11 diagnosis 
codes do not appear on either list. These codes are: 250.70, 276.51, 
276.7, 276.8, 280.0, 287.5, 427.31, 440.1, 458.9, 496, and 707.15.
    Although the commenter has identified common diagnoses in this 
patient population, our medical advisors reviewed the clinical issues 
and claims data for cases reporting each of the conditions not on the 
MCC or CC list as a secondary diagnosis. After evaluating the claims 
data and analyzing the clinical issues, our medical advisors recommend 
that we not change the CC status for the codes mentioned above. They do 
not believe there is sufficient justification for making these codes 
CCs. We do not believe that we should make further changes to the MS-
DRG assignments based on combinations of selected diagnoses. These 
types of analyses could be done with virtually any MS-DRG and would add 
significant complexity to the DRG system that we do not believe is 
warranted at this time. We reiterate that the MS-DRGs--like the 
predecessor CMS-DRGs--are intended to establish an average payment 
based on groups of patients that are similar in costs and clinical 
characteristics. Over time, we found that the CMS DRGs did not 
sufficiently recognize differences in patient severity of illness, and 
we proposed to adopt the MS-DRGs as an alternative to achieve this 
objective. While we acknowledge that further potential improvements may 
be warranted as we have more experience with the new system, we have 
significant concerns about selectively analyzing specific diagnoses 
within a given MS-DRG to change their DRG assignment. Although we have 
increased the assigned severity level for a limited number of cases, 
these decisions recognize that the patient was more complex than was 
suggested by their secondary diagnosis either because of a specific 
procedure (in the case of intestinal transplants) or the type of 
technology used to treat their condition (in the case of cochlear 
implants and spinal stabilization devices).
    We refer readers to section II.D.2.a. of this preamble for complete 
information on the CC list.
l. Coronary Artery Stents (MDC 5)
    Effective for cases discharged on or after October 1, 2005 (FY 
2006), the ICD-9-CM Coordination and Maintenance Committee created a 
series of adjunct codes further describing procedures on the vascular 
system. These codes were at the 00.4 subcategory (Adjunct vascular 
system procedures), with codes 00.40 through 00.43 describing the 
number of vessels upon which a procedure was performed, and codes 00.45 
through 00.48 describing the number of stents which were inserted. As 
these codes were deemed to be adjunct codes that supplemented the 
information describing a patient's hospital treatment, they were not 
considered procedure codes that would affect DRG assignment. However, 
coders were encouraged to thoroughly and completely code all hospital 
stays, in case this information would be used for future DRG 
determination. We received comments on the proposed MS-DRGs concerning 
the DRG assignment for procedures on multiple coronary vessels and 
insertion of multiple stents in coronary arteries.
    Comment: Commenters have analyzed standardized charges in the FY 
2006 MedPAR data for percutaneous transluminal coronary angioplasty 
(PTCA) in conjunction with codes indicating insertion of drug-eluting 
or non-drug-eluting coronary artery stent(s) and the use of codes 
indicating procedures on multiple vessels and/or insertion of multiple 
stents. These commenters believe that mean standardized charges for 
these combination codes vary substantially from the mean standardized 
charges associated with the DRGs to which they are proposed to be 
assigned. The DRGs under consideration in this section for drug-eluting 
stents are MS-DRG 246 (Percutaneous Cardiovascular Procedure with Drug-
Eluting Stent with MCC) (formerly CMS DRG 557 (Percutaneous 
Cardiovascular Procedure with Drug-Eluting Stent with Major 
Cardiovascular Diagnosis)) and MS-DRG 247 (Percutaneous Cardiovascular 
Procedure with Drug-Eluting Stent without MCC) (formerly CMS DRG 558 
(Percutaneous Cardiovascular Procedure with Drug-Eluting Stent without 
Major Cardiovascular Diagnosis)). The DRGs under consideration in this 
section for non-drug-eluting stents are MS-DRG 248 (Percutaneous 
Cardiovascular Procedure with Non-Drug-Eluting Stent with MCC) and MS-
DRG 249 (Percutaneous Cardiovascular Procedure with Non-Drug-Eluting 
Stent with MCC). (These were either formerly CMS DRG 555 (Percutaneous 
Cardiovascular Procedures with Major Cardiovascular Diagnosis) or CMS 
DRG 556 (Percutaneous Cardiovascular Procedure with Non-Drug-Eluting 
Stent without Major Cardiovascular Diagnosis), respectively.)
    The commenters recommended that PTCA code 00.66 (Percutaneous 
transluminal coronary angioplasty [PTCA] or coronary atherectomy) in 
combination with a code for insertion of a drug-eluting or non-drug-
eluting stent, plus adjunct codes indicating procedures on multiple 
vessels and insertion of multiple stents be assigned to MS-DRGs 246 and 
248 as described above. They stated that their analysis of standardized 
charges for PTCA with insertion of a drug-eluting or non-drug-eluting 
stent(s) in multiple vessels or with insertion of multiple stents vary 
substantially from the mean standardized charges associated with the 
DRGs to which they are proposed to be assigned. The commenters found 
that the variation in charges between the subgroups and the overall DRG 
average meet CMS' criteria for moving cases between DRGs, and suggested 
that cases with multiple vessels and multiple stents be moved up to the 
first DRG in the series. That is, cases with insertion of drug-eluting 
stents in MS-DRG 247 would be assigned to MS-DRG 246, and cases with 
non-drug-eluting stents in MS-DRG 249 would be assigned to MS-DRG 248. 
In each of the MS-DRGs, cases where multiple vessels are treated or 
multiple stents are placed would be assigned to the ``with MCC'' MS-DRG 
rather than the ``without MCC'' MS-DRG.
    Response: We reviewed the MedPAR data in response to these comments 
and found that PTCAs with four or more vessels or four or more stents 
were more comparable in average charges to the higher weighted DRG in 
the group. These data are summarized in the following tables.

[[Page 47260]]



----------------------------------------------------------------------------------------------------------------
                                                                     Number of    Average length      Average
                             MS-DRG                                    cases          of stay         charges
----------------------------------------------------------------------------------------------------------------
MS-DRG 246--All cases...........................................          31,204            6.34      $64,009.36
MS-DRG 246--Cases with codes 00.66 and 36.07 with 4 or more                1,425            5.68        78,02.93
 vessels (code 00.43) and 4 or more stents (code 000.48)........
MS-DRG 247--All cases...........................................         267,684            2.24       40,857.34
MS-DRG 247--Cases with codes 00.66 and 36.07 with 4 or more                8,095            2.33       61,666.34
 vessels (code 00.43) and 4 or more stents (code 000.48)........
MS-DRG 248--All cases...........................................           4,710            6.53       56,671.61
MS-DRG 248--Cases with codes 00.66 and 36.06 with 4 or more                  112            6.38       69,431.81
 vessels (code 00.43) and 4 or more stents (code 000.48)........
MS-DRG 249--All cases...........................................          27,914            2.55       35,577.22
MS-DRG 249--Cases with codes 00.66 and 36.06 with 4 or more                  232            3.76       54,203.87
 vessels (code 00.43) and 4 or more stents (code 000.48)........
----------------------------------------------------------------------------------------------------------------

    In both cases, we believe that the average charges for cases where 
four or more vessels are treated or four or more stents are placed more 
closely approximate average charges in the higher weighted MS-DRG. 
Therefore, we are assigning these cases to the higher weighted MS-DRG 
according to the following logic.
    Claims containing code 00.66 for PTCA, and code 36.07 (Insertion of 
drug-eluting coronary artery stent(s)), and code 00.43 (Procedure on 
four or more vessels) or code 00.48 (Insertion of four or more vascular 
stents) are assigned to MS-DRG 246. In addition, claims containing code 
00.66 for PTCA, and code 36.06 (Insertion of non-drug-eluting coronary 
artery stent(s)), and code 00.43 or code 00.48 are assigned to MS-DRG 
248.
    We are also making conforming changes to the MS-DRG titles as 
follows: MS-DRG 246 is titled ``Percutaneous Cardiovascular Procedures 
with Drug-Eluting Stent(s) with MCC or 4 or more Vessels/Stents''. The 
title for MS-DRG 247 will remain unchanged. MS-DRG 248 is titled 
``Percutaneous Cardiovascular Procedures with Non Drug-Eluting Stent(s) 
with MCC or 4 or more Vessels/Stents''. The title for MS-DRG 249 will 
remain unchanged. This DRG modification is based on newly created codes 
that were developed to provide additional detail on the number of 
vessels treated and the number of stents inserted. The DRG combines two 
distinct concepts: the insertion of four or more stents or the 
performance of a vascular procedure on four or more vessels, in order 
to determine the DRG assignment. Although we are adopting this DRG 
change for FY 2008, we plan to continue examining whether this revision 
of the DRG definition captures a relatively homogeneous group of cases. 
We currently only have one year of data on these new codes. Therefore, 
we plan to revisit this issue further in next year's proposed rule when 
we have a second year of data to better distinguish the different types 
of cases that are treated with this technology.
m. Endovascular Repair of Aortic and Thoracic Aneurysms (MDC 5)
    Comment: Several commenters expressed concern that the relative 
weights for MS-DRGs 237 and 238 (Major Cardiovascular Procedures with 
MCC and without MCC, respectively), formerly CMS-DRGs 110 and 111 
(Major Cardiovascular Procedures with CC and without CC, respectively) 
do not reflect the severity of illness and the resource use required 
for such complex care. One commenter noted that regardless of the DRG 
assignment, the cost of the endovascular graft or device does not 
change, nor is it insignificant. The commenter further stated that MS-
DRGs 237 and 238 do not adequately factor into the relative weights 
that the device is not incidental to treatment; it is a major component 
of the treatment.
    Response: New MS-DRGs 237 and 238 are exactly the same as their 
predecessor CMS DRGs 110 and 111 in content. Using historic Medicare 
charges and hospital cost report data submitted to us by hospitals, we 
have included the cost of the device into the MS-DRG relative weights.
    Comment: Several commenters suggested that MS-DRGs 237 and 238 
should be divided into three levels of severity: ``with MCC'', ``with 
CC'', and ``without CC/MCC'' and noted that it is important that CMS be 
consistent and not create inequities with regard to major surgical 
procedures. One commenter stated that patients with aortic aneurysm 
fall naturally into three clinical categories, with patients who are 
genetically predisposed to an aneurysm are likely to be younger 
(between 50 and 60 years of age, not between 70 and 80 years of age) 
and are more likely to be healthier than the typical aneurysm patient. 
Those cases are suggested for an MS-DRG without CC/MCC. The commenter 
added that the other cases would fall into the ``with MCC'' or ``with 
CC'' MS-DRGs based on the severity of their CCs.
    Response: When we consolidated all existing DRGs into the base 
DRGs, we removed all demarcations that had been added over the years, 
including considerations for age, gender, and discharge disposition, as 
well as elimination of the current split based on the presence or 
absence of a CC, burns, trauma, AMI, major cardiovascular condition, 
among others. We then applied the severity criteria described elsewhere 
in this preamble, and stated that in order to warrant creation of a CC 
or major CC subgroup within a base MS-DRG, the subgroup had to meet all 
five criteria. The commenter states that genetically predisposed 
patients tend to be younger. Although age is a variable that would be 
available in the Medicare claims data, genetic predisposition to a 
certain class of diseases generally cannot be identified in the ICD-9-
CM coding system. Therefore, as we are not able to identify those 
patients, we cannot subdivide these MS-DRGs using genetic 
predisposition as criterion.
    We considered subdividing MS-DRGs 237 and 238 into three DRGs for 
the proposed rule. However, MS-DRGs 237 and 238 did not meet the 
criteria for a 3-way split.
    Comment: Two commenters suggested that instead of ``with MCC'' in 
the surgical DRGs, CMS should establish a list of devices that would be 
equivalent to the MCC categorization and further subdivide the MS-DRGs 
based on the presence of ``with Major Device.'' Specifically, they 
suggested that endovascular devices or grafts used during 
cardiovascular procedures should be considered major devices. 
Therefore, they added, when a major device or implantable graft is used 
in a cardiovascular repair procedure, such as those performed to repair 
an abdominal or thoracic aortic aneurysm, CMS should assign those cases 
to MS-DRGs where the DRG title has been changed to reflect that the 
costs of the device are similar to the costs of an MCC.

[[Page 47261]]

    Response: We believe the commenter is suggesting that we establish 
a list of major devices and use them as a proxy for MCCs. We will take 
this suggestion under consideration in future reviews of the MS-DRGs.
    We looked at data to review the differences between endovascular 
graft repair of abdominal aortic aneurysm (code 39.71) and endovascular 
graft repair of thoracic aortic aneurysm (code 39.73). Our findings are 
represented in the table below.

