[Federal Register Volume 73, Number 161 (Tuesday, August 19, 2008)]
[Rules and Regulations]
[Pages 48434-49083]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-17914]



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Part II

Book 2 of 2 Books

Pages 48433-49084





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, 422, and 489



 Medicare Program; Changes to the Hospital Inpatient Prospective 
Payment Systems and Fiscal Year 2009 Rates; Payments for Graduate 
Medical Education in Certain Emergency Situations; Changes to 
Disclosure of Physician Ownership in Hospitals and Physician Self-
Referral Rules; Updates to the Long-Term Care Prospective Payment 
System; Updates to Certain IPPS-Excluded Hospitals; and Collection of 
Information Regarding Financial Relationships Between Hospitals; Final 
Rule

Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / 
Rules and Regulations

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 411, 412, 413, 422, and 489

[CMS-1390-F; CMS-1531-IFC1; CMS-1531-IFC2; CMS-1385-F4]
RIN 0938-AP15; RIN 0938-AO35; RIN 0938-AO65


Medicare Program; Changes to the Hospital Inpatient Prospective 
Payment Systems and Fiscal Year 2009 Rates; Payments for Graduate 
Medical Education in Certain Emergency Situations; Changes to 
Disclosure of Physician Ownership in Hospitals and Physician Self-
Referral Rules; Updates to the Long-Term Care Prospective Payment 
System; Updates to Certain IPPS-Excluded Hospitals; and Collection of 
Information Regarding Financial Relationships Between Hospitals

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

ACTION: Final rules.

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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, the Medicare Improvements and Extension Act, 
Division B, Title I of the Tax Relief and Health Care Act of 2006, the 
TMA, Abstinence Education, and QI Programs Extension Act of 2007, and 
the Medicare Improvements for Patients and Providers Act of 2008. In 
addition, in the Addendum to this final rule, we describe the changes 
to the amounts and factors used to determine the rates for Medicare 
hospital inpatient services for operating costs and capital-related 
costs. These changes are generally applicable to discharges occurring 
on or after October 1, 2008. We also are setting forth the update to 
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. The updated rate-of-increase limits are effective for 
cost reporting periods beginning on or after October 1, 2008.
    In addition to the changes for hospitals paid under the IPPS, this 
document contains revisions to the patient classifications and relative 
weights used under the long-term care hospital prospective payment 
system (LTCH PPS). This document also contains policy changes relating 
to the requirements for furnishing hospital emergency services under 
the Emergency Medical Treatment and Labor Act of 1986 (EMTALA).
    In this document, we are responding to public comments and 
finalizing the policies contained in two interim final rules relating 
to payments for Medicare graduate medical education to affiliated 
teaching hospitals in certain emergency situations.
    We are revising the regulatory requirements relating to disclosure 
to patients of physician ownership or investment interests in hospitals 
and responding to public comments on a collection of information 
regarding financial relationships between hospitals and physicians. In 
addition, we are responding to public comments on proposals made in two 
separate rulemakings related to policies on physician self-referrals 
and finalizing these policies.

DATES: Effective Dates: This final rule is effective on October 1, 
2008, with the following exceptions: Amendments to Sec. Sec.  412.230, 
412.232, and 412.234 are effective on September 2, 2008. Amendments to 
Sec. Sec.  411.357(a)(5)(ii), (b)(4)(ii), (1)(3)(i) and (ii), and 
(p)(1)(i)(A) and (B) and the definition of entity in Sec.  411.351 are 
effective on October 1, 2009.
    Applicability Dates: The provisions of Sec.  412.78 relating to 
payments to SCHs are applicable for cost reporting periods beginning on 
or after January 1, 2009. Our process for allowing certain hospitals to 
opt out of decisions made on behalf of hospitals (as discussed in 
section III.I.7. of this preamble) are applicable on August 19, 2008.

FOR FURTHER INFORMATION CONTACT: Gay Burton, (410) 786-4487, Operating 
Prospective Payment, MS-DRGs, Wage Index, New Medical Service and 
Technology Add-On Payments, Hospital Geographic Reclassifications, and 
Postacute Care Transfer Issues.
    Tzvi Hefter, (410) 786-4487, Capital Prospective Payment, Excluded 
Hospitals, Direct and Indirect Graduate Medical Education, MS-LTC-DRGs, 
EMTALA, Hospital Emergency Services, and Hospital-within-Hospital 
Issues.
    Siddhartha Mazumdar, (410) 786-6673, Rural Community Hospital 
Demonstration Program Issues.
    Sheila Blackstock, (410) 786-3502, Quality Data for Annual Payment 
Update Issues.
    Thomas Valuck, (410) 786-7479, Hospital Value-Based Purchasing and 
Readmissions to Hospital Issues.
    Rebecca Paul, (410) 786-0852, Collection of Managed Care Encounter 
Data Issues.
    Jacqueline Proctor, (410) 786-8852, Disclosure of Physician 
Ownership in Hospitals and Financial Relationships between Hospitals 
and Physicians Issues.
    Lisa Ohrin, (410) 786-4565, and Don Romano, (410) 786-1401, 
Physician Self-Referral 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

AARP American Association of Retired Persons
AAHKS American Association of Hip and Knee Surgeons
AAMC Association of American Medical Colleges
ACGME Accreditation Council for Graduate Medical Education
AF Artrial fibrillation
AHA American Hospital Association
AICD Automatic implantable cardioverter defibrillator
AHIMA American Health Information Management Association
AHIC American Health Information Community
AHRQ Agency for Healthcare Research and Quality
AMA American Medical Association
AMGA American Medical Group Association
AMI Acute myocardial infarction
AOA American Osteopathic Association
APR DRG All Patient Refined Diagnosis Related Group System
ASC Ambulatory surgical center
ASITN American Society of Interventional and Therapeutic 
Neuroradiology
BBA Balanced Budget Act of 1997, Public Law 105-33
BBRA Medicare, Medicaid, and SCHIP [State Children's Health 
Insurance Program] Balanced Budget Refinement Act of 1999, Public 
Law 106-113
BIPA Medicare, Medicaid, and SCHIP [State Children's Health 
Insurance Program] Benefits Improvement and Protection Act of 2000, 
Public Law 106-554

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BLS Bureau of Labor Statistics
CAH Critical access hospital
CARE [Medicare] Continuity Assessment Record & Evaluation 
[Instrument]
CART CMS Abstraction & Reporting Tool
CBSAs Core-based statistical areas
CC Complication or comorbidity
CCR Cost-to-charge ratio
CDAC [Medicare] Clinical Data Abstraction Center
CDAD Clostridium difficile-associated disease
CIPI Capital input price index
CMI Case-mix index
CMS Centers for Medicare & Medicaid Services
CMSA Consolidated Metropolitan Statistical Area
COBRA Consolidated Omnibus Reconciliation Act of 1985, Public Law 
99-272
CoP [Hospital] condition of participation
CPI Consumer price index
CY Calendar year
DFRR Disclosure of financial relationship report
DRA Deficit Reduction Act of 2005, Public Law 109-171
DRG Diagnosis-related group
DSH Disproportionate share hospital
DVT Deep vein thrombosis
ECI Employment cost index
EMR Electronic medical record
EMTALA Emergency Medical Treatment and Labor Act of 1986, Public Law 
99-272
ESRD End-stage renal disease
FAH Federation of Hospitals
FDA Food and Drug Administration
FHA Federal Health Architecture
FIPS Federal information processing standards
FQHC Federally qualified health center
FTE Full-time equivalent
FY Fiscal year
GAAP Generally Accepted Accounting Principles
GAF Geographic Adjustment Factor
GME Graduate medical education
HACs Hospital-acquired conditions
HCAHPS Hospital Consumer Assessment of Healthcare Providers and 
Systems
HCFA Health Care Financing Administration
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, 
Public Law 104-191
HIPC Health Information Policy Council
HIS Health information system
HIT Health information technology
HMO Health maintenance organization
HPMP Hospital Payment Monitoring Program
HSA Health savings account
HSCRC [Maryland] Health Services Cost Review Commission
HSRV Hospital-specific relative value
HSRVcc Hospital-specific relative value cost center
HQA Hospital Quality Alliance
HQI Hospital Quality Initiative
HWH Hospital-within-a hospital
ICD-9-CM International Classification of Diseases, Ninth Revision, 
Clinical Modification
ICD-10-PCS International Classification of Diseases, Tenth Edition, 
Procedure Coding System
ICR Information collection requirement
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
LAMCs Large area metropolitan counties
LTC-DRG Long-term care diagnosis-related group
LTCH Long-term care hospital
MA Medicare Advantage
MAC Medicare Administrative Contractor
MCC Major complication or comorbidity
MCE Medicare Code Editor
MCO Managed care organization
MCV Major cardiovascular condition
MDC Major diagnostic category
MDH Medicare-dependent, small rural hospital
MedPAC Medicare Payment Advisory Commission
MedPAR Medicare Provider Analysis and Review File
MEI Medicare Economic Index
MGCRB Medicare Geographic Classification Review Board
MIEA-TRHCA Medicare Improvements and Extension Act, Division B of 
the Tax Relief and Health Care Act of 2006, Public Law 109-432
MIPPA Medicare Improvements for Patients and Providers Act of 2008, 
Public Law 110-275
MMA Medicare Prescription Drug, Improvement, and Modernization Act 
of 2003, Public Law 108-173
MMSEA Medicare, Medicaid, and SCHIP Extension Act of 2007, Public 
Law 110-173
MPN Medicare provider number
MRHFP Medicare Rural Hospital Flexibility Program
MRSA Methicillin-resistant Staphylococcus aureus
MSA Metropolitan Statistical Area
MS-DRG Medicare severity diagnosis-related group
MS-LTC-DRG Medicare severity long-term care diagnosis-related group
NAICS North American Industrial Classification System
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]
PE Pulmonary embolism
PMS As Primary metropolitan statistical areas
POA Present on admission
PPI Producer price index
PPS Prospective payment system
PRM Provider Reimbursement Manual
ProPAC Prospective Payment Assessment Commission
PRRB Provider Reimbursement Review Board
PSF Provider-Specific File
PS&R Provider Statistical and Reimbursement (System)
QIG Quality Improvement Group, CMS
QIO Quality Improvement Organization
RAPS Risk Adjustment Processing System
RCE Reasonable compensation equivalent
RHC Rural health clinic
RHQDAPU Reporting hospital quality data for annual payment update
RNHCI Religious nonmedical health care institution
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
TEFRA Tax Equity and Fiscal Responsibility Act of 1982, Public Law 
97-248
TMA TMA [Transitional Medical Assistance], Abstinence Education, and 
QI [Qualifying Individuals] Programs Extension Act of 2007, Public 
Law. 110-09
TJA Total joint arthroplasty
UHDDS Uniform hospital discharge data set
VAP Ventilator-associated pneumonia
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 (MIEA-TRHCA)
    D. Provision of the TMA, Abstinence Education, and QI Programs 
Extension Act of 2007
    E. Issuance of a Notice of Proposed Rulemaking
    1. Proposed Changes to MS-DRG Classifications and Recalibrations 
of Relative Weights
    2. Proposed Changes to the Hospital Wage Index

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    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
    6. Proposed Changes Relating to Disclosure of Physician 
Ownership in Hospitals
    7. Proposed Changes and Solicitation of Comments on Physician 
Self-Referral Provisions
    8. Proposed Collection of Information Regarding Financial 
Relationships Between Hospitals and Physicians
    9. Determining Proposed Prospective Payment Operating and 
Capital Rates and Rate-of-Increase Limits
    10. Impact Analysis
    11. Recommendation of Update Factors for Operating Cost Rates of 
Payment for Inpatient Hospital Services
    12. Disclosure of Financial Relationships Report (DFRR) Form
    13. Discussion of Medicare Payment Advisory Commission 
Recommendations
    F. Public Comments Received on the FY 2009 IPPS Proposed Rule 
and Issues in Related Rules
    1. Comments on the FY 2009 IPPS Proposed Rule
    2. Comments on Phase-Out of the Capital Teaching Adjustment 
Under the IPPS Included in the FY 2008 IPPS Final Rule With Comment 
Period
    3. Comments on Policy Revisions Related to Payment to Medicare 
GME Affiliated Hospitals in Certain Declared Emergency Areas 
Included in Two Interim Final Rules With Comment Period
    4. Comments on Proposed Policy Revisions Related to Physician 
Self-Referrals Included in the CY 2008 Physician Fee Schedule 
Proposed Rule
    G. Provisions of the Medicare Improvements for Patients and 
Providers Act of 2008
II. Changes to Medicare Severity DRG (MS-DRG) Classifications and 
Relative Weights
    A. Background
    B. MS-DRG Reclassifications
    1. General
    2. Yearly Review for Making MS-DRG Changes
    C. Adoption of the MS-DRGs in FY 2008
    D. MS-DRG Documentation and Coding Adjustment, Including the 
Applicability to the Hospital-Specific Rates and the Puerto Rico-
Specific Standardized Amount
    1. MS-DRG Documentation and Coding Adjustment
    2. Application of the Documentation and Coding Adjustment to the 
Hospital-Specific Rates
    3. Application of the Documentation and Coding Adjustment to the 
Puerto Rico-Specific Standardized Amount
    4. Potential Additional Payment Adjustments in FYs 2010 Through 
2012
    E. Refinement of the MS-DRG Relative Weight Calculation
    1. Background
    2. Summary of RTI's Report on Charge Compression
    3. Summary of RAND's Study of Alternative Relative Weight 
Methodologies
    4. Refining the Medicare Cost Report
    5. Timeline for Revising the Medicare Cost Report
    6. Revenue Codes Used in the MedPAR File
    F. Preventable Hospital-Acquired Conditions (HACs), Including 
Infections
    1. General Background
    2. Statutory Authority
    3. Public Input
    4. Collaborative Process
    5. Selection Criteria for HACs
    6. HACs Selected During FY 2008 IPPS Rulemaking and Changes to 
Certain Codes
    a. Foreign Object Retained After Surgery
    b. Pressure Ulcers: Changes in Code Assignments
    7. Candidate HACs
    a. Manifestations of Poor Glycemic Control
    b. Surgical Site Infections
    c. Deep Vein Thrombosis (DVT)/Pulmonary Embolism (PE)
    d. Delirium
    e. Ventilator-Associated Pneumonia (VAP)
    f. Staphylococcus aureus Septicemia
    g. Clostridium difficile-Associated Disease (CDAD)
    h. Legionnaires' Disease
    i. Iatrogenic Pneumothorax
    j. Methicillin-resistant Staphylococcus aureus (MRSA)
    8. Present on Admission Indicator Reporting (POA)
    9. Enhancement and Future Issues
    a. Risk-Adjustment of Payments Related to HACs
    b. Risk-Based Measurement of HACs
    c. Use of POA Information
    d. Transition to ICD-10
    e. Healthcare-Associated Conditions in Other Payment Settings
    f. Relationship to NQF's Serious Reportable Adverse Events
    g. Additional Potential Candidate HACs, Suggested Through 
Comment
    10. HAC Coding
    a. Foreign Object Retained After Surgery
    b. MRSA
    c. POA
    11. HACs Selected for Implementation on October 1, 2008
    G. Changes to Specific MS-DRG Classifications
    1. Pre-MDCs: Artificial Heart Devices
    2. MDC 1 (Diseases and Disorders of the Nervous System)
    a. Transferred Stroke Patients Receiving Tissue Plasminogen 
Activator (tPA)
    b. Intractable Epilepsy With Video Electroencephalogram (EEG)
    3. MDC 5 (Diseases and Disorders of the Circulatory System)
    a. Automatic Implantable Cardioverter-Defibrillators (AICD) Lead 
and Generator Procedures
    b. Left Atrial Appendage Device
    4. MDC 8 (Diseases and Disorders of the Musculoskeletal System 
and Connective Tissue): Hip and Knee Replacements and Revisions
    a. Brief History of Development of Hip and Knee Replacement 
Codes
    b. Prior Recommendations of the AAHKS
    c. Adoption of MS-DRGs for Hip and Knee Replacements for FY 2008 
and AAHKS' Recommendations
    d. AAHKS' Recommendations for FY 2009
    e. CMS' Response to AAHKS' Recommendations
    f. Conclusion
    5. MDC 18 (Infections and Parasitic Diseases (Systemic or 
Unspecified Sites): Severe Sepsis
    6. MDC 21 (Injuries, Poisonings and Toxic Effects of Drugs): 
Traumatic Compartment Syndrome
    7. Medicare Code Editor (MCE) Changes
    a. List of Unacceptable Principal Diagnoses in MCE
    b. Diagnoses Allowed for Males Only Edit
    c. Limited Coverage Edit
    8. Surgical Hierarchies
    9. CC Exclusions List
    a. Background
    b. CC Exclusions List for FY 2009
    10. Review of Procedure Codes in MS-DRGs 981, 982, and 983; 984, 
985, and 986; and 987, 988, and 989
    a. Moving Procedure Codes From MS-DRGs 981 Through 983 or MS-
DRGs 987 Through 989 to MDCs
    b. Reassignment of Procedures Among MS-DRGs 981 Through 983, 984 
Through 986, and 987 Through 989
    c. Adding Diagnosis or Procedure Codes to MDCs
    11. Changes to the ICD-9-CM Coding System
    12. Other MS-DRG Issues
    a. Heart Transplants or Implants of Heart Assist System and 
Liver Transplants
    b. New Codes for Pressure Ulcers
    c. Coronary Artery Stents
    d. TherOx (Downstream(r) System)
    e. Spinal Disc Devices
    f. Spinal Fusion
    g. Special Treatment for Hospitals With High Percentages of ESRD 
Discharges
    H. Recalibration of MS-DRG Weights
    I. Medicare Severity Long-Term Care Diagnosis Related Group (MS-
LTC-DRG) Reclassifications and Relative Weights for LTCHs for FY 
2009
    1. Background
    2. Changes in the MS-LTC-DRG Classifications
    a. Background
    b. Patient Classifications Into MS-LTC-DRGs
    3. Development of the FY 2009 MS-LTC-DRG Relative Weights
    a. General Overview of Development of the MS-LTC-DRG Relative 
Weights
    b. Data
    c. Hospital-Specific Relative Value (HSRV) Methodology
    d. Treatment of Severity Levels in Developing Relative Weights
    e. Low-Volume MS-LTC-DRGs
    4. Steps for Determining the FY 2009 MS-LTC-DRG Relative Weights
    5. Other Comments
    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

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    3. FY 2009 Status of Technologies Approved for FY 2008 Add-On 
Payments
    4. FY 2009 Applications for New Technology Add-On Payments
    a. CardioWest\TM\ Temporary Total Artificial Heart System 
(CardioWest\TM\ TAH-t)
    b. Emphasys Medical Zephyr[supreg] Endobronchial Valve 
(Zephyr[supreg] EBV)
    c. Oxiplex[supreg]
    d. TherOx Downstream[supreg] System
    5. Regulatory Changes
III. Changes to the Hospital Wage Index
    A. Background
    B. Requirements of Section 106 of the MIEA-TRHCA
    1. Wage Index Study Required Under the MIEA-TRHCA
    a. Legislative Requirement
    b. MedPAC's Recommendations
    c. CMS Contract for Impact Analysis and Study of Wage Index 
Reform
    d. Public Comments Received on the MedPAC Recommendations and 
the CMS/Acumen Wage Index Study and Analysis
    e. Impact Analysis of Using MedPAC's Recommended Wage Index
    2. CMS Proposals and Final Policy Changes in Response to 
Requirements Under Section 106(b) of the MIEA-TRHCA
    a. Proposed and Final Revision of the Reclassification Average 
Hourly Wage Comparison Criteria
    b. Within-State Budget Neutrality Adjustment for the Rural and 
Imputed Floors
    c. Within-State Budget Neutrality Adjustment for Geographic 
Reclassification
    C. Core-Based Statistical Areas for the Hospital Wage Index
    D. Occupational Mix Adjustment to the FY 2009 Wage Index
    1. Development of Data for the FY 2009 Occupational Mix 
Adjustment
    2. Calculation of the Occupational Mix Adjustment for FY 2009
    3. 2007-2008 Occupational Mix Survey for the FY 2010 Wage Index
    E. Worksheet S-3 Wage Data for the FY 2009 Wage Index
    1. Included Categories of Costs
    2. Excluded Categories of Costs
    3. Use of Wage Index Data by Providers Other Than Acute Care 
Hospitals Under the IPPS
    F. Verification of Worksheet S-3 Wage Data
    1. Wage Data for Multicampus Hospitals
    2. New Orleans' Post-Katrina Wage Index
    G. Method for Computing the FY 2009 Unadjusted Wage Index
    H. Analysis and Implementation of the Occupational Mix 
Adjustment and the FY 2009 Occupational Mix Adjusted Wage Index
    I. Revisions to the Wage Index Based on Hospital Redesignations
    1. General
    2. Effects of Reclassification/Redesignation
    3. FY 2009 MGCRB Reclassifications
    4. FY 2008 Policy Clarifications and Revisions
    5. Redesignations of Hospitals Under Section 1886(d)(8)(B) of 
the Act
    6. Reclassifications Under Section 1886(d)(8)(B) of the Act
    7. Reclassifications Under Section 508 of Public Law 108-173
    J. FY 2009 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 2009
IV. Other Decisions and Changes to the IPPS for Operating Costs and 
GME Costs
    A. Changes to the Postacute Care Transfer Policy
    1. Background
    2. Policy Change Relating to Transfers to Home With a Written 
Plan for the Provision of Home Health Services
    3. Evaluation of MS-DRGs Under Postacute Care Transfer Policy 
for FY 2009
    B. Reporting of Hospital Quality Data for Annual Hospital 
Payment Update 1. Background
    a. Overview
    b. Voluntary Hospital Quality Data Reporting
    c. Hospital Quality Data Reporting Under Section 501(b) of 
Public Law 108-173
    d. Hospital Quality Data Reporting Under Section 5001(a) of 
Public Law 109-171
    2. Quality Measures for the FY 2010 Payment Determination and 
Subsequent Years
    a. Quality Measures for the FY 2010 Payment Determination
    b. Possible New Quality Measures, Measure Sets, and Program 
Requirements for the FY 2011 Payment Determination and Subsequent 
Years
    c. Considerations in Expanding and Updating Quality Measures 
Under the RHQDAPU Program
    3. Form and Manner and Timing of Quality Data Submission
    4. RHQDAPU Program Procedures for FY 2009 and FY 2010
    a. RHQDAPU Program Procedures for FY 2009
    b. RHQDAPU Program Procedures for FY 2010
    5. HCAHPS Requirements for FY 2009 and FY 2010
    a. FY 2009 HCAHPS Requirements
    b. FY 2010 HCAHPS Requirements
    6. Chart Validation Requirements for FY 2009 and FY 2010
    a. Chart Validation Requirements for FY 2009
    b. Chart Validation Requirements for FY 2010
    c. Chart Validation Methods and Requirements Under Consideration 
for FY 2011 and Subsequent Years
    7. Data Attestation Requirements for FY 2009 and FY 2010
    a. Data Attestation Requirements for FY 2009
    b. Data Attestation Requirements for FY 2010
    8. Public Display Requirements
    9. Reconsideration and Appeal Procedures
    10. RHQDAPU Program Withdrawal Deadlines for FY 2009 and FY 2010
    11. Requirements for New Hospitals
    12. Electronic Medical Records
    13. RHQDAPU Data Infrastructure
    C. Medicare Hospital Value-Based Purchasing (VBP) Plan
    1. Medicare Hospital VBP Plan Report to Congress
    2. Testing and Further Development of the Medicare Hospital VBP 
Plan
    D. Sole Community Hospitals (SCHs) and Medicare-Dependent, Small 
Rural Hospitals (MDHs)
    1. Background
    2. Rebasing of Payments to SCHs
    3. Volume Decrease Adjustment for SCHs and MDHs: Data Sources 
for Determining Core Staff Values
    E. Rural Referral Centers (RRCs)
    1. Case-Mix Index
    2. Discharges
    F. Indirect Medical Education (IME) Adjustment
    1. Background
    2. IME Adjustment Factor for FY 2009
    G. Payments for Direct Graduate Medical Education (GME)
    1. Background
    2. Medicare GME Affiliation Provisions for Teaching Hospitals in 
Certain Emergency Situations
    a. Legislative Authority
    b. Regulatory Changes Issued in 2006 to Address Certain 
Emergency Situations
    c. Additional Regulatory Changes Issued in 2007 To Address 
Certain Emergency Situations
    d. Public Comments Received on the April 12, 2006 and November 
27, 2007 Interim Final Rules With Comment Period
    e. Provisions of the Final Rule
    f. Technical Correction
    H. Payments to Medicare Advantage Organizations: Collection of 
Risk Adjustment Data
    I. Hospital Emergency Services Under EMTALA
    1. Background
    2. EMTALA Technical Advisory Group (TAG) Recommendations
    3. Changes Relating to Applicability of EMTALA Requirements to 
Hospital Inpatients
    4. Changes to the EMTALA Physician On-Call Requirements
    a. Relocation of Regulatory Provisions
    b. Shared/Community Call
    5. Technical Change to Regulations
    J. Application of Incentives To Reduce Avoidable Readmissions to 
Hospitals
    1. Overview
    2. Measurement
    3. Shared Accountability
    4. VBP Incentives
    5. Direct Payment Adjustment
    6. Performance-Based Payment Adjustment
    7. Public Reporting of Readmission Rates
    8. Potential Unintended Consequences of VBP Incentives
    K. Rural Community Hospital Demonstration Program
V. Changes to the IPPS for Capital-Related Costs
    A. Background
    1. Exception Payments
    2. New Hospitals
    3. Hospitals Located in Puerto Rico
    B. Revisions to the Capital IPPS Based on Data on Hospital 
Medicare Capital Margins

[[Page 48438]]

    1. Elimination of the Large Add-On Payment Adjustment
    2. Changes to the Capital IME Adjustment
    a. Background and Changes Made for FY 2008
    b. Public Comments Received on Phase Out of Capital IPPS 
Teaching Adjustment Provisions Included in the FY 2008 IPPS Final 
Rule With Comment Period and on the FY 2009 IPPS Proposed Rule
VI. Changes for Hospitals and Hospital Units Excluded From the IPPS
    A. Payments to Excluded Hospitals and Hospital Units
    B. IRF PPS
    C. LTCH PPS
    D. IPF PPS
    E. Determining LTCH Cost-to-Charge Ratios (CCRs) Under the LTCH 
PPS
    F. Change to the Regulations Governing Hospitals-Within-
Hospitals
    G. Report of Adjustment (Exceptions) Payments
VII. Disclosure Required of Certain Hospitals and Critical Access 
Hospitals (CAHs) Regarding Physician Ownership
VIII. Physician Self-Referral Provisions
    A. General Overview
    1. Statutory Framework and Regulatory History
    2. Physician Self-Referral Provisions Finalized in this FY 2009 
IPPS Final Rule
    B. ``Stand in the Shoes'' Provisions
    1. Background
    a. Regulatory History of the Physician ``Stand in the Shoes'' 
Rules
    b. Summary of Proposed Revisions to the Physician ``Stand in the 
Shoes'' Rules
    c. Summary of Proposed DHS Entity ``Stand in the Shoes'' Rules
    2. Physician ``Stand in the Shoes'' Provisions
    3. DHS Entity ``Stand in the Shoes'' Provisions
    4. Application of the Physician ``Stand in the Shoes'' and the 
DHS Entity ``Stand in the Shoes'' Provisions (``Conventions'')
    5. Definitions: ``Physician'' and ``Physician Organization''
    C. Period of Disallowance
    D. Alternative Method for Compliance With Signature Requirements 
in Certain Exceptions
    E. Percentage-Based Compensation Formulae
    F. Unit of Service (Per Click) Payments in Lease Arrangements
    1. General Support for Proposal
    2. Authority
    3. Hospitals as Risk-Averse and Access to Care
    4. Evidence of Overutilization: Therapeutic Versus Diagnostic
    5. Per-Click Payments as Best Measure of Fair Market Value
    6. Lithotripsy as Not DHS
    7. Time-Based Rental Arrangements
    8. Physician Entities as Lessors
    9. Physicians and Physician Entities as Lessees
    G. Services Provided ``Under Arrangements'' (Services Performed 
by an Entity Other Than the Entity That Submits the Claim)
    1. Support for Proposal
    2. MedPAC Approach
    3. Authority for Proposal
    4. Community Benefit and Access to Care
    5. Hospitals as Risk-Averse
    6. Proposal Based on Anecdotal Evidence
    7. Cardiac Catheterization
    8. Therapeutic Versus Diagnostic
    9. Professional Fee Greater Than Incremental Return for 
Technical Component
    10. Existing Exceptions Are Sufficient Potection
    11. Suggested Changes to Definitions
    12. Cause Claim To Be Submitted
    13. Physician-Owned Implant Companies
    14. Procedures Must Be Done in a Hospital Setting Because the 
ASC Does Not Pay Enough
    15. Lithotripsy as Not DHS
    16. Procedures That Are DHS Only When Furnished in a Hospital
    17. Exceptions
    18. Personally Performed Services
    19. Outpatient Services Treated Differently Than Inpatient 
Services
    20. Sleep Centers
    21. Dialysis
    22. Effective Date
    H. Exceptions for Obstetrical Malpractice Insurance Subsidies
    I. Ownership or Investment Interest in Retirement Plans
    J. Burden of Proof
IX. Financial Relationships Between Hospitals and Physicians
X. MedPAC Recommendations
XI. Other Required Information
    A. Requests for Data From the Public
    B. Collection of Information Requirements
    1. Legislative Requirement for Solicitation of Comments
    2. Requirements in Regulatory Text
    a. ICRs Regarding Physician Reporting Requirements
    b. ICRs Regarding Risk Adjustment Data
    c. ICRs Regarding Basic Commitments of Providers
    3. Associated Information Collections Not Specified in 
Regulatory Text
    a. Present on Admission (POA) Indicator Reporting
    b. Add-On Payments for New Services and Technologies
    c. Reporting of Hospital Quality Data for Annual Hospital 
Payment Update
    d. Occupational Mix Adjustment to the FY 2009 Index (Hospital 
Wage Index Occupational Mix Survey)
    C. Waiver of Proposed Rulemaking, Waiver of Delay in Effective 
Date, and Retroactive Effective Date
    1. Requirements for Waivers and Retroactive Rulemaking
    2. FY 2008 Puerto Rico--Specific Rates
    3. Rebasing of Payments to SCHs
    4. Technical Change to Regulations Governing Payments to 
Hospitals With High Percentage of ESRD Discharges

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, 2008

I. Summary and Background
II. Changes to the Prospective Payment Rates for Hospital Inpatient 
Operating Costs for FY 2009
    A. Calculation of the Tentative Adjusted Standardized Amount
    B. Tentative Adjustments for Area Wage Levels and Cost-of-Living
    C. MS-DRG Relative Weights
    D. Calculation of the Prospective Payment Rates
III. Changes to Payment Rates for Acute Care Hospital Inpatient 
Capital-Related Costs for FY 2009
    A. Determination of Federal Hospital Inpatient Capital-Related 
Prospective Payment Rate Update
    B. Calculation of the Inpatient Capital-Related Prospective 
Payments for FY 2009
    C. Capital Input Price Index
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 2007; Hospital Average Hourly Wages for Federal 
Fiscal Years 2007 (2003 Wage Data), 2008 (2004 Wage Data), and 2009 
(2005 Wage Data); and 3-Year Average of Hospital Average Hourly 
Wages
    Table 3A.--FY 2009 and 3-Year Average Hourly Wage for Urban 
Areas by CBSA
    Table 3B.--FY 2009 and 3-Year Average Hourly Wage for Rural 
Areas by CBSA
    Table 4J.--Out-Migration Wage Adjustment--FY 2009
    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 (Available 
through the Internet on the CMS Web site at: http://www.cms.hhs.gov/
AcuteInpatientPPS/)

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    Table 6H.--Deletions from the CC Exclusions List (Available 
through the Internet on the CMS Web site at: http://www.cms.hhs.gov/
AcuteInpatientPPS/)
    Table 6I.--Complete List of Complication and Comorbidity (CC) 
Exclusions (Available only through the Internet on the CMS Web site 
at: http://www.cms.hhs.gov/AcuteInpatientPPS/)
    Table 6J.--Major Complication and Comorbidity (MCC) List 
(Available Through the Internet on the CMS Web site at:  http://
www.cms.hhs.gov/AcuteInpatientPPS/)
    Table 6K.--Complication and Comorbidity (CC) List (Available 
Through the Internet on the CMS Web site at: http://www.cms.hhs.gov/
AcuteInpatientPPS/)
    Table 7A.--Medicare Prospective Payment System Selected 
Percentile Lengths of Stay: FY 2007 MedPAR Update--March 2008 
GROUPER V25.0 MS-DRGs
    Table 7B.--Medicare Prospective Payment System Selected 
Percentile Lengths of Stay: FY 2007 MedPAR Update--March 2008 
GROUPER V26.0 MS-DRGs
    Table 8A.--Statewide Average Operating Cost-to-Charge Ratios--
July 2008
    Table 8B.--Statewide Average Capital Cost-to-Charge Ratios--July 
2008
    Table 8C.--Statewide Average Total Cost-to-Charge Ratios for 
LTCHs--July 2008
    Table 9A.--Hospital Reclassifications and Redesignations--FY 
2009
    Table 9B.--Hospitals Redesignated as Rural Under Section 
1886(d)(8)(E) of the Act--FY 2009
    Table 10.--Tentative 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 2008
    Table 11.--FY 2009 MS-LTC-DRGs, Relative Weights, Geometric 
Average Length of Stay, and Short-Stay Outlier (SSO) Threshold
Appendix A: Regulatory Impact Analysis
    I. Overall Impact
    II. Objectives
    III. Limitations of 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 MS-DRG Reclassifications and 
Relative Cost-Based Weights (Column 2)
    D. Effects of Wage Index Changes (Column 3)
    E. Combined Effects of MS-DRG and Wage Index Changes (Column 4)
    F. Effects of MGCRB Reclassifications (Column 5)
    G. Effects of the Rural Floor and Imputed Rural Floor, Including 
the Transition To Apply Budget Neutrality at the State Level (Column 
6)
    H. Effects of the Wage Index Adjustment for Out-Migration 
(Column 7)
    I. Effects of All Changes With CMI Adjustment Prior to Estimated 
Growth (Column 8)
    J. Effects of All Changes With CMI Adjustment and Estimated 
Growth (Column 9)
    K. Effects of Policy on Payment Adjustments for Low-Volume 
Hospitals
    L. Impact Analysis of Table II
    VII. Effects of Other Policy Changes
    A. Effects of Policy on HACs, Including Infections
    B. Effects of MS-LTC-DRG Reclassifications and Relative Weights 
for LTCHs
    C. Effects of Policy Change Relating to New Medical Service and 
Technology Add-On Payments
    D. Effects of Requirements for Hospital Reporting of Quality 
Data for Annual Hospital Payment Update
    E. Effects of Policy Change to Methodology for Computing Core 
Staffing Factors for Volume Decrease Adjustment for SCHs and MDHs
    F. Impact of the Policy Revisions Related to Payment to 
Hospitals for Direct Graduate Medical Education (GME)
    G. Effects of Clarification of Policy for Collection of Risk 
Adjustment Data From MA Organizations
    H. Effects of Policy Changes Relating to Hospital Emergency 
Services Under EMTALA
    I. Effects of Implementation of Rural Community Hospital 
Demonstration Program
    J. Effects of Policy Changes Relating to Payments to Hospitals-
Within-Hospitals
    K. Effects of Policy Changes Relating to Requirements for 
Disclosure of Physician Ownership in Hospitals
    L. Effects of Policy Changes Relating to Physician Self-Referral 
Provisions
    M. Effects of Changes Relating to Reporting of Financial 
Relationships Between Hospitals and Physicians
VIII. Effects 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 2009
    III. Secretary's Final Recommendation
    IV. MedPAC Recommendation for Assessing Payment Adequacy and 
Updating Payments in Traditional Medicare

I. Background

A. Summary

1. Acute Care Hospital Inpatient Prospective Payment System (IPPS)
    Section 1886(d) of the Social Security Act (the Act) sets forth a 
system of payment for the operating costs of acute care hospital 
inpatient stays under Medicare Part A (Hospital Insurance) based on 
prospectively set rates. Section 1886(g) of the Act requires the 
Secretary to pay for the capital-related costs of hospital inpatient 
stays under a prospective payment system (PPS). Under these PPSs, 
Medicare payment for hospital inpatient operating and capital-related 
costs is made at predetermined, specific rates for each hospital 
discharge. Discharges are classified according to a list of diagnosis-
related groups (DRGs).
    The base payment rate is comprised of a standardized amount that is 
divided into a labor-related share and a nonlabor-related share. The 
labor-related share is adjusted by the wage index applicable to the 
area where the hospital is located. If the hospital is located in 
Alaska or Hawaii, the nonlabor-related share is adjusted by a cost-of-
living adjustment factor. This base payment rate is multiplied by the 
DRG relative weight.
    If the hospital treats a high percentage of low-income patients, it 
receives a percentage add-on payment applied to the DRG-adjusted base 
payment rate. This add-on payment, known as the disproportionate share 
hospital (DSH) adjustment, provides for a percentage increase in 
Medicare payments to hospitals that qualify under either of two 
statutory formulas designed to identify hospitals that serve a 
disproportionate share of low-income patients. For qualifying 
hospitals, the amount of this adjustment may vary based on the outcome 
of the statutory calculations.
    If the hospital is an approved teaching hospital, it receives a 
percentage add-on payment for each case paid under the IPPS, known as 
the indirect medical education (IME) adjustment. This percentage 
varies, depending on the ratio of residents to beds.
    Additional payments may be made for cases that involve new 
technologies or medical services that have been approved for special 
add-on payments. To qualify, a new technology or medical service must 
demonstrate that it is a substantial clinical improvement over 
technologies or services otherwise available, and that, absent an add-
on payment, it would be inadequately paid under the regular DRG 
payment.
    The costs incurred by the hospital for a case are evaluated to 
determine whether the hospital is eligible for an additional payment as 
an outlier case. This additional payment is designed to protect the 
hospital from large financial losses due to unusually expensive cases. 
Any outlier payment due is added to the DRG-adjusted base payment rate, 
plus

[[Page 48440]]

any DSH, IME, and new technology or medical service add-on adjustments.
    Although payments to most hospitals under the IPPS are made on the 
basis of the standardized amounts, some categories of hospitals are 
paid in whole or in part based on their hospital-specific rate based on 
their costs in a base year. For example, sole community hospitals 
(SCHs) receive the higher of a hospital-specific rate based on their 
costs in a base year (the higher of FY 1982, FY 1987, or FY 1996) or 
the IPPS rate based on the standardized amount. (We note that, as 
discussed in section IV.D.2. of this preamble, effective for cost 
reporting periods beginning on or after January 1, 2009, an SCH's 
hospital-specific rate will be based on their costs per discharge in FY 
2006 if greater than the hospital-specific rates based on its costs in 
FY 1982, FY 1987, or FY 1996, or the IPPS rate based on the 
standardized amount.) Until FY 2007, a Medicare-dependent, small rural 
hospital (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 based on their costs in a base year (the higher 
of FY 1982, FY 1987, or FY 2002) is higher than the IPPS 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. SCHs are the sole source of care in their areas, and 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.
    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. However, as discussed in section V.B.2. of this 
preamble, the capital IME adjustment will be reduced by 50 percent in 
FY 2009 (as established in the FY 2008 IPPS final rule with comment 
period). 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 Public Law 106-
113 and section 307(b)(1) of Public Law 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 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 Public Law 106-
113, inpatient psychiatric facilities (IPFs) (formerly psychiatric 
hospitals and psychiatric units of acute care hospitals) are paid under 
the IPF PPS. For cost reporting periods beginning on or after January 
1, 2008, all IPFs are paid 100 percent of the Federal per diem payment 
amount established under the IPF PPS. (For cost reporting periods 
beginning on or after January 1, 2005, and ending on or before December 
31, 2007, some IPFs received transitioned payments for inpatient 
hospital services based on a blend of reasonable cost-based payment and 
a Federal per diem payment rate.) 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 are 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

[[Page 48441]]

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)

    Section 5001(b) of the Deficit Reduction Act of 2005 (DRA), Public 
Law 109-171, requires the Secretary to develop a plan to implement, 
beginning with FY 2009, a value-based purchasing plan for section 
1886(d) hospitals defined in the Act. In section IV.C. of the preamble 
of this proposed rule, we discuss the report to Congress on the 
Medicare value-based purchasing plan and the current testing of the 
plan.

C. Provisions of the Medicare Improvements and Extension Act Under 
Division B, Title I of the Tax Relief and Health Care Act of 2006 
(MIEA-TRHCA)

    Section 106(b)(2) of the MIEA-TRHCA instructed the Secretary of 
Health and Human Services 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. The 
Secretary was also instructed to consider MedPAC's recommendations on 
the Medicare wage index classification system in developing these 
proposals. In section III. of the preamble of this final rule, we 
summarize Acumen's comparative and impact analysis of the MedPAC and 
CMS wage indices.

D. Provision of the TMA, Abstinence Education, and QI Programs 
Extension Act of 2007

    Section 7 of the TMA [Transitional Medical Assistance], Abstinence 
Education, and QI [Qualifying Individuals] Programs Extension Act of 
2007 (Pub. L. 110-90) provides for a 0.9 percent prospective 
documentation and coding adjustment in the determination of 
standardized amounts under the IPPS (except for MDHs, SCHs, and Puerto 
Rico hospitals) for discharges occurring during FY 2009. The 
prospective documentation and coding adjustment was established in FY 
2008 in response to the implementation of an MS-DRG system under the 
IPPS that resulted in changes in coding and classification that did not 
reflect real changes in case-mix under section 1886(d) of the Act. We 
discuss our implementation of this provision in section II.D. of the 
preamble of this final rule and in the Addendum and in Appendix A to 
this final rule.

E. Issuance of a Notice of Proposed Rulemaking

    On April 30, 2008, we issued in the Federal Register (73 FR 23528) 
a notice of proposed rulemaking that set forth proposed changes to the 
Medicare IPPS for operating costs and for capital-related costs in FY 
2009. 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, 
2008. In addition, we presented proposed changes relating to disclosure 
to patients of physician ownership and investment interests in 
hospitals, proposed changes to our physician self-referral regulations, 
and a solicitation of public comments on a proposed collection of 
information regarding financial relationships between hospitals and 
physicians.
    Below is a summary of the major changes that we proposed to make:
1. Proposed Changes to MS-DRG Classifications and Recalibrations of 
Relative Weights In section II. of the Preamble to the Proposed Rule, 
We Included--
     Proposed changes to MS-DRG reclassifications based on our 
yearly review.
     Proposed application of the documentation and coding 
adjustment to hospital-specific rates resulting from implementation of 
the MS-DRG system.
     Proposed changes to address the RTI reporting 
recommendations on charge compression.
     Proposed recalibrations of the MS-DRG relative weights.
    We also proposed to refine the hospital cost reports so that 
charges for relatively inexpensive medical supplies are reported 
separately from the costs and charges for more expensive medical 
devices. This proposal would be applied to the determination of both 
the IPPS and the OPPS relative weights as well as the calculation of 
the ambulatory surgical center payment rates.
    We presented a listing and discussion of additional hospital-
acquired conditions (HACs), including infections, that were proposed to 
be subject to the statutorily required quality adjustment in MS-DRG 
payments for FY 2009.
    We presented our evaluation and analysis of the FY 2009 applicants 
for add-on payments for high-cost new medical services and technologies 
(including public input, as directed by Pub. L. 108-173, obtained in a 
town hall meeting).
    We proposed the annual update of the MS-LTC-DRG classifications and 
relative weights for use under the LTCH PPS for FY 2009.
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 include the following:
     Proposed wage index reform changes in response to 
recommendations made to Congress as a result of the wage index study 
required under Public Law 109-432. We discussed changes related to 
reclassifications criteria, application of budget neutrality in 
reclassifications, and the rural floor and imputed floor budget 
neutrality at the State level.
     Changes to the CBSA designations.
     The methodology for computing the proposed FY 2009 wage 
index.
     The proposed FY 2009 wage index update, using wage data 
from cost reporting periods that began during FY 2005.
     Analysis and implementation of the proposed FY 2009 
occupational mix adjustment to the wage index.
     Proposed revisions to the wage index based on hospital 
redesignations and reclassifications.
     The proposed adjustment to the wage index for FY 2009 
based on commuting patterns of hospital employees who reside in a 
county and work in a different area with a higher wage index.
     The timetable for reviewing and verifying the wage data 
used to compute the proposed FY 2009 wage index.
     The proposed labor-related share for the FY 2009 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:
     Proposed changes to the postacute care transfer policy as 
it relates to transfers to home with the provision of home health 
services.
     The reporting of hospital quality data as a condition for 
receiving the full annual payment update increase.
     Proposed changes in the collection of Medicare Advantage 
(MA) encounter data that are used for computing the risk payment 
adjustment made to MA organizations.
     Discussion of the report to Congress on the Medicare 
value-based purchasing

[[Page 48442]]

plan and current testing and further development of the plan.
     Proposed changes to the methodology for determining core 
staff values for the volume decrease payment adjustment for SCHs and 
MDHs.
     The proposed updated national and regional case-mix values 
and discharges for purposes of determining RRC status.
     The statutorily required IME adjustment factor for FY 2009 
and technical changes to the GME payment policies.
     Proposed changes to policies on hospital emergency 
services under EMTALA to address EMTALA Technical Advisory Group (TAG) 
recommendations.
     Solicitation of public comments on Medicare policies 
relating to incentives for avoidable readmissions to hospitals.
     Discussion of the fifth 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. We acknowledged the public comments that we 
received on the phase-out of the capital teaching adjustment included 
in the FY 2008 IPPS final rule with comment period, and again solicited 
public comments on this phase-out.
5. Proposed Changes to the Payment Rates for Excluded Hospitals and 
Hospital Unit
    In section VI. of the preamble to the proposed rule, we discussed 
proposed changes to payments to excluded hospitals and hospital units, 
proposed changes for determining LTCH CCRs under the LTCH PPS, and 
proposed changes to the regulations on hospitals-within-hospitals.
6. Proposed Changes Relating to Disclosure of Physician Ownership in 
Hospitals
    In section VII. of the preamble of the proposed rule, we presented 
proposed changes to the regulations relating to the disclosure to 
patients of physician ownership or investment interests in hospitals.
7. Proposed Changes and Solicitation of Comments on Physician Self-
Referral Provisions
    In section VIII. of the preamble of the proposed rule, we proposed 
changes to the physician self-referral regulations relating to the 
``Stand in Shoes'' provision and the period of disallowance for claims 
submitted in violation of the prohibition. In addition, we solicited 
public comments regarding physician-owned implant companies and 
gainsharing arrangements.
8. Proposed Collection of Information Regarding Financial Relationships 
Between Hospitals and Physicians
    In section IX. of the preamble of the proposed rule, we solicited 
public comments on our proposed collection of information regarding 
financial relationships between hospitals and physicians.
9. 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 2009 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 2009 
for hospitals and hospital units excluded from the PPS.
10. Impact Analysis
    In Appendix A of the proposed rule, we set forth an analysis of the 
impact that the proposed changes would have on affected hospitals.
11. 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 2009 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.
12. Disclosure of Financial Relationships Report (DFRR) Form
    In Appendix C of the proposed rule, we presented the reporting form 
that we proposed to use for the proposed collection of information on 
financial relationships between hospitals and physicians discussed in 
section IX. of the preamble of the proposed rule.
13. Discussion of Medicare Payment Advisory Commission Recommendations
    Under section 1805(b) of the Act, MedPAC is required to submit a 
report to Congress, no later than March 1 of each year, in which MedPAC 
reviews and makes recommendations on Medicare payment policies. 
MedPAC's March 2008 recommendations concerning hospital inpatient 
payment policies address the update factor for 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 2008 
reports or to obtain a copy of the reports, contact MedPAC at (202) 
220-3700 or visit MedPAC's Web site at: http://www.medpac.gov.

F. Public Comments Received on the FY 2009 IPPS Proposed Rule and 
Issues in Related Rules

1. Comments on the FY 2009 IPPS Proposed Rule
    We received over 1,100 timely pieces of correspondence in response 
to the FY 2009 IPPS proposed rule issued in the Federal Register on 
April 30, 2008. 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.
2. Comments on Phase-Out of the Capital Teaching Adjustment Under the 
IPPS Included in the FY 2008 IPPS Final Rule With Comment Period
    In the FY 2008 IPPS final rule with comment period, we solicited 
public comments on our policy changes related to phase-out of the 
capital teaching adjustment to the capital payment update under the 
IPPS (72 FR 47401). We received approximately 90 timely pieces of 
correspondence in response to our solicitation. In section V. of the 
preamble of the FY 2009 IPPS proposed rule, we acknowledged receipt of 
those public comments and again solicited public comments on the phase-
out. We received numerous pieces of timely correspondence in response 
to the second solicitation. In section V. of this final rule, we 
summarize the public comments received on both the FY 2008 IPPS final 
rule with comment period and the FY 2009 IPPS proposed rule and present 
our responses.

[[Page 48443]]

3. Comments on Policy Revisions Related to Payment to Medicare GME 
Affiliated Hospitals in Certain Declared Emergency Areas Included in 
Two Interim Final Rules With Comment Period
    We have issued two interim final rules with comment periods in the 
Federal Register that modified the GME regulations as they apply to 
Medicare GME affiliated groups to provide for greater flexibility in 
training residents in approved residency programs during times of 
disasters: On April 12, 2006 (71 FR 18654) and on November 27, 2007 (72 
FR 66892). We received a number of timely pieces of correspondence in 
response to these interim final rules with comment period. In section 
IV.G. of the preamble of this final rule, we summarize and address 
these public comments.
4. Comments on Proposed Policy Revisions Related to Physician Self-
Referrals Included in the CY 2008 Physician Fee Schedule Proposed Rule
    On July 12, 2007, we issued in the Federal Register proposed 
revisions to physician payment policies under the CY 2008 Physician Fee 
Schedule (72 FR 38121). Among these proposed changes were a number of 
proposed changes relating to physician self-referral issues that we 
have not finalized: Burden of proof; obstetrical malpractice insurance 
subsidies; ownership or investment interest in retirement plans; units 
of service (per click) payments in space and equipment leases; ``set in 
advance'' percentage-based compensation arrangements; alternative 
criteria for satisfying certain exceptions; and services provided under 
arrangement. In section VIII. of the preamble to this final rule, we 
are addressing the public comments that we received on these proposed 
revisions, presenting our responses to the public comments, and 
finalizing these policies.

G. Provisions of the Medicare Improvements for Patients and Providers 
Act of 2008

    After publication of the FY 2009 IPPS proposed rule, the Medicare 
Improvements for Patients and Providers Act of 2008, Public Law 110-
275, was enacted on July 15, 2008. Public Law 110-275 contains several 
provisions that impact payments under the IPPS for FY 2009, which we 
discuss or are implementing in this final rule:
     Section 122 of Public Law 110-275 provides that, for cost 
reporting periods beginning on or after January 1, 2009, SCHs will be 
paid based on an FY 2006 hospital-specific rate (that is, based on 
their updated costs per discharge from their 12-month cost reporting 
period beginning during Federal fiscal year 2007), if this results in 
the greatest payment to the SCH. Therefore, effective with cost 
reporting periods beginning January 1, 2009, SCHs will be paid based on 
the rate that results in the greatest aggregate payment using either 
the Federal rate or their hospital-specific rate based on their cost 
per discharge for 1982, 1987, 1996, or 2006. We address this provision 
under section IV.D.2. of the preamble of this final rule.
     Section 124 of Public Law 110-275 extends, through FY 
2009, wage index reclassifications for hospitals reclassified under 
section 508 of Public Law 108-173 (the MMA) and certain special 
hospital exceptions extended under the Medicare and Medicaid SCHIP 
Extension Act (MMSEA) of 2007 (Pub. L. 110-173). We discuss this 
provision in section III.I.7. and various other sections of this final 
rule. We note that because of the timing of enactment of Public Law 
110-275, we are not able to recompute the FY 2009 wage index values for 
any hospital that would be reclassified under the section 508 
provisions in time for inclusion in this final rule. We will issue the 
final FY 2009 wage index values and other related tables, as specified 
in the Addendum to this final rule, in a separate Federal Register 
notice implementing this extension that will be published subsequent to 
this final rule.

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

A. Background

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

B. MS-DRG Reclassifications

1. General
    As discussed in the preamble to the FY 2008 IPPS final rule with 
comment period (72 FR 47138), we focused our efforts in FY 2008 on 
making significant reforms to the IPPS consistent with the 
recommendations made by MedPAC in its ``Report to the Congress, 
Physician-Owned Specialty Hospitals'' in March 2005. MedPAC recommended 
that the Secretary refine the entire DRG system by taking severity of 
illness into account and applying hospital-specific relative value 
(HSRV) weights to DRGs.\1\ We began this reform process by adopting 
cost-based weights over a 3-year transition period beginning in FY 2007 
and making interim changes to the DRG system for FY 2007 by creating 20 
new CMS DRGs and modifying 32 other DRGs across 13 different clinical 
areas involving nearly 1.7 million cases. As described in more detail 
below, these refinements were intermediate steps towards comprehensive 
reform of both the relative weights and the DRG system that is 
occurring as we undertook further study. For FY 2008, we adopted 745 
new Medicare Severity DRGs (MS-DRGs) to replace the CMS DRGs. We refer 
readers to section II.D. of the FY 2008 IPPS final rule with comment 
period for a full detailed discussion of how the MS-DRG system, based 
on severity levels of illness, was established (72 FR 47141).
---------------------------------------------------------------------------

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

    Currently, cases are classified into MS-DRGs for payment under the 
IPPS based on the following information reported by the hospital: the 
principal diagnosis, up to eight additional diagnoses, and up to six 
procedures performed during the stay. In a small number of MS-DRGs, 
classification is also based on the age, sex, and discharge status of 
the patient. The diagnosis and procedure information is reported by the 
hospital using codes from the International Classification of Diseases, 
Ninth Revision, Clinical Modification (ICD-9-CM).
    Comment: Several commenters expressed concern that only nine 
diagnosis codes and six procedure codes are used by Medicare to process 
each

[[Page 48444]]

claim under the IPPS. The commenters stated that the implementation of 
new initiatives, such as the MS-DRG system, Present on Admission (POA) 
reporting, and the hospital-acquired condition (HAC) payment provision, 
depend on the capturing of all of the patient's diagnoses and 
procedures in order to fully represent the patient's severity of 
illness, complexity of care, and quality of care provided. In addition, 
the commenters stated that the adoption of ``component'' codes, such as 
the new ICD-9-CM codes for pressure ulcer stages, requires multiple 
diagnosis fields to represent a single diagnosis. The commenters 
recommended that CMS modify its systems so that the number of diagnoses 
codes processed would increase from 9 to 25 and the number of procedure 
codes processed would increase from 6 to 25. The commenters stated that 
hospitals submit claims to CMS in electronic format, and that the HIPAA 
compliant electronic transaction standard, HIPAA 837i, allows up to 25 
diagnoses and 25 procedures. The commenters stated that CMS does not 
require its fiscal intermediaries (or MAC) to process codes beyond the 
first nine diagnosis codes and six procedure codes. The commenters 
indicated that complex classification systems such as the proposed MS-
DRGs could use the information in these additional codes to improve 
patient classification.
    Response: The commenters are correct that CMS does not process 
codes submitted electronically on the 837i electronic format beyond the 
first nine diagnosis codes and first six procedure codes. While HIPAA 
requires CMS to accept up to 25 ICD-9-CM diagnosis and procedure codes 
on the HIPAA 837i electronic format, it does not require that CMS 
process that number of diagnosis and procedure codes. We agree with the 
commenters that there is value in retaining additional data on patient 
conditions that would result from expanding Medicare's data system so 
it can accommodate additional diagnosis and procedure codes. We have 
been considering this issue while we contemplate refinements to our DRG 
system to better recognize patient severity of illness. However, 
extensive lead time is required to allow for modifications to our 
internal and contractors' electronic systems in order to process and 
store this additional information. We are unable to currently move 
forward with this recommendation without carefully evaluating 
implementation issues. However, we will continue to carefully evaluate 
this request to expand the process capacity of our systems.
    The process of developing the MS-DRGs was begun by dividing all 
possible principal diagnoses into mutually exclusive principal 
diagnosis areas, referred to as Major Diagnostic Categories (MDCs). The 
MDCs were formulated by physician panels to ensure that the DRGs would 
be clinically coherent. The diagnoses in each MDC correspond to a 
single organ system or etiology and, in general, are associated with a 
particular medical specialty. Thus, in order to maintain the 
requirement of clinical coherence, no final MS-DRG could contain 
patients in different MDCs. For example, MDC 6 is Diseases and 
Disorders of the Digestive System. This approach is used because 
clinical care is generally organized in accordance with the organ 
system affected. However, some MDCs are not constructed on this basis 
because they involve multiple organ systems (for example, MDC 22 
(Burns)). For FY 2008, cases are assigned to one of 745 MS-DRGs in 25 
MDCs. The table below lists the 25 MDCs.

------------------------------------------------------------------------
                                  Major Diagnostic Categories (MDCs)
------------------------------------------------------------------------
1..........................  Diseases and Disorders of the Nervous
                              System.
2..........................  Diseases and Disorders of the Eye.
3..........................  Diseases and Disorders of the Ear, Nose,
                              Mouth, and Throat.
4..........................  Diseases and Disorders of the Respiratory
                              System.
5..........................  Diseases and Disorders of the Circulatory
                              System.
6..........................  Diseases and Disorders of the Digestive
                              System.
7..........................  Diseases and Disorders of the Hepatobiliary
                              System and Pancreas.
8..........................  Diseases and Disorders of the
                              Musculoskeletal System and Connective
                              Tissue.
9..........................  Diseases and Disorders of the Skin,
                              Subcutaneous Tissue and Breast.
10.........................  Endocrine, Nutritional and Metabolic
                              Diseases and Disorders.
11.........................  Diseases and Disorders of the Kidney and
                              Urinary Tract.
12.........................  Diseases and Disorders of the Male
                              Reproductive System.
13.........................  Diseases and Disorders of the Female
                              Reproductive System.
14.........................  Pregnancy, Childbirth, and the Puerperium.
15.........................  Newborns and Other Neonates with Conditions
                              Originating in the Perinatal Period.
16.........................  Diseases and Disorders of the Blood and
                              Blood Forming Organs and Immunological
                              Disorders.
17.........................  Myeloproliferative Diseases and Disorders
                              and Poorly Differentiated Neoplasms.
18.........................  Infectious and Parasitic Diseases (Systemic
                              or Unspecified Sites).
19.........................  Mental Diseases and Disorders.
20.........................  Alcohol/Drug Use and Alcohol/Drug Induced
                              Organic Mental Disorders.
21.........................  Injuries, Poisonings, and Toxic Effects of
                              Drugs.
22.........................  Burns.
23.........................  Factors Influencing Health Status and Other
                              Contacts with Health Services.
24.........................  Multiple Significant Trauma.
25.........................  Human Immunodeficiency Virus Infections.
------------------------------------------------------------------------

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

[[Page 48445]]



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

    Comment: One commenter noted that the MS-DRG titles for four MS-
DRGs have changed in Table 5 (which lists all of the MS-DRGs) in the 
Addendum to the proposed rule: MS-DRG 154 (Other Ear, Nose, Mouth and 
Throat Diagnoses with MCC); MS-DRG 155 (Other Ear, Nose, Mouth and 
Throat Diagnoses with CC); MS-DRG 156 (Other Ear, Nose, Mouth and 
Throat Diagnoses without CC/MCC); MS-DRG 250 (Percutaneous 
Cardiovascular Procedure without Coronary Artery Stent with MCC); and 
MS-DRG 251 (Percutaneous Cardiovascular Procedure without Coronary 
Artery Stent without MCC). The commenter stated that the current titles 
for these MS-DRGs are: MS-DRG 154 (Nasal Trauma and Deformity with 
MCC); MS-DRG 155 (Nasal Trauma and Deformity with CC); MS-DRG 156 
(Nasal Trauma and Deformity without CC/MCC); MS-DRG 250 (Percutaneous 
Cardiovascular Procedure without Coronary Artery Stent or AMI with 
MCC); and MS-DRG 251 (Percutaneous Cardiovascular Procedure without 
Coronary Artery Stent or AMI without MCC). The commenter inquired if 
these changes were discussed in the MS-DRGs section of the proposed 
rule.
    Response: The commenter is correct in that we changed these MS-DRG 
titles to better reflect the modification we made when we adopted the 
MS-DRGs for FY 2008. Specifically, CMS DRGs 72 (Nasal Trauma & 
Deformity) and 73 and 74 (Other Ear, Nose, Mouth and Throat Diagnoses 
Age > 17, Age 0-17, respectively) were consolidated to create MS-DRGs 
154, 155, 156 (72 FR 47156). There are other ear, nose, mouth, and 
throat diagnoses in addition to nasal trauma and deformity assigned to 
these MS-DRGs so we expanded the titles for MS-DRGs 154, 155, and 156. 
For MS-DRGs 250 and 251, ``or AMI'' was removed from the titles because 
these descriptors that were applicable in the CMS DRGs are no longer 
applicable in the MS-DRGs. We are making these corrections in this 
final rule.
    In addition to these changes to the MS-DRG titles, we are also 
amending one other MS-DRG title. Due to the creation, after the 
proposed rule was published, of 6 new ICD-9-CM diagnosis codes for 
various types of fevers, we are revising the title for MS-DRG 864 from 
``Fever of Unknown Origin'' to ``Fever''.
    Once the MDCs were defined, each MDC was evaluated to identify 
those additional patient characteristics that would have a consistent 
effect on hospital resource consumption. Because the presence of a 
surgical procedure that required the use of the operating room would 
have a significant effect on the type of hospital resources used by a 
patient, most MDCs were initially divided into surgical DRGs and 
medical DRGs. Surgical DRGs are based on a hierarchy that orders 
operating room (O.R.) procedures or groups of O.R. procedures by 
resource intensity. Medical DRGs generally are differentiated on the 
basis of diagnosis and age (0 to 17 years of age or greater than 17 
years of age). Some surgical and medical DRGs are further 
differentiated based on the presence or absence of a complication or 
comorbidity (CC) or a major complication or comorbidity (MCC).
    Generally, nonsurgical procedures and minor surgical procedures 
that are not usually performed in an operating room are not treated as 
O.R. procedures. However, there are a few non-O.R. procedures that do 
affect MS-DRG assignment for certain principal diagnoses. An example is 
extracorporeal shock wave lithotripsy for patients with a principal 
diagnosis of urinary stones. Lithotripsy procedures are not routinely 
performed in an operating room. Therefore, lithotripsy codes are not 
classified as O.R. procedures. However, our clinical advisors believe 
that patients with urinary stones who undergo extracorporeal shock wave 
lithotripsy should be considered similar to other patients who undergo 
O.R. procedures. Therefore, we treat this group of patients similar to 
patients undergoing O.R. procedures.
    Once the medical and surgical classes for an MDC were formed, each 
diagnosis class was evaluated to determine if complications or 
comorbidities would consistently affect hospital resource consumption. 
Each diagnosis was categorized into one of three severity levels. These 
three levels include a major complication or comorbidity (MCC), a 
complication or comorbidity (CC), or a non-CC. Physician panels 
classified each diagnosis code based on a highly iterative process 
involving a combination of statistical results from test data as well 
as clinical judgment. As stated earlier, we refer readers to section 
II.D. of the FY 2008 IPPS final rule with comment period for a full 
detailed discussion of how the MS-DRG system was established based on 
severity levels of illness (72 FR 47141).
    A patient's diagnosis, procedure, discharge status, and demographic 
information is entered into the Medicare claims processing systems and 
subjected to a series of automated screens called the Medicare Code 
Editor (MCE). The MCE screens are designed to identify cases that 
require further review before classification into an MS-DRG.
    After patient information is screened through the MCE and any 
further development of the claim is conducted, the cases are classified 
into the appropriate MS-DRG by the Medicare GROUPER software program. 
The GROUPER program was developed as a means of classifying each case 
into an MS-DRG on the basis of the diagnosis and procedure codes and, 
for a limited number of MS-DRGs, demographic information (that is, sex, 
age, and discharge status).
    After cases are screened through the MCE and assigned to an MS-DRG 
by the GROUPER, the PRICER software calculates a base MS-DRG payment. 
The PRICER calculates the payment for each case covered by the IPPS 
based on the MS-DRG relative weight and additional factors associated 
with each hospital, such as IME and DSH payment adjustments. These 
additional factors increase the payment amount to

[[Page 48446]]

hospitals above the base MS-DRG payment.
    The records for all Medicare hospital inpatient discharges are 
maintained in the Medicare Provider Analysis and Review (MedPAR) file. 
The data in this file are used to evaluate possible MS-DRG 
classification changes and to recalibrate the MS-DRG weights. However, 
in the FY 2000 IPPS final rule (64 FR 41500), we discussed a process 
for considering non-MedPAR data in the recalibration process. In order 
for us to consider using particular non-MedPAR data, we must have 
sufficient time to evaluate and test the data. The time necessary to do 
so depends upon the nature and quality of the non-MedPAR data 
submitted. Generally, however, a significant sample of the non-MedPAR 
data should be submitted by mid-October for consideration in 
conjunction with the next year's proposed rule. This date allows us 
time to test the data and make a preliminary assessment as to the 
feasibility of using the data. Subsequently, a complete database should 
be submitted by early December for consideration in conjunction with 
the next year's proposed rule.
    As we indicated above, for FY 2008, we made significant improvement 
in the DRG system to recognize severity of illness and resource usage 
by adopting MS-DRGs that were reflected in the FY 2008 GROUPER, Version 
25.0, and were effective for discharges occurring on or after October 
1, 2007. The changes we proposed for FY 2009 (and are adopting in this 
final rule) will be reflected in the FY 2009 GROUPER, Version 26.0, and 
will be effective for discharges occurring on or after October 1, 2008. 
As noted in the FY 2009 IPPS proposed rule (73 FR 23538), our DRG 
analysis for the FY 2009 proposed rule was based on data from the 
September 2007 update of the FY 2007 MedPAR file, which contains 
hospital bills received through September 30, 2007, for discharges 
through September 30, 2007. For this final rule, our analysis is based 
on more recent data from the March 2008 update of the FY 2007 MedPAR 
file, which contains hospital bills received through March 31, 2008, 
for discharges occurring in FY 2007.
2. Yearly Review for Making MS-DRG Changes
    Many of the changes to the MS-DRG classifications we make annually 
are the result of specific issues brought to our attention by 
interested parties. We encourage individuals with comments about MS-DRG 
classifications to submit these 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 MS-DRG recalibration process, 
comments about MS-DRG classification issues should be submitted no 
later than early December in order to be considered and possibly 
included in the next annual proposed rule updating the IPPS.
    The actual process of forming the MS-DRGs was, and will likely 
continue to be, highly iterative, involving a combination of 
statistical results from test data combined with clinical judgment. In 
the FY 2008 IPPS final rule (72 FR 47140 through 47189), we described 
in detail the process we used to develop the MS-DRGs that we adopted 
for FY 2008. In addition, in deciding whether to make further 
modification to the MS-DRGs for particular circumstances brought to our 
attention, we considered whether the resource consumption and clinical 
characteristics of the patients with a given set of conditions are 
significantly different than the remaining patients in the MS-DRG. We 
evaluated patient care costs using average charges and lengths of stay 
as proxies for costs and relied on the judgment of our medical advisors 
to decide whether patients are clinically distinct or similar to other 
patients in the MS-DRG. In evaluating resource costs, we considered 
both the absolute and percentage differences in average charges between 
the cases we selected for review and the remainder of cases in the MS-
DRG. We also considered variation in charges within these groups; that 
is, whether observed average differences were consistent across 
patients or attributable to cases that were extreme in terms of charges 
or length of stay, or both. Further, we considered the number of 
patients who will have a given set of characteristics and generally 
preferred not to create a new MS-DRG unless it would include a 
substantial number of cases.

C. Adoption of the MS-DRGs in FY 2008

    In the FY 2006, FY 2007, and FY 2008 IPPS final rules, we discussed 
a number of recommendations made by MedPAC regarding revisions to the 
DRG system used under the IPPS (70 FR 47473 through 47482; 71 FR 47881 
through 47939; and 72 FR 47140 through 47189). As we noted in the FY 
2006 IPPS final rule, we had insufficient time to complete a thorough 
evaluation of these recommendations for full implementation in FY 2006. 
However, we did adopt severity-weighted cardiac DRGs in FY 2006 to 
address public comments on this issue and the specific concerns of 
MedPAC regarding cardiac surgery DRGs. We also indicated that we 
planned to further consider all of MedPAC's recommendations and 
thoroughly analyze options and their impacts on the various types of 
hospitals in the FY 2007 IPPS proposed rule.
    For FY 2007, we began this process. In the FY 2007 IPPS proposed 
rule, we proposed to adopt Consolidated Severity DRGs (CS DRGs) for FY 
2008 (if not earlier). However, based on public comments received on 
the FY 2007 IPPS proposed rule, we decided not to adopt the CS DRGs (71 
FR 47906 through 47912). 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 represented a number of body systems. In creating these 20 new 
DRGs, we deleted 8 existing DRGs and modified 32 existing DRGs. We 
indicated that these interim steps for FY 2007 were being taken as a 
prelude to more comprehensive changes to better account for severity in 
the DRG system by FY 2008.
    In the FY 2007 IPPS final rule (71 FR 47898), we indicated our 
intent to pursue further DRG reform through two initiatives. First, we 
announced that we were in the process of engaging a contractor to 
assist us with evaluating alternative DRG systems that were raised as 
potential alternatives to the CMS DRGs in the public comments. Second, 
we indicated our intent to review over 13,000 ICD-9-CM diagnosis codes 
as part of making further refinements to the current CMS DRGs to better 
recognize severity of illness based on the work that CMS (then HCFA) 
did in the mid-1990s in connection with adopting severity DRGs. We 
describe below the progress we have made on these two initiatives, our 
actions for FY 2008, and our proposals for FY 2009 based on our 
continued analysis of reform of the DRG system. We note that the 
adoption of the MS-DRGs to better recognize severity of illness has 
implications for the outlier threshold, the application of the 
postacute care transfer policy, the measurement of real case-mix versus 
apparent case-mix, and the IME and DSH payment adjustments. We discuss 
these implications for FY 2009 in other sections of this preamble and 
in the Addendum to this final rule.

[[Page 48447]]

    In the FY 2007 IPPS proposed rule, we discussed MedPAC's 
recommendations to move to a cost-based HSRV weighting methodology 
using HSRVs beginning with the FY 2007 IPPS proposed rule for 
determining the DRG relative weights. Although we proposed to adopt the 
HSRV weighting methodology for FY 2007, we decided not to adopt the 
proposed methodology in the final rule after considering the public 
comments we received on the proposal. Instead, in the FY 2007 IPPS 
final rule, we adopted a cost-based weighting methodology without the 
HSRV portion of the proposed methodology. The cost-based weights 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 HSRV-based 
methodology as well as other issues brought to our attention related to 
the cost-based weighting methodology adopted in the FY 2007 final rule. 
There was significant concern in the public comments that our cost-
based weighting methodology does not adequately account for charge 
compression--the practice of applying a higher percentage charge markup 
over costs to lower cost items and services and a lower percentage 
charge markup over costs to higher cost items and services. Further, 
public commenters expressed concern about potential inconsistencies 
between how costs and charges are reported on the Medicare cost reports 
and charges on the Medicare claims. In the FY 2007 IPPS final rule, we 
used costs and charges from the cost report to determine departmental 
level cost-to-charge ratios (CCRs) which we then applied to charges on 
the Medicare claims to determine the cost-based weights. The commenters 
were concerned about potential distortions to the cost-based weights 
that would result from inconsistent reporting between the cost reports 
and the Medicare claims. After publication of the FY 2007 IPPS final 
rule, we entered into a contract with RTI International (RTI) to study 
both charge compression and to what extent our methodology for 
calculating DRG relative weights is affected by inconsistencies between 
how hospitals report costs and charges on the cost reports and how 
hospitals report charges on individual claims. Further, as part of its 
study of alternative DRG systems, the RAND Corporation analyzed the 
HSRV cost-weighting methodology. We refer readers to section II.E. of 
the preamble of this final rule for discussion of the issue of charge 
compression and the HSRV cost-weighting methodology for FY 2009.
    We believe that revisions to the DRG system to better recognize 
severity of illness and changes to the relative weights based on costs 
rather than charges are improving the accuracy of the payment rates in 
the IPPS. We agree with MedPAC that these refinements should be 
pursued. Although we continue to caution that any prospective payment 
system based on grouping cases will always present some opportunities 
for providers to specialize in cases they believe have higher margins, 
we believe that the changes we have adopted and the continuing reforms 
we are making in this final rule for FY 2009 will improve payment 
accuracy and reduce financial incentives to create specialty hospitals.
    We refer readers to section II.D. of the FY 2008 IPPS final rule 
with comment period for a full discussion of how the MS-DRG system was 
established based on severity levels of illness (72 FR 47141).

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

1. MS-DRG Documentation and Coding Adjustment
    As stated above, we adopted the new MS-DRG patient classification 
system for the IPPS, effective October 1, 2007, to better recognize 
severity of illness in Medicare payment rates. Adoption of the MS-DRGs 
resulted in the expansion of the number of DRGs from 538 in FY 2007 to 
745 in FY 2008. By increasing the number of DRGs and more fully taking 
into account severity of illness in Medicare payment rates, the MS-DRGs 
encourage hospitals to improve their documentation and coding of 
patient diagnoses. In the FY 2008 IPPS final rule with comment period 
(72 FR 47175 through 47186), which appeared in the Federal Register on 
August 22, 2007, we indicated that we believe the adoption of the MS-
DRGs had the potential to lead to increases in aggregate payments 
without a corresponding increase in actual patient severity of illness 
due to the incentives for improved documentation and coding. In that 
final rule with comment period, using the Secretary's authority under 
section 1886(d)(3)(A)(vi) of the Act to maintain budget neutrality by 
adjusting the standardized amount to eliminate the effect of changes in 
coding or classification that do not reflect real changes in case-mix, 
we established prospective documentation and coding adjustments of -1.2 
percent for FY 2008, -1.8 percent for FY 2009, and -1.8 percent for FY 
2010.
    On September 29, 2007, the TMA, Abstinence Education, and QI 
Programs Extension Act of 2007, Public Law 110-90, was enacted. Section 
7 of Public Law 110-90 included a provision that reduces the 
documentation and coding adjustment for the MS-DRG system that we 
adopted in the FY 2008 IPPS final rule with comment period to -0.6 
percent for FY 2008 and -0.9 percent for FY 2009. To comply with 
section 7 of Public Law 110-90, in a final rule that appeared in the 
Federal Register on November 27, 2007 (72 FR 66886), we changed the 
IPPS documentation and coding adjustment for FY 2008 to -0.6 percent, 
and revised the FY 2008 payment rates, factors, and thresholds 
accordingly, with these revisions effective October 1, 2007.
    For FY 2009, Public Law 110-90 requires a documentation and coding 
adjustment of -0.9 percent instead of the -1.8 percent adjustment 
established in the FY 2008 IPPS final rule with comment period. As 
required by statute, we are applying a documentation and coding 
adjustment of -0.9 percent to the FY 2009 IPPS national standardized 
amount. The documentation and coding adjustments established in the FY 
2008 IPPS final rule with comment period, as amended by Public Law 110-
90, are cumulative. As a result, the -0.9 percent documentation and 
coding adjustment in FY 2009 is in addition to the -0.6 percent 
adjustment in FY 2008, yielding a combined effect of -1.5 percent.
    Comment: A number of commenters disagreed with the need for the 
documentation and coding adjustment and reiterated concerns about the 
documentation and coding adjustment expressed in prior comments on the 
FY 2008 IPPS proposed rule. Several of the commenters recommended that 
CMS not apply the documentation and coding adjustment to the national 
standardized amount in FY 2009.
    Response: The FY 2008 IPPS final rule (72 FR 47175 through 47186) 
established a documentation and coding adjustment for FY 2008, FY 2009, 
and FY 2010. The establishment of the documentation and coding 
adjustment was subject to notice and comment rulemaking. When we 
established the documentation and coding adjustment in the FY 2008 IPPS 
final rule with comment period, we considered concerns about the 
adjustment expressed by commenters on the FY 2008 IPPS proposed rule 
and provided responses to those public comments in the corresponding 
rule. Subsequently,

[[Page 48448]]

Congress enacted Public Law 110-90, which mandated that the 
documentation and coding adjustments established in the FY 2008 IPPS 
final rule with comment period be changed to -0.6 percent for FY 2008 
and -0.9 percent for FY 2009. As required by law, we are applying the 
statutorily specified documentation and coding adjustment to the FY 
2009 national standardized amount.
    Comment: One commenter stated that Public Law 110-90 requires an 
adjustment of -0.9 percent for FY 2009, not a cumulative adjustment of 
-1.5 percent for FY 2009.
    Response: The documentation and coding adjustments established in 
the FY 2008 IPPS final rule with comment period are cumulative. That 
final rule indicated that CMS believes that a -4.8 percent adjustment 
for documentation and coding is necessary (72 FR 47816). Rather than 
implement the full adjustment in 1 year, the final rule phased it in 
over 3 years: -1.2 percent in FY 2008, -1.8 percent in FY 2009, and -
1.8 percent in FY 2010, for a total of -4.8 percent. Public Law 110-90 
requires that in implementing the FY 2008 IPPS final rule with comment 
period, we substitute 0.6 percent for the 1.2 percent FY 2008 
documentation and coding adjustment established in that final rule and 
0.9 percent for the 1.8 percent FY 2009 documentation and coding 
adjustment established in that final rule. Public Law 110-90 did not 
make any change to the cumulative nature of the documentation and 
coding adjustments established in the FY 2008 IPPS final rule with 
comment period. Therefore, consistent with Public Law 110-90, we 
applied a -0.6 percent adjustment to the national standardized amount 
in FY 2008, and we are applying a -0.9 percent documentation and coding 
adjustment to the national standardized amount in FY 2009, which 
results in a cumulative effect of -1.5 percent by FY 2009.
    Comment: Several commenters suggested that the documentation and 
coding adjustment is intended to address inappropriate upcoding, where 
a hospital's coding is not justified by the medical record. The 
commenters suggested that CMS undertake studies to identify 
inappropriate coding by individual providers.
    Response: As we stated in the FY 2008 IPPS final rule with comment 
period, we do not believe there is anything inappropriate, unethical, 
or otherwise wrong with hospitals taking full advantage of coding 
opportunities to maximize Medicare payment as long as the coding is 
fully and properly supported by documentation in the medical record.
    The documentation and coding adjustment was developed based on the 
recognition that the MS-DRGs, by better accounting for severity of 
illness in Medicare payment rates, would encourage hospitals to ensure 
they had fully and accurately documented and coded all patient 
diagnoses and procedures consistent with the medical record in order to 
garner the maximum IPPS payment available under the MS-DRG system. For 
example, under the previous CMS DRGs, ``congestive heart failure, 
unspecified'' (code 428.0) was a CC. Under the MS-DRGs, this 
unspecified code has been made a non-CC, while more specific heart 
failure codes have been made CCs or MCCs. Because of this, hospitals 
have a financial incentive under the MS-DRG system, which they did not 
have under the previous CMS DRG system, to ensure that they code the 
type of heart failure a patient has as precisely as possible, 
consistent with the medical record.
    The statute requires that DRG recalibration be budget neutral. Due 
to the standard 2-year lag in claims data, when we recalibrated the MS-
DRGs in FY 2008, the calculations were based on FY 2006 claims data 
that reflected coding under the prior CMS DRG system. As a result, the 
claims data upon which the DRG recalibrations were performed in FY 2008 
did not reflect any improvements in documentation and coding encouraged 
by the MS-DRG system. Thus, our actuaries determined that a separate 
adjustment for documentation and coding improvements would be needed in 
order to ensure that the implementation of the MS-DRG system was budget 
neutral. This determination led to the establishment of the 
documentation and coding adjustment established in the FY 2008 IPPS 
final rule with comment period and amended by Public Law 110-90.
    As with any other DRG system, there is potential under the MS-DRG 
system for an individual provider to inappropriately code and bill for 
services. The MS-DRG documentation and coding adjustment was not 
developed to address such program integrity issues. Rather, the program 
integrity safeguards in place to address inappropriate billing under 
the CMS DRG system remain in place under the MS-DRG system.
2. Application of the Documentation and Coding Adjustment to the 
Hospital-Specific Rates
    Under section 1886(d)(5)(D)(i) of the Act, SCHs are paid based on 
whichever of the following rates yields the greatest aggregate payment: 
The Federal national rate; the updated hospital-specific rate based on 
FY 1982 costs per discharge; the updated hospital-specific rate based 
on FY 1987 costs per discharge; or the updated hospital-specific rate 
based on FY 1996 costs per discharge. Under section 1886(d)(5)(G) of 
the Act, MDHs are paid based on the Federal national rate or, if 
higher, the Federal national rate plus 75 percent of the difference 
between the Federal national rate and the updated hospital-specific 
rate based on the greater of either the FY 1982, 1987, or 2002 costs 
per discharge. In the FY 2008 IPPS final rule with comment period, we 
established a policy of applying the documentation and coding 
adjustment to the hospital-specific rates. In that rule, we indicated 
that because SCHs and MDHs use the same DRG system as all other 
hospitals, we believe they should be equally subject to the budget 
neutrality adjustment that we are applying for adoption of the MS-DRGs 
to all other hospitals. In establishing this policy, section 
1886(d)(3)(A)(vi) of the Act provides the authority to adjust ``the 
standardized amount'' to eliminate the effect of changes in coding or 
classification that do not reflect real change in case-mix. However, in 
a final rule that appeared in the Federal Register on November 27, 2007 
(72 FR 66886), we rescinded the application of the documentation and 
coding adjustment to the hospital-specific rates retroactive to October 
1, 2007. In that final rule, we indicated that, while we still believe 
it would be appropriate to apply the documentation and coding 
adjustment to the hospital-specific rates, upon further review, we 
decided that application of the documentation and coding adjustment to 
the hospital-specific rates is not consistent with the plain meaning of 
section 1886(d)(3)(A)(vi) of the Act, which only mentions adjusting 
``the standardized amount'' and does not mention adjusting the 
hospital-specific rates.
    In the FY 2009 IPPS proposed rule, we indicated that we continue to 
have concerns about this issue. Because hospitals paid based on the 
hospital-specific rate use the same MS-DRG system as other hospitals, 
we believe they have the potential to realize increased payments from 
coding improvements that do not reflect real increases in patients' 
severity of illness. In section 1886(d)(3)(A)(vi) of the Act,

[[Page 48449]]

Congress stipulated that hospitals paid based on the standardized 
amount should not receive additional payments based on the effect of 
documentation and coding changes that do not reflect real changes in 
case-mix. Similarly, we believe that hospitals paid based on the 
hospital-specific rate should not have the potential to realize 
increased payments due to documentation and coding improvements that do 
not reflect real increases in patients' severity of illness. While we 
continue to believe that section 1886(d)(3)(A)(vi) of the Act does not 
provide explicit authority for application of the documentation and 
coding adjustment to the hospital-specific rates, we believe that we 
have the authority to apply the documentation and coding adjustment to 
the hospital-specific rates using our special exceptions and adjustment 
authority under section 1886(d)(5)(I)(i) of the Act. The special 
exceptions and adjustment authority authorizes us to provide ``for such 
other exceptions and adjustments to [IPPS] payment amounts * * * as the 
Secretary deems appropriate.'' In light of this authority, for the FY 
2010 rulemaking, we plan to examine our FY 2008 claims data for 
hospitals paid based on the hospital-specific rate. In the FY 2009 IPPS 
proposed rule, we stated that if we find evidence of significant 
increases in case-mix for patients treated in these hospitals, we would 
consider proposing application of the documentation and coding 
adjustments to the FY 2010 hospital-specific rates under our authority 
in section 1886(d)(5)(I)(i) of the Act. As noted previously, the 
documentation and coding adjustments established in the FY 2008 IPPS 
final rule with comment period are cumulative. For example, the -0.9 
percent documentation and coding adjustment to the national 
standardized amount in FY 2009 is in addition to the -0.6 percent 
adjustment made in FY 2008, yielding a combined effect of -1.5 percent 
in FY 2009. Given the cumulative nature of the documentation and coding 
adjustments, if we were to propose to apply the documentation and 
coding adjustment to the FY 2010 hospital-specific rates, it may 
involve applying the FY 2008 and FY 2009 documentation and coding 
adjustments (-1.5 percent combined) plus the FY 2010 documentation and 
coding adjustment, discussed in the FY 2008 IPPS final rule with 
comment period, to the FY 2010 hospital-specific rates.
    Comment: A number of commenters opposed application of the 
documentation and coding adjustment to the hospital-specific rates. 
MedPAC supported application of a documentation and coding adjustment 
to the prospective payment rates and the hospital-specific rates for 
all IPPS hospitals that are paid based on their reported case-mix. 
Another commenter supported application of a documentation and coding 
adjustment to the hospital-specific rates if analysis of FY 2008 claims 
data supports a positive adjustment and recommended a transition be 
considered if the data support a negative adjustment.
    Response: We appreciate the comments received. We did not propose 
to apply the documentation and coding adjustment to the hospital-
specific rates for FY 2009. Instead, as we indicated in the proposed 
rule and reiterated above, we intend to consider whether such a 
proposal is warranted for FY 2010. To gather information to evaluate 
these considerations, we plan to perform analyses on FY 2008 claims 
data to examine whether there has been a significant increase in case-
mix for hospitals paid based on the hospital-specific rate. If we find 
that application of the documentation and coding adjustment to the 
hospital-specific rates for FY 2010 is warranted, we would include a 
proposal in the FY 2010 IPPS proposed rule, which would be open for 
public comment at that time.
3. Application of the Documentation and Coding Adjustment to the Puerto 
Rico-Specific Standardized Amount
    Puerto Rico hospitals are paid based on 75 percent of the national 
standardized amount and 25 percent of the Puerto Rico-specific 
standardized amount. As noted previously, the documentation and coding 
adjustment we adopted in the FY 2008 IPPS final rule with comment 
period relied upon our authority under section 1886(d)(3)(A)(vi) of the 
Act, which provides the authority to adjust ``the standardized amounts 
computed under this paragraph'' to eliminate the effect of changes in 
coding or classification that do not reflect real changes in case-mix. 
Section 1886(d)(3)(A)(vi) of the Act applies to the national 
standardized amounts computed under section 1886(d)(3) of the Act, but 
does not apply to the Puerto Rico-specific standardized amount computed 
under section 1886(d)(9)(C) of the Act. In calculating the FY 2008 
payment rates, we made an inadvertent error and applied the FY 2008 -
0.6 percent documentation and coding adjustment to the Puerto Rico-
specific standardized amount, relying on our authority under section 
1886(d)(3)(A)(vi) of the Act. However, section 1886(d)(3)(A)(vi) of the 
Act authorizes application of a documentation and coding adjustment to 
the national standardized amount and does not apply to the Puerto Rico-
specific standardized amount. In this final rule, we are correcting 
this inadvertent error by removing the -0.6 percent documentation and 
coding adjustment from the FY 2008 Puerto Rico-specific rates. The 
revised FY 2008 Puerto Rico-specific operating standardized amounts 
are: $1,471.10 for the labor share and $901.64 for the nonlabor share 
for a hospital with a wage index greater than 1 and $1,392.80 for the 
labor share and $979.94 for the non-labor share for a hospital with a 
wage index less than or equal to 1. The revised FY 2008 Puerto Rico 
capital payment rate is $202.89 (as discussed in section III.A.6.b. of 
the Addendum to this final rule). These revised rates are effective 
October 1, 2007, for FY 2008.
    While section 1886(d)(3)(A)(vi) of the Act is not applicable to the 
Puerto Rico-specific standardized amount, we believe that we have the 
authority to apply the documentation and coding adjustment to the 
Puerto Rico-specific standardized amount using our special exceptions 
and adjustment authority under section 1886(d)(5)(I)(i) of the Act. 
Similar to SCHs and MDHs that are paid based on the hospital-specific 
rate, discussed in section II.D.2. of this preamble, we believe that 
Puerto Rico hospitals that are paid based on the Puerto Rico-specific 
standardized amount should not have the potential to realize increased 
payments due to documentation and coding improvements that do not 
reflect real increases in patients' severity of illness. Consistent 
with the approach described for SCHs and MDHs in section II.D.2. of the 
preamble of this final rule, for the FY 2010 rulemaking, we plan to 
examine our FY 2008 claims data for hospitals in Puerto Rico. As we 
indicated in the FY 2009 proposed rule, if we find evidence of 
significant increases in case-mix for patients treated in these 
hospitals, we would consider proposing application of the documentation 
and coding adjustments to the FY 2010 Puerto Rico-specific standardized 
amount under our authority in section 1886(d)(5)(I)(i) of the Act. As 
noted previously, the documentation and coding adjustments established 
in the FY 2008 IPPS final rule with comment period are cumulative. 
Given the cumulative nature of the documentation and coding 
adjustments, if we were to propose to apply the documentation and 
coding adjustment to the FY 2010 Puerto Rico-specific standardized 
amount, it may involve applying the FY 2008 and FY

[[Page 48450]]

2009 documentation and coding adjustments (-1.5 percent combined) plus 
the FY 2010 documentation and coding adjustment, discussed in the FY 
2008 IPPS final rule with comment period, to the FY 2010 Puerto Rico-
specific standardized amount.
    Comment: Some commenters opposed application of the documentation 
and coding adjustment to the Puerto Rico-specific standardized amount. 
MedPAC supported application of a documentation and coding adjustment 
to the prospective payment rates and the hospital-specific rates for 
all IPPS hospitals that are paid based on their reported case-mix.
    Response: We appreciate the comments. We did not propose to apply 
the documentation and coding adjustment to the Puerto Rico-specific 
standardized amount for FY 2009. Instead, as we indicated in the 
proposed rule, we intend to consider whether such a proposal is 
warranted for FY 2010. To gather information to evaluate these 
considerations, we plan to perform analyses on FY 2008 claims data to 
examine whether there has been a significant increase in case-mix for 
hospitals in Puerto Rico. If we find that application of the 
documentation and coding adjustment to the Puerto Rico-specific 
standardized amount for FY 2010 is warranted, we would include a 
proposal in the FY 2010 proposed rule, which would be open for public 
comment at that time.
4. Potential Additional Payment Adjustments in FYs 2010 Through 2012
    Section 7 of Public Law 110-90 also provides for payment 
adjustments in FYs 2010 through 2012 based upon a retrospective 
evaluation of claims data from the implementation of the MS-DRG system. 
If, based on this retrospective evaluation, the Secretary finds that in 
FY 2008 and FY 2009, the actual amount of change in case-mix that does 
not reflect real change in underlying patient severity differs from the 
statutorily mandated documentation and coding adjustments implemented 
in those years, the law requires the Secretary to adjust payments for 
discharges occurring in FYs 2010 through 2012 to offset the estimated 
amount of increase or decrease in aggregate payments that occurred in 
FY 2008 and FY 2009 as a result of that difference, in addition to 
making an appropriate adjustment to the standardized amount under 
section 1886(d)(3)(A)(vi) of the Act.
    In order to implement these requirements of section 7 of Public Law 
110-90, we are planning a thorough retrospective evaluation of our 
claims data. Results of this evaluation would be used by our actuaries 
to determine any necessary payment adjustments in FYs 2010 through 2012 
to ensure the budget neutrality of the MS-DRG implementation for FY 
2008 and FY 2009, as required by law. In the FY 2009 IPPS proposed 
rule, we described our preliminary analysis plans to provide the 
opportunity for public input.
    In the proposed rule, we indicated that we intend to measure and 
corroborate the extent of the overall national average changes in case-
mix for FY 2008 and FY 2009. We expect part of this overall national 
average change would be attributable to underlying changes in actual 
patient severity and part would be attributable to documentation and 
coding improvements under the MS-DRG system. In order to separate the 
two effects, we plan to isolate the effect of shifts in cases among 
base DRGs from the effect of shifts in the types of cases within base 
DRGs. The shifts among base DRGs are the result of changes in principal 
diagnoses while the shifts within base DRGs are the result of changes 
in secondary diagnoses. Because we expect most of the documentation and 
coding improvements under the MS-DRG system will occur in the secondary 
diagnoses, we believe that the shifts among base DRGs are less likely 
to be the result of the MS-DRG system and the shifts within base DRGs 
are more likely to be the result of the MS-DRG system. We also 
anticipate evaluating data to identify the specific MS-DRGs and 
diagnoses that contributed significantly to the improved documentation 
and coding payment effect and to quantify their impact. This step would 
entail analysis of the secondary diagnoses driving the shifts in 
severity within specific base DRGs.
    In the proposed rule, we also stated that, while we believe that 
the data analysis plan described previously will produce an appropriate 
estimate of the extent of case-mix changes resulting from documentation 
and coding improvements, we may also decide, if feasible, to use 
historical data from our Hospital Payment Monitoring Program (HPMP) to 
corroborate the within-base DRG shift analysis. The HPMP is supported 
by the Medicare Clinical Data Abstraction Center (CDAC). From 1998 to 
2007, the CDAC obtained medical records for a sample of discharges as 
part of our hospital monitoring activities. These data were collected 
on a random sample of between 30,000 to 50,000 hospital discharges per 
year. The historical CDAC data could be used to develop an upper bound 
estimate of the trend in real case-mix growth (that is, real change in 
underlying patient severity) prior to implementation of the MS-DRGs.
    In the FY 2009 IPPS proposed rule, we solicited public comments on 
the analysis plans described above, as well as suggestions on other 
possible approaches for conducting a retrospective analysis to identify 
the amount of case-mix changes that occurred in FY 2008 and FY 2009 
that did not reflect real increases in patients' severity of illness.
    Comment: A few commenters, including MedPAC, expressed support for 
the analytic approach described in the proposed rule. A number of other 
commenters expressed concerns about certain aspects of the approach 
and/or suggested alternate analyses or study designs. In addition, one 
commenter recommended that any determination or retrospective 
evaluation by the actuaries of the impact of the MS-DRGs on case-mix be 
open to public scrutiny prior to the implementation of final payment 
adjustments for FY 2010 through FY 2012.
    Response: We thank the commenters for their comments. We will take 
all of the comments into consideration as we continue development of 
our analysis plans. Our analysis, findings, and any resulting proposals 
to adjust payments for discharges occurring in FYs 2010 through 2012 to 
offset the estimated amount of increase or decrease in aggregate 
payments that occurred in FY 2008 and FY 2009 will be discussed in 
future years' proposed rules, which will be open for public comment.
    Comment: One commenter expressed concern about the impact that an 
adjustment to the FY 2010 through FY 2012 payment rates could have on 
small rural hospitals. The commenter stated that if CMS finds that 
there was an increase in aggregate payments in FY 2008 or FY 2009 that 
requires an offsetting adjustment to the FY 2010 through FY 2012 
payment rates, CMS should consider a transition period before fully 
implementing such ad adjustment.
    Response: If our analysis suggests that an adjustment to the FY 
2010 through FY 2012 payment rates is necessary, a proposal would be 
made in a future proposed rule and the public would have an opportunity 
to comment on the proposal at that time.

