[Federal Register Volume 78, Number 153 (Thursday, August 8, 2013)]
[Rules and Regulations]
[Pages 48303-48311]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-19154]


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DEPARTMENT OF DEFENSE

Office of the Secretary

32 CFR Part 199

[DOD-2010-HA-0072]
RIN 0720-AB41


TRICARE; Reimbursement of Sole Community Hospitals and Adjustment 
to Reimbursement of Critical Access Hospitals

AGENCY: Office of the Secretary, Department of Defense (DoD).

ACTION: Final rule.

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SUMMARY: This Final Rule implements for Sole Community Hospitals (SCHs) 
the statutory provision at title 10, United States Code (U.S.C.), 
section 1079(j)(2) that TRICARE payment methods for institutional care 
be determined, to the extent practicable, in accordance with the same 
reimbursement rules as those that apply to payments to providers of 
services of the same type under Medicare. This Final Rule implements a 
reimbursement methodology similar to that applicable to Medicare 
beneficiaries for inpatient services provided by SCHs. It will be 
phased in over a several-year period. This Final Rule also provides for 
special reimbursement for labor/delivery and nursery services in SCHs 
and creates a possible General Temporary Military Contingency Payment 
Adjustment (GTMCPA) for inpatient services in SCHs and for Critical 
Access Hospitals (CAHs).

DATES: This rule is effective October 7, 2013.
    Applicability Date: The regulations setting forth the revised 
reimbursement system shall be applicable for all admissions to Sole 
Community Hospitals and Critical Access Hospitals commencing on or 
after the first day of the month which is at least 120 days from the 
date of publication of this rule in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Ann Fazzini, TRICARE Management 
Activity (TMA), Medical Benefits and Reimbursement Branch, telephone 
(303) 676-3803.

SUPPLEMENTARY INFORMATION:

I. Executive Summary

A. Purpose of the Final Rule

    The purpose of this Final Rule is to implement for SCHs the 
statutory requirement that TRICARE inpatient care ``payments shall be 
determined to the extent practicable in accordance with the same 
reimbursement rules as apply to payments to providers of services of 
the same type under Medicare.'' Medicare pays SCHs the greater of the 
amount under the general inpatient prospective payment system method 
based on diagnosis-related groups (DRGs) or an amount based on the 
hospital's reported costs. TRICARE pays for most hospital care under a 
DRG-based prospective payment system similar to Medicare's, but 
exempted SCHs from this system, instead paying them billed charges. 
Paying billed charges is fiscally imprudent and inconsistent with 
TRICARE's governing statute. Paying SCHs under a method similar to 
Medicare's is prudent, practicable, and harmonious with the statute. 
The Final Rule will transition over a several year period from the 
current billed charge method to the new method. The transition will be 
gradual to reduce the impact on the SCHs. Network SCHs will have 
payment reductions limited to 10 percent per year. Non-network SCHs 
will have reductions limited to 15 percent per year.
    The legal authority for this Final Rule is 10 U.S.C. 1079(j)(2).

B. Summary of the Major Provisions of the Final Rule

1. Ultimate Payment Method for SCHs
    Following the transition period, TRICARE will reimburse SCHs for 
inpatient care the higher of the DRG-based amount applicable to most 
hospitals or an amount approximating the SCH's costs. The cost-based 
amount will be determined by applying the SCH's most recent Medicare 
cost-to-charge ratio (CCR) to the SCH's charges. Individual claims will 
be paid under this cost-based method, followed by a year-end review to 
determine whether in the aggregate the DRG-based method would have paid 
more. If so, TRICARE will pay the SCH the aggregate difference.
2. Transition Period
    To protect SCHs from sudden significant reductions, the Final Rule 
will gradually transition from the base year of paying 100 percent of 
allowable charges (which is either the billed charge or, in the case of 
network hospitals, a voluntary discounted