----------------------------------------------------------------------------------------------------------------
                                                                     Number of    Average length      Average
                             MS-DRG                                    cases          of stay         charges
----------------------------------------------------------------------------------------------------------------
MS-DRG 237--All cases...........................................          20,789           11.47      $93,824.52
MS-DRG 237--Cases with code 39.71 (abdominal)...................           1,484            8.95       89,929.39
MS-DRG 237--ases with code 39.73 (thoracic).....................             277           10.98      119,120.51
MS-DRG 238--All cases...........................................          42,797            4.88       51,410.12
MS-DRG 238--Cases with code 39.71 (abdominal)...................          14,091            2.58       55,798.25
MS-DRG 238--Cases with code 39.73 (thoracic)....................             877            4.95       72,426.29
----------------------------------------------------------------------------------------------------------------

    Review of these data shows that the 887 thoracic cases in MS-DRG 
238 have average charges that are between both groups. We believe that 
the data indicate that endovascular repair of the thoracic aorta cases 
should be assigned to MS-DRG 237.
    Therefore, we are assigning procedure code 39.73 (Endovascular 
implantation of graft in thoracic aorta) to MS-DRG 237 in FY 2008.
n. O.R. Procedures for Obesity (MDC 10)
    Comment: One commenter was concerned with the conditions that are 
classified as MCCs and CCs for MS-DRGs 619, 620, 621 (O.R. Procedures 
for Obesity with MCC, with CC, and without CC/MCC, respectively), 
previously CMS DRG 288. The commenter fully supported efforts to base 
payments on patient severity, but states that some of the proposed 
changes do not appear to achieve that goal. The commenter acknowledged 
the three severity levels added to former CMS DRG 288 (O.R. Procedures 
for Obesity). However, the commenter stated that all of the morbidly 
obese Medicare patients will have one or more serious comorbidities. 
The commenter was concerned about the application of the complete MCC 
and CC list to MS-DRGs 619, 620, and 621. The commenter stated that the 
following codes, which are on the MCC and CC lists, should not be 
considered MCCs or CCs for these bariatric DRGs because these 
conditions are ``contraindications'' to performing bariatric surgery:
     Diabetes codes 250.10 through 250.13; 250.20 through 
250.23; and 250.30 through 250.33 (all MCCs).
     Coronary atherosclerosis codes 414.02 through 414.04; and 
414.06 and 414.07 (all CCs).
     Aneurysm and dissection of heart codes 414.10 (CC), 414.12 
(MCC), and 414.19 (CC).
    The commenter also requested that the following codes be classified 
as CCs for these bariatric DRGs:
     Diabetes codes--250.00 through 250.93.
     Obstructive sleep apnea--327.23.
     Hypertensive disease--401.0 through 405.99.
     Cirrhosis of liver without mention of alcohol--571.5.
     Biliary cirrhosis--571.6.
     Other chronic nonalcoholic liver disease--571.8.
     Unspecified chronic liver disease without mention of 
alcohol--571.9.
    Response: Our clinical advisors disagree with the recommendations 
to change the diabetes, coronary atherosclerosis, and aneurysm and 
dissection codes from MCCs and CCs to non-CCs for the bariatric MS-
DRGs. They believe these conditions represent significant CCs in the 
general patient population and the data we used to perform this 
analysis support their judgment. Although we do have secondary 
diagnosis codes that are ``exclusions'' (not counted as an MCC or a CC 
if they are related to the principal diagnosis), we have not analyzed 
whether to classify a particular diagnosis as an MCC or a CC for 
purposes of determining if a particular type of surgery should be 
performed. However, we believe the commenter indicates that our 
decision to classify these conditions as MCCs or CCs is correct by 
suggesting that the presence of these conditions is so significant in 
increasing severity of illness that it is a contraindication to 
surgery. We expect that physicians will not order surgical procedures 
that are contraindicated merely because the case would be assigned to a 
higher-paying DRG.
    Our medical advisors evaluated the request to make the codes 
specified above CCs. Our medical advisors reviewed claims data and 
clinical issues for cases reporting codes 250.00 through 250.93; 
327.23; 401.0 through 405.99; and 571.5 as secondary diagnoses. After 
evaluating the claims data and analyzing the clinical issues, our 
medical advisors recommend that we not change the CC status for codes 
250.00 through 250.93; 327.23; 401.0 through 405.99; and 571.5. They do 
not believe there is sufficient justification for making these codes 
CCs at this time.
o. Penile Restorative Procedures (MDC 12)
    Comment: One commenter, a national organization representing the 
prosthetic urology community applauded CMS for moving forward to ensure 
that Medicare payments for inpatient services are appropriate and 
accurately reflect the severity and resources required for patient 
care. The commenter supported the proposal to implement MS-DRGs on 
October 1, 2007. However, the commenter indicated that the cost of 
implants and prosthetics used in penile implant procedures are 
comparable to the resources utilized in a patient with a MCC or CC 
diagnosis. Generally, the commenter suggested that in surgical MS-DRGs 
where implants and prostheses are part of the ICD-9-CM procedure code 
title that CMS should consider revising the MS-DRG titles to account 
for the costs associated with surgical procedures that use an implant 
or prosthesis. As an example, the commenter expressed support for the 
proposed modification to MS-DRG 129 (Major Head and Neck Procedure with 
CC/MCC or Major Device). The commenter believed that, when a major 
implant/prosthesis/device demonstrates costs that are greater than or 
similar to the difference between the relative weights of a CC/MCC DRG 
versus a without CC/MCC DRG pair, CMS should recognize the device or 
implant in the MS-DRG titles and reassign these cases. Specifically, 
the commenter recommended that the title for proposed MS-DRG 709 (Penis 
Procedures with CC or MCC) be revised to add the phrase ``or major 
device or implant'' and include all cases where an implantable 
prosthesis is used in a penile restorative procedure.
    Response: We appreciate the commenter's support for MS-DRGs and

[[Page 47262]]

its general suggestions for future refinements. The commenter did not 
provide specific examples of types of implants and prosthesis which 
they want to have evaluated for possible DRG reassignment. We are not 
clear as to whether or not there will be ICD- 9-CM procedure codes for 
these specific implants. It is premature to modify the MS-DRG titles at 
this time without more specific information and analysis.
    Comment: This same commenter also urged CMS to review clinically 
significant conditions for penile restorative procedures on the 
proposed MCC and CC lists.
    Response: We refer readers to section II.D.3. of this final rule 
with comment period for a complete discussion on the public comments 
received on the MCC and CC lists. We welcome any specific 
recommendations for future revisions and refinements to the MCC and CC 
lists.
p. Female Reproductive System Reconstruction Procedures (MDC 13)
    Comment: Two commenters requested that CMS establish levels within 
MS-DRG 748 (Female Reproductive System Reconstruction Procedures). The 
commenters noted that all of the other proposed MS-DRGs for surgical 
male and female reproductive system procedures have either ``MCC or 
CC'' subdivisions. The commenters believed that CMS may have made an 
oversight by not establishing severity levels within this MS-DRG.
    Response: As stated in the FY 2008 proposed rule, in order to 
warrant creation of a CC or MCC subgroup within a base MS-DRG, the 
subgroup has to meet all five criteria. In developing the proposed MS-
DRGs, this base DRG did not meet three of the five criteria required to 
subdivide a DRG into additional severity subgroups. MS-DRG 748 failed 
the following three criteria:
     At least 5 percent of the patients in the MS-DRG fall 
within the MCC or CC subgroup.
     At least 500 cases are in the MCC or CC subgroup.
     There is a $4,000 difference in average charge between 
subgroups.
    We refer readers to section II.D.3 of the FY 2008 proposed rule (72 
FR 24705) for a complete listing of the criteria.
    As such, effective October 1, 2007, we are adopting the MS-DRGs as 
final policy and MS-DRG 748 will remain as proposed with the following 
title: MS-DRG 748 (Female Reproductive System Reconstruction 
Procedures).
q. Urological and Gynecological Disorders With Grafts or Prosthesis 
(MDCs 13 and 14)
    Comment: We received comments commending CMS for the creation of 
new ICD-9-CM procedure codes that identify the use of grafts or 
prosthetics in female pelvic prolapse repair procedures. The commenters 
acknowledged that the use of these new codes will result in better data 
collection, outcomes research, and improve the quality of health care 
for women. However, the commenters indicated that the cost of implants 
and prosthetics used in treating various urological and gynecological 
conditions are comparable to the resources utilized in a patient with 
an MCC or CC diagnosis. Specifically, the commenters recommended that 
the titles for the following proposed MS-DRGs be revised to add the 
term, ``or major device'' to account for cases where a graft or 
prosthesis is used.
     MS-DRG 333 (Rectal Resection with CC).
     MS-DRG 662 (Minor Bladder Procedures with Major CC).
     MS-DRG 707 (Major Male Pelvic Procedures with CC or Major 
CC).
     MS-DRG 709 (Penis Procedures with CC or Major CC).
     MS-DRG 746 (Vagina, Cervix & Vulva Procedures with CC or 
Major CC).
    Response: We appreciate the commenter's support of the new 
procedure codes and the suggestion to revise the proposed MS-DRG 
titles. The newly created codes describing the use of grafts or 
prosthetics are restricted to female pelvic prolapse repair procedures 
and are not effective until October 1, 2007. As a result, there is no 
data available for analysis at this time. We will evaluate these 
recommendations as we obtain additional data using the MS-DRGs to 
determine if future changes to the above mentioned MS-DRGs are 
warranted.
r. High Dose Interleukin-2 (HD-IL-2) (MDC 17)
    We received comments concerning the appropriate assignment within 
the MS-DRGs of patients receiving High-dose Interleukin-2 (IL-2).
    In the FY 2004 final rule (68 FR 45360, August 1, 2003), we 
discussed the creation of a specific code to identify IL-2 (procedure 
code 00.15, High-dose infusion of Interleukin-2 (IL-2)) and the 
subsequent modification of existing CMS DRG 492 (Chemotherapy with 
Acute Leukemia as Secondary Diagnosis) by adding code 00.15 to the DRG 
logic and changing the title to ``Chemotherapy with Acute Leukemia or 
with use of High Dose Chemotherapy Agent''. This drug is marketed as 
Proleukin(copyright). Under the proposed MS-DRGs, CMS DRG 492 would be 
replaced by MS-DRG 837 (Chemotherapy with Acute Leukemia as Secondary 
Diagnosis or with High Dose Chemotherapeutic Agent with MCC), MS-DRG 
838 (Chemotherapy with Acute Leukemia as Secondary Diagnosis with CC or 
High Dose Chemotherapeutic Agent), or MS-DRG 839 (Chemotherapy with 
Acute Leukemia as Secondary Diagnosis without CC/MCC).
    Administration of high-dose Interleukin-2 (HD-IL-2) is a hospital 
inpatient-based regimen that can produce durable remissions of 
metastatic renal cell cancer and metastatic melanoma in a subset of 
patients. In contrast to traditional cytotoxic chemotherapies which 
target cancer cells directly, HD-IL-2 enhances the body's natural 
cancer defenses by stimulating the growth and activity of cancer-
killing white blood cells. HD-IL-2 therapy is associated with severe 
complications that can include: hypotension, metabolic acidosis, acute 
renal failure, arrhythmia, myocardial inflammation, coagulation 
defects, hyperthyroidism, psychosis, respiratory distress syndrome, 
catheter related septicemia, hyperbilirubinemia and thrombocytopenia.
    To safely administer HD-IL-2, the FDA-approved label states that 
HD-IL-2 ``should be administered in a hospital setting under the 
supervision of a qualified physician experienced in the use of 
anticancer agents. An intensive care facility and specialists skilled 
in cardiopulmonary or intensive care medicine must be available.'' 
Strict nursing protocols must be followed in order to minimize adverse 
events such as cardiac arrhythmias as well as severe hypotension.
    Because it is associated with such severe side effects, HD-IL-2 
therapy requires substantially greater resource utilization, including 
longer hospital stays and additional nursing support, than conventional 
chemotherapy. Conventional chemotherapy may be administered to patients 
either on an outpatient basis or through a series of short (that is, 1 
to 3 day) inpatient stays. By contrast, FDA approval for high-dose IL-2 
refers specifically to the following protocol:
    ``Each course of high-dose IL-2 therapy is administered during two 
separate hospital admissions, with an average length of stay of six to 
seven days each. For the first cycle, Interleukin-2 is administered 
every 8 hours over a 5-day period. Patients are then discharged to rest 
at home for