E. Refinement of the MS-DRG Relative Weight Calculation

1. Background
    In the FY 2008 IPPS final rule with comment period (72 FR 47188), 
we

[[Page 48451]]

continued to implement significant revisions to Medicare's inpatient 
hospital rates by basing relative weights on hospitals' estimated costs 
rather than on charges. We continued our 3-year transition from charge-
based relative weights to cost-based relative weights. Beginning in FY 
2007, we implemented relative weights based on cost report data instead 
of based on charge information. We had initially proposed to develop 
cost-based relative weights using the hospital-specific relative value 
cost center (HSRVcc) methodology as recommended by MedPAC. However, 
after considering concerns raised in the public comments, we modified 
MedPAC's methodology to exclude the hospital-specific relative weight 
feature. Instead, we developed national CCRs based on distinct hospital 
departments and engaged a contractor to evaluate the HSRVcc methodology 
for future consideration. To mitigate payment instability due to the 
adoption of cost-based relative weights, we decided to transition cost-
based weights over 3 years by blending them with charge-based weights 
beginning in FY 2007. In FY 2008, we continued our transition by 
blending the relative weights with one-third charge-based weights and 
two-thirds cost-based weights.
    Also, in FY 2008, we adopted severity-based MS-DRGs, which 
increased the number of DRGs from 538 to 745. Many commenters raised 
concerns as to how the transition from charge-based weights to cost-
based weights would continue with the introduction of new MS-DRGs. We 
decided to implement a 2-year transition for the MS-DRGs to coincide 
with the remainder of the transition to cost-based relative weights. In 
FY 2008, 50 percent of the relative weight for each DRG was based on 
the CMS DRG relative weight and 50 percent was based on the MS-DRG 
relative weight. We refer readers to the FY 2007 IPPS final rule (71 FR 
47882) for more detail on our final policy for calculating the cost-
based DRG relative weights and to the FY 2008 IPPS final rule with 
comment period (72 FR 47199) for information on how we blended relative 
weights based on the CMS DRGs and MS-DRGs.
    As we transitioned to cost-based relative weights, some commenters 
raised concerns about potential bias in the weights due to ``charge 
compression,'' which is the practice of applying a higher percentage 
charge markup over costs to lower cost items and services, and a lower 
percentage charge markup over costs to higher cost items and services. 
As a result, the cost-based weights would 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. To address this concern, 
in August 2006, we awarded a contract to RTI to study the effects of 
charge compression in calculating the relative weights and to consider 
methods to reduce the variation in the CCRs across services within cost 
centers. RTI issued an interim draft report in March 2007 which was 
posted on the CMS Web site with its findings on charge compression. In 
that report, RTI found that a number of factors contribute to charge 
compression and affect the accuracy of the relative weights. RTI found 
inconsistent matching of charges in the Medicare cost report and their 
corresponding charges in the MedPAR claims for certain cost centers. In 
addition, there was inconsistent reporting of costs and charges among 
hospitals. For example, some hospitals would report costs and charges 
for devices and medical supplies in the Medical Supplies Charged to 
Patients cost center, while other hospitals would report those costs 
and charges in their related ancillary departments such as Operating 
Room or Radiology. RTI also found evidence that certain revenue codes 
within the same cost center had significantly different markup rates. 
For example, within the Medicare Supplies Charged to Patients cost 
center, revenue codes for devices, implantables, and prosthetics had 
different markup rates than the other medical supplies in that cost 
center. RTI's findings demonstrated that charge compression exists in 
several CCRs, most notably in the Medical Supplies and Equipment CCR.
    RTI offered short-term, medium-term, and long-term recommendations 
to mitigate the effects of charge compression. RTI's short-term 
recommendations included expanding the distinct hospital CCRs to 19 by 
disaggregating the ``Emergency Room'' and ``Blood and Blood Products'' 
from the Other Services cost center and by estimating regression-based 
CCRs to disaggregate Medical Supplies, Drugs, and Radiology cost 
centers. RTI recommended, for the medium-term, to expand the MedPAR 
file to include separate fields that disaggregate several existing 
charge departments. In addition, RTI recommended improving hospital 
cost reporting instructions so that hospitals can properly report costs 
in the appropriate cost centers. RTI's long-term recommendations 
included adding new cost centers to the Medicare cost report, such as 
adding a ``Devices, Implants and Prosthetics'' line under ``Medical 
Supplies Charged to Patients'' and a ``CT Scanning and MRI'' 
subscripted line under ``Radiology-Diagnostics''.
    Among RTI's short-term recommendations, for FY 2008, we expanded 
the number of distinct hospital department CCRs from 13 to 15 by 
disaggregating ``Emergency Room'' and ``Blood and Blood Products'' from 
the Other Services cost center as these lines already exist on the 
hospital cost report. Furthermore, in an effort to improve consistency 
between costs and their corresponding charges in the MedPAR file, we 
moved the costs for cases involving electroencephalography (EEG) from 
the Cardiology cost center to the Laboratory cost center group which 
corresponds with the EEG MedPAR claims categorized under the Laboratory 
charges. We also agreed with RTI's recommendations to revise the 
Medicare cost report and the MedPAR file as a long-term solution for 
charge compression. We stated that, in the upcoming year, we would 
consider additional lines to the cost report and additional revenue 
codes for the MedPAR file.
    Despite receiving public comments in support of the regression-
based CCRs as a means to immediately resolve the problem of charge 
compression, particularly within the Medical Supplies and Equipment 
CCR, we did not adopt RTI's short-term recommendation to create four 
additional regression-based CCRs for several reasons. We were concerned 
that RTI's analysis was limited to charges on hospital inpatient 
claims, while typically hospital cost report CCRs combine both 
inpatient and outpatient services. Further, because both the IPPS and 
OPPS rely on cost-based weights, we preferred to introduce any 
methodological adjustments to both payment systems at the same time. We 
have since expanded RTI's analysis of charge compression to incorporate 
outpatient services. RTI has been evaluating the cost estimation 
process for the OPPS cost-based weights, including a reassessment of 
the regression-based CCR models using both outpatient and inpatient 
charge data. Because the RTI report was not available until after the 
conclusion of our proposed rule development process, we were unable to 
include a summary of the report in the FY 2009 IPPS proposed rule. The 
IPPS-related chapters of RTI's interim report were posted on the CMS 
Web site on April 22, 2008, for a 60-day comment period, and we 
welcomed comments on the report. In this final rule, we are providing a 
summary of RTI's findings and the public comments

[[Page 48452]]

we received in section II.E.2. of the preamble of this final rule.
2. Summary of RTI's Report on Charge Compression
    As stated earlier, subsequent to the release of the FY 2009 IPPS 
proposed rule, we posted on April 22, 2008, an interim report 
discussing RTI's research findings for the IPPS MS-DRG relative weights 
to be available during the public comment period on the FY 2009 IPPS 
proposed rule. This report can be found on RTI's Web site at: http://
www.rti.org/reports/cms/HHSM-500-2005-0029I/PDF/Refining_Cost_to_
Charge_Ratios_200804.pdf. The IPPS-specific chapters, which were 
separately displayed in the April 2008 interim report, as well as the 
more recent OPPS chapters, are included in the July 2008 RTI final 
report entitled, ``Refining Cost-to-Charge Ratios for Calculating APC 
and DRG Relative Payment Weights,'' that became available at the time 
of the development of this final rule. The RTI final report can be 
found on RTI's Web site at: http://www.rti.org/reports/cms/HHSM-500-
2005-0029I/PDF/Refining_Cost_to_Charge_Ratios_200807_Final.pdf.
    RTI's final report distinguished between two types of research 
findings and recommendations: Those pertaining to the accounting or 
cost report data and those related to statistical regression analysis. 
Because the OPPS uses a hospital-specific CCR methodology, employs 
detailed cost report data, and estimates costs at the claim level, CMS 
asked RTI to closely evaluate the accounting component of the OPPS 
cost-based weight methodology. In reviewing the cost report data for 
nonstandard cost centers used in the crosswalk, RTI discovered some 
problems concerning the classification of nonstandard cost centers that 
impact both the IPPS and the OPPS. RTI reclassified nonstandard cost 
centers by reading providers' cost center labels. Standard cost centers 
are preprinted in the CMS-approved cost report software, while 
nonstandard cost centers are identified and updated periodically 
through analysis of frequently used labels. Under the IPPS, the line 
reassignments only slightly impact the 15 national aggregate CCRs used 
in the relative weight calculation. However, improved cost report data 
for CT Scanning, MRI, Nuclear Medicine, Therapeutic Radiology, and 
Cardiac Catheterization through line reassignments allowed for the 
reduction in aggregation bias by expanding the number of national CCRs 
available to separately capture these and other services. Importantly, 
RTI found that, under the IPPS and the OPPS, this improvement to the 
cost reporting data reduces some of the sources of aggregation bias 
without having to use regression-based adjustments.
    In general, with respect to the regression-based adjustments, RTI 
confirmed the findings of its March 2007 report that regression models 
are a valid approach for diagnosing potential aggregation bias within 
selected services for the IPPS and found that regression models are 
equally valid for setting payments under the OPPS. RTI also suggested 
that regression-based CCRs could provide a short-term correction until 
accounting data could be refined to support more accurate CCR estimates 
under both the IPPS and the OPPS. RTI again found aggregation bias in 
devices, drugs, and radiology and, using combined outpatient and 
inpatient claims, expanded the number of recommended regression-
adjusted CCRs to create seven regression-adjusted CCRs for Devices, IV 
Solutions, Cardiac Catheterization, CT Scanning, MRI, Therapeutic 
Radiology, and Nuclear Medicine.
    In almost all cases, RTI observed that potential distortions from 
aggregation bias and incorrect cost reporting in the OPPS relative 
weights were proportionally much greater than for MS-DRGs for both 
accounting-based and statistical adjustments because OPPS groups are 
small and generally price a single service. HCRIS line reassignments by 
themselves had little effect on most inpatient weights. However, just 
as the overall impacts on MS-DRGs were more moderate because MS-DRGs 
experienced offsetting effects in cost estimation among numerous 
revenue codes in an episode, a given hospital outpatient visit might 
include more than one service, leading to offsetting effects in cost 
estimation for services provided in the outpatient episode as a whole.
    Notwithstanding likely offsetting effects at the provider-level, 
RTI asserted that, while some averaging is appropriate for a 
prospective payment system, extreme distortions in payments for 
individual services bias perceptions of service profitability and may 
lead hospitals to inappropriately set their charge structure. RTI noted 
that this may not be true for ``core'' hospital services, such as 
oncology, but has a greater impact in evolving areas with greater 
potential for provider-induced demand, such as specialized imaging 
services. RTI also noted that cost-based weights are only one component 
of a final prospective payment rate. There are other rate adjustments 
(wage index, IME, and DSH) to payments derived from the revised cost-
based weights and the cumulative effect of these components may not 
improve the ability of final payment to reflect resource cost. With 
regard to APCs and MS-DRGs that contain substantial device costs, RTI 
cautioned that other prospective payment system adjustments (wage 
index, IME, and DSH) largely offset the effects of charge compression 
among hospitals that receive these adjustments. RTI endorsed short-term 
regression-based adjustments, but also concluded that more refined and 
accurate accounting data are the preferred long-term solution to 
mitigate charge compression and related bias in hospital cost-based 
weights.
    As a result of this research, RTI made 11 recommendations. The 
first set of recommendations is more applicable to the OPPS because it 
uses more granular HCRIS data and concentrates on short-term accounting 
changes to current cost report data. This set includes a recommendation 
that CMS immediately implement a review of HCRIS cost center 
assignments based on text searches of providers' line descriptions and 
reassign lines appropriately. The second set addresses short-term 
regression-based and other statistical adjustments. The third set 
focuses on clarifying existing cost report instructions to instruct 
providers to use all applicable standard cost centers, adding new 
standard cost centers (for Devices, CT Scans, MRIs, Cardiac 
Catheterization, and Infusion Drugs), and creating new charge category 
summaries in the MedPAR to match the new cost centers on the cost 
report. Specifically, the new MedPAR groups would be for Intermediate 
Care (revenue codes 0206 and 0214), Devices (revenue codes 0274, 0275, 
0276 and 0278), IV Solutions (revenue code 0258), CT Scanning (revenue 
codes 035x), Nuclear Medicine (revenue codes 034x, possibly combined 
with 0404), and Therapeutic Radiology (revenue codes 033x). RTI also 
recommends educating hospitals through industry-led educational 
initiatives directed at methods for capital cost finding, specifically 
encouraging providers to use direct assignment of equipment 
depreciation and lease costs wherever possible, or at least to allocate 
moveable equipment depreciation based on the dollar value of assigned 
depreciation costs. Lastly, although not directly the focus of its 
study, RTI mentions the problem of nursing cost compression in the 
relative weights, and notes that cost compression within inpatient 
nursing services is a significant source of distortion in the various 
IPPS' relative

[[Page 48453]]

weights, possibly more so than any of the factors studied by RTI. RTI 
suggests that it may be best for hospitals to agree to expand charge 
coding conventions for inpatient nursing, which would foster increased 
use of patient-specific nursing incremental charge codes in addition to 
baseline unit-specific per-diem charges.
    Comment: One commenter agreed with the enhancements made by RTI (in 
the portion of the RTI report that was made available to the public in 
the April 2008 report) to the model for disaggregating CCRs in the 
Medical Supplies cost center, but was ``disappointed'' that CMS did not 
post the complete report, including the impact of charge 
``decompression'' on the APC weights under the OPPS, and urged CMS to 
release the full report as soon as possible to allow a comprehensive 
review of the findings applicable to both the IPPS and the OPPS.
    Response: Because the final RTI report was not scheduled to be 
completed before July 2008, we were unable to make the complete report, 
including sections focusing on the OPPS, available to the public in 
April 2008. Because we wanted to give the public the benefit of a 60-
day comment period on the IPPS sections of the RTI report that would 
generally coincide with the 60-day comment period on the FY 2009 IPPS 
proposed rule, we chose to make available in April 2008 those sections 
of the RTI report that specifically dealt with the IPPS MS-DRG relative 
weights. We note that on July 3, 2008, we included on the CMS Web site 
the link to the complete RTI report: http://www.rti.org/reports/cms/
HHSM-500-2005-0029I/PDF/Refining_Cost_to_Charge_Ratios_200807_
Final.pdf.
    Comment: One commenter recommended that, for purposes of 
calculating the relative weights for FY 2009, CMS adopt RTI's 
recommendation to reassign cost center lines based on the provider's 
entered text description to correct errors in the assignment of costs 
and charges by hospitals in nonstandard cost centers on the cost 
report. The commenter also suggested that CMS adopt RTI's 
recommendation that, in the MedPAR file, intermediate care charges 
should be reclassified from the Intensive Care Unit cost center to the 
Routine cost center to correct a mismatch between where the 
intermediate care charges are assigned on the cost report (that is, in 
the Routine cost center) and where the charges are grouped in MedPAR 
(that is, with intensive care unit charges).
    Response: The commenter's recommendations are important and are 
consistent with existing Medicare policy. Currently, the MedPAR file 
incorrectly groups intermediate care charges with intensive care unit 
charges; intermediate care charges and costs are, in fact, to be 
included in the General Routine (that is, Adults and Pediatrics) cost 
center on the cost report, in accordance with section 2202.7.II.B. of 
the PRM-1. However, in its July 2008 report, RTI found that HCRIS line 
reassignments by themselves had little effect on most inpatient weights 
(page 8). The impact of adopting these recommendations would likely be 
more pronounced if we were adopting regression-based CCRs for purposes 
of calculating the relative weights for FY 2009. However, because we 
are not using regression-based CCRs for FY 2009, we do not believe it 
is necessary to adopt the commenter's recommendations for the MS-DRG 
relative weights at this time, but will consider them for future 
rulemaking.
    Comment: One commenter commended CMS for proposing to break out the 
existing line on the cost report for Medical Supplies Charged to 
Patients into two lines, one for costly devices and implants and the 
other for low-cost supplies, and for undertaking a comprehensive review 
of the cost report. However, the commenter observed that RTI's 2008 
report demonstrates that additional lines are also needed to further 
break out drugs, radiology (CT scans and MRI scans) and cardiac 
catheterization because hospitals apply varying markups within these 
cost centers as well.
    Response: We acknowledge, as RTI has found, that charge compression 
occurs in several cost centers that exist on the Medicare cost report. 
However, as we stated in the proposed rule, we proposed to focus on the 
CCR for Medical Supplies and Equipment because RTI found that the 
largest impact on the MS-DRG relative weights could result from 
correcting charge compression for devices and implants.
    We note that in the CY 2009 OPPS/ASC proposed rule (73 FR 41490), 
we are proposing to break the single standard Drugs Charged to Patient 
cost center, Line 56, into two standard cost centers, Drugs with High 
Overhead Cost Charged to Patients and Drugs with Low Overhead Cost 
Charged to Patients, to reduce the reallocation of pharmacy overhead 
cost from expensive to inexpensive drugs and biologicals. We use the 
term ``pharmacy overhead'' here to refer to overhead and related 
expenses such as pharmacy services and handling costs. This proposal is 
consistent with RTI's recommendation for creating a new cost center 
with a CCR that would be used to adjust charges to costs for drugs 
requiring detail coding. In the CY 2009 OPPS/ASC proposed rule, we note 
that comments on the proposed changes to the cost report for drugs 
should address any impact on both the inpatient and outpatient payment 
systems because both systems rely upon the Medicare hospital cost 
report for cost estimation. Furthermore, in that proposed rule, we 
specifically invited public comment on the appropriateness of creating 
standard cost centers for Computed Tomography (CT) Scanning, Magnetic 
Resonance Imaging (MRI), and Cardiac Catheterization, rather than 
continuing the established nonstandard cost centers for these services 
(73 FR 41431).
3. Summary of RAND's Study of Alternative Relative Weight Methodologies
    A second reason that we did not implement regression-based CCRs at 
the time of the FY 2008 IPPS final rule with comment period was our 
inability to investigate how regression-based CCRs would interact with 
the implementation of MS-DRGs. In the FY 2008 final rule with comment 
period (72 FR 47197), we stated that we engaged RAND as the contractor 
to evaluate the HSRV methodology in conjunction with regression-based 
CCRs and we would consider their analysis as we prepared for the FY 
2009 IPPS rulemaking process. We stated that we would analyze how the 
relative weights would change if we were to adopt regression-based CCRs 
and an HSRV methodology using fully-phased in MS-DRGs. We stated that 
we would consider the results of the second phase of the RAND study as 
we prepared for the FY 2009 IPPS rulemaking process. We had intended to 
include a detailed discussion of RAND's study in the FY 2009 IPPS 
proposed rule. However, due to some delays in releasing identifiable 
data to the contractor under revised data security rules, the report on 
this second stage of RAND's analysis was not completed in time for the 
development of the proposed rule. Therefore, we continued to have the 
same concerns with respect to uncertainty about how regression-based 
CCRs would interact with the MS-DRGs or an HSRV methodology, and we did 
not propose to adopt the regression-based CCRs or an HSRV methodology 
in the FY 2009 IPPS proposed rule. Nevertheless, we welcomed public 
comments on our proposals not to adopt regression-based CCRs or an HSRV 
methodology at that time or in the future. The RAND report on 
regression-based CCRs and the HSRV methodology was finalized at the 
conclusion of our proposed rule

[[Page 48454]]

development process and was posted on the CMS Web site on April 22, 
2008, for a 60-day comment period. Although we were unable to include a 
discussion of the results of the RAND study in the proposed rule, we 
welcomed public comment on the report. We are providing a summary of 
the report and the public comments we received below.
    RAND evaluated six different methods that could be used to 
establish relative weights: CMS' current relative weight methodology 
and five alternatives. In particular, RAND examined:
     How the relative weights differ across the alternative 
methodologies.
     How well each relative weight methodology explained 
variation in costs.
     Payment accuracy under each relative weight methodology 
and current facility-level adjustments.
     Payment implications of alternatives to the current 
methodology for establishing relative weights.
    RAND examined alternative relative weight methodologies including 
either our current methodology of 15 national CCRs or 19 CCRs that are 
disaggregated using the regression-based methodology, or hospital-
specific CCRs for 15 cost center groupings. The expansion from 15 to 19 
cost center groupings is intended to reduce charge compression in the 
relative weights introduced by combining services with different rates 
of charge markups into a single cost center for purposes of estimating 
cost. The hospital-specific CCRs are intended to account for 
differences in overall charging practices across hospitals (that is, 
smaller nonteaching hospitals tend not to have as much variation in 
rates of markup as larger teaching hospitals).
    In addition, RAND analyzed our standardization methodologies that 
account for systematic cost differences across hospitals. The purpose 
of standardization is to eliminate systematic facility-specific 
differences in cost so that these cost differences do not influence the 
relative weights. The three standardization methodologies analyzed by 
RAND include the ``hospital payment factor'' methodology currently used 
by CMS, where a hospital's wage index factor, and IME and/or DSH factor 
are divided out of its estimated DRG cost; the HSRV methodology that 
standardizes the cost for a given discharge by the hospital's own 
costliness rather than by the effect of the systematic cost differences 
across groups of hospitals; and the HSRVcc methodology, which removes 
hospital-level cost variation by calculating hospital-specific charge-
based relative values for each DRG at the cost center level and 
standardizing them for differences in case mix. Under the HSRVcc 
methodology, a national average charge-based relative weight is 
calculated for each cost center.
    RAND conducted two different types of analyses to evaluate 5 
alternative relative weight methodologies that varied use of 19 
national CCRs and 15 hospital-specific CCRs, and HSRV and HSRVcc 
standardization methodologies along with components of the current 
relative weight methodology using 15 national CCRs and hospital payment 
factor standardization. The first type of analysis compared the five 
alternative relative weight methodologies to CMS' current relative 
weight methodology and compared average payment under each relative 
weight methodology across different types of hospitals. The second 
analysis examined the relative payment accuracy of the relative weight 
methodologies. RAND used the costs under 15 hospital-specific CCRs as 
its hospital cost baseline. RAND noted that the choice for its baseline 
may affect the results of the analysis because relative weight 
methodologies that are similar to the 15 hospital-specific CCR 
methodology may be assessed more favorably because they are likely to 
have similar costs, while relative weight methodologies that are 
different from the 15 hospital-specific CCR methodology may not be as 
favorable. The payment accuracy analysis used a regression technique to 
evaluate how well the relative weight methodologies explained variation 
in costs and how well the hospital payments under the relative weight 
methodologies matched the costs per discharge. Finally, RAND examined 
payment-to-cost ratios among different types of hospitals.
    Overall, RAND found that none of the alternative methods of 
calculating the relative weights represented a marked improvement in 
payment accuracy over the current method, and there was little 
difference across methods in their ability to predict cost at either 
the discharge-level or the hospital-level. In their regression 
analysis, RAND found that after controlling for hospital payment 
factors, the relative weights are compressed. However, RAND also found 
that the hospital payment factors increase more rapidly than cost, so 
while the relative weights are compressed, these payment factors offset 
the compression so that total payment increases more rapidly than cost.
    RAND does not believe the regression-based charge compression 
adjustments significantly improve payment accuracy. RAND found that 
relative weights using the 19 national disaggregated regression-based 
CCRs result in significant redistributions in payments among hospital 
groupings. With regard to standardization methodologies, while RAND 
found that there is no clear advantage to the HSRV method or the HSRVcc 
method of standardizing cost compared to the current hospital payment 
factor standardization method, its analysis did reveal significant 
limitations of CMS' current hospital payment factor standardization 
method. The current standardization method has a larger impact on the 
relative weights and payment accuracy than any of the other 
alternatives that RAND analyzed because the method ``over-
standardizes'' by removing more variability for hospitals receiving a 
payment factor than can be empirically supported as being cost-related 
(particularly for IME and DSH). RAND found that instead of increasing 
proportionately with cost, the payment factors CMS currently uses (some 
of which are statutory), increase more rapidly than cost, thereby 
reducing payment accuracy. Further analysis is needed to isolate the 
cost-related component of the IPPS payment adjustments (some of which 
has already been done by MedPAC), use them to standardize cost, and 
revise the analysis of payment accuracy to reflect only the cost-
related component. Generally, RAND believes it is premature to consider 
further refinements in the relative weight methodology until data from 
FY 2008 or later that reflect coding improvement and other behavioral 
changes that are likely to occur as hospitals adopt the MS-DRGs can be 
evaluated.
    Comment: A number of commenters submitted comments on RAND's 
report. Some commenters supported RAND's methodology and findings. 
These commenters agreed with RAND's findings that regression-based CCRs 
would not have a material impact on payment accuracy. These commenters 
also agreed with RAND that CMS should wait until FY 2008 data are 
available to consider further refinements to the relative weight 
methodology.
    Some commenters disagreed with RAND's methodology and findings that 
the regression-based CCRs offer no improvement in payment accuracy. 
RAND found that regression-based CCRs result in significant 
redistributions in payment within hospital groups with increases in 
payments concentrated to the cardiac and orthopedic surgical DRGs. 
RAND's payment to cost ratio analysis, which measures payment equity 
across groups of hospitals, found that adopting regression-based CCRs 
led

[[Page 48455]]

to significant reductions in payment to cost ratio for rural hospitals. 
Commenters also indicated their belief that the payment-to-cost 
analysis is not the appropriate analysis to use because, in the 
hospital prospective payment system, costs at the DRG level are not 
precisely known. Furthermore, the commenters asserted RAND's analysis 
was flawed because, in its payment-to-cost analysis, RAND compared 
payment rates adjusted for charge compression with regression-based 
CCRs to payment rates unadjusted for charge compression. The commenters 
stated that when they compared payments adjusted for charge compression 
with regression-based CCRs to payment rates adjusted for charge 
compression, they found that regression-based CCRs improved payment 
accuracy. In addition, the commenters cited that RAND acknowledged that 
its choice for the baseline in comparing payment rates ``may affect the 
results and conclusions of our analysis''.
    Response: We appreciate the comments on the RAND report. Given the 
move to the MS-DRGs and the concerns surrounding documentation and 
coding and the most appropriate approach to improving payment accuracy, 
we generally agree with RAND's recommendation that it would be 
premature to revise the relative weights methodology until additional 
data from FY 2008 are available. With respect to the comments on RAND's 
analysis related to the regression-based CCRs, we understand the 
commenters' reasons for disputing RAND's choice to use a relative 
weight methodology that does not incorporate regression-based CCRs as 
its baseline for hospital costs. In RAND's payment-to-cost analysis, 
RAND used the relative weight methodology with 15 hospital-specific 
CCRs to determine the hospital costs baseline. RAND noted that, while 
it believes its choice of cost measure is appropriate, it recognizes 
that ``the choice may affect the results of the analysis because 
relative weight methods that use the hospital-specific CCRs may be 
assessed more favorably than would have been the case had we used a 
different cost measure. Similarly, the use of 15 rather than 19 cost 
center CCRs may favor the relative weight methods that do not account 
for charge compression.'' If a single method existed that clearly 
yielded the best measure of cost, it seems unlikely that a study to 
evaluate five alternative methods of calculating cost for the MS-DRG 
relative weights would have been necessary. We believe that it was 
within RAND's discretion to decide how best to conduct its payment 
analyses, and while there may be benefits and drawbacks to alternative 
approaches (including whether to use a baseline that adjusts for charge 
compression), RAND's choice is defensible. Accordingly, RAND's finding 
that regression-based CCRs do not improve payment accuracy cannot be 
summarily dismissed.
    Comment: Many commenters opposed the HSRV methodology for 
standardization. The commenters cited RAND's findings that the HSRV 
methodology inappropriately compresses the relative weights. They 
believed that the methodology only improves the accuracy of the 
relative weights under the unlikely situations where all hospitals have 
identical mix of patients and costs structures, or if all hospitals 
have identical costs across all cost centers or if all hospitals have 
the same case-mix and the costs differ by a constant factor across all 
DRGs and all cost centers. The commenters agreed with RAND that it 
would be premature to consider further refinements to the methodology 
for setting relative weights, including the HSRV method of 
standardization, until data from FY 2008 or later can be evaluated.
    Response: We appreciate the comments on the HSRV methodology, and 
we understand that many commenters continue to oppose to the HSRV 
methodology. In FY 2007, we did not adopt the HSRV methodology after 
consideration of concerns raised by commenters' opposition to the 
methodology. Instead, in the FY 2007 IPPS final rule (71 FR 47897), we 
stated that we would undertake further analysis to study the payment 
impacts of the HSRV methodology with regression-based CCRs under the 
MS-DRGs. We engaged RAND as our contractor to conduct this analysis, 
and in its report, RAND observed that relative weights that were based 
on hospital-specific CCRs with 15 cost centers that were standardized 
using the current standardization methodology would warrant further 
consideration as an improvement over the current relative weights. RAND 
did not find the HSRV or HSRVcc standardization methods to be 
preferable to the hospital payment factor method. However, RAND also 
cautioned that its results reveal some significant limitations of the 
current hospital payment factor method. Specifically, current IME and 
DSH payment adjustments increase more quickly than their cost, and when 
used for standardization, compress the relative weights. We agree with 
RAND that our current standardization process requires additional 
analysis, and therefore, we are not changing our current method of 
standardizing for FY 2009. We will continue to consider various options 
for improving payment accuracy.
    Comment: One commenter supported RAND's finding that CMS should 
revise its hospital payment factor method for standardizing claims 
charges to remove the effects of hospital-specific factors (that is, 
wage index, IME, and DSH) that affect cost estimates. The commenter 
recommended that CMS could improve its standardization process by 
removing the effects of these factors by using empirical estimates 
rather than using current policy adjustments. The commenter noted that 
MedPAC and CMS have done empirical estimates of these factors in the 
past.
    Response: One of the issues that the RAND report specifically 
addressed was standardization methods that account for systematic cost 
differences across hospitals. These methods include what RAND called 
the hospital payment factor method, which is CMS' current approach to 
standardizing claims charges, the HSRV methodology, and the HSRVcc 
methodology. Although RAND's results do not indicate that the HSRV or 
HSRVcc standardization method is clearly preferable to the hospital 
payment factor method, RAND found that the current hospital payment 
factor standardization method has significant limitations. 
Specifically, RAND found that the hospital payment factor method 
``over-standardizes'' by using a hospital payment factor that is larger 
than can be empirically supported as being cost-related (particularly 
for IME and DSH) and that has a larger impact on the relative weights 
and payment accuracy than other elements of the cost-based methodology. 
However, RAND cautions that ``re-estimating'' these payment factors 
``raises important policy issues that warrant additional analyses'' 
(page 49), particularly to ``determine the analytically justified-
levels using the MS-DRGs'' (page 110). In addition, we note that RTI, 
in its July 2008 final report, also observed that the adjustment 
factors under the IPPS (the wage index, IME, and DSH adjustments) 
complicate the determination of cost and these factors ``within the 
rate calculation may offset the effects of understated weights due to 
charge compression'' (page 109). We understand that MedPAC has done 
analysis of what the empirically-justified levels of the IME and DSH 
adjustment should be. We cannot propose to change the IME and DSH 
factors used for actual payment under the IPPS because these factors 
are

[[Page 48456]]

required by statute. After further studying the issue, we may consider 
proposing various options for improving payment accuracy when 
standardizing charges as part of the relative weights calculation.
    Comment: Many commenters continued to oppose adoption of the 
regression-based CCRs, asserting that the charge compression issue is 
not urgent enough to warrant the use of substitute data for real cost 
and charge information. The commenters indicated that many hospitals 
believe that most increases or decreases in the MS-DRG relative weights 
will have a minimal dollar impact on their bottom line. They further 
stated that the RAND report asserts that the regression-based CCR 
adjustments would not materially impact payment accuracy. The 
commenters also agreed with CMS' position at the time of the proposed 
rule that there had not been sufficient time to evaluate the impact of 
a regression-based approach on inpatient or outpatient services, and on 
the MS-DRGs. The commenters further believed that calculating 
regression-based CCRs is ``excessively complicated,'' is difficult to 
validate, and may be flawed to the extent that the regressions would be 
based on data in which the mismatch between MedPAR charges and cost 
report costs and charges has not been corrected. The commenters 
believed that more accurate and uniform reporting and improvements to 
the cost report is the best approach to improving payment accuracy.
    A number of commenters objected to the regression-based approach to 
break out the one CCR for all radiology services that CMS is currently 
using. The commenters noted that the RTI estimates suggest that 
hospitals mark up CT services on average by more than 1800 percent over 
cost (CCR 0.054), while routine radiology services are marked up by an 
average of more than 300 percent over cost. The commenters believed 
that this vast difference in the markup practices of hospitals seems 
implausible and, therefore, would result in significant payment 
distortions if CMS were to adopt RTI's disaggregated radiology CCRs or 
some related adjustment to the radiology CCR, for Medicare ratesetting. 
The commenters asserted that use of RTI's CCRs would significantly 
reduce payment for imaging-intensive DRGs in the inpatient setting for 
trauma services, but the impact on payments under the OPPS and the 
Medicare physician fee schedule (MPFS) imaging services capped by OPPS 
payments would be even more dramatic. The commenters believed that the 
CCRs for advanced imaging may reflect a misallocation of capital costs 
on the cost report. They further stated that this could indicate that 
many hospitals are reporting CT and MRI machines as fixed equipment and 
allocate the related capital costs as part of the facility's Building 
and Fixtures overhead cost center instead of reporting the capital 
costs directly in the Radiology cost center, resulting in RTI's 
estimate of the costs and CCRs for CT and MRI equipment to be too low. 
The commenters argued that, regardless of the reason for the low CCRs, 
the use of RTI's CCRs could result in aberrant payments for radiology 
services, where payments to a hospital for outpatient x-rays might be 
higher than the payment for a similar CT scan, and where the physician 
fee schedule rates for the technical component cost of the CT scan may 
also be less than the cost of these scans estimated by CMS, providing a 
disincentive for hospitals and physicians to provide these services. In 
concluding that RTI's analysis of the CCRs for imaging services is 
flawed, several commenters urged CMS to more carefully analyze CCRs for 
radiology before proposing any measures to change these CCRs. The 
commenters believed that if the underreported capital costs are 
considered, it is likely that the CCRs for CT scanning and MRI services 
would be approximately equal to the overall radiology CCR and no 
adjustment would be needed.
    A significant number of commenters supported applying the 
regression-based CCRs as a temporary solution to address charge 
compression. The commenters believed that because CMS' proposed changes 
to the cost report would not have an impact on the relative weights 
until FY 2012, implementation of regression-based CCRs is necessary in 
the interim. The commenters cited what they believed is ample evidence, 
particularly from the RTI report and from MedPAC, that regression-based 
CCRs are appropriate as a short-term solution.
    While several commenters agreed on the use of regression-based CCRs 
as a short-term solution to charge compression, many commenters gave 
varied suggestions as to how to implement these regression-based CCRs. 
The commenters suggested that CMS implement a 3-year phase-in of 
regression-based CCRs beginning in FY 2009 to mitigate any 
distributional impacts on hospitals. The commenters asked CMS to 
consider using a regression analysis for 25 percent of the estimated 
cost of medical supplies in FY 2009, then 50 percent in FY 2010, and 75 
percent in FY 2011. The commenters further stated that once the data 
from the new cost centers for supplies and devices are available, the 
regression adjustments could be phased out, or remain in use even after 
FY 2012, should the data from the new cost centers still be incomplete 
at that time. Furthermore, the commenters believed that this transition 
would remove the need for a transition period to separate CCRs for 
medical devices and medical supplies once the cost report data are 
available.
    Some commenters supported adoption of regression-based CCRs except 
for those within the radiology category. Other commenters suggested 
that CMS only implement regression-based CCRs for medical supplies and 
devices because the proposed changes to the cost report focused on the 
medical supplies and devices. They argued that CMS' proposed cost 
report changes for medical supplies and devices signifies that CMS 
believes it is most important to address charge compression in the 
medical supplies group.
    One commenter recommended that, based on the findings in RTI's 2008 
report, CMS should implement a total of 22 regression-based CCRs. (In 
its March 2007 report, RTI recommended that CMS expand the number of 
CCRs from 15 to 19 with the use of statistical adjustments to 
disaggregate medical devices from medical supplies, IV solutions and 
other drugs from drugs and CT scanning and MRI from radiology. In the 
interim RTI report posted on the CMS Web site on April 22, 2008, RTI 
increased the potential regression-based CCRs from 19 to 23 national 
CCRs after evaluating OPPS data with IPPS data.) The commenter believed 
that CMS should expand the number of CCRs from 15 to 22 with 
disaggregated CCRs for medical supplies, medical devices, IV solutions, 
other drugs and detail coded drugs, CT scans, MRI, therapeutic 
radiation and nuclear medicine. The commenter recommended implementing 
these regression-based CCRs to ensure payment equity across these types 
of services. Because of limited time to develop the final rule, the 
commenter recognized that it would be difficult for CMS to implement 
revised regression estimates. To account for this, the commenter 
recommended what the commenter believed is a relatively simple ratio 
technique, similar to RTI's methodology, to implement regression-based 
CCRs for the FY 2009 IPPS final rule. The commenter believed that CMS 
could use more detailed charge information from the Standard Analytic 
File (SAF) and the regression-based estimates from RTI's 2008 report to

[[Page 48457]]

calculate national CCRs for the subgroups within drugs, supplies and 
radiology. The commenter stated that CMS would then compare those CCRs 
under RTI's regression-based estimates to the RTI-estimated national 
CCR for the broader category. To further clarify its recommendation, 
the commenter stated that, for example, if CMS were to disaggregate the 
supplies CCR, CMS would create regression-based CCRs for medical 
supplies and medical devices based on RTI's regression-based CCRs for 
those subgroups. Then a ratio would be calculated comparing those CCRs 
to the original RTI-estimated national CCR for the broader supplies 
category. Those ratios would then be multiplied by their own national 
overall CCR for the broader supplies category to obtain national CCRs 
for the subgroup that reflect updated cost and charge data.
    Response: In the FY 2009 IPPS proposed rule (73 FR 23543), we 
stated several reasons why we did not propose to adopt any regression-
based CCRs for FY 2009. Specifically, because a number of commenters on 
the FY 2008 proposed rule objected to the adoption of the regression-
based CCRs, and because, at the time the FY 2009 IPPS proposed rule was 
under development, we did not yet have the results of the RTI study 
analyzing the effects of charge compression on inpatient and outpatient 
charges as well as the results of the RAND study analyzing how the 
relative weights would change if we were to adopt regression CCRs while 
simultaneously adopting the HSRV methodology using fully phased in MS-
DRGs, we did not propose to adopt regression-based CCRs in the FY 2009 
IPPS proposed rule. However, we did solicit public comments on our 
proposal not to adopt regression-based CCRs in the FY 2009 IPPS 
proposed rule. Consequently, as was the case during the FY 2008 IPPS 
proposed rule comment period, we received numerous public comments both 
against and in favor of adopting regression-based CCRs. Once again, we 
have considered all of the public comments we received. We have also 
considered the findings of the RAND report, and note that RAND believes 
that it may be premature to consider further refinements in the 
relative weight methodology until data using MS-DRGs from FY 2008 or 
later can be evaluated (page 108). Also noteworthy is RAND's belief 
that regression-based CCRs may not improve payment accuracy, and that 
it is equally if not more important to consider revisions to the 
current IPPS hospital payment factor standardization method in order to 
improve payment accuracy. We appreciate the recognition by one 
commenter that the time in which CMS must develop the final rule is 
limited, and the consideration given by this commenter in recommending 
a relatively simple approach to implementing the regression-based CCRs 
for FY 2009. Nevertheless, we agree with the commenters that believe 
that the best approach at this time to addressing charge compression is 
to focus on improving the accuracy of hospital cost reporting, coupled 
with long-term changes to the cost report discussed below so that CMS 
can continue to rely on hospital's reported cost and charge data. With 
respect to the CCR for radiology services, we note that the 2008 RTI 
report found that significant improvements and refinements to the 
radiology CCR can be achieved without using regression-based CCRs, 
simply by reallocating the costs and charges from nonstandard cost 
centers on the cost report and using increased charge detail from the 
SAF to supplement the radiology charges in the MedPAR. Therefore, as we 
stated in the FY 2009 IPPS proposed rule (73 FR XXXXX), we believe that 
ultimately, improved and more precise cost reporting is the best way to 
minimize charge compression and improve the accuracy of the cost 
weights. Accordingly, we are not adopting regression-based CCRs for the 
calculation of the FY 2009 IPPS relative weights.
    We received public comments on the FY 2008 IPPS proposed rule 
raising concerns on the accuracy of using regression-based CCR 
estimates to determine the relative weights rather than on the Medicare 
cost report. The commenters noted that regression-based CCRs would not 
fix the underlying mismatch of hospital reporting of costs and charges. 
Instead, the commenters suggested that the impact of charge compression 
might be mitigated through an educational initiative that would 
encourage hospitals to improve their cost reporting. The commenters 
recommended that hospitals be educated to report costs and charges in a 
way that is consistent with how charges are grouped in the MedPAR file. 
In an effort to achieve this goal, hospital associations have launched 
an educational campaign to encourage consistent reporting, which would 
result in consistent groupings of the cost centers used to establish 
the cost-based relative weights. The commenters requested that CMS 
communicate to the fiscal intermediaries/MACs that such action is 
appropriate. In the FY 2008 IPPS final rule with comment period, we 
stated that we were supportive of the educational initiative of the 
industry, and we encouraged hospitals to report costs and charges 
consistently with how the data are used to determine relative weights 
(72 FR 47196). We would also like to affirm that the longstanding 
Medicare principles of cost apportionment in the regulations at 42 CFR 
413.53 convey that, under the departmental method of apportionment, the 
cost of each ancillary department is to be apportioned separately 
rather than being combined with another ancillary department (for 
example, combining the cost of Medical Supplies Charged to Patients 
with the costs of Operating Room or any other ancillary cost center). 
(We note that, effective for cost reporting periods starting on or 
after January 1, 1979, the departmental method of apportionment 
replaced the combination method of apportionment where all the 
ancillary departments were apportioned in the aggregate (Section 2200.3 
of the PRM-I).)
    Furthermore, longstanding Medicare cost reporting policy has been 
that hospitals must include the cost and charges of separately 
``chargeable medical supplies'' in the Medical Supplies Charged to 
Patients cost center (line 55 of Worksheet A), rather than in the 
Operating Room, Emergency Room, or other ancillary cost centers. 
Routine services, which can include ``minor medical and surgical 
supplies'' (Section 2202.6 of the PRM-1), and items for which a 
separate charge is not customarily made, may be directly assigned 
through the hospital's accounting system to the department in which 
they were used, or they may be included in the Central Services and 
Supply cost center (line 15 of Worksheet A). Conversely, the separately 
chargeable medical supplies should be assigned to the Medical Supplies 
Charged to Patients cost center on line 55.
    We note that not only is accurate cost reporting important for IPPS 
hospitals to ensure that accurate relative weights are computed, but 
hospitals that are still paid on the basis of cost, such as CAHs and 
cancer hospitals, and SCHs and MDHs must adhere to Medicare cost 
reporting principles as well.
    The CY 2008 OPPS/ASC final rule with comment period (72 FR 66600 
through 66601) also discussed the issue of charge compression and 
regression-based CCRs, and noted that RTI is currently evaluating the 
cost estimation process underpinning the OPPS cost-based weights, 
including a reassessment of the regression models using both outpatient 
and inpatient charges, rather than inpatient charges only. In

[[Page 48458]]

responding to comments in the CY 2008 OPPS/ASC final rule with comment 
period, we emphasized that we ``fully support'' the educational 
initiatives of the industry and that we would ``examine whether the 
educational activities being undertaken by the hospital community to 
improve cost reporting accuracy under the IPPS would help to mitigate 
charge compression under the OPPS, either as an adjunct to the 
application of regression-based CCRs or in lieu of such an adjustment'' 
(72 FR 66601). However, as we stated in the FY 2008 IPPS final rule 
with comment period, we would consider the results of the RAND study 
before considering whether to adopt regression-based CCRs, and in the 
CY 2008 OPPS/ASC final rule with comment period (72 FR 66601), we 
stated that we would determine whether refinements should be proposed 
after reviewing the results of the RTI study.
    On February 29, 2008, we issued Transmittal 321, Change Request 
5928, to inform the fiscal intermediaries/MACs of the hospital 
associations' initiative to encourage hospitals to modify their cost 
reporting practices with respect to costs and charges in a manner that 
is consistent with how charges are grouped in the MedPAR file. We noted 
that the hospital cost reports submitted for FY 2008 may have costs and 
charges grouped differently than in prior years, which is allowable as 
long as the costs and charges are properly matched and the Medicare 
cost reporting instructions are followed. Furthermore, we recommended 
that fiscal intermediaries/MACs remain vigilant to ensure that the 
costs of items and services are not moved from one cost center to 
another without moving their corresponding charges. Due to a time lag 
in submittal of cost reporting data, the impact of changes in 
providers' cost reporting practices occurring during FY 2008 would be 
reflected in the FY 2011 IPPS relative weights.
    Comment: One commenter urged CMS to audit cost reports closely to 
ensure initial and ongoing compliance with the new reporting 
requirements. Several commenters who, over the course of the past year, 
have supported an educational initiative to encourage hospitals to 
prepare their Medicare cost reports such that Medicare charges, total 
charges, and total costs are aligned with each other, and with the 
current categories in the MedPAR file, continued to believe that this 
educational initiative is an important effort. These commenters 
appreciated CMS' efforts to inform the fiscal intermediaries/MACs of 
this educational initiative and to work with hospitals to ensure proper 
cost reporting (in Transmittal 321, Change Request 5928, issued 
February 29, 2008). However, the commenters expressed concern that this 
transmittal did not address the need by some hospitals to elect a cost-
estimated approach to ensure that costs and charges for supplies are 
aligned. The commenters urged CMS to instruct fiscal intermediaries/
MACs not to reverse or undo reporting that relies on estimation 
approaches to achieve this alignment, provided that hospitals submit 
adequate documentation of their methodology.
    Response: We agree that audit and compliance measures are 
important, and we will work within the audit budget to determine 
whether hospitals properly follow payment policies and the cost 
reporting instructions. With respect to Transmittal 321, Change Request 
5928, CMS did remind fiscal intermediaries/MACs that ``providers may 
submit cost reports with cost and charges grouped differently than in 
prior years, as long as the cost and charges are properly matched and 
Medicare cost reporting instructions are followed. Medicare contractors 
shall not propose adjustments that regroup costs and charges merely to 
be consistent with previous year's reporting if the costs and charges 
are properly grouped on the as-filed cost report.'' However, Medicare 
payment is governed by longstanding principles contained in Sec. Sec.  
413.20 and 413.24 which we cannot instruct the fiscal intermediaries/
MACs to overlook. In accordance with Sec.  413.20, the principles of 
cost reimbursement require that providers maintain sufficient financial 
records and statistical data for proper determination of costs payable 
under the program. Furthermore, Sec.  413.24(a) specifies that 
providers receiving payment on the basis of reimbursable cost must 
provide adequate cost data. This must be based on their financial and 
statistical records which must be capable of verification by qualified 
auditors. In addition, Sec.  413.24(c) states that adequate cost 
information must be obtained from the provider's records to support 
payments made for services furnished to beneficiaries. The requirement 
of adequacy of data implies that the data be accurate and in sufficient 
detail to accomplish the purpose for which the data are intended. 
Adequate data capable of being audited are consistent with good 
business concepts and effective and efficient management of any 
organization. Furthermore, we note that these cost reimbursement 
principles continue to apply even under the IPPS. Specifically, Sec.  
412.53 states, ``All hospitals participating in the prospective payment 
systems must meet the recordkeeping and cost reporting requirements of 
Sec. Sec.  413.20 and 413.24 of this chapter.'' Therefore, CMS cannot 
instruct the Medicare contractors to disregard these longstanding 
policies when auditing and settling cost reports.
4. Refining the Medicare Cost Report
    In developing the FY 2009 IPPS proposed rule, we considered whether 
there were concrete steps we could take to mitigate the bias introduced 
by charge compression in both the IPPS and OPPS relative weights in a 
way that balances hospitals' desire to focus on improving the cost 
reporting process through educational initiatives with device industry 
interest in adopting regression-adjusted CCRs. Although RTI recommended 
adopting regression-based CCRs, particularly for medical supplies and 
devices, as a short-term solution to address charge compression, RTI 
also recommended refinements to the cost report as a long-term 
solution. RTI's draft interim March 2007 report discussed a number of 
options that could improve the accuracy and precision of the CCRs 
currently being derived from the Medicare cost report and also reduce 
the need for statistically-based adjustments. As mentioned in the FY 
2008 IPPS final rule with comment period (72 FR 47193), we believe that 
RTI and many of the public commenters on the FY 2008 IPPS proposed rule 
concluded that, ultimately, improved and more precise cost reporting is 
the best way to minimize charge compression and improve the accuracy of 
cost weights. Therefore, in the FY 2009 IPPS proposed rule (73 FR 
23544), we proposed to begin making cost report changes geared to 
improving the accuracy of the IPPS and OPPS relative weights. However, 
we also received comments last year asking that we proceed cautiously 
with changing the Medicare cost report to avoid unintended consequences 
for hospitals that are paid on a cost basis (such as CAHs, cancer 
hospitals, and, to some extent, SCHs and MDHs), and to consider the 
administrative burden associated with adapting to new cost reporting 
forms and instructions. Accordingly, we proposed to focus in the FY 
2009 proposed rule on the CCR for Medical Supplies and Equipment 
because RTI found that the largest impact on the relative weights could 
result from correcting charge compression for devices and implants. 
When examining markup differences within the Medical Supplies Charged 
to Patients cost center, RTI found that its

[[Page 48459]]

``regression results provide solid evidence that if there were distinct 
cost centers for items, cost ratios for devices and implants would 
average about 17 points higher than the ratios for other medical 
supplies'' (January 2007 RTI report, page 59). This suggests that much 
of the charge compression within the Medical Supplies CCR results from 
inclusion of medical devices that have significantly different markups 
than the other supplies in that CCR. Furthermore, in the FY 2007 IPPS 
final rule and FY 2008 IPPS final rule with comment period, the Medical 
Supplies and Equipment CCR received significant attention by the public 
commenters.
    Although we proposed to make improvements to mitigate the effects 
of charge compression only on the Medical Supplies and Equipment CCR as 
a first step, we invited public comments as to whether to make other 
changes to the Medicare cost report to refine other CCRs. In addition, 
we indicated that we were open to making further refinements to other 
CCRs in the future. Therefore, in the FY 2009 IPPS proposed rule, we 
proposed to add only one cost center to the cost report, such that, in 
general, the costs and charges for relatively inexpensive medical 
supplies would be reported separately from the costs and charges of 
more expensive devices (such as pacemakers and other implantable 
devices). We indicated that we would consider public comments submitted 
on the proposed rule for purposes of both the IPPS and the OPPS 
relative weights and, by extension, the calculation of the ambulatory 
surgical center (ASC) payment rates (73 FR XXXXX).
    Under the IPPS for FY 2007 and FY 2008, the aggregate CCR for 
chargeable medical supplies and equipment was computed based on line 55 
for Medical Supplies Charged to Patients and lines 66 and 67 for DME 
Rented and DME Sold, respectively. To compute the 15 national CCRs used 
in developing the cost-based weights under the IPPS (explained in more 
detail under section II.H. of the preamble of the proposed rule and 
this final rule), we take the costs and charges for the 15 cost groups 
from Worksheet C, Part I of the Medicare cost report for all hospital 
patients and multiply each of these 15 CCRs by the Medicare charges on 
Worksheet D-4 for those same cost centers to impute the Medicare cost 
for each of the 15 cost groups. Under this proposal, the goal would be 
to split the current CCR for Medical Supplies and Equipment into one 
CCR for medical supplies, and another CCR for devices and DME Rented 
and DME Sold.
    In considering how to instruct hospitals on what to report in the 
cost center for medical supplies and the cost center for devices, we 
looked at the existing criteria for the type of device that qualifies 
for payment as a transitional pass-through device category in the OPPS. 
(There are no such existing criteria for devices under the IPPS.) The 
provisions of the regulations under Sec.  419.66(b) state that for a 
medical device to be eligible for pass-through payment under the OPPS, 
the medical device must meet the following criteria:
    a. If required by the FDA, the device must have received FDA 
approval or clearance (except for a device that has received an FDA 
investigational device exemption (IDE) and has been classified as a 
Category B device by the FDA in accordance with Sec. Sec.  405.203 
through 405.207 and 405.211 through 405.215 of the regulations) or 
another appropriate FDA exemption.
    b. The device is determined to be reasonable and necessary for the 
diagnosis or treatment of an illness or injury or to improve the 
functioning of a malformed body part (as required by section 
1862(a)(1)(A) of the Act).
    c. The device is an integral and subordinate part of the service 
furnished, is used for one patient only, comes in contact with human 
tissues, and is surgically implanted or inserted whether or not it 
remains with the patient when the patient is released from the 
hospital.
    d. The device is not any of the following:
     Equipment, an instrument, apparatus, implement, or item of 
this type for which depreciation and financing expenses are recovered 
as depreciable assets as defined in Chapter 1 of the Medicare Provider 
Reimbursement Manual (CMS Pub. 15-1).
     A material or supply furnished incident to a service (for 
example, a suture, customized surgical kit, or clip, other than a 
radiological site marker).
     Material that may be used to replace human skin (for 
example, a biological or synthetic material).
    These requirements are the OPPS criteria used to define a device 
for pass-through payment purposes and do not include additional 
criteria that are used under the OPPS to determine if a candidate 
device is new and represents a substantial clinical improvement, two 
other requirements for qualifying for pass-through payment.
    For purposes of applying the eligibility criteria, we interpret 
``surgical insertion or implantation'' to include devices that are 
surgically inserted or implanted via a natural or surgically created 
orifice as well as those devices that are inserted or implanted via a 
surgically created incision (70 FR 68630).
    In proposing to modify the cost report to have one cost center for 
medical supplies and one cost center for devices, we proposed that 
hospitals would determine what should be reported in the Medical 
Supplies cost center and what should be reported in the Medical Devices 
cost center using criteria consistent with those listed above that are 
included under Sec.  419.66(b), with some modification. Specifically, 
for purposes of the cost reporting instructions, we proposed that an 
item would be reported in the device cost center if it meets the 
following criteria:
    a. If required by the FDA, the device must have received FDA 
approval or clearance (except for a device that has received an FDA 
investigational device exemption (IDE) and has been classified as a 
Category B device by the FDA in accordance with Sec. Sec.  405.203 
through 405.207 and 405.211 through 405.215 of the regulations) or 
another appropriate FDA exemption.
    b. The device is reasonable and necessary for the diagnosis or 
treatment of an illness or injury or to improve the functioning of a 
malformed body part (as required by section 1862(a)(1)(A) of the Act).
    c. The device is an integral and subordinate part of the service 
furnished, is used for one patient only, comes in contact with human 
tissue, is surgically implanted or inserted through a natural or 
surgically created orifice or surgical incision in the body, and 
remains in the patient when the patient is discharged from the 
hospital.
    d. The device is not any of the following:
     Equipment, an instrument, apparatus, implement, or item of 
this type for which depreciation and financing expenses are recovered 
as depreciable assets as defined in Chapter 1 of the Medicare Provider 
Reimbursement Manual (CMS Pub. 15-1).
     A material or supply furnished incident to a service (for 
example, a surgical staple, a suture, customized surgical kit, or clip, 
other than a radiological site marker).
     Material that may be used to replace human skin (for 
example, a biological or synthetic material).
     A medical device that is used during a procedure or 
service and does not remain in the patient when the patient is released 
from the hospital.
    We proposed to select the existing criteria for what type of device 
qualifies

[[Page 48460]]

for payment as a transitional pass-through device under the OPPS as a 
basis for instructing hospitals on what to report in the cost center 
for Medical Supplies Charged to Patients or the cost center for Medical 
Devices Charged to Patients because these criteria are concrete and 
already familiar to the hospital community. However, the key difference 
between the existing criteria for devices that are eligible for pass-
through payment under the OPPS in the regulations at Sec.  419.66(b) 
and our proposed criteria stated above to be used for cost reporting 
purposes is that the device that is implanted remains in the patient 
when the patient is discharged from the hospital. Essentially, we 
proposed to instruct hospitals to report only implantable devices that 
remain in the patient at discharge in the cost center for devices. All 
other devices and nonroutine supplies which are separately chargeable 
would be reported in the medical supplies cost center. We believe that 
defining a device for cost reporting purposes based on criteria that 
specify implantation and adding that the device must remain in the 
patient upon discharge would have the benefit of capturing virtually 
all costly implantable devices (for example, implantable cardioverter 
defibrillators (ICDs), pacemakers, and cochlear implants) for which 
charge compression is a significant concern.
    However, we acknowledge that a definition of device based on 
whether an item is implantable and remains in the patient could, in 
some cases, include items that are relatively inexpensive (for example, 
urinary catheters, fiducial markers, vascular catheters, and drainage 
tubes), and which many would consider to be supplies. Thus, some modest 
amount of charge compression could still be present in the cost center 
for devices if the hospital does not have a uniform markup policy. In 
addition, requiring as a cost reporting criterion that the device is to 
remain in the patient at discharge could exclude certain technologies 
that are moderately expensive (for example, cryoablation probes, 
angioplasty catheters, and cardiac echocardiography catheters, which do 
not remain in the patient upon discharge). Therefore, some charge 
compression could continue for these technologies. We believe this 
limited presence of charge compression is acceptable, given that the 
proposed definition of device for cost reporting purposes would isolate 
virtually all of the expensive items, allowing them to be separately 
reported from most inexpensive supplies.
    The criteria we proposed above for instructing hospitals as to what 
to report in the device cost center specify that a device is not a 
material or supply furnished incident to a service (for example, a 
surgical staple, a suture, customized surgical kit, or clip, other than 
a radiological site marker) (emphasis added). We understand that 
hospitals may sometimes receive surgical kits from device manufacturers 
that consist of a high-cost primary implantable device, external 
supplies required for operation of the device, and other disposable 
surgical supplies required for successful device implantation. Often 
the device and the attending supplies are included on a single invoice 
from the manufacturer, making it difficult for the hospital to 
determine the cost of each item in the kit. In addition, manufacturers 
sometimes include with the primary device other free or ``bonus'' items 
or supplies that are not an integral and necessary part of the device 
(that is, not actually required for the safe surgical implantation and 
subsequent operation of that device). (We note that arrangements 
involving free or bonus items or supplies may implicate the Federal 
anti-kickback statute, depending on the circumstances.) One option is 
for the hospital to split the total combined charge on the invoice in a 
manner that the hospital believes best identifies the cost of the 
device alone. However, because it may be difficult for hospitals to 
determine the respective costs of the actual device and the attending 
supplies (whether they are required for the safe surgical implantation 
and subsequent operation of that device or not), we solicited comments 
with respect to how supplies, disposable or otherwise, that are part of 
surgical kits should be reported. We are distinguishing between such 
supplies that are an integral and necessary part of the primary device 
(that is, required for the safe surgical implantation and subsequent 
operation of that device) from other supplies that are not directly 
related to the implantation of that device, but may be included by the 
device manufacturer with or without charge as ``perks'' along with the 
kit. If it is difficult to break out the costs and charges of these 
lower cost items that are an integral and necessary part of the primary 
device, we would consider allowing hospitals to report the costs and 
charges of these lower cost supplies along with the costs and charges 
of the more expensive primary device in the cost report cost center for 
implantable devices. However, to the extent that device manufacturers 
could be encouraged to refine their invoicing practices to break out 
the charges and costs for the lower cost supplies and the higher cost 
primary device separately, so that hospitals need not ``guesstimate'' 
the cost of the device, this would facilitate more accurate cost 
reporting and, therefore, the calculation of more accurate cost-based 
weights. Under either scenario, even for an aggregated invoice that 
contains an expensive device, we believe that RTI's findings of 
significant differences in supply CCRs for hospitals with a greater 
percentage of charges in device revenue codes demonstrate that breaking 
the Medical Supplies Charged to Patients cost center into two cost 
centers and using appropriate revenue codes for devices, and 
crosswalking those costs to the proposed new ``Implantable Devices 
Charged to Patients'' cost center, will result in an increase in 
estimated device costs.
    In summary, we proposed to modify the cost report to have one cost 
center for ``Medical Supplies Charged to Patients'' and one cost center 
for ``Implantable Devices Charged to Patients.'' We proposed to 
instruct hospitals to report only devices that meet the four criteria 
listed above (specifically including that the device is implantable and 
remains in the patient at discharge) in the proposed new cost center 
for Implantable Devices Charged to Patients. All other devices and 
nonchargeable supplies would be reported in the Medical Supplies cost 
center. This would allow for two distinct CCRs, one for medical 
supplies and one for implantable devices and DME rented and DME sold.
    Comment: Many commenters supported the proposed cost reporting 
refinements to address charge compression in the medical supplies and 
devices CCR. However, most commenters stated that they preferred a more 
``comprehensive'' approach to reforming the cost report, expressing 
concern that CMS is taking a ``piecemeal'' approach which does not 
address the underlying problem of using an ``antiquated'' cost 
reporting instrument to collect cost data that neither suits the needs 
of CMS in calculating the relative weights, nor does it fit with the 
current accounting practices of hospitals. One commenter stated 
generally that the cost report and MedPAR data sources were never 
intended to be integrated, which affects the accuracy of the DRG 
recalibration. The commenter wanted CMS to improve the accuracy of the 
cost report by incorporating a new schedule to ``continue the reporting 
of revenue by UB revenue code by cost report line'' and to calculate a 
weighted CCR by UB

[[Page 48461]]

revenue code. The commenter believed this is a ``major area of reform'' 
to the cost report that would ``greatly enhance the accuracy of costing 
data'' not only for inpatient and outpatient PPS hospitals, but also 
for CAHs and children's and cancer hospitals. Nevertheless, these 
commenters supported CMS' proposal to split the ``Medical Supplies 
Charged to Patients'' cost center into one cost center for ``Medical 
Supplies Charged to Patients,'' and one for ``Implantable Devices 
Charged to Patients'' as a short-term approach, believing that this 
measure may help address charge compression in the relative weights of 
MS-DRGs that include medical supplies and devices. Another commenter 
encouraged CMS to complete a thorough review of charge compression and 
then separately propose rules that would provide hospitals with 
adequate notice to make the necessary changes, with implementation of 
those changes occurring no earlier than FY 2010. One commenter 
qualified its support for CMS' proposal on the contingency that CMS 
commits to working with the hospital industry to address the larger 
issues surrounding the cost reports as a data collection tool. Another 
commenter added that it did not oppose CMS' proposal, but stated that 
its ``comments should not be viewed as an endorsement to adding 
additional cost centers in the future'' and that CMS should ``proceed 
with extreme caution with any additional incremental changes.'' Other 
commenters were disappointed in what they characterized as ``CMS' 
failure to work with the hospital field from the outset on such an 
important endeavor.'' Another commenter suggested that CMS may want to 
use its database to run further analyses on charge compression because 
the majority of hospitals submitting clinical and financial data to the 
commenter have cost accounting systems. The commenters generally urged 
CMS to provide adequate notice to hospitals before making any changes 
to the cost report because hospitals will need to make significant 
revisions to their accounting and billing systems before the start of 
their fiscal years.
    One commenter supported CMS' proposal for using the existing 
requirements for determining which devices qualify for pass-through 
payment under the OPPS, and whether a device is implantable and remains 
in the patient upon discharge, as the criteria for determining what 
types of implantable devices would be reported in the proposed new cost 
center. The commenter believed that the proposed criteria are objective 
and most accurately describe the type of medical devices that are most 
impacted by charge compression. However, a large number of commenters 
opposed CMS' proposed criteria for distinguishing between low-cost 
supplies and high-cost devices for reporting in the proposed new cost 
report cost centers. Rather than using CMS' proposed criteria which are 
based on the existing requirements for determining which devices 
qualify for pass-through payment under the OPPS, and whether a device 
is implantable and remains in the patient upon discharge, in addition 
to use of existing revenue codes, most commenters preferred that the 
cost report cost centers be defined exclusively based on the use of 
existing revenue codes and associated definitions. The commenters 
pointed out that using existing revenue codes and definitions as they 
have been currently established by the National Uniform Billing 
Committee (NUBC) makes sense, as these definitions have been in place 
for some time and are used across all payers, not just by CMS. The 
commenters believed that introduction of exceptions by CMS to what 
hospitals may include in certain revenue codes can be disruptive to 
hospitals' billing and accounting systems. Furthermore, they added, 
this method is consistent with the analytic approach and revenue 
centers used by RTI to develop the regression-based CCRs for medical 
devices. Accordingly, the commenters recommended that the proposed new 
cost centers on the cost report for ``Medical Supplies Charged to 
Patients'' and ``Implantable Devices Charged to Patients'' be defined 
exclusively on the following revenue code criteria: Specifically, 
revenue codes 0275 (Pacemaker), 0276 (Intraocular lens), 0278 (other 
implants), and 0624 (FDA investigational devices) would be used in the 
proposed new cost center for high-cost devices. The commenters noted 
that revenue code 0624 generally consists of higher cost implants, but 
indicated that this revenue code could be refined at a later point by 
the NUBC to provide a revenue code that could be reported when the FDA 
investigational device does not include implants. According to the 
commenters, all other revenue codes in the device/supply category (in 
027x and 062x) would be reported in the lower cost medical supplies 
cost center on the cost report. The commenters acknowledged that 
distinguishing between low-cost supplies and high-cost devices through 
exclusive use of the existing revenue codes will not thoroughly 
separate low and high-cost items, and therefore, some amount of charge 
compression will remain in the proposed new ``Implantable Devices 
Charged to Patients CCR.'' Nevertheless, the commenters believed that 
use of existing revenue codes and definitions represents the most 
administratively simple and least burdensome approach to addressing 
charge compression; the incremental improvements of a more refined 
approach do not warrant more wholesale changes. One commenter, however, 
did recommend that CMS request new revenue codes from the NUBC as 
needed to identify all devices that would be reported in the new 
implantable devices cost center under the revised cost report 
definition of implantable device so as to minimize exclusion of 
innovative technologies and mitigate the impact of charge compression.
    Response: In the FY 2009 IPPS proposed rule (73 FR 23546), we 
stated that we have begun a comprehensive review of the Medicare 
hospital cost report, and our proposal to split the current cost center 
for Medical Supplies Charged to Patients into one line for ``Medical 
Supplies Charged to Patients'' and another line for ``Implantable 
Devices Charged to Patients'' is part of that initiative to update and 
revise the cost report. Under the effort to update the cost report and 
eliminate outdated requirements in conjunction with the PRA, changes to 
the cost report form and cost report instructions would be made 
available to the public for comment. Thus, the commenters would have an 
opportunity to suggest the more comprehensive reforms that they are 
advocating, and would similarly be able to make suggestions for 
ensuring that these reforms are made in a manner that is not disruptive 
to hospitals' billing and accounting systems, and are within the 
guidelines of GAAP, Medicare principles of reimbursement, and sound 
accounting practices. However, we note that while the commenters on the 
FY 2009 IPPS proposed rule appear to be advocating a more comprehensive 
and thorough approach to reforming the cost report, the public comments 
we received on the FY 2008 proposed rule urged us to proceed cautiously 
with changing the Medicare cost report to avoid unintended consequences 
for hospitals that are paid on a cost basis (such as CAHs, cancer 
hospitals, and, to some extent, SCHs and MDHs), and to consider the 
administrative burden associated with adapting to new cost report forms 
and instructions (73 FR 23544 and 72 FR 47193). We explained that 
because of these comments on the FY 2008 IPPS proposed rule, we

[[Page 48462]]

decided to start out slowly with modifying the cost report to improve 
the data used in calculating the cost-based weights. Specifically, we 
chose to focus initially on the cost center for Medical Supplies 
Charged to Patients, because RTI found that the largest impact on the 
DRG relative weights could result from correcting charge compression 
for devices and implants. We are willing to work with and consider 
comments from finance and cost report experts from the hospital 
community as we work to improve and modify the hospital cost report. As 
noted above, in the CY 2009 OPPS/ASC proposed rule (73 FR XXXXX), we 
also are proposing to break the single standard pharmacy cost center 
5600 into two standard cost centers, Drugs with High Overhead Cost 
Charged to Patients and Drugs with Low Overhead Cost Charged to 
Patients, and we are specifically inviting public comment on the 
appropriateness of creating standard cost centers for Computed 
Tomography (CT) Scanning, Magnetic Resonance Imaging (MRI), and Cardiac 
Catheterization, rather than continuing the established nonstandard 
cost centers for these services. Proposed changes to the cost report 
will impact both IPPS and OPPS, and public comments should address both 
systems.
    We have considered the comments in favor of finalizing our proposal 
to split the current cost center for Medical Supplies Charged to 
Patients into one line for ``Medical Supplies Charged to Patients'' and 
another line for ``Implantable Devices Charged to Patients,'' and the 
comments recommending that these cost centers be defined based solely 
on existing revenue codes. Although we believed that adopting the 
existing criteria for determining whether a device is eligible for 
pass-through payment under the OPPS to identify devices for the 
``Implantable Devices Charged to Patients'' cost center was a 
reasonable proposal because the criteria are concrete and already 
familiar to the hospital community, we understand that hospitals are 
already familiar with the definitions of the existing revenue codes as 
well because they have been in place for some time. In addition, 
identifying devices based only on the existing revenue code definitions 
is more straightforward than also incorporating the criteria for 
devices that qualify for OPPS pass-through payment. Therefore, we agree 
with the commenters that use of the existing revenue code definitions 
is the simplest and least burdensome approach for hospitals to 
implement that would concretely, although not completely, address 
charge compression.
    Accordingly, in this final rule, we are finalizing our proposed 
policy to split the current cost center for Medical Supplies Charged to 
Patients into one line for ``Medical Supplies Charged to Patients'' and 
another line for ``Implantable Devices Charged to Patients.'' However, 
when determining what should be reported in these respective cost 
centers, rather than finalize our proposed policy to use existing 
criteria for determining which devices qualify for OPPS pass-through 
payment, with the modification that the implantable device must remain 
in the patient at discharge, we are instead adopting the commenters' 
recommendation that hospitals should use revenue codes established by 
the NUBC to determine what should be reported in the ``Medical Supplies 
Charged to Patients'' and the ``Implantable Devices Charged to 
Patients'' cost centers. We note that use of the existing revenue codes 
will still generally result in implantable devices being reported in 
the ``Implantable Devices Charged to Patients'' cost center because 
revenue codes 0275 (Pacemaker), 0276 (Intraocular lens), 0278 (other 
implants), and 0624 (FDA investigational devices) for the most part, 
generally would be used for reporting higher cost implants. However, 
use of the existing NUBC definitions would not require that the 
implantable device remain in the patient when the patient is 
discharged; therefore, in this respect, the policy we are finalizing 
differs from the one we proposed.
    In the FY 2009 IPPS proposed rule (73 FR 23547), in an effort to 
improve the match between the costs and charges included on the cost 
report and the charges in the MedPAR file, we recommended that certain 
revenue codes be used for items reported in the new ``Medical Supplies 
Charged to Patients'' cost center and the new ``Implantable Devices 
Charged to Patients'' cost center, respectively. These recommendations 
were similar to the commenters' suggested method for use of existing 
revenue codes in determining whether an item should be reported in the 
proposed new supply or device cost center in the cost report. In this 
final rule, we are finalizing our policy to create a cost center for 
implantable devices. Under this policy, charges reported with revenue 
codes 0275 (Pacemaker), 0276 (Intraocular Lens), 0278 (Other Implants), 
and 0624 (Investigational Device (IDE)) would correspond to implantable 
devices reported in the new ``Implantable Devices Charged to Patients'' 
cost center. Items for which a hospital may have previously used 
revenue code 0270 (General Classification), but actually are an 
implantable device, should instead be billed with an implantable device 
revenue code. Conversely, items and supplies that are not implantable 
would be reported in the new ``Medical Supplies Charged to Patients'' 
cost center on the cost report. We would expect these items and 
supplies to be billed with revenue codes 0270 (general 
classifications), 0271 (nonsterile supply), 0272 (sterile supply), and 
0273 (take-home supplies). In the proposed rule, we indicated that 
revenue code 0274 (Prosthetic/Orthotic Devices) and revenue code 0277 
(Oxygen--Take Home) might be associated with the cost centers for 
Durable Medical Equipment (DME)-Rented and DME-Sold on the cost report. 
We received comments that indicated that all other (not implantable) 
supply revenue codes, including 0274, 0277, 0621, and 0622, should be 
associated with the new ``Medical Supplies Charged to Patients'' cost 
center. For the purpose of this final policy, we are most concerned 
with identifying the revenue code costs and charges that define the new 
``Implantable Devices Charged to Patients'' cost center. With the 
exception of the present proposal, CMS typically does not specify a 
revenue code-to-cost center crosswalk that hospitals must adopt to 
prepare their cost report. Beyond the supply revenue codes we 
identified above for ``Medical Supplies Charged to Patients,'' we 
assume hospitals will include other appropriate supply revenue codes in 
this new cost center, which may or may not include 0621, 0622, 0274, 
and 0277.
    Hospitals must continue to report ICD-9-CM codes and charges with 
an appropriate UB revenue code consistent with NUBC requirements. When 
reporting the appropriate revenue codes for services, hospitals should 
choose the most precise revenue code, or subcode if appropriate. As 
NUBC guidelines dictate: ``It is recommended that providers use the 
more detailed subcategory when applicable/available rather than revenue 
codes that end in ``0'' (General) or ``9'' (Other).'' Furthermore, 
hospitals are required to follow the Medicare cost apportionment 
regulations at 42 CFR 413.53(a)(1), which convey that, under the 
departmental method of apportionment, the cost of each ancillary 
department is to be apportioned separately rather than being combined 
with another department. In order to comply with the requirements of 
this regulation,

[[Page 48463]]

hospitals must follow the Medicare payment policies in section 2302.8 
of the PRM-I and the PRM-II in order to ensure that their ancillary 
costs and charges are reported in the appropriate cost centers on the 
cost report. We rely on hospitals to fully comply with the revenue code 
reporting instructions and Medicare cost apportionment policies.
    In general, proper reporting would dictate that if an item is 
reported as an implantable device on the cost report, it is an item for 
which the NUBC would require use of revenue code 0275 (Pacemaker), 0276 
(Intraocular Lens), 0278 (Other Implants), or 0624 (Investigational 
Device). Likewise, items reported as Medical Supplies should receive an 
appropriate revenue code indicative of supplies. We did indicate in the 
proposed rule that we might consider requesting additional revenue 
codes from the NUBC, but we note that because the majority of 
commenters have requested that they be allowed to use existing revenue 
codes to distinguish between the low cost supplies and high cost 
devices, we may wait and see what the results of that approach are 
before we request the creation of additional codes from the NUBC.
    We would also like to caution that, as the commenters themselves 
acknowledged, the use of existing revenue code definitions to crosswalk 
devices and supplies to the device cost center and supplies cost 
center, respectively, will not separate high and low cost items as 
thoroughly as would the use of the proposed criteria for implantable 
devices that remain in the patient at discharge. Therefore, some degree 
of charge compression will remain in the medical devices cost center. 
Furthermore, this methodology, and the accuracy of the relative 
weights, is heavily dependent upon hospitals' reporting practices. 
While CMS is responsible for issuing cost reporting instructions that 
are clear, hospitals are responsible for ensuring that their cost 
reporting and billing practices are consistent and conform to Medicare 
policy.
    Comment: A few commenters, who supported the proposal that only 
devices that are implantable and that remain in the patient at 
discharge should be reported in the new ``Implantable Devices Charged 
to Patients'' cost center, also expressed concern that there are 
instances where these criteria are too narrow. One commenter mentioned 
various types of implantable devices that do not remain in the patient 
at discharge, including atherectomy and thrombectomy catheters, laser 
sheaths for removal of pacemaker and defibrillator leads, and 
thrombolysis catheters. Two commenters mentioned one product, an 
external fixation device that is used to treat trauma of the upper and 
lower extremities and to assist in the treatment of severe fractures, 
and noted that this device is commonly removed from patients prior to 
discharge. The commenters believed that if this device is not assigned 
to a revenue code for an ``implantable device,'' the true implant costs 
for many of these discharges may not be recognized. One of the 
commenters asked that CMS consider exempting external fixation devices 
from the proposed ``implantable device'' standard, or provide another 
appropriate mechanism to ensure accurate cost reporting for this 
device. The other commenter also supported the creation of the devices 
cost center based on the use of existing revenue codes and associated 
definitions established by the NUBC. Another commenter stated that CMS' 
proposed definition of device as one that must remain in the patient at 
discharge could result in inconsistent billing and reporting because 
whether a device remains in the patient could depend on the particular 
patient's length of stay. The commenter used the example of an 
implantable port for medication delivery, where one patient is well 
enough to be discharged from the hospital but needs the port at home 
for extended IV therapy. Another patient with the same implantable 
medication port, however, may have additional complications and need to 
stay in the hospital longer, but may ultimately improve to the extent 
where he or she is discharged without the port. The commenter observed 
that, as a result, there could be a device that would qualify as an 
implant for some patients but not for others.
    Response: In the FY 2009 IPPS proposed rule (73 FR 23545), we 
acknowledged that a definition of a device based on whether it is 
implantable and remains in the patient at discharge could, in some 
cases, include some relatively inexpensive items, and could also 
exclude some expensive items. Therefore, some charge compression could 
continue for these technologies. We also acknowledge the point of one 
of the commenters that depending upon a patient's severity of the 
illness and length of stay, a device may or may not qualify as an 
implantable device based on our proposed criteria. However, we note 
that, in response to the many comments we received as summarized 
previously, we have decided not to finalize our proposed definition of 
a device, which was based on the existing OPPS criteria for identifying 
devices that qualify for pass-through payment, with the additional 
requirement that the device must remain in the patient at discharge. 
Instead, as suggested by the vast majority of commenters, we are 
finalizing a policy that would distinguish between supplies and devices 
based on the existing revenue codes and definitions. Therefore, while 
the device must still be implantable to map to the new implantable 
device cost center, our final policy no longer includes the requirement 
that the device remain in the patient at discharge. We expect hospitals 
to follow the revenue code definitions in assigning the costs and 
charges of devices.
    Comment: Commenters asked CMS to provide a contingency plan if the 
medical device CCR is substantially lower than the regression-based 
device CCR estimate or the current supplies CCR, once the data become 
available.
    Response: We agree that we will need to evaluate the medical supply 
and device CCRs once the data become available for FY 2012 ratesetting. 
At that point and forward, we will continue to analyze the cost report 
data. However, we point out that we do not believe it is appropriate to 
``pick and choose'' between CCRs; rather, the determining factor should 
be payment accuracy, regardless of whether one method increases or 
decreases payment for devices.
    Comment: One commenter supported CMS' proposal to split the medical 
supplies cost center. However, the commenter stated that CMS' proposal 
could result in the relative weight for MS-DRG 001 (Heart Transplant or 
Implant of Heart Assist with MCCs) being reduced because the weight for 
MS-DRG 001 is not ``device-driven'' due to the presence of a large 
number of hospitalizations with relatively low device costs (heart 
transplant and combined heart-lung transplant), which could weaken the 
effect of the proposed cost center changes with respect to the relative 
weight for MS-DRG 001. To remedy this, the commenter requested, in 
part, that CMS create a cost center on the cost report that would 
enable CMS to capture more accurate data on LVADs. In addition, the 
commenter noted that CMS should remain open to cost centers that 
capture devices in the $500-$2,500 range (Class I implantable devices), 
and separate cost centers for devices in the $2,500-$100,000 range 
(Class II implantable devices). The commenter stated that it would 
continue to monitor CMS' policy changes in the coming years and will 
provide input to the CMS regarding the

[[Page 48464]]

``impact to hospitals that provide lifesaving LVAD therapy to Medicare 
beneficiaries.''
    Response: We do not believe it is appropriate at this time to 
create a new cost center, or further refine the device cost center 
based on cost categories, so as to capture data more accurately for 
LVADs. Instead, as an initial step, we believe it would be better to 
finalize the broader proposal of creating one cost center for supplies, 
and a cost center for implantable devices, which would include LVADs. 
We are receptive to the commenter's input to CMS regarding the impact 
to hospitals that provide LVAD therapy as part of our own monitoring 
and analyses of the cost-based relative weights, and if appropriate, we 
may consider further refining the implantable devices cost center in 
the future.
    Comment: A number of commenters focused on the section of the 2007 
RTI report that highlighted the problem of nursing care cost 
compression. The report found that nursing care represents about 41 
percent of hospitals' costs, and these costs are allocated as fixed 
daily room rates, despite substantial evidence that daily nursing care 
hours and costs vary substantially among patients. As a result, the 
current DRG relative weights do not reflect differences in nursing 
care, leading to payment inaccuracy. One commenter noted that this 
creates a ``perverse incentive for hospitals to cut nursing staff as 
reimbursement is not matched to the average amount of nursing time and 
costs within each DRG as are the ancillary services.'' Some commenters 
reiterated their comments submitted on the FY 2008 IPPS proposed rule, 
recommending that CMS study adoption of Nursing Intensity Weights 
(NIWs), which is in use in the New York State Medicaid program. The 
commenters suggested that unbundling nursing care from current routine 
and intensive care daily rates and billing for nursing using the 023X 
revenue code for actual daily nursing time (nursing intensity) expended 
for individual patients provides a reasonable solution to the problem 
of nursing cost compression. Specifically, the commenters urged CMS to 
reconsider its proposal for FY 2009 and explore ways to:
    (a) Implement the recommendations of the RTI report to unbundle 
nursing care from current accommodation (room and board) revenue codes 
using the 023X Nursing Incremental Charge UB04 revenue code.
    (b) Modify the Medicare cost report to separate out nursing costs 
and hours of care to allow construction of a nursing cost to charge 
ratio within the existing routine and intensive care cost centers.
    (c) Develop a method to evaluate nursing performance by case mix 
within the new severity adjusted DRGs using the unbundled 023X nursing 
hours and costs data.
    (d) Incorporate the inpatient nursing performance measure into the 
emerging value-based purchasing effort in the coming fiscal years to 
identify low performing hospitals relative to the mean nursing 
intensity within MS-DRG and high cost hospitals.
    The commenters believed that accomplishing these four 
recommendations will ``improve overall payment accuracy, lead to a 
better understanding of how nursing care hours and costs are allocated 
to individual patients and by DRG within and across hospitals, identify 
hospital nursing performance, and inform policy makers on the state of 
inpatient nursing care in the United States.''
    Response: The commenters raised similar concerns in response to the 
FY 2008 IPPS proposed rule. In response to those comments, we 
acknowledged RTI's finding in its January 2007 report that ``because 
intensity of nursing is likely correlated with DRG assignment, this 
could be a significant source of bias in DRG weights,'' and agreed that 
this issue should be studied further. We appreciate that the commenters 
have also given more thought to methods of addressing nursing cost 
compression, but we note that the initiation and eventual success of 
much of these efforts lie within the hospital community. In its July 
2008 report, RTI states that, ``the best long-term solution would be 
for the industry to agree to expand charge coding conventions for 
inpatient nursing, which would foster increased use of patient-specific 
nursing incremental charge codes in addition to baseline unit-specific 
per-diem charges. Additional detail in revenue codes would permit 
inpatient charges to be converted by CCRs in the same way as charges 
for ancillary service use are converted, to more accurately aggregate 
costs at the level of the system payment unit.'' (page 118) Therefore, 
whether the preferred method would be to separate charges for nursing 
care from the accommodation revenue codes using the existing 023X 
(Incremental Nursing Care) revenue codes, or some other approach, we 
believe the hospital community must take the initiative to decide upon 
a uniform method of reporting nursing charges in such a manner that 
reflects the varying nursing intensity in caring for individual 
patients.
    The commenters requested that the cost report be modified to 
separate nursing costs and hours of care to allow for the calculation 
of CCRs for routine care and intensive care, and we believe this could 
possibly be a long-term goal. We note that RTI observes that given the 
inconsistent use of patient-level nursing acuity data systems, ``it is 
difficult to imagine an administratively feasible way to incorporate 
nursing acuity measures into standard Medicare reporting as a long-term 
solution for reducing nursing cost compression'' (page 118). However, 
we encourage the nursing community, the hospital industry, and others 
to consider researching ideas for how nursing intensity can be 
recognized in the cost weights.
    Comment: Several commenters responded to our solicitation for 
comments on how to report supplies that are part of surgical kits. The 
commenters generally did not support our proposal to require hospitals 
to separate the costs of supplies from devices within surgical kits. 
Some commenters recommended using the existing revenue codes so as not 
to increase the documentation burdens for hospitals. That is, the costs 
and charges of the kit should be reported consistent with the use of 
the revenue code, such that, for example, if the kit is billed with 
revenue code 0278 (Other Implants), it would be reported in the new 
``Implantable Devices Charged to Patients'' cost center. These 
commenters acknowledged that this approach will not separate all low 
cost items, but will still reduce charge compression.
    Another commenter stated that ``unbundling'' the device from the 
surgical kit would increase administrative costs for hospitals and 
vendors, and that more medical errors would likely result, which 
surgical packs were designed to reduce. Another commenter noted the 
terms CMS used in describing the supplies that are part of surgical 
kits, such as ``integral to'' or ``unrelated to,'' and ``free'' or 
``bonus'' items. The commenter recommended that CMS consider clarifying 
these terms via an issuance such as a transmittal or an MLN Matters 
article rather than the Federal Register because all healthcare 
providers do not read it, and that CMS' clarification provide 
``rationale that is vital to understanding underlying compliance 
concerns associated with supply charge practices.'' This commenter 
further recommended that as a long-term solution, CMS and the NUBC 
develop a revenue code called ``Integrated Supplies'' specifically to 
report supplies in customized kits, packs, and trays. This new revenue 
code

[[Page 48465]]

would capture all of the routine supplies that are part of the package 
in one charge, except for the charge for the implantable device, which 
would be itemized separately on the invoice The commenter noted that 
most hospitals' chargemaster software allows multiple charges to be 
linked together as part of a ``panel master.'' Therefore, the 
Integrated Supplies revenue code could be linked with the various 
revenue codes used for implantable devices (0275, 0276, and 0278), 
without requiring vendors and hospitals to itemize every single supply 
in a kit separately on an invoice or the chargemaster.
    One commenter stressed the value that packaging such items together 
has for hospitals, arguing that the kits reduce labor hours associated 
with the procedure, and that ``hospitals do not purchase these packages 
for what CMS refers to as `bonus' items, but for the efficiencies 
gained though the packaging of the items.'' The commenter did not 
believe such kits should be considered a violation of the anti-kickback 
statute.
    Response: In the FY 2009 IPPS proposed rule (73 FR 23545), we 
discussed how hospitals could accurately report the costs of an 
expensive device and the costs of less expensive supplies needed to 
implant that device on the cost report, given that often the device and 
the supplies are included on a single invoice from the manufacturer, 
making it difficult for the hospital to determine the cost of each item 
in the kit. We suggested that one option is for the hospital to split 
the total combined charge on the invoice in a manner that the hospital 
believes best identifies the cost of the device alone. However, because 
it may be difficult for hospitals to determine the respective costs of 
the actual device and the attending supplies (whether they are required 
for the safe surgical implantation and subsequent operation of that 
device or not), we solicited comments with respect to how supplies, 
disposable or otherwise, that are part of surgical kits should be 
reported. We distinguished between such supplies that are an integral 
and necessary part of the primary device (that is, required for the 
safe surgical implantation and subsequent operation of that device) 
from other supplies that are not directly related to the implantation 
of that device, but may be included by the device manufacturer with or 
without charge as ``perks'' along with the kit. We stated that if it is 
difficult to break out the costs and charges of these lower cost items 
that are an integral and necessary part of the primary device, we would 
consider allowing hospitals to report the costs and charges of these 
lower cost supplies along with the costs and charges of the more 
expensive primary device in the cost report cost center for implantable 
devices. However, we stated that to the extent that device 
manufacturers could be encouraged to refine their invoicing practices 
to break out the charges and costs for the lower cost supplies and the 
higher cost primary device separately, so that hospitals need not 
``guesstimate'' the cost of the device, this would facilitate more 
accurate cost reporting and, therefore, the calculation of more 
accurate cost-based weights.
    We have considered the public comments which essentially 
recommended that hospitals should not attempt to break out the costs of 
the expensive device from the attending supplies, but instead, that 
hospitals report the entire kit based on the single revenue code used 
for the device in the kit. We still believe that device manufacturers 
could make a better effort at refining their invoices to separately 
break out the charges and costs of the high-cost device from the low-
cost supplies because this would likely lead to more accurate cost 
reporting and a further mitigation of charge compression. Certainly, if 
the supplies that are included in the kit are not integral to and 
necessary for the safe, surgical implementation of the device, we 
believe that it would be best for hospitals to report those costs and 
charges separately from the costs and charges for the implantable 
device. Nevertheless, because commenters are generally satisfied with 
an approach for reporting the costs and charges of the entire kit based 
on the revenue code that is used for the device in that kit, we will 
accept the commenters' recommendation and permit hospitals to follow 
this approach in reporting the costs and charges of surgical kits. As 
we noted in the proposed rule, even for an aggregated invoice that 
contains an expensive device, we believe that RTI's findings of 
significant differences in supply CCRs for hospitals with a greater 
percentage of charges in device revenue codes demonstrate that breaking 
the Medical Supplies Charged to Patients cost center into two cost 
centers, using appropriate revenue codes for devices, and mapping those 
costs to the new ``Implantable Devices Charged to Patients'' cost 
center, will result in an increase in estimated device costs that could 
lead to more accurate payment for those costs. However, we do 
appreciate the acknowledgement from the commenter that it is important 
for the industry to understand the rationale for compliance 
requirements and the recommendation of the commenter that a new revenue 
code for Integrated Supplies be created as a long-term solution for 
capturing costs and charges of incidental supplies, and we may consider 
this as part of other changes that may or may not require NUBC 
approval.
    With respect to the commenter that argued that such kits should not 
be considered a violation of the anti-kickback statute, we note that we 
did not state that surgical kits should necessarily be considered a 
violation of the anti-kickback statute. The commenter made the point 
that hospitals do not purchase the kits for the value of the ``bonus 
items,'' but rather because of the increased efficiencies that result 
from packaging all the items necessary for a particular surgical 
procedure together. However, we point out that the IPPS proposed rule 
refers specifically to ``free or `bonus' items that are not an integral 
and necessary part of the device (that is, not actually required for 
the safe surgical implantation and subsequent operation of that 
device)'' (73 FR 23545, emphasis added). Therefore, the parenthetical 
sentence in the proposed rule that follows the reference to ``free'' or 
``bonus'' items refers to those free or bonus items that are not an 
integral and necessary part of the device implantation procedure and 
subsequent operation of that device. Specifically, we stated that 
``arrangements involving free or bonus items or supplies may implicate 
the Federal anti-kickback statute, depending on the circumstances'' (73 
FR 23545, emphasis added). That is, hospitals should be aware that, 
depending on the circumstances, kits that include other items that are 
unrelated to the safe implantation or operation of a device could 
possibly implicate the Federal anti-kickback statute.
    Comment: One commenter advised that many hospitals do not report 
some charges in the Medical/Surgical Supplies revenue codes when they 
consider those items to be part of hospital room and board (that is, 
blood transfusion administration). The commenter stated that hospitals 
seek guidance from CMS to avoid discrepancies in reporting, and 
recommended that CMS define what is included in ``room and board'' to 
further standardize billing practices and promote consistency and 
continuity across all hospitals.
    Response: CMS' longstanding policy with respect to what constitutes 
a routine service (sometimes called ``room and board'') as compared to 
an ancillary

[[Page 48466]]

service is discussed in the regulations at Sec.  413.53(b) and in the 
PRM-I under Section 2202.6 (Routine Services) and Section 2202.8 
(Ancillary Services). If an item is not specifically enumerated as a 
routine item or service in Section 2202.6, or an ancillary item or 
service in Section 2202.8, then the rules in Section 2203 of the PRM-I 
apply. This section requires that the common or established practice of 
providers of the same class in the same State should be followed. If 
there is no common or established classification of an item or service 
as routine or ancillary among providers of the same class in the same 
State, a provider's customary charging practice is recognized so long 
as it is consistently followed for all patients and does not result in 
an inequitable apportionment of cost to the program.
    With respect to blood transfusion/administration, to which the 
commenter refers, this service should not be billed under the Medical/
Surgical Supplies code, regardless of the hospital's accounting system. 
``Blood Transfusion/Administration'' is a service rather than an item, 
and the blood itself is also not treated as a medical supply item. The 
cost report includes a standard cost center for ``Blood Storing, 
Processing, and Transfusion'' (Line 47 of Worksheet A, under the 
``Ancillary Service Cost Centers''), and there is a UB revenue code 
0391 for Blood Administration, in addition to revenue codes in the 038X 
category for various blood products. However, the revenue codes for 
Medical/Surgical Supplies fall within another category, 027x. Because 
blood transfusion and blood products are not specifically mentioned in 
the definition of ``routine services'' in the PRM-1 under Section 
2202.6, or in the definition of ``ancillary services'' in Section 
2202.8, the commenter is asking whether it is appropriate not to bill a 
separate ancillary charge for the transfusions occurring in the routine 
cost centers, but to consider that the charge is encompassed in the 
routine Room and Board Charge under one of the Room and Board UB 
revenue codes.
    In accordance with PRM-I, Section 2202.8, if the provider does not 
impose a separate charge in addition to a routine service charge, the 
service is considered not to be ``ancillary''. As mentioned above, 
under PRM-I, Section 2203, the provider must consider the established 
practice of the same class of providers in the same State as to whether 
to include blood transfusion in the routine service charge (for both 
Medicare and non-Medicare patients). For blood transfused in the 
Operating Room, Emergency Room, or other ancillary cost centers, 
providers should be billing a separate charge (just as for implantable 
devices in case of Implantable Devices Charged to Patients) under UB 
revenue code 0391 (Blood Administration), and the cost and charges 
should be reported on Line 47 of the cost report.
    Comment: A few commenters indicated that, with the changes that CMS 
is proposing to the reporting of costs and charges of medical devices 
on the cost report, the quality of the cost data that CMS will be 
collecting will improve. Accordingly, they stated that, the CCR for the 
new ``Implantable Devices Charges to Patients'' cost center will 
improve to the extent that applying it to the reported charges for 
devices from the cost report will generate an actual device cost and 
that this actual device cost should be an accurate reflection of the 
hospital's device acquisition cost. Therefore, the commenter suggested 
that this cost should be determined and incorporated into the process 
for calculating the relative weights, and that CMS should use the 
actual cost in the relative weight calculation rather than an imputed 
cost estimated by applying a national CCR to claims charge data, in 
instances where the imputed cost is lower than the cost reported by the 
hospital on its cost report.
    Response: While we are optimistic that the addition of a new cost 
report line for implantable devices should certainly allow for the 
collection of more accurate cost data, we do not believe we can use 
this aggregate actual cost amount for setting relative weights. The 
costs and charges for all implantable devices for the hospital across 
all payers are collected and aggregated on the cost report. However, 
the cost of a specific device cannot be determined from this aggregated 
information. We have to estimate the cost of devices for each MS-DRG in 
each claim in order to estimate an average imputed cost for the entire 
MS-DRG, including device costs. Different MS-DRGs will include 
different kinds of devices, each with a different cost. We also do not 
believe it is appropriate to use the actual cost in the relative weight 
calculation rather than the imputed cost in instances where the imputed 
cost is lower than the cost reported by the hospital on its cost 
report, as the commenter suggested.
    We also solicited comments on alternative approaches that could be 
used in conjunction with or in lieu of the four proposed criteria for 
distinguishing between what should be reported in the new cost centers 
for Implantable Devices and Medical Supplies, respectively. Another 
option we considered would distinguish between high-cost and low-cost 
items based on a cost threshold. Under this methodology, we would also 
have one cost center for Medical Supplies and one cost center for 
Devices, but we would instruct hospitals to report items that are not 
movable equipment or a capital expense but are above a certain cost 
threshold in the cost center for Devices. Items costing below that 
threshold would be reported in the cost center for Medical Supplies.
    Establishing a cost threshold for cost reporting purposes would 
directly address the problem of charge compression and would enable 
hospitals to easily determine whether an item should be reported in the 
supply or the device cost center. A cost threshold would also 
potentially allow a broader variety of expensive, single use devices 
that do not remain in the patient at discharge to be reported in the 
device cost center (such as specialized catheters or ablation probes). 
While we have a number of concerns with the cost threshold approach, we 
nevertheless solicited public comments on whether such an approach 
would be worthwhile to pursue. Specifically, we are concerned that 
establishing a single cost threshold for pricing devices could possibly 
be inaccurate across hospitals. Establishing a threshold would require 
identifying a cost at which hospitals would begin applying reduced 
markup policies. Currently, we do not have data from which to derive a 
threshold. We have anecdotal reports that hospitals change their markup 
thresholds between $15,000 and $20,000 in acquisition costs. Recent 
research on this issue indicated that hospitals with average inpatient 
discharges in DRGs with supply charges greater than $15,000, $20,000, 
and $30,000 have higher supply CCRs (Advamed March 2006).
    Furthermore, although a cost threshold directly addresses charge 
compression, it may not eliminate all charge compression from the 
device cost center because a fixed cost threshold may not accurately 
capture differential markup policies for an individual hospital. At the 
same time, we also are concerned that establishing a cost threshold may 
interfere with the pricing practices of device manufacturers in that 
the prices for certain devices or surgical kits could be inflated to 
ensure that the devices met the cost threshold. We believe our proposed 
approach of identifying a group of items that are relatively expensive 
based on the existing criteria for OPPS device pass-through payment 
status, rather than adopting a cost threshold, would not

[[Page 48467]]

influence pricing by the device industry. In addition, if a cost 
threshold were adopted to distinguish between high-cost devices and 
low-cost supplies on the cost report, we would need to periodically 
reassess the threshold for changes in markup policies and price 
inflation over time.
    Comment: Several commenters addressed the use of a cost threshold 
to determine whether an item should be categorized in the medical 
device cost center of the cost report. Some commenters believed that 
establishing a cost threshold to determine whether an item should be 
reported as a device or a supply would be inappropriate because it is 
difficult to ensure that charges are properly reported because there 
would not be any specific revenue codes for these high-cost and low-
cost items. Further, commenters disagreed about what the threshold 
should be. (In the proposed rule, we had discussed that we have 
anecdotal evidence that inpatient discharges in DRGs with supply 
charges greater than $15,000, $20,000 and $30,000 have higher supply 
CCRs.) However, the commenters stated that if CMS used a cost 
threshold, it should be set lower at a range of $1,000 to $2,000. 
Another commenter recommended that CMS set a cost threshold at $4,000, 
so its nonimplantable device could qualify as a device for cost 
reporting purposes.
    Response: In the proposed rule, we proposed to instruct hospitals 
to report only devices that met our criteria (including that a device 
is implantable and remains in the patient upon discharge) in the new 
cost center for ``Implantable Devices Charged to Patients'' and to 
report all other devices and supplies in the new ``Medical Supplies 
Charged to Patients'' cost center. However, we also solicited comments 
on alternative approaches that could be used in conjunction with or in 
lieu of our proposed criteria to distinguish between the new cost 
center for Implantable Devices and the new cost center for Medical 
Supplies. One alternative could have been that hospitals report items 
above a certain cost threshold in the Medical Devices cost center while 
items costing below the threshold would be reported in the Medical 
Supplies cost center. The few commenters on this proposal were 
generally opposed to establishing a cost threshold to differentiate 
between medical devices and medical supplies. As discussed in our 
proposed rule (73 FR 23546), we continue to be concerned that a cost 
threshold may affect pricing practices of device manufacturers where 
prices of certain devices could be inflated to ensure the item met the 
threshold to be classified as a device. Further, we believe it would be 
difficult to establish a cost threshold because we currently have no 
empirical data from which to establish one, and the commenters 
disagreed with the anecdotal evidence we presented that a potential 
cost threshold for devices could be between $15,000 and $20,000. 
Therefore, the policy that we are finalizing in this final rule does 
not include a cost threshold to determine whether items should be 
reported as a medical device or a medical supply.
    Another option for distinguishing between high-cost and low-cost 
items for purposes of the cost report would be to divide the Medical 
Supplies Charged to Patients cost center based on markup policies by 
placing items with lower than average markups in a separate cost 
center. This approach would center on documentation requirements for 
differential charging practices that would lead hospitals to 
distinguish between the reporting of supplies and devices on different 
cost report lines. That is, because charge compression results from the 
different markup policies that hospitals apply to the supplies and 
devices they use based on the estimated costs of those supplies and 
devices, isolating supplies and devices with different markup policies 
mitigates aggregation in markup policies that cause charge compression 
and is specific to a hospital's internal accounting and pricing 
practices. If requested by the fiscal intermediaries/MACs at audit, 
hospitals could be required to submit documentation of their markup 
policies to justify the way they have reported relatively inexpensive 
supplies on one line and more expensive devices on the other line. We 
believe that it should not be too difficult for hospitals to document 
their markup practices because, as was pointed out by many commenters 
since the implementation of cost-based weights, the source of charge 
compression is varying markup practices. Greater knowledge of the 
specifics of hospital markup practices may allow ultimately for 
development of standard cost reporting instructions that instruct 
hospitals to report an item as a device or a supply based on the type 
of markup applied to that item. This option related to markup 
practices, the proposal to define devices based on four specific 
criteria, and the third alternative that would establish a cost 
threshold for purposes of distinguishing between high-cost and low-cost 
items could be utilized separately or in some combination for purposes 
of cost report modification. Again, in the proposed rule, we solicited 
comments on these alternative approaches. We also expressed interest in 
other recommendations for appropriate cost reporting improvements that 
address charge compression.
    Comment: One commenter supported the use of the markup threshold to 
separate medical supplies from medical devices because, according to 
the commenter, it would be the most accurate way to mitigate charge 
compression as the source of charge compression is hospitals' varying 
markup practices. However, the commenter noted that establishing a 
markup threshold would require additional documentation from hospitals 
that could be burdensome. Other commenters believed that a markup 
threshold would likely separate medical devices that were very 
expensive or very inexpensive, but would not address medical devices 
that are moderately priced. The commenters who opposed a markup 
threshold noted that because there is great variability in markup 
practices among hospitals, it would be difficult to apply a national 
markup threshold. The commenters also noted that urban hospitals 
compared to rural hospitals would have very different charging 
practices.
    Response: In the FY 2009 IPPS proposed rule, we listed several 
reasons why adopting a policy where high and low cost items would be 
divided based on markup policy could be appropriate (73 FR 23546). We 
also stated that this option would focus on documentation requirements, 
although we did not believe these documentation requirements would be 
too difficult. However, the commenters believed that this approach is 
too burdensome, and that it would be difficult to apply a national 
markup threshold given the varying markup practices among hospitals. 
Therefore, because most commenters approved of a revenue code-based 
approach to distinguishing between high-cost and low-cost items, we are 
not adopting a policy based on markup practices at this time.
5. Timeline for Revising the Medicare Cost Report
    As mentioned in the FY 2008 IPPS final rule with comment period (72 
FR 47198), we have begun a comprehensive review of the Medicare 
hospital cost report, and the finalized policy to split the current 
cost center for Medical Supplies Charged to Patients into one line for 
``Medical Supplies Charged to Patients'' and another line for 
``Implantable Devices Charged to Patients,'' as part of our initiative 
to update and revise the hospital cost

[[Page 48468]]

report. Under an effort initiated by CMS to update the Medicare 
hospital cost report to eliminate outdated requirements in conjunction 
with the PRA, we plan to propose the actual changes to the cost 
reporting form, the attending cost reporting software, and the cost 
report instructions in Chapter 36 of the Medicare PRM, Part II. We 
expect the proposed revision to the Medicare hospital cost report to be 
issued sometime after publication of this final rule. Because we are 
finalizing our proposal to create one cost center for ``Medical 
Supplies Charged to Patients'' and one cost center for ``Implantable 
Devices Charged to Patients'' in this final rule, the cost report forms 
and instructions should reflect those changes. In the FY 2009 IPPS 
proposed rule (73 FR 23547), we stated that we expect the revised cost 
report would be available for hospitals to use when submitting cost 
reports during FY 2009 (that is, for cost reporting periods beginning 
on or after October 1, 2008). We now believe the revised cost report 
may not be available until cost reporting periods starting after the 
Spring of 2009. Because there is approximately a 3-year lag between the 
availability of cost report data for IPPS and OPPS ratesetting purposes 
in a given fiscal year, we may be able to derive two distinct CCRs, one 
for medical supplies and one for devices, for use in calculating the FY 
2012 or FY 2013 IPPS relative weights and the CY 2012 or CY 2013 OPPS 
relative weights.
    Comment: Commenters generally expressed concern with the timeframe 
in which we proposed to implement the cost report changes. One 
commenter questioned hospitals' ability to quickly change their 
chargemaster to ensure that revenue codes are always reported in MedPAR 
consistently with the cost centers in which they are reported on the 
cost report. The commenter cautioned that initial calculations of the 
relative weights may not be accurate if hospitals do not have 
sufficient time to adapt to the new reporting requirements. Another 
commenter did not believe that the time between issuance of the final 
rule and October 1, 2008, is enough time for hospitals to make the 
changes to their processes and systems necessary to conform to the new 
cost reporting procedures. The commenter pointed out that hospital 
employees may need to be retrained, and new cost reporting technology 
may need to be purchased, all of which is costly to hospitals operating 
on tight margins. The commenter requested that CMS provide no less than 
6 months lead time, but preferably 1 year, before implementing any 
changes to the cost report, asserting that an ``overly-aggressive'' 
timeframe in which to implement changes to the cost report may lead to 
inaccurate data, which runs counter to CMS' goal of improving the 
accuracy of its CCR data.
    Response: We are sympathetic to the commenter's concerns, but we 
note that, thus far, we have not proposed to implement drastic changes 
to the cost report and cost reporting procedures that warrant overhaul 
of hospitals' current accounting systems. As we stated in the FY 2009 
IPPS proposed rule (73 FR 23543), longstanding Medicare policy has been 
that, under the departmental method of apportionment, the cost of each 
ancillary department is to be apportioned separately rather than being 
combined with another ancillary department. Hospitals must include the 
cost and charges of separately ``chargeable medical supplies'' in the 
Medical Supplies Charged to Patients cost center (line 55 of Worksheet 
A), rather than in the Operating Room, Emergency Room, or other 
ancillary cost centers. Routine services, which can include ``minor 
medical and surgical supplies'' (Section 2202.6 of the PRM, Part 1), 
and items for which a separate charge is not customarily made, may be 
directly assigned through the hospital's accounting system to the 
department in which they were used, or they may be included in the 
Central Services and Supply cost center (line 15 of Worksheet A). 
Conversely, the separately chargeable medical supplies should be 
assigned to the Medical Supplies Charged to Patients cost center on 
line 55. Our proposal to split the existing Medical Supplies Charged to 
Patients cost center into two cost centers, one specifically for 
``Implantable Devices Charged to Patients,'' is simply a refinement of 
what should be hospitals' existing cost reporting practices, wherein, 
rather than reporting all separately chargeable supplies and devices in 
one cost center, the devices would be reported in a separate, new cost 
center. We do not view this as a significant shift in cost reporting 
policy. Further, our adoption of the commenters' suggested method of 
separating supplies and devices based on existing revenue codes and 
NUBC definitions, with which all hospitals are already familiar, should 
minimize the disruption to hospitals' accounting and billing systems. 
Lastly, we note that, although participation in the hospital 
associations' educational initiatives has been voluntary, efforts have 
certainly been made by the hospital community over the past year to 
increase awareness and improve the accuracy of hospitals' cost 
reporting practices. Also, with respect to the commenter that 
questioned hospitals' ability to quickly change their chargemaster to 
ensure that revenue codes are always reported in the MedPACR file 
consistently with the cost centers in which they are reported on the 
cost report, as we stated in response to a previous comment, hospitals 
must use the billing codes as directed by the NUBC, regardless of the 
cost center in which the cost is reported on the cost report. Hospitals 
must continue to report ICD-9-CM codes and charges with an appropriate 
UB revenue code, consistent with NUBC requirements. When reporting the 
appropriate revenue code for services, hospitals should choose the most 
precise revenue code, or subcode if appropriate. As NUBC guidelines 
dictate: ``It is recommended that providers use the more detailed 
subcategory when applicable/available rather than revenue codes that 
end in ``0'' (General) or ``9'' (Other).'' Furthermore, with respect to 
the cost report, hospitals are required to follow the Medicare cost 
apportionment regulations at 42 CFR 413.53(a)(1) which convey that, 
under the departmental method of apportionment, the cost of each 
ancillary department is to be apportioned separately rather than 
combined with another department. In order to comply with the 
requirements of this regulation, hospitals must follow the Medicare 
payment policies in Section 2302/8 of the PRM-I and the PRM-II in order 
to ensure that their ancillary costs and charges are reported in the 
appropriate cost centers on the cost report. We rely on hospitals to 
fully comply with the revenue code reporting instructions and Medicare 
cost apportionment policies.
    Therefore, we do not believe that it is necessary to significantly 
delay availability of the revised cost reporting form beyond the date 
that we proposed; that is, for cost reporting periods starting after 
the Spring of 2009. In practice, hospitals need not have modified their 
systems (to the extent necessary) by the Spring of 2009, but rather, by 
the time they are completing and submitting cost reports for cost 
reporting periods beginning after the Spring of 2009. Further, as we 
have stated previously, no change to the actual cost reporting form 
will be undertaken without first going through notice and comment 
procedures in accordance with the PRA.

