[Federal Register Volume 77, Number 92 (Friday, May 11, 2012)]
[Proposed Rules]
[Pages 27869-28192]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-9985]



[[Page 27869]]

Vol. 77

Friday,

No. 92

May 11, 2012

Part II





Department of Health and Human Services





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Centers for Medicare & Medicaid Services





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42 CFR Parts 412, 413, 424, et. al





Medicare Program; Hospital Inpatient Prospective Payment Systems for 
Acute Care Hospitals and the Long-Term Care Hospital Prospective 
Payment System and Fiscal Year 2013 Rates; Hospitals' Resident Caps for 
Graduate Medical Education Payment Purposes; Quality Reporting 
Requirements for Specific Providers and for Ambulatory Surgical 
Centers; Proposed Rule

Federal Register / Vol. 77, No. 92 / Friday, May 11, 2012 / Proposed 
Rules

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 412, 413, 424, 476, and 489

[CMS-1588-P]
RIN 0938-AR12


Medicare Program; Hospital Inpatient Prospective Payment Systems 
for Acute Care Hospitals and the Long-Term Care Hospital Prospective 
Payment System and Fiscal Year 2013 Rates; Hospitals' Resident Caps for 
Graduate Medical Education Payment Purposes; Quality Reporting 
Requirements for Specific Providers and for Ambulatory Surgical Centers

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

ACTION: Proposed rule.

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SUMMARY: We are proposing to revise the Medicare hospital inpatient 
prospective payment systems (IPPS) for operating and capital-related 
costs of acute care hospitals to implement changes arising from our 
continuing experience with these systems and to implement certain 
statutory provisions contained in the Patient Protection and Affordable 
Care Act and the Health Care and Education Reconciliation Act of 2010 
(collectively known as the Affordable Care Act) and other legislation. 
These changes would be applicable to discharges occurring on or after 
October 1, 2012. We also are proposing to update the rate-of-increase 
limits for certain hospitals excluded from the IPPS that are paid on a 
reasonable cost basis subject to these limits. The updated rate-of-
increase limits would be effective for cost reporting periods beginning 
on or after October 1, 2012.
    We are proposing to update the payment policy and the annual 
payment rates for the Medicare prospective payment system (PPS) for 
inpatient hospital services provided by long-term care hospitals 
(LTCHs) and implementing certain statutory changes made by the 
Affordable Care Act. These proposed changes would be applicable to 
discharges occurring on or after October 1, 2012.
    In addition, we are proposing changes relating to determining a 
hospital's full-time equivalent (FTE) resident cap for the purpose of 
graduate medical education (GME) and indirect medical education (IME) 
payments. We are proposing new requirements or revised requirements for 
quality reporting by specific providers (acute care hospitals, PPS-
exempt cancer hospitals, LTCHs, and inpatient psychiatric facilities 
(IPFs)) that are participating in Medicare. We also are proposing new 
administrative, data completeness, and extraordinary circumstance 
waivers or extension requests requirements, as well as a 
reconsideration process, for quality reporting by ambulatory surgical 
centers (ASCs) that are participating in Medicare.
    We are proposing requirements for the Hospital Value-Based 
Purchasing (VBP) Program and the Hospital Readmissions Reduction 
Program.

DATES: Comment Period: To be assured consideration, comments must be 
received at one of the addresses provided below, no later than 5 p.m. 
EDT on June 25, 2012.

ADDRESSES: When commenting, please refer to file code CMS-1588-P. 
Because of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    You may submit comments in one of four ways (please choose only one 
of the ways listed):
    1. Electronically. You may submit electronic comments on this 
regulation at http://www.regulations.gov. Follow the instructions for 
``Comment or Submission'' and enter the file code CMS-1588-P to submit 
comments on this proposed rule.
    2. By regular mail. You may mail written comments (one original and 
two copies) to the following address ONLY: Centers for Medicare & 
Medicaid Services, Department of Health and Human Services, Attention: 
CMS-1588-P, P.O. Box 8011, Baltimore, MD 21244-1850.
    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By express or overnight mail. You may send written comments (one 
original and two copies) to the following address ONLY: Centers for 
Medicare & Medicaid Services, Department of Health and Human Services, 
Attention: CMS-1588-P, Mail Stop C4-26-05, 7500 Security Boulevard, 
Baltimore, MD 21244-1850.
    4. By hand or courier. If you prefer, you may deliver (by hand or 
courier) your written comments (one original and two copies) before the 
close of the comment period to either of the following addresses:
    a. Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue 
SW., Washington, DC 20201.
    (Because access to the interior of the HHH Building is not readily 
available to persons without Federal Government identification, 
commenters are encouraged to leave their comments in the CMS drop slots 
located in the main lobby of the building. A stamp-in clock is 
available for persons wishing to retain a proof of filing by stamping 
in and retaining an extra copy of the comments being filed.)
    b. 7500 Security Boulevard, Baltimore, MD 21244-1850.
    If you intend to deliver your comments to the Baltimore address, 
please call telephone number (410) 786-7195 in advance to schedule your 
arrival with one of our staff members.
    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and received after the comment 
period.
    For information on viewing public comments, see the beginning of 
the Supplementary Information section.

FOR FURTHER INFORMATION CONTACT: Tzvi Hefter, (410) 786-4487, and Ing-
Jye Cheng, (410) 786-4548, Operating Prospective Payment, MS-DRGs, 
Hospital Acquired Conditions (HAC), Wage Index, New Medical Service and 
Technology Add-On Payments, Hospital Geographic Reclassifications, 
Graduate Medical Education, Capital Prospective Payment, Excluded 
Hospitals, Medicare Disproportionate Share Hospital (DSH), and 
Postacute Care Transfer Issues.
    Michele Hudson, (410) 786-4487, and Judith Richter, (410) 786-2590, 
Long-Term Care Hospital Prospective Payment System and MS-LTC-DRG 
Relative Weights Issues.
    Mollie Knight, (410) 786-7948, Market Basket for LTCHs Issues.
    Siddhartha Mazumdar, (410) 786-6673, Rural Community Hospital 
Demonstration Program Issues.
    James Poyer, (410) 786-2261, Inpatient Quality Reporting and 
Hospital Value-Based Purchasing--Program Administration, Validation, 
and Reconsideration Issues.
    Shaheen Halim, (410) 786-0641, Inpatient Quality Reporting--
Measures Issues Except Hospital Consumer Assessment of Healthcare 
Providers and Systems Issues; and Readmission Measures for Hospitals 
Issues.
    Elizabeth Goldstein, (410) 786-6665, Inpatient Quality Reporting--
Hospital Consumer Assessment of Healthcare Providers and Systems 
Measures Issues.
    Mary Pratt, (410) 786-6867, LTCH Quality Data Reporting Issues.
    Kim Spaulding Bush, (410) 786-3232, Hospital Value-Based Purchasing 
Efficiency Measures Issues.
    James Poyer, (410) 786-2261, and Barbara Choo, (410) 786-4449, 
Inpatient Psychiatric Facility Quality Reporting Issues and PPS-Exempt 
Cancer Hospital Quality Reporting Issues.

[[Page 27871]]

    Anita Bhatia, (410) 786-7236, Ambulatory Surgical Center Quality 
Reporting Issues.

SUPPLEMENTARY INFORMATION: 
    Inspection of Public Comments: All comments received before the 
close of the comment period are available for viewing by the public, 
including any personally identifiable or confidential business 
information that is included in a comment. We post all comments 
received before the close of the comment period on the following Web 
site as soon as possible after they have been received: http://www.regulations.gov. Follow the search instructions at the Web site to 
view public comments.
    Comments received timely will also be available for public 
inspection, generally beginning approximately 3 weeks after publication 
of a document, at the headquarters of the Centers for Medicare & 
Medicaid Services, 7500 Security Boulevard, Baltimore, Maryland 21244, 
Monday through Friday of each week from 8:30 a.m. to 4:00 p.m. To 
schedule an appointment to view public comments, phone 1-800-743-3951.

Electronic Access

    This Federal Register document is also available from the Federal 
Register online database through the U.S. Government Printing Office 
Web page at: http://www.gpo.gov/fdsys/browse/collection.action?collectionCode=FR. Free public access is available on 
a Wide Area Information Server (WAIS) through the Internet and via 
asynchronous dial-in. Internet users can access the database by using 
the World Wide Web (the Superintendent of Documents' home Web page 
address), 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).

Tables Available Only Through the Internet on the CMS Web Site

    In the past, a majority of the tables referred to throughout this 
preamble and in the Addendum to this proposed rule were published in 
the Federal Register as part of the annual proposed and final rules. 
However, beginning in FY 2012, some of the IPPS tables and LTCH PPS 
tables are no longer published as part of the annual IPPS and LTCH PPS 
proposed and final rules. Instead, these tables will be available only 
through the Internet. The IPPS tables for this proposed rule are 
available only through the Internet on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/01_overview.asp. Click on the link 
on the left side of the screen titled, ``FY 2013 IPPS Final Rule Home 
Page'' or ``Acute Inpatient--Files for Download''. The LTCH PPS tables 
for this FY 2013 proposed rule are available only through the Internet 
on the CMS Web site at: http://www.cms.gov/LongTermCareHospitalPPS/LTCHPPSRN/list.asp under the list item for Regulation Number CMS-1588-
F. For complete details on the availability of the tables referenced in 
this proposed rule, we refer readers to section VI. of the Addendum to 
this proposed rule.
    Readers who experience any problems accessing any of the tables 
that are posted on the CMS Web sites identified above should contact 
Nisha Bhat at (410) 786-4487.

Acronyms

3M 3M Health Information System
AAMC Association of American Medical Colleges
ACGME Accreditation Council for Graduate Medical Education
AHA American Hospital Association
AHIC American Health Information Community
AHIMA American Health Information Management Association
AHRQ Agency for Healthcare Research and Quality
ALOS Average length of stay
ALTHA Acute Long Term Hospital Association
AMA American Medical Association
AMGA American Medical Group Association
AOA American Osteopathic Association
APR DRG All Patient Refined Diagnosis Related Group System
ARRA American Recovery and Reinvestment Act of 2009, Public Law 111-
5
ASC Ambulatory surgical center
ASCA Administrative Simplification Compliance Act of 2002, Public 
Law 107-105
ASCQR Ambulatory Surgical Center Quality Reporting
ASITN American Society of Interventional and Therapeutic 
Neuroradiology
BBA Balanced Budget Act of 1997, Public Law 105-33
BBRA Medicare, Medicaid, and SCHIP [State Children's Health 
Insurance Program] Balanced Budget Refinement Act of 1999, Public 
Law 106-113
BIPA Medicare, Medicaid, and SCHIP [State Children's Health 
Insurance Program] Benefits Improvement and Protection Act of 2000, 
Public Law 106-554
BLS Bureau of Labor Statistics
CAH Critical access hospital
CARE [Medicare] Continuity Assessment Record & Evaluation 
[Instrument]
CART CMS Abstraction & Reporting Tool
CBSAs Core-based statistical areas
CC Complication or comorbidity
CCR Cost-to-charge ratio
CDAC [Medicare] Clinical Data Abstraction Center
CDAD Clostridium difficile-associated disease
CDC Center for Disease Control and Prevention
CIPI Capital input price index
CMI Case-mix index
CMS Centers for Medicare & Medicaid Services
CMSA Consolidated Metropolitan Statistical Area
COBRA Consolidated Omnibus Reconciliation Act of 1985, Public Law 
99-272
COLA Cost-of-living adjustment
CoP [Hospital] condition of participation
CPI Consumer price index
CRNA Certified Registered Nurse Anesthetist
CY Calendar year
DPP Disproportionate patient percentage
DRA Deficit Reduction Act of 2005, Public Law 109-171
DRG Diagnosis-related group
DSH Disproportionate share hospital
ECI Employment cost index
EDB [Medicare] Enrollment Database
EHR Electronic health record
EMR Electronic medical record
FAH Federation of Hospitals
FDA Food and Drug Administration
FFY Federal fiscal year
FQHC Federally qualified health center
FTE Full-time equivalent
FY Fiscal year
GAAP Generally Accepted Accounting Principles
GAF Geographic Adjustment Factor
GME Graduate medical education
HACs Hospital-acquired conditions
HCAHPS Hospital Consumer Assessment of Healthcare Providers and 
Systems
HCFA Health Care Financing Administration
HCO High-cost outlier
HCRIS Hospital Cost Report Information System
HHA Home health agency
HHS Department of Health and Human Services
HICAN Health Insurance Claims Account Number
HIPAA 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
ICD-9-CM International Classification of Diseases, Ninth Revision, 
Clinical Modification
ICD-10-CM International Classification of Diseases, Tenth Revision, 
Clinical Modification

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ICD-10-PCS International Classification of Diseases, Tenth Revision, 
Procedure Coding System
ICR Information collection requirement
IGI IHS Global Insight, Inc.
IHS Indian Health Service
IME Indirect medical education
I-O Input-Output
IOM Institute of Medicine
IPF Inpatient psychiatric facility
IPPS [Acute care hospital] inpatient prospective payment system
IRF Inpatient rehabilitation facility
IQR Inpatient Quality Reporting
LAMCs Large area metropolitan counties
LOS Length of stay
LTC-DRG Long-term care diagnosis-related group
LTCH Long-term care hospital
LTCHQR Long-Term Care Hospital Quality Reporting
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
MMEA Medicare and Medicaid Extenders Act of 2010, Public Law 111-309
MMSEA Medicare, Medicaid, and SCHIP Extension Act of 2007, Public 
Law 110-173
MRHFP Medicare Rural Hospital Flexibility Program
MRSA Methicillin-resistant Staphylococcus aureus
MSA Metropolitan Statistical Area
MS-DRG Medicare severity diagnosis-related group
MS-LTC-DRG Medicare severity long-term care diagnosis-related group
NAICS North American Industrial Classification System
NALTH National Association of Long Term Hospitals
NCD National coverage determination
NCHS National Center for Health Statistics
NCQA National Committee for Quality Assurance
NCVHS National Committee on Vital and Health Statistics
NECMA New England County Metropolitan Areas
NHSN National Healthcare Safety Network
NQF National Quality Forum
NTIS National Technical Information Service
NTTAA National Technology Transfer and Advancement Act of 1991 (Pub. 
L. 104-113)
NVHRI National Voluntary Hospital Reporting Initiative
OACT [CMS'] Office of the Actuary
OBRA 86 Omnibus Budget Reconciliation Act of 1996, Public Law 99-509
OES Occupational employment statistics
OIG Office of the Inspector General
OMB Executive Office of Management and Budget
OPM U.S. Office of Personnel Management
O.R. Operating room
OSCAR Online Survey Certification and Reporting [System]
PCH PPS-exempt cancer hospital
PCHQR PPS-exempt cancer hospital quality reporting
PMSAs Primary metropolitan statistical areas
POA Present on admission
PPACA Patient Protection and Affordable Care Act, Public Law 111-148
PPI Producer price index
PPS Prospective payment system
PRM Provider Reimbursement Manual
ProPAC Prospective Payment Assessment Commission
PRRB Provider Reimbursement Review Board
PRTFs Psychiatric residential treatment facilities
PSF Provider-Specific File
PS&R Provider Statistical and Reimbursement (System)
QIG Quality Improvement Group, CMS
QIO Quality Improvement Organization
RCE Reasonable compensation equivalent
RHC Rural health clinic
RHQDAPU Reporting hospital quality data for annual payment update
RNHCI Religious nonmedical health care institution
RPL Rehabilitation psychiatric long-term care (hospital)
RRC Rural referral center
RTI Research Triangle Institute, International
RUCAs Rural-urban commuting area codes
RY Rate year
SAF Standard Analytic File
SCH Sole community hospital
SFY State fiscal year
SIC Standard Industrial Classification
SNF Skilled nursing facility
SOCs Standard occupational classifications
SOM State Operations Manual
SSO Short-stay outlier
TEFRA Tax Equity and Fiscal Responsibility Act of 1982, Public Law 
97-248
TEP Technical expert panel
TMA TMA [Transitional Medical Assistance], Abstinence Education, and 
QI [Qualifying Individuals] Programs Extension Act of 2007, Public 
Law 110-90
TPS Total Performance Score
UHDDS Uniform hospital discharge data set

Table of Contents

I. Executive Summary and Background
    A. Executive Summary
    1. Purpose and Legal Authority
    2. Summary of the Major Provisions of Rule
    3. Summary of Costs and Benefits
    B. Background
    1. Acute Care Hospital Inpatient Prospective Payment System 
(IPPS)
    2. Hospitals and Hospital Units Excluded From the IPPS
    3. Long-Term Care Hospital Prospective Payment System (LTCH PPS)
    4. Critical Access Hospitals (CAHs)
    5. Payments for Graduate Medical Education (GME)
    C. Provisions of the Patient Protection and Affordable Care Act 
(Pub. L. 111-148) and the Health Care and Education Reconciliation 
Act of 2010 (Pub. L. 111-152) Applicable to FY 2013
    D. Major Contents of This Proposed Rule
II. Proposed Changes to Medicare Severity Diagnosis-Related Group 
(MS-DRG) Classifications and Relative Weights
    A. Background
    B. MS-DRG Reclassifications
    1. General
    2. Yearly Review for Making MS-DRG Changes
    C. Adoption of the MS-DRGs in FY 2008
    D. Proposed FY 2013 MS-DRG Documentation and Coding Adjustment, 
Including the Applicability to the Hospital-Specific Rates and the 
Puerto Rico-Specific Standardized Amount
    1. Background on the Prospective MS-DRG Documentation and Coding 
Adjustments for FY 2008 and FY 2009 Authorized by Public Law 110-90
    2. Prospective Adjustment to the Average Standardized Amounts 
Required by Section 7(b)(1)(A) of Public Law 110-90
    3. Recoupment or Repayment Adjustments in FYs 2010 Through 2012 
Required by Pub. L. 110-90
    4. Retrospective Evaluation of FY 2008 and FY 2009 Claims Data
    5. Prospective Adjustment for FY 2008 and FY 2009 Authorized by 
Section 7(b)(1)(A) of Public Law 110-90 and Section 1886(d)(3)(vi) 
of the Act
    6. Recoupment or Repayment Adjustment Authorized by Section 
7(b)(1)(B) of Public Law 110-90
    7. Background on the Application of the Documentation and Coding 
Adjustment to the Hospital-Specific Rates
    8. Documentation and Coding Adjustment to the Hospital-Specific 
Rates for FY 2011 and Subsequent Fiscal Years
    9. Application of the Documentation and Coding Adjustment to the 
Puerto Rico-Specific Standardized Amount
    a. Background
    b. Documentation and Coding Adjustment to the Puerto Rico-
Specific Standard Amount
    10. Proposed Prospective Adjustments for FY 2010 Documentation 
and Coding Effect
    E. Refinement of the MS-DRG Relative Weight Calculation
    1. Background
    2. Summary of Policy Discussions in FY 2012
    3. Discussion for FY 2013
    F. Preventable Hospital-Acquired Conditions (HACs), Including 
Infections
    1. Background
    2. HAC Selection

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    a. Diagnosis Codes Proposed To Be Added to Existing HACs
    b. Proposals To Add New HAC Candidate: Surgical Site Infection 
(SSI) Following Cardiac Implantable Electronic Device (CIED) 
Procedures
    c. Proposal Regarding Previously Considered HAC Candidate: 
Iatrogenic Pneumothorax With Venous Catheterization
    3. Present on Admission (POA) Indicator Reporting
    4. HACs and POA Reporting in ICD-10-CM and ICD-10-PCS
    5. Proposed Changes to the HAC Policy for FY 2013
    6. RTI Program Evaluation Summary
    G. Proposed Changes to Specific MS-DRG Classifications
    1. Pre-Major Diagnostic Categories (Pre-MDCs)
    a. Ventricular Assist Device
    b. Allogeneic Bone Marrow Transplant
    2. MDC 4 (Diseases and Disorders of the Ear, Nose, Mouth and 
Throat): Influenza With Pneumonia
    3. MDC 5 (Diseases and Disorders of the Circulatory System)
    a. Mitral Valve Repair
    b. Endovascular Implantation of Branching or Fenestrated Grafts 
in Aorta
    4. MDC 10 (Endocrine, Nutritional, and Metabolic Diseases and 
Disorders): Disorders of Porphyrin Metabolism
    5. Proposed Medicare Code Editor (MCE) Changes
    6. Surgical Hierarchies
    7. Complications or Comorbidity (CC) Exclusions List
    a. Background
    b. CC Exclusions List for FY 2013
    (1) No Revisions Based on Changes to the ICD-9-CM Diagnosis 
Codes for FY 2013
    (2) Suggested Changes to MS-DRG Severity Levels for Diagnosis 
Codes for FY 2013
    (A) Protein-Calorie Malnutrition
    (B) Antineoplastic Chemotherapy Induced Anemia
    (C) Cardiomyopathy and Congestive Heart Failure, Unspecified
    (D) Chronic Total Occlusion of Artery of the Extremities
    (E) Acute Kidney Failure With Other Specified Pathological 
Lesion in Kidney
    (F) Pressure Ulcer, Unstageable
    8. Review of Procedure Codes in MS-DRGs 981 Through 983, 984 
Through 986, and 987 Through 989
    a. Moving Procedure Codes From MS-DRGs 981 Through 983 or MS-
DRGs 987 Through 989 Into 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
    9. Proposed Changes to the ICD-9-CM Coding System, Including 
Discussion of the Replacement of the ICD-9-CM System With the ICD-
10-CM and ICD-10-PCS Systems in FY 2014
    a. ICD-9-CM Coding System
    b. Code Freeze
    c. Processing of 25 Diagnosis Codes and 25 Procedure Codes on 
Hospital Inpatient Claims
    d. ICD-10 MS-DRGs
    H. Recalibration of MS-DRG Weights
    1. Data Sources for Developing the Proposed Weights
    2. Methodology for Calculation of the Proposed Relative Weights
    3. Development of National Average CCRs
    4. Bundled Payments for Care Improvement (BPCI) Initiative
    I. Proposed Add-On Payments for New Services and Technologies
    1. Background
    2. Public Input Before Publication of a Notice of Proposed 
Rulemaking on Add-On Payments
    3. FY 2013 Status of Technology Approved for FY 2012 Add-On 
Payments: AutoLaser Interstitial Thermal Therapy (AutoLITT\TM\)
    4. FY 2013 Applications for New Technology Add-On Payments
    a. Glucarpidase (Trade Brand Voraxaze[supreg])
    b. DIFICID\TM\ (Fidaxomicin) Tablets
    c. Zilver[supreg] PTX[supreg] Drug-Eluting Stent
    d. Zenith[supreg] Fenestrated Abdominal Aortic Aneurysm (AAA) 
Endovascular Graft
III. Proposed Changes to the Hospital Wage Index for Acute Care 
Hospitals
    A. Background
    B. Core-Based Statistical Areas for the Hospital Wage Index
    C. Worksheet S-3 Wage Data for the Proposed FY 2013 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
    D. Verification of Worksheet S-3 Wage Data
    E. Method for Computing the Proposed FY 2013 Unadjusted Wage 
Index
    F. Proposed Occupational Mix Adjustment to the FY 2013 Wage 
Index
    G. Analysis and Implementation of the Proposed Occupational Mix 
Adjustment and the Proposed FY 2013 Occupational Mix Adjusted Wage 
Index
    1. Analysis of the Occupational Mix Adjustment and the 
Occupational Mix Adjusted Wage Index
    2. Application of the Rural, Imputed, and Frontier Floors
    a. Rural Floor
    b. Imputed Floor and Proposal for an Alternative, Temporary 
Methodology for Computing the Imputed Floor
    c. Frontier Floor
    3. Proposed FY 2013 Wage Index Tables
    H. Revisions to the Wage Index Based on Hospital Redesignations 
and Reclassifications
    1. General
    2. Effects of Reclassification/Redesignation
    3. FY 2013 MGCRB Reclassifications
    a. FY 2013 Reclassification Requirements and Approvals
    b. Applications for Reclassifications for FY 2014
    4. Redesignations of Hospitals Under Section 1886(d)(8)(B) of 
the Act
    5. Reclassifications Under Section 1886(d)(8)(B) of the Act
    6. Reclassifications Under Section 508 of Public Law 108-173
    7. Waiving Lugar Redesignation for the Out-Migration Adjustment
    8. Other Geographic Reclassification Issues
    a. Requested Reclassification for Single Hospital MSAs
    b. Requests for Exceptions to Geographic Reclassification Rules
    I. Proposed FY 2013 Wage Index Adjustment Based on Commuting 
Patterns of Hospital Employees
    J. Process for Requests for Wage Index Data Corrections
    K. Labor-Related Share for the FY 2013 Wage Index
IV. Other Proposed Decisions and Changes to the IPPS for Operating 
Costs and GME Costs
    A. Hospital Readmission Reduction Program
    1. Statutory Basis for the Hospital Readmissions Reduction 
Program
    2. Overview
    3. FY 2013 Proposed Policies for the Hospital Readmissions 
Reduction Program
    a. Overview
    b. Proposals Regarding Base Operating DRG Payment Amount, 
Including Special Rules for SCHs and MDHs and Hospitals Paid Under 
Section 1814 of the Act
    (1) Proposed Definition of Base Operating DRG Payment Amount 
(Proposed Sec.  412.152)
    (2) Proposal on Special Rules for Certain Hospitals: Hospitals 
Paid Under Section 1814(b)(3) of the Act (Proposed Sec.  412.154(d))
    c. Proposals Regarding Adjustment Factor (Both the Ratio and 
Floor Adjustment Factor (Proposed Sec.  412.154(c))
    d. Proposals Regarding Aggregate Payments for Excess 
Readmissions and Aggregate Payment for All Discharges (Proposed 
Sec.  412.152)
    e. Proposals Regarding Applicable Hospital (Proposed Sec.  
412.152)
    4. Limitations on Review (Proposed Sec.  412.154(e))
    5. Reporting Hospital-Specific Information, Including 
Opportunity To Review and Submit Corrections ((Proposed Sec.  
412.154(f))
    B. Sole Community Hospitals (SCHs) (Sec.  412.92)
    1. Background
    2. Clarification of Regulations Regarding Duration of 
Classification (Proposed Sec.  412.92(b)(3)(iv))
    3. Proposed Change to Effective Date of Classification for MDHs 
Applying for SCH Status Upon the Expiration of the MDH Program 
(Proposed Sec.  412.92(b)(3)(v))
    C. Rural Referral Centers (RRCs): Annual Update to Case-Mix 
Index (CMI) and Discharge Criteria (Sec.  412.96)
    1. Case-Mix Index (CMI)
    2. Discharges
    D. Proposed Payment Adjustment for Low-Volume Hospitals (Sec.  
412.101)
    1. Expiration of the Affordable Care Act Provision for FYs 2011 
and 2012
    2. Background
    3. Affordable Care Act Provisions for FYs 2011 and 2012
    4. Proposed Payment Adjustment for FY 2013 and Subsequent Years

[[Page 27874]]

    E. Indirect Medical Education (IME) Adjustment (Sec.  412.105)
    1. IME Adjustment Factor for FY 2013
    2. Clarification and Proposal Regarding Timely Filing 
Requirements Under Fee-for-Service Medicare
    F. Payment Adjustment for Medicare Disproportionate Share 
Hospitals (DSHs) and Indirect Medical Education (IME) (Sec. Sec.  
412.105 and 412.106)
    1. Background
    2. Proposed Policy Change Relating to Treatment of Labor and 
Delivery Beds in the Calculation of the Medicare DSH Payment 
Adjustment and the IME Payment Adjustment
    G. Medicare-Dependent, Small Rural Hospital (MDH) Program (Sec.  
412.108)
    H. Proposed Changes in the Inpatient Hospital Update
    1. FY 2013 Inpatient Hospital Update
    2. FY 2013 Puerto Rico Hospital Update
    I. Payment for Graduate Medical Education Costs
    1. Background
    2. New Teaching Hospitals: Proposed Change in New Growth Period 
From 3 Years to 5 Years
    3. Clarification Related to 5-Year Period Following 
Implementation of Reductions and Increases to Hospitals' FTE 
Resident Caps for GME Payment Purposes Under Section 5503 of the 
Affordable Care Act
    4. Preservation of Resident Cap Positions From Closed Hospitals 
(Section 5506 of the Affordable Care Act)
    a. Background
    b. Proposed Change in Amount of Time Provided for Submitting 
Applications Under Section 5506 of the Affordable Care Act
    c. Proposed Change to the Ranking Criteria Under Section 5506
    d. Effective Dates of Slots Awarded Under Section 5506
    e. Clarification of Relationship Between Ranking Criteria One, 
Two, and Three
    f. Proposed Modifications to the Section 5506 CMS Evaluation 
Form
    J. Proposed Changes to the Reporting Requirements for Pension 
Costs for Medicare Cost-Finding Purposes
    K. Rural Community Hospital Demonstration Program
    1. Background
    2. Proposed FY 2013 Budget Neutrality Offset Amount
    L. Hospital Routine Services Furnished Under Arrangements
    M. Proposed Technical Change
V. Proposed Changes to the IPPS for Capital-Related Costs
    A. Overview
    B. Additional Provisions
    1. Exception Payments
    2. New Hospitals
    3. Hospitals Located in Puerto Rico
    C. Proposed Changes in the Documentation and Coding Adjustment 
for FY 2013
    1. Background
    2. Prospective Documentation and Coding Adjustment to the 
National Capital Federal Rate for FY 2013 and Subsequent Years
    3. Documentation and Coding Adjustment to the Puerto Rico-
Specific Capital Rate
    D. Proposed Changes for Annual Update for FY 2013
VI. Proposed Changes for Hospitals Excluded From the IPPS
VII. Proposed Changes to the Long-Term Care Hospital Prospective 
Payment System (LTCH PPS) for FY 2013
    A. Background of the LTCH PPS
    1. Legislative and Regulatory Authority
    2. Criteria for Classification as a LTCH
    a. Classification as a LTCH
    b. Hospitals Excluded From the LTCH PPS
    3. Limitation on Charges to Beneficiaries
    4. Administrative Simplification Compliance Act (ASCA) and 
Health Insurance Portability and Accountability Act (HIPAA) 
Compliance
    B. Proposed Medicare Severity Long-Term Care Diagnosis-Related 
Group (MS-LTC-DRG) Classifications and Relative Weights for FY 2013
    1. Background
    2. Patient Classifications Into MS-LTC-DRGs
    a. Background
    b. Proposed Changes to the MS-LTC-DRGs for FY 2013
    3. Development of the Proposed FY 2013 MS-LTC-DRG Relative 
Weights
    a. General Overview of the Development of the MS-LTC-DRG 
Relative Weights
    b. Development of the Proposed MS-LTC-DRG Relative Weights for 
FY 2013
    c. Data
    d. Hospital-Specific Relative Value (HSRV) Methodology
    e. Proposed Treatment of Severity Levels in Developing the MS-
LTC-DRG Relative Weights
    f. Proposed Low-Volume MS-LTC-DRGs--Steps for Determining the 
Proposed FY 2013 MS-LTC-DRG Relative Weights
    g. Steps for Determining the Proposed FY 2013 MS-LTC-DRG 
Relative Weights
    C. Proposed Use of a LTCH-Specific Market Basket Under the LTCH 
PPS
    1. Background
    2. Overview of the Proposed FY 2009-Based LTCH-Specific Market 
Basket
    3. Proposed Development of a LTCH-Specific Market Basket
    a. Development of Cost Categories
    b. Cost Category Computation
    c. Selection of Price Proxies
    d. Proposed Methodology for the Capital Portion of the Proposed 
FY 2009-Based LTCH-Specific Market Basket
    e. Proposed FY 2013 Market Basket for LTCHs
    f. Proposed FY 2013 Labor-Related Share
    D. Proposed Changes to the LTCH Payment Rates and Other Changes 
to the FY 2013 LTCH PPS
    1. Overview of Development of the LTCH Payment Rates
    2. Proposed FY 2013 LTCH PPS Annual Market Basket Update
    a. Overview
    b. Revision of Certain Market Basket Updates as Required by the 
Affordable Care Act
    c. Proposed Market Basket Under the LTCH PPS for FY 2013
    d. Proposed Annual Market Basket Update for LTCHs for FY 2013
    3. Proposed LTCH PPS Cost-of-Living Adjustment (COLA) for LTCHs 
Located in Alaska and Hawaii
    E. Expiration of Certain Payment Rules for LTCH Services and the 
Moratorium on the Establishment of Certain Hospitals and Satellite 
Facilities and on the Increase in Number of Beds at in LTCHs and 
LTCH Satellite Facilities
    1. Background
    2. The 25-Percent Payment Adjustment Threshold
    3. The ``IPPS Comparable Per Diem Amount'' Payment Option for 
Very Short Stays Under the SSO Policy
    4. Proposed One-Time Prospective Adjustment to the Standard 
Federal Rate Under Sec.  412.523(d)(3)
VIII. Proposed Quality Data Reporting Requirements for Specific 
Providers and Suppliers
    A. Hospital Inpatient Quality Reporting (IQR) Program
    1. Background
    a. History of Measures Adopted for the Hospital IQR Program
    b. Maintenance of Technical Specifications for Quality Measures
    c. Public Display of Quality Measures
    2. Removal and Suspension of Hospital IQR Program Measures
    a. Considerations in Removing Quality Measures From the Hospital 
IQR Program
    b. Hospital IQR Program Measures Removed in Previous Rulemakings
    c. Proposed Removal of Hospital IQR Program Measures for the FY 
2015 Payment Determination and Subsequent Years
    (1) Proposed Removal of One Chart-Abstracted Measure
    (2) Proposed Removal of 16 Claims-Based Measures
    (A) Proposed Removal of Eight Hospital-Acquired Condition (HAC) 
Measures
    (B) Proposed Removal of Three AHRQ IQI Measures
    (C) Proposed Removal of Five AHRQ PSI Measures
    d. Suspension of Data Collection for the FY 2014 Payment 
Determination and Subsequent Years
    3. Proposed Measures for the FY 2015 and FY 2016 Hospital IQR 
Program Payment Determinations
    a. Additional Considerations in Expanding and Updating Quality 
Measures Under the Hospital IQR Program
    b. Proposed Hospital IQR Program Measures for the FY 2015 
Payment Determination and Subsequent Years
    (1) Process for Retention of Hospital IQR Program Measures 
Adopted in Previous Payment Determinations
    (2) Proposed Additional Hospital IQR Program Measures for FY 
2015 Payment Determination and Subsequent Years
    (A) Proposed New Survey-Based Measure Items for Inclusion in the 
HCAHPS Survey Measure for the FY 2015 Payment Determination and 
Subsequent Years
    (B) Proposed New Claims-Based Measures for the FY 2015 Payment 
Determination and Subsequent Years

[[Page 27875]]

    (C) Proposed New Chart-Abstracted Measure: Elective Delivery 
Prior to 39 Completed Weeks Gestation: Percentage of Babies 
Electively Delivered Prior to 39 Completed Weeks Gestation (NQF 
469)
    (D) Clarification Regarding Existing Hospital IQR Program 
Measures That Have Undergone Changes During NQF Measure Maintenance 
Processes
    c. Proposed Hospital IQR Program Quality Measures for the FY 
2016 Payment Determination and Subsequent Years
    4. Possible New Quality Measures and Measure Topics for Future 
Years
    5. Form, Manner, and Timing of Quality Data Submission
    a. Background
    b. Proposed Procedural Requirements for the FY 2015 Payment 
Determination and Subsequent Years
    c. Proposed Data Submission Requirements for Chart-Abstracted 
Measures
    d. Proposed Sampling and Case Thresholds Beginning With the FY 
2015 Payment Determination
    e. Proposed HCAHPS Requirements for the FY 2014, FY 2015, and FY 
2016 Payment Determinations
    f. Proposed Data Submission Requirements for Structural Measures
    g. Proposed Data Submission and Reporting Requirements for 
Healthcare-Associated Infection (HAI) Measures Reported via NHSN
    6. Proposed Supplements to the Chart Validation Process for the 
Hospital IQR Program for the FY 2015 Payment Determination and 
Subsequent Years
    a. Separate Validation Approaches for Chart-Abstracted Clinical 
Process of Care and HAI Measures
    (1) Background and Rationale
    (2) Selection and Sampling of Clinical Process of Care Measures 
for Validation
    (3) Selection and Sampling of HAI Measures for Validation
    (4) Validation Scoring for Chart-Abstract Clinical Process of 
Care and HAI Measures
    (5) Criteria To Evaluate Whether a Score Passes or Fails
    b. Number and Manner of Selection for Hospitals Included in the 
Base Annual Validation Random Sample
    c. Targeting Criteria for Selection of Supplemental Hospitals 
for Validation
    7. Proposed Data Accuracy and Completeness Acknowledgement 
Requirements for the FY 2015 Payment Determination and Subsequent 
Years
    8. Public Display Requirements for the FY 2015 Payment 
Determination and Subsequent Years
    9. Reconsideration and Appeal Procedures for the FY 2015 Payment 
Determination
    10. Hospital IQR Program Disaster Extensions or Waivers
    11. Electronic Health Records (EHRs)
    a. Background
    b. HITECH Act EHR Provisions
    B. PPS-Exempt Cancer Hospital Quality Reporting (PCHQR) Program
    1. Statutory Authority
    2. Covered Entities
    3. Proposed Quality Measures for PCHs for FY 2014 Program and 
Subsequent Program Years
    a. Considerations in the Selection of the Quality Measures
    b. Proposed PCHQR Program Quality Measures for FY 2014 Program 
and Subsequent Program Years
    (1) Proposed CDC/NHSN-Based Healthcare-Associated Infection 
(HAI) Measures
    (A) Proposed Central Line Associated Blood Stream Infections 
((CLABSI), NQF 0139)
    (B) Proposed Catheter Associated Urinary Tract Infection 
((CAUTI), NQF 0138)
    (2) Proposed Cancer-Specific Measures
    (A) Proposed Adjuvant Chemotherapy Is Considered or Administered 
Within 4 Months (120 Days) of Surgery to Patient Under the Age of 80 
With AJCC III (Lymph Node Positive Colon Cancer) (NQF 0223)
    (B) Proposed Combination Chemotherapy Is Considered or 
Administered Within 4 Months (120 Days) of Diagnosis for Women Under 
70 With AJCC T1c or Stage II or III Hormone Receptor Negative Breast 
Cancer (NQF 0559)
    (C) Proposed Adjuvant Hormonal Therapy (NQF 0220)
    4. Possible New Quality Measure Topics for Future Years
    5. Maintenance of Technical Specifications for Quality Measures
    6. Proposed Public Display Requirements for the FY 2014 Program 
and Subsequent Program Years
    7. Proposed Form, Manner, and Timing of Data Submission for FY 
2014 Program and Subsequent Program Years
    a. Background
    b. Proposed Procedural Requirements for FY 2014 Program and 
Subsequent Program Years
    c. Proposed Reporting Mechanisms for FY 2014 Program and 
Subsequent Program Years
    (1) Proposed Reporting Mechanism for the Proposed HAI Measures
    (2) Proposed Reporting Mechanism for the Proposed Cancer-
Specific Measures
    d. Proposed Data Submission Timelines for FY 2014 Program and 
Subsequent Program Years
    e. Proposed Data Accuracy and Completeness Acknowledgement 
(DACA) Requirements for FY 2014 Program and Subsequent Program Years
    C. Hospital Value-Based Purchasing (VBP) Program
    1. Statutory Background
    2. Overview of the FY 2013 Hospital VBP Program
    3. FY 2014 Hospital VBP Program Measures
    4. Other Previously Finalized Requirements for the Hospital VBP 
Program
    5. Proposed Hospital VBP Payment Adjustment Calculation 
Methodology
    a. Proposed Definitions of the Term ``Base Operating DRG Payment 
Amount'' for Purposes of the Hospital VBP Program
    b. Proposals for Calculating the Funding Amount for Value-Based 
Incentive Payments Each Year
    c. Proposed Methodology To Calculate the Value-Based Incentive 
Payment Adjustment
    d. Proposed Timing of the Base Operating DRG Payment Amount 
Reduction and Value-Based Incentive Payment Adjustment for FY 2013 
and Future Hospital VBP Program Years
    e. Proposed Process for Reducing the Base Operating DRG Payment 
Amount and Applying the Value-Based Incentive Payment Amount 
Adjustment for FY 2013
    6. Proposed Review and Corrections Processes
    a. Background
    b. Proposed Review and Corrections Process for Claims-Based 
Measure Rates
    c. Proposed Review and Corrections Process for Condition-
Specific Scores, Domain-Specific Scores and TSPs
    7. Proposed Appeal Process Under the Hospital VBP Program
    a. Background
    b. Proposed Appeal Process
    8. Proposed Measures for the FY 2015 Hospital VBP Program
    a. Relationship Between the National Strategy and the Hospital 
VBP Program
    b. Proposed FY 2015 Measures
    c. Proposed General Process for Hospital VBP Program Measure 
Adoption for Future Program Years
    9. Proposed Measures and Domains for the FY 2016 Hospital VBP 
Program
    a. Proposed FY 2016 Measures
    b. Proposed Quality Measure Domains for the FY 2016 Hospital VBP 
Program
    c. Proposed Performance Standards for FY 2016 Hospital VBP 
Program Measures
    10. Proposed Performance Periods and Baseline Periods for the FY 
2015 Hospital VBP Program
    a. Proposed Clinical Process of Care Domain Performance Period 
and Baseline Periods for FY 2015
    b. Proposed Patient Experience of Care Domain Performance Period 
and Baseline Period for FY 2015
    c. Proposed Efficiency Domain Measure Performance Period and 
Baseline Period for FY 2015
    d. Proposed Outcome Domain Performance Periods for FY 2015
    (1) Mortality Measures
    (2) Proposed AHRQ PSI Composite Measure
    (3) CLABSI Measure
    e. Proposed Performance Periods for Proposed FY 2016 Measures
    11. Proposed Performance Periods for the Hospital VBP Program 
for FY 2015 and FY 2016
    a. Background
    b. Proposed Performance Standards for the FY 2015 Hospital VBP 
Program Measures
    c. Proposed Performance Standards for FY 2016 Hospital VBP 
Program Measures
    d. Adopting Performance Periods and Standards for Future Program 
Years
    12. Proposed FY 2015 Hospital VBP Program Scoring Methodology
    a. General Hospital VBP Program Scoring Methodology
    b. Proposed Domain Weighting for the FY 2015 Hospital VBP 
Program for Hospitals That Receive a Score on All Four Proposed 
Domains

[[Page 27876]]

    c. Proposed Domain Weighting for Hospitals Receiving Scores on 
Fewer Than Four Domains
    13. Applicability of the Hospital VBP Program to Hospitals
    a. Background
    b. Proposed Exemption Request Process for Maryland Hospitals
    14. Proposed Minimum Numbers of Cases and Measures for the FY 
2015 Program
    a. Background
    b. Proposed Minimum Numbers of Cases and Measures for the FY 
2015 Outcome Domain
    c. Proposed Medicare Spending per Beneficiary Measure Case 
Minimum
    15. Immediate Jeopardy Citations
    D. Long-Term Care Hospital Quality Reporting (LTCHQR) Program
    1. Statutory History
    2. LTCH Program Measures for the FY 2014 Payment Determination 
and Subsequent Fiscal Years Payment Determinations
    a. Proposed Process for Retention of LTCHQR Program Measures 
Adopted in Previous Payment Determinations
    b. Proposed Process for Adoption of Changes to LTCHQR Program 
Measures
    3. Proposal To Retain Previously Adopted Finalized Measures for 
the LTCHQR Program FY 2014 Payment Determination
    4. Proposed LTCHQR Program Quality Measures for the FY 2016 
Payment Determinations and Subsequent Fiscal Years Payment 
Determinations
    a. Considerations in Updating and Expanding Quality Measures 
Under the LTCHQR Program for FY 2016 and Subsequent Payment Update 
Determinations
    b. Proposed New LTCHQR Program Quality Measures Beginning With 
the FY 2016 Payment Determination
    (1) Proposed New Quality Measure 1 for the FY 2016 
Payment Determination and Subsequent Fiscal Years Payment 
Determinations: Percent of Nursing Home Residents Who Were Assessed 
and Appropriately Given the Seasonal Influenza Vaccine (Short-Stay) 
(NQF 0680)
    (2) Proposed New LTCH Quality Measure 2 for the FY 2016 
Payment Determination and Subsequent Fiscal Years Payment 
Determinations: Percentage of Residents or Patients Who Were 
Assessed and Appropriately Given the Pneumococcal Vaccine (Short-
Stay) (NQF 0682)
    (3) Proposed New LTCH Quality Measure 3 for the FY 2016 
Payment Determination and Subsequent Fiscal Years Payment 
Determinations: Influenza Vaccination Coverage Among Healthcare 
Personnel (NQF 0431)
    (4) Proposed New LTCH Quality Measure 4 for the FY 2016 
Payment Determination and Subsequent Fiscal Years Payment 
Determinations: Ventilator Bundle (NQF 0302)
    (5) Proposed New LTCH Quality Measure 5 for the FY 2016 
Payment Determination and Subsequent Fiscal Years Payment 
Determinations: Restraint Rate per 1,000 Patient Days
    5. Proposed Timeline for Data Submission Under the LTCHQR 
Program for the FY 2015 Payment Determination
    6. Proposed Timeline for Data Submission Under the LTCHQR 
Program for the FY 2016 Payment Determination
    7. Proposed Public Display of Data Quality Measures
    E. Proposed Quality Reporting Requirements for Ambulatory 
Surgical Centers (ASCs)
    1. Background
    2. Proposed Requirements for Reporting of ASC Quality Data
    a. Proposed Administrative Requirements
    (1) Proposals Regarding QualityNet Account and Administrator for 
the CYs 2014 and 2015 Payment Determinations
    (2) Proposals Regarding Participation Status for the CY 2014 
Payment Determination and Subsequent Payment Determination Years
    b. Proposals Regarding Form, Manner, and Timing for Claims-Based 
Measures for CYs 2014 and 2015 Payment Determinations
    (1) Background
    (2) Proposed Minimum Threshold for Claims-Based Measures Using 
QDCs
    c. ASC Quality Reporting Program Validation of Claims-Based and 
Structural Measures
    3. Proposed Extraordinary Circumstances Extension or Waiver for 
the CY 2014 Payment Determination and Subsequent Payment 
Determination Years
    4. Proposed ASC Quality Reporting Program Reconsideration 
Procedures for the CY 2014 Payment Determination and Subsequent 
Payment Determination Years
    F. Inpatient Psychiatric Facilities Quality Reporting (IPFQR) 
Program
    1. Statutory Authority
    2. Application of the Payment Update Reduction for Failure To 
Report for FY 2014 Payment Determination and Subsequent Years
    3. Covered Entities
    4. Proposed Quality Measures
    a. Considerations in Selecting Quality Measures
    b. Proposed Quality Measures Beginning With FY 2014 Payment 
Determination and Subsequent Years
    (1) HBIPS-2 (Hours of Physical Restraint Use)
    (2) HBIPS-3 (Hours of Seclusion Use)
    (3) HBIPS-4 (Patients Discharged on Multiple Antipsychotic 
Medications)
    (4) HBIPS-5 (Patients Discharged on Multiple Antipsychotic 
Medications With Appropriate Justification)
    (5) HBIPS-6 (Post Discharge Continuing Care Plan Created)
    (6) HBIPS-7 (Post Discharge Continuing Care Plan Transmitted to 
the Next Level of Care Provider Upon Discharge)
    c. Maintenance of Technical Specifications for Quality Measures
    5. Possible New Quality Measures for Future Years
    6. Public Display Requirements for the FY 2014 Payment 
Determination and Subsequent Years
    7. Form, Manner, and Timing of Quality Data Submission for the 
FY 2014 Payment Determination and Subsequent Years
    a. Background
    b. Proposed Procedural Requirements for the FY 2014 Payment 
Determination and Subsequent Years
    c. Proposed Reporting and Submission Requirements for the FY 
2014 Payment Determination
    d. Proposed Reporting and Submission Requirements for the FY 
2015 and FY 2016 Payment Determinations
    e. Proposed Population, Sampling, and Minimum Case Threshold for 
FY 2014 and Subsequent Years
    f. Proposed Data Accuracy and Completeness Acknowledgement 
Requirements for the FY 2014 Payment Determination and Subsequent 
Years
    8. Reconsideration and Appeals Procedure for the FY 2014 Payment 
Determination and Subsequent Years
    9. Proposed Waivers From Quality Reporting Requirements for the 
FY 2014 Payment Determination and Subsequent Years
    10. Electronic Health Records (EHRs)
IX. MedPAC Recommendations and Other Related Reports and Studies for 
the IPPS and LTCH PPS
    A. MedPAC Recommendations for the IPPS for FY 2013
    B. Studies and Reports on Reforming the Hospital Wage Index
    1. Secretary's Report to Congress on Wage Index Reform
    2. Institute of Medicine (IOM) Study on Medicare's Approach to 
Measuring Geographic Variations in Hospitals' Wage Costs
X. Proposed Quality Improvement Organization (QIO) Regulation 
Changes Relating to Provider and Practitioner Medical Record 
Deadlines and Claim Denials
XI. Other Required Information
    A. Requests for Data From the Public
    B. Collection of Information Requirements
    1. Statutory Requirement for Solicitation of Comments
    2. ICRs for Add-On Payments for New Services and Technologies
    3. ICRs for the Occupational Mix Adjustment to the FY 2013 Index 
(Hospital Wage Index Occupational Mix Survey)
    4. Hospital Applications for Geographic Reclassifications by the 
MGCRB
    5. ICRs for Application for GME/IME Resident Slots
    6. ICRs for the Hospital Inpatient Quality Reporting (IQR) 
Program
    7. ICRs for PPS-Exempt Cancer Hospital Quality Reporting (PCHQR) 
Program
    8. ICRs for Hospital Value-Based Purchasing (VBP) Program
    9. ICRs for the Quality Reporting Program for LTCHs
    10. ICRs for the Ambulatory Surgical Center (ASC) Quality 
Reporting Program
    11. ICRs for the Inpatient Psychiatric Facilities Quality 
Reporting (IPFQR) Program
    C. Response to Public Comments

[[Page 27877]]

Regulation Text Addendum--Proposed Schedule of Standardized Amounts, 
Update Factors, and Rate-of-Increase Percentages Effective With Cost 
Reporting Periods Beginning on or After October 1, 2012 and Proposed 
Payment Rates for LTCHs Effective With Discharges Occurring on or After 
October 1, 2012

I. Summary and Background
II. Proposed Changes to the Prospective Payment Rates for Hospital 
Inpatient Operating Costs for Acute Care Hospitals for FY 2013
    A. Calculation of the Proposed Adjusted Standardized Amount
    B. Proposed Adjustments for Area Wage Levels and Cost-of-Living
    C. Proposed MS-DRG Relative Weights
    D. Calculation of the Proposed Prospective Payment Rates
III. Proposed Changes to Payment Rates for Acute Care Hospital 
Inpatient Capital-Related Costs for FY 2013
    A. Determination of Federal Hospital Inpatient Capital-Related 
Prospective Payment Rate Update
    B. Calculation of the Proposed Inpatient Capital-Related 
Prospective Payments for FY 2013
    C. Capital Input Price Index
IV. Proposed Changes to Payment Rates for Certain Excluded 
Hospitals: Rate-of-Increase Percentages for FY 2013
    V. Proposed Changes to the Payment Rates for the LTCH PPS for FY 
2013
    A. Proposed LTCH PPS Standard Federal Rate for FY 2013
    B. Proposed Adjustment for Area Wage Levels Under the LTCH PPS 
for FY 2013
    1. Background
    2. Geographic Classifications/Labor Market Area Definitions
    3. Proposed LTCH PPS Labor-Related Share
    4. Proposed LTCH PPS Wage Index for FY 2013
    5. Proposed Budget Neutrality Adjustment for Changes to the Area 
Wage Level Adjustment
    C. Proposed LTCH PPS Cost-of-Living Adjustment for LTCHs Located 
in Alaska and Hawaii
    D. Proposed Adjustment for LTCH PPS High-Cost Outlier (HCO) 
Cases
    E. Computing the Proposed Adjusted LTCH PPS Federal Prospective 
Payments for FY 2013
VI. Tables Referenced in This Proposed Rulemaking and Available 
Through the Internet on the CMS Web Site

Appendix A--Economic Analyses

I. Regulatory Impact Analysis
    A. Introduction
    B. Need
    C. Objectives of the IPPS
    D. Limitations of Our Analysis for the IPPS
    E. Hospitals Included in and Excluded From the IPPS
    F. Effects on Hospitals and Hospital Units Excluded From the 
IPPS
    G. Quantitative Effects of the Proposed Policy Changes Under the 
IPPS for Operating Costs
    1. Basis and Methodology of Estimates
    2. Analysis of Table I
    3. Impact Analysis of Table II
    H. Effects of Proposed Other Policy Changes
    1. Effects of Proposed Policy on HACs, Including Infections
    2. Effects of Proposed Policy Changes Relating to New Medical 
Service and Technology Add-On Payments
    3. Effects of Proposed Policy Changes Relating to SCHs
    4. Effects of Proposed Payment Adjustment for Low-Volume 
Hospitals for FY 2013
    5. Effects of Proposed Policy Changes Relating to Payment 
Adjustments for Medicare Disproportionate Share Hospitals (DSHs) and 
Indirect Medical Education (IME)
    6. Effects of the Proposed Policy Changes Relating to Direct GME 
and IME
    a. Effects of Clarification and Proposal Regarding Timely Filing 
Requirements for Claims for Medicare Advantage Enrollees Under Fee-
for-Service Medicare
    b. Effects of Proposed Policy Changes Relating to New Teaching 
Hospitals: New Program Growth From 3 Years to 5 Years
    c. Effects of Proposed Changes Relating to 5-Year Period 
Following Implementation of Reductions and Increases to Hospitals' 
FTE Resident Caps for GME Payment Purposes Under Section 5503 of the 
Affordable Care Act
    d. Preservation of Resident Cap Positions From Closed Hospitals 
(Section 5506 of the Affordable Care Act)
    7. Effects of Proposed Changes Relating to the Reporting 
Requirements for Pension Costs for Medicare Cost-Finding Purposes
    8. Effects of Proposed Budget Neutrality Offset Amount for the 
Rural Community Hospital Demonstration Program
    9. Effects of Proposed Change in Effective Date for Policies 
Relating to Hospital Services Furnished Under Arrangements
    I. Effects of Proposed Changes in the Capital IPPS
    1. General Considerations
    2. Results
    J. Effects of Proposed Payment Rate Changes and Policy Changes 
Under the LTCH PPS
    1. Introduction and General Considerations
    2. Impact on Rural Hospitals
    3. Anticipated Effects of Proposed LTCH PPS Payment Rate Change 
and Policy Changes
    4. Effect on the Medicare Program
    5. Effect on Medicare Beneficiaries
    K. Effects of Proposed Requirements for Hospital Inpatient 
Quality Reporting (IQR) Program
    L. Effects of Proposed PPS-Exempt Cancer Hospital Quality 
Reporting (PCHQR) Program
    M. Effects of Proposed Hospital Value-Based Purchasing (VBP) 
Program Requirements
    N. Anticipated Effects of Proposed New Measures To Be Added to 
the LTCH Quality Reporting (LTCHQR) Program
    O. Effects of Proposed Quality Reporting Requirements for 
Ambulatory Surgical Centers
    P. Effects of Proposed Requirements for the Inpatient 
Psychiatric Facilities Quality Reporting Program
    Q. Alternatives Considered
    R. Overall Conclusion
    1. Acute Care Hospitals
    2. LTCHs
II. Accounting Statements and Tables
    A. Acute Care Hospitals
    B. LTCHs
III. Regulatory Flexibility Act (RFA) Analysis
IV. Impact on Small Rural Hospitals
V. Unfunded Mandate Reform Act (UMRA) Analysis
VI. 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 2013
    A. Proposed FY 2013 Inpatient Hospital Update
    B. Proposed Update for SCHs for FY 2013
    C. Proposed FY 2013 Puerto Rico Hospital Update
    D. Proposed Update for Hospitals Excluded From the IPPS
    E. Proposed Update for LTCHs
III. Secretary's Recommendation
IV. MedPAC Recommendation for Assessing Payment Adequacy and 
Updating Payments in Traditional Medicare

I. Executive Summary and Background

A. Executive Summary

1. Purpose and Legal Authority
    This proposed rule would make payment and policy changes under the 
Medicare inpatient prospective payment systems (IPPS) for operating and 
capital-related costs of acute care hospitals as well as for certain 
hospitals and hospital units excluded from the IPPS. In addition, it 
would make payment and policy changes for the Medicare hospitals under 
the long-term care hospital prospective payment system (LTCH PPS). It 
also makes policy changes to programs associated with Medicare IPPS 
hospitals and LTCHs.
    Under various statutory authorities, we are proposing to make 
changes to the Medicare IPPS, to the LTCH PPS, and to other related 
payment methodologies and programs for FY 2013. These statutory 
authorities include, but are not limited to, the following:
     Section 1886(d) of the Social Security Act (the Act), 
which 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 that, instead of paying for capital-related costs of inpatient 
hospital services on a

[[Page 27878]]

reasonable cost basis, the Secretary use a prospective payment system 
(PPS).
     Section 1886(d)(1)(B) of the Act, which specifies that 
certain hospitals and hospital units are excluded from the IPPS. These 
hospitals and units are: rehabilitation hospitals and units; LTCHs; 
psychiatric hospitals and units; children's hospitals; and cancer 
hospitals. Religious nonmedical health care institutions (RNHCIs) are 
also excluded from the IPPS.
     Sections 123(a) and (c) of Public Law 106-113 and section 
307(b)(1) of Public Law 106-554 (as codified under section 1886(m)(1) 
of the Act), which provide for the development and implementation of a 
prospective payment system for payment for inpatient hospital services 
of long-term care hospitals (LTCHs) described in section 
1886(d)(1)(B)(iv) of the Act.
     Sections 1814(l), 1820, and 1834(g) of the Act, which 
specifies that payments are made to critical access hospitals (CAHs) 
(that is, rural hospitals or facilities that meet certain statutory 
requirements) for inpatient and outpatient services and that these 
payments are generally based on 101 percent of reasonable cost.
     Section 1886(d)(3)(A)(vi) of the Act, which authorizes us 
to maintain budget neutrality by adjusting the national standardized 
amount, to eliminate the estimated effect of changes in coding or 
classification that do not reflect real changes in case-mix.
     Section 1886(d)(4)(D) of the Act, which addresses certain 
hospital-acquired conditions (HACs), including infections. Section 
1886(d)(4)(D) of the Act specifies that, by October 1, 2007, the 
Secretary was required to select, in consultation with the Centers for 
Disease Control and Prevention (CDC), at least two conditions that: (a) 
Are high cost, high volume, or both; (b) are assigned to a higher 
paying MS-DRG when present as a secondary diagnosis (that is, 
conditions under the MS-DRG system that are CCs or MCCs); and (c) could 
reasonably have been prevented through the application of evidence-
based guidelines. Section 1886(d)(4)(D) of the Act also specifies that 
the list of conditions may be revised, again in consultation with CDC, 
from time to time as long as the list contains at least two conditions. 
Section 1886(d)(4)(D)(iii) of the Act requires that hospitals, 
effective with discharges occurring on or after October 1, 2007, submit 
information on Medicare claims specifying whether diagnoses were 
present on admission (POA). Section 1886(d)(4)(D)(i) of the Act 
specifies that effective for discharges occurring on or after October 
1, 2008, Medicare no longer assigns an inpatient hospital discharge to 
a higher paying MS-DRG if a selected condition is not POA.
     Section 1886(a)(4) of the Act, which specifies that 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.
     Section 1886(b)(3)(B)(viii) of the Act, which requires the 
Secretary to reduce the applicable percentage increase in payments to a 
subsection (d) hospital for a fiscal year if the hospital does not 
submit data on measures in a form and manner, and at a time, specified 
by the Secretary.
     Section 1886(o) of the Act, which requires the Secretary 
to establish a Hospital Value-Based Purchasing (VBP) Program under 
which value-based incentive payments are made in a fiscal year to 
hospitals meeting performance standards established for a performance 
period for such fiscal year. Both the performance standards and the 
performance period for a fiscal year are to be established by the 
Secretary. Section 1886(o)(1)(B) of the Act directs the Secretary to 
begin making value-based incentive payments under the Hospital 
Inpatient VBP Program to hospitals for discharges occurring on or after 
October 1, 2012.
     Section 1886(q) of the Act, as added by section 3025 of 
the Affordable Care Act and amended by section 10309 of the Affordable 
Care Act, which establishes the ``Hospital Readmission Reduction 
Program'' effective for discharges from an ``applicable hospital'' 
beginning on or after October 1, 2012, under which payments to those 
hospitals under section 1886(d) of the Act will be reduced to account 
for certain excess readmissions.
2. Summary of the Major Provisions
a. MS-DRG Documentation and Coding Adjustment, Including the 
Applicability to the Hospital-Specific Rates and the Puerto Rico-
Specific Standardized Amount
    Section 7(b)(1)(A) of Public Law 110-90 requires that, if the 
Secretary determines that implementation of the MS-DRG system resulted 
in changes in documentation and coding that did not reflect real 
changes in case-mix for discharges occurring during FY 2008 or FY 2009 
that are different than the prospective documentation and coding 
adjustments applied under section 7(a) of Public Law 110-90, the 
Secretary shall make an appropriate prospective adjustment under 
section 1886(d)(3)(A)(vi) of the Act.
    Section 7(b)(1)(B) of Public Law 110-90 requires the Secretary to 
make an additional one-time adjustment to the standardized amounts to 
offset the estimated increase or decrease in aggregate payments for FYs 
2008 and 2009 resulting from the difference between the estimated 
actual documentation and coding effect and the documentation and coding 
adjustment applied under section 7(a) of Public Law 110-90.
    After accounting for adjustments made in FYs 2008 and 2009, we have 
found a remaining documentation and coding effect of 3.9 percent. As we 
have discussed, an additional cumulative adjustment of -3.9 percent 
would be necessary to meet the requirements of section 7(b)(1)(A) of 
Public Law 110-90. Without making this adjustment, our actuaries 
estimated that annual aggregate payments would be increased by 
approximately $4 billion. Furthermore, an additional one-time 
adjustment of -5.8 percent would be required to fully recapture 
overpayments (estimated at approximately $6.9 billion) due to 
documentation and coding that occurred in FY 2008 and FY 2009, as 
required by section 7(b)(1)(B) of Public Law 110-90.
    CMS has thus far implemented a -2.0 percent (of a required -3.9 
percent) prospective adjustment, and completed the full one-time -5.8 
percent recoupment adjustment (-2.9 percent in both FYs 2011 and 2012). 
In FY 2013, we are proposing to complete the remaining -1.9 percent 
prospective adjustment, while also making a +2.9 percent adjustment to 
remove the effect of the FY 2012 one-time recoupment adjustment. We 
have also determined that a cumulative adjustment of -5.4 percent is 
required to eliminate the full effect of documentation and coding 
changes on future payments to SCHs and MDHs. After accounting for 
adjustments made to the hospital-specific rate in FY 2011 and FY 2012, 
an additional prospective adjustment of -0.5 percent is necessary to 
complete the full -5.4 adjustment. We are proposing a full -0.5 percent 
adjustment to the hospital-specific rate, in keeping with our policy of 
applying equivalent adjustments, when applicable, to other subsection 
(d) hospital payment systems.
    We also are proposing an additional adjustment to account for 
documentation and coding effects that occurred in FY 2010. After review 
of comments and recommendations from MedPAC, CMS analyzed FY 2010 
claims

[[Page 27879]]

using the same methodology as previously applied to FYs 2008 and 2009 
claims. CMS estimates that there was a 0.8 percentage point effect due 
to documentation and coding that did not reflect an actual increase in 
patient severity. Our actuaries estimate that this 0.8 percentage point 
increase resulted in additional aggregate payments of approximately 
$1.19 billion. Therefore, we are proposing an adjustment of -0.8 to the 
standardized amount and a -0.8 percent adjustment to the hospital-
specific rate. This would result in a total documentation and coding 
adjustment of +0.2 percent (-1.9 plus +2.9 plus -0.8) to the 
standardized amount and a -1.3 percent (-0.5 plus -0.8) adjustment to 
the hospital-specific rate.
b. Hospital-Acquired Conditions (HACs)
    Section 1886(d)(4)(D) specifies that, by October 1, 2007, the 
Secretary was required to select, in consultation with the Centers for 
Disease Control and Prevention (CDC), at least two conditions that: (a) 
Are high cost, high volume, or both; (b) are assigned to a higher 
paying MS-DRG when present as a secondary diagnosis (that is, 
conditions under the MS-DRG system that are CCs or MCCs); and (c) could 
reasonably have been prevented through the application of evidence-
based guidelines. Section 1886(d)(4)(D) of the Act also specifies that 
the list of conditions may be revised, again in consultation with CDC, 
from time to time as long as the list contains at least two conditions.
    In this proposed rule, we are proposing two new conditions, 
Surgical Site Infection (SSI) Following Cardiac Implantable Electronic 
Device (CIED) Procedures and Pneumothorax with Venous Catheterization, 
for the HAC payment provisions for FY 2013 under section 1886(d)(4)(D) 
of the Act. We also are proposing to add diagnosis codes 999.32 
(Bloodstream infection due to central venous catheter) and 999.33 
(Local infection due to central venous catheter) to the existing 
Vascular Catheter-Associated Infection HAC category for FY 2013.
c. Reduction of Hospital Payments for Excess Readmissions
    We are proposing a number of policies to implement section 1886(q) 
of the Act, as added by section 3025 of the Affordable Care Act, which 
establishes the Hospital Readmissions Reduction Program. The Hospital 
Readmissions Reduction Program requires a reduction to a hospital's 
base operating DRG payments to account for excess readmissions of 
selected applicable conditions, which are acute myocardial infarction, 
heart failure, and pneumonia. We are proposing the applicable hospitals 
that included in the Hospital Readmissions Reduction Program, the 
methodology to calculate the adjustment factor, the portion of the 
hospital's payment that is reduced by the adjustment factor, and the 
process under which the hospitals have the opportunity to review and 
submit corrections for their readmissions information prior to the 
information being posted on the Hospital Compare Web site.
d. Long-Term Care Hospital-Specific Market Basket
    We are proposing to update LTCH payment rates with a separate 
market basket comprised of data from only LTCHs, which we refer to as a 
``LTCH-specific market basket.'' We are proposing to implement a stand-
alone LTCH market basket based on FY 2009 Medicare cost report data. 
The method used to calculate the cost weights and the price proxies 
used are generally similar to those used in the FY 2008-based RPL 
market basket that was finalized for the FY 2012 IPPS/LTCH PPS final 
rule. The primary difference is that we are using data from LTCH 
providers only.
e. Expiration of Certain Payment Rules for LTCH Services and the 
Moratorium on the Establishment of Certain Hospitals and Satellite 
Facilities and the Increase in the Number of Beds in LTCHs and LTCH 
Satellite Facilities
    Moratoria on the implementation of certain LTCH payment policies 
and on the development of new LTCHs and LTCH satellite facilities and 
on bed increases in existing LTCHs and LTCH satellite facilities 
established under sections 114(c) and (d) of the MMSEA (Pub. L. 110-
173) as amended by section 4302 of the ARRA (Pub. L. 111-5) and further 
amended by sections 3106 and 10312 of the Affordable Care Act are set 
to expire during CY 2012, under current law.
    The moratoria established by these provisions delayed the full 
implementation of the following policies for 5 years beginning at 
various times in CY 2007:
     The full application of the ``25-percent payment 
adjustment threshold'' to certain LTCHs, including hospitals-within-
hospitals (HwHs) and LTCH satellite facilities for cost reporting 
periods beginning on or after July 1, 2007, and before July 1, 2012, or 
cost reporting periods beginning on or after October 1, 2007, and 
before October 1, 2012, as applicable under the regulations at 
Sec. Sec.  412.534 and 412.536.
     The inclusion of an ``IPPS comparable per diem amount'' 
option for payment determinations under the short stay outlier (SSO) 
adjustment at Sec.  412.529 of the regulations for LTCH discharges 
occurring on or after December 29, 2007, but prior to December 29, 
2012.
     The application of any one-time budget neutrality 
adjustment to the LTCH PPS standard Federal rate provided for in Sec.  
412.523(d)(3) of the regulations from December 29, 2007, through 
December 28, 2012.
     In general, the development of new LTCHs and LTCH 
satellite facilities, or increases in the number of beds in existing 
LTCHs and LTCH satellite facilities from December 29, 2007, through 
December 28, 2012, unless one of the specified exceptions to the 
particular moratorium was met.
    In this proposed rule, we are proposing to extend the existing 
delay of the full implementation of the 25-percent payment adjustment 
threshold for an additional year; that is, for cost reporting periods 
beginning on or after October 1, 2012, and before October 1, 2013, as 
applicable. Although we are proposing to extend the moratoria relating 
to the application of the ``25-percent threshold'' payment adjustment 
for cost reporting periods beginning on or after October 1, 2012, and 
before October 1, 2013, the moratoria will expire for several 
regulatory provisions for cost reporting periods beginning before July 
1, 2012, prior to the effective date of the proposed extension, 
affecting freestanding LTCHs, grandfathered hospitals-within-hospitals 
(HwHs), and grandfathered satellites. This gap in the continued 
application of the moratorium is a result of the July 1, 2007 effective 
date of section 114(c)(1) of the MMSEA as amended by section 4302(a)(1) 
of the ARRA which was based on the former July 1 through June 30 
regulatory cycle for the LTCH PPS.
    We are proposing an additional 1-year extension in the delay of the 
full application of the 25-percent payment adjustment threshold policy 
because we believe, based on a recent research initiative, that we 
could soon be in a position to propose revisions to our payment 
policies that could render the 25-percent payment adjustment threshold 
policy unnecessary. In light of this potential result, we believe it is 
prudent to avoid requiring LTCHs (or CMS systems) to implement the full 
reinstatement of the policy for what could be a relatively short period 
of time.
    We are not proposing to make any changes to the SSO policy as it 
currently exists in the regulations at Sec.  412.529.

[[Page 27880]]

Accordingly, consistent with the existing regulations at Sec.  
412.529(c)(3), for SSO discharges occurring on or after December 29, 
2012, the ``IPPS comparable per diem amount'' option at Sec.  
412.529(c)(3)(i)(D) would apply to payment determinations for cases 
with a covered length of stay that was equal to or less than one 
standard deviation from the geometric average length of stay for the 
same MS-DRG under the IPPS (that is, the ``IPPS comparable 
threshold'').
    The moratoria on the development of new LTCHs or LTCH satellite 
facilities and on an increase in the number of beds in existing LTCHs 
or LTCH satellite facilities are set to expire on December 29, 2012, 
under current law.
    We are proposing to make a one-time prospective adjustment under 
Sec.  412.523(d)(3) of the regulations (which would not apply to 
payments for discharges occurring on or before December 28, 2012, 
consistent with the statute) and to transition the application of this 
adjustment over a 3-year period. Regulations at Sec.  412.523(d)(3) 
provide for the possibility of making a one-time prospective adjustment 
to the LTCH PPS rates so that the effect of any significant difference 
between the data used in the original computations of budget neutrality 
for FY 2003 and more recent data to determine budget neutrality for FY 
2003 is not perpetuated in the prospective payment rates for future 
years.
f. Hospital Inpatient Quality Reporting (IQR) Program
    Under section 1886(b)(3)(B)(vii) of the Act, hospitals are required 
to report data on measures selected by the Secretary for the Hospital 
IQR Program in order to receive the full annual percentage increase. In 
past rules, we have established measures for reporting and the process 
for submittal and validation of the data.
    In this proposed rule, we are proposing programmatic changes to the 
Hospital IQR Program for the FY 2015 payment determination and 
subsequent years. These proposed changes would streamline and simplify 
the process for hospitals and reduce burden. We are proposing to reduce 
the number of measures in the Hospital IQR Program from 72 to 59 for 
the FY 2015 payment determination. We are proposing to remove 1 chart-
abstracted measure and 16 claims based measures from the program for 
the FY 2015 payment determination and subsequent years. We are 
proposing to remove these measures for a number of reasons, including 
that these measures are losing NQF endorsement, are included in an 
existing composite measure, are duplicative of other measures in the 
Hospital IQR Program, or could otherwise be reported on Hospital 
Compare in the future under the authority of section 3008 of the 
Affordable Care Act. In addition, we are proposing to adopt three 
claims-based measures, one chart-abstracted measure and a survey-based 
measure regarding care transitions, which we will collect using the 
existing HCAHPS survey, to the measure set for the FY 2015 payment 
determination and subsequent years. We also are proposing to adopt a 
structural measure for the FY 2016 payment determination and subsequent 
years.
    In an effort to streamline the rulemaking process, we are proposing 
to retain measures for all subsequent payment determinations, unless 
specifically stated otherwise, through rulemaking. We also are 
proposing to adopt certain changes to the Hospital IQR Program measures 
that arise out of the NQF endorsement maintenance process without going 
through further rulemaking to adopt such changes. To ensure that 
hospitals that participate in the Hospital IQR Program are submitting 
data for a full year, we are proposing that hospitals that would like 
to participate in the Hospital IQR Program for the first time must 
submit a completed Notice of Participation by December 31 of the 
calendar year preceding the first quarter of the calendar year in which 
chart-abstracted data submission is required for any given fiscal year. 
In addition, if a hospital wishes to withdraw from the program, it 
would have until May 15 prior to the start of the payment year affected 
to do so. In order reduce the burden associated with validation, we are 
proposing to reduce the base annual validation sample from 800 to 400, 
with an additional sample of up to 200 targeted hospitals. All 
hospitals failing validation would be included in the 200 hospital 
supplement, with a random sample drawn from hospitals meeting one or 
more additional targeting criteria. We also are proposing to require 
passing scores on both the chart-abstracted clinical process of care 
and hospital-acquired infection measure set groupings to pass 
validation, rather than only requiring one passing score for all 
validated measures.
g. Hospital Value-Based Purchasing Program
    Section 1886(o)(1)(B) of the Act directs the Secretary to begin 
making value-based incentive payments under the Hospital Inpatient VBP 
Program to hospitals for discharges occurring on or after October 1, 
2012. These incentive payments will be funded for FY 2013 through a 
reduction to the FY 2013 base operating MS-DRG payment for each 
discharge of 1 percent, as required by section 1886(o)(7)(B)(i) of the 
Act. The applicable percentage for FY 2014 is 1.25 percent, for FY 2015 
is 1.5 percent, for FY 2016 is 1.75 percent, and for FY 2017 and 
subsequent years is 2 percent.
    We previously published the requirements and related measures to 
implement the Hospital Inpatient VBP Program in a final rule issued in 
the Federal Register on April 29, 2011 (76 FR 26490, May 6, 2011, and 
76 FR 26495 through 26511) and in the FY 2012 IPPS/LTCH PPS final rule 
(76 FR 51653 through 51660). In this proposed rule, we are proposing to 
add requirements for the FY 2015 Hospital Inpatient VBP Program. 
Specifically, we are proposing to add one additional clinical process 
of care measure, AMI-10: Statin Prescribed at Discharge, and two 
additional outcomes measures--an AHRQ Patient Safety Indicators 
composite measure and CLABSI: Central Line-Associated Blood Stream 
Infection. We also are proposing to add a measure of Medicare Spending 
per Beneficiary in the Efficiency domain.
3. Summary of Costs and Benefits
     Proposed FY 2013 Documentation and Coding Adjustment: 
Section 7(b)(1)(A) of Pub. L. 110-90 requires that, if the Secretary 
determines that implementation of the MS-DRG system resulted in changes 
in documentation and coding that did not reflect real changes in case-
mix for discharges occurring during FY 2008 or FY 2009 that are 
different than the prospective documentation and coding adjustments 
applied under section 7(a) of Public Law 110-90, the Secretary shall 
make an appropriate prospective adjustment under section 
1886(d)(3)(A)(vi) of the Act. Section 7(b)(1)(B) of Public Law 110-90 
requires the Secretary to make an additional one-time adjustment to the 
standardized amounts to offset the estimated increase or decrease in 
aggregate payments for FYs 2008 and 2009 resulting from the difference 
between the estimated actual documentation and coding effect and the 
documentation and coding adjustment applied under section 7(a) of 
Public Law 110-90.
    After accounting for adjustments made in FYs 2008 and 2009, we have 
found a remaining documentation and coding effect of 3.9 percent. As we 
have discussed, an additional cumulative adjustment of -3.9 percent 
would be necessary to meet the requirements of section 7(b)(1)(A) of 
Public Law 110-90.

[[Page 27881]]

Without making this adjustment, our actuaries estimated that annual 
aggregate payments would be increased by approximately $4 billion. 
Furthermore, an additional one-time adjustment of -5.8 percent would be 
required to fully recapture overpayments (estimated at approximately 
$6.9 billion) due to documentation and coding that occurred in FY 2008 
and FY 2009, as required by section 7(b)(1)(B) of Public Law 110-90.
    CMS has thus far implemented a -2.0 percent (of a required -3.9 
percent) prospective adjustment, and completed the full one-time -5.8 
percent recoupment adjustment (-2.9 percent in both FYs 2011 and 2012). 
In FY 2013, we are proposing to complete the remaining -1.9 percent 
prospective adjustment, while also making a +2.9 percent adjustment to 
remove the effect of the FY 2012 one-time recoupment adjustment. We 
have also determined that a cumulative adjustment of -5.4 percent is 
required to eliminate the full effect of documentation and coding 
changes on future payments to SCHs and MDHs. After accounting for 
adjustments made to the hospital-specific rate in FY 2011 and FY 2012, 
an additional prospective adjustment of -0.5 percent is necessary to 
complete the full -5.4 percent adjustment. We are proposing a full -0.5 
percent adjustment to the hospital-specific rate, in keeping with our 
policy of applying equivalent adjustments, when applicable, to other 
subsection (d) hospital payment systems.
    In addition, we are proposing an additional adjustment to account 
for documentation and coding effects that occurred in FY 2010. After 
review of comments and recommendations from MedPAC, CMS analyzed FY 
2010 claims using the same methodology as previously applied to FYs 
2008 and 2009 claims. CMS estimates that there was a 0.8 percentage 
point effect due to documentation and coding that did not reflect an 
actual increase in patient severity. Our actuaries estimate that this 
0.8 percentage point increase resulted in additional aggregate payments 
of approximately $1.19 billion. Therefore we are proposing an 
adjustment of -0.8 to the standardized amount, and a -0.8 percent 
adjustment to the hospital-specific rate.
    The total IPPS documentation and coding adjustment of +0.2 percent 
(-1.9 plus +2.9 plus -0.8) would increase total payments by 
approximately $200 million. The total adjustment to the hospital-
specific rate would be -1.3 percent (-0.5 plus -0.8), and would 
decrease total payment by $312 million. The combined impact of the 
proposed FY 2013 documentation and coding adjustments would reduce 
total payments by approximately $112 million.
     Hospital-Acquired Conditions (HACs). For FY 2013, we are 
proposing to continue to implement section 1886 (d)(4)(D) of the Act 
that addresses certain hospital-acquired conditions (HACs), including 
infections. We are proposing to add two additional conditions for FY 
2013, Surgical Site Infection (SSI) Following Cardiac Implantable 
Electronic Device (CIED) Procedures and Iatrogenic Pneumothorax with 
Venous Catheterization. The projected savings estimate for these two 
conditions is less than $1 million, with the total estimated savings 
from HACs for FY 2013 projected at $24 million dollars.
     Reduction to Hospital Payments for Excess Readmissions. We 
are proposing a number of policies to implement section 1886(q) of the 
Act, as added by section 3025 of the Affordable Care Act, which 
establishes the Hospital Readmissions Reduction Program. The Hospital 
Readmissions Reduction Program requires a reduction to a hospital's 
base operating DRG payments to account for excess readmissions of 
selected applicable conditions, which are acute myocardial infarction, 
heart failure, and pneumonia. This provision is not budget neutral. A 
hospital's readmission payment adjustment is the higher of a ratio of a 
hospital's aggregate dollars for excess readmissions to their aggregate 
dollars for all discharges, or 0.99 (that is, or a 1-percent reduction) 
for FY 2013. In this proposed rule, we estimate that the Hospital 
Readmissions Reduction Program will result in a 0.3 percent decrease, 
or approximately $300 million, in payments to hospitals.
     Long-Term Care Hospital-Specific Market Basket. The 
proposed FY 2009-based LTCH-specific market basket update (as measured 
by percentage increase) for FY 2013 is currently forecasted to be the 
same as the market basket update based on the FY 2008-based RPL market 
basket at 3.0 percent (currently used under the LTCH PPS). Therefore, 
we are projecting that there would be no fiscal impact on the LTCH PPS 
payment rates in FY 2013 as a result of this proposal. In addition, we 
are proposing to update the labor-related share under the LTCH PPS for 
FY 2013 based on the proposed relative importance of each labor-related 
cost category in the proposed FY 2009-based LTCH-specific market 
basket. Although this proposal would result in a decrease in the LTCH 
PPS labor-related share for FY 2013, we are projecting that there would 
be no effect on aggregate LTCH PPS payments due to the regulatory 
requirement that any changes to the LTCH area wage adjustment 
(including the labor-related share) are adopted in a budget neutral 
manner.
     Update to the LTCH PPS Standard Federal Rate, including 
the Expiration of Certain Payment Rules for LTCH Services and the 
Moratorium on the Establishment of Certain Hospitals and Satellite 
Facilities and the Increase in the Number of Beds in LTCHs and LTCH 
Satellite Facilities. Based on the best available data for the 427 
LTCHs in our database, we estimate that the changes we are presenting 
in the preamble and Addendum of this proposed rule, including the 
proposed update to the standard Federal rate for FY 2013, the proposed 
changes to the area wage adjustment for FY 2013, and changes to short-
stay outliers and high cost outlier would result in an increase in 
estimated payments from FY 2012 of approximately $100 million (or about 
1.9 percent). Although we are generally projecting an increase in 
payments for all LTCHs in FY 2013 as compared to FY 2012, we expect 
rural LTCHs to experience a larger than average increase in payments 
(3.6 percent) primarily due to the proposed changes to the area wage 
level adjustment. Rural hospitals generally have a wage index of less 
than 1; therefore, the proposed decrease to the labor-related share 
results in their proposed wage index reducing a smaller portion of the 
standard Federal rate, resulting in an estimated increase in payments 
in FY 2013 as compared to FY 2012. In addition, the effect of the 
proposed extension of the moratorium on the application of the ``25 
percent threshold'' payment adjustment policy, as provided by section 
114(c) of the MMSEA, as amended by section 4302(a) of the ARRA and 
sections 3106(a) and 10312(a) of the Affordable Care Act, for cost 
reporting periods beginning on or after October 1, 2012, and before 
October 1, 2012, is estimated to result in a payment impact of 
approximately $170 million to LTCHs. Overall, we estimate that the 
increase in aggregate LTCH PPS payments in FY 2013 will be $270 
million.
     Hospital Inpatient Quality Reporting Program. In this 
proposed rule, we discuss our requirements for hospitals to report 
quality data under the Hospital IQR Program in order to receive the 
full annual percentage increase for FY 2015. We estimate that 
approximately 95 hospitals may not receive the full annual percentage 
increase in any fiscal year. However, at this time, information is not 
available to

[[Page 27882]]

determine the precise number of hospitals that will not meet the 
requirements to receive the full annual percentage increase for FY 
2015.
    We are proposing supplements to the chart validation process for 
the Hospital IQR Program. Starting with the FY 2015 payment 
determination, we are proposing a modest increase to the current 
Hospital IQR Program validation sample of 18 cases per quarter to 27 
cases per quarter in order to capture data on CLABSI, CAUTI, and SSI 
measures. However, in order not to increase the Hospital IQR validation 
program's overall burden to hospitals, we are proposing to reduce the 
total sample size of hospitals included in the annual validation sample 
from 800 eligible hospitals to 600 eligible hospitals.
    We provide payment to hospitals for the cost of sending charts to 
the CDAC contractor at the rate of 12 cents per page for copying and 
approximately $4.00 per chart for postage. Our experience shows that 
the average chart received by the CDAC contractor is approximately 275 
pages. The requirement of an additional 9 charts per hospital submitted 
for validation, combined with the decreased sample size, will result in 
approximately 1,800 additional charts per quarter being submitted to 
CMS by all selected hospitals. Thus, we estimate that we would expend 
approximately $66,600 per quarter to collect the additional charts we 
need to validate all measures.
     Hospital Value-Based Purchasing Program. The Hospital 
Value-Based Purchasing Program for FY 2013 is statutorily mandated to 
be budget neutral. We believe that the program's benefits will be seen 
in improved patient outcomes, safety, and experience of care. We cannot 
estimate these benefits in actual dollar and patient terms because the 
program does not commence until FY 2013 payments.

B. 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 use a prospective payment system (PPS) to pay for the 
capital-related costs of inpatient hospital services for these 
``subsection (d) hospitals.'' 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 certain 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 varies based on the 
outcome of the statutory calculations.
    If the hospital is an approved teaching hospital, it receives a 
percentage add-on payment for each case paid under the IPPS, known as 
the indirect medical education (IME) adjustment. This percentage 
varies, depending on the ratio of residents to beds.
    Additional payments may be made for cases that involve new 
technologies or medical services that have been approved for special 
add-on payments. To qualify, a new technology or medical service must 
demonstrate that it is a substantial clinical improvement over 
technologies or services otherwise available, and that, absent an add-
on payment, it would be inadequately paid under the regular DRG 
payment.
    The costs incurred by the hospital for a case are evaluated to 
determine whether the hospital is eligible for an additional payment as 
an outlier case. This additional payment is designed to protect the 
hospital from large financial losses due to unusually expensive cases. 
Any eligible outlier payment is added to the DRG-adjusted base payment 
rate, plus any DSH, IME, and new technology or medical service add-on 
adjustments.
    Although payments to most hospitals under the IPPS are made on the 
basis of the standardized amounts, some categories of hospitals are 
paid in whole or in part based on their hospital-specific rate, which 
is determined from their costs in a base year. For example, sole 
community hospitals (SCHs) receive the higher of a hospital-specific 
rate based on their costs in a base year (the highest of FY 1982, FY 
1987, FY 1996, or FY 2006) or the IPPS Federal rate based on the 
standardized amount. Through and including FY 2006, a Medicare-
dependent, small rural hospital (MDH) received the higher of the 
Federal rate or the Federal rate plus 50 percent of the amount by which 
the Federal rate is exceeded by the higher of its FY 1982 or FY 1987 
hospital-specific rate. As discussed below, for discharges occurring on 
or after October 1, 2007, but before October 1, 2012, an MDH will 
receive the higher of the Federal rate or the Federal rate plus 75 
percent of the amount by which the Federal rate is exceeded by the 
highest of its FY 1982, FY 1987, or FY 2002 hospital-specific rate. (We 
note that the statutory provision for payments to MDHs expires at the 
end of FY 2012, that is, after September 30, 2012.) SCHs are the sole 
source of care in their areas, and MDHs are a major source of care for 
Medicare beneficiaries in their areas. Specifically, section 
1886(d)(5)(D)(iii) of the Act defines an SCH as a hospital that is 
located more than 35 road miles from another hospital or that, by 
reason of factors such as isolated location, weather conditions, travel 
conditions, or absence of other like hospitals (as determined by the 
Secretary), is the sole source of hospital inpatient services 
reasonably available to Medicare beneficiaries. In addition, certain 
rural hospitals previously designated by the Secretary as essential 
access community hospitals are considered SCHs. Section 
1886(d)(5)(G)(iv) of the Act defines an MDH as a hospital that is 
located in a rural area, has not more than 100 beds, is not an SCH, and 
has a high percentage of Medicare discharges (not less than 60 percent 
of its inpatient days or discharges in its cost reporting year 
beginning in FY 1987 or in two of its three most recently settled 
Medicare cost reporting years). Both of these categories of hospitals 
are afforded this special payment protection in order to maintain 
access to services for beneficiaries.
    Section 1886(g) of the Act requires the Secretary to pay for the 
capital-related costs of inpatient hospital services ``in accordance 
with a prospective payment system established by the Secretary.'' The 
basic methodology for determining capital prospective payments is set 
forth in our regulations at 42 CFR 412.308 and 412.312. Under the 
capital IPPS, payments are adjusted by the same DRG for the case as 
they are under the operating IPPS. Capital IPPS payments are also 
adjusted for IME and DSH, similar to the adjustments made under

[[Page 27883]]

the operating IPPS. In addition, hospitals may receive outlier payments 
for those cases that have unusually high costs.
    The existing regulations governing payments to hospitals under the 
IPPS are located in 42 CFR Part 412, Subparts A through M.
2. Hospitals and Hospital Units Excluded From the IPPS
    Under section 1886(d)(1)(B) of the Act, as amended, certain 
hospitals and hospital units are excluded from the IPPS. These 
hospitals and units are: Rehabilitation hospitals and units; long-term 
care hospitals (LTCHs); psychiatric hospitals and units; children's 
hospitals; and cancer hospitals. Religious nonmedical health care 
institutions (RNHCIs) are also excluded from the IPPS. Various sections 
of the Balanced Budget Act of 1997 (BBA, Pub. L. 105-33), the Medicare, 
Medicaid and SCHIP [State Children's Health Insurance Program] Balanced 
Budget Refinement Act of 1999 (BBRA, Pub. L. 106-113), and the 
Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act 
of 2000 (BIPA, Pub. L. 106-554) provide for the implementation of PPSs 
for rehabilitation hospitals and units (referred to as inpatient 
rehabilitation facilities (IRFs)), LTCHs, and psychiatric hospitals and 
units (referred to as inpatient psychiatric facilities (IPFs)). (We 
note that the annual updates to the LTCH PPS are now included as part 
of the IPPS annual update document. Updates to the IRF PPS and IPF PPS 
are issued as separate documents.) Children's hospitals, cancer 
hospitals, and RNHCIs continue to be paid solely under a reasonable 
cost-based system subject to a rate-of-increase ceiling on inpatient 
operating costs.
    The existing regulations governing payments to excluded hospitals 
and hospital units are located in 42 CFR parts 412 and 413.
3. Long-Term Care Hospital Prospective Payment System (LTCH PPS)
    The Medicare prospective payment system (PPS) for LTCHs applies to 
hospitals described in section 1886(d)(1)(B)(iv) of the Act effective 
for cost reporting periods beginning on or after October 1, 2002. The 
LTCH PPS was established under the authority of sections 123(a) and (c) 
of Public Law 106-113 and section 307(b)(1) of Public Law 106-554 (as 
codified under section 1886(m)(1) of the Act). During the 5-year 
(optional) transition period, a LTCH's payment under the PPS was based 
on an increasing proportion of the LTCH Federal rate with a 
corresponding decreasing proportion based on reasonable cost 
principles. Effective for cost reporting periods beginning on or after 
October 1, 2006, all LTCHs are paid 100 percent of the Federal rate. 
The existing regulations governing payment under the LTCH PPS are 
located in 42 CFR part 412, Subpart O. Beginning October 1, 2009, we 
issue the annual updates to the LTCH PPS in the same documents that 
update the IPPS (73 FR 26797 through 26798).
4. Critical Access Hospitals (CAHs)
    Under sections 1814(l), 1820, and 1834(g) of the Act, payments are 
made to critical access hospitals (CAHs) (that is, rural hospitals or 
facilities that meet certain statutory requirements) for inpatient and 
outpatient services are generally based on 101 percent of reasonable 
cost. Reasonable cost is determined under the provisions of section 
1861(v)(1)(A) of the Act and existing regulations under 42 CFR parts 
413 and 415.
5. Payments for Graduate Medical Education (GME)
    Under section 1886(a)(4) of the Act, costs of approved educational 
activities are excluded from the operating costs of inpatient hospital 
services. Hospitals with approved graduate medical education (GME) 
programs are paid for the direct costs of GME in accordance with 
section 1886(h) of the Act. The amount of payment for direct GME costs 
for a cost reporting period is based on the hospital's number of 
residents in that period and the hospital's costs per resident in a 
base year. The existing regulations governing payments to the various 
types of hospitals are located in 42 CFR part 413.

C. Provisions of the Patient Protection and Affordable Care Act (Pub. 
L. 111-148) and the Health Care and Education Reconciliation Act of 
2010 (Pub. L. 111-152) Applicable to FY 2013

    The Patient Protection and Affordable Care Act (Pub. L. 111-148), 
enacted on March 23, 2010, and the Health Care and Education 
Reconciliation Act of 2010 (Pub. L. 111-152), enacted on March 30, 
2010, made a number of changes that affect the IPPS and the LTCH PPS. 
(Pub. L. 111-148 and Pub. L. 111-152 are collectively referred to as 
the ``Affordable Care Act.'') A number of the provisions of the 
Affordable Care Act affect the updates to the IPPS and the LTCH PPS and 
providers and suppliers. The provisions of the Affordable Care Act that 
were applicable to the IPPS and the LTCH PPS for FYs 2010, 2011, and 
2012 were implemented in the June 2, 2010 Federal Register notice (75 
FR 31118), the FY 2011 IPPS/LTCH PPS final rule (75 FR 50042) and the 
FY 2012 IPPS/LTCH PPS final rule (76 FR 51476).
    In this proposed rule, we are proposing to implement, or continuing 
in FY 2013 to implement, the following provisions (or portions of the 
following provisions) of the Affordable Care Act that are applicable to 
the IPPS, the LTCH PPS, and PPS-exempt cancer hospitals:
     Section 3001 of Public Law 111-148, which provides for 
establishment of a hospital inpatient value-based purchasing program 
under which value-based incentive payments will be made in a fiscal 
year to hospitals that meet performance standards established for a 
performance period with respect to discharges occurring during FY 2014.
     Section 3004 of Public Law 111-148, which provides for the 
submission of quality data for LTCHs beginning in FY 2014 in order to 
receive the full annual update to the payment rates beginning with FY 
2015 and the establishment of quality data measures by FY 2013 for the 
FY 2015 payment determination.
     Section 3005 of Public Law 111-148, which provides for the 
establishment of a quality reporting program for PPS-exempt cancer 
hospitals beginning with the FY 2014 program year, and for subsequent 
program years.
     Section 3025 of Public Law 111-148, which establishes a 
hospital readmissions reduction program and requires the Secretary to 
reduce payments to applicable hospitals with excess readmissions 
effective for discharges beginning on or after October 1, 2012.
     Section 3125 and 10314 of Public Law 111-148, which 
modified the definition of a low-volume hospital and the methodology 
for calculating the payment adjustment for low-volume hospitals, 
effective only for discharges occurring during FYs 2011 and 2012. 
Beginning with FY 2013, the preexisting low-volume hospital qualifying 
criteria and payment adjustment, as implemented in FY 2005, will 
resume.
     Section 3401 of Public Law 111-148, which provides for the 
incorporation of productivity adjustments into the market basket 
updates for IPPS hospitals and LTCHs.
     Section 10324 of Public Law 111-148, which provides for a 
wage adjustment for hospitals located in frontier States.
     Sections 3401 and 10319 of Public Law 111-148 and section 
1105 of Public Law 111-152, which revise certain market basket update 
percentages for

[[Page 27884]]

IPPS and LTCH PPS payment rates for FY 2013.
     Section 3137 of Public Law 111-148, which requires the 
Secretary to submit to Congress a report that includes a plan to 
comprehensively reform the Medicare wage index under the IPPS. In 
developing the plan, the Secretary was directed to take into 
consideration the goals for reforming the wage index that were set 
forth by MedPAC in its June 2007 Report to Congress and to consult with 
relevant affected parties.
     Section 5503 of Public Law 111-148, as amended by Public 
Law 111-152 and section 203 of Public Law 111-309, which provides for 
the reduction in FTE resident caps for direct GME under Medicare for 
certain hospitals, and the ``redistribution'' of the estimated number 
of FTE resident slots to other qualified hospitals. In addition, 
section 5503 requires the application of these provisions to IME in the 
same manner as the FTE resident caps for direct GME.
     Section 5506 of Public Law 111-148, which added a 
provision to the Act that instructs the Secretary to establish a 
process by regulation under which, in the event a teaching hospital 
closes, the Secretary will permanently increase the FTE resident caps 
for hospitals that meet certain criteria up to the number of the closed 
hospital's FTE resident caps. The Secretary is directed to ensure that 
the aggregate number of FTE resident cap slots distributed is equal to 
the amount of slots in the closed hospital's direct GME and IME FTE 
resident caps, respectively.

D. Major Contents of This Proposed Rule

    In this proposed rule, we are setting forth proposed changes to the 
Medicare IPPS for operating costs and for capital-related costs of 
acute care hospitals in FY 2013. We also are setting forth proposed 
changes relating to payments for IME costs and payments to certain 
hospitals that continue to be excluded from the IPPS and paid on a 
reasonable cost basis. In addition, in this proposed rule, we are 
setting forth proposed changes to the payment rates, factors, and other 
payment rate policies under the LTCH PPS for FY 2013.
    Below is a summary of the major changes that we are proposing to 
make:
1. Proposed Changes to MS-DRG Classifications and Recalibrations of 
Relative Weights
    In section II. of the preamble of this proposed rule, we include 
the following:
     Proposed changes to MS-DRG classifications based on our 
yearly review.
     Proposed application of the documentation and coding 
adjustment for FY 2013 resulting from implementation of the MS-DRG 
system.
     A discussion of the Research Triangle Institute, 
International (RTI) reports and recommendations relating to charge 
compression.
     Proposed recalibrations of the MS-DRG relative weights.
     Proposed changes to hospital-acquired conditions (HACs) 
and a listing and discussion of HACs, including infections, that would 
be subject to the statutorily required adjustment in MS-DRG payments 
for FY 2013.
     A discussion of the FY 2013 status of new technologies 
approved for add-on payments for FY 2012 and a presentation of our 
evaluation and analysis of the FY 2013 applicants for add-on payments 
for high-cost new medical services and technologies (including public 
input, as directed by Public Law 108-173, obtained in a town hall 
meeting).
2. Proposed Changes to the Hospital Wage Index for Acute Care Hospitals
    In section III. of the preamble to this proposed rule, we are 
proposing revisions to the wage index for acute care hospitals and the 
annual update of the wage data. Specific issues addressed include the 
following:
     The proposed FY 2013 wage index update using wage data 
from cost reporting periods beginning in FY 2009.
     Analysis and implementation of the proposed FY 2013 
occupational mix adjustment to the wage index for acute care hospitals.
     Proposed revisions to the wage index for acute care 
hospitals based on hospital redesignations and reclassifications.
     The proposed adjustment to the wage index for acute care 
hospitals for FY 2013 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 2013 hospital wage index.
     Determination of the labor-related share for the proposed 
FY 2013 wage index.
    3. Other Decisions and Proposed Changes to the IPPS for Operating 
Costs and GME Costs
    In section IV. of the preamble of this proposed rule, we discussed 
proposed changes or clarifications of a number of the provisions of the 
regulations in 42 CFR parts 412, 413, and 476, including the following:
     The proposed rules for payment adjustments under the 
Hospital Readmissions Reduction Program based on hospital readmission 
measures and the process for hospital review and correction of those 
rates.
     Proposed clarification regarding the duration of the 
classification status of SCHs.
     The proposed updated national and regional case-mix values 
and discharges for purposes of determining RRC status.
     Proposed payment adjustment for low-volume hospitals for 
FY 2013.
     The statutorily required IME adjustment factor for FY 
2013, a clarification of the requirements of timely filing of claims 
for Medicare Advantage enrollees for IME, direct GME, and nursing and 
allied health education payment purposes, and a proposal to apply the 
timely filing requirements to the submission of no-pay bills for 
purposes of calculating the DSH payment adjustment.
     Proposal for counting labor and delivery beds in the 
formula for determining the payment adjustment for disproportionate 
share hospitals and IME payments.
     Discussion of the expiration of the MDH program in FY 
2012.
     Proposed changes to the inpatient hospital update for FY 
2013, including incorporation of a productivity adjustment.
     Proposed changes relating to GME and IME payments, 
including proposed changes in new growth period for new residency 
programs from 3 years to 5 years for new teaching hospitals; 
clarification related to the 5-year period following implementation of 
reductions and increases to hospitals' FTE resident caps; and proposals 
and clarifications related to the preservation of resident cap 
positions from closed hospitals.
     Proposed conforming changes to regulations relating to 
reporting requirements for pension costs for Medicare cost-finding 
purposes.
     Discussion of the Rural Community Hospital Demonstration 
Program and a proposal for making a budget neutrality adjustment for 
the demonstration program.
     Proposed delay in the effective date of regulations 
relating to hospital routine services furnished under arrangements.
4. Proposed FY 2013 Policy Governing the IPPS for Capital-Related Costs
    In section V. of the preamble to this proposed rule, we discuss the 
proposed payment policy requirements for capital-related costs and 
capital payments to hospitals for FY 2013 and

[[Page 27885]]

the proposed MS-DRG documentation and coding adjustment for FY 2013.
5. Proposed Changes to the Payment Rates for Certain Excluded 
Hospitals: Rate-of-Increase Percentages
    In section VI. of the preamble of this proposed rule, we discuss 
proposed changes to payments to certain excluded hospitals.
6. Proposed Changes to the LTCH PPS
    In section VII. of the preamble of this proposed rule, we set forth 
proposed changes to the payment rates, factors, and other payment rate 
policies under the LTCH PPS for FY 2013. Specifically, we are proposing 
the following major changes: a 1-year extension of the moratorium on 
the full implementation of the ``25-percent threshold'' payment 
adjustment at 42 CFR 412.534 and 412.536; a ``one-time prospective 
adjustment'' to the standard Federal rate phased in over a 3-year 
period (which would not be applicable to payments for discharges 
occurring on or before December 28, 2012, consistent with the statute); 
an LTCH-specific market basket; and annual updates to the LTCH PPS 
standard Federal rate and to other payment factors.
7. Proposed Changes Relating to Quality Data Reporting for Specific 
Providers and Suppliers
    In section VIII. of the preamble of this proposed rule, we 
address--
     Proposed requirements for the Hospital Inpatient Quality 
Reporting (IQR) Program as a condition for receiving the full 
applicable percentage increase.
     The proposed establishment of a quality reporting program 
for PPS-exempt cancer hospitals.
     Proposed requirements for the Hospital Value-Based 
Purchasing Program.
     Proposed revisions to the quality reporting measures under 
the LTCH quality reporting program.
     Proposed quality data reporting requirements for 
ambulatory surgical centers (ASCs).
     The establishment of the Inpatient Psychiatric Facilities 
Quality Reporting Program
8. Determining Proposed Prospective Payment Operating and Capital Rates 
and Rate-of-Increase Limits for Acute Care Hospitals
    In the Addendum to this proposed rule, we set forth proposed 
changes to the amounts and factors for determining the proposed FY 2013 
prospective payment rates for operating costs and capital-related costs 
for acute care hospitals. We also are proposing to establish the 
threshold amounts for outlier cases. In addition, we address the 
proposed update factors for determining the rate-of-increase limits for 
cost reporting periods beginning in FY 2013 for certain hospitals 
excluded from the IPPS.
9. Determining Proposed Prospective Payment Rates for LTCHs
    In the Addendum to this proposed rule, we set forth proposed 
changes to the amounts and factors for determining the proposed FY 2013 
prospective standard Federal rate. We also are proposing to establish 
the proposed adjustments for wage levels, the labor-related share, the 
cost-of-living adjustment, and high-cost outliers, including the fixed-
loss amount, and the LTCH cost-to-charge ratios (CCRs) under the LTCH 
PPS.
10. Impact Analysis
    In Appendix A of this proposed rule, we set forth an analysis of 
the impact that the proposed changes would have on affected acute care 
hospitals, LTCHs, ASCs, and IPFs.
11. Recommendation of Update Factors for Operating Cost Rates of 
Payment for Hospital Inpatient Services
    In Appendix B of this proposed rule, as required by sections 
1886(e)(4) and (e)(5) of the Act, we provide our recommendations of the 
appropriate percentage changes for FY 2013 for the following:
     A single average standardized amount for all areas for 
hospital inpatient services paid under the IPPS for operating costs of 
acute care hospitals (and hospital-specific rates applicable to SCHs).
     Target rate-of-increase limits to the allowable operating 
costs of hospital inpatient services furnished by certain hospitals 
excluded from the IPPS.
     The standard Federal rate for hospital inpatient services 
furnished by LTCHs.
12. Discussion of Medicare Payment Advisory Commission Recommendations
    Under section 1805(b) of the Act, MedPAC is required to submit a 
report to Congress, no later than March 1 of each year, in which MedPAC 
reviews and makes recommendations on Medicare payment policies. 
MedPAC's March 2012 recommendations concerning hospital inpatient 
payment policies address the update factor for hospital inpatient 
operating costs and capital-related costs under the IPPS, for hospitals 
and distinct part hospital units excluded from the IPPS. We addressed 
these recommendations in Appendix B of this proposed rule. For further 
information relating specifically to the MedPAC March 2012 report or to 
obtain a copy of the report, contact MedPAC at (202) 220-3700 or visit 
MedPAC's Web site at: http://www.medpac.gov.