[[Page 47263]]

several days, and then readmitted for a second cycle consisting of an 
identical dosing regimen. These two cycles comprise the first course of 
high-dose IL-2 therapy, which may be repeated after 8 to 12 weeks if 
the patient is responding.''
    Based on data from peer reviewed publications, some centers may 
administer IL-2 ``off-label'' in low- or intermediate-dose regimens. 
For such off-label uses, IL-2 is either not administered as a bolus, or 
in a much lower-dose bolus. Because low- or intermediate-dose IL-2 
therapy poses a lower risk of serious side effects, its administration 
is less resource intensive in terms of patient monitoring, nursing 
support, and length of stay.
    A specific code was created for the administration of High-dose 
Interleukin-2 beginning with cases discharged on or after October 1, 
2003. Code 00.15 (High-dose infusion interleukin-2 (IL-2)) came from 
existing code 99.28 (Injection or infusion of biological response 
modified [BMR] as an antineoplastic agent), which had been created for 
use on or after October 1, 1994. However, as there may be some 
confusion in the industry concerning the differentiation and correct 
coding of ``high-dose'' IL-2 therapy from less resource intensive uses, 
some non-high-dose cases have probably been incorrectly billed under 
00.15 as high-dose cases when they should have been classified to code 
99.28. Code 00.15 is specifically titled ``High-dose infusion 
Interleukin-2'' and contains inclusion terms specifying ``Infusion (IV 
Bolus, CIV) interleukin.'' A specifically written ``excludes note'' in 
the Tabular section of the Procedure Manual sends Coders to code 99.28 
to correctly describe the administration of low-dose infusion 
Interleukin-2. This confusion has possibly caused Medicare to overpay 
for some non-high-dose cases as if they were high dose cases, and may 
have reduced the reported average charges and costs of true high-dose 
IL-2 therapy [in the MedPAR data files]. If reported average charges do 
not reflect true high-dose IL-2 therapy, the result of this coding 
inaccuracy may be causing the IPPS relative weight to reflect a blend 
of the costs of patient treated with high-dose and low-dose 
administration of IL-2.
    To address this incorrect coding issue, CMS will clarify the ICD-9-
CM coding system by making additional entries in both the Index and 
Tabular portions of the Procedure section of the code book. Procedure 
code 00.15 should only be billed for ``bolus, high-dose IL-2.'' Cases 
must satisfy the following four criteria, as documented in the medical 
record, to qualify for use of code 00.15 as ``bolus, high-dose IL-2'':
     Bolus infusions given over no more than 30 minutes at a 
dose of no less than 600,000 IU/kg (weight adjusted);
     Placement and utilization of a central line;
     Administration in a hospital setting under the supervision 
of a qualified physician experienced in the use of anticancer agent 
with an intensive care facility and specialists skilled in 
cardiopulmonary or intensive care medicine available, and
     A planned 5-day treatment protocol.
    Comment: Commenters indicated that the administration of High-dose 
IL-2 is an extremely complicated and advanced therapy, requiring much 
stricter nursing protocols to prevent or manage the expected 
complications which accompany this type of cytotoxic therapy. The 
commenters also noted that HD-IL-2 cases are assigned to a CMS DRG for 
chemotherapy that, in their view, is clinically inappropriate. The 
commenters stated that technologies should be assigned to clinically 
consistent DRGs. Therefore, the commenters added, when a therapy 
differs clinically and in resource allocation from the other cases 
assigned to the same base DRG, adoption of a new DRG for that 
technology is warranted. Commenters urged CMS to reassess whether cases 
using HD-IL-2 and other treatments involving advanced technologies are 
assigned to appropriate DRGs and to create new, clinically appropriate 
DRGs for all advanced therapies.
    Response: The cost of treating patients with HD-IL-2 continues to 
be represented in MS-DRGs 837, 838, and 839, but the cases have been 
distributed according to the presence or absence of an MCC, a CC, or 
the lack of either a comorbidity or complication according to the 
historical data represented by MedPAR. Medicare likely will continue to 
pay the same amount for all patients in these MS-DRGs. However, our 
payments will better reflect patient severity of illness by paying 
higher amounts for those cases where the patient has an MCC or CC than 
if they do not. The data suggest that it is appropriate to divide CMS 
DRG 492 based on severity levels, so for the MS-DRG system, new MS-DRGs 
837, 838, and 839 were created, as described above. Our findings are 
represented in the following table.

----------------------------------------------------------------------------------------------------------------
                                                                     Number of    Average length      Average
                             MS-DRG                                    cases          of stay         charges
----------------------------------------------------------------------------------------------------------------
MS-DRG 837--All cases...........................................           1,525           22.62     $107,269.93
MS-DRG 837--Cases with IL-2 Infusion (Code 00.15)...............              56            8.11       73,104.34
MS-DRG 837--Cases without IL-2 Infusion (Code 00.15)............           1,469           23.17      108,600.39
MS-DRG 838--All cases...........................................             855            9.15       46,596.45
MS-DRG 838--Cases with IL-2 Infusion (Code 00.15)...............             555            4.78       44,008.54
MS-DRG 838--Cases without IL-2 Infusion (Code 00.15)............             522           11.94       48,247.36
MS-DRG 839--All cases...........................................           1,307            6.04       22,693.30
MS-DRG 839--Cases with IL-2 Infusion (Code 00.15)...............              20            4.40       38,002.15
MS-DRG 839--Cases without IL-2 Infusion (Code 00.15)............           1,287            6.07       22,455.40
----------------------------------------------------------------------------------------------------------------

    These data suggest that average charges for patients receiving HD-
IL-2 are either comparable or lower than other patients within assigned 
MS-DRGs 837 and 838. For this reason, we believe most cases treated 
with HD-IL-2 will be paid adequately under the MS-DRGs. The remaining 
20 cases in MS-DRG 839 have average charges that are more than $15,000 
higher than other cases within this MS-DRG. The average charges for 
these cases are closer to those for MS-DRG 838.
    In spite of the possibility of erroneous coding of low-dose IL-2 
cases to procedure code 00.15 instead of the more appropriate code 
99.28 as discussed above, the data do not currently suggest a problem 
with Medicare payment for most of the HD-IL-2 cases assigned to MS-DRGs 
837, 838, and 839. However, the data do suggest that the costs of cases 
of IL-2 coded with 00.15 currently assigned to MS-DRG 839 are closer to 
MS-DRG 838. Therefore, for FY 2008, we are assigning procedure code 
00.15 (High-dose infusion of Interleukin-2 (IL-2)) to MS-DRG 837 
(Chemotherapy with Acute Leukemia as Secondary Diagnosis

[[Page 47264]]

or with High Dose Chemotherapeutic Agent with MCC) and MS-DRG 838 
(Chemotherapy with Acute Leukemia as Secondary Diagnosis with CC or 
High Dose Chemotherapeutic Agent).
s. Computer Assisted Surgery
    Comment: We received one comment from a manufacturer requesting 
that CMS recognize improved clinical outcomes resulting from computer 
assisted surgery and develop new MS-DRGs to group patients together who 
receive this technology. The commenter noted that effective October 1, 
2004, CMS created codes to describe specific forms of computer assisted 
surgery. The commenter further noted that clinical outcomes are 
superior when computer assisted surgery is utilized; however, assigning 
the computer assisted surgery codes does not affect the DRG assignment. 
The commenter encouraged CMS to consider this issue as it continues to 
refine the DRG system.
    Response: We appreciate the commenter's recommendation that CMS 
evaluate how to better recognize the clinical outcomes associated with 
computer-assisted surgical procedures. It is unclear which procedures 
the commenter is proposing we specifically examine at this time. 
Currently, the procedure codes that identify the use of computer 
assisted surgery are as follows:
     00.31, Computer assisted surgery with CT/CTA.
     00.32, Computer assisted surgery with MR/MRA.
     00.33, Computer assisted surgery with fluoroscopy.
     00.34, Imageless computer assisted.
     00.35, Computer assisted surgery with multiple datasets.
     00.39, Other computer assisted surgery.
    We will continue to study this issue as we obtain additional data 
under the MS-DRGs and determine if it is appropriate to make further 
modifications.
13. Changes to MS-DRG Logic As a Result of Public Comments
    To assist the readers in identifying all changes that were made to 
the MS-DRGs as a result of public comments received on the FY 2008 IPPS 
proposed rule, we have developed the following summary chart of those 
changes.

                                              MS-DRG Summary Chart
----------------------------------------------------------------------------------------------------------------
         MDC/MS-DRG                 Proposed title              Final title         Procedure code reassignments
----------------------------------------------------------------------------------------------------------------
                                                     Pre-MDC
                                              Intestinal Transplant
----------------------------------------------------------------------------------------------------------------
MS-DRG 005..................  Liver transplant and/or    Liver transplant w MCC    Cases with procedure code
                               intestinal transplant w    or intestinal             46.97 (Transplant of
                               MCC.                       transplant.               intestine) are reassigned
                                                                                    from MS-DRG 006 to MS-DRG
                                                                                    005.
MS-DRG 006..................  Liver transplant and/or    Liver transplant w/o
                               Intestinal Transplant w/   MCC.
                               o MCC.
----------------------------------------------------------------------------------------------------------------
                              MDC 1 (Diseases and Disorders of the Nervous System)
                                     Implantation of Chemotherapeutic Agent
                                               Intracranial Stents
----------------------------------------------------------------------------------------------------------------
MS-DRG 023..................  Craniotomy with major      Cranio w major dev iImpl/ Cases with procedure code
                               device implant or acute    acute complex CNS PDX     00.10 (Implantation of
                               complex central nervous    with MCC or chemo         chemotherapeutic agent) are
                               system principal           implant.                  reassigned from MS-DRG 024
                               diagnosis with MCC.                                  to MS-DRG 023.
MS-DRG 024..................  Craniotomy with major      Cranio w major dev impl/  Cases with procedure code
                               device implant or acute    acute complex CNS PDX w/  00.62 (Percutaneous
                               complex central nervous    o MCC.                    angioplasty or atherectomy
                               system principal                                     of intracranial vessel(s))
                               diagnosis without MCC.                               are reassigned from MS-DRGs
                                                                                    037-039 to MS-DRGs 023-024.
----------------------------------------------------------------------------------------------------------------
                                               Intracranial Stents
----------------------------------------------------------------------------------------------------------------
MS-DRG 025..................  Craniotomy & endovascular  Craniotomy &              Cases with procedure code
                               intracranial procedures    endovascular              00.62 (Percutaneous
                               w MCC.                     intracranial procedures   angioplasty or atherectomy
                                                          w MCC.                    of intracranial vessel(s))
                                                                                    are reassigned from MS-DRGs
                                                                                    037 039 to MS-DRGS 025-027.
MS-DRG 026..................  Craniotomy & endovascular  Craniotomy &endovascular
                               intracranial procedures    intracranial procedures
                               w CC.                      w CC.
MS-DRG 027..................  Craniotomy & endovascular  Craniotomy &
                               intracranial procedures    endovascular
                               w/o CC/MCC.                intracranial procedures
                                                          w/o CC/MCC.
----------------------------------------------------------------------------------------------------------------

[[Page 47265]]