[[Page 48469]]

6. Revenue Codes Used in the MedPAR File
    An important first step in RTI's study (as explained in its March 
2007 report) was determining how well the cost report charges used to 
compute CCRs matched to the charges in the MedPAR file. This match (or 
lack thereof) directly affects the accuracy of the DRG cost estimates 
because MedPAR charges are multiplied by CCRs to estimate cost. RTI 
found 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 some 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 Charged to Patients cost 
center. While the educational initiative undertaken by the national 
hospital associations is encouraging hospitals to consistently report 
costs and charges for devices and other medical supplies only in the 
Medical Supplies Charged to Patients cost center, equal attention must 
be paid to the way in which charges are grouped by hospitals in the 
MedPAR file. Several commenters on the FY 2008 IPPS proposed rule 
supported RTI's recommendation of including additional fields in the 
MedPAR file to disaggregate certain cost centers. One commenter stated 
that the assignment of revenue codes and charges to revenue centers in 
the MedPAR file should be reviewed and changed to better reflect 
hospital accounting practices as reflected on the cost report (72 FR 
47198).
    In an effort to improve the match between the costs and charges 
included on the cost report and the charges in the MedPAR file, in the 
FY 2009 IPPS proposed rule, we recommended that certain revenue codes 
be used for items reported in the proposed Medical Supplies Charged to 
Patients cost center and the proposed Implantable Devices Charged to 
Patients cost center, respectively. Specifically, under the proposal to 
create a cost center for implantable devices that remain in the patient 
upon discharge, revenue codes 0275 (Pacemaker), 0276 (Intraocular 
Lens), and 0278 (Other Implants) would correspond to implantable 
devices reported in the proposed Implantable Devices Charged to 
Patients cost center. Items for which a hospital may have previously 
used revenue code 0270 (General Classification), but actually meet the 
proposed definition of an implantable device that remains in the 
patient upon discharge should instead be billed with the 0278 revenue 
code. Conversely, relatively inexpensive items and supplies that are 
not implantable and do not remain in the patient at discharge would be 
reported in the proposed Medical Supplies Charged to Patients cost 
center on the cost report, and should be billed with revenue codes 0271 
(nonsterile supply), 0272 (sterile supply), and 0273 (take-home 
supplies), as appropriate. Revenue code 0274 (Prosthetic/Orthotic 
devices) and revenue code 0277 (Oxygen--Take Home) should be associated 
with the costs reported on lines 66 and 67 for DME-Rented and DME-Sold 
on the cost report. Charges associated with supplies used incident to 
radiology or to other diagnostic services (revenue codes 0621 and 0622 
respectively) should match those items used incident to those services 
on the Medical Supplies Charged to Patients cost center of the cost 
report, because, under this proposal, supplies furnished incident to a 
service would be reported in the Medical Supplies Charged to Patients 
cost center. (We refer readers to item b. as listed under the proposed 
definition of a device in section II.E.4. of the preamble of this final 
rule.) A revenue code of 0623 for surgical dressings would similarly be 
associated with the costs and charges of items reported in the proposed 
Medical Supplies Charged to Patients cost center, while a revenue code 
of 0624 for FDA investigational device, if that device does not remain 
in the patient upon discharge, could be associated with items reported 
on the Medical Supplies Charged to Patients cost center as well.
    In general, proper reporting would dictate that if an item is 
reported as an implantable device on the cost report, it is an item for 
which the NUBC would require use of revenue code 0275 (Pacemaker), 0276 
(Intraocular Lens), 0278 (Other Implants), or 0624 (Investigational 
Device). Likewise, items reported as Medical Supplies Charged to 
Patients should receive an appropriate revenue code indicative of 
supplies. We understand that many of these revenue codes have been in 
existence for many years and have been added for purposes unrelated to 
the goal of refining the calculation of cost-based weights. 
Accordingly, in the proposed rule, we acknowledged that additional 
instructions relating to the appropriate use of these revenue codes may 
need to be issued. In addition, CMS or the hospital associations, or 
both, may need to request new revenue codes from the NUBC. In either 
case, we do not believe either action should delay use of the new 
Medical Supplies and Implantable Devices CCRs in setting payment rates. 
However, in light of our proposal to create two separate cost centers 
for Medical Supplies Charged to Patients and Implantable Devices 
Charged to Patients, respectively, we solicited comments on how the 
existing revenue codes or additional revenue codes could best be used 
in conjunction with the revised cost centers on the cost report.
    Comment: Two commenters supported CMS' efforts to better match 
costs and charges and reduce charge compression, but remained concerned 
about ``three key problems'' that result from using two different data 
sources (MedPAR and the cost report) to calculate relative weights:
     First, the method used by CMS to group hospital charges 
for the MedPAR files differs from that used by hospitals to group 
Medicare charges, total charges, and overall costs on the cost report.
     Second, hospitals group their Medicare charges, total 
charges, and overall costs in different departments on their cost 
reports for various reasons.
     Third, hospitals across the country complete their cost 
reports in different ways, as allowed by CMS. In addition, 
interpretations of Medicare allowable costs vary from one fiscal 
intermediary/MAC to another.
    The commenters were concerned that CMS' proposal might require 
hospitals to manually track a patient bill through several departments 
of the hospital to obtain information about implantable devices used, 
an effort that is difficult and inefficient. The commenters also stated 
that the combined use of hospital-specific charges and a national CCR 
result in a distortion of the MS-DRG relative weights and a shifting of 
Medicare payments among hospitals, not based on resource utilization, 
but rather on a mathematical calculation. One commenter recommended 
that CMS continue to collaborate with the workgroup heading up the 
educational initiative to develop a mechanism for determining the cost 
of implantable devices.
    Response: The commenters are correct that hospitals do have some 
flexibility in how they report and group charges, but we note that 
hospitals must separately apportion the costs of each ancillary 
department and not combine them with other ancillary departments 
(Section 2200.3 of the PRM-I). Further, hospitals must include costs 
and charges of separately chargeable medical supplies in the cost 
center for Medical Supplies Charged to Patients (Section 2202.6 of the 
PRM-I), and effective for

[[Page 48470]]

cost reporting periods beginning after the Spring of 2009, hospitals 
must include separately chargeable implantable medical devices in the 
new ``Implantable Devices Charged to Patients'' cost center. Further, 
because we are finalizing the policy that the existing revenue codes 
and definitions are to be used to determine whether an item is reported 
as a supply or an implantable device on the cost report, hospitals must 
ensure that they choose the most appropriate revenue codes in the 027x 
and 062x series to report supplies and implantable devices and 
subsequently matched to the appropriate cost center. As evidenced in 
the preceding comment summary, the vast majority of commenters believe 
that this is the least administratively burdensome approach for 
hospitals, and therefore, we are optimistic that the commenters' 
hospitals also have the capability to adapt to more careful cost 
reporting practices that are aligned with Medicare policy and the 
method used by CMS to group costs and charges in the relative weight 
calculation. 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 
we stated in the FY 2008 IPPS final rule with comment period (72 FR 
47197), ``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' 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'').''
    Comment: One commenter recommended that CMS revise the MedPAR file 
to be consistent with the 23 revenue center groups identified by the 
RTI report. The commenter believed this is a feasible long-term step 
because the MedPAR file is derived from a larger claims data set that 
has more detailed charge information that can be matched to the 23 
revenue centers analyzed by RTI.
    Response: In RTI's 2008 report, RTI recommended, as a medium-term 
goal, that CMS expand the MedPAR file to include separate fields that 
disaggregate several existing charge departments. RTI recommended that 
the new fields should include those used to compute the statistically 
disaggregated CCRs. To expand MedPAR, we would have to get detailed 
charge information from the Standard Analytic File. We agree that more 
detailed charge information on the MedPAR file would allow us to create 
more refined CCRs to mitigate charge compression. As we indicated in 
the FY 2008 final rule with comment period (72 FR 47198), we will 
consider suggestions for modifying the MedPAR in conjunction with other 
competing priorities we have for our information systems.
    Comment: One commenter recommended that CMS update its device-
dependent MS-DRG tables with a crosswalk to the specific Level II HCPCS 
device codes used in the associated surgical procedures. The commenter 
stated that although inpatient claims do not report HCPCS codes, most 
hospital chargemasters list device charges with the associated HCPCS 
codes and UB revenue center. The commenter further stated that when a 
device HCPCS code is entered on an inpatient claim, the HCPCS code is 
repressed but the device UB revenue code is shown on the claim along 
with the corresponding charge. The commenter believed the development 
of a HCPCS code to MS-DRG crosswalk would help providers validate that 
device charges are being uniformly captured on patients' claims, 
regardless of their inpatient or outpatient status. The commenter 
believed this crosswalk could also support development of a claim edit 
for both inpatient and outpatient claims based on the reporting of 
specific UB revenue codes and device HCPCS codes that would result in 
payment of a device-dependent MS-DRG or device-dependent APC.
    Response: As the commenter noted, unlike the OPPS, payments under 
the IPPS are not based on HCPCS codes. The IPPS also differs from the 
OPPS in that under the IPPS, the costs of individual services, even 
those using expensive devices, are components of the costs of a much 
larger group of services provided to a particular patient, and 
therefore, larger payment groups using more claims insure against bias 
in an MS-DRG weight despite possible errors in reporting the charge for 
an expensive device. Further, adoption of such a claim edit policy 
could require burdensome changes in coding practices by some hospitals. 
Therefore, we are not adopting the commenter's recommendation.
    Comment: One commenter urged CMS to undertake an analysis of the FY 
2007 fourth quarter MedPAR claims to determine whether documentation 
and coding-related payment increases are evident, and whether they are 
peculiar to most hospitals or only to a subset of hospitals. The 
commenter asked that if CMS observes that only a subset of hospitals 
are driving the documentation and coding-related increases, CMS hold 
the blend of the CMS DRG and the MS-DRG relative weights at 50/50 for 
FY 2009. Another commenter recommended that, in FY 2009, CMS continue 
to blend the CMS DRG and MS-DRG relative weights at 50/50 because the 
FY 2007 MedPAR claims that are used to calculate the FY 2009 relative 
weights do not reflect the significant changes that were made to the 
IPPS in FY 2008 (that is, the move to MS-DRGs and the revised CC list). 
The commenter believed that delaying full implementation of the MS-DRG 
weights until FY 2010 would allow use of the FY 2008 MedPAR claims 
data, which would reflect a full year of services coded under the new 
MS-DRGs and CC list. The commenters argued that this will, in turn, 
help improve the accuracy and consistency of the cost-based MS-DRG 
relative weights.
    Response: Because of the limited time we had available to address 
the public comments as well as analyze the FY 2007 fourth quarter 
MedPAR data, we were unable to perform an indepth analysis of where 
documentation and coding-related payment increases were most evident. 
However, we did perform some analysis, which did not show any obvious 
trends in subsets of hospitals. Furthermore, use of the FY 2007 MedPAR 
claims to set the FY 2009 MS-DRG relative weights represents the most 
recent and best data available from which to do so. Therefore, because 
we did not propose to delay the full implementation of the MS-DRGs and 
their attending relative weights in FY 2009, we are finalizing the 
transition to 100 percent MS-DRGs in FY 2009.
    Comment: One commenter expressed concern about the effect that a 
new CCR for Medical Devices might have on its Medicaid reimbursement 
because Medicaid does not pay for devices and the CCR for Medical 
Supplies and Equipment would be diluted.
    Response: The cost-based relative weights were developed solely 
using Medicare data. 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. We encourage non-Medicare 
payers to adapt the MS-DRGs and the relative weight methodology to 
better serve their needs.
    Comment: Numerous commenters asked that CMS make changes to the 
cost report or other changes to resolve concerns with charge 
compression in

[[Page 48471]]

hospital OPPS weights for pharmacy services, radiology services, 
radiopharmaceuticals, drugs and biologicals, and other services paid 
under the OPPS.
    Response: These comments are out of the scope of this final rule 
because we proposed only to change the cost report to address charge 
compression for devices under both the IPPS and the OPPS. The CY 2009 
OPPS/ASC proposed rule was published in the Federal Register on July 
18, 2008 (73 FR 41416), and public comments on the effects of charge 
compression on the OPPS weights for items and services other than 
devices should be made in response to that proposed rule. The comment 
period for the OPPS/ASC proposed rule closes at 5 p.m. E.S.T. on 
September 2, 2008.

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

1. General Background
    In its landmark 1999 report ``To Err is Human: Building a Safer 
Health System,'' the Institute of Medicine found that medical errors, 
particularly hospital-acquired conditions (HACs) caused by medical 
errors, are a leading cause of morbidity and mortality in the United 
States. The report noted that the number of Americans who die each year 
as a result of medical errors that occur in hospitals may be as high as 
98,000. The cost burden of HACs is also high. Total national costs of 
these errors due to lost productivity, disability, and health care 
costs were estimated at $17 to $29 billion.\2\ In 2000, the CDC 
estimated that hospital-acquired infections added nearly $5 billion to 
U.S. health care costs every year.\3\ A 2007 study found that, in 2002, 
1.7 million hospital-acquired infections were associated with 99,000 
deaths.\4\ Research has also shown that hospitals are not following 
recommended guidelines to avoid preventable hospital-acquired 
infections. A 2007 Leapfrog Group survey of 1,256 hospitals found that 
87 percent of those hospitals do not follow recommendations to prevent 
many of the most common hospital-acquired infections.\5\ The costs 
associated with hospital-acquired infections are particularly 
burdensome for Medicare, as Medicare covers a greater portion of 
patients with hospital-acquired infections than other payers. One study 
found that the payer mix for patients without infections was 37 percent 
Medicare, 28 percent commercial, 21 percent other, and 14 percent 
Medicaid, while the payer mix for patients with hospital-acquired 
infections was 57 percent Medicare, 17 percent commercial, 15 percent 
other, and 11 percent Medicaid.\6\
---------------------------------------------------------------------------

    \2\ Institute of Medicine: To Err Is Human: Building a Safer 
Health System, November 1999. Available at: http://www.iom.edu/
Object.File/Master/4/117/ToErr-8pager.pdf.
    \3\ Centers for Disease Control and Prevention: Press Release, 
March 2000. Available at: http://www.cdc.gov/od/oc/media/pressrel/
r2k0306b.htm.
    \4\ Klevens et al. Estimating Health Care-Associated Infections 
and Deaths in U.S. Hospitals, 2002. Public Health Reports. March-
April 2007. Volume 122.
    \5\ 2007 Leapfrog Group Hospital Survey. The Leapfrog Group 
2007. Available at: http://www.leapfroggroup.org/media/file/
Leapfrog_hospital_acquired_infections_release.pdf.
    \6\ 1.6 Million Admission Analysis, MedMined, Inc. September 
2006.
---------------------------------------------------------------------------

    As one approach to combating HACs, including infections, in 2005 
Congress authorized CMS to adjust Medicare IPPS hospital payments to 
encourage the prevention of these conditions. The preventable HAC 
provision at section 1886(d)(4)(D) of the Act is part of an array of 
Medicare value-based purchasing (VBP) tools that CMS is using to 
promote increased quality and efficiency of care. Those tools include 
measuring performance, using payment incentives, publicly reporting 
performance results, applying national and local coverage policy 
decisions, enforcing conditions of participation, and providing direct 
support for providers through Quality Improvement Organization (QIO) 
activities. CMS' application of VBP tools through various initiatives, 
such as this HAC provision, is transforming Medicare from a passive 
payer to an active purchaser of higher value health care services. We 
are applying these strategies for inpatient hospital care and across 
the continuum of care for Medicare beneficiaries.
    Additionally, the President's FY 2009 Budget outlines another 
approach for addressing serious preventable adverse events (``never 
events''), including HACs (see section II.F.9. below for a discussion 
regarding which HACs are included in the list of Serious Reportable 
Adverse Events). The President's Budget proposal would: (1) Prohibit 
hospitals from billing the Medicare program for ``never events'' and 
prohibit Medicare payment for these events and (2) require hospitals to 
report any occurrence of these events or receive a reduced annual 
payment update.
    Medicare's IPPS encourages hospitals to treat patients efficiently. 
Hospitals receive the same DRG payment for stays that vary in length 
and in the services provided, which gives hospitals an incentive to 
avoid unnecessary costs in the delivery of care. In some cases, 
complications acquired in the hospital do not generate higher payments 
than the hospital would otherwise receive for uncomplicated cases paid 
under the same DRG. To this extent, the IPPS encourages hospitals to 
avoid complications. However, complications, such as infections 
acquired in the hospital, can generate higher Medicare payments in two 
ways. First, the treatment of complications can increase the cost of a 
hospital stay enough to generate an outlier payment. However, the 
outlier payment methodology requires that a hospital experience a large 
loss on an outlier case, which serves as an incentive for hospitals to 
prevent outliers. Second, under the MS-DRGs that took effect in FY 
2008, there are currently 258 sets of MS-DRGs that are split into 2 or 
3 subgroups based on the presence or absence of a complicating 
condition (CC) or a major complicating condition (MCC). If a condition 
acquired during a hospital stay is one of the conditions on the CC or 
MCC list, the hospital currently receives a higher payment under the 
MS-DRGs (prior to the October 1, 2008 effective date of the HAC payment 
provision). Medicare will continue to assign a discharge to a higher 
paying MS-DRG if the selected condition is present on admission. (We 
refer readers to section II.D. of the FY 2008 IPPS final rule with 
comment period for a discussion of DRG reforms (72 FR 47141).) The 
following is an example of how an MS-DRG may be paid under the HAC 
provision:

[[Page 48472]]



------------------------------------------------------------------------
                                            Present on
 Service: MS-DRG assignment * (examples     admission
  below with CC/MCC indicate a single       (status of    Median payment
       secondary diagnosis only)            secondary
                                            diagnosis)
------------------------------------------------------------------------
Principal Diagnosis:
     Intracranial hemorrhage or  ...............       $5,347.98
     cerebral infarction (stroke)
     without CC/MCC--MS-DRG 066........
------------------------------------------------------------------------
Principal Diagnosis:
     Intracranial hemorrhage or               Y         6,177.43
     cerebral infarction (stroke) with
     CC--MS-DRG 065....................
Example Secondary Diagnosis:
     Dislocation of patella-
     open due to a fall (code 836.4
     (CC))
------------------------------------------------------------------------
Principal Diagnosis:
     Intracranial hemorrhage or               N         5,347.98
     cerebral infarction (stroke) with
     CC--MS-DRG 065....................
Example Secondary Diagnosis:
     Dislocation of patella-
     open due to a fall (code 836.4
     (CC))
------------------------------------------------------------------------
Principal Diagnosis:
     Intracranial hemorrhage or               Y         8,030.28
     cerebral infarction (stroke) with
     MCC--MS-DRG 064...................
Example Secondary Diagnosis:
     Stage III pressure ulcer
     (code 707.23 (MCC))
------------------------------------------------------------------------
Principal Diagnosis:
     Intracranial hemorrhage or               N         5,347.98
     cerebral infarction (stroke) with
     MCC--MS-DRG 064...................
Example Secondary Diagnosis:
     Stage III pressure ulcer
     (code 707.23 (MCC))
------------------------------------------------------------------------
* Operating amounts for a hospital whose wage index is equal to the
  national average. Based on FY 2008 wage index.

    This example illustrates a payment scenario in which the CC/MCC 
indicates a single secondary diagnosis only. It is atypical for a 
hospitalized Medicare beneficiary to have only one secondary 
diagnosis.\7\
---------------------------------------------------------------------------

    \7\ Medicare Payment for Selected Adverse Events: Building the 
Business Case for Investing in Patient Safety. Health Affairs. Zhan 
et al. September 2006.
---------------------------------------------------------------------------

2. Statutory Authority
    Section 1886(d)(4)(D) of the Act required the Secretary to select 
at least two conditions by October 1, 2007, that are: (a) High cost, 
high volume, or both; (b) assigned to a higher paying MS-DRG when 
present as a secondary diagnosis; and (c) could reasonably have been 
prevented through the application of evidence-based guidelines. 
Beginning October 1, 2008, Medicare can no longer assign an inpatient 
hospital discharge to a higher paying MS-DRG if a selected HAC is not 
present on admission. That is, the case will be paid as though the 
secondary diagnosis were not present. Medicare will continue to assign 
a discharge to a higher paying MS-DRG if the selected condition is 
present on admission. However, if any nonselected CC/MCC appears on the 
claim, the claim will be paid at the higher MS-DRG rate; to cause a 
lower MS-DRG payment, all CCs/MCCs on the claim must be selected 
conditions for the HAC payment provision. Section 1886(d)(4)(D) of the 
Act provides that the list of conditions can be revised from time to 
time, as long as the list contains at least two conditions. Beginning 
October 1, 2007, we required hospitals to begin submitting information 
on Medicare claims specifying whether diagnoses were present on 
admission (POA).
    The POA indicator reporting requirement and the HAC payment 
provision apply to IPPS hospitals only. At this time, non-IPPS 
hospitals, including CAHs, LTCHs, IRFs, IPFs, cancer hospitals, 
children's inpatient hospitals, and hospitals in Maryland operating 
under waivers, are exempt from POA reporting and the HAC payment 
provision. Throughout this section, ``hospital'' refers to IPPS 
hospitals.
3. Public Input
    In the FY 2007 IPPS proposed rule (71 FR 24100), we sought public 
input regarding conditions with evidence-based prevention guidelines 
that should be selected in implementing section 1886(d)(4)(D) of the 
Act. The public comments 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 sought formal public comment on 
conditions that we proposed to select. In the FY 2008 IPPS final rule 
with comment period (72 FR 47200 through 47218), we summarized the 
public comments we received on the FY 2008 IPPS proposed rule, 
presented our responses, selected eight conditions to which the HAC 
provision will apply, and noted that we would be seeking comments on 
additional HAC candidates in the FY 2009 IPPS proposed rule.
    In the FY 2009 IPPS proposed rule (73 FR 23547), we proposed 
several candidate HACs in addition to proposing refinements to the 
previously selected HACs. In this FY 2009 IPPS final rule, we summarize 
the public comments we received on the FY 2009 IPPS proposed rule, 
present our responses, select additional conditions to which the HAC 
payment provision will apply, and note that we will be seeking comments 
on additional HAC candidates in the FY 2010 IPPS proposed rule.
4. Collaborative Process
    CMS experts worked closely with public health and infectious 
disease professionals from the CDC to identify the candidate 
preventable HACs, review comments, and select HACs. CMS and CDC staff 
also collaborated on the process for hospitals to submit a POA 
indicator for each diagnosis listed on IPPS hospital Medicare claims 
and on the payment implications of the various POA reporting options.
    On December 17, 2007, CMS and CDC hosted a jointly-sponsored HAC 
and POA Listening Session to receive input from interested 
organizations and individuals. The agenda, presentations, audio file, 
and written transcript of the listening session are available on the 
CMS Web site at: http://www.cms.hhs.gov/HospitalAcqCond/07_
EducationalResources.asp. CMS and CDC also received verbal comments

[[Page 48473]]

during the listening session and subsequently received numerous written 
comments.
    Comment: Several commenters recommended that CMS develop an 
advisory panel of clinicians and scientists to provide the agency with 
guidance on which conditions are appropriate for inclusion under this 
policy.
    Response: We are committed to working with stakeholders as we 
refine and make additions to the HAC list each year. We intend to 
engage the public through rulemaking as discussed in section II.F.3. of 
this preamble and other mechanisms similar to those discussed above.
5. Selection Criteria for HACs
    In selecting proposed candidate conditions and finalizing 
conditions as HACs, CMS and CDC staff evaluated each condition against 
the criteria established by section 1886(d)(4)(D)(iv) of the Act.
     Cost or Volume--Medicare data \8\ must support that the 
selected conditions are high cost, high volume, or both. We have not 
yet analyzed Medicare claims data indicating which secondary diagnoses 
were POA because POA indicator reporting began only recently; 
therefore, the currently available data for candidate conditions 
includes all secondary diagnoses.
---------------------------------------------------------------------------

    \8\ For the HAC section of this FY 2009 IPPS final rule, the DRG 
analysis is based on data from the September 2007 update of the FY 
2007 MedPAR file, which contains hospital bills received through 
September 30, 2007.
---------------------------------------------------------------------------

     Complicating Condition (CC) or Major Complicating 
Condition (MCC)--Selected conditions must be represented by ICD-9-CM 
diagnosis codes that clearly identify the condition, are designated as 
a CC or an MCC, and result in the assignment of the case to an MS-DRG 
that has a higher payment when the code is reported as a secondary 
diagnosis. That is, selected conditions must be a CC or an MCC that 
would, in the absence of this provision, result in assignment to a 
higher paying MS-DRG.
     Evidence-Based Guidelines--Selected conditions must be 
considered reasonably preventable through the application of evidence-
based guidelines. By reviewing guidelines from professional 
organizations, academic institutions, and entities such as the 
Healthcare Infection Control Practices Advisory Committee (HICPAC), we 
evaluated whether guidelines are available that hospitals should follow 
to prevent the condition from occurring in the hospital.
     Reasonably Preventable--Selected conditions must be 
considered reasonably preventable through the application of evidence-
based guidelines.
6. HACs Selected During FY 2008 IPPS Rulemaking and Changes to Certain 
Codes
    The conditions that were selected for the HAC payment provision 
through the FY 2008 IPPS final rule with comment period are listed 
below. The HAC payment provision implications for these selected HACs 
will take effect on October 1, 2008. We refer readers to section 
II.F.6. of the FY 2008 IPPS final rule with comment period (72 FR 47202 
through 47218) for a detailed analysis supporting the selection of each 
of these HACs.

----------------------------------------------------------------------------------------------------------------
                                          Medicare data  (FY       CC/MCC  (ICD-9-CM     Selected evidence-based
             Selected HAC                       2007)                    codes)                 guidelines
----------------------------------------------------------------------------------------------------------------
Foreign Object Retained After Surgery   750 cases *...  998.4 (CC) or 998.7      NQF Serious Reportable
                                        $63,631/         (CC).                    Adverse Event.
                                        hospital stay.**.                                NQF's Safe Practices
                                                                                          for Better Healthcare
                                                                                          available at the Web
                                                                                          site: http://
www.ahrq.gov/qual/
nqfpract.htm.
Air Embolism.........................   57 cases......  999.1 (MCC)............  NQF Serious Reportable
                                        $71,636/                                  Adverse Event.
                                        hospital stay..                                  NQF's Safe Practices
                                                                                          for Better Healthcare
                                                                                          available at the Web
                                                                                          site: http://
www.ahrq.gov/qual/
nqfpract.htm.
Blood Incompatibility................   24 cases......  999.6 (CC).............  NQF Serious Reportable
                                        $50,455/                                  Adverse Event.
                                        hospital stay..                                  NQF's Safe Practices
                                                                                          for Better Healthcare
                                                                                          available at the Web
                                                                                          site: http://
www.ahrq.gov/qual/
nqfpract.htm.
Pressure Ulcer Stages III & IV.......   257,412 cases   707.23 (MCC) or 707.24   NQF Serious Reportable
                                        ***.                     (MCC).                   Adverse Event.
                                        $43,180/                                 Available at the Web
                                        hospital stay..                                   site: http://
www.ncbi.nlm.nih.gov/
books/
bv.fcgi?rid=hstat2.cha
                                                                                          pter.4409.
Falls and Trauma:....................   193,566 cases.  Codes within these       NQF Serious Reportable
--Fracture...........................   $33,894/         ranges on the CC/MCC     Adverse Events address
--Dislocation........................   hospital stay..          list: 800-829, 830-      falls, electric shock,
--Intracranial Injury................                            839, 850-854, 925-929,   and burns.
--Crushing Injury....................                            940-949, 991-994.       NQF's Safe Practices
--Burn...............................                                                     for Better Healthcare
--Electric Shock.....................                                                     available at the Web
                                                                                          site: http://
www.ahrq.gov/qual/
nqfpract.htm.
Catheter-Associated Urinary Tract       12,185 cases..  996.64 (CC)............  Available at the Web
 Infection (UTI).                       $44,043/        Also excludes the         site: http://
 hospital stay..          following from acting    www.cdc.gov/ncidod/
 as a CC/MCC: 112.2       dhqp/gl--catheter--
                                                                 (CC), 590.10 (CC),       assoc.html.
                                                                 590.11 (MCC), 590.2
                                                                 (MCC), 590.3 (CC),
                                                                 590.80 (CC), 590.81
                                                                 (CC), 595.0 (CC),
                                                                 597.0 (CC), 599.0
                                                                 (CC)..
Vascular Catheter-Associated            29,536 cases..  999.31 (CC)............  Available at the Web
 Infection.                             $103,027/                                 site: http://
 hospital stay..                                   www.cdc.gov/ncidod/
dhqp/gl_
                                                                                          intravascular.html.

[[Page 48474]]

 
Surgical Site Infection-Mediastinitis   69 cases......  519.2 (MCC)............  Available at the Web
 After Coronary Artery Bypass Graft     $299,237/       And one of the            site: http://
 (CABG).                                hospital stay..          following procedure      www.cdc.gov/ncidod/
 codes: 36.10-36.19..     dhqp/gl--
                                                                                          surgicalsite.html.
----------------------------------------------------------------------------------------------------------------
* A case represents a patient discharge identified from the MedPAR database that met the associated HAC
  diagnosis/procedure criteria (a secondary diagnosis on the HAC list and, where appropriate, a procedure code
  described in conjunction with a specific HAC).
** Standardized charge is the total charge for a patient discharge record based on the CMS standardization file.
  The average standardized charge for the HAC is the average charge for all patient discharge records that met
  the associated HAC criteria.
*** The number of cases of pressure ulcers reflects CC/MCC assignments for codes 707.00 through 707.07 and
  707.09, which are currently being reported. New MCC codes 707.23 and 707.24 will be implemented on October 1,
  2008.

    In the FY 2009 IPPS proposed rule (73 FR 23552), we sought public 
comments on the following refinements to two of the previously selected 
HACs:
a. Foreign Object Retained After Surgery
    In the FY 2009 IPPS proposed rule (73 FR 23552), we solicited 
public comments regarding the inclusion of ICD-9-CM diagnosis code 
998.7 (Acute reaction to foreign substance accidentally left during a 
procedure) to more accurately and completely identify foreign object 
retained after surgery as an HAC.
    Comment: Commenters universally supported the addition of ICD-9-CM 
code 998.7 to identify foreign object retained after surgery as an HAC. 
The commenters also reiterated their support for recognizing foreign 
object retained after surgery as an HAC.
    Response: We appreciate the commenters' support. We refer readers 
to a more detailed discussion of HAC coding for foreign object retained 
after surgery in section II.F.10.a. of this preamble.
    After consideration of the public comments received, we are 
finalizing our proposal to include diagnosis code 998.7 as an 
additional code to code 998.4 selected in FY 2008 to identify foreign 
object retained after surgery as an HAC under the HAC payment 
provision.

                  Foreign Object Retained After Surgery
------------------------------------------------------------------------
          ICD-9-CM codes                      Code descriptor
------------------------------------------------------------------------
998.4............................  Foreign body accidentally left during
                                    a procedure.
998.7............................  Acute reaction to foreign substance
                                    accidentally left during a
                                    procedure.
------------------------------------------------------------------------

b. Pressure Ulcers
    In the FY 2009 IPPS proposed rule (73 FR 23552), we proposed that, 
beginning October 1, 2008, the codes used to make MS-DRG adjustments 
for pressure ulcers under the HAC provision would include proposed MCC 
codes 707.23 and 707.24 (pressure ulcer stages III and IV).
    Comment: Commenters supported the creation of the new ICD-9-CM 
codes 707.23 and 707.24 to capture the stage of the pressure ulcer and 
supported the use of these codes to identify pressure ulcer stages III 
and IV as HACs. However, some commenters expressed concern about the 
proposal to classify ICD-9-CM codes 707.23 and 707.24 as MCCs and to 
remove the CC/MCC classifications from the existing pressure site 
codes.
    Response: We appreciate the commenters support for using codes 
707.23 and 707.24 to identify pressure ulcer stages III and IV as HACs.
    In response to the commenters' concerns regarding the CC/MCC 
classification for these codes, we refer readers to section II.G.12. of 
this preamble where we address specific concerns about the creation of 
new codes for identifying pressure ulcers.
    After consideration of public comments received, we are adopting as 
final our proposal that, beginning October 1, 2008, the codes used to 
identify pressure ulcer stages III and IV as HACs include the following 
MCC codes:

                             Pressure Ulcers
------------------------------------------------------------------------
          ICD-9-CM codes                      Code descriptor
------------------------------------------------------------------------
707.23...........................  Pressure ulcer, stage III.
707.24...........................  Pressure ulcer, stage IV.
------------------------------------------------------------------------

7. Candidate HACs
    CMS and CDC have diligently worked together and with other 
stakeholders to identify and select candidates for the HAC payment 
provision. The additional candidate HACs selected in this FY 2009 IPPS 
final rule will have payment implications beginning October 1, 2008.
    As in the FY 2009 IPPS proposed rule, we present in this final rule 
the statutory criteria for each HAC candidate in tabular format. Each 
table contains the following:
     HAC Candidate--We sought public comment on all HAC 
candidates.
     Medicare Data--We sought public comment on the statutory 
criterion of high cost, high volume, or both as it applies to each HAC 
candidate.
     CC/MCC--We sought public comment on the statutory 
criterion that an ICD-9-CM diagnosis code(s) clearly identifies the HAC 
candidate.
     Selected Evidence-Based Guidelines--We sought public 
comment on whether guidelines are available that hospitals should 
follow to prevent the condition from occurring in the hospital.
     Reasonably Preventable--We sought public comment on 
whether each condition could be considered reasonably preventable 
through the application of evidence-based guidelines.
    Comment: Many commenters recommended various general standards for 
determining which conditions could reasonably have been prevented 
through the application of evidence-based guidelines. The majority of 
commenters favored a zero, or near zero, standard for those conditions 
to be considered reasonably preventable when evidence-based guidelines 
are followed.
    Response: We did not propose and did not specifically seek public 
comments on a general standard for reasonably preventable through the 
application of evidence-based guidelines in the FY 2009 IPPS proposed 
rule, and we are not setting a general standard in this final rule. We 
further note that the statute does not require that a condition be 
``always preventable'' in order to qualify as an HAC, but rather that 
it be ``reasonably preventable,'' which necessarily implies something 
less than 100 percent.
    After consideration of the public comments received and in light of 
the three statutory criteria, we are finalizing several additional 
conditions for the HAC payment provision. The additional conditions are 
defined by specific codes within the broad categories of manifestations 
of poor glycemic control, surgical site infections, and deep vein 
thrombosis/pulmonary embolism, as discussed below.

[[Page 48475]]

a. Manifestations of Poor Glycemic Control
    Hyperglycemia and hypoglycemia are extremely common laboratory 
findings in hospitalized patients and can be complicating features of 
underlying diseases and some therapies. However, we believe that 
extreme manifestations of poor glycemic control are reasonably 
preventable through the application of evidence-based guidelines and 
sound medical practice while in the hospital setting; specifically, we 
believe that they are preventable through the use of routine serum 
glucose measurement and control which are basic elements of good 
hospital care.
    We originally proposed the diagnosis codes representing four 
extreme manifestations of poor glycemic control as HACs, but we are not 
finalizing the following codes representing diabetic coma because the 
codes are nonspecific and more precise, specific codes are available to 
describe the condition: (1) Diabetes with coma, type II or unspecified 
type, not stated as controlled (250.30); (2) diabetes with coma, type 
I, not stated as controlled (250.31); (3) diabetes with coma, type II 
or unspecified type, uncontrolled (250.32); and (4) diabetes with coma, 
type I, uncontrolled (250.33).
    Comment: Commenters generally considered all of the manifestations 
of poor glycemic control together. The majority of commenters agreed 
that these extreme manifestations of poor glycemic control are 
reasonably preventable through the application of evidence-based 
guidelines. In support of selecting this condition, one commenter 
provided additional evidence-based guidelines addressing glycemic 
control.
    Response: We agree with commenters that extreme manifestations of 
poor glycemic control are reasonably preventable through the 
application of evidence-based guidelines. We are including the 
additional evidence-based guidelines submitted by a commenter in the 
chart for manifestations of poor glycemic control below.
    Comment: Of the proposed codes representing the manifestations of 
poor glycemic control, hypoglycemic coma received the most attention 
from commenters. Many commenters considered hypoglycemic coma to be a 
strong candidate because it is included in the NQF's list of Serious 
Reportable Adverse Events.
    Response: We agree with commenters that hypoglycemic coma is 
reasonably preventable through the application of evidence-based 
guidelines.
    Comment: Although the majority of commenters supported the 
selection of diabetic ketoacidosis, nonketotic hyperosmolar coma, and 
hypoglycemic coma as HACs, CMS received a small number of comments 
opposing the selection of codes from the manifestations of poor 
glycemic control category. Some commenters expressed that recent 
studies demonstrate that tight glycemic control in septic patients 
leads to poorer outcomes. One commenter identified the diabetic patient 
population as high risk, citing an estimate that any person with 
insulin-treated diabetes will experience 0.5 to 1.0 severe hypoglycemic 
events annually, which appears to not necessarily be within the control 
of caregivers.\9\
---------------------------------------------------------------------------

    \9\ The Diabetes Control and Complications Trial. New England 
Journal of Medicine, 1993, Vol. 329, pp. 977-986.
---------------------------------------------------------------------------

    Response: We have addressed the commenters' concerns about tight 
glycemic control and hypoglycemic events by selecting specific, narrow 
codes representing extreme manifestations as HACs. For example, the 
commenter's concern about the preventability of all hypoglycemic events 
is addressed by selecting as an HAC only the code representing 
hypoglycemic coma (251.0), an extreme manifestation. We further note 
that the statute does not require that a condition be ``always 
preventable'' in order to qualify as an HAC, but rather that it be 
``reasonably preventable,'' which necessarily implies something less 
than 100 percent.
    Comment: Commenters supported adding the following four secondary 
diabetes diagnosis codes: (1) ICD-9-CM code 249.10 (Secondary diabetes 
mellitus with ketoacidosis, not stated as uncontrolled, or 
unspecified); (2) ICD-9-CM code 249.11 (Secondary diabetes mellitus 
with ketoacidosis, uncontrolled); (3) ICD-9-CM code 249.20 (Secondary 
diabetes mellitus with hyperosmolarity, not stated as uncontrolled, or 
unspecified); and (4) ICD-9-CM code 249.21 (Secondary diabetes mellitus 
with hyperosmolarity, uncontrolled). These new secondary diabetes codes 
will be effective on October 1, 2008.
    Response: We agree with commenters that the secondary diabetes 
codes should be included to capture the full range of extreme 
manifestations of poor glycemic control as HACs. The secondary diabetes 
codes are clinically similar to the proposed codes and including these 
codes more accurately captures the range of manifestations of poor 
glycemic control.
    We are finalizing manifestations of poor glycemic control as an HAC 
because we have determined after considering the comments received that 
these conditions meet the statutory criteria. The following chart 
includes the codes that describe manifestations of the poor glycemic 
control as an HAC:

[[Page 48476]]

[GRAPHIC] [TIFF OMITTED] TR19AU08.332


[[Page 48477]]



                 Manifestations of Poor Glycemic Control
------------------------------------------------------------------------
          ICD-9-CM code                       Code descriptor
------------------------------------------------------------------------
249.10...........................  Secondary diabetes mellitus with
                                    ketoacidosis, not stated as
                                    uncontrolled, or unspecified.
249.11...........................  Secondary diabetes mellitus with
                                    ketoacidosis, uncontrolled.
249.20...........................  Secondary diabetes mellitus with
                                    hyperosmolarity, not stated as
                                    uncontrolled, or unspecified.
249.21...........................  Secondary diabetes mellitus with
                                    hyperosmolarity, uncontrolled.
250.10...........................  Diabetes with ketoacidosis, type II
                                    or unspecified type, not stated as
                                    uncontrolled.
250.11...........................  Diabetes with ketoacidosis, type I
                                    [juvenile type], not stated as
                                    uncontrolled.
250.12...........................  Diabetes with ketoacidosis, type II
                                    or unspecified type, uncontrolled.
250.13...........................  Diabetes with ketoacidosis, type I
                                    [juvenile type], uncontrolled.
250.20...........................  Diabetes with hyperosmolarity, type
                                    II or unspecified type, not stated
                                    as uncontrolled.
250.21...........................  Diabetes with hyperosmolarity, type I
                                    [juvenile type], not stated as
                                    uncontrolled.
250.22...........................  Diabetes with hyperosmolarity, type
                                    II or unspecified type,
                                    uncontrolled.
250.23...........................  Diabetes with hyperosmolarity, type I
                                    [juvenile type], uncontrolled.
251.0............................  Hypoglycemic coma.
------------------------------------------------------------------------

b. Surgical Site Infections
    In the FY 2009 IPPS proposed rule (73 FR 23553), we requested 
public comments on the applicability of each of the statutory criteria 
to surgical site infections following certain procedures. We were 
particularly interested in receiving comments on the degree of 
preventability of these infections. We also requested, and received, 
public comment on additional surgical procedures that would qualify for 
the HAC provision by meeting all of the statutory criteria.
    Comment: Numerous commenters raised issues regarding the 
applicability of each statutory criterion to surgical site infections 
generally, especially with regard to degree of preventability. 
Commenters raised concerns that patient characteristics and other 
factors can put patients at risk for surgical site infections 
regardless of the application of evidence-based guidelines. Commenters 
asserted that elective procedures have a tendency to be short-stay 
admissions or outpatient procedures, and if a surgical site infection 
presents after discharge, this HAC would not be captured under the 
inpatient provision.
    Response: We agree that the risk of a typical patient undergoing a 
procedure is a factor in determining whether these conditions are 
reasonably preventable (see discussion of risk adjustment in section 
II.F.9. of this preamble), but we do not agree that the average length 
of stay following the procedure or the ability to perform the procedure 
at an alternative site are determinative factors for selecting HACs.
    Comment: Some commenters emphasized that certain procedures 
typically thought of as elective by clinicians are not necessarily 
elective by patients. Two commenters noted that even if total knee 
replacement is considered nonemergent and therefore elective from a 
clinician's perspective, a patient may consider the surgery critical 
and urgent to avoid pain and immobility.
    Response: We agree with the commenters that procedures typically 
thought of as elective based on urgency are not necessarily viewed as 
elective from the perspective of the patient's quality of life. Given 
lack of consensus regarding the classification of procedures as 
elective, we have discontinued referring to this broad category of 
surgical site infections as ``following elective procedures.''
    Comment: Many commenters asserted that surgical site infections 
following total knee replacement could be considered reasonably 
preventable, however those commenters questioned why CMS proposed this 
HAC because the candidate codes are CCs, and total knee replacement 
procedures typically map to MS-DRGs that only split to MCCs.
    Response: We are unable to select this condition as an HAC because, 
as commenters noted, surgical site infection is a CC that does not 
trigger the higher paying MCC MS-DRG payment for total knee replacement 
procedures; thus, it does not meet the second statutory criterion. If a 
change to the MS-DRGs results in total knee replacement procedures 
mapping to MS-DRGs that split to CCs in the future, we could reconsider 
adding surgical site infections following total knee replacement as an 
HAC. In addition, we will be reviewing other ICD-9-CM MCC codes 
relevant to total knee replacement, and we will consider proposing 
those codes as future HAC candidates.
    Comment: Commenters addressed the discrepancy between the proposed 
CC code (Other postoperative infection) and the MS-DRG split only to 
MCC for total knee replacement and suggested that CMS review and 
consider adding other procedures that map to MS-DRGs that split by CC. 
One commenter referenced a 2002 meta-analysis finding that antibiotic 
prophylaxis is successful in significantly reducing the rates of 
postoperative spinal infections.\10\
---------------------------------------------------------------------------

    \10\ Baker, F.G.: Efficacy of prophylactic antibiotic therapy in 
spinal surgery: A meta-analysis. Neurosurgery. 51(2): 391-400 
(2002).
---------------------------------------------------------------------------

    Response: We agree with the commenters' recommendations and 
considered additional orthopedic procedures. We identified the 
following MS-DRGs that split by CC:
     MS-DRGs 453, 454, and 455 (Combined Anterior/Posterior 
Spinal Fusion with MCC, CC and without CC/MCC);
     MS-DRGs 471, 472, and 473 (Cervical Spinal Fusion, with 
MCC, CC and without CC/MCC);
     MS-DRGs 507 and 508 (Major Shoulder or Elbow Joint 
Procedures, with CC/MCC and without CC/MCC).
    In response to commenters' suggestions, we are selecting certain 
orthopedic procedures that fall within the MS-DRGs listed above in the 
HAC surgical site infection category. The category of surgical site 
infection following certain orthopedic surgeries includes selected 
procedures that are often elective and that involve the repair, 
replacement, or fusion of various joints including the shoulder, elbow, 
and spine. In future rulemaking, we will work with stakeholders to 
identify additional procedures, orthopedic and other types, for which 
surgical site infections can be considered reasonably preventable 
through the application of evidence-based guidelines.
    The following chart includes the codes that describe surgical site 
infection following certain orthopedic procedures as an HAC:

     Surgical Site Infection Following Certain Orthopedic Procedures
------------------------------------------------------------------------
          ICD-9-CM code                       Code descriptor
------------------------------------------------------------------------
996.67...........................  Infection and inflammatory reaction
                                    due to other orthopedic device and
                                    implant graft.
                                                   --OR--
998.59...........................  Other postoperative infection.
                                                  --AND--
81.01............................  Atlas-axis fusion.
81.02............................  Other cervical fusion anterior.
81.03............................  Other cervical fusion posterior.
81.04............................  Dorsal/dorsolum fusion anterior.

[[Page 48478]]

 
81.05............................  Dorsal/dorsolum fusion posterior.
81.06............................  Lumbar/lumbosac fusion anterior.
81.07............................  Lumbar/lumbosac fusion lateral.
81.08............................  Lumbar/lumbosac fusion posterior.
81.23............................  Arthrodesis of shoulder.
81.24............................  Arthrodesis of elbow.
81.31............................  Refusion of atlas-axis.
81.32............................  Refusion of other cervical spine
                                    anterior.
81.33............................  Refusion of other cervical spine
                                    posterior.
81.34............................  Refusion of dorsal spine anterior.
81.35............................  Refusion of dorsal spine posterior.
81.36............................  Refusion of lumbar spine anterior.
81.37............................  Refusion of lumbar spine lateral.
81.38............................  Refusion of lumbar spine posterior.
81.83............................  Shoulder arthroplast NEC.
81.85............................  Elbow arthroplast NEC.
------------------------------------------------------------------------

    We proposed surgical site infections following ligation and 
stripping of varicose veins as an HAC, but we are not finalizing this 
procedure because these MS-DRGs do not currently split into severity 
levels based on the presence of a CC, and the surgical site infection 
code is a CC. Thus, surgical site infection following ligation and 
stripping of varicose veins does not currently meet the second 
statutory HAC selection criterion of triggering the higher-paying MS-
DRG.
    We solicited comments on each of the statutory criteria as they 
apply to surgical site infections following laparoscopic bypass and 
gastroenterostomy. Laparoscopic gastroenterostomy (44.38) includes 
several different types of gastric bypass procedures, all of which are 
done using a laparoscope to avoid surgically opening the abdomen 
(laparotomy). Gastroenterostomy (44.39) is a general term that 
describes surgically connecting the stomach to another area of the 
intestine.
    Comment: Some commenters pointed out that the 208 cases cited in 
the FY 2009 IPPS proposed rule (73 FR 23553) is a relatively small 
number of cases, which may not meet the statutory criterion of high 
cost, high volume, or both.
    Response: As noted in the FY 2009 IPPS proposed rule, the average 
cost of a case with a surgical site infection following laparoscopic 
gastric bypass and gastroenterostomy is $180,142 per hospital stay, 
which we consider high cost. Thus, this condition meets the high cost 
statutory criterion.
    Comment: Many stakeholders from provider organizations, including 
medical specialty societies, cited that the population undergoing 
bariatric surgery for obesity is a high risk population per se; thus, 
the condition may not be considered reasonably preventable through the 
application of evidence-based guidelines. Commenters noted that these 
patients commonly have conditions, such as diabetes and hypertension, 
in addition to obesity, which are well-known risk factors for 
infections and other post-operative complications.
    Response: We recognize that patients undergoing this procedure may 
typically be high risk; however, (1) selecting this procedure as an HAC 
will have the positive effect of encouraging attention to risk 
assessment prior to surgery and (2) conditions such as complicated 
forms of diabetes, hypertensive heart and kidney disease, and a body 
mass index of 40 or higher are CCs or MCCs under the IPPS payment 
system that, when present on the claim, will continue to trigger the 
higher-paying MS-DRG. Thus, the usual presence of additional CC/MCCs on 
claims for these procedures serves as an ``inherent risk adjuster'' to 
payment for typical bariatric surgery cases for obese patients. We 
further note that the statute does not require that a condition be 
``always preventable'' in order to qualify as an HAC, but rather that 
it be ``reasonably preventable,'' which necessarily implies something 
less than 100 percent.
    Comment: One commenter noted that gastroenterostomy is routinely 
used to bypass a damaged or obstructed duodenum in high risk 
populations such as cancer patients.
    Response: In 2007, CMS issued Change Request (CR) 5477 regarding 
the proper use of ICD-9-CM codes for bariatric surgery for morbid 
obesity, available on the Web site at: http://www.cms.hhs.gov/
Transmittals/downloads/R1233CP.pdf. This CR addresses the comment above 
by focusing on only those procedures with a primary diagnosis of 
obesity (278.01). Further, as referenced in CR 5477, bariatric surgery 
for obesity contains the following procedures: (1) Laparoscopic gastric 
bypass (44.38), (2) gastroenterostomy (44.39), and (3) laparoscopic 
gastric restrictive procedure (44.95). Laparoscopic gastric restrictive 
procedure (44.95) refers to the laparoscopic placement of a restrictive 
band around the stomach to reduce the effective size. By adopting the 
coding scheme laid out in CR 5477, we are finalizing not only 44.38 and 
44.39, but also 44.95, as procedures within the HAC category of 
surgical site infections following bariatric surgery for obesity. The 
addition of Laparoscopic gastric restrictive procedure (44.95) more 
completely and accurately captures the range of surgical site infection 
following bariatric surgery for obesity as an HAC.
    The following chart includes the codes that describe surgical site 
infection following bariatric surgery for obesity as an HAC:

     Surgical Site Infection Following Bariatric Surgery for Obesity
------------------------------------------------------------------------
          ICD-9-CM code                       Code descriptor
------------------------------------------------------------------------
278.01*..........................  Morbid obesity.
                                                  --AND--
998.59...........................  Other postoperative infection.
                                                  --AND--
44.38............................  Laparoscopic gastroenterostomy.
                                                   --OR--
44.39............................  Other gastroenterostomy.
                                                   --OR--
44.95............................  Laparoscopic gastric restrictive
                                    procedure.
------------------------------------------------------------------------
*As principal diagnosis.

    In the FY 2009 IPPS proposed rule, we requested, and received, 
public comment on additional surgical procedures that would meet the 
statutory criteria for a surgical site infection HAC.
    Comment: A commenter recommended that CMS add surgical site 
infection following implantation of cardiac devices as an HAC. The 
commenter noted a recent estimate of approximately 300,000 pacemaker 
implants performed in 2007.\11\ In addition, the commenter referenced 
that the estimated rate of infection following cardiac device 
implantation is 4 percent and that the cost to treat each pacemaker 
infection is approximately $25,000.\12\ Further, the commenter cited 
evidence-based guidelines for preventing these infections.\13\ \14\ 
\15\
---------------------------------------------------------------------------

    \11\ Morgan, J.P.: Cardiac Rhythm Management, Market Model, 
August 31, 2007.
    \12\ Darouiche, R.O.: Treatment of Infections Associated with 
Surgical Implants, New England Journal of Medicine, 350:1422-9 
(2004).
    \13\ Bratzler, D. et al.: Antimicrobial Prophylaxis for Surgery: 
An Advisory Statement from the National Surgical Infection 
Prevention Project, American Journal of Surgery, 189:395-404 (2005).
    \14\ Da Costa, A et al.: Antibiotic Prophylaxis for Permanent 
Pacemaker Implantation: A Meta-Analysis, Circulation; 97:1796-1801 
(1998).
    \15\ Klug, D. et al.: Risk Factors Related to Infection of 
Implanted Pacemakers and Cardioverter-Defibrillators: Results of a 
Large Prospective Study, Circulation, 116:1349-55 (2007).

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

[[Page 48479]]

    Response: We agree with the commenter that surgical site infection 
following certain cardiac device procedures is a strong candidate HAC. 
The condition is high cost and high volume, triggers a higher-paying 
MS-DRG, and may be considered reasonably preventable through the 
application of evidence-based guidelines. We did not propose this 
specific condition in the FY 2009 IPPS proposed rule; however, we 
expect to propose surgical site infection following certain cardiac 
device procedures, as well as surgical site infections following other 
types of device procedures, as future candidate HACs.
    We are selecting surgical site infections following certain 
orthopedic procedures, and bariatric surgery for obesity. These 
procedures will join mediastinitis following coronary artery bypass 
graft (CABG), which was selected in the FY 2008 IPPS final rule with 
comment period, as surgical site infection HACs. We look forward to 
working with stakeholders to identify additional procedures, such as 
device procedures, in which surgical site infections can be considered 
reasonably preventable through the application of evidence-based 
guidelines.

[[Page 48480]]

[GRAPHIC] [TIFF OMITTED] TR19AU08.331

c. Deep Vein Thrombosis (DVT)/Pulmonary Embolism (PE)
    In the FY 2009 IPPS proposed rule, we proposed DVT/PE as a 
candidate HAC. We solicited comments on each of the statutory criteria, 
with particular focus on the degree to which DVT can be diagnosed on 
hospital admission and can be considered reasonably preventable. DVT 
occurs when a blood clot forms in the deep veins of an extremity, 
usually the leg, and causes pain, swelling, and inflammation. PE occurs 
when a clot or piece of a clot migrates from its original site to the 
lungs, causing the death of lung tissue, which can be fatal.

[[Page 48481]]

    Comment: The majority of commenters emphasized the inability to 
determine whether DVT was present on admission. The commenters were 
concerned about the lack of a standard clinical definition and 
diagnostic criteria, as well as difficulty in identifying at-risk 
patients. One commenter suggested that nearly half of all DVT/PEs are 
asymptomatic on admission. One commenter explained that obtaining the 
most accurate results would require expensive diagnostic testing of all 
patients, implying that this strategy would not be cost-effective and 
would, therefore, be unreasonable.
    Response: The commenters' concerns about the ability to diagnose 
DVT do not preclude DVT/PE from being selected as an HAC, as the 
attending physician determines whether the condition was present on 
admission (``Y'' POA reporting option) or whether presence on admission 
cannot be determined based on clinical judgment (``W'' POA reporting 
option). Hospitals will continue to be paid the higher MS-DRG amount 
for HACs coded as ``Y'' or ``W'' (we refer readers to section II.F.8. 
of this preamble).
    Comment: Regarding the preventability of DVT/PE, one commenter 
cited reduction of DVT/PE occurrence through mentoring and onsite 
consultation as a particularly effective intervention strategy.
    Response: We agree that the occurrence of DVT/PE can be 
significantly reduced through the use of intervention strategies, 
including mentoring and onsite consultation.
    Comment: A large proportion of commenters underscored the 
importance of considering risk factors in weighing the degree of 
preventability. Commenters noted that common risk factors, some of 
which cannot be modified, include clotting disorders, obesity, 
hypercoagulable state, cancer, HIV, or rheumatoid arthritis.
    Response: We agree with commenters that the risk factors of a 
typical patient are important to consider when weighing the degree of 
preventability as it applies to DVT/PE (discussion of risk adjustment 
in section II.F.9. of this preamble). Selecting DVT/PE for these 
procedures as an HAC will have the positive effect of encouraging 
attention to risk assessment prior to surgery. Further, conditions such 
as clotting disorders, obesity, hypercoagulable state, cancer, HIV, and 
rheumatoid arthritis are CCs or MCCs under the IPPS payment system 
that, when present on the claim, will continue to trigger the higher-
paying MS-DRG. Thus, the usual presence of additional CC/MCCs on claims 
for these procedures serves as an ``inherent risk adjuster'' to payment 
for total knee replacement and hip replacement cases.
    Comment: Although no commenters submitted quantitative data to 
establish a rate of preventability, many commenters noted that 
adherence to evidence-based pharmacologic and nonpharmacologic 
interventions will not prevent all DVTs. One commenter suggested that 
DVT/PE should only be considered for the HAC payment provision when a 
patient did not receive proper prophylaxis.
    Response: The fact that prophylaxis will not prevent every 
occurrence of DVT/PE does not preclude its selection as a reasonably 
preventable HAC. Further, as discussed in section IV.B. of this 
preamble, the Reporting Hospital Quality Data for the Annual Payment 
Update program includes a process of care measure regarding venous 
thromboembolism (VTE) prophylaxis within 24 hours prior to or after 
surgery. An analysis of publicly available data on Hospital Compare 
indicates that the national rate for the VTE prophylaxis measure for 
the third quarter of 2007 is approximately 82 percent.\16\ We have 
concluded from these data that a significant number of patients are not 
receiving the recommended evidence-based prophylaxis. We further note 
that the statute does not require that a condition be ``always 
preventable'' in order to qualify as an HAC, but rather that it be 
``reasonably preventable,'' which necessarily implies something less 
than 100 percent.
---------------------------------------------------------------------------

    \16\ Hospital Compare available at the Web site: http://
www.hospitalcompare.hhs.gov. Reviewed July 8, 2008.
---------------------------------------------------------------------------

    Comment: Commenters also noted that, in some cases, anticoagulation 
prophylaxis may be contraindicated based on individual patient factors, 
including an increased risk of bleeding in postoperative patients.
    Response: We agree with commenters that, in some cases, 
anticoagulation prophylaxis may be contraindicated. However, we do not 
view this as precluding the selection of DVT/PE as an HAC, as evidence-
based interventions beyond pharmacologic prophylaxis, such as 
mechanical prophylaxis and early movement, should also be applied.
    Comment: Some commenters supported DVT/PE as reasonably preventable 
through the application of evidence-based guidelines for certain 
subpopulations, specifically following certain orthopedic procedures.
    Response: We agree with commenters that DVT/PE is reasonably 
preventable in specific subpopulations, and we are therefore selecting 
DVT/PE following certain orthopedic surgeries, specifically certain hip 
and knee replacement surgeries, as HACs. Total knee replacement is a 
surgery performed to replace the entire knee joint with an artificial 
internal prosthesis because the native knee joint is no longer able to 
function, because it is very painful, or both, usually due to advanced 
osteoarthritis, and total hip replacement is the analogous operation 
involving the hip joint. Our decision may be construed as only applying 
to the MCC PE, rather than DVT/PE, following certain hip and knee 
replacement surgeries as HACs because of coding considerations. The MS-
DRGs that these procedures typically map to do not currently split 
based on CCs, and DVT is a CC.
    The following chart includes the codes that describe DVT/PE 
following certain orthopedic surgeries as an HAC:

----------------------------------------------------------------------------------------------------------------
                                          Medicare data  (FY       CC/MCC  (ICD-9-CM     Selected evidence-based
             Selected HAC                       2007)                    codes)                 guidelines
----------------------------------------------------------------------------------------------------------------
Deep Vein Thrombosis (DVT)/Pulmonary    4,250 cases...  DVT: 453.40-453.42 (CC)  Available on the Web
 Embolism (PE)                          $58,625/         OR                       site: http://
--Total Knee Replacement.............   hospital stay..         PE: 415.11 (MCC) or       www.chestjournal.org/
--Hip Replacement....................                            415.19 (MCC) AND.        cgi/reprint/126/3--
                                                                Total Knee Replacement:   suppl/172S.
                                                                 (81.54) OR.             Available on the Web
                                                                Hip Replacement: (00.85-  site: http://
 00.87, 81.51-81.52).     orthoinfo.aaos.org/
                                                                                          topic.cfm?topic=A00219
                                                                                          .
----------------------------------------------------------------------------------------------------------------


[[Page 48482]]


           Deep Vein Thrombosis (DVT)/Pulmonary Embolism (PE)
------------------------------------------------------------------------
          ICD-9-CM codes                      Code descriptors
------------------------------------------------------------------------
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.
415.11...........................  Iatrogenic pulmonary embolism and
                                    infarction.
415.19...........................  Other pulmonary embolism and
                                    infarction--other.
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.
453.42...........................  Venous embolism and thrombosis of
                                    deep vessels of distal lower
                                    extremity.
------------------------------------------------------------------------

d. Delirium
    Delirium is a relatively abrupt deterioration in a patient's 
ability to sustain attention, learn, or reason. Delirium is strongly 
associated with aging and treatment of illnesses that are associated 
with hospitalizations. Delirium affects nearly half of hospital patient 
days for individuals age 65 and older, and approximately three-quarters 
of elderly individuals in intensive care units have delirium. About 14 
to 24 percent of hospitalized elderly individuals have delirium at the 
time of admission. Having delirium is a very serious risk factor, with 
1-year mortality of 35 to 40 percent, a rate as high as those 
associated with heart attacks and sepsis. The adverse effects of 
delirium routinely last for months. Delirium is a clinical diagnosis, 
commonly assisted by screening tests such as the Confusion Assessment 
Method. The clinician must establish that the onset has been abrupt and 
that the deficits affect the ability to maintain attention, maintain 
orderly thinking, and learn from new information. Delirium is 
substantially under-recognized and is regularly conflated with 
dementia. Because of the high rate of mortality and incidence noted 
above, we proposed delirium as a candidate HAC, and provided the 
following information for consideration:

----------------------------------------------------------------------------------------------------------------
                                          Medicare data  (FY                             Selected evidence-based
            HAC candidate                       2007)           CC/MCC  (ICD-9-CM code)         guidelines
----------------------------------------------------------------------------------------------------------------
Delirium.............................   480 cases.....  293.1 (CC).............  Available on the Web
                                        $23,290/                                  site: http://
 hospital stay..                                   www.ahrq.gov/clinic/
ptsafety/chap28.htm.
----------------------------------------------------------------------------------------------------------------

    We solicited comments on each of the statutory criteria, with 
particular focus on the degree to which delirium can be considered 
reasonably preventable through the application of evidence-based 
guidelines.
    Comment: Most commenters strongly opposed placing delirium on the 
HAC list. Citing a study mentioned in the FY 2009 IPPS proposed rule 
(73 FR 23555), commenters emphasized that the ability to prevent only 
30 to 40 percent of all delirium cases through the application of 
evidence-based guidelines does not, in their opinion, meet that 
statutory criterion. Many commenters stated that evidence-based 
guidelines, such as reducing certain medications, reorienting patients, 
assuring sleep and sensory input, and improving patient nutrition and 
hydration, were more appropriately used as process rather than outcome 
measures.
    A number of commenters stated that it is difficult to define and 
diagnose a condition that varies in degree, such as delirium. They 
stated that symptoms of delirium may be intermittent. In addition, the 
commenters indicated that it may be difficult to differentiate between 
delirium and intensive care unit psychosis resulting from pre-admission 
hypoxia. Many commenters noted that delirium may be caused by many 
factors unrelated to clinical treatment. For example, commenters stated 
that delirium is a common symptom in Alzheimer's patients, who are 
likely to become disoriented in unfamiliar hospital surroundings. One 
commenter also noted that the diagnosis is difficult to make if a 
patient is intoxicated.
    In addition to those commenters who expressed blanket support for 
selecting all candidate HACs, a few commenters explicitly supported 
inclusion of delirium as an HAC. One commenter suggested that delirium 
resulting from medication error could be reasonably prevented by 
implementation of computerized physician order entry systems. Another 
commenter suggested that prevention based on the six factors in the 
Confusion Assessment Model would improve intake assessment and health 
care quality.
    Response: After consideration of the public comments received, we 
have decided not to select delirium as an HAC in this final rule. We 
will continue to monitor the evidence-based guidelines surrounding 
prevention of delirium. If evidence warrants, we may consider proposing 
delirium as an HAC in the future. Although we are not selecting 
delirium as an HAC, we would like to recognize two additional ICD-9-CM 
codes 292.81 (CC) and 293.0 (CC) that the commenters suggested to 
identify delirium and note that their input will be taken into account 
in any future reconsideration.

                                Delirium
------------------------------------------------------------------------
          ICD-9-CM codes                      Code descriptors
------------------------------------------------------------------------
292.81...........................  Drug-induced delirium.
293.0............................  Delirium due to conditions classified
                                    elsewhere.
293.1............................  Subacute delirium.
------------------------------------------------------------------------

e. Ventilator-Associated Pneumonia (VAP)
    VAP is a serious hospital-acquired infection associated with high 
mortality, significantly increased length of stay, and high cost. It is 
typically caused by the aspiration of contaminated gastric or 
oropharyngeal secretions. The presence of an endotracheal tube 
facilitates both the contamination of secretions and aspiration. We 
presented the following information in the FY 2009 IPPS proposed rule 
for consideration:

[[Page 48483]]



----------------------------------------------------------------------------------------------------------------
                                          Medicare data  (FY                             Selected evidence-based
            HAC candidate                       2007)           CC/MCC  (ICD-9-CM code)         guidelines
----------------------------------------------------------------------------------------------------------------
Ventilator-Associated Pneumonia (VAP)   30,867 cases..  997.31 (CC)............  Available on the Web
                                        $135,795/                                 site: http://
 hospital stay..                                   www.rcjournal.com/cpgs/
09.03.0869.html.
----------------------------------------------------------------------------------------------------------------


                     Ventilator-Associated Pneumonia
------------------------------------------------------------------------
          ICD-9-CM code                       Code descriptor
------------------------------------------------------------------------
997.31...........................  Ventilator-associated pneumonia.
------------------------------------------------------------------------

    The CDC recently updated the ICD-9-CM coding guidelines for proper 
use of code 997.31, which goes into effect on October 1, 2008. The ICD-
9-CM Official Coding Guidelines are available at: http://www.cdc.gov/
nchs/datawh/ftpserv/ftpICD9/ftpICD9.htm.
    We solicited comments on each of the statutory criteria, with 
particular focus on the degree to which evidence-based guidelines can 
reasonably prevent VAP.
    Comment: The majority of commenters addressed whether or not VAP 
could be considered reasonably preventable through the application of 
evidence-based guidelines. Citing literature mentioned in the IPPS FY 
2009 proposed rule, commenters noted that VAP is only preventable 40 
percent of the time, which, in their opinion, does not meet the 
statutory requirement for reasonably preventable through the 
application of evidence-based guidelines. (The proposed rule referenced 
the American Association of Respiratory Care (AARC) Evidence-Based 
Clinical Practice Guidelines as one example of an existing evidence-
based standard designed to prevent VAP.) A few commenters questioned 
the narrow focus of the AARC's guidelines.
    In addition to problems related to its preventability, many 
commenters also argued that VAP may be difficult to diagnose based on 
shortfalls associated with clinical definitions and diagnostic tests. 
The commenters stated that clinical cultures are not predictive for 
pneumonia, radiographic evidence of pneumonia is difficult to 
standardize, and vaccines do not protect against infection during the 
current hospital stay. The commenters pointed out that no standard 
definition of VAP exists--the definition is constructed of nonspecific 
clinical signs common to many complications; thus, because of its 
imprecise definition, selection of VAP as an HAC could be especially 
susceptible to unintended consequences. One commenter stated that the 
flexibility inherent to VAP's imprecise definitions coupled with threat 
of nonpayment created a ``perverse incentive'' to diagnose VAP as 
another condition. Commenters noted that patient risk factors may also 
impact the risk of developing VAP. For example, burn patients are 
especially susceptible to infections.
    While some commenters indicated that VAP is a serious condition and 
could be a good candidate HAC in the future, the many commenters argued 
that current evidence and technology are not well-enough developed at 
this time to meet the statutory requirement of reasonably preventable 
through the application of evidence-based guidelines. One commenter 
pointed out that the Institute for Healthcare Improvement and the Joint 
Commission are currently evaluating alternative standards for VAP 
prevention.
    Response: In light of the public comments that we received, we are 
not selecting VAP as an HAC. We will work in partnership with the CDC 
and closely monitor the evolving literature addressing the prevention 
of VAP through the application of evidence-based guidelines. If 
evidence warrants, we may consider proposing VAP as an HAC in the 
future.
f. Staphylococcus aureus Septicemia
    Staphylococcus aureus is a bacterium that lives on multiple 
anatomic sites in most people. It usually does not cause physical 
illness, but it can cause a variety of infections ranging from 
superficial boils to cellulitis to pneumonia to life-threatening 
bloodstream infections (septicemia). It typically becomes pathogenic by 
infecting normally sterile tissue through traumatized tissue, such as 
cuts or abrasions, or at the time of invasive procedures and can be 
both an early and/or late complication of trauma or surgery. 
Staphylococcus aureus septicemia can also be a late effect of an injury 
or a surgical procedure. Risk factors for developing Staphylococcus 
aureus septicemia include advanced age, debilitated state, 
immunocompromised status, and history of an invasive medical procedure.
    In the IPPS FY 2009 proposed rule, we presented the following 
information for consideration:

----------------------------------------------------------------------------------------------------------------
                                          Medicare data  (FY                             Selected evidence-based
            HAC candidate                       2007)           CC/MCC (ICD-9-CM codes)         guidelines
----------------------------------------------------------------------------------------------------------------
Staphylococcus aureus Septicemia.....   27,737 cases..  038.11(MCC) or 038.12    Available on the Web
                                        $84,976/         (MCC).                   site: http://
 hospital stay..                                   www.cdc.gov/ncidod/
dhqp/gl_
                                                                                          isolation.html.
                                                                Also excludes the        Available on the Web
                                                                 following from acting    site: http://
 as CC/MCC: 995.91        www.cdc.gov/ncidod/
                                                                 (MCC) 995.92 (MCC)       dhqp/gl--
                                                                 998.59 (CC).             intravascular.html
                                                                                          (Intravascular
                                                                                          catheter-associated
                                                                                          Staphylococcus aureus
                                                                                          Septicemia only).
----------------------------------------------------------------------------------------------------------------


                    Staphylococcus aureus Septicemia
------------------------------------------------------------------------
          ICD-9-CM codes                      Code descriptors
------------------------------------------------------------------------
038.11...........................  Staphylococcus aureus septicemia.
038.12...........................  Methicillin-resistant Staphylococcus
                                    aureus septicemia.
995.91...........................  Sepsis.
995.92...........................  Severe sepsis.
998.59...........................  Other postoperative infection.
------------------------------------------------------------------------

    We solicited comments on each of the statutory criteria, with 
particular focus on the degree to which this condition can be 
considered reasonably preventable through the application of evidence-
based guidelines.
    Comment: Many commenters described difficulty in determining 
whether an infection was present upon admission, as the development of

[[Page 48484]]

infection while in a hospital may not necessarily indicate that the 
infection was hospital-acquired. The commenters suggested that 
Staphylococcus aureus septicemia may also result from permanent 
tunneled and nontunneled catheters used in cancer patients or through 
dialysis shunts. The commenters asserted that the risk of infection may 
be higher for different subpopulations of patients.
    A large number of commenters suggested that the CDC's guidelines 
specific to vascular catheter-associated infections do not extend to 
Staphylococcus aureus septicemia generally. However, because the 
majority of Staphylococcus aureus septicemia events are related to 
catheters and skin lesions, commenters also argued that the previously 
selected HAC, vascular catheter-associated infections, will already 
capture the vast majority of preventable Staphylococcus aureus 
septicemia events. According to the commenters, adopting Staphylococcus 
aureus septicemia as an additional condition would yield little quality 
improvement but could cause expensive and unnecessary treatments for 
both hospitals and patients.
    Response: In light of these public comments, we are not selecting 
Staphylococcus aureus septicemia as an HAC in this final rule. If 
evidence warrants, we may consider proposing Staphylococcus aureus 
septicemia as an HAC in the future. We note that several commenters 
recognized that Staphylococcus aureus septicemia cases are being 
addressed through the vascular catheter-associated infection HAC that 
was selected in the FY 2008 IPPS final rule with comment period.
g. Clostridium difficile-Associated Disease (CDAD)
    Clostridium difficile is a bacterium that colonizes the 
gastrointestinal (GI) tract of a certain number of healthy people as 
well as being present on numerous environmental surfaces. Under 
conditions where the normal flora of the gastrointestinal tract is 
altered, Clostridium difficile can flourish and release large enough 
amounts of a toxin to cause severe diarrhea or even life-threatening 
colitis. Risk factors for CDAD include the prolonged use of broad 
spectrum antibiotics, gastrointestinal surgery, prolonged nasogastric 
tube insertion, and repeated enemas. CDAD can be acquired in the 
hospital or in the community. Its spores can live outside of the body 
for months and thus can be spread to other patients in the absence of 
meticulous hand washing by care providers and others who contact the 
infected patient.
    In the IPPS FY 2009 proposed rule, we presented the following 
information for consideration:

----------------------------------------------------------------------------------------------------------------
                                          Medicare data  (FY                             Selected evidence-based
            HAC candidate                       2007)            CC/MCC (ICD-9-CM code)         guidelines
----------------------------------------------------------------------------------------------------------------
Clostridium difficile-Associated        96,336 cases..  008.45 (CC)............  Available on the Web
 Disease (CDAD).                        $59,153/                                  site: http://
 hospital stay..                                   www.cdc.gov/ncidod/
dhqp/gl_
                                                                                          isolation.html.
                                                                                         Available on the Web
                                                                                          site: http://
www.cdc.gov/ncidod/
dhqp/id_CdiffFAQ_
                                                                                          HCP.html#9.
----------------------------------------------------------------------------------------------------------------


                Clostridium difficile-Associated Disease
------------------------------------------------------------------------
          ICD-9-CM code                       Code descriptor
------------------------------------------------------------------------
008.45...........................  Clostridium difficile.
------------------------------------------------------------------------

    We solicited comments on each of the statutory criteria, with 
particular focus on the degree to which CDAD can be reasonably 
prevented through the application of evidence-based guidelines.
    Comment: The majority of commenters addressed preventability and 
the inability to distinguish between community-acquired and hospital-
acquired infections without culturing each patient to determine strain 
or type of infection. The commenters emphasized that CDAD is a known 
adverse side effect of appropriate broad spectrum antibiotic use. One 
commenter suggested establishing a unique ICD-9-CM code to identify 
cases of CDAD that occur other than as a side effect of broad spectrum 
treatment to distinguish situations of patient-to-patient transmission 
of Clostridium difficile that are more likely to be considered 
reasonably preventable. Commenters further asserted that the 
appropriate use of proton pump inhibitors and H2 blockers is also 
associated with CDAD infections and outbreaks. Many commenters stated 
that no specific evidence-based prevention guidelines are currently 
available, rather the CDC guidelines apply to patient-to-patient 
transmissions generally and do not apply to CDAD specifically. Many 
commenters addressed the difficulty of distinguishing between 
community-acquired and hospital-acquired infection as a barrier to 
adopting CDAD as an HAC.
    Response: In light of these public comments, we are not selecting 
CDAD as an HAC in this final rule. However, we continue to receive 
strong support from consumers and purchasers to include CDAD as an HAC, 
and we will continue to consult with the CDC regarding the evidence-
based prevention guidelines and coding for CDAD. If evidence warrants, 
we may consider proposing CDAD as an HAC in the future.
h. Legionnaires' Disease
    Legionnaires' Disease is a type of pneumonia caused by the 
bacterium Legionella pneumophila. It is contracted by inhaling 
contaminated water vapor or droplets. It is not spread person-to-
person. The bacterium thrives in warm aquatic environments and 
infections have been linked to large industrial water systems, 
including hospital water systems such as air conditioning cooling 
towers and potable water plumbing systems.
    In the FY 2009 IPPS proposed rule, we presented the following 
information for consideration:

----------------------------------------------------------------------------------------------------------------
                                                                                         Selected evidence-based
            HAC candidate              Medicare data (FY 2007)   CC/MCC (ICD-9-CM code)         guidelines
----------------------------------------------------------------------------------------------------------------
Legionnaires' Disease................   351 cases.....   482.84 (MCC)..........  Available at the Web
                                        $86,014/                                  site: http://
 hospital stay.                                    www.cdc.gov/ncidod/
dbmd/diseaseinfo/
legionellosis_g.htm.

[[Page 48485]]

 
                                                                                         Available at the Web
                                                                                          site: http://
www.legionella.org/.
----------------------------------------------------------------------------------------------------------------


                          Legionnaires' Disease
------------------------------------------------------------------------
          ICD-9-CM code                       Code descriptor
------------------------------------------------------------------------
482.84...........................  Legionnaires' disease.
------------------------------------------------------------------------

    We requested public comment regarding the applicability of each of 
the statutory criteria to Legionnaires' Disease, particularly 
addressing the degree of preventability of this condition through the 
application of evidence-based guidelines and the degree to which 
hospital-acquired Legionnaires' Disease can be distinguished from 
community-acquired cases. We also sought comments on additional water-
borne pathogens that would qualify for the HAC provision by meeting the 
statutory criteria.
    Comment: Many commenters noted that Legionnaries' Disease is not a 
high volume condition and questioned whether it should be prioritized 
as an HAC. In addition, the commenters emphasized that CDC's 
Environmental Infection Control Guidelines recognize that the mere 
presence of the bacterium Legionella in the water supply is not 
necessarily associated with Legionnaires' Disease, and that without 
evidence of a dose-response relationship, surveillance and treatment is 
not recommended. The commenters stated that even when decontamination 
efforts are pursued, there is no guarantee that treatment will ensure 
Legionella can be completely eradicated from hospital water intakes 
without damaging infrastructures. In addition, many commenters 
expressed concern regarding the unintended consequence of increasing 
the use of costly sterile water in hospitals.
    When addressing the degree to which hospital-acquired Legionnaires' 
Disease can be distinguished from community-acquired cases, the 
commenters noted that the epidemiologic strain causing the disease is 
widespread in the community.
    Response: In light of these public comments, we are not selecting 
Legionnaires' Disease as an HAC in this final rule. Although we are not 
selecting Legionnaires' Disease as an HAC in this final rule, we will 
continue to consult with the CDC about the evidence-based prevention 
guidelines. If evidence warrants, we may consider Legionnaires' Disease 
and other water-borne pathogens suggested by commenters and noted in 
section II.F.9. of this preamble (Enhancement and Future Issues) as 
HACs in the future.
i. Iatrogenic Pneumothorax
    Iatrogenic pneumothorax refers to the accidental introduction of 
air into the pleural space, which is the space between the lung and the 
chest wall, by medical treatment or procedure. When air is introduced 
into this space, it partially or completely collapses the lung. 
Iatrogenic pneumothorax can occur during any procedure where there is 
the possibility of air entering the pleural space, including needle 
biopsy of the lung, thoracentesis, central venous catheter placement, 
pleural biopsy, tracheostomy, and liver biopsy. Iatrogenic pneumothorax 
can also occur secondary to positive pressure mechanical ventilation 
when an air sac in the lung ruptures, allowing air into the pleural 
space. In the FY 2009 IPPS proposed rule, we presented the following 
information for consideration:

----------------------------------------------------------------------------------------------------------------
                                          Medicare data  (FY                             Selected evidence-based
            HAC candidate                       2007)           CC/MCC  (ICD-9-CM code)         guidelines
----------------------------------------------------------------------------------------------------------------
Iatrogenic Pneumothorax..............   22,665 cases..   512.1 (CC)............  Available at the Web
                                        $75,089/                                  site: http://
 hospital stay..                                   www.ncbi.nlm.nih.gov/
 pubmed/1485006.
----------------------------------------------------------------------------------------------------------------


                         Iatrogenic Pneumothorax
------------------------------------------------------------------------
          ICD-9-CM code                       Code descriptor
------------------------------------------------------------------------
512.1............................  Iatrogenic pneumothorax.
------------------------------------------------------------------------

    We solicited public comment on the applicability of each of the 
statutory criteria to this condition. We were particularly interested 
in receiving comments on the degree to which iatrogenic pneumothorax 
could be considered reasonably preventable through the application of 
evidence-based guidelines.
    Comment: Most commenters opposed the selection of iatrogenic 
pneumothorax as an HAC. They indicated that the evidence-based 
guidelines often acknowledge that iatrogenic pneumothorax is a known, 
relatively common risk for certain procedures. Further, with regard to 
evidence-based guidelines, many commenters opposed designation of this 
condition as an HAC due to a lack of consensus within the medical 
community regarding its preventability.\17\ Some commenters offered 
suggestions to exclude certain procedures or situations, including 
central line placement, thoracotomy, and use of a ventilator, if 
iatrogenic pneumothorax were to be selected as an HAC.
---------------------------------------------------------------------------

    \17\ Accidental Iatrogenic Pneumothorax in Hospitalized 
Patients. Zhan et al., Medical Care 44(2):182-6, 2006 Feb.
---------------------------------------------------------------------------

    Response: In light of these public comments, we are not selecting 
iatrogenic pneumothorax as an HAC in this final rule. Although we are 
not selecting iatrogenic pneumothorax as an HAC in this final rule, we 
do recognize this as an adverse event that occurs frequently. We will 
continue to review the development of evidence-based guidelines for the 
prevention of iatrogenic pneumothorax. If evidence warrants, we may 
consider iatrogenic pneumothorax as an HAC in the future.
j. Methicillin-Resistant Staphylococcus aureus (MRSA)
    In October 2007, the CDC published in the Journal of the American 
Medical Association an article citing high mortality rates from MRSA, 
an antibiotic-resistant ``superbug.'' The article estimates 19,000 
people died from MRSA infections in the United States in 2005. The 
majority of invasive MRSA cases are health care-related--contracted in 
hospitals or nursing homes--though community-acquired MRSA also poses a 
significant public health concern. Hospitals have been focused for 
years on controlling MRSA through the application of CDC's evidence-
based guidelines outlining best practices for combating the bacterium 
in that setting. In the proposed FY 2009 IPPS rule, we

[[Page 48486]]

presented the following information for consideration:

----------------------------------------------------------------------------------------------------------------
                                                                                        Selected evidence-based
             Condition               Medicare data (FY 2007)  CC/MCC (ICD-9-CM code)          guidelines
----------------------------------------------------------------------------------------------------------------
Methicillin-resistant                 88,374 (V09.0)  No CC/MCC.............  Available at the Web site:
 Staphylococcus aureus (MRSA) (Code   cases.                                           http://www.cdc.gov/ncidod/
 V09.0 includes infections with       $32,049/                                 dhqp/gl--isolation.html.
 microorganisms resistant to          hospital stay..
 penicillins).
----------------------------------------------------------------------------------------------------------------

    During its March 19-20, 2008 meeting, the ICD-9-CM Coordination and 
Maintenance Committee discussed several new codes to more accurately 
capture MRSA. The following new codes will be implemented on October 1, 
2008:

               Methicillin-Resistant Staphylococcus aureus
------------------------------------------------------------------------
          ICD-9-CM codes                      Code descriptors
------------------------------------------------------------------------
038.12............................  Methicillin-resistant Staphylococcus
                                     aureus septicemia.
041.12............................  Methicillin-resistant Staphylococcus
                                     aureus in conditions classified
                                     elsewhere and of unspecified site.
482.42............................  Methicillin-resistant Pneumonia due
                                     to Staphylococcus aureus.
V02.53............................  Carrier or suspected carrier of
                                     Methicillin-susceptible
                                     Staphylococcal aureus.
V02.54............................  Carrier or suspected carrier of
                                     Methicillin-resistant
                                     Staphylococcal aureus.
V12.04............................  Personal history of Methicillin-
                                     resistant Staphylococcal aureus.
------------------------------------------------------------------------

    Though we did not propose MRSA as a candidate HAC in the FY 2009 
IPPS proposed rule, MRSA can trigger the HAC payment provision. For 
every infectious condition selected as an HAC, MRSA could be the 
etiology of that infection. For example, if MRSA were the cause of a 
vascular catheter-associated infection (one of the eight conditions 
selected in the FY 2008 IPPS final rule with comment period), the HAC 
payment provision would apply to that MRSA infection. As we noted in 
the FY 2008 IPPS final rule with comment period (72 FR 47212), 
colonization by MRSA is not a reasonably preventable condition 
according to the current evidence-based guidelines. Therefore, MRSA 
does not meet the ``reasonably preventable'' statutory criterion for an 
HAC.
    Comment: The majority of commenters strongly supported the CMS 
decision not to propose MRSA as an HAC candidate.
    Response: We appreciate the support of the commenters and reiterate 
that MRSA is addressed by the HAC payment provision in situations where 
it triggers a condition that we have identified as an HAC. We also 
direct readers to a detailed discussion regarding coding of MRSA in 
section II.F.10.b. of this preamble. As we noted in the FY 2009 IPPS 
proposed rule (73 FR 23559), we are pursuing collaborative efforts with 
other HHS agencies to combat MRSA. The Agency for Healthcare Research 
and Quality (AHRQ) has launched a new initiative in collaboration with 
CDC and CMS to identify and suppress the spread of MRSA and related 
infections. In support of this work, Congress appropriated $5 million 
to fund research, implementation, management, and evaluation practices 
that mitigate such infections.
    CDC has carried out extensive research on the epidemiology of MRSA 
and effective techniques that could be used to treat the infection and 
reduce its spread. The following Web sites contain information that 
reflect CDC's commitment: (1) http://www.cdc.gov/ncidod/dhqp/ar_
mrsa.html (health care-associated MRSA); (2) http://www.cdc.gov/ncidod/
dhqp/ar_mrsa_ca_public.html (community-acquired MRSA); (3) http://
www.cdc.gov/mmwr/preview/mmwrhtml/mm4908a1.htm; and (4) http://
www.cdc.gov/handhygiene/.
    AHRQ has made previous investments in systems research to help 
monitor MRSA and related infections in hospital settings, as reflected 
in material on its Web sites at: http://www.guideline.gov/browse/
guideline_index.aspx and http://www.ahrq.gov/clinic/ptsafety/pdf/
ptsafety.pdf.
8. Present on Admission Indicator Reporting (POA)
    Collection of present on admission (POA) indicator data is 
necessary to identify which conditions were acquired during 
hospitalization for the HAC payment provision and for broader public 
health uses of Medicare data. Through Change Request (CR) No. 5679 
(released June 20, 2007), CMS issued instructions requiring IPPS 
hospitals to submit POA indicator data for all diagnosis codes on 
Medicare claims. CMS also issued CR No. 6086 (released June 30, 2008) 
regarding instructions for processing non-IPPS claims. Specific 
instructions on how to select the correct POA indicator for each 
diagnosis code are included in the ICD-9-CM Official Guidelines for 
Coding and Reporting, available at the CDC Web site: http://
www.cdc.gov/nchs/datawh/ftpserv/ftpicd9/icdguide07.pdf (POA reporting 
guidelines begin on page 92). Additional information regarding POA 
indicator reporting and application of the POA reporting options is 
available at the CMS Web site: http://www.cms.hhs.gov/HospitalAcqCond. 
CMS has historically not provided coding advice, rather we collaborate 
with the American Hospital Association (AHA) through the Coding Clinic 
for ICD-9-CM. CMS has been collaborating with the AHA to promote the 
Coding Clinic for ICD-9-CM as the source for coding advice about the 
POA indicator.
    There are five POA indicator reporting options, as defined by the 
ICD-9-CM Official Coding Guidelines:

------------------------------------------------------------------------
          Indicator                            Descriptor
------------------------------------------------------------------------
Y............................  Indicates that the condition was present
                                on admission.

[[Page 48487]]

 
W............................  Affirms that the provider has determined
                                based on data and clinical judgment that
                                it is not possible to document when the
                                onset of the condition occurred.
N............................  Indicates that the condition was not
                                present on admission.
U............................  Indicates that the documentation is
                                insufficient to determine if the
                                condition was present at the time of
                                admission.
1............................  Signifies exemption from POA reporting.
                                CMS established this code as a
                                workaround to blank reporting on the
                                electronic 4010A1. A list of exempt ICD-
                                9-CM diagnosis codes is available in the
                                ICD-9-CM Official Coding Guidelines.
------------------------------------------------------------------------

    In the FY 2009 IPPS proposed rule for the HAC payment provision (73 
FR 23559), we proposed to pay the CC/MCC MS-DRGs only for those HACs 
coded with ``Y'' and ``W'' indicators.
    Comment: Commenters overwhelmingly supported payment for both the 
POA ``Y'' and ``W'' options.
    Response: We agree with commenters and are finalizing our proposal 
to pay for both the POA ``Y'' and ``W'' options. We plan to analyze 
whether both the ``Y'' and ``W'' indicators are being used 
appropriately. Medicare program integrity initiatives closely monitor 
for inaccurate coding and coding that is inconsistent with medical 
record documentation.
    We proposed to not pay the CC/MCC MS-DRGs for HACs coded with the 
``N'' indicator.
    Comment: Commenters were in favor of not paying for the POA ``N'' 
indicator option.
    Response: We agree with the commenters and are finalizing our 
proposal to not pay for the POA ``N'' indicator option.
    Comment: The majority of commenters opposed not paying for the POA 
``U'' indicator option. Commenters expressed that the reporting of the 
POA indicators is still new, and hospitals continue to learn how to 
apply them, as well as educate their physicians on the required 
documentation without which POA reporting is impossible.
    Response: Although we recognize that POA indicator reporting is new 
for some IPPS hospitals, we are finalizing the proposed policy of not 
paying for the ``U'' option. We believe that this approach will 
encourage better documentation and will result in more accurate public 
health data.
    We plan to analyze whether both the ``N'' and ``U'' POA reporting 
options are being used appropriately. The American Health Information 
Management Association (AHIMA) has promulgated Standards of Ethical 
Coding that require accurate coding regardless of the payment 
implications of the diagnoses. That is, diagnoses and POA indicators 
must be reported accurately on claims regardless of the fact that 
diagnoses coded with an ``N'' or ``U'' indicator may no longer trigger 
a higher paying MS-DRG. Medicare program integrity initiatives closely 
monitor for inaccurate coding and coding inconsistent with medical 
record documentation.
    Although we proposed, and are now finalizing, the policy of not 
paying the CC/MCC MS-DRGs for HACs coded with the ``U'' indicator, we 
recognize that there may be some exceptional circumstances under which 
payment might be made. Death, elopement (leaving against medical 
advice), and transfers out of a hospital may preclude making an 
informed determination of whether an HAC was present on admission. We 
sought public comments on the potential use of patient discharge status 
codes to identify exceptional circumstances.
    Comment: The majority of commenters did not address the patient 
discharge status codes as an exception for payment when the ``U'' POA 
indicator is used. The commenters who did address this issue were in 
favor of using patient discharge status codes as an exception for 
payment.
    Response: We will monitor the extent to which and under what 
circumstances the ``U'' POA indicator code is used. In the future, we 
may consider proposing use of the patient discharge status codes to 
recognize exceptions for payment.
9. Enhancement and Future Issues
    In section II.F.9. of the FY 2009 IPPS proposed rule (73 FR 23560), 
we encouraged the public to provide ideas and models for combating 
preventable HACs through the application of VBP principles. We note 
that we are not proposing Medicare policy in this discussion. However, 
we believe that collaborating with stakeholders to improve the HAC 
policy is another step toward fulfilling VBP's potential to provide 
better health care for Medicare beneficiaries.
    To stimulate reflection and creativity, we presented several 
enhancement options, including: (a) Applying risk adjustment to make 
the HAC payment provision more precise; (b) collecting HAC rates to 
obtain a more robust longitudinal measure of a hospital's incidence of 
these conditions; (c) using POA information in various ways to decrease 
the incidence of preventable HACs; (d) adopting ICD-10 to facilitate 
more precise identification of HACs; (e) applying the principle of the 
IPPS HAC payment provision to Medicare payments in other care settings; 
(f) using CMS' authority to address events on the NQF's list of Serious 
Reportable Adverse Events; and (g) additional potential candidate HACs, 
suggested through comment, for future consideration.
a. Risk-Adjustment of Payments Related to HACs
    In the FY 2009 IPPS proposed rule, we suggested that payment 
adjustments made when one of the selected HACs occurs could be made 
more precise by reflecting various sources and degrees of individual 
patient or patient population risk. For example, a patient's medical 
history, current health status (including comorbidities), and severity 
of illness can affect the expected occurrence of conditions selected as 
HACs. Rather than not paying any additional amount when a selected HAC 
occurs during a hospitalization, payment reductions could be related to 
the expected occurrence of that condition (that is, the less likely the 
complication, the greater the payment reduction).
    In general, most commenters supported the idea of risk-adjusted 
payments for HACs, noting that proportional payments could reduce the 
risk of unintended consequences, as compared to the current HAC payment 
policy, through more equitable treatment of both hospitals and 
patients. Specifically, a few commenters expressed concern that all-or-
nothing payment for HACs may disproportionately impact urban, teaching, 
and academic hospitals that treat under-served populations. Commenters 
stated that, because these populations may be at greater risk for HACs, 
risk-adjusted payments could allow all hospitals to continue treating 
high-risk populations without being penalized for treating riskier 
patients.
    Commenters proposed addressing patient risk factors on both the 
individual and population levels. The majority of commenters supported 
assessing risk at the individual patient level. Although this approach 
may offer

[[Page 48488]]

the most precise risk adjustment, current technology and resources 
limit the ability to risk adjust at this level, as we discussed in the 
FY 2009 IPPS proposed rule. Risk adjustment at the subpopulation level, 
however, could capture and correct for high patient risk related to 
specific medical conditions. For example, many commenters noted that 
burn patients in particular are at high risk for some of the selected 
HACs, including infections. Other high-risk patient populations 
mentioned by commenters included trauma, immunosuppressed, and 
palliative care patients.
    Other commenters emphasized that for certain HACs, risk adjustment 
strategies would not be appropriate. Commenters stated that payments 
for ``never events,'' such as retention of a foreign object after 
surgery, air embolism, and blood incompatibility, should never be 
adjusted for risk because such occurrences can be considered absolutely 
preventable.
b. Rate-Based Measurement of HACs
    In the FY 2009 IPPS proposed rule, we suggested that a hospital's 
rates of HACs could be included as a measurement domain within each 
hospital's total performance score under a pay-for-performance model 
like the Medicare Hospital Value-Based Purchasing Plan. (We refer 
readers to section IV.C. of this preamble for a discussion of the 
Plan.) We asserted that measurement of rates over time could be a more 
meaningful, actionable, and fair way to adjust a hospital's MS-DRG 
payments for the incidence of HACs. The consequence of a higher 
incidence of measured conditions would be a lower VBP incentive 
payment, while public reporting of the measured rates of HACs would 
give hospitals an additional, nonfinancial incentive to prevent 
occurrence of the conditions.
    The majority of commenters preferred a standardized framework for 
rate-based measurement and VBP payment implications for HACs, as 
opposed to not being paid the higher MS-DRG amount. Many commenters 
suggested determining expected rates of HACs and using those expected 
rates as benchmark targets for comparison, rewarding providers who stay 
at or below benchmark, while decreasing payment for those who exceed 
the benchmark.
    Though the majority of commenters supported rate-based measurement 
of HACs, some commenters raised issues. A number of commenters noted 
that the extremely low incidence of ``never events'' could preclude 
meaningful rate-based measurement of the occurrence of those events. 
Other commenters opposed public reporting of the rates as a 
nonfinancial VBP incentive.
c. Use of POA Information
    In the FY 2009 IPPS proposed rule, we asserted that POA data could 
be used to better understand and prevent the occurrence of HACs. 
Medicare data could be analyzed separately or in combination with 
private sector or State POA data, which are currently available in 
certain States. Health services researchers could use these data in a 
variety of ways to assess the incidence of HACs and to identify best 
practices for HAC prevention. In addition, publicly reported POA data 
could also be used to support better health care decision making by 
Medicare beneficiaries, as well as other health care consumers, 
professionals, and caregivers.
    Commenters addressed various uses of POA data, including informing 
risk adjustment, making benchmark comparisons between and within 
hospitals, and public reporting. Commenters noted that POA data have 
important applications to risk adjustment for quality measurement. In 
the absence of risk adjustment mechanisms, one commenter suggested that 
CMS expand POA codes beyond those discussed in section II.F.8. of the 
preamble of the proposed rule to include a code that would preclude 
reduced payment if the provider attests that ``the HAC is believed to 
be the result of a natural disease process/severe patient condition and 
is not believed to be indicative of the level of the quality of care 
provided.'' Nearly all commenters addressing the use of POA data urged 
CMS to provide hospitals with timely feedback of POA information. 
Specifically, many commenters wanted CMS to provide each hospital with 
its POA rates and comparisons to peer hospitals.
    Commenters' responses to publicly reporting POA data were mixed. A 
large number of commenters opposed public reporting of POA data, 
arguing that only measures endorsed by the NQF and adopted by the HQA 
should be considered for public reporting. A few commenters voiced 
concern that public reporting would discourage hospitals from 
accurately reporting POA data. A few commenters suggested a phased-in 
public reporting timeline for POA data, allowing hospital data to 
remain confidential for a period while hospitals adjust to new coding 
and reporting requirements. Nearly all commenters stated that, if POA 
data were to be publicly reported, the data should be posted on 
Hospital Compare.
d. Transition to ICD-10
    In the FY 2009 IPPS proposed rule, we suggested that adopting ICD-
10 codes to replace the outdated, vague codes of ICD-9-CM would allow 
CMS to capture more accurate and precise information about HACs.\18\ 
Noting that the current ICD-9-CM codes are over three decades old, we 
proposed that ICD-10 codes more precisely capture information using 
current medical terminology. For example, ICD-9-CM codes for pressure 
ulcers do not provide information about the size, depth, or exact 
location of the ulcer, while ICD-10 has 125 codes to capture this 
information.
---------------------------------------------------------------------------

    \18\ In the FY 2009 IPPS proposed rule, there is a typographical 
error such that the rule refers to ICD-10-PCS (procedure codes) 
rather than ICD-10 (diagnosis codes).
---------------------------------------------------------------------------

    A number of commenters supported the adoption of ICD-10. Many of 
the commenters pointed out that the adoption of ICD-10 would facilitate 
more precise identification of HACs. Several commenters supported the 
adoption of ICD-10 with an appropriate 2-year transition period. 
Commenters stated that they have known since the 1990's that the ICD-9-
CM coding structure was reaching its limits, and it was becoming 
increasingly difficult to identify new technologies that are commonly 
used in today's medical practices. The commenters stated that there is 
a critical need to move in a timely manner to CM and ICD-10-PCS because 
hospitals would have the ability to capture data more accurately, thus 
providing higher quality and more accurate data for reporting. 
Commenters urged the implementation of ICD-10 to ensure the 
availability of appropriate, consistent, and accurate clinical 
information reflective of patients' medical conditions and care 
provided. Commenters asserted that this would allow the nation to 
better measure quality, implement value-based purchasing, identify 
hospital-acquired conditions, and continue to refine a prospective 
payment system that improves recognition of variances in severity of 
illness.
    One commenter expressed concern about the benefit of moving to ICD-
10 and believed that its benefit in the outpatient setting had not been 
demonstrated. The commenter expressed concern about the cost of moving 
to a new coding system with the need to update software and redraft 
policies.