II. Proposed 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, 
Medicare pays 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

    For general information about the MS-DRG system, including yearly 
reviews and changes to the MS-DRGs, we refer readers to the previous 
discussions in the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 
43764 through 43766), the FY 2011 IPPS/LTCH PPS final rule (75 FR 50053 
through 50055), and the FY 2012 IPPS/LTCH PPS final rule (76 FR 51485 
through 51487).

C. Adoption of the MS-DRGs in FY 2008

    For information on the adoption of the MS-DRGs in FY 2008, we refer 
readers to the FY 2008 IPPS final rule with comment period (72 FR 47140 
through 47189).

[[Page 27886]]

D. Proposed FY 2013 MS-DRG Documentation and Coding Adjustment, 
Including the Applicability to the Hospital-Specific Rates and the 
Puerto Rico-Specific Standardized Amount

1. Background on the Prospective MS-DRG Documentation and Coding 
Adjustments for FY 2008 and FY 2009 Authorized by Public Law 110-90
    In the FY 2008 IPPS final rule with comment period (72 FR 47140 
through 47189), we adopted the MS-DRG patient classification system for 
the IPPS, effective October 1, 2007, to better recognize severity of 
illness in Medicare payment rates for acute care hospitals. The 
adoption of the MS-DRG system resulted in the expansion of the number 
of DRGs from 538 in FY 2007 to 745 in FY 2008. (Currently, there are 
751 MS-DRGs, which include 4 additional MS-DRGs that we adopted for FY 
2012.) By increasing the number of MS-DRGs and more fully taking into 
account patient severity of illness in Medicare payment rates for acute 
care hospitals, MS-DRGs encourage hospitals to improve their 
documentation and coding of patient diagnoses.
    In the FY 2008 IPPS final rule with comment period (72 FR 47175 
through 47186), we indicated that the adoption of the MS-DRGs had the 
potential to lead to increases in aggregate payments without a 
corresponding increase in actual patient severity of illness due to the 
incentives for additional documentation and coding. In that final rule 
with comment period, we exercised our authority under section 
1886(d)(3)(A)(vi) of the Act, which authorizes us to maintain budget 
neutrality by adjusting the national standardized amount, to eliminate 
the estimated effect of changes in coding or classification that do not 
reflect real changes in case-mix. Our actuaries estimated that 
maintaining budget neutrality required an adjustment of -4.8 percent to 
the national standardized amount. We provided for phasing in this -4.8 
percent adjustment over 3 years. Specifically, we established 
prospective documentation and coding adjustments of -1.2 percent for FY 
2008, -1.8 percent for FY 2009, and -1.8 percent for FY 2010.
    On September 29, 2007, Congress enacted the TMA [Transitional 
Medical Assistance], Abstinence Education, and QI [Qualifying 
Individuals] Programs Extension Act of 2007, Public Law 110-90. Section 
7(a) of Public Law110-90 reduced the documentation and coding 
adjustment made as a result of the MS-DRG system that we adopted in the 
FY 2008 IPPS final rule with comment period to -0.6 percent for FY 2008 
and -0.9 percent for FY 2009, and we finalized the FY 2008 adjustment 
through rulemaking, effective on October 1, 2007 (72 FR 66886).
    For FY 2009, section 7(a) of Public Law 110-90 required a 
documentation and coding adjustment of -0.9 percent, and we finalized 
that adjustment through rulemaking (73 FR 48447). The documentation and 
coding adjustments established in the FY 2008 IPPS final rule with 
comment period, which reflected the amendments made by Public Law 110-
90, are cumulative. As a result, the -0.9 percent documentation and 
coding adjustment for FY 2009 was in addition to the -0.6 percent 
adjustment for FY 2008, yielding a combined effect of -1.5 percent.
2. Prospective Adjustment to the Average Standardized Amounts Required 
by Section 7(b)(1)(A) of Public Law 110-90
    Section 7(b)(1)(A) of Public Law 110-90 requires that, if the 
Secretary determines that implementation of the MS-DRG system resulted 
in changes in documentation and coding that did not reflect real 
changes in case-mix for discharges occurring during FY 2008 or FY 2009 
that are different than the prospective documentation and coding 
adjustments applied under section 7(a) of Public Law 110-90, the 
Secretary shall make an appropriate adjustment under section 
1886(d)(3)(A)(vi) of the Act. Section 1886(d)(3)(A)(vi) of the Act 
authorizes adjustments to the average standardized amounts for 
subsequent fiscal years in order to eliminate the effect of such coding 
or classification changes. These adjustments are intended to ensure 
that future annual aggregate IPPS payments are the same as the payments 
that otherwise would have been made had the prospective adjustments for 
documentation and coding applied in FY 2008 and FY 2009 reflected the 
change that occurred in those years.
3. Recoupment or Repayment Adjustments in FYs 2010 Through 2012 
Required by Public Law 110-90
    If, based on a retroactive evaluation of claims data, the Secretary 
determines that implementation of the MS-DRG system resulted in changes 
in documentation and coding that did not reflect real changes in case-
mix for discharges occurring during FY 2008 or FY 2009 that are 
different from the prospective documentation and coding adjustments 
applied under section 7(a) of Public Law 110-90, section 7(b)(1)(B) of 
Public Law 110-90 requires the Secretary to make an additional 
adjustment to the standardized amounts under section 1886(d) of the 
Act. This adjustment must offset the estimated increase or decrease in 
aggregate payments for FYs 2008 and 2009 (including interest) resulting 
from the difference between the estimated actual documentation and 
coding effect and the documentation and coding adjustment applied under 
section 7(a) of Public Law 110-90. This adjustment is in addition to 
making an appropriate adjustment to the standardized amounts under 
section 1886(d)(3)(A)(vi) of the Act as required by section 7(b)(1)(A) 
of Public Law 110-90. That is, these adjustments are intended to recoup 
(or repay, in the case of underpayments) spending in excess of (or less 
than) spending that would have occurred had the prospective adjustments 
for changes in documentation and coding applied in FY 2008 and FY 2009 
precisely matched the changes that occurred in those years. Public Law 
110-90 requires that the Secretary only make these recoupment or 
repayment adjustments for discharges occurring during FYs 2010, 2011, 
and 2012.
4. Retrospective Evaluation of FY 2008 and FY 2009 Claims Data
    In order to implement the requirements of section 7 of Public Law 
110-90, we performed a retrospective evaluation of the FY 2008 data for 
claims paid through December 2008 using the methodology first described 
in the FY 2009 IPPS/LTCH PPS final rule (73 FR 43768 and 43775) and 
later discussed in the FY 2010 final rule (74 FR 43768 through 43772). 
We performed the same analysis for FY 2009 claims data using the same 
methodology as we did for FY 2008 claims (75 FR 50057 through 50068). 
The results of the analysis for the FY 2011 proposed and final rules, 
and subsequent evaluations in FY 2012, supported that the 5.4 percent 
estimate accurately reflected the FY 2009 increases in documentation 
and coding under the MS-DRG system. We were persuaded by both MedPAC's 
analysis (as discussed in the FY 2011 IPPS/LTCH PPS final rule (75 FR 
50064 through 50065) and our own review of the methodologies 
recommended by various commenters that the methodology we employed to 
determine the required documentation and coding adjustments were sound.
5. Prospective Adjustments for FY 2008 and FY 2009 Authorized by 
Section 7(b)(1)(A) of Public Law 110-90 and Section 1886(d)(3)(vi) of 
the Act
    In the FY 2010 IPPS/LTCH PPS final rule (74 FR 43767 through 
43777), we

[[Page 27887]]

opted to delay the implementation of any documentation and coding 
adjustment until a full analysis case-mix changes based on FY 2009 
claim data could be completed. We refer readers to the FY 2010 IPPS/
LTCH PPS final rule for a detailed description of our proposal, 
responses to comments, and finalized policy. After analysis of the FY 
2009 claims data for the FY 2011 IPPS/LTCH PPS final rule (75 FR 50057 
through 50073), we found a total prospective documentation and coding 
effect of 1.054 percent. After accounting for the -0.6 percent and the 
-0.9 percent documentation and coding adjustments in FYs 2008 and 2009, 
we found a remaining documentation and coding effect of 3.9 percent. As 
we have discussed, an additional cumulative adjustment of -3.9 percent 
would be necessary to meet the requirements of section 7(b)(1)(A) of 
Public Law 110-90 to make an adjustment to the average standardized 
amounts in order to eliminate the full effect of the documentation and 
coding changes that do not reflect real changes in case-mix on future 
payments. Unlike section 7(b)(1)(B) of Public Law 110-90, section 
7(b)(1)(A) does not specify when we must apply the prospective 
adjustment, but merely requires us to make an ``appropriate'' 
adjustment. Therefore, as we stated in the FY 2011 IPPS/LTCH PPS final 
rule (75 FR 50061), we believe we have some discretion as to the manner 
in which we apply the prospective adjustment of -3.9 percent. We 
indicated that applying the full prospective adjustment of -3.9 percent 
for FY 2011, in combination with the proposed recoupment adjustment of 
-2.9 percent in FY 2011 (discussed below) would require an aggregate 
adjustment of -6.8 percent. As we discuss extensively in the FY 2011 
IPPS/LTCH PPS final rule, it has been our practice to moderate payment 
adjustments when necessary to mitigate the effects of significant 
downward adjustments on hospitals, to avoid what could be widespread, 
disruptive effects of such adjustments on hospitals. Therefore, we 
stated that we believed it was appropriate to not implement any or all 
of the -3.9 percent prospective adjustment in FY 2011 because we 
finalized a -2.9 percent recoupment adjustment for that year. 
Accordingly, we did not propose a prospective adjustment under section 
7(b)(1)(A) of Public Law 110-90 for FY 2011 (75 FR 23868 through 
23870). We note that, as a result, payments in FY 2011 (and in each 
future year until we implement the requisite adjustment) would be 3.9 
percent higher than they would have been if we had implemented an 
adjustment under section 7(b)(1)(A) of Public Law 110-90. Our actuaries 
estimate that this 3.9 percentage point increase will result in an 
aggregate payment of approximately $4 billion. We also noted that 
payments in FY 2010 were also expected to be 3.9 percent higher than 
they would have been if we had implemented an adjustment under section 
7(b)(1)(A) of Public Law 110-90, which our actuaries estimated 
increased aggregate payments by approximately $4 billion in FY 2010.
    In the FY 2012 IPPS/LTCH PPS final rule (76 FR 51489 and 51497), we 
indicated that because further delay of this prospective adjustment 
will result in a continued accrual of unrecoverable overpayments, it 
was imperative that we implement a prospective adjustment for FY 2012, 
while recognizing CMS' continued desire to mitigate the effects of any 
significant downward adjustments to hospitals. Therefore, we 
implemented a -2.0 percent prospective adjustment (a reduction of a 
proposed -3.15 percent adjustment) to the standardized amount to 
partially eliminate the full effect of the documentation and coding 
changes that do not reflect real changes in case-mix on future 
payments. Due to the offsetting nature of the remaining recoupment 
adjustment under section 7(b)(1)(B) of Public Law 110-90 (described in 
section II.D.6. of this preamble), and after considering other payment 
adjustments to FY 2012 rates proposed elsewhere in the FY 2012 proposed 
rule, we indicated that we believe a -2.0 percent adjustment would 
allow for a significant reduction in potential unrecoverable 
overpayments, yet would maintain a comparable adjustment level between 
FY 2011 and FY 2012, reflecting the applicable percentage increase with 
a documentation and coding adjustment. We stated that we recognize that 
an additional adjustment of -1.9 percent (3.9 percent minus 2.0 
percent) would be required in future rulemaking to complete the 
necessary -3.9 adjustment to meet CMS' statutory requirement under 
section 7(b)(1)(A) of Public Law 110-90.
    For FY 2013, we are proposing to complete the prospective portion 
of the adjustment required under section 7(b)(1)(B) of Public Law 110-
90. We are proposing a -1.9 percent adjustment to the standardized 
amount for FY 2013. This adjustment would remove the remaining effect 
of the documentation and coding changes that do not reflect real 
changes in case-mix that occurred in FY 2008 and FY 2009. We believe it 
is imperative to implement the full remaining adjustment, as any 
further delay would result in an overstated standardized amount in FY 
2013 and any future years until a full adjustment is made. We believe 
that the offsetting nature of the FY 2012 recoupment adjustment 
(described in section II.D.6. of this preamble) will mitigate any 
negative financial impacts of this prospective adjustment.
6. Recoupment or Repayment Adjustment Authorized by Section 7(b)(1)(B) 
of Public Law 110-90
    As discussed in section II.D.3. of this preamble, section 
7(b)(1)(B) of Public Law 110-90 requires the Secretary to make an 
adjustment to the standardized amounts under section 1886(d) of the Act 
to offset the estimated increase or decrease in aggregate payments for 
FY 2008 and FY 2009 (including interest) resulting from the difference 
between the estimated actual documentation and coding effect and the 
documentation and coding adjustments applied under section 7(a) of 
Public Law 110-90. This determination must be based on a retrospective 
evaluation of claims data. Our actuaries estimated that this 5.8 
percentage point increase resulted in an increase in aggregate payments 
of approximately $6.9 billion. Therefore, as discussed in the FY 2011 
IPPS/LTCH PPS final rule (75 FR 50062 through 50067), we determined 
that an aggregate adjustment of -5.8 percent in FYs 2011 and 2012 would 
be necessary in order to meet the requirements of section 7(b)(1)(B) of 
Public Law 110-90 to adjust the standardized amounts for discharges 
occurring in FYs 2010, 2011, and/or 2012 to offset the estimated amount 
of the increase in aggregate payments (including interest) in FYs 2008 
and 2009.
    It is often our practice to phase in rate adjustments over more 
than one year in order to moderate the effect on rates in any one year. 
Therefore, consistent with the policies that we have adopted in many 
similar cases, in the FY 2011 IPPS/LTCH PPS final rule, we made an 
adjustment to the standardized amount of -2.9 percent, representing 
approximately half of the aggregate adjustment required under section 
7(b)(1)(B) of Public Law 110-90, for FY 2011. An adjustment of this 
magnitude allowed us to moderate the effects on hospitals in one year 
while simultaneously making it possible to implement the entire 
adjustment within the timeframe required under section 7(b)(1)(B) of 
Public Law 110-90 (that is, no later than FY 2012).
    As we stated in prior rulemaking, a major advantage of making the -
2.9 percent adjustment to the standardized

[[Page 27888]]

amount in FY 2011 was that, because the required recoupment adjustment 
is not cumulative, we anticipated removing the FY 2011 -2.9 percent 
adjustment from the rates (in other words, making a positive 2.9 
percent adjustment to the rates) in FY 2012, at the same time that the 
law required us to apply the remaining approximately -2.9 percent 
adjustment required by section 7(b)(1)(B) of Public Law 110-90.
    Therefore, for FY 2012, in accordance with the timeframes set forth 
by section 7(b)(1)(B) of Public Law 110-90, and consistent with the 
discussion in the FY 2011 IPPS/LTCH PPS final rule, we completed the 
recoupment adjustment by implementing the remaining -2.9 percent 
adjustment, in addition to removing the effect of the -2.9 percent 
adjustment to the standardized amount finalized for FY 2011 (76 FR 
51489 and 51498). Because these adjustments, in effect, balanced out, 
there was no year-to-year change in the standardized amount due to this 
recoupment adjustment for FY 2012.
    The -2.9 percent adjustment in each of the 2 previous fiscal years 
completed the required recoupment for overpayments due to documentation 
and coding effects on discharges occurring in FYs 2008 and 2009. In 
this FY 2013 proposed rule, we are proposing to make a final +2.9 
percent adjustment to the standardized amount. This adjustment would 
remove the effect of the onetime -2.9 percent adjustment implemented in 
FY 2012. We continue to believe that this is a reasonable and fair 
approach that satisfies the requirements of the statute while 
substantially moderating the financial impact on hospitals.
7. Background on the Application of the Documentation and Coding 
Adjustment to the Hospital-Specific Rates
    Under section 1886(d)(5)(D)(i) of the Act, SCHs are paid based on 
whichever of the following rates yields the greatest aggregate payment: 
The Federal rate; the updated hospital-specific rate based on FY 1982 
costs per discharge; the updated hospital-specific rate based on FY 
1987 costs per discharge; the updated hospital-specific rate based on 
FY 1996 costs per discharge; or the updated hospital-specific rate 
based on FY 2006 costs per discharge. Under section 1886(d)(5)(G) of 
the Act, MDHs are paid based on the Federal national rate or, if 
higher, the Federal national rate plus 75 percent of the difference 
between the Federal national rate and the updated hospital-specific 
rate based on the greatest of the FY 1982, FY 1987, or FY 2002 costs 
per discharge. (We note that the MDH program expires in FY 2012, as 
discussed in section IV.H. of this proposed rule.) In the FY 2008 IPPS 
final rule with comment period (72 FR 47152 through 47188), we 
established a policy of applying the documentation and coding 
adjustment to the hospital-specific rates. In that final rule with 
comment period, we indicated that because SCHs and MDHs use the same 
DRG system as all other hospitals, we believe they should be equally 
subject to the budget neutrality adjustment that we are applying for 
adoption of the MS-DRGs to all other hospitals. In establishing this 
policy, we relied on section 1886(d)(3)(A)(vi) of the Act, which 
provides us with the authority to adjust ``the standardized amount'' to 
eliminate the effect of changes in documentation and coding that do not 
reflect real change in case-mix.
    However, in the final rule that appeared in the Federal Register on 
November 27, 2007 (72 FR 66886), we rescinded the application of the 
documentation and coding adjustment to the hospital-specific rates 
retroactive to October 1, 2007. In that final rule, we indicated that, 
while we still believe it would be appropriate to apply the 
documentation and coding adjustment to the hospital-specific rates, 
upon further review, we decided that the application of the 
documentation and coding adjustment to the hospital-specific rates is 
not consistent with the plain meaning of section 1886(d)(3)(A)(vi) of 
the Act, which only mentions adjusting ``the standardized amount'' 
under section 1886(d) of the Act and does not mention adjusting the 
hospital-specific rates.
    In the FY 2009 IPPS proposed rule (73 FR 23540), we indicated that 
we continued to have concerns about this issue. Because hospitals paid 
based on the hospital-specific rate use the same MS-DRG system as other 
hospitals, we believe they have the potential to realize increased 
payments from documentation and coding changes that do not reflect real 
increases in patient severity of illness. In section 1886(d)(3)(A)(vi) 
of the Act, Congress stipulated that hospitals paid based on the 
standardized amount should not receive additional payments based on the 
effect of documentation and coding changes that do not reflect real 
changes in case-mix. Similarly, we believe that hospitals paid based on 
the hospital-specific rates should not have the potential to realize 
increased payments due to documentation and coding changes that do not 
reflect real increases in patient severity of illness. While we 
continue to believe that section 1886(d)(3)(A)(vi) of the Act does not 
provide explicit authority for application of the documentation and 
coding adjustment to the hospital-specific rates, we believe that we 
have the authority to apply the documentation and coding adjustment to 
the hospital-specific rates using our special exceptions and adjustment 
authority under section 1886(d)(5)(I)(i) of the Act. The special 
exceptions and adjustment provision authorizes us to provide ``for such 
other exceptions and adjustments to [IPPS] payment amounts * * * as the 
Secretary deems appropriate.'' In the FY 2009 IPPS final rule (73 FR 
48448 through 48449), we indicated that, for the FY 2010 rulemaking, we 
planned to examine our FY 2008 claims data for hospitals paid based on 
the hospital-specific rate. We further indicated that if we found 
evidence of significant increases in case-mix for patients treated in 
these hospitals that do not reflect real changes in case-mix, we would 
consider proposing application of the documentation and coding 
adjustments to the FY 2010 hospital-specific rates under our authority 
in section 1886(d)(5)(I)(i) of the Act.
    In response to public comments received on the FY 2009 IPPS 
proposed rule, we stated in the FY 2009 IPPS final rule that we would 
consider whether such a proposal was warranted for FY 2010. To gather 
information to evaluate these considerations, we indicated that we 
planned to perform analyses on FY 2008 claims data to examine whether 
there has been a significant increase in case-mix for hospitals paid 
based on the hospital-specific rate. If we found that application of 
the documentation and coding adjustment to the hospital-specific rates 
for FY 2010 was warranted, we indicated that we would propose to make 
such an adjustment in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule.
8. Documentation and Coding Adjustment to the Hospital-Specific Rates 
for FY 2011 and Subsequent Fiscal Years
    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule and final rule 
(74 FR 24098 through 24100 and 74 FR 43775 through 43776, 
respectively), we discussed our retrospective evaluation of the FY 2008 
claims data for SCHs and MDHs using the same methodology described 
earlier for other IPPS hospitals. We found that, independently for both 
SCHs and MDHs, the change due to documentation and coding that did not 
reflect real changes in case-mix for discharges occurring during FY 
2008 slightly exceeded the proposed 2.5 percent result discussed 
earlier for other

[[Page 27889]]

IPPS hospitals, but did not significantly differ from that result. We 
refer readers to those FY 2010 proposed and final rules for a more 
complete discussion.
    As we have noted previously, because hospitals paid on the basis of 
their hospital-specific rate, including SCHs (and MDHs until the end of 
FY 2012), use the same MS-DRG system as all other IPPS hospitals, we 
believe they have the potential to realize increased payments from 
documentation and coding changes that do not reflect real increases in 
patient severity of illness. Therefore, we believe they should be 
equally subject to a prospective budget neutrality adjustment that we 
are applying for adoption of the MS-DRGs to all other hospitals. We 
believe the documentation and coding estimates for all subsection (d) 
hospitals should be the same. While the findings for the documentation 
and coding effect for all IPPS hospitals are similar to the effect for 
SCHs (and were slightly different to the effect for MDHs), we continue 
to believe that this is the appropriate policy so as to neither 
advantage or disadvantage different types of providers. Our best 
estimate, based on the most recently available data, is that a 
cumulative adjustment of -5.4 percent is required to eliminate the full 
effect of the documentation and coding changes on future payments to 
hospitals paid on the basis of their hospital-specific rate. We note 
that, for FY 2013, this adjustment would only apply the SCHs because 
the MDH program expires in FY 2012 (as discussed in section IV.G. of 
this preamble). Unlike the case of standardized amounts paid to IPPS 
hospitals, prior to FY 2011, we had not made any previous adjustments 
to the hospital-specific rates paid to SCHs (and MDHs) to account for 
documentation and coding changes. Therefore, the entire -5.4 percent 
adjustment needed to be made, as opposed to a -3.9 percent remaining 
adjustment for IPPS hospitals.
    After finalizing a -2.9 percent prospective adjustment in FY 2011 
(75 FR 50067 through 50071), we finalized a prospective adjustment to 
the hospital-specific rate of -2.0 percent for FY 2012 (76 FR 51499) 
instead of our proposed adjustment of -2.5 percent. Making this level 
of adjustment allows CMS to maintain, for FY 2012, consistency in 
payment rates for different IPPS hospitals paid using the MS-DRG. We 
indicated in the final rule that because this -2.0 percent adjustment 
no longer reflects the entire remaining requirement adjustment amount 
of -2.5 percent, an additional -0.5 percent adjustment to the hospital-
specific payment rates would be required in future rulemaking.
    For this FY 2013 proposed rule, we are proposing to complete the 
remaining prospective adjustment to account for the documentation and 
coding effect that occurred in FY 2008 and FY 2009 by applying a -0.5 
percent adjustment to the hospital-specific rate. We continue to 
believe that SCHs had the same opportunity to benefit from improvements 
in documentation and coding that did not reflect an increase in patient 
severity, and we continue to believe that any resulting adjustments 
should be applied similarly to all subsection (d) hospitals, when 
possible. In FY 2013, we are proposing a prospective adjustment of -1.9 
percent to the standardized amount. Therefore, we believe it is also 
appropriate to propose a -0.5 percent adjustment to the hospital-
specific rate for FY 2013.
9. Application of the Documentation and Coding Adjustment to the Puerto 
Rico-Specific Standardized Amount
a. Background
    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 Secretary the authority to adjust ``the 
standardized amounts computed under this paragraph'' to eliminate the 
effect of changes in documentation and coding 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.
    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 that are paid based on the hospital-specific rate, 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 changes that 
do not reflect real increases in patient severity of illness. 
Consistent with the approach described for SCHs and MDHs in the FY 2009 
IPPS final rule (73 FR 48449), we indicated that we planned to examine 
our FY 2008 claims data for hospitals in Puerto Rico. We indicated in 
the FY 2009 IPPS proposed rule (73 FR 23541) that if we found evidence 
of significant increases in case-mix for patients treated in these 
hospitals, we would consider proposing to apply 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.
b. Documentation and Coding Adjustment to the Puerto Rico-Specific 
Standardized Amount
    As discussed in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50071 
through 50073), using the same methodology we applied to estimate 
documentation and coding changes under IPPS for non-Puerto Rico 
hospitals, our best estimate was that, for documentation and coding 
that occurred over FY 2008 and FY 2009, a cumulative adjustment of -2.6 
percent was required to eliminate the full effect of the documentation 
and coding changes that do not reflect real changes in case-mix on 
future payments from the Puerto Rico-specific rate. As we stated above, 
we believe it important to maintain both consistency and equity among 
all hospitals paid on the basis of the same MS-DRG system. At the same 
time, however, we recognize that the estimated cumulative impact on 
aggregate payment rates resulting from implementation of the MS-DRG 
system was smaller for Puerto Rico hospitals as compared to IPPS 
hospitals and SCHs. In the FY 2011 IPPS/LTCH PPS final rule (75 FR 
50072 through 50073), we stated that we believed that a full 
prospective adjustment was the most appropriate means to take into full 
account the effect of documentation and coding changes on payments, 
while maintaining equity as much as possible between hospitals paid on 
the basis of different prospective rates.
    Because the Puerto Rico-specific rate received a full prospective 
adjustment of -2.6 percent in FY 2011, we proposed no further 
adjustment in the proposed rule for FY 2012. For FY 2013, we also are 
not proposing any adjustment to the Puerto Rico-specific rate.

[[Page 27890]]

10. Proposed Prospective Adjustments for FY 2010 Documentation and 
Coding Effect
    Section 7(b)(1)(A) of Public Law 110-90 required CMS to make 
prospective documentation and coding adjustments under section 
1886(d)(3)(A)(iv) of the Act if, based upon a review of FY 2008 and FY 
2009 discharges, we determined that implementation of the MS-DRG system 
resulted in changes in documentation and coding that did not reflect 
real changes in case-mix during FY 2008 or FY 2009 and that were 
different than the prospective documentation and coding adjustments 
applied under section 7(a) of Public Law 110-90. However, section 
1886(d)(3)(A)(vi) of the Act authorizes adjustments to the average 
standardized amounts if the Secretary determines such adjustments to be 
necessary for any subsequent fiscal years in order to eliminate the 
effect of coding or classification changes that do not reflect real 
changes in case-mix. After review of comments and recommendations 
received in a FY 2012 comment letter from MedPAC (available on the 
Internet at: http://www.medpac.gov/documents/06172011_FY12IPPS_MedPAC_COMMENT.pdf), we analyzed claims data in FY 2010 to determine 
whether any additional adjustment would be required to ensure that the 
introduction of MS-DRGs was implemented in a budget neutral manner. 
While we expect that the impacts of documentation and coding behavior 
in response to the introduction of MS-DRGs in FY 2008 will eventually 
decline to insignificant levels, we analyzed FY 2010 data on claims 
paid through December 2011 using the same claims-based methodology as 
described in previous rulemaking (73 FR 43768 and 43775). We determined 
a total prospective documentation and coding effect of 1.008 percent 
for FY 2010. Our actuaries have estimated that this 0.8 percentage 
point increase resulted in an increase in aggregate payments of 
approximately $1.19 billion in FY 2010. Therefore, we also are 
proposing an additional -0.8 percent adjustment to account for the 
effects of documentation and coding changes that did not reflect real 
changes in case-mix in FY 2010.
    The combined total prospective adjustment to the standardized 
amount proposed for FY 2013 under Public Law 110-90 to account for 
documentation and coding effects in FY 2008 and FY 2009 and under 
section 1886(d)(3)(A)(vi) of the Act to account for documentation and 
coding effect in FY 2010 is -2.7 percent (-1.9 percent plus -0.8 
percent). The proposed adjustment would eliminate the effect of 
documentation and coding that did not reflect real changes in case-mix 
for discharges occurring during FYs 2008, 2009, 2010. While we are 
making no proposals regarding future fiscal years at this time, we plan 
to continue to monitor and analyze additional claims data and make 
adjustments, when necessary, as authorized under 1886(d)(3)(A)(vi) of 
the Act. We note that the proposed total adjustment to the proposed FY 
2013 standardized amount would be +0.2 percent because these 
prospective adjustments will be offset by the completion of the 
recoupment adjustment under section 7(b)(1)(B) of Public Law 110-90, as 
discussed below.
    We note that while we have decided to review FY 2010 claims data to 
determine whether additional prospective adjustments are necessary (as 
discussed earlier), section 7(b)(1)(B) of Public Law 110-90 does not 
authorize CMS to calculate any retrospective adjustment for 
overpayments made in FY 2010, nor to recover any related overpayments 
beyond FY 2012. The Secretary's authority under section 
1886(d)(3)(A)(vi) of the Act is limited to prospective adjustments.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                        Removal of
                                                               Remaining         Prospective          Proposed           onetime       Combined proposed
                                                              prospective     adjustment for FY     prospective         recoupment      documentation &
                                                             adjustment for          2010        adjustment for FY   adjustment in FY  coding adjustment
                                                             FYs 2008-2009                              2013               2013           for FY 2013
--------------------------------------------------------------------------------------------------------------------------------------------------------
Level of Adjustments.....................................             -1.9%              -0.8%              -2.7%              +2.9%              +0.2%
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Consistent with our proposal for IPPS hospitals paid on the basis 
of the standardized amount, our special exceptions and adjustment 
authority under section 1886(d)(5)(I)(i) of the Act, and based upon our 
review of FY 2010 claims data, we also are proposing an additional -0.8 
percent adjustment to the hospital-specific rate to account for 
documentation and coding changes in FY 2010 that did not reflect real 
changes in case-mix. We believe that a full prospective adjustment for 
hospitals paid based on the hospital-specific rate is the most 
appropriate means to take into account the effect of documentation and 
coding changes on payments, while maintaining equity as much as 
possible between hospitals paid on the basis of different prospective 
rates. Therefore, we are proposing a combined adjustment of -1.3 
percent (-0.5 percent + -0.8 percent) to the hospital-specific rate, 
accounting for all documentation and coding effects observed between FY 
2008 though FY 2010.
    Based upon our analysis of FY 2010 claims data, we found no 
significant additional effect of documentation and coding in FY 2010 
that would warrant any additional adjustment to the Puerto Rico-
specific rate.
    As in prior years, the FY 2008, FY 2009, and FY 2010 MedPAR files 
are available to the public to allow independent analysis of the FY 
2008 and FY 2009 documentation and coding effects. Interested 
individuals may still order these files through the Web site at: http://www.cms.hhs.gov/LimitedDataSets/ by clicking on MedPAR Limited Data 
Set (LDS)-Hospital (National). This Web page describes the file and 
provides directions and further detailed instructions for how to order.
    Persons placing an order must send the following: a Letter of 
Request, the LDS Data Use Agreement and Research Protocol (refer to the 
Web site for further instructions), the LDS Form, and a check for 
$3,655 to:
    Mailing address if using the U.S. Postal Service: Centers for 
Medicare & Medicaid Services, RDDC Account, Accounting Division, P.O. 
Box 7520, Baltimore, MD 21207-0520.
    Mailing address if using express mail: Centers for Medicare & 
Medicaid Services, OFM/Division of Accounting--RDDC, 7500 Security 
Boulevard, C3-07-11, Baltimore. MD 21244-1850.

E. Refinement of the MS-DRG Relative Weight Calculation

1. Background
    Beginning in FY 2007, we implemented relative weights for DRGs 
based on cost report data instead of charge information. We refer 
readers to the FY 2007 IPPS final rule (71 FR

[[Page 27891]]

47882) for a detailed discussion of 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 implemented cost-based relative weights, some public 
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 the Research 
Triangle Institute, International (RTI) to study the effects of charge 
compression in calculating the relative weights and to consider methods 
to reduce the variation in the cost-to-charge ratios (CCRs) across 
services within cost centers. For a detailed summary of RTI's findings, 
recommendations, and public comments that we received on the report, we 
refer readers to the FY 2009 IPPS/LTCH PPS final rule (73 FR 48452 
through 48453).
    In the FY 2009 IPPS/LTCH PPS final rule (73 FR 48458 through 
48467), in response to the RTI's recommendations concerning cost report 
refinements, we discussed our decision to pursue changes to the cost 
report to split the 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.'' We 
acknowledged, as RTI had found, that charge compression occurs in 
several cost centers that exist on the Medicare cost report. However, 
as we stated in the FY 2009 IPPS/LTCH PPS final rule, we focused 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. In determining 
the items that should be reported in these respective cost centers, we 
adopted the commenters' recommendations that hospitals should use 
revenue codes established by the AHA's National Uniform Billing 
Committee to determine the items that should be reported in the 
``Medical Supplies Charged to Patients'' and the ``Implantable Devices 
Charged to Patients'' cost centers. Accordingly, a new subscripted line 
55.30 for ``Implantable Devices Charged to Patients'' was created in 
July 2009 as part of CMS' Transmittal 20 update to the cost report Form 
CMS-2552-96. This new subscripted cost center has been available for 
use for cost reporting periods beginning on or after May 1, 2009.
    As we discussed in the FY 2009 IPPS final rule (73 FR 48458, 
respectively) and in the CY 2009 OPPS/ASC final rule with comment 
period (73 FR 68519 through 68527), in addition to the findings 
regarding implantable devices, RTI also found that the costs and 
charges of computed tomography (CT) scans, magnetic resonance imaging 
(MRI), and cardiac catheterization differ significantly from the costs 
and charges of other services included in the standard associated cost 
center. RTI also concluded that both the IPPS and the OPPS relative 
weights would better estimate the costs of those services if CMS were 
to add standard costs centers for CT scans, MRI, and cardiac 
catheterization in order for hospitals to report separately the costs 
and charges for those services and in order for CMS to calculate unique 
CCRs to estimate the costs from charges on claims data. In the FY 2011 
IPPS/LTCH PPS final rule (75 FR 50075 through 50080), we finalized our 
proposal to create standard cost centers for CT scans, MRI, and cardiac 
catheterization, and to require that hospitals report the costs and 
charges for these services under new cost centers on the revised 
Medicare cost report Form CMS 2552-10. (We refer readers to the FY 2011 
IPPS/LTCH PPS final rule (75 FR 50075 through 50080) for a detailed 
discussion of the reasons for the creation of standard cost centers for 
CT scans, MRI, and cardiac catheterization.) The new standard cost 
centers for CT scans, MRI, and cardiac catheterization are effective 
for cost report periods beginning on or after May 1, 2010, on the 
revised cost report Form CMS-2552-10.
2. Summary of Policy Discussion in FY 2012
    In the FY 2009 IPPS final rule (73 FR 48468), we stated that, due 
to what is typically a 3-year lag between the reporting of cost report 
data and the availability for use in ratesetting, we anticipated that 
we might be able to use data from the new ``Implantable Devices Charged 
to Patients'' cost center to develop a CCR for Implantable Devices 
Charged to Patients in the FY 2012 or FY 2013 IPPS rulemaking cycle. 
However, as noted in the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 
FR 43782), due to delays in the issuance of the revised cost report CMS 
2552-10, we determined that a new CCR for Implantable Devices Charged 
to Patients might not be available before FY 2013. Similarly, when we 
finalized the decision in the FY 2011 IPPS/LTCH PPS final rule to add 
new cost centers for CT scans, MRI, and cardiac catheterization, we 
explained that data from any new cost centers that may be created will 
not be available until at least 3 years after they are first used (75 
FR 50077).
    Accordingly, during the FY 2012 IPPS rulemaking (76 FR 51502), we 
assessed the availability of data in the ``Implantable Devices Charged 
to Patients'' cost center. In order to develop a robust analysis 
regarding the use of cost data from the ``Implantable Devices Charged 
to Patients'' cost center, it was necessary to have a critical mass of 
cost reports filed with data in this cost center. We checked the 
availability of data in the ``Implantable Devices Charged to Patients'' 
cost center on the FY 2009 cost reports, but we did not believe that 
there was a sufficient amount of data from which to generate a 
meaningful analysis in this particular situation. Therefore, we did not 
propose to use data from the ``Implantable Devices Charged to 
Patients'' cost center to create a distinct CCR for ``Implantable 
Devises Charged to Patients'' for use in calculating the MS-DRG 
relative weights for FY 2012. We indicated that we would reassess the 
availability of data for the ``Implantable Devices Charged to 
Patients'' cost center for the FY 2013 IPPS/LTCH PPS rulemaking cycle 
and, if appropriate, we would propose to create a distinct CCR at that 
time.
3. Discussion for FY 2013
    To calculate the MS-DRG relative weights, we use two data sources: 
the MedPAR file as the claims data source and the HCRIS as the cost 
data source. We adjust the charges from the claims to costs by applying 
the 15 national average CCRs developed from the cost reports. In the 
past several years, we have made progress in changing the cost report 
to add the ``Implantable Devices Charged to Patients'' cost center. At 
this time, there is a sizeable number of hospitals in the FY 2010 HCRIS 
that have reported data for ``Implantable Devices Charged to Patients'' 
on their cost reports beginning during FY 2010. However, we note that, 
during the development of this proposed rule, we have been able to 
access only those cost reports in the FY 2010 HCRIS with fiscal year 
begin dates on or after October 1, 2009, and before May 1, 2010. This 
is because cost reports with fiscal year begin dates of May 1, 2010,

[[Page 27892]]

through September 30, 2010, were filed on the new cost report Form 
2552-10, and cost reports filed on the Form 2552-10 are not currently 
accessible in the HCRIS. Normally, we pull the HCRIS dataset that is 3 
years prior to the IPPS fiscal year (that is, for the FY 2013 relative 
weights, we would use the FY 2010 HCRIS, which includes data from cost 
reports that begin on or after October 1, 2009, and before October 1, 
2010). However, because data from the Form 2552-10 cost reports are not 
currently available, to ensure that the relative weights are calculated 
with a data set that is as comprehensive and accurate as possible, we 
are proposing to calculate the FY 2013 relative weights with data from 
FY 2010 cost reports for providers with fiscal year begin dates of on 
or after October 1, 2009, and before May 1, 2010, and to back fill with 
data from FY 2009 cost reports for those providers that have fiscal 
year begin dates on or after May 1, 2010 through September 30, 2010. 
Further complicating matters is that, due to additional unforeseen 
technical difficulties, the corresponding information regarding charges 
for implantable devices on hospital claims is not yet available to us 
in the MedPAR file. Without the breakout in the MedPAR file of charges 
associated with implantable devices to correspond to the costs of 
implantable devices on the cost report, we believe that we have no 
choice but to propose to continue computing the relative weights with 
the current CCR that combines the costs and charges for supplies and 
implantable devices. When we do have the necessary supplies and 
implantable device data on the claims in the MedPAR file to create 
distinct CCRs for supplies and implantable devices, perhaps for FY 
2014, we also hope that we will have data for an analysis of creating 
distinct CCRs for MRI, CT scans, and cardiac catheterization. Prior to 
proposing to create these CCRs, we will first thoroughly analyze and 
determine the impacts of the data. Distinct CCRs for implantable 
devices, MRIs, and CT scans would be used in the calculation of the 
relative weights only if they were first finalized through rulemaking.

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

1. Background
    Section 1886(d)(4)(D) of the Act addresses certain hospital-
acquired conditions (HACs), including infections. This provision is 
part of an array of Medicare tools that we are using to promote 
increased quality and efficiency of care. Under the IPPS, hospitals are 
encouraged to treat patients efficiently because they 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, conditions acquired in the hospital do 
not generate higher payments than the hospital would otherwise receive 
for cases without these conditions. To this extent, the IPPS encourages 
hospitals to avoid complications.
    However, the treatment of certain conditions can generate higher 
Medicare payments in two ways. First, if a hospital incurs 
exceptionally high costs treating a patient, the hospital stay may 
generate an outlier payment. Because the outlier payment methodology 
requires that hospitals experience large losses on outlier cases before 
outlier payments are made, hospitals have an incentive to prevent 
outliers. Second, under the MS-DRG system that took effect in FY 2008 
and that has been refined through rulemaking in subsequent years, 
certain conditions can generate higher payments even if the outlier 
payment requirements are not met. Under the MS-DRG system, there are 
currently 261 sets of MS-DRGs that are split into 2 or 3 subgroups 
based on the presence or absence of a CC or an MCC. The presence of a 
CC or an MCC generally results in a higher payment.
    Section 1886(d)(4)(D) specifies that, by October 1, 2007, the 
Secretary was required to select, in consultation with the Centers for 
Disease Control and Prevention (CDC), at least two conditions that: (a) 
Are high cost, high volume, or both; (b) are assigned to a higher 
paying MS-DRG when present as a secondary diagnosis (that is, 
conditions under the MS-DRG system that are CCs or MCCs); and (c) could 
reasonably have been prevented through the application of evidence-
based guidelines. Section 1886(d)(4)(D) of the Act also specifies that 
the list of conditions may be revised, again in consultation with CDC, 
from time to time as long as the list contains at least two conditions.
    Effective for discharges occurring on or after October 1, 2008, 
pursuant to the authority of section 1886(d)(4)(D) of the Act, Medicare 
no longer assigns an inpatient hospital discharge to a higher paying 
MS-DRG if a selected condition is not present on admission (POA). Thus, 
if a selected condition that was not POA manifests during the hospital 
stay, it is considered a HAC and the case is paid as though the 
secondary diagnosis was not present. However, even if a HAC manifests 
during the hospital stay, if any nonselected CC/MCC appears on the 
claim, the claim will be paid at the higher MS-DRG rate. In addition, 
Medicare continues to assign a discharge to a higher paying MS-DRG if a 
selected condition is POA. When a HAC is not POA, payment can be 
effected in a manner shown in the diagram below.

[[Page 27893]]

[GRAPHIC] [TIFF OMITTED] TP11MY12.000

2. HAC Selection
    Beginning in FY 2007, we have set forth proposals, and solicited 
and responded to public comments, to implement section 1886(d)(4)(D) of 
the Act through the IPPS annual rulemaking process. For specific 
policies addressed in each rulemaking cycle, including a detailed 
discussion of the collaborative interdepartmental process and public 
input regarding selected and potential candidate HACs, we refer readers 
to the following rules: The FY 2007 IPPS proposed rule (71 FR 24100) 
and final rule (71 FR 48051 through 48053); the FY 2008 IPPS proposed 
rule (72 FR 24716 through 24726) and final rule with comment period (72 
FR 47200 through 47218); the FY 2009 IPPS proposed rule (73 FR 23547) 
and final rule (73 FR 48471); the FY 2010 IPPS/RY 2010 LTCH PPS 
proposed rule (74 FR 24106) and final rule (74 FR 43782); the FY 2011 
IPPS/LTCH PPS proposed rule (75 FR 23880) and final rule (75 FR 50080); 
and the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25810 through 25816) 
and final rule (76 FR 51504 through 51522). A complete list of the 10 
current categories of HACs is included on the CMS Web site at: http://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/HospitalAcqCond/Hospital-Acquired_Conditions.html.
    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25813 through 
25814) and FY 2012 IPPS/LTCH PPS final rule (76 FR 51507 through 
50509), we proposed but did not finalize the candidate condition 
Contrast-Induced Acute Kidney Injury. Instead, we deferred the decision 
making on this condition as a selected HAC until future rulemaking and 
such a time when improved coding for the condition is available.
3. Present on Admission (POA) Indicator Reporting
    Collection of POA indicator data is necessary to identify which 
conditions were acquired during hospitalization for the HAC payment 
provision as well as for broader public health uses of Medicare data. 
In previous rulemaking, we provided both CMS and CDC Web site resources 
that are available to hospitals for assistance in this reporting 
effort. For detailed information regarding these sites and materials, 
including the application and use of POA indicators, we refer the 
reader to the FY 2012 IPPS/LTCH PPS final rule (76 FR 51506 through 
51507).
    As discussed in previous IPPS proposed and final rules, there are 
five POA indicator reporting options, as defined by the ICD-9-CM 
Official Guidelines for Coding and Reporting: Under the HAC policy, we 
treat HACs coded with ``Y'' and ``W'' indicators as POA and allow the 
condition on its own to cause an increased payment at the CC/MCC level. 
We treat HACs coded with ``N'' and ``U'' indicators as Not Present on 
Admission (NPOA) and do not allow the condition on its own to cause an 
increased payment at the CC/MCC level. We refer readers to the 
following rules for a detailed discussion: The FY 2009 IPPS proposed 
rule (73 FR 23559) and final rule (73 FR 48486 through 48487); the FY 
2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24106) and final rule 
(74 FR 43784 through 43785); the FY 2011 IPPS/LTCH PPS proposed rule 
(75 FR 23881 through 23882) and final rule (75 FR 50081 through 50082); 
and the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25812 through 25813) 
and final rule (76 FR 51506 through 51507).

------------------------------------------------------------------------
        Indicator                            Descriptor
------------------------------------------------------------------------
Y........................  Indicates that the condition was present on
                            admission.
W........................  Affirms that the hospital has determined
                            that, based on data and clinical judgment,
                            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
                            Guidelines for Coding and Reporting.
------------------------------------------------------------------------


[[Page 27894]]

    Beginning on or after January 1, 2011, hospitals were required to 
begin reporting POA indicators using the 5010 electronic transmittal 
standards format. The 5010 format removes the need to report a POA 
indicator of ``1'' for codes that are exempt from POA reporting. We 
have issued CMS instructions on this reporting change as a One-Time 
Notification, Pub. No. 100-20, Transmittal No. 756, Change Request 
7024, effective on August 13, 2010, which can be located at the 
following link on the CMS Web site: http://www.cms.gov/manuals/downloads/Pub100_20.pdf. However, for claims that continue to be 
submitted using the 4010 electronic transmittal standards format, the 
POA indicator of ``1'' is still necessary because of reporting 
restrictions from the use of the 4010 electronic transmittal standards 
format.
    In addition, as discussed elsewhere in section III.G.9. of the 
preamble of this proposed rule, the 5010 format allows the reporting 
and effective January 1, 2011, the processing of up to 25 diagnoses and 
25 procedure codes. As such, it is necessary to report a valid POA 
indicator for each diagnosis code, including the principal and all 
secondary diagnoses up to 25.
4. HACs and POA Reporting in ICD-10-CM and ICD-10-PCS
    As we stated in the FY 2012 IPPS/LTCH PPS final rule (76 FR 51506 
and 51507), in preparation for the transition to the ICD-10-CM and ICD-
10-PCS code sets, further information regarding the use of the POA 
indicator with the ICD-10-CM/ICD-10-PCS classifications as they pertain 
to the HAC policy will be discussed in future rulemaking.
    At the March 5, 2012 meeting of the ICD-9-CM Coordination and 
Maintenance Committee, an announcement was made with regard to the 
availability of the ICD-9-CM HAC list translation to ICD-10-CM and ICD-
10-PCS code sets. Participants were informed that the list of the 
current ICD-9-CM selected HACs has been translated into codes using the 
ICD-10-CM and ICD-10-PCS classification system. It was recommended that 
the public review this list of ICD-10-CM/ICD-10-PCS code translations 
of the current selected HACs available on the CMS Web site at: http://www.cms.gov/ICD10/17_ICD10_MS_DRG_Conversion_Project.asp. The 
translations can be found under the link titled ICD-10-CM/PCS MS-DRG 
v29 Definitions Manual Table of Contents--Full Titles--HTML Version in 
Appendix I--Hospital Acquired Conditions (HACs). The translation list 
also is available on the CMS Web page at: http://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/HospitalAcqCond/icd10_hacs.html. We 
encourage the public to submit comments on these translations through 
the HACs Web page using the CMS ICD-10-CM/PCS HAC Translation Feedback 
Mailbox that has been set up for this purpose under the Related Links 
section titled ``CMS HAC Feedback.'' The final HAC list translation 
from ICD-9-CM to ICD-10-CM/ICD-10-PCS will be subject to formal 
rulemaking.
    In the meantime, we continue to encourage readers to review the 
educational materials and draft code sets currently available for ICD-
10-CM/ICD-10-PCS on the CMS Web site at: http://www.cms.gov/ICD10/. In 
addition, the draft ICD-10-CM/ICD-10-PCS coding guidelines can be 
viewed on the CDC Web site at: http://www.cdc.gov/nchs/icd/icd10cm.htm.
5. Proposed Changes to the HAC Policy for FY 2013
a. Proposed Additional Diagnosis Codes to Existing HACs
    As changes to diagnosis codes and new diagnosis codes have been 
proposed and finalized for the list of CCs and MCCs, we have modified 
the list of selected HACs to reflect these changes. While there are not 
any new diagnosis codes being proposed for FY 2013, there were new and 
revised diagnosis codes effective October 1, 2011 (FY 2012) that were 
not finalized in time for inclusion in the FY 2012 IPPS rulemaking. 
Therefore, we are now proposing to add two of these codes to an 
existing HAC category. We are proposing to add diagnosis codes 999.32 
(Bloodstream infection due to central venous catheter) and 999.33 
(Local infection due to central venous catheter) to the Vascular 
Catheter-Associated Infection HAC category for FY 2013. These codes 
were created in response to a request discussed at the March 9-10, 2011 
ICD-9-CM Coordination and Maintenance Committee meeting to better 
identify specific types of infections (systemic vs. local) that occur 
as a result of central venous catheter placement.
    Previously, there was only one existing HAC code (999.31 (Infection 
due to central venous catheter)) in the Vascular Catheter-Associated 
Infection HAC category. With the creation of codes 999.32 and 999.33, 
effective October 1, 2011, the title for code 999.31 was revised to 
``Other and unspecified infection due to central venous catheter.'' 
Therefore, codes 999.32 and 999.33 provide further specificity as to 
the type of infection due to a central venous catheter. We refer 
readers to page 45 of the topic packet found at the following link on 
the CDC ICD-9-CM Web page at http://www.cdc.gov/nchs/data/icd9/TopicpacketforMarch2011_HA1.pdf for further information.
    Shown in the table below are these proposed two diagnosis codes 
with their corresponding descriptions and their CC/MCC designations.

------------------------------------------------------------------------
                                                             CC/MCC
         ICD-9-CM code             Code descriptor        designation
------------------------------------------------------------------------
999.32........................  Bloodstream infection  CC
                                 due to central
                                 venous catheter.
999.33........................  Local infection due    CC
                                 to central venous
                                 catheter.
------------------------------------------------------------------------

    We are inviting public comments on the proposed adoption of these 
two ICD-9-CM diagnosis codes designated as CC/MCCs that are listed 
above, to be added to the Vascular Catheter-Associated Infection HAC 
category as indicated for FY 2013.
b. Proposal To Add New HAC Condition: Surgical Site Infection (SSI) 
Following Cardiac Implantable Electronic Device (CIED) Procedures
    We discuss below our rationale for proposing a new condition, 
Surgical Site Infection (SSI) Following Cardiac Implantable Electronic 
Device (CIED) Procedures, for selection for FY 2013 as a HAC under 
section 1886(d)(4)(D) of the Act. As described in more detail in 
section II.F.1. of this preamble, each HAC must be: (1) High cost, high 
volume, or both; (2) assigned to a higher paying MS-DRG when present as 
a secondary diagnosis (that is, conditions under the MS-DRG system that 
are CCs or MCCs); and (3) could reasonably have been prevented through 
the application of evidence-based guidelines. We also discuss other 
considerations relating to the selection of a HAC, including any

[[Page 27895]]

administrative or operational issues associated with a proposed 
condition. For example, the condition may only be able to be identified 
by multiple codes, thereby requiring the development of special GROUPER 
logic to also exclude similar or related ICD-9-CM codes from being 
classified as a CC or an MCC. Similarly, a condition acquired during a 
hospital stay may arise from another condition that the patient had 
prior to admission, making it difficult to determine whether the 
condition was reasonably preventable. We are inviting public comment on 
the degree to which these conditions fulfill these statutory 
requirements, as well as clinical, coding, and prevention issues on our 
proposal to add Surgical Site Infection (SSI) Following Cardiac 
Implantable Electronic Device (CIED) Procedures as a condition subject 
to the HAC payment provision for discharges occurring on or after 
October 1, 2012.
    CIED therapy reduces morbidity and mortality in selected patients 
with cardiac rhythm disturbances.\1\ More than 500,000 CIEDs are 
implanted each year in the United States and 70 percent of CIED 
recipients are age 65 or older.\2\ However, this benefit with regard to 
the treatment of cardiac rhythm disturbances is somewhat reduced by 
complications following device placement, including infections. 
Patients can present with early or late infections because of CIED 
placement.\3\ Two-thirds of these infections are caused by 
Staphylococcus aureus and coagulase-negative Staphylococcus species. 
Treatment of these infections usually entails surgical explantation of 
the device, sometimes under general anesthesia and a prolonged course 
of intravenous antibiotics, along with external electrical support in a 
monitored intensive care setting. The rate of CIED infection is 
increasing faster than the rate of CIED implantation,\4\ and there are 
published data on the mortality and cost associated with CIED infection 
or the relationship of these outcomes to different CIED types.
---------------------------------------------------------------------------

    \1\ Epstein, A. E., J. P. DiMarco, et al. (2008). ``ACC/AHA/HRS 
2008 Guidelines for Device-Based Therapy of Cardiac Rhythm 
Abnormalities: a report of the American College of Cardiology/
American Heart Association Task Force on Practice Guidelines 
(Writing Committee to Revise the ACC/AHA/NASPE 2002 Guideline Update 
for Implantation of Cardiac Pacemakers and Antiarrhythmia Devices): 
developed in collaboration with the American Association for 
Thoracic Surgery and Society of Thoracic Surgeons.'' Circulation 
117(21): e350-408.
    \2\ Zhan, C., W. B. Baine, et al. (2007). ``Cardiac device 
implantation in the United States from 1997 through 2004: a 
population-based analysis.'' J Gen Intern Med, 23 Suppl 1: 13-19.
    \3\ Baddour, L. M., A. E. Epstein, et al. (2010). ``Update on 
cardiovascular implantable electronic device infections and their 
management: a scientific statement from the American Heart 
Association.'' Circulation, 121(20048212): 458-477.
     Baddour, L. M., A. E. Epstein, et al. (2010). ``Update on 
Cardiovascular Implantable Electronic Device Infections and Their 
Management: A Scientific Statement From the American Heart 
Association.'' Circulation, 121(3): 458-477.
    \4\ Greenspon, A. J., J. D. Patel, et al. (2011). ``16-Year 
Trends in the Infection Burden for Pacemakers and Implantable 
Cardioverter-Defibrillators in the United States 1993 to 2008.'' 
Journal of the American College of Cardiology 58(10): 1001-1006.
---------------------------------------------------------------------------

    There is not a unique code that identifies SSI Following CIED 
Procedures. However, the condition can be identified as a subset of 
discharges with ICD-9-CM diagnosis code 996.61 (Infection and 
inflammatory reaction due to cardiac device, implant and graft) or 
998.59 (Other postoperative infection). Our clinical advisors believe 
that diagnosis code 996.61 or 998.59, in combination with the 
associated procedure codes below, can accurately identify SSI Following 
CIED Procedures. The procedure codes are:
     00.50 (Implantation of cardiac resynchronization pacemaker 
without mention of defibrillation, total system [CRT-P]);
     00.51 (Implantation of cardiac resynchronization 
defibrillator, total system [CRT-D]);
     00.52 (Implantation or replacement of transvenous lead 
[electrode] into left ventricular coronary venous system);
     00.53 (Implantation or replacement of cardiac 
resynchronization pacemaker pulse generator only [CRT-P]);
     00.54 (Implantation or replacement of cardiac 
resynchronization defibrillator pulse generator device only [CRT-D]);
     37.80 (Insertion of permanent pacemaker, initial or 
replacement, type of device not specified);
     37.81 (Initial insertion of single-chamber device, not 
specified as rate responsive);
     37.82 (Initial insertion of single-chamber device, rate 
responsive);
     37.83 (Initial insertion of dual-chamber device);
     37.85 (Replacement of any type pacemaker device with 
single-chamber device, not specified as rate responsive);
     37.86 (Replacement of any type of pacemaker device with 
single-chamber device, rate responsive);
     37.87 (Replacement of any type pacemaker device with dual-
chamber device);
     37.94 (Implantation or replacement of automatic 
cardioverter/defibrillator, total system [AICD]);
     37.96 (Implantation of automatic cardioverter/
defibrillator pulse generator only);
     37.98 (Replacement of automatic cardioverter/defibrillator 
pulse generator only);
     37.74 (Insertion or replacement of epicardial lead 
[electrode] into epicardium);
     37.75 (Revision of lead [electrode]);
     37.76 (Replacement of transvenous atrial and/or 
ventricular lead(s) [electrode]);
     37.77 (Removal of lead(s) [electrode] without 
replacement);
     37.79 (Revision or relocation of cardiac device pocket); 
and
     37.89 (Revision or removal of pacemaker device).
    We are proposing to identify Surgical Site Infection Following CIED 
Procedures with diagnosis code 996.61 or 998.59 in combination with one 
or more of the above associated procedure codes. We believe the 
condition meets the three criteria for inclusion on the HAC list, as 
discussed in greater detail below.
    First, the condition is one that is high cost and high volume. We 
reviewed Medicare claims data in the FY 2011 MedPAR file. For FY 2011, 
we found that there were 859 inpatient discharges coded with Surgical 
Site Infection Following CIED Procedures as specified by diagnosis code 
996.61 or 998.59 when reported with one or more of the above cited 
associated procedure codes submitted through Medicare claims. The cases 
had an average cost of $51,795 for the entire hospital stay. We found 
that there were 583 inpatient discharges coded with Surgical Site 
Infection Following CIED Procedures as specified by diagnosis code 
996.61 or 998.59 when reported with one or more of the above cited 
associated procedure codes submitted through Medicare claims reported 
as POA. These POA cases had an average cost of $41,999. We also found 
that there were 276 inpatient discharges coded with Surgical Site 
Infection Following CIED Procedures as specified by diagnosis code 
996.61 or 998.59 when reported with one or more of the above cited 
associated procedure codes submitted through Medicare claims reported 
as NPOA. These NPOA cases had an average cost of $72,485. We note that 
these data are consistent with other data presented for current HACs. 
Therefore, we believe this condition is high cost and high volume.
    In addition, we reviewed the literature regarding this condition. 
Infection associated with CIED procedures resulted in a substantial 
incremental increase in admission mortality and long-term mortality, 
and varies with the type of CIED. For the purposes of this proposal, we 
are considering CIED procedures in the

[[Page 27896]]

aggregate. Several large studies showed CIED infection associated with 
an approximately 5 percent to 8 percent inhospital mortality as well as 
a 17.5 percent to 35.1 percent one year mortality.\5\ Additionally, 
there is a significant cost impact for patients who suffer infections 
after CIED implantation. A recent large analysis of 2007 data on over 
200,000 Medicare beneficiaries demonstrated the mean hospital cost of 
CIED infections to be $28,676 to $53,349, compared with a mean hospital 
cost ranging from $12,468 to $36,851 for beneficiaries without 
infection.\6\ This additional information supports our conclusion from 
our analysis of data in the MedPAR file that this condition is high 
cost.
---------------------------------------------------------------------------

    \5\ Tarakji, K. G., E. J. Chan, et al. (2010). ``Cardiac 
implantable electronic device infections: Presentation, management, 
and patient outcomes.'' Heart Rhythm 7(8): 1043-1047.
    \6\ Sohail, M. R., C. A. Henrikson, et al. (2011). ``Mortality 
and cost associated with cardiovascular implantable electronic 
device infections.'' Arch Intern Med 171(20): 1821-1828.
---------------------------------------------------------------------------

    Second, the condition of Surgical Site Infection Following CIED 
Procedures, as specified in our proposal, is a CC under the MS-DRG 
system. We have not identified any additional administrative or 
operational difficulties associated with proposing this condition as a 
HAC.
    Third, because there are widely recognized guidelines for the 
prevention of Surgical Site Infection Following CIED Procedures, we 
believe the condition is reasonably preventable through application of 
evidenced-based guidelines. A large randomized controlled trial 
demonstrated that prophylactic preoperative antibiotics reduced CIED 
infection by 81 percent in patients who received them.\7\ Well-accepted 
guidelines for the prevention and prophylaxis of CIED infection now 
exist supporting the use of prophylactic antibiotics.
---------------------------------------------------------------------------

    \7\ de Oliveira, J. C., M. Martinelli, et al. (2009). ``Efficacy 
of Antibiotic Prophylaxis Before the Implantation of Pacemakers and 
Cardioverter-Defibrillators: Results of a Large, Prospective, 
Randomized, Double-Blinded, Placebo-Controlled Trial.'' Circ 
Arrhythm Electrophysiol, 2(1): 29-34.
---------------------------------------------------------------------------

    We are inviting public comment on whether Surgical Site Infection 
Following CIED Procedures meets the requirements set forth under 
section 1886(d)(4)(D) of the Act, as well as other coding and 
prevention issues associated with our proposal to add this condition as 
a proposed condition subject to the HAC payment provision for FY 2013 
(for discharges occurring on or after October 1, 2012). We are 
particularly interested in receiving comments on the degree to which 
Surgical Site Infection Following CIED Procedures is reasonably 
preventable through the application of evidence-based guidelines.
c. Proposal To Add New HAC: Iatrogenic Pneumothorax With Venous 
Catheterization
    We discuss below our rationale for proposing a new condition, 
Iatrogenic Pneumothorax with Venous Catheterization, for selection as a 
HAC for FY 2013 under section 1886(d)(4)(D) of the Act. We had 
previously proposed Iatrogenic Pneumothorax more generally as a HAC in 
the FY 2009 IPPS rulemaking (73 FR 48485).
    In the FY 2009 IPPS final rule (73 FR 48485), we considered 
Iatrogenic Pneumothorax as a condition but did not finalize it due to 
commenters' concerns about the preventability of the condition when 
following the evidence-based guidelines. Most commenters opposed the 
selection of Iatrogenic Pneumothorax as a HAC and 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 a HAC due to a lack of 
consensus within the medical community regarding its preventability.\8\ 
Some commenters offered suggestions to exclude certain procedures or 
situations, including central line placement, thoracotomy, and the use 
of a ventilator, if Iatrogenic Pneumothorax were to be selected as a 
HAC. In that rule, we noted that we would continue to review the 
development of evidence-based guidelines for the prevention of 
Iatrogenic Pneumothorax if evidence warrants and consider Iatrogenic 
Pneumothorax as a HAC in the future. We refer readers to that final 
rule for a more detailed discussion (73 FR 48485). To address concerns 
raised by commenters in FY 2009, we reviewed changes in the standard of 
care and evidence-based guidelines to identify specific situations 
where Iatrogenic Pneumothorax would be considered reasonably 
preventable and identified venous catheterization as one such instance.
---------------------------------------------------------------------------

    \8\ Ahan, et al. ``Accidental Iatrogenic Pneumothorax in 
Hospitalized Patients,'' Medical Care, 44(2):182-6, Feb. 2006.
---------------------------------------------------------------------------

    Pneumothorax is defined as the presence of air or gas in the 
pleural cavity, which is the space between the covering of the tissue 
of the lung and parietal pleura, or the part of the pleura that lines 
the chest wall. The presence of air in this space partially or 
completely collapses the lung and is life threatening. Air can enter 
the intrapleural space through a passage through the chest wall. 
Iatrogenic Pneumothorax is a type of traumatic pneumothorax that 
results from incursion into the pleural space secondary to diagnostic 
or therapeutic medical intervention, such as needle placement for 
central line catheter guidance.
    There is no unique code that identifies Iatrogenic Pneumothorax 
with Venous Catheterization. However, Iatrogenic Pneumothorax with 
Venous Catheterization can be identified as a subset of discharges with 
ICD-9-CM diagnosis code 512.1 (Iatrogenic pneumothorax). Our clinical 
advisors believe that diagnosis code 512.1, in combination with the 
associated procedure code 38.93 (Venous catheterization NEC), can 
accurately identify Iatrogenic Pneumothorax with Venous 
Catheterization. We are proposing to identify Iatrogenic Pneumothorax 
with Venous Catheterization reported in combination with diagnosis code 
512.1 (Iatrogenic pneumothorax) and procedure code 38.93 (Venous 
catheterization NEC). We recognize that, in quality measurement such as 
with the Agency for Healthcare Research and Quality (AHRQ) Patient 
Safety Indicator (PSI) Number 6 (Iatrogenic Pneumothorax Rate), 
exclusion criteria are used to increase the accuracy of identifying 
these cases. We believe that, by limiting our proposal to include 
Iatrogenic Pneumothorax as a HAC only in the context of venous 
catheterization, we have improved our ability to accurately identify 
these cases. While we are not proposing exclusion criteria, we welcome 
public comment in this regard. In addition, we believe this more 
narrowly tailored condition meets the three criteria for inclusion on 
the HAC list, as discussed in greater detail below.
    First, the condition is one that is high cost and high volume. We 
reviewed Medicare claims data in the FY 2011 MedPAR file. We found that 
there were 4,467 inpatient discharge cases coded for Iatrogenic 
Pneumothorax with Venous Catheterization as specified by diagnosis code 
512.1 reported with procedure code 38.93. The cases had an average cost 
of $39,128 for the entire hospital stay. We found that there were 612 
inpatient discharge cases coded for Iatrogenic Pneumothorax with Venous 
Catheterization as specified by diagnosis code 512.1 reported with 
procedure code 38.93 submitted through Medicare claims reported as POA. 
These POA cases had an average cost of $26,693. We also found that 
there were 3,855 inpatient discharge cases coded for

[[Page 27897]]

Iatrogenic Pneumothorax with Venous Catheterization as specified by 
diagnosis code 512.1 reported with procedure code 38.93 submitted 
through Medicare claims reported as NPOA. These NPOA cases had an 
average cost of $41,102. We note that these data are consistent with 
other data presented for current HACs. Therefore, we believe this 
condition is high cost and high volume.
    In addition, we reviewed the literature regarding this condition. 
The cannulation of veins (that is insertion of a catheter) with central 
venous catheterization is an important aspect of patient care for the 
administration of fluids and medications and for monitoring purposes. 
Eight percent of hospitalized patients receive a central venous 
catheter, and more than 5 million central venous catheters are inserted 
in the United States each year. Indwelling catheters have several known 
complications and side effects associated with their use, such as 
infections or vessel damage. Additionally, there are risks associated 
with the placement of central venous catheters including the risk of 
pneumothorax for central catheters placed in the upper area of the 
patient's neck or chest when placed in the internal jugular or 
subclavian veins. Mechanical complications associated with Iatrogenic 
Pneumothorax are reported to occur in 5 to 19 percent of patients.\9\
---------------------------------------------------------------------------

    \9\ McGee, D. C. and M. K. Gould (2003). ``Preventing 
Complications of Central Venous Catheterization.'' New England 
Journal of Medicine, 348(12): 1123-1133.
---------------------------------------------------------------------------

    Second, the condition of Iatrogenic Pneumothorax with Venous 
Catheterization as specified in our proposal is a CC under the MS-DRGs.
    Third, there are widely recognized guidelines that address the 
prevention of Iatrogenic Pneumothorax with Venous Catheterization, and 
we believe that Iatrogenic Pneumothorax in the context of venous 
catheterization is reasonably preventable through application of these 
evidenced-based guidelines.
    In terms of guidelines, the AHRQ, in a 2001 report ``Making Health 
Care Safer: A Critical Analysis of Patient Safety Practices'' (AHRQ 
Publication No. 01-EO58) recommended the use of ultrasound for the 
placement of all central venous catheters as one of its 11 practices 
aimed at improving patient care. Current standard placement techniques 
for these venous catheters rely on the knowledge of anatomic landmarks 
and other indicators to guide the initial cannulation of the vein. The 
increase in the number of small, advanced and portable 2D ultrasound 
devices has inspired the use of these newer ultrasound devices in 
central venous line placement, as now direct visualization of the 
target vessel can be achieved, making it easier to avoid these 
complications. Recommendations for the use of ultrasound as an adjunct 
to central venous line placement now exist and are based on supportive 
literature Category A (Randomized controlled trials report 
statistically significant (P -- .01) differences between clinical 
interventions for a specified clinical outcome) with a Level 1 weight 
of scientific evidence (multiple randomized controlled trials with the 
aggregated findings supported by meta-analysis).\10\ Several studies 
have shown a decrease in the mechanical complication rate with the use 
of ultrasound during line placement.\11\ Guidelines for performing 
ultrasound guided vascular cannulation have been recently 
published.\12\
---------------------------------------------------------------------------

    \10\ Echoc, A., U. R., B. T., A. S., O. A., A. T., S. O., C. A., 
T. F., O. T. (2010). ``Practice Guidelines for Perioperative 
Transesophageal Echocardiography.'' Anesthesiology, 112(5): 1084-
1096 1010.1097/ALN.1080b1013e3181c1051e1090.
    \11\ Hind, D.: ``Ultrasonic device for central venous 
cannulation: Meta-analysis.'' BJM, 2003, vol. 327, 7411:361-364; and
    Troianos, C. A., G. S. Hartman, et al. (2012). ``Guidelines for 
Performing Ultrasound Guided Vascular Cannulation: Recommendations 
of the American Society of Echocardiography and the Society of 
Cardiovascular Anesthesiologists.'' Anesthesia and Analgesia, 
114(1): 46-72.
    \12\ Troianos, C. A., G. S. Hartman, et al. (2012). ``Guidelines 
for Performing Ultrasound Guided Vascular Cannulation: 
Recommendations of the American Society of Echocardiography and the 
Society of Cardiovascular Anesthesiologists.'' Anesthesia and 
Analgesia, 114(1): 46-72.
---------------------------------------------------------------------------

    We believe new evidence-based guidelines provide substantial 
clinical guidance for reasonable prevention when this condition occurs 
in the context of venous catheterization. We are inviting public 
comment on whether Iatrogenic Pneumothorax with Venous Catheterization 
meets the requirements set forth under section 1886(d)(4)(D) of the 
Act, as well as other coding and prevention issues associated with our 
proposal to add this proposed condition, as a condition subject to the 
HAC payment provision for discharges occurring on or after October 1, 
2012. We are particularly interested in public comment on how limiting 
the condition to situations in which it occurs in conjunction with 
venous catheterization influences preventability, and whether 
additional limits should be considered in the context of venous 
catheterization.
    With the exception of the condition of Iatrogenic Pneumothorax with 
Venous Catheterization, at this time, we do not believe that additional 
analysis exists that would require us to change our previous 
determinations regarding the previously considered candidate HACs in 
the FY 2008 IPPS final rule with comment period (72 FR 47200 through 
47218), the FY 2009 IPPS final rule (73 FR 48471 through 48491), the FY 
2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43782 through 43785), and 
the FY 2012 IPPS/LTCH PPS final rule (76 FR 51510 through 51511). We 
refer readers to these rules for a detailed discussion that supports 
our determination regarding each of the previously considered candidate 
HACs and continue to encourage public dialogue about refinements to the 
HAC list.
6. RTI Program Evaluation Summary
    On September 30, 2009, a contract was awarded to Research Triangle 
Institute, International (RTI) to evaluate the impact of the Hospital-
Acquired Condition--Present on Admission (HAC-POA) provisions on the 
changes in the incidence of selected conditions, effects on Medicare 
payments, impacts on coding accuracy, unintended consequences, and 
infection and event rates. This is an intra-agency project with funding 
and technical support coming from CMS, OPHS, AHRQ, and CDC. The 
evaluation will also examine the implementation of the program and 
evaluate additional conditions for future selection.
    RTI's evaluation of the HAC-POA provisions is divided into several 
parts. The evaluation includes conditions that are currently treated as 
HACs and also previously considered candidate conditions. We refer 
readers to the FY 2011 IPPS/LTCH PPS final rule (50085 through 50101), 
and the FY 2012 IPPS/LTCH PPS final rule (76 FR 51512 through 51522) 
for a fuller description of this evaluation and findings to date 
regarding analysis of FY 2009 and FY 2010 data, respectively. Summary 
and detailed data were made publicly available on the CMS Web site at: 
http://www.cms.gov/HospitalAcqCond/01_Overview.asp and the RTI Web 
site at: http://www.rti.org/reports/cms/. RTI's analysis of the FY 2011 
MedPAR data file for the HAC-POA program evaluation is being prepared 
for the FY 2013 IPPS/LTCH PPS final rule. When these summary and 
detailed data are available, they also will be made publicly available 
on the two Web sites noted above.
    In addition to the evaluation of HAC and POA MedPAR claims data, 
RTI has also conducted analyses on readmissions due to HACs and the 
incremental costs of HACs to the health care system, a study of 
spillover effects and unintended consequences, as well

[[Page 27898]]

as an updated analysis of the evidence-based guidelines for selected 
and previously considered HACs. Reports on these analyses have been 
made publicly available on the CMS Web site at: http://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/HospitalAcqCond/index.html.

G. Proposed Changes to Specific MS-DRG Classifications

    In this FY 2013 IPPS/LTCH PPS proposed rule, we are inviting public 
comment on each of the MS-DRG classification proposed changes described 
below, as well as our proposals to maintain certain existing MS-DRG 
classifications, which are also discussed below. In some cases, we are 
proposing changes to the MS-DRG classifications based on our analysis 
of claims data. In other cases, we are proposing to maintain the 
existing MS-DRG classification based on our analysis of claims data.
    We encourage input from our stakeholders concerning the annual IPPS 
updates when that input is made available to us by December of the year 
prior to the next annual proposed rule update. For example, to be 
considered for any updates or changes in FY 2013, comments and 
suggestions should have been submitted by early December 2011. The 
comments that were submitted in a timely manner are discussed below in 
this section.
1. Pre-Major Diagnostic Categories (Pre-MDCs)
a. Ventricular Assist Devices (VADs)
    A ventricular assist device (VAD) is a mechanical circulatory 
device or pump that is used to partially or completely support heart 
function and blood flow in patients with a damaged or weakened heart. 
The device takes blood from the ventricles of the heart and helps pump 
the blood to the rest of the body.
    Some VADs are intended for short-term use, often for patients who 
are recovering from heart attacks or heart surgery, while other VADs 
are intended for long-term use (months to years and, in some cases, for 
life). VADs are not the same device as artificial hearts, which are 
designed to completely take over cardiac function and generally require 
the removal of the patient's native heart.
    VADs are designed to assist the ventricles, either the right (RVAD) 
or the left (LVAD), and, in some cases, both ventricles at once 
(BiVAD). The type of VAD used depends on the patient's underlying heart 
disease and the pulmonary arterial resistance that determines the load 
on the right ventricle. LVADs are the most commonly used, but when 
pulmonary arterial resistance is high, right ventricular assistance 
becomes necessary and an RVAD may be inserted. Long-term VADs are 
normally used to help maintain a patient's quality of life while he or 
she awaits a heart transplant. This process is known as a ``bridge to 
transplant.'' However, sometimes the insertion of an LVAD becomes the 
final treatment for the patient, which is known as ``destination 
therapy.'' In this case, the VAD is a permanent implant, and no heart 
transplantation occurs. In a smaller number of cases, the implantation 
of a VAD, combined with pharmaceutical therapy, has enabled the native 
heart to recover sufficiently to allow the VAD to be explanted, a 
``bridge to recovery.''
    We have issued a national coverage determination (NCD) entitled 
``Artificial Hearts and Related Devices'' under Section 20.9 of the 
Medicare Coverage Manual (Pub. No. 100-3). This NCD, which describes 
CMS' requirements for coverage of medical services provided to Medicare 
beneficiaries for the insertion of VADs, can be found at the CMS Web 
site at: https://www.cms.gov/medicare-coverage-database/details/ncd-details.aspx?NCDId=246&ncdver=5&NCAId=211&ver=20&NcaName=Artificial+Hearts&bc=ACAAAAAAIAAA&. We refer readers to this Web site for the complete 
viewing of the NCD for the insertion of VADs.
    The assignment of procedure codes used to describe the insertion of 
VADs has been discussed repeatedly in IPPS rulemaking, for the CMS-DRGs 
(in effect prior to FY 2008) and more recently for the MS-DRGs (FY 2008 
to present). We refer readers to the FY 2003 IPPS final rule (67 FR 
49989) for a complete discussion of the assignment of these procedure 
codes up to that date. In addition, the topic was discussed in FY 2005; 
we refer readers to the FY 2005 IPPS final rule (69 FR 48927 through 
48930) for a complete discussion regarding the assignment of these 
procedure codes for FY 2005. Specifically, for FY 2005, we moved ICD-9-
CM procedure code 37.66 (Insertion of implantable heart assist system) 
from CMS-DRG 525 (Other Heart Assist System Implant) to CMS-DRG 103 
(Heart Transplant). When we adopted the MS-DRG classification system in 
FY 2008, former CMS-DRG 103 remained in the Pre-MDC section but was 
renamed and subdivided into MS-DRG 001 (Heart Transplant or Implant of 
Heart Assist System with MCC) and MS-DRG 002 (Heart Transplant or 
Implant of Heart Assist System without MCC).
    For FY 2013, we have received a request to restructure MS-DRGs 001 
and 002 by removing all of the procedure codes that describe the 
insertion of a device, leaving only procedure codes 33.6 (Combined 
heart-lung transplantation) and 37.51 (Heart transplantation) in the 
heart transplant DRGs. The requestor further asked that the remaining 
device codes be assigned to newly created MS-DRGs. The requestor 
believed that, within the existing MS-DRG grouping, CMS is underpaying 
for services to patients who have a VAD implanted and overpaying for 
services to patients who have heart transplantations. The requestor 
believed that the recommended restructuring ``would allow defined 
grouping of cases with the higher level of resource [sic] required 
reflected in payment.''
    We have reviewed data in the September 2011 update of the FY 2011 
MedPAR file and found that the average length of stay for heart 
transplantations and VAD implantation cases are very similar (35.1 days 
for heart transplantations and 36.63 days for VAD implantations). We 
also found that the average cost for VAD implantation cases alone is 
higher than the average cost of heart transplantation cases. The table 
below includes our findings.

----------------------------------------------------------------------------------------------------------------
                                                                     Number of    Average length
                             MS-DRG                                    cases          of stay      Average cost
----------------------------------------------------------------------------------------------------------------
MS-DRG 001--All Cases...........................................           1,235           36.97        $164,846
MS-DRG 001--Cases with Heart Transplant without VAD.............             384           35.1          123,472
MS-DRG 001--Cases with VAD Insertion Alone......................             811           36.85         181,915
MS-DRG 002--All Cases...........................................             313           19.66          89,818
MS-DRG 002--Cases with Heart Transplant without VAD.............             172           15.1           58,890
MS-DRG 002--Cases with VAD Insertion Alone......................             140           25.31         128,069
----------------------------------------------------------------------------------------------------------------


[[Page 27899]]

    We believe that this higher average cost could be attributable to 
the cost of the device itself. There are very few VADs approved by FDA; 
therefore, we believe this small group of manufacturers is able to set 
their own charges in the market. We point out that the IPPS is not 
designed to pay solely for the cost of devices. The MS-DRG 
classification system (and more importantly, the IPPS) is not based 
solely on the cost of devices.
    Rather, the MS-DRG system is a patient classification system that 
provides an average means of relating the type of patients a hospital 
treats (that is, case-mix) to the costs incurred by the hospital. We 
have previously stated that, ``Central to the success of the Medicare 
inpatient hospital prospective payment system is that DRGs have 
remained a clinical description of why the patient required 
hospitalization. We believe it would be undesirable to transform DRGs 
into detailed descriptions of the technology and processes used by the 
hospital to treat the patient. If such a transformation were to happen, 
the DRGs would become largely a repackaging of fee-for-service without 
the management and communication benefits. The separation of the 
clinical and payment weight methodologies allows a stable clinical 
methodology to be maintained, while the payment weights evolve in 
response to changing practice patterns. The packaging of all services 
associated with the care of a particular type of patient into a single 
payment amount provides the incentive for efficiency inherent in a DRG-
based prospective payment system. Substantial disaggregation of the 
DRGs into smaller units of payment, or a substantial number of cases 
receiving extra payments, would undermine the incentives and 
communication value in the DRG system.'' (66 FR 46904)
    The results of our review of the claims data for MS-DRGs 001 and 
002 are summarized in the following table.

------------------------------------------------------------------------
                                       Description of        Number of
               Code                        code(s)             cases
------------------------------------------------------------------------
MS-DRG 001 (Heart Transplant or Implant of Heart Assist System With MCC)
------------------------------------------------------------------------
All codes.........................  ....................           1,235
33.6 or 37.51.....................  Combined heart-lung              384
                                     transplantation or
                                     Heart
                                     transplantation.
33.6 or 37.51 with 37.66..........  Combined heart-lung               11
                                     transplantation or
                                     Heart
                                     transplantation
                                     with Insertion of
                                     implantable heart
                                     assist system (VAD).
37.52.............................  Implantation of                    2
                                     total internal
                                     biventricular heart
                                     replacement system
                                     (Artificial heart).
37.66.............................  Insertion of                     811
                                     implantable heart
                                     assist system (VAD).
37.60 with 37.64..................  Implantation or                    1
                                     insertion of
                                     biventricular
                                     external heart
                                     assist system +
                                     Removal of external
                                     heart assist
                                     system(s) or
                                     device(s).
37.63 with 37.64..................  Repair of heart                    0
                                     assist system +
                                     Removal of external
                                     heart assist
                                     system(s) or
                                     device(s).
37.64 with 37.65..................  Removal of external               22
                                     heart assist
                                     system(s) or
                                     device(s) + plant
                                     of single
                                     ventricular
                                     (extracorporeal)
                                     external heart
                                     assist system.
                                    Multiple VADs                     22
                                     without heart
                                     transplant.
------------------------------------------------------------------------
MS-DRG 002 (Heart Transplant or Implant of Heart Assist System With MCC)
------------------------------------------------------------------------
All codes.........................  ....................             313
33.6 or 37.51.....................  Combined heart-lung              172
                                     transplantation or
                                     Heart
                                     transplantation.
33.6 or 37.51 with 37.66..........  Combined heart-lung                0
                                     transplantation or
                                     Heart
                                     transplantation
                                     with Insertion of
                                     implantable heart
                                     assist system (VAD).
37.52.............................  Implantation of                    0
                                     total internal
                                     biventricular heart
                                     replacement system
                                     (Artificial heart).
37.66.............................  Insertion of                     140
                                     implantable heart
                                     assist system (VAD).
37.60 with 37.64..................  Implantation or                    0
                                     insertion of
                                     biventricular
                                     external heart
                                     assist system plus
                                     Removal of external
                                     heart assist
                                     system(s) or
                                     device(s).
37.63 with 37.64..................  Repair of heart                    0
                                     assist system +
                                     Removal of external
                                     heart assist
                                     system(s) or
                                     device(s).
37.64 with 37.65..................  Removal of external                1
                                     heart assist
                                     system(s) or
                                     device(s) + plant
                                     of single
                                     ventricular
                                     (extracorporeal)
                                     external heart
                                     assist system.
                                    Multiple VADs                      4
                                     without heart
                                     transplant.
------------------------------------------------------------------------

    In general, we believe that the IPPS should accurately recognize 
differences in utilization for clinically distinct procedures. However, 
we also reiterate the language in the FY 2009 IPPS final rule that the 
payments under a prospective payment system are predicated on averages 
(73 FR 48443). To create a new MS-DRG specific to VAD implantation 
would require basing that MS-DRG almost exclusively on the presence of 
procedure code 37.66, representing a single procedure and currently one 
manufacturer with FDA approval. Currently, other manufacturers are 
reported to be in clinical trials with their VADs. This approach 
negates our longstanding method of grouping like procedures and 
diminishes the concept of averaging. Further, we are concerned that 
ignoring the structure of the MS-DRG system solely for the purpose of 
increasing payment for one device would set an unwarranted precedent 
for defining all of the other MS-DRGs in the system (73 FR 48497 and 
48498).
    The commenter requested that we create two new MS-DRGs for the VADs 
and that the requested MS-DRGs be divided based on the presence or 
absence of an MCC. We point out that the final rule establishing the 
MS-DRGs sets 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). The original criteria were based on 
average charges; we now use average costs (FY 2007 IPPS final rule (71 
FR 47882)). To reiterate, these criteria are as follows:
     A reduction in variance of costs of at least 3 percent.
     At least 5 percent of the patients in the MS-DRG fall 
within the CC or MCC subgroup.
     At least 500 cases are in the CC or MCC subgroup.
     There is at least a 20-percent difference in average costs 
between subgroups.

[[Page 27900]]

     There is a $2,000 difference in average cost between 
subgroups.
    As procedure code 37.66 predominates in our claims data for VAD 
implantations, we are including the following table demonstrating the 
cost difference between MS-DRG 001 and MS-DRG 002.

------------------------------------------------------------------------
                                             Number of
                 MS-DRG                        cases       Average cost
------------------------------------------------------------------------
001--Cases with procedure code 37.66....             811        $181,915
002--Cases with procedure code 37.66....             140         128,069
------------------------------------------------------------------------

    As stated in the FY 2008 IPPS final rule with comment period, all 
five criteria must be met in order to subdivide an MS-DRG into MCC and 
non-MCC severity levels. In this instance, the number of cases in MS-
DRG 002 containing procedure code 37.66 is 140, not the minimum number 
of 500 cases as established by the MS-DRG severity criteria. Therefore, 
even if we were to create a new MS-DRG for VAD implantation, unless we 
further divided the MS-DRG based on the presence of an MCC, we would 
substantially overpay approximately 15 percent of total VAD cases. 
However, we could not create multiple MS-DRGs for VAD implantation 
without ignoring our rules for subdividing MS-DRGs.
    For these reasons, for FY 2013, we are not proposing to make any 
changes to the structure of MS-DRGs 001 and 002. We are inviting public 
comment on our proposal.
b. Allogeneic Bone Marrow Transplant
    In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50101), we deleted 
MS-DRG 009 (Bone Marrow Transplant) and created two new MS-DRGs: MS-DRG 
014 (Allogeneic Bone Marrow Transplant) and MS-DRG 015 (Autologous Bone 
Marrow Transplant). We created MS-DRGs 014 and 015 because of 
differences in costs associated with the procedures in these two MS-
DRGs. In the FY 2012 IPPS/LTCH PPS final rule (76 FR 51525 through 
51526), we further subdivided MS-DRG 015 into two severity levels, by 
deleting MS-DRG 015 and creating MS-DRG 016 (Autologous Bone Marrow 
Transplant with CC/MCC); and MS-DRG 017 (Autologous Bone Marrow 
Transplant without CC/MCC). We created MS-DRGs 014 and 015 as these 
groups meet all five criteria for subdivision by severity level that we 
established in the FY 2008 IPPS final rule with comment period (72 FR 
47169). As we discussed in the FY 2012 IPPS/LTCH PPS final rule, MS-DRG 
014 did not meet the criteria for subdivision by severity level.
    During the comment period for the FY 2012 IPPS/LTCH PPS proposed 
rule, we received a public comment regarding related and unrelated 
allogeneic bone marrow transplants (which are captured in MS-DRG 014) 
that had not been the subject of a proposal in that proposed rule. This 
issue was referred to briefly in the FY 2012 IPPS/LTCH PPS final rule 
(76 FR 51557), but we did not address the issue because we considered 
the comment to be out of the scope of provisions of the proposed rule. 
However, we are addressing this issue in this FY 2013 proposed rule. 
The commenter recommended that MS-DRG 014 be subdivided into two MS-
DRGs based on related and unrelated transplant donor source.
    Allogeneic bone marrow transplantation utilizes the bone marrow or 
stem cells from a donor that is either related (sibling or other close 
family member) or unrelated (not a close family member of the 
recipient) in the treatment of certain cancers and bone marrow 
diseases. Allogeneic transplant recipients must have a tissue type that 
matches the donor. According to the commenter, a related donor will 
typically be managed by the transplant facility from human leukocyte 
antigen (HLA) molecular typing through mobilization and collection, 
while an unrelated donor requires the use of donor registry for 
searching and collection process. According to the commenter, the 
unrelated donor setting adds significant costs to the transplant that 
would not be incurred in the related transplant setting.
    Currently, there are three ICD-9-CM procedure codes that identify 
the transplant donor source:

 00.91 (Transplant from live related donor)
 00.92 (Transplant from live non-related donor)
 00.93 (Transplant from cadaver)

    In our analysis of data in the FY 2011 MedPAR file, we found 467 
cases assigned to MS-DRG 014 with average costs of approximately 
$64,403 and an average length of stay of approximately 24.8 days. There 
were 125 cases that reported procedure code 00.91 on the claim as the 
related transplant donor source with average costs of approximately 
$55,969 and an average length of stay of approximately 24.1 days. In 
our analysis of the unrelated donor source, we included the cases 
reported with the transplant from a cadaver donor source (code 00.93) 
with the transplant from a live nonrelated donor source (code 00.92). 
There were 213 cases that reported either code 00.92 or 00.93 as the 
transplant donor source with average costs of approximately $64,837 and 
an average length of stay of approximately 23 days. There were 129 
cases that did not report a transplant donor source with average costs 
of approximately $71,859 and an average length of stay of approximately 
28.5 days. The following table illustrates our findings:

----------------------------------------------------------------------------------------------------------------
                                                                     Number of    Average length
                             MS-DRG                                    cases          of stay      Average costs
----------------------------------------------------------------------------------------------------------------
MS-DRG 014--All cases...........................................             467            24.8         $64,403
MS-DRG 014--Live related donor (code 00.91).....................             125            24.1          55,969
MS-DRG 014--Live nonrelated donor (code 00.92) or cadaver (code              213              23          64,837
 00.93).........................................................
MS-DRG 014--No donor source.....................................             129            28.5          71,859
----------------------------------------------------------------------------------------------------------------

    We note that one quarter of the cases (129 out of 467 cases) that 
did not report a transplant donor source code had the highest average 
costs of approximately $71,859, compared to $55,969 for live related 
donors and $64,837 for live nonrelated or cadaver donors and $64,403 
for the overall average cost of cases within MS-DRG 014. The cases 
without a transplant donor source code also had a longer length of stay 
(28.5 days) than the live-related donor cases

[[Page 27901]]

(24.1 days), the live nonrelated or cadaver cases (23 days), and the 
overall cases (24.8 days) assigned to MS-DRG 014.
    Based on these findings, we believe that it would not be advisable 
to include cases without a transplant donor source code with the live 
nonrelated or cadaver donor cases, as we believe it would encourage 
providers not to report the transplant donor source code. All possible 
options must be included in any MS-DRG reconfiguration. Therefore, 
cases with no reported transplant donor source code must be included in 
the updated logic because this is the group with the highest average 
costs. Our clinical advisors reviewed this issue and do not support 
splitting MS-DRG 014 into two MS-DRGs because a quarter of the cases 
did not provide a transplant donor source. Therefore, we have concluded 
that the cases reported with a transplant donor source code are 
appropriately assigned to MS-DRG 014 and that MS-DRG does not warrant 
further subdivision. Without more complete information on donor source, 
we are not proposing that MS-DRG 014 be subdivided at this time. We are 
inviting public comment on our proposal not to subdivide MS-DRG 014 
into two MS-DRGs based on related and unrelated donor source.
2. MDC 4 (Diseases and Disorders of the Ear, Nose, Mouth and Throat): 
Influenza With Pneumonia
    In the FY 2012 IPPS/LTCH PPS final rule (76 FR 51557), we discussed 
a public comment that we considered out of the scope of the FY 2012 
proposed rule. Therefore, we did not address the issues in the final 
rule. The commenter requested that we consider reassigning cases with a 
combined diagnosis of influenza with pneumonia from a set of simple 
pneumonia MS-DRGs to a set of MS-DRGs that captures a more severe type 
of pneumonia. The specific request involves cases now assigned to MS-
DRGs 193 (Simple Pneumonia and Pleurisy with MCC), 194 (Simple 
Pneumonia and Pleurisy with CC), and 195 (Simple Pneumonia and Pleurisy 
without MCC/CC) being moved to MS-DRGs 177 (Respiratory Infections and 
Inflammations with MCC), 178 (Respiratory Infections and Inflammations 
with CC), and 179 (Respiratory Infections and Inflammations without 
MCC/CC).
    We examined data in the FY 2011 MedPAR file on cases that reported 
diagnosis code 487.0 (Influenza with pneumonia) as the principal 
diagnosis with an additional secondary diagnosis code for one of the 
following types of pneumonia:

 482.0 (Pneumonia due to Klebsiella pneumoniae)
 482.1 (Pneumonia due to Pseudomonas)
 482.40 (Pneumonia due to Staphylococcus, unspecified)
 482.41 (Methicillin susceptible pneumonia due to 
Staphylococcus aureus)
 482.42 (Methicillin resistant pneumonia due to Staphylococcus 
aureus)
 482.49 (Other Staphylococcus pneumonia)
 482.81 (Pneumonia due to anaerobes)
 482.82 (Pneumonia due to Escherichia coli [E. coli])
 482.83 (Pneumonia due to other gram-negative bacteria)
 482.84 (Pneumonia due to Legionnaires' disease)
 482.89 (Pneumonia due to other specified bacteria)

    Currently, when one of the pneumonia codes listed above is reported 
as a principal diagnosis, the case is assigned to MS-DRG 177, 178, or 
179. However, when the patient has been diagnosed with one of these 
types of pneumonia and also has influenza, the ICD-9-CM coding book 
directs the coder to report diagnosis code 487.0 as the principal 
diagnosis and to assign an additional secondary code to describe the 
specific type of pneumonia. This reporting results in cases with 
diagnoses of both influenza and specific types of pneumonia being 
assigned to MS-DRG 193, 194, or 195 (Simple Pneumonia and Pleurisy with 
MCC, with CC, or without CC/MCC, respectively), instead of MS-DRG 177, 
178, or 179. The commenter requested that we reassign cases reporting 
code 487.0 as the principal diagnosis with one of the specific 
pneumonia codes listed above as a secondary diagnosis to MS-DRGs 177, 
178, and 179.
    We analyzed data from the MedPAR file on cases with patients with 
pneumonia and found the following:

----------------------------------------------------------------------------------------------------------------
                                                                     Number of    Average length
                             MS-DRG                                    cases          of stay      Average cost
----------------------------------------------------------------------------------------------------------------
MS-DRG 177--All cases...........................................          69,128            8.20         $13,002
MS-DRG 178--All cases...........................................          59,559            6.40           9,193
MS-DRG 179--All cases...........................................          14,108            4.65           6,365
MS-DRG 193--All cases...........................................         125,892            6.28           9,589
MS-DRG 193--Cases with principal diagnosis code 487.0 and with a              57            9.3           15,867
 secondary diagnosis code of 482.0, 482.1, 482.40, 482.41,
 482.42, 482.49, 482.81, 482.82, 482.83, 482.84, or 482.89......
MS-DRG 193--Cases with principal diagnosis code 487.0 and                  1,320            6.93          10,416
 without a secondary diagnosis code of 482.0, 482.1, 482.40,
 482.41, 482.42, 482.49, 482.81, 482.82, 482.83, 482.84, or
 482.89.........................................................
MS-DRG 194--All cases...........................................         191,030            4.73           6,524
MS-DRG 194--Cases with principal diagnosis code 487.0 and with a              59            6.9            9,752
 secondary diagnosis code of 482.0, 482.1, 482.40, 482.41,
 482.42, 482.49, 482.81, 482.82, 482.83, 482.84, or 482.89......
MS-DRG 194--Principal diagnosis code 487.0 and without a                   2,088            5.16           6,871
 secondary diagnosis code of 482.0, 482.1, 482.40, 482.41,
 482.42, 482.49, 482.81, 482.82, 482.83, 482.84, or 482.89......
MS-DRG 195--All cases...........................................          80,253            3.53           4,660
MS-DRG 195--Cases with a principal diagnosis code 487.0 and a                 12            4.8            5,842
 secondary diagnosis code of 482.0, 482.1, 482.40, 482.41,
 482.42, 482.49, 482.81, 482.82, 482.83, 482.84, or 482.89......
MS-DRG 195--Cases with principal diagnosis code 487.0 and                  1,065            3.78           4,580
 without a secondary diagnosis code of 482.0, 482.1, 482.40,
 482.41, 482.42, 482.49, 482.81, 482.82, 482.83, 482.84, or
 482.89.........................................................
----------------------------------------------------------------------------------------------------------------


[[Page 27902]]

    The data showed that cases reporting a principal diagnosis code 
487.0 with one of the pneumonia codes listed above as a secondary 
diagnosis have significantly higher average costs ($15,867 in MS-DRG 
193, $9,752 in MS-DRG 194, and $5,842 in MS-DRG 195) than those cases 
reported without one of the pneumonia codes listed above as a secondary 
diagnosis ($10,416 in MS-DRG 193, $6,871 in MS-DRG 194, and $4,580 in 
MS-DRG 195), and also the overall average costs for all cases in MS-
DRGs 193, 194, and 195 ($9,589, $6,524, and $4,660, respectively). The 
influenza and pneumonia cases had average costs that more closely align 
with the average costs of cases currently assigned to MS-DRGs 177, 178, 
and 179 ($13,002, $9,193, and $6,365, respectively).
    As a result of our analysis, the data support the commenter's 
request that we reassign cases reporting a principal diagnosis code 
487.0 and an additional secondary diagnosis code for one of the 
pneumonia codes listed above, from MS-DRGs 193, 194, and 195 to MS-DRGs 
177, 178, and 179. Our clinical advisors also support reassigning these 
cases to MS-DRGs 177, 178, and 179. Therefore, for FY 2013, we are 
proposing to reassign cases with a principal diagnosis code 487.0 and 
an additional secondary diagnosis code of one of the following 
pneumonia codes listed as a secondary diagnosis codes from MS-DRGs 193, 
194, and 195 to MS-DRGs 177, 178, and 179: 482.0; 482.1; 482.40; 
482.41; 482.42; 482.49; 482.81; 482.82; 482.83; 482.84; and 482.89.
    We are inviting public comment on our proposal for FY 2013.
3. MDC 5 (Diseases and Disorders of the Circulatory System)
a. Percutaneous Mitral Valve Repair With Implant
    We received a request to reassign procedure code 35.97 
(Percutaneous mitral valve repair with implant) to the following MS-
DRGs:
     MS-DRG 216 (Cardiac Valve & Other Major Cardiothoracic 
Procedures with Cardiac with MCC);
     MS-DRG 217 (Cardiac Valve & Other Major Cardiothoracic 
Procedures with Cardiac with CC);
     MS-DRG 218 (Cardiac Valve & Other Major Cardiothoracic 
Procedures with Cardiac without CC/MCC);
     MS-DRG 219 (Cardiac Valve & Other Major Cardiothoracic 
Procedures without Cardiac with MCC);
     MS-DRG 220 (Cardiac Valve & Other Major Cardiothoracic 
Procedures without Cardiac with CC); and
     MS-DRG 221 (Cardiac Valve & Other Major Cardiothoracic 
Procedures without Cardiac without CC/MCC).
    In the FY 2012 IPPS/LTCH PPS final rule (76 FR 51528 through 
51529), we discussed reassigning procedure code 35.97 from MS-DRGs 231 
and 232 (Coronary Bypass with PTCA with MCC and without MCC, 
respectively) and 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), 249 (Percutaneous Cardiovascular 
Procedure with Non-Drug-Eluting Stent without MCC), 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). In that final rule, we stated that we 
did not have sufficient claims data on which to base and evaluate any 
proposed changes to the current MS-DRG assignment. Procedure code 35.97 
was created for use beginning October 1, 2010 (FY 2011) after the 
concept of percutaneous valve repair was presented at the March 2010 
ICD-9-CM Coordination and Maintenance Committee meeting. Procedure code 
35.97 was created at that time to describe the MitraClipTM 
device and any other percutaneous mitral valve repair devices currently 
on the market. This procedure code was assigned to the following MS-
DRGs: 231 and 232 (Coronary Bypass with PTCA with MCC and without MCC, 
respectively); 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); 249 (Percutaneous Cardiovascular Procedure 
with Non-Drug-Eluting Stent without MCC); 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).
    According to the Food and Drug Administration's (FDA's) terms of 
the clinical trial for MitraClip\TM\, the device is to be implanted in 
patients without any additional surgeries performed. Therefore, based 
on these terms, we stated that while the procedure code is assigned to 
MS-DRGs 246 through 251, the most likely MS-DRG assignments would be 
MS-DRGs 250 and 251, as described above. As we stated in the FY 2012 
IPPS/LTCH PPS final rule, because procedure code 35.97 had only been in 
use since October 1, 2010, there were no claims data in the most recent 
update of the MedPAR file at that time to evaluate any alternative MS-
DRG assignments. Therefore, we did not make any MS-DRG assignment 
changes for procedure code 35.97 for FY 2012.
    For this proposed rule, we have analyzed claims data from the FY 
2011 MedPAR file on the procedure that describes mitral valve repair 
with implant and found the following:

----------------------------------------------------------------------------------------------------------------
                                                                     Number of    Average length
                             MS-DRG                                    cases          of stay      Average costs
----------------------------------------------------------------------------------------------------------------
MS-DRG 216--All Cases...........................................           9,624           16.44         $61,015
MS-DRG 217--All Cases...........................................           5,655           10.24          41,324
MS-DRG 218--All Cases...........................................             995            7.43          34,587
MS-DRG 219--All Cases...........................................          15,336           12.53          50,176
MS-DRG 220--All Cases...........................................          18,455            7.53          34,150
MS-DRG 221--All Cases...........................................           4,719            5.59          29,082
MS-DRG 231--All Cases...........................................           1,170           12.17          49,728
MS-DRG 231--Cases with Procedure Code 35.97.....................               4           13.75          35,409
MS-DRG 232--All Cases...........................................           1,010            9.16          37,820
MS-DRG 232--Cases with Procedure Code 35.97.....................               9           13.56          46,008
MS-DRG 246--All Cases...........................................          29,299            5.20          20,725
MS-DRG 247--All Cases...........................................         109,661            2.39          13,014
MS-DRG 248--All Cases...........................................          13,562            6.35          19,785
MS-DRG 248--Cases with Procedure Code 35.97.....................               1           32.00         110,262
MS-DRG 249--All Cases...........................................          35,100            2.86          11,806

[[Page 27903]]

 
MS-DRG 250--All Cases...........................................           8,313            7.07          19,673
MS-DRG 250--Cases with Procedure Code 35.97.....................              39            9.77          29,753
MS-DRG 251--All Cases...........................................          31,316            2.92          12,658
MS-DRG 251--Cases with Procedure Code 35.97.....................              98            2.69          18,651
----------------------------------------------------------------------------------------------------------------

    We note that most of the cases were found in MS-DRGs 250 and 251, 
as we predicted in the FY 2012 IPPS/LTCH PPS final rule based on FDA's 
terms of the clinical trial for MitraClip\TM\. As stated earlier, the 
device is to be implanted in patients without any additional surgeries 
performed. There were 39 cases in MS-DRG 250 with average costs of 
$29,753 (which includes cases with an MCC). These average costs are 
significantly lower than the average costs of $61,015 for cases in MS-
DRG 216, and the average costs of $50,176 for cases in MS-DRG 219 
(which includes cases with an MCC). There were 98 cases in MS-DRG 251 
(without MCC) with average costs of $18,651. These average costs also 
are lower than the average costs of comparable cases in MS-DRGs 217, 
218, 220, and 221, whose average costs range from a high of $41,324 to 
a low of $29,082. While the average costs of mitral valve repair cases 
are higher than the average costs of other cases assigned to MS-DRGs 
250 and 251, they are significantly less than the average costs of 
cardiac valve replacement cases assigned to MS-DRGs 216 through 221. 
Our analysis of the claims data does not support reassigning the 
procedure that describes percutaneous mitral valve repair with implant 
from MS-DRGs 250 and 251 to MS-DRGs 216 through 221. Our clinical 
advisors also support maintaining the current assignment of this 
procedure in MS-DRGs 250 and 251. Therefore, based on our findings, we 
are not proposing to reassign procedure code 35.97 from MS-DRGs 250 and 
251 to MS-DRGs 216 through 221.
    We are inviting public comment on our proposal to maintain the 
current assignment of procedure code 35.97 in MS-DRGs 250 and 251 and 
not to reassign the procedure code to MS-DRGs 217 through 221.
b. Endovascular Implantation of Branching or Fenestrated Grafts in 
Aorta
    The fenestrated (with holes) graft device is designed to treat 
patients with abdominal aortic aneurysms (AAA). Current treatment 
options for patients with AAAs include open surgical repair, 
endovascular repair using stent-grafts, or medical management.
    Aneurysmal disease that extends proximally to the level of the 
renal arteries is usually indicative of more extensive aortic disease 
and comorbidities. As a result, many of these patients are at a higher 
overall risk when undergoing open surgical repair. In addition, these 
patients are often not suitable for endovascular treatment with 
currently available endografts because the length of healthy aorta is 
insufficient to provide an adequate seal at the proximal end. The 
indications for use for many of the standard endografts call for an 
aortic neck length greater than or equal to 15 millimeters.
    Published industry reports estimate that 8 percent to 30 percent of 
patients with AAAs that need repair have aortic necks of less than 15 
millimeters in length. One institution has reported that over half of 
its patients with AAAs were considered ineligible for endovascular 
aneurysm repair or endovascular aortic repair (EVAR) due to an 
inadequate length of nondiseased aorta. These patients also were 
predominantly contraindicated for open repair.
    Prior to the development of a fenestrated graft device, the only 
treatment option available to a large number of these high-risk 
patients would have been medical management. Open surgical repair is 
too challenging to frail patients, as it requires supraceliac clamping 
of the aorta and may result in renal ischemia, mesenteric ischemia, or 
atheroembolization of the visceral vessels of the aorta. EVAR with a 
standard endograft is not a viable option either because the shortened 
neck precludes an adequate proximal end seal, which can lead to type I 
endoleaks (leaking of blood around the device into the aneurysm 
resulting in continued pressurization of the aneurysm). Medical 
management alone leaves these patients at high risk for AAA-related 
morbidity and mortality. These suboptimal choices led to the creation 
of fenestrated endografts that can seal above the renal arteries while 
maintaining access and uninterrupted blood flow to branch vessels of 
the aorta.
    The fenestrated graft is currently under clinical trial in the 
United States, but has not yet received FDA approval. One of the two 
companies that are conducting clinical trials expects to receive FDA 
approval in the second quarter of 2012. Both companies listed on the 
FDA clinical trial Web site are still recruiting participants.
    At the September 15, 2010 meeting of the ICD-9-CM Coordination and 
Maintenance Committee, the topic of fenestrated graft was presented 
with a request for a unique procedure code. As a result of that 
meeting, and additional meetings with manufacturers throughout the 
year, procedure code 39.78 (Endovascular implantation of branching or 
fenestrated graft(s) in aorta) was created for use beginning October 1, 
2011 (FY 2012). This code is assigned to MS-DRGs 252, 253, and 254 
(Other Vascular Procedures with MCC, with CC, and without CC/MCC, 
respectively).
    We have received a request from a manufacturer to reassign 
procedure code 39.78 from MS-DRGs 252, 253, and 254 and to MS-DRGs 237 
and 238 (Major Cardiovascular Procedures with MCC and without MCC, 
respectively). The requestor stated that the assignment to MS-DRGs 252, 
253, and 254 violates both of CMS' stated principles regarding 
assigning new codes to MS-DRGs that reflect both clinical coherence and 
similar consumption of resources.
    From the standpoint of clinical coherence, the requestor noted 
that, while procedures in MS-DRGs 252, 253, and 254 are vascular 
procedures, the procedures do not involve the aorta. The requestor 
further notes that AAA repairs, both open and endovascular, are 
assigned to MS-DRGs 237 and 238. From the standpoint of similar 
consumption of resources, the requestor included anticipated device 
costs of $17,424 to $21,824 for a fenestrated endovascular procedure. 
The requestor noted that these costs only represent the device and do 
not include any additional resources required during the 
hospitalization. The requestor believed that the device costs are more 
similar to devices used in MS-DRGs 237 and 238.
    CMS' practice is to assign new codes to MS-DRGs where similar 
procedures are also located. In terms of clinical coherence, CMS 
assigned the new code to the vascular procedure MS-DRGs (252, 253, and 
254) where other noncoronary endovascular procedures for blood vessel 
repair also are assigned. This decision was based on our practice

[[Page 27904]]

to group similar procedures together, in this case repairs to blood 
vessels, especially for new codes when CMS has no data history.
    With regard to resource consumption, we point out that procedure 
code 39.78 was created for use effective with discharges on or after 
October 1, 2011. Our review of data in the MedPAR file shows no 
utilization of this code because it is too new. That is, we have no 
claims data that would either prove or disprove the requestor's 
supposition that procedure code 39.78 is not adequately paid under MS-
DRGs 252, 253, and 254. As discussed elsewhere in this preamble, CMS is 
not a device classification system. Therefore, because there are very 
few companies currently marketing their fenestrated graft devices, we 
are concerned that these companies are able to set their own charges in 
the market.
    In addition, the requestor opined that ``an argument could possibly 
be made that the increased device costs and longer procedural times for 
[procedure code] 39.78 suggest assignment into MS-DRG 237 alone would 
be appropriate,'' although the requestor further stated that, without a 
significant volume of actual claims data, it might be more reasonable 
[for CMS] to take a conservative approach and assign these procedures 
to either MS-DRG 237 or MS-DRG 238. We note that MS-DRGs 237 and 238 
are paired MS-DRGs, with both MS-DRGs containing the same procedure 
codes, but which have been subdivided based on the formula for the 
presence or absence of comorbid or complicating conditions. It is not 
an inherent part of the GROUPER logic to assign a code to only one DRG 
in a set of paired or triplicate MS-DRGs.
    We will continue to evaluate the clinical coherence and resource 
consumption costs that impact this code and the current MS-DRG 
assignment. We also note that the requestor has expressed its intent to 
apply for New Technology status, provided that its anticipated FDA 
approval is granted in time for this year's IPPS update.
    Because there is no data history for procedure code 39.78 that 
would justify a reassignment based on either clinical coherence or 
resource consumption, we are not proposing to make a change to the MS-
DRG assignment of procedure code 39.78 for FY 2013. We believe that 
procedure code 39.78 has been appropriately placed within the MS-DRG 
structure. We are inviting public comment on our proposal.
4. MDC 10 (Endocrine, Nutritional, and Metabolic Diseases and 
Disorders): Disorders of Porphyrin Metabolism
    We received a request for the creation of a new MS-DRG to better 
identify cases where patients with disorders of porphyrin metabolism 
exist, to recognize the resource requirements in caring for these 
patients, to ensure appropriate payment for these cases, and to 
preserve patient access to necessary treatments. Porphyria is defined 
as a group of rare disorders (``porphyrias'') that interfere with the 
production of hemoglobin that is needed for red blood cells. While some 
of these disorders are genetic (inborn) and others can be acquired, 
they all result in the abnormal accumulation of hemoglobin building 
blocks, called porphyrins, which can be deposited in the tissues where 
they particularly interfere with the functioning of the nervous system 
and the skin.
    Treatment for patients suffering from disorders of porphyrin 
metabolism consists of an intravenous injection of Panhematin[supreg] 
(hemin for injection). This pharmaceutical agent became the first drug 
approved under the Orphan Drug Act for rare diseases in 1983. It is the 
only FDA-approved prescription treatment for acute intermittent 
porphyria.
    ICD-9-CM diagnosis code 277.1 (Disorders of porphyrin metabolism) 
describes these cases, which are currently assigned to MS-DRG 642 
(Inborn and Other Disorders of Metabolism). We analyzed data from the 
FY 2011 MedPAR file for cases assigned to this MS-DRG. As shown in the 
table below, we found a total of 1,447 cases in MS-DRG 642 with an 
average length of stay of 4.63 days and average costs of $7,400. We 
then analyzed the data for cases reporting diagnosis code 277.1 as the 
principal diagnosis in this same MS-DRG. We found a total of 330 cases, 
with an average length of stay of 6.12 days and average costs of 
$11,476.