 
                                             Spinal Neurostimulators
----------------------------------------------------------------------------------------------------------------
MS-DRG 028..................  Spinal procedures w MCC..  Spinal procedures w MCC.  Full system spinal cord non-
MS-DRG 029..................  Spinal procedures w CC...  Spinal procedures w CC     rechargeable and
                              .........................   or spinal                 rechargeable neurostimulator
MS-DRG 030..................  Spinal procedures w/o CC/   neurostimulators..        cases in MS-DRG 030 are
                               MCC.                      Spinal procedures w/o CC/  reassigned to MS-DRG 029 in
                                                          MCC..                     MDC 1. ICD-9-CM procedure
                                                                                    codes 03.93 (Implantation or
                                                                                    replacement of spinal
                                                                                    neurostimulator lead(s)),
                                                                                    and 86.94 (Insertion or
                                                                                    replacement of single array
                                                                                    neurostimulator pulse
                                                                                    generator, not specified as
                                                                                    rechargeable), or 86.95
                                                                                    (Insertion or replacement of
                                                                                    dual array neurostimulator
                                                                                    pulse generator, not
                                                                                    specified as rechargeable),
                                                                                    or 86.97 (Insertion or
                                                                                    replacement of single array
                                                                                    rechargeable neurostimulator
                                                                                    pulse generator), or 86.98
                                                                                    (Insertion or replacement of
                                                                                    dual array rechargeable
                                                                                    neurostimulator pulse
                                                                                    generator) must be reported
                                                                                    in order for the spinal
                                                                                    neurostimulator cases to be
                                                                                    assigned to MS-DRG 029.
----------------------------------------------------------------------------------------------------------------
                                               Intracranial Stents
----------------------------------------------------------------------------------------------------------------
MS-DRG 037..................  Extracranial procedures w  Extracranial procedures   Cases with procedure code
                               MCC.                       w MCC.                    00.62 (Percutaneous
MS-DRG 038..................  Extracranial procedures w  Extracranial procedures    angioplasty or atherectomy
MS-DRG 039..................   CC.                        w CC..                    of intracranial vessel(s))
                              Extracranial procedures w/ Extracranial procedures    are reassigned from MS-DRGs
                               o CC/MCC.                  w/o CC/MCC..              037 to MS-DRGs 023-027.
----------------------------------------------------------------------------------------------------------------
                                           Peripheral Neurostimulators
----------------------------------------------------------------------------------------------------------------
MS-DRG 040..................  Periph & cranial nerve &   Periph & cranial nerve &  Full system peripheral non-
                               other nerv syst proc w     other nerv syst proc      rechargeable and
MS-DRG 041..................   MCC.                       with MCC.                 rechargeable neurostimulator
                              Peripheral/Cranial nerve   Periph/cranial nerve &     cases in MS-DRG 042 are
                               & other nerv syst proc     other nerv syst proc w    reassigned to MS-DRG 041.
MS-DRG 042..................   with CC..                  CC or periph neurostim..  ICD 9 CM procedure codes
                              Peripheral/cranial nerve   Periph/cranial nerve &     04.92 (Implantation or
                               & other nerv syst proc w/  other nerv syst proc w/   replacement of peripheral
                               o CC/MCC..                 o CC/MCC..                neurostimulator lead(s)),
                                                                                    and 86.94 (Insertion or
                                                                                    replacement of single array
                                                                                    neurostimulator pulse
                                                                                    generator, not specified as
                                                                                    rechargeable), or 86.95
                                                                                    (Insertion or replacement of
                                                                                    dual array neurostimlator
                                                                                    pulse generator, not
                                                                                    specified as rechargeable),
                                                                                    or 86.97 (Insertion or
                                                                                    replacement of single array
                                                                                    rechargeable neurostimulator
                                                                                    pulse generator), or 86.98
                                                                                    (Insertion or replacement of
                                                                                    dual array rechargeable
                                                                                    neurostimulator pulse
                                                                                    generator) must be reported
                                                                                    in order for the peripheral
                                                                                    neurostimulator cases to be
                                                                                    assigned to MS-DRG 041.
----------------------------------------------------------------------------------------------------------------
                                                   Pain Codes
----------------------------------------------------------------------------------------------------------------
MS-DRG 091..................  Other disorders of         Other disorders of        Cases with a principal
                               nervous system w MCC.      nervous system w MCC.     diagnosis of code 338.0
MS-DRG 092..................  Other disorders of         Other disorders of         (Central pain syndrome) or
                               nervous system w CC..      nervous system w CC..     code 338.21 (Chronic pain
MS-DRG 093..................  Other disorders of         Other disorders of         due to trauma) or code
                               nervous system w/o CC/     nervous system w/o CC/    338.22 (Chronic post-
                               MCC..                      MCC..                     thoracotomy pain) or code
                                                                                    338.28 (Other chronic
                                                                                    postoperative pain) or code
                                                                                    338.29 (Other chronic pain)
                                                                                    or code 338.4 (Chronic pain
                                                                                    syndrome) are reassigned
                                                                                    from MDC 23, MS-DRGs 947-948
                                                                                    to MS-DRGs 091-093.
----------------------------------------------------------------------------------------------------------------
                        MDC 3 (Disease and Disorders of the Ear, Nose, Mouth, and Throat)
                                                Cochlear Implants
----------------------------------------------------------------------------------------------------------------
MS-DRG 129..................  Major head & neck          Major head & neck         Cochlear implant cases are
                               procedures w CC/MCC.       procedures w CC/MCC or    reassigned from MS-DRG 130
MS-DRG 130..................  Major head & neck           Major Device.             to MS-DRG 129. The ICD 9 CM
                               procedures w/o CC/MCC..   Major head & neck          procedure codes for cochlear
                                                          procedures w/o CC/MCC..   implants are: 20.96
                                                                                    (Implantation or replacement
                                                                                    of cochlear prosthetic
                                                                                    device, not otherwise
                                                                                    specified), or 20.97
                                                                                    (Implantation or replacement
                                                                                    of cochlear prosthetic
                                                                                    device, single channel), or
                                                                                    20.98 (Implantation or
                                                                                    replacement of cochlear
                                                                                    prosthetic device, multiple
                                                                                    channel).
----------------------------------------------------------------------------------------------------------------

[[Page 47266]]

 
                             MDC 5 (Disease and Disorders of the Circulatory System)
                              Endovascular Implantation of Graft in Thoracic Aorta
----------------------------------------------------------------------------------------------------------------
MS-DRG 237..................  Major cardiovascular       Major cardiovasc          Cases with procedure code
                               procedures w MCC.          procedures w MCC or       39.73 (Endovascular
                              .........................   thoracic aortic           implantation of graft in
MS-DRG 238..................  Major cardiovascular        aneurysm repair.          thoracic aorta) are
                               procedures w/o MCC..      Major cardiovascular       reassigned from MS-DRG 238
                                                          procedures w/o MCC..      to MS-DRG 237.
----------------------------------------------------------------------------------------------------------------
                                   Multiple Vessels, Multiple Coronary Stents
----------------------------------------------------------------------------------------------------------------
MS-DRG 246..................  Percutaneous               Perc cardiovasc proc w    Cases in MS-DRG 247 with
                               cardiovascular pro w       drug-eluting stent w      procedure code 00.66
                               drug-eluting stent w       MCC or 4+ Vessels/        (Percutaneous transluminal
MS-DRG 247..................   Major CC.                  Stents.                   coronary angioplasty [PTCA]
                              Percutaneous               Perc cardiovasc proc w     or coronary atherectomy),
                               cardiovascular proc w      drug-eluting stent w/o    and code 36.07 (Insertion of
                               drug-eluting stent w/o     MCC..                     drug-eluting coronary artery
                               Major CC..                                           stent(s)), and code 00.43
                                                                                    (Procedure on four or more
                                                                                    vessels), or code 00.48
                                                                                    (Insertion of four or more
                                                                                    vascular stents) are
                                                                                    reassigned to MS-DRG 246.
MS-DRG 248..................  Percutaneous               Perc cardiovasc proc w    Cases in MS-DRG 249 with
                               cardiovascular proc w      non-drug-eluting stent    procedure codes 00.66
                               non-drug-eluting stent w   w MCC or 4+ Ves/stents.   (Percutaneous transluminal
MS-DRG 249..................   Major CC.                 Perc cardiovasc proc w     coronary angioplasty [PTCA]
                              Percutaneous                non-drug-eluting stent    or coronary atherectomy),
                               cardiovascular proc w      w/o MCC..                 and code 36.06 (Insertion of
                               non-drug-eluting stent w/                            non-drug-eluting coronary
                               o Major CC..                                         artery stent(s)), and code
                                                                                    00.43 (Procedure on four or
                                                                                    more vessels), or code 00.48
                                                                                    (Insertion of four or more
                                                                                    vascular stents) are
                                                                                    reassigned to MS-DRG 248.
               MDC 8 (Diseases and Disorders of the Musculoskeletal System and Connective Tissue)
                                                  Spinal Fusion
----------------------------------------------------------------------------------------------------------------
MS-DRG 456..................  Spinal fusion exc cerv w   Spinal fusion exc cerv w  The following diagnoses are
                               spinal curv, malig or 9+   spinal curv/malig/infec   added to the principal
                               fusions w MCC.             or 9+ fusions w MCC.      diagnosis list for MS-DRGs
MS-DRG 457..................  Spinal fusion exc w        Spinal fusion exc cerv w   456-458: 015.02
                               spinal curv, malig or 9+   spinal curv/malig/infec   (Tuberculosis of bones and
                               fusions w CC..             or 9+ fusions w CC..      joints, vertebral column,
MS-DRG 458..................  Spinal fusion exc w        Spinal fusion exc cerv w   bacteriological or
                               spinal curv, malig or 9+   spinal curv/malig/infec   histological examination
                               fusions w/o CC/MCC..       or 9+ fusions w/o CC/     unknown (at present));
                                                          MCC..                     015.04 (Tuberculosis of
                                                                                    bones and joints, vertebral
                                                                                    column, tubercle bacilli not
                                                                                    found (in sputum) by
                                                                                    microscopy, but found by
                                                                                    bacterial culture); 015.05
                                                                                    (Tuberculosis of bones and
                                                                                    joints, vertebral column,
                                                                                    tubercle bacilli not found
                                                                                    by bacteriological
                                                                                    examination, but
                                                                                    tuberculosis confirmed
                                                                                    histologically); 730.08
                                                                                    (Acute osteomyelitis of
                                                                                    other specified sites);
                                                                                    730.18 (Chronic
                                                                                    osteomyelitis of other
                                                                                    specified sites); and 730.28
                                                                                    (Unspecified oteomyelitis of
                                                                                    other specified sites).
                                                                                   Procedure code 81.64 (Fusion
                                                                                    or refusion of 9 or more
                                                                                    vertebrae) is added to the
                                                                                    list of procedures for MS-
                                                                                    DRGs 456-458.
----------------------------------------------------------------------------------------------------------------
                                            Hip and Knee Replacements
----------------------------------------------------------------------------------------------------------------
MS-DRG 466..................  Revision of hip or knee    Revision of hip or knee   Cases with procedure code
                               replacement w MCC.         replacement w MCC.        00.83 (Revision of knee
MS-DRG 467..................  Revision of hip or knee    Revision of hip or knee    replacement, patellar
                               replacement w CC..         replacement w CC..        component), or code 00.84
MS-DRG 468..................  Revision of hip or knee    Revision of hip or knee    (Revision of total knee
                               replacement w/o CC/MCC..   replacement w/o CC/MCC..  replacement, tibial insert
                                                                                    (liner)) are reassigned from
                                                                                    MS-DRGs 466-468 to MS-DRGs
                                                                                    485-489.
MS-DRG 485..................  Knee procedures w pdx of   Knee procedures w pdx of
                               infection w MCC.           infection w MCC.
MS-DRG 486..................  Knee procedures w pdx of   Knee procedures w pdx of
                               infection w CC.            infection w CC.
MS-DRG 487..................  Knee procedures w pdx of   Knee procedures w pdx of  .............................
                               infection w/o CC/MCC.      infection w/o CC/MCC.
MS-DRG 488..................  Knee procedures w/o pdx    Knee Procedures without
                               of infection w CC/MCC.     Principal Diagnosis of
                                                          Infection with CC/MCC.
MS-DRG 489..................  Knee procedures w/o pdx    Knee Procedures without
                               of infection w/o CC/MCC.   Principal Diagnosis of
                                                          Infection without CC/
                                                          MCC.
----------------------------------------------------------------------------------------------------------------

[[Page 47267]]