[[Page 48304]]

charge) to paying the percentage equal to the Medicare CCR (generally 
in the range of 30 to 50 percent). The transition rules prevent a 
reduction of more than 10 percentage points per year for network 
hospitals or 15 percentage points per year for non-network hospitals. 
So, for example, in the case of a non-network hospital with a CCR of 40 
percent, payment in the first year would be 85 percent of the base year 
amount; 70 percent in the second year, 55 percent in the third year, 
and 40 percent in the fourth and subsequent years. In the case of a 
network hospital with a CCR of 40 percent that had agreed to a 5 
percent discount (i.e., the allowable amount was 95 percent of billed 
charges) in the base year, payment in the first year would be 85 
percent of the base year amount, 75 percent in the second year, 65 
percent in the third year, 55 percent in the fourth year, 45 percent in 
the fifth year, and 40 percent in the sixth and subsequent years. 
During each year, the resulting aggregate payment amount would be 
compared to the aggregate amount that would have been provided under 
the DRG-based system, and if that would have been more, the difference 
will be paid.
3. Special Payment Rule for Labor/Delivery and Nursery Care
    In response to public comments, the Final Rule includes a special 
payment rule for labor/delivery and nursery care in SCHs. Based on an 
assessment that the Medicare CCR does not accurately reflect the cost 
to charge ratio for these services, following the transition period, 
rather than applying the Medicare CCR to charges to labor/delivery and 
nursery DRGs, TRICARE will apply 130 percent of the Medicare CCR.
 4. GTMCPA for SCHs and CAHs
    One of the purposes of the TRICARE program is to support military 
members and their families during periods of war or contingency 
operations, when military facility capability may be diverted or 
insufficient to meet military readiness priorities. To preserve the 
availability of SCHs during such periods, the Final Rule includes 
authority for a year-end discretionary, temporary adjustment that the 
TMA Director may approve in extraordinary economic circumstances for a 
network hospital that serves a disproportionate share of Active Duty 
Service members (ADSMs) and Active Duty dependents (ADDs). This same 
adjustment possibility is also made available to Critical Access 
Hospitals since they share some attributes of SCHs.
    TRICARE is in the process of developing policy and procedural 
instructions for exercising the discretionary authority under the 
qualifying criteria for the GTMCPAs for inpatient services provided in 
SCHs and CAHs. The policy and procedural instructions will be available 
within 3 to 6 months following the applicability date of the new 
inpatient reimbursement methodology for SCHs. Hospitals will be able to 
request a GTMCPA approximately 14 months from the applicability date of 
the new reimbursement method as any GTMCPA will be based on twelve 
months of claims payment data under the new method. Once finalized, the 
policy and procedural instructions will be available in the TRICARE 
Reimbursement Manual at http://manuals.tricare.osd.mil. As with any 
discretionary authority exercised under the regulation, a determination 
approving or denying a GTMCPA for a hospital is not subject to the 
appeal and hearing procedures set forth in 32 CFR 199.10. Section 
199.14(a)(8) of this final rule has been revised to clarify this point.

C. Costs and Benefits

    The economic impact of the Final Rule is to reduce DoD payments to 
SCHs, producing estimated DoD budgetary savings (cost avoidance) as 
follows:

FY 2013: $36.5 million
FY 2014: $80.2 million
FY 2015: $130.3 million
FY 2016: $186.1 million
FY 2017: $243.1 million
    Total FY 2013-2017: $676.1 million

II. Discussion of Final Rule

A. Introduction and Background

    In the Federal Register of July 5, 2011 (76 FR 39043), DoD 
published for public comment a Proposed Rule regarding an inpatient 
payment system for SCHs. Under 10 U.S.C. 1079(j)(2), the amount to be 
paid to hospitals, skilled nursing facilities, and other institutional 
providers under TRICARE, ``shall be determined to the extent 
practicable in accordance with the same reimbursement rules as apply to 
payments to providers of services of the same type under Medicare.'' 
Medicare reimburses SCHs for inpatient care the greatest of these 
aggregate amounts:
    (1) What the SCH would have been paid under the Medicare DRG method 
for all of that hospital's Medicare discharges; or
    (2) The amount that would have been paid if the SCH were paid the 
average ``cost'' per discharge at that hospital in Fiscal Year (FY) 
1982, 1987, 1996, or 2006 updated to the current year for all its 
Medicare discharges.
    TRICARE currently pays SCHs for inpatient care in one of two ways:
    (1) Network hospitals: Payment is an amount equal to billed charges 
less a negotiated discount. The discounted reimbursement is usually 
substantially greater than what would be paid using the DRG method, 
which TRICARE generally uses to reimburse hospitals for inpatient care; 
or
    (2) Non-network hospitals: Payment is equal to billed charges.
    TRICARE's current method results in reimbursing SCHs substantially 
more than Medicare does for equivalent inpatient care. A change is 
needed to conform to the statute.
    Under 32 Code of Federal Regulations (CFR) 199.14(a)(1)(ii)(D)(6), 
SCHs are currently exempt from the TRICARE DRG-based payment system. 
Based on the above statutory mandate, TRICARE is adopting in this Final 
Rule an approach that approximates the Centers for Medicare and 
Medicaid Services' (CMS) method for SCHs.