[[Page 48489]]

e. Healthcare-Associated Conditions in Other Payment Settings
    In the FY 2009 IPPS proposed rule, we suggested that the broad 
principle of Medicare not paying for preventable healthcare-associated 
conditions could potentially be applied in Medicare payment settings 
beyond IPPS hospitals, including for example, hospital outpatient 
departments, SNFs, and physician practices. Although the implementation 
would be different for each setting, alignment of incentives across 
settings of care is an important goal for all of CMS' VBP initiatives. 
To stimulate public input, we have included a discussion in several 
Medicare payment regulations regarding application of the broad 
principle of Medicare not paying for preventable healthcare-associated 
conditions in payment settings beyond IPPS. The discussion was included 
in the following regulations: FY 2009 IRF proposed rule (73 FR 22688), 
the CY 2009 OPPS/ASC proposed rule (73 FR 41547), the FY 2009 SNF 
proposed rule (73 FR 25932), and the FY 2009 LTCH final rule (73 FR 
26829).
    Commenters' reaction to the notion of applying the IPPS HAC payment 
provision to other settings was mixed. A number of commenters 
recognized that this use of payment incentives could promote better 
continuity of care (including documentation) and a reduction in 
avoidable readmissions. Commenters noted that aligned payment 
incentives would force pre- and post-acute care settings to share 
accountability for preventing healthcare-associated conditions. One 
commenter who supported expanding the policy to nursing homes suggested 
that CMS consider including dehydration measures for nonpayment in that 
setting.
    While many commenters recognized potential benefits, many other 
commenters raised concerns or opposed implementing the IPPS HAC payment 
provision in other settings. Generally, commenters who were opposed to 
expanding the policy's reach believed that doing so would be premature 
until CMS assesses the impacts of the policy in the IPPS setting. 
Commenters also raised concerns about applying the policy in particular 
settings. For example, many commenters stated that Medicare payment for 
the physician setting is extremely different from that of the IPPS 
setting and that attribution issues in particular would make the policy 
difficult to accurately and fairly implement.
    Commenters suggested that, if CMS did implement a similar policy in 
the physician setting, the agency should ensure that the policy does 
not create disincentives for treating high-risk patients. From the 
long-term care perspective, one commenter noted that the risk of an 
adverse event occurring increases with the duration of the stay and so 
such a policy would be particularly concerning for LTCHs.
f. Relationship to NQF's Serious Reportable Adverse Events
    In the FY 2009 IPPS proposed rule, we discussed how CMS has applied 
its authority to address the events on the NQF's list of Serious 
Reportable Adverse Events (also known as ``never events''). We have 
adopted a number of items from the NQF's list of events as HACs. 
However, we also discussed that the HAC payment provision is not 
ideally suited to address every condition on the NQF's list.
    Commenters unanimously asserted that CMS should not pay for never 
events. However, many commenters were concerned about the widespread 
misperception that HACs are never events, which can be considered 
absolutely preventable. Commenters urged CMS to explicitly 
differentiate its ``reasonably preventable'' HACs from the ``never 
events'' on the NQF's list of Serious Reportable Adverse Events.
    Commenters suggested alternatives to Medicare's existing authority 
under the HAC provision to address never events. One commenter 
suggested that no higher CC/MCC MS-DRG payment should be made for 
claims including a selected HAC if that HAC overlaps with a never 
event. This would preclude a higher MS-DRG payment regardless of 
whether any other CC/MCCs that would otherwise trigger a higher MS-DRG 
payment are present on the claim.
g. Additional Potential Candidate HACs, Suggested Through Comment
    We received the following suggestions of potential candidates for 
the HAC payment provision:
     Surgical site infection following device procedures
     Failure to rescue
     Death or disability associated with drugs, devices, or 
biologics
     Events on the NQF's list of Serious Reportable Adverse 
Events, not previously addressed by the HAC payment provision
     Dehydration
     Malnutrition
     Water-borne pathogens, not previously addressed by the HAC 
payment provision.
    We reiterate that we are not making policy in this subsection; 
rather, we are providing a summary of the comments. We would like to 
thank commenters for the thoughtful comments received, and we will take 
this input into consideration as we develop any future regulatory and/
or legislative proposals to refine and enhance the HAC payment 
provision.
10 HAC Coding
    This HAC coding section addresses additional coding issues that 
were raised by commenters regarding the selected and candidate HACs.
a. Foreign Object Retained After Surgery
    Comment: One commenter requested that CMS provide technical 
guidance on how to address certain situations related to retained 
foreign objects. According to the commenter, in certain circumstances, 
it may be in the best interest of the patient not to remove the object. 
For example, the commenter stated that leaving a patient under 
anesthesia for a prolonged period of time and displacing internal 
organs in search of a surgical object left in the body may be more 
harmful than leaving the object inside the patient and completing a 
surgery in an expedited fashion. The commenter suggested that CMS 
clearly specify that the policy applies to an unintended retention of a 
foreign object, to allow physicians to exercise clinical judgment 
regarding the relative risk of leaving an object versus removing it.
    Response: We believe that ICD-9-CM codes 998.4 and 998.7 clearly 
describe the application of the HAC provision to a foreign body 
``inadvertently'' or ``accidentally'' left in a patient during a 
procedure.
b. MRSA
    Comment: Commenters raised issues regarding the MRSA coding. One 
commenter stated that the recent addition of unique MRSA ICD-9-CM codes 
will allow for improved tracking of MRSA infections and will complement 
the surveillance efforts underway at the CDC and the AHRQ. The 
commenter stated that the creation of new MRSA-specific codes will 
generate better data on which to base important MRSA prevention and 
management policy decisions, and will allow the health care community 
to more effectively address this growing public health problem. The 
commenter stated that CMS could reflect the increased utilization of 
resources associated with MRSA diagnoses by making CC/MCC 
classifications for the following three MRSA codes: Code 038.12 
(Methicillin-resistant Staphylococcus aureus septicemia--MCC); code 
482.42 (Methicillin-resistant

[[Page 48490]]

pneumonia due to Staphylococcus aureus--MCC); and code 041.12 
(Methicillin-resistant Staphylococcus aureus in conditions classified 
elsewhere and of unspecified site--CC).
    As justification for this request, the commenter pointed out that 
the predecessor codes for 038.12 and 482.42 are MCCs. The predecessor 
code for 038.12 is 038.11 (Staphylococcus aureus septicemia), which is 
an MCC. The predecessor code for 482.42 is 482.41 (Pneumonia due to 
Staphylococcus aureus), which is also an MCC.
    The commenter's justification for making 041.12 a CC is not based 
on the predecessor code's CC/MCC assignment. The commenter acknowledged 
the predecessor code, 041.11 (Staphylococcus aureus) is a non-CC. The 
commenter reviewed data provided in the development of the original CC/
MCC classifications for the MS-DRGs and acknowledged that the data did 
not clearly support making predecessor code 041.11 a CC. The commenter 
also recognized that clinical judgment was also used in deciding the 
non-CC/CC/MCC classification of each diagnosis code. Given CMS' use of 
both data and clinical evaluation, the commenter stated that code 
041.11 ``captures many minor and routine bacterial infections that are 
relatively simple and inexpensive to treat--in other words, diagnoses 
that do not lead to substantially increased use of hospital 
resources.'' Therefore, the commenter found it understandable that the 
predecessor code, 041.11, was classified as a non-CC.
    However, the commenter believed that the new MRSA specific code, 
041.12, will allow differentiation between MRSA and other infections 
and will likely show that these MRSA infections are significantly more 
difficult and expensive to treat. Therefore, the commenter requested 
that code 041.12 be classified as a CC.
    Response: The final CC/MCC classifications for new ICD-9-CM 
diagnosis codes are shown in Table 6A of the Addendum to this final 
rule. This table shows that we have classified codes 038.12 
(Methicillin-resistant Staphylococcus aureus septicemia) and 482.42 
(Methicillin-resistant pneumonia due to Staphylococcus aureus) as MCCs. 
We agree that, based on the predecessor code and our clinical 
evaluation, this MCC classification is warranted.
    We disagree with classifying code 041.12 (Methicillin-resistant 
Staphylococcus aureus in conditions classified elsewhere and of 
unspecified site) as a CC. As is shown in Table 6A, we have classified 
this code as a non-CC. We agree with the commenter that the predecessor 
code was a non-CC. However, we also point out that all codes in the 
041.00-041.9 category of bacterial infection in conditions classified 
elsewhere and of unspecified site are non-CCs. All of the codes in this 
category are used as an additional code to identify a bacterial agent 
in diseases that are classified by another more precise code. For 
instance, if a patient has a MRSA urinary tract infection or infected 
toenail, one would assign a code for the specific type and location of 
the infection (for example, urinary tract infection or infected toenail 
bed) and an additional code to fully describe the bacterial agent, such 
as MRSA. The CC/MCC classification would be determined by the more 
precise infection code (for example, urinary tract infection or 
infected toenail bed).
    We do not believe it is appropriate to change the CC/MCC 
classification of one of the codes in the category of bacterial 
infection in conditions classified elsewhere and of unspecified site to 
a CC while leaving all of the others as non-CCs. Further, we believe it 
is more appropriate to assign a CC/MCC classification based on the more 
precise description of the patient's infection such as pneumonia, 
septicemia, or nail bed infection. Therefore, we have made code 041.12 
a non-CC, as shown in Table 6A of the Addendum to this final rule.
c. POA
    Comment: Commenters raised issues regarding the timing of 
laboratory testing (receiving results in 48-72 hours) and the effect 
this may have on the POA indicator reported for the HAC candidates 
proposed, such as Staphylococcus aureus septicemia and CDAD. The 
commenters expressed concern that when a lab test including cultures is 
performed upon admission, the results may not be available until 48-72 
hours later. The commenters were not clear on how the POA indicator 
would be applied in this scenario.
    Response: We acknowledge the commenter's concerns regarding correct 
assignment of the POA indicator when lab tests are involved. We refer 
the reader to the ICD-9-CM Official Guidelines for Coding and 
Reporting, Appendix I, Present on Admission Reporting Guidelines. These 
guidelines have been updated to address the issue of timeframe for POA 
identification and documentation. The updated guidelines recognize that 
in some clinical situations it may take a period of time after 
admission before a definitive diagnosis can be made. Determination of 
whether the condition was present on admission will be based on the 
applicable POA guidelines or on the physician's best clinical judgment. 
The guidelines address several scenarios, including those with 
infections and organisms, and how to assign the POA indicator. We also 
note that in this final rule we decided not to select at this time the 
proposed HAC cited by the commenter, Staphylococcus aureus septicemia, 
as an HAC.
11. HACs Selected for Implementation on October 1, 2008
    The following table sets out a complete list of the HACs selected 
for implementation on October 1, 2008 in this final rule and in the FY 
2008 IPPS final rule with comment period:

 
------------------------------------------------------------------------
                  HAC                        CC/MCC (ICD-9-CM codes)
------------------------------------------------------------------------
Foreign Object Retained After Surgery..  998.4 (CC)
                                         998.7 (CC)
Air Embolism...........................  999.1 (MCC)
Blood Incompatibility..................  999.6 (CC)
Pressure Ulcer Stages III & IV.........  707.23 (MCC)
                                         707.24 (MCC)
Falls and Trauma:......................  Codes within these ranges on
                                          the CC/MCC list:
    --Fracture.........................  800-829
    --Dislocation......................   830-839
    --Intracranial Injury..............  850-854
    --Crushing Injury..................  925-929
    --Burn.............................  940-949

[[Page 48491]]

 
    --Electric Shock...................  991-994
Catheter-Associated Urinary Tract        996.64 (CC)
 Infection (UTI).
                                         Also excludes the following
                                          from acting as a CC/MCC:
                                         112.2 (CC)
                                         590.10 (CC)
                                         590.11 (MCC)
                                         590.2 (MCC)
                                         590.3 (CC)
                                         590.80 (CC)
                                         590.81 (CC)
                                         595.0 (CC)
                                         597.0 (CC)
                                         599.0 (CC)
Vascular Catheter-Associated Infection.  999.31 (CC)
Manifestations of Poor Glycemic Control  250.10-250.13 (MCC)
                                         250.20-250.23 (MCC)
                                         251.0 (CC)
                                         249.10-249.11 (MCC)
                                         249.20-249.21 (MCC)
Surgical Site Infection, Mediastinitis,  519.2 (MCC)
 Following Coronary Artery Bypass Graft  And one of the following
 (CABG).                                  procedure codes: 36.10-36.19
Surgical Site Infection Following        996.67 (CC)
 Certain Orthopedic Procedures.
                                         998.59 (CC)
                                         And one of the following
                                          procedure codes: 81.01-81.08,
                                          81.23-81.24, 81.31-81.83,
                                          81.83, 81.85
Surgical Site Infection Following        Principal Diagnosis--278.01
 Bariatric Surgery for Obesity.          998.59 (CC)
                                         And one of the following
                                          procedure codes: 44.38, 44.39,
                                          or 44.95
Deep Vein Thrombosis and Pulmonary       415.11 (MCC)
 Embolism Following Certain Orthopedic   415.19 (MCC)
 Procedures.
                                         453.40-453.42 (MCC)
                                         And one of the following
                                          procedure codes: 00.85-00.87,
                                          81.51-81.52, or 81.54
------------------------------------------------------------------------

G. Changes to Specific MS-DRG Classifications

1. Pre-MDCs: Artificial Heart Devices
    Heart failure affects more than 5 million patients in the United 
States with 550,000 new cases each year, and causes more than 55,000 
deaths annually. It is a progressive disease that is medically managed 
at all stages, but over time leads to continued deterioration of the 
heart's ability to pump sufficient amounts of adequately oxygenated 
blood throughout the body. When medical management becomes inadequate 
to continue to support the patient, the patient's heart failure would 
be considered to be the end stage of the disease. At this point, the 
only remaining treatment options are a heart transplant or mechanical 
circulatory support. A device termed an artificial heart has been used 
only for severe failure of both the right and left ventricles, also 
known as biventricular failure. Relatively small numbers of patients 
suffer from biventricular failure, but the exact numbers are unknown. 
There are about 4,000 patients approved and waiting to receive heart 
transplants in the United States at any given time, but only about 
2,000 hearts per year are transplanted due to a scarcity of donated 
organs. There are a number of mechanical devices that may be used to 
support the ventricles of a failing heart on either a temporary or 
permanent basis. When it is apparent that a patient will require long-
term support, a ventricular support device is generally implanted and 
may be considered either as a bridge to recovery or a bridge to 
transplantation. Sometimes a patient's prognosis is uncertain, and with 
device support the native heart may recover its function. However, when 
recovery is not likely, the patient may qualify as a transplant 
candidate and require mechanical circulatory support until a donor 
heart becomes available. This type of support is commonly supplied by 
ventricular assist devices (VADs), which are surgically attached to the 
native ventricles but do not replace them.
    Devices commonly called artificial hearts are biventricular heart 
replacement systems that differ from VADs in that a substantial part of 
the native heart, including both ventricles, is removed. When the heart 
remains intact, it remains possible for the native heart to recover its 
function after being assisted by a VAD. However, because the artificial 
heart device requires the resection of the ventricles, the native heart 
is no longer intact and such recovery is not possible. The designation 
``artificial heart'' is somewhat of a misnomer because some portion of 
the native heart remains and there is no current mechanical device that 
fully replaces all four chambers of the heart. Over time, better 
descriptive language for these devices may be adopted.
    In 1986, CMS made a determination that the use of artificial hearts 
was not covered under the Medicare program. To conform to that 
decision, we placed ICD-9-CM procedure code 37.52 (Implantation of 
total replacement heart system) on the GROUPER program's MCE in the 
noncovered procedure list.
    On August 1, 2007, CMS began a national coverage determination 
process for artificial hearts. SynCardia Systems, Inc. submitted a 
request for reconsideration of the longstanding noncoverage policy when 
its device, the CardioWest\TM\ Temporary Total Artificial Heart (TAH-t) 
System, is used for ``bridge to transplantation'' in accordance with 
the FDA-labeled indication for the device. ``Bridge to 
transplantation'' is a phrase meaning

[[Page 48492]]

that a patient in end-stage heart failure may qualify as a heart 
transplant candidate, but will require mechanical circulatory support 
until a donor heart becomes available. The CardioWest\TM\ TAH-t System 
is indicated for use as a bridge to transplantation in cardiac 
transplant-eligible candidates at risk of imminent death from 
biventricular failure. The system is intended for use inside the 
hospital as the patient awaits a donor heart. The ultimate desired 
outcome for insertion of the TAH-t is a successful heart transplant, 
along with the potential that offers for cure from heart failure.
    CMS determined that a broader analysis of artificial heart coverage 
was deemed appropriate, as another manufacturer, Abiomed, Inc., has 
developed an artificial heart device, AbioCor[supreg] Implantable 
Replacement Heart Device, with different indications. SynCardia 
Systems, Inc. has received approval of its device from the FDA for 
humanitarian use as destination therapy for patients in end-stage 
biventricular failure who cannot qualify as transplant candidates. The 
AbioCor[supreg] Implantable Replacement Heart Device is indicated for 
use in severe biventricular end-stage heart disease patients who are 
not cardiac transplant candidates and who are less than 75 years old, 
who require multiple inotropic support, who are not treatable by VAD 
destination therapy, and who cannot be weaned from biventricular 
support if they are on such support. The desired outcome for this 
device is prolongation of life and discharge to home.
    On February 1, 2008, CMS published a proposed coverage decision 
memorandum for artificial hearts which stated, in part, that while the 
evidence is inadequate to conclude that the use of an artificial heart 
is reasonable and necessary for Medicare beneficiaries, the evidence is 
promising for the uses of artificial heart devices as described above. 
CMS supports additional research for these devices, and therefore 
proposed that the artificial heart will be covered by Medicare when 
performed under the auspices of a clinical study. The study must meet 
all of the criteria listed in the proposed decision memorandum. This 
proposed coverage decision memorandum may be found on the CMS Web site 
at: http://www.cms.hhs.gov/mcd/viewdraftdecisionmemo.asp?id=211.
    Following consideration of the public comments received, CMS made a 
final decision to cover artificial heart devices for Medicare 
beneficiaries under ``Coverage with Evidence Development'' when 
beneficiaries are enrolled in a clinical study that meets all of the 
criteria set forth by CMS. These criteria can be found in the final 
decision memorandum on the CMS Web site at: http://www.cms.hhs.gov/mcd/
viewdecisionmemo.asp?id=211. The effective date of this decision was 
May 1, 2008.
    The topic of coding of artificial heart devices was discussed at 
the September 27-28, 2007 ICD-9-CM Coordination and Maintenance 
Committee meeting held at CMS in Baltimore, MD. We note that this topic 
was placed on the Committee's agenda because any proposed changes to 
the ICD-9-CM coding system must be discussed at a Committee meeting, 
with opportunity for comment from the public. At the September 2007 
Committee meeting, the Committee accepted oral comments from 
participants and encouraged attendees or anyone with an interest in the 
topic to comment on proposed changes to the code, inclusion terms, or 
exclusion terms. We accepted written comments until October 12, 2007. 
As a result of discussion and comment from the Committee meeting, the 
Committee revised the title of procedure code 37.52 for artificial 
hearts to read ``Implantation of internal biventricular heart 
replacement system'' with an inclusion note specifying that this is the 
code for an artificial heart. This code can be found in Table 6F, 
Revised Procedure Code Titles, in the Addendum to this final rule. In 
addition, the Committee created new code 37.55 (Removal of internal 
biventricular heart replacement system) to identify explantation of the 
artificial heart prior to heart transplantation. This code can be found 
in Table 6B, New Procedure Codes, in the Addendum to this final rule.
    To make conforming changes to the IPPS system with regard to the 
proposed revision to the coverage decision for artificial hearts, in 
the FY 2009 IPPS proposed rule (73 FR 23563), we proposed to remove 
procedure code 37.52 from MS-DRG 215 (Other Heart Assist System 
Implant) and assign it to MS-DRG 001 (Heart Transplant or Implant of 
Heart Assist System with Major Comorbidity or Complication (MCC)) and 
MS-DRG 002 (Heart Transplant or Implant of Heart Assist System without 
Major Comorbidity or Complication (MCC)). In addition, we proposed to 
remove procedure code 37.52 from the MCE ``Non-Covered Procedure'' edit 
and assign it to the ``Limited Coverage'' edit. In addition, we 
proposed to include in this edit the requirement that ICD-9-CM 
diagnosis code V70.7 (Examination of participant in clinical trial) 
also be present on the claim. We proposed that claims submitted without 
both procedure code 37.52 and diagnosis code V70.7 would be denied 
because they would not be in compliance with the proposed coverage 
policy.
    Comment: Commenters supported CMS' proposal to remove procedure 
code 37.52 from MS-DRG 215 and reassign it to MS-DRGs 001 and 002. We 
did not receive any public comments regarding the corresponding change 
to the MCE.
    Response: We appreciate the commenters' support.
    Comment: One commenter suggested that CMS create a new MS-DRG 
combining all implantable heart assist devices to ensure that the 
proposed changes to cost centers reflect both LVAD device costs and 
implantable artificial hearts. The commenter suggested that if CMS were 
unwilling to create an MS-DRG combining all the implantable heart 
assist devices, an acceptable alternative would be to assign all 
ventricular assist devices identified by ICD-9-CM procedure code 37.66 
(Insertion of implantable heart assist system) into MS-DRG 001, 
irrespective of the absence of a secondary diagnosis code determined to 
be an MCC.
    Response: We believe that we have already appropriately created MS-
DRGs combining heart transplantation, heart assist devices, and other 
VAD device insertion in MS-DRGs 001 and 002. As the coverage decision 
for artificial hearts has only become effective May 1, 2008, CMS has no 
data to suggest that the cost centers will not adequately reflect the 
cost of all implantable heart devices. We also point out that change to 
the structure of the MS-DRGs is most appropriately discussed in the 
proposed rule, so that the public has a chance to review the proposal 
and comment on it as it affects a facility or medical practice.
    With regard to the alternative suggestion of assigning all VADs to 
MS-DRG 001, irrespective of the presence of an MCC, we point out that 
when the MS-DRGs were originally created for use beginning FY 2008, the 
data suggested the appropriateness of separating the patients based on 
their severity as determined by the presence of an MCC or a CC. We do 
not have convincing evidence that hospitals are not being adequately 
reimbursed for the VAD procedures. Therefore, we are not adopting this 
suggestion.
    After consideration of the public comments received, in this final 
rule, we are assigning code 37.52 (now titled ``Implantation of total 
internal biventricular heart replacement system'') to MS-DRGs 001 and 
002, as

[[Page 48493]]

proposed. In addition, we are removing code 37.52 from the ``Non-
Covered Procedure'' edit and assign it to the ``Limited Coverage'' 
edit. This means that implantation of an artificial heart in a Medicare 
beneficiary will be covered when the implanting facility has met the 
criteria as set forth by CMS. In addition, both procedure code 37.52 
and diagnosis code V07.7 must be present on the claim in order for the 
claim to be considered a covered Medicare service.
    To reiterate, during FY 2008, we made mid-year changes to portions 
of the GROUPER program not affecting MS-DRG assignment or ICD-9-CM 
coding. However, as the final coverage decision memorandum for 
artificial hearts was published after the CMS contractor's testing and 
release of the mid-year product, changes to the MCE included in the 
proposed rule were not included in that revision of the GROUPER Version 
25.0. GROUPER Version 26.0, which will be in use for FY 2009, contains 
the final changes that we are adopting in this final rule. The edits in 
the MCE Version 25.0 will be effective retroactive to May 1, 2008. (To 
reduce confusion, we note that the version number of the MCE is one 
digit lower than the current GROUPER version number; that is, Version 
26.0 of the GROUPER uses Version 25.0 of the MCE.)
2. MDC 1 (Diseases and Disorders of the Nervous System)
a. Transferred Stroke Patients Receiving Tissue Plasminogen Activator 
(tPA)
    In 1996, the FDA approved the use of tissue plasminogen activator 
(tPA), one type of thrombolytic agent that dissolves blood clots. In 
1998, the ICD-9-CM Coordination and Maintenance Committee created code 
99.10 (Injection or infusion of thrombolytic agent) in order to be able 
to uniquely identify the administration of these agents. Studies have 
shown that tPA can be effective in reducing the amount of damage the 
brain sustains during an ischemic stroke, which is caused by blood 
clots that block blood flow to the brain. tPA is approved for patients 
who have blood clots in the brain, but not for patients who have a 
bleeding or hemorrhagic stroke. Thrombolytic therapy has been shown to 
be most effective when used within the first 3 hours after the onset of 
an embolic stroke, but it is contraindicated in hemorrhagic strokes.
    For FY 2006, we modified the structure of CMS DRGs 14 (Intracranial 
Hemorrhage or Cerebral Infarction) and 15 (Nonspecific CVA and 
Precerebral Occlusion without Infarction) by removing the diagnostic 
ischemic (embolic) stroke codes. We created a new CMS DRG 559 (Acute 
Ischemic Stroke with Use of Thrombolytic Agent) which increased 
reimbursement for patients who sustained an ischemic or embolic stroke 
and who also had administration of tPA. The intent of this DRG was not 
to award higher payment for a specific drug, but to recognize the need 
for better overall care for this group of patients. Even though tPA is 
indicated only for a small proportion of stroke patients, that is, 
those patients experiencing ischemic strokes treated within 3 hours of 
the onset of symptoms, our data suggested that there was a sufficient 
quantity of patients to support the DRG change. While our goal is to 
make payment relate more closely to resource use, we also note that use 
of tPA in a carefully selected patient population may lead to better 
outcomes and overall care and may lessen the need for postacute care.
    For FY 2008, with the adoption of MS-DRGs, CMS DRG 559 became MS-
DRGs 061 (Acute Ischemic Stroke with Use of Thrombolytic Agent with 
MCC), 062 (Acute Ischemic Stroke with Use of Thrombolytic Agent with 
CC), and 063 (Acute Ischemic Stroke with Use of Thrombolytic Agent 
without CC/MCC). Stroke cases in which no thrombolytic agent was 
administered were grouped to MS-DRGs 064 (Intracranial Hemorrhage or 
Cerebral Infarction with MCC), 065 (Intracranial Hemorrhage or Cerebral 
Infarction with CC), or 066 (Intracranial Hemorrhage or Cerebral 
Infarction without CC/MCC). The MS-DRGs that reflect use of a 
thrombolytic agent, that is, MS-DRGs 061, 062, and 063, have higher 
relative weights than the hemorrhagic or cerebral infarction MS-DRGs 
064, 065, and 066.
    The American Society of Interventional and Therapeutic 
Neuroradiology (ASITN) (now the Society of NeuroInterventional Surgery 
(SNIS)) and the American Academy of Neurology Professional Association 
(AANPA) have made us aware of a treatment issue that is of concern to 
the stroke provider's community. In some instances, patients suffering 
an embolytic or thrombolytic stroke are evaluated and given tPA in a 
community hospital's emergency department, and then are transferred to 
a larger facility's stroke center that is able to provide the level of 
services required by the increased severity of these cases. The 
facility providing the administration of tPA in its emergency 
department does not realize increased reimbursement, as the patient is 
often transferred as soon a possible to a stroke center. The facility 
to which the patient is transferred does not realize increased 
reimbursement, as the tPA was not administered there. The ASITN/SNIS 
requested that CMS give permission to code the administration of tPA as 
if it had been given in the receiving facility. This would result in 
the receiving facility being paid the higher weighted MS-DRGs 061, 062, 
or 063 instead of MS-DRGs 064, 065, or 066. The ASITN/SNIS's rationale 
was that the patients who received tPA in another facility (even though 
administration of tPA may have alleviated some of the worst 
consequences of their strokes) are still extremely compromised and 
require increased health care services that are much more resource 
consumptive than patients with less severe types of stroke. We have 
advised the ASITN/SNIS that hospitals may not report services that were 
not performed in their facility.
    We recognize that the ASITN/SNIS's concerns potentially have merit 
but the quantification of the increased resource consumption of these 
patients is not currently possible in the existing ICD-9-CM coding 
system. Without specific length of stay and average charges data, we 
are unable to determine an appropriate MS-DRG for these cases. 
Therefore, we advised the ASITN/SNIS and AANAP to present a request at 
the diagnostic portion of the ICD-9-CM Coordination and Maintenance 
Committee meeting on March 20, 2008, for creation of a code that would 
recognize the fact that the patient had received a thrombolytic agent 
for treatment of the current stroke. In the proposed rule, we indicated 
that if this request was presented at the March 20, 2008 meeting, it 
could not be approved in time to be published as a new code in Table 6A 
in the proposed rule. However, we indicated that if a diagnosis code 
was created by the National Centers for Health Statistics as a result 
of that meeting, it would be added to the list of codes published in 
the FY 2009 IPPS final rule effective on October 1, 2008. With such 
information appearing on subsequent claims, we will have a better idea 
of how to classify these cases within the MS-DRGs. Therefore, because 
we did not have data to identify these patients at the time we issued 
the FY 2009 IPPS proposed rule, we did not propose an MS-DRG 
modification for the stroke patients receiving tPA in one facility 
prior to being transferred to another facility.
    The AANPA did make such a request at the Coordination and 
Maintenance Committee Meeting on March 20, 2008, which resulted in the 
creation of code V45.88 (Status post administration of tPA (rtPA) in a 
different facility within the last 24 hours prior to admission to 
current facility). This code can be found

[[Page 48494]]

on Table 6A in the Addendum to this final rule.
    Comment: All of the commenters approved the creation of a V-code to 
identify patients who had tPA administered at another hospital but were 
then transferred to a tertiary facility with the specialized stroke 
center resources to provide optimal patient care throughout the 
patient's entire hospital stay. According to two of the commenters, the 
description of patients who receive intravenous tPA administration at 
one facility but are then transferred to a tertiary hospital's stroke 
center are commonly referred to in the health care industry as ``drip 
and ship''.
    The commenters agreed with CMS' suggestion to recognize these 
patients by specific diagnostic coding, and suggested that CMS gather 
data in order to appropriately categorize these patients in the MS-DRG 
system. One commenter specifically suggested that data be collected via 
the new diagnostic code in FY 2009 with a view toward establishing a 
new MS-DRG or set of MS-DRGs in FY 2010.
    Response: We appreciate the support from the industry regarding 
creation of a unique code and subsequent data gathering. We believe 
that the transferred patients who have received tPA are a unique 
category of patients, but without precise and evidentiary data, we are 
not able yet to evaluate whether a modification of the structure of the 
MS-DRG system concerning these stroke patients is warranted. We will 
continue to examine these cases and the broad category of stroke DRGs 
in our upcoming reviews of revisions to the MS-DRG classifications that 
may be warranted.
    Comment: One commenter disagreed with CMS' suggestion that a new 
diagnostic code be approved and used to identify ``drip and ship'' 
cases. The commenter believed that CMS may not be able to identify this 
patient population based on the restriction of the CMS claims 
processing system. The commenter encouraged CMS to update the claims 
processing systems to accept the reporting of more than eight secondary 
diagnosis codes per claim.
    Response: We believe that the commenter has misunderstood our 
statement in the proposed rule (73 FR 23563 and 23564). We stated: ``* 
* * the quantification of the increased resource consumption of these 
patients is not currently possible in the existing ICD-9-CM coding 
system. Without specific length of stay and average charge data, we are 
unable to determine an appropriate MS-DRG for these cases.'' This 
statement was made in the context of describing the need for a specific 
code describing patients to whom tPA had been administered in another 
setting and who then were transferred to a tertiary care hospital. We 
did not intend to open the CMS claims processing system for discussion 
of possible changes.
    There are currently six stroke MS-DRGs as described above, with MS-
DRGs 061, 062, and 063 identifying cases of acute ischemic stroke with 
use of thrombolytic agents, by severity, and MS-DRGs 064, 065, and 066 
identifying cases of intracranial hemorrhage or cerebral infarction, 
again divided by severity as determined by the presence of an MCC, a 
CC, or neither a CC or an MCC. We believe to arbitrarily assign the 
``drip and ship'' cases to any one of these six DRGs is capricious and 
lacks objectivity. Further, in the interest of longitudinal data, we 
point out that epidemiologists will be able to gather their statistics 
more logically if we ultimately assign the cases to the most 
appropriate MS-DRG(s) after it has been proven that the patients 
consume a certain level of resources during their inpatient hospital 
course of treatment.
    Comment: One commenter encouraged CMS to assign all patients 
receiving tPA in a transferring hospital to the categorization of those 
patients in MS-DRGs 061, 062, and 063 at the receiving hospital as 
``the payment rate for these transferred patients should be the same as 
for patients treated with tPA in the admitting hospital because the 
remainder of the care is the same. The commenter believed that 
establishment of a separate code should not be a prerequisite to 
including these cases in MS-DRGs 061, 062, and 063 if CMS would allow 
hospitals to code the administration of tPA as if it had occurred at 
the receiving hospital until such time as a new code is established.
    Response: The new diagnostic code V45.88 (Status post 
administration of tPA (rtPA) in a different facility within the last 24 
hours prior to admission to current facility) has been established, and 
will be implemented for FY 2009 for those patients who are discharged 
on or after October 1, 2008. This will allow CMS sufficient time to 
collect accurate data on the most appropriate assignment of these 
patients in the MS-DRG system. We point out that other commenters have 
supported this position by urging CMS to gather data in order to create 
a new DRG for these patients. As we do not yet have comprehensive 
information on this category of patients regarding frequency, 
distribution, length of stay, or charge data, we do not believe it is 
appropriate to assign these cases to a potentially inappropriate MS-
DRG. We point out the MS-DRGs system is a system of averages. If we 
assign cases to an MS-DRG based on what the industry believes to be 
warranted, but if later data for the cases reflect that the cases are 
less costly than assumed, the result would be that, in subsequent 
annual recalibrations, the relative weight(s) for those MS-DRGs would 
decrease. This would ultimately result in a lower payment for precisely 
those cases that should be receiving higher payment due to their 
complexity.
    In addition, we reiterate our position regarding the submission of 
an ICD-9-CM code for a service that was not specifically performed at a 
facility receiving the transferred patient. Hospitals are not permitted 
to report services that were not performed in their facilities.
    Comment: Two commenters suggested that, if a new code describing 
the administration of tPA at another facility is created, the new code 
be assigned to the list of major comorbidities and complications. The 
commenter suggested that this action would allow cases to be assigned 
to MS-DRG 064 (Intracranial Hemorrhage or Cerebral Infarction with MCC) 
or MS-DRG 067 (Nonspecific Cerebrovascular Accident and Precerebral 
Occlusion without Infarction with MCC).
    The commenters also suggested that, if a new code describing the 
administration of tPA at another facility was not created, a proxy code 
that is already in the list of MCCs could be assigned to the ``drip and 
ship'' cases that would then allow hospitals to be compensated for this 
category of more severe patients. The commenters suggested code 286.5 
(Hemorrhagic disorder due to intrinsic circulating anticoagulants) as a 
proxy code.
    Response: We believe the types of action suggested by the 
commenters would result in a dilution of the principles upon which the 
MS-DRGs are structured. When we created the MS-DRGs for implementation 
beginning with FY 2008, we did so based on data and statistics. As we 
stated in the FY 2008 IPPS final rule: ``The purpose of the MS-DRGs is 
to more accurately stratify groups of Medicare patients with varying 
levels of severity'' (72 FR 47155). Therefore, we would not assign the 
new diagnostic code V45.88 that we have created (discussed earlier) to 
the list of MCCs or CCs without understanding the ramifications of such 
an action on the rest of the MS-DRGs and thus compromise our own need 
for accuracy. We refer the readers to the FY 2008 IPPS final rule that 
identifies the criteria we used to create the lists of MCCs and CCs (72 
FR 47153). In the

[[Page 48495]]

same vein, we would not randomly choose a code that is already assigned 
to the list of MCCs and suggest that hospitals include this code on 
their claims submission to insure placement of the case in a higher-
weighted MS-DRG. We believe that this violate the intent of the 
construction of the CCs and MCCs. We also believe that the hospital 
personnel responsible for entering these codes on the claim would be 
reluctant to do so, given that the patient may not actually have this 
condition.
    After consideration of the public comments received, we are 
specifying that, for FY 2009 and absent any other conditions or 
procedures that would result in an alternative MS-DRG assignment, 
stroke cases involving patients who receive intravenous tPA 
administration at one facility but are then transferred to a tertiary 
hospital's stroke center will continue to be assigned to MS-DRGs 064, 
065, and 066. We will continue to monitor the cases of patients 
suffering an embolytic or thrombolytic stroke who are evaluated and 
given tPA in a community hospital's emergency department and then are 
transferred to another facility. In the future, we will evaluate our 
data for potential MS-DRG reassignment based on the use of the new 
diagnostic code V45.88, and we are strongly encouraging receiving 
hospitals to include this code on appropriate claims.
b. Intractable Epilepsy With Video Electroencephalogram (EEG)
    As we did for FY 2008, we received a request from an individual 
representing the National Association of Epilepsy Centers to consider 
further refinements to the MS-DRGs describing seizures. Specifically, 
the representative recommended that a new MS-DRG be established for 
patients with intractable epilepsy who receive an electroencephalogram 
with video monitoring (vEEG) during their hospital stay. Similar to the 
initial recommendation, the representative 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. 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.
    Effective October 1, 2007, MS-DRG 100 (Seizures with MCC) and MS-
DRG 101 (Seizures without MCC) were implemented as a result of 
refinements to the DRG system to better recognize severity of illness 
and resource utilization. Once again, the representative applauded CMS 
for making changes in the DRG structure to better recognize differences 
in patient severity. However, the representative stated that a subset 
of patients in MS-DRG 101 who have a primary diagnosis of intractable 
epilepsy and are treated with vEEG are substantially more costly to 
treat than other patients in this MS-DRG and represent the majority of 
patients being evaluated by specialized epilepsy centers. 
Alternatively, the representative stated that he was not requesting any 
change in the structure of MS-DRG 100. According to the representative, 
the number of cases that would fall into this category is not 
significant. The representative further noted that this is a change 
from last year's request.
    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'' for without mention of intractable epilepsy
     ``1'' for with intractable epilepsy
    With the assistance of an outside reviewer, the representative 
analyzed cost data for MS-DRGs 100 and 101, which focused on three 
subsets of patients identified with a primary diagnosis of epilepsy or 
convulsions who also received vEEG (procedure code 89.19):
     Patients with a primary diagnosis of epilepsy with 
intractability specified (codes 345.01 through 345.91)
     Patients with a primary diagnosis of epilepsy without 
intractability specified (codes 345.00 through 345.90)
     Patients with a primary diagnosis of convulsions (codes 
780.39)
    The representative acknowledged that the association did not 
include any secondary diagnoses in its analyses. Based on its results, 
the representative recommended that CMS further refine MS-DRG 101 by 
subdividing cases with a primary diagnosis of intractable epilepsy 
(codes 345.01 through 345.91) when vEEG (code 89.19) is also performed 
into a separate MS-DRG that would be defined as ``MS-DRG XXX'' 
(Epilepsy Evaluation without MCC).
    According to the representative, these cases are substantially more 
costly than the other cases within MS-DRG 101 and are consistent with 
the criteria for dividing MS-DRGs on the basis of CCs and MCCs. In 
addition, the representative stated that the request would have a 
minimal impact on most hospitals but would substantially improve the 
accuracy of payment to hospitals specializing in epilepsy care.
    In the FY 2009 IPPS proposed rule, we discussed our performance of 
an analysis using FY 2007 MedPAR data. As shown in the table below, we 
found a total of 54,060 cases in MS-DRG 101 with average charges of 
$14,508 and an average length of stay of 3.69 days. There were 879 
cases with intractable epilepsy and vEEG with average charges of 
$19,227 and an average length of stay of 5 days.

----------------------------------------------------------------------------------------------------------------
                                                                     Number of    Average length      Average
                             MS-DRG                                    cases          of stay         charges
----------------------------------------------------------------------------------------------------------------
MS-DRG 100--All Cases...........................................          16,142            6.34         $27,623
MS-DRG 100--Cases with Intractable Epilepsy with vEEG (Codes                  69            6.6           26,990
 345.01, 345.11, 345.41, 345.51, 345.61, 345.71, 345.81, 345.91)
MS-DRG 100--Cases with Intractable Epilepsy without vEEG........             328            7.81          32,539
MS-DRG 101--All cases...........................................          54,060            3.69          14,508
MS-DRG 101--Cases with Intractable Epilepsy with vEEG (Codes                 879            5.0           19,227
 345.01, 345.11, 345.41, 345.51, 345.61, 345.71, 345.81, 345.91)
MS-DRG 101--Cases with Intractable Epilepsy without vEEG........           1,351            4.25          14,913
----------------------------------------------------------------------------------------------------------------

    In applying the criteria to establish subgroups, the data do not 
support the creation of a new subdivision for MS-DRG 101 for cases with 
intractable epilepsy and vEEG, nor does the data support moving the 879 
cases from MS-DRG 101 to MS-DRG 100. Moving the 879 cases to MS-DRG 100 
would mean moving cases with average charges of approximately $19,000 
into an MS-DRG with average charges of $28,000. Therefore, we did not 
propose to refine

[[Page 48496]]

MS-DRG 101 by subdividing cases with a primary diagnosis of intractable 
epilepsy (codes 345.01 through 345.91) when vEEG (code 89.19) is also 
performed into a separate MS-DRG.
    Comment: One commenter supported the National Association of 
Epilepsy Centers in recommending that MS-DRG 101 be subdivided for a 
subset of patients with a primary diagnosis of intractable epilepsy 
(codes 345.01 through 345.91) when EEG with video monitoring is 
reported. Similar to the Association's comments, the commenter stated 
that this subgroup of patients is most often admitted to hospitals with 
specialized epilepsy centers for a comprehensive evaluation to 
determine epilepsy seizure type, cause and location for consideration 
of surgery or to alter medications, and that the hospitalization is 
longer than the other cases in MS-DRG 101, resulting in higher costs 
(due to continuous 24-hour EEG with video monitoring (vEEG) and 
additional expensive diagnostic tests such as MRI, ictal SPECT, PET, 
and neuropsychological testing).
    The commenter acknowledged that CMS has set specific criteria for 
the establishment of a new MS-DRG. According to the commenter, the FY 
2007 data analyzed by the Association reported that the intractable 
epilepsy with vEEG cases exceed the average charge criteria as well as 
the minimum number of cases needed to establish a separate DRG. 
However, the total number of cases in the subgroup represents less than 
2 percent of the cases in MS-DRG 101, while the criterion calls for a 
threshold of 5 percent. The commenter stated that the number of cases 
is small because most patients with intractable epilepsy admitted to 
the hospital for vEEG are younger than 65 years of age and are eligible 
for Medicare due to their disability. In addition, the commenter 
indicated that the population is typically covered by private insurance 
or Medicaid. The commenter asserted that the Medicare intractable 
epilepsy with vEEG cases will remain small, but asked that CMS 
establish the separate MS-DRG as it has done for pediatric and other 
small subgroups of patients.
    Lastly, like the Association, the commenter noted that most of the 
admissions of the epilepsy subgroup occur in a relatively small number 
of hospitals with specialized epilepsy centers. The commenter believed 
that the establishment of a separate MS-DRG for the epilepsy subgroup 
would have a minimal impact on most hospitals, but would substantially 
improve the accuracy of payment to hospitals that specialize in 
epilepsy care.
    Response: We appreciate the commenter's comments. As we indicated 
in the proposed rule and in this final rule, we performed an analysis 
of the FY 2007 MedPAR data. In applying the criteria to establish 
subgroups, the data did not support the creation of a new subdivision 
for MS-DRG 101 for cases with intractable epilepsy and vEEG.
    As mentioned elsewhere in this final rule, we received several 
comments acknowledging CMS' discussion of the FY 2008 implementation of 
MS-DRGs and lack of data to support major MS-DRG changes for FY 2009. 
The commenters accepted CMS' proposal of not making significant 
revisions to the MS-DRGs until claims data under the new MS-DRG system 
are available. Therefore, as final policy for FY 2009, we are not 
modifying MS-DRG 101.
3. MDC 5 (Diseases and Disorders of the Circulatory System)
a. Automatic Implantable Cardioverter-Defibrillators (AICD) Lead and 
Generator Procedures
    In the FY 2008 IPPS final rule with comment period (72 FR 47257), 
we created a separate, stand alone DRG for automatic implantable 
cardioverter-defibrillator (AICD) generator replacements and 
defibrillator lead replacements. The new MS-DRG 245 (AICD lead and 
generator procedures) 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 lead(s) only
     37.96, Implantation of automatic cardioverter/
defibrillator pulse generator only
     37.97, Replacement of automatic cardioverter/defibrillator 
lead(s) only
     37.98, Replacement of automatic cardioverter/defibrillator 
pulse generator only
    Commenters on the FY 2008 IPPS proposed rule supported this MS-DRG, 
which recognizes the distinct differences in resource utilization 
between pacemaker and defibrillator generators and leads. One commenter 
suggested that CMS 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.
    In response to the commenter, we indicated that the data supported 
separate MS-DRGs for these very different devices (72 FR 47257). We 
indicated that moving the defibrillator leads back into a pacemaker MS-
DRG defeated the purpose of creating separate MS-DRGs for 
defibrillators and pacemakers. Therefore, we finalized MS-DRG 245 as 
proposed with the leads and generator codes listed above.
    After publication of the FY 2008 IPPS final rule with comment 
period, we received a request from a manufacturer that recommended a 
subdivision for MS-DRG 245 (AICD Lead and Generator Procedures). The 
requestor suggested creating a new MS-DRG to separate the implantation 
or replacement of the AICD leads from the implantation or replacement 
of the AICD pulse generators to better recognize the differences in 
resource utilization for these distinct procedures.
    The requestor applauded CMS' decision to create separate MS-DRGs 
for the pacemaker device procedures from the AICD procedures in the FY 
2008 IPPS final rule (72 FR 47257). The requestor further acknowledged 
its support of the clinically distinct MS-DRGs for pacemaker devices. 
Currently, MS-DRGs 258 and 259 (Cardiac Pacemaker Device Replacement 
with MCC and without MCC, respectively) describe the implantation or 
replacement of pacemaker generators, while MS-DRGs 260, 261, and 262 
(Cardiac Pacemaker Revision Except Device Replacement with MCC, with 
CC, without CC/MCC, respectively) describe the insertion or replacement 
of pacemaker leads.
    The requestor believed that the IPPS ``needs to continue to evolve 
to accurately reflect clinical differences and costs of services.'' As 
such, the requestor recommended that CMS follow the same structure as 
it did with the pacemaker MS-DRGs for MS-DRG 245 to separately identify 
the implantation or replacement of the defibrillator leads (codes 
37.95, 37.97, and 00.52) from the implantation or replacement of the 
pulse generators (codes 37.96, 37.98 and 00.54).
    In the FY 2009 IPPS proposed rule, we discussed our analysis of the 
FY 2007 MedPAR data, in which we found a total of 5,546 cases in MS-DRG 
245 with average charges of $62,631 and an average length of stay of 
3.3 days. We

[[Page 48497]]

found 1,894 cases with implantation or replacement of the defibrillator 
leads (codes 37.95, 37.97, and 00.52) with average charges of $42,896 
and an average length of stay of 3.4 days. We also found a total of 
3,652 cases with implantation or replacement of the pulse generator 
(codes 37.96, 37.98, 00.54) with average charges of $72,866 and an 
average length of stay of 3.2 days.
    We agree with the requestor that the IPPS should accurately 
recognize differences in resource utilization for clinically distinct 
procedures. As the data demonstrate, average charges for the 
implantation or replacement of the AICD pulse generators are 
significantly higher than for the implantation or replacement of the 
AICD leads. Therefore, we proposed to create a new MS-DRG 265 to 
separately identify these distinct procedures.
    Comment: Several commenters expressed their appreciation and 
applauded CMS for acting on the proposal to subdivide MS-DRG 245 and 
create a new MS-DRG to recognize the differences in resource 
utilization for the implantation or replacement of leads from the 
implantation or replacement of pulse generators. The commenters 
supported these refinements to the MS-DRG classification system and 
stated that this proposed modification would ``reflect appropriate 
allocation and use of resources.''
    Response: We appreciate the commenters' support. We proposed that 
the title for this new MS-DRG 265 would be ``AICD Lead Procedures'' and 
would include procedure codes that identify the AICD leads (codes 
37.95, 37.97 and 00.52). We also proposed that the title for MS-DRG 245 
would be revised to ``AICD Generator Procedures'' and include procedure 
codes 37.96, 37.98, and 00.54. We believe these changes will better 
reflect the clinical differences and resources utilized for these 
distinct procedures.
    Therefore, in this final rule, we are finalizing our proposals to 
revise the title of MS-DRG 245 to read ``AICD Generator Procedures'', 
which includes procedure codes 37.96, 37.98, 00.54 and to create a new 
MS-DRG 265 (AICD Lead Procedures) to include procedure codes 37.95, 
37.97 and 00.52, effective October 1, 2009.
b. Left Atrial Appendage Device
    Atrial fibrillation (AF) is the primary cardiac abnormality 
associated with ischemic or embolytic stroke. Most ischemic strokes 
associated with AF are possibly due to an embolism or thrombus that has 
formed in the left atrial appendage. Evidence from studies such as 
transesophageal echocardiography shows left atrial thrombi to be more 
frequent in AF patients with ischemic stroke as compared to AF patients 
without stroke. While anticoagulation medication can be efficient in 
ischemic stroke prevention, there can be problems of safety and 
tolerability in many patients, especially those older than 75 years. 
Chronic warfarin therapy has been proven to reduce the risk of embolism 
but there can be difficulties concerning its administration. Frequent 
blood tests to monitor warfarin INR are required at some cost and 
patient inconvenience. In addition, because warfarin INR is affected by 
a large number of drug and dietary interactions, it can be 
unpredictable in some patients and difficult to manage. The efficacy of 
aspirin for stroke prevention in AF patients is less clear and remains 
controversial. With the known disutility of warfarin and the 
questionable effectiveness of aspirin, a device-based solution may 
provide added protection against thromboembolism in certain patients 
with AF.
    At the April 1, 2004 ICD-9-CM Coordination and Maintenance 
Committee meeting, a proposal was presented for the creation of a 
unique procedure code describing insertion of the left atrial appendage 
filter system. Subsequently, ICD-9-CM code 37.90 (Insertion of left 
atrial appendage device) was created for use beginning October 1, 2004. 
This code was designated as a non-operating room (non-O.R.) procedure, 
and had an effect only on cases in MDC 5, CMS DRG 518 (Percutaneous 
Cardiovascular Procedure without Coronary Artery Stent or Acute 
Myocardial Infarction). With the adoption of MS-DRGs in FY 2008, CMS 
DRG 518 was divided into MS-DRGs 250 (Percutaneous Cardiovascular 
Procedure without Coronary Artery Stent or AMI with MCC) and 251 
(Percutaneous Cardiovascular Procedure without Coronary Artery Stent or 
AMI without MCC).
    We have reviewed the data concerning this procedure code annually. 
Using FY 2005 MedPAR data for the FY 2007 IPPS final rule, 24 cases 
were reported, and the average charges ($27,620) closely mimicked the 
average charges of the other 22,479 cases in CMS DRG 518 ($28,444). As 
the charges were comparable, we made no recommendations to change the 
CMS DRG assignment for FY 2007.
    Using FY 2006 MedPAR data for the FY 2008 IPPS final rule, we 
divided CMS DRG 518 into the cases that would be reflected in the MS-
DRG configuration; that is, we divided the cases based on the presence 
or absence of an MCC. There were 35 cases without an MCC with average 
charges of $24,436, again mimicking the 38,002 cases with average 
charges of $32,546. There were 3 cases with an MCC with average charges 
of $62,337, compared to the 5,458 cases also with an MCC with average 
charges of $53,864. Again, it was deemed that cases with code 37.90 
were comparable to the rest of the cases in CMS DRG 518, and the 
decision was made not to make any changes in the DRG assignment for 
this procedure code. As noted above, CMS DRG 518 became MS-DRGs 250 and 
251 in FY 2008.
    We have received a request regarding code 37.90 and its placement 
within the MS-DRG system for FY 2009. The requestor, a manufacturer's 
representative, asked for either the reassignment of code 37.90 to an 
MS-DRG that would adequately cover the costs associated with the 
complete procedure or the creation of a new MS-DRG that would reimburse 
hospitals adequately for the cost of the device. The requestor reported 
that the device's IDE clinical trial is nearing completion, with the 
conclusion of study enrollment in May 2008. The requestor will continue 
to enroll patients in a Continued Use Registry following completion of 
the trial. The requestor reported that it did not charge hospitals for 
the atrial appendage device, estimated to cost $6,000, during the trial 
period, but it will begin to charge hospitals upon the completion of 
the trial in May. The requestor provided us with its data showing what 
it believed to be a differential of $107 more per case than the payment 
average for MS-DRG 250, and a shortfall of $3,808 per case than the 
payment average for MS-DRG 251.
    The requestor pointed out that code 37.90 is assigned to both MS-
DRGs 250 and 251, but stated that the final MS-DRG assignment would be 
MS-DRG 251 when the patient has a principal diagnosis of atrial 
fibrillation (code 427.31) because AF is not presently listed as a CC 
or an MCC. We note that it is the principal diagnosis that is used to 
determine assignment of a case to the correct MDC and subsequently the 
MS-DRG. Secondary or additional diagnosis codes are the only codes that 
can be used to determine the presence of a CC or an MCC.
    With regard to the request to create a specific MS-DRG for the 
insertion of this device titled ``Percutaneous Cardiovascular 
Procedures with Implantation of a Left Atrial Appendage Device without 
CC/MCC'', we point out that the payments under a prospective

[[Page 48498]]

payment system are predicated on averages. The device is already 
assigned to MS-DRGs containing other percutaneous cardiovascular 
devices; to create a new MS-DRG specific to this device would be to 
remove all other percutaneously inserted devices and base the MS-DRG 
assignment solely on the presence of code 37.90. This approach negates 
our longstanding method of grouping like procedures, and removes the 
concept of averaging. Further, to ignore the structure of the MS-DRG 
system solely for the purpose of increasing payment for one device 
would set an unwelcome precedent for defining all of the other MS-DRGs 
in the system. We also point out that the final rule establishing the 
MS-DRGs set forth five criteria, all five of which are required to be 
met, in order to warrant creation of a CC or an MCC subgroup within a 
base MS-DRG. The criteria can be found in the FY 2008 IPPS final rule 
with comment period (72 FR 47169). One of the criteria specifies that 
there will be at least 500 cases in the CC or MCC subgroup. To date, 
there are not enough cases assigned to code 37.90 that are reported 
within the MedPAR data.
    Using FY 2007 MedPAR data, for the FY 2009 IPPS proposed rule, we 
reviewed MS-DRGs 250 and 251 for the presence of the left atrial 
appendage device. The following table displays our results:

----------------------------------------------------------------------------------------------------------------
                                                                     Number of    Average length      Average
                             MS-DRG                                    cases          of stay         charges
----------------------------------------------------------------------------------------------------------------
250--All Cases..................................................           6,424            7.72      $60,597.58
250--Cases with code 37.90......................................               4            6.50       65,829.51
250--Cases without code 37.90...................................           6,420            7.72       60,594.32
251--All Cases..................................................          39,456            2.84       35,719.81
251--Cases with code 37.90......................................             101            1.30       20,846.09
251--Cases without code 37.90...................................          39,335            2.85       35,757.98
----------------------------------------------------------------------------------------------------------------

    There were a total of 105 cases assigned code 37.90 that were 
reported for Medicare beneficiaries in the 2007 MedPAR data. There are 
4 cases with an atrial appendage device in MS-DRG 250 that have higher 
average charges than the other 6,420 cases in the MS-DRG, and that have 
slightly shorter lengths of stay by 1.25 days. However, the more 
telling data are located in MS-DRG 251, which shows that the 101 cases 
in which an atrial appendage device was implanted have much lower 
average charges ($20,846.09) than the other 39,355 cases in the MS-DRG 
with average charges of $35,758.98. The difference in the average 
charges is approximately $14,912, so even when the manufacturer begins 
charging the hospitals the estimated $6,000 for the device, there is 
still a difference of approximately $8,912 in average charges based on 
the comparison within the total MS-DRG 251. Interestingly, the 101 
cases also have an average length of stay of less than half of the 
average length of stay compared to the other cases assigned to that MS-
DRG.
    Because the data did not support either the creation of a unique 
MS-DRG or the assignment of procedure code 37.90 to another higher-
weighted MS-DRG, we did not propose any change to MS-DRGs 250 and 251, 
or to code 37.90 for FY 2009. We believe, based on the past 3 years' 
comparisons, that this code is appropriately located within the MS-DRG 
structure.
    We did not receive any comments on our proposal to make no changes 
to MS-DRGs 250 or 251, or on the assignment of code 37.90 (Insertion of 
left atrial appendage device) within the MS-DRG structure. Therefore, 
in the absence of comment to the contrary, and in the presence of what 
we believe to be compelling evidence concerning the accuracy of the 
placement of code 37.90 in the current MS-DRG structure, we are not 
modifying MS-DRG 250 or 251 or procedure code 37.90 for FY 2009.
    As an additional note, we point out that the titles of MS-DRGs 250 
and 251 have been changed for FY 2009. We have removed the reference to 
AMI, as that portion of the title was a holdover from the CMS DRGs last 
used in FY 2007. The correct titles are: MS-DRG 250 (Percutaneous 
Cardiovascular Procedure without Coronary Artery Stent with MCC) and 
MS-DRG 251 (Percutaneous Cardiovascular Procedure without Coronary 
Artery Stent without MCC). The entire list of MS-DRGs can be found in 
Table 5 of the Addendum to this final rule.
4. MDC 8 (Diseases and Disorders of the Musculoskeletal System and 
Connective Tissue): Hip and Knee Replacements and Revisions
    For FY 2009, we again received a request from the American 
Association of Hip and Knee Surgeons (AAHKS), a specialty group within 
the American Academy of Orthopedic Surgeons (AAOS), concerning 
modifications of the lower joint procedure MS-DRGs. The request is 
similar, in some respects, to the AAHKS' request in FY 2008, 
particularly as it relates to separating routine and complex 
procedures. For the benefit of the reader, we are republishing a 
history of the development of DRGs for hip and knee replacements and a 
summary of the AAHKS FY 2008 request that were included in the FY 2008 
IPPS final rule with comment period (72 FR 47222 through 47224) before 
we discuss the AAHKA's more recent request.
a. Brief History of Development of Hip and Knee Replacement Codes
    In the FY 2006 IPPS final rule (70 FR 47303), we deleted CMS DRG 
209 (Major Joint and Limb Reattachment Procedures of Lower Extremity) 
and created two new CMS DRGs: 544 (Major Joint Replacement or 
Reattachment of Lower Extremity) and 545 (Revision of Hip or Knee 
Replacement). The two new CMS DRGs were created because revisions of 
joint replacement procedures are significantly more resource intensive 
than original hip and knee replacements procedures. CMS DRG 544 
included the following procedure code assignments:
     81.51, Total hip replacement
     81.52, Partial hip replacement
     81.54, Total knee replacement
     81.56, Total ankle replacement
     84.26, Foot reattachment
     84.27, Lower leg or ankle reattachment
     84.28, Thigh reattachment
    CMS DRG 545 included 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

[[Page 48499]]

     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 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 CMS DRGs to determine if future additional DRG modifications are 
needed.
b. Prior Recommendations of the AAHKS
    Prior to this year, the AAHKS had recommended that we make further 
refinements to the CMS DRGs for knee and hip arthroplasty procedures. 
The AAHKS previously presented data to CMS on the important differences 
in clinical characteristics and resource utilization between primary 
and revision total joint arthroplasty procedures. The 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. The 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.
    The 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, the 
AAHKS recommended that CMS examine Medicare claims data and consider 
the creation of separate DRGs for total hip and total knee arthroplasty 
procedures. The 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, the 
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 head 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
    The AAHKS also recommended the continuation of CMS DRG 471 
(Bilateral or Multiple Major Joint Procedures of Lower Extremity) 
without modifications. CMS DRG 471 included 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
c. Adoption of MS-DRGs for Hip and Knee Replacements for FY 2008 and 
AAHKS' Recommendations
    In the FY 2008 IPPS final rule with comment period (72 FR 47222 
through 47226), we adopted MS-DRGs to better recognize severity of 
illness for FY 2008. The MS-DRGs include two new severity of illness 
levels under the then current base DRG 544. We also added three new 
severity of illness levels to the base DRG for Revision of Hip or Knee 
Replacement. 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)
     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. In the final rule, we 
presented data indicating the average charges for each new MS-DRG for 
the joint procedures.
    In the FY 2008 IPPS final rule with comment period, 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. Commenters on the FY 2008 proposed 
rule had encouraged CMS to continue working with the orthopedic

[[Page 48500]]

community, including the AAHKS, to monitor the need for additional new 
DRGs. The commenters stated that 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. 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 had proposed three severity levels for 
revision of hip and knee replacement (MS-DRGs 466, 467, and 468), and 
AAHKS agreed with this 3-level subdivision.)
    The AAHKS 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. AAHKS 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. AAHKS 
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. It recommended 
that the existing five criteria be modified for low volume subgroups to 
assure materiality. For higher volume MS-DRG subgroups, the AAHKS 
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 AAHKS 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 MCC) within the base DRG for payment weight 
calculations.
    In response, we indicated that we did not believe it was 
appropriate to modify our five criteria for creating severity 
subgroups. Our data did not support creating additional subdivisions 
based on the criteria. At that time, we believed the criteria we 
established to create subdivisions within a base DRG were 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 indicated that 
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.
    The AAHKS indicated in its response to the FY 2008 proposed rule 
that it continued to support the separation of routine and complex 
joint procedures. It believed that certain joint replacement procedures 
have significantly lower average charges than do other joint 
replacements. The AAKHS' data suggest that more routine joint 
replacements are associated with substantially less resource 
utilization than other more complex revision procedures. The AAHKS 
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.
    In 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 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. We found that 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).
    Given the very similar resource requirements of MS-DRG 485 and the 
fact that these DRGs also contain knee procedures, we moved 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 also indicated that we would continue to monitor 
the revision MS-DRGs to determine if additional modifications are 
needed.
d. AAHKS' Recommendations for FY 2009
    The AAHKS' current request involves the following recommendations:
     That CMS consolidate and reassign certain joint procedures 
that have a diagnosis of an infection or malignancy into MS-DRGs that 
are similar in terms of clinical characteristics and resource 
utilization. The AAKHS further identifies groups called Stage 1 and 2 
procedures that it believes require significant differences in resource 
utilization.
     That CMS reclassify certain specific joint procedures, 
which AAHKS refers to as ``routine,'' out of their current MS-DRG 
assignments. The three joint procedures that AAHKS classifies as 
``routine'' are codes 00.73 (Revision of hip replacement, acetabular 
liner and/or femoral head only), 00.83 (Revision of knee replacement, 
patellar component), and 00.84 (Revision of total knee replacement, 
tibial insert (liner)). The AAHKS advocated removing these three 
``routine'' procedures from the following DRGs: MS-DRGs 466, 467, and 
468, MS-DRGs 485, 486, and 487, and MS-DRGs 488 and 489. The AAHKS 
refers to MS-DRGs 466, 467, and 468 as ``complex'' revision MS-DRGs, 
and recommended that the three ``routine'' procedures be moved out of 
MS-DRGs 466, 467, and 468 and MS-DRGs 485, 486, and 489 and into MS-
DRGs 469 and 470 (Major Joint Replacement or Reattachment of Lower 
Extremity with and without MCC, respectively). The AAHKS contended that 
the three ``routine'' procedures have similar clinical characteristics 
and resource utilization to those in MS-DRGs 469.
    The recommendations suggested by AAHKS are quite complex and 
involve a number of specific code lists and MS-DRG assignment changes. 
We discuss each of these requests in detail below.
    (1) AAHKS Recommendation 1: Consolidate and reassign patients with

[[Page 48501]]

hip and knee prosthesis related infections or malignancies.
    The AAHKS pointed out that deep infection is one of the most 
devastating complications associated with hip and knee replacements. 
These infections have been reported to occur in approximately 0.5 
percent to 3 percent of primary and 4 percent to 6 percent of revision 
total joint replacement procedures. These infections often result in 
the need for multiple reoperations, prolonged use of intravenous and 
oral antibiotics, extended inpatient and outpatient rehabilitation, and 
frequent followup visits. Furthermore, clinical outcomes following 
single- and two-stage revision total joint arthroplasty procedures have 
been less favorable than revision for other causes of failure not 
associated with infection.
    In addition to the clinical impact, the AAHKS stated that infected 
total joint replacement procedures also have substantial economic 
implications for patients, payers, hospitals, physicians, and society 
in terms of direct medical costs, resource utilization, and the 
indirect costs associated with lost wages and productivity. The AAHKS 
stated that the considerable resources required to care for these 
patients have resulted in a strong financial disincentive for 
physicians and hospitals to provide care for patients with infected 
total joint replacements, an increased economic burden on the high 
volume tertiary care referral centers where patients with infected hip 
replacement procedures are frequently referred for definitive 
management. The AAHKS further stated that, in some cases, there are 
compromised patient outcomes due to treatment delays as patients with 
infected joint replacements seek providers who are willing to care for 
them.
    Once a deep infection of a total joint prosthesis is identified, 
the first stage of treatment involves a hospital admission for removal 
of the infected prosthesis and debridement of the involved bone and 
surrounding tissue. During the same procedure, an antibiotic-
impregnated cement spacer is typically inserted to maintain alignment 
of the limb during the course of antibiotic therapy. The patient is 
then discharged to a rehabilitation facility/nursing home (or to home 
if intravenous therapy can be safely arranged for the patient) for a 6-
week course of IV antibiotic treatment until the infection has cleared.
    After the completion of antibiotic therapy, the hip or knee may be 
reaspirated to look for evidence of persistent infection or eradication 
of infection. A second stage procedure is then undertaken, where the 
patient is readmitted, the hip or knee is reexplored, and the cement 
spacer removed. If there are no signs of persistent infection, a hip or 
knee prosthesis is reimplanted, often using bone graft and costly 
revision implants in order to address extensive bone loss and distorted 
anatomy. Thus, the entire course of treatment for patients with 
infected joint replacements is 4 to 6 months, with an additional 6 to 
12 months of rehabilitation. Furthermore, clinical outcomes following 
revision for infection are poor relative to outcomes following revision 
for other aseptic causes. The AAHKS noted that patients with bone 
malignancy have a similar treatment focus--surgery to remove diseased 
tissue, chemotherapy to treat the malignancy, and implantation of the 
new prosthesis. They also have similar resource use. For simplicity, 
the AAHKS' discussion focused on infected joint prostheses, but it 
suggested that the issues it raises would apply to patients with a 
malignancy as well.
    The AAHKS stated that these patients are currently grouped in 
multiple MS-DRGs, and the cases are often ``outliers'' in each one. 
AAHKS proposed to consolidate these patients with similar clinical 
characteristics and treatment into MS-DRGs reflective of their resource 
utilization.
    The AAHKS states that these more severe patients are currently 
classified into the following MS-DRGs:
     MS-DRGs 463, 463, and 465 (Wound Debridement and Skin 
Graft Excluding Hand, for Musculoskeletal-Connective Tissue Disease 
with MCC, with CC, without CC/MCC, respectively)
     MS-DRGs 480, 481, and 482 (Hip and Femur Procedures Except 
Major Joint with MCC, with CC, without CC/MCC, respectively)
     MS-DRGs 485, 486, and 487 (Knee Procedures with Principal 
Diagnosis of Infection and with MCC, with CC, and without CC/MCC, 
respectively)
     MS-DRGs 488 and 489 (Knee Procedures without Principal 
Diagnosis of Infection and with CC/MCC and without CC/MCC, 
respectively)
     MS-DRGs 495, 496, and 497 (Local Excision and Removal of 
Internal Fixation Devices Except Hip and Femur with MCC, with CC, and 
without CC/MCC, respectively)
     Other MS-DRGs (The AAHKS did not specify what these other 
MS-DRGs were.)
    The AAHKS indicated that cases with the severe diagnoses of 
infections, neoplasms, and structural defects have similarities. These 
similarities are due to an overlap of a severe diagnosis (including a 
principal diagnosis of code 996.66 (Infected joint prosthesis) and the 
resulting need for more extensive surgical procedures. The AAHKS stated 
that currently these patients are grouped into MS-DRGs by major 
procedure alone. AAHKS recommended that these cases be grouped into 
what it refers to as Stages 1 and 2 as follows:
     Stage 1 would include the removal of an infected 
prosthesis and includes cases in MS-DRGs 463, 464, and 465, 480, 481, 
and 482, 485 through 489, and 495, 496, and 497. Stage 1 joint 
procedure codes would include codes 80.05 (Arthrotomy for removal of 
prosthesis, hip), 80.06 (Arthrotomy for removal of prosthesis, knee), 
00.73 (Revision of hip replacement, acetabular liner and/or femoral 
head only), and 00.84 (Revision of knee replacement, tibial insert 
(liner)).
     Stage 2 would include the implant of a new prosthesis and 
includes cases in MS-DRGs 461 and 462, 463, 464, and 465, 466, 467, and 
468, and 469 and 470. Stage 2 joint procedure codes would include codes 
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), 00.80 (Revision 
of knee replacement, total (all components)), 00.81 (Revision of knee 
replacement, tibial component), 00.82 (Revision of knee replacement, 
femoral component), 00.85 (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 (Revise hip replacement), 81.54 
(Total knee replacement), 81.55 (Revise knee replacement), and 81.56 
(Total ankle replacement).
    As stated earlier, the AAHKS recommended patients with certain more 
severe diagnoses be grouped into a higher severity level. While most of 
AAHKS' comments focused on joint replacement patients with infections, 
the AAHKS also believed that patients with certain neoplasms require 
greater resources. To this group of infections and neoplasms, the AAHKS 
recommended the addition of four codes that capture acquired 
deformities. The AAHKS believed that these codes would capture 
admissions for the second stage of the treatment for an infected joint. 
The AAHKS stated that the significance of these diagnoses when they are 
reported as the principal code position was significant in predicting 
resource utilization. However, the impact was not as significant when 
the diagnosis was reported as a secondary diagnosis.

[[Page 48502]]

The AAHKS recommended that patients with one of the following 
infection/neoplasm/defect principal diagnosis codes be segregated into 
a higher severity level.

Stage 1 Infection/Neoplasm/Defect Principal Diagnosis Codes

     170.7 (Malignant neoplasm of long bones of lower limb)
     171.3 (Malignant neoplasm of soft tissue, lower limb, 
including hip)
     711.05 (Pyogenic arthritis, pelvic region and thigh)
     711.06 (Pyogenic arthritis, lower leg)
     730.05 (Acute osteomyelitis, pelvic region and thigh)
     730.06 (Acute osteomyelitis, lower leg)
     730.15 (Chronic osteomyelitis, pelvic region and thigh)
     730.16 (Chronic osteomyelitis, lower leg)
     730.25 (Unspecified osteomyelitis, pelvic region and 
thigh)
     730.26 (Unspecified osteomyelitis, lower leg)
     996.66 (Infection and inflammatory reaction due to 
internal joint prosthesis)
     996.67 (Infection and inflammatory reaction due to other 
internal orthopedic device, implant, and graft)

Stage 2 Infection/Neoplasm/Defect Principal Diagnosis Codes (an 
Asterisk * Shows the Diagnoses Included in Stage 2 That Were Not Listed 
in Stage 1)

     170.7 (Malignant neoplasm of long bones of lower limb)
     171.3 (Malignant neoplasm of soft tissue, lower limb, 
including hip)
     198.5 (Secondary malignant neoplasm of bone and bone 
marrow) *
     711.05 (Pyogenic arthritis, pelvic region and thigh)
     711.06 (Pyogenic arthritis, lower leg)
     730.05 (Acute osteomyelitis, pelvic region and thigh)
     730.06 (Acute osteomyelitis, lower leg)
     730.15 (Chronic osteomyelitis, pelvic region and thigh)
     730.16 (Chronic osteomyelitis, lower leg)
     730.25 (Unspecified osteomyelitis, pelvic region and 
thigh)
     730.26 (Unspecified osteomyelitis, lower leg)
     736.30 (Acquired deformities of hip, unspecified 
deformity)
     736.39 (Other acquired deformities of hip) *
     736.6 (Other acquired deformities of knee) *
     736.89 (Other acquired deformities of other parts of 
limbs) *
     996.66 (Infection and inflammatory reaction due to 
internal joint prosthesis) *
     996.67 (Infection and inflammatory reaction due to other 
internal orthopedic device, implant, and graft) *
    For the Stage 2 procedures, AAHKS also suggested the use of the 
following secondary diagnosis codes to assign the cases to a higher 
severity level. These conditions would not be the reason the patient 
was admitted to the hospital. They would instead represent secondary 
conditions that were also present on admission or conditions that were 
diagnosed after admission.

Stage 2 Infection/Neoplasm/Defect Secondary Diagnosis Codes

     170.7 (Malignant neoplasm of long bones of lower limb)
     171.3 (Malignant neoplasm of soft tissue, lower limb, 
including hip)
     711.05 (Pyogenic arthritis, pelvic region and thigh)
     711.06 (Pyogenic arthritis, lower leg)
     730.05 (Acute osteomyelitis, pelvic region and thigh)
     730.06 (Acute osteomyelitis, lower leg)
     730.15 (Chronic osteomyelitis, pelvic region and thigh)
     730.16 (Chronic osteomyelitis, lower leg)
     730.25 (Unspecified osteomyelitis, pelvic region and 
thigh)
     730.26 (Unspecified osteomyelitis, lower leg)
     996.66 (Infection and inflammatory reaction due to 
internal joint prosthesis)
     996.67 (Infection and inflammatory reaction due to other 
internal orthopedic device, implant, and graft)
    (2) AAHKS Recommendation 2: Reclassify certain specific joint 
procedures.
    The AAHKS suggested that cases with the infection/neoplasm/defect 
diagnoses listed above be segregated according to the Stage 1 and 2 
groups listed above. The AAHKS made one final recommendation concerning 
joint procedure cases with infections. It identified a subset of 
patients who had a principal diagnosis of code 996.66 (Infection and 
inflammatory reaction due to internal joint prosthesis) and who also 
had a secondary diagnosis of sepsis or septicemia. The AAHKS believed 
that these patients are for the most part admitted with both the joint 
infection and sepsis/septicemia present at the time of admission. The 
codes for sepsis/septicemia are classified as MCCs under MS-DRGs. The 
AAHKS believed it is inappropriate to count the secondary diagnosis of 
sepsis/septicemia as an MCC when it is reported with code 996.66. The 
AAHKS believed that counting sepsis and septicemia as an MCC results in 
double counting the infections. It believed that the joint infection 
and septicemia are the same infection. The AAHKS recommended that the 
following sepsis and septicemia codes not count as an MCC when reported 
with code 996.66:
     038.0 (Streptococcal septicemia)
     038.10 (Staphylococcal septicemia, unspecified)
     038.11 (Staphylococcal aureus septicemia)
     038.19 (Other staphylococcal septicemia)
     038.2 (Pneumococcal septicemia [streptococcus pneumonia 
septicemia])
     038.3 (Septicemia due anaerobes)
     038.40 (Septicemia due to gram-negative organisms)
     038.41 (Hemophilus influenzae [H. Influenzae])
     038.42 (Escherichia coli [E. Coli])
     038.43 (Pseudomonas)
     038.44 (Serratia)
     038.49 (Other septicemia due to gram-negative organisms)
     038.8 (Other specified septicemias)
     038.9 (Unspecified septicemia)
     995.91 (Sepsis)
     995.92 (Severe sepsis)
e. CMS' Response to AAHKS' Recommendations
    The MS-DRG modifications proposed by the AAHKS are quite complex 
and have many separate parts. We made changes to the MS-DRGs in FY 2008 
as a result of a request by the AAHKS as discussed above, to recognize 
two types of partial knee replacements as less complex procedures. We 
have no data on how effective the new MS-DRGs for joint procedures are 
in differentiating patients with varying degrees of severity. 
Therefore, as we indicated in the proposed rule, we analyzed data 
reported prior to the adoption of MS-DRGs to analyze each of the 
recommendations made. We begin our analysis by focusing first on the 
more simple aspects of the recommendations made by the AAHKS.
    (1) Changing the MS-DRG assignment for codes 00.73, 00.83, and 
00.84.
    As discussed previously, in FY 2008, the AAHKS recommended that CMS 
classify certain joint procedures as either routine or complex. We 
examined the data for these cases and found that the following two 
codes had significantly lower charges than the other joint revisions: 
00.83 (Revision of knee replacement, patellar component) and 00.84 
(Revision of knee replacement, tibial insert (liner)). Therefore, we 
moved these two codes to MS-DRGs 485, 486, and 487, and MS-DRGs 488 and 
489.
    As a result of AAHKS' most recent recommendations, we once again

[[Page 48503]]

examined claims data for these two knee procedures (codes 00.83 and 
00.84) as well as its request that we move code 00.73 (Revision of hip 
replacement, acetabular liner and/or femoral head only). Code 00.73 is 
assigned to MS-DRGs 466, 467, and 468. The following tables show our 
findings.

----------------------------------------------------------------------------------------------------------------
                                                                     Number of    Average length      Average
                             MS-DRG                                    cases          of stay         charges
----------------------------------------------------------------------------------------------------------------
485--All Cases..................................................           1,122           12.20      $64,672.47
485--Cases with Code 00.83 or 00.84.............................             179           11.83       64,446.68
485--Cases without Code 00.83 or 00.84..........................             943           12.27       64,715.33
486--All Cases..................................................           2,061            8.03       40,758.55
486--Cases with Code 00.83 or 00.84.............................             464            7.34       39,864.39
486--Cases without Code 00.83 or 00.84..........................           1,597            8.23       41,018.34
487--All Cases..................................................           1,236            5.67       29,180.88
487--Cases with Code 00.83 or 00.84.............................             284            5.61       31,231.79
487--Cases without Code 00.83 or 00.84..........................             952            5.68       28,569.06
488--All Cases..................................................           2,374            5.17       30,180.80
488--Cases with Code 00.83 or 00.84.............................             754            4.09       28,432.06
488--Cases without Code 00.83 or 00.84..........................           1,620            5.67       30,994.73
489--All Cases..................................................           5,493            3.04       21,385.67
489--Cases with Code 00.83 or 00.84.............................           2,154            3.07       23,122.18
489--Cases without Code 00.83 or 00.84..........................           3,339            3.03       20,265.44
469--All Cases..................................................          29,030            8.17       56,681.64
470--All Cases..................................................         385,123            3.93       36,126.23
466--All Cases..................................................           3,888            9.18       76,015.66
466--Cases with Code 00.73......................................             273           10.02       71,293.33
466--Cases without Code 00.73...................................           3,616            9.12       76,372.06
467--All Cases..................................................          13,551            5.50       53,431.63
467--Cases with Code 00.73......................................           1,078            5.94       43,635.63
467--Cases without Code 00.73...................................          12,484            5.47       54,284.13
468--All Cases..................................................          19,917            3.94       44,055.62
468--Cases with Code 00.73......................................           1,688            3.93       33,449.22
468--Cases without Code 00.73...................................          18,232            3.94       45,037.09
469--All Cases..................................................          29,030            8.17       56,681.64
470--All Cases..................................................         385,123            3.93       36,126.23
----------------------------------------------------------------------------------------------------------------

    The tables show that codes 00.73, 00.83, and 00.84 are 
appropriately assigned to their current MS-DRGs. The data do not 
support moving these three codes to MS-DRGs 469 and 470. Therefore, we 
did not propose a change of MS-DRG assignment for codes 00.73, 00.83, 
and 00.84 for FY 2009.
    (2) Excluding sepsis and septicemia from being an MCC with code 
996.66.
    There are cases where a patient may be admitted with an infection 
of a joint prosthesis (code 996.66) and also have sepsis. In these 
cases, it may be possible to perform joint procedures as suggested by 
AAHKS. However, in other cases, a patient may be admitted with an 
infection of a joint prosthesis and then develop sepsis during the 
stay. Because our current data do not indicate whether a condition is 
present on admission, we could not determine whether or not the sepsis 
occurred after admission. Our data have consistently shown that cases 
of sepsis and septicemia require significant resources. Therefore, we 
classified the sepsis and septicemia codes as MCCs. Our clinical 
advisors do not believe it is appropriate to exclude all cases of 
sepsis and septicemia that are reported as a secondary diagnosis with 
code 996.66 from being classified as a MCC. We discuss septicemia as 
part of the HAC provision under section II.F. of the preamble of the 
proposed rule and this final rule. For the purposes of classifying 
sepsis and septicemia as non-CCs when reported with code 996.66, we do 
not support this recommendation. Therefore, in the proposed rule, we 
did not propose that the sepsis and septicemia codes be added to the CC 
exclusion list for code 996.66.
    (3) Differences between Stage 1 and 2 cases with severe diagnoses.
    As indicated in the proposed rule, we next examined data on AAHKS' 
suggestion that there are significant differences in resource 
utilization for cases they refer to as Stage 1 and 2. AAHKS stated that 
this is particularly true for those with infections, neoplasms, or 
structural defects. We used the list of procedure codes listed above 
that AAHKS describes as Stage 1 and 2 procedures. We also used AAHKS' 
designated lists of Stage 1 and 2 principal diagnosis codes to examine 
this proposal. This proposal entails moving cases with a Stage 1 or 2 
principal diagnosis and procedure out of their current MS-DRG 
assignment in the following 19 MS-DRGs and into a newly consolidated 
set of MS-DRGs: MS-DRGs 463, 464, and 465, 480, 481, and 482, 485 
through 489, and 495, 496, and 497.
    As can be seen from the information below, there was not a 
significant difference in average charges between these Stage 1 and 
Stage 2 cases that have an MCC.

----------------------------------------------------------------------------------------------------------------
                                                                                  Average length      Average
                             Stage 1                                Total cases       of stay         charges
----------------------------------------------------------------------------------------------------------------
                          Stage 1 Cases With Infection, Neoplasm, or Structural Defect
----------------------------------------------------------------------------------------------------------------
With MCC........................................................           1,306            14.1         $79,232
Without MCC.....................................................           4,115             7.6         $44,716
----------------------------------------------------------------------------------------------------------------

[[Page 48504]]

 
                          Stage 2 Cases With Infection, Neoplasm, or Structural Defect
----------------------------------------------------------------------------------------------------------------
With MCC........................................................           1,072            10.9         $80,781
Without MCC.....................................................           5,413             6.0         $57,355
----------------------------------------------------------------------------------------------------------------

    Average charges for Stage 1 cases with an MCC was $79,232 compared 
to $80,781 for Stage 2. Stage 1 cases without an MCC had average 
charges of $44,716 compared to $57,355. These data do not support 
reconfiguring the current MS-DRGs based on this new subdivision.
    (4) Moving joint procedure cases to new MS-DRGs based on secondary 
diagnoses of infection.
    We examined AAHKS' recommendation that Stage 2 joint cases with 
specific secondary diagnoses of infection or neoplasm be moved out of 
their current MS-DRG assignments and into a newly constructed MS-DRG. 
We indicated in the proposed rule that we are reluctant to make this 
type of significant DRG change to the joint MS-DRGs based on the 
presence of a secondary diagnosis. This results in the movement of 
cases out of MS-DRGs which were configured based on the reason for the 
admission (for example, principal diagnosis) and surgery. The cases 
would instead be assigned based on conditions that are reported as 
secondary diagnoses. In some cases, the infection may have developed or 
be diagnosed during the admission. This would be a significant logic 
change to the MS-DRGs for joint procedures. This logic change would 
involve setting a new precedent of reassigning cases to a different MS-
DRG if an infection is reported as a secondary diagnosis. The secondary 
diagnosis of infection could be present on admission or develop after 
the admission. Currently, secondary diagnoses are evaluated to 
determine if they are an MCC or CC, and then they can lead to the case 
being assigned to a higher severity level. The secondary diagnoses do 
not currently lead to the removal of the case from the MS-DRG and 
reassignment to a new MS-DRG. We have not had an opportunity to examine 
claims data based on hospital discharges under the MS-DRGs which began 
October 1, 2008. Our clinical advisors believe it would be more 
appropriate to wait for data under the new MS-DRG system to determine 
how well the new severity levels are addressing accurate payment for 
these cases before considering this approach to assigning cases to a 
MS-DRG.
    (5) Moving cases with infection, neoplasms, or structural defects 
out of 19 MS-DRGs and into two newly developed MS-DRGs.
    The last recommended by AAHKS that we considered was moving cases 
with a principal diagnosis of infection, neoplasm, or structural defect 
from their list of Stage 1 and 2 diagnoses and consolidating them into 
newly constructed and modified MS-DRGs. AAHKS could not identify an 
existing set of MS-DRGs with similar resource utilizations into which 
the Stage 1 cases could be assigned. Therefore, the AAHKS recommended 
that CMS create three new MS-DRGs for Stage 1 cases with infections, 
neoplasms and structural defects which would be titled ``Arthrotomy/
Removal/Component exchange of Infected Hip or Knee Prosthesis with MCC, 
with CC, and without CC/MCC'', respectively.
    The AAHKS recommended moving Stage 2 cases out of MS-DRGs 466, 467, 
and 468, and 469 and 470 and into MS-DRGs 461 and 462. AAHKS 
recommended that MS-DRGs 461 and 462 be renamed ``Major Joint 
Procedures of Lower Extremity--Bilateral/Multiple/Infection/
Malignancy''.
    As we indicated in the proposed rule, in reviewing these proposed 
changes, we had a number of concerns. The first concern was that these 
proposed changes would result in the removal of cases with varying 
average charges from 19 current MS-DRGs and consolidating them into two 
separate sets of MS-DRGs. As the data below indicate, the average 
charges vary from as low as $29,181 in MS-DRG 487 to $81,089 in MS-DRG 
463. Furthermore, the average charges for these infection/neoplasm/
structural defect cases are very similar to other cases in their 
respective MS-DRG assignments for many of these MS-DRGs. There are 
cases where the average charges are higher. In MS-DRG 469 and 470, the 
infection/neoplasm/structural defect cases are significantly higher. 
However, there are only 136 cases in MS-DRG 469 out of a total of 
29,030 cases with these diagnoses. There are only 673 cases in MS-DRG 
470 out of a total of 385,123 cases with one of these diagnoses. The 
table below clearly demonstrates the wide variety of charges for cases 
with these diagnoses.

----------------------------------------------------------------------------------------------------------------
                                                                     Number of    Average length      Average
                             MS-DRGs                                   cases          of stay         charges
----------------------------------------------------------------------------------------------------------------
463--All Cases..................................................           4,747           16.25      $73,405.46
463--Cases with PDX of Infection/Malignancy/React...............           1,009           17.79       81,089.07
464--All Cases..................................................           5,499           10.21       44,387.73
464--Cases with PDX of Infection/Malignancy/React...............           1,420           10.59       46,800.60
465--All Cases..................................................           2,271            5.95       26,631.57
465--Cases with PDX of Infection/Malignancy/React...............             557           10.59       29,816.40
466--All Cases..................................................           3,888            9.18       76,015.66
466--Cases with PDX of Infection/Malignancy/React...............             890           10.67       79,334.69
467--All Cases..................................................          13,551            5.50       53,431.63
467--Cases with PDX of Infection/Malignancy/React...............           2,401            6.71       58,506.86
468--All Cases..................................................          19,917            3.94       44,055.62
468--Cases with PDX of Infection/Malignancy/React...............           1,994            4.76       54,322.03
469--All Cases..................................................          29,030            8.17       56,681.64
469--Cases with PDX of Infection/Malignancy/React...............             136           11.74       85,256.07
470--All Cases..................................................         385,123            3.93       36,126.23
470--Cases with PDX of Infection/Malignancy/React...............             673            6.44       59,676.31
480--All Cases..................................................          25,391            9.32       52,281.65
480--Cases with PDX of Infection/Malignancy/React...............             880           14.53       76,355.15
481--All Cases..................................................          68,655            5.94       32,963.64

[[Page 48505]]

 
481--Cases with PDX of Infection/Malignancy/React...............             878            8.78       48,655.30
482--All Cases..................................................          45,832            4.86       27,266.20
482--Cases with PDX of Infection/Malignancy/React...............             577            6.19       37,572.38
485--All Cases..................................................           1,122           12.20       64,672.47
485--Cases with PDX of Infection/Malignancy/React...............           1,122           12.20       64,672.47
486--All Cases..................................................           2,061            8.03       40,758.55
486--Cases with PDX of Infection/Malignancy/React...............           2,061            8.03       40,758.55
487--All Cases..................................................           1,236            5.67       29,180.88
487--Cases with PDX of Infection/Malignancy/React...............           1,236            5.67       29,180.88
488--All Cases..................................................           2,374            5.17       30,180.80
488--Cases with PDX of Infection/Malignancy/React...............              31            7.13       50,155.42
489--All Cases..................................................           5,493            3.04       21,385.67
489--Cases with PDX of Infection/Malignancy/React...............              36            3.72       35,313.84
495--All Cases..................................................           1,860           10.94       55,103.91
495--Cases with PDX of Infection/Malignancy/React...............           1,025           11.74       59,453.69
496--All Cases..................................................           5,203            5.95       32,177.29
496--Cases with PDX of Infection/Malignancy/React...............           2,759            6.98       36,940.99
497--All Cases..................................................           6,259            3.01       21,445.60
497--Cases with PDX of Infection/Malignancy/React...............           1,500            5.18       29,966.98
----------------------------------------------------------------------------------------------------------------

    Given the wide variety of charges and the small number of cases 
where there are differences in charges, we do not believe the data 
support the AAKHS' recommendations. The data do not support removing 
these cases from the 19 MS-DRGs above and consolidating them into a new 
set of MS-DRGs, either newly created, or by adding them to MS-DRG 461 
or 462, which have average charges of $80,718 and $57,355, 
respectively.
    A second major concern involves redefining MS-DRGs 461 and 462 is 
that these MS-DRGs currently capture bilateral and multiple joint 
procedures. These MS-DRGs were specifically created to capture a unique 
set of patients who undergo procedures on more than one lower joint. 
Redefining these MS-DRGs to include both single and multiple joints 
undermines the clinical coherence of this MS-DRG. It would create a 
widely diverse group of patients based on either a list of specific 
diagnoses or the fact that the patient had multiple lower joint 
procedures.
    Comment: While we did not receive any public comments specifically 
supporting the reassignment of codes 00.73, 00.83, and 00.84 to MS-DRGs 
469 and 470, several commenters acknowledged CMS' discussion of the FY 
2008 implementation of MS-DRGs and lack of data to support major MS-DRG 
changes for FY 2009. The commenters accepted CMS' proposal of not 
making significant revisions to the MS-DRGs until claims data under the 
new MS-DRG system are available.
    Several commenters suggested an alternative way of capturing the 
more resource intensive joint procedure cases, particularly those 
involving an infected joint. The commenters recommended moving codes 
80.05 (Arthrotomy for removal of hip prosthesis) and 80.06 (Arthrotomy 
for removal of knee prosthesis) into MS-DRGs 463 through 465 (Wound 
Debridement and Skin Graft Except Hand, for Musculoskeletal-Connective 
Tissue Disease with MCC, with CC, and without CC/MCC, respectively). 
(We note that code 80.05 is currently assigned to MS-DRGs 480 through 
482 (Hip and Femur Procedures Except Major Joint with MCC, with CC, and 
without CC/MCC, respectively). Code 80.06 is currently assigned to MS-
DRGs 495 through 497 (Local Excision and Removal Internal Fixation 
Devices Except Hip and Femur with MCC, with CC, and without CC/MCC, 
respectively).)
    The commenters stated that a deep infection is one of the most 
devastating complications associated with hip and knee joint 
replacements, and that these cases require increased costs and resource 
utilization. The commenters believed that there is a strong financial 
disincentive for physicians and hospitals to provide care for patients 
with infected joint replacements. They indicated that this leads to an 
increased economic burden on tertiary care referral centers where 
patients with infected joint replacements are frequently referred for 
definitive management.
    The commenters believed that codes 80.05 and 80.06 were a good 
proxy for cases of infected joints containing a previously implanted 
joint prosthesis. The commenters suggested that moving these two codes 
was considerably less complex than the previously discussed revisions 
to the joint DRGs. They also believed these two codes clearly captured 
cases with infected joint prostheses. The commenters believed that 
these codes would only be reported in cases of an infected joint where 
the previous infected prosthesis was removed and no new prosthesis was 
inserted. The commenters stated that when a previously implanted joint 
prosthesis is removed and replaced with a new prosthesis, coders assign 
only the code for the insertion of the new prosthesis. They added that 
they do not routinely assign an additional code for the removal of the 
joint prosthesis (code 80.05 or 80.06). The commenters also stated that 
when there is an infected joint, the joint prosthesis may be removed 
and extensive debridement may be provided involving bone and 
surrounding tissue. The commenters further stated that an antibiotic-
impregnated cement spacer may be inserted to maintain alignment of the 
limb during the course of antibiotic therapy. According to the 
commenters, the new prosthesis will not be inserted until such time as 
the infection is fully resolved. In this case, the commenter stated 
that code 80.05 or 80.06 would be reported.
    The commenters believed that when codes 80.05 or 80.06 are reported 
to capture the removal of a joint prosthesis, one can assume that the 
patient had a joint infection. Therefore, the commenters requested that 
codes 80.05 and 80.06 be reassigned to MS-DRGs 463, 464, and 465 
because wound debridement is a treatment for infected joints.
    Response: We agree with the commenters that we should not move 
codes 00.73, 00.83, and 00.84 to MS-DRGs 469 and 470. Our data do not 
support this change. Therefore, in this final rule for FY 2009, we are 
not moving codes 00.73, 00.83, and 00.84 to MS-DRGs 469 and 470.