 
                                                Spinal Procedures
                                             Spinal Neurostimulators
----------------------------------------------------------------------------------------------------------------
MS-DRG 490..................  Back & neck procedures     Back & neck proc exc      Cases with procedure codes
                               except spinal fusion w     spinal fusion with CC/    84.59 (Insertion of other
                               CC/MCC or disc devices.    MCC or disc device/       spinal devices), or 84.62
MS-DRG 491..................  Back & neck procedures      neurostim.                (Insertion of total spinal
                               except spinal fusion w/o  Back & neck proc exc       disc prosthesis, cervical),
                               CC/MCC..                   spinal fusion w/o CC/     or 84.65 (Insertion of total
                                                          MCC..                     spinal disc prosthesis,
                                                                                    lumbosacral), or 84.80
                                                                                    (Insertion or replacement of
                                                                                    interspinous process
                                                                                    device(s)), or 84.82
                                                                                    (Insertion or replacement of
                                                                                    pedicle-based dynamic
                                                                                    stabilization device(s)), or
                                                                                    84.84 (Insertion or
                                                                                    replacement of facet
                                                                                    replacement devices) are
                                                                                    reassigned from MS-DRG 491
                                                                                    to MS-DRG 490.
                                                                                   Reassign full system spinal
                                                                                    cord non-rechargeable and
                                                                                    rechargeable neurostimulator
                                                                                    cases in MS-DRG 491 to MS-
                                                                                    DRG 490 in MDC 8. ICD-9-CM
                                                                                    procedure codes 03.93
                                                                                    (Implantation or replacement
                                                                                    of spinal neurostimulator
                                                                                    lead(s)), and 86.94
                                                                                    (Insertion or replacement of
                                                                                    single array neurostimulator
                                                                                    pulse generator, not
                                                                                    specified as rechargeable),
                                                                                    or 86.95 (Insertion or
                                                                                    replacement of dual array
                                                                                    neurostimulator pulse
                                                                                    generator, not specified as
                                                                                    rechargeable), or 86.97
                                                                                    (Insertion or replacement of
                                                                                    single array rechargeable
                                                                                    neurostimulator pulse
                                                                                    generator), or 86.98
                                                                                    (Insertion or replacement of
                                                                                    dual array rechargeable
                                                                                    neurostimulator pulse
                                                                                    generator) must be reported
                                                                                    in order for the spinal
                                                                                    neurostimulator cases to be
                                                                                    assigned to MS-DRG 490.
----------------------------------------------------------------------------------------------------------------
                MDC 17 (MYELOPROLIFERATIVE DISEASES AND DISORDERS, POORLY DIFFERENTIATED NEOPLASM
                                    High-dose infusion interleukin-2 [IL-2])
----------------------------------------------------------------------------------------------------------------
MS-DRG 837..................  Chemo w acute leukemia as  Chemo w acute leukemia    Cases with procedure code
                               sdx or w high dose chemo   as sdx or w high dose     00.15 (High-Dose Infusion
                               agent w MCC.               chemo agent w MCC.        Interleukin-2 [IL-2]) are
                                                                                    reassigned from MS-DRG 839
                                                                                    to MS-DRG 838.
MS-DRG 838..................  Chemo w acute leukemia as  Chemo w acute leukemia
                               sdx or w high dose chemo   as sdx w CC or high
                               agent w CC.                dose chemo agent.
MS-DRG 839..................  Chemo w acute leukemia as  Chemo w acute leukemia
                               sdx or w high dose chemo   as sdx w/o CC/MCC.
                               agent w/o CC/MCC.
----------------------------------------------------------------------------------------------------------------
                MDC 23 (Factors Influencing Health Status and Other Contacts with Health Status)
----------------------------------------------------------------------------------------------------------------
MS-DRG 947..................  Signs & symptoms w MCC...  Signs & symptoms w MCC..  Cases with a principal
MS-DRG 948..................  Signs & symptoms w/o MCC.  Signs & symptoms w/o       diagnosis of code 338.0
                                                          MCC..                     (Central pain syndrome),
                                                                                    338.21 (Chronic pain due to
                                                                                    trauma), or 338.22 (Chronic
                                                                                    post-thoracotomy pain), or
                                                                                    338.28 (Other chronic
                                                                                    postoperative pain), or
                                                                                    338.29 (Other chronic pain),
                                                                                    or 338.4 (Chronic pain
                                                                                    syndrome) are reassigned
                                                                                    from MDC 23, MS-DRGs 947-948
                                                                                    to MS-DRGs 091-093 in MDC 1.
----------------------------------------------------------------------------------------------------------------

H. Recalibration of DRG Weights

    In section II.E. of the preamble of this final rule with comment 
period, we stated that we are continuing to implement the cost-based 
DRG relative weights under a 3-year transition period such that, in FY 
2008 (year two of the transition), the relative weights will be 
recalibrated using a blend of 67 percent of the cost-based relative 
weight and 33 percent of the charge-based relative weight. For FY 2009, 
the relative weights will be 100 percent cost-based. We are making a 
few minor changes to the cost-based relative weighting methodology that 
we adopted in the FY 2007 IPPS final rule (71 FR 47962 through 47971). 
However, in section II.E.2. of the preamble of the FY 2008 IPPS 
proposed rule, we requested public comments about whether to adopt any 
of the short-term recommendations to the cost-based relative weighting 
methodology for FY 2008 made by RTI. In response to those comments, we 
state in section II.E.2. of the preamble of this final rule with 
comment period that we are not adopting RTI's recommended regression-
based CCRs for medical supplies and devices, IV drugs, and CT Scans and 
MRIs for FY 2008. However, as recommended by RTI, for FY 2008, we are 
adding two new CCRs for a total of 15 CCRs: One for ``Emergency Room'' 
and one for ``Blood and Blood Products,'' both of which can be derived 
directly from the Medicare cost report.
    As we proposed, in developing the FY 2008 system of weights, we 
used two data sources: Claims data and cost report data. As in previous 
years, the claims data source is the MedPAR file. This file is based on 
fully coded diagnostic and procedure data for all Medicare inpatient 
hospital bills. The FY 2006 MedPAR data used in this final rule with 
comment period include discharges occurring on October 1, 2005, through 
September 30, 2006, based on bills received by CMS through March 2007, 
from all hospitals subject to the IPPS and short-term, acute care 
hospitals in Maryland (which are under

[[Page 47268]]

a waiver from the IPPS under section 1814(b)(3) of the Act). The FY 
2006 MedPAR file used in calculating the relative weights includes data 
for approximately 11,782,098 Medicare discharges from IPPS providers. 
Discharges for Medicare beneficiaries enrolled in a Medicare Advantage 
managed care plan are excluded from this analysis. The data exclude 
CAHs, including hospitals that subsequently became CAHs after the 
period from which the data were taken. The second data source used in 
the cost-based relative weighting methodology is the FY 2005 Medicare 
cost report data files from HCRIS, which represents the most recent 
full set of cost report data available. We used the March 31, 2007 
update of the HCRIS cost report files for FY 2005 in setting the 
relative cost-based weights.
    Because we are implementing the relative weights on a transitional 
basis, it is necessary to calculate both charge-based and cost-based 
relative weights. The charge-based methodology used to calculate the 
DRG relative weights from the MedPAR data is the same methodology that 
was in place for FY 2006 and FY 2007 and was applied as follows:
     To the extent possible, all the claims were regrouped 
using the MS-DRGs being adopted for FY 2008, as discussed in section 
II.D. of the preamble of this final rule with comment period.
     The transplant cases that were used to establish the 
relative weights for heart and heart-lung, liver and/or intestinal, and 
lung transplants (MS-DRGs 001, 002, 005, 006, and 007, respectively; 
previously CMS DRGs 103, 480, and 495) were limited to those Medicare-
approved transplant centers that have cases in the FY 2006 MedPAR file. 
(Medicare coverage for heart, heart-lung, liver and/or intestinal, and 
lung transplants is limited to those facilities that have received 
approval from CMS as transplant centers.)
     Organ acquisition costs for kidney, heart, heart-lung, 
liver, lung, pancreas, and intestinal (or multivisceral organs) 
transplants continue to be paid on a reasonable cost basis. Because 
these acquisition costs are paid separately from the IPPS rates, it was 
necessary to subtract the acquisition charges from the total charges on 
each transplant bill that showed acquisition charges before computing 
the average charge for the DRG and before eliminating statistical 
outliers.
     Total charges were standardized to remove the effects of 
differences in area wage levels, IME and DSH payments, and, for 
hospitals in Alaska and Hawaii, the cost-of-living adjustment was 
applied. Beginning with FY 2008, because hospital charges include 
charges for both operating and capital costs, we are standardizing 
total charges to remove the effects of differences in geographic 
adjustment factors, large urban add-on payments, cost-of-living 
adjustments, DSH payments, and IME adjustments under the capital IPPS 
as well.
     Statistical outliers were eliminated by removing all cases 
that were beyond 3.0 standard deviations from the mean of the log 
distribution of both the standardized charges per case and the 
standardized charges per day for each DRG.
     The average charge for each DRG was then recomputed 
(excluding the statistical outliers). To compute the average DRG 
charge, we sum the standardized charges by DRG and divide by the 
transfer adjusted case count. A transfer case is counted as a fraction 
of a case based on the ratio of its transfer payment under the per diem 
payment methodology to the full DRG payment for nontransfer cases. That 
is, a transfer case receiving payment under the transfer methodology 
equal to half of what the case would receive as a nontransfer would be 
counted as 0.5 of a total case. The average charge per DRG is then 
divided by the national average standardized charge per case to 
determine the relative weight.
    The new charge-based weights were then normalized by an adjustment 
factor of 1.50850 so that the average case weight after recalibration 
was equal to the average case weight before recalibration. This 
normalization adjustment is intended to ensure that recalibration by 
itself neither increases nor decreases total payments under the IPPS as 
required by section 1886(d)(4)(C)(iii) of the Act.
    The methodology we used to calculate the DRG cost-based relative 
weights from the FY 2006 MedPAR claims data and FY 2005 Medicare cost 
report data is as follows:
     To the extent possible, all the claims were regrouped 
using the FY 2008 MS-DRG classifications discussed in section II.D. of 
the preamble of this final rule with comment period.
     The transplant cases that were used to establish the 
relative weights for heart and heart-lung, liver and/or intestinal, and 
lung transplants (MS-DRGs 001, 002, 005, 006, and 007, respectively; 
previously CMS DRGs 103, 480, and 495) were limited to those Medicare-
approved transplant centers that have cases in the FY 2006 MedPAR file. 
(Medicare coverage for heart, heart-lung, liver and/or intestinal, and 
lung transplants is limited to those facilities that have received 
approval from CMS as transplant centers.)
     Organ acquisition costs for kidney, heart, heart-lung, 
liver, lung, pancreas, and intestinal (or multivisceral organs) 
transplants continue to be paid on a reasonable cost basis. Because 
these acquisition costs are paid separately from the prospective 
payment rate, it is necessary to subtract the acquisition charges from 
the total charges on each transplant bill that showed acquisition 
charges before computing the average cost for each DRG and before 
eliminating statistical outliers.
     Claims with total charges or total length of stay less 
than or equal to zero were deleted. Claims that had an amount in the 
total charge field that differed by more than $10.00 from the sum of 
the routine day charges, intensive care charges, pharmacy charges, 
special equipment charges, therapy services charges, operating room 
charges, cardiology charges, laboratory charges, radiology charges, 
other service charges, labor and delivery charges, inhalation therapy 
charges, and anesthesia charges were also deleted.
     At least 96.1 percent of the providers in the MedPAR file 
had charges for 10 of the 15 cost centers. Claims for providers that 
did not have charges greater than zero for at least 10 of the 15 cost 
centers were deleted.
     Statistical outliers were eliminated by removing all cases 
that were beyond 3.0 standard deviations from the mean of the log 
distribution of both the total charges per case and the total charges 
per day for each DRG.
    Once the MedPAR data were trimmed and the statistical outliers were 
removed, the charges for each of the 15 cost groups for each claim were 
standardized to remove the effects of differences in area wage levels, 
IME and DSH payments, and for hospitals in Alaska and Hawaii, the 
applicable cost of living adjustment. Beginning with FY 2008, because 
hospital charges include charges for both operating and capital costs, 
we are standardizing total charges to remove the effects of differences 
in geographic adjustment factors, large urban add-on payments, cost-of-
living adjustments, DSH payments, and IME adjustments under the capital 
IPPS as well. Charges were then summed by DRG for each of the 15 cost 
groups so that each DRG had 15 standardized charge totals. These 
charges were then adjusted to cost by applying the national average 
CCRs developed from the FY 2005 cost report data.
    The 15 cost centers that we used in the relative weight calculation 
are shown in the following table. Included

[[Page 47269]]

in the 15 CCRs are two distinct CCRs for FY 2008 for ``Emergency Room'' 
and ``Blood and Blood Products.'' The costs and charges for these two 
additional CCRs are removed from the ``Other Services'' CCR. The table 
shows the lines on the cost report that we used to create the 15 
national cost center CCRs that we used to adjust the DRG charges to 
cost. For FY 2008, we are making minor revisions to the Cardiology, 
Laboratory, Radiology, and Other Services CCRs we are using to 
calculate the DRG relative weights, as follows:
     The costs for cases involving Electroencephalography 
(EEG), cost report line 54, are currently in the Cardiology cost center 
group. However, MedPAR categorizes the claims data for EEG under 
Laboratory Charges (revenue codes 0740 and 0749). In order to maintain 
consistency with matching costs on the cost report to charges on MedPAR 
claims, we are moving cost report line 54 for EEG out of the Cardiology 
cost center group into the Laboratory cost center group.
     In the FY 2007 IPPS proposed rule, we originally included 
the costs for Radioisotopes, cost report line 43, in the Radiology cost 
center group. However, in response to comments, we moved Radioisotopes 
to the Other Services cost center group. After researching this issue 
further over the past year, we believe that Radioisotopes is a 
radiology-related service that more appropriately belongs in the 
Radiology cost center group. Accordingly, for FY 2008, as we proposed, 
we are moving the cost report line item for line 43, Radioisotopes, out 
of the Other Services cost center group and into the Radiology cost 
center group. The version of the 15 cost center groupings are in the 
table below:
BILLING CODE 4120-01-P
[GRAPHIC] [TIFF OMITTED] TR22AU07.003


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[GRAPHIC] [TIFF OMITTED] TR22AU07.004


[[Page 47271]]


[GRAPHIC] [TIFF OMITTED] TR22AU07.005


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[GRAPHIC] [TIFF OMITTED] TR22AU07.006


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[GRAPHIC] [TIFF OMITTED] TR22AU07.009

BILLING CODE 4120-01-C

[[Page 47276]]