----------------------------------------------------------------------------------------------------------------
                                                                     Number of    Average length
                             MS-DRG                                    cases          of stay      Average costs
----------------------------------------------------------------------------------------------------------------
MS-DRG 642--All cases...........................................           1,447            4.63          $7,400
MS-DRG 642--Cases with principal diagnosis code 277.1...........             330            6.12          11,476
----------------------------------------------------------------------------------------------------------------

     While the average costs for the 330 cases reporting a principal 
diagnosis code of 277.1 were higher than all cases in MS-DRG 642 
($11,476 versus $7,400), the volume of affected cases is small, 
representative of approximately 20 percent of all of the cases in MS-
DRG 642. Under our existing policy (76 FR 51487 and 51488), in deciding 
whether to make modifications to the MS-DRGs, we consider whether the 
resource consumption and clinical characteristics of the patients with 
a given set of conditions are significantly different from the 
remaining patients in the MS-DRG. We evaluate the utilization of 
resources related to patient care using average costs and length of 
stay and rely 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 consider both the absolute and 
percentage differences in average costs between the cases we selected 
for review and the reminder of cases in the MS-DRG. We also consider 
variation in costs within these groups; that is, whether observed 
average differences are consistent across patients or attributable to 
cases that were extreme in terms of charges or length of stay. Further, 
we consider the number of patients who have a given set of 
characteristics and generally prefer not to create a new MS-DRG unless 
it would include a substantial number of cases. Therefore, we have 
determined that the findings do not support the creation of a new MS-
DRG.
    We acknowledge the importance of ensuring that patients diagnosed 
with a disorder of porphyrin metabolism have adequate access to care 
and receive the necessary treatment. Despite the fact that our data 
analysis did not demonstrate support for the creation of a new MS-DRG 
at this time, we also explored an alternative option. In reviewing the 
medical MS-DRGs in terms of resources and clinical coherence that are 
also located within MDC 10, we found three MS-DRGs that we believe are 
similar to MS-DRG 642. We analyzed data from the MedPAR file on cases 
in MS-DRGs 643, 644, and 645 (Endocrine Disorders with MCC, with CC, 
and without CC/MCC, respectively) to determine if the cases reporting a 
principal diagnosis code of 277.1 would be more appropriately 
reassigned from MS-DRG 642 to MS-DRGs 643, 644, and 645. Upon 
examination of the data,

[[Page 27905]]

we found that the average costs of these cases were $10,835, $6,816, 
and $4,762, respectively, as shown in the table below.

----------------------------------------------------------------------------------------------------------------
                                                                     Number of    Average length
                             MS-DRG                                    cases          of stay      Average costs
----------------------------------------------------------------------------------------------------------------
MS-DRG 643--Cases with principal diagnosis code 277.1...........           6,562            7.11         $10,835
MS-DRG 644--Cases with principal diagnosis code 277.1...........          12,769            4.89           6,816
MS-DRG 645--Cases with principal diagnosis code 277.1...........           5,979            3.40           4,762
----------------------------------------------------------------------------------------------------------------

    Based on these findings, if we were to reassign cases where 
disorders of porphyrin metabolism (diagnosis code 277.1) were reported 
as the principal diagnosis with a secondary diagnosis designated as a 
CC (MS-DRG 644) or with a secondary diagnosis that was not a CC/MCC 
(MS-DRG 645), Medicare would pay significantly less for these cases 
than they are now paid under MS-DRG 642. Therefore, it would not be 
appropriate to reassign cases reporting a principal diagnosis code of 
277.1 from MS-DRG 642 to MS-DRGs 643, 644, and 645. In addition, our 
clinical advisors did not support this reassignment. The MS-DRG 
classification system on which the IPPS is based comprises a system of 
averages. As such, it is understood that, in any particular MS-DRG, it 
is not unusual for a small number of cases to demonstrate higher than 
average costs, nor is it unusual for a small number of cases to 
demonstrate lower than average costs. Upon review of the MedPAR data 
and the alternative option discussed, our clinical advisors agree that 
the current MS-DRG assignment for diagnoses of disorders of porphyrin 
metabolism (diagnosis code 277.1) to MS-DRG 642 is most appropriate at 
this time.
    As stated previously, we acknowledge and recognize the severity of 
symptoms that patients diagnosed with disorders of porphyrin metabolism 
may experience. We also are sensitive to concerns about access to care 
and treatment for these patients. We will continue to monitor this 
issue and determine how to better account for the variation in resource 
utilization within the IPPS for these cases.
    In summary, we are not proposing to create a new MS-DRG or to 
reassign cases reporting a principal diagnosis code of 277.1 to MS-DRGs 
643, 644, and 645 for FY 2013. We are inviting public comment on our 
proposal.
5. Proposed Medicare Code Editor (MCE) Changes
    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 an MS-DRG.
    We are proposing to make a change to the MCE edits which includes 
the creation of a new length of stay edit for continuous invasive 
mechanical ventilation for 96 consecutive hours or more.
    It was brought to our attention that a number of hospitals 
reporting ICD-9-CM procedure code 96.72 (Continuous invasive mechanical 
ventilation for 96 consecutive hours or more) may be inaccurately 
reporting this code. As the title of the procedure code implies, a 
patient must have received continuous mechanical ventilation for 96 
hours or more in order for this code to be assigned. This equates to a 
patient being hospitalized for at least a 4-day length of stay and 
having received continuous invasive mechanical ventilation for a 
minimum of 4 days. Therefore, a patient with a length of stay less than 
4 days who received continuous invasive mechanical ventilation should 
not have procedure code 96.72 reported on the claim.
    The ICD-9-CM classification system contains three procedure codes 
that identify and describe continuous invasive mechanical ventilation: 
Procedure code 96.70 (Continuous invasive mechanical ventilation of 
unspecified duration); procedure code 96.71 (Continuous invasive 
mechanical ventilation for less than 96 consecutive hours); and 
procedure code 96.72 (Continuous invasive mechanical ventilation for 96 
consecutive hours or more). To assist in the accurate assignment of 
these codes, guidance in the form of a ``Note'' is provided within the 
designated procedure section of ICD-9-CM. This ``Note'' describes the 
calculation of the number of hours during a hospitalization in which a 
patient receives continuous invasive mechanical ventilation. In 
addition, coding advice pertaining to appropriate code assignment for 
mechanical ventilation has been published in various editions of the 
American Hospital Association's (AHA's) Coding Clinic for ICD-9-CM.
    We analyzed the FY 2011 MedPAR data to determine how many cases 
reported procedure code 96.72 with a length of stay less than 4 days. 
Specifically, we reviewed cases reporting procedure code 96.72 with a 
length of stay of 1 day, 2 days, or 3 days. We found a total of 595 
cases meeting those criteria. The data analysis showed there were 89 
cases reporting procedure code 96.72 with a length of stay of 1 day and 
average costs of $5,948, 134 cases reporting procedure code 96.72 with 
a length of stay of 2 days and average costs of $7,776, and 372 cases 
reporting procedure code 96.72 with a length of stay of 3 days and 
average costs of $11,613.
    The data also demonstrate that the 595 cases found were distributed 
across a wide range of MS-DRGs, with the top two (in terms of volume) 
being MS-DRG 207 (Respiratory System Diagnosis with Ventilator Support 
96+ Hours) and MS-DRG 870 (Septicemia or Severe Sepsis with Mechanical 
Ventilation 96+ hours). We note that the two MS-DRGs with the highest 
volume of cases reporting procedure code 96.72 and having a length of 
stay less than 4 days are the two MS-DRGs that specifically reference 
``96+ hours'' in their titles. More importantly, a large percentage of 
these cases reporting procedure code 96.72 in error are being grouped 
to the incorrect MS-DRGs, resulting in significant overpayments. For 
example, of the 89 cases reporting procedure code 96.72 with a length 
of stay of 1 day, 31 cases were grouped to MS-DRGs 207 and 870. Of the 
134 cases reporting procedure code 96.72 with a length of stay of 2 
days, 54 cases were grouped to MS-DRGs 207 and 870. Lastly, of the 372 
cases reporting procedure code 96.72 with a length of stay of 3 days, 
160 cases were grouped to MS-DRGs 207 and 870. Therefore, the data show 
that a total of 245 cases (41 percent) were grouped to MS-DRGs 207 and 
870 in error, resulting in approximately $25,000 in increased payments 
for each case (or approximately $6 million in increased payments for 
all 245 cases). Based on the results of these figures for that portion 
of the total 595 cases found,

[[Page 27906]]

there is an even larger dollar amount that is being overpaid to 
hospitals. These overpayments justify the proposed corrective actions.
    However, we also note that the presumed amount of overpayments for 
claims having a length of stay less than 4 days, as discussed above, is 
merely an estimate based on the data analysis that has been conducted 
at this time. We are aware that, for particular circumstances such as 
those patients who may require observation services, it is possible to 
have procedure code 96.72 reported on the claim with a length of stay 
less than 4 days. Although unlikely, a patient might be briefly 
ventilated in an extended outpatient stay following a toxic ingestion 
with loss of protective reflexes or following outpatient procedures 
with a prolonged effect of anesthesia. A subsequent conversion to an 
inpatient stay would cause the costs to be attributable to the stay, 
while the days themselves were not reported in the inpatient date span 
on the claim. Similar effects could occur following an observation stay 
for a patient on chronic home or skilled nursing facility ventilation. 
It is for this reason that we are proposing a new edit in which claims 
found to have procedure code 96.72 with a length of stay less than 4 
days would be returned to the provider for validation and resubmission. 
Instructions in the form of a Change Request (CR) would be issued prior 
to the implementation date. We are inviting the public to comment on 
our proposal to create this edit, effective for FY 2013.
6. 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 ``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 costs of MS-DRG 1 is higher 
than that of MS-DRG 3, but the average costs of MS-DRGs 4 and 5 are 
higher than the average costs 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 weigh the average costs 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 cost is 
ordered above a surgical class with a higher average cost. 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 costs for the MS-DRG or MS-DRGs in that 
surgical class may be higher than those 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 
costs for two surgical classes is very small. We have found that small 
differences generally do not warrant reordering of the hierarchy 
because, as a result of reassigning cases on the basis of the hierarchy 
change, the average costs are likely to shift such that the higher-
ordered surgical class has lower average costs than the class ordered 
below it.
    We are proposing limited changes to the MS-DRG classifications for 
FY 2013, as discussed in sections II.G.1. and 4. of this preamble. In 
our review of these proposed changes, we did not identify any needed 
changes to the surgical hierarchy. Therefore, we are not proposing any 
changes to the surgical hierarchy for Pre-MDCs and MDCs for FY 2013.
7. Complications or Comorbidity (CC) Exclusions List
a. Background
    Under the IPPS MS-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 47121 through 47152).
b. Proposed CC Exclusions List for FY 2013
    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

[[Page 27907]]

(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.\13\
---------------------------------------------------------------------------

    \13\ 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; the FY 2008 final rule (72 
FR 47130) for the FY 2008 revisions, the FY 2009 final rule (73 FR 
48510), the FY 2010 final rule (74 FR 43799); the FY 2011 final rule 
(75 FR 50114); and the FY 2012 final rule (76 FR 51542). 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.
---------------------------------------------------------------------------

(1) No Revisions Based on Changes to the ICD-9-CM Diagnosis Codes for 
FY 2013
    For FY 2013, we are not proposing to make any revisions to the CC 
Exclusions List. There were no changes made to the ICD-9-CM coding 
system, effective October 1, 2012, due to the partial code freeze. (We 
refer readers to section II.G.9. of the preamble of this proposed rule 
for a discussion of ICD-9-CM coding system.)
(2) Suggested Changes to the MS-DRG Severity Levels for Diagnosis Codes 
for FY 2013
(A) Protein-Calorie Malnutrition
    We received a request that we consider changing the severity levels 
for the following protein-calorie malnutrition diagnosis codes:
     263.0 (Malnutrition of moderate degree)
     263.1 (Malnutrition of mild degree)
     263.9 (Unspecified protein-calorie malnutrition)
    It was suggested that we change the severity level for diagnosis 
codes 263.0 and 263.1 from a non-CC to a CC, while changing the 
severity level for diagnosis code 263.9 from a CC to a non-CC. We 
received this comment during the comment period for the FY 2012 IPPS/
LTCH PPS proposed rule. We referred to this issue briefly in the FY 
2012 IPPS/LTCH PPS final rule (76 FR 51557). We indicated that we 
considered this comment outside of the scope of the proposed rule, as 
we did not propose any severity level changes to these codes for FY 
2012, and did not address it in the final rule. However, we are 
addressing this issue in this FY 2013 proposed rule.
    For this proposed rule, we analyzed the claims data in the FY 2011 
MedPAR file for diagnosis codes 263.0, 263.1, and 263.9. We used the 
same approach we used in initially creating the MS-DRGs and classifying 
secondary diagnosis codes as non-CCs, CCs, or MCCs. A detailed 
discussion of the process and criteria we used in this process is 
described in the FY 2008 IPPS final rule with comment period (72 FR 
47158 through 47161). We refer the readers to this discussion for 
complete information on our approach to developing the non-CC, CC, and 
MCC lists. Each diagnosis for which Medicare data were available was 
evaluated to determine its impact on resource use and to determine the 
most appropriate CC subclass (non-CC, CC, or MCC) assignment. In order 
to make this determination, the average cost for each subset of cases 
was compared to the expected cost for cases in that subset. The 
following format was used to evaluate each diagnosis:

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

    Count (Cnt) is the number of patients in each subset. C1, C2, and 
C3 are a measure of the impact on resource use of patients in each of 
the subsets. The C1, C2, and C3 values are a measure of the ratio of 
average costs for patients with these conditions to the expected 
average cost across all cases. The C1 value reflects a patient with no 
other secondary diagnosis or with all other secondary diagnoses that 
are non-CCs. The C2 value reflects a patient with at least one other 
secondary diagnosis that is a CC but none that is a MCC. The C3 value 
reflects a patient with at least one other secondary diagnosis that is 
a MCC. A value close to 1.0 in the C1 field suggests that the diagnosis 
code produces the same expected value as a non-CC. A value close to 2.0 
suggests the condition is more like a CC than a non-CC but not as 
significant in resource usage as an MCC. A value close to 3.0 suggests 
the condition is expected to consume resources more similar to an MCC 
than a CC or non-CC. For additional details on this analysis, we refer 
readers to the FY 2008 IPPS final rule with comment period (72 FR 47158 
through 47161).
    The following chart shows the analysis for each of the protein-
calorie malnutrition diagnosis codes:

[[Page 27908]]



--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                     Cnt 1                 Cnt 2                 Cnt 3
                   Code                          Diagnosis description        CC level    Cnt 1      impact     Cnt 2      impact     Cnt 3      impact
--------------------------------------------------------------------------------------------------------------------------------------------------------
263.0....................................  Malnutrition of moderate degree.     Non-CC      6,040       2.14     21,383       2.61     21,635       3.20
263.1....................................  Malnutrition of mild degree.....     Non-CC      4,139       2.22     11,598       2.50      8,921       3.13
263.9....................................  Unspecified protein-calorie              CC      2,737       2.16    165,825       2.54    178,044       3.34
                                            malnutrition.
--------------------------------------------------------------------------------------------------------------------------------------------------------

    We ran the following data as described in FY 2008 IPPS final rule 
with comment period (72 FR 47158 through 47161). The C1 value reflects 
a patient with no other secondary diagnosis or with all other secondary 
diagnoses that are non-CCs. The C2 value reflects a patient with at 
least one other secondary diagnosis that is a CC but none that is a 
MCC. The C3 value reflects a patient with at least one other secondary 
diagnosis that is a MCC.
    The chart above shows that the C1 findings ranged from a low of 
2.14 to a high of 2.22. As stated earlier, a C1 value close to 2.0 
suggests the condition is more like a CC than a non-CC but not as 
significant in resource usage as a MCC. The C1 findings suggest that 
these codes are more like a CC than a non-CC. The C2 findings ranged 
from 2.50 to 2.61. A value close to 2.0 suggests the condition is more 
like a CC than a non-CC but not as significant in resource usage as an 
MCC. A value close to 3.0 suggests the condition is expected to consume 
resources more similar to an MCC than a CC or non-CC. The C2 findings 
of 2.50 for diagnosis code 263.1 and 2.54 for diagnosis code 263.9 
suggest these codes are more similar to a CC than a non-CC, while the 
finding of 2.61 for diagnosis code 263.0 is borderline more similar to 
a MCC than a CC or non-CC when there is at least one other secondary 
diagnosis code that is a CC but none that is an MCC.
    CC conditions typically have a C1 value over 1.75, a C2 value under 
2.5, and a C3 value under 3.2. MCC conditions typically have a C1 value 
over 2.4, a C2 value over 2.8, and a C3 value over 3.3. We concluded 
that diagnosis code 263.0 is more similar to a CC than an MCC.
    Therefore, the C1 and C2 findings support changing diagnosis codes 
263.0 and 263.1 from a non-CC to a CC and maintaining code 263.9 as a 
CC. Our clinical advisors reviewed this issue and are in support of 
these findings that these conditions are more appropriately classified 
as CCs. Based on the data and clinical analysis, we are proposing for 
FY 2013 to change diagnosis codes 263.0 and 263.1 from a non-CC to a 
CC. We are not proposing any change to the severity level for diagnosis 
code 263.9. We are inviting public comment on our proposals.
(B) Antineoplastic Chemotherapy Induced Anemia
    We received a request from a commenter that the severity level for 
diagnosis code 285.3 (Antineoplastic chemotherapy induced anemia) be 
changed from a non-CC to a CC. We received this comment during the 
comment period for the FY 2012 IPPS/LTCH PPS proposed rule. We referred 
to this issue briefly in the FY 2012 IPPS/LTCH PPS final rule (76 FR 
51557). In that rule, we indicated that we considered this comment 
outside of the scope of the proposed rule because we did not propose 
any severity level changes to diagnosis code 285.3 for FY 2012; 
therefore, we did not address the issue in the final rule. However, we 
are addressing this issue in this FY 2013 proposed rule. We examined 
claims data in the FY 2011 MedPAR file for diagnosis code 285.3 
according to the approach that we used in FY 2008 as described above. 
The following table illustrates our findings:

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                 Cnt 1                   Cnt 2                   Cnt 3
                 Code                      Diagnosis description       CC level      Cnt 1      impact       Cnt 2      impact       Cnt 3      impact
--------------------------------------------------------------------------------------------------------------------------------------------------------
285.3................................  Antineoplastic chemotherapy         Non-CC     1,937        1.36      11,858        2.21       6,036        3.11
                                        induced anemia.
--------------------------------------------------------------------------------------------------------------------------------------------------------

    As discussed above, a value close to 1.0 in the C1 field suggests 
that the diagnosis code produces the same expected value as a non-CC. A 
value of close to 2.0 suggests the condition is more like a CC than a 
non-CC but not as significant in resource usage as an MCC. The C1 
finding for diagnosis code 285.3 of 1.36 supports the current severity 
level of a non-CC. The C2 finding of 2.21 for diagnosis code 285.3 
suggests that this code is more similar to a CC than a non-CC but not 
as significant as an MCC when there is at least one other secondary 
diagnosis code that is a CC. CC conditions typically have a C1 value 
over 1.75, a C2 value under 2.5, and a C3 value under 3.2.
    Therefore, the C1 and C2 findings do not support changing the 
severity level for diagnosis code 285.3 to a CC. In addition, our 
clinical advisors reviewed this issue and support the decision not to 
change the severity level for diagnosis code 285.3 because the anemia 
is inherent in the treatment of cancer and does not qualify as a CC. As 
a result of our data analysis as well as the advice of our clinical 
advisors, we are not proposing any change to the severity level for 
diagnosis code 285.3 for FY 2013. We are inviting public comment on our 
proposal.
(C) Cardiomyopathy and Congestive Heart Failure, Unspecified
    We received a comment that recommended changes to the severity 
levels for the cardiomyopathy and congestive heart failure, unspecified 
codes. The commenter recommended that cardiomyopathy codes, which are 
currently classified as CCs, be changed to non-CCs and diagnosis code 
428.0 (Congestive heart failure, unspecified) be changed from a non-CC 
to a CC. According to the commenter, these proposed changes would 
better represent the resources utilized in caring for this population 
and reduce the administrative burden in clarifying these diagnoses with 
providers. We received this comment during the comment period for the 
FY 2012 IPPS/LTCH PPS proposed rule. We referred to this issue briefly 
in the FY 2012 IPPS/LTCH PPS final rule (76 FR 51557). We indicated 
that we considered this comment outside of the scope of the proposed 
rule because we did not propose any severity level changes to these 
codes for FY 2012; therefore, we did not address it in the final rule. 
However, we are addressing this issue in this FY 2013 proposed rule.
    The commenter did not provide a list of the cardiomyopathy codes. 
We identified the following codes for analysis of the claims data in 
the FY 2011 MedPAR file:

[[Page 27909]]

     425.4 (Other primary cardiomyopathies)
     425.5 (Alcoholic cardiomyopathy)
     425.7 (Nutritional and metabolic cardiomyopathy)
     425.8 (Cardiomyopathy in other diseases classified 
elsewhere)
     425.9 (Secondary cardiomyopathy, unspecified)
     428.0 (Congestive heart failure, unspecified)
    We did not include diagnosis codes 425.11(Hypertrophic obstructive 
cardiomyopathy) and 425.18 (Other hypertrophic cardiomyopathy) for our 
analysis because these two codes were created in FY 2012 and the data 
are not yet available. We examined claims data according to the 
approach that we used in FY 2008 as described above. The following 
table illustrates our findings:

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                     Cnt 1                 Cnt 2                 Cnt 3
                   Code                          Diagnosis description        CC Level    Cnt 1      impact     Cnt 2      impact     Cnt 3      impact
--------------------------------------------------------------------------------------------------------------------------------------------------------
425.4....................................  Other primary cardiomyopathies..         CC     39,489       1.47    243,719       2.18    139,689       3.20
425.5....................................  Alcoholic cardiomyopathy........         CC        438       1.68      2,643       2.19      1,670       3.26
425.7....................................  Nutritional and metabolic                CC         60       1.18        869       2.17        799       3.14
                                            cardiomyopathy.
425.8....................................  Cardiomyopathy in other diseases         CC        940       1.19      5,967       2.15      5,171       3.14
                                            classified elsewhere.
425.9....................................  Secondary cardiomyopathy,                CC        356       1.56      2,078       2.07      1.372       3.22
                                            unspecified.
428.0....................................  Congestive heart failure,            Non-CC    304,963       1.40    634,241       2.16    748,649       3.06
                                            unspecified.
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The table above shows that the C1 findings for the cardiomyopathy 
codes ranged from a low of 1.18 to a high of 1.68. A value close to 1.0 
in the C1 field suggests that the diagnosis code produces the same 
expected value as a non-CC. A value of close to 2.0 suggests the 
condition is more like a CC than a non-CC but not as significant in 
resource usage as an MCC. The C1 findings suggest that the majority of 
these cardiomyopathy codes are more similar to a non-CC than a CC. The 
C2 findings ranged from a low of 2.07 to a high of 2.19. These findings 
suggest that these cardiomyopathy codes are more similar to a CC.
    The C1 finding for diagnosis code 428.0 of 1.40 suggests that the 
condition is more similar to a non-CC than a CC. The C2 finding for 
diagnosis code 428.0 of 2.16 suggests that the secondary diagnosis is 
more similar to a CC than a non-CC.
    The data are mixed between the C1 and C2 findings for the 
cardiomyopathy codes and do not consistently support a change in the 
severity level. Our clinical advisors reviewed these issues and are not 
in support of proposing any changes to the severity levels for these 
codes. Our clinical advisors stated that the diagnosis of 
cardiomyopathy (diagnosis codes 425.4 through 425.9) is generally 
severe, with significant impact on the patient requiring additional 
monitoring resources and cognitive effort, and is appropriately 
classified as a CC.
    The data are mixed between the C1 and C2 findings for the 
congestive heart failure, unspecified, diagnosis code 428.0. Our 
clinical advisors reviewed these issues and are not in support of 
proposing any changes to the severity level of code 428.0. They 
indicated that diagnosis code 428.0 is very nonspecific and does not 
identify the severity of the heart failure, and concluded that the 
current classification for code 428.0 as a non-CC is appropriate. As a 
result of our data analysis and clinical advisors' review of these 
issues, we are not proposing any changes to the severity level for the 
cardiomyopathy and congestive heart failure, unspecified codes for FY 
2013. We are inviting public comment on our proposal.
(D) Chronic Total Occlusion of Artery of the Extremities
    We received a request to change the severity level designation for 
diagnosis code 440.4 (Chronic total occlusion of artery of the 
extremities) to a CC. Currently, the diagnosis code is classified as a 
non-CC. Chronic total occlusion of artery of the extremities forms when 
plaque accumulates in an artery over an extended period of time, 
resulting in total cessation of blood flow. We analyzed claims data in 
the FY 2011 MedPAR file for this diagnosis code according to the 
approach that we used in FY 2008 as described above. The following 
table illustrates our findings:

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                 Cnt 1                   Cnt 2                   Cnt 3
                 Code                      Diagnosis description       CC level      Cnt 1      impact       Cnt 2      impact       Cnt 3      impact
--------------------------------------------------------------------------------------------------------------------------------------------------------
440.4................................  Chronic total occlusion of          Non-CC     8,439        1.38       8,057        2.70       5,366        3.23
                                        artery of the extremities.
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The C1 finding of 1.38 for diagnosis code 440.4 supports the 
current designation of this diagnosis code as a non-CC. However, the C2 
findings of 2.70 suggests that this code is similar to a CC or perhaps 
an MCC, as this value is near to 3.0, which suggests that this 
condition is similar to an MCC. However, we would expect a higher C1 
value such as 2.4 for this condition to qualify as an MCC.
    The C1 and C2 findings support changing diagnosis code 440.4 from a 
non-CC to a CC. Our clinical advisors reviewed this issue and are in 
support of changing the severity level because this condition behaves 
as a CC. Therefore, we are proposing to change the severity level for 
diagnosis code 440.4 from a non-CC to a CC for FY 2013. We are inviting 
public comment on our proposal.
(E) Acute Kidney Failure With Other Specific Pathological Lesion in 
Kidney
    We received a request to consider changing the severity level for 
diagnosis code 584.8 (Acute kidney failure with other specified 
pathological lesion in kidney). This diagnosis code's severity level is 
currently classified as an MCC. We examined claims data for this code 
in the FY 2011 MedPAR file according to the approach described above. 
The following table illustrates those findings.

[[Page 27910]]



--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                       Severity                  Cnt 1                   Cnt 2                   Cnt 3
                 Code                      Diagnosis description         level       Cnt 1      impact       Cnt 2      impact       Cnt 3      impact
--------------------------------------------------------------------------------------------------------------------------------------------------------
584.8................................  Acute kidney failure with              MCC        12        0.98          13        1.89       1,350        3.17
                                        other specified pathological
                                        lesion in kidney.
--------------------------------------------------------------------------------------------------------------------------------------------------------

    As discussed above, a C1 value close to 1.0 in the C1 field 
suggests that the diagnosis code produces the same expected value as a 
diagnosis code that has been classified as a non-CC. A value close to 
2.0 in the C1 field suggests that the condition is more similar to a CC 
severity level than a non-CC severity level, but not as significant in 
resource usage as an MCC severity level. In this case, the C1 value 
finding for diagnosis code 584.8 of 0.98 suggests that this diagnosis 
code is more similar to a non-CC than an MCC. A C2 value close to 3.0 
suggests that the condition is more similar to an MCC than a CC or a 
non-CC. A C2 value close to 2.0 suggests that the condition is more 
similar to a CC than a non-CC. The C2 value finding for diagnosis code 
584.8 of 1.89 supports classifying the severity level of this diagnosis 
code as a CC. Therefore, the C1 and C2 value findings support changing 
the severity level of diagnosis code 584.8 from an MCC to a lower 
severity level, that is, a CC. Our clinical advisors reviewed this 
issue and stated that this condition behaves as a CC. Therefore, they 
supported changing the severity level of this diagnosis code to a CC. 
Based on the clinical analysis and consistent with supporting claims 
data, we believe that the severity level of diagnosis code 584.8 should 
be changed from an MCC to a CC. Therefore, we are proposing to change 
the severity level of diagnosis code 584.8 from an MCC to a CC for FY 
2013. We are inviting public comment on our proposal.
(F) Pressure Ulcer, Unstageable
    We received a request to consider changing the severity level for 
diagnosis code 707.25 (Pressure ulcer, unstageable) from its current 
classification as a non-CC to an MCC. This issue was referred to as an 
out-of-scope public comment in the FY 2012 IPPS/LTCH PPS final rule (76 
FR 51557), but was not addressed in that rule.
    For this FY 2013 proposed rule, we analyzed claims data for 
diagnosis code 707.25 from the FY 2011 MedPAR file according to the 
process and approach described above. The following table illustrates 
our findings:

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                 Cnt 1                   Cnt 2                   Cnt 3
                 Code                      Diagnosis description       CC level      Cnt 1      impact       Cnt 2      impact       Cnt 3      impact
--------------------------------------------------------------------------------------------------------------------------------------------------------
707.25...............................  Pressure ulcer, unstageable..       Non-CC     1,839        1.87       7,161        2.46      13,285        3.08
--------------------------------------------------------------------------------------------------------------------------------------------------------

    As discussed above, a C1 value close to 2.0 suggests the condition 
is more similar to a CC than a non-CC severity level but not as 
significant in resource usage as an MCC. The C1 value finding of 1.87 
for diagnosis code 707.25, which is near but not that close to a 2.0, 
suggests that this code is more similar to a CC than an MCC. A C2 value 
of close to 3.0 suggests the condition is more similar to an MCC than a 
CC or non-CC. The C2 value finding for diagnosis code 707.25 is 2.46, 
which is not close to 3.0 and, therefore, the data do not support 
classifying this as an MCC. The C1 and C2 findings are more supportive 
of a classification as a CC than an MCC. There is another problem with 
this request to change diagnosis code 707.25 from a non-CC to an MCC. 
Currently, only stages III and IV pressure ulcers are MCCs. This 
unstageable code captures a pressure ulcer whose stage has not been 
determined. It would be inappropriate to assume that a pressure ulcer 
reported with diagnosis code 707.25 might be a stage III or IV pressure 
ulcer. Our claims data C1 and C2 findings do not support the fact that 
this code acts as an MCC. As mentioned earlier, the claims data are 
more supportive of a classification as a CC than an MCC. We asked our 
clinical advisors to review this issue. Our clinical advisors agree 
that the data findings and their own clinical evaluation support not 
changing the severity level of this diagnosis code to a CC or an MCC. 
Our clinical advisors recommend that unstageable pressure ulcers should 
continue to be classified as a non-CC because the stage is not clearly 
designated as a stage III or IV. Unstageable codes do not delineate 
what the stage of the ulcer might be. As a result of our data analysis 
as well as the advice of our clinical advisors, we believe that 
unstageable pressure ulcers should continue to be classified as a non-
CC. Therefore, we are proposing that diagnosis code 707.25 remain a 
non-CC for FY 2013.
    We are inviting public comment on our proposal not to change the 
severity level for diagnosis code 707.25 for FY 2013.
    For FY 2013, there are proposed changes to Table 6G (Additions to 
the CC Exclusion List). As we discuss earlier, we are proposing to 
change the severity level for diagnosis codes 263.0, 263.1, and 440.4 
from a non-CC to a CC. There are no proposed changes to Table 6H 
(Deletions to the CC Exclusion List). These tables, which contain codes 
that are effective for discharges occurring on or after October 1, 
2012, are not being published in the Addendum to this proposed 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 diagnosis 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 available 
through the Internet on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS. Beginning with discharges on or after October 1, 
2011, the indented diagnoses were not recognized by the GROUPER as 
valid CCs for the asterisked principal diagnosis.
    To assist readers in identifying the proposed changes to the MCC 
and CC lists that occur as a result of our review of severity levels 
for several ICD-9-CM diagnosis codes, we are providing the following 
summaries of those proposed MCC and CC changes for FY 2013. There will 
be no new, revised, or deleted diagnosis codes for FY 2013. Therefore, 
there will be no Tables 6A, 6C, and 6E published for FY 2013.

[[Page 27911]]

Summary of Proposed Additions to The MS-DRG MCC List--Table 6I.1

    There are no proposed additions to the MS-DRG MCC List.

                                           Summary of Proposed Deletions From the MS-DRG MCC List--Table 6I.2
--------------------------------------------------------------------------------------------------------------------------------------------------------
                    Code                                                                     Description
--------------------------------------------------------------------------------------------------------------------------------------------------------
584.8......................................  Acute kidney failure with other specified pathological lesion in kidney.
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                             Summary of Proposed Additions to the MS-DRG CC List--Table 6J.1
--------------------------------------------------------------------------------------------------------------------------------------------------------
                    Code                                                                     Description
--------------------------------------------------------------------------------------------------------------------------------------------------------
263.0......................................  Malnutrition of moderate degree.
263.1......................................  Malnutrition of mild degree.
440.4......................................  Chronic total occlusion of artery of the extremities.
584.8......................................  Acute kidney failure with other specified pathological lesion in kidney.
--------------------------------------------------------------------------------------------------------------------------------------------------------

Summary of Proposed Deletions From the MS-DRG CC List--Table 6J.2

    There are no proposed deletions from the MS-DRG CC list.
    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 MS-DRG Definitions Manual, Version 29.0, is available on a CD 
for $225.00. Version 30.0 of this manual, which will include the final 
FY 2013 MS-DRG changes, will be available on a CD for $225.00. 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, or by 
obtaining an order form at the Web site: http://www.3MHIS.com. Please 
specify the revision or revisions requested.
8. Review of Procedure Codes in MS DRGs 981 Through 983; 984 Through 
986; and 987 Through 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, respectively). 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, 
respectively). 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, respectively).
    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 MS-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.\14\
---------------------------------------------------------------------------

    \14\ 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 FYs 2008, 2009, FY 2010, 
FY 2011 and FY 2012, no procedures were moved, as noted in the FY 
2008 final rule with comment period (72 FR 46241), the FY 2009 final 
rule (73 FR 48513), the FY 2010 final rule (74 FR 43796); the FY 
2011 final rule (75 FR 50122); and the FY 2012 final rule (76 FR 
51549).
---------------------------------------------------------------------------

    Our review of MedPAR claims data showed that there were no cases 
that merited movement or should logically be assigned to any of the 
other MDCs.

[[Page 27912]]

Therefore, for FY 2013, we are not proposing to change the procedures 
assigned among these MS-DRGs.
a. Moving Procedure Codes From MS-DRGs 981 Through 983 or MS-DRGs 987 
Through 989 Into MDCs
    We annually conduct a review of procedures producing assignment to 
MS-DRGs 981 through 983 (Extensive O.R. procedure unrelated to 
principal diagnosis with MCC, with CC, and without CC/MCC, 
respectively) or MS-DRGs 987 through 989 (Nonextensive O.R. procedure 
unrelated to principal diagnosis with MCC, with CC, and without CC/MCC, 
respectively) on the basis of volume, by procedure, to see if it would 
be appropriate to move procedure codes out of these MS-DRGs into one of 
the surgical MS-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 MS-DRGs for the MDC in which the diagnosis falls. 
As noted above, there were no cases that merited movement or that 
should logically be assigned to any of the other MDCs. Therefore, for 
FY 2013, we are not proposing to remove any procedures from MS-DRGs 981 
through 983 or MS-DRGs 987 through 989 into one of the surgical MS-DRGs 
for the MDC into which the principal diagnosis is assigned.
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 diagnosis code, result in 
assignment to MS-DRGs 981 through 983, 984 through 986 (Prostatic O.R. 
procedure unrelated to principal diagnosis with MCC, with CC, or 
without CC/MCC, respectively), and 987 through 989, to ascertain 
whether any of those procedures should be reassigned from one of these 
three MS-DRGs to another of the three MS-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 MS-DRG assignment illogical. If we find these shifts, we 
would propose to move cases to keep the MS-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.
    There were no cases representing shifts in treatment practice or 
reporting practice that would make the resulting MS-DRG assignment 
illogical, or that merited movement so that cases should logically be 
assigned to any of the other MDCs. Therefore, for FY 2013, we are not 
proposing to move any procedure codes among these MS-DRGs.
c. Adding Diagnosis or Procedure Codes to MDCs
    Based on the review of cases in the MDCs as described above in 
sections III.G.1. through 4. of this preamble, we are not proposing to 
add any diagnosis or procedure codes to MDCs for FY 2013.
9. Proposed Changes to the ICD-9-CM Coding System, Including Discussion 
of the Replacement of the ICD-9-CM Coding System With the ICD-10-CM and 
ICD-10-PCS Systems in FY 2014
a. ICD-9-CM Coding System
    The ICD-9-CM is a coding system currently 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 $29.00 by 
calling (202) 512-1800.) Complete information on ordering the CD-ROM is 
also available at: http://www.cms.hhs.gov/ICD9ProviderDiagnosticCodes/05_CDROM.asp#TopOfPage. 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 2013 at a public meeting held on September 14, 
2011 and finalized the coding changes after consideration of comments 
received at the meetings and in writing by November 18, 2011. For FY 
2013, there were no changes to the ICD-9-CM coding system due to the 
partial code freeze or for new technology. Therefore, there will be no 
new, revised, or deleted diagnosis and procedure codes that are usually 
announced in Tables 6A (New Diagnosis Codes), 6B (New Procedure Codes), 
6C (Invalid Diagnosis Codes), 6D (Invalid Procedure Codes), 6E (Revised 
Diagnosis Code Titles), and 6F (Revised Procedure Codes). Therefore, 
these tables will not be published as part of this FY 2013 proposed 
rulemaking.
    Copies of the minutes of the procedure codes discussions at the 
Committee's September 14, 2011 meeting and March 5, 2012 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 14, 2011 meeting and March 
5, 2012 meeting are found at: http://www.cdc.gov/nchs/icd.htm. These 
Web

[[Page 27913]]

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.
    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.
    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, 2012 implementation of an ICD-9-CM 
code at the September 14, 2011 Committee meeting. Therefore, there were 
no new ICD-9-CM codes implemented on April 1, 2012.
    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/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 
Medicare 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 
MS-DRG in which its predecessor code was assigned so there will be no 
MS-DRG impact as far as

[[Page 27914]]

MS-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.
b. Code Freeze
    The International Classification of Diseases, 10th Revision (ICD-
10) coding system applicable to hospital inpatient services was to be 
implemented on October 1, 2013, as described in the Health Insurance 
Portability and Accountability Act (HIPAA) Administrative 
Simplification: Modifications to Medical Data code Set Standards to 
Adopt ICD-10-CM and ICD-10-PCS final rule (74 FR 3328 through 3362, 
January 16, 2009). However, the Secretary of Health and Human Services 
has issued a proposed rule that would delay, from October 1, 2013, to 
October 1, 2014, the compliance date for the International 
Classification of Diseases, 10th Edition diagnosis and procedure codes 
(ICD-10). The proposed rule, CMS-0040-P, went on display at the Office 
of the Federal Register on April 9, 2012, and was published in the 
Federal Register on April 17, 2012 (77 FR 22950) and is available for 
viewing at: http://www/gpo.gov/fdsys/browse/
collection.action?collectionCode=FR.
    The ICD-10 coding system includes the International Classification 
of Diseases, 10th Revision, Clinical Modification (ICD-10-CM) for 
diagnosis coding and the International Classification of Diseases, 10th 
Revision, Procedure Coding System (ICD-10-PCS) for inpatient hospital 
procedure coding, as well as the Official ICD-10-CM and ICM-10-PCS 
Guidelines for Coding and Reporting. In the January 16, 2009 ICD-10-CM 
and ICD-10-PCS final rule (74 FR 3328 through 3362), there was a 
discussion of the need for a partial or total freeze in the annual 
updates to both ICD-9-CM and ICD-10-CM and ICD-10-PCS codes. The public 
comment addressed in that final rule stated that the annual code set 
updates should cease l year prior to the implementation of ICD-10. The 
commenters stated that this freeze of code updates would allow for 
instructional and/or coding software programs to be designed and 
purchased early, without concern that an upgrade would take place 
immediately before the compliance date, necessitating additional 
updates and purchases.
    We responded to comments in the ICD-10 final rule that the ICD-9-CM 
Coordination and Maintenance Committee has jurisdiction over any action 
impacting the ICD-9-CM and ICD-10 code sets. Therefore, we indicated 
that the issue of consideration of a moratorium on updates to the ICD-
9-CM, ICD-10-CM, and ICD-10-PCS code sets in anticipation of the 
adoption of ICD-10-CM and ICD-10-PCS would be addressed through the 
Committee at a future public meeting.
    The code freeze was discussed at multiple meetings of the ICD-9-CM 
Coordination and Maintenance Committee and public comment was actively 
solicited. The Committee evaluated all comments from participants 
attending the Committee meetings as well as written comments that were 
received. There was an announcement at the September 15-16, 2010 and 
September 14, 2011 ICD-9-CM Coordination and Maintenance Committee 
meetings that a partial freeze of both ICD-9-CM and ICD-10 codes will 
be implemented as follows:
     The last regular annual update to both ICD-9-CM and ICD-10 
code sets was made on October 1, 2011.
     On October 1, 2012, there will be only limited code 
updates to both ICD-9-CM and ICD-10 code sets to capture new technology 
and new diseases.
     On October 1, 2013, there were to be only limited code 
updates to ICD-10 code sets to capture new technology and diagnoses as 
required by section 503(a) of Pub. L. 108-173. There were to be no 
updates to ICD-9-CM on October 1, 2013, as the system would no longer 
be a HIPAA standard and, therefore, no longer be used for reporting. 
With the proposed ICD-10 implementation delay, there will be only 
limited code updates to both ICD-9-CM and ICD-10 to capture new 
technology and new diagnoses on October 1, 2013.
     On October 1, 2014, regular updates to ICD-10 were to 
begin. As stated earlier, HHS has issued a proposed rule that would 
delay the compliance date of ICD-10 from October 1, 2013, to October 1, 
2014. If this delay is implemented, there would be only limited ICD-10 
code updates for new technologies and new diseases on October 1, 2014. 
There will be no updates to ICD-9-CM on October 1, 2014, as the system 
will no longer be a HIPAA standard and, therefore, no longer be used 
for reporting. Full ICD-10 updates would begin on October 1, 2015, 1 
year after the implementation of ICD-10.
    The ICD-9-CM Coordination and Maintenance Committee announced that 
it would continue to meet twice a year during the freeze. At these 
meetings, the public will be encouraged to comment on whether or not 
requests for new diagnosis and procedure codes should be created based 
on the need to capture new technology and new diseases. Any code 
requests that do not meet the criteria will be evaluated for 
implementation within ICD-10 on or after October 1, 2014, once the 
partial freeze is ended.
    Complete information on the partial code freeze and discussions of 
the issues at the Committee meetings can be found on the ICD-9-CM 
Coordination and Maintenance Committee Web site at: http://www.cms.gov/ICD9ProviderDiagnosticCodes/03. A summary of the September 14, 2011 
Committee meeting, along with both written and audio transcripts of 
this meeting, are posted on the ``Download'' section of this Web page.
c. Processing of 25 Diagnosis Codes and 25 Procedure Codes on Hospital 
Inpatient Claims
    CMS is currently processing all 25 diagnosis codes and 25 procedure 
codes submitted on electronic hospital inpatient claims. Prior to 
January 1, 2011, hospitals could submit up to 25 diagnosis and 25 
procedures; however, CMS' system limitations allowed for the processing 
of only the first 9 diagnosis codes and 6 procedure codes. We discussed 
this change in processing claims in the FY 2011 IPPS/LTCH PPS final 
rule (75 FR 50127), in the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 
25843), in a correction notice issued in the Federal Register on June 
14, 2011 (76 FR 24633), and in the FY 2012 IPPS/LTCH PPS final rule (76 
FR 51553). As discussed in these prior rules, CMS undertook an 
expansion of our internal system capability so that we are able to 
process up to 25 diagnoses and 25 procedures on hospital inpatient 
claims as part of the HIPAA ASC X12 Technical Reports Type 3, Version 
005010 (Version 5010) standards system update. We recognize the value 
of the additional information provided by this coded data for multiple 
uses such as for payment, quality measures, outcome analysis, and other 
important uses. We will continue to process up to 25 diagnosis codes 
and 25 procedure codes when received on the 5010 format.
d. ICD-10 MS-DRGs
    In response to the FY 2011 IPPS/LTCH PPS proposed rule, we received 
comments on the creation of the ICD-10 version of the MS-DRGs, which 
will be implemented at the same time as ICD-10 (75 FR 50127 and 50128). 
As we

[[Page 27915]]

stated earlier, the Secretary of Health and Human Services has issued a 
proposed rule that would delay the compliance date of ICD-10 from 
October 1, 2013 to October 1, 2014. While we did not propose an ICD-10 
version of the MS-DRGs in the FY 2011 IPPS/LTCH PPS proposed rule, we 
noted that we have been actively involved in converting our current MS-
DRGs from ICD-9-CM codes to ICD-10 codes and sharing this information 
through the ICD-9-CM Coordination and Maintenance Committee. We 
undertook this early conversion project to assist other payers and 
providers in understanding how to go about their own conversion 
projects. We posted ICD-10 MS-DRGs based on Version 26.0 (FY 2009) of 
the MS-DRGs. We also posted a paper that describes how CMS went about 
completing this project and suggestions for others to follow. All of 
this information can be found on the CMS Web site at: http://www.cms.gov/ICD10/17_ICD10_MS_DRG_Conversion_Project.asp. We have 
continued to keep the public updated on our maintenance efforts for 
ICD-10-CM and ICD-10-PCS coding systems as well as the General 
Equivalence Mappings that assist in conversion through the ICD-9-CM 
Coordination and Maintenance Committee. Information on these committee 
meetings can be found at: http://www.cms.gov/ICD9ProviderDiagnosticCodes/03_meetings.asp.
    During FY 2011, we developed and posted Version 28.0 of the ICD-10 
MS-DRGs based on the FY 2011 MS-DRGs (Version 28.0) that we finalized 
in the FY 2011 IPPS/LTCH PPS final rule on the CMS Web site. This ICD-
10 MS-DRGs Version 28.0 also included the CC Exclusion List and the 
ICD-10 version of the hospital-acquired conditions (HACs), which was 
not posted with Version 26.0. We also discussed this update at the 
September 15-16, 2010 and the March 9-10, 2011 meetings of the ICD-9-CM 
Coordination and Maintenance Committee. The minutes of these two 
meetings are posted on the CMS Web site at: http://www.cms.gov/ICD9ProviderDiagnosticCodes/03_meetings.asp.
    We reviewed comments on the ICD-10 MS-DRGs Version 28.0 and made 
updates as a result of these comments. We called the updated version 
the ICD-10 MS-DRGs Version 28 R1. We posted a Definitions Manual of 
ICD-10 MS-DRGs Version 28 R1 on our ICD-10 MS-DRG Conversion Project 
Web site at: http://www.cms.gov/ICD10/17_ICD10_MS_DRG_Conversion_Project.asp. To make the review of Version 28 R1 updates easier for the 
public, we also made available pilot software on a CD-ROM that could be 
ordered through the National Technical Information Service (NTIS). A 
link to the NTIS ordering page was provided on the CMS ICD-10 MS-DRG 
Web page. We stated that we believed that, by providing the ICD-10 MS-
DRG Version 28 R1 Pilot Software (distributed on CD-ROM), the public 
would be able to more easily review and provide feedback on updates to 
the ICD-10 MS-DRGs. We discussed the updated ICD-10 MS-DRGs Version 28 
R1 at the September 14, 2011 ICD-9-CM Coordination and Maintenance 
Committee meeting. We encouraged the public to continue to review and 
provide comments on the ICD-10 MS-DRGs so that CMS could continue to 
update the system.
    In FY 2012, we prepared the ICD-10 MS-DRGs Version 29.0, based on 
the FY 2012 MS-DRGs (Version 29.0) that we finalized in the FY 2012 
IPPS/LTCH PPS final rule. We posted a Definitions Manual of ICD-10 MS-
DRGs Version 29.0 on our ICD-10 MS-DRGs Web site. We also prepared a 
document that describes changes made from Version 28.0 to Version 29.0 
to facilitate a review. The ICD-10 MS-DRGs Version 29.0 was discussed 
at the ICD-9-CM Coordination and Maintenance Committee meeting on March 
5, 2012. Information was provided on the types of updates made. Once 
again the public was encouraged to review and comment on the most 
recent update to the ICD-10 MS-DRGs.
    We provided information on a study conducted on the impact on 
converting MS-DRGs to ICD-10-CM and ICD-10-PCS. Information on this 
study is summarized in a paper entitled ``Impact of the Transition to 
ICD-10 on Medicare Inpatient Hospital Payments.'' This paper is posted 
on the CMS ICD-10 MS-DRG conversion Web site at: http://www.cms.gov/ICD10/17_ICD10_MS_DRG_Conversion_Project.asp. The paper describes 
CMS' approach to the conversion of the MS-DRGs from ICD-9-CM codes to 
ICD-10 codes. The study was undertaken using the ICD-9-CM MS-DRGs 
Version 27.0 (FY 2010) and converted to the ICD-10 MS-DRGs Version 
27.0. The study estimated the impact on aggregate payment to hospitals 
and the distribution of payments across hospitals. The paper was 
distributed and discussed at the September 15, 2010 ICD-9-CM 
Coordination and Maintenance Committee. The impact of the conversion 
from ICD-9-CM to ICD-10 on Medicare MS-DRG hospital payments was 
estimated using 2009 Medicare data. The study found a hospital payment 
increase of 0.05 percent using the ICD-10 MS-DRGs Version 27.0. For 
detailed information on this study, we refer readers to the complete 
report which is posted on the CMS Web site at: http://www.cms.gov/ICD10/17_ICD10_MS_DRG_Conversion_Project.asp.
    CMS provided an overview of this hospital payment impact study at 
the March 5, 2012 ICD-9-CM Coordination and Maintenance Committee 
meeting. This presentation followed presentations on the creation of 
ICD-10 MS-DRGs Version 29.0. A summary report of this meeting can be 
found on the CMS Web site at: http://www.cms.gov/ICD9ProviderDiagnosticCodes/03_meetings.asp. At this March 2012 
meeting, CMS announced that it would produce an update on this impact 
study based on an updated version of the ICD-10 MS-DRGs. This update 
will provide additional information to the public as CMS is evaluating 
refinements made to the ICD-10 MS-DRGs based on public comments.
    We will continue to work with the public to explain how we are 
approaching the conversion of MS-DRGs to ICD-10 and will post drafts of 
updates as they are developed for public review. The final version of 
the ICD-10 MS-DRGs will be implemented at the same time as ICD-10 and 
will be subject to notice and comment rulemaking. In the meantime, we 
will provide extensive and detailed information on this activity 
through the ICD-9-CM Coordination and Maintenance Committee.

H. Recalibration of MS-DRG Weights

1. Data Sources for Developing the Proposed Weights
    In developing the proposed FY 2013 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 2011 MedPAR data used in this proposed rule include 
discharges occurring on October 1, 2010, through September 30, 2011, 
based on bills received by CMS through December 31, 2011, 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 2011 MedPAR file used in calculating the 
proposed relative weights includes data for approximately 10,354,422 
Medicare discharges from IPPS providers. Discharges for Medicare 
beneficiaries enrolled in a Medicare

[[Page 27916]]

Advantage managed care plan are excluded from this analysis. These 
discharges are excluded when the MedPAR ``GHO Paid'' indicator field on 
the claim record is equal to ``1'' or when the MedPAR DRG payment 
field, which represents the total payment for the claim, is equal to 
the MedPAR ``Indirect Medical Education (IME)'' payment field, 
indicating that the claim was an ``IME only'' claim submitted by a 
teaching hospital on behalf of a beneficiary enrolled in a Medicare 
Advantage managed care plan. In addition, the December 31, 2011 update 
of the FY 2011 MedPAR file complies with version 5010 of the X12 HIPAA 
Transaction and Code Set Standards, and includes a variable called 
``claim type.'' Claim type ``60'' indicates that the claim was an 
inpatient claim paid as fee-for-service. Claim types ``61,'' ``62,'' 
``63,'' and ``64'' relate to encounter claims, Medicare Advantage IME 
claims, and HMO no-pay claims. Therefore, the calculation of the 
proposed relative weights for FY 2013 also excludes claims with claim 
type values not equal to ``60.'' 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 Medicare cost report data files from the 
HCRIS. Normally, we use the HCRIS dataset that is 3 years prior to the 
IPPS fiscal year (that is, for the calculation of the FY 2013 MS-DRG 
relative weights, we use data from the FY 2010 HCRIS, which are data 
from cost reports that began on or after October 1, 2009 and before 
October 1, 2010). However, during the development of this proposed 
rule, we have found that those cost reports in the FY 2010 HCRIS 
dataset with fiscal year begin dates that are on or after May 1, 2010, 
and before October 1, 2010, are not accessible. This inaccessibility is 
because cost reports with fiscal year begin dates of May 1, 2010, 
through September 30, 2010, were filed on the new cost report Form 
2552-10, and cost reports filed on Form 2552-10 are not currently 
accessible in the HCRIS. However, because data from cost reports filed 
on Form 2552-10 are not currently available, to ensure that the FY 2013 
MS-DRG relative weights are calculated with a dataset that is as 
comprehensive and accurate as possible, we are proposing to calculate 
the FY 2013 MS-DRG relative weights with data from FY 2010 cost reports 
for providers with fiscal year begin dates of on or after October 1, 
2009 and before May 1, 2010, and to backfill with data from FY 2009 
cost reports for those providers that have fiscal year begin dates on 
or after May 1, 2010 through September 30, 2010. We used cost report 
data for the December 31, 2011 update of the HCRIS for FY 2009 and FY 
2010 in calculating the proposed FY 2013 relative cost-based weights.
2. Methodology for Calculation of the Proposed Relative Weights
    The methodology we used to calculate the proposed FY 2013 MS-DRG 
cost-based relative weights based on claims data in the FY 2011 MedPAR 
file and data from the FY 2009 and FY 2010 Medicare cost reports is as 
follows:
     To the extent possible, all the claims were regrouped 
using the proposed FY 2013 MS-DRG classifications discussed in sections 
II.B. and G. of the preamble of this proposed 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 2010 MedPAR file. (Medicare coverage for heart, heart-
lung, liver and/or intestinal, and lung transplants is limited to those 
facilities that have received approval from CMS as transplant centers.)
     Organ acquisition costs for kidney, heart, heart-lung, 
liver, lung, pancreas, and intestinal (or multivisceral organs) 
transplants continue to be paid on a reasonable cost basis. Because 
these acquisition costs are paid separately from the prospective 
payment rate, it is necessary to subtract the acquisition charges from 
the total charges on each transplant bill that showed acquisition 
charges before computing the average cost for each MS-DRG and before 
eliminating statistical outliers.
     Claims with total charges or total lengths 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 96.3 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 MS-DRG.
     Effective October 1, 2008, because hospital inpatient 
claims include a POA indicator field for each diagnosis present on the 
claim, only for purposes of relative weight-setting, the POA indicator 
field was reset to ``Y'' for ``Yes'' for all claims that otherwise have 
an ``N'' (No) or a ``U'' (documentation insufficient to determine if 
the condition was present at the time of inpatient admission) in the 
POA field.
    Under current payment policy, the presence of specific HAC codes, 
as indicated by the POA field values, can generate a lower payment for 
the claim. Specifically, if the particular condition is present on 
admission (that is, a ``Y'' indicator is associated with the diagnosis 
on the claim), it is not a HAC, and the hospital is paid for the higher 
severity (and, therefore, the higher weighted MS-DRG). If the 
particular condition is not present on admission (that is, an ``N'' 
indicator is associated with the diagnosis on the claim) and there are 
no other complicating conditions, the DRG GROUPER assigns the claim to 
a lower severity (and, therefore, the lower weighted MS-DRG) as a 
penalty for allowing a Medicare inpatient to contract a HAC. While the 
POA reporting meets policy goals of encouraging quality care and 
generates program savings, it presents an issue for the relative 
weight-setting process. Because cases identified as HACs are likely to 
be more complex than similar cases that are not identified as HACs, the 
charges associated with HAC cases are likely to be higher as well. 
Thus, if the higher charges of these HAC claims are grouped into lower 
severity MS-DRGs prior to the relative weight-setting process, the 
relative weights of these particular MS-DRGs would become artificially 
inflated, potentially skewing the relative weights. In addition, we 
want to protect the integrity of the budget neutrality process by 
ensuring that, in estimating payments, no increase to the standardized 
amount occurs as a result of lower overall payments in a previous year 
that stem from using weights and case-mix that are based on lower 
severity MS-DRG assignments. If this would occur, the anticipated cost 
savings from the HAC policy would be lost.
    To avoid these problems, we reset the POA indicator field to ``Y'' 
only for relative weight-setting purposes for all

[[Page 27917]]

claims that otherwise have an ``N'' or a ``U'' in the POA field. This 
resetting ``forced'' the more costly HAC claims into the higher 
severity MS-DRGs as appropriate, and the relative weights calculated 
for each MS-DRG more closely reflect the true costs of those cases.
    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, and DSH payments under the capital 
IPPS as well. Charges were then summed by MS-DRG for each of the 15 
cost groups so that each MS-DRG had 15 standardized charge totals. 
These charges were then adjusted to cost by applying the national 
average CCRs developed from the FY 2009 and FY 2010 cost report data.
    The 15 cost centers that we used in the proposed 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.
BILLING CODE 4120-01-P

[[Page 27918]]

[GRAPHIC] [TIFF OMITTED] TP11MY12.001


[[Page 27919]]


[GRAPHIC] [TIFF OMITTED] TP11MY12.002


[[Page 27920]]


[GRAPHIC] [TIFF OMITTED] TP11MY12.003


[[Page 27921]]


[GRAPHIC] [TIFF OMITTED] TP11MY12.004


[[Page 27922]]


[GRAPHIC] [TIFF OMITTED] TP11MY12.005


[[Page 27923]]


[GRAPHIC] [TIFF OMITTED] TP11MY12.006


[[Page 27924]]


[GRAPHIC] [TIFF OMITTED] TP11MY12.007


[[Page 27925]]


[GRAPHIC] [TIFF OMITTED] TP11MY12.008


[[Page 27926]]


[GRAPHIC] [TIFF OMITTED] TP11MY12.009


[[Page 27927]]


[GRAPHIC] [TIFF OMITTED] TP11MY12.010


[[Page 27928]]


[GRAPHIC] [TIFF OMITTED] TP11MY12.011


[[Page 27929]]


[GRAPHIC] [TIFF OMITTED] TP11MY12.012

BILLING CODE 4120-01-C

[[Page 27930]]

3. Development of National Average CCRs
    We developed the national average CCRs as follows:
    Using the FY 2009 and FY 2010 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 because we include 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 MS-DRG in each of 
the 15 cost centers by the corresponding national average CCR, we 
summed the 15 ``costs'' across each MS-DRG to produce a total 
standardized cost for the MS-DRG. The average standardized cost for 
each MS-DRG was then computed as the total standardized cost for the 
MS-DRG divided by the transfer-adjusted case count for the MS-DRG. The 
average cost for each MS-DRG was then divided by the national average 
standardized cost per case to determine the relative weight.
    The proposed FY 2013 cost-based relative weights were then 
normalized by an adjustment factor of 1.5877342556 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 proposed national average CCRs for FY 2013 are as follows:

------------------------------------------------------------------------
                          Group                                 CCR
------------------------------------------------------------------------
Routine Days............................................           0.514
Intensive Days..........................................           0.442
Drugs...................................................           0.199
Supplies & Equipment....................................           0.335
Therapy Services........................................           0.370
Laboratory..............................................           0.142
Operating Room..........................................           0.238
Cardiology..............................................           0.145
Radiology...............................................           0.136
Emergency Room..........................................           0.226
Blood and Blood Products................................           0.389
Other Services..........................................           0.397
Labor & Delivery........................................           0.451
Inhalation Therapy......................................           0.189
Anesthesia..............................................           0.109
------------------------------------------------------------------------

    Since FY 2009, the relative weights have been based on 100 percent 
cost weights based on our MS-DRG grouping system.
    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. In this FY 2013 IPPS/LTCH PPS proposed 
rule, we are proposing to use that same case threshold in recalibrating 
the MS-DRG weights for FY 2013. Using data from the FY 2011 MedPAR 
file, there were 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 aged 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 aged 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 
received 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. Newborns are unique and 
require separate MS-DRGs that are not mirrored in the adult population. 
Therefore, it remains necessary to retain separate MS-DRGs for 
newborns. All of the low-volume MS-DRGs listed below are for newborns. 
In FY 2013, because we do not have sufficient MedPAR data to set 
accurate and stable cost weights for these low-volume MS-DRGs, we are 
proposing to compute weights for the low-volume MS-DRGs by adjusting 
their FY 2012 weights by the percentage change in the average weight of 
the cases in other MS-DRGs. The crosswalk table is shown below:

------------------------------------------------------------------------
 Low[dash]volume MS-DRG        MS-DRG title         Crosswalk to MS-DRG
------------------------------------------------------------------------
768....................  Vaginal Delivery with    FY 2012 FR weight
                          O.R. Procedure Except    (adjusted by percent
                          Sterilization and/or     change in average
                          D&C.                     weight of the cases
                                                   in other MS-DRGs).
789....................  Neonates, Died or        FY 2012 FR weight
                          Transferred to Another   (adjusted by percent
                          Acute Care Facility.     change in average
                                                   weight of the cases
                                                   in other MS-DRGs).
790....................  Extreme Immaturity or    FY 2012 FR weight
                          Respiratory Distress     (adjusted by percent
                          Syndrome, Neonate.       change in average
                                                   weight of the cases
                                                   in other MS-DRGs).
791....................  Prematurity with Major   FY 2012 FR weight
                          Problems.                (adjusted by percent
                                                   change in average
                                                   weight of the cases
                                                   in other MS-DRGs).
792....................  Prematurity without      FY 2012 FR weight
                          Major Problems.          (adjusted by percent
                                                   change in average
                                                   weight of the cases
                                                   in other MS-DRGs).
793....................  Full-Term Neonate with   FY 2012 FR weight
                          Major Problems.          (adjusted by percent
                                                   change in average
                                                   weight of the cases
                                                   in other MS-DRGs).
794....................  Neonate with Other       FY 2012 FR weight
                          Significant Problems.    (adjusted by percent
                                                   change in average
                                                   weight of the cases
                                                   in other MS-DRGs).
795....................  Normal Newborn.........  FY 2012 FR weight
                                                   (adjusted by percent
                                                   change in average
                                                   weight of the cases
                                                   in other MS-DRGs).
------------------------------------------------------------------------


[[Page 27931]]

4. Bundled Payments for Care Improvement (BPCI) Initiative
a. Background
    Section 3021 of the Affordable Care Act, codified at section 1115A 
of the Act, authorizes CMS to test innovative payment and service 
delivery models with the goal of reducing Medicare program expenditures 
while preserving or enhancing the quality of care furnished to 
individuals. Because initiatives established under this authority could 
result in IPPS hospitals receiving a payment different than what they 
otherwise would receive under the IPPS, we believe it is important to 
identify how these initiatives are addressed in the context of MS-DRG 
recalibration and ratesetting, budget neutrality, and the impact 
analysis in the Addendum of this proposed rule.
    Under the Bundled Payments for Care Improvement (BPCI) initiative, 
CMS would link payments for multiple services that patients receive 
during an episode of care. CMS is working in partnership with providers 
to develop and test models of bundling payments through the BPCI 
initiative. On August 23, 2011, CMS invited providers to apply to help 
develop and test four different models of bundling payments. For 
additional information, we refer readers to the CMS Web site at: http://www.innovations.cms.gov/initiatives/Bundled-Payments/index.html. We 
are providing below a brief overview of payments under each model. 
However, the BPCI initiative Request for Application and related 
information on the CMS Web site at http://innovations.cms.gov/initiatives/bundled-payments/ provide more details of this initiative.
    As described below and also in the Addendum to this proposed rule, 
we are generally proposing to include data from hospitals participating 
in the BPCI initiative and to treat these hospitals without regard to 
their participation in the BPCI initiative for the purposes of IPPS 
ratesetting.
Model 1
    In Model 1, the episode of care is defined as the inpatient 
hospital services for the acute care hospital stay only. Applicants for 
this model were asked to propose discount percentages for various 
periods of the 3-year program, which would be applied to the IPPS 
operating MS-DRG payment for each participating hospital's MS-DRGs over 
the lifetime of the initiative. That is, for hospitals participating in 
Model 1, Medicare would continue to pay participating acute care 
hospitals under the IPPS. However, these payments to participating 
acute care hospitals would be at a reduced payment amount that reflects 
the applicable discount percentage for cases in all MS-DRGs for the 
specific period of the program. We note that an adjustment would be 
made such that payments for IME, DSH, and outliers would be calculated 
based on the nondiscounted MS-DRG operating IPPS payment amount and 
then paid, if applicable, in addition to the discounted MS-DRG 
operating IPPS payment. The minimum discount percentage that awardees 
are expected to offer would be phased in over time, with the discount 
percentage updated as frequently as every 6 months.
Model 2
    In Model 2, the episode of care is defined as the inpatient acute 
care hospital stay for specific clinical conditions and a specified 
period of time following discharge (with a minimum episode length of at 
least 30 days following hospital discharge). The payment bundle for 
Model 2 would encompass all Medicare Part A payments for designated MS-
DRGs, Part B professional services paid under the Medicare Physician 
Fee Schedule (MPFS) during the hospital stay, and related professional 
services furnished after discharge during the episode, ``related 
readmissions'' (as defined under the BPCI initiative), care by a 
postacute care provider such as an HHA, IRF, SNF, LTCH, and other 
related services furnished during the episode (that is, all Medicare 
Part A and Part B with the exception of hospice care). Applicants, 
which may be a Medicare supplier or provider, groups of such entities, 
or other organizations that bring together providers and suppliers to 
test the model, are asked to propose specific MS-DRG(s) for the 
clinical condition(s) to be tested in Model 2. Furthermore, the 
applicants are asked to propose the target price on an MS-DRG basis for 
the episode that includes a single rate of discount off of the expected 
Medicare payment (including hospital, postacute care, Medicare Part B 
professional services, and other services, as applicable) for all Model 
2 beneficiaries discharged from the inpatient hospital stay with the 
specified MS-DRG(s). We note that, when proposing the target price, 
applicants are instructed to include IPPS outlier payments in their 
calculation; however, IPPS IME and DSH payments should be excluded from 
the target price. In Model 2, payments would be made at the usual fee-
for-service payment rates to the participating providers through the 
regular claims processing system, after which the aggregate Medicare 
payment for the episode would be reconciled against the target price. 
If aggregate Medicare expenditures are less than the target price, the 
awardee would be paid the difference as a reconciliation payment. 
Conversely, if aggregate Medicare expenditures exceed the target price, 
CMS would recoup that amount from the awardee.
Model 3
    In Model 3, the episode of care begins at initiation of postacute 
services at one of four postacute care providers (HHAs, IRFs, SNFs, and 
LTCHs) within 30 days after discharge from any acute care hospital for 
specific clinical conditions. As with the other three models, 
applicants may be one or more Medicare providers or supplier or other 
organization(s) bringing those entities together to test the model. 
Applicants are asked to propose an episode length that would extend to 
at least 30 days following initiation of care at an HHA, IRF, SNF, or 
LTCH. The payment bundle for Model 3 would encompass care by a 
postacute care provider, and other related services furnished during 
the episode, including Medicare Part B professional services paid under 
the MPFS, and inpatient hospital readmissions (as defined under the 
BPCI initiative). In contrast to Model 2, the payment bundle for Model 
3 does not include services provided in the initial acute care hospital 
stay. We note that, while the episode is initiated at one of the four 
postacute care providers rather than at an acute care hospital, 
applicants are asked to specify the clinical condition(s) to be tested 
in Model 3 by proposing relevant MS-DRG(s). Therefore, applicable to 
all Model 3 beneficiaries discharged from any inpatient acute care 
hospital stay with the specified MS-DRG(s), applicants are to propose a 
target price on an MS-DRG basis for the episode that includes a single 
rate of discount off of the expected Medicare payment, which includes 
care by a postacute care provider, related Medicare Part B professional 
services paid under the MPFS, inpatient hospital readmissions, and 
other related services furnished during the episode. In Model 3, 
payments would be made at the usual fee-for-service payment rates to 
the participating providers through the regular claims processing 
process, after which the aggregate Medicare payment for the episode 
would be reconciled against the target price. Like Model 2, if 
aggregate Medicare expenditures are less than the target price, the 
awardee would be paid the difference as a reconciliation payment. 
Conversely, if

[[Page 27932]]

aggregate Medicare expenditures exceed the target price, CMS would 
recoup that amount from the awardee. We note that Model 3 does address 
payment for related hospital readmissions.
Model 4
    In Model 4, the episode of care is defined as the acute care 
hospital stay and includes all ``related readmissions'' (as defined 
under the BPCI initiative). The payment bundle for Model 4 would 
encompass Medicare inpatient hospital services, Medicare Part B 
professional services paid under the MPFS furnished during the initial 
hospitalization, as well as hospital services and Medicare Part B 
professional services during any related readmissions. Applicants are 
asked to propose specific MS-DRG(s) for the clinical condition(s) to be 
tested in Model 4. Applicants for this model are asked to propose a 
target price for the episode that includes a single rate of discount 
off of expected Medicare payment (including both Medicare Part A 
hospital services and Part B professional services) for all 
beneficiaries discharged from the inpatient hospital stay with the 
specified MS-DRG(s).
    In contrast to Models 2 and 3, where usual Medicare fee-for-service 
payments are made to all providers and reconciliation of Medicare 
spending against the target price for the episode is conducted 
retrospectively, under Model 4, hospitals would receive a prospectively 
established bundled payment for specified MS-DRGs. This payment would 
include both the MS-DRG payment for the hospital and a fixed payment 
amount for the Medicare Part B professional services anticipated to be 
furnished during the episode. That is, separate payment for providers' 
professional services furnished during the inpatient hospital stay 
would not be made. Participating Model 4 hospitals receiving payment 
would take responsibility for distributing payment to providers that 
would otherwise be paid separately. We note that IPPS IME and DSH 
payments to Model 4 hospitals would be calculated based on the 
nondiscounted base MS-DRG operating IPPS payment that would have been 
made in the absence of the model. Other applicable payment adjustors 
would also be calculated based on the base MS-DRG operating IPPS 
payment amount that would otherwise have applied to the case, as 
opposed to the prospectively established amount paid through this 
initiative, which would be higher as it includes payment for Part B 
services as well as the base MS-DRG payment. Under Model 4, no separate 
IPPS outlier payments would be made.
b. Proposed Treatment of Data From Hospitals Participating in the BPCI 
Initiative
    As discussed above, acute care hospitals have the opportunity to 
apply and participate in the BPCI payment models described above. For 
Model 1 and Model 2, participating acute care hospitals would continue 
to receive an IPPS payment under section 1886(d) of the Act (subject to 
a predetermined discount for hospitals participating in Model 1). For 
Model 2, participating hospitals may also receive a reconciliation 
payment under the BPCI initiative (based on their predetermined target 
price). Under Model 3, services provided in the initial acute care 
hospital stay are not included; however, the model does address payment 
for possible hospital readmissions. Under Model 1, hospitals 
participate for all MS-DRGs, while, under Model 2, hospitals 
participate for only pre-selected MS-DRGs. We believe it is appropriate 
to include all applicable data from these subsection(d) hospitals in 
our IPPS payment modeling and ratesetting calculations because these 
hospitals are still receiving IPPS payments under section 1886(d) of 
the Act (in addition to, with respect to Model 2 hospitals, any 
reconciliation payment the hospital may receive under the BPCI 
initiative). Moreover, even if these hospitals were not receiving IPPS 
payments under section 1886(d) of the Act (and were participating in 
Models 1 and 2), the Secretary has the authority to make appropriate 
adjustments for payment amounts under section 1886(d)(5)(I)(i) of the 
Act to include all applicable data from these subsection(d) hospitals 
in our IPPS ratesetting calculations. We believe it is appropriate to 
use the Secretary's authority under section 1886(d)(5)(I)(i) of the Act 
to include all IPPS, short-term, acute care hospitals within the IPPS 
ratesetting calculations because excluding these hospitals would 
diminish the number of providers used to determine the IPPS rates, 
which could cause fluctuations in the IPPS rates and could produce 
instability to the IPPS rates. Therefore, because we believe it is 
appropriate to include all claims from hospitals participating within 
Models 1 and 2 within the IPPS ratesetting calculations, using the 
Secretary's authority under section 1886(d)(5)(I)(i) of the Act, we are 
proposing to include all applicable data from ``subsection (d)'' 
hospitals participating in Models 1 and 2 under the BPCI initiative in 
our IPPS payment modeling and ratesetting calculations (which includes 
recalibration of the MS-DRG weights, ratesetting, calculation of the 
budget neutrality factors, and the impact analysis). In essence, we 
would continue to treat these hospitals the same as prior fiscal years 
for purposes of the FY 2013 (and subsequent years) IPPS payment 
modeling and ratesetting process without regard to a hospital's 
participation within these two bundled payment models (that is, we 
would treat these hospitals as if they are not participating in Model 1 
or Model 2 under the BPCI initiative).
    In contrast to BPCI Models 1 and 2 (wherein participating IPPS 
hospitals would receive an IPPS payment under section 1886(d) of the 
Act, and, in the case of Model 2, may also receive a reconciliation 
payment under the BPCI initiative), IPPS hospitals participating in 
Model 4 would receive a predetermined bundled payment for Medicare Part 
A and Part B services for a pre-specified MS-DRG ``episode'' (and any 
``related readmissions'' as defined under the BPCI initiative). These 
bundled payments are for certain pre-specified MS- DRG(s) episodes (not 
all cases) and would be made in accordance with the terms of the model, 
as authorized by section 1115A of the Act (these IPPS hospitals would 
also receive ``regular'' IPPS payments under section 1886(d) of the Act 
for those MS-DRGs not included in the bundling model). Similar to 
Models 1 and 2, we believe it is appropriate to keep all applicable 
data from these ``subsection (d)'' hospitals in our IPPS payment 
modeling and ratesetting calculations because the majority of Medicare 
payments these hospitals would receive would be IPPS payments under 
section 1886(d) of the Act (that is, payments for cases in MS-DRGs that 
are not included in the bundled payment model). Moreover, although 
these hospitals are not receiving payments under 1886(d) of the Act for 
the cases included in the prospective bundled payment under Model 4, 
the Secretary has the authority to make appropriate adjustments for 
payment amounts at section 1886(d)(5)(I)(i) of the Act to include all 
applicable data from these subsection(d) hospitals in our IPPS 
ratesetting calculations. We believe it is appropriate to use the 
Secretary's authority under section 1886(d)(5)(I)(i) of the Act to 
include all IPPS, short-term, acute care hospitals and their claims 
within the IPPS ratesetting calculations because excluding these 
hospitals would diminish the number of providers used to determine the 
IPPS rates, which could cause fluctuations in the IPPS rates and could 
produce

[[Page 27933]]

instability to the IPPS rates. Therefore, because we believe it is 
appropriate to include all claims from hospitals participating within 
Models 1 and 2 within the IPPS ratesetting calculations and use the 
Secretary's authority under section 1886(d)(5)(I)(i) of the Act to 
include those hospitals and claims, we also believe it is appropriate 
to include all applicable data from subsection (d) hospitals 
participating in Model 4 in our IPPS payment modeling and ratesetting 
calculations (which includes recalibration of the MS-DRG weights, 
ratesetting, calculation of the budget neutrality factors, and the 
impact analysis) and propose to do so. In essence, we would continue to 
treat these hospitals the same as prior fiscal years for purposes of 
the FY 2013 (and subsequent years) IPPS payment modeling and 
ratesetting process without regard to a hospital's participation within 
this bundled payment model (that is, we would treat these hospitals as 
if they are not participating in Model 4 under the BPCI initiative).
    We note that Model 3 only addresses payments for related 
readmissions and postacute care services (rather than IPPS payments). 
Therefore, we believe it is not necessary to propose to address the 
treatment of any data for participating hospitals in Model 3.

I. Proposed 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 a new medical service or technology may be considered 
for new technology add-on payment 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.'' We note that 
beginning with discharges occurring in FY 2008, CMS transitioned from 
CMS-DRGs to MS-DRGs.
    The regulations at 42 CFR 412.87 implement these provisions and 
specify three criteria for a new medical service or technology to 
receive the additional payment: (1) The medical service or technology 
must be new; (2) the medical service or technology must be costly such 
that the DRG rate otherwise applicable to discharges involving the 
medical service or technology is determined to be inadequate; and (3) 
the service or technology must demonstrate a substantial clinical 
improvement over existing services or technologies. Below we highlight 
some of the major statutory and regulatory provisions relevant to the 
new technology add-on payment criteria as well as other information. 
For a complete discussion on the new technology add-on payment 
criteria, we refer readers to the FY 2012 IPPS/LTCH PPS final rule (76 
FR 51572 through 51574).
    Under the first criterion, as reflected in 42 CFR 412.87(b)(2), 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 MS-DRG weights through recalibration. We note 
that we do not consider a service or technology to be new if it is 
substantially similar to one or more existing technologies. That is, 
even if a technology receives a new FDA approval, it may not 
necessarily be considered ``new'' for purposes of new technology add-on 
payments if it is ``substantially similar'' to a technology that was 
approved by FDA and has been on the market for more than 2 to 3 years. 
In the FY 2006 IPPS final rule (70 FR 47351) and FY 2010 IPPS/RY 2010 
LTCH PPS final rule (74 FR 43813 and 43814), we explained our policy 
regarding substantial similarity in detail.
    Under the second criterion, Sec.  412.87(b)(3) further provides 
that, to be eligible for the add-on payment for new medical services or 
technologies, the MS-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 MS-
DRG prospective payment rate, we evaluate whether the charges for cases 
involving the new technology exceed certain threshold amounts. Table 10 
that was released with the FY 2012 IPPS/LTCH PPS final rule contains 
the final thresholds that will be used to evaluate applications for new 
technology add-on payments for FY 2013. We refer readers to the Web 
site http://www.cms.gov/AcuteInpatientPPS/FR2012/list.asp#TopOfPage for 
a complete viewing of Table 10 from the FY 2012 IPPS/LTCH PPS final 
rule.
    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 Health Insurance Portability and Accountability 
Act (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. We refer readers to the FY 2012 IPPS/LTCH PPS final 
rule (76 FR 51573) for complete information on this issue.
    Under the third criterion, Sec.  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 cost-to-
charge ratios (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 MS-DRG payment plus 50 percent of the estimated 
costs of the new technology.
    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

[[Page 27934]]

payments for new medical services and technologies. Therefore, in 
accordance with 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.
    In the FY 2009 IPPS final rule (73 FR 48561 through 48563), we 
modified our regulations at Sec.  412.87 to codify our longstanding 
practice of how CMS evaluates the eligibility criteria for new medical 
service or technology add-on payment applications. That is, 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. We 
also amended Sec.  412.87(c) to specify that all applicants for new 
technology add-on payments must have FDA approval or clearance for 
their new medical service or technology by July 1 of each year prior to 
the beginning of the fiscal year that the application is being 
considered.
    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 (CM), who is 
also designated as the CTI's Executive Coordinator.
    The specific processes for coverage, coding, and payment are 
implemented by CM, 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. At the same time, the CTI also works 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 improving the quality of care for 
Medicare beneficiaries.
    To improve the understanding of CMS' processes for coverage, 
coding, and payment and how to access them, the CTI has developed an 
``Innovator's Guide'' to these processes. 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. This guide was published in August 2008 and is 
available on the CMS Web site at: http://www.cms.gov/CouncilonTechInnov/Downloads/InnovatorsGuide5_10_10.pdf.
    As we indicated in the FY 2009 IPPS final rule (73 FR 48554), we 
invite any product developers or manufacturers of new medical 
technologies to contact the agency 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.
    We note that applicants for add-on payments for new medical 
services or technologies for FY 2014 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 that 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 the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/08_newtech.asp. To allow interested parties to 
identify the new medical services or technologies under review before 
the publication of the proposed rule for FY 2014, the Web site also 
will post the tracking forms completed by each applicant.
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 2013 prior 
to publication of this FY 2013 IPPS/LTCH PPS proposed rule, we 
published a notice in the Federal Register on November 18, 2011 (76 FR 
71571 through 71572), and held a town hall meeting at the CMS 
Headquarters Office in Baltimore, MD, on February 14, 2012. 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 2013 new 
medical service and technology add-on payment applications before the 
publication of this FY 2013 proposed rule.
    Approximately 70 individuals registered to attend the town hall 
meeting in person, while additional individuals listened over an open 
telephone line. Four of the five FY 2013

[[Page 27935]]

applicants presented information on its technology, including a 
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 
the applications that were received by the due date of March 6, 2012, 
in our evaluation of the new technology add-on applications for FY 2013 
in this proposed rule.
    In response to the published notice and the new technology town 
hall meeting, we received written comments regarding applications for 
FY 2013 new technology add-on payments. We summarize these comments 
below or, if applicable, indicate that there were no comments received, 
at the end of each discussion of the individual applications in this 
proposed rule.
    Comment: A number of attendees at the new technology town hall 
meeting provided comments that were unrelated to the issue of whether 
the FY 2013 new technology add-on applications met the ``substantial 
clinical improvement'' criterion.
    Response: As explained above and in the Federal Register notice 
announcing the new technology town hall meeting (76 FR 71571), the 
purpose of the new technology town hall meeting was specifically to 
discuss the substantial clinical improvement criterion in regard to 
pending new technology applications for FY 2013. Therefore, we are not 
summarizing those comments in this proposed rule. Commenters are 
welcome to resubmit these comments in response to proposals presented 
in this proposed rule.
3. FY 2013 Status of Technology Approved for FY 2012 Add-On Payments: 
Auto Laser Interstitial Thermal Therapy (AutoLITT\TM\) System
    Monteris Medical submitted an application for new technology add-on 
payments for FY 2011 for the AutoLITT\TM\. AutoLITT\TM\ is a minimally 
invasive, MRI-guided laser tipped catheter designed to destroy 
malignant brain tumors with interstitial thermal energy causing 
immediate coagulation and necrosis of diseased tissue. The technology 
can be identified by ICD-9-CM procedure codes 17.61 (Laser interstitial 
thermal therapy [LITT] of lesion or tissue of brain under guidance), 
and 17.62 (Laser interstitial thermal therapy [LITT] of lesion or 
tissue of head and neck under guidance), which became effective on 
October 1, 2009.
    The AutoLITT\TM\ received a 510K FDA clearance in May 2009. The 
AutoLITT\TM\ is indicated for use to necrotize or coagulate soft tissue 
through interstitial irradiation or thermal therapy in medicine and 
surgery in the discipline of neurosurgery with 1064 nm lasers. The 
AutoLITT\TM\ may be used in patients with glioblastoma multiforme brain 
tumors. The applicant stated in its application and through 
supplemental information that, due to required updates, the technology 
was actually introduced to the market in December 2009. The applicant 
explained that it was necessary to reduce the thermal damage lines from 
three to one and complete International Electrotechnical Commission/
Underwriter Laboratory testing, which led to the introduction of the 
technology to the market in December 2009, although the technology was 
approved by FDA in May 2009. The applicant also stated through 
supplementary information to its application that the first sale of the 
product took place on March 19, 2010. However, because the product was 
already available for use in December 2009, it appears that the newness 
date would begin in December 2009. In the FY 2011 IPPS/LTCH PPS 
proposed rule, we welcomed public comments on this issue.
    After evaluation of the newness, costs, and substantial clinical 
improvement criteria for new technology payments for the AutoLITT\TM\ 
and consideration of the public comments we received in response to the 
FY 2011 IPPS/RY 2011 LTCH PPS proposed rule, including the additional 
analysis of clinical data and supporting information submitted by the 
applicant, we approved the AutoLITT\TM\ for new technology add-on 
payments for FY 2011. Consistent with the applicant's clinical trial, 
the add-on payment is intended only for use of the device in cases of 
glioblastoma multiforme. Therefore, we limited the new technology add-
on payment to cases involving the AutoLITT\TM\ in MS-DRGs 025 
(Craniotomy and Endovascular Intracranial Procedures with MCC), 026 
(Craniotomy and Endovascular Intracranial Procedures with CC), and 027 
(Craniotomy and Endovascular Intracranial Procedures without CC or 
MCC). Cases involving the AutoLITT\TM\ that are eligible for the new 
technology add-on payment are identified by assignment to MS-DRGs 025, 
026, and 027 with a procedure code of 17.61 (Laser interstitial 
thermotherapy of lesion or tissue of brain under guidance) in 
combination with a principal diagnosis code that begins with a prefix 
of 191 (Malignant neoplasm of brain). We note that using the procedure 
and diagnosis codes above and restricting the add-on payment to cases 
that map to MS-DRGs 025, 026, and 027 is consistent with information 
provided by the applicant, which demonstrated that cases of the 
AutoLITT\TM\ would only map to MS-DRGs 025, 026, and 027. Procedure 
code 17.62 (Laser interstitial thermotherapy of lesion or tissue of 
head and neck under guidance) does not map to MS-DRGs 025, 026, or 027 
under the GROUPER software and, therefore, is ineligible for new 
technology add-on payment.
    The average cost of the AutoLITT\TM\ is reported as $10,600 per 
case. Under Sec.  412.88(a)(2) of the regulations, new technology add-
on payments are limited to the lesser of 50 percent of the average cost 
of the device or 50 percent of the costs in excess of the MS-DRG 
payment for the case. As a result, the maximum add-on payment for a 
case involving the AutoLITT\TM\ is $5,300.
    The new technology add-on payment regulations provide 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'' (42 
CFR 412.87(b)(2)). Our practice has been to begin and end new 
technology add-on payments on the basis of a fiscal year, and we have 
generally followed a guideline that uses a 6-month window before and 
after the start of the fiscal year to determine whether to extend the 
new technology add-on payment for an additional fiscal year. In 
general, we extend add-on payments for an additional year only if the 
3-year anniversary date of the product's entry on the market occurs in 
the latter half of the fiscal year (70 FR 47362). With regard to the 
newness criterion for the AutoLITTTM, as stated above, we 
consider the beginning of the newness period for the device to commence 
from the market release date of December 2009. Therefore, for FY 2013, 
as of December 2012, the AutoLITTTM will have been on the 
market for 3 years, and would therefore no longer be considered ``new'' 
as of December 2012 nor be considered eligible for new technology add-
on payments in FY 2013. However, we received information from the 
manufacturer that the market release date of the AutoLITTTM 
occurred after April 2010 (which occurs in the latter half of the 
fiscal year) and, therefore, it appears that the AutoLITTTM 
would still be considered ``new'' for FY 2013 and would still be 
eligible for new technology add-on payments in FY 2013. We note that we 
received this information in close proximity to the

[[Page 27936]]

publication of the proposed rule and anticipate receiving further 
information on the delayed market release date from the manufacturer 
and welcome public comment as well.
4. FY 2013 Applications for New Technology Add-On Payments
    We received six applications for new technology add-on payments for 
FY 2013. However, two applicants withdrew their applications prior to 
the publication of this proposed rule.
a. Glucarpidase (Trade Brand Voraxaze[supreg])
    BTG International, Inc. submitted an application for new technology 
add-on payments for Glucarpidase (trade brand Voraxaze[supreg]) for FY 
2013. Glucarpidase is used in the treatment of patients who have been 
diagnosed with toxic methotrexate (MTX) concentrations as a result of 
renal impairment. The administration of Glucarpidase causes a rapid and 
sustained reduction of toxic MTX concentrations.
    Methotrexate (MTX) is a widely used anticancer agent. The 
administration of high-dose methotrexate (HDMTX) is an important 
component of the treatment provided to patients who have been diagnosed 
with various types of cancer. According to the applicant, HDMTX, in 
particular, is specifically used in the treatment of patients who have 
been diagnosed with osteosarcoma, acute lymphoblastic leukemia, non-
Hodgkin's lymphoma, or primary CNS lymphoma. The applicant further 
stated that the administration of HDMTX can cause renal dysfunction. 
Renal dysfunction impairs the elimination of MTX, which in turn causes 
the levels of MTX to rise to the point of life-threatening toxicity.
    The applicant maintains that there are not any currently FDA-
approved pharmaceutical treatment options available to rapidly decrease 
MTX levels in patients who have been diagnosed with toxic MTX 
concentrations as a result of renal impairment. The applicant asserts 
that extracorporeal treatment options that are routinely employed to 
rapidly treat this condition, such as hemodialysis, hemodiafiltration, 
high-flux hemodialysis, charcoal hemoperfusion or hemofiltration, 
peritoneal dialysis, exchange transfusion, or plasma exchange, are 
invasive, may add excess morbidity to the treatment regimen, and have 
proven to have limited effects.\15\ High flux hemodialysis is the most 
effective method of extracorporeal MTX removal, but this method 
requires 5 to 6 days of daily treatment (4 to 6 hours per session).\16\ 
The risks associated with repeated hemodialysis procedures such as 
anemia, infection, and increased mortality, especially in neutropenic 
or thrombocytopenic patients, are significant and cause rebounds in MTX 
levels. The applicant maintains that other treatment options, such as 
the administration of leucovorin, hydration, and urinary 
alkalinization, also are commonly used to reduce harmful levels of MTX. 
However, these treatment options do not reduce toxic MTX concentrations 
in all patient populations.\17\
---------------------------------------------------------------------------

    \15\ Widemann et al., [Cancer, 2004, and Vilay et al.,], 
Pharmacotherapy, Vol 30, January, 2010).
    \16\ Wall et al., American Journal of Kidney Diseases, Vol. 28, 
No. 6, 1996.
    \17\ Pinedo et al, Cancer Research, 36, 4418-4424 December, 
1976.
---------------------------------------------------------------------------

    Voraxaze[supreg] is an orphan drug that was approved by the FDA on 
January 17, 2012. Beginning in 1993, certain patients could obtain 
expanded access for treatment use to Voraxaze[supreg] as an 
investigational drug. Since 2007, the applicant has been authorized to 
recover the costs of making Voraxaze[supreg] available through its 
expanded access program. We describe expanded access for treatment use 
of investigational drugs and authorization to recover certain costs of 
investigational drugs in more detail below. The applicant intends to 
make Voraxaze[supreg] available on the market in the United States as a 
commercial product to the larger population in April 2012.
    With regard to newness, we are concerned that Voraxaze[supreg] may 
no longer be considered ``new''. Specifically, 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''. In addition, the regulations at Sec.  
412.87(b)(2) state 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 
service or technology (depending on when a new code is assigned and 
data on the new 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 of this section.'' As we have 
indicated in the past, we generally believe that the newness period 
begins on the date that FDA approval is granted. The FDA approval date 
is typically the date when new technologies are available on the market 
and as a result begin to be reflected within the MS-DRGs cost data.
    As noted above, Voraxaze[supreg] was approved by the FDA in January 
2012. However, starting in 1993, certain patients were able to obtain 
access to Voraxaze[supreg] as an investigational drug through an 
expanded access program, and the applicant has been authorized to 
recover certain costs of making Voraxaze[supreg] available through its 
expanded access program since 2007. We discuss below in more detail 
whether the cost of Voraxaze[supreg] is already reflected within the 
MS-DRG relative weights.
    To determine the date of newness for Voraxaze[supreg], we believe 
it is appropriate to compare investigational drugs provided under the 
expanded access program to devices eligible for the Humanitarian Use 
Device (HUD) Program because these programs contain similarities to 
evaluate the newness criterion.
    In prior final rules, we have evaluated and approved technologies 
with a Humanitarian Device Exemption (HDE) approval. In the FY 2010 
IPPS/LTCH PPS final rule, we approved new technology add-on payments 
for the Spiration[supreg] IBV[supreg], which received a HDE approval 
from the FDA on October 24, 2008, and had its first IRB approval on 
March 12, 2009 (74 FR 43754, 43819). Therefore, technologies with an 
HDE approval may be eligible for new technology add-on payments. In 
other words, we have concluded that HDE approval constitutes an FDA 
approval in the context of the newness criterion and would begin the 
newness period, subject to market availability.
    There are separate processes and standards for providing expanded 
access to investigational drugs for treatment use and for the HUD 
Program. The term ``expanded access'' refers to the use of 
investigational drugs, or approved drugs where availability is limited 
by a risk evaluation or mitigation strategy, when the primary purpose 
is to diagnose, monitor, or treat a patient's disease or condition. 
When the requirements in (FDA's regulations at) 21 CFR part 312, 
Subpart I are met, a patient or group of patients with a serious or 
immediately life-threatening disease or condition, and no comparable or 
satisfactory alternative therapy, may obtain expanded access to an 
investigational drug. When patients obtain expanded access to an 
unapproved investigational drug, the safety and effectiveness of the 
drug have

[[Page 27937]]

not been fully established, and the drug does not have formal FDA 
approval under a New Drug Application (NDA) or Biologics Licensing 
Application (BLA) for commercial marketing. Manufacturers may continue 
conducting clinical trials in parallel to the expanded access program 
in order to pursue formal market approval from the FDA under an NDA or 
BLA for commercial marketing. The FDA's Office of Orphan Products 
Development administers the HUD Program. A HUD is a device that is 
intended to benefit patients by treating or diagnosing a disease or 
condition that affects fewer than 4,000 individuals in the United 
States per year. To obtain approval for a HUD, a HDE application is 
submitted to FDA. A HDE application is similar in both form and content 
to a Premarket Approval (PMA) application, but is exempt from the 
effectiveness requirements of a PMA. A HDE application must, however, 
contain sufficient information for FDA to determine that the device 
does not pose an unreasonable or significant risk of illness or injury, 
and that the probable benefit to health outweighs the risk of injury or 
illness from its use, taking into account the probable risks and 
benefits of currently available devices or alternative forms of 
treatment. An approved HDE authorizes marketing of the HUD, however, an 
HDE approval requires that the device only be used in facilities that 
have established a local Institutional Review Board (IRB) to supervise 
clinical testing of devices, and that an IRB approve the use of the 
device to treat or diagnose the specific disease. Although HUDs can be 
marketed, they are subject to a general prohibition on profit; that is, 
they may not, except in narrow circumstances, be sold for an amount 
that exceeds the cost of research and development, fabrication and 
distribution.
    Expanded access to investigational drugs and the HUD Program have 
similarities and differences that are relevant to the newness 
criterion. Both have limits on who is eligible to receive a drug or use 
a device. In addition, to satisfy the requirements for expanded access 
in FDA's regulations, and for a HDE to meet the standard for approval, 
a sponsor is not required to demonstrate effectiveness of the product 
at the same level as for approval of a PMA, NDA, or BLA. Expanded 
access to investigational drugs and the HUD Program differ in many 
ways, including that the HUD Program is for devices, and the expanded 
access programs provide access to drugs. In addition, under the HUD 
Program, the device is granted FDA approval for limited use. However, 
while FDA authorizes expanded access to an investigational drug, FDA 
does not approve the investigational drug when it authorizes expanded 
access.
    This second difference is key to our interpretation of our policy 
to recognize a HDE approval as an FDA approval. We believe that the 
availability of a drug through the expanded access program would not 
constitute FDA approval in the context of the newness criterion because 
unapproved, investigational drugs made available to certain patients 
through the expanded access program do not receive FDA approval prior 
to enrollment in the program and cannot be marketed. In other words, we 
believe that for the purposes of evaluating whether a new technology 
meets the newness criterion, it may be appropriate not to consider the 
date when Voraxaze[supreg] became available to certain patients through 
the applicant's expanded access program as the date of market 
availability.
    We note that cost recovery for investigational drugs is of concern 
with regard to the newness criterion. Although a sponsor (for example, 
a drug manufacturer) may not commercially distribute an investigational 
drug, in certain circumstances, a sponsor of a clinical trial or an 
expanded access program may receive authorization from FDA to charge 
for certain costs associated with making an investigational drug 
available. The applicant has been authorized to recover certain costs 
by making Voraxaze[supreg] available since 2007. As we stated earlier, 
once CMS has recalibrated the DRGs based on available data to reflect 
the costs of an otherwise new technology, that technology will no 
longer be considered ``new''' for the purposes of the new technology 
add-on payments. It is possible that a hospital may have submitted a 
claim to Medicare for the cost of Voraxaze[supreg] provided through the 
applicant's expanded access program. Therefore, it is also possible 
that the costs associated with this technology may already be reflected 
in some limited fashion in the data used to determine the MS-DRG 
relative weights. While these are possibilities, we have not in the 
past been confronted with a situation where an applicant has indicated 
that hospitals have sought cost recovery for their technology when the 
technology was available through the expanded access program. We also 
have not been confronted with a situation where an applicant has 
indicated that cost recovery was sought for technologies (that were not 
available via an expanded access program) during clinical trials. We 
note that our data do not distinguish charges for drugs by FDA approval 
status, and, therefore, we do not exclude from the relative weight 
calculation costs (as derived from charges) associated with 
investigational drugs if they are included by hospitals on a claim. 
Therefore, cost data for non-FDA approved technologies (that is, still 
involved in clinical trials) may be present in the relative weights on 
a very limited basis prior to FDA approval, regardless of whether a 
technology received new technology add-on payments.
    We are inviting public comment regarding the issue of whether a 
drug is considered ``new'' for the purposes of new technology add-on 
payments starting with its availability in the expanded access program, 
and how that may differ from devices being considered ``new'' starting 
from the date the device received FDA approval under a HDE (subject to 
market availability or availability to Medicare beneficiaries) and 
specifically request comment on these considerations in the context of 
Voraxaze[supreg]. We also are inviting public comment on whether the 
costs of Voraxaze[supreg], or more generally, any unapproved 
investigational drug for which cost recovery is authorized are already 
included in data used to determine relative weights, and how that 
influences the start of a newness period, if at all. In addition, we 
are inviting public comment regarding the market availability of 
Voraxaze[supreg] between its FDA approval date of January 17, 2012, and 
the market availability date according to the applicant of April 2012 
and the reasons for the delay in availability.
    The applicant submitted a request to the ICD-9-CM Coordination and 
Maintenance Committee for a new procedure code, which was discussed at 
the committee's March 2012 meeting. For further information regarding 
the code proposal, we refer readers to the following CMS Web site: 
http://www.cms.hhs.gov/Medicare/Coding/ICD9ProviderDiagnosticCodes/ICD-9-CM-C-and-M-Meeting-Materials.html.
    We are inviting public comment on whether or not Voraxaze[supreg] 
meets the newness criterion, especially in light of its reported 
availability date through the applicant's expanded access program, and 
the ability for the applicant to charge for certain costs associated 
with making an investigational drug available. In addition, we are 
inviting public comment on considerations that should be given in 
regard to the technology's delay in availability after FDA's approval 
was granted, in addition to the reason for the delay, as it relates to 
the newness criterion.