[[Page 48506]]

    We evaluated the alternative suggestion of moving codes 80.05 and 
80.06 into MS-DRGs 463, 464, and 465. We disagree with the suggestion 
that the use of codes 80.05 and 80.06 serves as a good proxy for cases 
of infected joint prostheses. These two codes are used to capture the 
fact that a previously inserted joint prosthesis is now being removed. 
These prostheses can be removed for a variety of reason including 
wearing, breakage, and infection. Assuming that these cases are 
infections and then moving the cases to the debridement DRGs, MS-DRGs 
463, 464, and 465, is inappropriate. We acknowledge that when a patient 
has an infected joint prosthesis, the prosthesis may be removed and 
treatment for the infection instituted, such as debridement. However, 
the most specific way of identifying these cases would be to examine 
the diagnosis code for the presence of an infection and to look for a 
debridement procedure code.
    Furthermore, the current codes for removal of joint prostheses do 
not have specific instructions indicating that a coder must not report 
codes 80.05 and 80.06 when also reporting one of the joint revision 
codes. While the coding index implies that one does not need to report 
a code for the removal of the prosthesis when it is being replaced, it 
is not precluded under the codes. If a code is reported for the removal 
of the previous joint prosthesis along with a code for the joint 
revision, the proposed logic change would result in the case being 
assigned to MS-DRGs 463, 464, and 465 even though the patient did not 
have an infection or a debridement performed. This DRG assignment would 
be a result of the surgical hierarchy which places the debridement DRGs 
(MS-DRGs 463, 464, and 465) higher than the joint revision DRGs (MS-
DRGs 466, 467, and 468). The proposed MS-DRG logic change could lead to 
the misclassification of many joint revision cases that did not have an 
infection or a debridement into the debridement DRGs.
    We plan to discuss the need to provide more definitive coding notes 
under codes 80.05 and 80.06 at the September 24-25, 2008 ICD-9-CM 
Coordination and Maintenance Committee meeting to better clarify that 
one would not assign a code for the removal of a joint prosthesis if a 
new prosthesis is inserted. This clarification may be useful when 
considering future refinements to the joint procedure DRGs. However, at 
this time, we believe that codes 80.05 and 80.06 cannot be used as a 
definitive means of capturing cases of an infected joint prosthesis. We 
believe it is more appropriate to utilize diagnosis codes to clearly 
identify joint infections and debridement codes to indicate 
debridement. We will continue to examine means to better classify joint 
infections under the MS-DRGs. However, we are not moving codes 80.05 
and 80.06 into MS-DRGs 463, 464, and 465 at this time. In addition, as 
stated previously, we also are not moving codes 00.73, 00.83, and 00.84 
to MS-DRGs 469 and 470. We are making no changes to the joint procedure 
MS-DRGs for FY 2009.
    Comment: One commenter provided additional recommendations to those 
discussed in the previous comment. The commenter stated that, after 
submission of his first comment, he had discovered a technical anomaly 
in the treatment of patients with hip and knee revision who also have a 
debridement that relates to the surgical hierarchy in MDC 8. The 
commenter pointed out that the wound debridement and skin graft MS-DRGs 
(MS-DRGs 463, 464, and 465) are currently sequenced before the revision 
of hip or knee replacement MS-DRGs (MS-DRGs 466, 467, and 468). 
Therefore, the commenter added, if codes are reported for revision of 
hip or knee replacement as well as for debridement of an infection, the 
case will be assigned to MS-DRGs 463, 467, or 465. The commenter 
believed that cases with both a debridement and a total revision 
prosthesis are more clinically similar to the revision cases than the 
debridement cases. Therefore, the commenter requested that the order of 
the wound debridement and skin graft MS-DRGs and the revision of the 
hip and knee MS-DRGs be reversed.
    Response: We agree that the current logic for wound debridement of 
infections results in cases being assigned to MS-DRGs 463, 467, and 
465. We also agree that joint revisions without debridements of 
infections are currently assigned to MS-DRGs 466, 467, and 468. We 
point out that this logic results in patients with infections being 
assigned to the exact MS-DRGs requested by the commenters in the prior 
discussion. We believe this current logic results in the appropriate 
assignment of joint revisions with and without debridements.
    MS-DRGs 466, 467, and 468 contain revisions for both total and 
partial joint revisions. For instance, MS-DRGs 466, 467, and 468 
includes revisions of the total hip joint as well as a partial hip 
revision of only the femoral component. The commenter believed that a 
subset of the revision cases, those with a total revision, are more 
clinically similar to the revision cases than to the debridement cases. 
For this reason, the commenter recommended that the surgical hierarchy 
be changed so that revision of a hip and knee prosthesis in MS-DRGs 
466, 467, and 468 should be placed above the debridement MS-DRGs (MS-
DRGs 463, 464, and 465). We point out that the surgical hierarchy is 
based on all cases within each DRG, not a subset. Furthermore, we have 
no MS-DRG claims data on which to evaluate the need to change the 
surgical hierarchy based on this recommendation. We note that this 
discussion reinforces the point that the current codes for debridement 
of an infection and joint revisions seem to correctly assign cases to 
the most appropriate MS-DRG. Therefore, in this final rule, we are not 
making any changes to the joint procedure MS-DRGs for FY 2009. We are 
deferring the examination of infections of joint replacements until 
such time as we have MS-DRG claims data.
    Comment: Several commenters expressed their concern about the joint 
procedure MS-DRGs. The commenters supported CMS' efforts in the FY 2008 
IPPS final rule to better reflect the clinical needs of patients and 
the resources used by hospitals. The commenters particularly 
appreciated CMS' adoption of the FY 2008 refined joint replacement MS-
DRGs that better recognize patient acuity. However, the commenters 
believed that further refinements and additional MS-DRGs are needed for 
joint procedures. The commenters stated that the joint procedure MS-
DRGs could be improved by making changes in FY 2009 to the MCC/CC 
classifications of specific codes that represent conditions impacting 
joint procedure patients. In particular, the commenters recommended the 
following changes:
     Changing the following codes from non-CCs to CCs: 731.3 
(Major osseous defects); 278.0 (Overweight and obesity); V85.35 (Body 
Mass index 35.0-35.9, adult); V85.36 (Body Mass index 36.0-36.9, 
adult); and V85.37 (Body Mass index 37.0-37.9, adult).
     Changing the following codes from non-CCs to MCCs: 278.01 
(Morbid obesity); V85.38 (Body Mass index 38.0-38.9, adult); and V85.39 
(Body Mass index 39.0-39.9, adult).
     Changing code V85.40 (Body Mass index 40 and over, adult) 
from a CC to an MCC.
    The commenters also recommended that CMS continue to evaluate the 
MS-DRG assignments for codes 00.73 (Revision of hip replacement, 
acetabular liner and/or femoral head only) and 00.84 (Revision of total 
knee replacement, tibial insert (liner)). The commenters stated that 
once CMS receives MS-DRG data, these data may

[[Page 48507]]

support reassigning these codes to other MS-DRGs.
    Response: While we acknowledge that the commenters were concerned 
about the effect that the obesity may have on joint patients, we point 
out that specific codes are classified as CCs or MCCs based on how they 
affect a wide range of patients. In the creation of the MS-DRGs, 
clinical evaluation and claims data did support the current MCC/CC 
classifications for these codes. However, as we gain experience and 
data under the MS-DRG system, we will continue to examine ways to 
improve the joint procedure MS-DRGs. We do not have MS-DRG data to 
evaluate these MCC/CC reclassifications or the possible reassignment of 
codes 00.73 or 00.84 at this time.
    Therefore, in this final rule, we are not changing the MCC/CC 
classifications or the MS-DRG reassignments for codes 00.73, 00.83, or 
00.84 for FY 2009. We also are not making changes to the joint 
procedure MS-DRGs for FY 2009.
f. Conclusion
    The AAHKS recommended a number of complicated, interrelated MS-DRG 
changes to the joint procedure MS-DRGs. We have not yet had the 
opportunity to review data for these cases under the new MS-DRGs. We 
did analyze the impact of these recommendations using cases prior to 
the implementation of MS-DRGs. The recommendations were difficult to 
analyze because there were so many separate logic changes that impacted 
a number of MS-DRGs. We did examine each major suggestion separately, 
and found that our data and clinical analysis did not support making 
these changes. Therefore, in the FY 2009 IPPS proposed rule, we did not 
propose any revisions to the joint procedure MS-DRGs for FY 2009, nor 
are we making any revisions in this final rule. We look forward to 
examining these issues once we receive data under the MS-DRG system. As 
we indicated in the proposed rule, we also welcome additional 
recommendations from the AAHKS and others on a more incremental 
approach to resolving its concerns about the ability of the current MS-
DRGs to adequately capture differences in severity levels for joint 
procedure patients.
5. MDC 18 (Infections and Parasitic Diseases (Systemic or Unspecified 
Sites): Severe Sepsis
    We received a request from a manufacturer to modify the titles for 
three MS-DRGs with the most significant concentration of severe sepsis 
patients. The manufacturer stated that modification of the titles will 
assist in quality improvement efforts and provide a better reflection 
on the types of patients included in these MS-DRGs. Specifically, the 
manufacturer urged CMS to incorporate the term ``severe sepsis'' into 
the titles of the following MS-DRGs that became effective October 1, 
2007 (FY 2008)
     MS-DRG 870 (Septicemia with Mechanical Ventilation 96+ 
Hours)
     MS-DRG 871 (Septicemia without Mechanical Ventilation 96+ 
Hours with MCC)
     MS-DRG 872 (Septicemia without Mechanical Ventilation 96+ 
Hours without MCC)
    These MS-DRGs were created to better recognize severity of illness 
among patients diagnosed with conditions including septicemia, severe 
sepsis, septic shock, and systemic inflammatory response syndrome 
(SIRS) who are also treated with mechanical ventilation for a specified 
duration of time.
    According to the manufacturer, ``severe sepsis is a common, deadly 
and costly disease, yet the number of patients impacted and the 
outcomes associated with their care remain largely hidden within the 
administrative data set.'' The manufacturer further noted that, 
although improvements have been made in the ICD-9-CM coding of severe 
sepsis (diagnosis code 995.92) and septic shock (diagnosis code 
785.52), results of an analysis demonstrated an unacceptably high 
mortality rate for patients reported to have those conditions. The 
manufacturer believed that revising the titles to incorporate ``severe 
sepsis'' will provide various clinicians and researchers the 
opportunity to improve outcomes for these patients. Therefore, the 
manufacturer recommended revising the current MS-DRG titles as follows:
     Proposed Revised MS-DRG 870 (Septicemia or Severe Sepsis 
with Mechanical Ventilation 96+ Hours)
     Proposed Revised MS-DRG 871 (Septicemia or Severe Sepsis 
without Mechanical Ventilation 96+ Hours with MCC)
     Proposed Revised MS-DRG 872 (Septicemia or Severe Sepsis 
without Mechanical Ventilation 96+ Hours without MCC)
    Comment: Many commenters applauded CMS for helping to promote 
quality improvement efforts for patients with severe sepsis. The 
commenters expressed their support for revising the titles of MS-DRGs 
870, 871, and 872 to include the term ``Severe Sepsis''. The commenters 
agreed that MS-DRGs 870, 871, and 872 already include a significant 
concentration of patients with severe sepsis and the change would 
increase awareness as well as facilitate research to improve care and 
patient outcomes.
    Response: As we indicated in the proposed rule, we agree that 
revising the current MS-DRG titles to include the term ``Severe 
Sepsis'' would better assist in the recognition and identification of 
this disease, which could lead to better clinical outcomes and quality 
improvement efforts. In addition, both severe sepsis (diagnosis code 
995.92) and septic shock (diagnosis code 785.52) are currently already 
assigned to these three MS-DRGs. Therefore, as we proposed, in this 
final rule we are revising the titles of MS-DRGs 870, 871, and 872 to 
reflect severe sepsis in the titles for FY 2009, as suggested and 
listed above.
    Comment: One commenter thanked CMS for the proposal to modify the 
titles for MS-DRGs 870, 871, and 872 by including the term ``severe 
sepsis'' and suggested that the title for MS-DRG 853 (Infectious and 
Parasitic Diseases with O.R. Procedure with MCC) be modified to include 
the term ``severe sepsis and other'' as well. The commenter stated 
that, based on an analysis the commenter conducted using Medicare 
discharge data, the concentration of patients with severe sepsis (code 
995.92) and septic shock (code 785.52) in surgical MS-DRG 853 is 
comparable to the concentration of patients in medical MS-DRGs 870, 
871, and 872.
    According to the commenter's study, 43.1 percent of cases in MS-DRG 
853 represent patients with severe sepsis. As a result of these 
findings, the commenter stated that revising the title for MS-DRG 853 
to include the term ``severe sepsis and other'' would be consistent 
with the rationale for proposing to modify the titles to MS-DRGs 870, 
871, and 872. The commenter asserted that this additional MS-DRG 
modification would also better assist in the recognition and 
identification of severe sepsis, leading to better clinical outcomes 
and quality improvement efforts.
    Response: We appreciate the commenter's support for the proposal to 
modify the titles to MS-DRGs 870, 871, and 872 to include the term 
``Severe Sepsis''. As stated above, we agree and are finalizing the 
proposed revisions to the titles for MS-DRGs 870, 871, and 872 for FY 
2009.
    With regard to modifying the title to MS-DRG 853, we point out that 
the MS-DRG titles generally do not reflect all of the diagnoses or 
conditions that may have a significant concentration of patients within 
that particular MS-DRG.

[[Page 48508]]

In other words, the foundation of the MS-DRG titles represents 
``Diagnostic-Related Groups'' [emphasis added].
    We have also received several comments acknowledging CMS' 
discussion of the FY 2008 implementation of MS-DRGs and the lack of 
data to support major MS-DRG changes at this time. Overall, the 
commenters accepted CMS' proposal of not making significant revisions 
to the MS-DRGs until claims data under this new system are available. 
Therefore, as final policy for FY 2009, we are not making any change to 
the title for MS-DRG 853.
    Comment: One commenter agreed with CMS' proposal to revise the 
descriptions for MS-DRGs 870, 871, and 872 by including the term 
``Severe Sepsis'' in the titles. However, the commenter also suggested 
that CMS continue to study technological advances that may provide 
earlier identification of sepsis and clinical findings that indicate 
endotoxemia as a ``driver of morbidity and mortality in sepsis.''
    The commenter believed that it would be essential to continue 
making modifications to the MS-DRG classification system to recognize 
newer technologies and treatments. Specifically, this commenter asked 
that CMS consider endotoxemia as an MCC, stating this would be 
consistent with the current MS-DRG system's designation of sepsis and 
septicemia as MCCs.
    Response: We acknowledge the commenter's suggestion and appreciate 
the support for modifying the titles for MS-DRGs 870, 871, and 872 to 
include the term ``Severe Sepsis''. As mentioned earlier, we are 
finalizing the proposed revisions to the titles for these MS-DRGs for 
FY 2009.
    In response to the commenter's recommendation that the MS-DRG 
classification system continue to be modified for purposes of 
recognizing new technologies or treatments, we do have a process in 
place under which we annually evaluate data and specific issues brought 
to our attention to determine if revisions are warranted. We refer the 
reader to section II.B.2 of the preamble in this final rule for a 
discussion on this process, as well as section II.J. of the preamble of 
this final rule for a discussion on the new technology add-on payment 
policy.
    The term ``endotoxemia'' is defined as the presence of endotoxins 
in the blood. This condition (or finding) is established on the basis 
of a laboratory test. The ICD-9-CM coding system currently indexes the 
term ``endotoxemia'' with the instructional note to ``code to 
condition''. This instruction refers the coder to seek the underlying, 
definitive condition that is established and documented as a result of 
the laboratory finding of endotoxemia. Therefore, an ICD-9-CM code for 
endotoxemia does not exist and consideration cannot be given as to a 
severity level assignment such as MCC, as the commenter requested. 
However, as the commenter pointed out, the diagnoses of sepsis and 
septicemia are currently designated as MCCs and, as such; patients with 
these diagnoses are already appropriately identified in the 
classification system, despite the presence or absence of endotoxemia.
6. MDC 21 (Injuries, Poisonings and Toxic Effects of Drugs): Traumatic 
Compartment Syndrome
    Traumatic compartment syndrome is a condition in which increased 
pressure within a confined anatomical space that contains blood 
vessels, muscles, nerves, and bones causes a decrease in blood flow and 
may lead to tissue necrosis.
    There are five ICD-9-CM diagnosis codes that were created effective 
October 1, 2006, to identify traumatic compartment syndrome of various 
sites.
     958.90 (Compartment syndrome, unspecified)
     958.91 (Traumatic compartment syndrome of upper extremity)
     958.92 (Traumatic compartment syndrome of lower extremity)
     958.93 (Traumatic compartment syndrome of abdomen)
     958.99 (Traumatic compartment syndrome of other sites)
    Cases with one of the diagnosis codes listed above reported as the 
principal diagnosis and no operating room procedure are assigned to 
either MS-DRG 922 (Other Injury, Poisoning and Toxic Effect Diagnosis 
with MCC) or MS-DRG 923 (Other Injury, Poisoning and Toxic Effect 
Diagnosis without MCC) in MDC 21.
    In the FY 2008 IPPS final rule with comment period when we adopted 
the MS-DRGs, we inadvertently omitted the addition of these traumatic 
compartment syndrome codes 958.90 through 958.99 to the multiple trauma 
MS-DRGs 963 (Other Multiple Significant Trauma with MCC), MS-DRG 964 
(Other Multiple Significant Trauma with CC), and MS-DRG 965 (Other 
Multiple Significant Trauma without CC/MCC) in MDC 24 (Multiple 
Significant Trauma). Cases are assigned to MDC 24 based on the 
principal diagnosis of trauma and at least two significant trauma 
diagnosis codes (either as principal or secondary diagnoses) from 
different body site categories. There are eight different body site 
categories as follows:
     Significant head trauma
     Significant chest trauma
     Significant abdominal trauma
     Significant kidney trauma
     Significant trauma of the urinary system
     Significant trauma of the pelvis or spine
     Significant trauma of the upper limb
     Significant trauma of the lower limb
    Therefore, in the FY 2009 IPPS proposed rule, we proposed to add 
traumatic compartment syndrome codes 958.90 through 958.99 to MS-DRGs 
963 and MS-DRG 965 in MDC 24. Under this proposal, codes 958.90 through 
958.99 would be added to the list of principal diagnosis of significant 
trauma. In addition, code 958.91 would be added to the list of 
significant trauma of upper limb, code 958.92 would be added to the 
list of significant trauma of lower limb, and code 958.93 would be 
added to the list of significant abdominal trauma.
    We did not address the consolidation of heart transplant MS-DRGs or 
liver transplant MS-DRGs in the FY 2009 IPPS proposed rule. However, we 
received a comment on these issues.
    Comment: One commenter representing a national association of 
health information professionals expressed appreciation to CMS for 
proposing to add the traumatic compartment syndrome codes to the 
multiple trauma MS-DRGs in order to correct a previous omission.
    Response: We appreciate the commenter's support.
    In this final rule, we are adopting as final our proposal to add 
traumatic compartment syndrome codes 958.90 through 958.99 to MS-DRGs 
963 and MS-DRG 965 in MDC 24. Codes 958.90 through 958.99 are added to 
the list of principal diagnosis of significant trauma. In addition, 
code 958.91 is added to the list of significant trauma of upper limb, 
code 958.92 is added to the list of significant trauma of lower limb, 
and code 958.93 is added to the list of significant abdominal trauma.
7. Medicare Code Editor (MCE) Changes
    As explained under section II.B.1. of the preamble of this final 
rule, 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.

[[Page 48509]]

For FY 2009, we proposed to make the following changes to the MCE 
edits:
a. List of Unacceptable Principal Diagnoses in MCE
    Diagnosis code V62.84 (Suicidal ideation) was created for use 
beginning October 1, 2005. At the time the diagnosis code was created, 
it was not clear that the creation of this code was requested in order 
to describe the principal reason for admission to a facility or the 
principal reason for treatment. The NCHS Official ICD-9-CM Coding 
Guidelines therefore categorized the group of codes in V62.X for use 
only as additional or secondary diagnoses. It has been brought to the 
government's attention that the use of this code is hampered by its 
designation as an additional-only diagnosis. NCHS has therefore 
modified the Official Coding Guidelines for FY 2009 by making this code 
acceptable as a principal diagnosis as well as an additional diagnosis. 
In order to conform to this change by NCHS, we proposed to remove code 
V62.84 from the MCE list of ``Unacceptable Principal Diagnoses'' for FY 
2009.
    We did not receive any public comments on this proposal. Therefore, 
in this final rule, we are adopting as final our proposal to remove 
code V62.84 from the MCE list of ``Unacceptable Principal Diagnoses'' 
for FY 2009.
b. Diagnoses Allowed for Males Only Edit
    There are four diagnosis codes that were inadvertently left off of 
the MCE edit titled ``Diagnoses Allowed for Males Only.'' These codes 
are located in the chapter of the ICD-9-CM diagnosis codes entitled 
``Diseases of Male Genital Organs.'' We are proposing to add the 
following four codes to this MCE edit: 603.0 (Encysted hydrocele), 
603.1 (Infected hydrocele), 603.8 (Other specified types of hydrocele), 
and 603.9 (Hydrocele, unspecified). We have had no reported problems or 
confusion with the omission of these codes from this section of the 
MCE, but in order to have an accurate product, we proposed that these 
codes be added for FY 2009.
    We did not receive any public comments on these proposed MCE 
revisions. Therefore, for FY 2009, we are implementing the proposed 
changes as final by adding codes 603.0, 603.1, 603.8, and 603.9 to the 
MCE edit of diagnosis allowed for males only.
c. Limited Coverage Edit
    As explained in section II.G.1. of the preamble of the proposed 
rule, we proposed to remove procedure code 37.52 (Implantation of 
internal biventricular heart replacement system) from the MCE ``Non-
Covered Procedure'' edit and to assign it to the ``Limited Coverage'' 
edit. We proposed to include in this proposed edit the requirement that 
ICD-9-CM diagnosis code V70.7 (Examination of participant in clinical 
trial) also be present on the claim. We proposed that claims submitted 
without both procedure code 37.52 and diagnosis code V70.7 would be 
denied because they would not be in compliance with the coverage policy 
explained in section II.G.1. of this preamble.
    We did not receive any public comments on this proposed MCE 
revision. Therefore, for FY 2009, we are implementing the proposed 
changes as final by removing code 37.52 from the ``Non-Covered 
Procedures'' edit and assigning it to the ``Limited Coverage'' edit. In 
addition, included in this edit is the requirement that ICD-9-CM 
diagnosis code V70.7 also be present on the claim. Claims submitted on 
behalf of Medicare beneficiaries that do not have both procedure code 
37.52 and diagnosis code V70.7 will be denied, retroactive to May 1, 
2008 (the date of the coverage decision memorandum described in section 
II.G.1. of the preamble of this final rule).
8. 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 MS-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 MS-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 MS-DRG associated with the most 
resource-intensive surgical class.
    Because the relative resource intensity of surgical classes can 
shift as a function of MS-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 MS-DRGs. For 
example, in MDC 11, the surgical class ``kidney transplant'' consists 
of a single MS-DRG (MS-DRG 652) and the class ``kidney, ureter and 
major bladder procedures'' consists of three MS-DRGs (MS-DRGs 653, 654, 
and 655). Consequently, in many cases, the surgical hierarchy has an 
impact on more than one MS-DRG. The methodology for determining the 
most resource-intensive surgical class involves weighting the average 
resources for each MS-DRG by frequency to determine the weighted 
average resources for each surgical class. For example, assume surgical 
class A includes MS-DRGs 1 and 2 and surgical class B includes MS-DRGs 
3, 4, and 5. Assume also that the average charge of MS-DRG 1 is higher 
than that of MS-DRG 3, but the average charges of MS-DRGs 4 and 5 are 
higher than the average charge of MS-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 MS-DRG 
in the class by frequency (that is, by the number of cases in the MS-
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 MS-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 MS-DRG or MS-
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.

[[Page 48510]]

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 2009, we proposed to revise the surgical hierarchy for MDC 5 
(Diseases and Disorders of the Circulatory System) by reordering MS-DRG 
245 (AICD Generator Procedures) above new MS-DRG 265 (AICD Lead 
Procedures).
    We did not receive any public comments on the proposed change to 
the surgical hierarchy described above. Based on the test of the 
proposed revision using the March 2008 update of the FY 2007 MedPAR 
file and the revised GROUPER software, we found that the revision is 
still supported by the data. Therefore, we are incorporating the 
proposed revision to the surgical hierarchy as final for FY 2009.
9. CC Exclusions List
a. Background
    As indicated earlier in the preamble of this final rule, 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 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 the FY 2008 IPPS final rule with comment period for a 
discussion of the refinement of CCs in relation to the MS-DRGs we 
adopted for FY 2008 (72 FR 47152 through 47121).
b. CC Exclusions List for FY 2009
    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.\19\
---------------------------------------------------------------------------

    \19\ 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; the FY 2007 final rule 
(71 FR 47870) for the FY 2007 revisions; and the FY 2008 final rule 
(72 FR 47130) for the FY 2008 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 2009, as we proposed, in this final rule 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, 2008. (See section II.G.11. of the preamble of 
this final rule 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, 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 adopted for FY 
2008.
    Tables 6G and 6H, Additions to and Deletions from the CC Exclusion 
List, respectively, which will be effective for discharges occurring on 
or after October 1, 2008, are not being published in this final rule 
because of the length of the two tables. Instead, we are making them 
available through the Internet on the CMS Web site at: http://
www.cms.hhs.gov/AcuteInpatientPPS. Each of these principal diagnoses 
for which there is a CC exclusion is shown in Tables 6G and 6H 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 also 
available through the Internet on the CMS Web site at: http:/
www.cms.hhs.gov/AcuteInpatientPPS. Beginning with discharges on or 
after October 1, 2008, the indented diagnoses will not be recognized by 
the GROUPER as valid CCs for the asterisked principal diagnosis.
    To assist readers in the review of changes to the MCC and CC lists 
that occurred as a result of updates to the ICD-9-CM codes, as 
described in Tables 6A, 6C, and 6E, we are providing the following 
summaries of those MCC and CC changes.
    In the summary tables, the diagnosis codes with an asterisk (*) 
were discussed at the March 19-20, 2008 ICD-9-CM Coordination and 
Maintenance Committee meeting and were not finalized in time to include 
in the proposed rule. Code 998.33 in Table 6J1, marked with two 
asterisks (**), had a change in code title subsequent to the

[[Page 48511]]

proposed rule. The new codes will be implemented on October 1, 2008.

         Summary of Additions to the MS-DRG MCC List--Table 6I.1
------------------------------------------------------------------------
             Code                              Description
------------------------------------------------------------------------
038.12*.......................  Methicillin resistant Staphylococcus
                                 aureus septicemia.
249.10........................  Secondary diabetes mellitus with
                                 ketoacidosis, not stated as
                                 uncontrolled, or unspecified.
249.11........................  Secondary diabetes mellitus with
                                 ketoacidosis, uncontrolled.
249.20........................  Secondary diabetes mellitus with
                                 hyperosmolarity, not stated as
                                 uncontrolled, or unspecified.
249.21........................  Secondary diabetes mellitus with
                                 hyperosmolarity, uncontrolled.
249.30........................  Secondary diabetes mellitus with other
                                 coma, not stated as uncontrolled, or
                                 unspecified.
249.31........................  Secondary diabetes mellitus with other
                                 coma, uncontrolled.
482.42*.......................  Methicillin resistant pneumonia due to
                                 Staphylococcus aureus.
535.71*.......................  Eosinophilic gastritis, with hemorrhage.
707.23........................  Pressure ulcer, stage III.
707.24........................  Pressure ulcer, stage IV.
777.50........................  Necrotizing enterocolitis in newborn,
                                 unspecified.
777.51........................  Stage I necrotizing enterocolitis in
                                 newborn.
777.52........................  Stage II necrotizing enterocolitis in
                                 newborn.
777.53........................  Stage III necrotizing enterocolitis in
                                 newborn.
780.72........................  Functional quadriplegia.
------------------------------------------------------------------------


        Summary of Deletions From the MS-DRG MCC List--Table 6I.2
------------------------------------------------------------------------
             Code                              Description
------------------------------------------------------------------------
136.2.........................  Specific infections by free-living
                                 amebae.
511.8.........................  Other specified forms of pleural
                                 effusion, except tuberculous.
707.02........................  Pressure ulcer, upper back.
707.03........................  Pressure ulcer, lower back.
707.04........................  Pressure ulcer, hip.
707.05........................  Pressure ulcer, buttock.
707.06........................  Pressure ulcer, ankle.
707.07........................  Pressure ulcer, heel.
777.5.........................  Necrotizing enterocolitis in fetus or
                                 newborn.
------------------------------------------------------------------------


         Summary of Additions to the MS-DRG CC List--Table 6J.1
------------------------------------------------------------------------
             Code                              Description
------------------------------------------------------------------------
046.11........................  Variant Creutzfeldt-Jakob disease.
046.19........................  Other and unspecified Creutzfeldt-Jakob
                                 disease.
046.71........................  Gerstmann-Str[auml]ussler-Scheinker
                                 syndrome.
046.72........................  Fatal familial insomnia.
046.79........................  Other and unspecified prion disease of
                                 central nervous system.
059.01........................  Monkeypox.
059.21........................  Tanapox.
136.29........................  Other specific infections by free-living
                                 amebae.
199.2.........................  Malignant neoplasm associated with
                                 transplant organ.
203.02........................  Multiple myeloma, in relapse.
203.12........................  Plasma cell leukemia, in relapse.
203.82........................  Other immunoproliferative neoplasms, in
                                 relapse.
204.02........................  Acute lymphoid leukemia, in relapse.
204.12........................  Chronic lymphoid leukemia, in relapse.
204.22........................  Subacute lymphoid leukemia, in relapse.
204.82........................  Other lymphoid leukemia, in relapse.
204.92........................  Unspecified lymphoid leukemia, in
                                 relapse.
205.02........................  Acute myeloid leukemia, in relapse.
205.12........................  Chronic myeloid leukemia, in relapse.
205.22........................  Subacute myeloid leukemia, in relapse.
205.32........................  Myeloid sarcoma, in relapse.
205.82........................  Other myeloid leukemia, in relapse.
205.92........................  Unspecified myeloid leukemia, in
                                 relapse.
206.02........................  Acute monocytic leukemia, in relapse.
206.12........................  Chronic monocytic leukemia, in relapse.
206.22........................  Subacute monocytic leukemia, in relapse.
206.82........................  Other monocytic leukemia, in relapse.
206.92........................  Unspecified monocytic leukemia, in
                                 relapse.
207.02........................  Acute erythremia and erythroleukemia, in
                                 relapse.
207.12........................  Chronic erythremia, in relapse.
207.22........................  Megakaryocytic leukemia, in relapse.
207.82........................  Other specified leukemia, in relapse.

[[Page 48512]]

 
208.02........................  Acute leukemia of unspecified cell type,
                                 in relapse.
208.12........................  Chronic leukemia of unspecified cell
                                 type, in relapse.
208.22........................  Subacute leukemia of unspecified cell
                                 type, in relapse.
208.82........................  Other leukemia of unspecified cell type,
                                 in relapse.
208.92........................  Unspecified leukemia, in relapse.
209.00........................  Malignant carcinoid tumor of the small
                                 intestine, unspecified portion.
209.01........................  Malignant carcinoid tumor of the
                                 duodenum.
209.02........................  Malignant carcinoid tumor of the
                                 jejunum.
209.03........................  Malignant carcinoid tumor of the ileum.
209.10........................  Malignant carcinoid tumor of the large
                                 intestine, unspecified portion.
209.11........................  Malignant carcinoid tumor of the
                                 appendix.
209.12........................  Malignant carcinoid tumor of the cecum.
209.13........................  Malignant carcinoid tumor of the
                                 ascending colon.
209.14........................  Malignant carcinoid tumor of the
                                 transverse colon.
209.15........................  Malignant carcinoid tumor of the
                                 descending colon.
209.16........................  Malignant carcinoid tumor of the sigmoid
                                 colon.
209.17........................  Malignant carcinoid tumor of the rectum.
209.20........................  Malignant carcinoid tumor of unknown
                                 primary site.
209.21........................  Malignant carcinoid tumor of the
                                 bronchus and lung.
209.22........................  Malignant carcinoid tumor of the thymus.
209.23........................  Malignant carcinoid tumor of the
                                 stomach.
209.24........................  Malignant carcinoid tumor of the kidney.
209.25........................  Malignant carcinoid tumor of foregut,
                                 not otherwise specified.
209.26........................  Malignant carcinoid tumor of midgut, not
                                 otherwise specified.
209.27........................  Malignant carcinoid tumor of hindgut,
                                 not otherwise specified.
209.29........................  Malignant carcinoid tumor of other
                                 sites.
209.30........................  Malignant poorly differentiated
                                 neuroendocrine carcinoma, any site.
238.77........................  Post-transplant lymphoproliferative
                                 disorder (PTLD).
279.50........................  Graft-versus-host disease, unspecified.
279.51........................  Acute graft-versus-host disease.
279.52........................  Chronic graft-versus-host disease.
279.53........................  Acute on chronic graft-versus-host
                                 disease.
346.60........................  Persistent migraine aura with cerebral
                                 infarction, without mention of
                                 intractable migraine without mention of
                                 status migrainosus.
346.61........................  Persistent migraine aura with cerebral
                                 infarction, with intractable migraine,
                                 so stated, without mention of status
                                 migrainosus.
346.62........................  Persistent migraine aura with cerebral
                                 infarction, without mention of
                                 intractable migraine with status
                                 migrainosus.
346.63........................  Persistent migraine aura with cerebral
                                 infarction, with intractable migraine,
                                 so stated, with status migrainosus.
349.31*.......................  Accidental puncture or laceration of
                                 dura during a procedure.
349.39*.......................  Other dural tear.
511.81........................  Malignant pleural effusion.
511.89........................  Other specified forms of effusion,
                                 except tuberculous.
649.70........................  Cervical shortening, unspecified as to
                                 episode of care or not applicable.
649.71........................  Cervical shortening, delivered, with or
                                 without mention of antepartum
                                 condition.
649.73........................  Cervical shortening, antepartum
                                 condition or complication.
695.12........................  Erythema multiforme major.
695.13........................  Stevens-Johnson syndrome.
695.14........................  Stevens-Johnson syndrome-toxic epidermal
                                 necrolysis overlap syndrome.
695.15........................  Toxic epidermal necrolysis.
695.53........................  Exfoliation due to erythematous
                                 condition involving 30-39 percent of
                                 body surface.
695.54........................  Exfoliation due to erythematous
                                 condition involving 40-49 percent of
                                 body surface.
695.55........................  Exfoliation due to erythematous
                                 condition involving 50-59 percent of
                                 body surface.
695.56........................  Exfoliation due to erythematous
                                 condition involving 60-69 percent of
                                 body surface.
695.57........................  Exfoliation due to erythematous
                                 condition involving 70-79 percent of
                                 body surface.
695.58........................  Exfoliation due to erythematous
                                 condition involving 80-89 percent of
                                 body surface.
695.59........................  Exfoliation due to erythematous
                                 condition involving 90 percent or more
                                 of body surface.
997.31........................  Ventilator associated pneumonia.
997.39........................  Other respiratory complications.
998.30........................  Disruption of wound, unspecified.
998.33**......................  Disruption of traumatic injury wound
                                 repair.
999.81........................  Extravasation of vesicant chemotherapy.
999.82........................  Extravasation of other vesicant agent
------------------------------------------------------------------------


         Summary of Deletions to the MS-DRG CC List--Table 6J.2
------------------------------------------------------------------------
             Code                              Description
------------------------------------------------------------------------
046.1.........................  Jakob-Creutzfeldt disease.
337.0.........................  Idiopathic peripheral autonomic
                                 neuropathy.
695.1.........................  Erythema multiforme.
707.00........................  Pressure ulcer, unspecified site.
707.01........................  Pressure ulcer, elbow.

[[Page 48513]]

 
707.09........................  Pressure ulcer, other site.
997.3.........................  Respiratory complications.
999.8.........................  Other transfusion reaction.
------------------------------------------------------------------------

    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 25.0, is available for $225.00, 
which includes $15.00 for shipping and handling. Version 26.0 of this 
manual, which includes the final FY 2009 DRG changes, is available in 
hard copy for $250.00. Version 26.0 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.
10. Review of Procedure Codes in MS DRGs 981, 982, and 983; 984, 985, 
and 986; and 987, 988, and 989.
    Each year, we review cases assigned to former 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 
adopted for FY 2008, CMS DRG 468 was split three ways and became 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 became 
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 
became 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 DRGs are 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, with MS-DRGs 987 through 989 assigned to those 
discharges in which the only procedures performed are nonextensive 
procedures that are unrelated to the principal diagnosis.\20\
---------------------------------------------------------------------------

    \20\ 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 FY 2008, no procedures 
were moved, as noted in the final rule with comment period (72 FR 
46241).
---------------------------------------------------------------------------

    For FY 2009, we did not propose to change the procedures assigned 
among these DRGs. We did not receive any public comments on our 
proposal and, therefore, are adopting it as final for FY 2009 in this 
final rule.
a. Moving Procedure Codes From MS-DRGs 981 Through 983 or MS-DRGs 987 
Through 989 to MDCs
    We annually conduct a review of procedures producing assignment to 
MS-DRGs 981 through 983 (formerly CMS DRG 468) or MS-DRGs 987 through 
989 (formerly CMS DRG 477) 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. For 
FY 2009, we did not propose to remove any procedures from MS-DRGs 981 
through 983 or MS-DRGs 987 through 989. We did not receive any public 
comments on our proposal and, therefore, we are adopting it as final 
for FY 2009 in this final rule.
b. Reassignment of Procedures Among 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

[[Page 48514]]

diagnosis code, result in assignment to MS-DRGs 981 through 983, 984 
through 986, and 987 through 989 (formerly, CMS DRGs 468, 476, and 477, 
respectively), 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.
    For FY 2009, we did not propose to move any procedure codes among 
these DRGs. We did not receive any public comments on our proposal and, 
therefore, we are adopting it as final for FY 2009 in this final rule.
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 2009. We did not receive any public 
comments on this subject.
11. Changes to the ICD-9-CM Coding System
    As described in section II.B.1. of the preamble of this final rule, 
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 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 $27.00 by 
calling (202) 512-1800.) Complete information on ordering the CD-ROM is 
also available at: http://www.cdc.gov/nchs/products/_prods/subject/
icd96ed.htm. 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 2009 at a public meeting held on September 27-28, 
2007 and finalized the coding changes after consideration of comments 
received at the meetings and in writing by December 3, 2007. Those 
coding changes are announced in Tables 6A through 6F in the Addendum to 
this final rule. The Committee held its 2008 meeting on March 19-20, 
2008. New codes for which there was a consensus of public support and 
for which complete tabular and indexing changes were made by May 2008 
will be included in the October 1, 2008 update to ICD-9-CM. Code 
revisions that were discussed at the March 19-20, 2008 Committee 
meeting but that could not be finalized in time to include them in the 
Addendum to the proposed rule are included in Tables 6A through 6F of 
this final rule and are marked with an asterisk (*).
    Copies of the minutes of the procedure codes discussions at the 
Committee's September 27-28, 2007 meeting and March 19-20, 2008 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 27-28, 2007 meeting and 
March 19-20, 2008 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, 2008. 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. 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 2009 IPPS proposed 
rule, we only solicited comments on the proposed classification of 
these new 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, 2008. Table 6D contains invalid 
procedure codes. These

[[Page 48515]]

invalid procedure codes will not be recognized by the GROUPER beginning 
with discharges occurring on or after October 1, 2008. Revisions to 
diagnosis code titles are in Table 6E (Revised Diagnosis Code Titles), 
which also includes the MS-DRG assignments for these revised codes. 
Table 6F includes revised procedure code titles for FY 2009.
    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 19-20, 2008 Committee meeting 
that received consensus and that were finalized by May 2008, are 
included in Tables 6A through 6F of the Addendum to this final rule.
    Comment: One commenter was encouraged that CMS and the CDC have 
acted favorably on the commenter's proposal to create a new ICD-9-CM 
diagnosis code for heparin-induced thrombocytopenia (HIT).
    According to the commenter, a specific code dedicated to this 
disease will provide more information regarding the prevalence of the 
condition and the cost associated with treating the disease. The 
increased focus on this condition can in turn promote proper screening 
to avoid its occurrence and improve patient safety. Accurate diagnosis 
and coding will also ensure that proper protocols are put in place and 
HIT specific treatment is rendered, thereby reducing adverse events 
when HIT does arise.
    Response: We appreciate the comment. Effective October 1, 2008, an 
ICD-9-CM diagnosis code 289.84 (Heparin-induced thrombocytopenia (HIT)) 
is created.
    Section 503(a) of Public Law 108-173 included a requirement for 
updating ICD-9-CM codes twice a year instead of a single update on 
October 1 of each 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 Public Law 
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 
approved for an expedited April l, 2008 implementation of an ICD-9-CM 
code at the September 27-28, 2007 Committee meeting. Therefore, there 
were no new ICD-9-CM codes implemented on April 1, 2008.
    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: http://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: http://www.cdc.gov/

[[Page 48516]]

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.
12. Other MS-DRG Issues
a. Heart Transplants or Implants of Heart Assist System and Liver 
Transplants
    Comment: One commenter representing transplant surgeons was 
concerned about the proposed reductions in the MS-DRG relative weights 
for MS-DRG 002 (Heart Transplant or Implant of Heart Assist System 
without MCC) and MS-DRG 006 (Liver Transplant without MCC). According 
to the commenter, the relative weight for MS-DRG 006 would decrease by 
approximately 33 percent and the relative weight for MS-DRG 002 would 
be reduced by 20 percent. The commenter also reported that only 30 
percent of the heart transplant cases were assigned to MS-DRG 002 and 
26 percent of the liver transplant cases were assigned to MS-DRG 006. 
The commenter questioned the statistical reliability of the data and 
recommended that CMS establish a single MS-DRG for heart transplants 
and a single MS-DRG for liver transplants.
    The commenter stated that one factor that influences hospital costs 
and lengths of stay is the characteristics of the donor organ. The 
commenter stated that the donor risk index (DRI) 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. The commenter acknowledged that it is in 
the process of developing a proposal for NCHS to incorporate this 
information into potential ICD-9-CM diagnosis codes. The commenter 
stated that, until these factors can be incorporated into the data, it 
is not appropriate to have severity-based DRGs for heart and liver 
transplant procedures based on CC or MCC that have not been validated 
as predictors in the transplant population.
    The commenter also requested that CMS create a new MS-DRG for 
combined liver/kidney transplants. These cases are currently assigned 
to the liver transplant DRGs 005-006 (Liver Transplant with MCC or 
Intestinal Transplant and Liver Transplant without MCC). While the 
commenter acknowledged that most of these cases would be assigned to 
MS-DRG 005, the MCC group, the commenter contended that a separate DRG 
is needed to address the significantly higher costs and length of stay 
associated with combined liver/kidney transplants.
    Response: As we stated in the FY 2008 IPPS final rule (72 FR 
47251), clinical evaluation and claims data supported the current MCC 
split for heart and liver transplants. Several commenters accepted 
CMS's proposal of not making significant revisions to the MS-DRGs until 
claims data under the new MS-DRG system are available. At this time, we 
do not have MS-DRG data to evaluate these significant changes. 
Therefore, we are not implementing any changes to the transplant MS-
DRGs for FY 2009.
b. New Codes for Pressure Ulcers
    As discussed in the FY 2008 IPPS final rule with comment period (72 
FR 47205-47206), we referred the need for more detailed ICD-9-CM 
pressure ulcer codes to the CDC. The topic of expanding pressure ulcer 
codes to capture the stage of the ulcer was addressed at the September 
27-28, 2007, meeting of the ICD-9-CM Coordination and Maintenance 
Committee. A summary report of that meeting is available on the Web 
site at: http://www.cdc.gov/nchs/about/otheract/icd9/maint/maint.htm.
    At the September 2007 meeting of the ICD-9-CM Coordination and 
Maintenance Committee, numerous wound care professionals supported 
modifying the pressure ulcer codes to capture staging information. The 
stage of the pressure ulcer is a powerful predictor of severity and 
resource utilization. At the meeting, the ICD-9-CM Coordination and 
Maintenance Committee discussed the creation of pressure ulcer codes to 
capture staging information. The new codes, along with their CC/MCC 
classifications, are shown in Table 6A of the Addendum to the proposed 
rule and this final rule. The new codes are as follows:
     707.20 (Pressure ulcer, unspecified stage)
     707.21 (Pressure ulcer stage I)
     707.22 (Pressure ulcer stage II)
     707.23 (Pressure ulcer stage III)
     707.24 (Pressure ulcer stage IV)
     707.25 (Pressure ulcer unstageable)
    Comment: Several commenters supported the ICD-9-CM diagnosis codes 
for pressure ulcer stages. The commenters also supported the revised 
terminology for the existing decubitus ulcer codes (707.00 through 
707.09), stating that changing these code titles from decubitus ulcer 
to pressure ulcer is a more accurate and appropriate nomenclature. 
Further, the commenters asked for additional pressure ulcer stage codes 
beyond what was created for FY 2009, as shown in Table 6A of the 
Addendum to this final rule (codes 707.20 through 707.25). Instead of a 
single code for pressure ulcer, unstageable (707.25), the commenters 
requested the following:
     Recommended new code: 707.25 (Deep tissue injury)
     Recommended new code: 707.26 (Unstageable pressure ulcers)
    The commenters asked that both of these proposed new codes be 
classified as MCCs because either condition can progress to a stage III 
or stage IV pressure ulcer. In addition, the commenters stated that 
unstageable pressure ulcers will be a stage III or stage IV if 
debridement takes place. However, the commenters added, debridement is 
not always indicated in unstageable pressure ulcers, so the wound may 
remain unstageable throughout the entire stay. The commenters further 
stated that deep tissue injury can deteriorate rapidly into a stage III 
or stage IV pressure ulcer, even with optimal treatment.
    Response: As stated earlier, the creation of new codes for pressure

[[Page 48517]]

ulcers was discussed at the ICD-9-CM Coordination and Maintenance 
Committee on September 28, 2007. CDC received formal comments on the 
proposed new codes through December 3, 2007. CDC considered a wide 
range of comments, including those mentioned above. CDC finalized the 
pressure ulcer stage codes, which included new codes 707.20 through 
707.25. As mentioned above, CDC created a new ICD-9-CM code, 707.25 
(Pressure ulcer, unstageable) to include pressure ulcers described as 
unstageable as well as pressure ulcers documented as deep tissue 
injury. The ICD-9-CM index specifically assigns pressure ulcers that 
are described as deep tissue injuries to code 707.25. These new codes 
will go into effect on October 1, 2008. After experience is gained 
using these new codes, the public can request that the ICD-9-CM 
Coordination and Maintenance Committee reconsider the issue of pressure 
ulcer coding.
    We do not support the request to make ICD-9-CM code 707.25 
(Pressure ulcer, unstageable) an MCC. Unstageable indicates that the 
stage of the pressure ulcer cannot be determined because it is covered 
by a dressing or because it is covered by a black eschar. If the ulcer 
does deteriorate and is determined to be a stage III or stage IV 
pressure ulcer, then stage III or IV codes will be reported. To 
classify an unstageable pressure ulcer as the same severity as a stage 
III or stage IV because it may become a stage III or stage IV is 
inappropriate. Therefore, we are not changing the MCC/CC classification 
of code 707.25 (Pressure ulcer, unstageable), and it will remain a non-
CC.
    The CDC has recently updated the ICD-9-CM coding guidance for 
pressure ulcers. Code assignments for pressure ulcer stages may be 
based on medical record documentation from clinicians who are not the 
patient's provider. The coding guidelines are available at: http://
www.cdc.gov/nchs/datawh/ftpserv/ftpICD9/ftpICD9.htm.
c. Coronary Artery Stents
    This topic was not raised by CMS in the proposed rule. However, 
four commenters have taken this opportunity to comment on the content 
of MS-DRG 246 (Percutaneous Cardiovascular Procedure with Drug-Eluting 
Stent with MCC or 4+ Vessels/Stents), and 248 (Percutaneous 
Cardiovascular Procedure with Non-Drug-Eluting Stent with MCC or 4+ 
Vessels/Stents) in MDC 5 (Diseases and Disorders of the Circulatory 
System).
    For a comprehensive review of the most recent discussion concerning 
coronary stents, both drug-eluting and non-drug-eluting, we refer 
readers to FY 2006 IPPS final rule (70 FR 47929 through 47295). In 
Table 6B of that rule, we published the new ICD-9-CM procedure codes 
describing newly created adjunct codes 00.40 through 00.43 (codes 
describing the number of blood vessels upon which a procedure had been 
performed) and 00.45 through 00.48 (codes describing the number of 
vascular stents which had been inserted). These codes were available 
for use beginning October 1, 2006, for FY 2007. We note that under the 
former CMS DRG structure, the DRGs containing either drug-eluting or 
non-drug-eluting stents were located in CMS DRG 556 (Percutaneous 
Cardiovascular Procedure with Non-Drug-Eluting Stent without Major 
Cardiovascular Diagnosis), CMS DRG 557 (Percutaneous Cardiovascular 
Procedure with Drug-Eluting Stent with Major Cardiovascular Diagnosis), 
or CMS DRG 558 (Percutaneous Cardiovascular Procedure with Drug-Eluting 
Stent without Major Cardiovascular Diagnosis).
    In response to a late comment during the last update cycle 
regarding insertion of four or more stents, CMS had reviewed, but did 
not publish, FY 2007 MedPAR data containing some statistics included in 
MS-DRGs 246 and 248. The ICD-9-CM procedure codes we reviewed were:
     00.66 (Percutaneous transluminal coronary angioplasty 
[PTCA] or coronary atherectomy)
     00.40 (Procedure on single vessel)
     00.41 (Procedure on two vessels)
     00.42 (Procedure on three vessels)
     00.43 (Procedure on four or more vessels)
     00.44 (Procedure on vessel bifurcation)
     00.45 (Insertion of one vascular stent)
     00.46 (Insertion of two vascular stents)
     00.47 (Insertion of three vascular stents)
     00.48 (Insertion of four or more vascular stents)
    We arrayed the data several ways, looking at PTCA cases with 4+ 
vessels without 4+ stents (codes 00.66 with 00.43), with 4+ stents 
without 4+ vessels (codes 00.66 with 00.48), and the balance of the 
contents of MS-DRGs 246 and 248 eliminating PTCA plus 4+ vessels and 4+ 
stents (codes 00.66 plus 00.43) and (codes 00.66 plus 00.48). In 
addition, we reviewed the data on cases involving 1-3 vessels with 4+ 
stents (codes 00.40 through 00.42 with 00.48) and 1-3 stents with 4+ 
vessels (codes 00.45 through 00.47 with 00.43). We also reviewed MS-
DRGs 246, 247, 248, and 249 containing the code for vessel bifurcation 
(code 00.44). The data we reviewed are represented in the tables below.

----------------------------------------------------------------------------------------------------------------
                                                                     Number of    Average length      Average
                             MS-DRGs                                   cases          of stay         charges
----------------------------------------------------------------------------------------------------------------
246--All Cases..................................................          27,591            5.36      $65,423.34
246--Cases with PTCA with 4+ vessels without 4+ stents (Codes                311            2.56       50,986.31
 00.66 with 00.43)..............................................
246--Cases with PTCA with 4+ stents without 4+ vessels (Codes              5,697            2.73       66,275.14
 00.66 with 00.48)..............................................
246--Cases without Codes 00.66 with 00.43 or 00.66 with 00.48...          21,289            6.13       65,329.96
247--All Cases..................................................         180,307            2.17       42,084.09
248--All Cases..................................................          12,979            6.03       59,016.01
248--Cases with PTCA with 4+ vessels without 4+ stents (Codes                 59            2.44       44,454.05
 00.66 with 00.48)..............................................
248--Cases with PTCA with 4+ stents withouth 4+ vessels (Codes             1,474            3.57       57,210.58
 00.66 with 00.48)..............................................
248--Cases without Codes 00.66 with 00.43 or 00.66 with 00.48...          11,396            6.38       59,318.54
249--All Cases..................................................          65,858            2.50       36,958.18
246--All Cases..................................................          27,591            5.36       65,423.34
246--Cases with 1-3 vessels with 4+ stents (Codes 00.40-00.42              3,901            2.67       64,363.82
 with 00.48)....................................................
246--Cases with 1-3 stents with 4+ vessels (Codes 00.45-00.47                214            2.45       50,425.73
 with 00.43)....................................................
246--Cases with procedure on vessel bifurcation (Code 00.44)....             387            3.56       62,338.01
247--All Cases..................................................         180,307            2.17       42,084.09
247--Cases with procedure on vessel bifurcation (Code 00.44)....           1,742            1.97       42,212.23
248--All Cases..................................................          12,979            6.03       59,016.01
248--Cases with 1-3 vessels with 4+ stents (Codes 00.40-00.42                961            3.60       55,721.11
 with 00.48)....................................................
248--Cases with 1-3 stents with 4+ vessels (Codes 00.45-00.47                 45            2.36       45,491.68
 with 00.43)....................................................

[[Page 48518]]

 
248--Cases with procedure on vessel bifurcation (Code 00.44)....              92            5.22       65,756.27
249--All Cases..................................................          65,858            2.50       36,958.18
249--Cases with procedure on vessels bifurcation (Code 00.44)...             422            2.31       38,507.05
----------------------------------------------------------------------------------------------------------------

    The results of our review do not suggest to us that there should be 
any proposal for change to MS-DRGs 246 or 248 for FY 2009 because there 
was no compelling evidence that the cases involving either 4+ vessels 
or 4+ stents were inappropriately placed in the MS-DRGs.
    Comment: Three commenters urged CMS to revise the GROUPER logic to 
include ICD-9-CM procedure codes 00.42 and 00.47 in MS-DRG 246. In 
addition, the commenters suggested the CMS revise the GROUPER logic for 
the bare metal stents in MS-DRG 248 by assigning codes 00.42 and 00.47 
there as well. One commenter stated that assigning these codes to the 
``with MCC'' MS-DRGs increases payment accuracy.
    Response: We agree that reassigning these codes to MS-DRG 246 and 
248 would increase payment. However, at this time we are not convinced 
that a change of this nature would increase payment accuracy. As 
previously stated, we reviewed the data for cases involving 4+ vessels 
and 4+ stents as shown above in the tables, but did not specifically 
review the data for cases involving 3 vessels and/or 3 stents inserted 
at one operative episode. However, we note that while all three 
commenters submitted data based on the MedPAR files of FY 2007, their 
conclusions regarding the numbers of cases and the charges were not 
consistent among themselves, nor did their data match our figures, even 
to the number of cases under review.
    We note that evaluation of CMS's data comparing insertion of 1-3 
stents with 4+ vessels shows an average length of stay almost 3 days 
lower than the average length of stay for the entire MS-DRG 246, as 
well as average charges $15,000 lower than the average for the entire 
DRG. Another evaluation of CMS's data comparing insertion in 1-3 
vessels with 4+ stents shows an average length of stay of 2.7 days 
lower than the average length of stay for the entire MS-DRG 246, as 
well as average charges more than $1,000 lower than the average for the 
entire DRG. We believe that these data do not support an MS-DRG change.
    Comment: One commenter, a device manufacturer, believed that MS-
DRGs 246 through 251 (percutaneous cardiovascular procedures with and 
without drug-eluting and non-drug-eluting stents and with and without 
MCCs) contain appropriate procedure code assignments. The commenter 
indicated its intent to continue to monitoring the data in these MS-
DRGs in an effort to improve coding accuracy and appropriate hospital 
resource allocation, but, at this time, recommended no changes to this 
group of MS-DRGs.
    Response: We appreciate the commenter's feedback and look forward 
to working with the industry to assure appropriate payment to hospitals 
under all MS-DRGs.
    As stated above, the topic of reassigning certain procedure codes 
for numbers of cardiac stents in cardiac vessels was not discussed in 
the FY 2009 IPPS proposed rule; therefore, no proposals had been made 
by CMS. We believe it is inappropriate to make these MS-DRG 
modifications without claims data under the MS-DRG system. Therefore, 
we will continue to monitor MDC 5 and the stent MS-DRGs. Should there 
be evidence-based justification for reassignment of codes within these 
MS-DRGs, we will be open to proposing to make changes to the structure 
of the MS-DRG in the future.
d. TherOx (Downstream[supreg] System)
    This topic was not discussed in the FY 2009 IPPS proposed rule. 
However, one commenter addressed this subject.
    TherOx, manufacturer of the Downstream[supreg] System, also known 
as SuperSaturated Oxygen Therapy (SSO2) or Aqueous Oxygen 
(AO) System, is a new technology involving the creation and delivery of 
superoxygenated arterial blood directly to reperfused areas of 
myocardial tissue. The concept is that this will reduce infarct size by 
minimizing microvascular damage in heart attack patients following 
percutaneous coronary intervention. The Downstream[supreg] System is 
the console portion of a disposable cartridge-based system that 
withdraws a small amount of the patient's arterial blood, mixes it with 
a small amount of saline, and supersaturates it with oxygen to create 
highly oxygen-enriched blood, which is delivered directly to the 
infarct-related artery via the TherOx infusion catheter. An additional 
100 minutes of catheterization laboratory time is required for this 
procedure. According to the proposed package insert, the 
Downstream[supreg] System will be used for patients undergoing a 
percutaneous cardiovascular procedure in which a stent is implanted. 
According to the manufacturer, factoring in the average charges for 
supplies ($2,333), procedure time ($8,727) and device cost ($10,560), 
the additional charges unique to the Downstream[reg] System are 
estimated to be $21,620.
    At the September 27, 2007, a request was made before the ICD-9-CM 
Coordination and Maintenance Committee to consider establishing a new 
code to describe this intervention. A new code, 00.49 (SuperSaturated 
oxygen therapy) was created for use beginning October 1, 2008, for FY 
2009. This code can be found in Table 6B of the Addendum to this final 
rule.
    Comment: One commenter, the manufacturer of the Downstream[supreg] 
System, expressed concern about the assignment of code 00.49 as a non-
O.R. procedure in the proposed rule. This is indicated by an ``N'' in 
the O.R. column of Table 6B, and indicates that the GROUPER program 
will not take this code into account when reviewing Medicare claims 
data for MS-DRG assignment. The manufacturer encouraged CMS to assign 
code 00.49 to MS-DRG 246 (Percutaneous Cardiovascular Procedures with 
Drug-Eluting Stent with MCC or 4+ Vessels/Stents), irrespective of the 
actual presence of a drug-eluting stent or an MCC.
    The manufacturer also encouraged CMS to help ensure that hospitals 
adopt this unique and beneficial treatment option in a timely manner 
after its FDA approval by assigning cases using the technology to MS-
DRG 246, stating that: ``This action will provide appropriate 
reimbursement [to hospitals] for its use''. The manufacturer further 
noted that in 2002, CMS established DRG assignments for drug-eluting 
stents, a technology that had not yet been approved by the FDA. The 
manufacturer requested that CMS take similar action [to the precedent 
set for drug-eluting stents] for cases involving patients that have had 
an anterior ST-elevated myocardial infarction (STEMI) and have received 
a stent and the Downstream[supreg] System.
    The manufacturer further noted that assigning all cases using the 
Downstream[supreg] System to MS-DRG 246 is

[[Page 48519]]

consistent with CMS' past MS-DRG reclassifications, pointing out that, 
in the FY 2008 final rule, CMS reorganized several MS-DRGs to better 
recognize the costs of particular technologies. The example was given 
concerning the reassignment of all cases utilizing the Gliadel[supreg] 
Wafer to MS-DRG 023 after CMS found that the average charges for 
Gliadel[supreg] cases in MS-DRG 024 were 27 percent greater than the 
average charges for non-Gliadel[supreg] cases. The manufacturer 
encourages CMS to follow this example ``by assigning all cases using 
the Downstream[supreg] System to MS-DRG 246 where the average charges 
of these cases will be more closely aligned with the overall average of 
charges in the MS-DRG.''
    Response: We note that procedure code 00.49 is so new that it has 
not yet had a chance to be reflected in the MedPAR database. Therefore, 
we do not have data on the impact of the Downstream[supreg] System 
procedure, which is an adjunct therapy to PTCA. Without claims data, we 
cannot evaluate the commenter's suggestion that the use of the 
Downstream[supreg] System is equivalent to cases in MS-DRG 246 which 
include the insertion of drug-eluting stents with MCC or 4+ vessels/
stent. We also believe that the Downstream[supreg] System is not a 
stand-alone procedure (that is, it is only performed after a PTCA has 
been done, and while the patient is still in the catheterization 
laboratory). Therefore, it is most appropriately described as non-O.R. 
in its GROUPER designation. This would continue to allow the MS-DRG 
assignment to be based on the definitive procedures performed such as a 
PTCA or the insertions of stents, and not on adjunctive procedures.
    When we created the severity-based MS-DRGs for use beginning in FY 
2008, we thoroughly reviewed over 13,000 diagnosis codes in order to 
establish realistic severity measures. We had two major goals: 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. We developed a set of five criteria to determine whether an 
MS-DRG should be subdivided into subgroups based on the presence of a 
CC or an MCC, and determined that a subgroup had to meet all five 
criteria in order to be so subdivided. These criteria can be reviewed 
in the FY 2008 final rule with comment period (72 FR 47169). There was 
no criteria suggesting that device-based procedures be assigned to the 
MS-DRG with an MCC designation in order for additional reimbursement to 
be made available to hospitals.
    The commenter used the example of our review of the Gliadel[supreg] 
Wafer and subsequent MS-DRG reassignment to bolster the argument that 
these Downstream[supreg] System cases should be assigned to MS-DRG 246. 
We point out that the commenter himself noted that this reassignment 
took place after CMS had reviewed the MedPAR data and was able to 
determine that the average charges for Gliadel[supreg] cases in MS-DRG 
024 were 27 percent greater than the average charges for non-
Gliadel[supreg] cases, thereby warranting such a change.
    Without evidence-based data, we are reluctant to subjectively 
assign a technology to an MS-DRG based on assumption. Further, to 
ignore the structure of the MS-DRG system solely for the purpose of 
increasing payment for one device would set an unwelcome precedent for 
defining all of the other MS-DRGs in the system, as previously stated 
in the FY 2007 IPPS final rule (71 FR 47943). We believe that the MS-
DRG structure for the percutaneous procedures with stent insertion (MS-
DRGs 246, 247, 248, and 249, with and without volume of vessels and/or 
stents, and with or without CC/MCC) are appropriate MS-DRG assignments 
for the Downstream[supreg] System, and the cases will be assigned based 
on the presence of either a drug-eluting or a non-drug eluting stent, 
and the presence or absence of an MCC. Therefore, for FY 2009, because 
there is no data to support the assignment of procedure code 00.49 to 
MS-DRG 246, we are not making the change requested by the commenter. 
Should there be evidence-based justification for assignment of code 
00.49 in the future, we will be open to making a proposal to change the 
structure of these MS-DRGs.
e. Spinal Disc Devices
    This topic was not discussed in the FY 2009 IPPS proposed rule. 
However, one commenter addressed this subject.
    Comment: One commenter representing a manufacturer of artificial 
disc devices recommended that CMS create a new MS-DRG for disc device 
procedures in MDC 8 (Diseases and Disorders of the Musculoskeletal 
System and Connective Tissue). Specifically, the commenter suggested 
that ICD-9-CM codes 84.58 (Implantation of interspinous process 
decompression device), 84.59 (Insertion of other spinal devices), 84.62 
(Insertion of total spinal disc prosthesis, cervical), and 84.65 
(Insertion of total spinal disc prosthesis, lumbosacral) be moved into 
a separate MS-DRG that combines procedures that utilize expensive 
implantable devices. According to the commenter, by creating this new 
MS-DRG, CMS would avoid classifying these procedures with procedures 
that do not utilize devices.
    Response: We point out that ICD-9-CM code 84.58 was deleted 
effective October 1, 2007 (FY 2008). The procedure previously assigned 
to that code was reassigned to new ICD-9-CM code 84.80 (Insertion or 
replacement of interspinous process device(s)).
    With regards to the creation of a new MS-DRG for the procedure 
codes 84.59, 84.62, and 84.65, we refer the reader to the FY 2008 IPPS 
proposed rule (72 FR 24733 through 24735) and the FY 2008 IPPS final 
rule with comment period (72 FR 47226 through 47232) for a discussion 
on the comprehensive evaluation of all the spinal DRGs in the 
development of the MS-DRG classification system. Effective October 1, 
2007, all the aforementioned procedures were grouped together in MS-DRG 
490 (Back and Neck Procedures Except Spinal Fusion with CC/MCC or Disc 
Device/Neurostimulator). The modifications made to the spinal DRGs for 
FY 2008 recognized the similar utilization of resources, differences in 
levels of severity and the complexity of the services being performed 
on patients undergoing those types of procedures.
    In response to the suggested creation of a new, separate MS-DRG to 
combine spinal procedures that utilize expensive implantable devices, 
we note that the MS-DRG classification system (and more importantly, 
the IPPS), is not based solely on the cost of devices; it is not a 
device classification system. We refer the reader to section II.B.2. of 
the preamble to this final rule for a summary of the process and 
criteria utilized in determining whether specific MS-DRG modifications 
are warranted in a given year.
    We note that several commenters acknowledged CMS' discussion of the 
FY 2008 implementation of the MS-DRGs and the lack of data to support 
major MS-DRG changes for FY 2009. In addition, several commenters 
accepted CMS' proposal of not making significant revisions to the MS-
DRGs until claims data under the new MS-DRG system are available. 
Therefore, because we do not have claims data at this time to evaluate 
the need for revisions to MS-DRGs, we are not making any revisions to 
the MS-DRGs involving implantable spinal devices for FY 2009.
f. Spinal Fusion
    This topic was not discussed in the FY 2009 IPPS proposed rule. 
However, one commenter addressed this subject.

[[Page 48520]]

    Comment: Similar to last year, a manufacturer again requested that 
CMS reassign procedure code 84.82 (Insertion or replacement of pedicle-
based dynamic stabilization device(s)), which was effective October 1, 
2007, from MS-DRG 490 (Back and Neck Procedures Except Spinal Fusion 
with CC/MCC or Disc Device/Neurostimulator) to MS-DRG 460 (Spinal 
Fusion Except Cervical without MCC).
    As a result of CMS' final policy for FY 2008 that assigned 
procedure code 84.82 to MS-DRG 490, the commenter reported that it 
conducted a number of analyses that included: (1) A clinical comparison 
of the implant procedure of dynamic stabilization and instrumented 
spinal fusion; (2) a comparison of average charge data in MS-DRGs 460 
and 490 utilizing FY 2007 MedPAR data; and (3) a cost comparison of 
claims including the implant of the Dynesys[supreg] system compared to 
those of spinal fusion.
    Due to the fact that claims data on procedure code 84.82 was 
unavailable in the MedPAR file, the commenter stated it utilized 
procedure code 84.59 (Insertion of other spinal devices) and conducted 
the same analysis CMS had done for FY 2008. Results of the commenter's 
analysis showed a large increase in the volume of cases with procedure 
code 84.59 assigned, which, according to the commenter, provided a more 
reliable number of cases to compare average charges.
    Response: We appreciate the commenter's analysis and acknowledge 
the commenter's request. In response to the commenter's analyses of the 
charge data for procedure code 84.59, the Dynesys[supreg] system is not 
the only technology that was assigned to code 84.59 in the years that 
the commenter examined. During that time, there were a number of other 
spinal technologies that were under development or in clinical trials 
that were also assigned procedure code 84.59 because a unique code for 
their specific technology did not yet exist.
    As stated in the FY 2008 final rule with comment period (72 FR 
47228), we conducted a comprehensive review of the entire group of 
spine DRGs in the development of the MS-DRG system. In the analysis 
that we conducted, the data demonstrated that procedures assigned to 
MS-DRG 490 were not the same in terms of resource utilization, severity 
of illness, and complexity of care, as those assigned to MS-DRG 460 
(Spinal Fusion Except Cervical without MCC). As we stated earlier, we 
received several comments acknowledging CMS' discussion of the recent 
implementation of MS-DRGs and lack of data to support major MS-DRG 
changes for FY 2009. The commenters accepted CMS' proposal of not 
making significant revisions to the MS-DRGs until claims data under the 
new MS-DRG system are available. Therefore, as final policy for FY 
2009, we are not reassigning procedure code 84.82 from MS-DRG 490 to 
MS-DRG 460.
g. Special Treatment for Hospitals With High Percentages of ESRD 
Discharges
    In our existing regulations under 42 CFR 412.104, we provide that 
CMS will make an additional payment to a hospital for inpatient 
services furnished to a beneficiary with end-stage renal disease (ESRD) 
who is discharged and who receives a dialysis treatment during a 
hospital stay, if the hospital has established that ESRD beneficiary 
discharges constitute 10 percent or more of its total Medicare 
discharges. However, as specified in the regulations, in determining a 
hospital's eligibility for this additional payment, we excluded from 
the hospital's ESRD beneficiary discharge count discharges classified 
into the following CMS DRGs: DRG 302 (Kidney Transplant); DRG 316 
(Renal Failure); or DRG 317 (Admit for Renal Dialysis). As discussed in 
section II.C. of the preamble of this final rule, we adopted the MS-DRG 
classification system for FY 2008 to better recognize severity of 
illness. Under the MS-DRG system, these three DRGs have been changed. 
Therefore, we are revising Sec.  412.104 to make the three DRG numbers 
and titles consistent with their replacement MS-DRGs. DRG 302 (Kidney 
Transplant) became MS-DRG 652; DRG 316 (Renal Failure) became MS-DRG 
682 (Renal Failure with MCC), MS-DRG 683 (Renal Failure with CC), and 
MS-DRG 684 (Renal Failure without CC/MCC); and DRG 317 (Admit for Renal 
Dialysis) became MS-DRG 685 (Admit for Renal Dialysis).

H. Recalibration of MS-DRG Weights

    In section II.E. of the preamble of this final rule, we state that 
we are fully implementing the cost-based DRG relative weights for FY 
2009, which is the third year in the 3-year transition period to 
calculate the relative weights at 100 percent based on costs. In the FY 
2008 IPPS final rule with comment period (72 FR 47267), as recommended 
by RTI, for FY 2008, we added 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 2009 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 2007 MedPAR data used in this final rule include 
discharges occurring on October 1, 2006, through September 30, 2007, 
based on bills received by CMS through March 2008, from all hospitals 
subject to the IPPS and short-term, acute care hospitals in Maryland 
(which are under a waiver from the IPPS under section 1814(b)(3) of the 
Act). The FY 2007 MedPAR file used in calculating the relative weights 
includes data for approximately 11,554,993 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 
2006 Medicare cost report data files from HCRIS (that is, cost reports 
beginning on or after October 1, 2005, and before October 1, 2006), 
which represents the most recent full set of cost report data 
available. We used the March 31, 2008 update of the HCRIS cost report 
files for FY 2006 in setting the relative cost-based weights.
    The methodology we used to calculate the DRG cost-based relative 
weights from the FY 2007 MedPAR claims data and FY 2006 Medicare cost 
report data is as follows:
     To the extent possible, all the claims were regrouped 
using the FY 2009 MS-DRG classifications discussed in sections II.B. 
and G. of the preamble of this final rule.
     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) 
were limited to those Medicare-approved transplant centers that have 
cases in the FY 2007 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

[[Page 48521]]

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, emergency room charges, blood charges, and anesthesia charges 
were also deleted.
     At least 95.9 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. Because hospital charges include 
charges for both operating and capital costs, we standardized total 
charges to remove the effects of differences in geographic adjustment 
factors, 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 2006 cost report data.
    The 15 cost centers that we used in the relative weight calculation 
are shown in the following table. The table shows the lines on the cost 
report and the corresponding revenue codes that we used to create the 
15 national cost center CCRs.
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    We developed the national average CCRs as follows:
    Taking the FY 2006 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-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-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 1.50598 so that the average case weight after 
recalibration was equal to the average case weight before 
recalibration. 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 2009 are as follows:

------------------------------------------------------------------------
                          Group                                 CCR
------------------------------------------------------------------------
Routine Days............................................           0.546
Intensive Days..........................................           0.486
Drugs...................................................           0.205
Supplies & Equipment....................................           0.345
Therapy Services........................................           0.423
Laboratory..............................................           0.169
Operating Room..........................................           0.295
Cardiology..............................................           0.190
Radiology...............................................           0.171
Emergency Room..........................................           0.292
Blood and Blood Products................................           0.444
Other Services..........................................           0.432
Labor & Delivery........................................           0.476
Inhalation Therapy......................................           0.199
Anesthesia..............................................           0.149
------------------------------------------------------------------------

    As we explained in section II.E. of the preamble of this final 
rule, we are completing our 2-year transition to the MS-DRGs. For FY 
2008, the first year of the transition, 50 percent of the relative 
weight for an MS-DRG was 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 an MS-DRG was 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 are based on 100 percent cost

[[Page 48528]]

weights computed using the Version 26.0 (FY 2009) MS-DRGs.
    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 are using that same case threshold in 
recalibrating the MS-DRG weights for FY 2009. Using the FY 2007 MedPAR 
data set, there are 8 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 
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 MS-
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 2009, 
because we do not have sufficient MedPAR data to set accurate and 
stable cost weights for these low-volume MS-DRGs, we are computing 
weights for the low-volume MS-DRGs by adjusting their FY 2008 weights 
by the percentage change in the average weight of the cases in other 
MS-DRGs. The crosswalk table is shown below:

------------------------------------------------------------------------
                                                       Crosswalk to MS-
        Low-volume MS-DRG            MS-DRG title             DRG
------------------------------------------------------------------------
768.............................  Vaginal Delivery    FY 2008 FR weight
                                   with O.R.           (adjusted by
                                   Procedure Except    percent change in
                                   Sterilization and/  average weight of
                                   or D&C.             the cases in
                                                       other MS-DRGs).
789.............................  Neonates, Died or   FY 2008 FR weight
                                   Transferred to      (adjusted by
                                   Another Acute       percent change in
                                   Care Facility.      average weight of
                                                       the cases in
                                                       other MS-DRGs).
790.............................  Extreme Immaturity  FY 2008 FR weight
                                   or Respiratory      (adjusted by
                                   Distress            percent change in
                                   Syndrome, Neonate.  average weight of
                                                       the cases in
                                                       other MS-DRGs).
791.............................  Prematurity with    FY 2008 FR weight
                                   Major Problems.     (adjusted by
                                                       percent change in
                                                       average weight of
                                                       the cases in
                                                       other MS-DRGs).
792.............................  Prematurity         FY 2008 FR weight
                                   without Major       (adjusted by
                                   Problems.           percent change in
                                                       average weight of
                                                       the cases in
                                                       other MS-DRGs).
793.............................  Full-Term Neonate   FY 2008 FR weight
                                   with Major          (adjusted by
                                   Problems.           percent change in
                                                       average weight of
                                                       the cases in
                                                       other MS-DRGs).
794.............................  Neonate with Other  FY 2008 FR weight
                                   Significant         (adjusted by
                                   Problems.           percent change in
                                                       average weight of
                                                       the cases in
                                                       other MS-DRGs).
795.............................  Normal Newborn....  FY 2008 FR weight
                                                       (adjusted by
                                                       percent change in
                                                       average weight of
                                                       the cases in
                                                       other MS-DRGs).
------------------------------------------------------------------------

    We did not receive any public comments on this section. Therefore, 
we are adopting the national average CCRs as proposed, with the MS-DRG 
weights recalibrated based on these CCRs.

I. Medicare Severity Long-Term Care (MS-LTC-DRG) Reclassifications and 
Relative Weights for LTCHs for FY 2009

1. Background
    Section 123 of the BBRA requires that the Secretary implement a PPS 
for LTCHs (that is, a per discharge system with a diagnosis-related 
group (DRG)-based patient classification system reflecting the 
differences in patient resources and costs). Section 307(b)(1) of the 
BIPA modified the requirements of section 123 of the BBRA by requiring 
that the Secretary examine ``the feasibility and the impact of basing 
payment under such a system [the long-term care hospital (LTCH) PPS] on 
the use of existing (or refined) hospital DRGs that have been modified 
to account for different resource use of LTCH patients, as well as the 
use of the most recently available hospital discharge data.''
    When the LTCH PPS was implemented for cost reporting periods 
beginning on or after October 1, 2002, we adopted the same DRG patient 
classification system (that is, the CMS DRGs) that was utilized at that 
time under the IPPS. As a component of the LTCH PPS, we refer to the 
patient classification system as the ``long-term care diagnosis-related 
groups (LTC-DRGs).'' As discussed in greater detail below, although the 
patient classification system used under both the LTCH PPS and the IPPS 
are the same, the relative weights are different. The established 
relative weight methodology and data used under the LTCH PPS result in 
LTC-DRG relative weights that reflect ``the differences in patient 
resource use * * *'' of LTCH patients (section 123(a)(1) of the BBRA 
(Pub. L. 106-113). As part of our efforts to better recognize severity 
of illness among patients, in the FY 2008 IPPS final rule with comment 
period (72 FR 47130), the MS-DRGs and the Medicare severity long-term 
care diagnosis-related groups (MS-LTC-DRGs) were adopted for the IPPS 
and the LTCH PPS, respectively, effective October 1, 2007 (FY 2008). 
For a full description of the development and implementation of the MS-
DRGs and MS-LTC-DRGs, we refer readers to the FY 2008 IPPS final rule 
with comment period (72 FR 47141 through 47175 and 47277 through 
47299). (We note that, in that same final rule, we revised the 
regulations at Sec.  412.503 to specify that for LTCH discharges 
occurring on or after October 1, 2007, when applying the provisions of 
42 CFR Part 412, Subpart O applicable to LTCHs for policy descriptions 
and payment calculations, all references to LTC-DRGs would be 
considered a reference to MS-LTC-DRGs. For the remainder of this 
section, we present the discussion in terms of the current MS-LTC-DRG 
patient classification system unless specifically referring to the 
previous LTC-DRG patient classification system that was in effect 
before October 1, 2007.) We believe the MS-DRGs (and by extension, the 
MS-LTC-DRGs) represent a substantial improvement over the previous CMS 
DRGs in their ability to differentiate cases based on severity of 
illness and resource consumption.

[[Page 48529]]

    The MS-DRGs represent an increase in the number of DRGs by 207 
(that is, from 538 to 745) (72 FR 47171). In addition to improving the 
DRG system's recognition of severity of illness, we believe the MS-DRGs 
are responsive to the public comments that were made on the FY 2007 
IPPS proposed rule with respect to how we should undertake further DRG 
reform. The MS-DRGs use the CMS DRGs as the starting point for revising 
the DRG system to better recognize resource complexity and severity of 
illness. We have generally retained 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.
    Consistent with section 123 of the BBRA, as amended by section 
307(b)(1) of the BIPA, and Sec.  412.515, we use information derived 
from LTCH PPS patient records to classify LTCH discharges into distinct 
MS-LTC-DRGs based on clinical characteristics and estimated resource 
needs. We then assign an appropriate weight to the MS-LTC-DRGs to 
account for the difference in resource use by patients exhibiting the 
case complexity and multiple medical problems characteristic of LTCHs.
    Generally, under the LTCH PPS, a Medicare payment is made at a 
predetermined specific rate for each discharge; and that payment varies 
by the MS-LTC-DRG to which a beneficiary's stay is assigned. Cases are 
classified into MS-LTC-DRGs for payment based on the following six data 
elements:
     Principal diagnosis.
     Up to eight additional diagnoses.
     Up to six procedures performed.
     Age.
     Sex.
     Discharge status of the patient.
    Upon the discharge of the patient from a LTCH, the LTCH must assign 
appropriate diagnosis and procedure codes from the most current version 
of the International Classification of Diseases, Ninth Revision, 
Clinical Modification (ICD-9-CM). HIPAA Transactions and Code Sets 
Standards regulations at 45 CFR parts 160 and 162 require that no later 
than October 16, 2003, all covered entities must comply with the 
applicable requirements of Subparts A and I through R of Part 162. 
Among other requirements, those provisions direct covered entities to 
use the ASC X12N 837 Health Care Claim: Institutional, Volumes 1 and 2, 
Version 4010, and the applicable standard medical data code sets for 
the institutional health care claim or equivalent encounter information 
transaction (45 CFR 162.1002 and 45 CFR 162.1102). For additional 
information on the ICD-9-CM Coding System, we refer readers to the FY 
2008 IPPS final rule with comment period (72 FR 47241 through 47243 and 
47277 through 47281). We also refer readers to the detailed discussion 
on correct coding practices in the August 30, 2002 LTCH PPS final rule 
(67 FR 55981 through 55983). Additional coding instructions and 
examples are published in the Coding Clinic for ICD-9-CM, a product of 
the American Hospital Association.
    Medicare contractors (that is, fiscal intermediaries or MACs) enter 
the clinical and demographic information into their claims processing 
systems and subject this information to a series of automated screening 
processes called the Medicare Code Editor (MCE). These screens are 
designed to identify cases that require further review before 
assignment into a MS-LTC-DRG can be made. During this process, the 
following types of cases are selected for further development:
     Cases that are improperly coded. (For example, diagnoses 
are shown that are inappropriate, given the sex of the patient. Code 
68.69 (Other and unspecified radical abdominal hysterectomy) would be 
an inappropriate code for a male.)
     Cases including surgical procedures not covered under 
Medicare. (For example, organ transplant in a nonapproved transplant 
center.)
     Cases requiring more information. (For example, ICD-9-CM 
codes are required to be entered at their highest level of specificity. 
There are valid 3-digit, 4-digit, and 5-digit codes. That is, code 262 
(Other severe protein-calorie malnutrition) contains all appropriate 
digits, but if it is reported with either fewer or more than 3 digits, 
the claim will be rejected by the MCE as invalid.)
    After screening through the MCE, each claim is classified into the 
appropriate MS-LTC-DRG by the Medicare LTCH GROUPER software. The 
Medicare GROUPER software, which is used under the LTCH PPS, is 
specialized computer software, and is the same GROUPER software program 
used under the IPPS. The GROUPER software was developed as a means of 
classifying each case into a MS-LTC-DRG on the basis of diagnosis and 
procedure codes and other demographic information (age, sex, and 
discharge status). Following the MS-LTC-DRG assignment, the Medicare 
contractor determines the prospective payment amount by using the 
Medicare PRICER program, which accounts for hospital-specific 
adjustments. Under the LTCH PPS, we provide an opportunity for the LTCH 
to review the MS-LTC-DRG assignments made by the Medicare contractor 
and to submit additional information within a specified timeframe as 
provided in Sec.  412.513(c).
    The GROUPER software is used both to classify past cases to measure 
relative hospital resource consumption to establish the MS-LTC-DRG 
weights and to classify current cases for purposes of determining 
payment. The records for all Medicare hospital inpatient discharges are 
maintained in the MedPAR file. The data in this file are used to 
evaluate possible MS-DRG and MS-LTC-DRG classification changes and to 
recalibrate the MS-DRG and MS-LTC-DRG relative weights during our 
annual update under both the IPPS (Sec.  412.60(e)) and the LTCH PPS 
(Sec.  412.517), respectively.
    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 DRGs as those used under the IPPS for acute care 
hospitals, in that same final rule, we explained that the annual update 
of the LTC-DRG classifications and relative weights will continue to 
remain linked to the annual reclassification and recalibration of the 
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 the same notice as 
the proposed and final update for the IPPS (69 FR 34125).
    In the RY 2009 LTCH PPS final rule (73 FR 26798), due to 
administrative considerations as well as in response to numerous 
comments urging CMS to establish one rulemaking cycle that would 
encompass the update of the LTCH PPS payment rates, which has been 
updated on a rate year basis, effective July 1 as well as the 
development of the MS-LTC-DRG weights, which are updated on a fiscal 
year basis, effective October 1, we amended the regulations at Sec.  
412.503 and Sec.  412.535 in order to consolidate the rate year and 
fiscal year rulemaking cycles. Specifically, the annual update of the 
LTCH PPS payment rates (and description of the methodology and data 
used to calculate these payment rates) and the annual update of the MS-
LTC-

[[Page 48530]]

DRG classifications and associated weighting factors for LTCHs will be 
effective on October 1 of each Federal fiscal year beginning October 1, 
2009. In order to revise the payment rate update from July 1 through 
June 30 to an October 1 through September 30 cycle, we extended the 
2009 rate period to September 30, 2009, so that RY 2009 is 15 months. 
This 15-month rate year period is July 1, 2008, through September 30, 
2009. We believe that extending RY 2009 by 3 months (to include July, 
August, and September) provides for a smooth transition to a 
consolidated annual update for both the LTCH PPS payment rates and the 
LTCH PPS MS-LTC-DRG classifications and weighting factors. 
Consequently, under the extension of RY 2009 to a 15-month rate period, 
after September 30, 2009, when the RY 2009 cycle ends, the LTCH PPS 
payment rates and other policy changes will subsequently be updated on 
an October 1 through September 30 cycle in conjunction with the annual 
update to the MS-LTC-DRG classifications and relative weights. 
Accordingly, the next update to the LTCH PPS payment rates, after the 
15-month RY 2009, will begin October 1, 2009, coinciding with the 2010 
Federal fiscal year.
    In the past, the annual update to the DRGs used under the IPPS has 
been based on the annual revisions to the ICD-9-CM codes and was 
effective each October 1. As discussed in the FY 2009 IPPS proposed 
rule (73 FR 23591 through 23592), with the implementation of section 
503(a) of Public Law 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 Public Law 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, this policy change does not impact the DRG relative weights in 
effect for that year, which will continue to be updated only once a 
year (October 1). 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 HIPAA.
    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 the LTCH PPS have the potential of being updated 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 in the Federal Register. 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.11. of 
the preamble of this final rule). Any coding updates will be available 
through the Web sites provided in section II.G.11. of the preamble of 
this final rule 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 system. If new 
codes are implemented on April 1, revised code books and software 
systems, including the GROUPER software program, will be necessary 
because the most current ICD-9-CM codes must be reported. 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 
correct 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 Public Law 108-173, there will 
only be an April 1 update if new technology diagnosis and procedure 
code revisions are requested and approved. We note that any new codes 
created for April 1 implementation will be limited to those 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.11. of the preamble of this final rule).
    At the September 27, 2007 ICD-9-CM Coordination and Maintenance 
Committee meeting, there were no requests for an April 1, 2008 
implementation of ICD-9-CM codes. Therefore, the next update to the 
ICD-9-CM coding system will occur on October 1, 2008 (FY 2009). Because 
there were no coding changes suggested for an April 1, 2008 update, the 
ICD-9-CM coding set implemented on October 1, 2008, will continue 
through September 30, 2009 (FY 2009). The update to the ICD-9-CM coding 
system for FY 2009 is discussed in section II.G.11. of the preamble of 
this final rule.
    Accordingly, in this final rule, as discussed in greater detail 
below and as we proposed, we are modifying and revising the MS-LTC-DRG 
classifications and relative weights to be effective October 1, 2008 
through September 30, 2009 (FY 2009). As discussed in greater detail 
below, the MS-LTC-DRGs for FY 2009 in this final rule are the same as 
the MS-DRGs for the IPPS for FY 2009 (GROUPER Version 26.0) discussed 
in section II.B. of the preamble to this final rule.
2. Changes in the MS-LTC-DRG Classifications
a. Background
    As discussed earlier, section 123 of Public Law 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 Public Law 106-554 modified the requirements of 
section 123 of Public Law 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.''
    Consistent with section 123 of Public Law 106-113 as amended by 
section 307(b)(1) of Public Law 106-554 and Sec.  412.515 of our 
existing regulations, the

[[Page 48531]]

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, for FY 2008, we adopted MS-DRGs under the IPPS 
because we believe that this system results in a significant 
improvement in the DRG system's recognition of severity of illness and 
resource usage. We stated that we believe these improvements in the DRG 
system are equally applicable to the LTCH PPS. The changes we are 
making in this FY 2009 IPPS final rule are reflected in the FY 2009 
GROUPER, Version 26.0, that will be effective for discharges occurring 
on or after October 1, 2008, through September 30, 2009.
    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 Public Law 106-113, as modified by 
section 307(b) of Public Law 106-554, under the LTCH PPS for FY 2008, 
we adopted the use of MS-LTC-DRGs, which correspond to the MS-DRGs we 
adopted under the IPPS. In addition, as stated above, we are using the 
final FY 2009 GROUPER Version 26.0, established in section II.B. of 
this final rule, to classify cases effective for LTCH discharges 
occurring on or after October 1, 2008, and through September 30, 2009. 
The changes to the MS-DRG classification system that we are using under 
the IPPS for FY 2009 (GROUPER Version 26.0) are discussed in section 
II.B. of the preamble to this final rule.
    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 medical problems characteristic of LTCH 
patients. (Unless otherwise noted in this final rule, our MS-LTC-DRG 
analysis is based on LTCH data from the March 2008 update of the FY 
2007 MedPAR file, which contains hospital bills received through March 
31, 2008, for discharges occurring in FY 2007.)
    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 2008 IPPS final rule with comment period (72 FR 47283), we use 
low-volume quintiles in determining the DRG relative weights for DRGs 
with less than 25 LTCH cases (low-volume MS-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 2008 MS-LTC-DRGs (based on FY 2006 MedPAR data) appears in 
section II.I.3. of the FY 2008 IPPS final rule with comment period (72 
FR 47281 through 47288).) 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 (SSO) cases, as discussed 
below in section II.I.4. of the preamble of this final rule.
b. Patient Classifications Into MS-LTC-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 (discussed in section II.B. of the preamble of this final 
rule), 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 discusses the 
organization of the existing MS-DRGs, which we are maintaining under 
the MS-LTC-DRG system. 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 MS-DRGs, some surgical and medical DRGs are further defined 
for severity purposes based on the presence or absence of MCCs or CCs. 
The existing MS-LTC-DRGs are similarly categorized. (We refer readers 
to section II.B. of the preamble of this final rule for further 
discussion of surgical DRGs and medical DRGs.)
    Therefore, consistent with the MS-DRGs, a base MS-LTC-DRG may be 
subdivided according to three alternatives. The first alternative 
includes division of the DRG 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 
do not support the creation of three severity levels, the base DRG is 
divided into either two levels or the base is not subdivided.
    The two-level subdivisions consist of one of the following 
subdivisions: ``with CC/MCC'' or ``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'' 
and 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 2009 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, we adopted the 
MS-LTC-DRGs for the LTCH PPS beginning in 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.)
    Although the adoption of the MS-LTC-DRGs resulted in some 
modifications of existing procedures for assigning weights in cases of 
zero volume and/or nonmonotonicity, as discussed in the FY 2008 IPPS 
final rule with comment period (72 FR 47289 through 47295) and the FY 
2009 IPPS

[[Page 48532]]

proposed rule and as detailed in the following sections, the basic 
methodology for developing the FY 2009 MS-LTC-DRG relative weights in 
this final rule continue to be determined in accordance with the 
general methodology established in the August 30, 2002 LTCH PPS final 
rule (67 FR 55989 through 55991). Under the LTCH PPS, relative weights 
for each MS-LTC-DRG are a primary element used to account for the 
variations in cost per discharge and resource utilization among the 
payment groups (Sec.  412.515). To ensure that Medicare patients 
classified to each MS-LTC-DRG have access to an appropriate level of 
services and to encourage efficiency, we calculate a relative weight 
for each MS-LTC-DRG that represents the resources needed by an average 
inpatient LTCH case in that MS-LTC-DRG. For example, cases in an MS-
LTC-DRG with a relative weight of 2 will, on average, cost twice as 
much to treat as cases in an MS-LTC-DRG with a weight of 1.
b. Data
    In the FY 2009 IPPS proposed rule (73 FR 23593), to calculate the 
proposed MS-LTC-DRG relative weights for FY 2009, we obtained total 
Medicare allowable charges from FY 2007 Medicare LTCH bill data from 
the December 2007 update of the MedPAR file, which were the best 
available data at that time, and we used the proposed Version 26.0 of 
the CMS GROUPER that was also proposed for use under the IPPS to 
classify LTCH cases for FY 2009. We also proposed that if more recent 
data became available, we would use those data and the finalized 
Version 26.0 of the CMS GROUPER in establishing the FY 2009 MS-LTC-DRG 
relative weights in the final rule. Consistent with that proposal, to 
calculate the MS-LTC-DRG relative weights for FY 2009, in this final 
rule, we obtained total Medicare allowable charges from FY 2007 
Medicare LTCH bill data from the March 2008 update of the FY 2007 
MedPAR file, which are the best available data at this time, and we 
used the Version 26.0 of the CMS GROUPER that will be used under the 
IPPS (as discussed in section III.B. of the preamble of this final 
rule).
    Consistent with our historical methodology, as proposed, we have 
excluded the data from LTCHs that are all-inclusive rate providers and 
LTCHs that are reimbursed in accordance with demonstration projects 
authorized under section 402(a) of Public Law 90-248 or section 222(a) 
of Public Law 92-603. (We refer readers to the FY 2008 IPPS final rule 
with comment period (72 FR 47282).) Therefore, in the development of 
the FY 2009 MS-LTC-DRG relative weights in this final rule, we have 
excluded the data of the 17 all-inclusive rate providers and the 2 
LTCHs that are paid in accordance with demonstration projects that had 
claims in the FY 2007 MedPAR file.
c. Hospital-Specific Relative Value (HSRV) Methodology
    By nature, LTCHs often specialize in certain areas, such as 
ventilator-dependent patients and rehabilitation and wound care. Some 
case types (DRGs) may be treated, to a large extent, in hospitals that 
have, from a perspective of charges, relatively high (or low) charges. 
This nonarbitrary distribution of cases with relatively high (or low) 
charges in specific MS-LTC-DRGs has the potential to inappropriately 
distort the measure of average charges. To account for the fact that 
cases may not be randomly distributed across LTCHs, as we proposed, in 
this final rule, we used a hospital-specific relative value (HSRV) 
methodology to calculate the MS-LTC-DRG relative weights instead of the 
methodology used to determine the MS-DRG relative weights under the 
IPPS described in section II.H. of the preamble of this final rule. We 
believe this method will remove this hospital-specific source of bias 
in measuring LTCH average charges. Specifically, we are reducing the 
impact of the variation in charges across providers on any particular 
MS-LTC-DRG relative weight by converting each LTCH's charge for a case 
to a relative value based on that LTCH's average charge.
    Under the HSRV methodology, we standardize charges for each LTCH by 
converting its charges for each case to hospital-specific relative 
charge values and then adjusting those values for the LTCH's case-mix. 
The adjustment for case-mix is needed to rescale the hospital-specific 
relative charge values (which, by definition, average 1.0 for each 
LTCH). The average relative weight for a LTCH is its case-mix, so it is 
reasonable to scale each LTCH's average relative charge value by its 
case-mix. In this way, each LTCH's relative charge value is adjusted by 
its case-mix to an average that reflects the complexity of the cases it 
treats relative to the complexity of the cases treated by all other 
LTCHs (the average case-mix of all LTCHs).
    In accordance with the methodology established in the August 30, 
2002 LTCH PPS final rule (67 FR 55989 through 55991), we continue to 
standardize charges for each case by first dividing the adjusted charge 
for the case (adjusted for SSOs under Sec.  412.529 as described in 
section II.I.4. (step 3) of the preamble of this final rule) by the 
average adjusted charge for all cases at the LTCH in which the case was 
treated. SSO cases are cases with a length of stay that is less than or 
equal to five-sixths the average length of stay of the MS-LTC-DRG 
(Sec.  412.529 and Sec.  412.503). The average adjusted charge reflects 
the average intensity of the health care services delivered by a 
particular LTCH and the average cost level of that LTCH. The resulting 
ratio is multiplied by that LTCH's case-mix index to determine the 
standardized charge for the case.
    Multiplying by the LTCH's case-mix index accounts for the fact that 
the same relative charges are given greater weight at a LTCH with 
higher average costs than they would at a LTCH with low average costs, 
which is needed to adjust each LTCH's relative charge value to reflect 
its case-mix relative to the average case-mix for all LTCHs. Because we 
standardize charges in this manner, we count charges for a Medicare 
patient at a LTCH with high average charges as less resource intensive 
than they would be at a LTCH with low average charges. For example, a 
$10,000 charge for a case at a LTCH with an average adjusted charge of 
$17,500 reflects a higher level of relative resource use than a $10,000 
charge for a case at a LTCH with the same case-mix, but an average 
adjusted charge of $35,000. We believe that the adjusted charge of an 
individual case more accurately reflects actual resource use for an 
individual LTCH because the variation in charges due to systematic 
differences in the markup of charges among LTCHs is taken into account.
d. Treatment of Severity Levels in Developing Relative Weights
    Under the MS-LTC-DRGs, for purposes of the setting of the relative 
weights, as we discussed in the FY 2009 IPPS proposed rule (73 FR 
23594), there would be three different categories of DRGs based on 
volume of cases within specific MS-LTC-DRGs. MS-LTC-DRGs with at least 
25 cases are each assigned a unique relative weight; low-volume MS-LTC-
DRGs (that is, MS-LTC-DRGs that contain between one and 24 cases 
annually) are grouped into quintiles (described below) and assigned the 
weight of the quintile. No-volume MS-LTC-DRGs (that is, no cases in the 
database were assigned to those MS-LTC-DRGs) are crosswalked to other 
MS-LTC-DRGs based on the clinical similarities and assigned the 
relative weight of the crosswalked MS-LTC-DRG. (We provide in-depth 
discussions of our policy regarding weight setting for low-volume MS-
LTC-

[[Page 48533]]