    We developed the national average CCRs as follows:
    Taking the FY 2005 cost report data, we removed CAHs, Indian Health 
Service hospitals, all inclusive rate hospitals, and cost reports that 
represented time periods of less than 1 year (365 days). We included 
hospitals located in Maryland as we are including their charges in our 
claims database. We then created CCRs for each provider for each cost 
center (see prior table for line items used in the calculations) and 
removed any CCRs that were greater than 10 or less than 0.01. We 
normalized the departmental CCRs by dividing the CCR for each 
department by the total CCR for the hospital for the purpose of 
trimming the data. We then took the logs of the normalized cost center 
CCRs and removed any cost center CCRs where the log of the cost center 
CCR was greater or less than the mean log plus/minus 3 times the 
standard deviation for the log of that cost center CCR. Once the cost 
report data were trimmed, we calculated a Medicare specific CCR. The 
Medicare specific CCR was determined by taking the Medicare charges for 
each line item from Worksheet D, Part 4 and deriving the Medicare 
specific costs by applying the hospital specific departmental CCRs to 
the Medicare specific charges for each line item from Worksheet D, Part 
4. Once each hospital's Medicare specific costs were established, we 
summed the total Medicare specific costs and divided by the sum of the 
total Medicare specific charges to produce national average, charge 
weighted CCRs.
    After we multiplied the total charges for each DRG in each of the 
15 cost centers by the corresponding national average CCR, we summed 
the 15 ``costs'' across each DRG to produce a total standardized cost 
for the DRG. The average standardized cost for each DRG was then 
computed as the total standardized cost for the DRG divided by the 
transfer adjusted case count for the DRG. The average cost for each DRG 
was then divided by the national average standardized cost per case to 
determine the relative weight.
    The new cost-based relative weights were then normalized by an 
adjustment factor of 1.50957 so that the average case weight after 
recalibration was equal to the average case weight before 
recalibration. Since more trims were applied to the data under the 
cost-based weighting methodology than under the charge-based 
methodology, a smaller universe of claims was used in the cost-based 
weighting methodology. In this instance, the different universe of 
claims also resulted in a slightly higher cost-based normalization 
factor than the normalization factor derived for charge-based weights. 
The normalization adjustment is intended to ensure that recalibration 
by itself neither increases nor decreases total payments under the 
IPPS, as required by section 1886(d)(4)(C)(iii) of the Act.
    The 15 national average CCRs for FY 2008 are as follows:

------------------------------------------------------------------------
                            Group                                 CCR
------------------------------------------------------------------------
Routine Days.................................................      0.553
Intensive Days...............................................      0.490
Drugs........................................................      0.209
Supplies & Equipment.........................................      0.345
Therapy Services.............................................      0.428
Laboratory...................................................      0.177
Operating Room...............................................      0.303
Cardiology...................................................      0.196
Radiology....................................................      0.181
Emergency Room...............................................      0.309
Blood and Blood Products.....................................      0.455
Other Services...............................................      0.451
Labor & Delivery.............................................      0.501
Inhalation Therapy...........................................      0.198
Anesthesia...................................................      0.146
------------------------------------------------------------------------

    As we explained in section II.D. of the preamble of this final rule 
with comment period, in response to comments, we are implementing the 
MS-DRGs with a 2-year transition period beginning in FY 2008. For FY 
2008, the first year of the transition, 50 percent of the relative 
weight for a DRG is based on the two-thirds cost-based weight/one-third 
charge-based weight calculated using FY 2006 MedPAR data grouped to the 
Version 24.0 (FY 2007) DRGs. The remaining 50 percent of the FY 2008 
relative weight for a DRG is based on the two-thirds cost-based weight/
one-third charge based weight calculated using FY 2006 MedPAR grouped 
to the Version 25.0 (FY 2008) MS-DRGs. In FY 2009, the relative weights 
will be based on 100 percent cost weights computed using the Version 
26.0 (FY 2009) MS-DRGs. Specifically, the blended relative weights for 
FY 2008 are computed as follows:
    First, using the Version 24.0 GROUPER, relative weights are 
calculated based on 100 percent cost-based and 100 percent charge-
based, respectively. These weights are then blended using two-thirds of 
the cost-based weights and one-third of the charge-based weights to 
establish the CMS DRG portion of the transition weights.
    Second, using the Version 25.0 FY 2008 (MS-DRG) GROUPER, relative 
weights are calculated based on 100 percent cost-based weights and 100 
percent charge-based weights, respectively. These weights are then 
blended using two-thirds of the cost-based weights and one-third of the 
charge-based weights to establish the MS-DRG portion of the transition 
weights.
    Under the transition blend we are adopting in this final rule with 
comment period, we will group cases to MS-DRGs (using the Version 25.0 
GROUPER), but the payment weight for each DRG will be a 50/50 blend of 
the MS-DRG weight and CMS DRG weight. Thus, we had to determine a 
blended weight for each DRG. Using the claims in the FY 2006 MedPAR 
database that we used to compute cost based weights under the Version 
24.0 GROUPER, we grouped each case to a CMS-DRG (using the Version 24.0 
GROUPER) and an MS-DRG (using the Version 25.0 GROUPER). Commonly, a 
set of cases that grouped to a single MS-DRG grouped to two or more CMS 
DRGs. Therefore, we determined an average CMS DRG weight for all cases 
that grouped to each MS-DRG. Specifically, we summed the CMS DRG 
weights of all the cases that grouped to each MS-DRG and then divided 
that number by the transfer-adjusted case count. To establish the final 
blended weight for each DRG, we added 50 percent of the MS-DRG weight 
to 50 percent of the average CMS DRG weight for that MS-DRG. These 
final blended relative weights are listed in Table 5 of this final rule 
with comment period.
    When we recalibrated the DRG weights for previous years, we set a 
threshold of 10 cases as the minimum number of cases required to 
compute a reasonable weight. We used that same case threshold in 
recalibrating the DRG weights for FY 2008. Using the FY 2006 MedPAR 
data set, there are 7 MS-DRGs that contain fewer than 10 cases. Under 
the MS-DRGs, we have fewer low-volume DRGs than under the CMS DRGs 
because we no longer have separate DRGs for patients age 0 to 17 years. 
With the exception of newborns, we previously separated some DRGs based 
on whether the patient was age 0 to 17 years or age 17 years and older. 
Other than the age split, cases grouping to these DRGs are identical. 
The DRGs for patients age 0 to 17 years generally have very low volumes 
because children are typically ineligible for Medicare. In the past, we 
have found that the low volume of cases for the pediatric DRGs could 
lead to significant year-to-year instability in their relative weights. 
Although we have always encouraged non-Medicare payers to develop 
weights applicable to their own patient populations, we have heard 
frequent complaints from providers about the use of the Medicare 
relative weights in the pediatric population. We believe that

[[Page 47277]]

eliminating this age split in the MS-DRGs will provide more stable 
payment for pediatric cases by determining their payment using adult 
cases that are much higher in total volume. All of the low volume DRGs 
listed below are for newborns. Newborns are unique and require separate 
DRGs that are not mirrored in the adult population. Therefore, it 
remains necessary to retain separate DRGs for newborns. In FY 2008, 
because we do not have sufficient MedPAR data to set accurate and 
stable cost weights for these low-volume DRGs, we are computing weights 
for the low-volume DRGs by adjusting their FY 2007 weights by the 
percentage change in the average weight of the cases in other DRGs. The 
crosswalk table is shown below:

------------------------------------------------------------------------
   Low Volume DRG            DRG title             Crosswalk to DRG
------------------------------------------------------------------------
789.................  Neonates, Died or       FY 2007 FR weight
                       Transferred to          (adjusted by percent
                       Another Acute Care      change in average weight
                       Facility.               of the cases in other
                                               DRGs).
790.................  Extreme Immaturity or   FY 2007 FR weight
                       Respiratory Distress    (adjusted by percent
                       Syndrome, Neonate.      change in average weight
                                               of the cases in other
                                               DRGs).
791.................  Prematurity With Major  FY 2007 FR weight
                       Problems.               (adjusted by percent
                                               change in average weight
                                               of the cases in other
                                               DRGs).
792.................  Prematurity Without     FY 2007 FR weight
                       Major Problems.         (adjusted by percent
                                               change in average weight
                                               of the cases in other
                                               DRGs).
793.................  Full-Term Neonate With  FY 2007 FR weight
                       Major Problems.         (adjusted by percent
                                               change in average weight
                                               of the cases in other
                                               DRGs).
794.................  Neonate With Other      FY 2007 FR weight
                       Significant Problems.   (adjusted by percent
                                               change in average weight
                                               of the cases in other
                                               DRGs).
795.................  Normal Newborn........  FY 2007 FR weight
                                               (adjusted by percent
                                               change in average weight
                                               of the cases in other
                                               DRGs).
------------------------------------------------------------------------

I. MS-LTC-DRG Reclassifications and Relative Weights for LTCHs for FY 
2008

1. Background
    In the June 6, 2003 LTCH PPS final rule (68 FR 34122), we changed 
the LTCH PPS annual payment rate update cycle to be effective July 1 
through June 30 instead of October 1 through September 30. In addition, 
because the patient classification system utilized under the LTCH PPS 
uses the same CMS DRGs as those currently used under the IPPS for acute 
care hospitals, in that same final rule, we explained that the annual 
update of the long term care diagnosis related group (LTC-DRG) 
classifications and relative weights will continue to remain linked to 
the annual reclassification and recalibration of the CMS DRGs used 
under the IPPS. Therefore, we specified that we will continue to update 
the LTC-DRG classifications and relative weights to be effective for 
discharges occurring on or after October 1 through September 30 each 
year. We further stated that we will publish the annual proposed and 
final update of the LTC-DRGs in same notice as the proposed and final 
update for the IPPS (69 FR 34125).
    Comment: Several commenters strongly recommended that we establish 
one rulemaking cycle that would encompass the update of the LTCH PPS 
payment rates (July 1) as well as the development of the LTC-DRG 
weights (October 1). One commenter also suggests that this change 
should begin for RY 2009 and, for that year, CMS should implement a 3-
month update to the standardized amount (July 1, 2008 through September 
30, 2008 with no other policy changes. The commenters also have stated 
that there should only be one rulemaking cycle because of interactive 
effects of adjustments made at two different times.
    Response: In the RY 2008 LTCH PPS final rule (72 FR 26874), we 
responded to a similar comment by stating that we would ``evaluate 
whether such a consolidation is a workable alternative to the present 
schedule.'' While we appreciate the continued interest of commenters on 
this issue, we note that we did not propose a change to the LTCH PPS 
update cycle in the FY 2008 IPPS proposed rule. Therefore, we do not 
believe that the IPPS final rule is the appropriate vehicle for 
addressing these concerns. Rather, we believe that exploring the 
possibility of the consolidation of the LTCH PPS rulemaking cycles 
would be better addressed in the LTCH PPS rate year regulations since 
those rules are the primary vehicle for proposing and finalizing policy 
changes to the LTCH PPS. Therefore, we will continue our evaluation of 
this suggestion for the time being.
    In the FY 2008 IPPS proposed rule, we did not address the issue 
concerning changing the present update cycle for the LTCH PPS, and 
therefore, we are not making any changes to the LTCH PPS update cycle 
in this final rule with comment period. However, we will take all 
comments and suggestions concerning the RY 2009 update into 
consideration when preparing the RY 2009 LTCH PPS proposed rule. 
Commenters' concerns regarding any changes to the present rulemaking 
cycle will be considered when we evaluate the possibility of making 
changes to the present update cycle as well as any options that may be 
available. To this end, any proposed changes to the present update 
cycle would be included in the RY 2009 LTCH PPS proposed rule for 
public comment.
    In the past, the annual update to the IPPS CMS DRGs has been based 
on the annual revisions to the ICD-9-CM codes and was effective each 
October 1. As discussed in the FY 2008 IPPS proposed rule (72 FR 24755 
through 24757), with the implementation of section 503(a) of Pub. L. 
108-173, there is the possibility that one feature of the GROUPER 
software program may be updated twice during a Federal fiscal year 
(October 1 and April 1) as required by the statute for the IPPS. 
Section 503(a) of Pub. L. 108-173 amended section 1886(d)(5)(K) of the 
Act by adding a new clause (vii) which states that ``the Secretary 
shall provide for the addition of new diagnosis and procedure codes in 
[sic] April 1 of each year, but the addition of such codes shall not 
require the Secretary to adjust the payment (or diagnosis related group 
classification) * * * until the fiscal year that begins after such 
date.'' This requirement improves the recognition of new technologies 
under the IPPS by accounting for those ICD-9-CM codes in the MedPAR 
claims data earlier than the agency had accounted for new technology in 
the past. In implementing the statutory change, the agency has provided 
that ICD-9-CM diagnosis and procedure codes for new medical technology 
may be created and assigned to existing DRGs in the middle of the 
Federal fiscal year, on April 1. However,