[[Page 27938]]

    With respect to cost criterion, the applicant researched the 2009 
Standard Analytic Inpatient File (SAF) for cases with a principal or 
secondary diagnosis of osteosarcoma (ICD-9-CM code series 170.xx), 
acute lymphoblastic leukemia (ICD-9-CM code series 204.0x), non-
Hodgkin's lymphoma (ICD-9-CM code series 200.xx and 202.xx), or primary 
CNS lymphoma (ICD-9-CM code series 200.5x) with a corresponding ICD-9-
CM procedure code for chemotherapy (99.25) that may be eligible for 
Voraxaze[supreg], based on the product's approved indications. The 
applicant's search yielded potentially eligible cases within 249 MS-
DRGs, of which 56 MS-DRGs captured 12 or more cases.
    Using this universe of cases (249 MS-DRGs), the applicant added the 
additional costs of Voraxaze[supreg] to the case-weighted average 
standardized charge per case. Although the applicant submitted data 
related to the estimated cost of Voraxaze[supreg], the applicant noted 
that the cost of the technology was proprietary information. According 
to the applicant, it did not convert the costs to charges for this 
analysis because of the technology's high cost. The applicant maintains 
that an average adult receiving treatment for one of the diagnoses 
above would require a minimum of four vials of Voraxaze[supreg].
    The applicant used the following multiple analysis of different 
subsets of MS-DRGs to compare the average case-weighted standardized 
charge per case to the average case-weighted threshold to determine 
that Voraxaze[supreg] met the cost criteria:
     The applicant found 12,324 eligible cases within 249 MS-
DRGs, and determined a case-weighted average standardized charge per 
case of $87,582 (which includes the cost of Voraxaze[supreg]) and a 
case-weighted threshold of $39,216. The applicant maintains that 
Voraxaze[supreg] meets the cost criterion because the case-weighted 
average standardized charge per case exceeds the case-weighted 
threshold.
     The applicant excluded those MS-DRGs that had fewer than 
11 cases, which resulted in 12,134 eligible cases within 56 MS-DRGs. 
The applicant determined a case-weighted average standardized charge 
per case of $84,039 (which includes the cost of Voraxaze[supreg]) and a 
case-weighted threshold of $37,195. The applicant maintains that 
Voraxaze[supreg] meets the cost criterion because the case-weighted 
average standardized charge per case exceeds the case-weighted 
threshold.
     The applicant analyzed the 20 MS-DRGs that contained the 
highest number of cases and, based on the 20 cases they stated they 
found, determined a case-weighted average standardized charge per case 
of $80,400 (which includes the cost of Voraxaze[supreg]) and a case-
weighted threshold of $34,990. The applicant maintains that 
Voraxaze[supreg] meets the cost criterion because the case-weighted 
average standardized charge per case exceeds the case-weighted 
threshold.
    We are inviting public comment on whether or not Voraxaze[supreg] 
meets the cost criterion. Specifically, we welcome public comment on 
the methodologies used in the applicant's analysis, including (1) the 
methods used to identify the eligible cases used in the cost analysis 
of this technology, especially if there are cases that should be 
excluded from the analysis because of clinical reasons, and if there 
are other ways to identify cases for which this technology may be 
appropriate, and (2) the appropriateness of not converting the costs to 
charges for the purposes of this analysis and what would be an accurate 
and appropriate CCR for this technology.
    With regard to substantial clinical improvement, the applicant 
maintains that Voraxaze[supreg] is a clinical improvement compared to 
current treatment options because it is less time intensive, allows 
certain patient populations to avoid risks associated with current 
treatment options, and has characteristics that allows it to reduce MTX 
concentrations more effectively. As noted above, the applicant 
maintains that current treatment options for renal impairment as a 
result of toxic MTX concentrations are limited to extracorporeal 
methods that are time-intensive and could subject patients in certain 
populations to harm from the associated risks. The applicant states 
that the administration of Voraxaze[supreg] to patients who have been 
diagnosed with HDMTX-induced renal dysfunction metabolizes circulating 
MTX to the inactive metabolite DAMPA. The applicant asserts that this 
characteristic action of the technology represents a substantial 
clinical improvement over current treatment options available to 
patients who have toxic MTX concentrations in a more effective, and 
rapid way, and provides protection to eligible patient populations 
against potential harm associated with current treatment options.
    In addition, the applicant provided the results from a study of 23 
patients diagnosed with MTX-induced renal dysfunction treated with 
Voraxaze[supreg]. During this study, the applicant reported that the 
administration of Voraxaze[supreg] lowered toxic MTX concentrations in 
patients within 15 minutes after the administration by more than 98 
percent. Because the administration of Voraxaze[supreg] could 
metabolize both leucovorin and its active metabolite, 5-mTHF, these 
patients were also administered Thymidine, a drug used to enhance the 
treatment for patients with high levels of MTX. The applicant notes 
that the combination of Voraxaze[supreg] and Thymidine rescue was well 
tolerated by the 23 patients studied, and MTX-related toxicities were 
reduced from severe to mild to moderate. The range of age of these 23 
patients was 19 to 94 years old. The applicant asserts that the types 
of health conditions treated with HDMTX, such as acute lymphoblastic 
leukemia, osteosarcoma, central nervous system (CNS) lymphoma, and 
leptomeningeal cancer, tend to occur within the Medicare population and 
cites research that states ``HD-MTX-induced renal failure with 
persistence of toxic blood MTX levels is a rare but life threatening 
complication that occurs more frequently in adults, particularly those 
with advanced age and CNS lymphoma.'' \18\ When these malignancies 
arise which require treatment with HDMTX, HDMTX-induced renal failure 
with persistent toxic MTX levels is a complication that occurs more 
frequently in adults. The applicant asserts that the administration of 
Voraxaze[supreg] has been shown to be well-tolerated by older adult 
patients, while achieving similar reduction rates in younger patient 
populations who have been diagnosed with toxic MTX concentrations and 
treated with Voraxaze[supreg].\19\ The applicant also provided 
additional published peer-reviewed articles 
20,21,22,23,24,25 relevant to their application to support 
their

[[Page 27939]]

assertion that they meet the substantial clinical improvement criteria.
---------------------------------------------------------------------------

    \18\ Schwartz, Borner et al., The Oncologist, December 2007.
    \19\ Schwartz, Borner et al., The Oncologist, December 2007.
    \20\ Levy CC, Goldman P. The enzymatic hydrolysis of 
methotrexate and folic acid. J Biol Chem. 1967; 242:2993-2998.
    \21\ Minton NP, Atkinson T, Sherwood RF. Molecular cloning of 
the Pseudomonas carboxypeptidase G2 gene and its expression in 
Escherichia coli and Pseudomonas putida. J Bacteriol. 1983; 156: 
1222-1227.
    \22\ Widemann BC, Balis FM, Kim A, et al. Glucarpidase, 
leucovorin and thymidine for high-dose methotrexate induced renal 
dysfunction. Clinical and pharmacologic factors affecting outcome. J 
Clin Oncology 2010; 28:1-8.
    \23\ Patterson DM, Lee SM. Glucarpidase following high-dose 
methotrexate: Update on development. Expert Opin Biol Ther. 
2010;10(1):105-111.
    \24\ Phillips M, Smith W, Balan G, et al. Pharmacokinetics of 
glucarpidase in subjects with normal and impaired renal function. J 
Clin Pharmacol 2008; 48:279-284.
    \25\ Bleyer WA. Methotrexate: Clinical pharmacology, current 
status and therapeutic guidelines. Cancer Treat Rev. 1977;4:87-101.
---------------------------------------------------------------------------

    We are inviting public comment on whether or not Voraxaze[supreg] 
meets the criterion of representing a substantial clinical improvement 
for Medicare beneficiaries.
b. DIFICIDTM (Fidaxomicin) Tablets
    Optimer Pharmaceuticals, Inc. submitted an application for new 
technology add-on payments for FY 2013 for the use of 
DIFICIDTM (Fidaxomicin) tablets. The applicant asserts that 
Fidaxomicin is a major clinical advancement in the options available to 
treat Clostridium difficile-associated diarrhea (CDAD).
    Clostridium difficile (C. Diff.) is a bacterium that can cause 
infection with symptoms that range from diarrhea to life-threatening 
inflammation of the colon, and is also commonly referred to as CDAD. 
The symptoms associated with CDAD can be treated by stopping 
administration of an antibiotic because often antibiotics can alter the 
native intestinal microflora and thus trigger CDAD. For mild cases of 
CDAD, this step may be sufficient to relieve the associated symptoms. 
However, many patients who have been diagnosed with more severe cases 
of CDAD require further treatment. Further treatment options include 
prescribing antibiotics such as Metronidazole or Vancomycin, 
prescribing probiotics administered in conjunction with antibiotics, 
and performing surgery using a fecal transplant to restore healthy 
intestinal bacteria by placing donor stool in the colon. According to 
the applicant, about one-fourth of the patients diagnosed with CDAD 
experience a recurrence of these associated symptoms.
    As indicated on the labeling submitted to the FDA, the applicant 
noted that Fidaxomicin is taken twice a day as a daily dosage (200 mg 
tablet twice daily = 400 mg per day) as an oral antibiotic. The 
applicant asserts that Fidaxomicin provides potent bactericidal 
activity against C. Diff., and moderate bactericidal activity against 
certain other gram-positive organisms, such as enterococcus and 
staphylococcus. Unlike other antibiotics used to treat CDAD, the 
applicant noted that the effects of Fidaxomicin preserve bacteroides 
organisms in the fecal flora. These are markers of normal anaerobic 
microflora. The applicant asserts that this helps prevent pathogen 
introduction or persistence, which potentially inhibits the re-
emergence of C. Diff., and reduces the likelihood of overgrowths as a 
result of vancomycin-resistant Enterococcus (VRE). Because of this 
narrow spectrum of activity, the applicant asserts that Fidaxomicin 
does not alter this native intestinal microflora.\26\
---------------------------------------------------------------------------

    \26\ Koo, Garey et al. Future novel therapeutic agents for 
Clostridium difficile infection. Expert Opin Investig Drugs, 
2010;19(7):825-836. Tannock, Munro et al., A new macrocyclic 
antibiotic, fidaxomicin (OPT-80), causes less alteration to the 
bowel microbiota of Clostridium difficile-infected patients than 
does vancomycin. Microbiology. 2010 Nov;156(Pt 11):3354-9.
---------------------------------------------------------------------------

    With regard to the newness criterion, Fidaxomicin was approved by 
the FDA on May 27, 2011, for the treatment of CDAD in adult patients, 
18 years of age and older. Fidaxomicin was commercially available on 
the market within 7 weeks after the FDA's approval was granted. 
Currently, there are not any ICD-9-CM diagnosis or procedure codes that 
exist to uniquely identify the use of Fidaxomicin, or any oral drug, as 
a procedure. Optimer has submitted a request to the ICD-9-CM 
Coordination and Maintenance Committee for a new ICD-9-CM procedure 
code, which was discussed at the committee's meeting on March 5, 2012. 
For further information regarding the code proposal, we refer readers 
to the CMS Web site at: http://www.cms.hhs.gov/Medicare/Coding/ICD9ProviderDiagnosticCodes/ICD-9-CM-C-and-M-Meeting-Materials.html.
    We believe that under our current new technology add-on payment 
policy, eligibility for consideration for new technology add-on 
payments is limited to new technologies associated with procedures 
described by ICD-9-CM codes. In the FY 2002 IPPS final rule, we 
establish the framework for our current policy (66 FR 46907 through 
46915). The discussion of technologies in that rule focuses on those 
technologies identifiable by ICD-9-CM codes. We also discuss in 
response to comments the feasibility and appropriateness of HCPCS codes 
and V-codes. Similar to ICD-9-CM codes, HCPCS codes are also a 
procedure-based system and identify procedures. We noted in that rule 
that V-codes would not be appropriate to use for identification of new 
technology because they are not a substitute for procedure coding. 
Volume 3 of ICD-9-CM contains codes that describe inpatient procedures 
(65 FR 50325). In other words, we have not considered drugs that are 
only taken orally to be eligible for consideration for new technology 
add-on payments, because there is no procedure associated with these 
drugs and, therefore, no ICD-9-CM code(s).
    This interpretation is also consistent with other Medicare payment 
policies. For example, when drugs taken orally are given as part of an 
outpatient encounter, they would likely be considered self-administered 
drugs under the Hospital Outpatient Prospective Payment System (OPPS). 
If a Medicare beneficiary who has outpatient status were to be provided 
a self-administered drug by a hospital or wholly-owned or wholly-
operated entity of that hospital and that beneficiary were subsequently 
admitted to that hospital for a related reason within three days, the 
hospital may not include these self-administered drugs on the inpatient 
bill (under the 3-day payment window policy), because self-administered 
drugs are not covered under the OPPS. However, they would be required 
to include nondiagnostic services related to admission and all other 
diagnostic services on the inpatient bill (under the 3-day payment 
window).
    We are inviting public comment on our interpretation of our policy 
regarding drugs that are only self-administered for consideration for 
new technology add-on payments. Further, we are inviting public comment 
on whether or not Fidaxomicin meets the newness criterion.
    With regard to the cost criterion, Optimer researched the FY 2010 
MedPAR file for cases that would be eligible for treatment with 
Fidaxomicin to determine it if would qualify for the cost criterion for 
new technology add-on payments. Based on its analysis, the applicant 
identified cases in which a patient had been diagnosed with CDAD by 
searching the MedPAR file for claims that included ICD-9-CM diagnosis 
code 008.45 (Intestinal infection due to Clostridium difficile) as a 
principal diagnosis or secondary diagnosis. Optimer provided three 
examples of how the results of the analyses of different MS-DRGs 
demonstrate that it meets the cost criterion.
    Under the first analysis, the applicant researched the FY 2010 
MedPAR file for cases that included ICD-9-CM diagnosis code 008.45 as a 
principal or secondary diagnosis across all MS-DRGs. The applicant 
found 162,310 cases within 536 MS-DRGs, and determined a case-weighted 
average standardized charge per case (excluding charges for the cost of 
Fidaxomicin) of $50,136. Using a factor of 6.5 percent to inflate the 
charges to 2012 rates based on the Medical Consumer Price Index (CPI), 
the applicant determined a case-weighted standardized charge per case 
that equals $53,394. The applicant then added the charges related to 
the technology to the inflated charges. The applicant then determined a 
final case-weighted average standardized charge per case of $58,994, 
which exceeds the

[[Page 27940]]

case-weighted threshold of $43,673. Because the final case-weighted 
average standardized charge per case for the applicable MS-DRGs exceeds 
the case-weighted threshold amount in this first analysis, the 
applicant maintains that Fidaxomicin meets the cost criterion for new 
technology add-on payments.
    Under the second analysis, the applicant researched the FY 2010 
MedPAR file for cases that included ICD-9-CM diagnosis code 008.45 only 
as a principal diagnosis, which mapped to MS-DRGs 371 (Major 
Gastrointestinal Disorders and Peritoneal Infections with MCC), 372 
(Major Gastrointestinal Disorders and Peritoneal Infections with CC), 
and 373 (Major Gastrointestinal Disorders and Peritoneal Infections 
without CC/MCC). The applicant found 55,410 cases, and determined a 
case-weighted average standardized charge per case (excluding charges 
for the cost of Fidaxomicin) of $28,007. Using a factor of 6.5 percent 
to inflate the charges to 2012 rates based on the Medical CPI, the 
applicant determined a case-weighted standardized charge per case that 
equals $29,828. The applicant then added the charges related to the 
drug to the inflated charges. The applicant then determined a final 
case-weighted average standardized charge per case of $35,428, which 
exceeds the case-weighted threshold of $34,730. Because the final case-
weighted average standardized charge per case for the applicable MS-
DRGs exceeds the case-weighted threshold amount in this second 
analysis, the applicant maintains that Fidaxomicin meets the cost 
criterion for new technology add-on payments.
    Under the third analysis, the applicant again researched the FY 
2010 MedPAR file for cases that included ICD-9-CM diagnosis code 008.45 
as a principal or secondary diagnosis across all MS-DRGs. The applicant 
then narrowed the results of the analysis to include only the top 37 
MS-DRGs (in volume of cases), which accounted for 75 percent of all 
cases. The applicant's methodology resulted in 121,748 cases, and the 
applicant determined a case-weighted average standardized charge per 
case (excluding charges for the cost of Fidaxomicin) of $45,523. Using 
a factor of 6.5 percent to inflate the charges to 2012 rates based on 
the Medical CPI, the applicant determined a case-weighted standardized 
charge per case that equals $48,482. The applicant then added the 
charges related to the drug to the inflated charges. The applicant then 
determined a final case-weighted average standardized charge per case 
of $54,082, which exceeds the case-weighted threshold of $42,452. 
Because the final case-weighted average standardized charge per case 
for the applicable MS-DRGs exceeds the case-weighted threshold amount 
in this third analysis, the applicant maintains that Fidaxomicin meets 
the cost criterion for new technology add-on payments.
    In the three analyses discussed above, the applicant submitted data 
related to the estimated cost and charge of the drug (using a charge 
markup). However, the applicant has not released the cost of the 
technology, asserting that it is proprietary information. The applicant 
converted the cost of the technology to a charge using a charge markup 
(a factor of 6.5 percent based on the Medical CPI) that represented a 
10-day dosage.
    We are concerned that these analyses do not take into account 
situations in which patients would be prescribed Fidaxomicin later in 
the duration of their inpatient stay, and may finish the course of 
Fidaxomicin sometime after being discharged from the hospital. In 
addition, as discussed above, if Fidaxomicin is prescribed and self-
administered during the 3-day period prior to admission to an IPPS 
hospital for a related encounter, we do not believe that this service 
is payable under the OPPS, nor that it can be included on the inpatient 
claim submitted to Medicare because of the 3-day payment window policy. 
Therefore, it may not be appropriate to include in the applicant's 
calculations the full charges related to Fidaxomicin and the 
corresponding proprietary charges for the 10-day dose. In addition, we 
believe that it is necessary for the applicant to adjust its estimates 
to remove from the MedPAR file's claims for the charges that describe 
other types of treatment options such as Vancomycin, since use of these 
treatments would preclude use of Fidaxomicin. Furthermore, to identify 
the cases that may be eligible for the technology's use, the applicant 
researched and analyzed claims that included ICD-9-CM diagnosis code 
008.45 as the principal diagnosis or as the principal or secondary 
diagnosis. We are concerned that this baseline for eligible cases may 
not represent the appropriate universe of cases, such as if all MS-DRGs 
were considered or if a subset of MS-DRGs were considered.
    We are inviting public comment on whether or not Fidaxomicin meets 
the cost criterion. In addition, we are inviting public comment on the 
methodologies used by the applicant in its analyses, in particular the 
assumptions made about the dosage in developing the cost analysis. We 
also are interested in comments about the applicant's selection of 
claims with an ICD-9-CM diagnosis code 008.45 as the principal 
diagnosis or secondary diagnosis, and whether those cases accurately 
represent the Medicare population that may benefit from the 
technology's use.
    With regard to the substantial clinical improvement criterion, the 
applicant maintains that Fidaxomicin represents a substantial clinical 
improvement to the treatment options currently available. According to 
the applicant, Fidaxomicin represents the first major clinical 
advancement in the treatment options available to address CDAD in more 
than 25 years, and it is one of only two agents indicated by the FDA to 
treat this condition. The applicant notes that reports from its 
clinical trials show that a higher proportion of patients achieve 
positive clinical response to treatment with Fidaxomicin as opposed to 
treatment with Vancomycin. The applicant reported that these patients 
did not experience recurrences of associated symptoms for at least 25 
days after the end of treatment. The applicant asserts that Fidaxomicin 
has longer acting antimicrobial activity and inhibits spore production 
in C. difficile in vitro. The applicant stated that C. difficile cells 
produce spores when exposed to air; therefore, transmission of 
infection occurs even when the cells themselves are killed.
    The applicant reported on two randomized, double-blinded trials 
27,28. A non-inferiority design was utilized to demonstrate 
the efficacy of administering Fidaxomicin (200 mg twice daily for 10 
days) compared to administering Vancomycin (125 mg four times daily for 
10 days) to adult patients diagnosed with CDAD. The demographic profile 
and baseline CDAD characteristics of the subjects enrolled in both 
trials were similar. These patients had a median age of 64 years, were 
mainly white (90 percent), female (58 percent), and inpatients (63 
percent).
---------------------------------------------------------------------------

    \27\ Pivotal trial 101.1.C.003:
    Thomas J. Louie, M.D., Mark A. Miller, M.D., Kathleen M. 
Mullane, D.O., Karl Weiss, M.D., Arnold Lentnek, M.D., Yoav Golan, 
M.D., Sherwood Gorbach, M.D., Pamela Sears, Ph.D., and Youe-Kong 
Shue, Ph.D. for the OPT-80-003 Clinical Study Group. Fidaxomicin 
versus Vancomycin for Clostridium difficile Infection. N Engl J Med 
2011; 364:422-431 February 3, 2011. Attached reference: 12--
LouieNEJM2011.pdf.
    \28\ Crook D, Weiss K, Comely O, Miller M, Esposito R, Gorbach 
8. Randomized Clinical Trial (RCT) in Clostridium difficile 
Infection (CDI) Confirms Equivalent Cure Rate and Lower Recurrence 
Rate of Fidaxomicin (FDX) versus Vancomycin (VCN). 20th European 
Congress of Clinical Microbiology and Infectious Diseases; April 10-
13, 2010; Vienna, Austria.
---------------------------------------------------------------------------

    The applicant reported that the primary efficacy endpoint (for both 
trials) was the clinical response rate at

[[Page 27941]]

the end of therapy, based upon improvement in diarrhea or other 
symptoms such that, in the investigator's judgment, further CDAD 
treatment was not needed. An additional efficacy endpoint was sustained 
clinical response 25 days after the end of treatment. Sustained 
response was only evaluated for patients who were clinical successes at 
the end of treatment. Sustained response was defined as clinical 
response at the end of treatment, and survival without proven or 
suspected reoccurrence of a diagnosis of CDAD beyond 25 days after the 
end of treatment. The results for clinical response at the end of 
treatment in both trials, which the applicant submitted in the table 
below, indicate that the effects of administering Fidaxomicin is 
noninferior to the effects of administering Vancomycin based on the 95 
percent confidence interval (CI) lower limit being greater than the 
non-inferiority margin of -10 percent.
    The applicant stated that the results for sustained clinical 
response at the end of the follow-up period, also shown in the table 
below, indicate that the effects of administering Fidaxomicin is 
superior to the effects of administering Vancomycin on this endpoint. 
Because clinical success at the end of treatment and mortality rates 
were similar across treatment arms (approximately 6 percent in each 
group), the applicant determined that the differences in sustained 
clinical response were due to lower rates of proven or suspected 
reoccurrence of diagnoses of CDAD in patients during the follow-up 
period. In addition, the applicant asserts that the effects of 
administering Fidaxomicin has minimal impact on normal gut flora due to 
its limited specificity, and could be associated with a lower risk of 
acquisition of VRE if used as a treatment option instead of 
administering Vancomycin.

                                                    Clinical Response Rates at End-of-Therapy and Sustained Response at 25 Days Post-Therapy
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                       Clinical response at end of treatment                                              Sustained response at follow-up
                                ----------------------------------------------------------------------------------------------------------------------------------------------------------------
                                    FIDAXOMICIN % (N)         Vancomycin % (N)           Difference (95% CI)          FIDAXOMICIN % (N)       Vancomycin % (N)          Difference (95% CI)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Trial 1........................  88% (N = 289)            86% (N = 307)            2.6% (-2.9%, 8.0%)              70% (N = 289)           57% (N = 307)           12.7% (4.4%, 20.9%)
Trial 2........................  88% (N = 253)            87% (N = 256)            1.0% (-4.8%, 6.8%)              72% (N = 253)           57% (N = 256)           14.6% (5.8%, 23.3%)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

    Based on the analysis described above, the applicant asserts 
Fidaxomicin meets the substantial clinical improvement criterion as a 
treatment option with the potential to decrease hospitalizations and 
physician office visits, as well as to improve the quality of life for 
patients who have been diagnosed with CDAD.
    We are concerned that this technology may not offer a substantial 
clinical improvement compared to other effective treatment alternatives 
already available in the treatment of patients who have been diagnosed 
with CDAD. In addition, although the applicant maintains that there is 
no evidence of significant clinical resistance developing with the use 
of this drug, we are still concerned about the long-term possibility 
that patients may develop resistance to this drug since the applicant 
provided no data to substantiate its claim. We are inviting public 
comment on whether or not Fidaxomicin meets the substantial clinical 
improvement criterion based on the analysis and results presented by 
the applicant.
c. Zilver[supreg] PTX[supreg] Drug Eluting Stent
    Cook[supreg] Medical submitted an application for new technology 
add-on payments for the Zilver[supreg] PTX[supreg] Drug Eluting Stent 
(Zilver[supreg] PTX[supreg]) for FY 2013. The Zilver[supreg] 
PTX[supreg] is intended for use in the treatment of peripheral artery 
disease (PAD) of the above-the-knee femoropopliteal arteries 
(superficial femoral arteries). According to the applicant, the stent 
is percutaneously inserted into the artery(s), usually by accessing the 
common femoral artery in the groin. The applicant states that an 
introducer catheter is inserted over the wire guide and into the target 
vessel where the lesion will first be treated with an angioplasty 
balloon to prepare the vessel for stenting. The applicant indicates 
that the stent is self-expanding, made of nitinol (nickel titanium), 
and is coated with the drug Paclitaxel. Paclitaxel is a drug approved 
for use as an anticancer agent and for use with coronary stents to 
reduce the risk of renarrowing of the coronary arteries after stenting 
procedures.
    The manufacturer maintains that there are currently no FDA approved 
drug-eluting stents used for superficial femoral arteries. The 
applicant expects to receive FDA approval for the stent in the second 
quarter of 2012. The technology is currently described by ICD-9-CM 
procedure code 00.60 (Insertion of drug-eluting stent(s) of the 
superficial femoral artery). We are inviting public comment regarding 
how the Zilver[supreg] PTX[supreg] meets the newness criterion.
    With regard to the cost criterion, the applicant believes that 
cases of superficial femoral arteries typically map to MS-DRGs 252 
(Other Vascular Procedures with MCC), 253 (Other Vascular Procedures 
with CC), and 254 (Other Vascular Procedures without CC/MCC). The 
applicant searched the FY 2009 MedPAR file for cases with a procedure 
code of 39.90 (Insertion of non-drug-eluting peripheral vessel stents) 
in combination with a diagnosis code of 440.20 (Atherosclerosis of the 
extremities, unspecified), 440.21 (Atherosclerosis of the extremities, 
with intermittent claudication), 440.22 (Atherosclerosis of the 
extremities with rest pain), 440.23 (Atherosclerosis of the extremities 
with ulceration), and 440.24 (Atherosclerosis of the extremities with 
gangrene). The applicant found 7,144 cases (or 24.4 percent of all 
cases) in MS-DRG 252; 9,146 cases (or 31.2 percent of all cases) in MS-
DRG 253; and 13,012 cases (or 44.4 percent of all cases) in MS-DRG 254. 
The average charge per case was $78,765 for MS-DRG 252, $63,758 for MS-
DRG 253, and $47,586 for MS-DRG 254, equating to a case-weighted 
average charge per case of $60,236.
    The case-weighted average charge per case above does not include 
charges related to the Zilver[supreg] PTX[supreg]; therefore, it is 
first necessary to remove the amount of charges related to the nondrug-
eluting peripheral vessel stents and replace them with charges related 
to the Zilver[supreg] PTX[supreg]. The applicant used two methodologies 
to remove the charges of the nondrug-eluting peripheral vessel stents 
and replace them with charges related to the Zilver[supreg] 
PTX[supreg]. Although the applicant submitted data related to the 
estimated cost of the nondrug-eluting peripheral vessel stents and the 
Zilver[supreg] PTX[supreg], the applicant noted that the cost of these 
devices was proprietary information.
    Under the first methodology, the applicant determined the amount of

[[Page 27942]]

stents per case based on the following ICD-9-CM codes on each claim: 
00.45 (Insertion of one vascular stent), 00.46 (Insertion of two 
vascular stents), 00.47 (Insertion of three vascular stents) and 00.48 
(Insertion of four or more vascular stents). If a claim had a code of 
00.48, the applicant assumed a maximum of four stents per case. The 
applicant multiplied the amount of stents used per case by the average 
market price for nondrug-eluting peripheral vessel stents and then 
converted the cost of the stents used per case to a charge by dividing 
the results by the national average CCR of 0.329 for supplies and 
equipment (76 FR 51571). The applicant removed the appropriate amount 
of charges per case and then standardized the charges per case. Because 
the applicant used FY 2009 MedPAR data, it was necessary to inflate the 
charges from FY 2009 to FY 2012. Using data from the U.S. Department of 
Labor Bureau of Labor Statistics Consumer Price Index, the applicant 
inflated the average standardized charge per case with an inflation 
factor of 6 percent. To determine the amount of Zilver[supreg] 
PTX[supreg] stents per case, instead of using the amount of stents used 
per case based on the ICD-9-CM codes above, the applicant used an 
average of 1.9 stents per case based on the Zilver[supreg] PTX[supreg] 
Global Registry Clinical Study.\29\ The applicant believed that it is 
appropriate to use data from the clinical study (to determine the 
average amount of stents used per case) rather than the actual data 
from the claims because the length of a nondrug-eluting peripheral 
vessel stent typically ranges from 80mm to 120 mm, while the length of 
the Zilver[supreg] PTX[supreg] is 80 mm (which could cause a variance 
in the actual amount of stents used per case when using the 
Zilver[supreg] PTX[supreg]). Similar to above, the applicant multiplied 
the average of 1.9 stents used per case by the future market price for 
the Zilver[supreg] PTX[supreg] and then converted the cost of the 
stents used per claim to a charge by dividing the results by the 
national average CCR of 0.329 for supplies and equipment. The applicant 
then added the amount of charges related to the Zilver[supreg] 
PTX[supreg] to the inflated average standardized charge per case and 
determined a final case-weighted average standardized charge per case 
of $60,014. Using the FY 2013 Table 10 thresholds, the case-weighted 
threshold for MS-DRGs 252, 253, and 254 was $52,293 (all calculations 
above were performed using unrounded numbers). Because the case-
weighted average standardized charge per case for the applicable MS-
DRGs exceed the case-weighted threshold amount, the applicant maintains 
that the Zilver[supreg] PTX[supreg] meets the cost criterion.
---------------------------------------------------------------------------

    \29\ Dake, M.D., Ansel, G.M., Jaff, M.R., Ohki, T., Saxon, R.R., 
Smouse, H.B., Zeller, T., Roubin, G.S., Burket, M.W., Khatib, Y., 
Snyder, S.A., Ragheb, A.O., White, J.K., Machan, L.S.(2011), 
Paclitaxel-eluting stents show superiority to balloon angioplasty 
and bare metal stents in femoropopliteal disease: twelve-month 
zilver PTX randomized study results. Circulation Cardiovascular 
Interventions, published online September 27, 2011, 495-504.
---------------------------------------------------------------------------

    The second methodology was similar to the first methodology 
described above, but the applicant used hospital-specific CCRs from the 
FY 2009 IPPS impact file to convert the cost of the nondrug-eluting 
peripheral vessel stents and the cost of the Zilver[supreg] PTX[supreg] 
to charges. In summary, the applicant determined the amount of nondrug-
eluting peripheral vessel stents used per case based on the ICD-9-CM 
codes on each claim (as discussed above). The applicant multiplied the 
amount of stents used per case by the average market price for nondrug-
eluting peripheral vessel stents and then converted the cost of the 
stents used per case to a charge by dividing by the hospital-specific 
CCR (from the FY 2009 IPPS impact file). The applicant removed the 
appropriate amount of charges per case and then standardized the 
charges per case. Similar to the step described above, because the 
applicant used FY 2009 MedPAR data, it was necessary to inflate the 
charges from FY 2009 to FY 2012. Using data from the Bureau of Labor 
Statistics Consumer Price Index, the applicant inflated the average 
standardized charge per case with an inflation factor of 6 percent. To 
determine the amount of Zilver[supreg] PTX[supreg] stents per case, 
instead of using the amount of stents used per case based on the ICD-9-
CM codes above, the applicant used an average of 1.9 stents per case 
based on the Zilver[supreg] PTX[supreg] Global Registry Clinical Study 
(because of the reason stated in the first methodology). The applicant 
then multiplied the average of 1.9 stents used per case by the future 
market price for the Zilver[supreg] PTX[supreg] and then converted the 
cost of the stents used per claim to a charge by dividing the results 
by the hospital-specific CCR (from the FY 2009 IPPS impact file). The 
applicant then added the amount of charges related to the 
Zilver[supreg] PTX[supreg] to the inflated average standardized charge 
per case and determined a final case-weighted average standardized 
charge per case of $60,339. Using the FY 2013 Table 10 thresholds, the 
case-weighted threshold for MS-DRGs 252, 253, and 254 was $52,293 (all 
calculations above were performed using unrounded numbers). Because the 
case-weighted average standardized charge per case for the applicable 
MS-DRGs exceed the case-weighted threshold amount, the applicant 
maintains that the Zilver[supreg] PTX[supreg] would meet the cost 
criterion.
    We are inviting public comment on whether or not the Zilver[supreg] 
PTX[supreg] meets the cost criterion. Additionally, we are inviting 
public comment on the methodologies used by the applicant in its 
analysis, including its assumptions regarding the types of cases in 
which this technology could potentially be used, the number of stents 
required for each case, and the CCRs used in the cost calculation.
    In an effort to demonstrate that the technology meets the 
substantial clinical improvement criterion, the applicant shared 
several findings from the clinical trial data. The applicant stated 
that current treatment options for patients who have been diagnosed 
with PAD includes angioplasty, bare metal stenting, bypass graft and 
endarterectomy. The applicant asserts that the Zilver[supreg] 
PTX[supreg] meets the substantial clinical improvement because it 
decreases the recurrence of symptoms arising from restenotic SFA 
lesions, the rate of subsequent diagnostic or therapeutic interventions 
required to address restenotic lesions, and the number of future 
hospitalizations.
    The applicant cited a 480-patient, multicenter, multinational 
randomized controlled trial that compared the Zilver[supreg] 
PTX[supreg] to balloon angioplasty; an additional component of the 
study allowed a direct comparison of the Zilver[supreg] PTX[supreg] to 
a bare (uncoated) metal Zilver[supreg] stent. The primary safety 
endpoint of the randomized controlled study was ``Event-Free Survival'' 
(EFS), defined as ``freedom from the major adverse events of death, 
target lesion revascularization, target limb ischemia requiring 
surgical intervention or surgical repair of the target vessel, and 
freedom of worsening systems as described by the Rutherford 
classification by 2 classes or to class 5 or 6.'' The primary 
effectiveness endpoint was primary patency (defined as a less than 50 
percent renarrowing).
    The applicant noted that the Zilver[supreg] PTX[supreg] had an EFS 
of 90.4 percent compared to balloon angioplasty, which had an EFS of 
83.9 percent, demonstrating that the Zilver[supreg] PTX[supreg] is as 
safe or safer than balloon angioplasty. In addition, the applicant 
noted that the Zilver[supreg] PTX[supreg] demonstrated a 50-percent 
reduction in restenosis rates compared to angioplasty and a 20-percent 
reduction compared to bare metal stents. The 12-month patency rate

[[Page 27943]]

for the Zilver[supreg] PTX[supreg] was 83.1 percent, which compared 
favorably to the balloon angioplasty patency rate of 32.8 percent. In 
the provisional stenting arm of the study, which allowed a direct 
comparison of the Zilver[supreg] PTX[supreg] and a bare metal stent, 
the Zilver[supreg] PTX[supreg] primary patency exceeded the bare metal 
stent patency by nearly 20 percent (89.9 percent versus 73.0 percent). 
The applicant stated that these differences are significant, as they 
result in a substantial clinical improvement compared to angioplasty 
and bare metal stenting, with patients being spared a recurrence of 
their leg pain and the need to be admitted to the hospital for repeat 
procedures on these treated lesions.
    The applicant also cited a prospective, multicenter, multinational, 
787-patient single arm study on the Zilver[supreg] PTX[supreg] that 
demonstrated similar safety and effectiveness results consistent with 
those from the pivotal randomized controlled study above. The applicant 
cited an EFS for the Zilver[supreg] PTX[supreg] of 89.0 percent and an 
86.2 percent primary patency rate. The applicant stated that these 
results confirm the safety and effectiveness of the Zilver[supreg] 
PTX[supreg], and compare favorably to current results for angioplasty 
and bare metal stenting. The applicant added that these results also 
demonstrate a 67 to 81 percent relative reduction in Target Lesion 
Revascularization (the need to retreat an already treated lesion that 
has restenosed, resulting in a recurrence of symptoms) rates compared 
to recently published results of contemporary bare metal stents.\30\
---------------------------------------------------------------------------

    \30\ Dake, M. D., Scheinert, D., Tepe, G., Tessarek, J., 
Fanelli, F., Bosiers, M., et al. (2011). Nitinol stents with 
polymer-free paclitaxel coating for lesions in the superficial 
femoral and popliteal arteries above the knee: Twelve-month safety 
and effectiveness results from the zilver PTX single-arm clinical 
study. Journal of Endovascular Therapy, 18(5), 613-623.
---------------------------------------------------------------------------

    We are inviting public comment regarding whether the Zilver[supreg] 
PTX[supreg] meets the substantial clinical improvement criterion.
d. Zenith[supreg] Fenestrated Abdominal Aortic Aneurysm (AAA) 
Endovascular Graft
    Cook[supreg] Medical submitted an application for new technology 
add-on payments for the Zenith[supreg] Fenestrated Abdominal Aortic 
Aneurysm (AAA) Endovascular Graft (Zenith[supreg] F. Graft) for FY 
2013. The applicant stated that the current treatment for patients who 
have had an AAA is an endovascular graft. The applicant explained that 
the Zenith[supreg] F. Graft is an implantable device designed to treat 
patients who have an AAA and who are anatomically unsuitable for 
treatment with currently approved AAA endovascular grafts because of 
the length of the infrarenal aortic neck. The applicant noted that, 
currently, an AAA is treated through an open surgical repair or medical 
management for those patients not eligible for currently approved AAA 
endovascular grafts.
    The applicant stated that the Zenith[supreg] F. Graft is custom-
made for each patient. It is a modular system consisting of three 
components: a two-part main body graft and one iliac leg. The two-part 
main body of the graft consists of a proximal tubular graft and a 
distal bifurcated graft body. The proximal body graft contains 
precisely located holes (fenestrations) and/or cut-outs from the 
proximal margin (scallops) of the polyester graft material along with a 
bare proximal stent with barbs to provide fixation. The iliac leg 
component, which couples with the main bifurcated body, completes the 
basic fenestrated endograft.
    With respect to newness, the applicant stated that FDA approval for 
the use of the Zenith[supreg] F. Graft was granted on April 4, 2012. 
The technology is described by ICD-9-CM procedure code 39.78 
(Endovascular implantation of branching or fenestrated graft(s) in 
aorta), which became effective October 1, 2011. While procedure code 
39.78 maps to MS-DRGs 252, 253, and 254 (Other Vascular Procedures with 
MCC, with CC, and without MCC/CC, respectively), the applicant believes 
that MS-DRGs 237 and 238 (Major Cardiovascular Procedures with MCC and 
without MCC, respectively) would be a more appropriate assignment for 
procedure code 39.78. (We note that in section III.G.3.b. of this 
preamble, we discuss our response to the request for consideration of 
MS-DRGs 237 and 238 as a more appropriate assignment for procedure code 
39.78.) We are inviting public comment regarding whether the 
Zenith[supreg] F. Graft meets the newness criterion for new technology 
add-on payment.
    With regard to the cost criterion, the applicant used clinical 
trial data and three separate analyses of FY 2010 MedPAR data to 
demonstrate that the Zenith[supreg] F. Graft meets the cost criteria. 
The clinical trial data \31\ was based on 173 claims (all Medicare 
patients except one patient). The applicant found that, of the 173 
cases, 35 cases (or 20.2 percent of all cases) mapped to MS-DRG 252, 86 
cases (or 49.7 percent of all cases) mapped to MS-DRG 253, and 52 cases 
(or 30.1 percent of all cases) mapped to MS-DRG 254, equating to a 
case-weighted average charge per case of $87,733.
---------------------------------------------------------------------------

    \31\ Evaluation of the Safety and Effectiveness of the Zenith(R) 
Fenestrated AAA Endovascular Graft, Zenith Fenestrated AAA 
Endovascular Graft Pivotal Study, Clinicaltrials.gov: Identifier 
NCT00875563 and a Physician Sponsored IDE.
---------------------------------------------------------------------------

    The applicant noted that the investigational devices (the bare 
metal renal stents that are used in the procedure and the 
Zenith[supreg] F. Graft) were sold to the trial sites at reduced 
prices. Therefore, the average charge per case cited above contains 
reduced charges for the investigational devices rather than commercial 
charges. As a result, the applicant believes it is necessary to remove 
the reduced charges for the investigational devices and replace them 
with commercial charges, in order to determine the cost of the 
investigational devices for each of the three analyses. Although the 
applicant submitted data related to the estimated cost of the 
investigational devices, the applicant noted that the cost of these 
devices was proprietary information.
    To remove the reduced charges for the investigational devices, the 
applicant searched the clinical trial claims data and removed those 
charges with a revenue code of 0624 (investigational device exempt). 
Because the claims data for the clinical trial ranged from 2002 to 
2010, it was necessary to inflate the charges. Using data from the U.S. 
Department of Labor Bureau of Labor Statistics (BLS) Consumer Price 
Index, the applicant applied an inflation factor to the claim charges 
ranging from 3 percent to 27 percent, depending on the year of the 
claim. After inflating the charges, the applicant then added the 
commercial charges of the investigational devices to the inflated 
charge per case. To determine the amount of commercial charges related 
to the investigational devices, the applicant divided the cost of the 
investigational devices by the hospital-specific CCR from the FY 2012 
IPPS Final Rule Impact File. After adding the charges of the 
investigational devices to the inflated charges, the applicant then 
standardized the charges on each claim. As a result, the applicant 
determined a final case-weighted average standardized charge per case 
of $122,821. Using the FY 2013 Table 10 thresholds, the case-weighted 
threshold for MS-DRGs 252, 253, and 254 was $53,869 (all calculations 
above were performed using unrounded numbers). Because the final case-
weighted average standardized charge per case for the applicable MS-
DRGs exceeds the case-weighted threshold amount, the applicant 
maintains that the Zenith[supreg] F.

[[Page 27944]]

Graft meets the cost criterion for new technology add-on payment.
    We note that, in addition to the analysis above, the applicant 
conducted a similar cost analysis using drug eluting renal stents 
instead of bare metal renal stents. The applicant noted that the price 
of drug eluting renal stents exceeds the price of bare metal renal 
stents by approximately $2,200 per stent. Therefore, the applicant 
asserted that if the price of drug eluting renal stents is more 
expensive than bare metal renal stents and the Zenith[supreg] F. Graft 
meets the cost criteria with bare metal renal stents, the 
Zenith[supreg] F. Graft also meets the cost criteria when the applicant 
uses drug eluting renal stents in its analysis.
    As mentioned above, the applicant conducted three separate analyses 
using FY 2010 MedPAR data to identify cases eligible for the 
Zenith[supreg] F. Graft to demonstrate that it meets the cost 
criterion. Cases of endovascular implantation of branching or 
fenestrated graft(s) in the aorta are coded with procedure code 39.78, 
which currently map to MS-DRGs 252, 253, and 254. Because procedure 
code 39.78 was effective October 1, 2011, the applicant noted that it 
was unable to conduct a MedPAR data analysis with claims that contained 
a procedure code of 39.78. Therefore, in order to identify cases 
eligible for the Zenith[supreg] F. Graft prior to October 1, 2011, the 
applicant searched the MedPAR file for the following three scenarios. 
The first analysis searched the FY 2010 MedPAR file for cases with 
procedure code 39.71 (Endovascular implantation of graft in abdominal 
aorta) in combination with a diagnosis code of 441.4 (Abdominal 
aneurysm without mention of rupture). The applicant conducted this 
analysis using MS-DRGs 237 and 238 rather than MS-DRGs 252, 253, and 
254 because procedure code 39.71 maps to MS-DRGs 237 and 238. The 
applicant found 1,679 cases (or 9.1 percent of all cases) in MS-DRG 237 
and 16,793 cases (or 90.9 percent of all cases) in MS-DRG 238. The 
average charge per case was $122,252 for MS-DRG 237 and $76,883 for MS-
DRG 238, equating to a case-weighted average charge per case of 
$81,006.
    The applicant noted that these MedPAR claims data included charges 
for the existing stent graft but did not include charges for the 
Zenith[supreg] F. Graft. Therefore, the applicant stated that it was 
first necessary to remove the amount of charges related to the existing 
stent graft and replace them with charges for the Zenith[supreg] F. 
Graft. Although the applicant submitted data related to the estimated 
cost of the existing stent graft and the Zenith[supreg] F. Graft, the 
applicant noted that the cost of these devices was proprietary 
information.
    To determine the amount of charges for the existing stent graft, 
the applicant divided the costs for the existing stent graft by the 
national average CCR of 0.329 for supplies and equipment (76 FR 51571). 
The applicant removed the appropriate amount of charges per case from 
the average charge per case. Because the applicant used FY 2010 MedPAR 
data, it was necessary to inflate the charges from FY 2010 to FY 2012. 
Using data from the BLS' Consumer Price Index, the applicant inflated 
the case-weighted average standardized charge per case with an 
inflation factor of 4 percent. The applicant then determined the amount 
of charges for the Zenith[supreg] F. Graft by dividing the costs of the 
Zenith[supreg] F. Graft by the national average CCR of 0.329 for 
supplies. The applicant then added the amount of charges related to the 
Zenith[supreg] F. Graft to the inflated charges and then standardized 
the charges. The applicant determined a final case-weighted average 
standardized charge per case of $80,509. Using the FY 2013 Table 10 
thresholds, the case-weighted threshold for MS-DRGs 237and 238 was 
$72,512 (all calculations above were performed using unrounded 
numbers). Because the final case-weighted average standardized charge 
per case for the applicable MS-DRGs exceeds the case-weighted threshold 
amount under this first analysis, the applicant maintains that the 
Zenith[supreg] F. Graft meets the cost criterion for new technology 
add-on payment. The applicant noted that the FY 2013 Table 10 
thresholds for MS-DRGs 237 and 238 are much higher than the FY 2013 
Table 10 thresholds for MS-DRGs 252, 253, and 254. Therefore, the 
applicant believes that if the final case-weighted average standardized 
charge per case exceeds the case-weighted threshold for MS-DRGs 237 and 
238, it would exceed any case-weighted threshold for MS-DRGs 252, 253, 
and 254.
    For their second analysis, the applicant searched the FY 2010 
MedPAR file for cases with procedure code 38.44 (Resection of vessel 
with replacement, aorta) in combination with a diagnosis code of 441.4. 
Similar to the first analysis, the applicant conducted this analysis 
using MS-DRGs 237 and 238 rather than MS-DRGs 252, 253, and 254 because 
procedure code 38.44 maps to MS-DRGs 237 and 238. The applicant found 
1,310 cases (or 37.9 percent of all cases) in MS-DRG 237 and 2,145 
cases (or 62.1 percent of all cases) in MS-DRG 238. The average charge 
per case was $110,708 for MS-DRG 237 and $64,095 for MS-DRG 238, 
equating to a case-weighted average charge per case of $81,769.
    The next steps of the applicant's second analysis were similar to 
the steps in the first analysis. The applicant noted that the MedPAR 
claims data included charges for the vascular graft for open procedures 
but did not include charges for the Zenith[supreg] F. Graft. Therefore, 
the applicant indicated that it was first necessary to remove the 
amount of charges related to the vascular graft for open procedures and 
replace them with charges for the Zenith[supreg] F. Graft. Although the 
applicant submitted data related to the estimated cost of the vascular 
graft for open procedures and the Zenith[supreg] F. Graft, the 
applicant noted that the cost of these devices was proprietary 
information.
    To determine the amount of charges for the vascular graft for open 
procedures, the applicant divided the costs for the vascular graft for 
open procedures by the national average CCR of 0.329 for supplies and 
equipment (76 FR 51571). The applicant removed the appropriate amount 
of charges per case from the average charge per case. Similar to the 
first analysis, the applicant inflated the case-weighted average charge 
per case with an inflation factor of 4 percent (based on data from the 
BLS' Consumer Price Index). The applicant then determined the amount of 
charges for the Zenith[supreg] F. Graft by dividing the costs of the 
Zenith[supreg] F. Graft by the national average CCR of 0.329 for 
supplies. The applicant then added the amount of charges related to the 
Zenith[supreg] F. Graft to the inflated charges and then standardized 
the charges. The applicant determined a final case-weighted average 
standardized charge per case of $118,774. Using the FY 2013 Table 10 
thresholds, the case-weighted threshold for MS-DRGs 237 and 238 was 
$81,776 (all calculations above were performed using unrounded 
numbers). Because the final case-weighted average standardized charge 
per case for the applicable MS-DRGs exceeds the case-weighted threshold 
amount in this second analysis, the applicant maintains that the 
Zenith[supreg] F. Graft meets the cost criterion for new technology 
add-on payments. As discussed above, the applicant noted that the FY 
2013 Table 10 thresholds for MS-DRGs 237 and 238 are much higher 
($101,728 for MS-DRG 237 and $69,591 for MS-DRG 238) than the FY 2013 
Table 10 thresholds for MS-DRGs 252, 253, and 254 ($60,619 for MS-DRG 
252, $56,719 for MS-DRG 253 and $44,611 for MS-DRG 254).

[[Page 27945]]

Therefore, the applicant believes that if the final case-weighted 
average standardized charge per case exceeds the case-weighted 
threshold for MS-DRGs 237 and 238, it would exceed any case-weighted 
threshold for MS-DRGs 252, 253, and 254.
    While the applicant removed charges for the vascular graft for open 
procedures, we are concerned that the applicant did not remove charges 
for other services such as extra operating room time and other possible 
charges that would be incurred during an open procedure but would 
possibly not be incurred during cases when the Zenith[supreg] F. Graft 
is implanted.
    The third analysis was a combination of the first and second 
analyses discussed above. The applicant searched the FY 2010 MedPAR 
file for cases with a procedure code of 38.44 or 39.71 in combination 
with a diagnosis code of 441.4. Similar to the first and second 
analyses, the applicant conducted this analysis using MS-DRGs 237 and 
238 rather than MS-DRGs 252, 253, and 254 because both procedure codes 
map to MS-DRGs 237 and 238. The applicant found 2,981 cases (or 13.6 
percent of all cases) in MS-DRG 237 and 18,928 cases (or 86.4 percent 
of all cases) in MS-DRG 238. The applicant removed those cases that had 
both procedure codes 38.44 and 39.71 on the claim. The average charge 
per case was $116,826 for MS-DRG 237 and $75,298 for MS-DRG 238, 
equating to a case-weighted average charge per case of $80,948.
    The applicant noted that the MedPAR claims data included charges 
for the existing stent graft or vascular graft for open procedures but 
did not include charges for the Zenith[supreg] F. Graft. Therefore, the 
applicant stated that it was first necessary to remove the amount of 
charges related to the existing stent graft or vascular graft for open 
procedures and replace them with charges for the Zenith[supreg] F. 
Graft. Similar to the first and second analyses, to determine the 
amount of charges for the existing stent graft or vascular graft for 
open procedures, the applicant divided the costs for these devices by 
the national average CCR of 0.329 for supplies and equipment (76 FR 
51571). The applicant removed the appropriate amount of charges per 
case from the average charge per case. The applicant inflated the case-
weighted average standardized charge per case with an inflation factor 
of 4 percent (based on data from the BLS' Consumer Price Index). The 
applicant then determined the amount of charges for the Zenith[supreg] 
F. Graft by dividing the costs of the Zenith[supreg] F. Graft by the 
national average CCR of 0.329 for supplies. The applicant then added 
the amount of charges related to the Zenith[supreg] F. Graft to the 
inflated charges and then standardized the charges. As a result, the 
applicant determined a final case-weighted average standardized charge 
per case of $86,081. Using the FY 2013 Table 10 thresholds, the case-
weighted threshold for MS-DRGs 237 and 238 was $73,964 (all 
calculations above were performed using unrounded numbers). Because the 
final case-weighted average standardized charge per case for the 
applicable MS-DRGs exceeds the case-weighted threshold amount, the 
applicant maintains that the Zenith[supreg] F. Graft meets the cost 
criterion for new technology add-on payment. As discussed above, the 
applicant noted that the FY 2013 Table 10 thresholds for MS-DRGs 237 
and 238 are much higher than the FY 2013 Table 10 thresholds for MS-
DRGs 252, 253, and 254. The applicant believes that if the final case-
weighted average standardized charge per case exceeds the case-weighted 
threshold for MS-DRGs 237-238, it would exceed any case-weighted 
threshold for MS-DRGs 252, 253, and 254.
    Similar to our concerns with the second analysis, we are concerned 
that for this third analysis the applicant did not remove charges for 
other services such as extra operating room time and other possible 
charges that would be incurred during an open procedure, but would 
possibly not be incurred during cases when the Zenith[supreg] F. Graft 
is implanted.
    We appreciate the multiple analyses of the FY 2010 MedPAR data 
provided by the applicant and are inviting public comment on whether or 
not the Zenith[supreg] F. Graft meets the cost criterion for new 
technology add-on payments. In addition, we are inviting public comment 
on the methodologies used by the applicant, specifically on whether and 
the degree to which the second and third analyses may contain charges 
not relevant to the final case-weighted standardized charge per case 
determined by the applicant.
    The applicant maintains that the technology also meets the 
substantial clinical improvement criterion. The applicant first 
explained that current treatment for those patients who are not 
eligible for standard endovascular AAA devices is an open repair. The 
applicant referenced data from a published series \32\ that 
demonstrated an open repair can lead to a high risk of morbidity and 
increased mortality. The applicant added that an open procedure 
requires suprarenal aortic cross-clamping.\33\ The applicant also noted 
that there is a high risk of blood loss during an open procedure and 
the de-branching of vessels increases the level of surgical risk. The 
applicant further noted that 30 to 40 percent of patients who have an 
infrarenal AAA cannot be treated with current commercial devices 
because of anatomical reasons (for example, insufficient neck length to 
achieve graft adequate seal). The applicant added that use of standard 
endografts in patients with neck lengths less than 10 mm can result in 
a fourfold increase in an endoleak.\34\
---------------------------------------------------------------------------

    \32\ Wilderman, M. et al. Fenestrated Grafts or Debranching 
Procedures for Complex Abdominal Aortic Aneurysms. Perspectives in 
Vascular Surgery and Endovascular Therapy, March 2009; 21(1): 13-18.
    \33\ Jongkind V, Yeung K, et al. Juxtarenal aortic aneurysm 
repair. Journal of Vascular Surgery 2010 Sept; 29(3) 760-767.
    \34\ Amiot, S., et al., Fenestrated endovascular grafting: The 
French multicentre experience. Eur J Vasc Endovasc Surg, 2010. 
39(5): p. 537-44.
---------------------------------------------------------------------------

    The applicant also stated that the intended use of the 
Zenith[supreg] F. Graft differs from standard AAA endovascular grafts 
in that the fenestrated device provides physicians the ability to treat 
patients who have infrarenal aortic neck lengths as short as 4 mm, 
where standard endovascular AAA devices require an infrarenal aortic 
neck length of at least 10 to 15 mm. Therefore, the applicant believes 
that the Zenith[supreg] F. Graft offers an additional AAA repair option 
to those patients who have limited surgical treatment options (for 
example, if short infrarenal neck lengths make the patients at too high 
a risk to be candidates for open surgical repair).
    The applicant also stated, for patients who have AAAs and short 
infrarenal neck lengths, the Zenith[supreg] F. Graft offers a less 
invasive treatment option than open surgical repair. The applicant 
referred to several sources of literature to support the following 
endpoints for fenestrated endovascular aortic repair (EVAR) versus open 
repair of the juxtarenal AAA relative to open repair of the juxtarenal 
AAA: Reduced peri-operative mortality (2.4 percent (range: 0 to 5.7 
percent)) \35,36,37,38,39,40,41,42,43\

[[Page 27946]]

reported for fenestrated EVAR repairs versus 2.9 percent (range 0 to 
7.4 percent) \44,45\ reported for open repair of juxtarenal AAA); \46\ 
reduced morbidity by reducing renal failure requiring permanent 
dialysis (1.9 percent (pooled average) for fenestrated EVAR repairs 
versus 3.4 percent reported for open repair of juxtarenal AAA); shorter 
hospital stay and less operative blood loss to open repair. The 
applicant maintains that fenestrated EVAR repair results in an average 
length of stay of 3.5 days, compared to 14.2 days for open repair of 
juxtarenal AAA, and blood loss of 537 ml, compared to 2586 ml for open 
repair of juxtarenal AAA.
---------------------------------------------------------------------------

    \35\ Nordon, I.M., et al., Modern treatment of juxtarenal 
abdominal aortic aneurysms with fenestrated endografting and open 
repair--a systematic review. Eur J Vasc Endovasc Surg, 2009. 38(1): 
p. 35-41
    \36\ Verhoeven, E.L., et al., Fenestrated stent grafting for 
short-necked and juxtarenal abdominal aortic aneurysm: An 8-year 
single-centre experience. Eur J Vasc Endovasc Surg, 2010. 39(5): p. 
529-36.
    \37\ Chisci E, Kristmundsson T, de Donato G, et al. The AAA with 
a challenging neck: Outcome of open versus endovascular repair with 
standard and fenestrated stent-grafts. J Endovasc Ther 2009;16:137-
146.
    \38\ Amiot, S., et al., Fenestrated endovascular grafting: The 
French multicentre experience. Eur J Vasc Endovasc Surg, 2010. 
39(5): p. 537-44.
    \39\ Kristmundsson T, Sonesson B, Malina M, et al. Fenestrated 
endovascular repair for juxtarenal aortic pathology. J Vasc Surg 
2009;49:568-574.
    \40\ Beck AW, Bos WT, Vourliotakis G, et al. Fenestrated and 
branched endograft repair of juxtarenal aneurysms after previous 
open aortic reconstruction. J Vasc Surg 2009;49:1387-1394.
    \41\ Tambyraja, A.L., et al., Fenestrated aortic endografts for 
juxtarenal aortic aneurysm: Medium term outcomes. Eur J Vasc 
Endovasc Surg, 2011. 42(1): p. 54-8.
    \42\ Unpublished results, Evaluation of the Safety and 
Effectiveness of the Zenith(R) Fenestrated AAA Endovascular Graft, 
Zenith Fenestrated AAA Endovascular Graft Pivotal Study, 
Clinicaltrials.gov identifier NCT00875563.
    \43\ Unpublished results, British Society of Endovascular 
Therapy-sponsored GlobalStar Collaborative Study.
    \44\ Jongkind V, Yeung K, et al. Juxtarenal aortic aneurysm 
repair. J. Vasc. Surg. 2010 Sept; 29(3) 760-767.
    \45\ Landry G, Lau I, Liem T, Mitchell E, Moneta G.. Open 
abdominal aortic aneurysm repair in the endovascular era: Effect of 
clamp site on outcomes. Arch. Surg., 144 (9) Sep. 2009, 811-6.
---------------------------------------------------------------------------

    We note that the information provided by the applicant to evaluate 
substantial clinical improvement compares this technology to open 
surgical repair. We are concerned that the applicant does not present 
publicly available information comparing the technology to medical 
management, which the applicant mentions as another method for treating 
patients anatomically unsuited for currently approved AAA endovascular 
grafts. In these comparisons, we are also concerned that information 
regarding the longevity of the Zenith[supreg] F. Graft as well as long-
term complications and secondary interventions or reinterventions has 
not been presented. In terms of the data presented by the applicant, we 
are concerned that these clinical study data were nonrandomized, did 
not differentiate between patients by infrarenal neck length and/or 
suitability for other endovascular grafts, and were of noninferiority. 
We are inviting public comment on whether or not the Zenith[supreg] F. 
Graft meets the substantial clinical improvement criterion.

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

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 delineations 
of statistical areas established by the Office of Management and Budget 
(OMB). A discussion of the proposed FY 2013 hospital wage index based 
on the statistical areas, including OMB's revised definitions of 
Metropolitan Areas, appears under section III.B. 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 of the Act 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 proposed adjustment for 
FY 2013 is discussed in section II.B. of the Addendum to this proposed 
rule.
    As discussed below in section III.H. 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 proposed budget neutrality 
adjustment for FY 2013 is discussed in section II.A.4.b. of the 
Addendum to this proposed 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 proposing to 
apply beginning October 1, 2012 (the FY 2013 wage index) appears under 
section III.F. of this preamble.
    In response to concerns frequently expressed by providers and other 
relevant parties that the current wage index system does not 
effectively reflect the true variation in labor costs for a large 
cross-section of hospitals, two studies were undertaken by the 
Department. First, section 3137(b) of the Affordable Care Act required 
the Secretary to submit to Congress a report that includes a plan to 
comprehensively reform the Medicare wage index applied under section 
1886(d) of the Act. In developing the plan, the Secretary was directed 
to take into consideration the goals for reforming the wage index that 
were set forth by the Medicare Payment Advisory Commission (MedPAC) in 
its June 2007 report entitled ``Report to Congress: Promoting Greater 
Efficiency in Medicare'' and to ``consult with relevant affected 
parties.'' Second, the Secretary commissioned the Institute of Medicine 
(IOM) to ``evaluate hospital and physician geographic payment 
adjustments, the validity of the adjustment factors, measures and 
methodologies used in those factors, and sources of data used in those 
factors.'' Reports on both of these studies recently have been 
released. We refer readers to section IX.B. of this preamble for 
summaries of the studies, their findings, and recommendations on 
reforming the wage index system.

B. 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 (CBSAs) established by OMB 
and announced in December 2003 (69 FR 49027). For a discussion of OMB's 
delineations 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). We also discussed in the FY 2012 IPPS/LTCH PPS 
final rule (76 FR 51582) that, in 2013, OMB plans to announce new area 
delineations based on new standards adopted in 2010 (75 FR 37246) and 
the

[[Page 27947]]

2010 Census of Population and Housing data. For the FY 2013 wage index, 
to be effective October 1, 2012 and before the availability of OMB's 
new area delineations, we are proposing to use the same labor market 
areas that we used for the FY 2012 wage index (76 FR 51581).

C. Worksheet S-3 Wage Data for the FY 2013 Proposed Wage Index

    The FY 2013 proposed wage index values are based on the data 
collected from the Medicare cost reports submitted by hospitals for 
cost reporting periods beginning in FY 2009 (the FY 2012 wage indices 
were based on data from cost reporting periods beginning during FY 
2008).
1. Included Categories of Costs
    The FY 2013 proposed 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 pension costs (based on 
policies adopted in the FY 2012 IPPS/LTCH PPS final rule (76 FR 51586 
through 51590) and other deferred compensation costs.
2. Excluded Categories of Costs
    Consistent with the wage index methodology for FY 2012, the 
proposed wage index for FY 2013 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 proposed FY 2013 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 (HHAs), 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, other 
than for LTCHs. Such comments should be made in response to separate 
proposed rules for those providers.

D. Verification of Worksheet S-3 Wage Data

    The wage data for the FY 2013 proposed wage index were obtained 
from Worksheet S-3, Parts II and III of the Medicare cost report for 
cost reporting periods beginning on or after October 1, 2008, and 
before October 1, 2009. For wage index purposes, we refer to cost 
reports during this period as the ``FY 2009 cost report,'' the ``FY 
2009 wage data,'' or the ``FY 2009 data.'' 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 2009 data submitted to us as of 
March 2, 2011. 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/MACs to revise or verify data 
elements that result in specific edit failures. For the FY 2013 
proposed wage index, we identified and excluded 32 providers with data 
that was too aberrant to include in the proposed wage index, although 
if data elements for some of these providers are corrected, we intend 
to include some of these providers in the FY 2013 final 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 11, 2012. We intend that all 
unresolved data elements will be resolved by the date the final rule is 
issued. The revised data will be reflected in the FY 2013 IPPS final 
rule.
    In constructing the FY 2013 proposed wage index, we included the 
wage data for facilities that were IPPS hospitals in FY 2009, 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. 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 proposed rule, we 
removed 7 hospitals that converted to CAH status between February 15, 
2011, the cut-off date for CAH exclusion from the FY 2012 wage index, 
and February 14, 2012, the cut-off date for CAH exclusion from the FY 
2013 wage index. After removing hospitals with aberrant data and 
hospitals that converted to CAH status, the proposed FY 2013 wage index 
is calculated based on 3,443 hospitals.
    For the FY 2013 proposed wage index, we allotted the wages and 
hours data for a multicampus hospital among the different labor market 
areas where its campuses are located in the same manner we allotted 
such hospitals' data in the FY 2012 wage index (76 FR 51591). Table 2 
containing the FY 2013 proposed wage index associated with this 
proposed rule (available on the CMS Web site) includes separate wage 
data for the campuses of four multicampus hospitals.

E. Method for Computing the Proposed FY 2013 Unadjusted Wage Index

    The method used to compute the FY 2013 proposed wage index without 
an occupational mix adjustment follows the same methodology that we 
used to compute the FY 2012 final wage index without an occupational 
mix adjustment (76 FR 51591 through 51593).
    As discussed in that final rule, in ``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, 2008, through April 15, 2010, for private industry 
hospital workers from the BLS' Compensation and Working Conditions. 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 we are 
not proposing any changes to the usage for FY 2013. The factors used to 
adjust the hospital's data were based on the midpoint of the cost 
reporting period, as indicated below.

[[Page 27948]]



                    Midpoint of Cost Reporting Period
------------------------------------------------------------------------
                                                            Adjustment
                  After                       Before          factor
------------------------------------------------------------------------
10/14/2008..............................      11/15/2008         1.03003
11/14/2008..............................      12/15/2008         1.02786
12/14/2008..............................      01/15/2009         1.02582
01/14/2009..............................      02/15/2009         1.02386
02/14/2009..............................      03/15/2009         1.02199
03/14/2009..............................      04/15/2009         1.02014
04/14/2009..............................      05/15/2009         1.01826
05/14/2009..............................      06/15/2009         1.01635
06/14/2009..............................      07/15/2009         1.01446
07/14/2009..............................      08/15/2009         1.01263
08/14/2009..............................      09/15/2009         1.01086
09/14/2009..............................      10/15/2009         1.00910
10/14/2009..............................      11/15/2009         1.00728
11/14/2009..............................      12/15/2009         1.00539
12/14/2009..............................      01/15/2010         1.00352
01/14/2010..............................      02/15/2010         1.00172
02/14/2010..............................      03/15/2010         1.00000
03/14/2010..............................      04/15/2010         0.99830
------------------------------------------------------------------------

    For example, the midpoint of a cost reporting period beginning 
January 1, 2009, and ending December 31, 2009, is June 30, 2009. An 
adjustment factor of 1.01446 would be applied to the wages of a 
hospital with such a cost reporting period.
    Using the data as described above and in the FY 2012 IPPS-LTCH PPS 
final rule, the FY 2013 proposed national average hourly wage 
(unadjusted for occupational mix) is $37.4023. The proposed Puerto Rico 
overall average hourly wage (unadjusted for occupational mix) is 
$15.8467.

F. Proposed Occupational Mix Adjustment to the FY 2013 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 2013 Proposed Occupational Mix 
Adjustment Based on the 2010 Occupational Mix Survey
    As provided for under section 1886(d)(3)(E) of the Act, we collect 
data every 3 years on the occupational mix of employees for each short-
term, acute care hospital participating in the Medicare program.
    As discussed in the FY 2012 IPPS/LTCH PPS final rule (76 FR 51582 
through 51586), the FY 2013 proposed wage index is based on data 
collected on the new 2010 Medicare Wage Index Occupational Mix Survey 
(Form CMS-10079 (2010)). The survey is available on the CMS Web site 
at: http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp#TopOfPage 
and through the fiscal intermediaries/MACs. Hospitals were required to 
submit their completed 2010 surveys to their fiscal intermediaries/MACs 
by July 1, 2011. The preliminary, unaudited 2010 survey data was 
released in early October 2011, along with the FY 2009 Worksheet S-3 
wage data, for the FY 2013 wage index review and correction process.
2. Calculation of the Proposed Occupational Mix Adjustment for FY 2013
    For FY 2013, we are proposing to calculate the occupational mix 
adjustment factor using the same methodology that we used for the FY 
2012 wage index (76 FR 51582 through 51586). As a result of applying 
this methodology, the FY 2013 proposed occupational mix adjusted 
national average hourly wage is $37.3721. The FY 2013 proposed 
occupational mix adjusted Puerto Rico-specific average hourly wage is 
$15.8838.
    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 proposed FY 
2013 wage index. For the FY 2010 survey, the response rate was 91.7 
percent. In the FY 2013 proposed wage index established in this 
proposed rule, we applied proxy data for noncompliant hospitals, new 
hospitals, or hospitals that submitted erroneous or aberrant data in 
the same manner that we applied proxy data for such hospitals in the FY 
2012 wage index occupational mix adjustment (76 FR 51586).
    In the FY 2011 IPPS/LTCH PPS proposed and final rules (75 FR 23943 
and 50167, respectively), we stated that, in order to gain a better 
understanding of why some hospitals are not submitting the occupational 
mix data, we will require hospitals that do not submit occupational mix 
data to provide an explanation for not complying. This requirement was 
effective beginning with the new 2010 occupational mix survey. We 
instructed fiscal intermediaries/MACs to begin gathering this 
information as part of the FY 2013 wage index desk review process. We 
will review these data for future analysis and consideration of 
potential penalties for noncompliant hospitals.

[[Page 27949]]

G. Analysis and Implementation of the Proposed Occupational Mix 
Adjustment and the Proposed FY 2013 Occupational Mix Adjusted Wage 
Index

1. Analysis of the Occupational Mix Adjustment and the Occupational Mix 
Adjusted Wage Index
    As discussed in section III.F. of this preamble, for FY 2013, we 
are proposing to apply the occupational mix adjustment to 100 percent 
of the proposed FY 2013 wage index. We calculated the proposed 
occupational mix adjustment using data from the 2010 occupational mix 
survey data, using the methodology described in the FY 2012 IPPS-LTCH 
PPS final rule (76 FR 51582 through 51586).
    Using the occupational mix survey data and applying the 
occupational mix adjustment to 100 percent of the FY 2013 wage index 
results in a proposed national average hourly wage of $37.3721 and a 
proposed Puerto-Rico specific average hourly wage of $15.8838. After 
excluding data of hospitals that either submitted aberrant data that 
failed critical edits, or that do not have FY 2009 Worksheet S-3, Parts 
II and III, cost report data for use in calculating the proposed FY 
2013 wage index, we calculated the proposed FY 2013 wage index using 
the occupational mix survey data from 3,443 hospitals. Using the 
Worksheet S-3, Parts II and III, cost report data of 3,443 hospitals 
and occupational mix survey data from 3,157 hospitals represents a 91.7 
percent survey response rate. The proposed FY 2013 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............................................     37.362735568
National LPN and Surgical Technician...................     21.762566488
National Nurse Aide, Orderly, and Attendant............     15.312800678
National Medical Assistant.............................     17.240367808
National Nurse Category................................     31.807020884
------------------------------------------------------------------------

    The proposed national average hourly wage for the entire nurse 
category as computed in Step 5 of the occupational mix calculation is 
$31.807020884. 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 2010 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 43.34 
percent, and the national percentage of hospital employees in the all 
other occupations category is 56.66 percent. At the CBSA level, the 
percentage of hospital employees in the nurse category ranged from a 
low of 27.03 percent in one CBSA, to a high of 59.70 percent in another 
CBSA.
    We also compared the FY 2013 wage data adjusted for occupational 
mix from the 2010 survey to the FY 2013 wage data adjusted for 
occupational mix from the 2007-2008 survey. This analysis illustrates 
the effect on area wage indices of using the 2010 survey data compared 
to the 2007-2008 survey data; that is, it shows whether hospitals' wage 
indices are increasing or decreasing under the current survey data as 
compared to the prior survey data. Our analysis shows that the FY 2013 
wage index values for 190 (48.6 percent) urban areas and 18 (37.5 
percent) rural areas will increase. Fifty (12.8 percent) urban areas 
will increase by 1 percent or more, and no urban areas will increase by 
5 percent or more. Three (6.3 percent) rural areas will increase by 1 
percent or more, and no rural areas will increase by 5 percent or more. 
However, the wage index values for 197 (50.4 percent) urban areas and 
30 (62.5 percent) rural areas will decrease using the 2010 data. Sixty-
four (16.4 percent) urban areas will decrease by 1 percent or more, and 
no urban areas will decrease by 5 percent or more. Three (6.3 percent) 
rural areas will decrease by 1 percent or more, and no rural areas will 
decrease by 5 percent or more. The largest positive impacts using the 
2010 data compared to the 2007-2008 data are 4.37 percent for an urban 
area and 3.24 percent for a rural area. The largest negative impacts 
are 4.86 percent for an urban area and 2.28 percent for a rural area. 
Four urban areas and no rural areas will be unaffected. These results 
indicate that the wage indices of more CBSAs overall (51.7 percent) 
will be decreasing due to application of the 2010 occupational mix 
survey data as compared to the 2007-2008 survey data to the wage index. 
Further, a larger percentage of urban areas (48.6 percent) will benefit 
from the 2010 occupational mix survey as compared to the 2007-2008 
survey than will rural areas (37.5 percent).
    We compared the proposed FY 2013 occupational mix adjusted wage 
indices for each CBSA to the proposed unadjusted wage indices for each 
CBSA. As a result of applying the occupational mix adjustment to the 
wage data, the proposed wage index values for 207 (52.9 percent) urban 
areas and 32 (66.7 percent) rural areas would increase. One hundred 
seventeen (29.9 percent) urban areas would increase by 1 percent or 
more, and 3 (0.77 percent) urban areas would increase by 5 percent or 
more. Fourteen (29.2 percent) rural areas would increase by 1 percent 
or more, and no rural areas would increase by 5 percent or more. 
However, the wage index values for 184 (47.1 percent) urban areas and 
15 (31.3 percent) rural areas would decrease. Eighty-five (21.7 
percent) urban areas would decrease by 1 percent or more, and one urban 
area would decrease by 5 percent or more (0.26 percent). Seven (14.6 
percent) rural areas would decrease by 1 percent or more, and no rural 
areas would decrease by 5 percent or more. The largest positive impacts 
are 6.71 percent for an urban area and 3.10 percent for a rural area. 
The largest negative impacts are 5.22 percent for an urban area and 
3.10 percent for a rural area. No urban areas are unaffected, but one 
rural area is unaffected. These results indicate that a larger 
percentage of rural areas (66.7 percent) would benefit from the 
occupational mix adjustment than do urban areas (52.9 percent). While 
these results are more positive overall for rural areas than under the 
previous occupational mix adjustment that used survey data from 2007-
2008, approximately one-third (31.3 percent) of rural CBSAs would still 
experience a decrease in their wage indices as a result of the 
occupational mix adjustment.
2. Application of the Rural, Imputed, and Frontier Floors
a. Rural Floor
    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. This provision is referred to as the ``rural floor.'' 
Section 3141 of Public Law 111-148 also requires that a national budget 
neutrality adjustment be applied in implementing the rural floor. In 
the FY 2013 proposed wage index associated with this proposed rule and 
available on the CMS Web site, 393 hospitals are receiving an increase 
in their FY 2013 proposed wage index due to the application of the 
rural floor.

[[Page 27950]]

b. Imputed Floor and Proposal for an Alternative, Temporary Methodology 
for Computing the Imputed Floor
    In the FY 2005 IPPS final rule (69 FR 49109), we adopted the 
``imputed floor'' policy as a temporary 3-year regulatory measure to 
address concerns from hospitals in all-urban States that have argued 
that they are disadvantaged by the absence of rural hospitals to set a 
wage index floor for those States. Since its initial implementation, we 
have extended the imputed floor policy three times, with the latest 
extension being set to expire on September 30, 2013 (we refer readers 
to the discussion in the FY 2012 IPPS/LTCH PPS final rule (76 FR 
51593)). There are currently two all-urban States, New Jersey and Rhode 
Island, that have a range of wage indices assigned to hospitals in the 
State, including through reclassification or redesignation (we refer 
readers to discussions of geographic reclassifications and 
redesignations in section III.H. of this preamble). However, as we 
explain below, the current method for computing the imputed floor 
benefits only New Jersey, and not Rhode Island.
    The current methodology for computing the imputed floor is 
contained in our regulations at 42 CFR 412.64(h)(4). In computing the 
imputed floor, we calculate the ratio of the lowest-to-highest CBSA 
wage index for each all-urban State (that is, New Jersey and Rhode 
Island) as well as the average of the ratios of lowest-to-highest CBSA 
wage indices of those all-urban States. We compare the State's own 
ratio to the average ratio and whichever is higher is multiplied by the 
highest CBSA wage index value in the State--the product of which 
establishes the imputed floor for the State. Rhode Island has only one 
CBSA (Providence-New Bedford-Fall River, RI-MA); therefore, Rhode 
Island's own ratio equals 1.0, and its imputed floor is equal to its 
original CBSA wage index value. Conversely, New Jersey has 10 CBSAs. As 
the average ratio of New Jersey and Rhode Island is higher than New 
Jersey's own ratio, the current methodology provides a benefit for New 
Jersey.
    For the FY 2013 wage index, the final year of the extension of the 
imputed floor policy under Sec.  412.64(h)(4), we are proposing an 
alternative, temporary methodology for computing the imputed floor wage 
index to address the concern that the current imputed floor methodology 
guarantees a benefit for one all-urban State with multiple wage indices 
but cannot benefit the other. This proposed alternative methodology for 
calculating the imputed floor would be established using empirical data 
from the application of the rural floor policy for FY 2013. Under this 
proposal, we would first determine the average percentage difference 
between the post-reclassified, pre-floor area wage index and the post-
reclassified, rural floor wage index (without rural floor budget 
neutrality applied) for all CBSAs receiving the rural floor. (Table 4D 
associated with this proposed rule and available on the CMS Web site 
includes the CBSAs receiving a State's rural floor wage index.) The 
lowest post-reclassified wage index assigned to a hospital in an all-
urban State having a range of such values would then be increased by 
this factor, the result of which would establish the State's 
alternative imputed floor. We are proposing to amend Sec.  412.64(h)(4) 
to add new paragraphs (v)(A) and (B) to incorporate this proposed 
alternative methodology, and to make conforming references.
    In addition, for the FY 2013 wage index, we are proposing no 
changes to the current imputed floor methodology at Sec.  412.64(h)(4) 
and, therefore, no changes to the New Jersey imputed floor computation 
for FY 2013. Instead, for FY 2013, we are proposing a second, 
alternative methodology that would be used in cases where an all-urban 
State has a range of wage indices assigned to its hospitals, but the 
State cannot benefit from the methodology in existing Sec.  
412.64(h)(4). We intend to further evaluate the need, applicability, 
and methodology for the imputed floor before the September 30, 2013 
expiration of the imputed floor policy and address these issues in the 
FY 2014 proposed rule.
    The proposed wage index and impact tables associated with this FY 
2013 proposed rule that are available on the CMS Web site include the 
application of the imputed floor policy at Sec.  412.64(h)(4) and a 
national budget neutrality adjustment for the imputed floor. There are 
29 providers in New Jersey that would receive an increase in their FY 
2013 proposed wage index due to the imputed floor policy. The proposed 
wage index and impact tables for this proposed rule do not reflect the 
application of the proposed second alternative methodology for 
computing the imputed floor, which we anticipate would benefit four 
hospitals in Rhode Island.
c. Frontier Floor
    Section 10324 of Public Law 111-148 requires that hospitals in 
frontier States cannot be assigned a wage index of less than 1.0000 (we 
refer readers to a discussion of the implementation of this provision 
in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50160). Four States in 
the FY 2013 proposed wage index are being treated as frontier States: 
Montana, North Dakota, South Dakota, and Wyoming; 51 providers in these 
States are receiving the frontier floor value of 1.0000 in the FY 2013 
proposed wage index associated with this proposed rule. Although Nevada 
is also, by definition, a frontier State and was assigned a frontier 
floor value of 1.0000 for FY 2012, its FY 2013 proposed rural floor 
value of 1.0293 is greater and, therefore, is the State's proposed 
minimum wage index for FY 2013.
    The areas affected by the rural, imputed, and frontier floor 
policies for the FY 2013 proposed wage index are identified in Table 4D 
associated with this proposed rule and available on the CMS Web site.
3. Proposed FY 2013 Wage Index Tables
    The proposed wage index values for FY 2013 (except those for 
hospitals receiving wage index adjustments under section 1886(d)(13) of 
the Act), included in Tables 4A, 4B, 4C, and 4F, available on the CMS 
Web site, include the proposed occupational mix adjustment, geographic 
reclassification or redesignation as discussed in section III.H. of 
this preamble, and the application of the rural, imputed, and frontier 
State floors as discussed in section III.G.2. of this preamble.
    Tables 3A and 3B, available on the CMS Web site, list the 3-year 
average hourly wage for each labor market area before the redesignation 
or reclassification 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, which is 
available on the CMS Web site, includes the adjusted average hourly 
wage for each hospital from the FY 2007 and FY 2008 cost reporting 
periods, as well as the FY 2009 period used to calculate the proposed 
FY 2013 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 proposed average hourly wages in 
Tables 2, 3A, and 3B, which are available on the CMS Web site, include 
the proposed occupational mix adjustment. The proposed wage index 
values in Tables 4A, 4B, 4C, and 4D also

[[Page 27951]]

include the proposed national rural and imputed floor budget neutrality 
adjustment. The proposed wage index values in Table 2 also include the 
proposed outmigration adjustment for eligible hospitals.

H. Revisions to the Wage Index Based on Hospital Redesignations and 
Reclassifications

1. General Policies and Effects of Reclassification and Redesignation
    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 regulations applicable 
to reclassifications by the MGCRB are located in 42 CFR 412.230 through 
412.280. (We refer readers to a discussion of the proximity 
requirements in the FY 2002 IPPS final rule (66 FR 39874 and 39875).) 
The general policies for reclassifications and redesignations that we 
are proposing for FY 2013, and the policies for the effects of 
hospitals' reclassifications and redesignations on the wage index, are 
the same as those discussed in the FY 2012 IPPS/LTCH PPS final rule for 
the FY 2012 final wage index (76 FR 51595 and 51596). Also, in the FY 
2012 IPPS/LTCH PPS final rule, we discussed the effects on the wage 
index of urban hospitals reclassifying to rural areas under 42 CFR 
412.103. Hospitals that are geographically located in States without 
any rural areas are ineligible to apply for rural reclassification 
pursuant to 42 CFR 412.103.
2. FY 2013 MGCRB Reclassifications
a. FY 2013 Reclassification Requirements and Approvals
    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 regulations 
under 42 CFR 412.230 through 412.280.
    At the time this proposed rule was constructed, the MGCRB had 
completed its review of FY 2013 reclassification requests. Based on 
such reviews, there were 238 hospitals approved for wage index 
reclassifications by the MGCRB for FY 2013. Because MGCRB wage index 
reclassifications are effective for 3 years, for FY 2013, hospitals 
reclassified during FY 2011 or FY 2012 are eligible to continue to be 
reclassified to a particular labor market area based on such prior 
reclassifications. There were 277 hospitals approved for wage index 
reclassifications in FY 2011, and 255 hospitals approved for wage index 
reclassifications in FY 2012. Of all of the hospitals approved for 
reclassification for FY 2011, FY 2012, and FY 2013, based upon the 
review at the time of this proposed rule, 770 hospitals are in a 
reclassification status for FY 2013.
    Under 42 CFR 412.273, hospitals that have been reclassified by the 
MGCRB are permitted to withdraw their applications within 45 days of 
the publication of a proposed rule. For information about withdrawing, 
terminating, or canceling a previous withdrawal or termination of a 3-
year reclassification for wage index purposes, we refer readers to 42 
CFR 412.273, as well as the FY 2002 IPPS final rule (66 FR 39887) and 
the FY 2003 IPPS final rule (67 FR 50065). Additional discussion on 
withdrawals and terminations, and clarifications regarding reinstating 
reclassifications and ``fallback'' reclassifications, were included in 
the FY 2008 IPPS final rule (72 FR 47333).
    Changes to the wage index that result from withdrawals of requests 
for reclassification, terminations, wage index corrections, appeals, 
and the Administrator's review process for FY 2013 will be incorporated 
into the wage index values published in the FY 2013 IPPS/LTCH PPS final 
rule. These changes affect not only the wage index value for specific 
geographic areas, but also the wage index value redesignated/
reclassified hospitals receive; that is, whether they receive the wage 
index that includes the data for both the hospitals already in the area 
and the redesignated/reclassified hospitals. Further, the wage index 
value for the area from which the hospitals are redesignated/
reclassified may be affected.
b. Applications for Reclassifications for FY 2014
    Applications for FY 2014 reclassifications are due to the MGCRB by 
September 4, 2012 (the first working day of September 2012). 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 2012, via the Internet on the CMS Web 
site at: http://cms.hhs.gov/MGCRB/02_instructions_and_applications.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.
3. 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. The FY 2013 chart with the listing of the rural 
counties containing the hospitals designated as urban under section 
1886(d)(8)(B) of the Act is available via the Internet on the CMS Web 
site.
4. Reclassifications Under Section 1886(d)(8)(B) of the Act
    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 market area in Table 4C associated with this 
proposed rule (available on the CMS Web site) into which they would be 
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 may 
withdraw from an MGCRB reclassification within 45 days of the 
publication of this FY 2013 proposed rule. (We refer readers to the FY 
2012 IPPS/LTCH PPS final rule (76 FR 51598 through 51599) for the 
procedural rules and requirements for a hospital that is redesignated 
under section 1886(d)(8)(B) of the Act and seeking reclassification 
under the MGCRB, as well as our policy of measuring the urban area, 
exclusive of the Lugar County, for purposes of meeting proximity 
requirements.) We treat New England deemed counties in a manner 
consistent with how we treat Lugar counties. (We refer readers to FY 
2008 IPPS final rule with comment period (72

[[Page 27952]]

FR 47337) for a discussion of this policy.)
5. Reclassifications Under Section 508 of Public Law 108-173
    Section 508 of Public Law 108-173 allowed certain qualifying 
hospitals to receive wage index reclassifications and assignments that 
they otherwise would not have been eligible to receive under the law. 
Although section 508 originally was scheduled to expire after a 3-year 
period, Congress extended the provision several times, as well as 
certain special exceptions that would have otherwise expired. For a 
discussion of the original section 508 provision and its various 
extensions, we refer readers to the FY 2012 notice, CMS-1442-N, which 
went on public display at the Office of the Federal Register on April 
19, 2012, and was published in the Federal Register on April 20, 2012. 
The most recent extension of the provision was included in section 302 
of the Temporary Payroll Tax Cut Continuation Act of 2011 (Pub. L. 112-
78), as amended by section 3001 of the Middle Class Tax Relief and Job 
Creation Act of 2012 (Pub. L. 112-96), which extends certain section 
508 reclassifications and special exception wage indices for a 6-month 
period during FY 2012, from October 1, 2011 through March 31, 2012. As 
of the drafting of this proposed rule, section 508 reclassifications 
and certain special exceptions have not been extended for FY 2013.
6. Waiving Lugar Redesignation for the Out-Migration Adjustment
    In the FY 2012 IPPS/LTCH PPS final rule (76 FR 51599 through 
51600), we adopted the policy that, beginning with FY 2012, an eligible 
hospital that waives its Lugar status in order to receive the out-
migration adjustment has effectively waived its deemed urban status 
and, thus, is rural for all purposes under the IPPS, including being 
considered rural for the DSH payment adjustment, effective for the 
fiscal year in which the hospital receives the out-migration 
adjustment. (We refer readers to a discussion of DSH payment adjustment 
under section IV.G. of this preamble.)
    In addition, we adopted a minor procedural change that would allow 
a Lugar hospital that qualifies for and accepts the out-migration 
adjustment (through written notification to CMS within the requisite 
number of days from the publication of the proposed rule \47\) to 
automatically waive its urban status for the 3-year period for which 
its out-migration adjustment is effective. That is, such a Lugar 
hospital would no longer be required during the second and third years 
of eligibility for the out-migration adjustment to advise us annually 
that it prefers to continue being treated as rural and receive the 
adjustment. Thus, under the procedural change, a Lugar hospital that 
requests to waive its urban status in order to receive the rural wage 
index in addition to the out-migration adjustment would be deemed to 
have accepted the out-migration adjustment and agrees to be treated as 
rural for the duration of its 3-year eligibility period, unless, prior 
to its second or third year of eligibility, the hospital explicitly 
notifies CMS in writing, within the required period (generally 45 days 
from the publication of the proposed rule), that it instead elects to 
return to its deemed urban status and no longer wishes to accept the 
out-migration adjustment.
---------------------------------------------------------------------------

    \47\ Hospitals generally have 45 days from publication of the 
proposed rule to request an out-migration adjustment in lieu of the 
section 1886(d)(8) deemed urban status.
---------------------------------------------------------------------------

    We refer readers to the FY 2012 IPPS/LTCH PPS final rule (76 FR 
51599 through 51600) for a detailed discussion of the policy and 
process for waiving Lugar status for the out-migration adjustment.

I. Proposed FY 2013 Wage Index Adjustment Based on Commuting Patterns 
of Hospital Employees

    In accordance with the broad discretion granted to the Secretary 
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. The proposed FY 2013 out-migration adjustment is 
based on the same policies, procedures, and computation that were used 
for the FY 2012 out-migration adjustment (we refer readers to a full 
discussion of the adjustment, including rules on deeming hospitals 
reclassified under section 1886(d)(8) or section 1886(d)(10) to have 
waived the out-migration adjustment, in the FY 2012 IPPS/LTCH PPS final 
rule (76 FR 51601 through 51602)). Table 4J, available via the Internet 
on the CMS Web site, lists the out-migration adjustments for the FY 
2013 proposed wage index.