DRGs in section II.I.3.e. of the preamble of this final rule and for 
no-volume MS-LTC-DRGs, under Step 5 in section II.I.4. of the preamble 
of this final rule.)
    As described above, in response to the need to account for severity 
and pay appropriately for cases, we developed a severity-adjusted 
patient classification system which we adopted for both the IPPS and 
the LTCH PPS in FY 2008. As described in greater detail above, the MS-
LTC-DRG system can accommodate three severity levels: ``with MCC'' 
(most severe); ``with CC,'' and ``without CC/MCC'' (the least severe) 
with each level assigned an individual MS-LTC-DRG number. In cases with 
two subdivisions, the levels are either ``with CC/MCC'' and ``without 
CC/MCC'' or ``with MCC'' and ``without MCC''. For example, under the 
MS-LTC-DRG system, multiple sclerosis and cerebellar ataxia with MCC is 
MS-LTC-DRG 58; multiple sclerosis and cerebellar ataxia with CC is MS-
LTC-DRG 59; and multiple sclerosis and cerebellar ataxia without CC/MCC 
is MS-LTC-DRG 60. For purposes of discussion in this section, the term 
``base DRG'' is used to refer to the DRG category that encompasses all 
levels of severity for that DRG. For example, when referring to the 
entire DRG category for multiple sclerosis and cerebellar ataxia, which 
includes the above three severity levels, we would use the term ``base-
DRG.''
    As noted above, while the LTCH PPS and the IPPS use the same 
patient classification system, the methodology that is used to set the 
DRG weights for use in each payment system differs because the overall 
volume of cases in the LTCH PPS is much less than in the IPPS. As a 
general rule, consistent with the methodology we used when we adopted 
the MS-LTC-DRGs in the FY 2008 IPPS final rule with comment period (72 
FR 47278 through 47281), as we proposed, we determined the FY 2009 
relative weights for the MS-LTC-DRGs using the following steps: (1) If 
an MS-LTC-DRG has at least 25 cases, it is assigned its own relative 
weight; (2) if an MS-LTC-DRG has between 1 and 24 cases, it is assigned 
to a quintile for which we compute a relative weight for all of the MS-
LTC-DRGS assigned to that quintile; and (3) if an MS-LTC-DRG has no 
cases, it is crosswalked to another MS-LTC-DRG based upon clinical 
similarities to assign an appropriate relative weight (as described 
below in detail in Step 5 of the Steps for Determining the FY 2009 MS-
LTC-DRG Relative Weights). Furthermore, in determining the FY 2009 MS-
LTC-DRG relative weights, when necessary, as we proposed, we are making 
adjustments to account for nonmonotonicity, as explained below.
    Theoretically, cases under the MS-LTC-DRG system that are more 
severe require greater expenditure of medical care resources and will 
result in higher average charges. Therefore, in the three severity 
levels, weights should increase with severity, from lowest to highest. 
If the weights do not increase (that is, if based on the relative 
weight methodology outlined above, the MS-LTC-DRG with MCC would have a 
lower relative weight than one with CC, or the MS-LTC-DRG without CC/
MCC would have a higher relative weight than either of the others), 
there is a problem with monotonicity. Since the start of the LTCH PPS 
for FY 2003 (67 FR 55990), in determining the LTC-DRG relative weights, 
we have made adjustments in order to maintain monotonicity by grouping 
both sets of cases together and establishing a new relative weight for 
both LTC-DRGs. We continue to believe that utilizing nonmonotonic 
relative weights to adjust Medicare payments would result in 
inappropriate payments because, in a nonmonotonic system, cases that 
are more severe and require greater expenditure of medical care 
resources would be paid based on a lower relative weight than cases 
that are less severe and require lower resource use. The procedure for 
dealing with nonmonotonicity under the MS-LTC-DRG classification system 
is discussed in greater detail below in section II.I.4. (Step 6) of the 
preamble of this final rule.
e. Low-Volume MS-LTC-DRGs
    In order to account for MS-LTC-DRGs with low volume (that is, with 
fewer than 25 LTCH cases), consistent with the methodology we 
established when we implemented the LTCH PPS (August 30, 2002; 67 FR 
55984 through 55995), we group those ``low-volume MS-LTC-DRGs'' (that 
is, MS-LTC-DRGs that contained between 1 and 24 cases annually) into 
one of five categories (quintiles) based on average charges, for the 
purposes of determining relative weights (72 FR 47283 through 47288). 
In determining the FY 2009 MS-LTC-DRG relative weights in this final 
rule, as we proposed, we continue to employ this quintile methodology 
for low-volume MS-LTC-DRGs. In addition, in cases where the initial 
assignment of a low-volume MS-LTC-DRG to quintiles results in 
nonmonotonicity within a base-DRG, in order to ensure appropriate 
Medicare payments, consistent with our historical methodology, we are 
making adjustments to the treatment of low-volume MS-LTC-DRGs to 
preserve monotonicity, as discussed in detail below in section II.I.4 
(Step 6 of the methodology for determining the FY 2009 MS-LTC-DRG 
relative weights). In this final rule, using LTCH cases from the March 
2008 update of the FY 2007 MedPAR file, we identified 290 MS-LTC-DRGs 
that contained between 1 and 24 cases. This list of MS-LTC-DRGs was 
then divided into one of the 5 low-volume quintiles, each containing 58 
MS-LTC-DRGs (290/5 = 58). As proposed, we assigned a low-volume MS-LTC-
DRG to a specific low-volume quintile by sorting the low-volume MS-LTC-
DRGs in ascending order by average charge in accordance with our 
established methodology. Specifically, for this final rule, the 290 
low-volume MS-LTC-DRGs were sorted by ascending order by average charge 
and assigned to a specific low-volume quintile (as described below). 
After sorting the 290 low-volume MS-LTC-DRGs by average charge in 
ascending order, we grouped the first fifth (1st through 58th) of low-
volume MS-LTC-DRGs (with the lowest average charge) into Quintile 1. 
This process was repeated through the remaining low-volume MS-LTC-DRGs 
so that each of the 5 low-volume quintiles contains 58 MS-LTC-DRGs. The 
highest average charge cases are grouped into Quintile 5. (We note 
that, consistent with our historical methodology, if the number of low-
volume MS-LTC-DRGs had not been evenly divisible by 5, we would have 
used the average charge of the low-volume MS-LTC-DRG to determine which 
low-volume quintile would have received the additional low-volume MS-
LTC-DRG.)
    Accordingly, in order to determine the relative weights for the MS-
LTC-DRGs with low-volume for FY 2009, as proposed, we used the five 
low-volume quintiles described above. The composition of each of the 
five low-volume quintiles shown in the chart below was used in 
determining the MS-LTC-DRG relative weights for FY 2009 (Table 11 of 
the Addendum to this final rule). We determined a relative weight and 
(geometric) average length of stay for each of the five low-volume 
quintiles using the methodology that we applied to the regular MS-LTC-
DRGs (25 or more cases), as described in section II.I.4. of the 
preamble of this final rule. As we proposed, we assigned the same 
relative weight and average length of stay to each of the low-volume 
MS-LTC-DRGs that make up an individual low-volume quintile. We note 
that, as this system is dynamic, it is possible that the number and 
specific type of

[[Page 48534]]

MS-LTC-DRGs with a low volume of LTCH cases will vary in the future. We 
use the best available claims data in the MedPAR file to identify low-
volume MS-LTC-DRGs and to calculate the relative weights based on our 
methodology.
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    We note that we will continue to monitor the volume (that is, the 
number of LTCH cases) in the low-volume quintiles to ensure that our 
quintile assignments result in appropriate payment for such cases and 
do not result in an unintended financial incentive for LTCHs to 
inappropriately admit these types of cases.
4. Steps for Determining the FY 2009 MS-LTC-DRG Relative Weights
    In general, as we proposed, the FY 2009 MS-LTC-DRG relative weights 
in this final rule were determined based on the methodology established 
in the August 30, 2002 LTCH PPS final rule (67 FR 55989 through 55991). 
In summary, for FY 2009, we grouped LTCH cases to the appropriate MS-
LTC-DRG, while taking into account the low-volume MS-LTC-DRGs (as 
described above), before the FY 2009 MS-LTC-DRG relative weights were 
determined. After grouping the cases to the appropriate MS-LTC-DRG (or 
low-volume quintile), we calculated the relative weights for FY 2009 by 
first removing statistical outliers and cases with a length of stay of 
7 days or less (as discussed in greater detail below). Next, we 
adjusted the number of cases in each MS-LTC-DRG (or low-volume 
quintile) for the effect of SSO cases (as also discussed in greater 
detail below). The SSO adjusted discharges and corresponding charges 
were used to calculate ``relative adjusted weights'' in each MS-LTC-DRG 
(or low-volume quintile) using the HSRV method (described above). In 
general, to determine the FY 2009 MS-LTC-DRG relative weights in this 
final rule, as we proposed, we used the same methodology we used in 
determining the FY 2008 MS-LTC-DRG relative weights in the FY 2008 IPPS 
final rule with comment period (72 FR 47281 through 47299). However, as 
we proposed, we made a modification to our methodology for determining 
relative weights for MS-LTC-DRGs with no LTCH cases (as discussed in 
greater detail in Step 5 below). Also, we note that, although we are 
generally using the same methodology in this final rule (with the 
exception noted above) as the

[[Page 48541]]

methodology used in the FY 2008 IPPS final rule with comment, the 
discussion presented below of the steps for determining the FY 2009 MS-
LTC-DRG relative weights varies slightly from the discussion of the 
steps for determining the FY 2008 MS-LTC-DRG relative weights 
(presented in the FY 2008 IPPS final rule with comment) because we took 
this opportunity to refine our description to more precisely explain 
our methodology for determining the MS-LTC-DRG relative weights.
    As discussed in the FY 2008 IPPS final rule with comment when we 
adopted the MS-LTC-DRGs, the adoption of the MS-LTC-DRGs with either 
two or three severity levels resulted in some slight modifications of 
procedures for assigning relative weights in cases of zero volume and/
or nonmonotonicity (described in detail below) from the methodology we 
established when we implemented the LTCH PPS in the August 30, 2002 
LTCH PPS final rule. As also discussed in the FY 2008 IPPS final rule 
with comment when we adopted the MS-LTC-DRGs, we implemented the MS-
LTC-DRGs with a 2-year transition beginning in FY 2008. For FY 2008, 
the first year of the transition, 50 percent of the relative weight for 
a MS-LTC-DRG was based on the average LTC-DRG relative weight under 
Version 24.0 of the LTC-DRG GROUPER. The remaining 50 percent of the 
relative weight was based on the MS-LTC-DRG relative weight under 
Version 25.0 of the MS-LTC-DRG GROUPER. In FY 2009, the MS-LTC-DRG 
relative weights are based on 100 percent of the MS-LTC-DRG relative 
weights. Accordingly, in determining the FY 2009 MS-LTC-DRG relative 
weights in this final rule, there was no longer a need to include a 
step to calculate MS-LTC-DRG transition blended relative weights (see 
Step 7 in the FY 2008 IPPS final rule with comment period (72 FR 
47295). Therefore, as we proposed, in this final rule, we determined 
the FY 2009 MS-LTC-DRG relative weights based solely on the MS-LTC-DRG 
relative weight under Version 26.0 of the MS-LTC-DRG GROUPER, which is 
discussed in section II.B. of the preamble of this final rule. 
Furthermore, as we proposed, we determined the final FY 2009 MS-LTC-DRG 
relative weights in this final rule based on the final Version 26.0 of 
the MS-LTC-DRG GROUPER that is presented in this final rule.
    Below we discuss in detail the steps for calculating the FY 2009 
MS-LTC-DRG relative weights. We note that, as we stated above in 
section II.I.3.b. of the preamble of this final rule, we have excluded 
the data of all-inclusive rate LTCHs and LTCHs that are paid in 
accordance with demonstration projects that had claims in the FY 2007 
MedPAR file.
    Step 1--Remove statistical outliers.
    As we proposed, the first step in the calculation of the FY 2009 
MS-LTC-DRG relative weights is to remove statistical outlier cases. 
Consistent with our historical relative weight methodology, we continue 
to define statistical outliers as cases that are outside of 3.0 
standard deviations from the mean of the log distribution of both 
charges per case and the charges per day for each MS-LTC-DRG. These 
statistical outliers are removed prior to calculating the relative 
weights because we believe that they may represent aberrations in the 
data that distort the measure of average resource use. Including those 
LTCH cases in the calculation of the relative weights could result in 
an inaccurate relative weight that does not truly reflect relative 
resource use among the MS-LTC-DRGs.
    Step 2--Remove cases with a length of stay of 7 days or less.
    The MS-LTC-DRG relative weights reflect the average of resources 
used on representative cases of a specific type. Generally, cases with 
a length of stay of 7 days or less do not belong in a LTCH because 
these stays do not fully receive or benefit from treatment that is 
typical in a LTCH stay, and full resources are often not used in the 
earlier stages of admission to a LTCH. If we were to include stays of 7 
days or less in the computation of the FY 2009 MS-LTC-DRG relative 
weights, the value of many relative weights would decrease and, 
therefore, payments would decrease to a level that may no longer be 
appropriate. We do not believe that it would be appropriate to 
compromise the integrity of the payment determination for those LTCH 
cases that actually benefit from and receive a full course of treatment 
at a LTCH, by including data from these very short-stays. Therefore, 
consistent with our historical relative weight methodology, in 
determining the FY 2009 MS-LTC-DRG relative weights, as we proposed, we 
removed LTCH cases with a length of stay of 7 days or less.
    Step 3--Adjust charges for the effects of SSOs.
    After removing cases with a length of stay of 7 days or less, we 
are left with cases that have a length of stay of greater than or equal 
to 8 days. As we proposed, as the next step in the calculation of the 
FY 2009 MS-LTC-DRG relative weights, consistent with our historical 
relative weight methodology, we adjusted each LTCH's charges per 
discharge for those remaining cases for the effects of SSOs (as defined 
in Sec.  412.529(a) in conjunction with Sec.  412.503 for LTCH 
discharges occurring on or after October 1, 2008). (We note that even 
if a case was removed in Step 2 (that is, cases with a length of stay 
of 7 days or less), it was paid as an SSO if its length of stay was 
less than or equal to five-sixths of the average length of stay of the 
MS-LTC-DRG.)
    We made this adjustment by counting an SSO case as a fraction of a 
discharge based on the ratio of the length of stay of the case to the 
average length of stay for the MS-LTC-DRG for non-SSO cases. This has 
the effect of proportionately reducing the impact of the lower charges 
for the SSO cases in calculating the average charge for the MS-LTC-DRG. 
This process produces the same result as if the actual charges per 
discharge of an SSO case were adjusted to what they would have been had 
the patient's length of stay been equal to the average length of stay 
of the MS-LTC-DRG.
    Counting SSO cases as full discharges with no adjustment in 
determining the FY 2009 MS-LTC-DRG relative weights would lower the FY 
2009 MS-LTC-DRG relative weight for affected MS-LTC-DRGs because the 
relatively lower charges of the SSO cases would bring down the average 
charge for all cases within an MS-LTC-DRG. This would result in an 
``underpayment'' for non-SSO cases and an ``overpayment'' for SSO 
cases. Therefore, as we proposed, we adjusted for SSO cases under Sec.  
412.529 in this manner because it results in more appropriate payments 
for all LTCH cases.
    Step 4--Calculate the FY 2009 MS-LTC-DRG relative weights on an 
iterative basis.
    Consistent with our historical relative weight methodology, as we 
proposed, we calculated the MS-LTC-DRG relative weights using the HSRV 
methodology, which is an iterative process. First, for each LTCH case, 
we calculate a hospital-specific relative charge value by dividing the 
SSO adjusted charge per discharge (see step 3) of the LTCH case (after 
removing the statistical outliers (see step 1)) and LTCH cases with a 
length of stay of 7 days or less (see step 2) by the average charge per 
discharge for the LTCH in which the case occurred. The resulting ratio 
was then multiplied by the LTCH's case-mix index to produce an adjusted 
hospital-specific relative charge value for the case. An initial case-
mix index value of 1.0 is used for each LTCH.
    For each MS-LTC-DRG, the FY 2009 relative weight was calculated by 
dividing the average of the adjusted hospital-specific relative charge 
values (from above) for the MS-LTC-DRG by

[[Page 48542]]

the overall average hospital-specific relative charge value across all 
cases for all LTCHs. Using these recalculated MS-LTC-DRG relative 
weights, each LTCH's average relative weight for all of its cases (that 
is, its case-mix) were calculated by dividing the sum of all the LTCH's 
MS-LTC-DRG relative weights by its total number of cases. The LTCHs' 
hospital-specific relative charge values above were multiplied by these 
hospital-specific case-mix indexes. These hospital-specific case-mix 
adjusted relative charge values were then used to calculate a new set 
of MS-LTC-DRG relative weights across all LTCHs. This iterative process 
was continued until there was convergence between the weights produced 
at adjacent steps, for example, when the maximum difference is less 
than 0.0001.
    Step 5--Determine an FY 2009 relative weight for MS-LTC-DRGs with 
no LTCH cases.
    As we stated above, we determined the FY 2009 relative weight for 
each MS-LTC-DRG using total Medicare allowable charges reported in the 
best available LTCH claims data (that is, the March 2008 update of the 
FY 2007 MedPAR file for this final rule). Of the FY 2009 MS-LTC-DRGs, 
we identified a number of MS-LTC-DRGs for which there were no LTCH 
cases in the database. That is, based on data from the FY 2007 MedPAR 
file used for this final rule, no patients who would have been 
classified to those MS-LTC-DRGs were treated in LTCHs during FY 2007 
and, therefore, no charge data were available for those MS-LTC-DRGs. 
Thus, in the process of determining the MS-LTC-DRG relative weights, we 
were unable to calculate relative weights for these MS-LTC-DRGs with no 
LTCH cases using the methodology described in Steps 1 through 4 above. 
However, because patients with a number of the diagnoses under these 
MS-LTC-DRGs may be treated at LTCHs, consistent with our historical 
methodology, as we proposed, we assigned relative weights to each of 
the no-volume MS-LTC-DRGs based on clinical similarity and relative 
costliness (with the exception of ``transplant'' MS-LTC-DRGs and 
``error'' MS-LTC-DRGs as discussed below). In general, we determined FY 
2009 relative weights for the MS-LTC-DRGs with no LTCH cases in the FY 
2007 MedPAR file used in this final rule (that is, ``no-volume MS-LTC-
DRGs) by crosswalking each no-volume MS-LTC-DRG to another MS-LTC-DRG 
with a calculated relative weight (determined in accordance with the 
methodology described above). Then, the ``no-volume'' MS-LTC-DRG was 
assigned the same relative weight of the MS-LTC-DRG to which it was 
crosswalked (as described in greater detail below). As noted above, as 
proposed, we made a modification to our methodology for determining 
relative weights for MS-LTC-DRGs with no LTCH cases in this final rule, 
which is discussed in greater detail below. As also noted above, even 
where we are not changing our existing methodology, as we did in the FY 
2009 IPPS proposed rule, we took this opportunity to refine our 
description to more precisely explain our proposed methodology for 
determining the MS-LTC-DRG relative weights in this final rule.
    Specifically, in this final rule, as we proposed, we determined the 
relative weight for each MS-LTC-DRG using total Medicare allowable 
charges reported in the March 2008 update of the FY 2007 MedPAR file. 
Of the 746 MS-LTC-DRGs for FY 2009, we identified 203 MS-LTC-DRGs for 
which there were no LTCH cases in the database (including the 8 
``transplant'' MS-LTC-DRGs and 2 ``error'' MS-LTC-DRGs). For this final 
rule, as noted above and as we proposed, we assigned relative weights 
for each of the 203 no-volume MS-LTC-DRGs (with the exception of the 8 
``transplant'' MS-LTC-DRGs and the 2 ``error'' MS-LTC-DRGs, which are 
discussed below) based on clinical similarity and relative costliness 
to one of the remaining 543 (746-203= 543) MS-LTC-DRGs for which we 
were able to determine relative weights, based on FY 2007 LTCH claims 
data. (For the remainder of this discussion, we refer to one of the 543 
MS-LTC-DRGs for which we were able to determine relative weight as the 
``crosswalked'' MS-LTC-DRG.) Then, as we proposed, we assigned the no-
volume MS-LTC-DRG the relative weight of the crosswalked MS-LTC-DRG. As 
discussed in the FY 2009 IPPS proposed rule (73 FR 23602), this 
approach differs from the one we used to determine the FY 2008 MS-LTC-
DRG relative weights when there were no LTCH cases (72 FR 47290). 
Specifically, in determining the FY 2008 MS-LTC-DRG relative weights in 
the FY 2008 IPPS final rule with comment period, if the no volume MS-
LTC-DRG was crosswalked to a MS-LTC-DRG that had 25 or more cases and, 
therefore, was not in a low-volume quintile, we assigned the relative 
weight of a quintile to a no-volume MS-LTC-DRG (rather than assigning 
the relative weight of the crosswalked MS-LTC-DRG). While we believe 
this approach would result in appropriate LTCH PPS payments (because it 
is consistent with our methodology for determining relative weights for 
MS-LTC-DRGs that have a low volume of LTCH cases (which is discussed 
above in section II.I.3.e. of this preamble)), upon further review 
during the development of the FY 2009 MS-LTC-DRG relative weights in 
this final rule, we now believe that assigning the relative weight of 
the crosswalked MS-LTC-DRG to the no-volume MS-LTC-DRG would result in 
more appropriate LTCH PPS payments because those cases generally 
require equivalent relative resource (and therefore should generally 
have the same LTCH PPS payment). The relative weight of each MS-LTC-DRG 
should reflect relative resource of the LTCH cases grouped to that MS-
LTC-DRG. Because the no-volume MS-LTC-DRGs are crosswalked to other MS-
LTC-DRGs based on clinical similarity and relative costliness, which 
usually require equivalent relative resource use, we believe that 
assigning the no-volume MS-LTC-DRG the relative weight of the 
crosswalked MS-LTC-DRG would result in appropriate LTCH PPS payments. 
(As explained below in Step 6, when necessary, we made adjustments to 
account for nonmonotonicity.)
    Comment: Although we did not receive any comments on any of the 
specific proposed MS-LTC-DRG no-volume crosswalks presented in the 
table in the proposed rule, we received one general comment on our 
description of the proposed methodology to determine the proposed no-
volume MS-LTC-DRGs crosswalks for FY 2009. Specifically, the commenter 
stated that, although it generally supported the proposed methodology 
for determining relative weights for the no-volume MS-LTC-DRGs, it was 
not clear how CMS was able to compare the ``relative costliness'' of 
the no-volume MS-LTC-DRGs to other MS-LTC-DRGs because, by definition, 
the no-volume MS-LTC-DRGs do not have costs associated with them (since 
there are no LTCH cases in the data). The commenter questioned whether 
CMS may have evaluated the relative costliness of the proposed no-
volume FY 2009 MS-LTC-DRGs using prior years' LTCH data or if relative 
costliness was assessed based on the cost experience of those MS-DRGs 
under the IPPS. The commenter requested that, in the final rule, CMS 
provide additional detail on the ``relative costliness'' aspect of the 
proposed no-volume crosswalk methodology.
    Response: We appreciate the commenter's support of our proposed 
methodology for determining relative weight for the no-volume MS-LTC-
DRGs for FY 2009. As requested by the commenter, we are taking this

[[Page 48543]]

opportunity to provide additional information on how we evaluated the 
relative costliness in determining the applicable MS-LTC-DRG to which a 
no-volume MS-LTC-DRG was cross-walked in order to assign an appropriate 
relative weight for the no-volume MS-LTC-DRGs in FY 2009. In general, 
most of the no-volume MS-LTC-DRGs historically have not had any cases 
in the LTCH data. Therefore, we typically are unable to evaluate 
relative costliness based on prior years' LTCH claims data. In 
evaluating the relative costliness for most of the no-volume MS-LTC-
DRGs, a group of CMS Medical Officers, who have extensive knowledge and 
familiarity with both the IPPS and LTCH DRG-based payment systems, used 
their DRG experience to evaluate the relative costliness of the no-
volume MS-LTC-DRGs. Specifically, the relative costliness of each of 
the no-volume MS-LTC-DRGs was assessed by taking into consideration 
factors such as relative resource use, clinical cohesiveness, and the 
comparableness of services provided, based on the collective IPPS and 
LTCH PPS experience of those Medical Officers. We also note, as 
discussed above, the no-volume MS-LTC-DRG crosswalks are based on both 
clinical similarity and relative costliness, including such factors as 
care provided during the period of time surrounding surgery, surgical 
approach (if applicable), length of time of surgical procedure, 
postoperative care, and length of stay. We believe in the rare event 
that there would be a few LTCH cases grouped to one of the no-volume 
MS-LTC-DRGs in the future, the relative weights assigned based on the 
crosswalked MS-LTC-DRGs will result in an appropriate LTCH PPS payment 
because the crosswalks, which are based on similar clinical similarity 
and relative costliness, generally require equivalent relative resource 
use.
    In this final rule, we are adopting the methodology we proposed for 
determining the relative weights for the no-volume MS-LTC-DRGs. Our 
methodology for determining the relative weights for the no-volume MS-
LTC-DRGs is as follows: We crosswalk the no-volume MS-LTC-DRG to an MS-
LTC-DRG for which there are LTCH cases in the FY 2007 MedPAR file and 
to which it is similar clinically in intensity of use of resources and 
relative costliness as determined by criteria such as care provided 
during the period of time surrounding surgery, surgical approach (if 
applicable), length of time of surgical procedure, postoperative care, 
and length of stay. We then assign the relative weight of the 
crosswalked MS-LTC-DRG as the relative weight for the no-volume MS-LTC-
DRG such that both of these MS-LTC-DRGs (that is, the no-volume MS-LTC-
DRG and the crosswalked MS-LTC-DRG) would have the same relative 
weight. We note that if the crosswalked MS-LTC-DRG has 25 cases or 
more, its relative weight, which is calculated using the methodology 
described in steps 1 through 4 above, is assigned to the no-volume MS-
LTC-DRG as well. Similarly, if the MS-LTC-DRG to which the no-volume 
MS-LTC-DRG is crosswalked has 24 or less cases, and therefore is 
designated to one of the low-volume quintiles for purposes of 
determining the relative weights, we assign the relative weight of the 
applicable low-volume quintile to the no-volume MS-LTC-DRG such that 
both of these MS-LTC-DRGs (that is, the no-volume MS-LTC-DRG and the 
crosswalked MS-LTC-DRG) have the same relative weight. (As we noted 
above, in the infrequent case where nonmonotonicity involving a no-
volume MS-LTC-DRG results, additional measures as described in Step 6 
are required in order to maintain monotonically increasing relative 
weights.)
    For this final rule, a list of the no-volume FY 2009 MS-LTC-DRGs 
and the FY 2009 MS-LTC-DRG to which it is crosswalked (that is, the 
crosswalked MS-LTC-DRG) is shown in the chart below.
BILLING CODE 4120-01-P

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[GRAPHIC] [TIFF OMITTED] TR19AU08.000


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[GRAPHIC] [TIFF OMITTED] TR19AU08.001


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[GRAPHIC] [TIFF OMITTED] TR19AU08.003


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[GRAPHIC] [TIFF OMITTED] TR19AU08.004

BILLING CODE 4120-01-C
    To illustrate this methodology for determining the relative weights 
for the MS-LTC-DRGs with no LTCH cases, we are providing the following 
example, which refers to the no-volume MS-LTC-DRGs crosswalk 
information for FY 2009 provided in the chart above.

    Example: There were no cases in the FY 2007 MedPAR file used for 
this final rule for MS-LTC-DRG 61 (Acute Ischemic Stroke with Use of 
Thrombolytic Agent with MCC). We determined that MS-LTC-DRG 70 
(Nonspecific Cerebrovascular Disorders with MCC) was similar 
clinically and based on resource use to MS-LTC-DRG 61. Therefore, we 
assigned the same relative weight of MS-LTC-DRG 70 of 0.8718 for FY 
2009 to MS-LTC-DRG 61 (Table 11 of the Addendum to this final rule).

    Furthermore, for FY 2009, consistent with our historical relative 
weight methodology, as we proposed, we are establishing MS-LTC-DRG 
relative weights of 0.0000 for the following transplant MS-LTC-DRGs: 
Heart Transplant or Implant of Heart Assist System with MCC (MS-LTC-DRG 
1); Heart Transplant or Implant of Heart Assist System without MCC (MS-
LTC-DRG 2); Liver Transplant with MCC or Intestinal Transplant (MS-LTC-
DRG 5); Liver Transplant without MCC (MS-LTC-DRG 6); Lung Transplant 
(MS-LTC-DRG 7); Simultaneous Pancreas/Kidney Transplant (MS-LTC-DRG 8); 
Pancreas Transplant (MS-LTC-DRG 10); and Kidney Transplant (MS-LTC-DRG 
652). This is because Medicare will only cover these procedures if they 
are performed at a hospital that has been certified for the specific 
procedures by Medicare and presently no LTCH has been so certified. 
Based on our research, we found that most LTCHs only perform minor 
surgeries, such as minor small and large bowel procedures, to the 
extent any surgeries are performed at all. Given the extensive criteria 
that must be met to become certified as a transplant center for 
Medicare, we believe it is unlikely that any LTCHs will become 
certified as a transplant center. In fact, in the more than 20 years 
since the implementation of the IPPS, there has never been a LTCH that 
even expressed an interest in becoming a transplant center.
    If in the future a LTCH applies for certification as a Medicare-
approved transplant center, we believe that the application and 
approval procedure would allow sufficient time for us to determine 
appropriate weights for the

[[Page 48549]]

MS-LTC-DRGs affected. At the present time, we only include these eight 
transplant MS-LTC-DRGs in the GROUPER program for administrative 
purposes only. Because we use the same GROUPER program for LTCHs as is 
used under the IPPS, removing these MS-LTC-DRGs would be 
administratively burdensome.
    Again, we note that, as this system is dynamic, it is entirely 
possible that the number of MS-LTC-DRGs with no volume of LTCH cases 
based on the system will vary in the future. We used the most recent 
available claims data in the MedPAR file to identify no-volume MS-LTC-
DRGs and to determine the relative weights in this final rule.
    Step 6--Adjust the FY 2009 MS-LTC-DRG relative weights to account 
for nonmonotonically increasing relative weights.
    As discussed in section II.B. of the preamble of this final rule, 
the MS-DRGs (used under the IPPS) on which the MS-LTC-DRGs are based 
provide a significant improvement in the DRG system's recognition of 
severity of illness and resource usage. The MS-DRGs contain base DRGs 
that have been subdivided into one, two, or three severity levels. 
Where there are three severity levels, the most severe level has at 
least one code that is referred to as an MCC. The next lower severity 
level contains cases with at least one code that is a CC. Those cases 
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 was divided 
into either two levels or the base was not subdivided. The two-level 
subdivisions could consist of the CC/MCC and the without CC/MCC. 
Alternatively, the other type of two level subdivision could consist of 
the MCC and without MCC.
    In those base MS-LTC-DRGs that are split into either two or three 
severity levels, cases classified into the ``without CC/MCC'' MS-LTC-
DRG are expected to have a lower resource use (and lower costs) than 
the ``with CC/MCC'' MS-LTC-DRG (in the case of a two-level split) or 
the ``with CC'' and ``with MCC'' MS-LTC-DRGs (in the case of a three-
level split). That is, theoretically, cases that are more severe 
typically require greater expenditure of medical care resources and 
will result in higher average charges. Therefore, in the three severity 
levels, relative weights should increase by severity, from lowest to 
highest. If the relative weights do not increase (that is, if within a 
base MS-LTC-DRG, an MS-LTC-DRG with MCC has a lower relative weight 
than one with CC, or the MS-LTC-DRG without CC/MCC has a higher 
relative weight than either of the others, they are nonmonotonic). We 
continue to believe that utilizing nonmonotonic relative weights to 
adjust Medicare payments would result in inappropriate payments. 
Consequently, in general, as we proposed, we combined MS-LTC-DRG 
severity levels within a base MS-LTC-DRG for the purpose of computing a 
relative weight when necessary to ensure that monotonicity is 
maintained. In determining the FY 2009 MS-LTC-DRG relative weights in 
this final rule, in general, we are using the same methodology to 
adjust for nonmonotonicity that we used to determine the FY 2008 MS-
LTC-DRG relative weights in the FY 2008 IPPS final rule with comment 
(72 FR 47293 through 47295). However, as noted above and as we did in 
the proposed rule, we are taking this opportunity to refine our 
description to more precisely explain our methodology for determining 
the MS-LTC-DRG relative weights in this final rule. We note that we did 
not receive any comments on our refinement to the description of our 
methodology for adjusting for nonmonotonicity in determining the 
relative weights for FY 2009 that was presented in the FY 2009 IPPS 
proposed rule. In determining the FY 2009 MS-LTC-DRG relative weights 
in this final rule, under each of the example scenarios provided below, 
we combined severity levels within a base MS-LTC-DRG as follows:
    The first example of nonmonotonically increasing relative weights 
for a MS-LTC-DRG pertains to a base MS-LTC-DRG with a three-level split 
and each of the three levels has 25 or more LTCH cases and, therefore, 
none of those MS-LTC-DRGs is assigned to one of the five low-volume 
quintiles. In this final rule, if nonmonotonicity was detected in the 
relative weights of the MS-LTC-DRGs in adjacent severity levels (for 
example, the relative weight of the ``with MCC'' (the highest severity 
level) is less than the ``with CC'' (the middle level), or the ``with 
CC'' is less than the ``without CC/MCC''), we combined the nonmonotonic 
adjacent MS-LTC-DRGs and redetermined a relative weight based on the 
case-weighted average of the combined LTCH cases of the nonmonotonic 
MS-LTC-DRGs. The case-weighted average charge is calculated by dividing 
the total charges for all LTCH cases in both severity levels by the 
total number of LTCH cases for both MS-LTC-DRGs. The same relative 
weight is assigned to both affected levels of the base MS-LTC-DRG. If 
nonmonotonicity remains an issue because the above process resulted in 
a relative weight that was still nonmonotonic to the remaining MS-LTC-
DRG relative weight within the base MS-LTC-DRG, we combined all three 
of the severity levels to redetermine the relative weights based on the 
case-weighted average charge of the combined severity levels. This same 
relative weight was then assigned to each of the MS-LTC-DRGs in that 
base MS-LTC-DRG.
    A second example of nonmonotonically increasing relative weights 
for a base MS-LTC-DRG pertains to the situation where there are three 
severity levels and one or more of the severity levels within a base 
MS-LTC-DRG has less than 25 LTCH cases (that is, low volume). In this 
final rule, if nonmonotonicity occurs in the case where either the 
highest or lowest severity level (``with MCC'' or ``without CC/MCC'') 
has 25 LTCH cases or more and the other two severity levels are low 
volume (and therefore the other two severity levels are otherwise 
assigned the relative weight of the applicable low-volume quintile(s)), 
we combined the data for the cases in the two adjacent low-volume MS-
LTC-DRGs for the purpose of determining a relative weight. If the 
combination resulted in at least 25 cases, we redetermined one relative 
weight based on the case-weighted average charge of the combined 
severity levels and assigned this same relative weight to each of the 
severity levels. If the combination resulted in less than 25 cases, 
based on the case-weighted average charge of the combined low-volume 
MS-LTC-DRGs, both MS-LTC-DRGs were assigned to the appropriate low-
volume quintile (discussed above in section II.I.3.e. of this preamble) 
based on the case-weighted average charge of the combined low-volume 
MS-LTC-DRGs. Then the relative weight of the affected low-volume 
quintile was redetermined and that relative weight was assigned to each 
of the affected severity levels (and all of the MS-LTC-DRGs in the 
affected low-volume quintile). If nonmonotonicity persisted, we 
combined all three severity levels and redetermined one relative weight 
based on the case-weighted average charge of the combined severity 
levels and this same relative weight was assigned to each of the three 
levels.
    Similarly, in nonmonotonic cases where the middle level has 25 
cases or more but either or both of the lowest or highest severity 
level has less than 25 cases (that is, low volume), we combined the 
nonmonotonic low-volume MS-LTC-DRG with the middle level MS-LTC-DRG of 
the base MS-

[[Page 48550]]

LTC-DRG. We redetermined one relative weight based on the case-weighted 
average charge of the combined severity levels and assigned this same 
relative weight to each of the affected MS-LTC-DRGs. If nonmonotonicity 
persisted, we combined all three levels for the purpose of 
redetermining a relative weight based on the case-weighted average 
charge of the combined severity levels, and assigned that relative 
weight to each of the three severity levels.
    In the case where all three severity levels in the base MS-LTC-DRGs 
were low-volume MS-LTC-DRGs and two of the severity levels were 
nonmonotonic in relation to each other, we combined the two adjacent 
nonmonotonic severity levels. If that combination resulted in less than 
25 cases, both low-volume MS-LTC-DRGs were assigned to the appropriate 
low-volume quintile (discussed above in section II.I.3.e. of this 
preamble) based on the case-weighted average charge of the combined 
low-volume MS-LTC-DRGs. Then the relative weight of the affected low-
volume quintile was redetermined and that relative weight was assigned 
to each of the affected severity levels (and all of the MS-LTC-DRGs in 
the affected low-volume quintile). If the nonmonotonicity persisted, we 
combined all three levels of that base MS-LTC-DRG for the purpose of 
redetermining a relative weight based on the case-weighted average 
charge of the combined severity levels, and assigned that relative 
weight to each of the three severity levels. If that combination of all 
three severity levels resulted in less than 25 cases, we assigned that 
``combined'' base MS-LTC-DRG to the appropriate low-volume quintile 
based on the case-weighted average charge of the combined low-volume 
MS-LTC-DRGs. Then the relative weight of the affected low-volume 
quintile was redetermined and that relative weight was assigned to each 
of the affected severity levels (and all of the MS-LTC-DRGs in the 
affected low-volume quintile).
    Another example of nonmonotonicity involves a base MS-LTC-DRG with 
three severity levels where at least one of the severity levels has no 
cases. As discussed above in greater detail in Step 5, based on 
resource use intensity and clinical similarity, as we proposed, we 
crosswalked a no-volume MS-LTC-DRG to an MS-LTC-DRG that had at least 
one case. Under our methodology for the treatment of no-volume MS-LTC-
DRGs, the no-volume MS-LTC-DRG was assigned the same relative weight as 
the MS-LTC-DRG to which the no-volume MS-LTC-DRG was crosswalked. For 
many no-volume MS-LTC-DRGs, as shown in the chart above in Step 5, the 
application of our methodology resulted in a crosswalked MS-LTC-DRG 
that is the adjacent severity level in the same base MS-LTC-DRG. 
Consequently, in most instances, the no-volume MS-LTC-DRG and the 
adjacent MS-LTC-DRG to which it was crosswalked did not result in 
nonmonotonicity because both of these severity levels would have the 
same relative weight. (In this final rule, under our methodology for 
the treatment of no-volume MS-LTC-DRGs, in the case where the no-volume 
MS-LTC-DRG was either the highest or lowest severity level, the 
crosswalked MS-LTC-DRG would be the middle level (``with CC'') within 
the same base MS-LTC-DRG, and therefore the no-volume MS-LTC-DRG 
(either the ``with MCC'' or the ``without CC/MCC'') and the crosswalked 
MS-LTC-DRG (the ``with CC'') would have the same relative weight. 
Consequently, no adjustment for monotonicity was necessary.) However, 
if our methodology for determining relative weights for no-volume MS-
LTC-DRGs resulted in nonmonotonicity with the third severity level in 
the base MS-LTC-DRG, all three severity levels were combined for the 
purpose of redetermining one relative weight based on the case-weighted 
average charge of the combined severity levels. This same relative 
weight was assigned to each of the three severity levels in the base 
MS-LTC-DRG.
    Thus far in the discussion, we have presented examples of 
nonmonotonicity in a base MS-LTC-DRG that has three severity levels. We 
apply the same process where the base MS-LTC-DRG contains only two 
severity levels. For example, if nonmonotonicity occurs in a base MS-
LTC-DRG with two severity levels (that is, the relative weight of the 
higher severity level is less than the lower severity level), where 
both of the MS-LTC-DRGs have at least 25 cases or where one or both of 
the MS-LTC-DRGs is low volume (that is, less than 25 cases), we combine 
the two MS-LTC-DRGs of that base MS-LTC-DRG for the purpose of 
redetermining a relative weight based on the combined case-weighted 
average charge for both severity levels. This same relative weight is 
assigned to each of the two severity levels in the base MS-LTC-DRG. 
Specifically, if the combination of the two severity levels results in 
at least 25 cases, we redetermine one relative weight based on the 
case-weighted average charge and assign that relative weight to each of 
the two MS-LTC-DRGs. If the combination results in less than 25 cases, 
we assign both MS-LTC-DRGs to the appropriate low-volume quintile 
(discussed above in section II.I.3.e. of this preamble) based on their 
combined case-weighted average charge. Then the relative weight of the 
affected low-volume quintile is redetermined and that relative weight 
is assigned to each of the affected severity levels.
    Step 7-- Calculate the FY 2009 budget neutrality factor.
    As we established in the RY 2008 LTCH PPS final rule (72 FR 26882), 
under the broad authority conferred upon the Secretary under section 
123 of Public Law 106-113 as amended by section 307(b) of Public Law 
106-554 to develop the LTCH PPS, beginning with the MS-LTC-DRG update 
for FY 2008, the annual update to the MS-LTC-DRG classifications and 
relative weights is done in a budget neutral manner such that estimated 
aggregate LTCH PPS payments would be unaffected, that is, would be 
neither greater than nor less than the estimated aggregate LTCH PPS 
payments that would have been made without the MS-LTC-DRG 
classification and relative weight changes. Specifically, in that same 
final rule, we established under Sec.  412.517(b) that the annual 
update to the MS-LTC-DRG classifications and relative weights be done 
in a budget neutral manner. For a detailed discussion on the 
establishment of the requirement to update the MS-LTC-DRG 
classifications and relative weights in a budget neutral manner, we 
refer readers to the RY 2008 LTCH PPS final rule (72 FR 26880 through 
26884). Updating the MS-LTC-DRGs in a budget neutral manner results in 
an annual update to the individual MS-LTC-DRG classifications and 
relative weights based on the most recent available data to reflect 
changes in relative LTCH resource use. To accomplish this, for each 
annual update, the MS-LTC-DRG relative weights are uniformly adjusted 
to ensure that estimated aggregate payments under the LTCH PPS would 
not be affected (that is, decreased or increased). Consistent with that 
provision, as we proposed, we updated the MS-LTC-DRG classifications 
and relative weights for FY 2009 based on the most recent available 
data and included a budget neutrality adjustment that was applied in 
determining the MS-LTC-DRG relative weights.
    To ensure budget neutrality in updating the MS-LTC-DRG 
classifications and relative weights under Sec.  412.517(b), consistent 
with the budget neutrality methodology we established in the FY 2008 
IPPS final rule with comment period (72 FR 47295

[[Page 48551]]

through 47296), in determining the budget neutrality adjustment for FY 
2009 in this final rule, as we proposed, we used a method that is 
similar to the methodology used under the IPPS. Specifically, for FY 
2009, after recalibrating the MS-LTC-DRG relative weights as we do 
under the methodology as described in detail in Steps 1 through 6 
above, we calculated and applied a normalization factor to those 
relative weights to ensure that estimated payments were not influenced 
by changes in the composition of case types or the changes to the 
classification system. That is, the normalization adjustment is 
intended to ensure that the recalibration of the MS-LTC-DRG relative 
weights (that is, the process itself) neither increases nor decreases 
total estimated payments.
    To calculate the normalization factor for FY 2009, as we proposed, 
we used the following steps: (1) We use the most recent available 
claims data (FY 2007) and the MS-LTC-DRG relative weights (determined 
above in Steps 1 through 6 above) to calculate the average CMI; (2) we 
group the same claims data (FY 2007) using the FY 2008 GROUPER (Version 
25.0) and FY 2008 relative weights (established in the FY 2008 IPPS 
final rule with comment period (72 FR 47295 through 47296)) and 
calculate the average CMI: and (3), we compute the ratio of these 
average CMIs by dividing the average CMI determined in step (2) by the 
average CMI determined in step (1). In determining the MS-LTC-DRG 
relative weights for FY 2009, based on the latest available LTCH claims 
data, the normalization factor is estimated as 1.03887, which is 
applied in determining each MS-LTC-DRG relative weight. That is, each 
MS-LTC-DRG relative weight is multiplied by 1.03887 in the first step 
of the budget neutrality process. Accordingly, the relative weights in 
Table 11 in the Addendum of this final rule reflect this normalization 
factor. We also ensured that estimated aggregate LTCH PPS payments 
(based on the most recent available LTCH claims data) after 
reclassification and recalibration (the new FY 2009 MS-LTC-DRG 
classifications and relative weights) are equal to estimated aggregate 
LTCH PPS payments (for the same most recent available LTCH claims data) 
before reclassification and recalibration (the existing FY 2008 MS-LTC-
DRG classifications and relative weights). Therefore, we calculated the 
budget neutrality adjustment factor by simulating estimated total 
payments under both sets of GROUPERs and relative weights using current 
LTCH PPS payment policies (RY 2009) and the most recent available LTCH 
claims data (FY 2007). As we discussed in the FY 2009 IPPS proposed 
rule (73 FR 23608), we have established payments rates and policies for 
RY 2009 prior to the development of the FY 2009 IPPS final rule (73 FR 
26788 through 26874). Therefore, for purposes of determining the FY 
2009 budget neutrality factor in this final rule, as we proposed, we 
simulated estimated total payments using the most recent LTCH PPS 
payment policies and LTCH claims data that are available at this time. 
As noted above, the most recent available LTCH claims data are from the 
March 2008 update of the FY 2007 MedPAR file.
    Accordingly, we used RY 2009 LTCH PPS rates and policies in 
determining the FY 2009 budget neutrality adjustment in this final 
rule, using the following steps: (1) We simulated estimated total 
payments using the normalized relative weights under GROUPER Version 
26.0 (as described above); (2) we simulated estimated total payments 
using the FY 2008 GROUPER (Version 25.0) and FY 2008 MS-LTC-DRG 
relative weights (as established in the FY 2008 IPPS final rule (72 FR 
47295 through 47296)); and (3) we calculated the ratio of these 
estimated total payments by dividing the estimated total payments 
determined in step (2) by the estimated total payments determined in 
step (1). Then, each of the normalized relative weights was multiplied 
by the budget neutrality factor to determine the budget neutral 
relative weight for each MS-LTC-DRG.
    Accordingly, in determining the MS-LTC-DRG relative weights for FY 
2009 in this final rule, based on the most recent available LTCH claims 
data, we are establishing a budget neutrality factor of 1.04186, which 
was applied to the normalized relative weights (described above). The 
FY 2009 MS-LTC-DRG relative weights in Table 11 in the Addendum of this 
final rule reflect this budget neutrality factor.
    Table 11 in the Addendum to this final rule lists the MS-LTC-DRGs 
and their respective budget neutral relative weights, geometric mean 
length of stay, and five-sixths of the geometric mean length of stay 
(used in the determination of SSO payments under Sec.  412.529) for FY 
2009.
5. Other Comments
    Comment: While CMS did not propose for FY 2009 an adjustment for 
improved coding practices resulting from the transition to the MS-LTC-
DRG system, one commenter urged CMS to wait until sufficient claims 
data under the MS-LTC-DRG system are available to provide CMS with a 
solid benchmark on coding behavior for the comparison between the 
previous LTC-DRG and current MS-LTC-DRG systems. The commenter believed 
that any evaluation of the need for an adjustment for improved coding 
practices should take into account all of the previous case-mix 
adjustments to the market basket and the self-correcting nature of the 
current policy of the budget neutral reweighting of the MS-LTC-DRG 
relative weights. Furthermore, the commenter believed that it would not 
be appropriate to apply a coding adjustment to the MS-LTC-DRGs where 
coding changes would not be expected to change as a result of the 
transitioning from LTC-DRGs to MS-LTC-DRGs (for example, in ventilator 
DRGs where there have been no changes from the LTC-DRG system to the 
MS-LTC-DRG system).
    Response: At this time, we have not proposed any adjustment for FY 
2009 to account for improved coding practices resulting from the 
transition to the MS-LTC-DRG system. In the FY 2008 IPPS final rule 
with comment period (72 FR 47297 through 47299), we indicated that we 
believe that the adoption of the MS-LTC-DRGs would create a risk of 
increased aggregate levels of payment as a result of increased 
documentation and coding. However, we acknowledged, at the time, that 
because we had not been able to determine an appropriate adjustment 
factor for LTCHs and because we have an established mechanism to adjust 
LTCH PPS payments to account for the effects of changes in 
documentation and coding practices, we believed that it was appropriate 
to continue to use this established process. We note that, in the FY 
2008 IPPS final rule with comment period, we responded to comments 
similar to the one summarized above. In section II.D.4. of this final 
rule, we discuss the intended future evaluation of claims data and 
resulting case-mix growth from the implementation of the MS-DRG system. 
A similar retrospective evaluation will be conducted for MS-LTC-DRGs. 
The analysis, findings, and any resulting proposals to adjust payments 
to offset the estimated amount of increase or decrease in aggregate 
payments that occurred in FY 2008 and FY 2009 for LTCHs as a result of 
coding improvements, will be discussed in future years' proposed rules, 
which would be open for public comment.
    Comment: One commenter addressed our discussion in the RY 2009 LTCH 
final rule on the possible application to LTCHs of the broad principle 
articulated in the HACs payment provision that

[[Page 48552]]

goes into effect for acute care hospitals paid under the IPPS for FY 
2009.
    Response: We appreciate the commenter's support and remarks 
concerning the possible application of a HACs payment provision to 
LTCHs. Although we did not propose a HAC provision under the LTCH PPS 
nor did we discuss the possible application of one in the FY 2009 IPPS 
proposed rule, we will take into account the commenter's concerns and 
recommendations in our ongoing consideration of the applicability of a 
possible HACs policy for LTCHs.

J. Add-On Payments for New Services and Technologies

1. Background
    Sections 1886(d)(5)(K) and (L) of the Act establish a process of 
identifying and ensuring adequate payment for new medical services and 
technologies (sometimes collectively referred to in this section as 
``new technologies'') under the IPPS. Section 1886(d)(5)(K)(vi) of the 
Act specifies that a medical service or technology will be considered 
new if it meets criteria established by the Secretary after notice and 
opportunity for public comment. Section 1886(d)(5)(K)(ii)(I) of the Act 
specifies that the process must apply to a new medical service or 
technology if, ``based on the estimated costs incurred with respect to 
discharges involving such service or technology, the DRG prospective 
payment rate otherwise applicable to such discharges under this 
subsection is inadequate.''
    The regulations implementing this provision establish three 
criteria for new medical services and technologies to receive an 
additional payment. First, 42 CFR 412.87(b)(2) states that a specific 
medical service or technology will be considered new for purposes of 
new medical service or technology add-on payments until such time as 
Medicare data are available to fully reflect the cost of the technology 
in the DRG weights through recalibration. Typically, there is a lag of 
2 to 3 years from the point a new medical service or technology is 
first introduced on the market (generally on the date that the 
technology receives FDA approval/clearance) and when data reflecting 
the use of the medical service or technology are used to calculate the 
DRG weights. For example, data from discharges occurring during FY 2007 
are used to calculate the FY 2009 DRG weights in this final rule. 
Section 412.87(b)(2) of our existing regulations provides that ``a 
medical service or technology may be considered new within 2 or 3 years 
after the point at which data begin to become available reflecting the 
ICD-9-CM code assigned to the new medical service or technology 
(depending on when a new code is assigned and data on the new medical 
service or technology become available for DRG recalibration). After 
CMS has recalibrated the DRGs based on available data to reflect the 
costs of an otherwise new medical service or technology, the medical 
service or technology will no longer be considered `new' under the 
criterion for this section.''
    The 2-year to 3-year period during which a medical service or 
technology can be considered new would ordinarily begin on the date on 
which the medical service or technology received FDA approval or 
clearance. (We note that, for purposes of this section of the final 
rule, we refer to both FDA approval and FDA clearance as FDA 
``approval.'') However, in some cases, initially there may be no 
Medicare data available for the new service or technology following FDA 
approval. For example, the newness period could extend beyond the 2-
year to 3-year period after FDA approval is received in cases where the 
product initially was generally unavailable to Medicare patients 
following FDA approval, such as in cases of a national noncoverage 
determination or a documented delay in bringing the product onto the 
market after that approval (for instance, component production or drug 
production has been postponed following FDA approval due to shelf life 
concerns or manufacturing issues). After the DRGs have been 
recalibrated to reflect the costs of an otherwise new medical service 
or technology, the medical service or technology is no longer eligible 
for special add-on payment for new medical services or technologies 
(Sec.  412.87(b)(2)). For example, an approved new technology that 
received FDA approval in October 2007 and entered the market at that 
time may be eligible to receive add-on payments as a new technology for 
discharges occurring before October 1, 2010 (the start of FY 2011). 
Because the FY 2011 DRG weights would be calculated using FY 2009 
MedPAR data, the costs of such a new technology would be fully 
reflected in the FY 2011 DRG weights. Therefore, the new technology 
would no longer be eligible to receive add-on payments as a new 
technology for discharges occurring in FY 2011 and thereafter.
    Section 412.87(b)(3) further provides that, to be eligible for the 
add-on payment for new medical services or technologies, the DRG 
prospective payment rate otherwise applicable to the discharge 
involving the new medical services or technologies must be assessed for 
adequacy. Under the cost criterion, to assess the adequacy of payment 
for a new technology paid under the applicable DRG-prospective payment 
rate, we evaluate whether the charges for cases involving the new 
technology exceed certain threshold amounts. In the FY 2004 IPPS final 
rule (68 FR 45385), we established the threshold at the geometric mean 
standardized charge for all cases in the DRG plus 75 percent of 1 
standard deviation above the geometric mean standardized charge (based 
on the logarithmic values of the charges and converted back to charges) 
for all cases in the DRG to which the new medical service or technology 
is assigned (or the case-weighted average of all relevant DRGs, if the 
new medical service or technology occurs in more than one DRG).
    However, section 503(b)(1) of Public Law 108-173 amended section 
1886(d)(5)(K)(ii)(I) of the Act to provide that, beginning in FY 2005, 
CMS will apply ``a threshold * * * that is the lesser of 75 percent of 
the standardized amount (increased to reflect the difference between 
cost and charges) or 75 percent of one standard deviation for the 
diagnosis-related group involved.'' (We refer readers to section IV.D. 
of the preamble to the FY 2005 IPPS final rule (69 FR 49084) for a 
discussion of the revision of the regulations to incorporate the change 
made by section 503(b)(1) of Pub. L. 108-173.) Table 10 in section XIX. 
of the interim final rule with comment period published in the Federal 
Register on November 27, 2007, contained the final thresholds that are 
being used to evaluate applications for new technology add-on payments 
for FY 2009 (72 FR 66888 through 66892). An applicant must demonstrate 
that the cost threshold is met using information from inpatient 
hospital claims.
    We note that section 124 of Public Law 110-275 extends, through FY 
2009, wage index reclassifications under section 508 of Public Law 108-
173 (the MMA) and special exceptions contained in the final rule 
promulgated in the Federal Register on August 11, 2004 (69 FR 49105, 
49107) and extended under section 117 of the MMSEA of 2007 (Pub. L. 
110-173). The wage data affects the standardized amounts (as well as 
the outlier offset and budget neutrality factors that are applied to 
the standardized amounts), which we use to compute the cost criterion 
thresholds in Table 10 of this final rule. Therefore, the thresholds 
reflected in Table 10 of this final rule are tentative. A new Table 10 
with revised thresholds will be published when section 124 of Public 
Law 110-275 is implemented and the

[[Page 48553]]

wage index rates for FY 2009 are finalized. Subsequent to the 
publication of this final rule, we will publish a Federal Register 
document listing the final version of Table 10 that will be used to 
determine if an applicant for new technology add-on payments in FY 2010 
meets the cost threshold for new technology add-on payments for FY 
2010. The final thresholds also will be published on the CMS Web site.
    In the September 7, 2001 final rule that established the new 
technology add-on payment regulations (66 FR 46917), we discussed the 
issue of whether the HIPAA Privacy Rule at 45 CFR parts 160 and 164 
applies to claims information that providers submit with applications 
for new technology add-on payments. Specifically, we explained that 
health plans, including Medicare, and providers that conduct certain 
transactions electronically, including the hospitals that would be 
receiving payment under the FY 2001 IPPS final rule, are required to 
comply with the HIPAA Privacy Rule. We further explained how such 
entities could meet the applicable HIPAA requirements by discussing how 
the HIPAA Privacy Rule permitted providers to share with health plans 
information needed to ensure correct payment, if they had obtained 
consent from the patient to use that patient's data for treatment, 
payment, or health care operations. We also explained that, because the 
information to be provided within applications for new technology add-
on payment would be needed to ensure correct payment, no additional 
consent would be required. The HHS Office of Civil Rights has since 
amended the HIPAA Privacy Rule, but the results remain. The HIPAA 
Privacy Rule no longer requires covered entities to obtain consent from 
patients to use or disclose protected health information for treatment, 
payment, or health care operations, and expressly permits such entities 
to use or to disclose protected health information for any of these 
purposes. (We refer readers to 45 CFR 164.502(a)(1)(ii), and 
164.506(c)(1) and (c)(3), and the Standards for Privacy of Individually 
Identifiable Health Information published in the Federal Register on 
August 14, 2002, for a full discussion of changes in consent 
requirements.)
    Section 412.87(b)(1) of our existing regulations provides that a 
new technology is an appropriate candidate for an additional payment 
when it represents ``an advance that substantially improves, relative 
to technologies previously available, the diagnosis or treatment of 
Medicare beneficiaries.'' For example, a new technology represents a 
substantial clinical improvement when it reduces mortality, decreases 
the number of hospitalizations or physician visits, or reduces recovery 
time compared to the technologies previously available. (We refer 
readers to the September 7, 2001 final rule for a complete discussion 
of this criterion (66 FR 46902).)
    The new medical service or technology add-on payment policy under 
the IPPS provides additional payments for cases with relatively high 
costs involving eligible new medical services or technologies while 
preserving some of the incentives inherent under an average-based 
prospective payment system. The payment mechanism is based on the cost 
to hospitals for the new medical service or technology. Under Sec.  
412.88, if the costs of the discharge (determined by applying CCRs as 
described in Sec.  412.84(h)) exceed the full DRG payment (including 
payments for IME and DSH, but excluding outlier payments), Medicare 
will make an add-on payment equal to the lesser of: (1) 50 percent of 
the estimated costs of the new technology (if the estimated costs for 
the case including the new technology exceed Medicare's payment) or (2) 
50 percent of the difference between the full DRG payment and the 
hospital's estimated cost for the case. Unless the discharge qualifies 
for an outlier payment, Medicare payment is limited to the full DRG 
payment plus 50 percent of the estimated costs of the new technology.
    Section 1886(d)(4)(C)(iii) of the Act requires that the adjustments 
to annual DRG classifications and relative weights must be made in a 
manner that ensures that aggregate payments to hospitals are not 
affected. Therefore, in the past, we accounted for projected payments 
under the new medical service and technology provision during the 
upcoming fiscal year, while at the same time estimating the payment 
effect of changes to the DRG classifications and recalibration. The 
impact of additional payments under this provision was then included in 
the budget neutrality factor, which was applied to the standardized 
amounts and the hospital-specific amounts. However, section 503(d)(2) 
of Public Law 108-173 provides that there shall be no reduction or 
adjustment in aggregate payments under the IPPS due to add-on payments 
for new medical services and technologies. Therefore, following section 
503(d)(2) of Public Law 108-173, add-on payments for new medical 
services or technologies for FY 2005 and later years have not been 
subjected to budget neutrality.
    Applicants for add-on payments for new medical services or 
technologies for FY 2010 must submit a formal request, including a full 
description of the clinical applications of the medical service or 
technology and the results of any clinical evaluations demonstrating 
that the new medical service or technology represents a substantial 
clinical improvement, along with a significant sample of data to 
demonstrate the medical service or technology meets the high-cost 
threshold. Complete application information, along with final deadlines 
for submitting a full application, will be posted as it becomes 
available on our Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/
08_newtech.asp#TopOfPage. To allow interested parties to identify the 
new medical services or technologies under review before the 
publication of the proposed rule for FY 2010, the Web site will also 
list the tracking forms completed by each applicant.
    The Council on Technology and Innovation (CTI) at CMS oversees the 
agency's cross-cutting priority on coordinating coverage, coding and 
payment processes for Medicare with respect to new technologies and 
procedures, including new drug therapies, as well as promoting the 
exchange of information on new technologies between CMS and other 
entities. The CTI, composed of senior CMS staff and clinicians, was 
established under section 942(a) of Public Law 108-173. The Council is 
co-chaired by the Director of the Office of Clinical Standards and 
Quality (OCSQ) and the Director of the Center for Medicare Management 
(CMM), who is also designated as the CTI's Executive Coordinator.
    The specific processes for coverage, coding, and payment are 
implemented by CMM, OCSQ, and the local claims-payment contractors (in 
the case of local coverage and payment decisions). The CTI supplements 
rather than replaces these processes by working to assure that all of 
these activities reflect the agency-wide priority to promote high-
quality, innovative care, and at the same time to streamline, 
accelerate, and improve coordination of these processes to ensure that 
they remain up to date as new issues arise. To achieve its goals, the 
CTI works to streamline and create a more transparent coding and 
payment process, improve the quality of medical decisions, and speed 
patient access to effective new treatments. It is also dedicated to 
supporting better decisions by patients and doctors in using Medicare-
covered services through the promotion of better evidence development, 
which is critical for

[[Page 48554]]

improving the quality of care for Medicare beneficiaries.
    CMS plans to continue its Open Door forums with stakeholders who 
are interested in CTI's initiatives. In addition, to improve the 
understanding of CMS' processes for coverage, coding, and payment and 
how to access them, the CTI is developing an ``innovator's guide'' to 
these processes. This guide will, for example, outline regulation 
cycles and application deadlines. The intent is to consolidate this 
information, much of which is already available in a variety of CMS 
documents and in various places on the CMS Web site, in a user-friendly 
format.
    In the meantime, we invite any product developers with specific 
issues involving the agency to contact us early in the process of 
product development if they have questions or concerns about the 
evidence that would be needed later in the development process for the 
agency's coverage decisions for Medicare.
    The CTI aims to provide useful information on its activities and 
initiatives to stakeholders, including Medicare beneficiaries, 
advocates, medical product manufacturers, providers, and health policy 
experts. Stakeholders with further questions about Medicare's coverage, 
coding, and payment processes, or who want further guidance about how 
they can navigate these processes, can contact the CTI at 
CTI@cms.hhs.gov or from the ``Contact Us'' section of the CTI home page 
(http://www.cms.hhs.gov/CouncilonTechInnov/).
    Comment: One commenter supported CMS' emphasis on the role of the 
CTI. The commenter also urged CMS to remain vigilant in ensuring that 
CTI's activities do not inadvertently layer new processes and 
requirements onto those already applicable to innovative medical 
technology.
    Response: We appreciate the support from the commenter. As 
discussed in the proposed rule, we intend to continue to use the CTI to 
promote high quality, innovative care while working to streamline, 
accelerate and improve coordination of the coverage, coding, and 
payment processes.
2. Public Input Before Publication of a Notice of Proposed Rulemaking 
on Add-On Payments
    Section 1886(d)(5)(K)(viii) of the Act, as amended by section 
503(b)(2) of Public Law 108-173, provides for a mechanism for public 
input before publication of a notice of proposed rulemaking regarding 
whether a medical service or technology represents a substantial 
clinical improvement or advancement. The process for evaluating new 
medical service and technology applications requires the Secretary to--
     Provide, before publication of a proposed rule, for public 
input regarding whether a new service or technology represents an 
advance in medical technology that substantially improves the diagnosis 
or treatment of Medicare beneficiaries;
     Make public and periodically update a list of the services 
and technologies for which applications for add-on payments are 
pending;
     Accept comments, recommendations, and data from the public 
regarding whether a service or technology represents a substantial 
clinical improvement; and
     Provide, before publication of a proposed rule, for a 
meeting at which organizations representing hospitals, physicians, 
manufacturers, and any other interested party may present comments, 
recommendations, and data regarding whether a new medical service or 
technology represents a substantial clinical improvement to the 
clinical staff of CMS.
    In order to provide an opportunity for public input regarding add-
on payments for new medical services and technologies for FY 2009 prior 
to publication of the FY 2009 IPPS proposed rule, we published a notice 
in the Federal Register on December 28, 2007 (72 FR 73845 through 
73847), and held a town hall meeting at the CMS Headquarters Office in 
Baltimore, MD, on February 21, 2008. In the announcement notice for the 
meeting, we stated that the opinions and alternatives provided during 
the meeting would assist us in our evaluations of applications by 
allowing public discussion of the substantial clinical improvement 
criterion for each of the FY 2009 new medical service and technology 
add-on payment applications before the publication of the FY 2009 IPPS 
proposed rule.
    Approximately 70 individuals attended the town hall meeting in 
person, while approximately 20 additional participants listened over an 
open telephone line. Each of the four FY 2009 applicants presented 
information on its technology, including a focused discussion of data 
reflecting the substantial clinical improvement aspect of the 
technology. We considered each applicant's presentation made at the 
town hall meeting, as well as written comments submitted on each 
applicant's application, in our evaluation of the new technology add-on 
applications for FY 2009 in the FY 2009 proposed rule and in this final 
rule. We received two comments during the town hall meeting. In the 
proposed rule, we summarized the comments we received at the town hall 
meeting or, if applicable, indicated at the end of the discussion of 
each application that no comments were received on that new technology. 
We refer readers to the FY 2009 IPPS proposed rule at 73 FR 23611 for 
those comments and responses.
    In addition to the comment summaries and our responses presented in 
the proposed rule, we received additional comments as summarized below.
    Comment: A number of commenters addressed topics relating to the 
marginal cost factor for the new technology add-on payment, the 
potential implementation of ICD-10-CM, the use of external data in 
determining the cost threshold, and the use of the date that a ICD-9-CM 
code is assigned to a technology or the FDA approval date (whichever is 
later) as the start of the newness period.
    Response: We did not request public comments nor propose to make 
any changes to any of the issues addressed above. Because these 
comments are out of the scope of the provisions in the proposed rule, 
we are not providing a complete summary of the comments or responding 
to them in this final rule.
3. FY 2009 Status of Technologies Approved for FY 2008 Add-On Payments
    We did not approve any applications for new technology add-on 
payments for FY 2008. For additional information, we refer readers to 
the FY 2008 IPPS final rule with comment period (72 FR 47305 through 
47307).
4. FY 2009 Applications for New Technology Add-On Payments
    We received four applications to be considered for new technology 
add-on payment for FY 2009. A discussion of each of these applications 
is presented below. We note that, in the past, we have considered 
applications during the rulemaking process that had not yet received 
FDA approval, but were anticipating FDA approval prior to publication 
of the IPPS final rule. In such cases, we generally provide a more 
limited discussion of those technologies in the proposed rule because 
it is not known if these technologies will meet the newness criterion 
in time for us to conduct a complete analysis in the final rule. This 
year, three out of four applicants had not yet received FDA approval of 
their technologies (Emphasys Medical Zephyr[supreg] Endobronchial 
Valve, Oxiplex[supreg], and the TherOx Downstream[supreg] System) prior 
to

[[Page 48555]]

issuance of the proposed rule. Consequently, we presented a limited 
analysis of them in the proposed rule. At the time of the development 
of this final rule, FDA approval was still pending for all three of the 
applicants. Therefore, those three applications are not eligible for 
consideration for FY 2009 new technology add-on payments because they 
do not meet the newness criterion (because, by definition, a technology 
that has not received FDA approval cannot be considered ``new'' for 
purposes of new technology add-on payments). Because those applications 
do not meet the newness criterion, the cost threshold criterion and the 
substantial clinical improvement criterion applicable to those 
applications are not discussed in this final rule. If FDA approval is 
received in time for consideration for the FY 2010 new technology add-
on payment application process, we encourage those applicants to submit 
new technology add-on payments applications for consideration during 
the FY 2010 IPPS rulemaking process.
a. CardioWestTM Temporary Total Artificial Heart System 
(CardioWestTM TAH-t)
    SynCardia Systems, Inc. submitted an application for approval of 
the CardioWestTM temporary Total Artificial Heart system 
(TAH-t) for new technology add-on payments for FY 2009. The TAH-t is a 
technology that is used as a bridge to heart transplant device for 
heart transplant-eligible patients with end-stage biventricular 
failure. The TAH-t pumps up to 9.5 liters of blood per minute. This 
high level of perfusion helps improve hemodynamic function in patients, 
thus making them better heart transplant candidates.
    The TAH-t was approved by the FDA on October 15, 2004, for use as a 
bridge to transplant device in cardiac transplant-eligible candidates 
at risk of imminent death from biventricular failure. The TAH-t is 
intended to be used in hospital inpatients. One of the FDA's post-
approval requirements is that the manufacturer agrees to provide a 
post-approval study demonstrating success of the device at one center 
can be reproduced at other centers. The study was to include at least 
50 patients who would be followed up to 1 year, including (but not 
limited to) the following endpoints; survival to transplant, adverse 
events, and device malfunction.
    In the past, Medicare did not cover artificial heart devices, 
including the TAH-t. However, on February 1, 2008, CMS proposed to 
reverse a national noncoverage determination that would extend coverage 
to this technology within the confines of an approved clinical study. 
(To view the proposed national coverage determination (NCD), we refer 
readers to the CMS Web site at http://www.cms.hhs.gov/mcd/
viewdraftdecisionmemo.asp?from2=viewdraftdecisionmemo.asp&id=211&). On 
May 1, 2008, CMS issued a final NCD expanding Medicare coverage of 
artificial hearts when they are implanted as part of a study that is 
approved by the FDA and is determined by CMS to meet CMS' Coverage with 
Evidence Development (CED) clinical research criteria. (The final NCD 
is available on the CMS Web site at: http://www.cms.hhs.gov/mcd/
viewdecisionmemo.asp?id=211.)
    Because Medicare's previous coverage policy with respect to this 
device has precluded payment from Medicare, we do not expect the costs 
associated with this technology to be currently reflected in the data 
used to determine MS-DRGs relative weights. As we have indicated in the 
past, and as we discussed in the proposed rule, although we generally 
believe that the newness period would begin on the date that FDA 
approval was granted, in cases where the applicant can demonstrate a 
documented delay in market availability subsequent to FDA approval, we 
would consider delaying the start of the newness period. This 
technology's situation represents such a case. We also note that 
section 1886(d)(5)(K)(ii)(II) of the Act requires that we provide for 
the collection of cost data for a new medical service or technology for 
a period of at least 2 years and no more than 3 years ``beginning on 
the date on which an inpatient hospital code is issued with respect to 
the service or technology.'' Furthermore, the statute specifies that 
the term ``inpatient hospital code'' means any code that is used with 
respect to inpatient hospital services for which payment may be made 
under the IPPS and includes ICD-9-CM codes and any subsequent 
revisions. Although the TAH-t has been described by the ICD-9-CM 
code(s) (described below in the cost threshold discussion) since the 
time of its FDA approval, because the TAH-t has not been covered under 
the Medicare program (and, therefore, no Medicare payment has been made 
for this technology), this code is not ``used with respect to inpatient 
hospital services for which payment'' is made under the IPPS, and thus 
we assume that none of the costs associated with this technology would 
be reflected in the Medicare claims data used to recalibrate the MS-DRG 
weights for FY 2009. For this reason, as discussed in the proposed 
rule, despite its FDA approval date, it appeared that this technology 
would still be eligible to be considered ``new'' for purposes of the 
new technology add-on payment if and when the proposal to reverse the 
national noncoverage determination concerning this technology was 
finalized. Therefore, based on this information, we stated that we 
believed that the TAH-t would meet the newness criterion on the date 
that Medicare coverage began, consistent with issuance of the final 
NCD. Because the final NCD was issued and became effective on May 1, 
2008, we believe that the TAH-t meets the newness criterion as of May 
1, 2008.
    Comment: One commenter, the manufacturer, agreed with CMS' 
statement in the proposed rule that the TAH-t appeared to meet the 
newness criterion even though it received FDA approval more than 3 
years ago. The commenter stated that because the TAH-t had not been 
covered by Medicare in any setting until the coverage decision issued 
on May 1, 2008, the costs associated with the TAH-t are not yet 
reflected in the Medicare claims data used to recalibrate the FY 2009 
MS-DRG relative weights.
    Response: We agree with the commenter and, as we discussed in the 
proposed rule, we continue to believe that the TAH-t meets the newness 
criterion despite having received FDA approval more than 3 years ago 
because it was not covered by Medicare until May 1, 2008. Therefore, as 
stated above, we believe that the TAH-t meets the newness criterion as 
of May 1, 2008.
    In an effort to demonstrate that TAH-t would meet the cost 
criterion, as presented in the proposed rule, the applicant submitted 
data based on 28 actual cases of the TAH-t. The data included 6 cases 
(or 21.4 percent of cases) from 2005, 13 cases (or 46.5 percent of 
cases) from 2006, 7 cases (or 25 percent of cases) from 2007, and 2 
cases (or 7.1 percent of cases) from 2008. Currently, cases involving 
the TAH-t are assigned to MS-DRG 215 (Other Heart Assist System 
Implant). As discussed below in this section, we are proposing to 
remove the TAH-t from MS-DRG 215 and reassign the TAH-t to 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). 
Therefore, to determine if the technology meets the cost criterion, it 
is appropriate to compare the average standardized charge per case to 
the thresholds for MS-DRGs 001, 002, and 215 included in Table 10 of 
the

[[Page 48556]]

November 27, 2007 interim final rule (72 FR 66888 through 66889). The 
thresholds for MS-DRGs 001, 002, and 215 included in Table 10 are 
$345,031, $178,142, and $151,824, respectively. Based on the 28 cases 
the applicant submitted, the average standardized charge per case was 
$731,632. Because the average standardized charge per case is much 
greater than the thresholds cited above for MS-DRG 215 (and MS-DRGs 001 
and 002, should the proposal to reassign the TAH-t be finalized), the 
applicant asserted that the TAH-t meets the cost criterion whether or 
not the costs were analyzed by using either a case-weighted threshold 
or case-weighted standardized charge per case.
    In addition to analyzing the costs of actual cases involving the 
TAH-t, the applicant searched the FY 2006 MedPAR file to identify cases 
involving patients who would have potentially been eligible to receive 
the TAH-t. The applicant submitted three different MedPAR analyses. The 
first MedPAR analysis involved a search for cases using ICD-9-CM 
diagnosis code 428.0 (Congestive heart failure) in combination with 
ICD-9-CM procedure code 37.66 (Insertion of implantable heart assist 
system), and an inpatient hospital length of stay greater than or equal 
to 60 days. The applicant found two cases that met this criterion, 
which had an average standardized charge per case of $821,522. The 
second MedPAR analysis searched for cases with ICD-9-CM diagnosis code 
428.0 (Congestive heart failure) and one or more of the following ICD-
9-CM procedure codes: 37.51 (Heart transplant), 37.52 (Implantation of 
total heart replacement system), 37.64 (Removal of heart assist 
system), 37.66 (Insertion of implantable heart assist system), or 37.68 
(Insertion of percutaneous external heart assist device), and a length 
of stay greater than or equal to 60 days. The applicant found 144 cases 
that met this criterion, which had an average standardized charge per 
case of $841,827. The final MedPAR analysis searched for cases with 
ICD-9-CM procedure code 37.51 (Heart transplant) in combination with 
one of the following ICD-9-CM procedure codes: 37.52 (Implantation of 
total heart replacement system), 37.65 (Implantation of external heart 
system), or 37.66 (Insertion of implantable heart assist system). The 
applicant found 37 cases that met this criterion, which had an average 
standardized charge per case of $896,601. Because only two cases met 
the criterion for the first analysis, consistent with historical 
practice, we would not consider it to be of statistical significance 
and, therefore, would not rely upon it to demonstrate whether the TAH-t 
would meet the cost threshold. However, both of the additional analyses 
seem to provide an adequate number of cases to demonstrate whether the 
TAH-t would meet the cost threshold. We assume that none of the costs 
associated with this technology would be reflected in the MedPAR 
analyses that the applicant used to demonstrate that the technology 
would meet the cost criterion. We note that, under all three of the 
analyses the applicant performed, it identified cases that would have 
been eligible for the TAH-t, but did not remove charges that were 
unrelated to the TAH-t, nor did the applicant insert a proxy of charges 
related to the TAH-t. However, as stated above, the average 
standardized charge per case is much greater than any of the thresholds 
for MS-DRGs 001, 002, and 215. Therefore, even if the applicant were to 
approximate what the costs of cases eligible to receive the TAH-t would 
have been by removing non-TAH-t associated charges and inserting 
charges related to the TAH-t, it appears that the average standardized 
charges per case for cases eligible for the TAH-t would exceed the 
relevant thresholds included in Table 10 (as discussed above) and would 
therefore appear to meet the cost criterion. In the FY 2009 IPPS 
proposed rule, we invited public comment on whether TAH-t met the cost 
criterion.
    Comment: One commenter, the manufacturer, asserted that it believed 
that the TAH-t satisfied the cost criterion by exceeding the cost 
threshold and agreed with CMS' discussion in the proposed rule that the 
TAH-t appeared to meet the cost threshold.
    Response: Based on data submitted by the applicant and discussed in 
the proposed rule, we noted that the TAH-t appeared to meet the cost 
threshold criterion. Using the March update of the FY 2007 MedPAR file, 
we searched for cases that matched the manufacturer's second and third 
MedPAR analyses described above. (As previously noted, because the 
first analysis only returned two cases, we did not simulate it for the 
final rule.) When we simulated the second and third analyses, we found 
a total of 75 cases and 79 cases, respectively (that mapped to CMS DRG 
103 (Heart Transplant or Implant of Heart Assist System) which 
crosswalks to MS-DRGs 001 and 002), with an average standardized charge 
per case of $883,301 and $830,200, respectively. Therefore, because the 
average standardized charge exceeds the thresholds of MS-DRGs 001 and 
002 ($345,031 and $178,142, respectively) based on data submitted by 
the applicant and on our analyses of MedPAR data, we believe that the 
TAH-t meets the cost threshold criterion.
    As noted in section II.G.1. of the preamble to the FY 2009 IPPS 
proposed rule, we proposed to remove the TAH-t from MS-DRG 215 and 
reassign the TAH-t to MS-DRGs 001 and 002. As stated earlier, on May 1, 
2008, CMS issued an NCD that extends coverage to artificial heart 
devices within the confines of an FDA-approved clinical study. 
Therefore, as of May 1, 2008, the MCE will require both procedure code 
37.52 (Implantation of total replacement heart system) and diagnosis 
code reflecting clinical trial--V70.7 (Examination of participant in 
clinical trial). As we stated in the proposed rule, the TAH-t appeared 
to meet the cost thresholds for MS-DRGs 001, 002, and 215. Therefore, 
we noted, its proposed reassignment from MS-DRG 215 to MS-DRGs 001 and 
002 would not appear to have a material effect on meeting the cost 
thresholds in MS-DRGs 001 and 002 should the reassignment proposal be 
finalized. In section II.G.1. of the preamble of this final rule, we 
finalized the proposal to reassign cases involving the TAH-t from MS-
DRG 215 to MS-DRGs 001 and 002. We refer readers to that section for 
additional information.
    The manufacturer stated that the TAH-t is the only mechanical 
circulatory support device intended as a bridge-to-transplant for 
patients with irreversible biventricular failure. It also asserted that 
the TAH-t improves clinical outcomes because it has been shown to 
reduce mortality in patients who are otherwise in end-stage heart 
failure. In addition, the manufacturer claimed that the TAH-t provides 
greater hemodynamic stability and end-organ perfusion, thus making 
patients who receive it better candidates for eventual heart 
transplant.
    We did not receive any written comments or public comments at the 
town hall meeting regarding whether this technology represents a 
substantial clinical improvement in the treatment of inpatients with 
end-stage biventricular heart failure relative to previous technology 
available to the Medicare population. However, in the FY 2009 IPPS 
proposed rule, we welcomed comments from the public regarding whether 
the TAH-t represents a substantial clinical improvement.
    Comment: One commenter, the manufacturer, stated that, with regard 
to whether the TAH-t meet the substantial clinical improvement 
criterion, the TAH-t ``fulfills a role that no other mechanical 
circulatory support device can for patients in irreversible

[[Page 48557]]

biventricular failure * * *'' With respect to the coverage decision 
that was issued on May 1, 2008, the commenter stated that ``the 
agency's reversal of such a longstanding noncoverage policy alone 
demonstrates that the TAH-t is a substantial clinical improvement.''
    Response: We disagree with the commenter's assertion that CMS' 
recent change to the coverage decision alone demonstrates that the TAH-
t is a substantial clinical improvement. Rather the coverage decision 
signifies that the TAH-t device is ``reasonable and necessary'' within 
the parameters of approved clinical trial studies. In our view, 
demonstration of substantial clinical improvement requires that a 
higher threshold be met. That is, not only is the device safe and 
effective (as indicated by FDA approval) and reasonable and necessary 
(as indicated by CMS coverage), but the device offers such clinical 
improvement over previously available technologies to the Medicare 
population that Medicare will lessen barriers inhibiting physicians and 
hospitals from utilizing the costly new technology so as not to hinder 
Medicare beneficiaries' access to the technology before its costs are 
adequately reflected in the MS-DRG payment system.
    However, we agree with the commenter's assertion that the TAH-t 
``fulfills a role that no other mechanical circulatory support device 
can for patients in irreversible biventricular failure.'' We note that 
the TAH-t is the only available FDA-approved temporary total artificial 
heart device. Clinical evidence submitted by the applicant supports the 
manufacturer's assertion that the TAH-t provides a treatment option for 
patients suffering from biventricular failure who may be unresponsive 
to, or ineligible for, currently available treatments (including other 
mechanical circulatory devices). Specifically, the applicant referred 
to the FDA approved multicenter IDE clinical trial in which 81 patients 
at risk of imminent death from biventricular heart failure received the 
device. At 30 days, 69.1 percent of those patients met the treatment 
success criteria for the study, which included: Having an improvement 
in heart failure from New York Heart Association Class IV to Class I or 
II, not being bedridden, not being ventilator dependent and not being 
on dialysis. Therefore, the TAH-t appears to provide a viable treatment 
option to patients who might otherwise be at risk for imminent death, 
and who, by virtue of successful bridge to transplant, may ultimately 
benefit from the extended survival that is possible with heart 
transplant. We acknowledge that there were some patients who did not 
survive despite receiving the TAH-t, but we believe at this time that 
the benefit provided by the device to patients who might otherwise be 
at risk for imminent death outweighs the risks associated with the 
device. Therefore, we believe that this device has demonstrated that it 
is a substantial clinical improvement over existing technology for 
those patients who meet the specific criteria for inclusion in an 
approved clinical trial for purposes of FY 2009 new technology add-on 
payments.
    After evaluation of the three new technology add-on criteria 
(newness, costs, and substantial clinical improvement) and 
consideration of the public comments received, we are approving the 
TAH-t for FY 2009 new technology add-on payment. As discussed above, we 
believe that the TAH-t offers a new treatment option that previously 
did not exist for patients with end-stage biventricular failure. 
However, we recognize that the TAH-t's Medicare coverage is limited to 
approved clinical trial settings. The new technology add-on payment 
status does not negate the restrictions under the NCD nor does it 
obviate the need for continued monitoring of clinical evidence for the 
TAH-t, and we remain interested in seeing whether the clinical evidence 
from the CED parameters demonstrates that the TAH-t continues to be 
effective. If evidence is found that the TAH-t may no longer offer a 
substantial clinical improvement, we reserve the right to discontinue 
new technology add-on payments, even within the 2 to 3 year period that 
the device may still be considered to be new. The new technology add-on 
payment for FY 2009 will be triggered by the presence of ICD-9-CM 
procedure code 37.52 (Implantation of total heart replacement system), 
condition code 30, and diagnosis code reflecting clinical trial--V70.7 
(Examination of participant in clinical trial). As noted in the 
proposed rule, the manufacturer submitted data to support its estimated 
operating cost per case involving the TAH-t procedure of $106,000. 
Accordingly, we are finalizing a maximum add-on payment of $53,000 
(that is, 50 percent of the estimated operating costs of the device) 
for cases that involve this technology.
b. Emphasys Medical Zephyr[supreg] Endobronchial Valve (Zephyr[supreg] 
EBV)
    Emphasys Medical submitted an application for new technology add-on 
payments for FY 2009 for the Emphasys Medical Zephyr[supreg] 
Endobronchial Valve (Zephyr[supreg] EBV). The Zephyr[supreg] EBV is 
intended to treat patients with emphysema by reducing volume in the 
diseased, hyperinflated portion of the emphysematous lung with fewer 
risks and complications than with more invasive surgical alternatives. 
Zephyr[supreg] EBV therapy involves placing small, one-way valves in 
the patients' airways to allow air to flow out of, but not into, the 
diseased portions of the lung thus reducing the hyperinflation. A 
typical procedure involves placing three to four valves in the target 
lobe using a bronchoscope, and the procedure takes approximately 20 to 
40 minutes to complete. The Zephyr[supreg] EBVs are designed to be 
relatively easy to place, and are intended to be removable so that, 
unlike more risky surgical alternatives such as Lung Volume Reduction 
Surgery (LVRS) or Lung Transplant, the procedure has the potential to 
be fully reversible.
    In the proposed rule, we noted that the Zephyr[supreg] EBV had yet 
to receive approval from the FDA, but the manufacturer indicated to CMS 
that it expected to receive its FDA approval in the second or third 
quarter of 2008. Because the technology had not yet been approved by 
the FDA, we limited our discussion of this technology in the proposed 
rule to data that the applicant submitted, rather than make specific 
proposals with respect to whether the device would meet the new 
technology add-on criteria.
    In an effort to demonstrate that the Zephyr[supreg] EBV would meet 
the cost criterion, as discussed in the proposed rule, the applicant 
searched the FY 2006 MedPAR file for cases with one of the following 
ICD-9-CM diagnosis codes: 492.0 (Emphysematous bleb), 492.8 (Other 
emphysema, NEC), or 496 (Chronic airway obstruction, NEC). Based on the 
diagnosis codes searched by the applicant, cases of the Zephyr[supreg] 
EBV would be most prevalent in MS- DRGs 190 (Chronic Obstructive 
Pulmonary Disease with MCC), 191 (Chronic Obstructive Pulmonary Disease 
with CC), and 192 (Chronic Obstructive Pulmonary Disease without CC/
MCC). The applicant found 1,869 cases (or 12.8 percent of cases) in MS-
DRG 190, 5,789 cases (or 39.5 percent of cases) in MS-DRG 191, and 
6,995 cases (or 47.7 percent of cases) in MS-DRG 192 (which equals a 
total of 14,653 cases). The average standardized charge per case was 
$21,567 for MS-DRG 190, $15,494 for MS-DRG 191, and $11,826 for MS-DRG 
192. The average standardized charge per case does not include charges 
related to the Zephyr[supreg] EBV; therefore, it is necessary to add 
the charges related to the device to the average standardized charge 
per case in

[[Page 48558]]

evaluating the cost threshold criteria. Although the applicant 
submitted data related to the estimated cost of the Zephyr[supreg] EBV 
per case, the applicant noted that the cost of the device was 
proprietary information because the device is not yet available on the 
open market. The applicant estimated $23,920 in charges related to the 
Zephyr[supreg] EBV (based on a 100 percent charge markup of the cost of 
the device). In addition to case-weighting the data based on the amount 
of cases that the applicant found in the FY 2006 MedPAR file, the 
applicant case-weighted the data based on its own projections of how 
many Medicare cases it would expect to map to MS-DRGs 190, 191, and 192 
in FY 2009. The applicant projected that, 5 percent of the cases would 
map to MS-DRG 190, 15 percent of the cases would map to MS-DRG 191, and 
80 percent of the cases would map to MS-DRG 192. Adding the charges 
related to the device to the average standardized charge per case 
(based on the applicant's projected case distribution) resulted in a 
case-weighted average standardized charge per case of $36,782 ($12,862 
plus $23,920). Using the thresholds published in Table 10 (72 FR 
66889), the case-weighted threshold for MS-DRGs 190, 191, and 192 was 
$18,394. Because the case-weighted average standardized charge per case 
for the applicable MS-DRGs exceed the case-weighted threshold amount, 
the applicant maintained that the Zephyr[supreg] EBV would meet the 
cost criterion. As noted above, the applicant also performed a case-
weighted analysis of the data based on the 14,653 cases the applicant 
found in the FY 2006 MedPAR file. Based on this analysis, the applicant 
found that the case-weighted average standardized charge per case 
($38,441 based on the 14,653 cases) exceeded the case-weighted 
threshold ($20,606 based on the 14,653 cases). Based on both analyses 
described above, we stated in the proposed rule that it appeared that 
the applicant would meet the cost criterion.
    In the FY 2009 IPPS proposed rule, we invited public comment on 
whether Zephyr[supreg] EBV met the cost criterion.
    Comment: One commenter, the manufacturer, addressed issues 
regarding whether the Zephyr[supreg] EBV met the cost criterion.
    Response: Because the Zephyr[supreg] EBV has not yet received FDA 
approval, and therefore, does not meet the newness criterion, as 
discussed above, it is not eligible for the IPPS new technology add-on 
payments for FY 2009. Therefore, we are not summarizing the details of 
this comment nor responding to them in this final rule.
    As discussed in the proposed rule, the applicant also asserted that 
the Zephyr[supreg] EBV is a substantial clinical improvement because it 
provides a new therapy along the continuum of care for patients with 
emphysema that offers improvement in lung function over standard 
medical therapy while incurring significantly less risk than more 
invasive treatments such as LVRS and lung transplant. Specifically, the 
applicant submitted data from the ongoing pivotal Endobronchial Valve 
for Emphysema Palliation (VENT) trial,\21\ which compared 220 patients 
who received EBV treatment to 101 patients who received standard 
medical therapy, including bronchodilators, steroids, mucolytics, and 
supplemental oxygen. At 6 months, patients who received the 
Zephyr[supreg] EBV had an average of 7.2 percent and 5.8 percent 
improvement (compared to standard medical therapy) in the primary 
effectiveness endpoints of the Forced Expiratory Volume in 1 second 
test (FEV1), and the 6 Minute Walk Test (6MWT), respectively. Both 
results were determined by the applicant to be statistically 
significant. The FEV1 results were determined using the t-test 
parametric confidence intervals (the p value determined using the one-
side t-test adjusted for unequal variance) and the 6MWT results were 
determined using the Mann-Whitney nonparametric confidence intervals 
(the p value was calculated using the one-sided Wilcoxon rank sum 
test). However, the data also showed that patients who received the 
Zephyr[supreg] EBV experienced a number of adverse events, including 
hemoptyis, pneumonia, respiratory failure, pneumothorax, and COPD 
exacerbations, as well as valve migrations and expectorations that, in 
some cases, required repeat bronchoscopy. The manufacturer also 
submitted the VENT pivotal trial 1-year followup data, but requested 
that the data not be disclosed in the proposed rule because it had not 
yet been presented publicly nor published in a peer-reviewed journal.
---------------------------------------------------------------------------

    \21\ Strange, Charlie., et al., Design of the Endobronchial 
Valve for Emphysema Palliation trial (VENT): A Nonsurgical Method of 
Lung Volume Reduction, BMC Pulmonary Medicine. 2007; 7:10.
---------------------------------------------------------------------------

    While CMS recognizes that the Zephyr[supreg] EBV therapy is 
significantly less risky than LVRS and lung transplant, we are 
concerned that the benefits as shown in the VENT pivotal trial may not 
outweigh the risks when compared with medical therapy alone. Further, 
we note that, according to the applicant, the Zephyr[supreg] EBV is 
intended for use in many patients who are ineligible for LVRS and/or 
lung transplant (including those too sick to undergo more invasive 
surgery and those with lower lobe predominant disease distribution), 
but that certain patients (that is, those with upper lobe predominant 
disease distribution) could be eligible for either surgery or the 
Zephyr[supreg] EBV.
    In the FY 2009 IPPS proposed rule, we welcomed comments from the 
public on both the patient population who would be eligible for the 
technology, and whether the Zephyr[supreg] EBV represented a 
substantial clinical improvement in the treatment of patients with 
emphysema.
    Comment: Commenters representing the manufacturer and physicians, 
outlined various reasons why they believed that the Zephyr[supreg] EBV 
represented a substantial clinical improvement over technologies 
currently available to Medicare beneficiaries.
    Response: Because the Zephyr[supreg] EBV has not yet received FDA 
approval, and therefore does not meet the newness criterion, as 
discussed above, it is not eligible for the IPPS new technology add-on 
payments for FY 2009. Therefore, we are not summarizing the details of 
these comments received nor responding to them in this final rule.
    As noted in the proposed rule, we also received written comments 
from the manufacturer and its presenters at the town hall meeting 
clarifying some questions that were raised at the town hall meeting. 
Specifically, these commenters explained that, in general, the target 
population for the Zephyr[supreg] EBV device was the same population 
that could benefit from LVRS, and also includes some patients who were 
too sick to undergo surgery. The commenters also explained that 
patients with emphysema with more heterogeneous lung damage were more 
likely to benefit from the device.
    In the FY 2009 IPPS proposed rule, we welcomed public comments 
regarding where exactly this technology falls in the continuum of care 
of patients with emphysema, and for whom the risk/benefit ratio is most 
favorable.
    Comment: Commenters representing the manufacturer and individual 
physicians addressed issues regarding where the Zephyr[supreg] EBV fell 
in the continuum of care of patients with emphysema and for whom the 
risk/benefit ratio was most favorable.
    Response: Because the Zephyr[supreg] EBV has not yet received FDA 
approval, and therefore does not meet the newness criterion, it is not 
eligible for the IPPS new technology add-on payments for FY 2009. 
Therefore, we are not summarizing the details of these public

[[Page 48559]]

comments nor responding to them in this final rule.
    As we previously stated, because the Zephyr[supreg] EBV has not yet 
received FDA approval, it does not meet the newness criterion. 
Therefore, it cannot be approved for FY 2009 IPPS new technology add-on 
payments.
c. Oxiplex[supreg]
    FzioMed, Inc. submitted an application for new technology add-on 
payments for FY 2009 for Oxiplex[supreg]. Oxiplex[supreg] is an 
absorbable, viscoelastic gel made of carboxymethylcellulose (CMC) and 
polyethylene oxide (PEO) that is intended to be surgically implanted 
during a posterior discectomy, laminotomy, or laminectomy. The 
manufacturer asserted that the gel reduces the potential for 
inflammatory mediators that injure, tether, or antagonize the nerve 
root in the epidural space by creating an acquiescent, semi-permeable 
environment to protect against localized debris. These proinflammatory 
mediators (phospholipase A and nitric oxide), induced or extruded by 
intervertebral discs, may be responsible for increased pain during 
these procedures. The manufacturer also asserted that Oxiplex[supreg] 
is a unique material in that it coats tissue, such as the nerve root in 
the epidural space, to protect the nerve root from the effects of 
inflammatory mediators originating from either the nucleus pulposus, 
from blood derived inflammatory cells, or cytokines during the healing 
process.
    Oxiplex[supreg] indicated to CMS that it was expecting to receive 
premarket approval from the FDA by June 2008. As discussed earlier in 
this section, Oxiplex[supreg] had not received FDA approval prior to 
the development of this final rule. Because the technology had not yet 
received FDA approval at the time the proposed rule was developed, we 
indicated in the proposed rule that we were limiting our discussion of 
this technology to data that the applicant submitted, rather than make 
specific proposals with respect to whether the device would meet the 
new technology add-on payment criteria.
    In the proposed rule, we noted that we were concerned that 
Oxiplex[supreg] may be substantially similar to adhesion barriers that 
have been on the market for several years. We also noted that 
Oxiplex[supreg] has been marketed as an adhesion barrier in other 
countries outside of the United States. The manufacturer maintained 
that Oxiplex[supreg] is different from adhesion barriers in several 
ways, including chemical composition, method of action, surgical 
application (that is, it is applied liberally to the nerve root and 
surrounding neural tissues as opposed to minimally only to nerve 
elements), and tissue response (noninflammatory as opposed to 
inflammatory).
    In the FY 2009 IPPS proposed rule, we welcomed comments from the 
public on this issue.
    Comment: One commenter, the manufacturer, addressed the issue of 
whether Oxiplex[supreg] met the newness criterion. The commenter 
explained that there are no products approved for this indication in 
the spine in the United States. The commenter further explained that 
the indication for use for Oxiplex[supreg] outside the United States 
includes the descriptor ``for the reduction of pain, radiculopathy, 
lower extreme weakness'' and the United State IDE study was designed to 
show that Oxiplex[supreg] reduces back and leg pain and associated 
neurological symptoms following discectomy or laminectomy, in a 
controlled, randomized study. The commenter asserted that this is a new 
and different indication for use in the United States, designated by 
the FDA as a product that fulfills an ``Unmet Medical Need.'' The 
commenter submitted clinical studies to demonstrate that 
Oxiplex[supreg] is substantially different than other adhesion barriers 
in the mode of action, dural healing, wound healing, and local tissue 
response.
    Response: We thank the commenter for its comments on the newness 
criteria. However, because Oxiplex[supreg] has not yet received FDA 
approval, and therefore does not meet the newness criterion, it is not 
eligible for the IPPS new technology add-on payments for FY 2009. 
Therefore, we are responding to these comments in this final rule.
    In an effort to demonstrate that the technology meets the cost 
criterion, as discussed in the proposed rule, the applicant searched 
the FY 2006 MedPAR file for cases with ICD-9-CM procedure codes 03.09 
(Other exploration and decompression of spinal canal) or 80.51 
(Excision of interveterbral disc) that mapped to CMS DRGs 499 and 500 
(CMS DRGs 499 and 500 are crosswalked to MS-DRGs 490 and 491 (Back and 
Neck Procedures except Spinal Fusion with or without CC)). Because 
these cases do not include charges associated with the technology, the 
applicant determined it was necessary to add an additional $7,143 in 
charges to the average standardized charge per case of cases that map 
to MS-DRGs 490 and 491. (To do this, the applicant used a methodology 
of inflating the costs of the technology by the average CCR computed by 
using the average costs and charges for supplies for cases with ICD-9-
CM procedure codes 03.09 and 80.51 that map to MS-DRGs 490 and 491). Of 
the 221,505 cases the applicant found, 95,340 cases (or 43 percent of 
cases) would map to MS-DRG 490, which has an average standardized 
charge of $60,301, and 126,165 cases (or 57 percent of cases) would map 
to MS-DRG 491, which has an average standardized charge per case of 
$43,888. This resulted in a case-weighted average standardized charge 
per case of $50,952. The case-weighted threshold for MS-DRGs 490 and 
491 was $27,481. Because the case-weighted average standardized charge 
per case exceeds the case-weighted threshold in MS-DRGs 490 and 491, 
the applicant maintained that Oxiplex[supreg] would meet the cost 
criterion.
    In the FY 2009 IPPS proposed rule, we invited public comment on 
whether Oxiplex[supreg] met the cost criterion.
    Comment: One commenter, the manufacturer, addressed the issue of 
whether Oxiplex[supreg] met the cost criterion.
    Response: Because Oxiplex[supreg] has not yet received FDA 
approval, and therefore does not meet the newness criterion, we are not 
summarizing this public comment nor responding to it in this final 
rule.
    As discussed in the proposed rule, the manufacturer maintained that 
Oxiplex[supreg] is a substantial clinical improvement because it 
``creates a protective environment around the neural tissue that limits 
nerve root exposure to post-surgical irritants and damage and thus 
reduces adverse outcomes associated with Failed Back Surgery Syndrome 
(FBSS) following surgery.'' The manufacturer also claimed that the 
Oxiplex[supreg] gel reduces leg and back pain after discetomy, 
laminectomy, and laminotomy. The manufacturer also asserted that the 
use of Oxiplex[supreg] is consistent with fewer revision surgeries. 
(During the FDA Investigational Device Exemption (IDE) trial, one 
Oxiplex[supreg] patient required revision surgery compared to six 
control patients.) However, as we noted in the proposed rule, we had 
concerns that Oxiplex[supreg] may be substantially similar to adhesion 
barriers that have been on the market for several years. We also stated 
that we were concerned that even if we were to determine that 
Oxiplex[supreg] is not substantially similar to existing adhesion 
barriers, there may still be insufficient evidence to support the 
manufacturer's claims that Oxiplex[supreg] reduces pain associated with 
spinal surgery. In addition, as discussed in the proposed rule, we have 
found no evidence to support the manufacturer's claims regarding mode 
of action, degree of dural healing, degree of wound