[[Page 47278]]

this policy change will not impact the DRG relative weights in effect 
for that year, which will continue to be updated only once a year 
(October 1), nor will it have any impact on Medicare payments in that 
year. The use of the ICD-9-CM code set is also compliant with the 
current requirements of the Transactions and Code Sets Standards 
regulations at 45 CFR Parts 160 and 162, promulgated in accordance with 
the Health Insurance Portability and Accountability Act of 1996 
(HIPAA), Pub. L. 104-191.
    As noted above, the patient classification system used under the 
LTCH PPS is the same patient classification system that is used under 
the IPPS. Therefore, the ICD-9-CM codes currently used under both the 
IPPS and LTCH PPS may be updated as often as twice a year. This 
requirement is included as part of the amendments to the Act relating 
to recognition of new medical technology under the IPPS.
    Because we do not publish a midyear IPPS rule, any April 1 ICD-9-CM 
coding update will not be published midyear. Rather, we will assign any 
new diagnosis or procedure codes to the same DRG in which its 
predecessor code was assigned, so that there will be no impact on the 
DRG assignments (as also discussed in section II.G.10. of the preamble 
of this final rule with comment period). Any coding updates will be 
available through the Web sites provided in section II.G.10. of the 
preamble of this final rule with comment period and through the Coding 
Clinic for ICD 9-CM, a product of the American Hospital Association. 
Publishers and software vendors currently obtain code changes through 
these sources in order to update their code books and software system. 
If new codes are implemented on April 1, revised code books and 
software systems, including the GROUPER software program, will be 
necessary because we must use current ICD-9-CM codes. Therefore, for 
purposes of the LTCH PPS, because each ICD 9-CM code must be included 
in the GROUPER algorithm to classify each case under the LTCH PPS, the 
GROUPER software program used under the LTCH PPS would need to be 
revised to accommodate any new codes.
    In implementing section 503(a) of Pub. L. 108-173, there will only 
be an April 1 update if new technology codes are requested and 
approved. We note that any new codes created for April 1 implementation 
will be limited to those diagnosis and procedure code revisions 
primarily needed to describe new technologies and medical services. 
However, we reiterate that the process of discussing updates to the 
ICD-9-CM is an open process through the ICD-9-CM Coordination and 
Maintenance Committee. Requestors will be given the opportunity to 
present the merits for a new code and to make a clear and convincing 
case for the need to update ICD-9-CM codes for purposes of the IPPS new 
technology add-on payment process through an April 1 update (as also 
discussed in section II.G.10. of the preamble of this final rule with 
comment period).
    As we discussed in the FY 2008 IPPS proposed rule (72 FR 24755), at 
the September 28, 2006 ICD-9-CM Coordination and Maintenance Committee 
meeting, there were no requests for an April 1, 2007 implementation of 
ICD 9-CM codes. Therefore, the next update to the ICD-9-CM coding 
system will not occur until October 1, 2007 (FY 2008). Because there 
were no coding changes suggested for an April 1, 2007 update, the ICD-
9-CM coding set implemented on October 1, 2006, will continue through 
September 30, 2007 (FY 2008). The update to the ICD-9-CM coding system 
for FY 2008 is discussed above in section II.G.10. of the preamble of 
this final rule with comment period. Accordingly, in this final rule 
with comment period, as discussed in greater detail below, we are 
modifying and revising the LTC-DRG classifications and relative 
weights, to be effective October 1, 2007 through September 30, 2008 (FY 
2008). In addition, we will notify LTCHs of any revisions to the 
GROUPER software used under the IPPS and the LTCH PPS that may be 
implemented on April 1, 2008. As discussed in greater detail below, the 
MS-LTC-DRGs for FY 2008 in this final rule with comment period are the 
same as the MS-DRGs adopted under the IPPS for FY 2008 (GROUPER Version 
25.0) discussed in section II.B. of the preamble to this final rule 
with comment period.
2. Changes in the LTC DRG Classifications
a. Background
    Section 123 of Pub. L. 106 113 specifically requires that the 
agency implement a PPS for LTCHs that is a per discharge system with a 
DRG-based patient classification system reflecting the differences in 
patient resources and costs in LTCHs. Section 307(b)(1) of Pub. L. 106-
554 modified the requirements of section 123 of Pub. L. 106-113 by 
specifically requiring that the Secretary examine ``the feasibility and 
the impact of basing payment under such a system [the LTCH PPS] on the 
use of existing (or refined) hospital diagnosis-related groups (DRGs) 
that have been modified to account for different resource use of long-
term care hospital patients as well as the use of the most recently 
available hospital discharge data.''
    In accordance with section 123 of Pub. L. 106-113 as amended by 
section 307(b)(1) of Pub. L. 106-554 and Sec.  412.515 of our existing 
regulations, the LTCH PPS uses information from LTCH patient records to 
classify patient cases into distinct LTC-DRGs based on clinical 
characteristics and expected resource needs. As described in section 
II.D. of the preamble of this final rule with comment period, we are 
adopting MS-DRGs under the IPPS because we believe that adopting this 
system will result in a significant improvement in the DRG system's 
recognition of severity of illness and resource usage. We believe these 
improvements in the DRG system will be equally applicable to the LTCH 
PPS. The changes we are currently making for the IPPS are reflected in 
the FY 2008 GROUPER, Version 25.0, to be effective for discharges 
occurring on or after October 1, 2007 through September 30, 2008. 
Currently, the LTC-DRGs used as the patient classification system under 
the LTCH PPS correspond to the current CMS DRGs applicable under the 
IPPS for acute care hospitals.
    Consistent with our historical practice of having LTC-DRGs 
correspond to the DRGs applicable under the IPPS, under the broad 
authority of section 123(a) of Pub. L. 106-113, as modified by section 
307(b) of Pub. L. 106-554, as proposed, under the LTCH PPS we are 
adopting the use of MS-LTC-DRGs, which correspond to the MS-DRGs we are 
adopting under the IPPS. In addition, as stated above, we will be using 
the FY 2008 GROUPER Version 25.0 to classify cases effective for LTCH 
discharges occurring on or after October 1, 2007 through September 30, 
2008. The changes to the current CMS DRG classification system used 
under the IPPS for FY 2008 (GROUPER Version 25.0) are discussed in 
section II.D. of the preamble to this final rule with comment period.
    Comment: Four commenters indicated support for the adoption of the 
MS-LTC-DRGs for the LTCH PPS but noted specific concerns and included 
policy suggestions that they believed could address these concerns.
    Response: We appreciate the commenters' support. We have seriously 
considered the areas of concern as well as the policy suggestions. As 
stated above, we are adopting the use of MS-LTC-DRGs beginning in FY 
2008.

[[Page 47279]]

Below, we explain our responses to these stated concerns.
    Comment: Several commenters expressed concern about the adoption of 
the MS-LTC-DRGs for FY 2008 in advance of RAND's final report. These 
commenters envisioned that a report recommending a DRG system other 
than the MS-DRGs, (upon which the MS-LTC-DRGs are based) could result 
in a CMS decision to implement ``yet another'' patient classification 
system in FY 2009.
    Response: As noted above in our response to similar comments 
focusing on the use of the MS-DRGs by the IPPS, as RAND has completed 
its evaluation of the alternative DRG systems, including the MS-DRGs, 
consistent with RAND's findings, we believe it is appropriate at this 
time to adopt the MS-DRG system for Medicare in FY 2008 for the IPPS 
and at the same time, we are also adopting the MS-LTC-DRGs for the LTCH 
PPS. While there will be an opportunity for the public to comment on 
RAND's findings, we do not think it is likely that there will be 
persuasive public comments suggesting that one of the alternative DRG 
systems being evaluated by RAND is clearly superior. We plan to use 
RAND's report to continue to examine ways to improve and refine 
Medicare inpatient payment systems and expect that any future 
refinements will be based on MS-DRGs. Therefore, as final policy for FY 
2008, we are adopting the MS-LTC-DRGs as the new classification system 
for the LTCH PPS. However, since we are interested in public input on 
this issue, we will make RAND's final report available on the CMS Web 
Site at: http://www.cms.hhs.gov/Reports/downloads/
 Interested members of the public can write to the following 
address:
    Division of Acute Care, Center for Medicare Management, 7500 
Security Boulevard, C4-08-06, Baltimore, MD 21244, Attn: Mady Hue.
    Comment: Two commenters requested that CMS delay adoption of the 
MS-LTC-DRGs until FY 2009 in order to provide LTCHs additional time to 
analyze the impact of the new classification system and to provide 
meaningful comments. The commenters suggested that, during this time, 
CMS examine the interaction of MS-LTC-DRG relative weights and new 
policies established for RY 2008 (for example, revisions to the short-
stay outlier policy resulting in the ``IPPS comparable threshold'') 
before implementing MS-LTC-DRGs. The commenters further stated that 
such a delay would allow LTCHs the opportunity to adjust to the other 
recent LTCH PPS changes.
    Response: We do not believe that it is either appropriate or 
necessary to delay the adoption of the MS-LTC-DRGs until FY 2009 as the 
commenters suggest. We believe that we provided a comprehensive 
analysis of the MS-DRG classification system, upon which the MS-LTC-
DRGs are based, in the proposed rule and, as discussed elsewhere in 
these responses, clear and specific direction, which are evidenced by 
the number of comments that were received, which allowed hospital 
stakeholders to simulate the impacts of the proposed policy change. We 
do not believe a full year delay in implementation of the MS-DRGs and 
the MS-LTC-DRGs is necessary or appropriate. We believe that 
implementing the severity-based DRGs will result in more appropriate 
Medicare payments, a goal that should not be postponed. However, 
although we are not delaying the adoption of the severity-based DRGs 
for either the IPPS or the LTCH PPS, we are providing a 2-year 
transition to the full adoption of both the MS-DRGs and the MS-LTC-
DRGs, described elsewhere in these responses. We believe the transition 
will mitigate the payment impact of the new DRG system for both acute 
care hospitals and LTCHs as they adapt to the system. Furthermore, as 
we note in our discussion of a similar comment regarding the adoption 
of the MS-DRGs for the IPPS (see section II.E. of the preamble of this 
final rule with comment period), many commenters supported immediate 
adoption of the MS-DRGs, particularly because they are so structurally 
similar to the current DRGs. Therefore, we continue to maintain that a 
full year's delay in the adoption of the MS-LTC-DRGs under the LTCH PPS 
is unwarranted. While the MS-DRGs do include some consolidations of 
base DRGs, the major changes from the current DRGs involve adding 
severity levels to the base DRGs. Therefore, the move to MS-LTC-DRGs 
will not necessitate additional data elements. Because we do not 
believe that extensive preparation for implementation of the MS-DRGs is 
necessary, we do not believe that it is appropriate or necessary to 
delay adoption of the MS-DRGs until FY 2009. We continue to believe 
that payment adjustments that were finalized in the RY 2008 LTCH PPS 
final rule, among which was the revision to the short-stay outlier 
policy noted by the commenters, will result in more appropriate 
Medicare payments to LTCHs. The revised SSO policy addresses the issue 
of LTCH discharges that are comparable to an acute care IPPS hospital 
discharge based on the length of stay for that discharge. That policy 
is not tied to or affected by the adoption of the MS-LTC-DRGs. Nor do 
we believe that the extension of the 25 percent threshold adjustment 
that we finalized for RY 2008 at revised Sec.  412.534 and new Sec.  
412.536, which governs Medicare payments for patients discharged from 
LTCHs who were admitted from specific referring hospitals, is tied to 
or affected by the adoption of the MS-LTC-DRGs. Furthermore, as noted 
above, because the MS-LTC-DRGs are so structurally similar to the LTC-
DRGs, we do not believe that postponing the adoption of the severity-
weighted DRGs in order to evaluate the interaction of the policy 
changes implemented for the LTCH PPS for RY 2008 would confer any 
significant advantage to stakeholders.
    Comment: Four commenters urged CMS to establish a 3-year transition 
to the full adoption of the MS-LTC-DRGs in order to minimize the 
``impact of behavioral changes in coding'' resulting from the new 
system. Referring to the proposed 2.4 percent downward adjustment, the 
commenters also maintained that a 3-year transition would allow CMS to 
analyze LTCH data which would indicate whether there were coding 
changes that could warrant the application of a prospective adjustment 
to LTCH PPS payment rates.
    Response: We have carefully considered each comment in determining 
whether there should be a transition period for the relative weights 
computed using the MS-LTC-DRGs, the length of the transition, and how 
to compute the relative weights during the transition. Although we 
received strong general support for adopting the MS-LTC-DRGs, we agree 
that some transition is warranted to mitigate the magnitude of 
potential changes in payment to LTCHs that could occur in one year. As 
discussed in section II.D. of the preamble to this final rule with 
comment period, although MedPAC recommended that CMS fully implement 
MS-DRGs immediately, MedPAC suggested that, if the agency chose not to 
fully implement severity-adjusted DRGs in FY 2008, CMS should implement 
MS-DRGs over a 2-year transition. Accordingly, as we discussed earlier 
regarding implementation of the MS-DRGs under the IPPS, we are also 
implementing a 2 year transition to MS-LTC-DRGs. For FY 2008, the first 
year of the transition, 50 percent of the relative weight for a MS-LTC-
DRG will be based on average relative weight under Version 24.0 of the 
LTC-DRG GROUPER. The remaining 50 percent of the FY 2008 relative 
weight for a MS-