J. Process for Requests for Wage Index Data Corrections

    The preliminary, unaudited Worksheet S-3 wage data and occupational 
mix survey data files for the proposed FY 2013 wage index were made 
available on October 4, 2011, 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 post 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 does 
not alter the current wage index process or schedule. We notify 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 encourage hospitals to sign up for automatic notifications of 
information about hospital issues and the scheduling of the Hospital 
Open Door forums at the CMS Web site at: http://www.cms.hhs.gov/OpenDoorForums/.
    In a memorandum dated September 29, 2011, 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 4, 2011 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 5, 2011. 
Hospitals were notified of this deadline and of all other 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 September 29, 2011 memorandum referenced above.
    In the September 29, 2011 memorandum, we also specified that a 
hospital requesting revisions to its occupational mix survey data was 
to copy its record(s) from the CY 2010 occupational mix preliminary 
files posted to the CMS Web site in October, highlight the revised 
cells on its spreadsheet, and submit its spreadsheet(s) and complete

[[Page 27953]]

documentation to its fiscal intermediary/MAC no later than December 5, 
2011.
    The fiscal intermediaries/MACs notified the hospitals by mid-
February 2012 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 2012. CMS published the proposed 
wage index public use files that included hospitals' revised wage index 
data on February 21, 2012. Hospitals had until March 5, 2012, 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' or the fiscal 
intermediary's (or, if applicable, the MAC's) mishandling of the wage 
index data. Hospitals also were 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 11, 
2012. The deadline for a hospital to request CMS intervention in cases 
where the hospital disagrees with the fiscal intermediary's (or, if 
applicable, the MAC's) policy interpretations was April 18, 2012.
    Hospitals should examine Table 2, which is listed in section VI. of 
the Addendum to this proposed rule and available on the CMS Web site 
at: http://www.cms.gov. Table 2 contains each hospital's adjusted 
average hourly wage used to construct the wage index values for the 
past 3 years, including the FY 2009 data used to construct the proposed 
FY 2013 wage index. We note that the hospital average hourly wages 
shown in Table 2 only reflect changes made to a hospital's data that 
were transmitted to CMS by March 2012.
    We will release the final wage index data public use files in early 
May 2012 on the Internet at: http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp. The May 2012 public use files are 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 
11, 2012). If, after reviewing the May 2012 final public use files, a 
hospital believes that its wage or occupational mix data are incorrect 
due to a fiscal intermediary/MAC or CMS error in the entry or 
tabulation of the final data, the hospital should send a letter to both 
its fiscal intermediary/MAC and CMS that outlines why the hospital 
believes an error exists and 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, the 
MACs) must receive these requests no later than June 4, 2012.
    Each request also must be sent to the fiscal intermediary/MAC. The 
fiscal intermediary/MAC will review requests upon receipt and contact 
CMS immediately to discuss any findings.
    After the release of the May 2012 wage index data files, changes to 
the wage and occupational mix data will only be made 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 will approve 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 11, 2012.
     Requests for correction of errors that were not, but could 
have been, identified during the hospital's review of the February 21, 
2012 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 4, 2012) 
will be incorporated into the final wage index in the FY 2013 IPPS/LTCH 
PPS final rule, which will be effective October 1, 2012.
    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 2013 payment rates. Accordingly, 
hospitals that do 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 IPPS final rule (64 FR 41513) for a discussion of the parameters 
for appeals 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 have 
access to the final wage index data by early May 2012, they have 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 2013 wage index by August 2012, and the 
implementation of the FY 2013 wage index on October 1, 2012. If 
hospitals avail 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 4, 2012, 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 4 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 MACs 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

[[Page 27954]]

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 4, 
2012 deadline for the FY 2013 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 calculated the final wage index (that 
is, by the June 4, 2012 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.

K. Labor-Related Share for the Proposed FY 2013 Wage Index

    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 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.'' Thus, 
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.
    In the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43850 
through 43856), we rebased and revised the hospital market basket for 
operating costs. We established a FY 2006-based IPPS hospital market 
basket to replace the FY 2002-based IPPS hospital market basket, 
effective October 1, 2009. In that final rule, we presented our 
analysis and conclusions regarding the frequency and methodology for 
updating the labor-related share for FY 2010. We also recalculated a 
labor-related share of 68.8 percent, using the FY 2006-based IPPS 
market basket, for discharges occurring on or after October 1, 2009. 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 IPPS base payment rate to which the area wage index is 
applied. In this FY 2013 proposed rule, we are not proposing to make 
any further changes to the national average proportion of operating 
costs that are attributable to wages and salaries, fringe benefits, 
contract labor, the labor-related portion of professional fees, 
administrative and business support services, and all other labor-
related services (previously referred to in the FY 2002-based IPPS 
market basket as labor-intensive).
    Therefore, for FY 2013, we are proposing to continue to use a 
labor-related share of 68.8 percent for discharges occurring on or 
after October 1, 2012. Tables 1A and 1B, which are published in section 
VI. of the Addendum to this proposed rule and available via the 
Internet, reflect this labor-related share. 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.'' Therefore, for 
all IPPS hospitals whose wage indices are less than 1.0000, we are 
proposing to apply the wage index to a labor-related share of 62 
percent of the national standardized amount. For all IPPS hospitals 
whose wage indices are greater than 1.0000, we are proposing to apply 
the wage index to a labor-related share of 68.8 percent of the national 
standardized amount.
    For Puerto Rico hospitals, the national labor-related share will 
always be 62 percent because the national wage index for all Puerto 
Rico hospitals is less than 1.0. In this proposed rule, we are 
proposing to continue to use a labor-related share for the Puerto Rico-
specific standardized amounts of 62.1 percent for discharges occurring 
on or after October 1, 2012. This Puerto Rico labor-related share of 
62.1 percent was also adopted in the FY 2010 IPPS/LTCH PPS final rule 
(74 FR 43857) at the time the FY 2006-based hospital market basket was 
established, effective October 1, 2009. 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, the labor-related portion of professional fees, 
administrative and business support services, and all other labor-
related services (previously referred to

[[Page 27955]]

in the FY 2002-based IPPS market basket as labor-intensive) 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. The labor-related share 
of a hospital's Puerto Rico-specific rate will be either the Puerto 
Rico-specific labor-related share of 62.1 percent or 62 percent, 
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 62.1 
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 62 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 62.1 percent for FY 2013 is 
reflected in Table 1C, which is published in section VI. of the 
Addendum to this proposed rule and available via the Internet.

IV. Other Decisions and Proposed Changes to the IPPS for Operating 
Costs and Graduate Medical Education (GME) Costs

A. Hospital Readmissions Reduction Program

1. Statutory Basis for the Hospital Readmissions Reduction Program
    Section 3025 of the Affordable Care Act, as amended by section 
10309 of the Affordable Care Act, added a new subsection (q) to section 
1886 of the Act. Section 1886(q) of the Act establishes the ``Hospital 
Readmissions Reduction Program'' effective for discharges from an 
``applicable hospital'' beginning on or after October 1, 2012, under 
which payments to those hospitals under section 1886(d) of the Act will 
be reduced to account for certain excess readmissions.
    Section 1886(q)(1) of the Act sets forth the methodology by which 
payments to ``applicable hospitals'' will be adjusted to account for 
excess readmissions. Pursuant to section 1886(q)(1) of the Act, 
payments for discharges from an ``applicable hospital'' will be an 
amount equal to the product of the ``base operating DRG payment 
amount'' and the adjustment factor for the hospital for the fiscal 
year. That is, ``base operating DRG payments'' are reduced by an 
adjustment factor that accounts for excess readmissions. Section 
1886(q)(1) of the Act requires the Secretary to make payments for a 
discharge in an amount equal to the product of ``the base operating DRG 
payment amount'' and ``the adjustment factor'' for the hospital in a 
given fiscal year. Section 1886(q)(2) of the Act defines the base 
operating DRG payment amount as ``the payment amount that would 
otherwise be made under subsection (d) (determined without regard to 
subsection (o) [the Hospital VBP Program]) for a discharge if this 
subsection did not apply; reduced by * * * any portion of such payment 
amount that is attributable to payments under paragraphs (5)(A), 
(5)(B), (5)(F), and (12) of subsection (d).'' Paragraphs (5)(A), 
(5)(B), (5)(F), and (12) of subsection(d) refer to outlier payments, 
IME payments, DSH payments, and payments for low-volume hospitals, 
respectively.
    Furthermore, section 1886(q)(2)(B) of the Act specifies special 
rules for defining ``the payment amount that would otherwise be made 
under subsection (d)'' for certain hospitals. Specifically, section 
1886(q)(2)(B) of the Act states that ``[i]n the case of a Medicare-
dependent, small rural hospital (with respect to discharges occurring 
during fiscal years 2012 and 2013) or a sole community hospital * * * 
the payment amount that would otherwise be made under subsection (d) 
shall be determined without regard to subparagraphs (I) and (L) of 
subsection (b)(3) and subparagraphs (D) and (G) of subsection (d)(5).'' 
We are proposing policies to implement the statutory provisions related 
to the definition of ``base operating DRG payment amount'' in this 
proposed rule.
    Section 1886(q)(3)(A) of the Act defines the ``adjustment factor'' 
for an applicable hospital for a fiscal year as equal to the greater of 
``(i) the ratio described in subparagraph (B) for the hospital for the 
applicable period (as defined in paragraph (5)(D)) for such fiscal 
year; or (ii) the floor adjustment factor specified in subparagraph 
(C).'' Section 1886(q)(3)(B) of the Act, in turn, describes the ratio 
used to calculate the adjustment factor. It states that the ratio is 
``equal to 1 minus the ratio of--(i) the aggregate payments for excess 
readmissions * * * and (ii) the aggregate payments for all discharges * 
* *.'' Section 1886(q)(3)(C) of the Act describes the floor adjustment 
factor, which is set at 0.99 for FY 2013, 0.98 for FY 2014, and 0.97 
for FY 2015 and subsequent fiscal years.
    Section 1886(q)(4) of the Act sets forth the definitions of 
``aggregate payments for excess readmissions'' and ``aggregate payments 
for all discharges'' for an applicable hospital for the applicable 
period. The term ``aggregate payments for excess readmissions'' is 
defined in section 1886(q)(4)(A) of the Act as ``the sum, for 
applicable conditions * * * of the product, for each applicable 
condition, of (i) the base operating DRG payment amount for such 
hospital for such applicable period for such condition; (ii) the number 
of admissions for such condition for such hospital for such applicable 
period; and (iii) the ``Excess Readmission Ratio * * * for such 
hospital for such applicable period minus 1.'' The ``Excess Readmission 
Ratio'' is a hospital-specific ratio based on each applicable 
condition. Specifically, section 1886(q)(4)(C) of the Act defines the 
Excess Readmission Ratio as the ratio of ``risk-adjusted readmissions 
based on actual readmissions'' for an applicable hospital for each 
applicable condition, to the ``risk-adjusted expected readmissions'' 
for the applicable hospital for the applicable condition.
    Section 1886(q)(5) of the Act provides definitions of ``applicable 
condition,'' ``expansion of applicable conditions,'' ``applicable 
hospital,'' ``applicable period,'' and ``readmission.'' The term 
``applicable condition,'' which is addressed in detail in section 
IV.C.3.a. of the FY 2012 IPPS/LTCH PPS final rule (76 FR 51665 through 
51666), is defined as a ``condition or procedure selected by the 
Secretary among conditions and procedures for which: (i) Readmissions * 
* * represent conditions or procedures that are high volume or high 
expenditures * * * and (ii) measures of such readmissions * * * have 
been endorsed by the entity with a contract under section 1890(a) * * * 
and such endorsed measures have exclusions for readmissions that are 
unrelated to the prior discharge (such as a planned readmission or 
transfer to another applicable hospital).'' Section 1886(q)(5)(B) of 
the Act also requires the Secretary, beginning in FY 2015, ``to the 
extent practicable, [to] expand the applicable conditions beyond the 3 
conditions for which measures have been endorsed * * * to the 
additional 4 conditions that have been identified by the Medicare 
Payment Advisory Commission in its report to Congress in June 2007 and 
to other conditions and procedures as determined appropriate by the 
Secretary.''
    Section 1886(q)(5)(C) of the Act defines ``applicable hospital,'' 
that is, a hospital subject to the Hospital Readmissions Reduction 
Program, as a ``subsection (d) hospital or a hospital that is paid 
under section 1814(b)(3) [of the Act], as the case may be.'' The term 
``applicable period,'' as defined under

[[Page 27956]]

section 1886(q)(5)(D) of the Act, ``means, with respect to a fiscal 
year, such period as the Secretary shall specify.'' As explained in the 
FY 2012 IPPS/LTCH PPS final rule, the ``applicable period'' is the 
period from which data are collected in order to calculate various 
ratios and adjustments under the Hospital Readmissions Reduction 
Program.
    Section 1886(q)(6) of the Act sets forth the public reporting 
requirements for hospital-specific readmission rates. Section 
1886(q)(7) of the Act limits administrative and judicial review of 
certain determinations made pursuant to section 1886(q) of the Act. 
Finally, section 1886(q)(8) of the Act requires the Secretary to 
collect data on readmission rates for all hospital inpatients for 
``specified hospitals'' in order to calculate the hospital-specific 
readmission rates for all hospital inpatients and to publicly report 
these readmission rates.
2. Overview
    As we stated in the FY 2012 IPPS/LTCH PPS final rule, we intend to 
implement the requirements of the Hospital Readmissions Reduction 
Program in the FY 2012, FY 2013, and future IPPS/LTCH PPS rulemaking 
cycles.
    As explained above, the payment adjustment factor set forth in 
section 1886(q) of the Act does not apply to discharges until FY 2013. 
Therefore, we elected to implement the Hospital Readmissions Reduction 
Program over a 2-year period, beginning in FY 2012. In the FY 2012 
IPPS/LTCH PPS final rule, we addressed the issues of the selection of 
readmission measures and the calculation of the excess readmission 
ratio, which will be used, in part, to calculate the readmission 
adjustment factor. Specifically, in the FY 2012 IPPS/LTCH PPS final 
rule (76 FR 51660 through 51676), we addressed portions of section 
1886(q) of the Act related to the following provisions:
     Selection of applicable conditions;
     Definition of ``readmission;''
     Measures for the applicable conditions chosen for 
readmission;
     Methodology for calculating the excess readmission ratio; 
and
     Definition of ``applicable period.''
    With respect to the topics of ``measures for readmission'' for the 
applicable conditions, and ``methodology for calculating the excess 
readmission ratio,'' we specifically addressed the following:
     Index hospitalizations;
     Risk adjustment;
     Risk standardized readmission rate;
     Data sources; and
     Exclusion of certain readmissions.
    We are providing below a summary of the provisions of section 
1886(q) of the Act that were finalized in the FY 2012 IPPS/LTCH PPS 
final rule.
    Applicable conditions: In the FY 2012 IPPS/LTCH PPS final rule (76 
FR 51665 through 51666), we finalized the applicable conditions for the 
FY 2013 Hospital Readmissions Reduction Program as heart failure (HF), 
acute myocardial infarction (AMI), and pneumonia (PN). Section 
1886(q)(5)(A) of the Act requires that the ``applicable conditions'' be 
conditions or procedures for which readmissions are ``high volume or 
high expenditure'' and that ``measures of such readmissions'' have been 
endorsed by the entity with a contract under section 1890(a) of the Act 
(currently National Quality Forum (NQF)) and such endorsed measures 
have exclusions for readmissions that are unrelated to the prior 
discharge. In this proposed rule, we are proposing to codify this 
definition of ``applicable conditions'' in the regulations we are 
proposing at 42 CFR 412.152.
    In the FY 2012 IPPS/LTCH PPS final rule, we discussed how each of 
the finalized ``applicable conditions'' for FY 2013 meets these 
statutory requirements. We noted that section 1886(q)(5)(B) of the Act 
allows for the Secretary to expand the conditions for the Hospital 
Readmissions Reduction Program starting in FY 2015.
    Readmission: In the FY 2012 IPPS/LTCH PPS final rule (76 FR 51666), 
we finalized a definition of ``readmission'' as occurring when a 
patient is discharged from an applicable hospital and then admitted to 
the same or another acute care hospital, that is, another applicable 
hospital, within a specified time period (30 days) from the date of 
discharge from the initial index hospitalization. In this proposed 
rule, we are proposing to codify this definition of ``readmission'' 
under the regulations we are proposing at 42 CFR 412.152. As also 
discussed in the FY 2012 IPPS/LTCH PPS final rule, only one readmission 
during the 30 days following the discharge from the initial 
hospitalization will count as a readmission for purposes of calculating 
the ratios set forth in section 1886(q)(3) of the Act. For any given 
patient, none of the subsequent readmissions he or she experiences 
within 30 days after discharge would be counted as a new ``index'' 
admission (that is, an admission evaluated for a subsequent 
readmission).
    Measures for applicable conditions: As finalized in the FY 2012 
IPPS/LTCH PPS final rule (76 FR 51666 and 51667), we will use three 
NQF-endorsed, hospital risk-standardized readmission measures for FY 
2013, which are currently in the Hospital IQR Program: Acute Myocardial 
Infarction 30-day Risk Standardized Readmission Measure (NQF 
0505); Heart Failure 30-Day Risk Standardized Readmission 
Measure (NQF 0330); and Pneumonia 30-day Risk Standardized 
Readmission Measure (NQF 0506). The measures, as endorsed by 
the NQF, include the 30-day time window, risk-adjustment methodology, 
and exclusions for certain readmissions.
    As finalized in the FY 2012 IPPS/LTCH PPS final rule (76 FR 51673), 
we will use the risk-standardized readmission ratio of the NQF-endorsed 
readmission measures as the excess readmission ratio. The ratio is a 
measure of relative performance. If a hospital performs better than an 
average hospital that admitted similar patients (that is, patients with 
the same risk factors for readmission such as age and comorbidities), 
the ratio will be less than 1.0. If a hospital performs worse than 
average, the ratio will be greater than 1.0.
    Measure methodology: In the FY 2012 IPPS/LTCH PPS final rule (76 FR 
51668 through 51669), we finalized the methodology of the measures and 
are summarizing it briefly below.
    Index hospitalizations included in the measure calculation: We 
finalized the definition of ``index hospital'' consistent with the NQF-
endorsed definition. The measures define an index hospitalization as a 
hospitalization evaluated in the measure for a possible readmission 
within 30 days after discharge (that is, a hospitalization included in 
the measure calculation). The measures exclude as index 
hospitalizations any hospitalization for patients with an in-hospital 
death, without at least 30 days post-discharge enrollment in Medicare 
fee-for-service (FFS), discharged against medical advice, and under the 
age of 65.
    Risk adjustment: The three measures, as endorsed by the NQF and 
finalized in the FY 2012 IPPS/LTCH PPS final rule, adjust for key 
factors that are clinically relevant and have strong relationships with 
the outcome (for example, patient demographic factors, patient 
coexisting medical conditions, and indicators of patient frailty). 
Under the current NQF-endorsed methodology, these covariates are 
obtained from Medicare claims extending 12 months prior to, and 
including, the index admission. This risk-adjustment approach adjusts 
for differences in the clinical status of the patient at the time of 
the index admission as well as for demographic variables. A complete 
list of the

[[Page 27957]]

variables used for risk adjustment and the clinical and statistical 
process for selecting the variables for each NQF-endorsed measure, as 
proposed, is available at the Web site: http://qualitynet.org/dcs/ContentServer?c=Page&pagename=QnetPublic%2FPage%2FQnetTier4&cid=1219069855841.
    Data sources: The finalized measures use Medicare inpatient claims 
data for Medicare FFS patients 65 years and older to identify index 
hospitalizations and readmissions. For risk adjustment, the measures 
use Part A and Part B claims for the 12 months prior to the index 
hospitalization as well as index hospitalization claims.
    Exclusion of certain readmissions: The NQF-endorsed measures of 
readmissions finalized in the FY 2012 IPPS/LTCH PPS final rule include 
exclusions of readmissions consistent with the statutory requirement 
that all measures exclude certain readmissions that are unrelated to 
the prior discharge, such as transfers to other acute care facilities 
and planned readmissions.
    Minimum number of discharges for applicable conditions: Section 
1886(q)(4)(C)(ii) of the Act allows the Secretary discretion to 
determine the minimum number of discharges for the applicable 
condition. We finalized a policy in the FY 2012 IPPS/LTCH PPS final 
rule that the minimum number of discharges for applicable conditions is 
25 for each condition for the FY 2013 Hospital Readmissions Reduction 
Program.
    Applicable period: Under 1886(q)(5)(D) of the Act, the Secretary 
has the authority to specify the applicable period with respect to a 
fiscal year. In the FY 2012 IPPS/LTCH PPS final rule, we finalized our 
policy to use 3 years worth of claims data to calculate the proposed 
readmission measures. Specifically, we finalized the policy to use 
claims data from July 1, 2008, to June 30, 2011, to calculate the 
excess readmission ratios and to calculate the FY 2013 Hospital 
Readmissions Reduction Program payment adjustment. As discussed in 
section IV.A.3.d. of this preamble, for the purpose of this proposed 
rule, the excess readmission ratios used to model our proposed 
methodology to calculate the Hospital Readmissions Reduction Program 
payment adjustment will be based on the 3-year time period of July 1, 
2007 to June 30, 2010. For the final rule, we intend to use excess 
readmission ratios based on the applicable period of July 1, 2008 to 
June 30, 2011, as finalized in the FY 2012 IPPS/LTCH PPS final rule. In 
this proposed rule, we are proposing to codify the definition of 
``applicable period'' under the regulations we are proposing at 42 CFR 
412.152 as the 3-year period from which data are collected in order to 
calculate excess readmission ratios and adjustments for the fiscal 
year.
    Excess Readmission Ratio calculation: In the FY 2012 IPPS/LTCH PPS 
final rule (76 FR 51673 through 51676), we finalized the excess 
readmission ratio pursuant to section 1886(q)(4)(C) of the Act. We 
established the excess readmission ratio as the risk-standardized 
readmission ratio from the NQF-endorsed measures. The ratio is 
calculated using hierarchical logistic regression. The method adjusts 
for variation across hospitals in how sick their patients are when 
admitted to the hospital (and therefore variation in hospital patients' 
readmission risk) as well as the variation in the number of patients 
that a hospital treats to reveal difference in quality. The method 
produces an adjusted actual (or ``predicted'') number in the numerator 
and an ``expected'' number in the denominator. The expected calculation 
is similar to that for logistic regression--it is the sum of all 
patients' expected probabilities of readmission, given their risk 
factors and the risk of readmission at an average hospital.
    For each hospital, the numerator of the ratio used in the NQF-
endorsed methodology (actual adjusted readmissions) is calculated by 
estimating the probability of readmission for each patient at that 
hospital and summing up over all the hospital's patients to get the 
actual adjusted number of readmissions for that hospital. 
Mathematically, the numerator equation can be expressed as:
[GRAPHIC] [TIFF OMITTED] TP11MY12.013

    The denominator of the risk-standardized ratio (excess readmission 
ratio) under this NQF-endorsed methodology sums the probability of 
readmission for each patient at an average hospital. This can be 
expressed mathematically as:

[[Page 27958]]

[GRAPHIC] [TIFF OMITTED] TP11MY12.014

    Thus, the ratio compares the total adjusted actual readmissions at 
the hospital to the number that would be expected if the hospital's 
patients were treated at an average hospital with similar patients. 
Hospitals with more adjusted actual readmissions than expected 
readmissions will have a risk-standardized ratio (excess readmission 
ratio) greater than one. In summary, in the FY 2012 IPPS/LTCH PPS final 
rule, we defined the ``excess readmission ratio'' as the risk-
standardized readmission ratio of the NQF-endorsed readmission 
measures. More in-depth detail surrounding the methodology of excess 
readmission ratio calculation can be accessed on the Web site at: 
http://qualitynet.org/dcs/ContentServer?c=Page&pagename=QnetPublic%2FPage%2FQnetTier4&cid=1219069855841.
    In this proposed rule, we are proposing to codify the definition of 
``excess readmission ratio'' under the regulations we are proposing at 
42 CFR 412.152 as a hospital-specific ratio for each applicable 
condition for an applicable period, which is the ratio (but not less 
than 1.0) of (1) risk-adjusted readmissions based on actual 
readmissions for an applicable hospital for each applicable condition 
to (2) the risk-adjusted expected readmissions for the applicable 
hospital for the applicable condition.
3. FY 2013 Proposed Policies for the Hospital Readmissions Reduction 
Program
a. Overview
    In this proposed rule, we are addressing the provisions in section 
1886(q) of the Act that are related to the Hospital Readmissions 
Reduction Program payment adjustment, as well as any other provisions 
in section 1886(q) of the Act that were not addressed in the FY 2012 
IPPS/LTCH PPS final rule that are effective for discharges beginning on 
or after October 1, 2012. Specifically, in this proposed rule, we are 
addressing section 1886(q) of the Act related to the following 
provisions:
     Base operating DRG payment amount, including policies for 
SCHs and MDHs and hospitals paid under section 1814(b) of the Act;
     Adjustment factor (both the ratio and floor adjustment 
factor);
     Aggregate payments for excess readmissions and aggregate 
payments for all discharges;
     Applicable hospital;
     Limitations on review;
     Reporting of hospital-specific information, including the 
process for hospitals to review and submit corrections.
    We are proposing to establish a new Subpart I under 42 CFR Part 412 
to incorporate the rules relating to the payment adjustments under the 
Hospital Readmissions Reduction Program.
b. Proposals Regarding Base Operating DRG Payment Amount, Including 
Special Rules for SCHs and MDHs and Hospitals Paid Under Section 1814 
of the Act
(1) Proposed Definition of Base Operating DRG Payment Amount (Proposed 
Sec.  412.152)
    Under the Hospital Readmissions Reduction Program at section 
1886(q) of the Act, payments for discharges from an ``applicable 
hospital'' will be an amount equal to the product of the ``base 
operating DRG payment amount'' and an ``adjustment factor'' that 
accounts for excess readmissions for the hospital for the fiscal year, 
for discharges beginning on or after October 1, 2012. Specifically, 
section 1886(q)(1) of the Act requires the Secretary to make payments 
for a discharge in an amount equal to the product of ``the base 
operating DRG payment amount'' and ``the adjustment factor'' for the 
hospital in a given fiscal year. The ``base operating DRG payment 
amount'' is defined under section 1886(q)(2) of the Act as ``the 
payment amount that would otherwise be made under subsection (d) 
(determined without regard to subsection (o) [the Hospital VBP 
Program]) for a discharge if this subsection did not apply; reduced by 
* * * any portion of such payment amount that is attributable to 
payments under paragraphs (5)(A), (5)(B), (5)(F), and (12) of 
subsection (d).'' Paragraphs (5)(A), (5)(B), (5)(F), and (12) of 
subsection (d) [of section 1886 of the Act] refer to outlier payments, 
indirect medical education (IME) payments, disproportionate share (DSH) 
payments, and low-volume hospital payments, respectively.
    In general, ``the payment amount that would otherwise be made under 
subsection (d) * * * for a discharge'' (that is, the discharge payment 
amount made under section 1886(d) of the Act) determined without 
consideration of the adjustments to payments made under the Hospital 
VBP Program (section 1886(o) of the Act) or under the Hospital 
Readmissions Reduction Program (section 1886(q) of the Act) is the 
applicable average standardized amount adjusted for resource 
utilization by the applicable MS-DRG relative weight and adjusted for 
differences in geographic costs by the applicable area wage index (and 
by the applicable cost-of-living adjustment (COLA) for hospitals 
located in Alaska and Hawaii), which is often

[[Page 27959]]

referred to as the ``wage-adjusted DRG operating payment.'' This 
payment amount may then be further adjusted if the hospital qualifies 
for an IME adjustment (under section 1886(d)(5)(B) of the Act), a DSH 
payment adjustment (under section 1886(d)(5)(F) of the Act), and/or a 
low-volume payment adjustment (under section 1886(d)(12) of the Act), 
or if the discharge qualifies for an outlier payment (under section 
1886(d)(5)(A) of the Act). Furthermore, certain discharges may qualify 
for an additional payment for new medical services or technologies 
under section 1886(d)(5)(K) of the Act (often referred to as a ``new 
technology add-on payment'').
    Consistent with section 1886(q)(2) of the Act, under the 
regulations we are proposing at 42 CFR 412.152, we would define the 
``base operating DRG payment amount'' under the Hospital Readmissions 
Reduction Program as the wage-adjusted DRG operating payment plus any 
applicable new technology add-on payments. As required by the statute, 
the proposed definition of ``base operating DRG payment amount'' does 
not include adjustments or add-on payments for IME, DSH, outliers and 
low-volume hospitals provided for under sections 1886(d)(5)(B), 
(d)(5)(F), (d)(5)(A), and (d)(12) of the Act, respectively. Section 
1886(q)(2) of the Act does not exclude new technology payments made 
under section 1886(d)(5)(K) of the Act; therefore, any payments made 
under section 1886(d)(5)(K) of the Act are included in the proposed 
definition of ``base operating DRG payment amount.'' In addition, under 
the regulations we are proposing at 42 CFR 412.152, we are proposing to 
define ``wage-adjusted DRG operating payment'' as the applicable 
average standardized amount adjusted for resource utilization by the 
applicable MS-DRG relative weight and adjusted for differences in 
geographic costs by the applicable area wage index (and by the 
applicable COLA for hospitals located in Alaska and Hawaii). We are 
proposing that, under Sec.  412.154(b)(1), to account for excess 
readmissions, an applicable hospital's base operating DRG payment 
amount is adjusted for each discharge occurring during the fiscal year. 
The payment adjustment for each discharge is determined by subtracting 
the product of the base operating DRG payment amount for such discharge 
by the hospital's admission payment adjustment factor for the fiscal 
year from the base operating DRG payment amount for such discharge.
    Under this proposal, consistent with section 1886(q)(2)(B)(i) of 
the Act and proposed Sec.  412.154(b)(2), for SCHs that receive 
payments based on their hospital-specific payment rate, we also are 
proposing to exclude the difference between the hospital's applicable 
hospital-specific payment rate and the Federal payment rate from the 
definition of ``base operating DRG payment amount.'' We note that, 
under the Hospital Readmissions Reduction Program at section 1886(q) of 
the Act, the proposed definition of ``base operating DRG payment 
amount'' would be used to calculate both the ``aggregate payments for 
excess readmissions'' and ``aggregate payments for all discharges'' 
under sections 1886(q)(4)(A) and (B) of the Act, which would then be 
used to determine the readmission adjustment factor that accounts for 
excess readmissions under section 1886(q)(3) of the Act (as discussed 
in greater detail in section IV.A.3.c. of this preamble), and would 
also be used to determine which payment amounts will be adjusted to 
account for excess readmissions. (We note that, as discussed in section 
IV.G. of this preamble, under current law, the MDH program expires at 
the end of FY 2012 (that is, the MDH program is currently only 
applicable to discharges occurring before October 1, 2012). Therefore, 
due to the expiration of the MDH program beginning with FY 2013, we are 
not including MDHs in the discussion of our proposals regarding the 
base operating DRG payment amount in this proposed rule.)
(2) Proposal on Special Rules for Certain Hospitals: Hospitals Paid 
Under Section 1814(b)(3) of the Act (Proposed Sec.  412.154(d))
    Although the definition of ``applicable hospital'' under section 
1886(q)(5)(C) of the Act includes hospitals paid under section 
1814(b)(3) of the Act (that is, certain Maryland hospitals), section 
1886(q)(2)(B)(ii) of the Act allows the Secretary to exempt such 
hospitals from the Hospital Readmissions Reduction Program, provided 
that the State submits an annual report to the Secretary describing how 
a similar program to reduce hospital readmissions in that State 
achieves or surpasses the measured results in terms of health outcomes 
and cost savings established by Congress for the program as applied to 
``subsection (d) hospitals.'' Accordingly, a program established by the 
State of Maryland that could serve to exempt the State from the 
Hospital Readmissions Reduction program would focus on those 
``applicable'' Maryland hospitals operating under the ``waiver'' 
provided by section 1814(b)(3) of the Act, that is, those hospitals 
that would otherwise have been paid by Medicare under the IPPS, absent 
the provision.
    In this proposed rule, we are proposing to establish criteria for 
evaluation of an annual report to CMS to determine whether Maryland 
should be exempted from the program each year. Accordingly, we would 
evaluate a report submitted by the State of Maryland documenting how 
its program that is described below meets those criteria. Based on the 
information in the report, we would determine whether or not Maryland's 
readmission program meets our criteria to be exempt from the Hospital 
Readmissions Reduction Program for FY 2013. We note that our proposed 
criteria to evaluate Maryland's program is for FY 2013, the first year 
of the program, and our evaluation criteria may change through notice-
and-comment rulemaking as the Hospital Readmissions Reduction Program 
evolves. We are proposing to codify this requirement at Sec.  
412.154(d) of the regulations.
    Based on preliminary discussions with the State, we understand 
that, effective July 1, 2011, Maryland has established the Admission-
Readmission Revenue (ARR) Program. The State has described its program 
as a voluntary program for acute care hospitals, of which 30 out of the 
46 acute care hospitals in the State are currently enrolled. Under the 
program, the State pays hospitals under a case-mix adjusted bundled 
payment per episode of care, where the episode of care is defined as 
the initial admission and any subsequent readmissions to the same 
hospital or linked hospital system that occur within 30 days of the 
original discharge. According to the State, an initial admission with 
no readmissions provides the hospital with the same weight as an 
initial admission with multiple readmissions. Therefore, hospitals 
receive a financial reward for decreased readmissions (as determined 
through the case mix adjusted, episode of care weights). Unlike the 
Hospital Readmissions Reduction Program under section 1886(q) of the 
Act, which is currently based on measures for three conditions (HF, 
AMI, and PN) for the Medicare FFS population and only adjusts the IPPS 
operating payments, Maryland's program applies to all conditions for 
all patients. In addition, while the Hospital Readmissions Reduction 
Program considers a readmission to be a subsequent admission to either 
the original acute care hospital from where the patient was initially 
discharged or an admission to another acute care hospital, currently 
Maryland only tracks readmissions to the same acute care hospital (or 
linked

[[Page 27960]]

hospital system) from which the patient was originally discharged. The 
State has noted that, under its ARR program, the readmission rates for 
the hospitals participating in the ARR program for the first quarter of 
its fiscal year compared to the first quarter of its previous fiscal 
year decreased from 9.86 percent to 8.96 percent.
    We are proposing to evaluate Maryland's ARR program based on 
whether the State can demonstrate that cost savings under its program 
achieve or exceed the savings to the Medicare program due to the 
Hospital Readmissions Reduction Program under section 1886(q) of the 
Act. We also are proposing to evaluate whether Maryland's program can 
demonstrate similar results in reducing unnecessary readmissions among 
hospitals in the State, as described in more detail below. With 
specific regard to Maryland's demonstration of cost savings, we are 
proposing to evaluate whether Maryland's ARR program can demonstrate 
savings to the Medicare program that are at least similar to those 
expected under the Hospital Readmissions Reduction Program. As 
discussed later in this proposed rule, we estimate that, under the 
Hospital Readmissions Reduction Program, for FY 2013, Medicare IPPS 
operating payments will decrease by approximately $300 million (or 0.3 
percent) of total Medicare IPPS operating payments. Maryland has 
indicated that it believes it can achieve comparable savings because it 
intends to reduce the rate update factor for all hospitals by 0.3 
percent, regardless of a hospital's performance on readmissions.
    In addition, we plan to propose in future rulemaking to evaluate 
whether Maryland's ARR program can meet or exceed health outcomes that 
we expect to improve under the Hospital Readmissions Reduction Program. 
Because the Hospital Readmissions Reduction Program is not effective 
until October 1, 2012, we do not yet have measured health outcomes 
against which we can evaluate Maryland's ARR program. However, we 
intend to have outcomes data in the future with which to evaluate 
Maryland's ARR program. We anticipate that, under the Hospital 
Readmissions Reduction Program, hospitals will experience a reduction 
in unnecessary readmissions. Therefore, in future rulemaking, we intend 
to propose to evaluate whether Maryland's ARR program can demonstrate 
similar decreases in potential preventable readmissions among hospitals 
in the State. Furthermore, we are proposing that the State's annual 
report and request for exemption from the Hospital Readmissions 
Reduction Program must be resubmitted and reconsidered annually in 
accordance with the statute and as proposed at Sec.  412.154(d)(2).
    Based on preliminary information provided by Maryland, the State 
believes that its program can meet our evaluation criteria and 
demonstrate that its program achieves or surpasses the measured results 
in terms of health outcomes and cost savings. We are reviewing whether 
the Maryland's ARR program, which currently cannot monitor readmissions 
to other hospitals and a financial reward for hospitals that reduce 
within-hospital readmissions and provides a 0.3 percent reduction to 
the annual rate update to account for comparable savings to the 
Hospital Readmissions Reduction Program, meets the criteria to exempt 
Maryland hospitals from the Hospital Readmissions Reduction Program. We 
welcome public comments on whether the Maryland ARR program meets the 
requirements for exemption from the Hospital Readmissions Reduction 
Program set forth in section 1886(q)(2)(B)(ii) of the Act.
    For the purposes of modeling the impacts of this proposal in this 
proposed rule, we have modeled under the assumption that Maryland 
hospitals will not have Hospital Readmission Reduction Program 
adjustment factors applied to them. Although the adjustment factors do 
not apply to these hospitals under our models, Maryland hospitals have 
excess readmission ratios, consistent with the definition of excess 
readmission ratio. Any readmission to a Maryland hospital from a 
subsection(d) hospital in another State is still considered a 
readmission for purposes of the original hospital in another State. 
This is consistent with the definition of readmissions in section 
1886(q)(5)(E) of the Act, which includes admissions to the same or 
another ``applicable hospital.'' As discussed above, we interpret the 
definition of ``applicable hospital'' under section 1886(q)(5)(C) of 
the Act includes both subsection (d) hospitals and hospitals paid under 
section 1814(b)(3) of the Act that would, absent the provisions of 
section 1814(b)(3) of the Act, be paid under subsection (d).
c. Proposals Regarding Adjustment Factor (Both the Ratio and Floor 
Adjustment Factor) (Proposed Sec.  412.154(c))
    Section 1886(q)(3)(A) of the Act defines the ``adjustment factor'' 
for an applicable hospital for a fiscal year as equal to the greater of 
``(i) the ratio described in subparagraph (B) for the hospital for the 
applicable period (as defined in paragraph (5)(D)) for such fiscal 
year; or (ii) the floor adjustment factor specified in subparagraph 
(C).'' Section 1886(q)(3)(B) of the Act in turn describes the ratio 
used to calculate the adjustment factor. Specifically, it states that 
the ratio is ``equal to 1 minus the ratio of--(i) the aggregate 
payments for excess readmissions * * *; and (ii) the aggregate payments 
for all discharges. * * *'' We are proposing to codify the calculation 
of this ratio at Sec.  412.154(c)(1) of the regulations. Section 
1886(q)(3)(C) of the Act specifies the floor adjustment factor, which 
is set at 0.99 for FY 2013, 0.98 for FY 2014, and 0.97 for FY 2015 and 
subsequent fiscal years. We are proposing to codify the floor 
adjustment factor at Sec.  412.154(c)(2) of the regulations.
    For FY 2013, under proposed Sec.  412.154(c), we are proposing that 
an applicable hospital would receive an adjustment factor that is 
either the greater of the ratio described in section IV.A.3.d. of this 
preamble or a floor adjustment factor of 0.99. We are proposing that 
the ratio would be rounded to the fourth decimal place, consistent with 
the calculation of other IPPS payment adjustments such as the wage 
index, DSH adjustment, and the IME adjustment. In other words, a 
hospital included in this program can have an adjustment factor that is 
between 1.0 and 0.9900 for FY 2013. Consistent with section 1886(q)(3) 
of the Act, under proposed Sec.  412.154(c), we are proposing that, for 
FY 2013, the hospital will receive an adjustment factor under the 
Hospital Readmissions Reduction Program that is the greater of the 
ratio or the floor of 0.99. Consistent with this proposal, under the 
regulations we are proposing at 42 CFR 412.152, we are proposing to 
define the ``floor adjustment factor'' as the value that the 
readmissions adjustment factor cannot be less than for a given fiscal 
year. As noted above, the floor adjustment factor is set at 0.99 for FY 
2013, 0.98 for FY 2014, and 0.97 for FY 2015 and subsequent fiscal 
years.
d. Proposals Regarding Aggregate Payments for Excess Readmissions and 
Aggregate Payments for All Discharges (Proposed Sec.  412.152)
    As discussed earlier, section 1886(q)(3)(B) of the Act specifies 
the ratio used to calculate the adjustment factor under the Hospital 
Readmissions Reduction Program. It states that the ratio is ``equal to 
1 minus the ratio of--(i) the aggregate payments for excess 
readmissions * * *; and (ii) the aggregate payments for all discharges 
* * *.'' In this section, we set forth

[[Page 27961]]

proposals to define aggregate payments for excess readmissions and 
aggregate payments for all discharges, as well as a methodology for 
calculating the numerator of the ratio (aggregate payments for excess 
readmissions) and the denominator of the ratio (aggregate payments for 
all discharges).
    Section 1886(q)(4) of the Act sets forth the definitions of 
``aggregate payments for excess readmissions'' and ``aggregate payments 
for all discharges'' for an applicable hospital for the applicable 
period. The term ``aggregate payments for excess readmissions'' is 
defined in section 1886(q)(4)(A) of the Act as ``for a hospital for an 
applicable period, the sum, for applicable conditions * * * of the 
product, for each applicable condition, of (i) the base operating DRG 
payment amount for such hospital for such applicable period for such 
condition; (ii) the number of admissions for such condition for such 
hospital for such applicable period; and (iii) the `Excess Readmission 
Ratio' * * * for such hospital for such applicable period minus 1.'' We 
are proposing to include this definition of ``aggregate payments for 
excess readmissions'' under the regulations we are proposing at 42 CFR 
412.152.
    The ``excess readmission ratio'' is a hospital-specific ratio 
calculated for each applicable condition. Specifically, section 
1886(q)(4)(C) of the Act defines the excess readmission ratio as the 
ratio of ``risk-adjusted readmissions based on actual readmissions'' 
for an applicable hospital for each applicable condition, to the 
``risk-adjusted expected readmissions'' for the applicable hospital for 
the applicable condition. The methodology for the calculation of the 
excess readmission ratio was finalized in the FY 2012 IPPS/LTCH PPS 
final rule (76 FR 51673). ``Aggregate payments for excess 
readmissions'' is the numerator of the ratio used to calculate the 
adjustment factor under the Hospital Readmissions Reduction Program.
    The term ``aggregate payments for all discharges'' is defined at 
section 1886(q)(4)(B) of the Act as ``for a hospital for an applicable 
period, the sum of the base operating DRG payment amounts for all 
discharges for all conditions from such hospital for such applicable 
period.'' ``Aggregate payments for all discharges'' is the denominator 
of the ratio used to calculate the adjustment factor under the Hospital 
Readmissions Reduction Program. We are proposing to include this 
definition of ``aggregate payments for all discharges'' under the 
regulations we are proposing at Sec.  412.152.
    As discussed above, when calculating the numerator (aggregate 
payments for excess readmission), CMS determines the base operating DRG 
for the applicable period. ``Aggregate payments for excess 
readmissions'' (the numerator) is defined as ``the sum, for applicable 
conditions * * * of the product, for each applicable condition, of (i) 
the base operating DRG payment amount for such hospital for such 
applicable period for such condition; (ii) the number of admissions for 
such condition for such hospital for such applicable period; and (iii) 
the `Excess Readmission Ratio' * * * for such hospital for such 
applicable period minus 1.''
    We discussed above our proposed definition of ``base operating DRG 
payment amount.'' When determining the base operating DRG payment 
amount for an individual hospital for such applicable period for such 
condition, we are proposing to use Medicare inpatient claims from the 
MedPAR file with discharge dates that are within the same applicable 
period that was finalized in the FY 2012 IPPS/LTCH PPS final rule (76 
FR 51671) to calculate the excess readmission ratio. We are proposing 
to use MedPAR claims data as our data source for determining aggregate 
payments for excess readmissions and aggregate payments for all 
discharges, as this data source is consistent with the claims data 
source used in IPPS rulemaking in order to determine IPPS rates. For FY 
2013, we are proposing to use data from MedPAR claims with discharge 
dates that are on or after July 1, 2008, and no later than June 30, 
2011, the applicable period finalized in the FY 2012 IPPS/LTCH PPS 
final rule. We are proposing to use the update of the MedPAR file for 
each Federal fiscal year, which is updated 6 months after the end of 
each Federal fiscal year within the applicable period, as our data 
source (that is, the March updates of the respective Federal fiscal 
year MedPAR files for the final rules, as described in greater detail 
below). These are the same MedPAR files that are used in the annual 
IPPS rulemaking for each Federal fiscal year.
    For the purposes of this proposed rule, for FY 2013, we are 
proposing to use the March 2009 update of the FY 2008 MedPAR file to 
identify claims within FY 2008 with discharges dates that are on or 
after July 1, 2008, the March 2010 update of the FY 2009 MedPAR file to 
identify claims within FY 2009, the March 2011 update of the FY 2010 
MedPAR file to identify claims within FY 2010, and the December 2011 
update of the FY 2011 MedPAR file to identify claims within FY 2011 
with discharge dates no later than June 30, 2011. However, for the FY 
2013 IPPS/LTCH PPS final rule, we plan to use the March 2012 update of 
the FY 2011 MedPAR file to identify claims within FY 2011, as these 
would be the most recently available FY 2011 claims data used for FY 
2013 rulemaking. These MedPAR data files are used each year in other 
areas of the IPPS, including calculating the IPPS relative weights, 
budget neutrality factors, outlier thresholds, and the standardized 
amount. Accordingly, we believe it is appropriate to use these same 
data files for the purpose of calculating the readmission adjustment 
factors. The FY 2008 through FY 2011 MedPAR data files can be purchased 
from CMS. These files allow the public to verify the readmission 
adjustment factors. Interested individuals may order these files 
through the Web site at: http://www.cms.hhs.gov/LimitedDataSets/ by 
clicking on the MedPAR Limited Data Set (LDS)-Hospital (National). This 
Web page describes the files and provides directions and further 
detailed instructions for how to order the data sets. Persons placing 
an order must send the following: a Letter of Request, the LDS Data Use 
Agreement and Research Protocol (refer to the Web site for further 
instructions), the LDS Form, and a check for $3,655 to:
    Mailing address if using the U.S. Postal Service: Centers for 
Medicare and Medicaid Services, RDDC Account, Accounting Division, P.O 
Box 7520, Baltimore, MD 21207-0520.
    Mailing address if using express mail: Centers for Medicare and 
Medicaid Services, OFM/Division of Accounting RDDC, Mailstop 
C-07-11, 7500 Security Boulevard, Baltimore, MD 21244-1850.
    We note that, in this proposed rule, we are proposing to determine 
aggregate payments for excess readmissions and aggregate payments for 
all discharges using data from MedPAR claims with discharge dates that 
are on or after July 1, 2008, and no later than June 30, 2011, which is 
the applicable period finalized in the FY 2012 IPPS/LTCH PPS final 
rule. However, in this proposed rule, for the purposes of modeling, we 
are using excess readmission ratios based on an older performance 
period of July 1, 2007 to June 30, 2010. For the final rule, we intend 
to use both the excess readmission ratios and MedPAR claims data to 
calculate aggregate payments for excess readmissions and aggregate 
payments for all discharges based on the applicable period finalized in 
the FY 2012 IPPS/LTCH PPS final rule (July 1, 2008 to June 30, 2011).

[[Page 27962]]

    In order to identify the admissions for each condition for an 
individual hospital for calculating the aggregate payments for excess 
readmissions, we are proposing to identify each applicable condition 
using the same ICD-9-CM codes used to identify applicable conditions to 
calculate the excess readmission ratios. In the FY 2012 IPPS/LTCH PPS 
final rule (76 FR 51669), in our discussion of the methodology of the 
readmissions measures, we stated that we identify eligible 
hospitalizations and readmissions of Medicare patients discharged from 
an applicable hospital having a principal diagnosis for the measured 
condition in an applicable period. The discharge diagnoses for each 
applicable condition are based on a list of specific ICD-9-CM codes for 
that condition. These codes are listed in the 2010 Measures Maintenance 
Technical Report: Acute Myocardial Infarction, Heart Failure, and 
Pneumonia 30-Day Risk-Standardized Readmission Measures. They also are 
posted on the Web site at: http://www.QualityNet.org > Hospital-
Inpatient > Readmission Measures > methodologies.
    In order to identify the applicable conditions to calculate the 
aggregate payments for excess readmissions, we are proposing to 
identify the claim as an applicable condition if the ICD-9-CM code for 
that condition is listed as the principal diagnosis on the claim, 
consistent with the methodology to identify conditions to calculate the 
excess readmission ratio. Furthermore, we are proposing to only 
identify Medicare FFS claims that meet the criteria (that is, claims 
paid for under Part C, Medicare Advantage, would not be included in 
this calculation), consistent with the methodology to calculate excess 
readmission ratios based on readmissions for Medicare FFS patients. The 
tables below list the ICD-9-CM codes we are proposing to use to 
identify each applicable condition to calculate the aggregate payments 
for excess readmissions under this proposal. These ICD-9-CM codes will 
also be used to identify the applicable conditions to calculate the 
excess readmission ratios, consistent with our policy finalized in the 
FY 2012 IPPS/LTCH PPS final rule.

               ICD-9-CM Codes To Identify Pneumonia Cases
------------------------------------------------------------------------
             ICD-9-CM Code                     Description of code
------------------------------------------------------------------------
480.0.................................  Pneumonia due to adenovirus.
480.1.................................  Pneumonia due to respiratory
                                         syncytial virus.
480.2.................................  Pneumonia due to parainfluenza
                                         virus.
480.3.................................  Pneumonia due to SARS-associated
                                         coronavirus.
480.8.................................  Viral pneumonia: pneumonia due
                                         to other virus not elsewhere
                                         classified.
480.9.................................  Viral pneumonia unspecified.
481...................................  Pneumococcal pneumonia
                                         [streptococcus pneumoniae
                                         pneumonia].
482.0.................................  Pneumonia due to klebsiella
                                         pneumoniae.
482.1.................................  Pneumonia due to pseudomonas.
482.2.................................  Pneumonia due to hemophilus
                                         influenzae [h. influenzae].
482.30................................  Pneumonia due to streptococcus
                                         unspecified.
482.31................................  Pneumonia due to streptococcus
                                         group a.
482.32................................  Pneumonia due to streptococcus
                                         group b.
482.39................................  Pneumonia due to other
                                         streptococcus.
482.40................................  Pneumonia due to staphylococcus
                                         unspecified.
482.41................................  Pneumonia due to staphylococcus
                                         aureus.
482.42................................  Methicillin Resistant Pneumonia
                                         due to Staphylococcus Aureus.
482.49................................  Other staphylococcus pneumonia.
482.81................................  Pneumonia due to anaerobes.
482.82................................  Pneumonia due to escherichia
                                         coli [e.coli].
482.83................................  Pneumonia due to other gram-
                                         negative bacteria.
482.84................................  Pneumonia due to legionnaires'
                                         disease.
482.89................................  Pneumonia due to other specified
                                         bacteria.
482.9.................................  Bacterial pneumonia unspecified.
483.0.................................  Pneumonia due to mycoplasma
                                         pneumoniae.
483.1.................................  Pneumonia due to chlamydia.
483.8.................................  Pneumonia due to other specified
                                         organism.
485...................................  Bronchopneumonia organism
                                         unspecified.
486...................................  Pneumonia organism unspecified.
487.0.................................  Influenza with pneumonia.
488.11................................  Influenza due to identified
                                         novel H1N1 influenza virus with
                                         pneumonia.
------------------------------------------------------------------------


             ICD-9-CM Codes To Identify Heart Failure Cases
------------------------------------------------------------------------
             ICD-9-CM Code                      Code description
------------------------------------------------------------------------
402.01................................  Hypertensive heart disease,
                                         malignant, with heart failure.
402.11................................  Hypertensive heart disease,
                                         benign, with heart failure.
402.91................................  Hypertensive heart disease,
                                         unspecified, with heart
                                         failure.
404.01................................  Hypertensive heart and chronic
                                         kidney disease, malignant, with
                                         heart failure and with chronic
                                         kidney disease stage I through
                                         stage IV, or unspecified.
404.03................................  Hypertensive heart and chronic
                                         kidney disease, malignant, with
                                         heart failure and with chronic
                                         kidney disease stage V or end
                                         stage renal disease.
404.11................................  Hypertensive heart and chronic
                                         kidney disease, benign, with
                                         heart failure and with chronic
                                         kidney disease stage I through
                                         stage IV, or unspecified.
404.13................................  Hypertensive heart and chronic
                                         kidney disease, benign, with
                                         heart failure and with chronic
                                         kidney disease stage I through
                                         stage IV, or unspecified
                                         failure and chronic kidney
                                         disease stage V or end stage
                                         renal disease.

[[Page 27963]]

 
404.91................................  Hypertensive heart and chronic
                                         kidney disease, unspecified,
                                         with heart failure and chronic
                                         kidney disease stage V or end
                                         stage renal disease heart
                                         failure and with chronic kidney
                                         disease stage I through stage
                                         IV, or unspecified.
404.93................................  Hypertensive heart and chronic
                                         kidney disease, unspecified,
                                         with heart failure and chronic
                                         kidney disease stage V or end
                                         stage renal disease.
428.xx................................  Heart Failure.
------------------------------------------------------------------------


      ICD-9-CM Codes To Identify Acute Myocardial Infarction Cases
------------------------------------------------------------------------
             ICD-9-CM Code                     Description of Code
------------------------------------------------------------------------
410.00................................  AMI (anterolateral wall)--
                                         episode of care unspecified.
410.01................................  AMI (anterolateral wall)--
                                         initial episode of care.
410.10................................  AMI (other anterior wall)--
                                         episode of care unspecified.
410.11................................  AMI (other anterior wall)--
                                         initial episode of care.
410.20................................  AMI (inferolateral wall)--
                                         episode of care unspecified.
410.21................................  AMI (inferolateral wall)--
                                         initial episode of care.
410.30................................  AMI (inferoposterior wall)--
                                         episode of care unspecified.
410.31................................  AMI (inferoposterior wall)--
                                         initial episode of care.
410.40................................  AMI (other inferior wall)--
                                         episode of care unspecified.
410.41................................  AMI (other inferior wall)--
                                         initial episode of care.
410.50................................  AMI (other lateral wall)--
                                         episode of care unspecified.
410.51................................  AMI (other lateral wall)--
                                         initial episode of care.
410.60................................  AMI (true posterior wall)--
                                         episode of care unspecified.
410.61................................  AMI (true posterior wall)--
                                         initial episode of care.
410.70................................  AMI (subendocardial)--episode of
                                         care unspecified.
410.71................................  AMI (subendocardial)--initial
                                         episode of care.
410.80................................  AMI (other specified site)--
                                         episode of care unspecified.
410.81................................  AMI (other specified site)--
                                         initial episode of care.
410.90................................  AMI (unspecified site)--episode
                                         of care unspecified.
410.91................................  AMI (unspecified site)--initial
                                         episode of care.
------------------------------------------------------------------------

    Section 1886(q)(2) of the Act defines the base operating DRG 
payment amount as ``the payment amount that would otherwise be made 
under subsection (d) (determined without regard to subsection (o) [the 
Hospital VBP Program]) for a discharge if this subsection did not 
apply; reduced by * * * any portion of such payment amount that is 
attributable to payments under paragraphs (5)(A), (5)(B), (5)(F), and 
(12) of subsection (d).'' Paragraphs (d)(5)(A), (d)(5)(B), (d)(5)(F), 
and (d)(12) of section 1886 refer to outlier payments, IME payments, 
DSH payments, and payments for low-volume hospitals, respectively.
    As discussed earlier in section IV.A.3.b.(1) of this preamble, we 
are proposing to define ``base operating DRG payment amount'' under the 
Hospital Readmissions Reduction Program as the wage-adjusted DRG 
operating payment plus any new technology add-on payments. Thus, in 
order to calculate the base operating DRG payment amount for such 
condition for such hospital, we are proposing to identify the base 
operating DRG payment amount for such conditions based on the payment 
amounts in the MedPAR files on the claims identified to meet those 
conditions based on their ICD-9-CM code.
    As discussed in section IV.A.3.b. of this preamble, applicable 
hospitals in the Hospital Readmissions Reduction Program include SCHs 
and current MDHs (whose status is set to expire at the end of FY 2012), 
as these hospitals meet the definition of subsection (d) hospitals. 
SCHs are paid in the interim (prior to cost report settlement) on a 
claim-by-claim basis at the amount that is the higher of the payment 
based on the hospital-specific rate or the IPPS Federal rate based on 
the standardized amount. At cost report settlement, the fiscal 
intermediary or MAC determines whether the hospital would receive 
higher IPPS payments in the aggregate using the hospital-specific rate 
(on all claims) or the Federal rate (on all claims). MDHs are paid the 
sum of the Federal payment amount plus 75 percent of the amount by 
which their hospital-specific rate exceeds the Federal payment amount. 
Although MDH status is to expire beginning in FY 2013, because we are 
using historical data to determine the base operating DRG payments to 
calculate adjustment factor, the payments reflected on claims for 
current MDHs may be based on the hospital-specific rate. For SCHs and 
current MDHs, we are proposing to model their base operating DRG 
payment amount as they would have been paid under the Federal 
standardized amount, rather than using the information on the claim 
(which may represent a payment either made under the hospital-specific 
rate or the Federal rate) so that their payments are consistent with 
our proposed definition of base operating DRG payment. As such, the 
payment difference between the payment made under the hospital-specific 
rate and the payment made under the Federal rate is not included in the 
base operating DRG amount to determine the readmission adjustment 
factor; that is, it is neither included in the numerator of the 
aggregate dollars for excess readmissions nor in the denominator of the 
aggregate dollars for all discharges.
    As discussed earlier, we are proposing to use data from the MedPAR 
files that contain claims from the 3-year applicable period of July 1, 
2008, to June 30, 2011, for FY 2013 to calculate aggregate payments for 
excess readmissions (the numerator of the ratio). To calculate 
aggregate payments for excess readmissions, we are proposing to 
calculate the base operating DRG payment amounts for all the claims in 
the 3-year applicable period that list each applicable

[[Page 27964]]

condition as the principal diagnosis (as described above). Once we have 
calculated the base operating DRG payment amounts for all the claims 
that list each condition as the principal diagnosis, we are proposing 
to add up the base operating DRG payment amounts by each condition, 
resulting in three summed amounts, one amount for each of the three 
applicable conditions. We then are proposing to multiply each amount 
for each condition by their respective excess readmission ratio minus 
1. The methodology for the calculation of the excess readmission ratio 
was finalized in the FY 2012 IPPS/LTCH PPS final rule (76 FR 51673). We 
are proposing that the excess readmission ratios for each condition 
used to calculate the numerator of this ratio are excess readmission 
ratios that have gone through the proposed review and correction 
process described later in this proposed rule. Each product in this 
computation represents the payment for excess readmissions for that 
condition. We are proposing to then sum the resulting products, which 
represent a hospital's proposed ``aggregate payments for excess 
readmissions'' (the numerator of the ratio).
    If a hospital has an excess readmission ratio that is greater than 
1 for a condition, that hospital has performed, with respect to 
readmissions for that applicable condition, worse than the average 
hospital with similar patients. As such, it will have aggregate 
payments for excess readmissions. If a hospital has an excess 
readmission ratio that is less than (or equal) to one, that hospital 
has performed better (or on average), with respect to readmissions for 
that applicable condition, than an average hospital with similar 
patients. As such, that hospital would not be considered to have 
``aggregate payments'' for excess readmissions, and its payments would 
not be reduced under section 1886(q) of the Act. As described in 
section 1886(q)(4)(C) of the Act, and finalized in the FY 2012 IPPS/
LTCH PPS final rule, the excess readmission ratio used cannot be less 
than 1 because the hospital will not have aggregate payments for excess 
readmissions and will not be subject to a readmission payment 
adjustment, as the hospital will have performed better than average. 
Because this calculation is performed separately for the three 
conditions, a hospital's excess readmission ratio must be less than or 
equal to 1 on each measure to avoid aggregate payments for excess 
readmissions.
    Section 1886(q)(4)(B) of the Act defines ``aggregate payments for 
all discharges'' (the denominator of the ratio) as ``for a hospital for 
an applicable period, the sum of the base operating DRG payment amounts 
for all discharges for all conditions from such hospital for such 
applicable period.'' We are proposing to use the same MedPAR files to 
calculate the denominator as we are proposing to use to calculate the 
numerator, for the 3-year applicable period of July 1, 2008 to June 30, 
2011, for FY 2013. We are proposing to calculate base operating DRG 
payments in the same manner as we calculate base operating DRG payments 
for the numerator. We are proposing to sum the base operating DRG 
payment amounts for all Medicare FFS claims for such hospital during 
the 3-year applicable period. We also are proposing that we would model 
base operating DRG payment amount for SCHs and current MDHs as they 
would have been paid under the Federal standardized amount, rather than 
using the information on the claim (as described above).
    We are proposing that the ratio described in section 1886(q)(3)(B) 
of the Act is 1 minus the ratio of the numerator and denominator 
described above. In addition, we are proposing that the readmission 
adjustment for an applicable hospital is the higher of this ratio under 
section 1886(q)(3)(B) of the Act or the floor of 0.99 for FY 2013. 
Consistent with this proposal, under the regulations we are proposing 
at 42 CFR 412.152, we are proposing to define ``readmissions adjustment 
factor'' as equal to the greater of: (i) 1 minus the ratio of the 
aggregate payments for excess readmissions to aggregate payments for 
all discharges or (ii) the floor adjustment factor.
    For this proposed rule, for the purpose of modeling the proposed 
aggregate payments for excess readmissions and the proposed 
readmissions adjustment factors, we are using excess readmission ratios 
for the applicable hospitals from the 3-year period of July 1, 2007 to 
June 30, 2010, because the underlying data from this period have 
already been available to the public on the Hospital Compare Web site 
(as of July 2011). The data from the 3-year applicable period for FY 
2013 of July 1, 2008 to June 30, 2011, have not been through the review 
and correct process required by section 1886(q)(6) of the Act (as 
discussed below). For the final rule, we intend to use excess 
readmission ratios based on discharges for the finalized applicable 
period of July 1, 2008 to June 30, 2011, to calculate the aggregate 
payments for excess readmissions and, ultimately, to calculate the 
readmission adjustment factors. Applicable hospitals will have had the 
opportunity to review and correct these data before they are made 
public under our proposal set forth below regarding the reporting of 
hospital-specific readmission rates, consistent with section 1886(q)(6) 
of the Act.

Formulas To Calculate the Readmission Adjustment Factor

Aggregate payments for excess readmissions = [sum of base operating DRG 
payments for AMI x (Excess Readmission Ratio for AMI-1)] + [sum of base 
operating DRG payments for HF x (Excess Readmission Ratio for HF-1)] + 
[sum of base operating DRG payments for PN x (Excess Readmission Ratio 
for PN-1)].
Aggregate payments for all discharges = sum of base operating DRG 
payments for all discharges.
Ratio = 1-(Aggregate payments for excess readmissions/Aggregate 
payments for all discharges).
Readmissions Adjustment Factor for FY 2013 is the higher of the ratio 
or 0.99.

    *Based on claims data from July 1, 2008 to June 30, 2011 for FY 
2013.

    During the FY 2012 IPPS rulemaking cycle, we received public 
comments expressing concern that hospitals that treat a larger 
proportion of patients of lower socioeconomic circumstances may have 
higher readmission rates and could be unfairly penalized under the 
Hospital Readmissions Reduction Program. The table below shows, based 
on the excess readmission ratios and the proposed methodology to 
calculate the readmissions adjustment factor discussed in this proposed 
rule, the estimated distribution of the readmission adjustment factors 
among hospitals ranked by their DSH patient percentage (DPP). The DPP 
is used as a proxy for low-income patients and is the sum of the 
hospital's Medicare fraction and Medicaid fraction. The Medicare 
fraction is computed by dividing the number of a hospital's inpatient 
days that are furnished to patients who were entitled to both Medicare 
Part A and Supplemental Security Income (SSI) benefits by the 
hospital's total number of patient days furnished to patients entitled 
to benefits under Medicare Part A. The Medicaid fraction is computed by 
dividing the hospital's number of inpatient days furnished to patients 
who, for such days, were eligible for Medicaid, but were not entitled 
to benefits under Medicare Part A, by the hospital's total number of 
inpatient days. The DPP is used to determine a hospital's Medicare DSH 
payment adjustment. Thus, hospitals with higher

[[Page 27965]]

percentages of Medicare patients entitled to SSI and higher percentages 
of Medicaid patients have higher DPPs. In the table, the hospitals are 
ranked by their estimated DPP and categorized into deciles. The table 
shows the number of hospitals within each decile that are subject to no 
proposed readmission payment adjustment, the -1 percent floor 
readmission payment adjustment, and a readmission payment adjustment 
that is less than the -1 percent floor. We are inviting public comment 
on this analysis.

             Distribution of Hospitals Readmission Adjustment Factor by DSH Patient Percentage (DPP)
----------------------------------------------------------------------------------------------------------------
                                                                 Payment
                                              Number of       adjustment of   -1 Percent floor   No readmission
                 Decile                       hospitals       less  than -1      adjustment        adjustment
                                                                 percent                             factor
----------------------------------------------------------------------------------------------------------------
Lowest DPP..............................               339               156                38               145
Second..................................               339               164                57               118
Third...................................               339               168                44               127
Fourth..................................               339               170                48               121
Fifth...................................               339               182                42               115
Sixth...................................               339               171                43               125
Seventh.................................               339               187                44               108
Eighth..................................               339               182                43               114
Ninth...................................               339               179                58               102
Highest DPP.............................               342               185                61                96
                                         -----------------------------------------------------------------------
    Total...............................             3,393             1,744               478             1,171
----------------------------------------------------------------------------------------------------------------

    In addition, we have examined the estimated distribution of the 
proposed readmission adjustment factor based on the excess readmission 
ratios in this proposed rule (determined using the 2007-2010 data 
discussed above). The table below shows the number and percentage of 
hospitals ranked by the percent reduction received under the Hospital 
Readmissions Reduction Program. The table shows that about 71 percent 
of hospitals would receive either no adjustment or a readmission 
adjustment factor that would reduce their base operating DRG payments 
by less than 0.5 percent.

             Distribution of Readmission Adjustment Factors
------------------------------------------------------------------------
                                          Number of        Percent of
          Percent reduction               hospitals         hospitals
------------------------------------------------------------------------
No Adjustment.......................             1,171              34.5
Up to -.09 Percent..................               347              10.2
-0.1 Percent to -0.19 Percent.......               280               8.3
-0.20 Percent to -0.29 Percent......               228               6.7
-0.30 Percent to -0.39 Percent......               196               5.8
-0.40 Percent to -0.49 Percent......               180               5.3
-0.50 Percent to -0.59 Percent......               129               3.8
-0.60 Percent to -0.69 Percent......               118               3.5
-0.70 Percent to -0.79 Percent......               110               3.2
-0.80 Percent to -0.89 Percent......                77               2.3
-0.90 Percent to -0.99 Percent......                76               2.2
-1.0 Percent........................               481              14.2
                                     -----------------------------------
    Total...........................             3,393             100.0
------------------------------------------------------------------------

e. Proposals Regarding Applicable Hospitals
    An ``applicable hospital,'' is defined at section 1886(q)(5)(C) of 
the Act as (1) ``a subsection(d) hospital or (2) a hospital that is 
paid under section 1814(b)(3).'' Specifically, hospitals subject to the 
Hospital Readmissions Reduction Program are hospitals paid under the 
IPPS and hospitals paid under the authority of section 1814(b)(3) of 
the Act. We are interpreting this reference to section 1814(b)(3) of 
the Act to mean those Maryland hospitals that are paid under section 
1814(b)(3) of the Act and that, absent the ``waiver'' specified by 
section 1814(b)(3) of the Act, would have been paid under the IPPS. A 
subsection (d) hospital is defined in section 1886(d)(1)(B) of the Act, 
in part, as a ``hospital located in one of the fifty States or the 
District of Columbia.'' The term subsection (d) hospital does not 
include hospitals located in the Territories or hospitals located in 
Puerto Rico. Section 1886(d)(9)(A) of the Act separately defines a 
``subsection(d) Puerto Rico hospital'' as a hospital that is located in 
Puerto Rico and that ``would be a subsection(d) hospital * * * if it 
were located in one of the 50 States.'' Therefore, Puerto Rico 
hospitals are not considered applicable hospitals under the Hospital 
Readmissions Reduction Program. Indian Health Services hospitals 
enrolled as a Medicare provider meet the definition of a subsection (d) 
hospital and, therefore, are considered an applicable hospital under 
the Hospital Readmissions Reduction Program, even if they are not paid 
under the IPPS. In addition, hospitals that are SCHs and current MDHs, 
although they may be paid under a hospital-specific rate instead of 
under the Federal rate under the IPPS, are subsection (d) hospitals 
and, therefore, are included in the definition of an applicable 
hospital

[[Page 27966]]

under the Hospital Readmissions Reduction Program.
    A subsection (d) hospital as defined in section 1886(d)(1)(B) of 
the Act does not include hospitals and hospital units excluded from the 
IPPS, such as LTCHs, cancer hospitals, children's hospitals, IRFs, and 
IPFs, and, therefore, these hospitals are not considered ``applicable 
hospitals.'' CAHs are not ``applicable hospitals'' because they do not 
meet the definition of a ``subsection (d) hospital,'' as they are 
separately defined under section 1886(mm) of the Act and are paid under 
a reasonable cost methodology under section 1814(l) of the Act. 
Consistent with the statute, therefore, we are proposing to define 
``applicable hospital'' under the regulations at 42 CFR 412.152 to 
include both (1) subsection (d) hospitals, that is, hospitals paid 
under the IPPS and (2) hospitals in Maryland that are paid under 
section 1814(b)(3) of the Act and that, absent the ``waiver'' specified 
by section 1814(b)(3) of the Act, would have been paid under the IPPS.
    The term ``applicable hospital'' is also referenced in the 
definition of readmission in section 1886(q)(5)(E) of the Act, which 
defines ``readmission'' as ``in the case of an individual who is 
discharged from an applicable hospital, the admission of the individual 
to the same or another applicable hospital within a time period 
specified by the Secretary from the date of such discharge.'' In the FY 
2012 IPPS/LTCH PPS final rule (76 FR 51666), we finalized the 
definition of readmission as ``occurring when a patient is discharged 
from the applicable hospital and then is admitted to the same or 
another acute care hospital within a specified time period from the 
time of discharge from the index hospitalization.'' Furthermore, we 
finalized the time period specified for these readmission measures as 
30 days. With our proposal to define an applicable hospital as a 
subsection (d) hospital or certain Maryland hospitals described above, 
we also are proposing to refine the definition of readmission to only 
include admissions and readmissions occurring from an applicable 
hospital (that is, a subsection (d) hospital or certain Maryland 
hospitals) to the same or another applicable hospital (again, a 
subsection (d) hospital or certain Maryland hospitals) (proposed Sec.  
412.152). Accordingly, excess readmission ratios calculated for the 
purpose of the Hospital Readmissions Reduction Program would include 
only admissions and readmissions to ``applicable hospitals.''
    We note that because the Hospital Readmissions Reduction Program 
only includes admissions and readmissions to ``applicable hospitals'' 
to calculate the excess readmission ratios used under section 1886(q) 
of the Act, these excess readmission ratios will differ from the 
readmission rates reported on Hospital Compare for the purpose of the 
Hospital IQR Program. The excess readmission ratios for the purpose of 
the Hospital IQR Program were determined based on admissions and 
readmissions to all hospitals, not just hospitals specified in sections 
1886(d) and 1814(b)(3) of the Act. Therefore, as discussed above, the 
excess readmission ratios used in this proposed rule will use a subset 
of the claims used to calculate the readmission rates reported on 
Hospital Compare for the purpose of the Hospital IQR Program and would 
be limited to admissions and readmissions to ``applicable hospitals'' 
and are based on the period of June 30, 2007 to July 1, 2010. In this 
proposed rule, we are using these excess readmission ratios, as they 
are based on the most recent data available and will allow the public 
to replicate our methodology to understand how the readmission 
adjustment factor is calculated. We believe that the differences 
between these proposed excess readmission ratios and those excess 
readmission ratios currently published on Hospital Compare under the 
Hospital IQR Program are minimal, and we believe that it is helpful for 
hospitals to see the impact of our proposed methodology to calculate 
the readmission adjustment using excess readmission ratios calculated 
under our methodology finalized in the FY 2012 IPPS/LTCH PPS final 
rule. For the final rule, we intend to use excess readmission ratios 
based on the applicable period of June 30, 2008 to July 1, 2011, as 
finalized in the FY 2012 IPPS/LTCH PPS final rule, and hospitals will 
have the opportunity to review and correct their data related to their 
excess readmission ratios prior to the publication of those excess 
readmission ratios.
    We are specifically inviting public comment on our readmissions 
proposal, including our proposed definition of base operating DRG 
payment, our proposed methodology to calculate the readmission 
adjustment factor, the minimum number of cases, and our proposed 
definition of applicable hospital.
4. Limitations on Review (Proposed Sec.  412.154(e))
    Section 1886(q)(7) of the Act provides that there will be no 
administrative or judicial review under section 1869 of the Act, under 
section 1878 of the Act, or otherwise for any of the following:
     The determination of base operating DRG payment amounts.
     The methodology for determining the adjustment factor, 
including the excess readmissions ratio, aggregate payments for excess 
readmissions, and aggregate payments for all discharges, and applicable 
periods and applicable conditions.
    We are proposing to include under proposed Sec.  412.154(e) that 
the provisions listed above will not be subject to administrative or 
judicial review, consistent with section 1886(q)(7) of the Act. We note 
that section 1886(q)(6) of the Act requires that the Secretary ``make 
information available to the public regarding readmissions rates of 
each subsection (d) hospital under the [Hospital Readmissions Reduction 
Program]'' and also requires the Secretary to ``ensure that a 
subsection (d) hospital has the opportunity to review and submit 
corrections for, the information to be made public.'' Our proposal for 
reporting hospital-specific information, including a hospital's 
opportunity to review and submit corrections, consistent with section 
1886(q)(7) of the Act, is discussed below.
5. Reporting Hospital-Specific Information, Including Opportunity To 
Review and Submit Corrections (Proposed Sec.  412.154(f))
    Section 1886(q)(6)(A) of the Act requires the Secretary to ``make 
information available to the public regarding readmissions rates of 
each subsection (d) hospital under the [Hospital Readmissions Reduction 
Program]''. Section 1886(q)(6)(B) of the Act also requires the 
Secretary to ``ensure that a subsection (d) hospital has the 
opportunity to review, and submit corrections for, the information to 
be made public with respect to the hospital.'' In addition, section 
1886(q)(6)(C) of the Act requires the Secretary to post the hospital-
specific readmission information for each subsection (d) hospital on 
the Hospital Compare Web site in an easily understood format.
    For purposes of the Hospital Readmissions Reduction Program for FY 
2013, we will calculate excess readmission ratios for each of the three 
conditions, AMI, HF, and PN, using the previously finalized 3-year 
applicable period for the FY 2013 payment determination that spans from 
July 1, 2008 through June 30, 2011 (76 FR 51671), data sources, and the 
minimum number of discharges previously finalized in the FY 2012 IPPS/
LTCH

[[Page 27967]]

PPS final rule for each applicable hospital (76 FR 51671 through 
51672). We intend to make these excess readmission ratios available to 
the public, consistent with the requirements of section 1886(q)(6)(B) 
of the Act, as part of the FY 2013 rulemaking process, in addition to 
posting this information on the Hospital Compare Web site in a 
subsequent release.
    In the FY 2012 IPPS/LTCH PPS final rule, we indicated that we would 
provide hospitals an opportunity to review and submit corrections using 
a process similar to what is currently used for posting results on 
Hospital Compare. We currently provide hospitals with the data elements 
necessary to verify the accuracy of their readmission rates for the 
Hospital IQR Program prior to posting their rates on Hospital Compare. 
Because we believe it is important to provide hospitals with relevant 
information available to hospitals for assessing payment impacts for 
purposes of the Hospital Readmissions Reduction Program, we plan to 
make the excess readmission ratios used for the Hospital Readmissions 
Reduction Program adjustment factor calculation available during the 
rulemaking cycle. As a result, the timeline and details of this process 
must accommodate the rulemaking timeline in addition to posting on 
Hospital Compare. We are proposing below the details regarding the 
process for hospitals to review and submit corrections to their excess 
readmission ratios prior to making this information available to the 
public in rulemaking and on Hospital Compare.
    For FY 2013, we are proposing to deliver confidential reports and 
accompanying confidential discharge-level information to applicable 
hospitals as defined in section IV.A.2. of this preamble, which contain 
their excess readmission ratios for the three applicable conditions by 
June 20, 2012. These reports will be delivered in hospitals' secure 
QualityNet accounts. The information in the confidential reports and 
accompanying confidential discharge-level information would be 
calculated using the claims information we had available approximately 
90 days after the last discharge date in the applicable period, which 
is when we would create the data extract for the calculations (we 
discuss this practice in more detail later).
    The discharge-level information accompanying the excess readmission 
ratios would include the risk-factors for the discharges that factor 
into the calculation of the excess readmission ratio, as well as 
information about the readmissions associated with these discharges 
(such as dates, provider numbers, and diagnosis upon readmission). Our 
intent in providing this information is twofold: (1) To facilitate 
hospitals' verification of the excess readmission ratio calculations we 
provide during the review and correction period based upon the 
information CMS had available at the time our data extract was created; 
and (2) to facilitate hospitals' quality improvement efforts with 
respect to readmissions.
    We are proposing to provide hospitals with a period of 30 days to 
review and submit corrections for their excess readmission ratios for 
the Hospital Readmissions Reduction Program. This 30-day period would 
begin the day hospitals' confidential reports and accompanying 
discharge-level information are posted to their QualityNet accounts. 
Based on previous experience with public reporting of measures under 
the Hospital IQR program, including the 30-day risk standardized 
readmission rates, we believe this 30-day period would allow enough 
time for hospitals to review their data and notify CMS of calculation 
errors, and for CMS to incorporate appropriate corrections to the 
excess readmission ratio calculations prior to the publication of the 
final rule, at which time the excess readmission ratios would be made 
available to the public in a table to be cited in the final rule and 
available via the Internet on the CMS Web site. During the review and 
correction period, hospitals should notify CMS of suspected errors in 
their excess readmission ratio calculations using the technical 
assistance contact information provided in their confidential reports.
    The review and correction process we are proposing for the excess 
readmission ratios above would not allow hospitals to submit additional 
corrections related to the underlying claims data we used to calculate 
the ratios, or allow hospitals to add new claims to the data extract we 
used to calculate the ratios. This is because it is necessary to take a 
static ``snapshot'' of the claims in order to perform the calculations. 
For purposes of this program, we would calculate the excess readmission 
ratios using a static snapshot (data extract) taken at the conclusion 
of the 90 day period following the last date of discharge used in the 
applicable period. We recognize that under our current timely claims 
filing policy, hospitals have up to one year from the date of discharge 
to submit a claim to CMS. However, in using claims data to calculate 
measures for this program, we are proposing to create data extracts 
using claims in CMS' Common Working File (CWF) 90 days after the last 
discharge date in the applicable period which we will use for the 
calculations. For example, if the last discharge date in the applicable 
period for a measure is June 30, 2011, we would create the data extract 
on September 30, 2011, and use that data to calculate the ratios for 
that applicable period. Hospitals would then receive the excess 
readmission ratio calculations in their confidential reports and 
accompanying discharge-level information and they would have an 
opportunity to review and submit corrections for the calculations. As 
we stated above, hospitals would not be able to submit corrections to 
the underlying data that were extracted on September 30, 2011, and 
would also not be able to add claims to the data set. Therefore, we 
would consider hospitals' claims data to be complete for purposes of 
calculating the excess readmission ratios for the Hospital Readmissions 
Reduction Program at the conclusion of the 90-day period following the 
last date of discharge used in the applicable period.
    We considered a number of factors in determining that a 90-day 
``run-out'' period is appropriate for purposes of calculating claims 
based measures. First, we seek to provide timely quality data to 
hospitals for the purpose of quality improvement and to the public for 
the purpose of transparency. Next, we seek to make payment adjustments 
to hospitals based on their performance on measures as close in time to 
the performance period as possible. Finally, with respect to claims-
based measures, we seek to have as complete a data set as possible, 
recognizing that hospitals have up to one year from the date of 
discharge to submit a claim under CMS' timely claims filing policy.
    After the data extract is created, it takes several months to 
incorporate other data needed for the calculations (particularly in the 
case of risk-adjusted, and/or episode-based measures). We then need to 
generate and check the calculations, as well as program, populate, and 
deliver the confidential reports and accompanying data to be delivered 
to hospitals. We also are aware that hospitals would prefer to receive 
the calculations to be used for the Hospital Readmissions Reduction 
Program as soon as possible. Because several months lead time is 
necessary after acquiring the data to generate these claims-based 
calculations, if we were to delay our data extraction point to 12 
months after the last date of the last discharge in the applicable 
period, we would not be able to deliver the calculations to hospitals 
sooner than 18 to 24 months after the last discharge

[[Page 27968]]

date. We believe this would create an unacceptably long delay both for 
hospitals and for CMS to deliver timely calculations to hospitals for 
quality improvement and transparency, and ultimately timely readmission 
adjustment factors for purposes of this program. Therefore, we are 
proposing to extract the data needed to calculate the excess 
readmission ratios for this program 90 days after the last date of 
discharge for the applicable period so that we can balance the need to 
provide timely program information to hospitals with the need to 
calculate the claims-based measures using as complete a data set as 
possible.
    During the 30-day review and correction process for the excess 
readmission ratios, if a subsection (d) hospital suspects that such 
discrepancies exist in the CMS application of the measures' 
methodology, it should notify CMS during the review and correction 
period using the technical support contacts provided in the hospital's 
confidential report. We would investigate the validity of each 
submitted correction and notify hospitals of the results. If we confirm 
that we made an error in creating the data extract or in calculating 
the excess readmission ratios, we would strive to correct the 
calculations, issue new confidential reports to subsection (d) 
hospitals, and then publicly report the corrected excess readmission 
ratios through the rulemaking process, and subsequently on Hospital 
Compare. However, if the errors take more time than anticipated to 
correct, not allowing for publication of the corrected ratios in the 
final rule, we would notify hospitals in the final rule that corrected 
ratios will be made available after the final rule through delivery of 
confidential reports followed by a second 30-day review and correction 
period, subsequent publication, and posting on Hospital Compare. In 
addition, we are proposing that any corrections to a hospital's excess 
readmission ratios would then be used to recalculate a hospital's ratio 
under section 1886(q)(4)(B) of the Act in order to determine the 
hospital's adjustment factor in accordance with section 1886(q)(3) of 
the Act.
    We believe that this proposed process would fulfill the statutory 
requirements at section 1886(q)(6)(A), section 1886(q)(6)(B), and 
section 1886(q)(6)(C) of the Act. We further believe that the proposed 
process would allow hospitals to review and correct their excess 
readmission ratios. We note that, under the proposed process, hospitals 
would retain the ability to submit new claims and corrections to 
submitted claims for payment purposes in line with CMS' timely claims 
filing policies. However, we emphasize that the administrative claims 
data used to calculate the excess readmission ratios reflect the state 
of the claims at the time of extraction from CMS' Common Working File. 
Under the proposed process, a hospital's opportunity to submit 
corrections to the calculation of the excess readmission ratios ends at 
the conclusion of the review and correction period. We welcome public 
comments on the proposed review and corrections process for the 
Hospital Readmissions Reduction Program.

B. Sole Community Hospitals (SCHs) (Sec.  412.92)

1. Background
    Section 1886(d)(5)(D)(iii) of the Act defines a sole community 
hospital (SCH) in part as a hospital that is located more than 35 road 
miles from another hospital or that, by reason of factors such as 
isolated location, weather conditions, travel conditions, or absence of 
other like hospitals (as determined by the Secretary), is the sole 
source of inpatient hospital services reasonably available to Medicare 
beneficiaries. The regulations at 42 CFR 412.92 set forth the criteria 
that a hospital must meet to be classified as a SCH. For more 
information on SCHs, we refer readers to the FY 2009 IPPS/LTCH PPS 
final rule (74 FR 43894 through 463897).
2. Clarification of Regulations Regarding Duration of Classification 
(Proposed Sec.  412.92(b)(3)(iv))
    The regulations at Sec.  412.92(b)(2) and (b)(3) address the 
effective dates of a classification as an SCH and the duration of this 
classification. Currently, a hospital's SCH classification status 
remains in effect without the need for reapproval unless there is a 
change in the circumstances under which the classification was 
approved. Section 412.92(b)(3) requires a hospital to notify the fiscal 
intermediary (or MAC) within 30 days of when a change occurs that could 
affect its classification as an SCH. Specifically, the regulations 
require an SCH to notify its fiscal intermediary or MAC if any of the 
following changes specified in Sec.  412.92(b)(3)(ii) (A) through (E) 
occur:
     The opening of a new hospital in its service area.
     The opening of a new road between itself and a like 
provider within 35 miles.
     An increase in the number of beds to more than 50, if the 
hospital qualifies as an SCH under Sec.  412.92(a)(1)(ii).
     Its geographic classification changes.
     Any changes to the driving conditions that result in a 
decrease in the amount of travel time between itself and a like 
provider if the hospital qualifies as an SCH under Sec.  412.92(a)(3).
    As discussed in the FY 2007 IPPS final rule (71 FR 48060), in the 
context of CMS becoming aware of several hospitals that had been paid 
based on SCH status, even after the original circumstances that led to 
the classification changed, CMS determined that an SCH's classification 
status would end 30 days after CMS notifies the SCH that it no longer 
meets the requirements to be classified as an SCH. However, if a 
hospital does not report when any one of the changes listed above 
occurs, CMS will cancel the hospital's SCH classification effective 
with the date that the hospital no longer met the criteria for SCH 
classification, subject to the reopening rules at 42 CFR 405.1885 
(Sec.  412.92(a)(3)(i)).
    For any change that is not listed under Sec.  412.92(b)(3)(ii)(A) 
through (E) that affects an SCH's classification status, CMS requires a 
hospital to report that change to the fiscal intermediary or MAC only 
if it ``becomes aware'' of the change. If a hospital does not report a 
change, other than those listed under Sec.  412.92(b)(3)(ii)(A) through 
(E), and it becomes known to CMS that the hospital had knowledge of 
that change, CMS will cancel the hospital's SCH classification 
effective with the date the hospital became aware of the event. 
Specifically, Sec.  412.92(b)(3)(iii) states that ``a sole community 
hospital must report to the fiscal intermediary if it becomes aware of 
any change that would affect its classification as a sole community 
hospital beyond the events listed in paragraph (b)(3)(ii) of this 
section within 30 days of the event. If CMS determines that a sole 
community hospital has failed to comply with this requirement, CMS will 
cancel the hospital's classification as a sole community hospital 
effective with the date the hospital became aware of the event that 
resulted in the sole community hospital no longer meeting the criteria 
for such classification, consistent with the provisions of Sec.  
405.1885 of this chapter.'' (Emphasis added.)
    It has come to our attention that the existing regulations only 
address a situation where an SCH no longer meets the requirements to be 
classified as an SCH. The existing language at Sec.  412.92(b)(3)(iii) 
only refers to a hospital becoming aware of a ``change,'' because it 
deals specifically with a situation where a hospital was

[[Page 27969]]

appropriately classified as an SCH because it had previously met the 
requirements to become an SCH. However, the regulations do not 
explicitly address the situation where a hospital never met the 
requirements to be classified as an SCH, but was incorrectly classified 
as an SCH. We believe that the regulations need to be clarified to 
state explicitly our current authority that if a determination is 
subsequently made that, in fact, a hospital did not ever qualify as an 
SCH, the withdrawal of SCH status could be made retroactively to revoke 
the SCH status for the entire time period, consistent with the 
reopening rules at Sec.  405.1885.
    We continue to believe that any factor or information, not only a 
change or an event, that could affect a hospital's SCH classification 
status, must be reported by the SCH to its fiscal intermediary or MAC. 
Accordingly, we are proposing to revise the regulations by adding a new 
paragraph (b)(3)(iv) to Sec.  412.92 to clarify our current authority 
that if CMS determines that the hospital was incorrectly classified as 
an SCH, SCH status could be cancelled retroactively, consistent with 
the provisions at Sec.  405.1885.
3. Proposed Change to Effective Date of Classification for MDHs 
Applying for SCH Status Upon the Expiration of the MDH Program 
(Proposed Sec.  412.92(b)(2)(v))
    Under existing regulations at Sec.  412.92(b)(2), a SCH's status is 
generally effective 30 days after CMS's written notification of 
approval. It has come to our attention that there may be a number of 
hospitals currently classified as MDHs under Sec.  412.108 of the 
regulations that intend to apply for classification as SCHs upon the 
expiration of the MDH program provision on September 30, 2012. Those 
hospitals may be reluctant to apply for SCH classification status well 
before the expiration of their MDH status because they would prefer to 
maintain their MDH status for as long as possible. Conversely, if those 
hospitals were to wait to apply for SCH classification status after 
expiration of their MDH status, they could experience a financial 
hardship if there were a delay in the approval for SCH classification 
status. In order to facilitate a seamless transition for hospitals that 
are currently classified as MDHs and that will qualify as SCHs, we are 
proposing to add an exception to the effective dates of SCH 
classification by adding a new paragraph (v) under Sec.  412.92(b)(2). 
We are proposing that, for any MDH that applies for SCH classification 
status at least 30 days prior to the expiration of the MDH program 
provision and requests that SCH classification status be effective with 
the expiration of the MDH program provision, and the MDH is approved 
for SCH classification status, the effective date of the hospital's 
classification as an SCH would be the day following the expiration date 
of the MDH program provision (that is, October 1, 2012). For example, 
Hospital A is an MDH that would like to maintain its MDH status for as 
long as possible and be classified as an SCH only after its MDH status 
expires. In order to seamlessly transition from MDH status to SCH 
status, Hospital A must apply for SCH status prior to September 1, 
2012, and must request that, if approved, SCH classification status be 
effective with the expiration of the MDH program provision. If CMS 
determines that Hospital A qualifies for SCH status, the effective date 
of its SCH classification will be October 1, 2012.

C. Rural Referral Centers (RRCs): Annual Update to Case-Mix Index (CMI) 
and Discharge Criteria (Sec.  412.96)

    Under the authority of section 1886(d)(5)(C)(i) of the Act, the 
regulations at Sec.  412.96 set forth the criteria that a hospital must 
meet in order to qualify under the IPPS as a rural referral center 
(RRC). RRCs receive some special treatment under both the DSH payment 
adjustment and the criteria for geographic reclassification.
    Section 402 of Public Law 108-173 raised the DSH payment adjustment 
for RRCs such that they are not subject to the 12-percent cap on DSH 
payments that is applicable to other rural hospitals. RRCs are also not 
subject to the proximity criteria when applying for geographic 
reclassification. In addition, they do not have to meet the requirement 
that a hospital's average hourly wage must exceed, by a certain 
percentage, the average hourly wage of the labor market area where the 
hospital is located.
    Section 4202(b) of Public Law 105-33 states, in part, ``[a]ny 
hospital classified as an RRC by the Secretary * * * for fiscal year 
1991 shall be classified as such an RRC for fiscal year 1998 and each 
subsequent year.'' In the August 29, 1997 IPPS final rule with comment 
period (62 FR 45999), CMS reinstated RRC status for all hospitals that 
lost the status due to triennial review or MGCRB reclassification. 
However, CMS did not reinstate the status of hospitals that lost RRC 
status because they were now urban for all purposes because of the OMB 
designation of their geographic area as urban. Subsequently, in the 
August 1, 2000 IPPS final rule (65 FR 47089), we indicated that we were 
revisiting that decision. Specifically, we stated that we would permit 
hospitals that previously qualified as an RRC and lost their status due 
to OMB redesignation of the county in which they are located from rural 
to urban, to be reinstated as an RRC. Otherwise, a hospital seeking RRC 
status must satisfy all of the other applicable criteria. We use the 
definitions of ``urban'' and ``rural'' specified in Subpart D of 42 CFR 
part 412. One of the criteria under which a hospital may qualify as an 
RRC is to have 275 or more beds available for use (Sec.  
412.96(b)(1)(ii)). A rural hospital that does not meet the bed size 
requirement can qualify as an RRC if the hospital meets two mandatory 
prerequisites (a minimum CMI and a minimum number of discharges), and 
at least one of three optional criteria (relating to specialty 
composition of medical staff, source of inpatients, or referral 
volume). (We refer readers to Sec.  412.96(c)(1) through (c)(5) and the 
September 30, 1988 Federal Register (53 FR 38513).) With respect to the 
two mandatory prerequisites, a hospital may be classified as an RRC 
if--
     The hospital's CMI is at least equal to the lower of the 
median CMI for urban hospitals in its census region, excluding 
hospitals with approved teaching programs, or the median CMI for all 
urban hospitals nationally; and
     The hospital's number of discharges is at least 5,000 per 
year, or, if fewer, the median number of discharges for urban hospitals 
in the census region in which the hospital is located. (The number of 
discharges criterion for an osteopathic hospital is at least 3,000 
discharges per year, as specified in section 1886(d)(5)(C)(i) of the 
Act.)
1. Case-Mix Index (CMI)
    Section 412.96(c)(1) provides that CMS establish updated national 
and regional CMI values in each year's annual notice of prospective 
payment rates for purposes of determining RRC status. The methodology 
we used to determine the national and regional CMI values is set forth 
in the regulations at Sec.  412.96(c)(1)(ii). The proposed national 
median CMI value for FY 2013 includes data from all urban hospitals 
nationwide, and the proposed regional values for FY 2013 are the median 
CMI values of urban hospitals within each census region, excluding 
those hospitals with approved teaching programs (that is, those 
hospitals that train residents in an approved GME program as provided 
in Sec.  413.75). These proposed values are based on discharges 
occurring during FY 2011 (October 1, 2010 through September 30, 2011), 
and include bills

[[Page 27970]]

posted to CMS' records through December 2011.
    We are proposing that, in addition to meeting other criteria, if 
rural hospitals with fewer than 275 beds are to qualify for initial RRC 
status for cost reporting periods beginning on or after October 1, 
2012, they must have a CMI value for FY 2011 that is at least--
     1.5378; or
     The median CMI value (not transfer-adjusted) for urban 
hospitals (excluding hospitals with approved teaching programs as 
identified in Sec.  413.75) calculated by CMS for the census region in 
which the hospital is located.
    The proposed median CMI values by region are set forth in the 
following table:

------------------------------------------------------------------------
                                                         Case-mix index
                        Region                                value
------------------------------------------------------------------------
1. New England (CT, ME, MA, NH, RI, VT)...............            1.3085
2. Middle Atlantic (PA, NJ, NY).......................            1.3739
3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV)            1.4647
4. East North Central (IL, IN, MI, OH, WI)............            1.4557
5. East South Central (AL, KY, MS, TN)................            1.4025
6. West North Central (IA, KS, MN, MO, NE, ND, SD)....            1.4734
7. West South Central (AR, LA, OK, TX)................            1.5861
8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY)..........            1.6132
9. Pacific (AK, CA, HI, OR, WA).......................            1.5156
------------------------------------------------------------------------

    The preceding numbers will be revised in the FY 2013 final rule to 
the extent required to reflect the updated FY 2011 MedPAR file, which 
will contain data from additional bills received through March 2012.
    A hospital seeking to qualify as an RRC should obtain its hospital-
specific CMI value (not transfer-adjusted) from its fiscal intermediary 
or MAC. Data are available on the Provider Statistical and 
Reimbursement (PS&R) System. In keeping with our policy on discharges, 
the CMI values are computed based on all Medicare patient discharges 
subject to the IPPS MS-DRG-based payment.
2. Discharges
    Section 412.96(c)(2)(i) provides that CMS set forth the national 
and regional numbers of discharges in each year's annual notice of 
prospective payment rates for purposes of determining RRC status. As 
specified in section 1886(d)(5)(C)(ii) of the Act, the national 
standard is set at 5,000 discharges. We would normally propose to 
update the regional standards based on discharges for urban hospitals' 
cost reporting periods that began during FY 2010 (that is, October 1, 
2009 through September 30, 2010), which would normally be the latest 
cost report data available at the time of the development of this 
proposed rule. However, due to a transition in our data system, in lieu 
of a full year of FY 2010 cost report data, we needed to use a 
combination of FY 2009 and FY 2010 cost report data in order to create 
a full fiscal year of cost report data for this analysis. Due to CMS' 
transition to a new cost reporting form effective for cost reporting 
periods beginning on or after May 1, 2010, cost reports with fiscal 
year begin dates of May 1, 2010 through September 30, 2010 were not 
accessible on our system for analysis at the time of the development of 
this proposed rule. Therefore, in order to have a complete fiscal year 
of cost report data, we utilized FY 2009 cost report data for providers 
with fiscal years beginning on or after May 1, 2010 and by September 
30, 2010, in addition to the FY 2010 cost report data for providers 
with fiscal years beginning on or after October 1, 2009 and before May 
1, 2010.
    Therefore, we are proposing that, in addition to meeting other 
criteria, a hospital, if it is to qualify for initial RRC status for 
cost reporting periods beginning on or after October 1, 2012, must 
have, as the number of discharges for its cost reporting period that 
began during FY 2010 (based on a combination of FY 2009 and FY 2010 
cost report data as explained in the preceding paragraph), at least--
     5,000 (3,000 for an osteopathic hospital); or
     The median number of discharges for urban hospitals in the 
census region in which the hospital is located, as indicated in the 
following table.

------------------------------------------------------------------------
                                                            Number of
                        Region                             discharges
------------------------------------------------------------------------
1. New England (CT, ME, MA, NH, RI, VT)...............             8,159
2. Middle Atlantic (PA, NJ, NY).......................            11,448
3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV)            11,728
4. East North Central (IL, IN, MI, OH, WI)............             8,833
5. East South Central (AL, KY, MS, TN)................             7,234
6. West North Central (IA, KS, MN, MO, NE, ND, SD)....             8,129
7. West South Central (AR, LA, OK, TX)................             6,253
8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY)..........             9,347
9. Pacific (AK, CA, HI, OR, WA).......................             8,745
------------------------------------------------------------------------

    These numbers will be revised in the FY 2013 final rule based on 
the latest available cost report data.
    We note that the median number of discharges for hospitals in each 
census region is greater than the national standard of 5,000 
discharges. Therefore, 5,000 discharges is the minimum criterion for 
all hospitals under this proposed rule.
    We reiterate that, if an osteopathic hospital is to qualify for RRC 
status for cost reporting periods beginning on or after October 1, 
2012, the hospital would be required to have at least 3,000 discharges 
for its cost reporting period that began during FY 2010 (based on a 
combination of FY 2009 and FY 2010 cost report data as explained 
earlier in this section).