B. SCH Reimbursement Methodology

    Establishing a TRICARE SCH inpatient reimbursement method exactly 
matching that of Medicare is not practicable. While TRICARE can 
calculate the aggregate DRG reimbursement for all TRICARE discharges by 
an SCH during a year, using the Medicare cost per discharge is not 
appropriate for TRICARE. Differences in the TRICARE and Medicare 
beneficiary case mix render the Medicare average cost per discharge not 
directly applicable for TRICARE purposes.
    In addition, basing SCH reimbursement on annual updates to a 
TRICARE base-year average cost per discharge could result in 
inappropriate payments to some SCHs. At many SCHs, the number of 
TRICARE discharges per year is very low. Approximately half of the SCHs 
had fewer than 20 TRICARE discharges annually. The TRICARE average cost 
per discharge in one year may not be a good predictor of the average 
cost per discharge in a future year due to significant change in the 
case mix that can occur between two small sets of patients.
    Alternatively, TRICARE could make payments equal to the SCH's 
Medicare CCR multiplied by the hospital's billed charges for inpatient 
services. For purposes of this rule, the Medicare CCR is the sum of 
Medicare's operating and capital CCRs. This would avoid making payments 
unrelated to case mix and would be consistent with the Medicare 
principle of relating payments for SCHs to cost of services. This is 
the approach adopted in the Final Rule.

[[Page 48305]]

C. TRICARE's SCH Phase-In Period

    In introducing its current SCH reimbursement method, Medicare used 
a 3-year phase-in period to provide the hospitals time for making 
business and clinical process adjustments. TRICARE will have a phase-in 
period with a maximum 15 percent per-year reduction from the starting 
point for non-network hospitals and a 10 percent-per-year reduction for 
network hospitals. This involves calculating a hospital's ratio of 
allowed charges to billed charges for TRICARE discharges and reducing 
that by 15 percentage points each year for non-network hospitals and 10 
percentage points each year for network hospitals until it reaches the 
hospital's Medicare CCR. For example, if a non-network hospital has a 
TRICARE-allowed to billed ratio of 100 percent, it would be paid 85 
percent of billed charges in year 1, 70 percent in year 2, 55 percent 
in year 3, and 40 percent in year 4. For a network hospital that had a 
TRICARE-allowed to billed ratio of 98 percent, it would be paid 88 
percent in year 1, 78 percent in year 2, 68 percent in year 3, and 58 
percent in year 4. It should be noted that in no year could the TRICARE 
payment fall below costs, as measured by the Medicare CCR (most 
hospitals have costs equal to 30 to 50 percent of billed charges). This 
transition method would approximately follow the CHAMPUS Maximum 
Allowable Charge physician payment system reform precedent and limit 
reductions to no more than 15 percent per year during the phase-in 
period. It also provides an incentive for hospitals to remain in the 
network by allowing a 5 percentage point difference in payment 
reductions per year. Finally, it will buffer the revenue reductions 
experienced upon initial implementation of TRICARE's SCH payment reform 
while allowing hospitals sufficient time to adjust and budget for these 
reductions.
    TRICARE will pay an SCH for inpatient services it provides during a 
year the greater of two aggregate amounts: (1) What the SCH would have 
been paid under the DRG method for all of that hospital's TRICARE 
discharges; or (2) an amount equal to the SCH's specific CCR multiplied 
by the hospital's billed charges for inpatient TRICARE services. This 
will be accomplished through a year-end adjustment to the 
reimbursements provided during the year.