[[Page 47280]]

LTC-DRG will be based on the MS-LTC-DRG relative weight. For a more 
detailed description of the calculation of the MS-LTC-DRG relative 
weights for FY 2008 under this transition methodology, we refer readers 
to section II.I.4. (step 7 of Steps for Determining the FY 2008 MS-LTC-
DRG Relative Weights) of the preamble of this final rule with comment 
period.) In FY 2009, the MS-LTC-DRG relative weights will be based on 
100 percent of MS-LTC-DRG relative weights.
    As discussed in detail elsewhere in these responses, we are not 
finalizing the proposed 2.4 percent downward adjustment to the MS-LTC-
DRG relative weights.
    Comment: Some commenters maintained that they are unable to fully 
evaluate the impact of the proposed MS-DRG system on their member 
hospitals due to the lack of access to the necessary tools. The 
commenters note that neither an MS-LTC-DRG GROUPER nor an MS-LTC-DRG 
Definitions Manual has been made available to help them completely 
understand the proposed system. Therefore, the commenters believed they 
have been prevented from thoroughly and completely evaluating the 
proposed system and providing meaningful comments. The commenter 
recommended delaying implementation of the MS-LTC-DRGs until such 
information has been made available and providers have had the 
opportunity to review it and provide meaningful comments.
    Response: We disagree that LTCHs have not had adequate access to 
information concerning the changes to the MS-DRGs and the MS-LTC-DRGs. 
Ample and thorough information was published in the FY 2008 IPPS 
proposed rule. We refer the commenters to Section II.D.2., 
``Development of Proposed Medicare Severity DRGs (MS-DRGs)'' beginning 
on page 24697 of the May 3, 2007 Federal Register (72 FR 24697 through 
24707), where CMS' entire process for the creation of the MS-DRGs was 
explained. We discussed the creation of base MS-DRGs, upon which the 
MS-LTC-DRGs are based, and the consolidation from the existing DRGs is 
summarized in Table F of the Addendum to the proposed rule (72 FR 
24702). We also discussed the process for applying the severity 
criteria to each of the 335 base DRGs, resulting in 745 proposed MS-
DRGs.
    We discussed the proposed changes to the LTC-DRG classifications 
(72 FR 24755 through 24771), and indicated that we proposed to conform 
the LTC-DRG system to the IPPS DRG system by using MS-LTC-DRGs which 
correspond to the proposed MS-DRGs. Further specific conforming 
language was spelled out on pages 24756 through 24757 of the FY 2008 
IPPS proposed rule.
    In addition, we made other information available to the public that 
would allow for a detailed analysis of the MS-LTC-DRG proposal. We made 
available two MedPAR files (FY 2005 and FY 2006) that included the CMS 
DRG and MS-DRG assignment for each case. As discussed in the preamble 
to the proposed rule, the MS-LTC-DRGs and MS-DRGs share identical 
titles. Furthermore, Table 11 of the Addendum to the proposed rule 
listed the relative weight for each MS-LTC-DRG. With this information, 
the public could determine the MS-LTC-DRG assignment and relative 
weight for all cases in the FY 2005 and FY 2006 MedPAR files. 
Therefore, we believe the public had detailed information with which to 
perform a comprehensive analysis of our proposal to adopt MS-LTC-DRGs.
    Because we believe that adequate access to proposed changes to MS-
LTC-DRGs has been provided, as discussed above, we are not delaying 
their implementation. As stated above, we are adopting the use of MS-
LTC-DRGs under the LTCH PPS, which correspond to the MS-DRGs adopted 
under the IPPS. Accordingly, we will be using the FY 2008 GROUPER 
Version 25.0 effective for LTCH discharges occurring on or after 
October 1, 2007 through September 30, 2008.
    In conjunction with the changes to the existing CMS DRGs for the 
IPPS by adoption of the MS-DRGs, as discussed above, we are adopting 
the MS-LTC-DRGs for the LTCH PPS, as both sets of DRGs are determined 
from the same DRG structure. Although the structure of the DRGs used 
under the IPPS and the LTCH PPS are identical, we refer to the DRGs 
under the LTCH PPS as MS-LTC-DRGs. This conforming change, that is, to 
replicate the MS-LTC-DRG structure after the MS-DRG structure, is 
appropriate in order to maintain consistency and uniformity among a 
number of stakeholders, such as acute care hospitals, LTCHs, 
epidemiologists, rate setting organizations, and payors, among others. 
Notwithstanding the value of consistency, however, we also emphasize, 
that the adoption of the MS-LTC-DRGs as the patient classification 
system for the LTCH PPS will improve identification of severity of 
illness and hospital resource use which will result in more appropriate 
Medicare payments for LTCHs. As noted above, the patient classification 
system used under the LTCH PPS is the same patient classification 
system used under the IPPS, which historically has been updated 
annually as required by section 1886(d)(4)(C) of the Act and is 
effective for discharges occurring on or after October 1 through 
September 30 of each year. As such, the updates to the MS-DRG 
classification system used under the IPPS for FY 2008 (GROUPER Version 
25.0), discussed in section II.D. of the preamble of this final rule 
with comment period, will be applicable to updates under the LTCH PPS 
(that is, the MS-LTC-DRGs).
    As discussed above, we proposed to adopt the MS-LTC-DRGs as the 
patient classification system under the LTCH PPS, beginning with 
discharges occurring on or after October 1, 2007. However, in the 
proposed rule, we omitted proposed changes to the regulation text 
reflecting the proposed change from LTC-DRGs to MS-LTC-DRGs. As 
discussed previously in this preamble, in this final rule with comment 
period, we are adopting MS-LTC-DRGs for use in the LTCH PPS beginning 
with discharges on or after October 1, 2007. In this final rule with 
comment period, we are revising the regulation text to conform to our 
proposed and final policy. Consequently, we are revising the regulation 
text at Sec.  412.503 where we define terms associated with the LTCH 
PPS in order to indicate the adoption of the MS-LTC-DRGs as the patient 
classification system under the LTCH PPS beginning with FY 2008 for 
discharges occurring on or after October 1, 2007. First, we are adding 
language to the definition of ``LTC-DRG'' indicating that effective, 
October 1, 2007, the MS-LTC-DRGs are used to classify patient 
discharges occurring on or after October 1, 2007, from a long-term care 
hospital and that for patient discharges occurring on or after October 
1, 2007 and that references to LTC-DRGs in 42 CFR Part 412, Subpart O 
for policy descriptions and/or payment calculations shall be considered 
to be references to the MS-LTC-DRGs. Secondly, we are adding a 
definition of ``MS-LTC-DRGs'' as ``* * * the severity-adjusted 
diagnosis-related group used to classify patient discharges from a 
long-term care hospital based on clinical characteristics and average 
resource use, for prospective payment purposes for discharges from a 
long-term care hospital occurring on or after October 1, 2007.''
    Under the LTCH PPS, as described in greater detail below, we 
determine relative weights for each of the MS-LTC-DRGs to account for 
the difference in resource use by patients exhibiting the case 
complexity and multiple

[[Page 47281]]

medical problems characteristic of LTCH patients. (Unless otherwise 
noted in this final rule with comment period, our MS-LTC-DRG analysis 
is based on LTCH data from the March 2007 update of the FY 2006 MedPAR 
file, which contains hospital bills received through March 31, 2007, 
for discharges occurring in FY 2006.)
    LTCHs do not typically treat the full range of diagnoses as do 
acute care hospitals. Therefore, as we discussed in the August 30, 2002 
LTCH PPS final rule (67 FR 55985), which implemented the LTCH PPS, and 
the FY 2006 IPPS final rule (70 FR 47324), we use low-volume quintiles 
in determining the DRG relative weights for DRGs with less than 25 LTCH 
cases (low-volume LTC-DRGs). Specifically, we group those low-volume 
DRGs into 5 quintiles based on average charges per discharge. (A 
listing of the composition of low-volume quintiles for the FY 2007 LTC-
DRGs (based on FY 2005 MedPAR data) appears in section II.I.2. of the 
FY 2007 IPPS final rule (71 FR 47975 through 47978).) We also adjust 
for cases in which the stay at the LTCH is less than or equal to five 
sixths of the geometric average length of stay; that is, short stay 
outlier cases, as discussed below in section II.I.4. of the preamble of 
this final rule with comment period.
b. Patient Classifications into DRGs
    Generally, under the LTCH-PPS, Medicare payment is made at a 
predetermined specific rate for each discharge; that is, payment varies 
by the DRG to which a beneficiary's stay is assigned. Just as cases 
have been classified into the MS-DRGs for acute care hospitals under 
the IPPS (section II.B. of the preamble of this final rule with comment 
period), cases have been classified into MS-LTC-DRGs for payment under 
the LTCH-PPS based on the principal diagnosis, up to eight additional 
diagnoses, and up to six procedures performed during the stay, as well 
as demographic information about the patient. The diagnosis and 
procedure information is reported by the hospital using the ICD-9-CM 
coding system. Under the MS-DRGs for the IPPS and the MS-LTC-DRGs for 
the LTCH-PPS, these factors will not change.
    Section II.B. of the preamble of this final rule with comment 
period discusses the organization of the existing CMS DRGs, which we 
are maintaining under the MS-DRG and MS-LTC-DRG systems. As noted 
above, the patient classification system for the LTCH-PPS is derived 
from the IPPS DRGs and is similarly organized into 25 major diagnostic 
categories (MDCs). Most of these MDCs are based on a particular organ 
system of the body and the remainder involves multiple organ systems 
(such as MDC 22, Burns). Accordingly, the principal diagnosis 
determines MDC assignment. Within most MDCs, cases are then divided 
into surgical DRGs and medical DRGs. Under the present CMS DRGs, some 
surgical and medical DRGs are further differentiated based on the 
presence or absence of CCs. The existing LTC-DRGs are similarly 
categorized. (See section II.B. of the preamble of this final rule with 
comment period for further discussion of surgical DRGs and medical 
DRGs.)
    The MS-DRGs and the MS-LTC-DRGs contain base DRGs that have been 
subdivided into one, two, or three severity levels. The most severe 
level has cases with at least one code that is a major CC, referred to 
as ``with MCC''. The next lower severity level contains cases with at 
least one CC, referred to as ``with CC''. Those DRGs without an MCC or 
a CC are referred to as ``without CC/MCC''. When data did not support 
the creation of three severity levels, the base DRG was divided into 
either two levels or the base was not subdivided. The two-level 
subdivisions consist of one of the following subdivisions:
     With CC/MCC.
     Without CC/MCC.
    In this type of subdivision, cases with at least one code that is 
on the CC or MCC list are assigned to the ``with CC/MCC'' DRG. Cases 
without a CC or an MCC are assigned to the ``without CC/MCC'' DRG.
    The other type of two-level subdivision is as follows:
     With MCC.
     Without MCC.
    In this type of subdivision, cases with at least one code that is 
on the MCC list are assigned to the ``with MCC'' DRG. Cases that do not 
have an MCC are assigned to the ``without MCC'' DRG. This type of 
subdivision could include cases with a CC code, but no MCC.
3. Development of the FY 2008 MS-LTC-DRG Relative Weights
a. General Overview of Development of the MS-LTC-DRG Relative Weights
    As we stated in the August 30, 2002 LTCH-PPS final rule (67 FR 
55981), one of the primary goals for the implementation of the LTCH-PPS 
is to pay each LTCH an appropriate amount for the efficient delivery of 
medical care to Medicare patients. The system must be able to account 
adequately for each LTCH's case-mix in order to ensure both fair 
distribution of Medicare payments and access to adequate care for those 
Medicare patients whose care is more costly. To accomplish these goals, 
we have annually adjusted the LTCH-PPS standard Federal prospective 
payment system rate by the applicable relative weight in determining 
payment to LTCHs for each case. (As we have noted above, as proposed, 
we are adopting the MS-LTC-DRGs for the LTCH-PPS for FY 2008. However, 
this change in the patient classification system does not affect the 
basic principles of the development of relative weights under a DRG-
based prospective payment system. For purposes of clarity, in the 
general discussion below in which we describe the basic methodology of 
the patient classification system, in use since the start of the LTCH-
PPS (that is, LTC-DRGs), we use ``MS-LTC-DRG'' to specify the DRG 
s