[[Page 27971]]

D. Payment Adjustment for Low-Volume Hospitals (Sec.  412.101)

1. Expiration of the Affordable Care Act Provision for FYs 2011 and 
2012
    For FYs 2011 and 2012, the Affordable Care Act expanded the 
definition of low-volume hospital and modified the methodology for 
determining the payment adjustment for hospitals meeting that 
definition. Beginning with FY 2013, the low-volume hospital qualifying 
criteria and payment adjustment will revert to the statutory 
requirements that were in effect prior to the amendments made by the 
Affordable Care Act. We discuss the proposed payment policies for FY 
2013 in section IV.D.4. of this preamble.
2. Background
    Section 1886(d)(12) of the Act, as added by section 406(a) of 
Public Law 108-173, provides for a payment adjustment to account for 
the higher costs per discharge for low-volume hospitals under the IPPS, 
effective beginning FY 2005. The additional payment adjustment to a 
low-volume hospital provided for under section 1886(d)(12) of the Act 
is ``in addition to any payment calculated under this section.'' 
Therefore, the additional payment adjustment is based on the per 
discharge amount paid to the qualifying hospital under section 1886 of 
the Act. In other words, the low-volume add-on payment amount is based 
on total per discharge payments made under section 1886 of the Act, 
including capital, DSH, IME, and outliers. For SCHs and MDHs, the low-
volume add-on payment amount is based on either the Federal rate or the 
hospital-specific rate, whichever results in a greater operating IPPS 
payment.
    Section 1886(d)(12)(C)(i) of the Act defined a low-volume hospital 
as ``a subsection (d) hospital (as defined in paragraph (1)(B)) that 
the Secretary determines is located more than 25 road miles from 
another subsection (d) hospital and that has less than 800 discharges 
during the fiscal year.'' Section 1886(d)(12)(C)(ii) of the Act further 
stipulates that the term ``discharge'' means ``an inpatient acute care 
discharge of an individual regardless of whether the individual is 
entitled to benefits under Part A.'' Therefore, the term ``discharge'' 
refers to total discharges, regardless of payer (that is, not only 
Medicare discharges). Furthermore, under section 406(a) of Public Law 
108-173, which initially added subparagraph (12) to section 1886(d) of 
the Act, the provision requires the Secretary to determine an 
applicable percentage increase for these low-volume hospitals based on 
the ``empirical relationship'' between ``the standardized cost-per-case 
for such hospitals and the total number of discharges of such hospitals 
and the amount of the additional incremental costs (if any) that are 
associated with such number of discharges.'' The statute thus mandates 
that the Secretary develop an empirically justifiable adjustment based 
on the relationship between costs and discharges for these low-volume 
hospitals. Section 1886(d)(12)(B)(iii) of the Act limits the applicable 
percentage increase adjustment to no more than 25 percent.
    Based on an analysis we conducted for the FY 2005 IPPS final rule 
(69 FR 49099 through 49102), a 25 percent low-volume adjustment to all 
qualifying hospitals with less than 200 discharges was found to be most 
consistent with the statutory requirement to provide relief to low-
volume hospitals where there is empirical evidence that higher 
incremental costs are associated with low numbers of total discharges. 
In the FY 2006 IPPS final rule (70 FR 47432 through 47434), we stated 
that multivariate analyses supported the existing low-volume adjustment 
implemented in FY 2005. Therefore, the low-volume adjustment of an 
additional 25 percent continues to be provided for qualifying hospitals 
with less than 200 discharges.
3. Affordable Care Act Provisions for FYs 2011 and 2012
    Sections 3125 and 10314 of the Affordable Care Act amended section 
1886(d)(12) of the Act, modifying the definition of a low-volume 
hospital and the methodology for calculating the payment adjustment for 
low-volume hospitals, effective only for discharges occurring during 
FYs 2011 and 2012. Beginning with FY 2013, the preexisting low-volume 
hospital qualifying criteria and payment adjustment, as implemented in 
FY 2005, will resume.
    Sections 3125(3) and 10314(1) of the Affordable Care Act amended 
the qualifying criteria for low-volume hospitals under section 
1886(d)(12)(C)(i) of the Act to make it easier for hospitals to qualify 
for the low-volume adjustment. Specifically, the provision specifies 
that, for FYs 2011 and 2012, a hospital qualifies as a low-volume 
hospital if it is ``more than 15 road miles from another subsection (d) 
hospital and has less than 1,600 discharges of individuals entitled to, 
or enrolled for, benefits under Part A during the fiscal year.'' In 
addition, section 1886(d)(12)(D) of the Act, as added by section 
3125(4) and amended by section 10314 of the Affordable Care Act, 
provides that the payment adjustment (the applicable percentage 
increase) is to be determined ``using a continuous linear sliding scale 
ranging from 25 percent for low-volume hospitals with 200 or fewer 
discharges of individuals entitled to, or enrolled for, benefits under 
Part A in the fiscal year to 0 percent for low-volume hospitals with 
greater than 1,600 discharges of such individuals in the fiscal year.''
    In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50238 through 50275 
and 50414), we revised our regulations at 42 CFR 412.101 to reflect the 
changes to the qualifying criteria and the payment adjustment for low-
volume hospitals according to the provisions of the Affordable Care 
Act. In addition to changing the regulations to conform them to the 
Affordable Care Act changes, we also defined, at Sec.  412.101(a), the 
term ``road miles'' to mean ``miles'' as defined at Sec.  412.92(c)(i). 
The definition of ``road miles'' continues to apply even after the 
Affordable Care Act provisions expire at the end of FY 2012. We also 
clarified the existing regulations to indicate that a hospital must 
continue to qualify as a low-volume hospital in order to receive the 
payment adjustment in that year; that is, it is not based on a one-time 
qualification. Furthermore, in that same final rule, we discussed the 
process for requesting and obtaining the low-volume hospital payment 
adjustment (75 FR 50240).
4. Proposed Payment Adjustment for FY 2013 and Subsequent Fiscal Years
    In accordance with section 1886(d)(12) of the Act, beginning with 
FY 2013, the low-volume hospital definition and payment adjustment 
methodology will revert back to the statutory requirements that were in 
effect prior to the amendments made by the Affordable Care Act. 
Therefore, effective for FY 2013 and subsequent years, in order to 
qualify as a low-volume hospital, a subsection (d) hospital must be 
more than 25 road miles from another subsection (d) hospital and have 
less than 200 discharges (that is, less than 200 discharges total, 
including both Medicare and non-Medicare discharges) during the fiscal 
year. As discussed above, the statute specifies that a low-volume 
hospital must have less than 800 discharges during the fiscal year. 
However, as required by section 1886(d)(12)(B)(i) of the Act and as 
discussed above, the Secretary has developed an empirically justifiable 
payment adjustment based on the relationship, for IPPS hospitals with 
less than 800 discharges, between the

[[Page 27972]]

additional incremental costs (if any) that are associated with a 
particular number of discharges. Based on an analysis we conducted for 
the FY 2005 IPPS final rule (69 FR 49099 through 49102), a 25-percent 
low-volume adjustment to all qualifying hospitals with less than 200 
discharges was found to be most consistent with the statutory 
requirement to provide relief for low-volume hospitals where there is 
empirical evidence that higher incremental costs are associated with 
low numbers of total discharges. (Under the policy we established in 
that same final rule, hospitals with between 200 and 799 discharges do 
not receive a low-volume hospital adjustment.)
    As described above, for FYs 2005 through 2010 and FY 2013 and 
subsequent years, the discharge determination is made based on the 
hospital's number of total discharges, that is, Medicare and non-
Medicare discharges. The hospital's most recently submitted cost report 
is used to determine if the hospital meets the discharge criterion to 
receive the low-volume payment adjustment in the current year (Sec.  
412.101(b)(2)(i)). We use cost report data to determine if a hospital 
meets the discharge criterion because this is the best available data 
source that includes information on both Medicare and non-Medicare 
discharges. We note that, for FYs 2011 and 2012, CMS used the most 
recently available MedPAR data to determine the hospital's Medicare 
discharges because only Medicare discharges were used to determine if a 
hospital met the discharge criterion for those years.
    For FY 2013 and for subsequent fiscal years, in addition to a 
discharge criterion, the eligibility for the low-volume payment 
adjustment is also dependent upon the hospital meeting the mileage 
criterion specified at Sec.  412.101(b)(2)(i). Specifically, to meet 
the mileage criterion to qualify for the low-volume payment adjustment 
for FY 2013 and subsequent fiscal years, a hospital must be located 
more than 25 road miles from the nearest ``subsection (d) hospital.'' 
As mentioned above, we define, at Sec.  412.101(a), the term ``road 
miles'' to mean ``miles'' as defined at Sec.  412.92(c)(i) (75 FR 30238 
through 50275 and 50414).
    As discussed in the FY 2011 IPPS/LTCH PPS final rule (75 FR 30238 
through 50275 and 50414), we discussed the process for requesting and 
obtaining the low-volume hospital payment adjustment. In order to 
qualify for the low-volume hospital payment adjustment, a hospital must 
provide to its fiscal intermediary or MAC sufficient evidence to 
document that it meets the discharge and distance requirements. The 
fiscal intermediary or MAC will determine, based on the most recent 
data available, if the hospital qualifies as a low-volume hospital, so 
that the hospital will know in advance whether or not it will receive a 
payment adjustment. The fiscal intermediary or MAC and CMS may review 
available data, in addition to the data the hospital submits with its 
request for low-volume hospital status, in order to determine whether 
or not the hospital meets the qualifying criteria.
    In order to receive a low-volume hospital payment adjustment under 
Sec.  412.101, a hospital must notify and provide documentation to its 
fiscal intermediary or MAC that it meets the mileage criterion. The use 
of a Web-based mapping tool, such as MapQuest, as part of documenting 
that the hospital meets the mileage criterion for low-volume hospitals, 
is acceptable. The fiscal intermediary or MAC will determine if the 
information submitted by the hospital, such as the name and street 
address of the nearest hospitals, location on a map, and distance (in 
road miles, as defined in the regulations at Sec.  412.101(a)) from the 
hospital requesting low-volume hospital status, is sufficient to 
document that it meets the mileage criterion. If not, the fiscal 
intermediary or MAC will follow up with the hospital to obtain 
additional necessary information to determine whether or not the 
hospital meets the low-volume mileage criterion. In addition, the 
fiscal intermediary or MAC will refer to the hospital's most recently 
submitted cost report to determine whether or not the hospital meets 
the discharge criterion. A hospital should refer to its most recently 
submitted cost report for total discharges (Medicare and non-Medicare) 
in order to decide whether or not to apply for low-volume hospital 
status for a particular fiscal year. As noted previously, a hospital 
must continue to meet the qualifying criterion at Sec.  
412.101(b)(2)(i) as a low-volume hospital (that is, the discharge 
criterion and the mileage criterion) in order to receive the payment 
adjustment in that year; that is, low-volume hospital status is not 
based on a ``one-time'' qualification.
    In order to be a low-volume hospital in FY 2013 and subsequent 
fiscal years, in accordance with our previously established procedure, 
a hospital must make its request for low-volume hospital status in 
writing to its fiscal intermediary or MAC by September 1 immediately 
preceding the start of the Federal fiscal year for which the hospital 
is applying for low-volume hospital status in order for the 25 percent 
low-volume add-on payment adjustment to be applied to payments for its 
discharges for the fiscal year beginning on or after October 1 
immediately following the request (that is, the start of the Federal 
fiscal year). For a hospital whose request for low-volume hospital 
status is received after September 1, if the fiscal intermediary or MAC 
determines the hospital meets the criteria to qualify as a low-volume 
hospital, the fiscal intermediary or MAC will apply the 25 percent low-
volume add-on payment adjustment to determine payment for the 
hospital's discharges for the fiscal year, effective prospectively 
within 30 days of the date of the fiscal intermediary's or MAC's low-
volume status determination.
    Specifically, for FY 2013, a hospital must make its request for 
low-volume hospital status in writing to its fiscal intermediary or MAC 
by September 1, 2012, in order for the 25 percent low-volume add-on 
payment adjustment to be applied to payments for its discharges 
beginning on or after October 1, 2012 (through September 30, 2013). If 
a hospital's request for low-volume hospital status for FY 2013 is 
received after September 1, 2012, and if the fiscal intermediary or MAC 
determines the hospital meets the criteria to qualify as a low-volume 
hospital, the fiscal intermediary or MAC will apply the 25 percent low-
volume add-on payment adjustment to determine the payment for the 
hospital's FY 2013 discharges, effective prospectively within 30 days 
of the date of the fiscal intermediary's or MAC's low-volume status 
determination. For additional information on our established 
application process for the low-volume hospital payment adjustment, we 
refer readers to the FY 2011 IPPS/LTCH PPS final rule (75 FR 20574 
through 20575), Transmittal 2060 (Change Request 7134; October 1, 
2010), and the FY 2012 IPPS/LTCH PPS final rule (76 FR 51680).
    In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50238 through 50275 
and 50414), in addition to implementing the Affordable Care Act 
provisions affecting low-volume hospitals for FYs 2011 and 2012, we 
also implemented changes to the regulations at 42 CFR 412.101 to 
conform them to the statutory requirements to require that, beginning 
with FY 2013, the low-volume hospital qualifying criteria and payment 
adjustment methodology will return to that which was in effect prior to 
the amendments made by the Affordable Care Act (that is, the low-volume 
hospital payment policy in effect for FYs 2005 through 2010). 
Therefore, no further revisions to the policy or to the

[[Page 27973]]

regulations at Sec.  412.101 are required to conform them to the 
statutory requirement that the low-volume hospital policy in effect 
prior to the Affordable Care Act returns for FY 2013 and subsequent 
years.

E. Indirect Medical Education (IME) Payment Adjustment (Sec.  412.105)

1. IME Adjustment Factor for FY 2013
    Under the IPPS, an additional payment amount is made to hospitals 
that have residents in an approved graduate medical education (GME) 
program in order to reflect the higher indirect patient care costs of 
teaching hospitals relative to nonteaching hospitals. The payment 
amount is determined by use of a statutorily specified adjustment 
factor. The regulations regarding the calculation of this additional 
payment, known as the IME adjustment, are located at Sec.  412.105. We 
refer readers to the FY 2012 IPPS/LTCH PPS final rule (76 FR 51680) for 
a full discussion of the IME adjustment and IME adjustment factor. 
Section 1886(d)(5)(B) of the Act states that, for discharges occurring 
during FY 2008 and fiscal years thereafter, the IME formula multiplier 
is 1.35. Accordingly, for discharges occurring during FY 2013, the 
formula multiplier is 1.35. We estimate that application of this 
formula multiplier for the FY 2013 IME adjustment will result in an 
increase in IPPS payment of 5.5 percent for every approximately 10-
percent increase in the hospital's resident-to-bed ratio.
2. Clarification and Proposal Regarding Timely Filing Requirements 
Under Fee-for-Service Medicare
a. IME and Direct GME
    The Balanced Budget Act of 1997 (Pub. L. 105-33) amended sections 
1886(d) and 1886(h) of the Act by adding paragraphs (d)(11) and 
(h)(3)(D), respectively, to establish payment provisions for IME and 
direct GME costs to hospitals providing services to Medicare + Choice 
(now Medicare Advantage) enrollees. Sections 1886(d)(11) and 
1886(h)(3)(D) of the Act specify that the Secretary shall provide for 
an ``additional payment amount'' for services furnished to individuals 
who are enrolled in a Medicare Advantage plan under Medicare Part C. To 
implement sections 1886(d)(11) and 1886(h)(3)(D) of the Act, we issued 
two final rules in the Federal Register that specifically addressed IME 
and direct GME payments to teaching hospitals for services provided to 
Medicare Advantage enrollees (the FY 1997 IPPS final rule (62 FR 46003) 
and the FY 1998 IPPS final rule (63 FR 26341)). Subsequent to the FY 
1998 IPPS final rule, we (then HCFA) issued a Program Memorandum (PM), 
A-98-21, in July 1998, which outlined fiscal intermediary and standard 
system changes needed to process requests for IME and direct GME 
supplemental payments for services provided to Medicare Advantage 
enrollees. The PM explained that hospitals must submit their Medicare 
claims to the fiscal intermediary in UB-92 format in order for the 
standard system to process the claims so that hospitals may be paid the 
supplemental IME and direct GME payments for services provided to 
Medicare Advantage enrollees. It was always our intent that the claims 
filing requirements under 42 CFR Part 424, including the time limits at 
42 CFR 424.44, fully applied to these claims submissions.
    Existing Sec.  424.44 of the regulations contains the time limits 
for filing all Medicare claims. In this proposed rule, we are 
clarifying again that the regulations governing time limits for filing 
claims at Sec.  424.44 apply to claims submitted for IME and direct GME 
payments associated with services provided to Medicare Advantage 
enrollees. The process that was established by PM A-98-21 is within the 
same framework of the preexisting methodology for submitting claims 
under Medicare Part A. Therefore, because IME and direct GME payments 
for services provided to Medicare Advantage enrollees are also made 
under Medicare Part A, the same timely filing requirements that apply 
to other Part A claims for payments also apply to claims for IME and 
direct GME payments for services provided to Managed Advantage 
enrollees. In this proposed rule, we are clarifying once again that 
when hospitals submit claims for services provided to Medicare 
Advantage enrollees for additional IME and direct GME payments, the 
hospitals must comply with the regulations governing time limits for 
filing claims at Sec.  424.44.
b. Nursing and Allied Health Education
    Section 541 of the Balanced Budget Refinement Act (BBRA) of 1999 
(Pub. L. 106-113) further amended section 1886 of the Act by adding 
subsection (l) to provide for additional payments to hospitals that 
operate nursing or allied health education programs and incur costs 
associated with services provided to Medicare+Choice (now Medicare 
Advantage) enrollees. Section 512 of the Benefits Improvement and 
Protection Act (BIPA) (Pub. L. 106-554) changed the formula for 
determining the additional payment amount paid to hospitals that 
operate nursing or allied health education programs and incur costs for 
services provided to Medicare+Choice (now Medicare Advantage) 
enrollees. We issued several PMs (Transmittals A-00-86 on November 22, 
2000, and A-03-043 on May 23, 2003) to implement section 541 of the 
BBRA and section 512 of the BIPA. We also issued related Transmittal A-
03-007 on February 3, 2003, and Transmittal A-03-045 on May 30, 2003, 
to instruct hospitals that operate a nursing or allied health education 
program and that qualify for additional payment related to services 
provided to Medicare Advantage enrollees to also submit those claims 
for processing as no-pay bills in the UB-92 format. These transmittals 
also instructed hospitals that are not paid under the IPPS, hospitals 
with rehabilitation and psychiatric units, and hospitals that operate 
approved nursing or allied health education programs (but may not have 
approved GME residency programs) to submit claims for services provided 
to Medicare Advantage enrollees to their fiscal intermediary in UB-92 
format with specific condition codes present. In this proposed rule, we 
also are clarifying that the regulations governing the time limits for 
filing claims at Sec.  424.44 also apply to claims submitted for 
nursing or allied health education program payments for services 
provided to Medicare Advantage enrollees.
c. Disproportionate Share Hospital (DSH) Payments
    On July 20, 2007, we issued Change Request 5647 instructing 
applicable hospitals to submit no pay bills for their Medicare 
Advantage patients for FY 2007 forward in order for these days to be 
captured in the DSH calculation. Because we issued this request in the 
middle of FY 2007, we later believed it was appropriate to extend the 
deadline for submission of FY 2007 and FY 2008 no pay Medicare 
Advantage bills to August 31, 2010.
    In this proposed rule, we are proposing to adopt a policy that 
hospitals that are required to submit no pay bills for services 
furnished on a prepaid capitation basis by a Medicare Advantage 
organization, or through cost settlement with either a health 
maintenance organization (HMO), a competitive medical plan (CMP), a 
health care prepayment plan (HCPP), or a demonstration, for the purpose 
of calculating the DSH patient percentage (DPP) must also do so within 
the time limits for filing claims specified at Sec.  424.44. In the FY 
2011 IPPS/LTCH PPS final rule (75 FR 50282), we

[[Page 27974]]

changed our methodology for calculating the SSI fraction of the DSH 
adjustment, in part, by using claims information that is updated 15 
months after the close of each Federal fiscal year. We believed that 
allowing for a 15-month run-out period would more closely align the 
timing of the match process with the requirements for the timely 
submission of claims. As we stated in that final rule, hospitals may 
not have an incentive to submit no pay bills in as timely a manner as 
they would for fee-for-service claims. In order to ensure that no pay 
claims are properly incorporated into the DSH calculation, in this 
proposed rule, we are proposing to extend our rules regarding the 
timely submission of claims to no pay bills submitted for the purposes 
of calculating the DPP.
    To clarify our existing policy for hospitals to file timely claims 
in order to receive supplemental IME, direct GME and/or nursing or 
allied health education payments for Medicare Advantage enrollees and 
to propose that hospitals that are required to submit no pay bills for 
the purpose of calculating the DPP must also follow the time limits for 
filing claims, we are proposing to revise the regulations at Sec.  
424.30 to reflect these requirements.
3. Other Related Proposed Policy Changes
    In sections IV.F. and IV.I of this preamble, we present other 
proposed policy changes relating to determining labor and delivery bed 
counts for purposes of the DSH payment adjustment and relating to 
determining FTE resident caps for direct GME and IME payment purposes 
that would have an effect on the IME payment adjustment.

F. Payment Adjustment for Medicare Disproportionate Share Hospitals 
(DSHs) and Indirect Medical Education (IME) (Sec. Sec.  412.105 and 
412.106)

1. Background
    For the most recent background discussion regarding the Medicare 
payment adjustment for subsection (d) hospitals that serve a 
significantly disproportionate number of low-income patients, we refer 
readers to the FY 2012 IPPS/LTCH PPS final rule (76 FR 51681).
    As we did in FY 2012 IPPS/LTCH PPS final rule, we are combining, 
under section IV.I.2. of this preamble, our discussion of proposed 
changes to the policies for counting beds in relation to the 
calculations for the IME adjustment at Sec.  412.105(b) and the DSH 
payment adjustment at Sec.  412.106(a)(1)(i) because the underlying 
concepts are similar, and we believe they should generally be 
interpreted in a consistent manner for both purposes.
2. Proposed Policy Change Relating to Treatment of Labor and Delivery 
Beds in the Calculation of the Medicare DSH Payment Adjustment and the 
IME Payment Adjustment
a. Background
    Medicare's policy with respect to the treatment of labor and 
delivery services in the calculation of the Medicare DSH payment 
adjustment has undergone a number of changes over the years. (We refer 
readers to the background discussion regarding these policy changes in 
the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43899 through 
43901)). The most recent change in policy was adopted in the FY 2010 
IPPS/RY 2010 LTCH PPS final rule. Prior to FY 2010, our policy was to 
exclude from the count of inpatient days for purposes of the Medicare 
DSH calculation labor and delivery patient days associated with beds 
used for ancillary labor and delivery services when the patient did not 
occupy a routine bed prior to occupying an ancillary labor and delivery 
bed. This policy applied whether the hospital maintained separate labor 
and delivery rooms and postpartum rooms, or whether it maintained 
``maternity suites'' in which labor, delivery, and postpartum services 
all occurred in the same bed. However, in the latter case, patient days 
were counted proportionally based on the proportion of (routine/
ancillary) services furnished. (We refer readers to the example 
provided in the FY 2004 IPPS final rule (68 FR 45420) that describes 
how routine and ancillary days are allocated under this policy.)
    In the FY 2010 IPPS/RY 2010 LTCH PPS final rule, we revised our 
regulations to include in the DPP of the Medicare DSH adjustment all 
patient days associated with patients occupying labor and delivery beds 
once the patient has been admitted to the hospital as an inpatient, 
regardless of whether the patient days are associated with patients who 
occupied a routine bed prior to occupying an ancillary labor and 
delivery bed. Our rationale for adopting this change was that the costs 
associated with labor and delivery patient days are generally payable 
under the IPPS. Although we adopted this change with respect to labor 
and delivery patient days, we did not make a similar change to our 
policy for counting hospital beds.
b. Proposed Policy Change
    As we recently stated in the FY 2012 IPPS/LTCH PPS final rule (76 
FR 51682), our policy for counting hospital beds is to include bed days 
available for IPPS-level acute care hospital services. In the FY 2004 
IPPS final rule (68 FR 45417), we stated that beds in a particular unit 
would be considered available for IPPS-level acute care services if the 
services furnished in that unit were generally payable under the IPPS. 
Moreover, as stated above, our policy for counting patient days with 
respect to the Medicare DSH payment adjustment is to include patient 
days in units that provide services that are generally payable under 
the IPPS. Under our current policy, the services furnished to a labor 
and delivery patient are considered to be generally payable under the 
IPPS (74 FR 43900).
    We recognize that, under our current policy, while the services 
furnished to a labor and delivery patient are considered to be 
generally payable under the IPPS, under Sec.  412.105(b)(4), the bed 
where the services are furnished is not considered to be available for 
IPPS-level care.
    Upon further examination of our existing policies, we believe that 
if a patient day is counted because the services furnished are 
generally payable under the IPPS, the bed in which the services were 
furnished should also be considered to be available for IPPS-level 
care. Accordingly, we believe it is appropriate to extend our current 
approach of including labor and delivery patient days in the DPP of the 
Medicare DSH payment adjustment to our rules for counting hospital beds 
for purposes of both the IME payment adjustment and the Medicare DSH 
payment adjustment. Specifically, because we have described labor and 
delivery patient days as being generally payable under the IPPS (74 FR 
43900), we believe that the bed in which such services are furnished 
should also be considered to be available for IPPS-level care, and 
should be included in the count of beds available for IPPS-level acute 
care hospital services. The rules for counting hospital beds for 
purposes of the IME payment adjustment are codified in the IME 
regulations at Sec.  412.105(b), which are cross-referenced in Sec.  
412.106(a)(1)(i) for purposes of determining the DSH payment 
adjustment.
    In light of the similar policy rationales for determining patient 
days in the calculation of the Medicare DSH payment adjustment, and for 
determining bed days for both the Medicare DSH payment adjustment and

[[Page 27975]]

IME payment adjustment, we are proposing to include labor and delivery 
bed days in the count of available beds used in the IME and DSH 
calculations. Moreover, our proposal to treat labor and delivery 
patient days and bed days consistently is consistent with our approach 
with respect to the observation, swing-bed, and hospice days, which are 
excluded from both the patient day count and the available bed count. 
Accordingly, we are proposing to revise the regulations at Sec.  
412.105(b)(4) to remove from the list of currently excluded beds those 
beds associated with ``ancillary labor/delivery services.'' We are 
proposing that this regulation change would be effective for cost 
reporting periods beginning on or after October 1, 2012.
    As we noted in the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 
43900), our policy for counting labor and delivery patient days does 
not allow for the inclusion of days of labor and delivery patients who 
are not admitted to the hospital as inpatients. For example, if a woman 
presents at a hospital for labor and delivery services, but is 
determined by medical staff to be in false labor and is sent home 
without ever being admitted to the hospital as an inpatient, any days 
associated with such services furnished by the hospital would not be 
included in the DPP for purposes of the calculation of the Medicare DSH 
payment adjustment. For the same reason, days on which labor and 
delivery beds are used for such services also will be excluded from the 
count of available bed days.

G. Expiration of the Medicare-Dependent, Small Rural Hospital (MDH) 
Program (Sec.  412.108)

    Under current law, separate special payment protections are 
provided to a Medicare-dependent, small rural hospital (MDH) under the 
IPPS through the end of FY 2012. (For additional information on the MDH 
program and the payment methodology, we refer readers to the FY 2012 
IPPS/LTCH PPS final rule (76 FR 51683 through 51684.) The provisions 
for MDHs at section 1886(d)(5) of the Act expire at the end of FY 2012 
(that is, with discharges occurring on September 30, 2012). As we 
discussed in the FY 2012 IPPS/LTCH PPS final rule, section 3124 of the 
Affordable Care Act extended the MDH program from the end of FY 2011 
(that is, for discharges occurring before October 1, 2011) to the end 
of FY 2012 (that is, for discharges occurring before October 1, 2012). 
Under prior law, as specified in section 5003(a) of Public Law 109-171 
(DRA 2005), the MDH program was to be in effect through the end of FY 
2011 only. Section 3124(a) of the Affordable Care Act amended sections 
1886(d)(5)(G)(i) and 1886(d)(5)(G)(ii)(II) of the Act to extend the MDH 
program and payment methodology from the end of FY 2011 to the end of 
FY 2012, by striking ``October 1, 2011'' and inserting ``October 1, 
2012''. Section 3124(b) of the Affordable Care Act also made conforming 
amendments to sections 1886(b)(3)(D)(i) and 1886(b)(3)(D)(iv) of the 
Act. Section 3124(b)(2) of the Affordable Care Act also amended section 
13501(e)(2) of OBRA 1993 to extend the provision permitting hospitals 
to decline reclassification as an MDH through FY 2012. In the FY 2011 
IPPS/LTCH PPS final rule (75 FR 50287 and 50414), we amended the 
regulations at Sec.  412.108(a)(1) and (c)(2)(iii) to reflect the 
statutory extension of the MDH program through FY 2012. In the FY 2012 
IPPS/LTCH PPS final rule (76 FR 51683 through 51684), we did not make 
any additional changes to this regulatory text for FY 2012.
    Because the MDH program is not authorized by statute beyond FY 
2012, all hospitals that previously qualified for MDH status will no 
longer have MDH status and will be paid based on the Federal rate 
beginning in FY 2013. (We note that, in section IV.B.3. of this 
preamble, we are proposing to revise our SCH policies to allow MDHs to 
apply for SCH status and be paid as such under certain proposed 
conditions, following expiration of the MDH program.) For the FY 2013 
impact of the expiration of the MDH program at the end of FY 2012, we 
refer readers to section I.G.2.j. of Appendix A to this proposed rule.

H. Proposed Changes in the Inpatient Hospital Update

1. FY 2013 Inpatient Hospital Update
    In accordance with section 1886(b)(3)(B)(i) of the Act, each year 
we update the national standardized amount for inpatient operating 
costs by a factor called the ``applicable percentage increase.'' Prior 
to enactment of the Affordable Care Act, section 1886(b)(3)(B)(i)(XX) 
of the Act set the applicable percentage increase equal to the rate-of-
increase in the hospital market basket for subsection (d) hospitals 
(hereafter referred to as ``IPPS hospitals'') in all areas, subject to 
the hospital submitting quality information under rules established by 
the Secretary in accordance with section 1886(b)(3)(B)(viii) of the 
Act. For hospitals that did not provide these data, the update was 
equal to the market basket percentage increase less an additional 2.0 
percentage points. The update for the hospital-specific rates for SCHs 
is set by section 1886(b)(3)(B)(iv) of the Act as discussed further 
below.
    Section 1886(b)(3)(B) of the Act, as amended by sections 3401(a) 
and 10319(a) of the Affordable Care Act, sets the applicable percentage 
increase under the IPPS for FY 2013 as equal to the rate-of-increase in 
the hospital market basket for IPPS hospitals in all areas (which is 
currently based on the first quarter 2012 forecast of the FY 2006-based 
IPPS market basket), subject to a reduction of 2.0 percentage points if 
the hospital fails to submit quality information under rules 
established by the Secretary in accordance with section 
1886(b)(3)(B)(viii) of the Act, and then subject to an adjustment based 
on changes in economy-wide productivity (the multifactor productivity 
(MFP) adjustment), and an additional reduction of 0.1 percentage point. 
Sections 1886(b)(3)(B)(xi) and (b)(3)(B)(xii) of the Act, as added by 
section 3401(a) of the Affordable Care Act, state that application of 
the MFP adjustment and the additional FY 2013 adjustment of 0.1 
percentage point may result in the applicable percentage increase being 
less than zero.
    In the FY 2012 IPPS/LTCH PPS final rule (76 FR 51689 through 
51692), we finalized our methodology for calculating and applying the 
MFP adjustment. For FY 2013, we are not proposing any change in our 
methodology for calculating and applying the MFP adjustment. Similar to 
the market basket increase, we are using the most recent data available 
for this proposed rule to compute the MFP adjustment. Using the 
methodology that we finalized in the FY 2012 IPPS/LTCH PPS final rule 
(76 FR 51690), based on the most recent data available for this 
proposed rule, in accordance with section 1886(b)(3)(B) of the Act, we 
based the proposed FY 2013 market basket update used to determine the 
applicable percentage increase for the IPPS on the IHS Global Insight, 
Inc. (IGI's) first quarter 2012 forecast of the FY 2006-based IPPS 
market basket rate-of-increase, which is estimated to be 3.0 percent. 
This proposed percentage increase, subject to the hospital submitting 
quality data under rules established by the Secretary in accordance 
with section 1886(b)(3)(B)(viii) of the Act, is then reduced by the 
most recent estimate of the MFP adjustment (the 10-year moving average 
of MFP for the period ending FY 2013) of 0.8 percent, which is 
calculated using the methodology described in the FY 2012 IPPS/LTCH

[[Page 27976]]

PPS final rule (76 FR 51690) and based on IGI's first quarter 2012 
forecast. Following application of the MFP adjustment, the applicable 
percentage increase is then reduced by 0.1 percentage point, as 
required by section 1886(b)(3)(B)(xii) of the Act (as discussed in 
section I. of the Addendum to this proposed rule).
    Consistent with current law, and based on IGI's first quarter 2012 
forecast of the FY 2013 market basket increase, we are proposing an 
applicable percentage increase to the FY 2013 operating standardized 
amount of 2.1 percent (that is, the FY 2013 estimate of the market 
basket rate-of-increase of 3.0 percent less an adjustment of 0.8 
percentage point for economy-wide productivity (that is, the MFP 
adjustment) and less 0.1 percentage point) for hospitals in all areas, 
provided the hospital submits quality data under rules established in 
accordance with section 1886(b)(3)(B)(viii) of the Act in accordance 
with our rules. For hospitals that do not submit these quality data, we 
are proposing an applicable percentage increase to the operating 
standardized amount of 0.1 percent (that is, the FY 2013 estimate of 
the market basket rate-of-increase of 3.0 percent, less 2.0 percentage 
points for failure to submit quality data, less an adjustment of 0.8 
percentage point for the MFP adjustment, and less an additional 
adjustment of 0.1 percentage point). Lastly, we also are proposing that 
if more recent data are subsequently available (for example, a more 
recent estimate of the market basket and MFP adjustment), we would use 
such data, if appropriate, to determine the FY 2013 market basket 
update and MFP adjustment in the final rule.
    We are proposing to revise the existing regulations at 42 CFR 
412.64(d)(1)(iv) to reflect the current law for the FY 2013 update. 
Specifically, in accordance with section 1886(b)(3)(B) of the Act, we 
are proposing to revise paragraph (d)(1)(iv) to reflect the applicable 
percentage increase to the FY 2013 operating standardized amount as the 
percentage increase in the market basket index less an MFP adjustment 
and less an additional reduction of 0.1 percentage point.
    Section 1886(b)(3)(B)(iv) of the Act provides that the applicable 
percentage increase to the hospital-specific rates for SCHs equals the 
applicable percentage increase set forth in section 1886(b)(3)(B)(i) of 
the Act (that is, the same update factor as for all other hospitals 
subject to the IPPS). Therefore, the update to the hospital-specific 
rates for SCHs is also subject to section 1886(b)(3)(B)(i) of the Act, 
as amended by sections 3401(a) and 10319(a) of the Affordable Care Act. 
Accordingly, we are proposing an update to the hospital-specific rates 
applicable to SCHs of 2.1 percent for hospitals that submit quality 
data or 0.1 percent for hospitals that fail to submit quality data. For 
FY 2013, the regulations in Sec. Sec.  412.73(c)(16), 412.75(d), 
412.77(e) and 412.78(e) already contain provisions that set the update 
factor for SCHs equal to the update factor applied to the national 
standardized amount for all IPPS hospitals. Therefore, we are not 
proposing to make further changes to these four regulatory provisions 
to reflect the FY 2013 update factor for the hospital-specific rates of 
SCHs.
    We note that, as discussed in section IV.G. of this preamble, 
section 3124 of the Affordable Care Act extended the MDH program from 
the end of FY 2011 (that is, for discharges occurring before October 1, 
2011) to the end of FY 2012 (that is, for discharges occurring before 
October 1, 2012). Under prior law, the MDH program was to be in effect 
through the end of FY 2011 only. Absent additional legislation further 
extending the MDH program, the MDH program will expire for discharges 
beginning in FY 2013. Accordingly, we are not including MDHs in our 
proposal to update the hospital-specific rates for FY 2013.
2. FY 2013 Puerto Rico Hospital Update
    Puerto Rico hospitals are paid a blended rate for their inpatient 
operating costs based on 75 percent of the national standardized amount 
and 25 percent of the Puerto Rico-specific standardized amount. Section 
1886(d)(9)(C)(i) of the Act is the basis for determining the applicable 
percentage increase applied to the Puerto Rico-specific standardized 
amount. Section 401(c) of Pub. L. 108-173 amended section 
1886(d)(9)(C)(i) of the Act, which states that, for discharges 
occurring in a fiscal year (beginning with FY 2004), the Secretary 
shall compute an average standardized amount for hospitals located in 
any area of Puerto Rico that is equal to the average standardized 
amount computed under subclause (I) for fiscal year 2003 for hospitals 
in a large urban area (or, beginning with FY 2005, for all hospitals in 
the previous fiscal year) increased by the applicable percentage 
increase under subsection (b)(3)(B) for the fiscal year involved. 
Therefore, the update to the Puerto Rico-specific operating 
standardized amount equals the applicable percentage increase set forth 
in section 1886(b)(3)(B)(i) of the Act, as amended by sections 3401(a) 
and 10319(a) of the Affordable Care Act (that is, the same update 
factor as for all other hospitals subject to the IPPS). Accordingly, we 
are proposing an applicable percentage increase to the Puerto Rico-
specific operating standardized amount of 2.1 percent for FY 2013. The 
regulations at Sec.  412.211(c) already set the update factor for the 
Puerto Rico-specific operating standardized amount equal to the update 
factor applied to the national standardized amount for all IPPS 
hospitals. Therefore, it is not necessary for us to propose changes to 
the existing regulatory text.

I. Payment for Graduate Medical Education (GME) and Indirect Medical 
Education (IME) Costs (Sec. Sec.  412.105, 413.75 Through 413.83)

1. Background
    Section 1886(h) of the Act, as added by section 9202 of the 
Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985 (Pub. L. 
99-272) and as currently implemented in the regulations at 42 CFR 
413.75 through 413.83, establishes a methodology for determining 
payments to hospitals for the direct costs of approved graduate medical 
education (GME) programs. Section 1886(h)(2) of the Act sets forth a 
methodology for the determination of a hospital-specific base-period 
per resident amount (PRA) that is calculated by dividing a hospital's 
allowable direct costs of GME in a base period by its number of full-
time equivalent (FTE) residents in the base period. The base period is, 
for most hospitals, the hospital's cost reporting period beginning in 
FY 1984 (that is, October 1, 1983 through September 30, 1984). The base 
year PRA is updated annually for inflation. In general, Medicare direct 
GME payments are calculated by multiplying the hospital's updated PRA 
by the weighted number of FTE residents working in all areas of the 
hospital complex (and at nonprovider sites, when applicable), and the 
hospital's Medicare share of total inpatient days.
    Section 1886(d)(5)(B) of the Act provides for a payment adjustment 
known as the indirect medical education (IME) adjustment under the 
hospital inpatient prospective payment system (IPPS) for hospitals that 
have residents in an approved GME program, in order to account for the 
higher indirect patient care costs of teaching hospitals relative to 
nonteaching hospitals. The regulations regarding the calculation of 
this additional payment are located at 42 CFR 412.105. The

[[Page 27977]]

hospital's IME adjustment applied to the DRG payments is calculated 
based on the ratio of the hospital's number of FTE residents training 
in either the inpatient or outpatient departments of the IPPS hospital 
to the number of inpatient hospital beds.
    The calculation of both direct GME and IME payments is affected by 
the number of FTE residents that a hospital is allowed to count. 
Generally, the greater the number of FTE residents a hospital counts, 
the greater the amount of Medicare direct GME and IME payments the 
hospital will receive. In an attempt to end the implicit incentive for 
hospitals to increase the number of FTE residents, Congress, through 
the Balanced Budget Act of 1997 (Pub. L. 105-33), established a limit 
on the number of allopathic and osteopathic residents that a hospital 
may include in its FTE resident count for direct GME and IME payment 
purposes. Under section 1886(h)(4)(F) of the Act, for cost reporting 
periods beginning on or after October 1, 1997, a hospital's unweighted 
FTE count of residents for purposes of direct GME may not exceed the 
hospital's unweighted FTE count for direct GME in its most recent cost 
reporting period ending on or before December 31, 1996. Under section 
1886(d)(5)(B)(v) of the Act, a similar limit based on the FTE count for 
IME during that cost reporting period is applied effective for 
discharges occurring on or after October 1, 1997. Dental and podiatric 
residents are not included in this statutorily mandated cap.
    The Affordable Care Act made a number of statutory changes relating 
to the determination of a hospital's FTE resident count for direct GME 
and IME payment purposes and the manner in which FTE resident limits 
are calculated and applied to hospitals under certain circumstances. 
Section 5503 of the Affordable Care Act added a new section 1886(h)(8) 
to the Act to provide for the reduction in FTE resident caps for direct 
GME under Medicare for certain hospitals training fewer residents than 
allowed by their caps, and to authorize the ``redistribution'' of the 
estimated number of excess FTE resident slots to other qualified 
hospitals. In addition, section 5503 amended section 1886(d)(5)(B)(v) 
of the Act to require the application of the section 1886(h)(8) of the 
Act provisions ``in the same manner'' to the IME FTE resident caps. The 
regulations implementing section 5503 of the Affordable Care Act were 
included in the November 24, 2010 final rule with comment period (75 FR 
72263).
2. New Teaching Hospitals: Proposed Change in New Program Growth From 3 
Years to 5 Years
    Section 1886(h)(4)(H)(i) of the Act requires CMS to establish rules 
for calculating the direct GME caps of teaching hospitals training 
residents in new programs established on or after January 1, 1995. 
Under section 1886(d)(5)(B)(viii) of the Act, these rules also apply to 
the establishment of a hospital's IME cap. CMS implemented these 
statutory requirements in the August 29, 1997 Federal Register (62 FR 
46005) and in the May 12, 1998 Federal Register (63 FR 26333). 
Generally, under existing regulations at 42 CFR 413.79(e)(1) and 42 CFR 
412.105(f)(1)(vii), if a hospital did not train any allopathic or 
osteopathic residents in its most recent cost reporting period ending 
on or before December 31, 1996, and it begins to participate in 
training residents in a new residency program (allopathic or 
osteopathic) on or after January 1, 1995, the hospital's unweighted FTE 
resident cap (which would otherwise be zero) may be adjusted based on 
the product of the highest number of FTE residents in any program year 
during the third year of the first new program, for all new residency 
training programs established during that 3-year period, and the 
minimum accredited length for each type of program. The number of FTE 
resident cap slots that a teaching hospital receives for each new 
program may not exceed the number of accredited slots that are 
available for each new program. Once a hospital's FTE resident cap is 
established, no subsequent cap adjustments may be made for new programs 
unless the teaching hospital is a rural hospital. A rural hospital's 
FTE resident caps may be adjusted for participation in subsequent new 
residency training programs. As a reminder, a hospital that did not 
train any allopathic or osteopathic residents in its most recent cost 
reporting period ending on or before December 31, 1996, may only 
receive a permanent FTE resident cap adjustment for training residents 
in a truly ``new'' residency training program; no permanent cap 
adjustment would be given for training residents associated with an 
existing program. That is, if a hospital that did not train any 
allopathic or osteopathic residents in its most recent cost reporting 
period ending on or before December 31, 1996, serves as a training site 
for residents in a program that exists or existed previously at another 
teaching hospital that remains open, that ``new'' teaching hospital 
does not receive a ``new program'' cap adjustment because it is not 
participating in training residents in a truly ``new'' program. 
However, it is possible for that hospital to receive a temporary cap 
adjustment if the new teaching hospital enters into a Medicare GME 
affiliation agreement with the existing teaching hospital as specified 
at 42 CFR 413.79(f) and 412.105(f)(1)(vi). (For a detailed discussion 
of the distinctions between a new residency program and an existing 
residency program, we refer readers to the August 27, 2009 final rule 
(74 FR 43908).)
    As stated previously, the existing regulations provide for a 3-year 
period in which a new teaching hospital can ``grow'' its programs, for 
the purpose of establishing its FTE resident caps. This 3-year period, 
which we will refer to as the ``3-year window'' for ease of reference, 
starts when (typically a July 1) the new teaching hospital first begins 
to train residents in its first new program, and it ends when the third 
program year of that first new program ends. For example, assume 
residents begin training in a new program for the first time on July 1, 
2012. The 3-year window begins on July 1, 2012, and ends on June 30, 
2015, the end of the third program year of that (first) new program. At 
this point in time, regardless of the actual accredited length of the 
new program, or the number of new programs started, the new teaching 
hospital's FTE resident caps are established permanently and are 
effective beginning with the fourth program year from the date the 
first new program started (using the same example, this would be July 
1, 2015).
    The provider community has expressed concerns that 3 years do not 
provide for a sufficient amount of time for a hospital to ``grow'' its 
new residency programs and to establish FTE resident caps that are 
properly reflective of the number of FTE residents that it will 
actually train, once the programs are fully grown. Providers have 
explained that 3 years is an insufficient amount of time primarily 
because a period of 3 years is not compatible with program 
accreditation requirements, particularly in instances where the new 
teaching hospital wishes to start more than one new program. For 
example, we understand that a new teaching hospital may not begin all 
of its new programs at the same time because of accreditation 
prerequisites; rather, a new teaching hospital must wait until the 
first program is in place for a specified amount of time before it can 
begin training residents in a second or third program. This potential 
delay means that a new teaching hospital may not be able to 
sufficiently ``grow'' all of

[[Page 27978]]

its new programs by the end of the ``3-year window.'' We understand, 
for example, that the Accreditation Council for Graduate Medical 
Education (ACGME) requires that, for a hospital to sponsor an 
anesthesiology program, the hospital must sponsor or be affiliated with 
at least one internal medicine program and one general surgery program. 
Furthermore, we understand that the ACGME can require new residency 
training programs to pass through an ``initial'' accreditation period 
of up to 3 years until they can be granted ``continued'' accreditation. 
During this initial accreditation period, a hospital is not allowed to 
add any additional positions to its new program. Therefore, even if a 
hospital has plans to expand its new training program beyond the number 
of positions for which it is initially accredited, it may not be 
possible for the hospital to actually do so until this initial period 
has expired. Lastly, we have been made aware that providers may want to 
stagger the start dates for their residency training programs if they 
plan on training residents in several programs because they may want to 
gain some experience in residency training before they begin all of 
their new programs.
    Given the concerns about new teaching hospitals having insufficient 
time to ``grow'' their new residency training programs and to establish 
an appropriately reflective permanent FTE resident cap within a 3-year 
window, we are proposing that a new teaching hospital will have 5 
years, or a ``5-year window,'' in which to establish and grow new 
programs. At the end of the fifth program year of the first new program 
in which the new teaching hospital participates, the new teaching 
hospital's FTE resident caps would be determined, and set permanently, 
effective with the beginning of the sixth program year. We are 
proposing that this change would apply to new teaching hospitals that 
begin training residents in new programs for the first time on or after 
October 1, 2012. Although we understand that many residency training 
programs begin July 1 of the calendar year, consistent with the 
proposed effective date of the FY 2013 IPPS provisions in this proposed 
rule, we are proposing an effective date for this change of October 1, 
2012. We are proposing to amend the regulations at Sec.  413.79(e)(1) 
to state that if a new teaching hospital participates in training 
residents in a new program for the first time on or after October 1, 
2012, the new teaching hospital's FTE resident cap may be adjusted 
based on the product of the highest number of FTE residents training in 
any program year during the fifth year of the first program's existence 
for all new residency training program(s) and the number of years in 
which residents are expected to complete the program based on the 
minimum accredited length for each type of program. This proposed 
policy would apply to the establishment of a hospital's cap for both 
direct GME and IME payment purposes. The IME regulations at Sec.  
412.105(f)(1)(vii) refer to the direct GME regulations at Sec.  
413.79(e)(1) through (e)(4) for the rules for the establishment of a 
new teaching hospital's cap. As is required under existing regulations, 
the number of cap slots associated with each new program cannot exceed 
the number of accredited slots available to the hospital for that new 
program.
    We note that we are not proposing to make any changes to 
regulations governing treatment of the rolling average and the intern 
and resident-to-bed (IRB) ratio for new programs. That is, new program 
FTE residents will continue to be exempt from the rolling average and 
the cap on the IRB ratio for the minimum accredited length for the 
specific type of residency training program. These exceptions are 
discussed in the regulations at Sec. Sec.  412.105(a)(1)(i) through 
(a)(1)(ii) and 413.79(d)(5). The current cost report instructions for 
Worksheet E-4, Line 6 (current year unweighted allopathic and 
osteopathic FTE count) instruct hospitals to contact their Medicare 
contractor for instructions on how to complete that line if the 
hospital has a new program for which the period of years is less than 
or greater than 3 years. Similarly, in the case of this proposed policy 
where the exemption from the rolling average for a new program could 
expire prior to the hospital's cap being set in the sixth year of the 
first new program, we would encourage our Medicare contractors to 
contact us if they have questions on the method of reporting FTE 
resident counts that are subject to the rolling average but not subject 
to the cap.
    We also are proposing to revise the regulations at Sec.  
413.79(e)(1)(i) that discuss the methodology used to calculate a new 
teaching hospital's cap adjustment for a new residency training program 
if residents training in the new program are rotating to more than one 
hospital during the 5-year window. This same methodology would apply to 
a rural teaching hospital because a rural teaching hospital can always 
receive a cap adjustment for starting a brand-new program. We are 
proposing to revise the regulations to specify that, in calculating the 
cap adjustment for each new program started within the 5-year window, 
we would look at the highest total number of FTE residents training in 
any program year during the fifth academic year of the first new 
program's existence at all participating hospitals involved and 
multiply that highest FTE resident count by the number of years in 
which residents are expected to complete the program, based on the 
minimum accredited length of the specific program. Furthermore, we are 
proposing that, for each new program started within the 5-year window, 
we would then take that product and multiply it by each hospital's 
ratio of the number of FTE residents in the new program training over 
the course of the 5-year period at each hospital to the total number 
FTE residents training at all participating hospitals over the course 
of the 5 years. We believe it is appropriate to propose to apportion 
the overall FTE cap among the hospitals participating in training 
residents in the new program based on the percentage of FTE residents 
each hospital trained over the course of the entire 5-year period, 
rather than the percentage of FTE residents each hospital trained only 
during the fifth academic year, because the trend of training over the 
entire 5-years may reflect more completely the patterns in the training 
in years subsequent to the fifth academic year. Otherwise, a hospital's 
FTE cap adjustment, which is permanent, may reflect too heavily the 
share of training time solely in the fifth academic year, which may or 
may not be beneficial to the hospital. We note that a hospital's cap 
adjustment could differ, depending on whether we look only at the fifth 
academic year of the first new program or look at every available year 
(up to 5 years) for which training occurred to calculate each 
hospital's share of the aggregate cap for a specific program.
    In addition, we are proposing to revise the existing regulation 
text at Sec.  413.79(e)(1)(i) to include the phrase ``the number of 
years in which residents are expected to complete the program based on 
the minimum accredited length for the type of program.'' This proposed 
language is consistent with our past, current, and proposed policy. We 
also note that Sec.  413.79(e)(1) applies in instances where the 
residents in the new program train only at one hospital; Sec.  
413.79(e)(1)(i) applies when residents in the new program train at more 
than one hospital, regardless of whether each of those hospitals are 
new hospitals or existing teaching hospitals with previously 
established caps. The example below illustrates the proposed 
methodology of how we would calculate

[[Page 27979]]

a new teaching hospital's cap (or rural teaching hospital's cap) if we 
changed the cap-building period from 3 years to 5 years. In this 
example, as explained above, we are proposing that we would calculate 
the cap based on what is occurring at the new teaching hospital(s) 
during the fifth academic year of the new teaching hospital's first new 
program (or the fifth academic year of the rural teaching hospital's 
new residency training program). The provider community has requested 
that the cap-building period be increased from 3 years to 5 years. 
Therefore, we are proposing that we would only look at the training 
that is occurring during the fifth academic year of the first new 
program to calculate the aggregate cap adjustment. However, we would 
look at the FTE residents training at the hospital(s) during all 5 
years to determine how we would distribute the aggregate cap adjustment 
among the participating hospitals.

    Example: Hospital A is a hospital that becomes a new teaching 
hospital by training residents in a new family medicine program in 
academic year 1. Within its 5-year window, it also begins a new 
surgery program in academic year 4 of the first new program, the 
family medicine program. The family medicine program is accredited 
for 15 positions, 5 positions per year (the minimum accredited 
length of a family medicine program is 3 years). The surgery program 
is accredited for 20 positions, 4 positions per year (the minimum 
accredited length of a surgery program is 5 years). Residents in 
both the family medicine program and the surgery program also rotate 
to Hospital B. Hospital B is an existing teaching hospital 
(nonrural) with a cap that is already established; therefore, it 
will not receive any cap adjustments for training FTE residents in 
the new family medicine program or the new surgery program. However, 
because both of these programs are approved programs and FTE 
residents are training at Hospital B for part of the time, Hospital 
B can count the FTE residents training in the family medicine 
program and the surgery program at its facility if it has room under 
its caps to do so.

    First, we will determine the cap adjustment that Hospital A will 
receive for training FTE residents in the family medicine program. The 
following table includes the allowable FTE resident counts in the 
family medicine program at both Hospital A and Hospital B during the 5-
year window. These numbers are FTE resident counts because they reflect 
the share of training time spent at Hospital A and Hospital B, and also 
assume for this example that we have excluded some nonallowable time, 
such as the time residents spend training in didactic activities in a 
medical school lecture hall.

                                                   Hospital A
----------------------------------------------------------------------------------------------------------------
             Year 1                     Year 2              Year 3              Year 4              Year 5
----------------------------------------------------------------------------------------------------------------
0.75 PGY 1......................  2.60 PGY 1........  4.00 PGY 1........  4.10 PGY 1........  4.20 PGY 1.
0.00 PGY 2......................  2.80 PGY 2........  3.40 PGY 2........  3.40 PGY 2........  3.70 PGY 2.
0.00 PGY 3......................  0.00 PGY 3........  2.40 PGY 3........  2.80 PGY 3........  2.80 PGY 3.
----------------------------------------------------------------------------------------------------------------
Total 0.75......................  Total 5.40........  Total 9.80........  Total 10.30.......  Total 10.70.
----------------------------------------------------------------------------------------------------------------

    Hospital A's 5 year total = 36.95.

                                                   Hospital B
----------------------------------------------------------------------------------------------------------------
             Year 1                     Year 2              Year 3              Year 4              Year 5
----------------------------------------------------------------------------------------------------------------
3.75 PGY 1......................  2.20 PGY 1........  0.90 PGY 1........  0.80 PGY 1........  0.60 PGY 1.
0.00 PGY 2......................  2.00 PGY 2........  1.50 PGY 2........  1.50 PGY 2........  1.20 PGY 2.
0.00 PGY 3......................  0.00 PGY 3........  2.40 PGY 3........  2.00 PGY 3........  2.00 PGY 3.
----------------------------------------------------------------------------------------------------------------
Total 3.75......................  Total 4.20........  Total 4.80........  Total 4.30........  Total 3.80.
----------------------------------------------------------------------------------------------------------------

    Hospital B's 5 year total = 20.85.
    Total Hospital A and Hospital B over 5 years = 36.95 + 20.85 = 
57.80 FTEs.
    To calculate the cap adjustment for Hospital A with respect to the 
family medicine program, we need to take the highest number of FTE 
residents training in any program year in the program (that is, FTE 
residents training at both Hospital A and Hospital B) in the fifth 
academic year of the first new program (which is the family medicine 
program). If we add the PGY 1s, the PGY 2s, and the PGY 3s at both 
hospitals, in year 5, we see that we would use the total number of PGY 
2s to calculate the FTE cap adjustment for the family medicine program, 
because the total number of PGY 2s at both hospitals is 4.90 FTEs (3.70 
+ 1.20), whereas the total number of PGY 1s and PGY 3s is only 4.80. We 
multiply 4.90 by the minimum accredited length of the family medicine 
program to get the total possible cap adjustment for the family 
medicine program (4.90 x 3 = 14.70). The cap adjustment that Hospital A 
receives for the family medicine program will be some number less than 
14.70 based on the ratio of the number of FTEs in the new program 
training over the course of the 5-year period at Hospital A to the 
total number FTE residents training at both hospitals over the course 
of the 5 year period.
    To determine this ratio, note that Hospital A's total FTE residents 
in the new family medicine program over the course of 5 years is the 
numerator, 36.95. The total FTE residents at Hospitals A and B in the 
new family medicine program over the course of 5 years is the 
denominator, 57.80 (that is, 36.95 + 20.85). The ratio of training that 
occurred at Hospital A is 36.95/57.80 = 0.64. Therefore, Hospital A's 
cap for its share of the family medicine program is 0.64 x 14.70, or 
9.41. (If Hospital B had been eligible to receive a cap adjustment, its 
ratio of the cap would have been 0.36, that is, (20.85/57.80), and its 
share would have been 5.30 (0.36 x 14.70). If we add 9.41 to 5.30, we 
get 14.71 (we note that 14.71 is ``approximately'' equal to 14.70, the 
total cap determined for the entire family medicine program, with a 
slight difference due to rounding). Thus, we have ensured that, in 
assigning a cap of 9.41 to Hospital A on behalf of its family medicine 
program, the total allowable and accredited number of slots has not 
been exceeded).
    Now we will determine the cap adjustment that Hospital A will 
receive for training FTE residents in the new

[[Page 27980]]

surgery program that began in year 4 of the first new program. The 
following tables include the allowable FTE resident counts in the 
surgery program at Hospital A and Hospital B, respectively, during the 
hospital's 5-year window. Again, assume we have excluded nonallowable 
time, such as time residents spent training in didactic activities in a 
medical school lecture hall.

                                                   Hospital A
----------------------------------------------------------------------------------------------------------------
             Year 1                     Year 2              Year 3              Year 4              Year 5.
----------------------------------------------------------------------------------------------------------------
0.00 PGY 1......................  0.00 PGY 1........  0.00 PGY 1........  4.10 PGY 1........  4.20 PGY 1.
0.00 PGY 2......................  0.00 PGY 2........  0.00 PGY 2........  0.00 PGY 2........  2.70 PGY 2.
0.00 PGY 3......................  0.00 PGY 3........  0.00 PGY 3........  0.00 PGY 3........  0.00 PGY 3.
0.00 PGY 4......................  0.00 PGY 4........  0.00 PGY 4........  0.00 PGY 4........  0.00 PGY 4.
0.00 PGY 5......................  0.00 PGY 5........  0.00 PGY 5........  0.00 PGY 5........  0.00 PGY 5.
----------------------------------------------------------------------------------------------------------------
Total 0.00......................  Total 0.00........  Total 0.00........  Total 4.10........  Total 6.90.
----------------------------------------------------------------------------------------------------------------

    Hospital A's 5 year total = 11.00.

                                                   Hospital B
----------------------------------------------------------------------------------------------------------------
             Year 1                     Year 2              Year 3              Year 4              Year 5
----------------------------------------------------------------------------------------------------------------
0.00 PGY 1......................  0.00 PGY 1........  0.00 PGY 1........  1.70 PGY 1........  0.60 PGY 1.
0.00 PGY 2......................  0.00 PGY 2........  0.00 PGY 2........  0.00 PGY 2........  1.50 PGY 2.
0.00 PGY 3......................  0.00 PGY 3........  0.00 PGY 3........  0.00 PGY 3........  0.00 PGY 3.
0.00 PGY 4......................  0.00 PGY 4........  0.00 PGY 4........  0.00 PGY 4........  0.00 PGY 4.
0.00 PGY 5......................  0.00 PGY 5........  0.00 PGY 5........  0.00 PGY 5........  0.00 PGY 5.
----------------------------------------------------------------------------------------------------------------
Total 0.00......................  Total 0.00........  Total 0.00........  Total 1.70........  Total 2.10.
----------------------------------------------------------------------------------------------------------------

    Hospital B's 5 year total = 3.80.
    Total Hospital A and Hospital B over 5 years = 11.00 + 3.80 = 14.80 
FTEs.
    To calculate the cap adjustment for Hospital A with respect to the 
surgery program, we need to take the highest number of FTE residents 
training in the program (that is, FTE residents training at both 
Hospital A and Hospital B) in the fifth academic year of the first new 
program (which is the family medicine program). Because the surgery 
program only started in Year 4 of the family medicine program, there 
are only PGY 1s and PGY 2s training at both Hospitals A and B in year 
5. If we add the PGY 1s and the PGY 2s at both hospitals in year 5, we 
see that we would use the total number of PGY 1s to calculate the FTE 
cap adjustment for the surgery program, because the total number of PGY 
1s is 4.80 FTEs (4.20 + 0.60), whereas the total number of PGY 2s is 
only 4.20. We multiply 4.80 by the minimum accredited length of the 
surgery program to get the total possible cap adjustment for the 
surgery program (4.80 x 5 = 24.00). However, because the surgery 
program is only accredited for 20 positions, the overall FTE resident 
cap associated with the surgery program that is to be apportioned 
between Hospital A and Hospital B is limited to a maximum of 20. In 
this instance, because the surgery program started in Year 4 of the 
family medicine program, and it only ``grew'' for 2 years, we only have 
2 years of FTE resident counts to consider and not 5 years. 
Nevertheless, the cap adjustment that Hospital A receives for the 
surgery program will be some number less than 20 and is based on the 
ratio of the number of FTE residents in the new program training over 
the course of the 2-year period at Hospital A to the total number of 
FTEs training at both hospitals over the course of the 2-year period.
    To determine this ratio, note that Hospital A's total FTE residents 
in the new surgery program over the course of 2 years is the numerator, 
11.00. The total number of FTE residents at Hospitals A and B in the 
new surgery program over the course of 5 years is the denominator, 
14.80 (that is, 11.00 + 3.80). The ratio of training that occurred at 
Hospital A is 11.00/14.80 = 0.74. Hospital A's cap for its share of the 
surgery program is 0.74 x 20 = 14.80. (If Hospital B had been eligible 
to receive a cap adjustment, its share of the cap would have been 5.20 
((3.80/14.80) x 20) = 5.20. Thus, we have ensured that, in assigning a 
cap of 14.80 to Hospital A on behalf of its surgery program, the total 
allowable and accredited number of slots has not been exceeded).
    Adding together the cap adjustment Hospital A receives for the new 
family medicine program and the cap adjustment it receives for the new 
surgery program, Hospital A's total permanent cap is 24.21 (9.41 + 
14.80 = 24.21).
    In summary, we are proposing to revise the regulations at Sec.  
413.79(e)(1) for the purposes of direct GME and, by reference, Sec.  
412.105(f)(1)(vii) for purposes of IME to state that if a hospital 
begins training residents in a new program for the first time on or 
after October 1, 2012, that hospital's caps may be adjusted based on 
the product of the highest number of FTE residents training in any 
program year during the fifth academic year of the first program's 
existence for all new residency training programs and the number of 
years in which residents are expected to complete the program based on 
the minimum accredited length for the type of program. The cap would be 
applied beginning with the sixth academic year of the first new 
program. We also are proposing conforming changes throughout paragraph 
(e)(1) of Sec.  413.79 to correspond with the proposed change to 
increase the length of the cap-building period from 3 to 5 years. In 
addition, we are proposing to change the regulation text at Sec.  
413.79(e)(1)(i) to reflect a methodology to calculate a new teaching 
hospital's cap adjustment if the residents in the new training program 
are training at more than one hospital. We are proposing that these 
changes would be effective for a hospital that begins training 
residents for the first time on or

[[Page 27981]]

after October 1, 2012. Lastly, we are making a clarification to the 
existing regulation text at Sec.  413.79(e)(1)(i) to insert the missing 
phrase ``and the number of years in which residents are expected to 
complete the program based on the minimum accredited length for the 
type of program.'' This change is consistent with our past, current, 
and proposed policy.
3. Clarification Related to 5-Year Period Following Implementation of 
Reductions and Increases to Hospitals' FTE Resident Caps for GME 
Payment Purposes Under Section 5503 of the Affordable Care Act
    As previously discussed, in an attempt to end the implicit 
incentive for hospitals to increase the number of FTE residents, 
Congress instituted a cap on the number of allopathic and osteopathic 
residents a hospital is allowed to count for direct GME and IME 
purposes. Some hospitals have trained a number of allopathic and 
osteopathic residents in excess of their FTE resident caps, while other 
hospitals are training a number of allopathic and osteopathic residents 
at some level below their FTE resident caps. Section 5503 of the 
Affordable Care Act added a new section 1886(h)(8) to the Act to 
provide for reductions in the statutory FTE resident caps for direct 
GME payment purposes under Medicare for certain hospitals that are 
training allopathic and osteopathic residents at a level below their 
FTE resident caps, and to authorize a ``redistribution'' to certain 
hospitals of the estimated number of FTE resident slots resulting from 
the reductions. Section 5503 of the Affordable Care Act also amended 
section 1886(d)(5)(B)(v) of the Act to require application of the 
provisions of section 1886(h)(8) of the Act ``in the same manner'' to 
the FTE resident caps for IME payment purposes.
    Section 1886(h)(8)(A)(i) of the Act provides that, effective for 
portions of cost reporting periods occurring on or after July 1, 2011, 
a hospital's FTE resident cap will be reduced by 65 percent of the 
difference between the hospital's ``otherwise applicable resident 
limit'' and its ``reference resident level,'' if its ``reference 
resident level'' is less than its ``otherwise applicable resident 
limit'' (as defined at section 1886(h)(8)(H) of the Act). (We refer 
readers to the November 24, 2010 final rule with comment period (75 FR 
72155 through 72161) for a discussion of these terms.) Section 
1886(h)(8)(A)(ii) of the Act and the November 24, 2010 final rule with 
comment period (75 FR 72147) describe which hospitals are exempt from a 
cap reduction under section 5503 of the Affordable Care Act, including 
rural hospitals with fewer than 250 acute care inpatient beds.
    Under section 1886(h)(8)(B) of the Act, the Secretary is authorized 
to increase the FTE resident caps for certain categories of hospitals 
for portions of cost reporting periods occurring on or after July 1, 
2011, in the aggregate, by a number that does not exceed the estimated 
overall reduction in FTE resident caps for all hospitals under section 
1886(h)(8)(A) of the Act. In determining which hospitals will receive 
an increase in their FTE resident caps, sections 1886(h)(8)(C) through 
1886(h)(8)(E) of the Act direct us to do all of the following:
     Take into account the demonstrated likelihood of the 
hospital filling the additional positions within the first three cost 
reporting periods beginning on or after July 1, 2011.
     Take into account whether the hospital has an accredited 
rural training track program.
     Distribute 70 percent of the resident slots to hospitals 
located in States with resident-to-population ratios in the lowest 
quartile.
     Distribute 30 percent of the resident slots to hospitals 
located in a State, a territory of the United States, or the District 
of Columbia that are among the top 10 States, territories, or the 
District in terms of the ratio of the total population living in an 
area designated as a health professional shortage area (HSPA), as of 
March 23, 2010, to the total population, and/or to hospitals located in 
rural areas.
    A comprehensive description of the rules implementing the cap slot 
redistribution under section 1886(h)(8) of the Act can be found in the 
November 24, 2010 final rule with comment period (75 FR 72168). Section 
1886(h)(8)(B)(ii) of the Act, as added by section 5503(a)(4) of the 
Affordable Care Act, specifies that a hospital that receives an 
increase in its cap shall ensure, during the 5-year period beginning on 
the date of such increase (July 1, 2011), that certain requirements, 
referred to as the primary care average and the 75-percent threshold, 
are met in order to retain those slots. Otherwise, section 
1886(h)(8)(B)(iii)(I) of the Act authorizes the Secretary to reduce the 
FTE resident caps of the hospital by the same number of FTE residents 
by which the hospital's FTE resident caps were increased if the 
hospital fails to meet either requirement; and section 
1886(h)(8)(B)(iii)(II) of the Act authorizes the Secretary to 
redistribute those positions.
    Specifically, section 1886(h)(8)(B)(ii) of the Act states, ``* * * 
a hospital that receives an increase in the otherwise applicable 
resident limit under this subparagraph shall ensure, during the 5-year 
period beginning on the date of such increase, that--
    (I) The number of full-time equivalent primary care residents, as 
defined in paragraph (5)(H) (as determined by the Secretary), excluding 
any additional positions under subclause (II), is not less than the 
average number of fulltime equivalent primary care residents (as so 
determined) during the 3 most recent cost reporting periods ending 
prior to the date of enactment of this paragraph; and
    (II) Not less than 75 percent of the positions attributable to such 
increase are in a primary care or general surgery residency (as 
determined by the Secretary).
    The Secretary may determine whether a hospital has met the 
requirements under this clause during such 5-year period in such manner 
and at such time as the Secretary determines appropriate, including at 
the end of such 5-year period.''
    In a case where the Secretary determines that a hospital did not 
meet the requirements in a cost reporting year during the 5-year time 
period, section 1886(h)(8)(B)(iii) of the Act states that ``* * * the 
Secretary shall--
    (I) Reduce the otherwise applicable resident limit of the hospital 
by the amount by which such limit was increased under this paragraph; 
and
    (II) Provide for the distribution of positions attributable to such 
reduction in accordance with the requirements of this paragraph.''
    In the November 24, 2010 final rule with comment period (75 FR 
72195 through 72203), we stated that the ``5-year period beginning on 
the date of such increase'' is July 1, 2011 through June 30, 2016, and 
we provided a detailed discussion of what the two requirements under 
sections 1886(h)(8)(B)(ii)(I) and 1886(h)(8)(B)(ii)(II) of the Act 
entail. In that final rule, we noted that section 1886(h)(8)(B)(ii) of 
the Act allows the Secretary to ``determine whether a hospital has met 
the requirements * * * during such 5-year period in such manner and at 
such time as the Secretary determines appropriate, including at the end 
of such 5-year period,'' and section 1886(h)(8)(B)(iii) of the Act 
instructs the Secretary to ``reduce the otherwise applicable resident 
limit of the hospital by the amount by which such limit was increased * 
* *.'' We also explained that we believe the Secretary has the 
discretion to consider a hospital's performance over more than one year 
or

[[Page 27982]]

to review each year during the 5 years independently in determining 
whether or not a hospital is in compliance with the primary care 
average and the 75-percent threshold, as required (75 FR 72196 and 
72197 and 72200 and 72201). We emphasized that it is within CMS' and 
the Medicare contractors' authority to adjust a hospital's IME and 
direct GME payments as early as it is feasible within a cost report's 
submission and review cycle, and that we need not wait until final 
settlement to do so. We further stated in the November 24, 2010 final 
rule with comment period implementing section 5503 that ``We also 
understand that we should consider that hospitals might not immediately 
fill all the slots they receive, particularly because they are only 
required to demonstrate the likelihood of filling the slots within the 
first three cost reporting periods beginning on or after July 1, 2011'' 
(75 FR 72197). However, we gave an example that indicated that, of the 
section 5503 FTE slots that the hospital does begin to use, 75 percent 
of those slots must be in primary care or general surgery.
    Since we awarded the section 5503 slots pursuant to section 
1886(h)(8) of the Act, we have received questions from hospitals asking 
if and how CMS would enforce the primary care average and the 75-
percent threshold requirements under sections 1886(h)(8)(B)(ii)(I) and 
1886(h)(8)(B)(ii)(II) of the Act if a hospital does not use any of its 
section 5503 slots until year 4 or year 5 of the 5-year period, or if a 
hospital does not use any of the section 5503 slots until after 
expiration of the 5-year period. We have informed hospitals that the 
75-percent threshold requirement applies once the hospital starts using 
any of the section 5503 slots, and the 3-year primary care average 
requirement applies immediately on July 1, 2011, regardless of whether 
or not the hospital begins to use its additional section 5503 slots in 
year 1 of the 5-year period. This is because the 3-year primary care 
average test applies to the hospital's pre-section 5503 resident 
complement as well, and not exclusively to the additional FTE residents 
associated with slots awarded under section 5503.
    In determining which hospitals applying for slots under section 
5503 will receive slots, section 1886(h)(8)(C)(i) of the Act specifies 
that the Secretary shall take into account the demonstrated likelihood 
of the hospital filling the slots within the first three cost reporting 
periods beginning on or after July 1, 2011. Hospitals included evidence 
supporting the demonstrated likelihood stipulation in their 
applications and we took that into consideration in awarding slots 
under section 5503. We believe that it is inappropriate and in direct 
conflict with a base consideration in the awarding of slots under 
section 5503 for hospitals to refrain from using their section 5503 
slots until after the initial 3 years after the slots have been awarded 
in an attempt to circumvent the primary care average or the 75-percent 
threshold requirements, or both.
    As stated in the November 14, 2010 final rule, CMS reserves the 
right to assess as many times as necessary in the 5-year period whether 
a hospital is meeting the required criteria. The agency also may remove 
the slots awarded to a hospital at any point during the 5-year period 
(75 FR 72196 and 72197 and 72200 and 72201). Because a statutorily 
directed criterion for consideration in awarding slots under section 
5503 included the requirement that hospitals applying for slots 
demonstrate the likelihood of filling the slots within the first three 
cost reporting periods beginning on or after July 1, 2011, and we 
relied on that information in awarding slots, we believe it is 
reasonable to expect that hospitals that received slots under section 
5503 should begin to use their slots within the first three 12-month 
cost reporting periods beginning on or after July 1, 2011, of the 5-
year period in order to give full effect to the requirements under 
section 1886(h)(8)(B)(ii) of the Act. Therefore, we are proposing that 
a hospital must fill at least half of its section 5503 slots, IME and 
direct GME respectively, in at least one of the following timeframes, 
or lose its section 5503 slots: (A) in its first 12-month cost 
reporting period of the 5-year period; and/or (B) in its second 12-
month cost reporting period of the 5-year period; and/or (C) in its 
third 12-month cost reporting period of the 5-year period. For example, 
Hospital A and Hospital B both have June 30 fiscal year ends (FYEs), 
and they received 10 slots under section 5503. In its FYE June 30, 
2012, Hospital A filled 8 slots. In its FYE June 30, 2013, Hospital A 
filled 0 slots. In its FYE June 30, 2014, Hospital A filled 5 slots. 
However, Hospital B, in its FYEs June 30, 2012, 2013, and 2014, only 
filled 3 slots respectively in each of the 3 years. Hospital A would 
have complied with our proposed requirement, because it filled at least 
half of its section 5503 slots in either its first, and/or second, and/
or its third 12-month cost reporting period during the 5-year period. 
Hospital B would not have complied with our proposed requirement 
because in neither its first, second, or third 12-month cost reporting 
period had it filled at least 5 (half of 10) slots.
    We are proposing to interpret that a hospital's failure to use 
slots awarded under section 5503 in a timely manner to also be a 
failure to meet the 75-percent threshold. We believe that we have the 
authority to interpret section 1886(h)(8)(B)(ii) of the Act in such a 
manner and to propose this requirement because section 
1886(h)(8)(B)(ii) of the Act allows the Secretary to ``* * * determine 
whether a hospital has met the requirements under this clause during 
such 5-year period in such manner and at such time as the Secretary 
determines appropriate, including at the end of such 5-year period.'' 
We are reiterating that the 75-percent threshold applies in the 
instance where a hospital uses less than half, or any amount, of its 
slots prior to its third 12-month cost reporting period during the 5-
year period (75 FR 72197). In other words, the 75-percent threshold 
applies throughout the 5-year period, as long as the hospital is using 
some amount of its section 5503 slots in the respective cost reporting 
period. If a hospital is using some of its section 5503 slots in a cost 
reporting period, the 75-percent threshold would be enforced; if a 
hospital is not using any of its section 5503 slots in a cost reporting 
period, the 75-percent threshold would not be enforced. However, as 
stated earlier, we are proposing that a hospital must use its section 
5503 slots no later than the hospital's third 12-month cost reporting 
period (and that at least half of its section 5503 slots must be used 
in either the first, or second, or third 12-month cost reporting 
period).
    We note that we did not specify that a hospital must use at least 
half of its section 5503 slots in its third 12-month cost reporting 
period of the 5-year period in the November 24, 2010 final rule with 
comment period because the possibility that a hospital might not begin 
to use its section 5503 slots for several years only came to our 
attention after July 1, 2011, in response to questions raised by 
hospitals. Furthermore, given the huge demand for these slots (to the 
extent that we ran out of slots during the redistribution process and 
were unable to award any slots to hospitals in qualifying, but lower 
ranking, States), and that the slots were slated to be distributed in 
States where there was an acute need for additional residents (that is, 
as sections 1886(h)(8)(D) and 1886(h)(8)(E) of the Act specify, to 
States with resident-to-population ratios in the lowest quartile, and 
to States that are among the top 10 in terms of the HPSA population to 
total

[[Page 27983]]

population ratios), we did not expect that hospitals that received 
section 5503 slots would not be able to make almost immediate use of 
the slots. Consequently, given the presumed huge need for these slots 
in the States where Congress directed that they be awarded, we believe 
it is appropriate to use our authority to reasonably ensure that those 
slots awarded are used in compliance with section 5503 (hence, the 
proposals in this proposed rule), and, if not, are able to be 
redistributed to other hospitals in need of slots as Congress intended.
    Section 1886(h)(8)(B)(iii) of the Act states that if the Secretary 
determines that a hospital does not meet either the primary care 
average or the 75-percent threshold, ``the Secretary shall (I) reduce 
the otherwise applicable resident limit of the hospital by the amount 
by which such limit was increased under this paragraph; and (II) 
provide for the distribution of positions attributable to such 
reduction in accordance with the requirements of this paragraph.'' 
Accordingly, we are exercising the broad authority that the Secretary 
is given to determine whether the requirements at section 
1886(h)(8)(B)(ii) of the Act are met by proposing that if a hospital 
fails to fill at least half of its section 5503 slots, IME and direct 
GME respectively, in its first 12-month cost reporting period of the 5-
year period, and/or in its second 12-month cost reporting period, and/
or in its third 12-month cost reporting period of the 5-year period, 
this would mean failure to meet the 75-percent threshold. In the case 
of such failure, CMS would instruct the Medicare contractor after audit 
to permanently remove all of the hospital's section 5503 slots from the 
earliest cost reporting period that is subject to reopening and in 
which it would be determined that the hospital did not meet the 
requirements (in accordance with existing Sec.  413.79(n)(2)(iii), 
which is proposed to be redesignated as Sec.  413.79(n)(2)(iv) in this 
proposed rule), even if the hospital had used at least half of its 
section 5503 slots in its fourth or subsequent cost reporting year of 
the 5-year period. Thus, as part of the Medicare contractors' reviews 
of the hospitals that received section 5503 slots, we are proposing 
that the Medicare contractors would determine whether a hospital filled 
at least half of its section 5503 slots in its first 12-month cost 
reporting period of the 5-year period, and/or in its second 12-month 
cost reporting period, and/or in its third 12-month cost reporting 
period of the 5-year period. We believe it is appropriate to remove the 
slots from a hospital that has not filled at least half of its slots in 
any 12-month cost reporting year prior to and including the third 12-
month cost reporting period so that these slots may be redistributed to 
other hospitals that may have greater success in filling the slots and 
that are located in States that are described in sections 
1886(h)(8)((D) and 1886(h)(8)(E) of the Act.
    We note that, as explained in the November 24, 2010 final rule with 
comment period, the start and end of each year of the 5-year period 
depend on the fiscal year begin date of each hospital's cost reporting 
periods. Hospitals with fiscal year begin dates of July 1 will have 
five 12-month cost reporting periods starting on July 1, 2011, and 
ending on June 30, 2016, while hospitals with fiscal year begin dates 
of other than July 1 will have a partial cost reporting period that 
includes July 1, 2011, four 12-month cost reporting periods, and 
another partial cost reporting period that includes June 30, 2016 (75 
FR 72197). For example, if Hospital A has a June 30 fiscal year end, 
its third 12-month cost reporting period of the 5-year period would be 
July 1, 2013, to June 30, 2014, and Hospital A must fill at least half 
of its section 5503 slots, IME and direct GME respectively, in its 
first 12-month cost reporting period of the 5-year period, and/or in 
its second 12-month cost reporting period, and/or in its third 12-month 
cost reporting period of the 5-year period. If Hospital B has a 
September 30 fiscal year end, its cost reporting periods occurring 
during July 1, 2011 through June 30, 2016 are as follows:
    Year 1--July 1, 2011-September 30, 2011
    Year 2--October 1, 2011-September 30, 2012
    Year 3--October 1, 2012-September 30, 2013
    Year 4--October 1, 2013-September 30, 2014
    Year 5--October 1, 2014-September 30, 2015
    Year 6--October 1, 2015-June 30, 2016
    Hospital B's third 12-month cost reporting period would be October 
1, 2013, to September 30, 2014, and Hospital B must fill at least half 
of its section 5503 slots, IME and direct GME, respectively, in its 
first 12-month cost reporting period of the 5-year period, and/or in 
its second 12-month cost reporting period, and/or in its third 12-month 
cost reporting period of the 5-year period. As explained in the 
November 24, 2010 final rule with comment period (75 FR 72197), if 
hospitals have other than a June 30 fiscal year end, for their cost 
reports that include July 1, 2011 and June 30, 2016 respectively, we 
will consider whether the hospital meets the primary care average and 
the 75-percent threshold requirements based on an annualized FTE count. 
Also, if during the period of July 1, 2011 through June 30, 2016, 
hospitals, for whatever reason, actually have less than 12-month cost 
reports, we would consider on a case-by-case basis which cost reports 
we would evaluate for purposes of meeting the proposed requirement of 
filling at least half of the section 5503 slots in its first, second, 
and/or third cost reporting period. As under existing policy, if the 
hospital does begin to fill its section 5503 slots but fails to meet 
the 75-percent threshold, the Medicare contractor would also remove the 
section 5503 slots, effective with the earliest year that the 75-
percent threshold is not met.
    Lastly, considering again that hospitals that received section 5503 
slots had to demonstrate the likelihood of filling the slots within the 
first three cost reporting periods beginning on or after July 1, 2011, 
we are proposing to require that hospitals that received section 5503 
slots must fill all of the slots they received in their final cost 
reporting period beginning during the timeframe of July 1, 2011 through 
June 30, 2016 (IME and direct GME respectively), or lose all of their 
section 5503 slots after June 30, 2016. As stated above, we consider it 
to be appropriate to remove the slots from a hospital that has not 
filled at least half of its slots in any 12-month cost reporting period 
prior to and including the third 12-month cost reporting period, so 
that these slots may be redistributed to other hospitals that otherwise 
qualified to receive slots, but did not receive them because the 
available slots were granted to higher ranking hospitals. We also are 
interested in commenters' recommendations regarding alternative 
approaches to encouraging compliance with the 3-year primary care 
average requirement and the 75-percent threshold.
    In summary, we are proposing that a hospital must fill at least 
half of its section 5503 slots, IME and direct GME respectively, in at 
least one of the following timeframes or lose its section 5503 slots: 
(A) in its first 12-month cost reporting period of the 5-year period; 
and/or (B) in its second 12-month cost reporting period of the 5-year 
period; and/or (C) in its third 12-month cost reporting period of the 
5-year period. We are proposing to enforce the 75-percent threshold 
test once the hospital begins to use its section 5503 slots,

[[Page 27984]]

which we are proposing must be no later than the hospital's third 12-
month cost reporting period (and that at least half of its section 5503 
slots must be used in either the first, or second, or third 12-month 
cost reporting period). In addition, we are proposing that a hospital 
does not meet the 75-percent threshold if it fails to fill at least 
half of its section 5503 slots, IME and direct GME, respectively, in 
one or a combination of the first three 12-month cost reporting period 
of the 5-year period, and upon that basis, CMS would instruct the 
Medicare contractor, after audit, to permanently remove all of the 
hospital's section 5503 slots from the earliest cost reporting period 
that is subject to reopening and in which it would be determined that 
the hospital did not meet the requirements (in accordance with existing 
Sec.  413.79(n)(2)(iii), which is proposed to be redesignated as Sec.  
413.79(n)(2)(iv) in this proposed rule), even if the hospital had used 
at least half of its section 5503 slots in its fourth or subsequent 
cost reporting year of the 5-year period. Thus, as part of the Medicare 
contractors' reviews of the hospitals that received section 5503 slots, 
we are proposing that the Medicare contractors would determine whether 
a hospital filled at least half of its section 5503 slots in its first 
12-month cost reporting period of the 5-year period, and/or in its 
second 12-month cost reporting period, and/or in its third 12-month 
cost reporting period of the 5-year period. Lastly, we are proposing to 
require that a hospital that received section 5503 slots must fill all 
of the slots it received in their final cost reporting period beginning 
during the timeframe of July 1, 2011 through June 30, 2016 (IME and 
direct GME respectively), or lose all of its section 5503 slots after 
June 30, 2016.
    We are proposing that these requirements would be effective for a 
hospital's third 12-month cost reporting period occurring during the 5-
year period of July 1, 2011 through June 30, 2016. For example, for 
hospitals with a June 30 fiscal year end, this would be July 1, 2013 
through June 30, 2014. For hospitals with a September 30 fiscal year 
end, this would be October 1, 2013 through September 30, 2014. For 
hospitals with a December 31 fiscal year end, this would be January 1, 
2014 through December 31, 2014. We are proposing to make appropriate 
changes to the regulations text at Sec.  413.79(n)(2) to incorporate 
our proposals. The IME regulations regarding section 5503 slots that 
are at existing Sec.  412.105(f)(1)(iv)(C)(2) reference the direct GME 
regulations text at Sec.  413.79(n) and would not require amendments.
4. Preservation of Resident Cap Positions From Closed Hospitals 
(Section 5506 of the Affordable Care Act)
a. Background
    Under existing regulations at Sec.  413.79(h) for direct GME and 
Sec.  412.105(f)(1)(ix) for IME, a hospital that is training FTE 
residents at or in excess of its FTE resident caps and takes in 
residents displaced by the closure of another teaching hospital may 
receive a temporary increase to its FTE residents caps so that it may 
receive direct GME and IME payment associated with those displaced FTE 
residents. However, those temporary FTE resident caps are associated 
with those specific displaced FTE residents, and the temporary caps 
expire as those displaced residents complete their training program. 
Thus, in the past, if a teaching hospital closed, its direct GME and 
IME FTE resident cap slots would be ``lost,'' because those cap slots 
are associated with a specific hospital's Medicare provider agreement, 
which would be retired upon the hospital's closure. Section 5506 of the 
Affordable Care Act addressed that situation by amending section 
1886(h)(4)(H) of the Act to add a new clause (vi) that instructs the 
Secretary to establish a process by regulation under which, in the 
event a teaching hospital closes, the Secretary will permanently 
increase the FTE resident caps for hospitals that meet certain criteria 
up to the number of the closed hospital's FTE resident caps. The 
Secretary is directed to ensure that the total number of FTE resident 
cap slots distributed shall be equal to the amount of slots in the 
closed hospital's direct GME and IME FTE resident caps, respectively. 
Under existing regulations at Sec.  489.52 and Sec.  413.79(h), 
``closure of a hospital'' means the hospital terminates its Medicare 
provider agreement. As finalized in the November 24, 2010 final rule 
with comment period (75 FR 72213), we also specified that the FTE 
resident cap slots of the hospital that closed no longer exist as part 
of any other hospital's permanent FTE resident cap.
    Section 1886(h)(4)(H)(vi)(II) of the Act, as added by section 
5506(a) of the Affordable Care Act, specifies that the Secretary shall 
distribute the FTE cap increases in the following priority order, 
``with preference given within each category to hospitals that are 
members of the same affiliated group'' (as defined by the Secretary) as 
the closed hospital:
     First, to hospitals located in the same core-based 
statistical area (CBSA) as, or in a CBSA contiguous to, the hospital 
that closed.
     Second, to hospitals located in the same State as the 
closed hospital.
     Third, to hospitals located in the same region of the 
country as the hospital that closed.
     Fourth, only if the slots are not able to be fully 
distributed under the third priority group, to qualifying hospitals in 
accordance with the criteria established under section 5503 
(``Distribution of Additional Residency Positions'') of the Affordable 
Care Act.
    For a detailed discussion on these ranking categories, we refer 
readers to the November 24, 2010 final rule with comment period (75 FR 
72214 and 72215). In the November 24, 2010 final rule with comment 
period (75 FR 72212 through 72240), we also finalized the following 
Ranking Criteria:
    [square] Ranking Criterion One. The applying hospital is requesting 
the increase in its FTE resident cap(s) because it is assuming (or 
assumed) an entire program (or programs) from the hospital that closed, 
and the applying hospital is continuing to operate the program(s) 
exactly as it had been operated by the hospital that closed (that is, 
same residents, possibly the same program director, and possibly the 
same (or many of the same) teaching staff).
    [square] Ranking Criterion Two. The applying hospital was listed as 
a participant of a Medicare GME affiliated group on the most recent 
Medicare GME affiliation agreement of which the closed hospital was a 
member before the hospital closed, and under the terms of that Medicare 
GME affiliation agreement, the applying hospital received slots from 
the hospital that closed, and the applying hospital will use the 
additional slots to continue to train at least the number of FTE 
residents it had trained under the terms of the Medicare GME 
affiliation agreement. If the most recent Medicare GME affiliation 
agreement of which the closed hospital was a member before the hospital 
closed was with a hospital that itself has closed or is closing, 
preference would be given to an applying hospital that was listed as a 
participant in the next most recent Medicare GME affiliation agreement 
(but not one which was entered into more than 5 years prior to the 
hospital's closure) of which the first closed hospital was a member 
before the hospital closed, and that applying hospital received slots 
from the closed hospital under the terms of that affiliation agreement.

[[Page 27985]]

    [square] Ranking Criterion Three. The applying hospital took in 
residents displaced by the closure of the hospital, but is not assuming 
an entire program or programs, and will use the additional slots to 
continue training residents in the same programs as the displaced 
residents, even after those displaced residents complete their training 
(that is, the applying hospital is permanently expanding its own 
existing programs).
    [square] Ranking Criterion Four. The applying hospital does not fit 
into Ranking Criteria One, Two, or Three, and will use additional slots 
to establish a new or expand an existing geriatrics residency program.
    [square] Ranking Criterion Five: Applying hospital does not meet 
Ranking Criterion One, Two, or Three, is located in a HPSA, and will 
use all the additional slots to establish or expand a primary care or 
general surgery residency program.
    [square] Ranking Criterion Six: Applying hospital does not meet 
Ranking Criterion One, Two, or Three, is not located in a HPSA, and 
will use all the additional slots to establish or expand a primary care 
or general surgery residency program.
    [square] Ranking Criterion Seven: Applying hospital seeks the slots 
for purposes that do not fit into any of the above ranking criteria.
    In determining which hospitals should receive the slots associated 
with the closed hospital, in addition to considering the ranking 
categories and criteria listed above, section 1886(h)(4)(H)(vi) of the 
Act, as added by section 5506(a) of the Affordable Care Act, states 
that the Secretary may only award slots to an applying hospital ``if 
the Secretary determines that the hospital has demonstrated a 
likelihood of filling the positions made available under this clause 
within 3 years.'' ``Within 3 years'' means within the 3 academic years 
immediately following the application deadline to receive slots after a 
particular hospital closes (75 FR 72224). For example, where the 
application deadline is April 1, 2011, the immediately following 
academic year is July 1, 2011; therefore, hospitals must demonstrate 
the likelihood of filling their slots by June 30, 2014.
    Finally, section 5506(d) of the Affordable Care Act specifies that 
``the Secretary shall give consideration to the effect of the 
amendments made by this section on any temporary adjustment to a 
hospital's FTE cap under Sec.  413.79(h) * * * (as in effect on the 
date of enactment of this Act) in order to ensure that there is no 
duplication of FTE slots * * *.'' In distributing slots permanently 
under section 5506, we need to be cognizant of the number of FTE 
residents for whom a temporary FTE cap adjustment was provided under 
existing regulations at Sec.  413.79(h), and when those residents will 
complete their training, at which point the temporary slot associated 
with those displaced residents would be available for permanent 
redistribution.
b. Proposed Change in Amount of Time Provided for Submitting 
Applications Under Section 5506 of the Affordable Care Act
    In the August 3, 2010 proposed rule (75 FR 46422), we proposed to 
establish an application process for hospitals to apply to CMS to 
receive an increase in FTE caps based on slots from closed hospitals. 
Section 5506 of the Affordable Care Act did not specify an application 
deadline for hospitals to request an increase to their caps when a 
hospital closes. With respect to the first application process, which 
applied to all teaching hospital closures between March 23, 2008, and 
August 3, 2010, we established an application deadline of April 1, 
2011. For future teaching hospital closures, we finalized a policy 
whereby we would inform the public through an appropriate medium that 
increases to hospitals' FTE resident caps are available for 
distribution due to the closure of a teaching hospital, and the 
application deadline would be 4 months following the issuance of that 
notice to the public (75 FR 72215).
    Some representatives of the provider community have commented that 
providing hospitals with 4 months following the announcement of a 
teaching hospital closure to apply for slots under section 5506 is 
longer than necessary. They asserted that such a long application 
period unnecessarily delays CMS' review of applications and the 
resulting distribution of resident cap slots from closed hospitals to 
the applicants. The provider representatives suggested that perhaps a 
2-month application window is sufficient and is more practical.
    We have considered the suggestion of the provider representatives, 
and after our initial experience in implementing section 5506 of the 
Affordable Care Act, we agree that 4 months may be more time than is 
needed for hospitals to properly prepare and submit section 5506 
applications to CMS. Accordingly, as recommended, we are proposing to 
set the application deadline for future section 5506 applications to be 
60 days following CMS' public notice of a hospital's closure and the 
availability of resident cap slots increases. We believe that reducing 
the application submission timeframe from 4 months to 60 days will 
shorten the entire process for awarding FTE resident cap slots from 
closed hospitals considerably.
c. Proposed Change to the Ranking Criteria Under Section 5506
    In the November 24, 2010 final rule with comment period (75 FR 
72223), we finalized the Ranking Criteria within each of the three 
first statutory priority categories (that is, same or contiguous CBSAs, 
same State, and same region) to be used to rank applications. For each 
application, we assigned slots based on Ranking Criteria, with Ranking 
Criterion One being the highest ranking and Ranking Criterion Seven 
being the lowest. For a complete list of the Ranking Criteria, we refer 
readers to section IV.I.4.a. of this preamble, which discusses the 
background for preservation of resident cap positions from closed 
hospitals under section 5506 of the Affordable Care Act. For a detailed 
discussion of the ranking categories, we refer readers to the November 
24, 2010 final rule with comment period (75 FR 72212 through 72240).
    After reviewing applications from the first section 5506 
application process (those applications that were due to CMS on April 
1, 2011), we observed that the overwhelming majority of applications 
fell under Ranking Criterion Seven, that is, the applying hospital 
seeks the slots for purposes that do not fit into any of Ranking 
Criterion One through Ranking Criterion Six. These applications 
included applications from hospitals that applied for FTE cap slots for 
both primary care and/or general surgery and for nonprimary care 
specialties as well as applications for general cap relief. The sheer 
number of applications we received under Ranking Criterion Seven was 
indicative of a need to further prioritize among the applicants that 
would have qualified under Ranking Criterion Seven. Therefore, we are 
proposing to replace current Ranking Criterion Seven with the two 
separate proposed Ranking Criteria listed below. We note that we are 
not proposing to make any changes to Ranking Criteria One through Six. 
We are proposing the following two criteria to replace existing Ranking 
Criterion Seven:
     Proposed Ranking Criterion Seven: The program does not 
meet Ranking Criterion One through Six, and the slots for which the 
hospital is applying are for a primary care or a general surgery 
program, but the hospital is also applying for slots under Ranking 
Criterion Eight.
     Proposed Ranking Criterion Eight: Applying hospital seeks 
the slots for

[[Page 27986]]

purposes that do not fit into any of the above ranking criteria.
    Our proposal to modify Ranking Criterion Seven is consistent with 
current Medicare policy goals to increase residency training in primary 
care and general surgery, because we are proposing to give a higher 
ranking to those applications from hospitals applying for primary care 
and general surgery FTE cap slots, as well as nonprimary care programs. 
Under the current Ranking Criteria, when a hospital applies for 
additional FTE cap slots for primary care and/or general surgery as 
well as nonprimary care programs, we do not distinguish between the 
primary care/general surgery and nonprimary care applications. 
Therefore, because the hospital would be applying for nonprimary 
program(s), all the hospital's applications would fall under proposed 
Ranking Criterion Seven. Under this proposal, although the hospital's 
application that requests FTE cap slots for primary care/general 
surgery would qualify for proposed Ranking Criterion Seven, the 
application for nonprimary care/general surgery would be classified as 
proposed Ranking Criterion Eight.
    Following is an example of how the proposed Ranking Criteria Seven 
and Eight would be assigned:
    Hospital A applies for slots from closed Hospital B. Hospital A is 
seeking to expand its internal medicine and dermatology programs. Under 
the current ranking system, both of Hospital A's applications would 
receive consideration under Ranking Criterion Seven. That is, the 
internal medicine application is ranked equally with the dermatology 
application even though internal medicine is a primary care specialty. 
Under the proposed change to the Ranking Criteria, Hospital A's 
internal medicine program would receive consideration under proposed 
Ranking Criterion Seven while the dermatology program would receive 
consideration under proposed Ranking Criterion Eight.
d. Effective Dates of Slots Awarded Under Section 5506
    As stated previously, section 5506(d) of the Affordable Care Act 
instructs the Secretary, in pertinent part, ``* * * to ensure that 
there is no duplication of FTE slots. * * *'' Accordingly, in 
distributing slots permanently under section 5506, we need to be 
cognizant of the number of FTE residents for whom a temporary FTE cap 
adjustment was provided under existing regulations at Sec.  413.79(h), 
when those residents will complete their training, and at which point 
the temporary slots associated with those displaced residents would be 
available for permanent redistribution. With that in mind, in the first 
distribution of section 5506 cap slots from hospitals that closed 
between March 23, 2008, and August 3, 2010, we used the following 
several effective dates based on the ranking criterion under which a 
hospital applied:
     Date of hospital closure. This effective date could have 
applied to Ranking Criterion Two. It also could have applied to Ranking 
Criteria One and Three if there were no temporary cap adjustments given 
for any displaced FTE residents.
     Cost reporting period following date of hospital closure. 
This effective date could have been used for awarding slots to 
hospitals that were training displaced FTE residents and qualified for 
Ranking Criterion One or Ranking Criterion Three because they were 
taking over an entire program or part of a program from a closed 
hospital and had received a temporary cap adjustment to train those 
displaced residents under 42 CFR 413.79(h).
     July 1 effective date. This effective date, which could 
have been retroactive, could have been used for awarding slots to 
hospitals that qualified under Ranking Criteria Four through Seven 
where there were temporary cap adjustments made for displaced FTE 
residents that completed training in a program on a specific June 30.
     Date of award announcement (January 30, 2012). This 
effective date could have applied to hospitals that qualified under 
Ranking Criteria Four through Seven either where there were no 
temporary cap increases under 42 CFR 413.79(h), or where there were 
temporary cap increases but those slots associated with the temporary 
cap increases were already accounted for. That is, displaced FTE 
residents graduated prior to a specific July 1, and, therefore, the cap 
slots associated with these FTE residents had already been permanently 
assigned that specific July 1, but the closed hospital still had 
remaining cap slots available for permanent assignment.
    Based on comments we have received from hospitals that were 
involved in the initial phase of section 5506 implementation (hospitals 
that applied for cap slots from hospitals that closed between March 23, 
2008 and August 3, 2010), we believe we need to clarify certain 
existing policies and propose a change to the effective dates 
associated with several ranking criteria.
    First, we are clarifying the effective date of slots awarded under 
section 5506 with respect to Ranking Criterion Two. Ranking Criterion 
Two applies to hospitals that participated in a Medicare GME 
affiliation agreement with the closed hospital (but not one that was 
entered into more than 5 years prior to the hospital's closure), 
received slots from the closed hospital as part of the affiliation 
agreement, and will use any additional awarded slots to continue to 
train at least the same number of FTE resident slots it trained as part 
of the affiliation agreement. For hospitals that qualify for additional 
slots under Ranking Criterion Two, we award the 5506 slots effective on 
a permanent basis with the date of the hospital's closure. However, for 
hospitals that qualify under Ranking Criteria One and Three and are 
already receiving temporary cap adjustments for displaced FTE residents 
under 42 CFR 413.79(h), we award the 5506 slots effective on a 
permanent basis with the cost reporting period following the date of 
the hospital's closure. Because these hospitals are already receiving 
temporary cap adjustments for their portion of their cost reporting 
period following the closure, for administrative ease, slots became 
permanent due to the section 5506 award effective with the cost 
reporting period following the date of the hospital's closure. However, 
this policy, applicable to hospitals that qualify under Ranking 
Criterion One or Three, is not appropriate for hospitals that qualify 
under Ranking Criterion Two and that participated in a Medicare GME 
affiliation agreement with the closed hospital and received cap slots 
from the closed hospital as part of that affiliation agreement. This 
policy is not appropriate because, in this case, there were no 
displaced FTE residents from the Medicare GME affiliation agreement 
and, therefore, the hospital did not receive a temporary cap 
adjustment. For example, if Hospital A received slots from Hospital B 
as part of an affiliation agreement so that FTE residents could train 
at Hospital A and Hospital B closes, Hospital A lost the cap adjustment 
it received from Hospital B as part of the affiliation agreement as of 
the date of the hospital's closure, and a temporary cap adjustment 
under 42 CFR 413.79(h) is not available to Hospital A. In this case, no 
FTE residents are displaced.
    In this proposed rule, we are clarifying that, for hospitals 
qualifying under Ranking Criterion Two that are awarded cap slots from 
the closed hospital, the award is effective with the date of the 
hospital's closure. This effective date allows a hospital applying 
under Ranking Criterion Two to receive funding for training the 
additional FTE

[[Page 27987]]

residents it was training as part of the Medicare GME affiliation 
agreement with the closed hospital immediately after the closure, 
without having to wait until the following cost reporting period to 
receive that cap adjustment. We note that, under existing regulations 
at 42 CFR 413.79(d), additional FTEs that a hospital receives under the 
terms of a Medicare GME affiliation agreement are subject to the 3-year 
rolling average. Therefore, hospitals that receive permanent assignment 
of FTE resident cap slots under Ranking Criterion Two do not receive an 
exemption from the rolling average. With regard to the IME intern and 
resident-to-bed (IRB) ratio, the existing regulations at 42 CFR 
412.105(a)(1)(i) indicate that the numerator of the prior year IRB 
ratio may be adjusted to reflect FTEs added under a Medicare GME 
affiliation agreement. The affiliation agreement would terminate when 
the hospital closes. Thus, on the cost report of the hospital that 
receives slots under Ranking Criterion Two, the prior year numerator of 
the IRB ratio would only be adjusted to reflect the portion of the 
affiliated FTEs that the hospital received prior to the other 
hospital's closure and the termination of the affiliation agreement.
    We also are clarifying that when there are no temporary cap 
adjustments for displaced FTE residents from hospitals that closed, and 
an applying hospital qualifies under Ranking Criterion One or Ranking 
Criterion Three, the FTE resident cap slots are awarded effective with 
the date of the hospital's closure. This was indicated in the November 
24, 2010 final rule with comment period (75 FR 72225), but we 
understand, based on comments received after the initial phase of 
section 5506 slot awards, that this policy was not clearly understood. 
These slots are also immediately included in applying the rolling 
average and IRB ratio cap.
    We are proposing to change the effective date of an award of 
additional FTE caps for hospitals that qualify under Ranking Criterion 
Four through proposed Ranking Criterion Eight where temporary caps were 
given for displaced FTE residents (we refer readers to section 
IV.I.4.b. of this preamble for a discussion of proposed Ranking 
Criteria Seven and Eight). As a general matter, hospitals that apply 
under Ranking Criterion Four through proposed Ranking Criterion Eight 
are applying either to establish or expand a program or to seek cap 
relief. We do not believe that, when a hospital receives additional cap 
slots to establish or expand a residency training program, we need to 
award the cap slots retroactively to a previous July 1 effective date. 
Rather, the awarded cap slots are to be used on a prospective basis to 
allow hospitals to expand current programs or establish new ones. We 
understand that if a hospital is applying for cap relief under proposed 
Ranking Criterion Eight (current Ranking Criterion Seven), the hospital 
would want its cap slots awarded retroactively to the date of the 
hospital's closure or the July 1 after a specific displaced resident 
has graduated if that date is prior to the date of the award 
announcement. However, we do not believe such a policy is consistent 
with the spirit of the BBA caps. Furthermore, the purpose of section 
5506 is for hospitals to receive slots from the closed hospital to 
facilitate the continuity of the closed hospital's programs and to 
promote stability in the number of physicians in a community. The 
proposed Ranking Criterion Eight of section 5506 does not serve to 
encourage the continuity of the closed hospital's programs; it merely 
provides Medicare funding for a certain amount of slots in excess of 
the BBA caps. Accordingly, we believe that hospitals applying for cap 
relief under proposed Ranking Criterion Eight should only receive their 
permanent cap slots effective on a prospective basis. Therefore, while 
under the initial section 5506 application process, it was possible for 
an applying hospital that qualified under Ranking Criteria Four through 
Seven to receive slots retroactive to the July 1 after a specific 
displaced FTE resident's graduation date, we are proposing that, for 
hospitals that qualify under Ranking Criteria Four through Eight for 
cap slots from a closed hospital even where there were temporary caps 
given for displaced FTE residents, the applying hospitals would receive 
the permanent FTE cap slots effective no earlier than the date of the 
award announcement. That is, if an applying hospital that qualified 
under Ranking Criterion Four through proposed Ranking Criterion Eight 
receives cap slots associated with a displaced FTE resident and that 
resident graduated prior to the date of the award announcement, the 
earliest the applying hospital could receive the permanent cap 
adjustment would be the date of the award announcement. If a hospital 
qualified under Ranking Criterion Four through proposed Ranking 
Criterion Eight, and the only available cap slots are temporarily being 
used to train displaced FTE residents that are expected to graduate 
after the date of the award, the applying hospital will receive the 
permanent slots effective the July 1 after those displaced FTE 
residents complete their training. For example, if a hospital closed 
January 1, 2012, and the section 5506 slot awards were announced May 1, 
2013, but residents displaced from the closed hospital did not complete 
their training until June 30, 2013, the applying hospital will receive 
section 5506 slots for those displaced residents effective July 1, 
2013, following the completion of training of those displaced 
residents. We are not proposing to change the effective date of section 
5506 awards for applying hospitals that qualify under Ranking Criterion 
Four through proposed Ranking Criterion Eight where there were no 
temporary caps given for displaced residents; as described in the 
November 24, 2010 final rule with comment period (75 FR 72227), those 
applying hospitals will continue to receive their section 5506 cap 
slots effective with the date of the award announcement.
    Alternatively, another option to consider for the effective date of 
Ranking Criteria Four through proposed Ranking Criterion Seven, which 
are ranking criteria associated with either starting a program or 
expanding a program, would be to award the slots in accordance with 
when the hospital actually needs the slots, as asserted in the 
hospital's section 5506 application. (The proposed effective date for 
proposed Ranking Criterion Eight would still be no earlier than the 
date of the award announcement.) For example, assume a hospital applies 
under Ranking Criterion Five to expand an internal medicine program by 
nine positions. As described in its section 5506 application, the 
hospital plans that expansion to occur beginning on July 1, 2012, and 
at that time, the hospital would add three residents, and on July 1, 
2013, the hospital would add another three residents, and then on July 
1, 2014, the hospital would add the last three internal medicine 
residents. Therefore, the effective date of three slots could be July 
1, 2012, the effective date of three additional slots would be July 1, 
2013, and the effective date of the last three slots would be July 1, 
2014. We are interested in receiving public comments on this policy 
alternative. We would still propose that the effective date for 
proposed Ranking Criterion Eight would be no earlier than date of the 
award.
    Thus far, we have clarified when various effective dates have been 
used (that is, the date of closure, or the cost reporting period 
following the date of the closure, or a July 1 date), and we have 
proposed a change to the effective date of Ranking Criteria Four 
through proposed Ranking Criterion Eight when

[[Page 27988]]

temporary cap adjustments for displaced residents were given (to be no 
earlier than the date of the award announcement). However, due to 
concerns expressed by recipients of slots under the first round of 
section 5506, particularly regarding the interaction with the rolling 
average as the retroactive section 5506 slots become effective, we are 
soliciting public comments on alternative approaches to implementing 
section 5506. While bearing in mind that section 5506(d) of the 
Affordable Care Act instructs the Secretary ``* * * to ensure that 
there is no duplication of FTE slots * * *,'' we would be interested in 
public comments regarding whether to either make the effective dates 
prospective for all section 5506 slots awarded under all ranking 
criteria, or, in certain instances such as when slots are awarded under 
Ranking Criteria One or Three, make the effective dates of the section 
5506 slots seamless with the expiration of applicable temporary cap 
adjustments under Sec.  413.79(h). We also are soliciting public 
comments on whether the regulatory temporary cap adjustment for 
residents displaced from closed hospitals under Sec.  413.79(h) is 
still necessary and appropriate, now that there is a provision in the 
statute that addresses permanent reassignment of slots from closed 
teaching hospitals. Alternatively, we would be interested in comments 
regarding whether the regulatory temporary cap adjustment for displaced 
residents under Sec.  413.79(h) should be preserved, but the exemption 
from the rolling average for those displaced FTE residents should be 
eliminated. These options should be considered by commenters not only 
in the context of section 5506 slots that have already been assigned, 
but also in the context of future teaching hospital closures, and how 
previously awarded section 5506 slots that have not as yet been filled 
might interact with eligibility for temporary cap adjustments for 
additional displaced residents in the future.
e. Clarification of Relationship Between Ranking Criteria One, Two, and 
Three
    In the November 24, 2010 final rule with comment period, as part of 
the response to a comment we received requesting that the order of 
Ranking Criterion One (regarding an applicant hospital that assumes an 
entire program from a closed hospital) and Ranking Criterion Two 
(regarding an applicant hospital that received slots under the terms of 
a Medicare GME affiliation agreement from a closed hospital) be 
switched, we stated:

    Furthermore, the commenter need not be concerned that hospitals 
that would fit into Ranking Criterion Two would be at a disadvantage 
and deprived of their fair share of slots to hospitals that would 
fit under Ranking Criterion One. In fact, Ranking Criteria One and 
Two are not competing with each other, and hospitals fitting into 
each category would get their `fair' share of slots. For example, 
assume a hospital with an FTE resident cap of 100 closes. Hospital A 
assumes the entire programs in which 80 FTE residents were training 
when the hospital closed. Hospital B had been receiving 20 FTE slots 
from the closed hospital under the terms of a Medicare GME 
affiliation agreement. Hospital A applies for 80 slots under Ranking 
Criterion One and, all other things being equal, is awarded 80 
slots. Hospital A could apply for more than 80 slots, but it could 
only receive consideration under Ranking Criterion One for a maximum 
of 80 slots. Therefore, 20 slots would remain for Hospital B to 
apply for and receive under Ranking Criterion Two. Accordingly, we 
do not believe it is necessary to reorder Ranking Criteria One and 
Two (75 FR 72218).