D. New SCHs and SCHs Without Inpatient Claims

    TRICARE will pay a new SCH using the average Medicare CCR for all 
SCHs calculated in the most recent year until its Medicare CCR is 
available in the CMS Inpatient Provider Specific File (PSF). For SCHs 
that had no inpatient claims from TRICARE prior to implementation of 
the SCH payment reform but do have a claim, TRICARE will pay them based 
directly on their Medicare CCR.

E. SCH GTMCPA

    In addition to the SCH phase-in period outlined above, a GTMCPA for 
inpatient services will be available for TRICARE network hospitals 
deemed essential for military readiness and support during contingency 
operations. The TMA Director, or designee, may approve an SCH GTMCPA 
for hospitals that serve a disproportionate share of ADSMs and ADDs. 
Specific procedures for requesting an SCH GTMCPA will be outlined in 
the TRICARE Reimbursement Manual.

F. Essential Access Community Hospitals (EACH)

    The SCH reform encompasses all SCHs as defined by Medicare that 
have inpatient stays for TRICARE patients. It also include hospitals 
classified by CMS as EACHs because for payment purposes, CMS treats as 
an SCH any hospital that CMS designates as an EACH. In other words, 
EACHs are subject to the SCH reform in this final rule. There are two 
EACHs in existence: Via Christi Hospital in Pittsburg, Kansas; and 
Avera Queen of Peace Hospital in Mitchell SD. Both have submitted 
claims to TRICARE.

G. CAH GTMCPA

    On August 31, 2009, we published in the Federal Register a Final 
Rule (74 FR 44752), which implemented a reimbursement methodology 
similar to that furnished to Medicare beneficiaries for services 
provided by CAHs (i.e., reimbursing them 101 percent of reasonable 
costs). It was brought to our attention that there may be some CAHs 
that are deemed essential for military readiness and support during 
contingency operations. Consequently, the Proposed Rule published in 
the Federal Register of July 5, 2011 (76 FR 39043), also proposed a CAH 
GTMCPA for TRICARE network hospitals deemed essential for military 
readiness and contingency operations. The TMA Director, or designee, 
may approve a CAH GTMCPA for hospitals that serve a disproportionate 
share of ADSMs and ADDs. Specific procedures for requesting a CAH 
GTMCPA will be outlined in the TRICARE Reimbursement Manual.

III. Public Comments

    The TRICARE SCH Proposed Rule (76 FR 39043) published on July 5, 
2011, provided a 60-day public comment period. Following is a summary 
of the public comments and our responses.
    Comment: Several commenters stated that using the Medicare CCR is 
not appropriate because of differences in the type of services utilized 
by the TRICARE beneficiary population, as compared to the Medicare 
population, especially services related to labor/delivery and newborn 
care. These commenters stated that use of the Medicare CCR is not 
directly applicable for TRICARE purposes and they recommended DoD use 
an adjusted Medicare CCR equal to the Medicare CCR multiplied by a 
factor of 1.464 to more accurately account for TRICARE costs.
    Response: Under the proposed transition period outlined in the 
Proposed Rule and adopted in this Final Rule, it will take an average 
of 4 to 6 years for most network SCHs to reach their Medicare CCR 
reimbursement level. In response to these comments, we have considered 
whether we should modify our proposed approach of using the Medicare 
CCR for all services. We analyzed data from SCH cost centers utilized 
by TRICARE beneficiaries, including labor/delivery and nursery to 
calculate a CCR for TRICARE patients, referred to as the TRICARE-
specific CCR. We found that the TRICARE-specific CCR was similar to the 
Medicare CCR at most SCHs. However, we also found that, in addition to 
TRICARE patients obviously using more maternity services than Medicare 
beneficiaries, the labor/delivery and nursery cost centers have higher 
CCRs than other cost centers. We found, on average, that the TRICARE-
specific CCR for nursery and labor/delivery services was 30 percent 
higher than the Medicare CCR. As a result, this Final Rule includes an 
adjustment for inpatient nursery and labor/delivery services. This 
adjustment will start at the end of the transition period when each SCH 
reaches its Medicare CCR (approximately 4 to 6 years from 
implementation of this Final Rule). The adjustment will be 130 percent 
of the Medicare CCR, rather than the Medicare CCR, for care that groups 
to labor/delivery and nursery DRGs.
    Comment: These same commenters recommended DoD modify its approach 
so that TRICARE payments will be equal to the highest of the SCH's CCRs 
from four base years (1982, 1987, 1996, and 2006) multiplied by the 
hospital's billed charge for services. They further state