[[Page 48560]]

healing, and local tissue response such as might be shown in animal 
studies.
    We did not receive any written comments or public comments at the 
town hall meeting regarding the substantial clinical improvement 
aspects of this technology. However, in the FY 2009 IPPS proposed rule, 
we welcomed comments from the public regarding whether Oxiplex[supreg] 
represented a substantial clinical improvement.
    Comment: One commenter, the manufacturer, claimed that 
Oxiplex[supreg] represents a substantial clinical improvement over 
technology currently available to Medicare beneficiaries. Other 
commenters representing trade associations and physicians, stated that 
there was not enough evidence to determine whether Oxiplex[supreg] 
represented a substantial clinical improvement because it had not yet 
received FDA approval and there was insufficient peer-reviewed 
published literature to make such a determination.
    Response: Because Oxiplex[supreg] has not yet received FDA 
approval, and therefore does not meet the newness criterion, we are not 
summarizing these public comments nor responding to them in this final 
rule.
    As we previously stated, Oxiplex[supreg] does not meet the newness 
criterion and, therefore, cannot be approved for FY 2009 IPPS new 
technology add-on payments.
d. TherOx Downstream[supreg] System
    TherOx, Inc. submitted an application for new technology add-on 
payments for FY 2009 for the TherOx Downstream[supreg] System 
(Downstream[supreg] System). The TherOx Downstream[supreg] System uses 
SuperSaturatedOxygen Therapy (SSO2) that is designed to limit 
myocardial necrosis by minimizing microvascular damage in acute 
myocardial infarction (AMI) patients following intervention with 
Percutaneous Transluminal Coronary Angioplasty (PTCA), and coronary 
stent placement by perfusing the affected myocardium with blood that 
has been supersaturated with oxygen. SSO2 therapy refers to the 
delivery of superoxygenated arterial blood directly to areas of 
myocardial tissue that have been reperfused using PTCA and stent 
placement, but which may still be at risk. The desired effect of SSO2 
therapy is to reduce infarct size and thus preserve heart muscle and 
function. The TherOx DownStream[supreg] System is the console portion 
of a disposable cartridge-based system that withdraws a small amount of 
the patient's arterial blood, mixes it with a small amount of saline, 
and supersaturates it with oxygen to create highly oxygen-enriched 
blood. The superoxygenated blood is delivered directly to the infarct-
related artery via the TherOx infusion catheter. SSO2 therapy is a 
catheter laboratory-based procedure. Additional time in the catheter 
lab area is an average of 100 minutes. The manufacturer claimed that 
the SSO2 therapy duration lasts 90 minutes and requires an additional 
10 minutes post-procedure preparation for transfer time. The TherOx 
Downstream[supreg] System was not FDA approved at the time that the 
proposed rule was published; however, the manufacturer indicated to CMS 
that it expected to receive FDA approval in the second quarter of 2008. 
Because the technology was not approved by the FDA during the 
development of the proposed rule, we limited our discussion of this 
technology to data that the applicant submitted, rather than make 
specific proposals with respect to whether the device would meet the 
new technology add-on criteria in the proposed rule. At the time of the 
development of this final rule, the TherOx Downstream[supreg] System 
had not yet received FDA approval.
    In an effort to demonstrate that it would meet the cost criterion 
as we discussed in the proposed rule, the applicant submitted two 
analyses. The applicant stated that it believed that cases that would 
be eligible for the Downstream[supreg] System would most frequently 
group to MS-DRGs 246 (Percutaneous Cardiovascular Procedure with Drug-
Eluting Stent with MCC or 4+ Vessels/Stents), 247 (Percutaneous 
Cardiovascular Procedure with Drug-Eluting Stent without MCC), 248 
(Percutaneous Cardiovascular Procedure with Non-Drug-Eluting Stent with 
MCC or 4+ Vessels/Stents), and 249 (Percutaneous Cardiovascular 
Procedure with Non-Drug-Eluting Stent without MCC). The first analysis 
used data based on 83 clinical trial patients from 10 clinical sites. 
Of the 83 cases, 78 were assigned to MS-DRGs 246, 247, 248, or 249. The 
data showed that 32 of these patients were 65 years old or older. There 
were 12 cases (or 15.4 percent of cases) in MS-DRG 246, 56 cases (or 
71.8 percent cases) in MS-DRG 247, 2 cases (or 2.6 percent of cases) in 
MS-DRG 248, and 8 cases (or 10.3 percent of cases) in MS-DRG 249. (The 
remaining five cases grouped to MS-DRGs that the technology would not 
frequently group to and therefore are not included in this analysis.) 
The average standardized charge per case for MS-DRGs 246, 247, 248, and 
249 was $66,730, $53,963, $54,977, and $41,594, respectively. The case-
weighted average standardized charge per case for the four MS-DRGs 
listed above is $54,665. Based on the threshold from Table 10 (72 FR 
66890), the case-weighted threshold for the four MS-DRGs listed above 
was $49,303. The applicant also searched the FY 2006 MedPAR file to 
identify cases that would be eligible for the Downstream[supreg] 
System. The applicant specifically searched for cases with primary ICD-
9-CM diagnosis code 410.00 (Acute myocardial infarction of 
anterolateral wall with episode of care unspecified), 410.01 (Acute 
myocardial infarction of anterolateral wall with initial episode of 
care), 410.10 (Acute myocardial infarction of other anterior wall with 
episode of care unspecified), or 410.11 (Acute myocardial infarction of 
other anterior wall with initial episode of care) in combination with 
ICD-9-CM procedure code of 36.06 (Insertion of non-drug-eluting 
coronary artery stent(s)) or 36.07 (Insertion of drug-eluting coronary 
artery stent(s)). The applicant's search found 13,527 cases within MS-
DRGs 246, 247, 248, and 249 distributed as follows: 2,287 cases (or 
16.9 percent of cases) in MS-DRG 246; 9,691 cases (or 71.6 percent of 
cases) in MS-DRG 247; 402 cases (or 3 percent of cases) in MS-DRG 248; 
and 1,147 cases (or 8.5 percent of cases) in MS-DRG 249. Not including 
the charges associated with the technology, the geometric mean 
standardized charge per case for MS-DRGs 246, 247, 248, and 249 was 
$59,631, $42,357, $49,718 and $37,446, respectively. Therefore, based 
on this analysis, the total case-weighted geometric mean standardized 
charge per case across these MS-DRGs was $45,080. The applicant 
estimated that it was necessary to add an additional $21,620 in charges 
to the total case-weighted geometric mean standardized charge per case. 
In the additional charge amount, the applicant included charges for 
supplies and tests related to the technology, charges for 100 minutes 
of additional procedure time in the catheter laboratory and charges for 
the technology itself. The inclusion of these charges would result in a 
total case-weighted geometric mean standardized charge per case of 
$66,700. The case-weighted threshold for MS-DRGs 246, 247, 248, and 249 
(from Table 10 (72 FR 66889)) was $49,714. Because the total case-
weighted average standardized charge per case from the first analysis 
and the case-weighted geometric mean standardized charge per case from 
the second analysis exceeds the applicable case-weighted threshold, the 
applicant maintained the Downstream[supreg] System would meet the cost 
criterion.
    In the FY 2009 IPPS proposed rule, we invited public comment on 
whether

[[Page 48561]]

Downstream[supreg] System met the cost criterion.
    Comment: One commenter, the manufacturer, addressed the issue of 
whether the TherOx Downstream[supreg] System met the cost criterion. 
Another comment addressed the 100 minutes of additional catheter lab 
time that is required for the therapy and the preparation for transfer 
time.
    Response: Because the TherOx Downstream[supreg] System has not yet 
received FDA approval, and therefore does not meet the newness 
criterion, it is not eligible for the IPPS new technology add-on 
payments for FY 2009. Therefore, we are not summarizing the details of 
these comments nor responding to them in this final rule.
    As discussed in the proposed rule, the applicant asserted that the 
Downstream[supreg] System is a substantial clinical improvement because 
it reduces infarct size in acute AMI where PTCA and stent placement 
have also been performed. Data was submitted from the Acute Myocardial 
Infarction Hyperbaric Oxygen Treatment (AMIHOT) II trial which was 
presented at the October 2007 Transcatheter Cardiovascular Therapeutics 
conference, but has not been published in peer reviewed literature, 
that showed an average of 6.5 percent reduction in infarct size as 
measured with Tc-99m Sestamibi imaging in patients who received 
supersaturated oxygen therapy. We note that those patients also showed 
a significantly higher incidence of bleeding complications. While we 
recognize that a reduction of infarct size may correlate with improved 
clinical outcomes, we question whether the degree of infarct size 
reduction found in the trial represents a substantial clinical 
improvement, particularly in light of the apparent increase in bleeding 
complications.
    As noted in the proposed rule, we received one written comment from 
the manufacturer clarifying questions that were raised at the town hall 
meeting. Specifically, the commenter explained the methodology of Tc-
99m sestamibi scanning and interpretation in the AMIHOT II trial. In 
addition, the commenter explained that the AMIHOT \22\ and AMIHOT II 
trials did not attempt to measure differences in heart failure outcomes 
nor mortality outcomes.
---------------------------------------------------------------------------

    \22\ Oneill, W.W., et al.: Acute Myocardial Infarction with 
Hyperoxemic Therapy (AMIHOT): A Prospective Randomized Trial of 
Intracoronary Hyperoxemic Reperfusion after Percutaneous Coronary 
Intervention. Journal of the American College of Cardiology, Vol. 
50, No. 5, 2007, pp. 397-405.
---------------------------------------------------------------------------

    In the FY 2009 IPPS proposed rule, we welcomed comments from the 
public on this matter.
    Comment: Commenters representing the manufacturer and physicians 
addressed the issue of whether the TherOx Downstream[supreg] System 
meets the substantial clinical improvement criterion.
    Response: Because the TherOx Downstream[supreg] System has not yet 
received FDA approval, and therefore does not meet the newness 
criterion, it is not eligible for the IPPS new technology add-on 
payments for FY 2009. Therefore, we are not summarizing the details of 
this comment nor responding to it in this final rule.
    As we previously stated, because the Downstream[supreg] System does 
not meet the newness criterion, it cannot be approved for FY 2009 IPPS 
new technology add-on payments.
5. Regulatory Changes
    Section 1886(d)(5)(K)(i) of the Act directs us to establish a 
mechanism to recognize the cost of new medical services and 
technologies under the IPPS, with such mechanism established after 
notice and opportunity for public comment. In accordance with this 
authority, we established at Sec.  412.87(b) of our regulations 
criteria that a medical service or technology must meet in order to 
qualify for the additional payment for new medical services and 
technologies. Specifically, we evaluate applications for new medical 
service or technology add-on payment by determining whether they meet 
the criteria of newness, adequacy of payment, and substantial clinical 
improvement.
    As stated in section III.J.1. of the preamble of this final rule, 
Sec.  412.87(b)(2) of our existing regulations provides that a specific 
medical service or technology will be considered new for purposes of 
new medical service or technology add-on payments after the point at 
which data begin to become available reflecting the ICD-9-CM code 
assigned to the new service or technology. The point at which these 
data become available typically begins when the new medical service or 
technology is first introduced on the market, generally on the date 
that the medical service or technology receives FDA approval. 
Accordingly, for purposes of the new medical service or technology add-
on payment, a medical service or technology cannot be considered new 
prior to the date on which FDA approval is granted.
    In addition, as stated in section III.J.1. of the preamble of this 
final rule, Sec.  412.87(b)(3) of our existing regulations provides 
that, to be eligible for the add-on payment for new medical services or 
technologies, the DRG prospective payment rate otherwise applicable to 
the discharge involving the new medical service or technology must be 
assessed for adequacy. Under the cost criterion, to assess the adequacy 
of payment for a new medical service or technology paid under the 
applicable DRG prospective payment rate, we evaluate whether the 
charges for cases involving the new medical service or technology 
exceed certain threshold amounts.
    Section 412.87(b)(1) of our existing regulations provides that, to 
be eligible for the add-on payment for new medical services or 
technologies, the new medical service or technology must represent an 
advance that substantially improves, relative to technologies 
previously available, the diagnosis or treatment of Medicare 
beneficiaries. In addition, Sec.  412.87(b)(1) states that CMS will 
announce its determination as to whether a new medical service or 
technology meets the substantial clinical improvement criteria in the 
Federal Register as part of the annual updates and changes to the IPPS.
    Since the implementation of the policy on add-on payments for new 
medical services and technologies, we accept applications for add-on 
payments for new medical services and technologies on an annual basis 
by a specified deadline. For example, applications for FY 2009 were 
submitted in November 2007. After accepting applications, CMS then 
evaluates them in the annual IPPS proposed and final rules to determine 
whether the medical service or technology is eligible for the new 
medical service or technology add-on payment. If an application meets 
each of the eligibility criteria, the medical service or technology is 
eligible for new medical service or technology add-on payments 
beginning on the first day of the new fiscal year (that is, October 1).
    We have advised prior and potential applicants that we evaluate 
whether a medical service or technology is eligible for the new medical 
service or technology add-on payments prior to publication of the final 
rule setting forth the annual updates and changes to the IPPS, with the 
results of our determination announced in the final rule. We announce 
our results in the final rule for each fiscal year because we believe 
predictability is an important aspect of the IPPS and that it is 
important to apply a consistent payment methodology for new medical 
services

[[Page 48562]]

or technologies throughout the entire fiscal year. For example, 
hospitals must train their billing and other staff after publication of 
the final rule to properly implement the coding and payment changes for 
the upcoming fiscal year set forth in the final rule. In addition, 
hospitals' budgetary process and clinical decisions regarding whether 
to utilize new technologies are based in part on the applicable payment 
rates under the IPPS for the upcoming fiscal year, including whether 
the new medical services or technologies qualify for the new medical 
service or technology add-on payment. If CMS were to make multiple 
payment changes under the IPPS during a fiscal year, these changes 
could adversely affect the decisions hospitals implement at the 
beginning of the fiscal year. As we stated in the proposed rule, for 
these reasons, we believe applications for new medical service or 
technology add-on payments should be evaluated prior to publication of 
the final IPPS rule for each fiscal year. Therefore, if an application 
does not meet the new medical service or technology add-on payment 
criteria prior to publication of the final rule, it will not be 
eligible for the new medical service or technology add-on payments for 
the fiscal year for which it applied for the add-on payments.
    Because we make our determination regarding whether a medical 
service or technology meets the eligibility criteria for the new 
medical service or technology add-on payments prior to publication of 
the final rule, we have advised both past and potential applicants that 
their medical service or technology must receive FDA approval early 
enough in the IPPS rulemaking cycle to allow CMS enough time to fully 
evaluate the application prior to the publication of the IPPS final 
rule. Moreover, because new medical services or technologies that have 
not received FDA approval do not meet the newness criterion, it would 
not be necessary or prudent for us to make a final determination 
regarding whether a new medical service or technology meets the cost 
threshold and substantial clinical improvement criteria prior to the 
medical service or technology receiving FDA approval. In addition, we 
do not believe it is appropriate for CMS to determine whether a medical 
service or technology represents a substantial clinical improvement 
over existing technologies before the FDA makes a determination as to 
whether the medical service or technology is safe and effective. For 
these reasons, we first determine whether a medical service or 
technology meets the newness criteria, and only if so, do we then make 
a determination as to whether the technology meets the cost threshold 
and represents a substantial clinical improvement over existing medical 
services or technologies. For example, even if an application has FDA 
approval, if the medical service or technology is beyond the timeline 
of 2-3 years to be considered new, in the past we have not made a 
determination on the cost threshold and substantial clinical 
improvement. Further, as we have discussed in prior final rules (69 FR 
49018-49019 and 70 FR 47344), it is our past and present practice to 
analyze the new medical service or technology add-on payment criteria 
in the following sequence: Newness, cost threshold, and finally 
substantial clinical improvement.
    In the FY 2009 IPPS proposed rule (73 FR 23616) we proposed to 
continue this practice of analyzing the eligibility criteria in this 
sequence and announce in the annual Federal Register as part of the 
annual updates and changes to the IPPS our determination on whether a 
medical service or technology meets the eligibility criteria in Sec.  
412.87(b). However, in the interest of more clearly defining the 
parameters under which CMS can fully and completely evaluate new 
medical service or technology add-on payment applications, we proposed 
to amend the regulations at Sec.  412.87 by adding a new paragraph (c) 
to codify our current policy and specify that CMS will consider whether 
a new medical service or technology meets the eligibility criteria in 
Sec.  412.87(b) and announce the results in the Federal Register as 
part of the annual updates and changes to the IPPS. As a result, we 
proposed to remove the duplicative text in Sec.  412.87(b)(1) that 
specifies that CMS will determine whether a new medical service or 
technology meets the substantial clinical improvement criteria and 
announce the results of its determination in the Federal Register as 
part of the annual updates and changes to the IPPS. We noted that this 
proposal was not a change to our current policy, as we have always 
given consideration to whether an application meets the new medical 
service or technology eligibility criteria in the annual IPPS proposed 
and final rules. Rather, the proposal was to simply codify our current 
practice of fully evaluating new medical service or technology add-on 
payment applications prior to publication of the final rule in order to 
maintain predictability within the IPPS for the upcoming fiscal year.
    We did not receive any public comments on this proposal. Therefore, 
in this final rule, we are adopting as final our proposal to Sec.  
412.87(b)(1) to remove the duplicative text.
    We also proposed in new paragraph (c) of Sec.  412.87 to set July 1 
of each year as the deadline by which IPPS new medical service or 
technology add-on payment applications must receive FDA approval. This 
deadline would provide us with enough time to fully consider all of the 
new medical service or technology add-on payment criteria for each 
application and maintain predictability in the IPPS for the coming 
fiscal year.
    Finally, under our proposal, applications that have not received 
FDA approval by July 1 would not be considered in the final rule, even 
if they were summarized in the corresponding IPPS proposed rule. 
However, applications that receive FDA approval of the medical service 
or technology after July 1 would be able to reapply for the new medical 
service or technology add-on payment the following year (at which time 
they would be given full consideration in both the IPPS proposed and 
final rules).
    Comment: A few commenters opposed the proposed policy. 
Specifically, the commenters expressed concern that the imposition of 
such a deadline would decrease flexibility in the new technology add-on 
payment approval process because applicants who received FDA approval 
shortly after the deadline would not be able to be considered for new 
technology add-on payments for the corresponding fiscal year and would 
instead have to wait until a subsequent year to apply. One commenter 
suggested that CMS use July 1 as a general guideline for when FDA 
approval would have to be received, but that technologies that received 
FDA approval a day or two after the deadline should also be considered. 
One commenter suggested that the deadline be announced at the annual 
new technology town hall meeting instead of through regulation.
    Response: While we acknowledge that the deadline may decrease 
flexibility in the new technology add-on payment approval process by a 
very marginal degree, we remind the commenters that we have been 
committed to working with applicants very closely throughout the new 
technology application review process and that we have afforded 
applicants an opportunity to supplement their original applications 
with information that we believed might better support their ability to 
demonstrate that they meet the eligibility criteria for the new 
technology add-on payments. Furthermore, we have provided

[[Page 48563]]

flexibility in the new technology add-on application process by 
accepting applications for technologies prior to their approval by the 
FDA, despite the fact that we are unable to approve a technology that 
has not been proven to be ``safe and effective'' for marketing in the 
United States as FDA approval signifies. We note that it is difficult 
to determine whether a technology is a substantial clinical improvement 
over existing (FDA-approved) technologies because there is usually only 
limited clinical data available and because it requires subjective 
judgment, but we have made efforts to analyze data available to us even 
prior to FDA approval. While we prefer that technologies have FDA 
approval at the time that an application for new technology add-on 
payment is submitted, we acknowledge that it is not always feasible for 
a new technology to receive FDA approval prior to the submission 
deadline for new technology add-on payment applications. We believe 
that July 1 of each year provides an appropriate balance between the 
necessity for adequate time to fully evaluate the applications, the 
requirement to publish the IPPS final rule by August 1 of each year, 
and the commenters' concerns that potential new technology applicants 
have some flexibility with respect to when their technology receives 
FDA approval. Finally, we believe that announcing the deadline at the 
annual new technology town hall meeting does not provide a standard as 
predictable as a regulatory standard. In addition, not all interested 
parties are able to attend the town hall meeting and, therefore, may 
not be aware of a deadline that is announced at that meeting.
    Comment: Two commenters supported the proposal. The commenters 
stated that setting a deadline would increase transparency and 
predictability in the IPPS new technology add-on application process. 
One of the commenters noted that setting such a deadline would save 
manufacturers the cost and effort of submitting an application for 
technologies that were not likely to make the deadline and that the 
deadline would also save CMS time from reviewing these applications. 
The commenter also stated that the deadline would bring clarity to the 
new technology application process by helping applicants coordinate the 
timing of their applications with FDA approval.
    Response: We appreciate the commenters' support and agree that both 
transparency and predictability in the new technology add-on payment 
application process will be improved as a result of this regulatory 
change. We also continue to believe that this policy will provide us 
with enough time to fully consider all of the new medical service or 
technology add-on payment criteria for each application without 
imposing additional burden on future applicants that are unable to meet 
this deadline.
    After consideration of the public comments received, we are 
adopting as final our proposal to revise Sec.  412.87 to remove the 
second sentence of (b)(1), thereby codifying our current practice of 
how CMS evaluates new medical service or technology add-on payment 
applications. We are also finalizing our proposal in paragraph (c) of 
Sec.  412.87 which establishes a date of July 1 of each year as the 
deadline by which IPPS new medical service or technology add-on payment 
applications must receive FDA approval in order to be fully evaluated 
in the applicable IPPS final rule each year.

III. Changes to the Hospital Wage Index

A. Background

    Section 1886(d)(3)(E) of the Act requires that, as part of the 
methodology for determining prospective payments to hospitals, the 
Secretary must adjust the standardized amounts ``for area differences 
in hospital wage levels by a factor (established by the Secretary) 
reflecting the relative hospital wage level in the geographic area of 
the hospital compared to the national average hospital wage level.'' In 
accordance with the broad discretion conferred under the Act, we 
currently define hospital labor market areas based on the definitions 
of statistical areas established by the Office of Management and Budget 
(OMB). A discussion of the FY 2009 hospital wage index based on the 
statistical areas, including OMB's revised definitions of Metropolitan 
Areas, appears under section III.C. of this preamble.
    Beginning October 1, 1993, section 1886(d)(3)(E) of the Act 
requires that we update the wage index annually. Furthermore, this 
section provides that the Secretary base the update on a survey of 
wages and wage-related costs of short-term, acute care hospitals. The 
survey must exclude the wages and wage-related costs incurred in 
furnishing skilled nursing services. This provision also requires us to 
make any updates or adjustments to the wage index in a manner that 
ensures that aggregate payments to hospitals are not affected by the 
change in the wage index. The adjustment for FY 2009 is discussed in 
section II.B. of the Addendum to this final rule.
    As discussed below in section III.I. of this preamble, we also take 
into account the geographic reclassification of hospitals in accordance 
with sections 1886(d)(8)(B) and 1886(d)(10) of the Act when calculating 
IPPS payment amounts. Under section 1886(d)(8)(D) of the Act, the 
Secretary is required to adjust the standardized amounts so as to 
ensure that aggregate payments under the IPPS after implementation of 
the provisions of sections 1886(d)(8)(B) and (C) and 1886(d)(10) of the 
Act are equal to the aggregate prospective payments that would have 
been made absent these provisions. The budget neutrality adjustment for 
FY 2009 is discussed in section II.A.4.b. of the Addendum to this final 
rule.
    Section 1886(d)(3)(E) of the Act also provides for the collection 
of data every 3 years on the occupational mix of employees for short-
term, acute care hospitals participating in the Medicare program, in 
order to construct an occupational mix adjustment to the wage index. A 
discussion of the occupational mix adjustment that we are applying 
beginning October 1, 2008 (the FY 2009 wage index) appears under 
section III.D. of this preamble.
    After the issuance of the FY 2009 IPPS proposed rule, a new law, 
the Medicare Improvements for Patients and Providers Act of 2008 (Pub. 
L. 110-275) was enacted on July 15, 2008. Section 124 of Public Law 
110-275 extended certain hospital wage index reclassifications 
originally provided for under section 508 of Public Law 108-173, as 
well as certain special exceptions, through September 30, 2009 (FY 
2009). A discussion of the provisions of section 124 and its 
implementation in a separate Federal Register notice to be published 
subsequent to this final rule are discussed in section III.I.7. of this 
preamble.

B. Requirements of Section 106 of the MIEA-TRHCA

1. Wage Index Study Required Under the MIEA-TRHCA
a. Legislative Requirement
    Section 106(b)(1) of the MIEA-TRHCA (Pub. L. 109-432) required 
MedPAC to submit to Congress, not later than June 30, 2007, a report on 
the Medicare wage index classification system applied under the 
Medicare IPPS. Section 106(b) of MIEA-TRHCA required the report to 
include any alternatives that MedPAC recommends to the method to 
compute the wage

[[Page 48564]]

index under section 1886(d)(3)(E) of the Act.
    In addition, section 106(b)(2) of the MIEA-TRHCA instructed 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. The Secretary was also to consider 
each of the following:
     Problems associated with the definition of labor markets 
for the wage index adjustment.
     The modification or elimination of geographic 
reclassifications and other adjustments.
     The use of Bureau of Labor of Statistics (BLS) data or 
other data or methodologies to calculate relative wages for each 
geographic area.
     Minimizing variations in wage index adjustments between 
and within MSAs and statewide rural areas.
     The feasibility of applying all components of CMS' 
proposal to other settings.
     Methods to minimize the volatility of wage index 
adjustments while maintaining the principle of budget neutrality.
     The effect that the implementation of the proposal would 
have on health care providers on each region of the country.
     Methods for implementing the proposal(s), including 
methods to phase in such implementations.
     Issues relating to occupational mix such as staffing 
practices and any evidence on quality of care and patient safety 
including any recommendation for alternative calculations to the 
occupational mix.
b. MedPAC's Recommendations
    In its June 2007 Report to Congress, ``Report to the Congress: 
Promoting Greater Efficiency in Medicare'' (Chapter 6 with Appendix), 
MedPAC made three broad recommendations regarding the wage index:
    (1) Congress should repeal the existing hospital wage index 
statute, including reclassifications and exceptions, and give the 
Secretary authority to establish a new wage index system;
    (2) The Secretary should establish a hospital compensation index 
that--
     Uses wage data from all employers and industry-specific 
occupational weights;
     Is adjusted for geographic differences in the ratio of 
benefits to wages;
     Is adjusted at the county level and smoothes large 
differences between counties; and
     Is implemented so that large changes in wage index values 
are phased in over a transition period; and
    (3) The Secretary should use the hospital compensation index for 
the home health and skilled nursing facility prospective payment 
systems and evaluate its use in the other Medicare fee-for-service 
prospective payment systems.
    The full June 2007 Report to Congress is available at the Web site: 
http://www.medpac.gov/documents/Jun07_EntireReport.pdf).
    In the presentation and analysis of its alternative wage index 
system, MedPAC addressed almost all of the nine points for 
consideration under section 106(b)(2) of Public Law 109-432. Following 
are the highlights of the alternative wage index system recommended by 
MedPAC:
     Although the MedPAC recommended wage index generally 
retains the current labor market definitions, it supplements the 
metropolitan areas with county-level adjustments and eliminates single 
wage index values for rural areas.
     In the MedPAC recommended wage index, the county-level 
adjustments, together with a smoothing process that constrains the 
magnitude of differences between and within contiguous wage areas, 
serve as a replacement for geographical reclassifications.
     The MedPAC recommended wage index uses BLS data instead of 
the CMS hospital wage data collected on the Medicare cost report. 
MedPAC adjusts the BLS data for geographic differences in the ratio of 
benefits to wages using Medicare cost report data.
     The BLS data are collected from a sample of all types of 
employers, not just hospitals. The MedPAC recommended wage index could 
be adapted to other providers such as HHAs and SNFs by replacing 
hospital occupational weights with occupational weights appropriate for 
other types of providers.
     In the MedPAC recommended wage index, volatility over time 
is addressed by the use of BLS data, which is based on a 3-year rolling 
sample design.
     MedPAC recommended a phased implementation for its 
recommended wage index in order to cushion the effect of large wage 
index changes on individual hospitals.
     MedPAC suggested that using BLS data automatically 
addresses occupational mix differences, because the BLS data are 
specific to health care occupations, and national industry-wide 
occupational weights are applied to all geographic areas.
     The MedPAC report does not provide any evidence of the 
impact of its wage index on staffing practices or the quality of care 
and patient safety.
c. CMS Contract for Impact Analysis and Study of Wage Index Reform
    To assist CMS in meeting the requirements of section 106(b)(2) of 
Public Law 109-432, in February 2008, CMS awarded a Task Order to 
Acumen, LLC. The two general responsibilities of the Task Order are to 
(1) conduct a detailed impact analysis that compares the effects of 
MedPAC's recommended wage and hospital compensation indices with the 
CMS wage index and (2) provide analysis and research that assist CMS in 
developing a proposal (or proposals) that addresses the nine points for 
consideration under section 106(b)(2) of Public Law 109-432. 
Specifically, the tasks under the Task Order include, but are not 
limited to, an evaluation of whether differences between the two types 
of wage data (that is, CMS cost report and occupational mix data and 
BLS data) produce significant differences in wage index values among 
labor market areas, a consideration of alternative methods of 
incorporating benefit costs into the construction of the wage index, a 
review of past and current research on alternative labor market area 
definitions, and a consideration of how aspects of the MedPAC 
recommended wage index can be applied to the CMS wage data in 
constructing a new methodology for the wage index. Acumen has completed 
the first phase of its study (that is, a comparative and impact 
analysis of the CMS wage index and the MedPAC recommended wage 
indices). A summary of Acumen's findings is included in section 
III.B.1.e. of the preamble to this final rule. Acumen will post on its 
Web site, subsequent to the publication of this final rule, an interim 
report that includes the full set of findings from this analysis. 
Acumen's Web site is: http://www.acumenllc.com/reports/cms.
d. Public Comments Received on the MedPAC Recommendations and the CMS/
Acumen Wage Index Study and Analysis
    We received many public comments regarding the MedPAC's 
recommendations for reforming the wage index, as well as on CMS' and 
Acumen's study and analysis. The public comments vary greatly, and at 
this time, we are not proposing or finalizing the specific 
recommendations made by MedPAC discussed above. For

[[Page 48565]]

this reason, we are briefly highlighting the public comments according 
to the issues they address. A complete set of the public comments on 
the FY 2009 IPPS proposed rule (CMS-1390-P) is available on the 
Internet at: www.regulations.gov. In developing proposals for 
additional wage index reform (anticipated to be included in the FY 2010 
IPPS proposed rule), we plan to consider all of the public comments on 
the MedPAC recommendations that we received in this rulemaking cycle, 
along with the interim and final reports to be submitted to us by 
Acumen.
    MedPAC Recommendation: Congress should repeal the existing hospital 
wage index statute, including reclassifications and exceptions.
    Public Comment Summaries:
     Wage index reclassifications and exceptions process should 
not be eliminated. Exceptions are necessary for hospitals with labor 
costs that are atypical for their local area but comparable to other 
areas.
     Reclassifications and other wage index exceptions should 
be modified or eliminated. As the MedPAC noted, 40 percent of hospitals 
receive a wage index exception, thereby indicating that the current 
system is broken.
    MedPAC Recommendation: Use BLS data instead of the CMS hospital 
wage data collected on the Medicare cost report to calculate the wage 
index.
    Public Comment Summaries:
     CMS should adopt the MedPAC's recommendations to use BLS 
data. A wage index based on a 3-year average, instead of a single year 
of 4-year-old data, would better reflect hospitals' average hourly 
wages.
     BLS data may be inappropriate to use for the hospital wage 
index because it includes data from all employers, not just short term 
acute hospitals.
     Wages for contract or temporary employees are included in 
BLS data, but they reflect the lower salary paid by the agency to the 
employee and not the higher salary of what the hospital paid the 
agency.
     Unlike CMS's public process for reviewing and correcting 
wage index data at the hospital level, BLS has a strict confidentiality 
policy. Hospitals would be unable to verify any inaccuracies in the BLS 
data. Complete transparency is needed for the entire wage index 
process.
     Every 6 months, BLS surveys 200,000 establishments and 
builds the database to include 1.2 million unique establishments over a 
3-year period. The data are then inflated to a certain month and year 
using a ``single national estimate'' of wage growth for broad 
occupational divisions. This approach fails to account for any 
differences in wage growth between markets over the 3-year period.
     To determine average hourly wages, CMS collects data over 
a 12-month period, while the BLS collects data from 2 payroll periods, 
with each period capturing data from one-sixth of the total number of 
sampled establishments. Integrity in the wage index may be compromised 
using data from only two payroll periods rather than from 12 months of 
data.
     BLS data exclude overtime pay, jury duty pay, and shift 
differentials. Excluding these costs, which are often associated with 
tight labor market areas, could understate areas that have higher 
utilization of these items.
     BLS data do not include employee fringe benefits costs. 
The MedPAC relied on benefit data from the CMS hospital, home health 
agency, and SNF cost reports, which negates the potential benefit of 
eliminating the collection of hospital-specific wage data. There are 
also concerns about mixing data from two sources.
     Full-time and part-time employees are equally weighted in 
the BLS data.
     Estimates from using a sampling methodology like the BLS 
uses are subject to sampling errors and will be less reliable than CMS' 
current methodology of using data from all PPS hospitals.
     CMS data are mandatory while BLS data are voluntary. Data 
that are voluntarily submitted may have less integrity than mandatory 
data.
     BLS imputes data for nonresponsive employers. The use of 
imputed data is inappropriate.
     BLS data do not reflect premiums that hospitals must pay 
for certain workers; for example, premiums for registered nurses with 
additional training and certification in specialties such as critical 
care. Payment premiums for these workers would not be adequately 
reflected in the BLS data because the BLS survey does not capture 
information on nurse specialty areas.
     On the BLS survey, hospitals simply report data for 
occupational categories by average hourly wage ranges. Hospitals do not 
report actual hours worked. BLS' method for weighting the data in 
computing hourly rates is confusing because it does not have hours as a 
basis for the weighting.
    MedPAC Recommendation: Use county-level adjustments, together with 
a smoothing process, to constrain the magnitude of differences between 
and within contiguous wage areas.
    Public Comment Summaries:
     The MedPAC used 2000 census data to establish the 
relationship between counties within a MSA. Using old data may create 
differences in wage indices that are inconsistent with actual 
geographic differences in wages.
     Using counties as the units of analysis may not be 
optimal. Some counties tend to be quite large and topographically 
diverse, while other counties are small and relatively homogeneous.
     CMS' current methodology, with the exception of commuting 
pattern adjustments, assumes there is no interrelationship between 
areas. More refined areas, such as resulting from the MedPAC's 
smoothing methodology, may be more realistic and less arbitrary.
     Smoothing may mask actual variation between labor market 
areas.
     The 10-percent cliffs used in the MedPAC's smoothing 
process are set subjectively and, as the MedPAC noted, a percentage of 
8 or 12 percent could alternatively be used. Depending on the area, 
changing the percentage could cause swings of millions of dollars.
    MedPAC Recommendation: Adopt methods (such as a 3-year rolling 
average) to minimize the volatility of wage index adjustments while 
maintaining the principle of budget neutrality.
    Public Comment Summaries:
     Volatility in hospital wage indices from one year to the 
next makes it difficult for hospitals to estimate Medicare payments for 
budgeting purposes. While the 3-year rolling average used by BLS may 
reduce volatility, alternative approaches should be examined, including 
those that do not rely on BLS data.
     While a rolling average may make the wage data look better 
from a statistical point, it may not result in a fair wage distribution 
tool. As hospitals make adjustments for current market conditions, an 
average will mask the change.
    CMS/Acumen Study and Analysis Plan: As stated earlier, CMS 
contracted with Acumen to conduct an impact analysis and compare the 
effects of MedPAC's recommended wage and hospital compensation indexes 
with the CMS wage index and to provide analysis that assists CMS in 
developing a proposal(s) that address the nine points under section 
106(b)(2) of the MIEA-TRHCA.
    Public Comment Summaries:
     Comments were favorable and supportive of CMS' contract 
with Acumen. One commenter found Acumen's analysis plan ``very 
thorough'' and was pleased with the ``wide variety of options and 
issues

[[Page 48566]]

relating to the wage index'' that were included in the analysis plan. 
(Acumen discussed the plan at CMS' May 20, 2008 special open door forum 
on wage index reform. The full transcript of the forum discussions is 
available at the Web site: http://www.cms.hhs.gov/OpendoorForums/05_
ODF_SpecialODF.asp. Acumen's analysis plan will be posted on Acumen's 
Web site subsequent to the publication of this final rule at: http://
www.acumenllc.com/reports/cms.) Another commenter expressed 
appreciation for the breadth and complexity of fulfilling CMS' 
statutory obligation under MIEA-TRHCA as well as the ``political 
challenges of this task,'' and commended CMS' engagement of an outside, 
independent contractor to assist CMS in this endeavor.
     The majority of commenters suggested that comprehensive 
wage index reform was necessary as opposed to incremental, interim 
changes. To that end, the commenters strongly urged that CMS make no 
changes to the wage index system until the Acumen study has been 
completed. The commenters also stated that the process to consider 
changes to the existing wage index should be very thorough and include 
a wide range of options beyond MedPAC's recommendations. In addition, 
the commenters recommended that CMS' review include the reasons that 
CMS replaced the BLS data with cost report data in the 1980s.
     Commenters commended CMS for the open door forum on the 
wage index held in May 2008 and believed that, given the importance the 
wage index has on hospital payment and the need for reform, the 
industry and interested stakeholders be given every opportunity for 
input through such open door forums. The commenters recommended 
transparency in the process and that CMS provide ample time for public 
review and comment on the study and any proposals stemming from CMS' 
and Acumen's study results.
     Several commenters suggested alternatives to the MedPAC 
recommendations and CMS proposals. For example, some commenters 
recommended that CMS implement a stop-loss to reduce wage index 
decreases from one year to the next. The commenters explained that a 
stop-loss would reduce volatility and increase predictability within 
the hospital wage index. In addition, many commenters expressed the 
need for a transition period for any changes to the wage index to 
ensure less volatility in the wage index and prevent significant 
reallocation of Medicare funds.
    Response: We appreciate the many comments we received regarding 
MedPAC's recommendations and the CMS/Acumen study and analysis of 
reforming the wage index. At this time, because Acumen has not yet 
completed all of its research and analysis and because we have not 
fully analyzed the MedPAC recommendations, we are neither proposing nor 
finalizing any changes in response to the specific MedPAC 
recommendations. As stated above, as we study wage index reform in 
further depth, we plan to consider all of the public comments on the 
recommendations received during the rulemaking cycle. We plan to 
include our assessment of the MedPAC recommendations, along with any 
additional recommendations for further reforming the wage index, in the 
FY 2010 IPPS proposed rule.
e. Impact Analysis of Using MedPAC's Recommended Wage Index
    Acumen conducted an analysis comparing use of the MedPAC 
recommended wage indices to the current CMS wage index. In the 
following discussion, we use a variety of terminology to refer to the 
wage indices recommended by MedPAC, as well as the wage indices 
currently used by CMS.
     When we refer to MedPAC's ``hospital compensation index'' 
or ``compensation index'', we are discussing the wage index that MedPAC 
developed that includes an adjustment to account for differences in the 
ratio of benefits to wages in different labor market areas. MedPAC 
developed this ratio of benefits using Medicare cost report data.
     When we refer to MedPAC's recommended ``wage index'', we 
are discussing the MedPAC-developed index without any adjustment for 
nonwage benefits. This wage index was developed using BLS data.
     When we refer to CMS' ``pre-reclassification wage index'' 
or ``pre-reclassification, pre-floor wage index'', we are discussing 
the wage index developed by CMS but without any adjustments for 
geographic reclassifications or the rural floor. This wage index also 
does not include any adjustments for outmigration, section 508 
reclassifications, Lugar redesignations, section 401 urban-to-rural 
reclassifications, or for any special exceptions.
     When we refer to CMS' ``final wage index'', we are 
discussing the wage index developed by CMS that is the final wage index 
received by or to be received by a hospital. Thus, this wage index does 
account for all geographic reclassifications as well as the rural 
floor. This final wage index also includes any adjustments as a result 
of outmigration, section 508 reclassifications, Lugar redesignations, 
section 401 urban-to-rural reclassifications, or any other special 
exceptions.
    Acumen analyzed and compared all four of the wage indices discussed 
above. In other words, Acumen compared (A) CMS' pre-reclassification, 
pre-floor wage index for FY 2008 (which was provided by CMS and is 
based on hospital cost reports from FY 2004) and CMS' final wage index 
for FY 2008 with (B) both the MedPAC recommended hospital compensation 
index and wage index for FY 2007. Acumen's comparisons of the CMS wage 
index to the MedPAC recommended indices indicate the effects of various 
components of the alternative wage indices. All of the comparisons 
reflect differences between the CMS and BLS wage data. The comparison 
of the CMS pre-reclassification index to the MedPAC compensation index 
reflects the additional impact of MedPAC's method of using county level 
adjustors to smooth differences in index values among the CMS wage 
areas. The comparison of the CMS pre-reclassification index to the 
MedPAC recommended wage index includes the effect of county-level 
smoothing and indicates the incremental effect of removing the MedPAC 
adjustment for benefits. The comparison of the CMS final wage index to 
the MedPAC recommended wage index adds the incremental effect of 
geographic reclassifications and other wage index exceptions (for 
example, the rural and imputed floors) to the preceding comparison. 
Finally, the comparison of the CMS final wage index to the MedPAC 
recommended compensation index yields the combined effects of all the 
differences between the two indices.
    First, Acumen analyzed the overall impacts of the MedPAC 
recommended indices. Acumen conducted the analysis at two levels: the 
hospital level and the county level. At the hospital level, Acumen 
analyzed all four comparisons described above. However, at the county 
level, Acumen did not include comparisons using the CMS final wage 
index because it includes reclassifications and other changes which are 
granted to hospitals, not counties. As a result, hospitals in the same 
county or wage area can have different final index values. Acumen's 
analysis was based on 3,426 hospitals, for which all four wage index 
values were available (the CMS pre-reclassification wage index, the CMS

[[Page 48567]]

final wage index, the MedPAC recommended hospital wage index, and the 
MedPAC recommended hospital compensation index), and on the 1,595 
counties in which these hospitals are located.
    Second, Acumen estimated the impact for several subgroups of 
hospitals and counties. At the hospital level, Acumen assessed the 
impact by geographic area (for example, urban hospitals and rural 
hospitals), hospital size (number of beds), geographic region, teaching 
status, DSH status, SCH status, RRC status, MDH status, type of 
ownership (government, proprietary, voluntary), and reclassification 
status. At the county level, Acumen presented results for metropolitan 
area counties and rural counties.
    Third, Acumen calculated the change in the wage index that each 
hospital (or county) could expect to experience from adopting the 
MedPAC recommendations and reported statistics on these expected 
differences (mean, median, standard deviation, minimum and maximum). 
Acumen did not model changes in Medicare payments that would result 
from using different wage indices. Instead, Acumen normalized all four 
wage indices by setting their discharge weighted means equal to 1.00. 
Normalization puts all four wage indices on the same scale so that 
differences in wage index values between one index and another index 
are directly comparable. As a result, the wage index differences 
reported by Acumen imply payment differences, but do not precisely 
measure the magnitude of those payment differences.
    The main findings of Acumen's impact analysis are summarized as 
follows:
     Adopting the MedPAC recommendations would reduce the 
differentials between wage index values across geographic areas. Both 
the MedPAC wage and compensation indices are less dispersed than either 
the CMS pre-reclassification wage index or the final wage index.
     Under either of the MedPAC recommended indices, 
differences between the highest and lowest wage index hospitals would 
be reduced. For example, the range or difference that exists from the 
highest wage index hospital to the lowest wage index hospital (the 
``high-low range'') under the MedPAC compensation index (0.752 versus 
1.499, or a difference of 0.747) is roughly 11 percent smaller than the 
high-low range in the CMS final wage index (0.732 versus 1.569, or a 
difference of 0.837). Using the CMS pre-reclassification wage index as 
a comparison (with a high-low range of 0.716 versus 1.600), the MedPAC 
recommended compensation index is roughly 16 percent smaller. The 
minimum value of the MedPAC recommended compensation index (0.752) is 
roughly 5 percent larger than the minimum value of the CMS pre-
reclassification wage index (0.716), and the maximum value of the 
MedPAC recommended compensation index (1.499) is roughly 6 percent less 
than the maximum value of the CMS pre-reclassification index (1.600).
     Adopting the MedPAC recommendations would also lower the 
wage dispersion among both rural and urban hospitals (whether 
classified by geography or payment), among hospitals of all sizes, and 
among all hospitals categorized by teaching status, DSH status, 
ownership status, and Medicare utilization status. These findings are 
generally consistent, regardless of whether the MedPAC recommended 
compensation index is compared to the CMS final wage index or to the 
CMS pre-reclassification wage index.
     Adopting the MedPAC recommendations would have a 
differential impact on urban hospitals across geographic regions of the 
country. In moving from the CMS final wage index to the MedPAC 
compensation index, the largest reduction in standard deviations would 
occur for urban hospitals in the New England region (-19.0 percent), 
the Middle Atlantic region (-27.8 percent), and the Pacific region (-
19.0 percent). However, for urban hospitals in the West North Central 
region, the standard deviation of wage index values would increase by 
11.7 percent.
     Adopting the MedPAC recommendations would decrease the 
standard deviation among hospitals with most types of 
reclassifications. For example, compared to the CMS final wage index, 
the MedPAC compensation index would reduce the standard deviation by 
11.6 percent.
     The adoption of the MedPAC recommended indices would lead 
a substantial number of hospitals to experience a large change in their 
index values in the transition. If the MedPAC compensation index is 
compared to the CMS final wage index, 37 percent of all hospitals would 
see either increases or decreases of more than 5 percent. For 
approximately 34 percent of the reclassified hospitals (or 278 
hospitals), wage index values would decrease by more than 5 percent. 
Reclassified hospitals comprise more than one-half of all hospitals 
that would likely experience wage index decreases greater than 5 
percent in moving from the CMS final wage index to the MedPAC 
compensation index.
     Under a move from the CMS pre-reclassification wage index 
to the MedPAC recommended compensation index, counties in rural areas 
would experience fewer decreases and more increases in their wage index 
compared to counties in urban areas. (As noted above, county level 
comparisons were not performed using the CMS final wage index.)
    The above findings are discussed in more detail in Acumen's interim 
report, which will be available after the publication of this final 
rule, at the Web site: http://www.acumenllc.com/reports/cms.
2. CMS Proposals and Final Policy Changes in Response to Requirements 
Under Section 106(b) of the MIEA-TRHCA
    As discussed in section III.A. of this preamble, the purpose of the 
hospital wage index is to adjust the IPPS standardized payment to 
reflect labor market area differences in wage levels. The geographic 
reclassification system exists in order to assist ``hospitals which are 
disadvantaged by their current geographic classification because they 
compete with hospitals that are located in the geographic area to which 
they seek to be reclassified'' (56 FR 25469). Geographic 
reclassification is established under section 1886(d)(10) of the Act 
and is implemented through 42 CFR part 412, subpart L. (We refer 
readers to section III.I. of this preamble for a detailed discussion of 
the geographic reclassification system and other area wage index 
exceptions.)
    In its June 2007 Report to Congress, MedPAC discussed its findings 
that geographic reclassification, and numerous other area wage index 
exceptions added to the system over the years, have created major 
complexities and ``troubling anomalies'' in the hospital wage index. A 
review of the IPPS final rules reveals a long history of legislative 
changes that have permitted certain hospitals, that otherwise would not 
be able to reclassify under section 1886(d)(10) of the Act, to receive 
a higher wage index than calculated for their geographic area. MedPAC 
reports that more than one-third of hospitals now receive a higher wage 
index due to geographic reclassification or other wage index 
exceptions. We are concerned about the integrity of the current system, 
and agree with MedPAC that the process has become burdensome.
    As noted above, MedPAC recommended the elimination of geographic 
reclassification and other

[[Page 48568]]

wage index exceptions. In addition, the President's FY 2009 Budget 
included a proposal to apply the geographic reclassification budget 
neutrality requirement at the State level rather than by adjusting the 
standardized rate for hospitals nationwide. Given the language in 
section 1886(d)(10) of the Act establishing the MGCRB, we believe a 
statutory change would be required to make these changes. However, we 
do have the authority to make some regulatory changes to the 
reclassification system. These regulatory changes are discussed below. 
We note that these changes do not preclude future consideration of the 
MedPAC recommendations discussed in section III.B.1. of this preamble, 
when the recommendations could be implemented administratively.
a. Proposed and Final Revision of the Reclassification Average Hourly 
Wage Comparison Criteria
    Regulations at 42 CFR 413.230(d)(1) set forth the average hourly 
wage comparison criteria that an individual hospital must meet in order 
for the MGCRB to approve a geographic reclassification application. Our 
current criteria (requiring an urban hospital to demonstrate that its 
average hourly wage is at least 108 percent of the average hourly wage 
of hospitals in the area in which the hospital is located and at least 
84 percent of the average hourly wage of hospitals in the area to which 
it seeks redesignation) were adopted in the FY 1993 IPPS final rule (57 
FR 39825). In that final rule, we explained that the 108 percent 
threshold ``is based on the national average hospital wage as a 
percentage of its area wage (96 percent) plus one standard deviation 
(12 percent).'' We also explained that we would use the 84-percent 
threshold to reflect the average hospital wage of the hospital as a 
percentage of its area wage less one standard deviation. We stated that 
``to qualify for a wage index reclassification, a hospital must have an 
average hourly wage that is more than one national standard deviation 
above its original labor market area and not less than one national 
standard deviation below its new labor market area'' (57 FR 39770). In 
response to numerous public comments we received, we expressed our 
policy and legal justifications for adopting the specific thresholds. 
Among other things, we stated that geographic reclassifications must be 
viewed not just in terms of those hospitals that are reclassifying, but 
also in terms of the nonreclassifying hospitals that, through a budget 
neutrality adjustment, are required to bear a financial burden 
associated with the higher wage indices received by those hospitals 
that reclassify. We also indicated that the Secretary has ample legal 
authority under section 1886(d)(10) of the Act to set the wage 
comparison thresholds and to revise such thresholds upon further 
review. We refer readers to that final rule for a full discussion of 
our justifications for the standards.
    In the FY 2000 IPPS final rule (65 FR 47089 through 47090), the 
wage comparison criteria for rural hospitals seeking individual 
hospital reclassifications were reduced to 82 percent and 106 percent 
to compensate for the historic economic underperformance of rural 
hospitals. The 2-percent drop in both thresholds was determined to 
allow a significant benefit to some hospitals that were close to 
meeting the existing criteria but would not make the reclassification 
standards overly liberal for rural hospitals.
    CMS had not evaluated or recalibrated the average hourly wage 
criteria for geographic reclassification since they were established in 
FY 1993. In consideration of the MIEA-TRHCA requirements and MedPAC's 
finding that over one-third of hospitals are receiving a reclassified 
wage index or other wage index adjustment, we decided to reevaluate the 
average hourly wage criteria for geographic reclassification. We ran 
simulations with more recent wage data to determine what would be the 
appropriate average hourly wage criteria. We found that the average 
hospital average hourly wage as a percentage of its area's wage has 
increased from approximately 96 percent in FY 1993 to closer to 98 
percent over FYs 2006, 2007, and 2008 (97.8, 98.1, and 98.1 percent, 
respectively). We also determined that the standard deviation has been 
reduced from approximately 12 percent in FY 1993 to closer to 10 
percent over the same 3-year period (10.7, 10.3, and 10.1 percent, 
respectively); that is, assuming normal distributions, approximately 68 
percent of all hospitals would have an average hourly wage that 
deviates less than 10 percentage points above or below the mean. This 
assessment indicates that the new baseline criteria for 
reclassification should be set to 88/108 percent. While the 108 
criterion does not require adjustment, the current 84 percent standard 
is too low a threshold to serve the purpose of establishing wage 
comparability with a proximate labor market area.
    To assess the impact that these changes would have had on hospitals 
that reclassified in FY 2008, we ran models that set urban individual 
reclassification standards to 88/108 percent and the county group 
reclassification standard to 88 percent. We retained the 2-percent 
benefit for rural hospitals by setting an 86/106 percent standard. We 
used 3-year average hourly wage figures from the 2005, 2006, and 2007 
wage surveys and compared them to 3-year average hourly wage figures 
for CBSAs over the same 3-year period.
    Of the 295 hospitals that applied for and received individual 
reclassifications in FY 2008, 45 of them (15.3 percent) would not meet 
the proposed 88/86 percent threshold. Of the 66 hospitals that applied 
for and received county group reclassification in FY 2008, 6 hospitals 
(9.1 percent) in 3 groups would not have qualified with the new 
standards. We also ran comparisons for hospitals that reclassified in 
FY 2006 and FY 2007 to determine if they would have been able to 
reclassify in FY 2008, using 3-year averages available in FY 2008. We 
found that, of all hospitals that were reclassified in FY 2008 (that 
is, applications approved for FYs 2006 through 2008), 14.7 percent of 
individual reclassifications and 8.5 percent of county group 
reclassification would not have qualified to reclassify in FY 2008.
    Section 106 of MIEA-TRHCA requires us to propose revisions to the 
hospital wage index system after considering the recommendations of 
MedPAC. To address this requirement, in the FY 2009 IPPS proposed rule 
(73 FR 23620), we proposed that the 84/108 criteria for urban hospital 
reclassifications and the 82/106 criteria for rural hospital 
reclassifications be recalibrated using the methodology published in 
the FY 1993 final rule and more recent wage data (that is, data used in 
computing the FYs 2006, 2007, 2008 wage indices). As we stated in the 
proposed rule, we believe that hospitals that are seeking to reclassify 
to another area should be required to demonstrate more similarity to 
the area than the current criteria permit, and our recent analysis 
demonstrates that those criteria are no longer appropriate. Therefore, 
we proposed to change the criterion for the comparison of a hospital's 
average hourly wage to that of the area to which the hospital seeks 
reclassification to 88 percent for urban hospitals and 86 percent for 
rural hospitals for new reclassifications beginning with the FY 2010 
wage index and, accordingly, revise our regulations at 42 CFR 412.230 
to reflect these changes. The criterion for the comparison of a 
hospital's average hourly wage to that of its geographic area would be 
unchanged

[[Page 48569]]

(108 percent for urban hospitals and 106 percent for rural hospitals). 
We also proposed that, when there are significant changes in labor 
market area definitions, such as CMS' adoption of new OMB CBSA 
definitions based upon the decennial census (69 FR 49027), we would 
again reevaluate and, if warranted, recalibrate these criteria. This 
would allow CMS to consider the effects of periodic changes in labor 
market boundaries and provide a regular timeline for updating and 
validating the reclassification criteria. Finally, we proposed to 
adjust the 85 percent criterion for both urban and rural county group 
reclassifications to be equal to the proposed 88 percent standard for 
urban reclassifications, and to revise the regulations at 42 CFR 
412.232 and 412.234 to reflect the change. The urban and rural county 
group average hourly wage standard has always been equivalent for both 
urban and rural county groups and has always been 1 percent higher than 
the 84 percent urban area individual reclassification standard. We 
proposed to continue the policy of having an equivalent wage comparison 
criterion for both urban and rural county groups, as these groups have 
always used the same wage comparison criteria. We also proposed to use 
the individual urban hospital reclassification standard of 88 percent 
because this threshold would ensure that the hospitals in the county 
group are at least as comparable to the proximate area as are 
individual hospitals within their own areas. In addition, we indicated 
that we do not believe it would be appropriate to have a group 
reclassification standard lower than the individual reclassification 
standards, thus potentially creating a situation where all of the 
hospitals in a county could reclassify, even though no single hospital 
within such county would be able to meet any average hourly wage-
related comparisons for an individual reclassification.
    We considered raising the group reclassification criterion to 89 
percent in order to preserve the historical policy of the standard 
being set at 1 percent higher than the individual reclassification 
standard. However, we determined that making the group standard equal 
to the individual standard would adequately address our stated 
concerns.
    The proposed changes in the reclassification criteria would apply 
only to new reclassifications beginning with the FY 2010 wage index. 
Any hospital or county group that is in the midst of a 3-year 
reclassification in FY 2010 would not be affected by the proposed 
criteria change until they reapply for a geographic reclassification. 
Therefore, we proposed that the effective date for these changes would 
be September 1, 2008, the deadline for hospitals to submit applications 
for reclassification for the FY 2010 wage index.
    Comment: The majority of commenters did not support CMS' proposal 
to revise the average hourly wage criteria because of concern that the 
policy would make achieving geographic reclassification more difficult 
for some providers. Most commenters stated that such proposals should 
be delayed and incorporated into a more comprehensive reform framework. 
The commenters also expressed concerns that such a proposal would 
further destabilize an already highly variable wage index system, and 
would make provider operations and planning more onerous and result in 
detrimental impacts on quality of care. Although some commenters 
supported CMS using more recent data to analyze the reclassification 
criteria, they questioned whether CMS performed appropriate statistical 
analysis. The commenters requested additional study and impact analyses 
to assure that provider-to-CBSA average hourly wage ratios (the basis 
for the reclassification average hourly wage criteria) were indeed 
normally distributed, as was assumed by the original methodology.
    Response: We do not believe that our commitment to examine further 
broad-based reform requires us to postpone specific reclassification 
criteria changes that would enhance labor market integrity under the 
current system. It is not our intention to destabilize the wage index 
system, but to instead implement consistent and meaningful criteria to 
standardize a reclassification process that analysis proves no longer 
accomplishes its stated purpose. The MedPAC report on the Medicare 
hospital wage index reform specifically cited the fact that a large 
percentage of the wage index variation between its proposed 
methodologies and the current system occurred relative to 
reclassifications and other wage index exceptions. This suggests that 
the current reclassification system has a strong causal connection to 
the large variations and inconsistencies that are often observed in the 
Medicare hospital wage index system. Although some hospitals will 
likely no longer be able to reclassify with the new standards, revising 
the reclassification average hourly wage comparison criteria is not 
only well within the authority of CMS under section 1886(d)(10)(D) of 
the Act, but it also reflects what we believe to be a more reasonable 
reclassification threshold based on the most recent data.
    In response to concerns expressed about the assumptions and 
validity of our methodology, we refer to the chart at the end of this 
response. We agree that, in using standard deviations from the mean to 
establish threshold criteria, it is important for the data to be 
normally distributed (for example, a bell-shaped curve). While some 
commenters stated that a mean of 98 percent (versus a mean of 100 
percent or 1.00) shows that the distribution was necessarily skewed, 
using FY 2008 data, we found that the analyzed ratios formed a 
consistent bell-curve and demonstrated only a minor negative skew which 
tested well within the bounds of statistical significance of a normal 
distribution. Rural hospitals show a greater variability and less 
central tendency than urban providers. However, even if the original 
methodology was applied to urban and rural providers separately, the 
mean and standard deviation would support a comparison criterion still 
more restrictive than the proposed 86-percent standard for rural 
providers. Furthermore, additional statistical analysis would suggest 
that the 106-percent standard is not restrictive enough for rural 
providers. Certain outliers are removed from the chart at the end of 
this response to provide a clearer visual representation. Inclusion or 
exclusion of these outliers did not greatly affect the statistical 
significance of the analysis. With the nearly perfectly distributed 
nature of the comparison data, and the additional 2 percent benefit 
that rural providers receive, we are not convinced that an alternative 
methodology would yield a truer representation of typical variations in 
any given labor market area.

[[Page 48570]]

[GRAPHIC] [TIFF OMITTED] TR19AU08.005

    Comment: Some commenters requested CMS to specifically address the 
impact on rural providers and RRCs.
    Response: Rural providers would be more likely to fail to meet 
reclassification standards. More than half of the hospitals currently 
receiving geographic reclassification are located in rural areas, while 
less than one-third of all IPPS hospitals are located in rural CBSAs. 
Therefore, it is to be expected that the proposed criteria change would 
affect a higher proportion of rural providers. However, we cannot fully 
analyze such a specific impact on rural providers because the 35-mile 
reclassification proximity requirement makes it quite possible that 
many rural providers would have additional reclassification 
opportunities, perhaps to more wage appropriate CBSAs. We also note 
that our proposal did not affect benefits currently afforded to RRCs, 
such as waiver of the 106/108 percent standards and limited waiver of 
normal proximity requirements.
    Comment: Other comments cited specific circumstances where 
providers would encounter significant negative impacts not considered 
by CMS when the average hourly wage criteria proposal is implemented in 
conjunction with other wage index proposals. One commenter requested 
that any criteria changes be phased in over the course of multiple 
fiscal years.
    Response: We believe that the overall benefits of maintaining 
appropriate reclassification standards will improve the overall wage 
index payment system. If some hospitals have been benefiting from 
reclassifying to labor market areas which are not statistically 
appropriate on the basis of their average hourly wage data, such 
reclassifications have been at the expense of all other providers 
because of the geographic reclassification budget neutrality 
adjustment.
    After consideration of the public comments we received, we are 
adopting in this final rule the policy to adjust the reclassification 
average hourly wage standard, comparing a reclassifying hospital's (or 
county hospital group's) average hourly wage relative to the average 
hourly wage of the area to which it seeks reclassification. However, we 
will be phasing in the adjustment over two years. For the first 
transitional year, FY 2010, the average hourly wage standards will be 
changed to 86 percent for urban and group reclassifications and to 84 
percent for rural hospitals. In the second year, FY 2011, the average 
hourly wage standards will be changed to 88 percent for urban and group 
reclassifications and to 86 percent for rural hospitals (revised 
Sec. Sec.  412.230, 412.232, and 412.234). The purpose of the wage 
index is to provide, as accurate as possible, a measure of geographic 
labor cost variations. The reclassification process was intended to 
provide hospitals that, due to imperfections in the labor market 
boundaries and/or definitions, compete with hospitals in higher waged 
labor market areas. It is a fundamental flaw in the reclassification 
system if payments are inappropriately redistributed because hospitals 
without statistically comparable labor costs are reclassified to areas 
with higher wage index values. Therefore, for reclassifications 
beginning in FY 2010 (for which the application deadline is September 
2, 2008), the transitional average hourly wage comparison criteria will 
be in effect. For reclassifications beginning in FY 2011, the new 
average hourly wage comparison criteria will be fully in effect.
b. Within-State Budget Neutrality Adjustment for the Rural and Imputed 
Floors
    Section 4410 of the Balanced Budget Act of 1997 (BBA) established 
the rural floor by requiring that the wage index for a hospital in an 
urban area of a State cannot be less than the area wage index received 
by rural hospitals in that State. Section 4410(b) of the BBA imposed 
the budget neutrality requirement and stated that the Secretary shall 
``adjust the area wage index referred to in subsection (a) for 
hospitals not described in such subsection.'' Therefore, in order to 
compensate for the increased wage indices of urban hospitals receiving 
the rural floor, a nationwide budget neutrality adjustment is applied 
to the wage index to account for the additional payment to these 
hospitals. As a result, urban hospitals that qualify for their State's 
rural floor wage index receive enhanced payments at the expense of all 
rural hospitals nationwide and all other urban hospitals that do not 
receive their State's rural floor. Tentatively, for the final wage 
index, we find that 277 hospitals in 28 States would receive the rural 
floor. (Due to the intervening requirements of section 124 of Pub. L. 
110-275, these numbers could change in the final FY 2009 wage index to 
be published in a separate Federal Register notice subsequent to this 
final rule.) The first chart below lists the percentage of total 
payments each State could either

[[Page 48571]]

receive or contribute to fund the current rural floor and imputed floor 
provisions with national budget neutrality adjustments (as indicated in 
the discussion of the imputed floor below in this section III.B.2.b.). 
The second chart below provides a graphical depiction of the tentative 
FY 2009 impacts.

 FY 2009 IPPS Estimated Payments With Transition to Within-State Rural Floor and Imputed Floor Budget Neutrality
----------------------------------------------------------------------------------------------------------------
                                                                                New policy
                                                                              application of
                                                                             rural floor and
                                                           Former policy      imputed rural
                                                           application of    floor with blend
                                                           national rural    of 80% national   Net effect of the
                         State                           floor and imputed    and 20% state-    change in policy
                                                            floor budget     specific budget      for FY 2009
                                                             neutrality         neutrality
                                                                              compared to no
                                                                             rural or imputed
                                                                               rural floor
----------------------------------------------------------------------------------------------------------------
Alabama................................................               -0.2               -0.2                  0
Alaska.................................................                  0                  0                  0
Arizona................................................               -0.2               -0.2                  0
Arkansas...............................................               -0.2               -0.2                  0
California.............................................                0.8                0.7               -0.2
Colorado...............................................                  0                  0                  0
Connecticut............................................                2.1                1.7               -0.4
Delaware...............................................               -0.2               -0.2                  0
Washington, DC.........................................               -0.2               -0.2                  0
Florida................................................               -0.1               -0.1                  0
Georgia................................................               -0.2               -0.2                  0
Hawaii.................................................               -0.2               -0.1                  0
Idaho..................................................               -0.2               -0.1                  0
Illinois...............................................               -0.2               -0.2                  0
Indiana................................................               -0.2               -0.1                  0
Iowa...................................................                  0                  0                  0
Kansas.................................................               -0.2               -0.1                  0
Kentucky...............................................               -0.2               -0.1                  0
Louisiana..............................................               -0.2               -0.1                  0
Maine..................................................               -0.2               -0.1                  0
Massachusetts..........................................               -0.2               -0.2                  0
Michigan...............................................               -0.2               -0.2                  0
Minnesota..............................................               -0.2               -0.2                  0
Mississippi............................................               -0.2               -0.2                  0
Missouri...............................................               -0.2               -0.1                  0
Montana................................................               -0.1               -0.1                  0
Nebraska...............................................               -0.2               -0.1                  0
Nevada.................................................               -0.2               -0.2                  0
New Hampshire..........................................                0.8                0.7               -0.2
New Jersey.............................................                0.7                0.5               -0.2
New Mexico.............................................               -0.1               -0.1                  0
New York...............................................               -0.2               -0.2                  0
North Carolina.........................................               -0.2               -0.2                  0
North Dakota...........................................                0.1                0.1                  0
Ohio...................................................               -0.2               -0.1                  0
Oklahoma...............................................               -0.2               -0.1                  0
Oregon.................................................               -0.2               -0.2                  0
Pennsylvania...........................................               -0.2               -0.1                  0
Puerto Rico............................................               -0.1               -0.1                  0
Rhode Island...........................................               -0.2               -0.2                  0
South Carolina.........................................               -0.1               -0.1                  0
South Dakota...........................................               -0.2               -0.1                  0
Tennessee..............................................               -0.1                  0                  0
Texas..................................................               -0.2               -0.1                  0
Utah...................................................               -0.2               -0.2                  0
Vermont................................................                3.4                2.7               -0.7
Virginia...............................................               -0.2               -0.2                  0
Washington.............................................               -0.1               -0.1                  0
West Virginia..........................................               -0.1               -0.1                  0
Wisconsin..............................................               -0.1               -0.1                  0
Wyoming................................................                  0                  0                  0
----------------------------------------------------------------------------------------------------------------

BILLING CODE 4120-01-P

[[Page 48572]]

[GRAPHIC] [TIFF OMITTED] TR19AU08.006

BILLING CODE 4120-01-C
    The above charts demonstrate how, at a State-by-State level, the 
rural floor is creating a benefit for a minority of States that is then 
funded by a majority of States, including States that are 
overwhelmingly rural in character. The rural floor was established to 
address anomalous occurrences where certain urban areas in a State have 
unusually depressed wages when compared to the State's rural areas. 
However, as we indicated in the proposed rule, because these 
comparisons occur at the State level, we believe it also would be sound 
policy to make the budget neutrality adjustment specific to the State, 
redistributing payments among hospitals within the State, rather than 
adjusting payments to hospitals in other States.
    In addition, we stated in the proposed rule that we believed a 
statewide budget neutrality adjustment would address the situation we 
discussed in the FY 2008 IPPS final rule with comment period (72 FR 
47324) in which rural CAHs were converting to IPPS status, apparently 
to raise the State's rural wage index to a level whereby all urban 
hospitals in the State would receive the rural floor. Medicare payments 
to CAHs are based

[[Page 48573]]

on 101 percent of reasonable costs, while the IPPS pays hospitals a 
fixed rate per discharge. In addition, as a CAH, a hospital is 
guaranteed to recover its costs, while an IPPS hospital is provided 
with incentives to increase efficiency to cover its costs. Thus, we 
stated that the identified CAHs were converting back to IPPS, even 
though the conversion would not directly benefit them. Because these 
hospitals' wage levels are higher than most, if not all, of the urban 
hospitals in the State, the wage indices for most, if not all, of the 
State's urban hospitals would increase as a result of the rural floor 
provision if the CAHs convert to IPPS status. In simulating the effect 
of the hospitals setting the State's rural floor, we estimated that 
payment to hospitals in the State would increase in excess of $220 
million in a single year. The MedPAC, in its June 2007 Report to the 
Congress stated, ``The fact that the movement of one or two CAHs in or 
out of the [I]PPS system can increase (or decrease) Medicare payments 
by $220 million suggests there is a flaw in the design of the wage 
index system.'' (We refer readers to page 131 of the report.)
    For the above reasons, in the FY 2009 IPPS proposed rule (73 FR 
23622), we proposed to apply a State level rural floor budget 
neutrality adjustment to the wage index beginning in FY 2009. We 
proposed that States that have no hospitals receiving a rural floor 
wage index would no longer have a negative budget neutrality adjustment 
applied to their wage indices. Conversely, hospitals in States with 
hospitals receiving a rural floor would have their wage indices 
downwardly adjusted to achieve budget neutrality within the State. We 
proposed that all hospitals within each State would, in effect, be 
responsible for funding the rural floor adjustment applicable within 
that specific State.
    In the FY 2005 IPPS final rule and the FY 2008 IPPS final rule with 
comment period (69 FR 49109 and 72 FR 47321, respectively), we 
temporarily adopted an ``imputed'' floor measure to address a concern 
by some individuals that hospitals in all-urban States were 
disadvantaged by the absence of rural hospitals. Because no rural wage 
index could be calculated, no rural floor could be applied within such 
States. We originally limited application of the policy to FYs 2005 
through 2007 and then extended it one additional year, through FY 2008. 
In the FY 2009 IPPS proposed rule (73 FR 23623), we proposed to extend 
the imputed floor for 3 additional years, through FY 2011, and to 
revise the introductory text of Sec.  412.64(h)(4) of our regulations 
to reflect this extension. For FY 2009, 26 hospitals in New Jersey 
(33.8 percent) would receive the imputed floor. Rhode Island, the only 
other all-urban State, has no hospitals that would receive the imputed 
floor. In past years, we applied a national budget neutrality 
adjustment to the standardized amount to ensure that payments remained 
constant to payments that would have occurred in the absence of the 
imputed floor policy. As a result, payments to all other hospitals in 
the Nation were adjusted downward to subsidize the higher payments to 
New Jersey hospitals receiving the imputed floor. As the intent of the 
imputed floor is to create a protection to all-urban States similar to 
the protection offered to urban-rural mixed States by the rural floor, 
and the effect of the measure is also State-specific like the rural 
floor, we indicated that we believe that the budget neutrality 
adjustments for the imputed floor and the rural floor should be applied 
in the same manner. Therefore, beginning with FY 2009, we also proposed 
to apply the imputed floor budget neutrality adjustment to the wage 
index and at the State level.
    In the proposed rule, we specifically requested public comments 
from national and State hospital associations regarding the proposals, 
particularly the national associations, as they represent member 
hospitals that are both positively and negatively affected by the 
proposed policies, and were, therefore, in the best position to comment 
on the policy merits of the proposals. We indicated that we would view 
the absence of any comments from the national hospital associations as 
a sign that they do not object to our proposed policies.
    Comment: Some commenters supported the proposal to apply the rural 
floor and imputed floor budget neutrality adjustment on a State basis, 
as opposed to making a national adjustment. A few commenters stated 
that it was not appropriate and competitively unfair for a provider 
receiving a wage index lower than the lowest urban providers in another 
State to have its wage index reduced by CMS to increase payments to the 
other higher paid providers. Other commenters supported CMS's efforts 
to protect hospitals from unwarranted reductions in their wage index 
values due to the current rural floor policy. MedPAC expressed its 
support for CMS's proposed statewide budget neutrality adjustments for 
the rural and imputed floors as an interim step in reforming the wage 
index. MedPAC noted that the rural floor policy itself is troubling 
because it is ``built on a false assumption that hospital wage rates in 
all urban labor markets in a (S)tate are always higher than the average 
hospital wage rate in rural areas of the (S)tate.'' MedPAC agreed with 
CMS that the proposed State level budget neutrality adjustment ``would 
improve fairness and reduce opportunities to game the wage index 
system.''
    However, the majority of commenters, including most national and 
State hospital associations, did not support the proposal to apply a 
State level budget neutrality adjustment for the rural and imputed 
floors. Many commenters stated that a major policy initiative should be 
postponed and included in discussions and planning for more broad-based 
wage index reform. They suggested that such a policy decision by CMS 
only makes the Medicare wage index system more variable and unstable, 
creating onerous difficulties for hospital administrators to plan 
operations and potentially harming the quality of care provided. Many 
of the commenters, particularly in States that benefit most from the 
current national budget neutrality adjustment for the rural and imputed 
floors, cited the financial losses that would result from our proposal.
    Some commenters stated that it is inconsistent with prior CMS 
policy to apply any wage index adjustment on a State-by-State basis. 
They suggested that, because the intent of Congress for the rural floor 
was to address ``anomalous'' situations where urban areas may have 
lower wages than nearby rural areas, the adjustment should be shared by 
all hospitals to maximize the benefit of the floor, while minimizing 
the individual costs to fund it. Similarly, the commenters contended 
that, ``budget neutrality must remain a national policy in accordance 
with current practice in order to retain balance and symmetry within a 
complex wage index environment.''
    Response: We continue to believe that, while the majority of wage 
index budget neutrality adjustments have been applied on a nationwide 
basis, the particular nature of the rural and imputed floors, for which 
applicability is determined on a State level basis, is better addressed 
by a within-State adjustment. The current system requires hospitals 
nationwide to fund an adjustment to the Medicare payment system to 
address unrelated situations in a minority of States. The variances 
between urban and rural wage indices within a State have no relevant 
causal connection to the wage indices of another State, and it does not 
follow that such variances should be adjusted

[[Page 48574]]

through a national budget neutrality adjustment.
    Therefore, we have decided to adopt our proposal for State level 
budget neutrality for the rural and imputed floors as final in this 
final rule, to be effective beginning with the FY 2009 wage index. 
However, in response to the public's concerns and taking into account 
the potentially drastic payment cuts that may occur to hospitals in 
some States, we have decided to phase in, over a 3-year period, the 
transition from the national budget neutrality adjustment to the State 
level budget neutrality adjustment. In FY 2009, hospitals will receive 
a blended wage index that is 20 percent of a wage index with the State 
level rural and imputed floor budget neutrality adjustment and 80 
percent of a wage index with the national budget neutrality adjustment. 
In FY 2010, the blended wage index will reflect 50 percent of the State 
level adjustment and 50 percent of the national adjustment. In FY 2011, 
the adjustment will be completely transitioned to the State level 
methodology.
    We are incorporating this final policy in our regulation text at 
new Sec.  412.64(e)(4). Specifically, we are providing that CMS makes 
an adjustment to the wage index to ensure that aggregate payments after 
implementation of the rural floor under section 4410 of the Balanced 
Budget Act of 1997 (Pub. L. 105-33) and the imputed rural floor under 
Sec.  412.64(h)(4) are made in a manner that ensures that aggregate 
payments to hospitals are not affected. Beginning October 1, 2008, such 
adjustments will transition from a nationwide to a statewide 
adjustment, with a statewide adjustment fully in place by October 1, 
2011.
    Comment: While some commenters supported CMS's efforts to address 
the issue of potential gaming of the rural floor, many commenters 
indicated that it should not be the sole impetus for within-State rural 
floor budget neutrality because it would unfairly penalize nongaming 
providers.
    Response: As discussed above, as well as in the FY 2008 final and 
FY 2009 proposed rules (72 FR 47321 and 73 FR 23620, respectively), 
while the gaming issue was an important concern that we sought to 
address, it was neither the only nor the primary justification for 
proposing the within-State budget neutrality adjustment. We believe 
that, for all providers, the within-State budget neutrality policy is 
more equitable than the national adjustment because it concentrates the 
budget neutrality at the State level for a statutory provision that 
applies benefits at the State level. We note that the statute requires 
that total payments with a rural floor do not exceed payments that 
would have been made in the absence of a floor, but does not mandate a 
national adjustment.
    Comment: One commenter stated that adoption of a within-State 
application of budget neutrality will further complicate the 
methodology for calculating the wage index, particularly for hospitals 
in CBSAs that cross State lines, or that reclassify to a CBSA in 
another State. The commenter expressed concern that the proposal will 
lead to less transparency in the wage index calculation and make it 
more difficult for hospitals to evaluate their most beneficial options 
in regard to reclassification and other wage index exceptions.
    Response: Application of the rural floor already requires that, for 
CBSAs that cross State lines, two or more wage indices may need to be 
calculated in order to reflect the reality of a rural floor applying in 
one or more of the States. (We refer readers to Table 4A, to be 
published in a separate Federal Register notice subsequent this final 
rule, to see how State location may affect the wage index within a 
single CBSA.) A State's rural or imputed floor budget neutrality 
adjustment applies to any hospital that is geographically located in 
the State, even when a hospital is reclassified or redesignated to a 
CBSA in another State. We explain in section II.A. of the Addendum to 
this final rule how within-State budget neutrality adjustments for the 
rural and imputed floors are calculated and how the transitional 
blended adjustment will be implemented.
    Comment: Some commenters disagreed with CMS' decision to further 
extend the imputed floor policy through FY 2011. The commenters 
contended that the imputed floor is unnecessary and should never have 
been implemented without Congressional mandate. Other commenters 
supported CMS' proposal to extend the imputed floor policy, but some 
supported the extension only on the condition that CMS applies the 
imputed floor budget neutrality adjustment in the same manner that it 
applies the rural floor adjustment.
    Response: As proposed, we are extending the imputed floor for 3 
additional years, through FY 2011. Beginning with the FY 2009 wage 
index in this final rule, we are also applying budget neutrality for 
the imputed floor in the same manner that we apply budget neutrality 
for the rural floor. (We refer readers to the discussion in section 
III.B.2.b. of this preamble.)
    In the proposed rule, we indicated that based on our impact 
analysis of these proposals for FY 2009, of the 49 States (Maryland is 
excluded because it is under a State waiver), the District of Columbia, 
and Puerto Rico, 39 would see either no change or an increase in total 
Medicare payments as a result of applying a budget neutrality 
adjustment to the wage index for the rural and imputed floors at the 
State level rather than the national level. The total payments of the 
remaining 12 States would decrease 0.1 percent to 3.4 percent compared 
to continuing our prior national adjustment policy. For this final 
rule, the full impact analysis of the final policy is reflected in the 
two charts presented in section III.B.2.b. of the preamble of this 
final rule. Table 4D-1, which will be included in a separate Federal 
Register notice subsequent to this final rule reflects the final FY 
2009 State level budget neutrality adjustments for the rural and 
imputed floors for the first year of the 3-year transition of the 
budget neutrality adjustments for these floors from the national level 
to the State level, as discussed above.
c. Within-State Budget Neutrality Adjustment for Geographic 
Reclassification
    As discussed in the FY 2009 IPPS proposed rule (73 FR 23623), the 
FY 2009 President's Budget includes a legislative proposal to apply 
geographic reclassification budget neutrality at the State level 
(available at the Web site: http://www.hhs.gov/budget/09budget/
2009BudgetInBrief.pdf under FY 2009 Medicare Proposals, page 54).
    Comment: A number of commenters objected to the legislative 
proposal we discussed in the proposed rule that would apply budget 
neutrality for geographic reclassification at the State level.
    Response: Our discussion of within-State budget neutrality for 
geographic reclassifications related to a legislative proposal included 
in the FY 2009 President's Budget, and not a new proposed 
administrative policy. If such a measure were enacted by the Congress, 
CMS would comply with the law.

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

    The wage index is calculated and assigned to hospitals on the basis 
of the labor market area in which the hospital is located. In 
accordance with the broad discretion under section 1886(d)(3)(E) of the 
Act, beginning with FY 2005, we define hospital labor market areas 
based on the Core-Based Statistical Areas

[[Page 48575]]

(CBSAs) established by OMB and announced in December 2003 (69 FR 
49027). For a discussion of OMB's revised definitions of CBSAs and our 
implementation of the CBSA definitions, we refer readers to the 
preamble of the FY 2005 IPPS final rule (69 FR 49026 through 49032).
    As with the FY 2008 final rule, in the FY 2009 IPPS proposed rule 
(73 FR 23623), we proposed to provide that hospitals receive 100 
percent of their wage index based upon the CBSA configurations. 
Specifically, for each hospital, we proposed to determine a wage index 
for FY 2009 employing wage index data from hospital cost reports for 
cost reporting periods beginning during FY 2005 and using the CBSA 
labor market definitions. We consider CBSAs that are MSAs to be urban, 
and CBSAs that are Micropolitan Statistical Areas as well as areas 
outside of CBSAs to be rural. In addition, it has been our longstanding 
policy that where an MSA has been divided into Metropolitan Divisions, 
we consider the Metropolitan Division to comprise the labor market 
areas for purposes of calculating the wage index (69 FR 49029). We 
proposed to codify this longstanding policy into our regulations at 
Sec.  412.64(b)(1)(ii)(A).
    Comment: One commenter supported the CMS proposal to codify its 
longstanding policy that a Metropolitan Division of an MSA is treated 
as a labor market area for purposes of calculating the wage index.
    Response: We appreciate the commenter's support of our proposal to 
codify this policy in our regulations. In this final rule, we are 
adopting the proposed change under Sec.  412.64(b)(1)(ii)(A) as final.
    On November 20, 2007, OMB announced the revision of titles for 
eight urban areas (OMB Bulletin No. 08-01). The revised titles are as 
follows:
     Hammonton, New Jersey qualifies as a new principal city of 
the Atlantic City, New Jersey CBSA. The new title is Atlantic City-
Hammonton, New Jersey CBSA;
     New Brunswick, New Jersey, located in the Edison, New 
Jersey Metropolitan Division, qualifies as a new principal city of the 
New York-Northern New Jersey-Long Island, New York, New Jersey, 
Pennsylvania CBSA. The new title for the Metropolitan Division is 
Edison-New Brunswick, New Jersey CBSA;
     Summerville, South Carolina qualifies as a new principal 
city of the Charleston-North Charleston, South Carolina CBSA. The new 
title is Charleston-North Charleston-Summerville, South Carolina;
     Winter Haven, Florida qualifies as a new principal city of 
the Lakeland, Florida CBSA. The new title is Lakeland-Winter Haven, 
Florida;
     Bradenton, Florida replaces Sarasota, Florida as the most 
populous principal city of the Sarasota-Bradenton-Venice, Florida CBSA. 
The new title is Bradenton-Sarasota-Venice, Florida. The new CBSA code 
is 14600;
     Frederick, Maryland replaces Gaithersburg, Maryland as the 
second most populous principal city in the Bethesda-Gaithersburg-
Frederick, Maryland CBSA. The new title is Bethesda-Frederick-
Gaithersburg, Maryland;
     North Myrtle Beach, South Carolina replaces Conway, South 
Carolina as the second most populous principal city of the Myrtle 
Beach-Conway-North Myrtle Beach, South Carolina CBSA. The new title is 
Myrtle Beach-North Myrtle Beach-Conway, South Carolina;
     Pasco, Washington replaces Richland, Washington as the 
second most populous principal city of the Kennewick-Richland-Pasco, 
Washington CBSA. The new title is Kennewick-Pasco-Richland, Washington.
    The OMB bulletin is available on the OMB Web site at https://
www.whitehouse.gov/OMB_go to ``Bulletins'' or ``Statistical Programs 
and Standards.'' CMS will apply these changes to the IPPS beginning 
October 1, 2008.

D. Occupational Mix Adjustment to the FY 2009 Wage Index

    As stated earlier, section 1886(d)(3)(E) of the Act provides for 
the collection of data every 3 years on the occupational mix of 
employees for each short-term, acute care hospital participating in the 
Medicare program, in order to construct an occupational mix adjustment 
to the wage index, for application beginning October 1, 2004 (the FY 
2005 wage index). The purpose of the occupational mix adjustment is to 
control for the effect of hospitals' employment choices on the wage 
index. For example, hospitals may choose to employ different 
combinations of registered nurses, licensed practical nurses, nursing 
aides, and medical assistants for the purpose of providing nursing care 
to their patients. The varying labor costs associated with these 
choices reflect hospital management decisions rather than geographic 
differences in the costs of labor.
1. Development of Data for the FY 2009 Occupational Mix Adjustment
    On October 14, 2005, we published a notice in the Federal Register 
(70 FR 60092) proposing to use a new survey, the 2006 Medicare Wage 
Index Occupational Mix Survey (the 2006 survey) to apply an 
occupational mix adjustment to the FY 2008 wage index. In the proposed 
2006 survey, we included several modifications based on the comments 
and recommendations we received on the 2003 survey, including (1) 
allowing hospitals to report their own average hourly wage rather than 
using BLS data; (2) extending the prospective survey period; and (3) 
reducing the number of occupational categories but refining the 
subcategories for registered nurses.
    We made the changes to the occupational categories in response to 
MedPAC comments to the FY 2005 IPPS final rule (69 FR 49036). 
Specifically, MedPAC recommended that CMS assess whether including 
subcategories of registered nurses would result in a more accurate 
occupational mix adjustment. MedPAC believed that including all 
registered nurses in a single category may obscure significant wage 
differences among the subcategories of registered nurses, for example, 
the wages of surgical registered nurses and floor registered nurses may 
differ. Also, to offset additional reporting burden for hospitals, 
MedPAC recommended that CMS should combine the general service 
categories that account for only a small percentage of a hospital's 
total hours with the ``all other occupations'' category because most of 
the occupational mix adjustment is correlated with the nursing general 
service category.
    In addition, in response to the public comments on the October 14, 
2005 notice, we modified the 2006 survey. On February 10, 2006, we 
published a Federal Register notice (71 FR 7047) that solicited 
comments and announced our intent to seek OMB approval on the revised 
occupational mix survey (Form CMS-10079 (2006)). OMB approved the 
survey on April 25, 2006.
    The 2006 survey provided for the collection of hospital-specific 
wages and hours data, a 6-month prospective reporting period (that is, 
January 1, 2006, through June 30, 2006), the transfer of each general 
service category that comprised less than 4 percent of total hospital 
employees in the 2003 survey to the ``all other occupations'' category 
(the revised survey focused only on the mix of nursing occupations), 
additional clarification of the definitions for the occupational 
categories, an expansion of the registered nurse category to include 
functional subcategories, and the exclusion of average hourly rate data 
associated with advance practice nurses.

[[Page 48576]]

    The 2006 survey included only two general occupational categories: 
nursing and ``all other occupations.'' The nursing category has four 
subcategories: Registered nurses, licensed practical nurses, aides, 
orderlies, attendants, and medical assistants. The registered nurse 
subcategory includes two functional subcategories: Management personnel 
and staff nurses or clinicians. As indicated above, the 2006 survey 
provided for a 6-month data collection period, from January 1, 2006 
through June 30, 2006. However, we allowed flexibility for the 
reporting period beginning and ending dates to accommodate some 
hospitals' biweekly payroll and reporting systems. That is, the 6-month 
reporting period had to begin on or after December 25, 2005, and end 
before July 9, 2006.
    As we proposed in the FY 2009 IPPS proposed rule (73 FR 23624), we 
are using the entire 6-month 2006 survey data to calculate the 
occupational mix adjustment for the FY 2009 wage index. The original 
timelines for the collection, review, and correction of the 2006 
occupational mix data were discussed in detail in the FY 2007 IPPS 
final rule (71 FR 48008). The revision and correction process for all 
of the data, including the 2006 occupational mix survey data to be used 
for computing the FY 2009 wage index, is discussed in detail in section 
III.K. of the preamble of this final rule.
2. Calculation of the Occupational Mix Adjustment for FY 2009
    For FY 2009 (as we did for FY 2008), we are calculating the 
occupational mix adjustment factor using the following steps:
    Step 1--For each hospital, determine the percentage of the total 
nursing category attributable to a nursing subcategory by dividing the 
nursing subcategory hours by the total nursing category's hours 
(registered nurse management personnel and registered nurse staff 
nurses or clinicians are treated as separate nursing subcategories). 
Repeat this computation for each of the five nursing subcategories: 
registered nurse management personnel; registered nurse staff nurses or 
clinicians; licensed practical nurses; nursing aides, orderlies, and 
attendants; and medical assistants.
    Step 2--Determine a national average hourly rate for each nursing 
subcategory by dividing a subcategory's total salaries for all 
hospitals in the occupational mix survey database by the subcategory's 
total hours for all hospitals in the occupational mix survey database.
    Step 3--For each hospital, determine an adjusted average hourly 
rate for each nursing subcategory by multiplying the percentage of the 
total nursing category (from Step 1) by the national average hourly 
rate for that nursing subcategory (from Step 2). Repeat this 
calculation for each of the five nursing subcategories.
    Step 4--For each hospital, determine the adjusted average hourly 
rate for the total nursing category by summing the adjusted average 
hourly rate (from Step 3) for each of the nursing subcategories.
    Step 5--Determine the national average hourly rate for the total 
nursing category by dividing total nursing category salaries for all 
hospitals in the occupational mix survey database by total nursing 
category hours for all hospitals in the occupational mix survey 
database.
    Step 6--For each hospital, compute the occupational mix adjustment 
factor for the total nursing category by dividing the national average 
hourly rate for the total nursing category (from Step 5) by the 
hospital's adjusted average hourly rate for the total nursing category 
(from Step 4).
    If the hospital's adjusted average hourly rate is less than the 
national average hourly rate (indicating the hospital employs a less 
costly mix of nursing employees), the occupational mix adjustment 
factor is greater than 1.0000. If the hospital's adjusted average 
hourly rate is greater than the national average hourly rate, the 
occupational mix adjustment factor is less than 1.0000.
    Step 7--For each hospital, calculate the occupational mix adjusted 
salaries and wage-related costs for the total nursing category by 
multiplying the hospital's total salaries and wage-related costs (from 
Step 5 of the unadjusted wage index calculation in section III.G. of 
this preamble) by the percentage of the hospital's total workers 
attributable to the total nursing category (using the occupational mix 
survey data, this percentage is determined by dividing the hospital's 
total nursing category salaries by the hospital's total salaries for 
``nursing and all other'') and by the total nursing category's 
occupational mix adjustment factor (from Step 6 above).
    The remaining portion of the hospital's total salaries and wage-
related costs that is attributable to all other employees of the 
hospital is not adjusted by the occupational mix. A hospital's all 
other portion is determined by subtracting the hospital's nursing 
category percentage from 100 percent.
    Step 8--For each hospital, calculate the total occupational mix 
adjusted salaries and wage-related costs for a hospital by summing the 
occupational mix adjusted salaries and wage-related costs for the total 
nursing category (from Step 7) and the portion of the hospital's 
salaries and wage-related costs for all other employees (from Step 7).
    To compute a hospital's occupational mix adjusted average hourly 
wage, divide the hospital's total occupational mix adjusted salaries 
and wage-related costs by the hospital's total hours (from Step 4 of 
the unadjusted wage index calculation in section III.G. of this 
preamble).
    Step 9--To compute the occupational mix adjusted average hourly 
wage for an urban or rural area, sum the total occupational mix 
adjusted salaries and wage-related costs for all hospitals in the area, 
then sum the total hours for all hospitals in the area. Next, divide 
the area's occupational mix adjusted salaries and wage-related costs by 
the area's hours.
    Step 10--To compute the national occupational mix adjusted average 
hourly wage, sum the total occupational mix adjusted salaries and wage-
related costs for all hospitals in the Nation, then sum the total hours 
for all hospitals in the Nation. Next, divide the national occupational 
mix adjusted salaries and wage-related costs by the national hours. The 
FY 2009 occupational mix adjusted national average hourly wage is 
$32.2449.
    Step 11--To compute the occupational mix adjusted wage index, 
divide each area's occupational mix adjusted average hourly wage (Step 
9) by the national occupational mix adjusted average hourly wage (Step 
10).
    Step 12--To compute the Puerto Rico specific occupational mix 
adjusted wage index, follow Steps 1 through 11 above. The FY 2009 
occupational mix adjusted Puerto Rico specific average hourly wage is 
$13.7851.
    The table below is an illustrative example of the occupational mix 
adjustment.
BILLING CODE 4120-01-P

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BILLING CODE 4120-01-C

[[Page 48580]]

    Because the occupational mix adjustment is required by statute, all 
hospitals that are subject to payments under the IPPS, or any hospital 
that would be subject to the IPPS if not granted a waiver, must 
complete the occupational mix survey, unless the hospital has no 
associated cost report wage data that are included in the FY 2009 wage 
index.
    For the FY 2008 wage index, if a hospital did not respond to the 
occupational mix survey, or if we determined that a hospital's 
submitted data were too erroneous to include in the wage index, we 
assigned the hospital the average occupational mix adjustment for the 
labor market area (72 FR 47314). We believed this method had the least 
impact on the wage index for other hospitals in the area. For areas 
where no hospital submitted data for purposes of calculating the 
occupational mix adjustment, we applied the national occupational mix 
factor of 1.0000 in calculating the area's FY 2008 occupational mix 
adjusted wage index. We indicated in the FY 2008 IPPS final rule that 
we reserve the right to apply a different approach in future years, 
including potentially penalizing nonresponsive hospitals (72 FR 47314).
    For the FY 2009 wage index, as we proposed, we are handling the 
data for hospitals that did not respond to the occupational mix survey 
(neither the 1st quarter nor 2nd quarter data) in the same manner as 
discussed above for the FY 2008 wage index. In addition, if a hospital 
submitted survey data for either the 1st quarter or 2nd quarter, but 
not for both quarters, we are using the data the hospital submitted for 
one quarter to calculate the hospital's FY 2009 occupational mix 
adjustment factor. Lastly, if a hospital submitted a survey(s), but 
that survey data can not be used because we determine it to be 
aberrant, we also assigned the hospital the average occupational mix 
adjustment for its labor market area. For example, if a hospital's 
individual nurse category average hourly wages were out of range (that 
is, unusually high or low), and the hospital did not provide sufficient 
documentation to explain the aberrancy, or the hospital did not submit 
any registered nurse staff salaries or hours data, we assigned the 
hospital the average occupational mix adjustment for the labor market 
area in which it is located.
    In calculating the average occupational mix adjustment factor for a 
labor market area, we replicated Steps 1 through 6 of the calculation 
for the occupational mix adjustment. However, instead of performing 
these steps at the hospital level, we aggregated the data at the labor 
market area level. In following these steps, for example, for CBSAs 
that contain providers that did not submit occupational mix survey 
data, the occupational mix adjustment factor ranged from a low of 
0.9060 (CBSA 12020, Athens-Clarke County, GA), to a high of 1.0805 
(CBSA 22500, Florence, SC). Also, in computing a hospital's 
occupational mix adjusted salaries and wage-related costs for nursing 
employees (Step 7 of the calculation), in the absence of occupational 
mix survey data, we multiplied the hospital's total salaries and wage-
related costs by the percentage of the area's total workers 
attributable to the area's total nursing category. For FY 2009, there 
are no CBSAs for which we did not have occupational mix data for any of 
its providers.
    In the FY 2007 IPPS final rule, we also indicated that we would 
give serious consideration to applying a hospital-specific penalty if a 
hospital does not comply with regulations requiring submission of 
occupational mix survey data in future years. We stated that we believe 
that section 1886(d)(5)(I)(i) of the Act provides us with the authority 
to penalize hospitals that do not submit occupational mix survey data. 
That section authorizes us to provide for exceptions and adjustments to 
the payment amounts under IPPS as the Secretary deems appropriate. We 
also indicated that we would address this issue in the FY 2008 IPPS 
proposed rule.
    In the FY 2008 IPPS proposed rule, we solicited comments and 
suggestions for a hospital-specific penalty for hospitals that do not 
submit occupational mix survey data. In response to the FY 2008 IPPS 
proposed rule, some commenters suggested a 1-percent to 2-percent 
reduction in the hospital's wage index value or a set percentage of the 
standardized amount. We noted that any penalty that we would determine 
for nonresponsive hospitals would apply to a future wage index, not the 
FY 2008 wage index.
    In the FY 2008 final rule with comment period, we assigned 
nonresponsive hospitals the average occupational mix adjustment for the 
labor market area. For areas where no hospital submitted survey data, 
we applied the national occupational mix adjustment factor of 1.0000 in 
calculating the area's FY 2008 occupational mix adjusted wage index. We 
appreciate the suggestions we received regarding future penalties for 
hospitals that do not submit occupational mix survey data. We stated in 
the FY 2008 final rule with comment period that we may consider 
proposing a policy to penalize hospitals that do not submit 
occupational mix survey data for FY 2010, the first year of the 
application of the new 2007-2008 occupational mix survey, and that we 
expected that any such penalty would be proposed in the FY 2009 IPPS 
proposed rule so hospitals would be aware of the policy before the 
deadline for submitting the data to the fiscal intermediaries/MAC. 
However, in the FY 2009 IPPS proposed rule, we did not propose a 
penalty for FY 2010. Rather, we reserved the right to propose a penalty 
in the FY 2010 IPPS proposed rule, once we collect and analyze the FY 
2007-2008 occupational mix survey data. Hospitals are still on notice 
that any failure to submit occupational mix data for the FY 2007-2008 
survey year may result in a penalty in FY 2010, thus achieving our 
policy goal of ensuring that hospitals are aware of the consequences of 
failure to submit data in response to the most recent survey.
    Comment: Several commenters reiterated the comment they had 
submitted previously with respect to the FY 2008 wage index (72 FR 
47314) that full participation in the occupational mix survey is 
critical, and urged CMS to develop a methodology that encourages 
hospitals to report occupational mix survey data but does not unfairly 
penalize neighboring hospitals. The commenters also suggested that, if 
CMS decides to adopt a penalty for nonresponsive hospitals, CMS should 
establish an appeal process for hospitals with extenuating 
circumstances.
    Response: We appreciate the commenters' continuous support for a 
policy to penalize hospitals that do not submit occupational mix survey 
data. As discussed above, we will consider proposing a penalty for the 
FY 2010 wage index after we analyze the results of the new 2007-2008 
occupational mix survey, for which the data are due to CMS in the fall 
of 2008. (We refer readers to section III.D.3. of this preamble for a 
discussion of the 2007-2008 survey).
    Comment: One commenter suggested that CMS' methodology for 
computing the occupational mix adjustment skews the results. The 
commenter stated that if CMS had selected a different use of the same 
data, a different and perhaps better adjustment could have resulted. 
However, the commenter offered no alternative methodology for computing 
the adjustment.
    Response: We welcome the commenter to submit to us its 
recommendations for computing the occupational mix adjustment, or to 
identify specific components of our

[[Page 48581]]

methodology that it believes are problematic.
3. 2007-2008 Occupational Mix Survey for the FY 2010 Wage Index
    As stated earlier, section 304(c) of Public Law 106-554 amended 
section 1886(d)(3)(E) of the Act to require CMS to collect data every 3 
years on the occupational mix of employees for each short-term, acute 
care hospital participating in the Medicare program. We used 
occupational mix data collected on the 2006 survey to compute the 
occupational mix adjustment for FY 2009. In the FY 2008 IPPS final rule 
with comment period (72 FR 47315), we discussed how we modified the 
occupational mix survey. The revised 2007-2008 occupational mix survey 
provides for the collection of hospital-specific wages and hours data 
for the 1-year period of July 1, 2007, through June 30, 2008, 
additional clarifications to the survey instructions, the elimination 
of the registered nurse subcategories, some refinements to the 
definitions of the occupational categories, and the inclusion of 
additional cost centers that typically provide nursing services. The 
revised 2007-2008 occupational mix survey will be applied beginning 
with the FY 2010 wage index.
    On February 2, 2007, we published in the Federal Register a notice 
soliciting comments on the proposed revisions to the occupational mix 
survey (72 FR 5055). The comment period for the notice ended on April 
3, 2007. After considering the comments we received, we made a few 
minor editorial changes and published the final 2007-2008 occupational 
mix survey on September 14, 2007 (72 FR 52568). OMB approved the survey 
without change on February 1, 2008 (OMB Control Number 0938-0907). The 
2007-2008 Medicare occupational mix survey (Form CMS-10079 (2008)) is 
available on the CMS Web site at: http://www.cms.hhs.gov/
AcuteInpatientPPS/WIFN/list.asp#TopOfPage, and through the fiscal 
intermediaries/MAC. Hospitals must submit their completed surveys to 
their fiscal intermediaries/MAC by September 2, 2008. The preliminary, 
unaudited 2007-2008 occupational mix survey data will be released in 
early October 2008, along with the FY 2006 Worksheet S-3 wage data, for 
the FY 2010 wage index review and correction process.