    We have recently been made aware that it may not always be true 
that Ranking Criteria One, Two, and even Three are not competing with 
each other. For example, in the case where the closed hospital was 
training residents in excess of its FTE resident caps, it is possible 
for hospitals to apply under Ranking Criteria One, Two, and/or Three 
for more slots than are available. However, under the policy expressed 
in the response quoted above from the November 24, 2010 final rule with 
comment period, because a hospital that takes over an entire program 
from the closed hospital is ranked under Ranking Criterion One, and a 
hospital that received slots from a Medicare GME affiliation agreement 
from the closed hospital is ranked under Ranking Criterion Two, all the 
slots could be assigned to the hospital under Ranking Criterion One, 
leaving no slots for hospitals ranked under Ranking Criterion Two or 
Three. (We note that in the first round of section 5506 awards 
associated with hospitals that closed between March 23, 2008, and 
August 3, 2010, this turned out not to be a concern because even in the 
case where a closed hospital was training residents in excess of its 
FTE caps at the time of closure, there were no applicants for the slots 
that simultaneously qualified under Ranking Criteria One, Two, and/or 
Three). For example, a hospital that closed has an FTE resident cap of 
10, but when it closed, it was training 15 FTEs in an internal medicine 
program. Hospital A assumes at least 90 percent of the internal 
medicine program; that is, the ``entire'' program (a hospital that 
takes on 90 percent of the residents training in a particular program 
at the closed hospital within 5 years prior to the hospital's closure 
or at the time of the hospital's closure would be deemed to have 
assumed an ``entire'' program (75 FR 72218)). Ninety percent of the 
internal medicine program is 13.5 FTEs. Because Hospital A took over 
the ``entire'' internal medicine program, it applies for slots under 
Ranking Criterion One. Hospital B applies under Ranking Criterion Three 
because it assumes the other 10 percent of the program, or 1.5 FTEs. 
However, because the closed hospital's FTE resident cap was limited to 
10, it would seem that all 10 slots would be assigned to Hospital A 
under Ranking Criterion One, leaving no slots for Hospital B under 
Ranking Criterion Three. Conversely, if Ranking Criteria One and Three 
were ranked as equals, the 10 slots could be prorated so that both 
Hospital A and Hospital B each receive a ``fair'' share.
    Another example might be one in which a closed hospital that was 
training residents in excess of its FTE resident cap of 10 ``lent'' 2 
of those 10 cap slots to Hospital C under the terms of a Medicare GME 
affiliation agreement. Although under the terms of the Medicare GME 
affiliation agreement, the hospital's FTE resident cap was reduced from 
10 to 8, the hospital actually trained 9 FTEs, and continued to do so 
until it closed. Hospital D then assumes the 9 FTEs, or the entirety of 
the program that remained at the closed hospital when it closed. Again, 
one policy approach would be to rank the ranking criteria in descending 
order, and assign all 10 slots to Hospital D since Hospital D qualifies 
under Ranking Criterion One. Alternatively, another policy approach 
would be to treat Ranking Criteria One and Two as equals, and then a 
prorata share of the 10 slots could be given each to Hospital C and 
Hospital D.
    After consideration of these scenarios, we believe that in the case 
where the closed hospital was training residents in excess of its FTE 
resident caps, prorating among hospitals that qualify under Ranking 
Criteria One, Two, and Three is not warranted. This is because we 
believe that a hospital that assumes an entire program from the closed 
hospital should be ranked highest, as it has taken the boldest step to 
ensuring the continuity of the closed hospital's program. As we 
explained first in the August 3, 2010 proposed rule (75 FR 46423) and 
again in the November 24, 2010 final rule with comment period (75 FR 
72218), ``We note that we are proposing this ranking criterion 
regarding affiliated hospitals as second, after the first ranking 
criterion regarding applying hospitals that assume an entire

[[Page 27989]]

program or programs from the closed hospital because, even though 
section 5506 of the Affordable Care Act directs the Secretary to give 
preference to members of the same affiliated group, we believe that a 
hospital that assumes the responsibility for an entire program or 
programs demonstrates a commitment to maintain the programs to an even 
greater degree than does a hospital that was affiliated with the 
hospital that closed and may only be maintaining a portion of the 
residency program or programs.'' Similarly, we believe that because 
section 5506 of the Affordable Care Act does give preference to members 
of the same affiliated group as the closed hospital, hospitals 
qualifying for Ranking Criterion Two should receive slots first before 
hospitals qualifying for slots under Ranking Criterion Three. While we 
would encourage a hospital to assume a part of a closed hospital's 
program if it does not have the capacity to assume the entire program, 
such a hospital would be ranked under Ranking Criterion Three, still 
receiving preference before all hospitals that did not necessarily have 
any relationship with the closed hospital and that qualify under 
Ranking Criteria Four and below. As we stated in the November 24, 2010 
final rule with comment period (75 FR 72226), ``we would still assign 
the slots to hospitals qualifying under Ranking Criteria One, Two, and 
Three in descending order.'' Therefore, in the instance where a closed 
hospital is training residents in excess of its FTE resident caps when 
it closes, we are clarifying that we would not prorate a closed 
hospital's FTE resident caps among applicant hospitals that qualify 
under Ranking Criteria One, Two, and Three.
f. Proposed Modifications to the Section 5506 CMS Evaluation Form
    We are proposing to make numerous changes to the Section 5506 CMS 
Evaluation Form. Most of the changes are not substantive, but are 
intended to clarify the requirements on the form, and therefore, we 
will not list them each individually. There are several proposed 
changes that are more substantive, and we will enumerate those. First, 
we are proposing to change the name of the CMS Evaluation Form to the 
CMS Application Form. We believe this is a more appropriate name, as it 
is the form used by hospitals to apply for slots under section 5506. 
Second, there are several instances on the proposed CMS Application 
Form where we prompt the applicant to specify whether the application 
is for a particular program, or for general cap relief, or for slots 
associated with a Medicare GME affiliation agreement with the closed 
hospital (which we did not do on the preceding form). Third, we are 
clarifying the titles of the Demonstrated Likelihood Criteria (DLC). 
Specifically, the proposed title for Demonstrated Likelihood Criterion 
1 is ``Establishing a New Residency Program'', the proposed title for 
Demonstrated Likelihood Criterion 2 is ``Taking Over All or Part of an 
Existing Residency Program from the Closed Hospital, or Expanding an 
Existing Residency Program,'' the proposed title for Demonstrated 
Likelihood Criterion 3 is ``Receiving Slots for General Cap Relief,'' 
and the proposed title for Demonstrated Likelihood Criterion 4 is 
``Receiving Slots by Virtue of Medicare GME Affiliated Group Agreement 
with Closed Hospital.'' Fourth, we are proposing to add a category 
under Demonstrated Likelihood Criterion 2 stating that if the hospital 
currently has unfilled positions in a residency program that have 
previously been approved by the ACGME, AOA, or the ABMS, and the 
hospital is now seeking to fill those positions, the hospital must 
attach documentation clearly showing its current number of approved 
positions, and its current number of filled positions (as proof of the 
unfilled positions). Fifth, we are proposing to change the wording in 
Ranking Criteria 4, 5, and 6, respectively, from ``The applying 
hospital does not meet ranking criteria 1, 2, or 3'' to ``The program 
does not meet ranking criterion 1, 2, or 3'' because the latter is more 
accurate. That is, it is possible for a hospital to qualify under 
Ranking Criterion 1, 2, or 3 for a particular program, and also to 
apply for slots separately under Ranking Criterion 4, 5, or 6 for a 
different program. Sixth, we are proposing to add a new Ranking 
Criterion 7: The program does not meet ranking criteria 1 through 6, 
and the slots for which the hospital is applying are for a primary care 
or a general surgery program, but the hospital is also applying for 
slots under Ranking Criterion Eight. We also are renumbering what had 
been the previous Ranking Criterion 7 to be the proposed Ranking 
Criterion 8.
    Following is the proposed revised section 5506 CMS Application 
Form:

CMS Application Form

As Part of the Application for the Increase in a Hospital's FTE Cap(s) 
under Section 5506 of the Affordable Care Act: Preservation of FTE Cap 
Slots from Teaching Hospitals that Close

    Directions: Please fill out the information below for each 
residency program for which the applicant hospital intends to use the 
increase in its FTE cap(s). If the hospital is applying for general FTE 
cap relief (an increase in the hospital's FTE cap(s) in recognition of 
already training residents in excess of the hospital's cap(s)), that 
application must be submitted separately from an individual program 
request. If the hospital is applying for slots associated with a 
Medicare GME affiliation agreement with a hospital that closed, that 
application must also be submitted separately from an individual 
program request.
NAME OF HOSPITAL:
-----------------------------------------------------------------------
MEDICARE PROVIDER NUMBER:
-----------------------------------------------------------------------
NAME OF MEDICARE CONTRACTOR:
-----------------------------------------------------------------------
CORE-BASED STATISTICAL AREA (CBSA in which the hospital is physically 
located--write the 5 digit code here):
-----------------------------------------------------------------------
COUNTY NAME (in which the hospital is physically located):
-----------------------------------------------------------------------

    Complete the following, as applicable:

1. Name of Specialty Training Program:
-----------------------------------------------------------------------
2. General FTE Cap Relief:
-----------------------------------------------------------------------
3. Medicare GME Affiliated Group:
-----------------------------------------------------------------------

(Check one):
    [squ] Allopathic Program
    [squ] Osteopathic Program

NUMBER OF FTE SLOTS REQUESTED FOR SPECIFIC PROGRAM (OR HOSPITAL OVERALL 
IF SEEKING GENERAL CAP RELIEF OR SLOTS ASSOCIATED WITH A MEDICATE GME 
AFFILIATED GROUP) AT YOUR HOSPITAL:

Direct GME: ----------IME:----------

Section A: Demonstrated Likelihood Criteria (DLC) of Filling the FTE 
Slots

    The applicant hospital must provide documentation to demonstrate 
the likelihood of filling requested slots under section 5506 within the 
3 academic years immediately following the application deadline to 
receive slots after a particular hospital closes. Please indicate the 
specific use for which you are requesting an increase in your 
hospital's FTE cap(s). If you are requesting an increase in the 
hospital's FTE cap(s) for a combination of DLC1, DLC2, or DLC3, you 
must complete a separate CMS Application Form for each DLC and specify 
the distinct

[[Page 27990]]

criterion from the list below within each Form.

Demonstrated Likelihood Criterion 1: Establishing a New Residency 
Program

    The hospital does not have sufficient room under its direct GME FTE 
cap or IME FTE cap, or both, and will establish a new residency program 
in the specialty. (The hospital must check at least one of the 
following.)
    [squ] Application for approval of the new residency program has 
been submitted to the ACGME, AOA or the ABMS (The hospital must attach 
a copy.)
    [squ] The hospital has submitted an institutional review document 
or program information form concerning the new program in an 
application for approval of the new program. (The hospital must attach 
a copy.)
    [square] The hospital has received written correspondence from the 
ACGME, AOA or ABMS acknowledging receipt of the application for the new 
program, or other types of communication from the accrediting bodies 
concerning the new program approval process (such as notification of 
site visit). (The hospital must attach a copy.)
    [square] The hospital has other documentation demonstrating that it 
has made a commitment to start a new program (The hospital must attach 
a copy.)

Demonstrated Likelihood Criterion 2: Taking Over All or Part of an 
Existing Residency Program From the Closed Hospital, or Expanding an 
Existing Residency Program

    The hospital does not have sufficient room under its direct GME FTE 
cap or IME FTE cap, or both, and a) has permanently taken over the 
closed hospital's entire residency program, or b) is permanently 
expanding its own previously established and approved residency program 
resulting from taking over part of a residency program from the closed 
hospital, or c) is permanently expanding its own existing residency 
program. (The hospital must check at least one of the following.)
    [square] Application for approval to take over the closed 
hospital's residency program has been submitted to the ACGME, AOA, or 
the ABMS, or approval has been received from the ACGME, AOA, or the 
ABMS. (The hospital must attach a copy.)
    [square] Application for approval of an expansion of the number of 
approved positions in its residency program resulting from taking over 
part of a residency program from the closed hospital has been submitted 
to the ACGME, AOA or the ABMS, or approval has been received from the 
ACGME, AOA, or the ABMS. (The hospital must attach a copy.)
    [square] Application for approval of an expansion of the number of 
approved positions in its residency program has been submitted to the 
ACGME, AOA or the ABMS, or approval has been received from the ACGME, 
AOA, or the ABMS. (The hospital must attach a copy.)
    [square] The hospital currently has unfilled positions in its 
residency program that have previously been approved by the ACGME, AOA, 
or the ABMS, and is now seeking to fill those positions. (The hospital 
must attach documentation clearly showing its current number of 
approved positions, and its current number of filled positions).
    [square] The hospital has submitted an institutional review 
document or program information form concerning the program in an 
application for approval of an expansion to the program (The hospital 
must attach a copy).

Demonstrated Likelihood Criterion 3: Receiving Slots for General Cap 
Relief

    [square] The hospital does not have sufficient room under its 
direct GME FTE cap or IME cap, or both, and is seeking an increase in 
its FTE cap(s) for general cap relief for residents that it is already 
training.

Demonstrated Likelihood Criterion 4: Receiving Slots by Virtue of 
Medicare GME Affiliated Group Agreement with Closed Hospital

    [square] The hospital was listed as a participant of a Medicare GME 
affiliated group on the most recent Medicare GME affiliation agreement 
of which the closed hospital was a member before the hospital closed, 
and under the terms of that Medicare GME affiliation agreement, the 
applying hospital received slots from the hospital that closed, and the 
applying hospital will use the additional slots to continue to train at 
least the number of FTE residents it had trained under the terms of the 
Medicare GME affiliation agreement. If the most recent Medicare GME 
affiliation agreement of which the closed hospital was a member before 
the hospital closed was with a hospital that itself has closed or is 
closing, the applying hospital was listed as a participant in the next 
most recent Medicare GME affiliation agreement (but not one which was 
entered into more than 5 years prior to the hospital's closure) of 
which the first closed hospital was a member before the hospital 
closed, and that applying hospital received slots from the closed 
hospital under the terms of that affiliation agreement. (Copies of EACH 
of the following must be attached.)
    [ssquf] Copies of the recent Medicare GME affiliation agreement of 
which the applying hospital and the closed hospital were a member of 
before the hospital closed.
    [ssquf] Copies of the most recent accreditation letters for all of 
the hospital's training programs in which the hospital had a shared 
rotational arrangement (as defined at Sec.  413.75(b)) with the closed 
hospital.

Section B. Level Priority Category

    (Place an ``X'' in the appropriate box that is applicable to the 
level priority category that describes the applicant hospital.)
    [square] First, to hospitals located in the same core-based 
statistical area (CBSA) as, or in a CBSA contiguous to, the hospital 
that closed.
    [square] Second, to hospitals located in the same State as the 
closed hospital.
    [square] Third, to hospitals located in the same region as the 
hospital that closed.
    [square] Fourth, if the slots have not yet been fully distributed, 
to qualifying hospitals in accordance with the criteria established 
under section 5503, ``Distribution of Additional Residency Positions''

Section C. Evaluation Criteria

    (Place an ``X'' in the box for each criterion that is appropriate 
for the applicant hospital and for the program for which the increase 
in the FTE cap is requested.)
    [square] Ranking Criterion One. The applying hospital is requesting 
the increase in its FTE resident cap(s) because it is assuming (or 
assumed) an entire program (or programs) from the hospital that closed, 
and the applying hospital is continuing to operate the program (s) 
exactly as it had been operated by the hospital that closed (that is, 
same residents, possibly the same program director, and possibly the 
same (or many of the same) teaching staff).
    [square] Ranking Criterion Two. The applying hospital was listed as 
a participant of a Medicare GME affiliated group on the most recent 
Medicare GME affiliation agreement of which the closed hospital was a 
member before the hospital closed, and under the terms of that Medicare 
GME affiliation agreement, the applying hospital received slots from 
the hospital that closed, and the applying hospital will use the 
additional slots to continue to train at least the number of FTE 
residents it had trained under the terms of the Medicare GME 
affiliation agreement. If the most recent Medicare

[[Page 27991]]

GME affiliation agreement of which the closed hospital was a member 
before the hospital closed was with a hospital that itself has closed 
or is closing, preference would be given to an applying hospital that 
was listed as a participant in the next most recent Medicare GME 
affiliation agreement (but not one which was entered into more than 5 
years prior to the hospital's closure) of which the first closed 
hospital was a member before the hospital closed, and that applying 
hospital received slots from the closed hospital under the terms of 
that affiliation agreement.
    [square] Ranking Criterion Three. The applying hospital took in 
residents displaced by the closure of the hospital, but is not assuming 
an entire program or programs, and will use the additional slots to 
continue training residents in the same programs as the displaced 
residents, even after those displaced residents complete their training 
(that is, the applying hospital is permanently expanding its own 
existing programs).
    [square] Ranking Criterion Four. The program does not meet Ranking 
Criteria 1, 2, or 3, and the applying hospital will use additional 
slots to establish a new or expand an existing geriatrics residency 
program.
    [square] Ranking Criterion Five: The program does not meet Ranking 
Criteria 1 through 4, the applying hospital is located in a HPSA, and 
will use all the additional slots to establish or expand a primary care 
or general surgery residency program.
    [square] Ranking Criterion Six: The program does not meet Ranking 
Criteria 1 through 5, and the applying hospital is not located in a 
HPSA, and will use all the additional slots to establish or expand a 
primary care or general surgery residency program.
    [square] Ranking Criterion Seven: The program does not meet Ranking 
Criteria 1 through 6, and the slots for which the hospital is applying 
are for a primary care or a general surgery program, but the hospital 
is also applying for slots under Ranking Criterion Eight.
    [square] Ranking Criterion Eight: The applying hospital seeks the 
slots for purposes that do not fit into any of the above ranking 
criteria.

Application Process and CMS Central Office and Regional Office Mailing 
Addresses for Receiving Increases in FTE Resident Caps

    In order for hospitals to be considered for increases in their FTE 
resident caps, each qualifying hospital must submit a timely 
application. The following information must be submitted on 
applications to receive an increase in FTE resident caps:
    [ssquf] The name and Medicare provider number, and Medicare 
contractor (to which the hospital submits its cost report) of the 
hospital.
    [ssquf] The total number of requested FTE resident slots for direct 
GME or IME, or both.
    [ssquf] A completed copy of the CMS Application Form for each 
residency program for which the hospital intends to use the requested 
increase in FTE residents.
    [ssquf] Source documentation to support the assertions made by the 
hospital on the CMS Application Form.
    [ssquf] FTE resident counts for direct GME and IME and FTE resident 
caps for direct GME and IME reported by the hospital in the most recent 
as-filed cost report. (If the CMS Form 2552-96 is applicable, include 
copies of Worksheets E, Part A, E-3, Part IV, and if a hospital 
received an increase to its FTE cap(s) under section 422 of the MMA, a 
copy of E-3, Part VI. If the CMS Form 2552-10 is applicable, include 
copies of Worksheets E, Part A, and E-4).
    [ssquf] An attestation, signed and dated by an officer or 
administrator of the hospital who signs the hospital's Medicare cost 
report, of the following information:
    ``I hereby certify that I understand that misrepresentation or 
falsification of any information contained in this application may be 
punishable by criminal, civil, and administrative action, fine and/or 
imprisonment under federal law. Furthermore, I understand that if 
services identified in this application were provided or procured 
through payment directly or indirectly of a kickback or were otherwise 
illegal, criminal, civil, and administrative action, fines and/or 
imprisonment may result. I also certify that, to the best of my 
knowledge and belief, it is a true, correct, and complete application 
prepared from the books and records of the hospital in accordance with 
applicable instructions, except as noted. I further certify that I am 
familiar with the laws and regulations regarding Medicare payment to 
hospitals for the training of interns and residents.''

J. Proposed Changes to the Reporting Requirements for Pension Costs for 
Medicare Cost-Finding Purposes

    In the FY 2012 IPPS/LTCH PPS final rule (76 FR 51693 through 
51697), we finalized our policy for reporting costs of qualified 
defined benefit pension plans for Medicare cost-finding purposes. 
Specifically, beginning with cost reporting periods on or after October 
1, 2011, a provider's pension cost for cost-finding purposes equals the 
cash basis contribution deposits plus any carry forward contributions, 
subject to a limitation. Providers with current contributions and carry 
forward contributions in excess of the limit may request approval of 
excess contributions, which will be reviewed on a case-by-case basis. 
Some or all of the excess contributions will be approved, as 
applicable, if it is determined that all or a portion of the excess 
contribution(s) are reasonable and necessary. To the extent that 
approval is granted, that portion of the excess is allowable as current 
period pension costs. We refer readers to the FY 2012 IPPS/LTCH PPS 
final rule for full details on this policy.
    In addition to finalizing this new policy in the FY 2012 IPPS/LTCH 
PPS final rule, we stated that we intended to make future amendments to 
conform existing regulations to this final policy (76 FR 51693). The 
existing regulations at 42 CFR 413.24 and 413.100 specify that pension 
costs of qualified defined benefit plans are reported on an accrual 
basis of accounting method. Sections 413.24 and 413.100 provide that 
revenue is reported in the period in which it is earned, regardless of 
when it is collected and expenses are reported in the period in which 
they are incurred, regardless of when it is paid. For Medicare payment 
purposes, the costs are generally allowable in the year in which the 
costs are accrued and claimed, subject to specific exceptions. 
Furthermore, for accrued costs to be recognized for Medicare payment in 
the year of the accrual, the requirements must be met with respect to 
the liquidation of related liabilities. Therefore, to conform these two 
existing regulations to the final policy we adopted in the FY 2012 
IPPS/LTCH PPS final rule with regard to pension costs for Medicare 
cost-finding purposes, we are proposing to amend the general cost 
reporting rules under Sec. Sec.  413.24 and 413.100 to note the 
exception for recognizing actual pension contributions funded during 
the cost reporting period on a cash basis. We also plan to revise 
section 2305.2 of the Provider Reimbursement Manual to reflect this 
policy change.

K. Rural Community Hospital Demonstration Program

1. Background
    Section 410A(a) of Public Law 108-173 required the Secretary to 
establish a demonstration program to test the feasibility and 
advisability of establishing ``rural community hospitals'' to furnish 
covered inpatient hospital services to Medicare

[[Page 27992]]

beneficiaries. The demonstration pays rural community hospitals under a 
reasonable cost-based methodology for Medicare payment purposes for 
covered inpatient hospital services furnished to Medicare 
beneficiaries. A rural community hospital, as defined in section 
410A(f)(1), is a hospital that--
     Is located in a rural area (as defined in section 
1886(d)(2)(D) of the Act) or is treated as being located in a rural 
area under section 1886(d)(8)(E) of the Act;
     Has fewer than 51 beds (excluding beds in a distinct part 
psychiatric or rehabilitation unit) as reported in its most recent cost 
report;
     Provides 24-hour emergency care services; and
     Is not designated or eligible for designation as a CAH 
under section 1820 of the Act.
    Section 410A(a)(4) of Public Law 108-173 specified that the 
Secretary was to select for participation no more than 15 rural 
community hospitals in rural areas of States that the Secretary 
identified as having low population densities. Using 2002 data from the 
U.S. Census Bureau, we identified the 10 States with the lowest 
population density in which rural community hospitals were to be 
located in order to participate in the demonstration: Alaska, Idaho, 
Montana, Nebraska, Nevada, New Mexico, North Dakota, South Dakota, 
Utah, and Wyoming. (Source: U.S. Census Bureau, Statistical Abstract of 
the United States: 2003).
    CMS originally solicited applicants for the demonstration in May 
2004; 13 hospitals began participation with cost report years beginning 
on or after October 1, 2004. In 2005, 4 of these 13 hospitals withdrew 
from the program and converted to CAH status. This left nine hospitals 
participating at that time. In 2008, we announced a solicitation for up 
to six additional hospitals to participate in the demonstration 
program. Four additional hospitals were selected to participate under 
this solicitation. These four additional hospitals began under the 
demonstration payment methodology with the hospital's first cost 
reporting period starting on or after July 1, 2008. At that time, 13 
hospitals were participating in the demonstration.
    Five hospitals (3 of the hospitals were among the 13 hospitals that 
were original participants in the demonstration program and 2 of the 
hospitals were among the 4 hospitals that began the demonstration 
program in 2008) withdrew from the demonstration program during CYs 
2009 and 2010. (Three of these hospitals indicated that they would be 
paid more for Medicare inpatient services under the rebasing option 
allowed under the SCH methodology provided for under section 122 of the 
Medicare Improvements for Patients and Providers Act of 2008 (Pub. L. 
110-275). One hospital restructured to become a CAH, and one hospital 
closed.) In CY 2011, one hospital that was among the original set of 
hospitals that participated in the demonstration withdrew from the 
demonstration. These actions left 7 of the originally participating 
hospitals (that is, hospitals that were selected to participate in 
either 2004 or 2008), participating in the demonstration program as of 
June 1, 2011.
    Sections 3123 and 10313 of the Affordable Care Act (Pub. L. 111-
148) amended section 410A of Public Law 108-173, which established the 
rural community hospital demonstration program. Sections 3123 and 10313 
of the Affordable Care Act changed the rural community hospital 
demonstration program in several ways. First, the Secretary is required 
to conduct the demonstration program for an additional 5-year period 
that begins on the date immediately following the last day of the 
initial 5-year period. Further, the Affordable Care Act requires, in 
the case of a rural community hospital that is participating in the 
demonstration program as of the last day of the initial 5-year period, 
the Secretary to provide for the continued participation of such rural 
hospital in the demonstration program during the 5-year extension, 
unless the hospital makes an election, in such form and manner as the 
Secretary may specify, to discontinue participation (section 
410A(g)(4)(A) of Pub. L. 108-173, as added by section 3123(a) of the 
Affordable Care Act and further amended by section 10313 of such Act). 
In addition, the Affordable Care Act provides that, during the 5-year 
extension period, the Secretary shall expand the number of States with 
low population densities determined by the Secretary to 20 (section 
410A(g)(2) of Public Law 108-173, as added by section 3123(a) and 
amended by section 10313 of the Affordable Care Act). Further, the 
Secretary is required to use the same criteria and data that the 
Secretary used to determine the States under section 410A(a)(2) of 
Public Law 108-173 for purposes of the initial 5-year period. The 
Affordable Care Act also allows not more than 30 rural community 
hospitals in such States to participate in the demonstration program 
during the 5-year extension period (section 410A(g)(3) of Pub. L. 108-
173, as added by section 3123(a) of the Affordable Care Act and as 
further amended by section 10313 of such Act).
    We published a solicitation for applications for additional 
participants in the rural community hospital demonstration program in 
the Federal Register on August 30, 2010 (75 FR 52960). Applications 
were due on October 14, 2010. The 20 States with the lowest population 
density that are eligible for the demonstration program are: Alaska, 
Arizona, Arkansas, Colorado, Idaho, Iowa, Kansas, Maine, Minnesota, 
Mississippi, Montana, Nebraska, Nevada, New Mexico, North Dakota, 
Oklahoma, Oregon, South Dakota, Utah, and Wyoming (Source: U.S. Census 
Bureau, Statistical Abstract of the United States: 2003). We approved 
19 new hospitals for participation in the demonstration program. We 
determined that each of these new hospitals would begin participating 
in the demonstration with its first cost reporting period beginning on 
or after April 1, 2011.
    Three of these 19 hospitals declined participation prior to the 
start of the cost report periods for which they would have begun the 
demonstration. In addition to the 7 hospitals that were selected in 
either 2004 or 2008 and that are still participating, the new selection 
led to a total of 23 hospitals in the demonstration.
    In addition, section 410A(c)(2) of Public Law 108-173 required 
that, ``[i]n conducting the demonstration program under this section, 
the Secretary shall ensure that the aggregate payments made by the 
Secretary do not exceed the amount which the Secretary would have paid 
if the demonstration program under this section was not implemented.'' 
This requirement is commonly referred to as ``budget neutrality.'' 
Generally, when we implement a demonstration program on a budget 
neutral basis, the demonstration program is budget neutral in its own 
terms; in other words, the aggregate payments to the participating 
hospitals do not exceed the amount that would be paid to those same 
hospitals in the absence of the demonstration program. Typically, this 
form of budget neutrality is viable when, by changing payments or 
aligning incentives to improve overall efficiency, or both, a 
demonstration program may reduce the use of some services or eliminate 
the need for others, resulting in reduced expenditures for the 
demonstration program's participants. These reduced expenditures offset 
increased payments elsewhere under the demonstration program, thus 
ensuring that the demonstration program as a whole is budget neutral or

[[Page 27993]]

yields savings. However, the small scale of this demonstration program, 
in conjunction with the payment methodology, makes it extremely 
unlikely that this demonstration program could be viable under the 
usual form of budget neutrality. Specifically, cost-based payments to 
participating small rural hospitals are likely to increase Medicare 
outlays without producing any offsetting reduction in Medicare 
expenditures elsewhere. Therefore, a rural community hospital's 
participation in this demonstration program is unlikely to yield 
benefits to the participant if budget neutrality were to be implemented 
by reducing other payments for these same hospitals.
    In the past eight IPPS final regulations, spanning the period for 
which the demonstration program has been implemented, we have adjusted 
the national inpatient PPS rates by an amount sufficient to account for 
the added costs of this demonstration program, thus applying budget 
neutrality across the payment system as a whole rather than merely 
across the participants in the demonstration program. As we discussed 
in the FYs 2005 through 2012 IPPS final rules (69 FR 49183; 70 FR 
47462; 71 FR 48100; 72 FR 47392; 73 FR 48670; 74 FR 43922, 75 FR 50343, 
and 76 FR 51698, respectively), we believe that the language of the 
statutory budget neutrality requirements permits the agency to 
implement the budget neutrality provision in this manner. In light of 
the statute's budget neutrality requirement, we are proposing a 
methodology to calculate a budget neutrality adjustment factor to the 
FY 2013 national IPPS rates.
    In general terms, in each of these previous years, we used 
available cost reports for the participating hospitals to derive an 
estimate of the additional costs attributable for the demonstration. We 
used finalized, or settled, cost reports, as available, and ``as 
submitted'' cost reports for hospitals for which finalized cost reports 
were not available. Annual market basket percentage increase amounts 
provided by the CMS Office of the Actuary reflecting the growth in the 
prices of inputs for inpatient hospitals were applied to these cost 
amounts. An annual update factor provided by the CMS Office of the 
Actuary reflecting growth in the volume of inpatient operating services 
was also applied. For the budget neutrality calculations in the IPPS 
final rules for FYs 2005 through 2011, the annual volume adjustment 
applied was 2 percent; for the IPPS final rule for FY 2012, it was 3 
percent. For a detailed discussion of our budget neutrality offset 
calculations, we refer readers to the IPPS final rule applicable to the 
fiscal year involved.
    In general, for FYs 2005 through 2009, we based the budget 
neutrality offset estimate on the estimated cost of the demonstration 
in an earlier given year. For these periods, we derived that estimated 
cost by subtracting the estimated amount that would otherwise be paid 
without the demonstration in an earlier given year from the estimated 
amount for the same year that would be paid under the demonstration 
under the reasonable cost-based methodology authorized by section 410A 
of Public Law 108-173. (The reasonable cost-based methodology 
authorized by section 410A of Pub. L. 108-173, and as later amended by 
Pub. L. 111-148, as applicable to the year, is hereafter referred to as 
the ``reasonable cost methodology.'' We refer readers to section 
410A(b) and (g)(4) of Pub. L. 108-173 and Pub. L. 111-148.) (We 
ascertained the estimated amount that would be paid in an earlier given 
year under the reasonable cost methodology and the estimated amount 
that would otherwise be paid without the demonstration in an earlier 
given year from ``as submitted'' cost reports that were submitted by 
the hospitals prior to the inception of the demonstration.) We then 
updated the estimated cost described above to the current year by 
multiplying it by the market basket percentage increases applicable to 
the years involved and the applicable annual volume adjustments. For 
the FY 2010 IPPS final rule, data from finalized cost reports 
reflecting the participating hospitals' experience under the 
demonstration were available. Specifically, the finalized cost reports 
for the first 2 years of the demonstration, that is, cost reports for 
cost reporting years beginning in FYs 2005 and 2006 (CYs 2004, 2005, 
and 2006) were available. These data showed that the actual costs of 
the demonstration for these years exceeded the amounts originally 
estimated in the respective final rules for the budget neutrality 
adjustment. In the FY 2010 IPPS/LTCH PPS final rule, we included in the 
budget neutrality offset amount an amount in addition to the estimate 
of the demonstration costs in that fiscal year. This additional amount 
was based on the amount that the costs of the demonstration for FYs 
2005 and 2006 exceeded the budget neutrality offset amounts finalized 
in the IPPS rules applicable for those years.
    Following upon the FY 2010 IPPS/LTCH PPS final rule, we have 
continued to propose a methodology for calculating the budget 
neutrality offset amount to account for both the estimated 
demonstration costs in the upcoming fiscal year and an amount by which 
the actual demonstration costs corresponding to an earlier, given year 
(which would be known once we have finalized cost reports for that 
year) exceeded the budget neutrality offset amount finalized in the 
corresponding year's IPPS final rule. However, we note that on account 
of a delay affecting the settlement process for cost reports for IPPS 
hospitals occurring on a larger scale than merely for the 
demonstration, we have been unable to finalize this component of the 
budget neutrality offset amount accounting for the amount by which the 
actual demonstration costs in a given year exceeded the budget 
neutrality offset amount finalized in the corresponding year's IPPS 
final rule for cost reports of demonstration hospitals dating to those 
beginning in FY 2007. (For only a small fraction of the hospitals that 
have participated in the demonstration from FY 2007 to FY 2010 have 
cost reports been finalized in any year, making the overall calculation 
of this component of the budget neutrality impossible at this time for 
any given year.)
2. Proposed FY 2013 Budget Neutrality Offset Amount
    We revisited the issue of which cost reports to propose to use for 
calculating the FY 2013 budget neutrality offset amount. Although we 
used finalized cost reports where available for the FYs 2010, 2011, and 
2012 IPPS/LTCH PPS final rules, for FY 2013, we are proposing to use 
the ``as submitted'' cost report for each hospital participating in the 
demonstration for the cost report period ending in CY 2010 in 
estimating the costs of the demonstration. We believe a way to 
streamline our methodology for calculating the budget neutrality offset 
amount would be to use cost reports all with the same status (that is, 
only ``as submitted'' cost reports as opposed to a mix of ``as 
submitted'' and ``settled'' cost reports) from the same time period for 
all hospitals participating in the demonstration (as opposed to varying 
cost reports of statuses from varying years for the various hospitals 
as has been done previously). Therefore, because ``as submitted'' cost 
reports ending in CY 2010 are the most recent complete set of cost 
reports for all demonstration hospitals, we are proposing to use these 
cost reports for our budget neutrality offset estimate. Further, 
because ``as submitted'' cost reports ending in CY 2010 are recent 
available cost reports, we believe they would be an accurate predictor 
of the costs of the

[[Page 27994]]

demonstration in FY 2013 because they give us a recent picture of the 
participating hospitals' costs.
    In revisiting the issue of which data sets to propose to use in the 
budget neutrality offset amount calculation, we also revisited the 
methodology for calculating the budget neutrality offset amount. In 
this proposed rule, we are proposing changes to that methodology in an 
effort to further improve and refine it. We note that the proposed 
methodology varies, in part, from that finalized in the FY 2012 IPPS/
LTCH PPS final rule (76 FR 51698 through 51707). Specifically, in 
proposing refinements to the methodology, we would simplify the 
calculation so that it includes only a few steps. In addition, we are 
proposing to incorporate different update factors (the market basket 
percentage increase and the applicable percentage increase, as 
applicable, to several years of data as opposed to solely using the 
market basket percentage increase) for the calculation of the budget 
neutrality offset amount. As explained in greater detail below, we 
believe this approach would maximize the precision of our calculation 
because we believe it would more closely replicate payments made with 
and without the demonstration.
    We note that, although we are proposing changes to certain aspects 
of the budget neutrality offset amount calculation, several core 
components of the methodology would remain unchanged. For example, we 
are continuing to propose to include in the budget neutrality offset 
amount the estimate of the demonstration costs for the upcoming fiscal 
year and the amount by which the actual demonstration costs 
corresponding to an earlier given year (which would be known once we 
have finalized cost reports for that year) exceeded the budget 
neutrality offset amount finalized in the corresponding year's IPPS 
final rule).
    The proposed methodology for calculating the estimated FY 2013 
demonstration cost for the 23 currently participating hospitals is as 
follows:
    Step 1: For each of the 23 participating hospitals, we are 
proposing to identify the general reasonable cost amount calculated 
under the reasonable cost methodology for covered inpatient hospital 
services (as indicated on the ``as submitted'' cost report for the 
hospital's cost reporting period ending in CY 2010) in FY 2010. The 
general reasonable cost amount calculated under the reasonable cost 
methodology for any applicable year is hereafter referred to as the 
``reasonable cost amount.''
    Because section 410A of Public Law 108-173 stipulates swing-bed 
services are to be included among the covered inpatient hospital 
services for which the demonstration payment methodology applies, we 
also are proposing to include the cost of these services, as reported 
on the cost reports for the hospitals that provide swing-bed services, 
within the general total estimated FY 2010 reasonable cost amount for 
covered inpatient hospitals services under the demonstration. As 
indicated above, we are proposing to use ``as submitted'' cost reports 
for the hospital's cost reporting period ending in CY 2010 for this 
calculation.
    We are proposing to sum the two above-referenced amounts to 
calculate the general total estimated FY 2010 reasonable cost amount 
for covered inpatient hospital services for all 23 hospitals.
    We are proposing to multiply this sum (that is, the general total 
estimated FY 2010 reasonable cost amount for covered inpatient hospital 
services for all 23 hospitals) by the FYs 2011 through 2013 IPPS market 
basket percentage increases, which were formulated by the CMS Office of 
the Actuary. In this proposed rule, the current estimate of the FY 2013 
IPPS market basket percentage increase provided by the CMS Office of 
the Actuary is indicated in section IV.H.1. of this preamble.) We also 
are proposing to then multiply the product of the general total 
estimated FY 2010 reasonable cost amount for all 23 hospitals and the 
market basket percentage increases applicable to the years involved by 
a 3-percent annual volume adjustment for the years 2011 through 2013--
the result would be the general total estimated FY 2013 reasonable cost 
amount for covered inpatient hospital services for all 23 hospitals.
    We are proposing to apply the IPPS market basket percentage 
increases applicable for FYs 2011 through 2013 to the FY 2010 
reasonable cost amount described above to model the estimated FY 2013 
reasonable cost amount under the demonstration. We are proposing to use 
the IPPS market basket percentage increases because we believe that 
these update factors appropriately indicate the trend of increase in 
inpatient hospital operating costs under the reasonable cost 
methodology for the years involved. The 3-percent annual volume 
adjustment was stipulated last year by the CMS Office of the Actuary 
and is proposed because it is intended to accurately reflect the 
tendency of hospitals' inpatient caseloads to increase. We acknowledge 
the possibility that inpatient caseloads for small hospitals may 
fluctuate, and are proposing to incorporate into the estimate of 
demonstration costs a factor to allow for a potential increase in 
inpatient hospital services.
    Step 2: For each of the 23 hospitals, we are proposing to identify 
the general estimated amount that would otherwise be paid in FY 2010 
under applicable Medicare payment methodologies for covered inpatient 
hospital services (as indicated on the ``as submitted'' cost report for 
cost reporting periods ending in CY 2010) if the demonstration was not 
implemented. Similarly, as in Step 1, for the hospitals that provide 
swing-bed services, we are proposing to identify the estimated amount 
that generally would otherwise be paid for these services (as indicated 
on the ``as submitted'' cost report for cost reporting periods ending 
in CY 2010) and include it in the total FY 2010 general estimated 
amount that would otherwise be paid for covered inpatient hospital 
services without the demonstration. We are proposing to sum these two 
amounts in order to calculate the estimated FY 2010 total payments that 
generally would otherwise be paid for covered inpatient hospital 
services for all 23 hospitals without the demonstration.
    We are proposing to multiply the above amount (that is, the 
estimated FY 2010 total payments that generally would otherwise be paid 
for covered inpatient hospital services for all 23 hospitals without 
the demonstration) by the FYs 2011 through 2013 IPPS applicable 
percentage increases and the proposed 3 percent annual volume 
adjustment for FYs 2011 through 2013--the result would be the general 
total estimated FY 2013 costs that would be paid without the 
demonstration for covered inpatient hospital services to the 23 
participating hospitals. In this proposed rule, the current estimate of 
the FY 2013 IPPS applicable percentage increase is 2.1 percent. This 
methodology differs from Step 1, in which we are proposing to apply the 
market basket percentage increases to the sum of the hospitals' general 
total FY 2010 estimated reasonable cost amount for covered inpatient 
hospital services. We believe that the IPPS applicable percentage 
increases are appropriate factors to update the estimated amounts that 
generally would otherwise be paid without the demonstration. This is 
because IPPS payments would constitute the majority of payments that 
would otherwise be made without the demonstration and the applicable 
percentage increase is the factor used under the IPPS to update the 
inpatient hospital payment rates.

[[Page 27995]]

Hospitals participating in the demonstration would be participating 
under the IPPS payment methodology if they were not in the 
demonstration. We note that such use of the applicable percentage 
increase would represent a shift from formulations in previous years of 
the budget neutrality offset amount. In this FY 2013 proposed rule, we 
are trying to increase the precision of the different nature of the 
projections that we are proposing for estimating the reasonable cost 
amounts and the estimated payments that would otherwise be paid without 
the demonstration.
    Step 3: We are proposing to subtract the amount derived in Step 2 
(representing the sum of estimated amounts that generally would 
otherwise be paid to the 23 hospitals for covered inpatient hospital 
services for FY 2013 if the demonstration was not implemented) from the 
amount derived in Step 1 (representing the sum of the estimated 
reasonable cost amount that generally would be paid under the 
demonstration to all 23 hospitals for covered inpatient hospital 
services for FY 2013). We are proposing that the resulting difference 
would be the amount for which an adjustment to the national IPPS rates 
would be calculated.
    For this proposed rule, the resulting difference is $35,077,708. 
For this FY 2013 IPPS/LTCH PPS proposed rule, this amount is the 
estimated amount for which an adjustment to the national IPPS rates is 
being calculated. This estimated amount is based on the specific 
assumptions identified regarding the data sources that are used, that 
is, ``as submitted'' recently available cost reports. We note that if 
updated data become available prior to the FY 2013 final rule, we are 
proposing to use them to the extent appropriate to estimate the costs 
of the demonstration program in FY 2013. Therefore, this estimated 
budget neutrality offset amount may change in the final rule depending 
on the availability of updated data. Similar to previous years, we are 
proposing that if settled cost reports for all of the demonstration 
hospitals that participated in the applicable fiscal year (FY 2007, 
2008, 2009, or 2010) are available prior to the FY 2013 IPPS/LTCH PPS 
final rule, we will include in the budget neutrality offset amount any 
additional amounts by which the final settled costs of the 
demonstration for the year (FY 2007, 2008, 2009, or 2010) exceeded the 
budget neutrality offset amount applicable to such year as finalized in 
the respective year's IPPS final rule. (The final settled costs of the 
demonstration for a year would be calculated by subtracting the total 
amount that would otherwise be paid under the applicable Medicare 
payment systems without the demonstration for the year from the amount 
paid to those hospitals under the reasonable cost methodology for such 
year.)

L. Hospital Routine Services Furnished Under Arrangements

    In the FY 2012 IPPS/LTCH PPS final rule (76 FR 51711 through 
51714), we included a provision that limits the circumstances under 
which a hospital may furnish services to Medicare beneficiaries ``under 
arrangement.'' Under the revised policy, therapeutic and diagnostic 
services are the only services that may be furnished under arrangements 
outside of the hospital to Medicare beneficiaries. ``Routine services'' 
(that is, bed, board, and nursing and other related services) must be 
furnished by the hospital. Under this revised policy, routine services 
furnished to Medicare beneficiaries as inpatients of the hospital are 
considered services furnished by the hospital. If these services are 
furnished outside of the hospital, the services are considered to be 
furnished ``under arrangement.''
    We have become aware that a number of affected hospitals need 
additional time to restructure existing arrangements and establish 
necessary operational protocols to comply with the requirement that 
therapeutic and diagnostic services are the only services that may be 
furnished outside of the hospital to Medicare beneficiaries ``under 
arrangement,'' and that ``routine services'' must be furnished by the 
hospital. While we still believe that our policy is correct and 
consistent with the statutory language, we also believe that because a 
number of hospitals are actively pursuing compliance (often building 
construction or restructuring is involved), it is appropriate to 
postpone the effective date of this requirement to give hospitals 
additional time to comply with the provision.
    Therefore, we are proposing to change the implementation date of 
this requirement to be effective for cost reporting periods beginning 
on or after October 1, 2013. We expect that, during FY 2013, hospitals 
will complete the work needed to ensure compliance with the new 
requirement. Beginning with a hospital's FY 2014 cost reporting period, 
we expect that all hospitals would be in full compliance with the 
revised policy for services furnished under arrangement. We will 
continue to work with affected hospitals to communicate the requirement 
established by this provision, and to provide continued guidance 
regarding compliance with the provision.

M. Proposed Technical Change

    In an interim final rule that appeared in the November 27, 2007 
Federal Register (72 FR 66895 through 66897), we made changes to the 
regulations governing the application of the emergency Medicare GME 
affiliation agreement rules in order to address the needs of hospitals 
located in the section 1135 emergency area in the aftermath of 
Hurricane Katrina and Rita. In that rule, we changed the length of 
emergency affiliation agreements from 3 years to 5 years under 42 CFR 
413.79(f)(7) (then Sec.  413.79(f)(6)); that is, we specified that the 
emergency Medicare GME affiliation agreement must terminate no later 
than the conclusion of 4 academic years following the academic year 
during which the section 1135 emergency period began. However, we 
inadvertently did not make a conforming change to 42 CFR 
413.79(f)(7)(i)(B). We are proposing to change the regulatory text 
specified Sec.  413.79(f)(7)(i)(B) to make it consistent with the 
regulatory text under Sec.  413.79(f)(7).

V. Proposed Changes to the IPPS for Capital-Related Costs

A. Overview

    Section 1886(g) of the Act requires the Secretary to pay for the 
capital-related costs of inpatient acute hospital services ``in 
accordance with a prospective payment system established by the 
Secretary.'' Under the statute, the Secretary has broad authority in 
establishing and implementing the IPPS for acute care hospital 
inpatient capital-related costs. The IPPS for capital-related costs was 
initially implemented in the Federal fiscal year (FY) 1992 IPPS final 
rule (56 FR 43358), in which we established a 10-year transition period 
to change the payment methodology for Medicare hospital inpatient 
capital-related costs from a reasonable cost-based methodology to a 
prospective methodology (based fully on the Federal rate).
    FY 2001 was the last year of the 10-year transition period 
established to phase in the IPPS for hospital inpatient capital-related 
costs. For cost reporting periods beginning in FY 2002, capital IPPS 
payments are based solely on the Federal rate for almost all acute care 
hospitals (other than hospitals receiving certain exception payments 
and certain new hospitals). (We refer readers to the FY 2002 IPPS final 
rule (66 FR 39910 through 39914) for additional information on the 
methodology used to

[[Page 27996]]

determine capital IPPS payments to hospitals both during and after the 
transition period.)
    The basic methodology for determining capital prospective payments 
using the Federal rate is set forth in Sec.  412.312 of the 
regulations. For the purpose of calculating capital payments for each 
discharge, the standard Federal rate is adjusted as follows:

(Standard Federal Rate) x (DRG Weight) x (Geographic Adjustment Factor 
(GAF)) x (COLA for hospitals located in Alaska and Hawaii) x (1 + 
Capital DSH Adjustment Factor + Capital IME Adjustment Factor, if 
applicable).

    In addition, under Sec.  412.312(c), hospitals also may receive 
outlier payments under the capital IPPS for extraordinarily high-cost 
cases that qualify under the thresholds established for each fiscal 
year.

B. Additional Provisions

1. Exception Payments
    The regulations at Sec.  412.348 provide for certain exception 
payments under the capital IPPS. The regular exception payments 
provided under Sec. Sec.  412.348(b) through (e) were available only 
during the 10-year transition period. For a certain period after the 
transition period, eligible hospitals may have received additional 
payments under the special exceptions provisions at Sec.  412.348(g). 
However, as noted in the FY 2012 IPPS/LTCH PPS final rule (76 FR 51725 
and 51804), FY 2012 was the final year hospitals could receive special 
exceptions payments. For additional details regarding these exceptions 
policies, we refer readers to the FY 2012 IPPS/LTCH PPS final rule (76 
FR 51725).
    Finally, under Sec.  412.348(f), a hospital may request an 
additional payment if the hospital incurs unanticipated capital 
expenditures in excess of $5 million due to extraordinary circumstances 
beyond the hospital's control. Additional information on the exception 
payment for extraordinary circumstances in Sec.  412.348(f) can be 
found in the FY 2005 IPPS final rule (69 FR 49185 and 49186).
2. New Hospitals
    Under the capital IPPS, Sec.  412.300(b) of the regulations defines 
a new hospital as a hospital that has operated (under previous or 
current ownership) for less than 2 years and lists examples of 
hospitals that are not considered new hospitals. In accordance with 
Sec.  412.304(c)(2), under the capital IPPS a new hospital is paid 85 
percent of its Medicare allowable capital-related costs through its 
first 2 years of operation, unless the new hospital elects to receive 
full prospective payment based on 100 percent of the Federal rate. We 
refer readers to the FY 2012 IPPS/LTCH PPS final rule (76 FR 51725) for 
additional information on payments to new hospitals under the capital 
IPPS.
3. Hospitals Located in Puerto Rico
    Section 412.374 of the regulations provides for the use of a 
blended payment amount for prospective payments for capital-related 
costs to hospitals located in Puerto Rico. Accordingly, under the 
capital IPPS, we compute a separate payment rate specific to Puerto 
Rico hospitals using the same methodology used to compute the national 
Federal rate for capital-related costs. In general, hospitals located 
in Puerto Rico are paid a blend of the applicable capital IPPS Puerto 
Rico rate and the applicable capital IPPS Federal rate. Capital IPPS 
payments to hospitals located in Puerto Rico are computed based on a 
blend of 25 percent of the capital IPPS Puerto Rico rate and 75 percent 
of the capital IPPS Federal rate. For additional details on capital 
IPPS payments to hospitals located in Puerto Rico, we refer readers to 
the FY 2012 IPPS/LTCH PPS final rule (76 FR 51725).

C. Proposed Changes in the Documentation and Coding Adjustment for FY 
2013

1. Background
    In the FY 2008 IPPS final rule with comment period (72 FR 47175 
through 47186), we established adjustments to both the national 
operating standardized amount and the national capital Federal rate to 
eliminate the estimated effect of changes in documentation and coding 
resulting from the adoption of the MS-DRGs that do not reflect real 
changes in case-mix. Specifically, we established prospective 
documentation and coding adjustments of -1.2 percent for FY 2008, -1.8 
percent for FY 2009, and -1.8 percent for FY 2010. However, to comply 
with section 7(a) of Public Law 110-90, enacted on September 29, 2007, 
in a final rule published in the Federal Register on November 27, 2007 
(72 FR 66886 through 66888), we modified the documentation and coding 
adjustment for FY 2008 to -0.6 percent, and consequently revised the FY 
2008 IPPS operating and capital payment rates, factors, and thresholds 
accordingly, with these revisions effective October 1, 2007.
    For FY 2009, section 7(a) of Public Law 110-90 required a 
documentation and coding adjustment of -0.9 percent instead of the -1.8 
percent adjustment established in the FY 2008 IPPS final rule with 
comment period. As discussed in the FY 2009 IPPS final rule with 
comment period (73 FR 48447 and 48733 through 48774), we applied an 
additional documentation and coding adjustment of -0.9 percent to the 
FY 2009 IPPS national standardized amounts and the national capital 
Federal rate. The documentation and coding adjustments established in 
the FY 2009 IPPS final rule, as amended by Public Law 110-90, are 
cumulative. As a result, the -0.9 percent documentation and coding 
adjustment in FY 2009 was in addition to the -0.6 percent adjustment in 
FY 2008, yielding a combined effect of -1.5 percent. (For additional 
details on the development and implementation of the documentation and 
coding adjustments for FY 2008 and FY 2009, we refer readers to section 
II.D. of this preamble and the following rules published in the Federal 
Register: August 22, 2007 (72 FR 47175 through 47186 and 47431 through 
47432); November 27, 2007 (72 FR 66886 through 66888); and August 19, 
2008 (73 FR 48447 through 48450 and 48773 through 48775).)
    For the FY 2011 IPPS/LTCH PPS proposed and final rules, we 
performed a retrospective evaluation of the FY 2009 claims data updated 
through December 2009 using the same analysis methodology as we did for 
FY 2008 claims in the FY 2010 IPPS/RY 2010 LTCH PPS proposed and final 
rules. Based on this evaluation, our actuaries determined that the 
implementation of the MS-DRG system resulted in a 5.4 percent change in 
case-mix due to documentation and coding that did not reflect real 
changes in case-mix for discharges occurring during FY 2009. In the FY 
2011 IPPS/LTCH PPS final rule (75 FR 50355), we implemented an 
additional adjustment to the FY 2011 national capital Federal rate of -
2.9 percent to account for part of the effect of the estimated changes 
in documentation and coding changes under the MS-DRG system that 
occurred in FYs 2008 and 2009 that did not reflect real changes in 
case-mix. Consistent with past practice, this -2.9 percent adjustment 
was applied in a cumulative manner, which yielded a combined effect of 
-4.4 percent. (For additional information on our estimate of the 5.4 
percent cumulative documentation effect under the MS-DRG system for FYs 
2008 and 2009 and the additional -2.9 percent documentation and coding 
adjustment applied to the national capital Federal rate in FY 2011, we 
refer readers to the

[[Page 27997]]

FY 2011 IPPS/LTCH PPS proposed rule (75 FR 24014) and the FY 2011 IPPS/
LTCH PPS final rule (75 FR 50355)).
    In the FY 2012 IPPS/LTCH PPS final rule (76 FR 51727), we made an 
additional -1.0 percent adjustment to the national capital Federal rate 
to account for the remainder of the 5.4 percent estimate of the 
cumulative effect of documentation and coding changes under the MS-DRG 
system that occurred during FYs 2008 and 2009. Consistent with past 
practice, this -1.0 percent adjustment was applied in a cumulative 
manner, which yielded a combined effect of -5.4 percent.
2. Prospective Documentation and Coding Adjustment to the National 
Capital Federal Rate for FY 2013 and Subsequent Years
    We continue to believe that it is appropriate to make adjustments 
to the capital IPPS rates to eliminate the effect of any documentation 
and coding changes as a result of the implementation of the MS-DRGs. 
These adjustments are intended to ensure that future annual aggregate 
IPPS payments are the same as payments that otherwise would have been 
made in those years absent the change to the MS-DRGs. Under section 
1886(g) of the Act, the Secretary has broad authority in establishing 
and implementing the IPPS for acute-care hospital inpatient capital-
related costs (that is, the capital IPPS). We have consistently stated 
since the initial implementation of the MS-DRG system that we do not 
believe it is appropriate for Medicare expenditures under the capital 
IPPS to increase due to MS-DRG related changes in documentation and 
coding. Accordingly, we believe that it is appropriate under the 
Secretary's broad authority under section 1886(g) of the Act, in 
conjunction with section 1886(d)(3)(A)(vi) of the Act and section 7(b) 
of Public Law 110-90, to make adjustments to the national capital 
Federal rate to eliminate the full effect of the documentation and 
coding changes resulting from the adoption of the MS-DRGs. We believe 
that this is appropriate because, in absence of such adjustments, the 
effect of the documentation and coding changes resulting from the 
adoption of the MS-DRGs results in inappropriately high capital IPPS 
payments because that portion of the increase in aggregate payments is 
not due to an increase in patient severity of illness (and costs).
    As noted above, based on our retrospective evaluation of the FY 
2009 claims, our actuaries determined that implementation of the MS-DRG 
system resulted in a 5.4 percent change in case-mix due to 
documentation and coding that did not reflect real changes in case-mix 
for discharges occurring during FY 2009. To date, we have made 
adjustments to the national capital Federal rate to account for the 
estimated 5.4 percent documentation and coding effect of documentation 
and coding changes under the MS-DRG system for FYs 2008 and 2009 (that 
is, -0.6 percent in FY 2008, -0.9 percent in FY 2009, -2.9 percent in 
FY 2011, and -1.0 in FY 2012).
    As discussed in greater detail in section II.D.10. of this 
preamble, we believe it is appropriate to analyze claims data from FY 
2010 to determine whether any additional adjustment would be required 
to ensure that the adoption of MS-DRGs was implemented in a budget 
neutral manner. Specifically, for this proposed rule, we analyzed FY 
2010 data on claims paid through December 2011 using our existing 
methodology (as described in section II.D.4. of this preamble). Based 
on this analysis, our actuaries determined that implementation of the 
MS-DRG system resulted in a 6.2 percent change in case-mix due to 
documentation and coding that did not reflect real changes in case-mix 
for discharges occurring during FY 2010. This is an estimated 
additional 0.8 percentage point increase over the 5.4 percent reduction 
currently applied to the national capital Federal rate.
    Therefore, in this proposed rule, under the Secretary's broad 
authority under section 1886(g) of the Act, in conjunction with section 
1886(d)(3)(A)(vi) of the Act, and consistent with our proposal for the 
operating IPPS standardized amounts (discussed in section II.D.5. of 
this preamble), we are proposing to reduce the national capital Federal 
rate in FY 2013 by an additional 0.8 percent to account for the 
remainder of the cumulative effect of the estimated changes in 
documentation and coding under the MS-DRG system that did not reflect 
an increase in case-mix severity in FY 2010. Furthermore, consistent 
with the documentation and coding adjustments we have made in the past, 
we are proposing to leave the proposed -0.8 percent adjustment in place 
for FY 2013 and subsequent fiscal years to account for the effect those 
years. As explained above, this proposed -0.8 percent adjustment 
accounts for the remainder of our current estimate of the cumulative 
effect of documentation and coding changes under the MS-DRG system that 
occurred during FYs 2008, 2009, and 2010 of 6.2 percent minus the 
existing cumulative adjustment already applied to the national capital 
Federal rate of -5.4 percent. We note that this proposed adjustment 
only adjusts the national capital Federal rate prospectively. It does 
not attempt to recoup any excess payments that have resulted in FYs 
2010, 2011, and 2012 as a result of this additional effect of 
documentation and coding in those years.
3. Documentation and Coding Adjustment to the Puerto Rico-Specific 
Capital Rate
    Under Sec.  412.74, Puerto Rico hospitals are currently paid based 
on 75 percent of the national capital Federal rate and 25 percent of 
the Puerto Rico-specific capital rate. In the FY 2011 IPPS/LTCH PPS 
final rule (75 FR 50358 through 50359), we discussed the retrospective 
evaluation of the FY 2009 claims data from the March 2010 update of the 
MedPAR file of hospitals located in Puerto Rico using the same 
methodology used to estimate documentation and coding changes under 
IPPS for non-Puerto Rico hospitals. This analysis shows that the change 
in case-mix due to documentation and coding that did not reflect real 
changes in case-mix for discharges occurring during FYs 2008 and 2009 
from hospitals located in Puerto Rico was approximately 2.6 percent. We 
also explained that we continue to believe that an adjustment for such 
increases is appropriate because all hospitals have the same financial 
incentives for documentation and coding improvements, and the same 
ability to benefit from the resulting increase in aggregate payments 
that do not reflect real changes in case-mix.
    Given this case-mix increase due to changes in documentation and 
coding under the MS-DRGs, under the Secretary's broad authority under 
section 1886(g) of the Act, we established an adjustment to the Puerto 
Rico-specific capital rate of -2.6 percent in FY 2011 for the 
cumulative increase in case-mix due to changes in documentation and 
coding under the MS-DRGs for FYs 2008 and 2009. In addition, consistent 
with our implementation of other prospective MS-DRG documentation and 
coding adjustments to the capital Federal rate and operating IPPS 
standardized amounts, we established that the -2.6 percent adjustment 
will remain in place for subsequent fiscal years in order to ensure 
that changes in documentation and coding resulting from the adoption of 
the MS-DRGs do not lead to an increase in aggregate payments not 
reflective of an increase in real case-mix in subsequent years. 
Therefore, the -2.6 percent adjustment to the capital

[[Page 27998]]

Puerto Rico-specific rate made in FY 2011 reflects the entire amount of 
our estimate at that time of the effects of documentation and coding 
that did not reflect real changes in case-mix for discharges occurring 
during FYs 2008 and 2009 from hospitals located in Puerto Rico.
    As discussed above, for this proposed rule, we analyzed FY 2010 
data on claims paid through December 2011 using our existing 
methodology to determine if any additional adjustment for the effects 
of documentation and coding that did not reflect real changes in case-
mix is warranted. Based on this analysis (which is described in greater 
detail in section II.D.10. of this preamble), we found no significant 
additional effect of documentation and coding that would warrant any 
additional adjustment. Therefore, we are not proposing any additional 
adjustment to the capital Puerto Rico-specific rate for FY 2013 for the 
effect of documentation and coding that did not reflect real changes in 
case-mix.

D. Proposed Changes for Annual Update for FY 2013

    The annual update to the capital IPPS Federal and Puerto Rico-
specific rates, as provided for at Sec.  412.308(c), proposed for FY 
2013 is discussed in section III. of the Addendum to this proposed 
rule.

VI. Proposed Changes for Hospitals Excluded From the IPPS

    Historically, hospitals and hospital units excluded from the 
prospective payment system received payment for inpatient hospital 
services they furnished on the basis of reasonable costs, subject to a 
rate-of-increase ceiling. A per discharge limit (the target amount as 
defined in Sec.  413.40(a)) was set for each hospital or hospital unit 
based on the hospital's own cost experience in its base year, and 
updated annually by a rate-of-increase percentage. The updated target 
amount was multiplied by total Medicare discharges during that period 
and applied as an aggregate upper limit (the ceiling as defined in 
Sec.  413.40(a)) on total inpatient operating costs for a hospital's 
cost reporting period. Prior to October 1, 1997, these payment 
provisions applied consistently to all categories of excluded 
providers, which included rehabilitation hospitals and units (now 
referred to as IRFs), psychiatric hospitals and units (now referred to 
as IPFs), LTCHs, children's hospitals, and IPPS-excluded cancer 
hospitals.
    Payment to children's hospitals and cancer hospitals that are 
excluded from the IPPS continues to be subject to the rate-of-increase 
ceiling based on the hospital's own historical cost experience. (We 
note that, in accordance with Sec.  403.752(a) of the regulations, 
RNHCIs are also subject to the rate-of-increase limits established 
under Sec.  413.40 of the regulations.)
    We are proposing that the FY 2013 rate-of-increase percentage to be 
applied to the target amount for cancer and children's hospitals and 
RNHCIs would be the FY 2013 percentage increase in the IPPS operating 
market basket. For this proposed rule, the FY 2013 percentage increase 
in the IPPS operating market basket is currently estimated to be 3.0 
percent. Beginning with FY 2006, we have used the percentage increase 
in the IPPS operating market basket to update the target amounts for 
children's and cancer hospitals. As explained in the FY 2006 IPPS final 
rule (70 FR 47396 through 47398), with IRFs, IPFs, and LTCHs being paid 
under their own PPS, the remaining number of providers being paid based 
on reasonable cost subject to a ceiling (that is, children's hospitals, 
11 cancer hospitals, and RNHCIs) is too small and the cost report data 
are too limited to be able to create a market basket solely for these 
hospitals. For FY 2013, we are proposing to continue to use the IPPS 
operating market basket to update the target amounts for children's and 
cancer hospitals and RNHCIs for the reasons discussed in the FY 2006 
IPPS final rule.
    We are proposing to use the FY 2006-based IPPS operating market 
basket to update the target amounts for children's and cancer hospitals 
and RNHCIs for FY 2013. Therefore, based on IHS Global Insight, Inc.'s 
2012 first quarter forecast, with historical data through the 2011 
fourth quarter, the current estimate of the IPPS operating market 
basket update for FY 2013 is 3.0 percent (that is, the estimate of the 
market basket rate-of-increase). We are proposing that if more recent 
data become available for the final rule, we would use them to 
calculate the IPPS operating market basket update for FY 2013.
    We note that IRFs, IPFs, and LTCHs, which were paid previously 
under the reasonable cost methodology, now receive payment under their 
own prospective payment systems, in accordance with changes made to the 
statute. In general, the prospective payment systems for IRFs, IPFs, 
and LTCHs provided transition periods of varying lengths during which 
time a portion of the prospective payment was based on cost-based 
reimbursement rules under Part 413. (However, certain providers do not 
receive a transition period or may elect to bypass the transition 
period as applicable under 42 CFR Part 412, Subparts N, O, and P.) We 
note that the various transition periods provided for under the IRF 
PPS, the IPF PPS, and the LTCH PPS have ended.
    The IRF PPS, the IPF PPS, and the LTCH PPS are updated annually. We 
refer readers to section IV. of the Addendum to this proposed rule for 
the specific proposed update changes to the Federal payment rates for 
LTCHs under the LTCH PPS for FY 2013. The annual updates for the IRF 
PPS and the IPF PPS are issued by the agency in separate Federal 
Register documents.

VII. Proposed Changes to the Long-Term Care Hospital Prospective 
Payment System (LTCH PPS) for FY 2013

A. Background of the LTCH PPS

1. Legislative and Regulatory Authority
    Section 123 of the Medicare, Medicaid, and SCHIP (State Children's 
Health Insurance Program) Balanced Budget Refinement Act of 1999 (BBRA) 
(Pub. L. 106-113) as amended by section 307(b) of the Medicare, 
Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 
(BIPA) (Pub. L. 106-554) provides for payment for both the operating 
and capital-related costs of hospital inpatient stays in long-term care 
hospitals (LTCHs) under Medicare Part A based on prospectively set 
rates. The Medicare prospective payment system (PPS) for LTCHs applies 
to hospitals that are described in section 1886(d)(1)(B)(iv) of the 
Social Security Act (the Act), effective for cost reporting periods 
beginning on or after October 1, 2002.
    Section 1886(d)(1)(B)(iv)(I) of the Act defines a LTCH as ``a 
hospital which has an average inpatient length of stay (as determined 
by the Secretary) of greater than 25 days.'' Section 
1886(d)(1)(B)(iv)(II) of the Act also provides an alternative 
definition of LTCHs: specifically, a hospital that first received 
payment under section 1886(d) of the Act in 1986 and has an average 
inpatient length of stay (LOS) (as determined by the Secretary of 
Health and Human Services (the Secretary)) of greater than 20 days and 
has 80 percent or more of its annual Medicare inpatient discharges with 
a principal diagnosis that reflects a finding of neoplastic disease in 
the 12-month cost reporting period ending in FY 1997.
    Section 123 of the BBRA requires the PPS for LTCHs to be a ``per 
discharge'' system with a diagnosis-related group (DRG) based patient 
classification system that reflects the differences in patient 
resources and costs in LTCHs.

[[Page 27999]]

    Section 307(b)(1) of the BIPA, among other things, mandates that 
the Secretary shall examine, and may provide for, adjustments to 
payments under the LTCH PPS, including adjustments to DRG weights, area 
wage adjustments, geographic reclassification, outliers, updates, and a 
disproportionate share adjustment.
    In the August 30, 2002 Federal Register, we issued a final rule 
that implemented the LTCH PPS authorized under the BBRA and BIPA (67 FR 
55954). For the initial implementation of the LTCH PPS (FYs 2003 
through FY 2007), the system used information from LTCH patient records 
to classify patients into distinct long-term care diagnosis-related 
groups (LTC-DRGs) based on clinical characteristics and expected 
resource needs. Beginning in FY 2008, we adopted the Medicare severity 
long-term care diagnosis-related groups (MS-LTC-DRGs) as the patient 
classification system used under the LTCH PPS. Payments are calculated 
for each MS-LTC-DRG and provisions are made for appropriate payment 
adjustments. Payment rates under the LTCH PPS are updated annually and 
published in the Federal Register.
    The LTCH PPS replaced the reasonable cost-based payment system 
under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) 
(Pub. L. 97-248) for payments for inpatient services provided by a LTCH 
with a cost reporting period beginning on or after October 1, 2002. 
(The regulations implementing the TEFRA reasonable cost-based payment 
provisions are located at 42 CFR Part 413.) With the implementation of 
the PPS for acute care hospitals authorized by the Social Security 
Amendments of 1983 (Pub. L. 98-21), which added section 1886(d) to the 
Act, certain hospitals, including LTCHs, were excluded from the PPS for 
acute care hospitals and were paid their reasonable costs for inpatient 
services subject to a per discharge limitation or target amount under 
the TEFRA system. For each cost reporting period, a hospital-specific 
ceiling on payments was determined by multiplying the hospital's 
updated target amount by the number of total current year Medicare 
discharges. (Generally, in section VIII. of this preamble, when we 
refer to discharges, the intent is to describe Medicare discharges.) 
The August 30, 2002 final rule further details the payment policy under 
the TEFRA system (67 FR 55954).
    In the August 30, 2002 final rule, we provided for a 5-year 
transition period from payments under the TEFRA System to payments 
under the LTCH PPS. During this 5-year transition period, a LTCH's 
total payment under the PPS was based on an increasing percentage of 
the Federal rate with a corresponding decrease in the percentage of the 
LTCH PPS payment that is based on reasonable cost concepts. However, 
effective for cost reporting periods beginning on or after October 1, 
2006, total LTCH PPS payments are based on 100 percent of the Federal 
rate.
    In addition, in the August 30, 2002 final rule, we presented an in-
depth discussion of the LTCH PPS, including the patient classification 
system, relative weights, payment rates, additional payments, and the 
budget neutrality requirements mandated by section 123 of the BBRA. The 
same final rule that established regulations for the LTCH PPS under 42 
CFR part 412, Subpart O, also contained LTCH provisions related to 
covered inpatient services, limitation on charges to beneficiaries, 
medical review requirements, furnishing of inpatient hospital services 
directly or under arrangement, and reporting and recordkeeping 
requirements. We refer readers to the August 30, 2002 final rule for a 
comprehensive discussion of the research and data that supported the 
establishment of the LTCH PPS (67 FR 55954).
    We refer readers to the FY 2012 IPPS/LTCH PPS final rule (76 FR 
51733 through 51743) for a chronological summary of the main 
legislative and regulatory developments affecting the LTCH PPS through 
the annual update cycles prior to this FY 2013 rulemaking cycle.
2. Criteria for Classification as a LTCH
a. Classification as a LTCH
    Under the existing regulations at Sec. Sec.  412.23(e)(1) and 
(e)(2)(i), which implement section 1886(d)(1)(B)(iv)(I) of the Act, to 
qualify to be paid under the LTCH PPS, a hospital must have a provider 
agreement with Medicare and must have an average Medicare inpatient LOS 
of greater than 25 days. Alternatively, Sec.  412.23(e)(2)(ii) states 
that, for cost reporting periods beginning on or after August 5, 1997, 
a hospital that was first excluded from the PPS in 1986 and can 
demonstrate that at least 80 percent of its annual Medicare inpatient 
discharges in the 12-month cost reporting period ending in FY 1997 have 
a principal diagnosis that reflects a finding of neoplastic disease 
must have an average inpatient length of stay for all patients, 
including both Medicare and non-Medicare inpatients, of greater than 20 
days.
b. Hospitals Excluded From the LTCH PPS
    The following hospitals are paid under special payment provisions, 
as described in Sec.  412.22(c), and therefore, are not subject to the 
LTCH PPS rules:
     Veterans Administration hospitals.
     Hospitals that are reimbursed under State cost control 
systems approved under 42 CFR part 403.
     Hospitals that are reimbursed in accordance with 
demonstration projects authorized under section 402(a) of the Social 
Security Amendments of 1967 (Pub. L. 90-248) (42 U.S.C. 1395b-1) or 
section 222(a) of the Social Security Amendments of 1972 (Pub. L. 92-
603) (42 U.S.C. 1395b-1 (note)) (Statewide all-payer systems, subject 
to the rate-of-increase test at section 1814(b) of the Act).
     Nonparticipating hospitals furnishing emergency services 
to Medicare beneficiaries.
3. Limitation on Charges to Beneficiaries
    In the August 30, 2002 final rule, we presented an in-depth 
discussion of beneficiary liability under the LTCH PPS (67 FR 55974 
through 55975). In the RY 2005 LTCH PPS final rule (69 FR 25676), we 
clarified that the discussion of beneficiary liability in the August 
30, 2002 final rule was not meant to establish rates or payments for, 
or define Medicare-eligible expenses. Under Sec.  412.507, if the 
Medicare payment to the LTCH is the full LTC-DRG payment amount, as 
consistent with other established hospital prospective payment systems, 
a LTCH may not bill a Medicare beneficiary for more than the deductible 
and coinsurance amounts as specified under Sec. Sec.  409.82, 409.83, 
and 409.87 and for items and services as specified under Sec.  
489.30(a). However, under the LTCH PPS, Medicare will only pay for days 
for which the beneficiary has coverage until the short-stay outlier 
(SSO) threshold is exceeded. Therefore, if the Medicare payment was for 
a SSO case (Sec.  412.529) that was less than the full LTC-DRG payment 
amount because the beneficiary had insufficient remaining Medicare 
days, the LTCH could also charge the beneficiary for services delivered 
on those uncovered days (Sec.  412.507).
4. Administrative Simplification Compliance Act (ASCA) and Health 
Insurance Portability and Accountability Act (HIPAA) Compliance
    Claims submitted to Medicare must comply with both the 
Administrative Simplification Compliance Act (ASCA) (Pub. L. 107-105), 
and the Health

[[Page 28000]]

Insurance Portability and Accountability Act of 1996 (HIPAA) (Pub. L. 
104-191). Section 3 of the ASCA requires that the Medicare Program deny 
payment under Part A or Part B for any expenses incurred for items or 
services ``for which a claim is submitted other than in an electronic 
form specified by the Secretary.'' Section 1862(h) of the Act (as added 
by section 3(a) of the ASCA) provides that the Secretary shall waive 
such denial in two specific types of cases and may also waive such 
denial ``in such unusual cases as the Secretary finds appropriate'' (68 
FR 48805). Section 3 of the ASCA operates in the context of the HIPAA 
regulations, which include, among other provisions, the transactions 
and code sets standards requirements codified as 45 CFR parts 160 and 
162, Subparts A and I through R (generally known as the Transactions 
Rule). The Transactions Rule requires covered entities, including 
covered health care providers, to conduct certain electronic health 
care transactions according to the applicable transactions and code 
sets standards.

B. Proposed Medicare Severity Long-Term Care Diagnosis-Related Group 
(MS-LTC-DRG) Classifications and Relative Weights for FY 2013

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 this 
patient classification system as the ``long-term care diagnosis-related 
groups (LTC-DRGs).'' 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 relative weights under the LTCH PPS 
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 under the IPPS and 
the LTCH PPS, respectively, effective beginning October 1, 2007 (FY 
2008). For a full description of the development and implementation and 
rationale for the use 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.)
    The MS-DRGs adopted in FY 2008 represent an increase in the number 
of DRGs by 207 (that is, from 538 to 745) (72 FR 47171). The MS-DRG 
classifications are updated annually. As described in section II.G. of 
this preamble, for FY 2013, we are not proposing to create or delete 
any MS-DRGs, and as such we would continue to have a total of 751 MS-
DRG groupings for FY 2013. Consistent with section 123 of the BBRA, as 
amended by section 307(b)(1) of the BIPA, and Sec.  412.515 of the 
regulations, 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.
    In a departure from the IPPS, and as discussed in greater detail 
below in section VII.B.3.f. of this preamble, we are proposing to 
continue to use low-volume MS-LTC-DRGs (that is, MS-LTC-DRGs with less 
than 25 LTCH cases) in determining the MS-LTC-DRG relative weights 
because LTCHs do not typically treat the full range of diagnoses as do 
acute care hospitals. For purposes of determining the relative weights 
for the large number of low-volume MS-LTC-DRGs, we are proposing to 
group all of the low-volume MS-LTC-DRGs into five quintiles based on 
average charge per discharge. (A detailed discussion of the initial 
development and application of the quintile methodology appears in the 
August 30, 2002 LTCH PPS final rule (67 FR 55978).) Consistent with our 
existing methodology, we also are proposing to account for adjustments 
to payments for SSO cases (that is, cases where the covered length of 
stay at the LTCH is less than or equal to five-sixths of the geometric 
average length of stay for the MS-LTC-DRG). Furthermore, we are 
proposing to continue to make adjustments to account for 
nonmonotonically increasing weights, when necessary. That is, 
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 such that, in the severity levels within a 
base MS-LTC-DRG, the weights should increase monotonically with 
severity from the lowest to highest severity level. (We discuss 
nonmonotonicity in greater detail and our methodology to adjust the MS-
LTC-DRG relative weights to account for nonmonotonically increasing 
relative weights in section VII.B.3.g. (Step 6) of this preamble.)
2. Patient Classifications Into MS-LTC-DRGs
a. Background
    The MS-DRGs (used under the IPPS) and the MS-LTC-DRGs (used under 
the LTCH PPS) are based on the CMS DRG structure. As noted above in 
this section, we refer to the DRGs under the LTCH PPS as MS-LTC-DRGs 
although they are structurally identical to the MS-DRGs used under the 
IPPS.
    The MS-DRGs are organized into 25 major diagnostic categories 
(MDCs), most of which are based on a particular organ system of the 
body; the remainder involve multiple organ systems (such as MDC 22, 
Burns). Within most MDCs, cases are then divided into surgical DRGs and 
medical DRGs. Surgical DRGs are assigned based on a surgical hierarchy 
that orders operating room (O.R.) procedures or groups of O.R. 
procedures by resource intensity. The

[[Page 28001]]

GROUPER software program does not recognize all ICD-9-CM procedure 
codes as procedures affecting DRG assignment. That is, procedures that 
are not surgical (for example, EKG), or minor surgical procedures (for 
example, biopsy of skin and subcutaneous tissue (procedure code 86.11)) 
do not affect the MS-LTC-DRG assignment based on their presence on the 
claim.
    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;
     Additional or secondary diagnoses;
     Surgical procedures;
     Age;
     Sex; and
     Discharge status of the patient.
    Through FY 2010, the number of secondary or additional diagnoses 
and the number of surgical procedures considered for MS-DRG assignment 
was limited to nine and six, respectively. However, for claims 
submitted on the 5010 format beginning January 1, 2011, we increased 
the capacity to process diagnosis and procedure codes up to 25 
diagnoses and 25 procedures. This includes one principal diagnosis and 
up to 24 secondary diagnoses for severity of illness determinations. We 
refer readers to section II.G.11.c. of the preamble of the FY 2011 
IPPS/LTCH PPS final rule for a complete discussion of this change (75 
FR 50127).
    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. (We refer readers to section 
II.G.13. of this preamble for additional information on the annual 
revisions to the ICD-9-CM codes.)
    With respect to the ICD-9-CM coding system, we have been discussing 
the conversion to the ICD-10-CM and the ICD-10-PCS coding systems for 
many years. In prior rules published in the Federal Register (for 
example, section II.G.11. of the FY 2011 IPPS/LTCH PPS final rule (75 
FR 50122 through 50128)), we discussed the implementation date for the 
conversion to the ICD-10-CM and ICD-10-PCS coding systems. We refer 
readers to section II.G.9. of this preamble for additional information 
on the adoption of the ICD-10-CM and ICD-10-PCS systems.
    To create the MS-DRGs (and by extension, the MS-LTC-DRGs), 
individual DRGs were subdivided according to the presence of specific 
secondary diagnoses designated as complications or comorbidities (CCs) 
into one, two, or three levels of severity, depending on the impact of 
the CCs on resources used for those cases. Specifically, there are sets 
of MS-DRGs that are split into 2 or 3 subgroups based on the presence 
or absence of a CC or a major complication and comorbidity (MCC). We 
refer readers to section II.D. of the FY 2008 IPPS final rule with 
comment period for a detailed discussion about the creation of MS-DRGs 
based on severity of illness levels (72 FR 47141 through 47175).
    Medicare contractors (that is, fiscal intermediaries and MACs) 
enter the clinical and demographic information submitted by LTCHs 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, certain cases are selected for further development (74 FR 
43949).
    After screening through the MCE, each claim is classified into the 
appropriate MS-LTC-DRG by the Medicare LTCH GROUPER software on the 
basis of diagnosis and procedure codes and other demographic 
information (age, sex, and discharge status). The GROUPER software used 
under the LTCH PPS is the same GROUPER software program used under the 
IPPS. 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 LTCHs 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.
b. Proposed Changes to the MS-LTC-DRGs for FY 2013
    As specified by our regulations at Sec.  412.517(a), which requires 
that the MS-LTC-DRG classifications and relative weights be updated 
annually and consistent with our historical practice of using the same 
patient classification system under the LTCH PPS as is used under the 
IPPS, we are proposing to update the MS-LTC-DRG classifications 
effective October 1, 2012, through September 30, 2013 (FY 2013) 
consistent with the changes to specific MS-DRG classifications 
presented in section II.G. of this preamble (that is, proposed GROUPER 
Version 30.0). Therefore, the proposed MS-LTC-DRGs for FY 2013 
presented in this proposed rule are the same as the proposed MS-DRGs 
that are being proposed for use under the IPPS for FY 2013. In 
addition, because the proposed MS-LTC-DRGs for FY 2013 are the same as 
the proposed MS-DRGs for FY 2013, the other changes that affect MS-DRG 
(and by extension MS-LTC-DRG) assignments under proposed Version 30.0 
of the GROUPER discussed in section II.G. of the preamble of this 
proposed rule, including the proposed changes to the MCE software and 
proposed changes to the ICD-9-CM coding system, also would be 
applicable under the LTCH PPS for FY 2013.

[[Page 28002]]

3. Development of the Proposed FY 2013 MS-LTC-DRG Relative Weights
a. General Overview of the Development of the MS-LTC-DRG Relative 
Weights
    As we stated in the August 30, 2002 LTCH PPS final rule (67 FR 
55984), 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.
    Although the adoption of the MS-LTC-DRGs resulted in some 
modifications of our historical procedures for assigning relative 
weights in cases of zero volume and/or nonmonotonicity, the basic 
methodology for developing the proposed FY 2013 MS-LTC-DRG relative 
weights in this proposed rule continues to be determined in accordance 
with the general methodology established in the August 30, 2002 LTCH 
PPS final rule (67 FR 55989 through 55991). (For additional details on 
the modifications to our historical procedures for assigning relative 
weights in cases of zero volume and/or nonmonotonicity, we refer 
readers to the FY 2008 IPPS final rule with comment period (72 FR 47289 
through 47295) and the FY 2009 IPPS final rule (73 FR 48542 through 
48550).) 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 calculated 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 a MS-LTC-DRG with a relative 
weight of 2 will, on average, cost twice as much to treat as cases in a 
MS-LTC-DRG with a relative weight of 1.
b. Development of the Proposed MS-LTC-DRG Relative Weights for FY 2013
    Beginning with the FY 2008 update, we established a budget 
neutrality requirement for the annual update to the MS-LTC-DRG 
classifications and relative weights at Sec.  412.517(b) (in 
conjunction with Sec.  412.503), 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 classification and relative weight changes (72 FR 
26882 through 26884). Consistent with Sec.  412.517(b), we are 
proposing to continue to apply our established two-step budget 
neutrality methodology, which is based on the current year MS-LTC-DRG 
classifications and relative weights. (For additional information on 
the established two-step budget neutrality methodology, we refer 
readers to the FY 2008 IPPS final rule (72 FR 47295 through 47296).) 
Thus, for this proposed rule, the proposed annual update to the MS-LTC-
DRG classifications and relative weights for FY 2013 are based on the 
FY 2012 MS-LTC-DRG classifications and relative weights established in 
Table 11 listed in section VI. of the Addendum to the FY 2012 IPPS/LTCH 
PPS final rule (76 FR 51813).
c. Data
    In this proposed rule, to calculate the proposed MS-LTC-DRG 
relative weights for FY 2013, we are proposing to obtain total charges 
from FY 2011 Medicare LTCH bill data from the December 2011 update of 
the FY 2011 MedPAR file, which are the best available data at this 
time, and to use the proposed Version 30.0 of the GROUPER to classify 
LTCH cases. Consistent with our existing methodology, we also are 
proposing that if more recent data become available, we would use those 
data and the finalized Version 30.0 of the GROUPER in establishing the 
FY 2013 MS-LTC-DRG relative weights in the final rule.
    Consistent with our historical methodology, we are proposing to 
exclude 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. Furthermore, consistent with our historical 
practice, we are proposing to continue to exclude Medicare Advantage 
(Part C) claims, which are now included in the MedPAR files, in the 
calculations for the relative weights under the LTCH PPS that are used 
to determine payments for Medicare fee-for-service claims. 
Specifically, under this proposal, we are not using any claims from the 
MedPAR files that have a GHO Paid indicator value of ``1,'' which 
effectively removes Medicare Advantage claims from the relative weight 
calculations (73 FR 48532). Accordingly, in the development of the 
proposed FY 2013 MS-LTC-DRG relative weights in this proposed rule, we 
are proposing to exclude the data of 14 all-inclusive rate providers 
and the 2 LTCHs that are paid in accordance with demonstration projects 
that had claims in the December 2011 update of the FY 2011 MedPAR file, 
as well as any Medicare Advantage claims.
d. Hospital-Specific Relative Value (HSRV) Methodology
    By nature, LTCHs often specialize in certain areas, such as 
ventilator-dependent patients and treatment of infections 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 nonrandom 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, 
consistent with the methodology we have used since the implementation 
of the LTCH PPS, we are proposing to continue to use a hospital-
specific relative value (HSRV) methodology to calculate the proposed 
MS-LTC-DRG relative weights for FY 2013. We believe this method removes 
this hospital-specific source of bias in measuring LTCH average charges 
(67 FR 55985). Specifically, under this proposed methodology, we reduce 
the impact of the variation in charges across providers on any 
particular proposed 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 adjust 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).

[[Page 28003]]

    In accordance with our established methodology, under this 
proposal, we would 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 VII.B.3.g. (Step 3) of this 
preamble) 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 (67 FR 55989).
    Multiplying the resulting ratio 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.
e. Proposed Treatment of Severity Levels in Developing the MS-LTC-DRG 
Relative Weights
    For purposes of determining the MS-LTC-DRG relative weights, under 
our historical methodology, there are 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 1 and 24 
cases based on a given year's claims data) are grouped into quintiles 
(as described below) and assigned the relative weight of the quintile. 
No-volume MS-LTC-DRGs (that is, no cases in the given year's claims 
data are assigned to those MS-LTC-DRGs) are cross-walked to other MS-
LTC-DRGs based on the clinical similarities and assigned the relative 
weight of the cross-walked MS-LTC-DRG (as described in greater detail 
below). In this proposed rule, we are proposing to continue to utilize 
these same three categories of MS-LTC-DRGs for purposes of the 
treatment of severity levels in determining the proposed MS-LTC-DRG 
relative weights for FY 2013. (We provide in-depth discussions of our 
policy regarding weight-setting for proposed low-volume MS-LTC-DRGs in 
section VII.B.3.f. of the preamble of this proposed rule and for 
proposed no-volume MS-LTC-DRGs, under Step 5 in section VII.B.3.g. of 
this preamble.)
    As also noted above, while the LTCH PPS and the IPPS use the same 
patient classification system, the methodology that is used to set the 
DRG relative 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. 
In general, consistent with our existing methodology we are proposing 
to use the following steps to determine the proposed FY 2013 MS-LTC-DRG 
relative weights: (1) if a proposed MS-LTC-DRG has at least 25 cases, 
it is assigned its own proposed relative weight; (2) if a proposed MS-
LTC-DRG has between 1 and 24 cases, it is assigned to a quintile for 
which we compute a proposed relative weight for all of the proposed MS-
LTC-DRGs assigned to that quintile; and (3) if a proposed MS-LTC-DRG 
has no cases, it is cross-walked to another proposed MS-LTC-DRG based 
upon clinical similarities to assign an appropriate proposed relative 
weight (as described below in detail in Step 5 of section VII.B.3.g. of 
this preamble). Furthermore, in determining the proposed FY 2013 MS-
LTC-DRG relative weights, when necessary, we are proposing to make 
adjustments to account for nonmonotonicity, as discussed in greater 
detail below in Step 6 of section VII.B.3.g. of this preamble. We refer 
readers to the discussion in the FY 2010 IPPS/RY LTCH PPS final rule 
for our rationale for including an adjustment for nonmonotonicity (74 
FR 43953 through 43954).
f. Proposed Low-Volume MS-LTC-DRGs
    In order to account for proposed MS-LTC-DRGs with low volume (that 
is, with fewer than 25 LTCH cases), consistent with our existing 
methodology, for purposes of determining the proposed FY 2013 MS-LTC-
DRG relative weights, we are proposing to continue to employ the 
quintile methodology for proposed low-volume MS-LTC-DRGs, such that we 
group the proposed ``low-volume MS-LTC-DRGs'' (that is, proposed MS-
LTC-DRGs that contained between 1 and 24 cases annually) into one of 
five categories (quintiles) based on average charges (67 FR 55984 
through 55995 and 72 FR 47283 through 47288). In determining the 
proposed FY 2013 MS-LTC-DRG relative weights in this proposed rule, in 
cases where the initial assignment of a proposed low-volume MS-LTC-DRG 
to quintiles resulted in nonmonotonicity within a base-DRG, in order to 
ensure appropriate Medicare payments, consistent with our historical 
methodology, we are proposing to make adjustments to the treatment of 
proposed low-volume MS-LTC-DRGs to preserve monotonicity, as discussed 
in detail below in section VII.B.3.g. (Step 6) in this preamble.
    In this proposed rule, using LTCH cases from the December 2011 
update of the FY 2011 MedPAR file, we identified 307 MS-LTC-DRGs that 
contained between 1 and 24 cases. This list of proposed MS-LTC-DRGs was 
then divided into one of the 5 low-volume quintiles, each containing a 
minimum of 61 proposed MS-LTC-DRGs (307/5 = 61 with 2 proposed MS-LTC-
DRG as the remainder). We assigned a proposed low-volume MS-LTC-DRG to 
a specific low-volume quintile by sorting the proposed low-volume MS-
LTC-DRGs in ascending order by average charge in accordance with our 
established methodology. Furthermore, because the number of MS-LTC-DRGs 
with less than 25 cases is not evenly divisible by 5, the average 
charge of the low-volume quintile was used to determine which of the 
proposed low-volume quintiles would contain the 2 additional proposed 
low-volume MS-LTC-DRGs. Specifically, after organizing the MS-LTC-DRGs 
by ascending order by average charge, we assigned the first fifth (1st 
through 55th) of proposed low-volume MS-LTC-DRGs (with the lowest 
average charge) into Quintile 1. The proposed MS-LTC-DRGs with the 
highest average charge cases would be assigned into Quintile 5. Because 
the average charge of the 184th proposed low-volume MS-LTC-DRG in the 
sorted list is closer to the average charge of the 185th proposed low-
volume MS-LTC-DRG (assigned to Quintile 4) than to the average charge 
of the 183rd proposed low-volume MS-LTC-DRG (assigned to Quintile 3), 
we are proposing to assign it to Quintile 4 (such that Quintile 4 
contains 62 proposed low-volume MS-LTC-DRGs before any adjustments for 
nonmonotonicity, as discussed below).