[[Page 48306]]

the CCR should be adjusted to reflect TRICARE costs, as described in 
the above comment.
    Response: Medicare does not use CCRs from these earlier years to 
pay SCHs. Instead, Medicare uses the cost per discharge from those 
years. Thus, using the highest CCR from these earlier years is not 
consistent with Medicare's approach. The approach proposed in this rule 
uses the most recent CCR data for a specific hospital which is the best 
reflection of a hospital's current costs relative to its billed 
charges, not the costs from 10-30 years ago.
    Comment: One commenter requested that TRICARE clarify that SCHs 
will need to file requests for capital cost reimbursement.
    Response: TRICARE's payment for SCHs will be based on a CCR which 
is equal to the sum of the Medicare operating CCR and the Medicare 
capital CCR. Thus, TRICARE SCH reimbursement will include capital costs 
and SCHs will not need to request additional reimbursement for capital.
    Comment: One commenter proposed that TRICARE pay SCHs using the 
average Medicare cost per discharge (the highest cost per discharge 
from several specified base year cost reports) inflated forward using 
the same factor used to update TRICARE DRG payments. Due to differences 
between the TRICARE and Medicare case mixes, the commenter suggested 
that the Medicare cost per discharge value be adjusted by the ratio of 
the TRICARE standardized payment amount (the Adjusted Standardized 
Amount in the TRICARE Inpatient Prospective Payment System) to the 
Medicare standardized payment amount.
    Response: The TRICARE and Medicare Inpatient Prospective Payment 
Systems use different weights and the allowed amounts per discharge are 
quite different due to differences in the weights and case mix. Thus, 
this proposed method would not be appropriate.
    Comment: Two commenters recommended DoD limit its per-year 
reductions in payments to 5 percent for all SCHs rather than the 10 and 
15 percent proposed. Another commenter requested the per-year 
reductions in payments be limited to 5 percent for network and 10 
percent for non-network SCHs.
    Response: Currently, SCHs receive TRICARE reimbursement for the 
most common services at more than twice the level of other acute 
hospitals. Under the transition period outlined in the Proposed Rule 
and adopted in the Final Rule, it will take an average of 4 to 6 years 
for most network SCHs to reach their Medicare CCR reimbursement levels. 
A reduction in payment of 10 percent for network SCHs and 15 percent 
for non-network SCHs buffers the decrease in revenues that hospitals 
will be experiencing during implementation of the TRICARE SCH 
reimbursement methodology. The transition period will allow SCHs 
sufficient time to adjust and budget for these reductions. The proposed 
payment reductions provide an incentive for hospitals to remain in the 
network by allowing a 5 percent difference in payment reductions per 
year. Additionally, reducing the payment by 5 percent per year during 
the transition would increase the time it will take to comply with the 
statute that governs TRICARE. A 10 to 15 percent reduction in payment 
during the transition is reasonable.
    Comment: Several commenters recommended DoD incorporate into 
TRICARE reimbursement methodology the additional payment protections 
that Medicare affords SCHs, and asked that other general Medicare 
payment adjustments be incorporated, including the low-volume 
adjustment, geographic wage index reclassification, and 
disproportionate share hospital (DSH) payments.
    Response: When TRICARE calculates DRG payments, Medicare's 
geographic wage index classification will be used. With respect to DSH 
payments, when DoD implemented the TRICARE DRG system in 1987, the 
supplementary information in the Final Rule stated that we would not 
implement the DSH adjustment. DoD decided not to implement the DSH 
adjustment because the TRICARE DRG system would pay hospitals 
adequately for TRICARE patients. This is also true for the SCH payment 
methodology adopted in this Final Rule. By creating an adjustment for 
labor/delivery and nursery services as well as a possible GTMCPA for 
hospitals that serve a disproportionate share of ADSMs and ADDs, 
hospitals are adequately compensated for care received by TRICARE 
beneficiaries. We believe that these specific adjustments designed to 
address the needs of the TRICARE beneficiaries negates the need for any 
additional adjustments.
    Comment: Several commenters recommended TRICARE develop an Medicare 
Dependent Hospital (MDH) payment methodology comparable to the SCH 
methodology because Medicare payments to MDHs track the methodology 
used to reimburse SCHs. Two of these commenters also recommended 
TRICARE recognize the MDH classification and adopt special payment 
provisions for MDHs.
    Response: Medicare identifies rural hospitals with less than 100 
beds which have 60 percent or more of their admissions or inpatient 
days reimbursed by Medicare as MDHs. Under Medicare rules, a hospital 
cannot be both an SCH and an MDH. Under current TRICARE rules, MDHs are 
paid under the normal DRG payment method. The Proposed Rule for TRICARE 
reimbursement of SCHs did not propose a special payment method for 
MDHs. It is notable that having a high percentage of Medicare 
admissions or days does not mean the hospital has a high percentage of 
TRICARE admissions or days. Further, this SCH rule does not change the 
status-quo for TRICARE payments to MDH hospitals. Outside the scope of 
this rule making, TRICARE will analyze whether it is practicable and 
appropriate to make any changes in reimbursements to hospitals 
classified by Medicare as MDHs based on Medicare's payment methodology 
for MDHs.
    Comment: One commenter requested that the rules for reimbursement 
remain unchanged.
    Response: The statutory provision at 10 U.S.C. 1079(j)(2) mandates 
that TRICARE payment methods for institutional care be determined, to 
the extent practicable, in accordance with the same reimbursement rules 
as those that apply to payments to providers of services of the same 
type under Medicare. Based on this statutory requirement, TRICARE is 
adopting a method similar to Medicare's payment system for 
reimbursement of SCH inpatient services.
    Comment: Several commenters are concerned the proposed payment 
methodology will result in significant cuts and compromise access to 
care.
    Response: TRICARE will make payments equal to the SCH's specific 
Medicare CCR multiplied by the hospital's billed charges for inpatient 
services. This is consistent with the Medicare principle of relating 
payments for SCHs to cost of services. Following the transition, SCHs 
with patients in delivery and newborn DRGs will receive payments for 
these patients based on the level of billed charges multiplied by a 
factor equal to 130 percent of the Medicare CCR. Those SCHs with a high 
proportion of ADSMs/ADDs admissions may be eligible to receive a 
GTMCPA. Additionally, the phase-in period will buffer the revenue 
reductions and will allow hospitals sufficient time to adjust and 
budget for this revised reimbursement methodology. Hospitals can also 
become network providers, for which the percentage per-year reduction 
of 10 percent is a more gradual step-