E. Worksheet S-3 Wage Data for the FY 2009 Wage Index

    The FY 2009 wage index values (effective for hospital discharges 
occurring on or after October 1, 2008, and before October 1, 2009, and 
to be published in a separate Federal Register notice subsequent to 
this final rule) will be based on the data collected from the Medicare 
cost reports submitted by hospitals for cost reporting periods 
beginning in FY 2005 (the FY 2008 wage index was based on FY 2004 wage 
data).
1. Included Categories of Costs
    The FY 2009 wage index includes the following categories of data 
associated with costs paid under the IPPS (as well as outpatient 
costs):
     Salaries and hours from short-term, acute care hospitals 
(including paid lunch hours and hours associated with military leave 
and jury duty)
     Home office costs and hours
     Certain contract labor costs and hours (which includes 
direct patient care, certain top management, pharmacy, laboratory, and 
nonteaching physician Part A services, and certain contract indirect 
patient care services (as discussed in the FY 2008 final rule with 
comment period (72 FR 47315))
     Wage-related costs, including pensions and other deferred 
compensation costs. We note that, on March 28, 2008, CMS published a 
technical clarification to the cost reporting instructions for pension 
and deferred compensation costs (sections 2140 through 2142.7 of the 
Provider Reimbursement Manual, Part I). These instructions are used for 
developing pension and deferred compensation costs for purposes of the 
wage index, as discussed in the instructions for Worksheet S-3, Part 
II, Lines 13 through 20 and in the FY 2006 final rule (70 FR 47369).
2. Excluded Categories of Costs
    Consistent with the wage index methodology for FY 2008, the wage 
index for FY 2009 also excludes the direct and overhead salaries and 
hours for services not subject to IPPS payment, such as SNF services, 
home health services, costs related to GME (teaching physicians and 
residents) and certified registered nurse anesthetists (CRNAs), and 
other subprovider components that are not paid under the IPPS. The FY 
2009 wage index also excludes the salaries, hours, and wage-related 
costs of hospital-based rural health clinics (RHCs), and Federally 
qualified health centers (FQHCs) because Medicare pays for these costs 
outside of the IPPS (68 FR 45395). In addition, salaries, hours, and 
wage-related costs of CAHs are excluded from the wage index, for the 
reasons explained in the FY 2004 IPPS final rule (68 FR 45397).
3. Use of Wage Index Data by Providers Other Than Acute Care Hospitals 
under the IPPS
    Data collected for the IPPS wage index are also currently used to 
calculate wage indices applicable to other providers, such as SNFs, 
home health agencies, and hospices. In addition, they are used for 
prospective payments to IRFs, IPFs, and LTCHs, and for hospital 
outpatient services. We note that, in the IPPS rules, we do not address 
comments pertaining to the wage indices for non-IPPS providers. Such 
comments should be made in response to separate proposed rules for 
those providers.

F. Verification of Worksheet S-3 Wage Data

    The wage data for the FY 2009 wage index were obtained from 
Worksheet S-3, Parts II and III of the FY 2005 Medicare cost reports. 
Instructions for completing Worksheet S-3, Parts II and III are in the 
Provider Reimbursement Manual (PRM), Part II, sections 3605.2 and 
3605.3. The data file used to construct the wage index includes FY 2005 
data submitted to us as of February 29, 2008. As in past years, we 
performed an intensive review of the wage data, mostly through the use 
of edits designed to identify aberrant data.
    We asked our fiscal intermediaries/MAC to revise or verify data 
elements that resulted in specific edit failures. For the proposed FY 
2009 wage index, we identified and excluded 37 providers with data that 
was too aberrant to include in the proposed wage index, although we 
stated that if data elements for some of these providers were 
corrected, we intended to include some of these providers in the FY 
2009 final wage index. However, because some unresolved data elements 
were included in the proposed FY 2009 wage index, we instructed fiscal 
intermediaries/MACs to complete their data verification of questionable 
data elements and to transmit any changes to the wage data no later 
than April 14, 2008. While the data for four hospitals were resolved, 
the data for two other hospitals were identified as too aberrant to 
include in the final wage index. Therefore, we determined that the data 
for 35 hospitals should not be included in the FY 2009 final wage 
index.
    In constructing the FY 2009 wage index, we included the wage data 
for facilities that were IPPS hospitals in FY 2005; inclusive of those 
facilities that have since terminated their participation in the 
program as hospitals, as long as those data did not fail any of our 
edits for reasonableness.

[[Page 48582]]

We believe that including the wage data for these hospitals is, in 
general, appropriate to reflect the economic conditions in the various 
labor market areas during the relevant past period and to ensure that 
the current wage index represents the labor market area's current wages 
as compared to the national average of wages. However, we excluded the 
wage data for CAHs as discussed in the FY 2004 IPPS final rule (68 FR 
45397). For this final rule, we removed 22 hospitals that converted to 
CAH status between February 16, 2007, the cut-off date for CAH 
exclusion from the FY 2008 wage index, and February 18, 2008, the cut-
off date for CAH exclusion from the FY 2009 wage index. After removing 
hospitals with aberrant data and hospitals that converted to CAH 
status, the FY 2009 wage index is calculated based on 3,534 hospitals.
1. Wage Data for Multicampus Hospitals
    In the FY 2008 final rule with comment period (72 FR 47317), we 
discussed our policy for allocating a multicampus hospital's wages and 
hours data, by full-time equivalent (FTE) staff, among the different 
labor market areas where its campuses are located. During the FY 2009 
wage index desk review process, we requested fiscal intermediaries/MACs 
to contact multicampus hospitals that had campuses in different labor 
market areas to collect the data for the allocation. The FY 2009 wage 
index in this final rule includes separate wage data for campuses of 
three multicampus hospitals.
    For FY 2009, we are again allowing hospitals to use FTE or 
discharge data for the allocation of a multicampus hospital's wage data 
among the different labor market areas where its campuses are located. 
The Medicare cost report was updated in May 2008 to provide for the 
reporting of FTE data by campus for multicampus hospitals. Because the 
data from cost reporting periods that begin in FY 2008 will not be used 
in calculating the wage index until FY 2012, a multicampus hospital 
will still have the option, through the FY 2011 wage index, to use 
either FTE or discharge data for allocating wage data among its 
campuses by providing the information from the applicable cost 
reporting period to CMS through its fiscal intermediary/MAC. Two of the 
three multicampus hospitals chose to have their wage data allocated by 
their Medicare discharge data for the FY 2009 wage index. One of the 
hospitals provided FTE staff data for the allocation. The average 
hourly wage associated with each geographical location of a multicampus 
hospital is reflected in Table 2 of the Addendum to this final rule.
2. New Orleans' Post-Katrina Wage Index
    Since 2005 when Hurricane Katrina devastated the Gulf States, we 
have received numerous comments suggesting that current Medicare 
payments to hospitals in New Orleans, Louisiana are inadequate, and the 
wage index does not accurately reflect the increase in labor costs 
experienced by the city after the storm. The post-Katrina effects on 
the New Orleans wage index will not be realized in the wage index until 
FY 2010, when the wage index will be based on cost reporting periods 
beginning during FY 2006 (that is, beginning on or after October 1, 
2005 and before October 1, 2006).
    In responding to the health-related needs of people affected by the 
hurricane, the Federal Government, through the Deficit Reduction Act of 
2005 (DRA), appropriated $2 billion in FY 2006. These funds allowed the 
Secretary to make available $160 million in February 2007 to Louisiana, 
Mississippi, and Alabama for payments to hospitals and skilled nursing 
facilities facing financial stress because of changing wage rates not 
yet reflected in Medicare payment methodologies. In March and May 2007, 
the Department provided two additional DRA grants of $15 million and 
$35 million, respectively, to Louisiana for professional health care 
workforce recruitment and sustainability in the greater New Orleans 
area, namely the Orleans, Jefferson, St. Bernard, and Plaquemines 
Parishes. In addition, the Department issued a supplemental award of 
$60 million in provider stabilization grant funding to Louisiana, 
Mississippi, and Alabama to continue to help health care providers meet 
changing wage rates not yet reflected by Medicare's payment policies. 
On July 23, 2007, HHS awarded to Louisiana a new $100 million Primary 
Care Grant to help increase access to primary care in the Greater New 
Orleans area. The resulting stabilization and expansion of the 
community based primary care infrastructure, post Katrina, helps 
provide a viable alternative to local hospital emergency rooms for all 
citizens of New Orleans, especially those who are poor and uninsured. 
In other Department efforts, the OIG has performed an in-depth review 
of the post-Katrina infrastructure of five New Orleans hospitals, 
including the hospitals' staffing levels and wage costs. The OIG's 
final reports and recommendations, which were published in the Spring 
of 2008, are available on the following Web site: http://oig.hhs.gov/
oas/cms.html.

G. Method for Computing the FY 2009 Unadjusted Wage Index

    The method used to compute the FY 2009 wage index without an 
occupational mix adjustment follows:
    Step 1--As noted above, we are basing the FY 2009 wage index on 
wage data reported on the FY 2005 Medicare cost reports. We gathered 
data from each of the non-Federal, short-term, acute care hospitals for 
which data were reported on the Worksheet S-3, Parts II and III of the 
Medicare cost report for the hospital's cost reporting period beginning 
on or after October 1, 2004, and before October 1, 2005. In addition, 
we included data from some hospitals that had cost reporting periods 
beginning before October 2004 and reported a cost reporting period 
covering all of FY 2004. These data are included because no other data 
from these hospitals would be available for the cost reporting period 
described above, and because particular labor market areas might be 
affected due to the omission of these hospitals. However, we generally 
describe these wage data as FY 2005 data. We note that, if a hospital 
had more than one cost reporting period beginning during FY 2005 (for 
example, a hospital had two short cost reporting periods beginning on 
or after October 1, 2004, and before October 1, 2005), we included wage 
data from only one of the cost reporting periods, the longer, in the 
wage index calculation. If there was more than one cost reporting 
period and the periods were equal in length, we included the wage data 
from the later period in the wage index calculation.
    Step 2--Salaries--The method used to compute a hospital's average 
hourly wage excludes certain costs that are not paid under the IPPS. 
(We note that, beginning with FY 2008 (72 FR 47315), we include lines 
22.01, 26.01, and 27.01 of Worksheet S-3, Part II for overhead services 
in the wage index. However, we note that the wages and hours on these 
lines are not incorporated into line 101, column 1 of Worksheet A, 
which, through the electronic cost reporting software, flows directly 
to line 1 of Worksheet S-3, Part II. Therefore, the first step in the 
wage index calculation for FY 2009 is to compute a ``revised'' Line 1, 
by adding to the Line 1 on Worksheet S-3, Part II (for wages and hours 
respectively) the amounts on Lines 22.01, 26.01, and 27.01.) In 
calculating a hospital's average salaries plus wage-related costs, we 
subtract from Line 1 (total salaries) the GME and CRNA costs reported 
on Lines 2, 4.01,

[[Page 48583]]

6, and 6.01, the Part B salaries reported on Lines 3, 5 and 5.01, home 
office salaries reported on Line 7, and exclude salaries reported on 
Lines 8 and 8.01 (that is, direct salaries attributable to SNF 
services, home health services, and other subprovider components not 
subject to the IPPS). We also subtract from Line 1 the salaries for 
which no hours were reported. To determine total salaries plus wage-
related costs, we add to the net hospital salaries the costs of 
contract labor for direct patient care, certain top management, 
pharmacy, laboratory, and nonteaching physician Part A services (Lines 
9 and 10), home office salaries and wage-related costs reported by the 
hospital on Lines 11 and 12, and nonexcluded area wage-related costs 
(Lines 13, 14, and 18).
    We note that contract labor and home office salaries for which no 
corresponding hours are reported are not included. In addition, wage-
related costs for nonteaching physician Part A employees (Line 18) are 
excluded if no corresponding salaries are reported for those employees 
on Line 4.
    Step 3--Hours--With the exception of wage-related costs, for which 
there are no associated hours, we compute total hours using the same 
methods as described for salaries in Step 2.
    Step 4--For each hospital reporting both total overhead salaries 
and total overhead hours greater than zero, we then allocate overhead 
costs to areas of the hospital excluded from the wage index 
calculation. First, we determine the ratio of excluded area hours (sum 
of Lines 8 and 8.01 of Worksheet S-3, Part II) to revised total hours 
(Line 1 minus the sum of Part II, Lines 2, 3, 4.01, 5, 5.01, 6, 6.01, 
7, and Part III, Line 13 of Worksheet S-3). We then compute the amounts 
of overhead salaries and hours to be allocated to excluded areas by 
multiplying the above ratio by the total overhead salaries and hours 
reported on Line 13 of Worksheet S-3, Part III. Next, we compute the 
amounts of overhead wage-related costs to be allocated to excluded 
areas using three steps: (1) We determine the ratio of overhead hours 
(Part III, Line 13 minus the sum of lines 22.01, 26.01, and 27.01) to 
revised hours excluding the sum of lines 22.01, 26.01, and 27.01 (Line 
1 minus the sum of Lines 2, 3, 4.01, 5, 5.01, 6, 6.01, 7, 8, 8.01, 
22.01, 26.01, and 27.01). (We note that for the FY 2008 and subsequent 
wage index calculations, we are excluding the sum of lines 22.01, 
26.01, and 27.01 from the determination of the ratio of overhead hours 
to revised hours because hospitals typically do not provide fringe 
benefits (wage-related costs) to contract personnel. Therefore, it is 
not necessary for the wage index calculation to exclude overhead wage-
related costs for contract personnel. Further, if a hospital does 
contribute to wage-related costs for contracted personnel, the 
instructions for lines 22.01, 26.01, and 27.01 require that associated 
wage-related costs be combined with wages on the respective contract 
labor lines.); (2) we compute overhead wage-related costs by 
multiplying the overhead hours ratio by wage-related costs reported on 
Part II, Lines 13, 14, and 18; and (3) we multiply the computed 
overhead wage-related costs by the above excluded area hours ratio. 
Finally, we subtract the computed overhead salaries, wage-related 
costs, and hours associated with excluded areas from the total salaries 
(plus wage-related costs) and hours derived in Steps 2 and 3.
    Step 5--For each hospital, we adjust the total salaries plus wage-
related costs to a common period to determine total adjusted salaries 
plus wage-related costs. To make the wage adjustment, we estimate the 
percentage change in the employment cost index (ECI) for compensation 
for each 30-day increment from October 14, 2003, through April 15, 
2005, for private industry hospital workers from the BLS' Compensation 
and Working Conditions. We use the ECI because it reflects the price 
increase associated with total compensation (salaries plus fringes) 
rather than just the increase in salaries. In addition, the ECI 
includes managers as well as other hospital workers. This methodology 
to compute the monthly update factors uses actual quarterly ECI data 
and assures that the update factors match the actual quarterly and 
annual percent changes. We also note that, since April 2006 with the 
publication of March 2006 data, the BLS' ECI uses a different 
classification system, the North American Industrial Classification 
System (NAICS), instead of the Standard Industrial Codes (SICs), which 
no longer exist. We have consistently used the ECI as the data source 
for our wages and salaries and other price proxies in the IPPS market 
basket and did not propos to make any changes to the usage for FY 2009. 
The factors used to adjust the hospital's data were based on the 
midpoint of the cost reporting period, as indicated below.

                    Midpoint of Cost Reporting Period
------------------------------------------------------------------------
                                                              Adjustment
                     After                         Before       factor
------------------------------------------------------------------------
10/14/2004....................................   11/15/2004      1.05390
11/14/2004....................................   12/15/2004      1.05035
12/14/2004....................................   01/15/2005      1.04690
01/14/2005....................................   02/15/2005      1.04342
02/14/2005....................................   03/15/2005      1.03992
03/14/2005....................................   04/15/2005      1.03641
04/14/2005....................................   05/15/2005      1.03291
05/14/2005....................................   06/15/2005      1.02940
06/14/2005....................................   07/15/2005      1.02596
07/14/2005....................................   08/15/2005      1.02264
08/14/2005....................................   09/15/2005      1.01943
09/14/2005....................................   10/15/2005      1.01627
10/14/2005....................................   11/15/2005      1.01308
11/14/2005....................................   12/15/2005      1.00987
12/14/2005....................................   01/15/2006      1.00661
01/14/2006....................................   02/15/2006      1.00333
02/14/2006....................................   03/15/2006      1.00000
03/14/2006....................................   04/15/2006      0.99670
------------------------------------------------------------------------

    For example, the midpoint of a cost reporting period beginning 
January 1, 2005, and ending December 31, 2005, is June 30, 2005. An 
adjustment factor of 1.02596 would be applied to the wages of a 
hospital with such a cost reporting period. In addition, for the data 
for any cost reporting period that began in FY 2005 and covered a 
period of less than 360 days or more than 370 days, we annualize the 
data to reflect a 1-year cost report. Dividing the data by the number 
of days in the cost report and then multiplying the results by 365 
accomplishes annualization.
    Step 6--Each hospital is assigned to its appropriate urban or rural 
labor market area before any reclassifications under section 
1886(d)(8)(B), section 1886(d)(8)(E), or section 1886(d)(10) of the 
Act. Within each urban or rural labor market area, we add the total 
adjusted salaries plus wage-related costs obtained in Step 5 for all 
hospitals in that area to determine the total adjusted salaries plus 
wage-related costs for the labor market area.
    Step 7--We divide the total adjusted salaries plus wage-related 
costs obtained under both methods in Step 6 by the sum of the 
corresponding total hours (from Step 4) for all hospitals in each labor 
market area to determine an average hourly wage for the area.
    Step 8--We add the total adjusted salaries plus wage-related costs 
obtained in Step 5 for all hospitals in the Nation and then divide the 
sum by the national sum of total hours from Step 4 to arrive at a 
national average hourly wage. Using the data as described above, the 
national average hourly wage (unadjusted for occupational mix) is 
$32.2696.
    Step 9--For each urban or rural labor market area, we calculate the 
hospital wage index value, unadjusted for occupational mix, by dividing 
the area average hourly wage obtained in Step 7

[[Page 48584]]

by the national average hourly wage computed in Step 8.
    Step 10--Following the process set forth above, we develop a 
separate Puerto Rico-specific wage index for purposes of adjusting the 
Puerto Rico standardized amounts. (The national Puerto Rico 
standardized amount is adjusted by a wage index calculated for all 
Puerto Rico labor market areas based on the national average hourly 
wage as described above.) We add the total adjusted salaries plus wage-
related costs (as calculated in Step 5) for all hospitals in Puerto 
Rico and divide the sum by the total hours for Puerto Rico (as 
calculated in Step 4) to arrive at an overall average hourly wage 
(unadjusted for occupational mix) of $13.7956 for Puerto Rico. For each 
labor market area in Puerto Rico, we calculate the Puerto Rico-specific 
wage index value by dividing the area average hourly wage (as 
calculated in Step 7) by the overall Puerto Rico average hourly wage.
    Step 11--Section 4410 of Public Law 105-33 provides that, for 
discharges on or after October 1, 1997, the area wage index applicable 
to any hospital that is located in an urban area of a State may not be 
less than the area wage index applicable to hospitals located in rural 
areas in that State. The areas affected by this provision will be 
identified in Table 4D-2 that is to be published in a separate Federal 
Register subsequent to this final rule.
    In the FY 2005 IPPS final rule (69 FR 49109), we adopted the 
``imputed'' floor as a temporary 3-year measure to address a concern by 
some individuals that hospitals in all-urban States were disadvantaged 
by the absence of rural hospitals to set a wage index floor in those 
States. The imputed floor was originally set to expire in FY 2007, but 
we are extending it an additional year in the FY 2008 IPPS final rule 
with comment period (72 FR 47321). As explained in section III.B.2.b. 
of the preamble of this final rule, we are extending the imputed floor 
for an additional 3 years, through FY 2011.

H. Analysis and Implementation of the Occupational Mix Adjustment and 
the FY 2009 Occupational Mix Adjusted Wage Index

    As discussed in section III.D. of this preamble, for FY 2009, we 
apply the occupational mix adjustment to 100 percent of the FY 2009 
wage index. We calculated the occupational mix adjustment using data 
from the 2006 occupational mix survey data, using the methodology 
described in section III.D.3. of this preamble.
    Using the first and second quarter occupational mix survey data and 
applying the occupational mix adjustment to 100 percent of the FY 2009 
wage index results in a national average hourly wage of $32.2449 and a 
Puerto-Rico specific average hourly wage of $13.7851. After excluding 
data of hospitals that either submitted aberrant data that failed 
critical edits, or that do not have FY 2005 Worksheet S-3 cost report 
data for use in calculating the FY 2009 wage index, we calculated the 
FY 2009 wage index using the occupational mix survey data from 3,365 
hospitals. Using the Worksheet S-3 cost report data of 3,534 hospitals 
and occupational mix first and/or second quarter survey data from 3,365 
hospitals represents a 95.2 percent survey response rate. The FY 2009 
national average hourly wages for each occupational mix nursing 
subcategory as calculated in Step 2 of the occupational mix calculation 
are as follows:

------------------------------------------------------------------------
                                                          Average hourly
          Occupational mix nursing subcategory                 wage
------------------------------------------------------------------------
National RN Management..................................        $38.6364
National RN Staff.......................................         33.4698
National LPN............................................         19.2364
National Nurse Aides, Orderlies, and Attendants.........         13.6892
National Medical Assistants.............................         15.7714
National Nurse Category.................................         28.7265
------------------------------------------------------------------------

    The national average hourly wage for the entire nurse category as 
computed in Step 5 of the occupational mix calculation is $28.7265. 
Hospitals with a nurse category average hourly wage (as calculated in 
Step 4) of greater than the national nurse category average hourly wage 
receive an occupational mix adjustment factor (as calculated in Step 6) 
of less than 1.0. Hospitals with a nurse category average hourly wage 
(as calculated in Step 4) of less than the national nurse category 
average hourly wage receive an occupational mix adjustment factor (as 
calculated in Step 6) of greater than 1.0.
    Based on the January through June 2006 occupational mix survey 
data, we determined (in Step 7 of the occupational mix calculation) 
that the national percentage of hospital employees in the Nurse 
category is 42.97 percent, and the national percentage of hospital 
employees in the All Other Occupations category is 57.03 percent. At 
the CBSA level, the percentage of hospital employees in the Nurse 
category ranged from a low of 27.26 percent in one CBSA, to a high of 
85.30 percent in another CBSA.
    The final wage index values for FY 2009 (except those for hospitals 
receiving wage index adjustments under section 1886(d)(13) of the Act) 
will be shown in Tables 4A, 4B, 4C, and 4F that are to be published in 
a separate Federal Register notice subsequent to this final rule.
    Tables 3A and 3B in the Addendum to this final rule list the 3-year 
average hourly wage for each labor market area before the redesignation 
of hospitals based on FYs 2007, 2008, and 2009 cost reporting periods. 
Table 3A lists these data for urban areas and Table 3B lists these data 
for rural areas. In addition, Table 2 in the Addendum to this final 
rule includes the adjusted average hourly wage for each hospital from 
the FY 2003 and FY 2004 cost reporting periods, as well as the FY 2005 
period used to calculate the FY 2009 wage index. The 3-year averages 
are calculated by dividing the sum of the dollars (adjusted to a common 
reporting period using the method described previously) across all 3 
years, by the sum of the hours. If a hospital is missing data for any 
of the previous years, its average hourly wage for the 3-year period is 
calculated based on the data available during that period.
    The wage index values in Tables 4A, 4B, 4C, and 4F (to be published 
in a subsequent Federal Register notice) will include the occupational 
mix adjustment. The average hourly wages in Tables 2, 3A, and 3B in the 
Addendum to this final rule include the occupational mix adjustment. 
The wage index values in Tables 4A, 4B, and 4C in the separate issuance 
also will include the State-specific rural floor and imputed floor 
budget neutrality adjustments that are discussed in section III.B.2. of 
this preamble. The State budget neutrality adjustments for the rural 
and imputed floors will be included in Table 4D-1 in a separate Federal 
Register notice to be published subsequent to this final rule.

I. Revisions to the Wage Index Based on Hospital Redesignations

1. General
    Under section 1886(d)(10) of the Act, the MGCRB considers 
applications by hospitals for geographic reclassification for purposes 
of payment under the IPPS. Hospitals must apply to the MGCRB to 
reclassify 13 months prior to the start of the fiscal year for which 
reclassification is sought (generally by September 1). Generally, 
hospitals must be proximate to the labor market area to which they are 
seeking reclassification and must demonstrate characteristics similar 
to hospitals located in that area. The MGCRB issues its decisions by 
the end of February for reclassifications that become effective for the 
following fiscal year (beginning October 1). The

[[Page 48585]]

regulations applicable to reclassifications by the MGCRB are located in 
42 CFR 412.230 through 412.280.
    Section 1886(d)(10)(D)(v) of the Act provides that, beginning with 
FY 2001, a MGCRB decision on a hospital reclassification for purposes 
of the wage index is effective for 3 fiscal years, unless the hospital 
elects to terminate the reclassification. Section 1886(d)(10)(D)(vi) of 
the Act provides that the MGCRB must use average hourly wage data from 
the 3 most recently published hospital wage surveys in evaluating a 
hospital's reclassification application for FY 2003 and any succeeding 
fiscal year.
    Section 304(b) of Public Law 106-554 provides that the Secretary 
must establish a mechanism under which a statewide entity may apply to 
have all of the geographic areas in the State treated as a single 
geographic area for purposes of computing and applying a single wage 
index, for reclassifications beginning in FY 2003. The implementing 
regulations for this provision are located at 42 CFR 412.235.
    Section 1886(d)(8)(B) of the Act requires the Secretary to treat a 
hospital located in a rural county adjacent to one or more urban areas 
as being located in the MSA to which the greatest number of workers in 
the county commute, if the rural county would otherwise be considered 
part of an urban area under the standards for designating MSAs and if 
the commuting rates used in determining outlying counties were 
determined on the basis of the aggregate number of resident workers who 
commute to (and, if applicable under the standards, from) the central 
county or counties of all contiguous MSAs. In light of the CBSA 
definitions and the Census 2000 data that we implemented for FY 2005 
(69 FR 49027), we undertook to identify those counties meeting these 
criteria. Eligible counties are discussed and identified under section 
III.I.5. of this preamble.
2. Effects of Reclassification/Redesignation
    Section 1886(d)(8)(C) of the Act provides that the application of 
the wage index to redesignated hospitals is dependent on the 
hypothetical impact that the wage data from these hospitals would have 
on the wage index value for the area to which they have been 
redesignated. These requirements for determining the wage index values 
for redesignated hospitals are applicable both to the hospitals deemed 
urban under section 1886(d)(8)(B) of the Act and hospitals that were 
reclassified as a result of the MGCRB decisions under section 
1886(d)(10) of the Act. Therefore, as provided in section 1886(d)(8)(C) 
of the Act, the wage index values were determined by considering the 
following:
     If including the wage data for the redesignated hospitals 
would reduce the wage index value for the area to which the hospitals 
are redesignated by 1 percentage point or less, the area wage index 
value determined exclusive of the wage data for the redesignated 
hospitals applies to the redesignated hospitals.
     If including the wage data for the redesignated hospitals 
reduces the wage index value for the area to which the hospitals are 
redesignated by more than 1 percentage point, the area wage index 
determined inclusive of the wage data for the redesignated hospitals 
(the combined wage index value) applies to the redesignated hospitals.
     If including the wage data for the redesignated hospitals 
increases the wage index value for the urban area to which the 
hospitals are redesignated, both the area and the redesignated 
hospitals receive the combined wage index value. Otherwise, the 
hospitals located in the urban area receive a wage index excluding the 
wage data of hospitals redesignated into the area.
    Rural areas whose wage index values would be reduced by excluding 
the wage data for hospitals that have been redesignated to another area 
continue to have their wage index values calculated as if no 
redesignation had occurred (otherwise, redesignated rural hospitals are 
excluded from the calculation of the rural wage index). The wage index 
value for a redesignated rural hospital cannot be reduced below the 
wage index value for the rural areas of the State in which the hospital 
is located.
    CMS has also adopted the following policies:
     The wage data for a reclassified urban hospital is 
included in both the wage index calculation of the area to which the 
hospital is reclassified (subject to the rules described above) and the 
wage index calculation of the urban area where the hospital is 
physically located.
     In cases where urban hospitals have reclassified to rural 
areas under 42 CFR 412.103, the urban hospital wage data are: (a) 
Included in the rural wage index calculation, unless doing so would 
reduce the rural wage index; and (b) included in the urban area where 
the hospital is physically located.
3. FY 2009 MGCRB Reclassifications
    Under section 1886(d)(10) of the Act, the MGCRB considers 
applications by hospitals for geographic reclassification for purposes 
of payment under the IPPS. The specific procedures and rules that apply 
to the geographic reclassification process are outlined in 42 CFR 
412.230 through 412.280.
    At the time this final rule was constructed, the MGCRB had 
completed its review of FY 2009 reclassification requests. Based on 
such reviews, there were 314 hospitals approved for wage index 
reclassifications by the MGCRB for FY 2009. Because MGCRB wage index 
reclassifications are effective for 3 years, for FY 2009, hospitals 
reclassified during FY 2007 or FY 2008 are eligible to continue to be 
reclassified to a particular labor market area based on such prior 
reclassifications. There were 175 hospitals approved for wage index 
reclassifications in FY 2007 and 324 hospitals approved for wage index 
reclassifications in FY 2008. Of all of the hospitals approved for 
reclassification for FY 2007, FY 2008, and FY 2009, based upon the 
review at the time of the final rule, 813 hospitals are in a 
reclassification status for FY 2009.
    Under 42 CFR 412.273, hospitals that have been reclassified by the 
MGCRB were permitted to withdraw their applications within 45 days of 
the publication of the proposed rule. Generally stated, the request for 
withdrawal of an application for reclassification or termination of an 
existing 3-year reclassification that would be effective in FY 2009 had 
to be received by the MGCRB within 45 days of the publication of the 
proposed rule. (We note that special rules for areas affected by 
section 124 of Pub. L. 110-275 are discussed in section III.I.7. of 
this preamble.) Hospitals may also cancel prior reclassification 
withdrawals or terminations in certain circumstances. For further 
information about withdrawing, terminating, or canceling a previous 
withdrawal or termination of a 3-year reclassification for wage index 
purposes, we refer the reader to 42 CFR 412.273, as well as the August 
1, 2002, IPPS final rule (67 FR 50065), and the August 1, 2001, IPPS 
final rule (66 FR 39887).
    Changes to the wage index that result from withdrawals of requests 
for reclassification, wage index corrections, appeals, and the 
Administrator's review process will be incorporated into the wage index 
values published in a separate Federal Register notice, in response to 
section 124 of Public Law 110-275 (see section III.I.7. of this 
preamble). These changes affect not only the wage index value for 
specific geographic areas, but also the wage index value redesignated 
hospitals receive; that is, whether they receive the wage index that 
includes the data for

[[Page 48586]]

both the hospitals already in the area and the redesignated hospitals. 
Further, the wage index value for the area from which the hospitals are 
redesignated may have been affected.
    Applications for FY 2010 reclassifications are due to the MGCRB by 
September 2, 2008 (the first working day of September 2008). We note 
that this is also the deadline for canceling a previous wage index 
reclassification withdrawal or termination under 42 CFR 412.273(d). 
Applications and other information about MGCRB reclassifications may be 
obtained, beginning in mid-July 2008, via the CMS Internet Web site at: 
http://cms.hhs.gov/providers/prrb/mgcinfo.asp, or by calling the MGCRB 
at (410) 786-1174. The mailing address of the MGCRB is: 2520 Lord 
Baltimore Drive, Suite L, Baltimore, MD 21244-2670.
4. FY 2008 Policy Clarifications and Revisions
    We note below several policies related to geographic 
reclassification that were clarified or revised in the FY 2008 IPPS 
final rule with comment period (72 FR 47333):
     Reinstating Reclassifications--As provided for in 42 CFR 
412.273(b)(2), once a hospital (or hospital group) accepts a newly 
approved reclassification, any previous reclassification is permanently 
terminated.
     Geographic Reclassification for Multicampus Hospitals--
Because campuses of a multicampus hospital can now have their wages and 
hours data allocated by FTEs or discharge data, a hospital campus 
located in a geographic area distinct from the geographic area 
associated with the provider number of the multicampus hospital will 
have official wage data to supplement an individual or group 
reclassification application (Sec.  412.230(d)(2)(v)).
     New England Deemed Counties--Hospitals in New England 
deemed counties are treated the same as Lugar hospitals in calculating 
the wage index. That is, the area is considered rural, but the 
hospitals within the area are deemed to be urban (Sec.  
412.64(b)(3)(ii)).
     ``Fallback'' Reclassifications--A hospital will 
automatically be given its most recently approved reclassification 
(thereby permanently terminating any previously approved 
reclassifications) unless it provides written notice to the MGCRB 
within 45 days of publication of the notice of proposed rulemaking that 
it wishes to withdraw its most recently approved reclassification and 
``fall back'' to either its prior reclassification or its home area 
wage index for the following fiscal year.
5. Redesignations of Hospitals Under Section 1886(d)(8)(B) of the Act
    Section 1886(d)(8)(B) of the Act requires us to treat a hospital 
located in a rural county adjacent to one or more urban areas as being 
located in the MSA if certain criteria are met. Effective beginning FY 
2005, we use OMB's 2000 CBSA standards and the Census 2000 data to 
identify counties in which hospitals qualify under section 
1886(d)(8)(B) of the Act to receive the wage index of the urban area. 
Hospitals located in these counties have been known as ``Lugar'' 
hospitals and the counties themselves are often referred to as 
``Lugar'' counties. We provide the FY 2009 chart below with the listing 
of the rural counties containing the hospitals designated as urban 
under section 1886(d)(8)(B) of the Act. For discharges occurring on or 
after October 1, 2008, hospitals located in the rural county in the 
first column of this chart will be redesignated for purposes of using 
the wage index of the urban area listed in the second column.

 Rural Counties Containing Hospitals Redesignated as Urban under Section
                        1886(d)(8)(B) of the Act
                  [Based on CBSAs and census 2000 data]
------------------------------------------------------------------------
              Rural county                             CBSA
------------------------------------------------------------------------
Cherokee, AL...........................  Rome, GA.
Macon, AL..............................  Auburn-Opelika, AL.
Talladega, AL..........................  Anniston-Oxford, AL.
Hot Springs, AR........................  Hot Springs, AR.
Windham, CT............................  Hartford-West Hartford-East
                                          Hartford, CT.
Bradford, FL...........................  Gainesville, FL.
Hendry, FL.............................  West Palm Beach-Boca Raton-
                                          Boynton, FL.
Levy, FL...............................  Gainesville, FL.
Walton, FL.............................  Fort Walton Beach-Crestview-
                                          Destin, FL.
Banks, GA..............................  Gainesville, GA.
Chattooga, GA..........................  Chattanooga, TN-GA.
Jackson, GA............................  Atlanta-Sandy Springs-Marietta,
                                          GA.
Lumpkin, GA............................  Atlanta-Sandy Springs-Marietta,
                                          GA.
Morgan, GA.............................  Atlanta-Sandy Springs-Marietta,
                                          GA.
Peach, GA..............................  Macon, GA.
Polk, GA...............................  Atlanta-Sandy Springs-Marietta,
                                          GA.
Talbot, GA.............................  Columbus, GA-AL.
Bingham, ID............................  Idaho Falls, ID.
Christian, IL..........................  Springfield, IL.
DeWitt, IL.............................  Bloomington-Normal, IL.
Iroquois, IL...........................  Kankakee-Bradley, IL.
Logan, IL..............................  Springfield, IL.
Mason, IL..............................  Peoria, IL.
Ogle, IL...............................  Rockford, IL.
Clinton, IN............................  Lafayette, IN.
Henry, IN..............................  Indianapolis-Carmel, IN.
Spencer, IN............................  Evansville, IN-KY.
Starke, IN.............................  Gary, IN.
Warren, IN.............................  Lafayette, IN.
Boone, IA..............................  Ames, IA.
Buchanan, IA...........................  Waterloo-Cedar Falls, IA.
Cedar, IA..............................  Iowa City, IA.
Allen, KY..............................  Bowling Green, KY.

[[Page 48587]]

 
Assumption Parish, LA..................  Baton Rouge, LA.
St. James Parish, LA...................  Baton Rouge, LA.
Allegan, MI............................  Holland-Grand Haven, MI.
Montcalm, MI...........................  Grand Rapids-Wyoming, MI.
Oceana, MI.............................  Muskegon-Norton Shores, MI.
Shiawassee, MI.........................  Lansing-East Lansing, MI.
Tuscola, MI............................  Saginaw-Saginaw Township North,
                                          MI.
Fillmore, MN...........................  Rochester, MN.
Dade, MO...............................  Springfield, MO.
Pearl River, MS........................  Gulfport-Biloxi, MS.
Caswell, NC............................  Burlington, NC.
Davidson, NC...........................  Greensboro-High Point, NC.
Granville, NC..........................  Durham, NC.
Harnett, NC............................  Raleigh-Cary, NC.
Lincoln, NC............................  Charlotte-Gastonia-Concord, NC-
                                          SC.
Polk, NC...............................  Spartanburg, SC.
Los Alamos, NM.........................  Santa Fe, NM.
Lyon, NV...............................  Carson City, NV.
Cayuga, NY.............................  Syracuse, NY.
Columbia, NY...........................  Albany-Schenectady-Troy, NY.
Genesee, NY............................  Rochester, NY.
Greene, NY.............................  Albany-Schenectady-Troy, NY.
Schuyler, NY...........................  Ithaca, NY.
Sullivan, NY...........................  Poughkeepsie-Newburgh-
                                          Middletown, NY.
Wyoming, NY............................  Buffalo-Niagara Falls, NY.
Ashtabula, OH..........................  Cleveland-Elyria-Mentor, OH.
Champaign, OH..........................  Springfield, OH.
Columbiana, OH.........................  Youngstown-Warren-Boardman, OH-
                                          PA.
Cotton, OK.............................  Lawton, OK.
Linn, OR...............................  Corvallis, OR.
Adams, PA..............................  York-Hanover, PA.
Clinton, PA............................  Williamsport, PA.
Greene, PA.............................  Pittsburgh, PA.
Monroe, PA.............................  Allentown-Bethlehem-Easton, PA-
                                          NJ.
Schuylkill, PA.........................  Reading, PA.
Susquehanna, PA........................  Binghamton, NY.
Clarendon, SC..........................  Sumter, SC.
Lee, SC................................  Sumter, SC.
Oconee, SC.............................  Greenville, SC.
Union, SC..............................  Spartanburg, SC.
Meigs, TN..............................  Cleveland, TN.
Bosque, TX.............................  Waco, TX.
Falls, TX..............................  Waco, TX.
Fannin, TX.............................  Dallas-Plano-Irving, TX.
Grimes, TX.............................  College Station-Bryan, TX.
Harrison, TX...........................  Longview, TX.
Henderson, TX..........................  Dallas-Plano-Irving, TX.
Milam, TX..............................  Austin-Round Rock, TX.
Van Zandt, TX..........................  Dallas-Plano-Irving, TX.
Willacy, TX............................  Brownsville-Harlingen, TX.
Buckingham, VA.........................  Charlottesville, VA.
Floyd, VA..............................  Blacksburg-Christiansburg-
                                          Radford, VA.
Middlesex, VA..........................  Virginia Beach-Norfolk-Newport
                                          News, VA.
Page, VA...............................  Harrisonburg, VA.
Shenandoah, VA.........................  Winchester, VA-WV.
Island, WA.............................  Seattle-Bellevue-Everett, WA.
Mason, WA..............................  Olympia, WA.
Wahkiakum, WA..........................  Longview, WA.
Jackson, WV............................  Charleston, WV.
Roane, WV..............................  Charleston, WV.
Green, WI..............................  Madison, WI.
Green Lake, WI.........................  Fond du Lac, WI.
Jefferson, WI..........................  Milwaukee-Waukesha-West Allis,
                                          WI.
Walworth, WI...........................  Milwaukee-Waukesha-West Allis,
                                          WI.
------------------------------------------------------------------------

    As in the past, hospitals redesignated under section 1886(d)(8)(B) 
of the Act are also eligible to be reclassified to a different area by 
the MGCRB. Affected hospitals are permitted to compare the reclassified 
wage index for the labor

[[Page 48588]]

market area in Table 4C in the Addendum to the proposed rule into which 
they have been reclassified by the MGCRB to the wage index for the area 
to which they are redesignated under section 1886(d)(8)(B) of the Act. 
Hospitals could have withdrawn from an MCGRB reclassification within 45 
days of the publication of the proposed rule. (We refer readers also to 
section III.I.7. of the preamble of this final rule for special 
withdrawal and termination rules that apply to areas affected by 
section 124 of Pub. L. 110-275.)
6. Reclassifications Under Section 1886(d)(8)(B) of the Act
    As discussed in last year's FY 2008 IPPS final rule with comment 
period (72 FR 47336-47337), Lugar hospitals are treated like 
reclassified hospitals for purposes of determining their applicable 
wage index and receive the reclassified wage index (Table 4C in a 
separate notice to be published in the Federal Register subsequent to 
this final rule) for the urban area to which they have been 
redesignated. Because Lugar hospitals are treated like reclassified 
hospitals, when they are seeking reclassification by the MCGRB, they 
are subject to the rural reclassification rules set forth at 42 CFR 
412.230. The procedural rules set forth at Sec.  412.230 list the 
criteria that a hospital must meet in order to reclassify as a rural 
hospital. Lugar hospitals are subject to the proximity criteria and 
payment thresholds that apply to rural hospitals. Specifically, the 
hospital must be no more than 35 miles from the area to which it seeks 
reclassification (Sec.  412.230(b)(1)); and the hospital must show that 
its average hourly wage is at least 106 percent of the average hourly 
wage of all other hospitals in the area in which the hospital is 
located (Sec.  412.230(d)(1)(iii)(C)). As discussed in section 
III.B.2.a. of the preamble of this final rule, beginning with the FY 
2010 wage index we will be phasing in regulatory changes, so that the 
hospital must also demonstrate that its average hourly wage is equal to 
at least 84 percent (in FY 2010) and 86 percent (beginning in FY 2011) 
of the average hourly wage of hospitals in the area to which it seeks 
redesignation (Sec.  412.230(d)(1)(iv)(C)).
    Hospitals not located in a Lugar county seeking reclassification to 
the urban area where the Lugar hospitals have been redesignated are not 
permitted to measure to the Lugar county to demonstrate proximity (no 
more than 15 miles for an urban hospital, and no more than 35 miles for 
a rural hospital or the closest urban or rural area for RRCs or SCHs) 
in order to be reclassified to such urban area. These hospitals must 
measure to the urban area exclusive of the Lugar County to meet the 
proximity or nearest urban or rural area requirement. As discussed in 
the FY 2008 final rule with comment period, we treat New England deemed 
counties in a manner consistent with how we treat Lugar counties. (We 
refer readers to 72 FR 47337 for a discussion of this policy.)
7. Reclassifications Under Section 508 of Public Law 108-173
    On July 15, 2008, the Medicare Improvements for Patients and 
Providers Act of 2008, Public Law 110-275 was enacted. Section 124 of 
Public Law 110-275 extends through FY 2009 wage index reclassifications 
under section 508 of Public Law 108-173 and certain special exceptions 
(for example, those special exceptions contained in the final rule 
promulgated in the Federal Register on August 11, 2004 (69 FR 49105, 
49107)) and extended under section 117 of the MMSEA of 2007 (Pub. L. 
110-173).
    Under section 508 of Public Law 108-173, a qualifying hospital 
could appeal the wage index classification otherwise applicable to the 
hospital and apply for reclassification to another area of the State in 
which the hospital is located (or, at the discretion of the Secretary), 
to an area within a contiguous State. We implemented this process 
through notices published in the Federal Register on January 6, 2004 
(69 FR 661), and February 13, 2004 (69 FR 7340). Such reclassifications 
were applicable to discharges occurring during the 3-year period 
beginning April 1, 2004, and ending March 31, 2007. Section 106(a) of 
the MIEA-TRHCA extended any geographic reclassifications of hospitals 
that were made under section 508 and that would expire on March 31, 
2007. On March 23, 2007, we published a notice in the Federal Register 
(72 FR 13799) that indicated how we were implementing section 106(a) of 
the MIEA-TRHCA through September 30, 2007. Section 117 of the MMSEA 
further extended section 508 reclassifications and special exceptions 
through September 30, 2008. On February 22, 2008, we published a notice 
in the Federal Register (73 FR 9807) regarding our implementation of 
section 117 of the MMSEA.
    Section 124 of Public Law 110-275 has now extended the hospital 
reclassifications provisions of section 508 and certain special 
exceptions through September 30, 2009 (FY 2009). Because of the timing 
of enactment of Public Law 110-275, we are not able to recompute the FY 
2009 wage index values for any hospital that would be reclassified 
under the section 508 and special exceptions provisions in time for 
inclusion in this final rule. Instead, we will issue the final FY 2009 
wage index values and other related tables, as specified in the 
Addendum to this final rule, in a separate Federal Register notice 
implementing this extension that will be published subsequent to this 
final rule. We will analyze the data of hospitals in labor market areas 
affected by this extension, including hospitals with Lugar 
redesignations, and make our best efforts to give those hospitals a 
wage index value that we believe results in the highest FY 2009 wage 
index for which they are eligible. The intervening legislation 
potentially affects only those areas that include the hospitals whose 
reclassifications or special exceptions were extended, as well as areas 
to which such hospitals were reclassified for FY 2009. Therefore, we 
want to make clear that we will not be choosing wage index values for 
hospitals that are reclassified to or located in areas containing no 
hospitals whose reclassifications or exceptions were extended by 
section 124 of Public Law 110-275.
    Hospitals will have 15 days from the date of publication of the 
separate notice to notify us if they wish to revise the decision that 
CMS makes on their behalf. Members of a group reclassification must 
ensure that all members of the group (except hospitals whose 
reclassifications were extended by section 124 of Pub. L. 110-275) have 
signed the revision request. Written requests to revise CMS' wage index 
decision must be received at the following address by no later than 5 
p.m. EST 15 days from the date of publication of the separate notice in 
the Federal Register: Division of Acute Care, Center for Medicare 
Management, C4-08-06, 7500 Security Boulevard, Baltimore, MD 21244, 
Attn: Brian Slater.
    If we do not receive notice from the hospital within this 15-day 
timeframe, the determination made by CMS on behalf of the hospital in 
the separate notice will be deemed final for FY 2009. We will not 
further recalculate the wage indices or standardized amounts based on 
hospitals' decisions that further revise decisions made by CMS on the 
hospitals' behalf. If CMS makes a decision on a hospital's behalf to 
terminate or withdraw a reclassification so that a hospital will 
receive a higher qualifying wage index for FY 2009, and the hospital 
does not reverse or modify CMS' decision within the 15-day timeframe, 
we will deem the hospital's reclassification is withdrawn or terminated 
for FY 2009 only, as section 508 reclassifications and special

[[Page 48589]]

exceptions are only extended through FY 2009. Such hospitals, if there 
is at least one remaining year in their 3-year reclassification, will 
automatically have their MGCRB reclassification reinstated for FY 2010. 
Thus, for example, if we assign a hospital a section 508 
reclassification wage index for FY 2009 and the hospital had been 
previously granted a reclassification by the MGCRB for FY 2008 through 
2010, the hospital's previous reclassification would be automatically 
reinstated for the remaining year, FY 2010. By the same token, if the 
omission of a section 508 or special exception hospital from the 
calculation of the reclassification wage index in Table 4C of the 
separate issuance results in the reclassification wage index decreasing 
to the point that a hospital should have terminated its MGCRB 
reclassification for FYs 2008 through 2010 and accepted its home wage 
index, we will withdraw or terminate the reclassification on the 
hospital's behalf. However, such reclassification will then be 
automatically reinstated for FY 2010. In the case that a hospital had a 
choice for FY 2009 of two overlapping possible MGCRB 3-year 
reclassifications, and one such MGCRB reclassification is assigned to 
the hospital via the process discussed above, then the reclassification 
not accepted would be permanently terminated. Likewise, if the hospital 
with the choice of two overlapping MGCRB reclassifications is a section 
508 or special exception hospital that receives the section 508 or 
special exception wage index for FY 2009, then only the 
reclassification that the hospital had originally chosen for FY 2009 
will be reinstated, and the other reclassification will be permanently 
terminated. In other words, in accordance with our current rules with 
regard to overlapping MGCRB reclassifications, a hospital will not be 
permitted to hold in reserve two possible MGCRB reclassifications 
through these procedures. In addition, if CMS believes that waiving a 
hospital's Lugar redesignation in order for the hospital to receive its 
home area wage index plus its out-migration adjustment results in the 
highest possible wage index for the hospital, and the hospital does not 
notify CMS within the 15-day timeframe to revise CMS' decision, such 
waiver will only apply to the FY 2009 wage index.
    Our special procedural rules for FY 2009 are authorized under 
section 1886(d)(10)(D)(v) of the Act, which requires the Secretary to 
``establish procedures under which a subsection (d) hospital may elect 
to terminate'' a reclassification. While the section authorizes the 
Secretary to establish procedures, it does not dictate the specifics of 
such procedures. Given the intervening legislation for FY 2009, and the 
need to expeditiously engage in a series of recalculations for FY 2009, 
we believe the most reasonable course at this point is for us to make 
our best efforts to give affected hospitals their highest wage index 
values, and then allow hospitals to opt out of such selections.
    The special procedural rules will be effective upon publication and 
supersede conflicting procedures included in 42 CFR 412.273. Because 
these rules are effective only for FY 2009, we are not revising the 
general rules included in the regulation at Sec.  412.273.

J. FY 2009 Wage Index Adjustment Based on Commuting Patterns of 
Hospital Employees

    In accordance with the broad discretion under section 1886(d)(13) 
of the Act, as added by section 505 of Public Law 108-173, beginning 
with FY 2005, we established a process to make adjustments to the 
hospital wage index based on commuting patterns of hospital employees 
(the ``out-migration'' adjustment). The process, outlined in the FY 
2005 IPPS final rule (69 FR 49061), provides for an increase in the 
wage index for hospitals located in certain counties that have a 
relatively high percentage of hospital employees who reside in the 
county but work in a different county (or counties) with a higher wage 
index. Such adjustments to the wage index are effective for 3 years, 
unless a hospital requests to waive the application of the adjustment. 
A county will not lose its status as a qualifying county due to wage 
index changes during the 3-year period, and counties will receive the 
same wage index increase for those 3 years. However, a county that 
qualifies in any given year may no longer qualify after the 3-year 
period, or it may qualify but receive a different adjustment to the 
wage index level. Hospitals that receive this adjustment to their wage 
index are not eligible for reclassification under section 1886(d)(8) or 
section 1886(d)(10) of the Act. Adjustments under this provision are 
not subject to the budget neutrality requirements under section 
1886(d)(3)(E) of the Act.
    Hospitals located in counties that qualify for the wage index 
adjustment are to receive an increase in the wage index that is equal 
to the average of the differences between the wage indices of the labor 
market area(s) with higher wage indices and the wage index of the 
resident county, weighted by the overall percentage of hospital workers 
residing in the qualifying county who are employed in any labor market 
area with a higher wage index. Beginning with the FY 2008 wage index, 
we use post-reclassified wage indices when determining the out-
migration adjustment (72 FR 47339).
    For the FY 2009 wage index, we will calculate the out-migration 
adjustment using the same formula described in the FY 2005 IPPS final 
rule (69 FR 49064), with the addition of using the post-reclassified 
wage indices, to calculate the out-migration adjustment. This 
adjustment is calculated as follows:
    Step 1. Subtract the wage index for the qualifying county from the 
wage index of each of the higher wage area(s) to which hospital workers 
commute.
    Step 2. Divide the number of hospital employees residing in the 
qualifying county who are employed in such higher wage index area by 
the total number of hospital employees residing in the qualifying 
county who are employed in any higher wage index area. For each of the 
higher wage index areas, multiply this result by the result obtained in 
Step 1.
    Step 3. Sum the products resulting from Step 2 (if the qualifying 
county has workers commuting to more than one higher wage index area).
    Step 4. Multiply the result from Step 3 by the percentage of 
hospital employees who are residing in the qualifying county and who 
are employed in any higher wage index area.
    These adjustments will be effective for each county for a period of 
3 fiscal years. For example, hospitals that received the adjustment for 
the first time in FY 2008 will be eligible to retain the adjustment for 
FY 2009. For hospitals in newly qualified counties, adjustments to the 
wage index are effective for 3 years, beginning with discharges 
occurring on or after October 1, 2008.
    Hospitals receiving the wage index adjustment under section 
1886(d)(13)(F) of the Act are not eligible for reclassification under 
sections 1886(d)(8) or (d)(10) of the Act unless they waive the out-
migration adjustment. Consistent with our FY 2005, 2006, 2007, and 2008 
IPPS final rules, we are specifying that hospitals redesignated under 
section 1886(d)(8) of the Act or reclassified under section 1886(d)(10) 
of the Act will be deemed to have chosen to retain their redesignation 
or reclassification. Section 1886(d)(10) hospitals that wish to receive 
the out-migration adjustment, rather than their reclassification, had 
to

[[Page 48590]]

follow the termination/withdrawal procedures specified in 42 CFR 
412.273 and section III.I.3. of the preamble of the proposed rule. 
Otherwise, they were deemed to have waived the out-migration 
adjustment. Hospitals redesignated under section 1886(d)(8) of the Act 
were deemed to have waived the out-migration adjustment, unless they 
explicitly notified CMS within 45 days from the publication of the 
proposed rule that they elected to receive the out-migration adjustment 
instead. (However, we refer readers to section III.I.7. of the preamble 
of this final rule for special rules for hospitals in areas affected by 
section 124 of Pub. L. 110-275.)
    Table 4J in the Addendum to this final rule lists the out-migration 
wage index adjustments for FY 2009. A revised table 4J will be 
published in a separate Federal Register notice, as explained in 
section III.I.7. of this preamble. Hospitals that are not otherwise 
reclassified or redesignated under section 1886(d)(8) or section 
1886(d)(10) of the Act (or who receive certain special 
reclassifications or exceptions under section 124 of Pub. L. 110-275) 
will automatically receive the listed adjustment. In accordance with 
the procedures discussed above, except as discussed in section III.I.7. 
of the preamble of this final rule, redesignated/reclassified hospitals 
are deemed to have waived the out-migration adjustment unless CMS was 
otherwise notified within the necessary timeframe. In addition, 
hospitals eligible to receive the out-migration wage index adjustment 
and that withdrew their application for reclassification should receive 
the wage index adjustment listed in the final Table 4J (a tentative 
Table 4J is included in the Addendum to this final rule but will be 
updated in the separate Federal Register notice discussed in section 
III.I.7. of this preamble).

K. Process for Requests for Wage Index Data Corrections

    The preliminary, unaudited Worksheet S-3 wage data and occupational 
mix survey data files for the FY 2009 wage index were made available on 
October 5, 2007, through the Internet on the CMS Web site at: http://
www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp#TopOfPage.
    In the interest of meeting the data needs of the public, beginning 
with the proposed FY 2009 wage index, we posted an additional public 
use file on our Web site that reflects the actual data that are used in 
computing the proposed wage index. The release of this new file did not 
alter the current wage index process or schedule. We notified the 
hospital community of the availability of these data as we do with the 
current public use wage data files through our Hospital Open Door 
forum. We encouraged hospitals to sign up for automatic notifications 
of information about hospital issues and the scheduling of the Hospital 
Open Door forums at: http://www.cms.hhs.gov/OpenDoorForums/.
    In a memorandum dated October 5, 2007, we instructed all fiscal 
intermediaries/MACs to inform the IPPS hospitals they service of the 
availability of the wage index data files and the process and timeframe 
for requesting revisions (including the specific deadlines listed 
below). We also instructed the fiscal intermediaries/MACs to advise 
hospitals that these data were also made available directly through 
their representative hospital organizations.
    If a hospital wished to request a change to its data as shown in 
the October 5, 2007 wage and occupational mix data files, the hospital 
was to submit corrections along with complete, detailed supporting 
documentation to its fiscal intermediary/MAC by December 7, 2007. 
Hospitals were notified of this deadline and of all other possible 
deadlines and requirements, including the requirement to review and 
verify their data as posted on the preliminary wage index data files on 
the Internet, through the October 5, 2007 memorandum referenced above.
    In the October 5, 2007 memorandum, we also specified that a 
hospital requesting revisions to its first and/or second quarter 
occupational mix survey data was to copy its record(s) from the CY 2006 
occupational mix preliminary files posted to our Web site in October, 
highlight the revised cells on its spreadsheet, and submit its 
spreadsheet(s) and complete documentation to its fiscal intermediary/
MAC no later than December 7, 2007.
    The fiscal intermediaries (or, if applicable, the MACs) notified 
the hospitals by mid-February 2008 of any changes to the wage index 
data as a result of the desk reviews and the resolution of the 
hospitals' early-December revision requests. The fiscal intermediaries/
MACs also submitted the revised data to CMS by mid-February 2008. CMS 
published the proposed wage index public use files that included 
hospitals' revised wage index data on February 25, 2008. In a 
memorandum also dated February 25, 2008, we instructed fiscal 
intermediaries/MACs to notify all hospitals regarding the availability 
of the proposed wage index public use files and the criteria and 
process for requesting corrections and revisions to the wage index 
data. Hospitals had until March 11, 2008, to submit requests to the 
fiscal intermediaries/MACs for reconsideration of adjustments made by 
the fiscal intermediaries/MACs as a result of the desk review, and to 
correct errors due to CMS's or the fiscal intermediary's (or, if 
applicable, the MAC's) mishandling of the wage index data. Hospitals 
were also required to submit sufficient documentation to support their 
requests.
    After reviewing requested changes submitted by hospitals, fiscal 
intermediaries/MACs were required to transmit any additional revisions 
resulting from the hospitals' reconsideration requests by April 14, 
2008. The deadline for a hospital to request CMS intervention in cases 
where the hospital disagreed with the fiscal intermediary's (or, if 
applicable, the MAC's) policy interpretations was April 21, 2008.
    Hospitals were given the opportunity to examine Table 2 in the 
Addendum to the proposed rule. Table 2 in the Addendum to the proposed 
rule contained each hospital's adjusted average hourly wage used to 
construct the wage index values for the past 3 years, including the FY 
2005 data used to construct the proposed FY 2009 wage index. We noted 
that the hospital average hourly wages shown in Table 2 only reflected 
changes made to a hospital's data and transmitted to CMS by February 
29, 2008.
    We released the final wage index data public use files in early May 
2008 on the Internet at http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/
list.asp#TopOfPage. The May 2008 public use files were made available 
solely for the limited purpose of identifying any potential errors made 
by CMS or the fiscal intermediary/MAC in the entry of the final wage 
index data that resulted from the correction process described above 
(revisions submitted to CMS by the fiscal intermediaries/MACs by April 
14, 2008). If, after reviewing the May 2008 final files, a hospital 
believed that its wage or occupational mix data were incorrect due to a 
fiscal intermediary/MAC or CMS error in the entry or tabulation of the 
final data, the hospital had to send a letter to both its fiscal 
intermediary/MAC and CMS that outlined why the hospital believed an 
error existed and to provide all supporting information, including 
relevant dates (for example, when it first became aware of the error). 
CMS and the fiscal intermediaries (or, if applicable,

[[Page 48591]]

the MACs) had to receive these requests no later than June 9, 2008.
    Each request also had to be sent to the fiscal intermediary/MAC. 
The fiscal intermediary/MAC reviewed requests upon receipt and 
contacted CMS immediately to discuss any findings.
    At this point in the process, that is, after the release of the May 
2008 wage index data files, changes to the wage and occupational mix 
data were only made only in those very limited situations involving an 
error by the fiscal intermediary/MAC or CMS that the hospital could not 
have known about before its review of the final wage index data files. 
Specifically, neither the fiscal intermediary/MAC nor CMS approved the 
following types of requests:
     Requests for wage index data corrections that were 
submitted too late to be included in the data transmitted to CMS by 
fiscal intermediaries or the MACs on or before April 21, 2008.
     Requests for correction of errors that were not, but could 
have been, identified during the hospital's review of the February 25, 
2008 wage index public use files.
     Requests to revisit factual determinations or policy 
interpretations made by the fiscal intermediary or the MAC or CMS 
during the wage index data correction process.
    Verified corrections to the wage index data received timely by CMS 
and the fiscal intermediaries or the MACs (that is, by June 9, 2008) 
were incorporated into the final wage index in this FY 2009 IPPS final 
rule, which will be effective October 1, 2008.
    We created the processes described above to resolve all substantive 
wage index data correction disputes before we finalize the wage and 
occupational mix data for the FY 2009 payment rates. Accordingly, 
hospitals that did not meet the procedural deadlines set forth above 
will not be afforded a later opportunity to submit wage index data 
corrections or to dispute the fiscal intermediary's (or, if applicable 
the MAC's) decision with respect to requested changes. Specifically, 
our policy is that hospitals that do not meet the procedural deadlines 
set forth above will not be permitted to challenge later, before the 
Provider Reimbursement Review Board, the failure of CMS to make a 
requested data revision. (See W. A. Foote Memorial Hospital v. Shalala, 
No. 99-CV-75202-DT (E.D. Mich. 2001) and Palisades General Hospital v. 
Thompson, No. 99-1230 (D.D.C. 2003).) We refer readers also to the FY 
2000 final rule (64 FR 41513) for a discussion of the parameters for 
appealing to the PRRB for wage index data corrections.
    Again, we believe the wage index data correction process described 
above provides hospitals with sufficient opportunity to bring errors in 
their wage and occupational mix data to the fiscal intermediary's (or, 
if applicable, the MAC's) attention. Moreover, because hospitals had 
access to the final wage index data by early May 2008, they had the 
opportunity to detect any data entry or tabulation errors made by the 
fiscal intermediary or the MAC or CMS before the development and 
publication of the final FY 2009 wage index by August 1, 2008, and the 
implementation of the FY 2009 wage index on October 1, 2008. If 
hospitals availed themselves of the opportunities afforded to provide 
and make corrections to the wage and occupational mix data, the wage 
index implemented on October 1 should be accurate. Nevertheless, in the 
event that errors are identified by hospitals and brought to our 
attention after June 9, 2008, we retain the right to make midyear 
changes to the wage index under very limited circumstances.
    Specifically, in accordance with 42 CFR 412.64(k)(1) of our 
existing regulations, we make midyear corrections to the wage index for 
an area only if a hospital can show that: (1) The fiscal intermediary 
or the MAC or CMS made an error in tabulating its data; and (2) the 
requesting hospital could not have known about the error or did not 
have an opportunity to correct the error, before the beginning of the 
fiscal year. For purposes of this provision, ``before the beginning of 
the fiscal year'' means by the June 9th deadline for making corrections 
to the wage data for the following fiscal year's wage index. This 
provision is not available to a hospital seeking to revise another 
hospital's data that may be affecting the requesting hospital's wage 
index for the labor market area. As indicated earlier, because CMS 
makes the wage index data available to hospitals on the CMS Web site 
prior to publishing both the proposed and final IPPS rules, and the 
fiscal intermediaries or the MAC notify hospitals directly of any wage 
index data changes after completing their desk reviews, we do not 
expect that midyear corrections will be necessary. However, under our 
current policy, if the correction of a data error changes the wage 
index value for an area, the revised wage index value will be effective 
prospectively from the date the correction is made.
    In the FY 2006 IPPS final rule (70 FR 47385), we revised 42 CFR 
412.64(k)(2) to specify that, effective on October 1, 2005, that is 
beginning with the FY 2006 wage index, a change to the wage index can 
be made retroactive to the beginning of the Federal fiscal year only 
when: (1) The fiscal intermediary (or, if applicable, the MAC) or CMS 
made an error in tabulating data used for the wage index calculation; 
(2) the hospital knew about the error and requested that the fiscal 
intermediary (or if applicable the MAC) and CMS correct the error using 
the established process and within the established schedule for 
requesting corrections to the wage index data, before the beginning of 
the fiscal year for the applicable IPPS update (that is, by the June 9, 
2008 deadline for the FY 2009 wage index); and (3) CMS agreed that the 
fiscal intermediary (or if applicable, the MAC) or CMS made an error in 
tabulating the hospital's wage index data and the wage index should be 
corrected.
    In those circumstances where a hospital requested a correction to 
its wage index data before CMS calculates the final wage index (that 
is, by the June 9th deadline), and CMS acknowledges that the error in 
the hospital's wage index data was caused by CMS' or the fiscal 
intermediary's (or, if applicable, the MAC's) mishandling of the data, 
we believe that the hospital should not be penalized by our delay in 
publishing or implementing the correction. As with our current policy, 
we indicated that the provision is not available to a hospital seeking 
to revise another hospital's data. In addition, the provision cannot be 
used to correct prior years' wage index data; and it can only be used 
for the current Federal fiscal year. In other situations where our 
policies would allow midyear corrections, we continue to believe that 
it is appropriate to make prospective-only corrections to the wage 
index.
    We note that, as with prospective changes to the wage index, the 
final retroactive correction will be made irrespective of whether the 
change increases or decreases a hospital's payment rate. In addition, 
we note that the policy of retroactive adjustment will still apply in 
those instances where a judicial decision reverses a CMS denial of a 
hospital's wage index data revision request.

L. Labor-Related Share for the Wage Index for FY 2009

    Section 1886(d)(3)(E) of the Act directs the Secretary to adjust 
the proportion of the national prospective payment system base payment 
rates that are attributable to wages and wage-related costs by a factor 
that reflects the relative differences in labor costs among geographic 
areas. It also directs the Secretary to estimate from time to time the 
proportion of hospital costs that are labor-related: ``The Secretary 
shall

[[Page 48592]]

adjust the proportion (as estimated by the Secretary from time to time) 
of hospitals' costs which are attributable to wages and wage-related 
costs of the DRG prospective payment rates * * *''. We refer to the 
portion of hospital costs attributable to wages and wage-related costs 
as the labor-related share. The labor-related share of the prospective 
payment rate is adjusted by an index of relative labor costs, which is 
referred to as the wage index.
    Section 403 of Public Law 108-173 amended section 1886(d)(3)(E) of 
the Act to provide that the Secretary must employ 62 percent as the 
labor-related share unless this ``would result in lower payments to a 
hospital than would otherwise be made.'' However, this provision of 
Public Law 108-173 did not change the legal requirement that the 
Secretary estimate ``from time to time'' the proportion of hospitals' 
costs that are ``attributable to wages and wage-related costs.'' We 
interpret this to mean that hospitals receive payment based on either a 
62-percent labor-related share, or the labor-related share estimated 
from time to time by the Secretary, depending on which labor-related 
share resulted in a higher payment.
    We have continued our research into the assumptions employed in 
calculating the labor-related share. Our research involves analyzing 
the compensation share separately for urban and rural hospitals, using 
regression analysis to determine the proportion of costs influenced by 
the area wage index, and exploring alternative methodologies to 
determine whether all or only a portion of professional fees and 
nonlabor intensive services should be considered labor-related.
    In the FY 2006 IPPS final rule (70 FR 47392), we presented our 
analysis and conclusions regarding the methodology for updating the 
labor-related share for FY 2006. We also recalculated a labor-related 
share of 69.731 percent, using the FY 2002-based PPS market basket for 
discharges occurring on or after October 1, 2005. In addition, we 
implemented this revised and rebased labor-related share in a budget 
neutral manner, but consistent with section 1886(d)(3)(E) of the Act, 
we did not take into account the additional payments that would be made 
as a result of hospitals with a wage index less than or equal to 1.0 
being paid using a labor-related share lower than the labor-related 
share of hospitals with a wage index greater than 1.0.
    The labor-related share is used to determine the proportion of the 
national PPS base payment rate to which the area wage index is applied. 
In this final rule, as we proposed, we are not making any changes to 
the national average proportion of operating costs that are 
attributable to wages and salaries, fringe benefits, professional fees, 
contract labor, and labor intensive services. Therefore, we are 
continuing to use a labor-related share of 69.731 percent for 
discharges occurring on or after October 1, 2008. Tables 1A and 1B in 
the Addendum to this final rule reflect this labor-related share. 
However, as noted in the Addendum, these figures are tentative only and 
will be revised as a result of section 124 of Public Law 110-275 in a 
separate Federal Register notice to be published subsequent to this 
final rule. We note that section 403 of Public Law 108-173 amended 
sections 1886(d)(3)(E) and 1886(d)(9)(C)(iv) of the Act to provide that 
the Secretary must employ 62 percent as the labor-related share unless 
this employment ``would result in lower payments to a hospital than 
would otherwise be made.''
    As we proposed, we also are continuing to use a labor-related share 
for the Puerto Rico-specific standardized amounts of 58.7 percent for 
discharges occurring on or after October 1, 2008. Consistent with our 
methodology for determining the national labor-related share, we added 
the Puerto Rico-specific relative weights for wages and salaries, 
fringe benefits, contract labor, nonmedical professional fees, and 
other labor-intensive services to determine the labor-related share. 
Puerto Rico hospitals are paid based on 75 percent of the national 
standardized amounts and 25 percent of the Puerto Rico-specific 
standardized amounts. For Puerto Rico hospitals, the national labor-
related share will always be 62 percent because the wage index for all 
Puerto Rico hospitals is less than 1.0. A Puerto Rico-specific wage 
index is applied to the Puerto Rico-specific portion of payments to the 
hospitals. The labor-related share of a hospital's Puerto Rico-specific 
rate will be either 62 percent or the Puerto Rico-specific labor-
related share depending on which results in higher payments to the 
hospital. If the hospital has a Puerto Rico-specific wage index of 
greater than 1.0, we will set the hospital's rates using a labor-
related share of 62 percent for the 25 percent portion of the 
hospital's payment determined by the Puerto Rico standardized amounts 
because this amount will result in higher payments. Conversely, a 
hospital with a Puerto Rico-specific wage index of less than 1.0 will 
be paid using the Puerto Rico-specific labor-related share of 58.7 
percent of the Puerto Rico-specific rates because the lower labor-
related share will result in higher payments. The Puerto Rico labor-
related share of 58.7 percent for FY 2008 is reflected in the tentative 
Table 1C of the Addendum to this final rule. (As explained in this 
preamble and the Addendum to this final rule, section 124 of Pub. L. 
119-275 will require us to recalculate the final rates and publish such 
rates in a separate Federal Register notice.)

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

A. Changes to the Postacute Care Transfer Policy (Sec.  412.4)

1. Background
    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 
accordance with Sec.  412.4(f), in transfer situations, the 
transferring hospital is paid based on a per diem rate for each day of 
the stay, not to exceed the full MS-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 MS-DRG payment by the geometric mean length of stay 
for the MS-DRG. Based on an analysis that showed that the first day of 
hospitalization is the most expensive (60 FR 5804), our policy 
generally provides for payment that is double the per diem amount for 
the first day, with each subsequent day paid at the per diem amount up 
to the full DRG payment (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 
(adjusted for geographic variations in costs), divided by the geometric 
mean length of stay for the MS-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 patients to another hospital, a SNF, or home under 
a written plan of care for home health services early in the patients' 
stay in order to minimize costs while still receiving the full MS-DRG 
payment. The transfer policy adjusts the payments to approximate the 
reduced costs of transfer cases.

[[Page 48593]]

    Beginning with the FY 2006 IPPS, the regulations at Sec.  412.4 
specified that, effective October 1, 2005, a DRG would be 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 made 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 adopted for FY 2008 were a significant revision 
to the CMS DRG system (72 FR 47141). Because the MS-DRGs were not 
reflected in Version 23.0 of the DRG Definitions Manual, consistent 
with Sec.  412.4, we established policy to recalculate the 55th 
percentile thresholds in order to determine which MS-DRGs would be 
subject to the postacute care transfer policy (72 FR 47186 through 
47188). Further, under the MS-DRGs, the subdivisions within the base 
DRGs are different than those under the previous CMS DRGs. Unlike the 
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 an MCC; (2) the presence of a CC; or (3) the 
absence of either an MCC or a CC. Consistent with our previous policy 
under which both CMS DRGs in a CC/non-CC pair were qualifying DRGs if 
one of the pair qualified, we established that each MS-DRG that shared 
a base MS-DRG will be a qualifying DRG if one of the MS-DRGs that 
shared the base DRG qualifies. We revised Sec.  412.4(d)(3)(ii) to 
codify this policy.
    Similarly, the adoption of the MS-DRGs also necessitated 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 (excluding any outlier payments and add-on payments for 
new technology) plus the average per diem for the first day of the 
stay. In addition, the hospital will receive 50 percent of the per diem 
amount for each subsequent day of the stay, up to the full MS-DRG 
payment amount. A CMS DRG was subject to the special payment 
methodology if it met the criteria in the regulations under Sec.  
412.4(f)(5). Section 412.4(f)(5)(iv) specifies that, for discharges 
occurring on or after October 1, 2005, and prior to October 1, 2007, 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 was no longer applicable under 
the MS-DRG system, in the FY 2008 IPPS final rule with comment period, 
we added a new Sec.  412.4(f)(6) (42 FR 47188 and 47410). Section 
412.4(f)(6) provides that, for discharges on or after October 1, 2007, 
if an MS-DRG meets the criteria specified under Sec. Sec.  
412.4(f)(6)(i) through (f)(6)(iii), any other MS-DRG that is part of 
the same MS-DRG group is also subject to the special payment 
methodology. We updated this criterion so that it conformed to the 
changes associated with adopting MS-DRGs for FY 2008. The revision 
makes 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.
    Section 1886(d)(5)(J) of the Act provides that, effective for 
discharges on or after October 1, 1998, a ``qualified discharge'' from 
one of DRGs selected by the Secretary to a postacute care provider 
would be treated as a transfer case. This section required the 
Secretary to define and pay as transfers all cases assigned to one of 
the DRGs selected by the Secretary, if the individuals are discharged 
to one of the following postacute care settings:
     A hospital or hospital unit that is not a subsection 
1886(d) hospital. (Section 1886(d)(1)(B) of the Act identifies the 
hospitals and hospital units that are excluded from the term 
``subsection (d) hospital'' as psychiatric hospitals and units, 
rehabilitation hospitals and units, children's hospitals, long-term 
care hospitals, and cancer hospitals.)
     A skilled nursing facility (as defined at section1819(a) 
of the Act).
     Home health services provided by a home health agency, if 
the services relate to the condition or diagnosis for which the 
individual received inpatient hospital services, and if the home health 
services are provided within an appropriate period (as determined by 
the Secretary). In the FY 1999 IPPS final rule (63 FR 40975 through 
40976 and 40979 through 40981), we specified that a patient discharged 
to home would be considered transferred to postacute care if the 
patient received home health services within 3 days after the date of 
discharge. In addition, in the FY 1999 IPPS final rule, we did not 
include patients transferred to a swing-bed for skilled nursing care in 
the definition of postacute care transfer cases (63 FR 40977).

[[Page 48594]]

2. Policy Change Relating to Transfers to Home with a Written Plan for 
the Provision of Home Health Services
    As noted above, in the FY 1999 IPPS final rule (63 FR 40975 through 
40976 and 40979 through 40981), we determined that 3 days is an 
appropriate period within which home health services should begin 
following a beneficiary's discharge to the home in order for the 
discharge to be considered a ``qualified discharge'' subject to the 
payment adjustment for postacute care transfer cases. In that same 
final rule, we noted that we would monitor whether 3 days would remain 
an appropriate timeframe.
    Section 1886(d)(5)(J)(ii)(III) of the Act provides that the 
discharge of an individual who receives home health services upon 
discharge will be treated as a transfer if ``such services are provided 
within an appropriate period (as determined by the Secretary. * * *''. 
The statute thus confers upon the Secretary the authority to determine 
an appropriate timeframe for the application of the postacute care 
transfer policy in cases where home health services commence subsequent 
to discharge from an acute care hospital. In the FY 1999 final IPPS 
rule, we established the policy that the postacute care transfer policy 
would apply to cases in which the home health care begins within 3 days 
after the date of discharge from an acute care hospital. We noted in 
that rule that we did not believe that it was appropriate to limit the 
transfer definition to cases in which home health care begins on the 
same day as the patient is discharged from the hospital. We observed 
that data indicated that less than 8 percent of discharged patients who 
receive home health care begin receiving those services on the date of 
discharge. We stated that we did not believe that it was reasonable to 
expect that patients who are discharged later in the day would receive 
a home health visit that same day. Furthermore, we believed that the 
financial incentive to delay needed home health care for only a matter 
of hours would be overwhelming if we limited the timeframe to one day. 
At the time of that final rule, we explained that we believed that 3 
days would be a more appropriate timeframe because it would mitigate 
the incentive to delay home health services to avoid the application of 
the postacute care transfer policy, and because a 3-day timeframe was 
consistent with existing patterns of care.
    In that final rule, we also noted that a number of commenters had 
raised issues and questions concerning the proposal to adopt 3 days as 
the appropriate timeframe for the application of the postacute care 
transfer policy in these cases. While most of the commenters advocated 
shorter timeframes, on the grounds that postacute care beginning 3 days 
after a discharge should not be considered a substitute for inpatient 
hospital care, others suggested that a 3-day window might still allow 
for needlessly prolonged hospital care or delayed home health in order 
to avoid the application of the postacute care transfer policy. 
Although MedPAC agreed with the commenters who asserted that home 
health care services furnished after a delay of more than one day may 
not necessarily be regarded as substituting for inpatient acute care, 
they also noted that a 3-day window allows for the fact that most home 
health patients do not receive care every day, as well as for those 
occasions in which there may be a delay in arranging for the provision 
of planned care (for example, an intervening weekend). MedPAC also 
stated that a shorter period may create a stronger incentive to delay 
the provision of necessary care beyond the window so that the hospital 
will receive the full DRG payment. In the light of these comments and, 
in particular, of the concern that a 3-day timeframe still allowed for 
some incentive to delay necessary home health services in order to 
avoid the application of the postacute care transfer policy, we 
indicated that we would continue to monitor this policy in order to 
track any changes in practices that may indicate the need for revising 
the window.
    Since the adoption of this policy in FY 1999, we have continued to 
receive reports that some providers discharge patients prior to the 
geometric mean length of stay but intentionally delay home health 
services beyond 3 days after the acute hospital discharge in order to 
avoid the postacute care transfer payment adjustment policy. These 
reports, and the concerns expressed by some commenters in FY 1999 about 
the adequacy of a 3-day window to reduce such incentives, have prompted 
us to examine the available data concerning the initiation and program 
payments for home health care subsequent to discharge from postacute 
care.
    We merged the FY 2004 MedPAR file with postacute care bill files 
matching beneficiary identification numbers and discharge and admission 
dates and looked at the 10 DRGs that were subject to the postacute care 
transfer policy from FYs 1999 through 2003 (DRG 14 (Intracranial 
Hemorrhage and Stroke with Infarction (formerly ``Specific 
Cerebrovascular Disorders Except Transient Ischemic Attack'')); DRG 113 
(Amputation for Circulatory System Disorders Except Upper Limb and 
Toe); DRG 209 (Major Joint Limb Reattachment Procedures of Lower 
Extremity); DRG 210 (Hip and Femur Procedures Except Major Joint 
Procedures Age <=17 with CC); DRG 211 (Hip and Femur Procedures Except 
Major Joint Procedures Age <=17 without CC); DRG 236 (Fractures of Hip 
and Pelvis); DRG 263 (Skin Graft and/or Debridement for Skin Ulcer or 
Cellulitis with CC); DRG 264 (Skin Graft and/or Debridement for Skin 
Ulcer or Cellulitis without CC); DRG 429 (Organic Disturbances and 
Mental Retardation); and DRG 483 (Tracheostomy with Mechanical 
Ventilation 96+ Hours or Principal Diagnosis Except Face, Mouth, and 
Neck Diagnoses (formerly ``Tracheostomy Except for Face, Mouth, and 
Neck Diagnoses'')). We selected the original 10 ``qualified DRGs'' 
because they were the DRGs to which the postacute care transfer policy 
applied for FYs 1999 through 2003 and because we expect that trends 
that we found in the data with those DRGs would be likely to accurately 
reflect provider practices after the inception of the postacute care 
transfer policy. We expect that provider practices for the original 10 
DRGs would be consistent even with the expansion of the DRGs that are 
subject to the postacute care transfer policy. We note that providers 
may have even a greater incentive to delay the initiation of home 
health care in an effort to avoid the postacute care transfer policy 
now that there are more DRGs to which the policy applies. We compared 
data on home health services provided to patients who were discharged 
prior to the geometric mean length of stay to patients who were 
discharged at or beyond the geometric mean length of stay. For purposes 
of this analysis, we assumed that home health was the first discharge 
designation from the acute care hospital setting.
    The data showed that, on average, the Medicare payment per home 
health visit was higher for patients who were discharged prior to the 
geometric mean length of stay (as compared to patients who were 
discharged at or beyond the geometric mean length of stay). 
Specifically, we found that average Medicare payments per home health 
care visit were consistently higher for patients discharged prior to 
the geometric mean length of stay than for patients discharged at or 
after the geometric mean length of stay. The average home health care 
per visit

[[Page 48595]]

payments for patients treated for the relevant DRGs and discharged 
before the geometric mean length of stay are $204 when the initiation 
of home health care began on the second day after discharge, $199 on 
the third day, and $182 on the sixth day, compared to $177, $163, and 
$171, respectively for patients discharged on or after the geometric 
mean length of stay. Furthermore, the ratio of the payments for these 
two groups increased from 1.16 on the third day after discharge to 1.22 
on the fourth day, before falling again to 1.04, 1.07, and 1.08 on the 
fifth, sixth, and seventh days. This suggested to us the possibility 
that home health care for some relatively sicker patients is being 
delayed until just beyond the 3-day window during which the postacute 
care transfer policy applies.
    In the light of these data, we indicated in the FY 2009 IPPS 
proposed rule (73 FR 23641) that we believed it was appropriate to 
propose extending the applicable timeframe in order to reduce the 
incentive for providers to delay home health care when discharging 
patients from the acute care setting. Further examination of the data 
indicated that the average per day Medicare payments for home health 
care for those patients, in the DRGs to which the postacute care 
transfer policy applies, who are discharged from the hospital prior to 
the geometric mean length of stay, stabilizes at a somewhat lower 
amount when the initiation of home health visits begins on the seventh 
and subsequent days after discharge. Specifically, average payments per 
visit for this group fall from $182 when home health services began on 
the sixth day after the acute care hospital discharge to $174 on the 
seventh day, and then remain relatively steady at $171, $177, and $172 
on the eighth, ninth, and tenth days. This suggested to us that a 7-day 
period might be an appropriate point at which to establish a new 
timeframe.
    As a consequence of this analysis, in the proposed rule, we 
proposed to revise the regulations at Sec.  412.4(c)(3) to extend the 
timeframe to within 7 days after the date of discharge to home under a 
written plan for the provision of home health services, effective 
October 1, 2008. We stated that we believed extending the applicable 
timeframe would lessen the incentive for providers to delay the start 
of home health care after discharging patients from the acute care 
hospital setting. We also indicated that during the comment period on 
the proposed rule, we planned to continue to search our data on 
postacute care discharges to home health services. We welcomed comments 
and suggestions on other data analyses that could be performed to 
determine an appropriate timeframe for which the postacute care 
transfer policy would apply.
    In addition to the reasons noted above, we stated that we believed 
that 7 days is currently an appropriate timeframe because we believe 
that it accommodates current practices and it is sufficiently long 
enough to lessen the likelihood that providers would delay the 
initiation of necessary home health services. At the same time, we 
stated that we believed that 7 days is narrow enough that we would 
still expect the majority of the home health services to be related to 
the condition to which the acute inpatient hospital stay was necessary. 
Further, we noted that there may be some cases for which it is not 
clinically appropriate to begin home health services immediately 
following an acute care discharge, and that even when home health 
services are clinically appropriate sooner than within 7 days of acute 
care discharge, home health services may not be immediately available.
    We note that, as we stated in the FY 2000 IPPS final rule (65 FR 
47081), if the hospital's continuing care plan for the patient is not 
related to the purpose of the inpatient hospital admission, a condition 
code 42 must be entered on the claim. In addition, if the proposed 
policy were to be adopted and the continuing care plan is related to 
the purpose of the inpatient hospital admission but begins after 7 days 
after discharge, a condition code 43 would have to be entered on the 
claim. Under the present policy, condition code 43 applies when the 
home health services begin within 3 days after the date of discharge 
from the acute care hospital. The presence of either of these condition 
codes in conjunction with patient status discharge code 06 (Discharged/
Transferred to Home under Care of Organized Home Health Service 
Organization in Anticipation of Covered Skilled Care) will result in 
full payment rather than the transfer payment amount.
    We received many comments on this proposal. The commenters included 
hospitals, hospital industry associations, HHAs, representatives of the 
home health care industry, and MedPAC. The comments were almost 
uniformly opposed to the proposal. As we discuss in more detail below, 
we are not proceeding with finalizing this proposal.
    Comment: Some commenters expressed opposition to the proposal on 
the grounds that the postacute care transfer policy in itself is 
inconsistent with the principles of a PPS. The commenters emphasized 
the nature of a PPS as a system of averages, designed to reward 
hospitals for the efficient provision of services. Under a PPS, they 
asserted, cases with longer-than-average lengths of stay tend to be 
paid less than costs, while cases with shorter-than-average stays tend 
to be paid more than costs. These commenters argued that, in general, 
the postacute care transfer policy penalizes hospitals for the 
efficient treatment of patients. Expansion of the postacute care 
transfer policy, they opined, would thus further undercut the basic 
principles and objectives of a PPS and only penalize hospitals further.
    Response: We disagree that the proposed postacute care transfer 
policy violates the principles of a PPS. The postacute care transfer 
provision is mandated by statute, and in previous rules we have 
thoroughly discussed the sound policy reasons for including such a 
provision within the IPPS. (We refer readers to previous IPPS final 
rules, including the rules at 63 FR 40975 through 40976 and 63 FR 40979 
through 40981, for more details.) Therefore, we do not believe that 
objections to the postacute care transfer policy in general provide any 
rationale for refraining from expansions and revisions to the policy, 
provided those changes are in and of themselves warranted by sound 
policy considerations.
    Comment: Many commenters opposed the proposal for reasons related 
to the merits of the proposal itself. These commenters presented a 
number of arguments against the proposal. Some commenters asserted that 
the data CMS used to support the proposal were outdated and incomplete. 
Other commenters argued that home health care that begins 4 or more 
days after the date of discharge is unlikely to be a continuation of 
acute-level care. Some commenters asserted that it is physicians, not 
hospitals, who typically order home health services for patients. 
Therefore, they contended, hospitals should not be financially 
penalized for decisions made outside of their control. Other commenters 
suggested that physicians be held responsible for those decisions 
through the physician fee schedule instead.
    Response: In response to the comment that we used outdated and 
incomplete data in developing our proposal, we note that, for the years 
for which the analysis was conducted (the data were based on claims 
from FYs 1999 through 2003), there were only 10 DRGs subject to the 
postacute care transfer policy. We continue to believe, as we stated in 
the proposed rule, that the trends we found when there were only 10 
DRGs subject

[[Page 48596]]

to the policy would be consistent with the trends that will be found in 
more recent data. Furthermore, we believe that these trends may be even 
more pronounced in light of the fact that there are now many more MS-
DRGs (273) subject to the postacute care transfer policy.
    We also do not find persuasive the comments arguing that because 
physicians typically order home health care rather than hospitals, 
decisions regarding the commencement of the provision of home health 
care are made outside of the hospital's control. We note that, even 
under the current 3-day policy, physicians, not hospitals, typically 
discharge patients from the acute care hospital setting and that the 
postacute care transfer policy applies when a ``qualified'' discharge 
occurs prior to the geometric mean length of stay and the hospital 
receives a reduced payment even under the current policy. Furthermore, 
because the physician who orders both the early discharge and the 
initiation of home health care for the patient is typically employed, 
contracted, or at least, has privileges at the affected hospital, we 
believe that the hospital has a relationship with the physician and 
should have knowledge of the physician's practices. Therefore, we 
disagree with the contention that the hospital is being inappropriately 
penalized for actions outside its control. Similarly, in response to 
the comment related to reducing physician payments, we note that 
section 1886(d)(5)(J)(ii)(III) of the Act requires that the postacute 
care transfer policy apply to acute care hospital payments under the 
IPPS, and not to physicians under the Medicare PFS. Therefore, we 
disagree with the contention that physician payments under the Medicare 
PFS should be affected by this provision. We also note that it is the 
hospital, not the physician, that stands to gain financially from the 
early discharge of a patient.
    We also note that the commenters who expressed the concern that 
home health care initiated more than 4 days after the discharge would 
be unrelated to the acute care stay failed to mention an important 
feature of the postacute care transfer policy. Specifically, it is 
important to recognize that CMS allows hospitals, through use of a 
condition code on the claim, to bypass the reduced transfer payment for 
home health care that is unrelated to the acute care stay. Therefore, 
we disagree that acute hospitals are financially penalized for 
appropriate transfers to home health that are unrelated to the acute 
care stay.
    Comment: Some commenters claimed that it is administratively 
burdensome for hospitals to track whether patients received home health 
care services up to 7 days after they have been discharged from the 
hospital, particularly for hospitals that submit their claims within 7 
days of discharge. In addition, these and other commenters argued that 
CMS should not implement a change to the postacute care transfer policy 
in light of recent changes made to the home health PPS in CY 2008, and 
in the light of our proposal to implement the CARE tool demonstration 
that will examine differences in costs and outcomes across postacute 
care settings (discussed in section IV.B. of this preamble).
    Response: We have stated in prior Federal Register notices and in 
provider education articles that, in most instances, we would expect 
the provider to be aware of the postacute care that its patient would 
receive. We also note that providers are allowed to adjust claims after 
they have been submitted, including making adjustments for the purpose 
of reflecting any home health services that are provided subsequent to 
the acute care hospital discharge.
    Providers made similar arguments when we adopted the 3-day window 
in FY 1999, which we responded to at that time. We refer readers to the 
FY 1999 IPPS final rule (63 FR 40979 through 40980) for a complete 
discussion. We have not become aware of any widespread pattern of 
providers being unaware of the postacute care received by recently 
discharged patients, although, as we mentioned in the FY 1999 IPPS 
final rule (63 FR 40980), there may be occasional instances in which 
the hospital is unaware that a physician has ordered home health 
services for a recently discharged patient. Therefore, we are not 
persuaded by these comments.
    In response to the comment related to recent changes in the home 
health PPS, we again note that the postacute care transfer policy 
applies to acute IPPS hospital payments, not to home health PPS 
payments. Based on information provided by the commenter (which did not 
point out any specific changes in the home health PPS that could 
potentially have an effect on the postacute care transfer policy), it 
is unclear exactly how changes to home health payments might have an 
effect on payments made under the postacute care transfer policy 
provision. Additionally, the commenter did not provide specific 
information on how the CARE Tool demonstration is related to postacute 
care transfer payments to acute care hospitals, and we see no evidence 
that one should effect the other.
    Comment: One commenter acknowledged that it had received anecdotal 
reports that some hospitals instructed physicians to delay the 
initiation of home health services until after 3 days. However, the 
commenter argued that expansion of the existing policy would not alter 
this behavior. Other commenters argued that there are legitimate 
reasons that the start of home health care services may be delayed, 
including: Patient/family preferences, availability of home health care 
providers, and insurance coverage. Specifically, commenters stated that 
patients may request that their primary care physician (someone other 
than the physician taking care of them while they were in the hospital) 
arrange for home health services. In addition, it is not uncommon for a 
patient to be discharged home from the hospital, then to visit their 
physician a day or two later, only to have the physician order home 
health services that take another day or two to begin--again pushing 
the start of home health services beyond the 3-day window. These 
commenters contended that hospitals should not be ``penalized'' because 
of these legitimate delays.
    Response: We agree that there may be legitimate delays in the 
initiation of home health care services subsequent to an acute care 
hospital discharge. However, the fact that the delays are legitimate 
does not establish that it is inappropriate to adjust payments to 
account for the discharge into postacute care. There may be legitimate 
delays in the initiation of home health care services even under the 3-
day window, but the postacute transfer policy still applies in that 
situation. This is because one of the primary objectives of the 
postacute care transfer policy is to pay providers appropriately for 
services rendered. When the care of a patient is shared between an 
acute care hospital provider and home health care services within 3 
days of the acute care discharge, we believe that it is appropriate to 
pay the acute care hospital a reduced payment because it only provided 
services for a shorter than average amount of time. Therefore, we 
believe that these comments lend support to the continued need to 
monitor the current policy to see if there are trends of delays in the 
initiation of home health services, whether such delays are 
``legitimate'' or not. As we discuss below, we are not proceeding with 
finalizing this proposal. We will continue to consider whether the 3-
day window is appropriate in light of all the relevant data.
    Comment: MedPAC commented that it does not believe that the data 
presented in the proposed rule support an expansion of the policy from 
3 days

[[Page 48597]]

to 7 days. MedPAC conducted its own analysis of 2005 and 2006 data and 
commented that its data do not support an expansion. In particular, 
MedPAC pointed out that its data provide no evidence of a spike in home 
health use 4 days after discharge, which it would have expected to see 
if there was significant gaming under our current 3-day window policy. 
In addition, MedPAC found that the distribution of claims by the number 
of days between hospital discharge and the beginning of home heath care 
is similar between DRGs subject to the postacute care transfer policy 
and those that are not subject to the postacute care transfer policy, 
suggesting that there has not been significant gaming of the system 
under the current 3-day window. MedPAC, therefore, concluded that CMS 
should provide stronger support for why the change is needed. Other 
commenters also suggested that CMS analyze the data more thoroughly and 
make a proposal based on that analysis in FY 2010.
    Response: We have not yet received MedPAC's data analysis in 
support of its conclusion that there is no evidence of a spike in home 
health care services that begin after 4 days of discharge from the 
acute care hospital setting. Similarly, we have not seen the specific 
data indicating that there is no significant difference between the 
number of days between hospital discharge and postacute care between 
those DRGs subject to the postacute care transfer policy. Therefore, we 
are unable to compare their data with our own data, which have shown 
some evidence of a spike in home heath care services 4 days after 
discharge. However, we agree with MedPAC that it would be preferable to 
defer proceeding with this or a similar proposal until stronger 
evidence (that is, data) is available in support of the change. We also 
agree with the other commenters who suggested that it is more prudent 
at this time to continue studying this issue than to proceed with 
finalizing our proposal to extend the current 3-day window to 7 days. 
However, we remain concerned that a relatively brief window, such as 3 
days, may create a strong incentive to delay the provision of necessary 
care beyond the window so that the hospital will receive the full MS-
DRG payment. Therefore, we will continue to monitor this policy in 
order to track any changes in practices that may indicate the need for 
revising the window. We may proceed with this proposal or another 
proposal to address the issue in a subsequent rulemaking cycle.
    After consideration of the public comments received, we are not 
adopting as final our proposed change to the regulations at Sec.  
412.4(c)(3) relating to the proposed 7-day window for postacute care 
transfers to home health care services. As we indicated above, we will 
continue to monitor the existing policy and may address the issue in a 
subsequent rulemaking.
3. Evaluation of MS-DRGs Under Postacute Care Transfer Policy for FY 
2009
    For FY 2009, we did not propose to make any changes to the criteria 
by which an MS-DRG would qualify for inclusion in the postacute care 
transfer policy. However, because we proposed to revise some existing 
MS-DRGs and to add one new MS-DRG (discussed under section II.G. of 
this preamble), we proposed to evaluate those MS-DRGs under our 
existing postacute care transfer criteria in order to determine whether 
any of the revised or new MS-DRGs will meet the postacute care transfer 
criteria for FY 2009. Therefore, we indicated that, for 2009, we were 
evaluating MS-DRGs 001, 002, 215, 245, 901 through 909, 913 through 
923, 955 through 959, and 963 through 965. We noted that any revisions 
made would not constitute a change to the application of the postacute 
care transfer policy. We included a list indicating which MS-DRGs would 
be subject to the postacute care transfer policy for FY 2009 in Table 5 
in the Addendum to the proposed rule.
    We did not receive any public comments on this issue. We completed 
our evaluation of the MS-DRGs listed above against the criteria for 
postacture care transfer payments. Table 5 of this final rule contains 
a complete list of MS-DRGs that are subject to the postacute care 
transfer policy for FY 2009.

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

1. Background
a. Overview
    CMS is transforming the Medicare program from a passive payer to an 
active purchaser of higher quality, more efficient health care. Such 
changes will contribute to the sustainability of the Medicare program, 
encourage the delivery of high quality care while avoiding unnecessary 
costs, and help ensure high value for beneficiaries. To support this 
transformation, CMS has worked with stakeholders to develop and 
implement quality measures, make provider and plan performance public, 
link payment incentives to reporting on measures, and ultimately is 
working to link payment to actual performance on these measures. 
Commonly referred to as value-based purchasing, this policy aligns 
payment incentives with the quality of care as well as the resources 
used to deliver care to encourage the delivery of high-value health 
care.
    The success of this transformation is supported by and dependent 
upon an increasing number of widely-agreed upon quality measures. The 
Medicare program has defined measures of quality in almost every 
setting and measures some aspect of care for almost all Medicare 
beneficiaries. These measures include clinical processes, patient 
perception of their care experience, and, increasingly, outcomes.
    The Medicare program has established mechanisms for collecting 
information on these measures, such as QualityNet, an Internet-based 
process that hospitals use to report all-payer information. Initial 
voluntary efforts were supplemented beginning in FY 2005 by a provision 
in the Medicare Prescription Drug Improvement and Modernization Act 
(MMA), which provided the full annual payment update only to 
``subsection (d) hospitals'' (that is, hospitals paid under the IPPS) 
that successfully reported on a set of widely-agreed upon quality 
measures. Since FY 2007, as required by subsequent legislation (the 
Deficit Reduction Act (DRA)) the number of quality measures and the 
amount of the financial incentive have increased.
    As a result, the great majority of hospitals now report on quality 
measures for heart failure, acute myocardial infarction, pneumonia, and 
surgical care improvement and received the full annual update for FY 
2008. The number of measures has continued to grow and the types of 
measures have grown as well, with the addition of outcomes measures, 
such as heart attack and heart failure mortality measures, and the 
HCAHPS measures of patient satisfaction. In section IV.B.2. of the 
preamble to the FY 2009 IPPS proposed rule, we sought public comments 
on proposed additional quality measures (73 FR 23646). Reporting on 
these measures provides hospitals a greater awareness of the quality of 
care they provide and provides actionable information for consumers to 
make more informed decisions about their health care providers and 
treatments.
    Moving beyond pay for reporting to paying for performance, CMS has 
designed a Hospital Value-Based Purchasing (VBP) Plan that would link 
hospital payments to their actual performance on quality measures. In 
accordance with the DRA, the Plan was submitted to Congress in November

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2007. We discuss the Plan more fully in section IV.C. of this preamble.
    The ongoing CMS Premier Hospital Quality Incentive Demonstration 
project is another effort linking payments to quality performance. 
Launched in 2003, the Premier Hospital Quality Incentive Demonstration 
project promotes measurable improvements in the quality of care, 
examining whether economic incentives to hospitals are effective at 
improving the quality of care. Early evidence from the project 
indicates that linking payments to quality performance is effective. 
This demonstration project is ongoing with a scheduled end date of 
September 2009.
    As required by section 5001(c) the DRA, CMS also has implemented a 
program intended to encourage the prevention of certain avoidable or 
preventable hospital-acquired conditions (HACs), including infections 
that may occur during a hospital stay. Beginning October 1, 2007, CMS 
required hospitals to begin reporting information on Medicare claims 
specifying whether certain diagnoses were present on admission (POA). 
Beginning October 1, 2008, CMS will no longer pay hospitals for a DRG 
using the higher-paying CC or MCC associated with one or more of these 
conditions (if no other condition meeting the higher paying CC or MCC 
criteria is present) unless the condition was POA (that is, not 
acquired during the hospi