[[Page 28004]]

This process was repeated through the remaining proposed low-volume MS-
LTC-DRGs so that 3 of the 5 low-volume quintiles contain 61 MS-LTC-DRGs 
(Quintiles 1, 2, and 3) and the other 2 low-volume quintiles contain 62 
MS-LTC-DRGs (Quintiles 4 and 5). Table 13A, which is listed in section 
VI. of the Addendum to this proposed rule and is available via the 
Internet, lists the composition of the proposed low-volume quintiles 
for MS-LTC-DRGs for FY 2013.
    Accordingly, in order to determine the proposed FY 2013 relative 
weights for the proposed MS-LTC-DRGs with low volume, we are proposing 
to use the 5 low-volume quintiles described above. The proposed 
composition of each of the 5 low-volume quintiles shown in Table 13A 
(listed in section VI. of the Addendum to this proposed rule and 
available via the Internet) was used in determining the proposed FY 
2013 MS-LTC-DRG relative weights (as shown in Table 11 listed in 
section VI. of the Addendum to this proposed rule and available via the 
Internet). We determined a proposed relative weight and (geometric) 
average length of stay for each of the 5 low-volume quintiles using the 
methodology that we are proposing to apply to the proposed MS-LTC-DRGs 
(25 or more cases), as described in section VII.B.3.g. of this 
preamble. We are proposing to assign the same relative weight and 
average length of stay to each of the proposed low-volume MS-LTC-DRGs 
that made up an individual low-volume quintile. We note that, as this 
system is dynamic, it is possible that the number and specific type of 
MS-LTC-DRGs with a proposed low volume of LTCH cases will vary in the 
future. We are proposing to use the most recent available claims data 
in the MedPAR file to identify proposed low-volume MS-LTC-DRGs and to 
calculate the proposed relative weights based on our methodology.
    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 used in determining the proposed MS-LTC-DRG 
relative weights 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.
g. Steps for Determining the Proposed FY 2013 MS-LTC-DRG Relative 
Weights
    In this proposed rule, we are proposing to determine the FY 2013 
MS-LTC-DRG relative weights based on our existing methodology. (For 
additional information on the original development of this methodology, 
and modifications to it since the adoption of the MS-LTC-DRGs, we refer 
readers to the August 30, 2002 LTCH PPS final rule (67 FR 55989 through 
55995) and the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43951 
through 43966).) In summary, to determine the proposed FY 2013 MS-LTC-
DRG relative weights, we are proposing to group LTCH cases to the 
appropriate proposed MS-LTC-DRG, while taking into account the proposed 
low-volume quintile (as described above). After grouping the cases to 
the appropriate MS-LTC-DRG (or low-volume quintile), we are proposing 
to calculate the proposed FY 2013 relative weights by first removing 
statistical outliers and cases with a length of stay of 7 days or less 
(Steps 1 and 2 below). Next, we are proposing to adjust the number of 
cases in each MS-LTC-DRG (or low-volume quintile) for the effect of SSO 
cases (Step 3 below). After removing statistical outliers (Step 1 
below) and cases with a length of stay of 7 days or less (Step 2 
below), the SSO adjusted discharges and corresponding charges were then 
used to calculate proposed ``relative adjusted weights'' for each 
proposed MS-LTC-DRG (or proposed low-volume quintile) using the HSRV 
method.
    Below we discuss in detail the steps for calculating the proposed 
FY 2013 MS-LTC-DRG relative weights. We note that, as we discussed in 
section VII.B.3.c. of this preamble, we excluded the data of all-
inclusive rate LTCHs, LTCHs that are paid in accordance with 
demonstration projects, and any Medicare Advantage claims in the 
December 2011 update of the FY 2011 MedPAR file.
    Step 1--Remove statistical outliers.
    The first step in the calculation of the proposed FY 2013 MS-LTC-
DRG relative weights is to remove statistical outlier cases. Consistent 
with our historical relative weight methodology, we are proposing to 
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 proposed 
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 proposed relative weights 
could result in an inaccurate relative weight that does not truly 
reflect relative resource use among the proposed MS-LTC-DRGs. (For 
additional information on this step of the relative weight methodology, 
we refer readers to 67 FR 55989 and 74 FR 43959.)
    Step 2--Remove cases with a length of stay of 7 days or less.
    The proposed 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 proposed FY 2013 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 proposed FY 2013 MS-LTC-DRG relative weights, we 
removed LTCH cases with a length of stay of 7 days or less. (For 
additional information on this step of the relative weight methodology, 
we refer readers to 67 FR 55989 and 74 FR 43959.)
    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 the next step in the calculation of the proposed FY 2013 
MS-LTC-DRG relative weights, consistent with our historical relative 
weight methodology, we are proposing to adjust 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).
    We are proposing to make 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 proposed 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 proposed 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

[[Page 28005]]

been equal to the average length of stay of the proposed MS-LTC-DRG.
    Counting SSO cases as full discharges with no adjustment in 
determining the proposed FY 2013 MS-LTC-DRG relative weights would 
lower the proposed FY 2013 MS-LTC-DRG relative weight for affected 
proposed MS-LTC-DRGs because the relatively lower charges of the SSO 
cases would bring down the average charge for all cases within a 
proposed MS-LTC-DRG. This would result in an ``underpayment'' for non-
SSO cases and an ``overpayment'' for SSO cases. Therefore, we are 
proposing to adjust for SSO cases under Sec.  412.529 in this manner 
because it results in more appropriate payments for all LTCH cases. 
(For additional information on this step of the relative weight 
methodology, we refer readers to 67 FR 55989 and 74 FR 43959.)
    Step 4--Calculate the proposed FY 2013 MS-LTC-DRG relative weights 
on an iterative basis.
    Consistent with our historical relative weight methodology, we are 
proposing to calculate the FY 2013 MS-LTC-DRG relative weights using 
the HSRV methodology, which is an iterative process. First, for each 
LTCH case, we are proposing to 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 is then multiplied by the LTCH's 
case-mix index to produce a proposed 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 proposed MS-LTC-DRG, we are proposing to calculate the 
proposed FY 2013 relative weight by dividing the average of the 
adjusted hospital-specific relative charge values (from above) for the 
proposed MS-LTC-DRG by the overall average hospital-specific relative 
charge value across all cases for all LTCHs. Using these recalculated 
proposed MS-LTC-DRG relative weights, each LTCH's average relative 
weight for all of its cases (that is, its case-mix) is calculated by 
dividing the sum of all the LTCH's proposed MS-LTC-DRG relative weights 
by its total number of cases. These LTCHs' hospital-specific relative 
charge values (from above) are then multiplied by these hospital-
specific case-mix indexes. These hospital-specific case-mix adjusted 
relative charge values are then used to calculate a new set of proposed 
MS-LTC-DRG relative weights across all LTCHs. This iterative process is 
continued until there is convergence between the weights produced at 
adjacent steps, for example, when the maximum difference is less than 
0.0001.
    Step 5--Determine a proposed FY 2013 relative weight for MS-LTC-
DRGs with no LTCH cases.
    As we stated above, we are proposing to determine the proposed FY 
2013 relative weight for each proposed MS-LTC-DRG using total Medicare 
allowable total charges reported in the best available LTCH claims data 
(that is, the December 2011 update of the FY 2011 MedPAR file for this 
proposed rule). Using these data, we identified the proposed MS-LTC-
DRGs for which there are no LTCH cases in the database, such that no 
patients who would have been classified to those proposed MS-LTC-DRGs 
were treated in LTCHs during FY 2011 and, therefore, no charge data are 
available for these proposed MS-LTC-DRGs. Thus, in the process of 
determining the proposed MS-LTC-DRG relative weights, we are unable to 
calculate proposed relative weights for the proposed 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 proposed MS-LTC-DRGs may be treated at LTCHs, consistent with our 
historical methodology, we are proposing to assign a proposed relative 
weight to each of the proposed 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). (For additional information on this step of the relative weight 
methodology, we refer readers to 67 FR 55991 and 74 FR 43959 through 
43960.)
    In general, we are proposing to determine proposed FY 2013 relative 
weights for the proposed MS-LTC-DRGs with no LTCH cases in the December 
2011 update of the FY 2011 MedPAR file used in this proposed rule (that 
is, proposed ``no-volume'' MS-LTC-DRGs) by cross-walking each no-volume 
proposed MS-LTC-DRG to another proposed MS-LTC-DRG with a calculated 
proposed relative weight (determined in accordance with the proposed 
methodology described above). Then, the proposed ``no-volume'' MS-LTC-
DRG is assigned the same relative weight (and average length of stay) 
of the proposed MS-LTC-DRG to which it is cross-walked (as described in 
greater detail below).
    Of the 751 proposed MS-LTC-DRGs for FY 2013, we identified 213 
proposed MS-LTC-DRGs for which there are no LTCH cases in the database 
(including the 8 ``transplant'' proposed MS-LTC-DRGs and 2 ``error'' 
proposed MS-LTC-DRGs). As stated above, we are proposing to assign 
relative weights for each of the 213 proposed no-volume MS-LTC-DRGs 
(with the exception of the 8 ``transplant'' proposed MS-LTC-DRGs and 
the 2 ``error'' proposed MS-LTC-DRGs, which are discussed below) based 
on clinical similarity and relative costliness to one of the remaining 
538 (751 - 213 = 538) proposed MS-LTC-DRGs for which we are able to 
determine proposed relative weights based on FY 2011 LTCH claims data 
using the steps described above. (For the remainder of this discussion, 
we refer to the proposed ``cross-walked'' MS-LTC-DRGs as the proposed 
MS-LTC-DRGs to which we crosswalk one of the 213 proposed ``no volume'' 
MS-LTC-DRGs for purposes of determining a proposed relative weight.) 
Then, we assigned the proposed no-volume MS-LTC-DRG the proposed 
relative weight of the proposed cross-walked MS-LTC-DRG. (As explained 
below in Step 6, when necessary, we made adjustments to account for 
nonmonotonicity.)
    For this proposed rule, we are proposing to crosswalk the proposed 
no-volume MS-LTC-DRG to a proposed MS-LTC-DRG for which there are LTCH 
cases in the December 2011 update of the FY 2011 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 evaluated the relative costliness in determining 
the applicable proposed MS-LTC-DRG to which a proposed no-volume MS-
LTC-DRG is cross-walked in order to assign an appropriate proposed 
relative weight for the proposed no-volume MS-LTC-DRGs in FY 2013. (For 
more details on our process for evaluating relative costliness, we 
refer readers to the FY 2010 IPPS/RY 2010 LTCH PPS final rule (73 FR 
48543).) We believe in the rare event that there would be a few LTCH 
cases grouped to one of the proposed no-volume MS-LTC-DRGs in FY 2013, 
the proposed relative weights assigned based on the proposed cross-
walked MS-LTC-DRGs would result in an appropriate LTCH PPS payment 
because the crosswalks, which are based on similar clinical similarity 
and

[[Page 28006]]

relative costliness, generally require equivalent relative resource 
use.
    We are proposing to then assign the proposed relative weight of the 
proposed cross-walked MS-LTC-DRG as the proposed relative weight for 
the proposed no-volume MS-LTC-DRG such that both of these proposed MS-
LTC-DRGs (that is, the proposed no-volume MS-LTC-DRG and the proposed 
cross-walked MS-LTC-DRG) have the same proposed relative weight for FY 
2013. We note that if the proposed cross-walked MS-LTC-DRG had 25 cases 
or more, its proposed relative weight, which is calculated using the 
proposed methodology described in Steps 1 through 4 above, is assigned 
to the proposed no-volume MS-LTC-DRG as well. Similarly, if the 
proposed MS-LTC-DRG to which the no-volume MS-LTC-DRG is cross-walked 
had 24 or less cases and, therefore, is designated to one of the low-
volume quintiles for purposes of determining the proposed relative 
weights, we assigned the proposed relative weight of the applicable 
low-volume quintile to the proposed no-volume MS-LTC-DRG such that both 
of these proposed MS-LTC-DRGs (that is, the proposed no-volume MS-LTC-
DRG and the proposed cross-walked MS-LTC-DRG) have the same proposed 
relative weight for FY 2013. (As we noted above, in the infrequent case 
where nonmonotonicity involving a proposed no-volume MS-LTC-DRG 
results, additional adjustments as described in Step 6 are required in 
order to maintain monotonically increasing relative weights.)
    For this proposed rule, a list of the proposed no-volume MS-LTC-
DRGs and the proposed MS-LTC-DRG to which it is cross-walked (that is, 
the proposed cross-walked MS-LTC-DRG) for FY 2013 is shown in Table 
13B, which is listed in section VI. of the Addendum to this proposed 
rule and is available via the Internet.
    To illustrate this methodology for determining the proposed 
relative weights for the FY 2013 MS-LTC-DRGs with no LTCH cases, we are 
providing the following example, which refers to the proposed no-volume 
MS-LTC-DRGs crosswalk information for FY 2013 provided in Table 13B.
    Example: There are no cases in the FY 2011 MedPAR file used for 
this proposed 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) is similar clinically 
and based on resource use to MS-LTC-DRG 61. Therefore, we assigned the 
same proposed relative weight of MS-LTC-DRG 70 of 0.8135 for FY 2013 to 
MS-LTC-DRG 61 (Table 11, which is listed in section VI. of the Addendum 
to this proposed rule and is available via the Internet).
    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 proposed no-volume 
MS-LTC-DRGs and to determine the proposed relative weights in this 
proposed rule.
    Furthermore, for FY 2013, consistent with our historical relative 
weight methodology, we are proposing to establish proposed MS-LTC-DRG 
relative weights of 0.0000 for the following transplant proposed MS-
LTC-DRGs: Heart Transplant or Implant of Heart Assist System with MCC 
(proposed MS-LTC-DRG 1); Heart Transplant or Implant of Heart Assist 
System without MCC (proposed MS-LTC-DRG 2); Liver Transplant with MCC 
or Intestinal Transplant (proposed MS-LTC-DRG 5); Liver Transplant 
without MCC (proposed MS-LTC-DRG 6); Lung Transplant (proposed MS-LTC-
DRG 7); Simultaneous Pancreas/Kidney Transplant (proposed MS-LTC-DRG 
8); Pancreas Transplant (proposed MS-LTC-DRG 10); and Kidney Transplant 
(proposed 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. At the present time, we include these proposed 
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 proposed MS-LTC-DRGs would be 
administratively burdensome. (For additional information regarding our 
treatment of transplant MS-LTC-DRGs, we refer readers to the RY 2010 
LTCH PPS final rule (74 FR 43964).)
    Step 6--Adjust the proposed FY 2013 MS-LTC-DRG relative weights to 
account for nonmonotonically increasing relative weights.
    As discussed earlier in this section, the MS-DRGs contain base DRGs 
that have been subdivided into one, two, or three severity of illness 
levels. Where there are three severity levels, the most severe level 
has at least one code that is referred to as an MCC (that is, major 
complication or comorbidity). The next lower severity level contains 
cases with at least one code that is a CC (that is, complication or 
comorbidity). Those cases 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 subdivided into either two levels or 
the base DRG is not subdivided. The two-level subdivisions could 
consist of the DRG with CC/MCC and the DRG without CC/MCC. 
Alternatively, the other type of two-level subdivision may consist of 
the DRG with MCC and the DRG 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 
both the ``with CC'' and the ``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, proposed relative weights should increase by severity, from 
lowest to highest. If the proposed relative weights decrease as 
severity increases (that is, if within a base proposed MS-LTC-DRG, a 
proposed MS-LTC-DRG with CC has a higher proposed relative weight than 
one with MCC, or the proposed MS-LTC-DRG ``without CC/MCC'' has a 
higher proposed 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 because the payment for the cases in the higher 
severity level in a base MS-LTC-DRG (which are generally expected to 
have higher resource use and costs) would be lower than the payment for 
cases in a lower severity level within the same base MS-LTC-DRG (which 
are generally expected to have lower resource use and costs). 
Consequently, in determining the proposed FY 2013 MS-LTC-DRG relative 
weights in this proposed rule, consistent with our historical 
methodology, we are proposing to combine proposed MS-LTC-DRG severity 
levels within a base proposed MS-LTC-DRG for the purpose of computing a 
proposed relative weight when necessary to ensure that monotonicity is 
maintained. For a comprehensive description of our existing methodology 
to adjust for nonmonotonicity, we refer readers to the FY 2010 IPPS/RY 
2010 LTCH PPS final rule (74 FR 43964 through 43966). Any adjustments 
for nonmonotonicity

[[Page 28007]]

that were made in determining the proposed FY 2013 MS-LTC-DRG relative 
weights in this proposed rule by applying this methodology are denoted 
in Table 11, which is listed in section VI. of the Addendum to this 
proposed rule and is available via the Internet.
    Step 7-- Calculate the proposed FY 2013 budget neutrality factor.
    In accordance with the regulations at Sec.  412.517(b) (in 
conjunction with Sec.  412.503), 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. (For a detailed 
discussion on the establishment of the budget neutrality requirement 
for the annual update of the MS-LTC-DRG classifications and relative 
weights, we refer readers to the RY 2008 LTCH PPS final rule (72 FR 
26881 and 26882).)
    The MS-LTC-DRG classifications and relative weights are updated 
annually based on the most recent available LTCH claims data to reflect 
changes in relative LTCH resource use (Sec.  412.517(a) in conjunction 
with Sec.  412.503). Under the budget neutrality requirement at Sec.  
412.517(b), 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, we are proposing to update the MS-LTC-
DRG classifications and relative weights for FY 2013 based on the most 
recent available LTCH data, and to apply a budget neutrality adjustment 
in determining the proposed FY 2013 MS-LTC-DRG relative weights.
    To ensure budget neutrality in the proposed update to the MS-LTC-
DRG classifications and relative weights under Sec.  412.517(b), we are 
proposing to continue to use our established two-step budget neutrality 
methodology. In this proposed rule, in the first step of our proposed 
MS-LTC-DRG budget neutrality methodology, for FY 2013, we are proposing 
to calculate and apply a proposed normalization factor to the 
recalibrated proposed relative weights (the result of Steps 1 through 6 
above) to ensure that estimated payments are not influenced by changes 
in the composition of case types or the changes to the classification 
system. That is, the proposed normalization adjustment is intended to 
ensure that the recalibration of the proposed MS-LTC-DRG relative 
weights (that is, the process itself) neither increases nor decreases 
the average CMI.
    To calculate the proposed normalization factor for FY 2013 (the 
first step of our budget neutrality methodology), we are proposing to 
use the following three steps: (1.a.) we used the most recent available 
LTCH claims data (FY 2011) and grouped them using the proposed FY 2013 
GROUPER (Version 30.0) and the proposed recalibrated FY 2013 MS-LTC-DRG 
relative weights (determined in steps 1 through 6 of the Steps for 
Determining the Proposed FY 2013 MS-LTC-DRG Relative Weights above) to 
calculate the average CMI; (1.b.) we grouped the same LTCH claims data 
(FY 2011) using the FY 2012 GROUPER (Version 29.0) and FY 2012 MS-LTC-
DRG relative weights and calculated the average CMI; and (1.c.) we 
computed the ratio of these average CMIs by dividing the average CMI 
for FY 2012 (determined in Step 1.b.) by the average proposed CMI for 
FY 2013 (determined in Step 1.a.). In determining the proposed MS-LTC-
DRG relative weights for FY 2013, each proposed recalibrated MS-LTC-DRG 
relative weight was multiplied by 1.12393 (determined in Step 1.c.) in 
the first step of the budget neutrality methodology, which produced 
proposed ``normalized relative weights.''
    In the second step of our proposed MS-LTC-DRG budget neutrality 
methodology, we are proposing to determine a budget neutrality factor 
to ensure that estimated aggregate LTCH PPS payments (based on the most 
recent available LTCH claims data) after reclassification and 
recalibration (that is, the proposed FY 2013 MS-LTC-DRG classifications 
and relative weights) are equal to estimated aggregate LTCH PPS 
payments before reclassification and recalibration (that is, the FY 
2012 MS-LTC-DRG classifications and relative weights). Accordingly, 
consistent with our existing methodology, we are proposing to use FY 
2011 discharge data to simulate payments and compare estimated 
aggregate LTCH PPS payments using the FY 2012 MS-LTC-DRGs and relative 
weights to estimate aggregate LTCH PPS payments using the proposed FY 
2013 MS-LTC-DRGs and relative weights. Furthermore, consistent with our 
historical policy of using the best available data, we also are 
proposing that if more recent data become available, we would use such 
data to determine the budget neutrality adjustment factor for FY 2013 
in the final rule.
    For this proposed rule, we are proposing to determine the proposed 
FY 2013 budget neutrality adjustment factor using the following three 
steps: (2.a.) we simulated estimated total LTCH PPS payments using the 
proposed normalized relative weights for FY 2013 and proposed GROUPER 
Version 30.0 (as described above); (2.b.) we simulated estimated total 
LTCH PPS payments using the FY 2012 GROUPER (Version 29.0) and the FY 
2012 MS-LTC-DRG relative weights in Table 11 of the Addendum to the FY 
2012 IPPS/LTCH PPS final rule available on the Internet (76 FR 51813); 
and (2.c.) we calculated the ratio of these estimated total LTCH PPS 
payments by dividing the estimated total LTCH PPS payments using the FY 
2012 GROUPER (Version 29.0) and the FY 2012 MS-LTC-DRG relative weights 
(determined in Step 2.b.) by the estimated total LTCH PPS payments 
using the proposed FY 2013 GROUPER (Version 30.0) and the proposed 
normalized MS-LTC-DRG relative weights for FY 2013 (determined in Step 
2.a.). In determining the proposed FY 2013 MS-LTC-DRG relative weights, 
each proposed normalized relative weight was multiplied by a budget 
neutrality factor of 0.9881603 (determined in Step 2.c.) in the second 
step of the proposed budget neutrality methodology to determine the 
proposed budget neutral FY 2013 relative weight for each proposed MS-
LTC-DRG.
    Accordingly, in determining the proposed FY 2013 MS-LTC-DRG 
relative weights in this proposed rule, consistent with our existing 
methodology, we are proposing to apply a normalization factor of 
1.12393 and a budget neutrality factor of 0.9881603 (computed as 
described above). Table 11, which is listed in section VI. of the 
Addendum to this proposed rule and is available via the Internet, lists 
the proposed MS-LTC-DRGs and their respective proposed relative 
weights, geometric mean length of stay, five-sixths of the geometric 
mean length of stay (used to identify SSO cases under Sec.  
412.529(a)), and the proposed ``IPPS Comparable Thresholds'' (used in 
determining SSO payments under Sec.  412.529(c)(3)), for FY 2013. The 
proposed FY 2013 MS-LTC-DRG relative weights in Table 11, which is 
listed in section VI. of the Addendum to this proposed rule and 
available via the Internet, reflect both the proposed normalization 
factor of 1.12393 and the proposed budget neutrality factor of 
0.9881603.

C. Proposed Use of a LTCH-Specific Market Basket Under the LTCH PPS

1. Background
    The input price index (that is, the market basket) that was used to 
develop the LTCH PPS for FY 2003 was the

[[Page 28008]]

``excluded hospital with capital'' market basket. That market basket 
was based on 1997 Medicare cost report data and included data for 
Medicare-participating IRFs, IPFs, LTCHs, cancer hospitals, and 
children's hospitals. Although the term ``market basket'' technically 
describes the mix of goods and services used in providing hospital 
care, this term is also commonly used to denote the input price index 
(that is, cost category weights and price proxies combined) derived 
from that market basket. Accordingly, the term ``market basket,'' as 
used in this section, refers to an input price index.
    Beginning with RY 2007, LTCH PPS payments were updated using a FY 
2002-based market basket reflecting the operating and capital cost 
structures for IRFs, IPFs, and LTCHs (hereafter referred to as the 
rehabilitation, psychiatric, and long-term care (RPL) market basket). 
We excluded cancer and children's hospitals from the RPL market basket 
because their payments are based entirely on reasonable costs subject 
to rate-of-increase limits established under the authority of section 
1886(b) of the Act, which are implemented in regulations at Sec.  
413.40. Those types of hospitals are not paid under a PPS. Also, the FY 
2002 cost structures for cancer and children's hospitals are noticeably 
different from the cost structures for freestanding IRFs, freestanding 
IPFs, and LTCHs. A complete discussion of the FY 2002-based RPL market 
basket appears in the RY 2007 LTCH PPS final rule (71 FR 27810 through 
27817).
    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 21062), 
we expressed our interest in exploring the possibility of creating a 
stand-alone LTCH market basket that only reflects the cost structures 
for LTCHs. However, as we discussed in the FY 2010 IPPS/RY 2010 LTCH 
PPS final rule (74 FR 43967 through 43968), we were in the process of 
conducting further research to assist us in understanding the 
underlying reasons for the variations in costs and cost structures 
between freestanding IRFs and hospital-based IRFs, as well as between 
freestanding IPFs and hospital-based IPFs. At this time, we remain 
unable to sufficiently explain the observed differences in costs and 
cost structures between hospital-based IRFs and freestanding IRFs and 
between hospital-based IPFs and freestanding IPFs.
    In the FY 2012 IPPS/LTCH PPS final rule (76 FR 51756), we finalized 
the rebasing and revising of the FY 2002-based RPL market basket by 
creating and implementing an FY 2008-based RPL market basket. We also 
discussed that we were exploring the viability of creating two separate 
market baskets from the current RPL market basket: One market basket 
would include freestanding IRFs and freestanding IPFs and could be used 
to update payments under both the IPF and IRF payment systems. We 
continue our research in this area. The other market basket would be a 
stand-alone LTCH market basket. We stated that, depending on the 
outcome of our research, we may propose a stand-alone LTCH market 
basket in the next LTCH PPS update cycle. We received several public 
comments in response to the FY 2012 proposed rule, all of which 
supported deriving a stand-alone LTCH market basket (76 FR 51756 
through 51757).
    As we routinely do, we have revisited the issue of the market 
basket used in the LTCH PPS. We previously did not estimate stand-alone 
market baskets for IRFs, IPFs, and LTCHs because of small sample sizes 
for freestanding facilities and the data concerns associated with the 
hospital-based facilities. Although we continue to do research in this 
area, at this time, we believe it is appropriate to move forward with a 
proposal to create a LTCH-specific market basket. This is because we 
believe we have sufficiently robust data to create such a market 
basket, and no longer need to rely on the cost report data from IPPS 
hospitals or from IRFs, IPFs, and LTCHs combined. Specifically, over 
the last several years, the number of LTCH facilities submitting a 
Medicare cost report has increased, helping to address concerns 
regarding the size of the available pool of facilities. The 
completeness and quality of the Medicare cost reports that we have been 
evaluating over the last several years have improved as well. 
Therefore, consistent with our intention to use the latest available 
and complete cost report data, we believe that it would be appropriate 
to create a market basket that would specifically reflect the cost 
structures of LTCHs based on Medicare cost report data for FY 2009, 
which are for cost reporting periods beginning on and after October 1, 
2008, and before October 1, 2009. We are proposing to use data from 
cost reports beginning in FY 2009 because these data are the latest 
available complete data and, therefore, we believe it will enable us to 
accurately calculate cost weights that specifically reflect the cost 
structures of LTCHs. As a result, in this FY 2013 proposed rule, we are 
proposing to create a LTCH-specific market basket based solely on 
Medicare cost report data from LTCHs of which the majority of the 
reports are settled. In the following discussion, we provide an 
overview of the proposed market basket and describe the methodologies 
we are proposing to use for determining the operating and capital 
portions of the proposed FY 2009-based LTCH-specific market basket.
2. Overview of the Proposed FY 2009-Based LTCH-Specific Market Basket
    The proposed FY 2009-based LTCH-specific market basket is a fixed-
weight, Laspeyres-type price index. A Laspeyres price index measures 
the change in price, over time, of the same mix of goods and services 
purchased in the base period. Any changes in the quantity or mix (that 
is, intensity) of goods and services purchased over time are not 
measured.
    The index itself is constructed in three steps. First, a base 
period is selected (in this proposed rule, we are proposing to use FY 
2009 as the base period) and total base period expenditures are 
estimated for a set of mutually exclusive and exhaustive spending 
categories, with the proportion of total costs that each category 
represents being calculated. These proportions are called ``cost 
weights'' or ``expenditure weights.'' Second, each expenditure category 
is matched to an appropriate price or wage variable, referred to as a 
``price proxy.'' In almost every instance, these price proxies are 
derived from publicly available statistical series that are published 
on a consistent schedule (preferably at least on a quarterly basis). 
Finally, the expenditure weight for each cost category is multiplied by 
the level of its respective price proxy. The sum of these products 
(that is, the expenditure weights multiplied by their price levels) for 
all cost categories yields the composite index level of the market 
basket in a given period. Repeating this step for other periods 
produces a series of market basket levels over time. Dividing an index 
level for a given period by an index level for an earlier period 
produces a rate of growth in the input price index over that timeframe.
    As noted above, the market basket is described as a fixed-weight 
index because it represents the change in price over time of a constant 
mix (quantity and intensity) of goods and services needed to furnish 
hospital services. The effects on total expenditures resulting from 
changes in the mix of goods and services purchased subsequent to the 
base period are not measured. For example, a hospital hiring more 
nurses to accommodate the needs of patients would increase the volume 
of goods and services purchased by the hospital, but would not be 
factored into the price

[[Page 28009]]

change measured by a fixed-weight hospital market basket. Only when the 
index is rebased would changes in the quantity and intensity be 
captured, with those changes being reflected in the cost weights. 
Therefore, we rebase the market basket periodically so that the cost 
weights reflect recent changes in the mix of goods and services that 
hospitals purchase (hospital inputs) to furnish inpatient care between 
base periods.
3. Proposed Development of a LTCH-Specific Market Basket
    We are inviting public comments on our proposed methodology, 
discussed below, for deriving a LTCH-specific market basket.
a. Development of Cost Categories
(1) Medicare Cost Reports
    The proposed FY 2009-based LTCH-specific market basket consists of 
several major cost categories derived from the FY 2009 LTCH Medicare 
cost reports as described previously, including wages and salaries, 
employee benefits, contract labor, pharmaceuticals, professional 
liability insurance, capital, and a residual. These FY 2009 Medicare 
cost reports are for cost reporting periods beginning on and after 
October 1, 2008, and before October 1, 2009. We are proposing to use FY 
2009 as the base year because we believe that the FY 2009 Medicare cost 
reports represent the most recent, complete set of Medicare cost report 
data available for LTCHs.
    Medicare cost report data include costs for all patients, including 
Medicare, Medicaid, and private payer. Because our goal is to measure 
cost shares for facilities that serve Medicare beneficiaries, and are 
reflective of case-mix and practice patterns associated with providing 
services to Medicare beneficiaries in LTCHs, we are proposing to limit 
our selection of Medicare cost reports to those from LTCHs that have a 
Medicare average length of stay that is within a comparable range of 
their total facility average length of stay. We believe this provides a 
more accurate reflection of the structure of costs for Medicare covered 
days. Similar to our methodology for the FY 2008-based RPL market 
basket, we are proposing to use the cost reports submitted by LTCHs 
with Medicare average lengths of stay within 15 percent (that is, 15 
percent higher or lower) of the total facility average length of stay 
for the hospital. This is the same edit we applied to derive the FY 
2008-based RPL market basket and generally includes those LTCHs with 
Medicare average length of stay within approximately 5 days of the 
facility average length of stay of the hospital.
    Using this set of Medicare cost reports, we then calculated cost 
weights for six cost categories, and a residual category as represented 
by all other costs, directly from the FY 2009 Medicare cost reports 
submitted by LTCHs (found in Table VII.C-1 below). These Medicare cost 
report cost weights were then supplemented with information obtained 
from other data sources (explained in more detail below) to derive the 
proposed FY 2009-based LTCH-specific market basket cost weights.
    The methodology used to develop the proposed FY 2009-based LTCH-
specific market basket cost weights is generally the same methodology 
used to develop the FY 2008-based RPL market basket cost weights, with 
the exception of the employee benefits and contract labor cost weights. 
For the FY 2008-based RPL market basket, there was an issue with 
obtaining data specifically for employee benefits and contract labor 
from the set of FY 2008 Medicare cost reports, as IRFs, IPFs, and LTCHs 
were not required to complete the Medicare cost report worksheet from 
which these data were collected (Worksheet S3, Parts II and III). As a 
result, only a proportion of the total number of IRFs, IPFs, and LTCHs 
reported data for employee benefits and contract labor; therefore, we 
developed these cost weights for the FY 2008-based RPL market basket 
using data obtained from IPPS Medicare cost reports. However, when we 
reviewed LTCH Medicare cost reports for FY 2009, we found that a 
greater proportion of LTCHs submitted data for employee benefits and 
contract labor (approximately 40 percent of LTCHs, whose total costs 
account for approximately 50 percent of total costs for all LTCHs, 
submitted a cost report) compared to the proportion of IRFs and IPFs 
that submitted these data. We believe that it is better to use the 
LTCH-specific cost report data whenever possible to further our goal to 
create a market basket that represents the cost structures of LTCHs 
serving Medicare beneficiaries. Therefore, we are proposing to use the 
LTCH-specific cost reports to derive the employee benefits and contract 
labor cost weights for the proposed FY 2009-based LTCH-specific market 
basket, as opposed to using the IPPS Medicare cost reports as a proxy, 
as was done for the FY 2008-based RPL market basket.

 Table VII.C-1--Proposed Major Cost Categories and Their Respective Cost
    Weights as Calculated Directly From FY 2009 Medicare Cost Reports
------------------------------------------------------------------------
                                   Proposed FY 2009-based LTCH- specific
      Major cost categories         market basket cost weights  obtained
                                   from Medicare cost reports  (percent)
------------------------------------------------------------------------
Wages and Salaries...............                                 40.407
Employee Benefits................                                  6.984
Contract Labor...................                                  6.947
Professional Liability Insurance                                   0.830
 (Malpractice)...................
Pharmaceuticals..................                                  8.877
Capital..........................                                  9.829
All Other (Residual).............                                 26.126
------------------------------------------------------------------------

 (2) Other Data Sources
    In addition to the data from Medicare cost reports submitted by 
LTCHs, the other data source we are proposing to use to develop the 
proposed FY 2009-based LTCH-specific market basket cost weights is the 
2002 Benchmark Input-Output (I-O) Tables created by the Bureau of 
Economic Analysis (BEA), U.S. Department of Commerce. We are proposing 
to use the 2002 BEA Benchmark I-O data to disaggregate the ``All Other 
(Residual)'' cost category (26.126 percent) into more detailed hospital 
expenditure category shares. We note that we use these data to derive 
most of the CMS market baskets, including the FY 2008-based RPL and

[[Page 28010]]

FY 2006-based IPPS market baskets. The BEA Benchmark I-O accounts 
provide the most detailed information on the goods and services 
purchased by an industry, which allows for a more detailed 
disaggregation of expenses in the market basket for which we can then 
proxy the appropriate price inflation.
    The BEA Benchmark I-O data are generally scheduled for publication 
every 5 years. The most recent data available are for 2002. BEA also 
produces Annual I-O estimates; however, the 2002 Benchmark I-O data 
represent a much more comprehensive and detailed set of data that are 
derived from the 2002 Economic Census. We used the 2002 BEA Benchmark 
I-O data for the FY 2008-based RPL market basket. Because BEA has not 
released new Benchmark I-O data, and we believe the data to be 
comprehensive and complete as indicated above, we are proposing to use 
the 2002 Benchmark I-O data in the proposed FY 2009-based LTCH-specific 
market basket.
    Instead of using the less detailed Annual I-O data, we aged the 
2002 Benchmark I-O data forward to 2009. The methodology we used to age 
the data forward involves applying the annual price changes from the 
respective price proxies to the appropriate cost categories. We repeat 
this practice for each year.
    The ``All Other'' cost category expenditure shares are determined 
as being equal to each category's proportion to total ``All Other'' 
expenditures based on the aged 2002 Benchmark I-O data. For instance, 
if the cost for telephone services represented 10 percent of the sum of 
the ``All Other'' Benchmark I-O hospital expenditures, telephone 
services would represent 10 percent of the ``All Other'' cost category 
of the LTCH-specific market basket.
b. Cost Category Computation
    As stated previously, for the proposed FY 2009-based LTCH-specific 
market basket, we are proposing to use data from the Medicare cost 
reports submitted by LTCHs to derive six major cost categories. The six 
major categories are: Wages and Salaries, Employee Benefits, Contract 
Labor, Professional Liability Insurance, Pharmaceuticals, and Capital, 
as shown above in Table VII.C-1. These represent the most detailed cost 
categories available from the Medicare cost reports, and, as stated 
above, in order to further disaggregate expenses, we then utilize the 
Benchmark I-O data. This is the same methodology used to derive most of 
the CMS market baskets, including the FY 2008-based RPL and FY 2006-
based IPPS market baskets. The proposed FY 2009-based LTCH market 
basket includes the same major cost categories that were included in 
the FY 2008-based RPL market basket (76 FR 51758), and two additional 
categories, Employee Benefits and Contract Labor.
c. Selection of Price Proxies
    After computing the FY 2009 cost weights for the proposed LTCH 
market basket, it was necessary to select appropriate wage and price 
proxies to reflect the rate of price change for each expenditure 
category. With the exception of the proxy for Professional Liability 
Insurance, all of the proxies for the operating portion of the proposed 
FY 2009-based LTCH market basket are based on Bureau of Labor 
Statistics (BLS) data and are grouped into one of the following BLS 
categories:
    Producer Price Indexes--Producer Price Indexes (PPIs) measure price 
changes for goods sold in markets other than the retail market. PPIs 
are preferable price proxies for goods and services that hospitals 
purchase as inputs because PPIs better reflect the actual price changes 
encountered by hospitals. For example, we are proposing to use a PPI 
for prescription drugs, rather than the Consumer Price Index (CPI) for 
prescription drugs, because hospitals generally purchase drugs directly 
from a wholesaler. The PPIs that we are proposing to use measure price 
changes at the final stage of production.
    Consumer Price Indexes--Consumer Price Indexes (CPIs) measure 
change in the prices of final goods and services bought by the typical 
consumer. Because they may not represent the price encountered by a 
producer, we are proposing to use CPIs only if an appropriate PPI is 
not available, or if the expenditures are more like those faced by 
retail consumers in general rather than by purchasers of goods at the 
wholesale level. For example, the CPI for food purchased away from home 
is proposed to be used as a proxy for contracted food services.
    Employment Cost Indexes--Employment Cost Indexes (ECIs) measure the 
rate of change in employee wage rates and employer costs for employee 
benefits per hour worked. These indexes are fixed-weight indexes and 
strictly measure the change in wage rates and employee benefits per 
hour. Appropriately, they are not affected by shifts in employment mix.
    We evaluated the price proxies using the criteria of reliability, 
timeliness, availability, and relevance. Reliability indicates that the 
index is based on valid statistical methods and has low sampling 
variability. Timeliness implies that the proxy is published regularly, 
preferably at least once a quarter. Availability means that the proxy 
is publicly available. Finally, relevance means that the proxy is 
applicable and representative of the cost category weight to which it 
is applied. We believe the proposed PPIs, CPIs, and ECIs selected meet 
these criteria.
    Table VII.C-2 below sets forth the proposed FY 2009-based LTCH-
specific market basket, including the cost categories and their 
respective weights and price proxies. For comparison purposes, the 
corresponding FY 2008-based RPL market basket cost weights also are 
listed. For example, ``Wages and Salaries'' are 46.330 percent of total 
costs in the proposed FY 2009-based LTCH-specific market basket 
compared to 49.447 percent for the FY 2008-based RPL market basket. 
``Employee Benefits'' are 8.008 percent in the proposed FY 2009-based 
LTCH-specific market basket compared to 12.831 percent for the FY 2008-
based RPL market basket. As a result, compensation costs (wages and 
salaries plus employee benefits) for the proposed FY 2009-based LTCH 
market basket are 54.338 percent of total costs compared to 62.278 
percent for the FY 2008-based RPL market basket. We note that the 
``Wages and Salaries'' cost weight contained in Table VII.C-2 (46.330 
percent) differs from that contained in Table VII.C-1 (40.407 percent). 
We attribute this difference to our allocation of the ``Contract 
Labor'' cost weight obtained from the Medicare cost reports (6.947 
percent) proportionately across the ``Wages and Salaries'' and 
``Employee Benefits'' cost weights obtained from the Medicare cost 
reports.
    Following Table VII.C-2 is a summary of the proxies we are 
proposing to use for the operating portion of the proposed FY 2009-
based LTCH-specific market basket. We note that the proxies we are 
proposing for the operating portion of the proposed FY 2009-based LTCH-
specific market basket are the same as those used for the FY 2008-based 
RPL market basket. Because these proposed proxies meet our criteria of 
reliability, timeliness, availability, and relevance, we believe they 
are the best measures of price changes for the cost categories. For 
further discussion on the FY 2008-based RPL market basket, we refer 
readers to the discussion in the FY 2012 IPPS/LTCH PPS final rule (76 
FR 51759). The price proxies proposed for the capital portion of the 
proposed FY 2009-based LTCH market basket are the same as those used 
for the FY 2008-based RPL market basket (prior to any vintage 
weighting), as described in the

[[Page 28011]]

FY 2012 IPPS/LTCH PPS final rule (75 FR 51765), and as described in 
more detail in the capital methodology section in section VII.C.3.d. of 
the preamble of this proposed rule.

   Table VII.C-2--Proposed FY 2009-Based LTCH-Specific Market Basket Cost Categories, Cost Weights, and Price
                        Proxies Compared to FY 2008-Based RPL Market Basket Cost Weights
----------------------------------------------------------------------------------------------------------------
                                               Proposed FY          FY
                                               2009-based    2008[dash]based
              Cost categories                 LTCH-specific     RPL market    Proposed FY 2009-based LTCH market
                                              market basket    basket cost           basket price proxies
                                              cost weights       weights
----------------------------------------------------------------------------------------------------------------
1. Compensation............................          54.338           62.278  ..................................
A. Wages and Salaries \1\..................          46.330           49.447  ECI for Wages and Salaries,
                                                                               Civilian Hospital Workers.
B. Employee Benefits \1\...................           8.008           12.831  ECI for Benefits, Civilian
                                                                               Hospital Workers.
2. Utilities...............................           1.751            1.578  ..................................
A. Electricity.............................           1.367            1.125  PPI for Commercial Electric Power.
B. Fuel, Oil, and Gasoline.................           0.281            0.371  PPI for Petroleum Refineries.
C. Water and Sewage........................           0.103            0.082  CPI-U for Water and Sewerage
                                                                               Maintenance.
3. Professional Liability Insurance........           0.830            0.764  CMS Hospital Professional
                                                                               Liability Insurance Premium
                                                                               Index.
4. All Other Products and Services.........          33.252           26.988  ..................................
A. All Other Products......................          19.531           15.574  ..................................
(1.) Pharmaceuticals.......................           8.877            6.514  PPI for Pharmaceutical
                                                                               Preparations for Human Use
                                                                               (Prescriptions).
(2.) Food: Direct Purchases................           3.409            2.959  PPI for Processed Foods and Feeds.
(3.) Food: Contract Services...............           0.478            0.392  CPI-U for Food Away From Home.
(4.) Chemicals \2\.........................           1.275            1.100  Blend of Chemical PPIs.
(5.) Medical Instruments...................           2.141            1.795  PPI for Medical, Surgical, and
                                                                               Personal Aid Devices.
(6.) Rubber and Plastics...................           1.329            1.131  PPI for Rubber and Plastic
                                                                               Products.
(7.) Paper and Printing Products...........           1.226            1.021  PPI for Converted Paper and
                                                                               Paperboard Products.
(8.) Apparel...............................           0.250            0.210  PPI for Apparel.
(9.) Machinery and Equipment...............           0.127            0.106  PPI for Machinery and Equipment.
(10.) Miscellaneous Products...............           0.419            0.346  PPI for Finished Goods less Food
                                                                               and Energy.
B. All Other Services......................          13.721           11.414  ..................................
(1.) Labor-Related Services................           5.349            4.681  ..................................
(a.) Professional Fees: Labor-Related......           2.256            2.114  ECI for Compensation for
                                                                               Professional and Related
                                                                               Occupations.
(b.) Administrative and Business Support              0.508            0.422  ECI for Compensation for Office
 Services.                                                                     and Administrative Services.
(c.) All Other: Labor-Related Services.....           2.585            2.145  ECI for Compensation for Private
                                                                               Service Occupations.
(2.) Nonlabor-Related Services.............           8.372            6.733  ..................................
(a.) Professional Fees: Nonlabor-Related...           5.332            4.211  ECI for Compensation for
                                                                               Professional and Related
                                                                               Occupations.
(b.) Financial Services....................           1.013            0.853  ECI for Compensation for Financial
                                                                               Activities.
(c.) Telephone Services....................           0.501            0.416  CPI-U for Telephone Services.
(d.) Postage...............................           0.779            0.630  CPI-U for Postage.
(e.) All Other: Nonlabor[dash]Related                 0.747            0.623  CPI-U for All Items less Food and
 Services.                                                                     Energy.
5. Capital-Related Costs...................           9.829            8.392  ..................................
A. Depreciation............................           5.707            5.519  ..................................
(1.) Building and Fixed Equipment..........           3.838            3.286  BEA chained price index for
                                                                               Nonresidential Construction for
                                                                               Hospitals and Special Care
                                                                               Facilities--vintage weighted (20
                                                                               years).
(2.) Movable Equipment.....................           1.869            2.233  PPI for Machinery and Equipment--
                                                                               vintage weighted (8 years).
B. Interest Costs..........................           2.434            1.954  ..................................
(1.) Government/Nonprofit..................           0.702            0.653  Average yield on Domestic
                                                                               Municipal Bonds (Bond Buyer 20
                                                                               bonds)--vintage-weighted (20
                                                                               years).
(2.) For Profit............................           1.732            1.301  Average yield on Moody's Aaa
                                                                               Bonds--vintage-weighted (20
                                                                               years).
C. Other Capital-Related Costs.............           1.688            0.919  CPI-U for Residential Rent.
                                            ---------------------------------
    Total..................................         100.000          100.000  ..................................
----------------------------------------------------------------------------------------------------------------
Note: Detail may not add to total due to rounding.
\1\ Contract Labor is distributed to Wages and Salaries and Employee Benefits based on the share of total
  compensation that each category represents.
\2\ To proxy the Chemicals cost category, we used a blended PPI composed of the PPI for Industrial Gas
  Manufacturing, the PPI for Other Basic Inorganic Chemical Manufacturing, the PPI for Other Basic Organic
  Chemical Manufacturing, and the PPI for Soap and Cleaning Compound Manufacturing. For more detail about this
  proxy, we refer readers to the FY 2012 IPPS/LTCH final rule (76 FR 51761).


[[Page 28012]]

(1) Wages and Salaries
    We are proposing to use the ECI for Wages and Salaries for Hospital 
Workers (All Civilian) (BLS series code CIU1026220000000I) to measure 
the price growth of this cost category.
(2) Employee Benefits
    We are proposing to use the ECI for Employee Benefits for Hospital 
Workers (All Civilian) to measure the price growth of this cost 
category.
(3) Electricity
    We are proposing to use the PPI for Commercial Electric Power (BLS 
series code WPU0542) to measure the price growth of this cost category.
(4) Fuel, Oil, and Gasoline
    We are proposing to use the PPI for Petroleum Refineries (BLS 
series code PCU324110324110) to measure the price growth of this cost 
category. We are proposing this proxy based on the same reasons set 
forth in the FY 2012 IPPS/LTCH final rule when this proxy was adopted 
for use in the FY 2008-based RPL market basket (76 FR 51761).
(5) Water and Sewage
    We are proposing to use the CPI for Water and Sewerage Maintenance 
(All Urban Consumers) (BLS series code CUUR0000SEHG01) to measure the 
price growth of this cost category.
(6) Professional Liability Insurance
    We are proposing to proxy price changes in hospital professional 
liability insurance premiums (PLI) using percentage changes as 
estimated by the CMS Hospital Professional Liability Index. To generate 
these estimates, we collect commercial insurance premiums for a fixed 
level of coverage while holding nonprice factors constant (such as a 
change in the level of coverage). This method is also used to proxy PLI 
price changes in the Medicare Economic Index (75 FR 73268).
(7) Pharmaceuticals
    We are proposing to use the PPI for Pharmaceuticals for Human Use, 
Prescription (BLS series code WPUSI07003) to measure the price growth 
of this cost category.
(8) Food: Direct Purchases
    We are proposing to use the PPI for Processed Foods and Feeds (BLS 
series code WPU02) to measure the price growth of this cost category.
(9) Food: Contract Services
    We are proposing to use the CPI for Food Away From Home (All Urban 
Consumers) (BLS series code CUUR0000SEFV) to measure the price growth 
of this cost category.
(10) Chemicals
    We are proposing to use a blended PPI composed of the PPI for 
Industrial Gas Manufacturing (NAICS 325120) (BLS series code 
PCU325120325120P), the PPI for Other Basic Inorganic Chemical 
Manufacturing (NAICS 325180) (BLS series code PCU32518-32518-), the PPI 
for Other Basic Organic Chemical Manufacturing (NAICS 325190) (BLS 
series code PCU32519-32519), and the PPI for Soap and Cleaning Compound 
Manufacturing (NAICS 325610) (BLS series code PCU32561-32561). We are 
proposing to use this blended index based on the reasons as set forth 
in the FY 2012 IPPS/LTCH PPS final rule (76 FR 51761) when this proxy 
was adopted for use in the FY 2008-based RPL market basket.
(11) Medical Instruments
    We are proposing to use the PPI for Medical, Surgical, and Personal 
Aid Devices (BLS series code WPU156) to measure the price growth of 
this cost category. We are proposing to use this index based on the 
reasons as set forth in the FY 2012 IPPS/LTCH PPS final rule (76 FR 
51761 through 51762) when this proxy was adopted for use in the FY 
2008-based RPL market basket.
(12) Rubber and Plastics
    We are proposing to use the PPI for Rubber and Plastic Products 
(BLS series code WPU07) to measure the price growth of this cost 
category.
(13) Paper and Printing Products
    We are proposing to use the PPI for Converted Paper and Paperboard 
Products (BLS series code WPU0915) to measure the price growth of this 
cost category.
(14) Apparel
    We are proposing to use the PPI for Apparel (BLS series code 
WPU0381) to measure the price growth of this cost category.
(15) Machinery and Equipment
    We are proposing to use the PPI for Machinery and Equipment (BLS 
series code WPU11) to measure the price growth of this cost category.
(16) Miscellaneous Products
    We are proposing to use the PPI for Finished Goods Less Food and 
Energy (BLS series code WPUSOP3500) to measure the price growth of this 
cost category.
(17) Professional Fees: Labor-Related
    We are proposing to use the ECI for Compensation for Professional 
and Related Occupations (Private Industry) (BLS series code 
CIS2020000120000I) to measure the price growth of this category. It 
includes occupations such as legal, accounting, and engineering 
services.
(18) Administrative and Business Support Services
    We are proposing to use the ECI for Compensation for Office and 
Administrative Support Services (Private Industry) (BLS series code 
CIU2010000220000I) to measure the price growth of this category. We 
believe this compensation index appropriately reflects the changing 
price of labor associated with the provision of Administrative and 
Business Support Services.
(19) All Other: Labor-Related Services
    We are proposing to use the ECI for Compensation for Service 
Occupations (Private Industry) (BLS series code CIU2010000300000I) to 
measure the price growth of this cost category.
(20) Professional Fees: Nonlabor-Related
    We are proposing to use the ECI for Compensation for Professional 
and Related Occupations (Private Industry) (BLS series code 
CIS2020000120000I) to measure the price growth of this category. This 
is the same price proxy that we are proposing to use for the 
Professional Fees: Labor-related cost category.
(21) Financial Services
    We are proposing to use the ECI for Compensation for Financial 
Activities (Private Industry) (BLS series code CIU201520A000000I) to 
measure the price growth of this cost category. We believe that this 
compensation index appropriately reflects the changing price of labor 
associated with the provision of Financial Services.
(22) Telephone Services
    We are proposing to use the CPI for Telephone Services (BLS series 
code CUUR0000SEED) to measure the price growth of this cost category.
(23) Postage
    We are proposing to use the CPI for Postage (BLS series code 
CUUR0000SEEC01) to measure the price growth of this cost category.
(24) All Other: Nonlabor-Related Services
    We are proposing to use the CPI for All Items Less Food and Energy 
(BLS

[[Page 28013]]

series code CUUR0000SA0L1E) to measure the price growth of this cost 
category. We believe that using the CPI for All Items Less Food and 
Energy avoids double counting of changes in food and energy prices as 
they are already captured elsewhere in the market basket.
d. Proposed Methodology for the Capital Portion of the Proposed FY 
2009-Based LTCH-Specific Market Basket
    In order to ensure consistency in the proposed FY 2009-based LTCH-
specific market basket, we are proposing to calculate the capital-
related cost weights using the same set of FY 2009 Medicare cost 
reports used to develop the operating cost weights with the same 
length-of-stay edit as applied when calculating the operating cost 
weights as described in section VII.C.3.a. of this preamble. The 
resulting proposed capital weight for the FY 2009 base year is 9.829 
percent. We then separated the total capital cost weight into more 
detailed cost categories.
    From the Medicare cost reports, we are able to derive cost weights 
for depreciation, interest, lease, and other capital-related expenses. 
Lease expenses are unique in that they are not broken out as a separate 
cost category in the proposed LTCH-specific market basket, but rather 
are proportionally distributed among the cost categories of 
Depreciation, Interest, and Other Capital-Related, reflecting the 
assumption that the underlying cost structure of leases is similar to 
that of capital costs in general. As was done in the FY 2008-based RPL 
market basket, we first assumed 10 percent of lease expenses represents 
overhead and assigned those costs to the Other Capital-Related Costs 
category accordingly. The remaining lease expenses were distributed 
across the three cost categories based on the respective weights of 
depreciation, interest, and other capital-related, not including lease 
expenses. This is the same method that was applied in the FY 2008-based 
RPL market basket.
    Depreciation contains two subcategories: (1) Building and Fixed 
Equipment (or Fixed Assets); and (2) Movable Equipment. In the FY 2008-
based RPL market basket, we disaggregated total depreciation expenses 
into Building and Fixed Equipment and Movable Equipment, using 
depreciation data from the FY 2008 Medicare cost reports for 
freestanding IRFs, freestanding IPFs, and LTCHs. Based on FY 2009 LTCH 
Medicare cost report data, we have determined that depreciation costs 
for building and fixed equipment account for 42 percent of total 
depreciation costs, while depreciation costs for movable equipment 
account for 58 percent of total depreciation costs. As mentioned above, 
we are proposing to allocate lease expenses among the ``Depreciation,'' 
``Interest,'' and ``Other Capital'' cost categories. We determined that 
leasing building and fixed equipment expenses account for 80 percent of 
total leasing expenses, while leasing movable equipment expenses 
account for 20 percent of total leasing expenses. We are proposing to 
sum the depreciation and leasing expenses for building and fixed 
equipment together, as well as sum the depreciation and leasing 
expenses for movable equipment. This results in the final building and 
fixed equipment depreciation cost weight (after leasing costs are 
included) being 67 percent of total depreciation costs and the movable 
equipment depreciation cost weight (after leasing costs are included) 
being 33 percent of total depreciation costs. We note that total 
leasing costs account for approximately one-half of total capital 
expenses.
    The total ``Interest'' cost category is split between government/
nonprofit interest and for-profit interest. The FY 2008-based RPL 
market basket allocated 33 percent of the total ``Interest'' cost 
weight to government/nonprofit interest and proxied that category by 
the average yield on domestic municipal bonds. The remaining 67 percent 
of the ``Interest'' cost weight was allocated to for-profit interest 
and was proxied by the average yield on Moody's Aaa bonds (76 FR 
51760). This was based on the FY 2008 Medicare cost report data on 
interest expenses for government/nonprofit and for-profit freestanding 
IRFs, freestanding IPFs, and LTCHs. For the proposed FY 2009-based 
LTCH-specific market basket, we are proposing to use the FY 2009 
Medicare cost report data on interest expenses for government/nonprofit 
and for-profit LTCHs. Based on these data, we calculated a proposed 29/
71 split between government/nonprofit and for-profit interest. We 
believe it is important that this split reflects the latest relative 
cost structure of interest expenses for LTCHs.
    Because capital is acquired and paid for over time, capital 
expenses in any given year are determined by both past and present 
purchases of physical and financial capital. The vintage-weighted 
capital portion of the proposed FY 2009-based LTCH-specific market 
basket is intended to capture the long-term consumption of capital, 
using vintage weights for depreciation (physical capital) and interest 
(financial capital). These vintage weights reflect the proportion of 
capital purchases attributable to each year of the expected life of 
building and fixed equipment, movable equipment, and interest. We are 
proposing to use vintage weights to compute vintage-weighted price 
changes associated with depreciation and interest expense.
    Vintage weights are an integral part of the proposed FY 2009-based 
LTCH-specific market basket. Capital costs are inherently complicated 
and are determined by complex capital purchasing decisions, over time, 
based on such factors as interest rates and debt financing. In 
addition, capital is depreciated over time instead of being consumed in 
the same period it is purchased. By accounting for the vintage nature 
of capital, we are able to provide an accurate and stable annual 
measure of price changes. Annual nonvintage price changes for capital 
are unstable due to the volatility of interest rate changes and, 
therefore, do not reflect the actual annual price changes for Medicare 
capital-related costs. The capital component of the proposed FY 2009-
based LTCH market basket would reflect the underlying stability of the 
capital acquisition process and provides hospitals with the ability to 
plan for changes in capital payments.
    To calculate the vintage weights for depreciation and interest 
expenses, we needed a time series of capital purchases for building and 
fixed equipment and movable equipment. We found no single source that 
provides an appropriate time series of capital purchases by hospitals 
for all of the above components of capital purchases. The early 
Medicare cost reports did not have sufficient capital data to meet this 
need. Data we obtained from the American Hospital Association (AHA) do 
not include annual capital purchases. However, the AHA does provide a 
consistent database of total expenses back to 1963. Consequently, we 
used data from the AHA Panel Survey and the AHA Annual Survey to obtain 
a time series of total expenses for hospitals. We then used data from 
the AHA Panel Survey supplemented with the ratio of depreciation to 
total hospital expenses obtained from the Medicare cost reports to 
derive a trend of annual depreciation expenses for 1963 through 2009.
    In order to estimate capital purchases using data on depreciation 
expenses, the expected life for each cost category (Building and Fixed 
Equipment, Movable Equipment, and Interest) is needed to calculate 
vintage weights. For the FY 2008-based RPL market basket, we used FY 
2008 Medicare cost reports for IPPS hospitals to determine the

[[Page 28014]]

expected life of building and fixed equipment and movable equipment (76 
FR 51763). The FY 2008-based RPL market basket was based on an expected 
average life of building and fixed equipment of 26 years and an 
expected average life of movable equipment of 11 years, which were both 
calculated using data for IPPS hospitals. We believed that this data 
source reflected the latest relative cost structure of depreciation 
expenses for hospitals at the time and was analogous to freestanding 
IRFs, freestanding IPFs, and LTCHs.
    The expected life of any asset can be determined by dividing the 
value of the asset (excluding fully depreciated assets) by its current 
year depreciation amount. This calculation yields the estimated useful 
life of an asset if the rates of depreciation were to continue at 
current year levels, assuming straight-line depreciation. Following a 
similar method to what was applied for the FY 2008-based RPL market 
basket, we are proposing to use the average expected life of building 
and fixed equipment to be equal to 20 years, and the average expected 
life of movable equipment to be 8 years. These expected lives are 
calculated using a 3-year average of data from Medicare cost reports 
for LTCHs for FY 2007 through FY 2009. We believe that using LTCH-
specific data to calculate the expected lives of assets best reflects 
the cost structures of LTCH facilities.
    We also are proposing to use the ``Building and Fixed Equipment'' 
and ``Movable Equipment'' cost weights derived from FY 2009 Medicare 
cost reports for LTCHs to separate the depreciation expenses into 
annual amounts of building and fixed equipment depreciation and movable 
equipment depreciation. Year-end asset costs for building and fixed 
equipment and movable equipment were determined by multiplying the 
annual depreciation amounts by the expected life calculations. We then 
calculated a time series, back to 1963, of annual capital purchases by 
subtracting the previous year's asset costs from the current year's 
asset costs. From this capital purchase time series, we were able to 
calculate the vintage weights for building and fixed equipment and for 
movable equipment. Each of these sets of vintage weights is explained 
in more detail below.
    For the proposed building and fixed equipment vintage weights, we 
used the real annual capital purchase amounts for building and fixed 
equipment to capture the actual amount of the physical acquisition, net 
of the effect of price inflation. This real annual purchase amount for 
building and fixed equipment was produced by deflating the nominal 
annual purchase amount by the building and fixed equipment price proxy, 
BEA's Chained Price Index for Nonresidential Construction for Hospitals 
and Special Care Facilities. This is the same proxy used for the FY 
2008-based RPL market basket. Because building and fixed equipment have 
an expected average life of 20 years, the vintage weights for building 
and fixed equipment are deemed to represent the average purchase 
pattern of building and fixed equipment over 20-year periods. With real 
building and fixed equipment purchase estimates available from 2009 
back to 1963, we averaged twenty-seven 20-year periods to determine the 
average vintage weights for building and fixed equipment that are 
representative of average building and fixed equipment purchase 
patterns over time. Vintage weights for each 20-year period are 
calculated by dividing the real building and fixed capital purchase 
amount in any given year by the total amount of purchases in the 20-
year period. This calculation is done for each year in the 20-year 
period, and for each of the twenty-seven 20-year periods. We used the 
average of each year across the twenty-seven 20-year periods to 
determine the average building and fixed equipment vintage weights for 
the proposed FY 2009-based LTCH-specific market basket.
    For the proposed movable equipment vintage weights, the real annual 
capital purchase amounts for movable equipment were used to capture the 
actual amount of the physical acquisition, net of price inflation. This 
real annual purchase amount for movable equipment was calculated by 
deflating the nominal annual purchase amounts by the movable equipment 
price proxy, the PPI for Machinery and Equipment. This is the same 
proxy used for the FY 2008-based RPL market basket. Based on our 
determination that movable equipment has an expected average life of 8 
years, the vintage weights for movable equipment represent the average 
expenditure for movable equipment over an 8-year period. With real 
movable equipment purchase estimates available from 2009 back to 1963, 
thirty-nine 8-year periods were averaged to determine the average 
vintage weights for movable equipment that are representative of 
average movable equipment purchase patterns over time. Vintage weights 
for each 8-year period are calculated by dividing the real movable 
capital purchase amount for any given year by the total amount of 
purchases in the 8-year period. This calculation was done for each year 
in the 8-year period and for each of the thirty-nine 8-year periods. We 
used the average of each year across the thirty-nine 8-year periods to 
determine the average movable equipment vintage weights for the 
proposed FY 2009-based LTCH-specific market basket.
    For the proposed interest vintage weights, the nominal annual 
capital purchase amounts for total equipment (building and fixed, and 
movable) were used to capture the value of the debt instrument 
(including, but not limited to, mortgages and bonds). We are proposing 
that the vintage weights for interest should represent the average 
purchase pattern of total equipment over 20-year periods, which is the 
average useful life of building and fixed equipment as calculated using 
the LTCH Medicare cost report data. We believe vintage weights for 
interest should represent the average useful life of buildings and 
fixed equipment because, based on previous research described in the FY 
1997 IPPS final rule (61 FR 46198), the expected life of hospital debt 
instruments and the expected life of buildings and fixed equipment are 
similar. With nominal total equipment purchase estimates available from 
2009 back to 1963, twenty-seven 20-year periods were averaged to 
determine the average vintage weights for interest that are 
representative of average capital purchase patterns over time. Vintage 
weights for each 20-year period are calculated by dividing the nominal 
total capital purchase amount for any given year by the total amount of 
purchases in the 20-year period. This calculation is done for each year 
in the 20-year period and for each of the twenty-seven 20-year periods. 
We used the average of each year across the twenty-seven 20-year 
periods to determine the average interest vintage weights for the 
proposed FY 2009-based LTCH-specific market basket. The vintage weights 
for the capital portion of the FY 2008-based RPL market basket and the 
proposed FY 2009-based LTCH-specific market basket are presented in 
Table VII.C-4 below.

[[Page 28015]]



     Table VII.C-4--FY 2008 RPL and Proposed FY 2009 LTCH Vintage Weights for Capital-Related Price Proxies
----------------------------------------------------------------------------------------------------------------
                                       Building and fixed         Movable equipment             Interest
                                            equipment        ---------------------------------------------------
               Year                --------------------------
                                    FY 2008  26  FY 2009  20  FY 2008  11   FY 2009  8  FY 2008  26  FY 2009  20
                                       years        years        years        years        years        years
----------------------------------------------------------------------------------------------------------------
1.................................        0.021        0.034        0.071        0.102        0.010        0.021
2.................................        0.023        0.037        0.075        0.108        0.012        0.024
3.................................        0.025        0.039        0.080        0.114        0.014        0.026
4.................................        0.027        0.042        0.083        0.123        0.016        0.029
5.................................        0.028        0.043        0.085        0.129        0.018        0.032
6.................................        0.030        0.045        0.089        0.134        0.020        0.035
7.................................        0.031        0.046        0.092        0.142        0.021        0.037
8.................................        0.033        0.047        0.098        0.149        0.024        0.040
9.................................        0.035        0.049        0.103  ...........        0.026        0.043
10................................        0.037        0.051        0.109  ...........        0.029        0.047
11................................        0.039        0.053        0.116  ...........        0.033        0.050
12................................        0.041        0.053  ...........  ...........        0.035        0.053
13................................        0.042        0.053  ...........  ...........        0.038        0.055
14................................        0.043        0.054  ...........  ...........        0.041        0.059
15................................        0.044        0.055  ...........  ...........        0.043        0.062
16................................        0.045        0.057  ...........  ...........        0.046        0.068
17................................        0.046        0.059  ...........  ...........        0.049        0.073
18................................        0.047        0.059  ...........  ...........        0.052        0.077
19................................        0.047        0.061  ...........  ...........        0.053        0.082
20................................        0.045        0.062  ...........  ...........        0.053        0.086
21................................        0.045  ...........  ...........  ...........        0.055  ...........
22................................        0.045  ...........  ...........  ...........        0.056  ...........
23................................        0.046  ...........  ...........  ...........        0.060  ...........
24................................        0.046  ...........  ...........  ...........        0.063  ...........
25................................        0.045  ...........  ...........  ...........        0.064  ...........
26................................        0.046  ...........  ...........  ...........        0.068  ...........
                                   -----------------------------------------------------------------------------
    Total.........................        1.000        1.000        1.000        1.000        1.000        1.000
----------------------------------------------------------------------------------------------------------------
Note: Numbers may not add to total due to rounding.

    After the capital cost category weights were computed, it was 
necessary to select appropriate price proxies to reflect the rate-of-
increase for each expenditure category. We are proposing to use the 
same price proxies (prior to any vintage weighting) for the capital 
portion of the proposed FY 2009-based LTCH market basket that were used 
in the FY 2008-based RPL market. We believe these are the most 
appropriate proxies for hospital capital costs that meet our selection 
criteria of relevance, timeliness, availability, and reliability.
    The price proxies (prior to any vintage weighting) for each of the 
capital cost categories, as shown in Table VII.C-2 above, are the same 
as those used for the FY 2008-based RPL market basket, as described in 
the FY 2012 IPPS/LTCH PPS final rule (76 FR 51765), as well as the FY 
2006-based Capital Input Price Index (CIPI) as described in the FY 2010 
IPPS/RY 2010 LTCH PPS final rule (74 FR 43857). The process of creating 
vintage-weighted price proxies requires applying the vintage weights to 
the price proxy index where the last applied vintage weight in Table 
VII.C-4 is applied to the most recent data point. We have provided on 
the CMS Web site an example of how the vintage weighting price proxies 
are calculated, using example vintage weights and example price 
indices. The example can be found at the following link: http://www.cms.gov/MedicareProgramRatesStats/05_MarketBasketResearch.asp#TopOfPage in the zip file titled ``Weight 
Calculations as described in the IPPS FY 2010 Proposed Rule''.
e. Proposed FY 2013 Market Basket Update for LTCHs
    For FY 2013 (that is, October 1, 2012, through September 30, 2013), 
we are proposing to use an estimate of the proposed FY 2009-based LTCH-
specific market basket to update payments to LTCHs based on the best 
available data. Consistent with historical practice, we estimate the 
LTCH market basket update for the LTCH PPS based on IHS Global Insight, 
Inc.'s (IGI's) forecast using the most recent available data. IGI is a 
nationally recognized economic and financial forecasting firm that 
contracts with CMS to forecast the components of the market baskets.
    Based on IGI's first quarter 2012 forecast with history through the 
fourth quarter of 2011, the projected market basket update for FY 2013 
is 3.0 percent. Therefore, consistent with our historical practice of 
estimating market basket increases based on the best available data, we 
are proposing a market basket update of 3.0 percent for FY 2013. 
Furthermore, because the proposed FY 2013 annual update is based on the 
most recent market basket estimate for the 12-month period (currently 
3.0 percent), we also are proposing that if more recent data are 
subsequently available (for example, a more recent estimate of the 
market basket), we would use such data, if appropriate, to determine 
the FY 2013 annual update in the final rule. (As discussed in greater 
detail in section V.A.2. of the Addendum to this proposed rule, we are 
proposing an annual update of 2.1 percent to the LTCH PPS standard 
Federal rate for FY 2013 under proposed Sec.  412.523(c)(3)(viii) of 
the regulations.)
    Using the current FY 2008-based RPL market basket and IGI's first 
quarter 2012 forecast for the market basket components, the FY 2013 
market basket update would be 3.0 percent (before taking into account 
any statutory adjustment). Table VII.C-5 below compares the FY 2008-
based RPL market basket and the proposed FY

[[Page 28016]]

2009-based LTCH-specific market basket percent changes.

  Table VII.C-5--FY 2008-Based RPL Market Basket and Proposed FY 2009-
    Based LTCH Market Basket Percent Changes; FY 2008 Through FY 2015
------------------------------------------------------------------------
                                                        Proposed FY 2009-
                                        FY 2008-based      based LTCH
          Fiscal year (FY)               RPL market       market basket
                                        basket index     index  percent
                                       percent change        change
------------------------------------------------------------------------
Historical data:
    FY 2008.........................               3.7               3.9
    FY 2009.........................               2.7               2.8
    FY 2010.........................               2.2               2.2
    FY 2011.........................               2.5               2.6
    Average 2008-2011...............               2.8               2.9
Forecast:
    FY 2012.........................               2.4               2.5
    FY 2013.........................               3.0               3.0
    FY 2014.........................               3.1               3.1
    FY 2015.........................               3.2               3.1
    Average 2012-2015...............               2.9               2.9
------------------------------------------------------------------------
Note that these market basket percent changes do not include any further
  adjustments as may be statutorily required.
Source: IHS Global Insight, Inc. first quarter 2012 forecast.

    For FY 2013, the proposed FY 2009-based LTCH-specific market basket 
update (as measured by percentage increase) is currently forecasted to 
be the same as the market basket update based on the FY 2008-based RPL 
market basket at 3.0 percent. The lower total compensation weight in 
the proposed FY 2009-based LTCH-specific market basket (54.338 percent) 
relative to the FY 2008-based RPL market basket (62.278 percent), 
absent other factors, would have resulted in a slightly lower market 
basket update for FY 2013 using the proposed FY 2009-based LTCH market 
basket. However, this impact is partially offset by the impact of the 
larger cost weights associated with the Pharmaceuticals and All Other 
Services cost categories. The net effect of these offsetting factors is 
that the market basket update is currently forecasted to be the same 
for FY 2013 based on the current FY 2008-based RPL market basket and 
the proposed FY 2009-based LTCH-specific market basket. As stated 
above, we are proposing that if more recent data (such as a revised IGI 
forecast) are subsequently available, we would use such data, if 
appropriate, to determine the FY 2013 annual update in the final rule.
f. Proposed FY 2013 Labor-Related Share
    As discussed in section V.B. of the Addendum to this proposed rule, 
under the authority of section 123 of the BBRA as amended by section 
307(b) of the BIPA, we established an adjustment to the LTCH PPS 
payments to account for differences in LTCH area wage levels (Sec.  
412.525(c)). The labor-related portion of the LTCH PPS standard Federal 
rate, hereafter referred to as the labor-related share, is adjusted to 
account for geographic differences in area wage levels by applying the 
applicable LTCH PPS wage index.
    The labor-related share is determined by identifying the national 
average proportion of total costs that are related to, influenced by, 
or vary with the local labor market. As discussed in more detail below 
and similar to the FY 2008-based RPL market basket and FY 2006 IPPS 
market basket (74 FR 43850), we classify a cost category as labor-
related and include it in the labor-related share if the cost category 
is defined as being labor-intensive and its cost varies with the local 
labor market. Given this, based on our definition of the labor-related 
share, we are proposing to include in the labor-related share the sum 
of the relative importance of Wages and Salaries, Employee Benefits, 
Professional Fees: Labor-related, Administrative and Business Support 
Services, All Other: Labor-related Services, and a portion of the 
Capital-Related cost weight. These are the same cost categories that 
were proposed and adopted in the FY 2012 labor-related share using the 
FY 2008-based RPL market basket, as we continue to believe these 
categories meet our criteria of being labor-intensive and whose costs 
vary with the local labor market. For a more detailed discussion of the 
selection of cost categories for inclusion in the FY 2012 labor-related 
share, we refer readers to the FY 2012 IPPS/LTCH PPS final rule (76 FR 
51766). We note that, similar to the FY 2008-based RPL market basket 
and as described above, the wages and salaries and benefit cost weights 
reflect allocated contract labor costs.
    For the FY 2008-based RPL market basket rebasing, in an effort to 
more accurately determine the share of professional fees for services 
such as accounting and auditing services, engineering services, legal 
services, and management and consulting services that should be 
included in the labor-related share, we obtained data from a survey of 
IPPS hospitals regarding the proportion of those fees that go to 
companies that are located beyond their own local labor market. The 
results from this survey were then used to separate a portion of the 
Professional Fees cost category into labor-related and nonlabor-related 
costs. These results and our allocation methodology are discussed in 
more detail in the FY 2012 IPPS/LTCH PPS final rule (76 FR 51766). For 
the proposed FY 2009-based LTCH-specific market basket, we are 
proposing to apply these survey results using this same methodology to 
separate the Professional Fees category into Professional Fees: Labor-
related and Professional Fees: Nonlabor-related cost categories. We 
believe using the survey results serves as an appropriate proxy for the 
purchasing patterns of professional services for LTCHs as they also are 
providers of institutional care.
    In addition to the professional services listed above, we also are 
proposing to classify expenses under NAICS 55, Management of Companies 
and Enterprises, into the Professional Fees: Labor-related and 
Professional Fees: Nonlabor-related cost categories, as was done for 
the FY 2008-based RPL

[[Page 28017]]

market basket. The NAICS 55 industry is mostly comprised of corporate, 
subsidiary, and regional managing offices (otherwise referred to as 
home offices). As stated above, we classify a cost category as labor-
related and include it in the labor-related share if the cost category 
is labor-intensive and if its costs vary with the local labor market. 
We believe many of the costs associated with NAICS 55 are labor-
intensive and vary with the local labor market. However, data indicate 
that not all LTCHs with home offices have home offices located in their 
local labor market. Therefore, we are proposing to include in the 
labor-related share only a proportion of the NAICS 55 expenses based on 
the methodology described below.
    For the FY 2008-based RPL market basket, we used data primarily 
from the Medicare cost reports and a CMS database of Home Office 
Medicare Records (HOMER) (a database that provides city and state 
information (addresses) for home offices) and determined that 19 
percent of the total number of freestanding IRFs, freestanding IPFs, 
and LTCHs that had home offices had those home offices located in their 
respective local labor markets--defined as being in the same 
Metropolitan Statistical Area (MSA). For a detailed discussion of this 
analysis, we refer readers to the FY 2012 IPPS/LTCH PPS final rule (76 
FR 51766 through 51767).
    For the proposed FY 2009-based LTCH-specific market basket, we 
conducted a similar analysis of home office data. However, instead of 
using data on freestanding IRF, freestanding IPF, and LTCHs, we began 
with the initial set of LTCH Medicare cost reports that were used to 
derive the cost weights for the proposed FY 2009-based LTCH-specific 
market basket. For consistency, we believe it is important for our 
analysis on home office data to be conducted on the same LTCHs used to 
derive the proposed FY 2009 LTCH market basket cost weights.
    The Medicare cost report requires a hospital to report information 
regarding their home office provider. Approximately 82 percent of LTCHs 
reported some type of home office information on their Medicare cost 
report for FY 2009 (for example, home office number, city, state, zip 
code, or name). For the majority of these providers, we were able to 
identify in which MSA the LTCH's home office was located using the 
HOMER database and the Medicare cost reports. We then compared the home 
office MSA with the MSA in which the LTCH was located.
    We found that 13 percent of the LTCHs with home offices had those 
home offices located in the same MSA as their facilities. We then 
concluded that these providers were located in the same local labor 
market as their home office. As a result, we are proposing to apportion 
the NAICS 55 expense data by this percentage. Thus, we are proposing to 
classify 13 percent of these costs into the ``Professional Fees: Labor-
related Services'' cost category and the remaining 87 percent into the 
``Professional Fees: Nonlabor-related Services'' cost category.
    Using this proposed method and the IGI forecast for the first 
quarter 2012 of the proposed FY 2009-based LTCH-specific market basket, 
the proposed LTCH labor-related share for FY 2013 would be the sum of 
the FY 2013 relative importance of each labor-related cost category. 
Consistent with our proposal to update the labor-related share with the 
most recent available data, the labor-related share for this proposed 
rule reflects IGI's first quarter 2012 forecast of the proposed FY 
2009-based LTCH-specific market basket. Table VII.C-6 below shows the 
proposed FY 2013 relative importance labor-related share using the 
proposed FY 2009-based LTCH-specific market basket and the FY 2012 
relative importance labor-related share using the FY 2008-based RPL 
market basket.

   Table VII.C-6--Comparison of the FY 2012 Relative Importance Labor-
   Related Share Based on the FY 2008-Based RPL Market Basket and the
  Proposed FY 2013 Relative Importance Labor-Related Share Based on the
                Proposed FY 2009-Based LTCH Market Basket
------------------------------------------------------------------------
                                                        Proposed FY 2013
                                      FY 2012 relative      relative
                                      importance labor- importance labor-
                                        related share     related share
                                             \1\               \2\
------------------------------------------------------------------------
Wages and Salaries..................            48.984            45.604
Employee Benefits...................            12.998             8.143
Professional Fees: Labor-Related....             2.072             2.216
Administrative and Business Support              0.416             0.502
 Services...........................
All Other: Labor-Related Services...             2.094             2.513
                                     -----------------------------------
    Subtotal........................            66.564            58.978
Labor-Related Portion of Capital                 3.635             4.239
 Costs (46%)........................
                                     -----------------------------------
    Total Labor-Related Share.......            70.199            63.217
------------------------------------------------------------------------
\1\ Published in the FY 2012 IPPS/LTCH PPS final rule (76 FR 51767) and
  based on the second quarter 2011 IGI forecast.
\2\ Based on the first quarter 2012 IGI forecast.

    The proposed labor-related share for FY 2013 is the sum of the 
proposed FY 2013 relative importance of each labor-related cost 
category, and would reflect the different rates of price change for 
these cost categories between the base year (FY 2009) and FY 2013. The 
sum of the proposed relative importance for FY 2013 for operating costs 
(Wages and Salaries, Employee Benefits, Professional Fees: Labor-
related, Administrative and Business Support Services, and All Other: 
Labor-related Services) would be 58.978 percent, as shown in Table 
VII.C-6 above. We are proposing that the portion of capital-related 
costs that is influenced by the local labor market is estimated to be 
46 percent, which is the same percentage applied to the FY 2008-based 
RPL market basket. Because the relative importance for capital-related 
costs would be 9.216 percent of the proposed FY 2009-based LTCH-
specific market basket in FY 2013, we are proposing to take 46 percent 
of 9.216 percent to determine the proposed labor-related share of 
capital-related costs for FY 2013 (.46 * 9.216). The result would be 
4.239 percent, which we are proposing to add to 58.978 percent for the 
operating cost amount to determine the total proposed labor-related 
share for FY

[[Page 28018]]

2013. Thus, the labor-related share that we are proposing to use for 
the LTCH PPS in FY 2013 would be 63.217 percent. This proposed labor-
related share is determined using the same methodology as employed in 
calculating all previous LTCH labor-related shares.

D. Proposed Changes to the LTCH Payment Rates for FY 2013 and Other 
Proposed Changes to the LTCH PPS for FY 2013

1. Overview of Development of the LTCH Payment Rates
    The basic methodology for determining LTCH PPS Federal prospective 
payment rates is set forth at Sec.  412.515 through Sec.  412.536. In 
this section, we discuss the factors that we are proposing to use to 
update the LTCH PPS standard Federal rate for FY 2013, that is, 
effective for LTCH discharges occurring on or after October 1, 2012 
through September 30, 2013.
    For further details on the development of the FY 2003 standard 
Federal rate when the LTCH PPS was initially implemented, we refer 
readers to the August 30, 2002 LTCH PPS final rule (67 FR 56027 through 
56037). For subsequent updates to the LTCH PPS Federal rate, we refer 
readers to the following final rules: RY 2004 LTCH PPS final rule (68 
FR 34134 through 34140); RY 2005 LTCH PPS final rule (68 FR 25682 
through 25684); RY 2006 LTCH PPS final rule (70 FR 24179 through 
24180); RY 2007 LTCH PPS final rule (71 FR 27819 through 27827); RY 
2008 LTCH PPS final rule (72 FR 26870 through 27029); RY 2009 LTCH PPS 
final rule (73 FR 26800 through 26804); RY 2010 LTCH PPS final rule (74 
FR 44021 through 44030); FY 2011 IPPS/LTCH PPS final rule (75 FR 50443 
through 50444); and FY 2012 IPPS/LTCH PPS final rule (76 FR 51769 
through 51773).
    The proposed update to the LTCH PPS standard Federal rate for FY 
2013 is presented in section V.A. of the Addendum to this proposed 
rule. The components of the proposed annual market basket update to the 
LTCH PPS standard Federal rate for FY 2013 are discussed below. 
Furthermore, as discussed in section VII.E.4. of this preamble, for FY 
2013, in addition to the proposed update factor, we are proposing to 
make a one-time prospective adjustment to the standard Federal rate for 
FY 2013 so that the effect of any significant difference between the 
data used in the original computations of budget neutrality for FY 2003 
and more recent data to determine budget neutrality for FY 2003 is not 
perpetuated in the prospective payment rates for future years under 
existing Sec.  412.523(d)(3) (this adjustment would not apply to 
payments made for discharges occurring on or before December 28, 2012, 
consistent with the statute). Furthermore, as discussed in section V.A. 
of the Addendum of this proposed rule, we are proposing to make an 
adjustment to the standard Federal rate to account for the estimated 
effect of the proposed changes to the area wage level adjustment for FY 
2013 on estimated aggregate LTCH PPS payments, in accordance with Sec.  
412.523(d)(4).
2. Proposed FY 2013 LTCH PPS Annual Market Basket Update
a. Overview
    Historically, the Medicare program has used a market basket to 
account for price increases in the services furnished by providers. The 
market basket used for the LTCH PPS includes both operating and 
capital-related costs of LTCHs because the LTCH PPS uses a single 
payment rate for both operating and capital-related costs. As discussed 
in section VII.C. of this preamble, we are proposing to adopt the newly 
created FY 2009-based LTCH-specific market basket for use under the 
LTCH PPS beginning in FY 2013. For additional details on the historical 
development of the market basket used under the LTCH PPS, we refer 
readers to section VII.C.1. of this preamble.
    Section 3401(c) of the Affordable Care Act provides for certain 
adjustments to any annual update to the standard Federal rate and 
refers to the timeframes associated with such adjustments as a ``rate 
year.'' (The adjustments are discussed in more detail in section 
VII.D.2.b. of this preamble.) We note that because the annual update to 
the LTCH PPS policies, rates, and factors now occurs on October 1, we 
adopted the term ``fiscal year'' (FY) rather than ``rate year'' (RY) 
under the LTCH PPS beginning October 1, 2010, to conform with the 
standard definition of the Federal fiscal year (October 1 through 
September 30) used by other PPSs, such as the IPPS (75 FR 50396 through 
50397). Although the language of sections 3401(c), 10319, and 1105(b) 
of the Affordable Care Act refers to years 2010 and thereafter under 
the LTCH PPS as ``rate year,'' consistent with our change in the 
terminology used under the LTCH PPS from ``rate year'' to ``fiscal 
year,'' for purposes of clarity, when discussing the annual update for 
the LTCH PPS, including the provisions of the Affordable Care Act, we 
employ ``fiscal year'' rather than ``rate year'' for 2011 and 
subsequent years.
b. Revision of Certain Market Basket Updates as Required by the 
Affordable Care Act
    Section 1886(m)(3)(A) of the Act, as added by section 3401(c) of 
the Affordable Care Act, specifies that, for rate year 2010 and each 
subsequent rate year through 2019, any annual update to the standard 
Federal rate shall be reduced:
     For rate year 2010 through 2019, by the ``other 
adjustment'' specified in sections 1886(m)(3)(A)(ii) and (m)(4) of the 
Act; and
     For rate year 2012 and each subsequent year, by the 
productivity adjustment (which we refer to as ``the multifactor 
productivity (MFP) adjustment'') described in section 
1886(b)(3)(B)(xi)(II) of the Act.
    Section 1886(m)(3)(B) of the Act provides that the application of 
paragraph (3) of section 1886(m) of the Act may result in the annual 
update being less than zero for a rate year, and may result in payment 
rates for a rate year being less than such payment rates for the 
preceding rate year.
    As discussed in the FY 2012 IPPS/LTCH PPS final rule (76 FR 51770 
through 51771), section 1886(b)(3)(B)(xi)(II) of the Act defines the 
MFP adjustment as equal to the 10-year moving average of changes in 
annual economy-wide, private nonfarm business multifactor productivity 
(as projected by the Secretary for the 10-year period ending with the 
applicable fiscal year, calendar year, cost reporting period, or other 
annual period). As discussed in the FY 2012 IPPS/LTCH PPS final rule 
(76 FR 51691 through 51692 and 51771), we proposed and finalized that 
the end of the 10-year moving average of changes in the MFP should 
coincide with the end of the appropriate FY update period. Therefore, 
the MFP adjustment that is applied in determining any annual update to 
the LTCH PPS standard Federal rate is the same adjustment that is 
required to be applied in determining the applicable percentage 
increase under the IPPS under section 1886(b)(3)(B)(i) of the Act as 
they are both based on a fiscal year. As we established in that same 
final rule, the MFP adjustment is derived using a projection of MFP 
that is currently produced by IHS Global Insight, Inc. We established 
our methodology for calculating and applying the MFP adjustment in 
determining any annual update to the LTCH PPS standard Federal rate in 
the FY 2012 IPPS/LTCH PPS final rule (76 FR 51771 through 51772). In 
this proposed rule, we are not proposing to change our methodology

[[Page 28019]]

for calculating and applying the MFP adjustment to determine the annual 
update to the LTCH PPS standard Federal rate for FY 2013. (For details 
on the development of the MFP, including our finalized methodology for 
calculating and applying the MFP adjustment, we refer readers to the FY 
2012 IPPS/LTCH PPS final rule (76 FR 51689 through 51692).)
c. Proposed Market Basket Under the LTCH PPS for FY 2013
    As discussed above in section VII.C. of this preamble, under the 
authority of section 123 of the BBRA as amended by section 307(b) of 
the BIPA, we are proposing to adopt a newly created FY 2009-based LTCH-
specific market basket for use under the LTCH PPS beginning in FY 2013 
because we believe it appropriately reflects the cost structure of 
LTCHs. The proposed FY 2009-based LTCH-specific market basket is based 
solely on the Medicare cost report data submitted by LTCHs and, 
therefore, specifically reflects the cost structures of only LTCHs.
d. Proposed Annual Market Basket Update for LTCHs for FY 2013
    Consistent with our historical practice, we are proposing to 
estimate the proposed market basket update and the proposed MFP 
adjustment based on IGI's forecast using the most recent available 
data. As discussed in section VII.C.3.e. of this preamble, based on 
IGI's first quarter 2012 forecast, the proposed FY 2013 full market 
basket estimate for the LTCH PPS using the proposed FY 2009-based LTCH-
specific market basket is 3.0 percent. Using our established 
methodology for determining the MFP adjustment (discussed in section 
VII.D.2.b. of this preamble), the current estimate of the proposed MFP 
adjustment for FY 2013 based on IGI's first quarter 2012 forecast is 
0.8 percent. Consistent with our historical practice of using the best 
available data, we are proposing that if more recent data become 
available to determine the market basket estimate or the MFP 
adjustment, we would use such data for the final rule, if appropriate.
    For FY 2013, section 1886(m)(3)(A)(i) of the Act requires that any 
annual update to the standard Federal rate be reduced by the 
productivity adjustment (``the MFP adjustment'') described in section 
1886(b)(3)(B)(xi)(II) of the Act. Consistent with the statute, we are 
proposing to reduce the full FY 2013 market basket update by the FY 
2013 MFP adjustment. To determine the market basket update for LTCHs 
for FY 2013, as reduced by the MFP adjustment, consistent with the 
approach we established in the FY 2012 IPPS/LTCH PPS final rule (76 FR 
51771), we are proposing to subtract the FY 2013 MFP adjustment from 
the FY 2013 market basket update. Furthermore, sections 
1886(m)(3)(A)(ii) and 1886(m)(4)(C) of the Act requires that any annual 
update to the standard Federal rate for FY 2013 be reduced by the 
``other adjustment'' described in paragraph (4), which is 0.1 
percentage point for FY 2013. Therefore, following application of the 
productivity adjustment, we are proposing to reduce the adjusted market 
basket update (that is, the full market basket increase less the MFP 
adjustment) by the ``other adjustment'' specified by sections 
1886(m)(3)(A)(ii) and 1886(m)(4) of the Act.
    In this proposed rule, in accordance with the statute, we are 
proposing to reduce the proposed FY 2013 full market basket estimate of 
3.0 percent (based on the first quarter 2012 forecast of the proposed 
FY 2009-based LTCH-specific market basket) by the proposed FY 2013 MFP 
adjustment (that is, the 10-year moving average of MFP for the period 
ending FY 2013, as described in section VII.D.2.b. of the preamble of 
this proposed rule) of 0.8 percentage point (based on IGI's first 
quarter 2012 forecast). Following application of the proposed 
productivity adjustment, the proposed adjusted market basket update of 
2.2 percent (3.0 percent minus 0.8 percentage point) is then reduced by 
0.1 percentage point, as required by sections 1886(m)(3)(A)(ii) and 
1886(m)(4)(C) of the Act. Therefore, in this proposed rule, under the 
authority of section 123 of the BBRA as amended by section 307(b) of 
the BIPA, we are proposing to establish an annual market basket update 
under the LTCH PPS for FY 2013 of 2.1 percent (that is, the most recent 
estimate of the proposed LTCH PPS market basket update at this time of 
3.0 percent less the proposed MFP adjustment of 0.8 percentage point 
less the 0.1 percentage point required under section 1886(m)(4)(C) of 
the Act). Accordingly, we are proposing to revise Sec.  412.523(c)(3) 
by adding a new paragraph (ix), which would specify that the standard 
Federal rate for FY 2013 is the standard Federal rate for the previous 
LTCH PPS year updated by 2.1 percent, and as further adjusted, as 
appropriate, as described in Sec.  412.523(d). In addition, proposed 
Sec.  412.523(c)(3)(ix)(B) would specify that, with respect to 
discharges occurring on or after October 1, 2012, and before December 
29, 2012, payments are based on the standard Federal rate in proposed 
Sec.  412.523(c)(3)(ix)(A) without regard to the one-time prospective 
adjustment provided for under proposed Sec.  412.523(d)(3)(iii). As 
stated above, consistent with our historical practice of using the most 
recent available data, we are proposing that if more recent data become 
available when we develop the final rule, we would use such data, if 
appropriate, in determining the final market basket update under the 
LTCH PPS for FY 2013. (We note that we are proposing to adjust the FY 
2013 standard Federal rate by a one-time prospective adjustment under 
proposed Sec.  412.523(d)(3) (discussed in section VII.E.4. of this 
preamble) and a proposed area wage level budget neutrality factor in 
accordance with Sec.  412.523(d)(4) (discussed in section V.B.5. of the 
Addendum of this proposed rule).)
3. Proposed LTCH PPS Cost-of-Living Adjustment (COLA) for LTCHs Located 
in Alaska and Hawaii
    Under Sec.  412.525(b), we established a cost-of-living adjustment 
(COLA) for LTCHs located in Alaska and Hawaii to account for the higher 
costs incurred in those States (67 FR 56022). Specifically, we apply a 
COLA to payments to LTCHs located in Alaska and Hawaii by multiplying 
the nonlabor-related portion of the standard Federal rate by the 
applicable COLA factors established annually by CMS. Higher labor-
related costs for LTCHs located in Alaska and Hawaii are taken into 
account in the adjustment for area wage levels.
    Historically, we have used the most recent updated COLA factors 
obtained from the U.S. Office of Personnel Management (OPM) Web site at 
http://www.opm.gov/oca/cola/rates.asp to adjust the payments for LTCHs 
in Alaska and Hawaii. Sections 1911 through 1919 of the Nonforeign Area 
Retirement Equity Assurance Act, as contained in subtitle B of title 
XIX of the National Defense Authorization Act (NDAA) for Fiscal Year 
2010 (Pub. L. 111-84, October 28, 2009) transitions the Alaska and 
Hawaii COLAs to locality pay. Under section 1914 of Public Law 111-84, 
locality pay is being phased in over a 3-year period beginning in 
January 2010, with COLA rates frozen as of the date of enactment, 
October 28, 2009, and then proportionately reduced to reflect the 
phase-in of locality. As we discussed in the FY 2012 IPPS/LTCH PPS 
final rule (76 FR 51809), we did not believe it was appropriate to use 
either the 2010 or 2011 reduced factors to adjust the nonlabor-related 
portion of the standard Federal rate for LTCHs in Alaska and Hawaii for 
Medicare payment purposes.

[[Page 28020]]

Therefore, we established in that same final rule that, for FY 2012, we 
continued to use the same COLA factors (published by OPM) that we used 
to adjust payments in FY 2011 (which were based on OPM's 2009 COLA 
factors) to adjust the nonlabor-related portion of the standard Federal 
rate for LTCHs located in Alaska and Hawaii.
    We believe it was appropriate to use ``frozen'' COLA factors to 
adjust payments in FY 2012 while we explored alternatives for updating 
the COLA adjustment in the future because we believe those COLA factors 
appropriately adjusted the nonlabor-related portion of the standard 
Federal rate for LTCHs located in Alaska ad Hawaii, consistent with 
Sec.  412.523(b) (76 FR 51809). In this proposed rule, under the 
authority of section 123 of the BBRA, as amended by section 307(b) of 
the BIPA, we are proposing to continue to use the same ``frozen'' COLA 
factors used in FY 2012 for FY 2013 and to update the COLA factors for 
Alaska and Hawaii, beginning in FY 2014, based on a comparison of the 
growth in the consumer price indices (CPIs) for Anchorage, Alaska and 
Honolulu, Hawaii relative to the growth in the CPI for the average U.S. 
city as published by the Bureau of Labor Statistics (BLS). 
Specifically, in FY 2014, under the authority of section 123 of the 
BBRA, as amended by section 307(b) of the BIPA, we would update the 
COLA factors published by OPM that we used to adjust payments in FY 
2011 (which are based on OPM's 2009 COLA factors) as these are the last 
COLA factors OPM published prior to transitioning from COLAs to 
locality pay. Because the BLS publishes CPI data only for the cities of 
Anchorage and Honolulu, we are proposing to use a comparison of the 
relative growth in the overall CPI for those cities to update the COLA 
adjustment factors for all areas in Alaska and Hawaii, respectively. We 
believe that the relative price differences between these cities and 
the United States are appropriate proxies for the relative price 
differences of the ``other areas'' of Alaska and Hawaii.
    The BLS publishes the CPI for All Items for Anchorage, Honolulu, 
and for the average U.S. city. However, we are proposing to create 
reweighted CPIs for each of the respective areas to reflect the 
underlying composition of the IPPS market basket nonlabor-related 
share. The current composition of the CPI for All Items for all the 
respective areas is approximately 40 percent commodities and 60 percent 
services. However, the IPPS nonlabor-related share is comprised of 
approximately 60 percent commodities and 40 percent services. 
Therefore, we are proposing to create reweighted indexes for Anchorage, 
Honolulu, and the average U.S. city using the respective CPI 
commodities index and CPI services index using the approximate 60/40 
share obtained from the IPPS market basket. We believe that proposing 
to use the underlying composition of the IPPS market basket nonlabor-
related share to reweighted CPIs for each of the respective areas is an 
appropriate proxy for determining the COLA adjustments for LTCHs 
because both LTCHs and IPPS hospitals are required to meet the same 
certification criteria set forth in section 1861(e) of the Act to 
participate as a hospital in the Medicare program and generally 
experience similar nonlabor-related costs for providing inpatient 
hospital services. We also note that the composition of the proposed 
nonlabor-related share of the propose LTCH-specific market basket is 
not significantly different from the approximate 60/40 share obtained 
from the IPPS market basket.
    We believe this proposed methodology is appropriate because we 
would be able to continue updating COLA adjustments for hospitals 
located in Alaska and Hawaii using the relative price differences as a 
proxy for relative cost differences. We believe this is an appropriate 
alternative methodology given the discontinuation of COLA factors from 
OPM. We note that OPM's COLA factors were calculated with a statutorily 
mandated cap of 25 percent, and since the inception of the LTCH PPS, we 
have exercised our discretionary authority to adjust payments to LTCHs 
located in Alaska and Hawaii by incorporating this cap. Consistent with 
our existing policy, our proposed approach for FY 2014 would continue 
to use such a cap, as our proposal is based on OPM's COLA factors 
(updated by the proposed methodology described above). We note that 
this proposal is consistent with the proposal we are making for IPPS 
hospitals discussed in section II.B.2. of the Addendum to this proposed 
rule.
    Lastly, we are proposing to update the COLA factors using this 
proposed methodology every 4 years (beginning in FY 2014), consistent 
with the proposal for updating the COLA factors under the IPPS 
discussed in section II.B.2. of the Addendum to this proposed rule. 
Under the IPPS, we are proposing to update the COLA factors every 4 
years (beginning of FY 2014) concurrently with the update to the labor-
related share of the IPPS market basket. The labor-related share of the 
IPPS market basket currently is not scheduled to be updated until FY 
2014. At the time of development of the FY 2014 proposed rule, we 
expect to have CPI data available through 2012. Therefore, the proposed 
FY 2014 COLA factors for Alaska and Hawaii would be based on the 2009 
OPM COLA factors updated through 2012 by the comparison of the growth 
in the CPIs for Anchorage, Alaska, and Honolulu, Hawaii, relative to 
the growth in the CPI for the average U.S. city.
    In this proposed rule, for FY 2013, under the broad authority 
conferred upon the Secretary by section 123 of the BBRA, as amended by 
section 307(b) of BIPA, to determine appropriate adjustments under the 
LTCH PPS, we are proposing to use the same COLA factors used to adjust 
payments in FY 2012 (which are based on OPM's 2009 COLA factors) by 
multiplying the nonlabor-related portion of the standard Federal 
payment rate by the proposed factors listed in the chart shown in 
section V.C. of the Addendum to this proposed rule. We believe that 
these proposed COLA factors would appropriately adjust the nonlabor-
related portion of the standard Federal rate in FY 2013 for LTCHs 
located in Alaska and Hawaii, consistent with Sec.  412.523(b).

E. Expiration of Certain Payment Rules for LTCH Services and the 
Moratorium on the Establishment of Certain Hospitals and Facilities and 
the Increase in Number of Beds in LTCHs and LTCH Satellite Facilities

1. Background
    Moratoria on the implementation of certain LTCH payment policies 
and on the development of new LTCHs and LTCH satellite facilities and 
on bed increases in existing LTCHs and LTCH satellite facilities 
established under sections 114(c) and (d) of the MMSEA (Pub. L. 110-
173) as amended by section 4302 of the ARRA (Pub. L. 111-5) and further 
amended by sections 3106 and 10312 of the Affordable Care Act are set 
to expire during CY 2012, under current law.
    The moratoria established by these provisions delayed the full 
implementation of the following policies for 5 years beginning at 
various times in CY 2007:
     The full application of the ``25-percent payment 
adjustment threshold'' to certain LTCHs, including hospitals-within-
hospitals (HwHs) and LTCH satellite facilities for cost reporting 
periods beginning on or after July 1, 2007, and before July 1, 2012, or 
cost reporting periods beginning on or after October 1, 2007, and 
before October 1,

[[Page 28021]]

2012, as applicable under the regulations at Sec. Sec.  412.534 and 
412.536.
     The inclusion of an ``IPPS comparable'' option for payment 
determinations under the short stay outlier (SSO) adjustment at Sec.  
412.529 of the regulations for LTCH discharges occurring on or after 
December 29, 2007, but prior to December 29, 2012.
     The application of any one-time prospective adjustment to 
the LTCH PPS standard Federal rate provided for in Sec.  412.523(d)(3) 
of the regulations from December 29, 2007, until December 29, 2012.
     In general, the development of new LTCHs and LTCH 
satellite facilities, or increases in the number of beds in existing 
LTCHs and LTCH satellite facilities from December 29, 2007, and ending 
December 28, 2012, unless one of the specified exceptions to the 
particular moratorium was met. (We refer readers to the May 22, 2008 
interim final rule with comment period for the MMSEA (73 FR 29699, 
29704 through 29707, 29709), the interim final rule for the ARRA (74 FR 
43990 through 43992, and 43997), and the finalizing of the ACA changes 
in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50399 through 50400, and 
50416) for a complete description of this moratorium.)
    In this proposed rule, we are proposing to extend the existing 
delay of the full implementation of the 25-percent payment adjustment 
threshold for an additional year; that is, for cost reporting periods 
beginning on or after October 1, 2012, and before October 1, 2013, as 
applicable. We also are proposing to make a one-time prospective 
adjustment to the standard Federal rate under Sec.  412.523(d)(3) of 
the regulations. We are proposing to phase in this proposed one-time 
prospective adjustment to the standard Federal rate over a 3-year 
period, beginning in FY 2013; however, consistent with the statute, 
this proposed adjustment would not apply to payments made for 
discharges occurring on or before December 28, 2012. We are not 
proposing to make any changes to the SSO policy as it currently exists 
in the regulations at Sec.  412.529. Accordingly, consistent with the 
existing regulations at Sec.  412.529(c)(3), for SSO discharges 
occurring on or after December 29, 2012, the ``IPPS comparable'' option 
at Sec.  412.529(c)(3)(i)(D) would apply to payment determinations as 
appropriate for certain short stay cases. The moratoria on the 
development of new LTCHs or LTCH satellite facilities and on an 
increase in the number of beds in existing LTCHs or LTCH satellite 
facilities mandated by section 114(d) of the MMSEA, as amended by 
section 4302(b) of the ARRA and further amended by section 3106 and 
10312 of the Affordable Care Act, are set to expire on December 29, 
2012, under current law. As discussed later in this section, we are 
supportive of a statutory extension of these moratoria as we anticipate 
potential payment policy changes to the LTCH PPS as a result of CMS' 
research initiatives.
2. The 25-Percent Payment Adjustment Threshold
    We are proposing to provide a 1-year extension (that is, for cost 
reporting periods beginning on or after October 1, 2012, and before 
October 1, 2013) on the moratorium on the application of the 25-percent 
payment adjustment threshold policy as provided by section 144(c) of 
the MMSEA, as amended by section 4302(a) of the ARRA and sections 
3106(c) and 10312(a) of the Affordable Care Act. Therefore, we are 
proposing to revise Sec. Sec.  412.534 and 412.536 of the regulations 
to reflect this proposed extension. Specifically, we are proposing to 
change ``2012'' to ``2013'' in Sec. Sec.  412.534(c)(1)(i) and (ii), 
(c)(2)(1), (d)(1) and (2), and (e)(1) and (2) to incorporate this 
proposed change. In addition, we are proposing to revise the headings 
at Sec. Sec.  412.534(c)(3), (d)(3), and (e)(3), and make conforming 
changes to (h)(4) and (5) and Sec.  412.536(a)(2) to reflect this 
proposed 1-year extension. This proposed 1-year extension would 
continue the existing statutory exemption of grandfathered HwHs and 
freestanding LTCHs from the 25-percent payment adjustment threshold and 
the continued statutory increase in the percentage threshold to 50 or 
75 percent, as applicable, for those LTCHs and LTCH satellite 
facilities presently so affected. For a detailed description of the 
moratorium on the ``25-percent threshold'' policy, we refer readers to 
the May 22, 2008 interim final rule with comment period (73 FR 29699 
through 29704) and the interim final rule with comment period for the 
ARRA (74 FR 43990 through 43992).
    Although we are proposing to extend the moratorium relating to the 
application of the 25-percent payment adjustment threshold policy for 
cost reporting period beginning on or after October 1, 2012, and before 
October 1, 2013, this moratorium will expire for certain classes of 
LTCHs prior to the effective date of the proposed extension. 
Specifically, under existing regulations, the moratoria on the ``25-
percent threshold'' payment adjustment policies set forth in Sec. Sec.  
412.534(h) and 412.536 for a LTCH described in Sec.  412.23(e)(2)(i) 
that meets the criteria in Sec.  412.22(f) and a satellite facility of 
a LTCH described under Sec.  412.22(h)(3)(i) (that is, a grandfathered 
HwH and a grandfathered LTCH satellite facility, respectively), and the 
moratoria on the ``25 percent threshold'' policies set forth in Sec.  
412.536 for a ``freestanding'' LTCH as described in Sec.  412.23(e)(5) 
will expire beginning with discharges occurring in cost reporting 
periods beginning on or after July 1, 2012. In addition, under existing 
regulations, the moratorium on the ``25-percent threshold'' policies 
set forth in Sec. Sec.  412.534(h) and 412.536 expire beginning with 
discharges occurring in cost reporting periods beginning on or after 
July 1, 2012, for a LTCH or a LTCH satellite facility that, as of 
December 29, 2007, was co-located with an entity that is a provider-
based, off-campus location of a subsection (d) hospital which did not 
provide services payable under section 1886(d) of the Act at the off-
campus location. Therefore, under our proposed policy, there will be a 
period during which the above-described LTCHs and LTCH satellite 
facilities must comply with Sec. Sec.  412.534 and 412.536 before 
becoming subject to the moratoria again. The period during which the 
above-described LTCHs and LTCH satellite facilities would comply with 
Sec. Sec.  412.534 and 412.536 would be for disc