[[Page 48307]]

down than the percentage per-year reduction of 15 percent for non-
network hospitals. We believe these feature are quite adequate to 
assure reasonable reimbursement and protect access to care.
    Comment: One commenter states that TRICARE's higher inpatient 
payments off-set losses on outpatient services provided to TRICARE.
    Response: The statutory provision at 10 U.S.C. 1079(j)(2) mandates 
that TRICARE payment methods for institutional care be determined, to 
the extent practicable, in accordance with the same reimbursement rules 
as those that apply to payments to providers of services of the same 
type under Medicare. Based on this statutory requirement, TRICARE is 
adopting Medicare's payment system for reimbursement of SCH inpatient 
services. In addition, TRICARE payments for hospital outpatient 
services are fully adequate.
    Comment: The above commenter further states the proposed cuts will 
likely result in a reduction in service line offerings.
    Response: We value the services offered by all hospitals and 
providers who treat TRICARE beneficiaries, including ADSMs, ADDs, 
Retirees, and our Wounded Warriors. The transition schedule in this 
Final Rule will reduce the effects of the transition going from a 
billed-charge reimbursement system to payments aligned with Medicare 
reimbursement levels. These provisions include a multi-year transition 
period and the possibility of a GTMCPA. Thus, we believe the final rule 
not only complies with our statutory mandate, but does so in a fair and 
reasonable manner to SCHs.

IV. Regulatory Impact Analysis

A. Overall Impact

    DoD has examined the impacts of this Final Rule as required by 
Executive Orders (E.O.s) 12866 (September 1993, Regulatory Planning and 
Review) and 13563 (January 18, 2011, Improving Regulation and 
Regulatory Review), the Regulatory Flexibility Act (RFA) (September 19, 
1980, Pub. L. 96-354), the Unfunded Mandates Reform Act of 1995 (Pub. 
L. 104-4), and the Congressional Review Act (5 U.S.C. 804(2)).
1. Executive Order 12866 and Executive Order 13563
    E.O.s 12866 and 13563 direct agencies to assess all costs and 
benefits of available regulatory alternatives and, if regulation is 
necessary, to select regulatory approaches that maximize net benefits 
(including potential economic, environmental, public health and safety 
effects, distributive impacts, and equity). E.O. 13563 emphasizes the 
importance of quantifying both costs and benefits, reducing costs, 
harmonizing rules, and promoting flexibility. A regulatory impact 
analysis (RIA) must be prepared for major rules with economically 
significant effects ($100 million or more in any one year).
    We estimate that the effects of the SCH provisions that would be 
implemented by this rule would result in SCH revenue reductions 
exceeding $100 million in at least one year. We estimate the reduction 
in hospital revenues under the SCH reform for its first full year of 
implementation compared to expenditures in that same period without the 
proposed SCH changes, to be well below the $100 million level because 
of the transition features of the Final Rule. However, after several 
years in the transition period, the amount of revenue reductions will 
reach the $100 million per year threshold.
    We estimate that this rulemaking is ``economically significant'' as 
measured by the $100 million threshold and, hence, also a major rule 
under the Congressional Review Act. Accordingly, we have prepared a 
regulatory impact analysis that, to the best of our ability, presents 
the costs and benefits of the rulemaking.
2. Congressional Review Act. 5 U.S.C. 801
    Under the Congressional Review Act, a major rule may not take 
effect until at least 60 days after submission to Congress of a report 
regarding the rule. A major rule is one that would have an annual 
effect on the economy of $100 million or more or have certain other 
impacts. This Final Rule is a major rule under the Congressional Review 
Act.
3. Regulatory Flexibility Act (RFA)
    The RFA requires agencies to analyze options for regulatory relief 
of small businesses if a rule has a significant impact on a substantial 
number of small entities. For purposes of the RFA, small entities 
include small businesses, nonprofit organizations, and small 
governmental jurisdictions. Most hospitals are considered to be small 
entities, either by being nonprofit organizations or by meeting the 
Small Business Administration (SBA) definition of a small business 
(having revenues of $34.5 million or less in any one year). For 
purposes of the RFA, we have determined that all SCHs would be 
considered small entities according to the SBA size standards. 
Individuals and States are not included in the definition of a small 
entity. Therefore, this Final Rule would have a significant impact on a 
substantial number of small entities. The Regulatory Impact Analysis, 
as well as the contents contained in the preamble, also serves as the 
Final Regulatory Flexibility Analysis.
4. Unfunded Mandates
    Section 202 of the Unfunded Mandates Reform Act of 1995 also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule whose mandates require spending in any one year of 
$100 million in 1995 dollars, updated annually for inflation. That 
threshold level is currently approximately $140 million. This Final 
Rule will not mandate any requirements for State, local, or tribal 
governments or the private sector.
5. Paperwork Reduction Act
    This rule will not impose significant additional information 
collection requirements on the public under the Paperwork Reduction Act 
of 1995 (44 U.S.C. 3502-3511). Existing information collection 
requirements of the TRICARE and Medicare programs will be utilized. We 
do not anticipate any increased costs to hospitals because of 
paperwork, billing, or software requirements since we are keeping 
TRICARE's billing/coding requirements (i.e., hospitals will be coding 
and filing claims in the same manner as they currently are with 
TRICARE).
6. Executive Order 13132, ``Federalism''
    This rule has been examined for its impact under E.O. 13132, and it 
does not contain policies that have federalism implications that would 
have substantial direct effects on the States, on the relationship 
between the national Government and the States, or on the distribution 
of power and responsibilities among the various levels of Government. 
Therefore, consultation with State and local officials is not required.

B. Hospitals Included In and Excluded From the SCH Reforms

    1. The SCH reform encompasses all SCHs as defined by Medicare that 
have inpatient stays for TRICARE patients. It also includes hospitals 
classified by CMS as Essential Access Community Hospitals (EACH) 
because for payment purposes, CMS treats as an SCH any hospital that 
CMS designates as an EACH. In other words, EACHs are subject to the SCH 
reform in this final rule. There are two EACHs in existence: Via 
Christi Hospital in Pittsburg, Kansas; and Avera Queen of Peace

[[Page 48308]]

Hospital in Mitchell SD. Both have submitted claims to TRICARE. Over a 
six month period, Via Christi hospital submitted about $309,000 in 
TRICARE inpatient claims and Avera Queen of Peach submitted about 
$270,000 in TRICARE inpatient claims.
    2. Hospitals that are paid by Medicare and TRICARE under a cost 
containment waiver are not included in the SCH Reform.

C. Analysis of the Impact of Policy Changes on Payment Under SCH Reform 
Alternatives Considered

    Alternatives that we considered, the proposed changes that we will 
make, and the reasons that we have chosen each option are discussed 
below.
1. Alternatives Considered for Addressing Reduction in SCH Payments
    Analysis of the effects of paying SCHs using the computation of 
either the greater of what the SCH would have been paid under the DRG 
method for all of that hospital's TRICARE discharges or an amount equal 
to the SCH's specific CCR multiplied by the hospital's billed charges 
for the TRICARE services approach would reduce the TRICARE payments to 
these SCHs by an average of over 50 percent. This approach would pay 
each SCH the greater of two aggregate amounts: (1) The sum of the 
TRICARE-allowed amounts if all the TRICARE inpatient admissions over a 
12-month period were paid using the TRICARE DRG method; or (2) the 
TRICARE-allowed amounts if all the TRICARE inpatient admissions over a 
12-month period were paid using the CCR approach (in which the TRICARE-
allowed amount for each admission is equal to the billed charge for 
that admission multiplied by the hospital's historical CCR). Table 3 
provides our estimate of the impact of this approach without any 
transitions.
    Because the impact of moving from a charge-based reimbursement to a 
cost-based reimbursement similar to Medicare's would produce large 
reductions in the TRICARE-allowed amounts for all types of SCHs, we 
considered a phase-in of this approach over a 4-year period. Under this 
option, the CCR portion of the approach would be modified so that the 
hospital's billed charge on each claim would not be multiplied by the 
hospital's CCR until the fourth year (when the transition was 
complete). In the first 3 years, the billed charges for each claim 
would be multiplied by a ratio so that there was an equal reduction in 
the ratio used each year over the 4-year transition. For example, if 
the hospital were receiving 100 percent of its billed charges prior to 
implementation of the SCH reform and it had a CCR of 0.32, then its 
billed charges would be multiplied by factors of 0.83, 0.66, and 0.49 
in the first 3 years respectively so that each year the payment ratio 
declined by an equal amount (in this case by a factor of 0.17). In each 
year, the aggregate level of allowed amounts produced using the CCR 
approach at each SCH would be compared with the aggregate level of DRG-
allowed amounts at the SCH, and the SCH would be paid the greater of 
the two aggregate amounts. This 4-year transition would allow hospitals 
to have a phased transition to the cost-based rates. Although this 
option would provide a multi-year period for SCHs to transition to the 
cost-based rates, we did not choose this option because it would still 
result in large reductions for some SCHs over a relatively short 
period.
    A second option we considered was to have a transition based on a 
reduction of 15 percentage points per year in the allowed amounts for 
each SCH. Under this option, the CCR portion in this approach would be 
modified. During the transition period, the billed charges on each 
claim at an SCH would be multiplied by a factor so that the ratio 
decreased by 15 percentage points each year from the level in the 
previous year. For example, if the SCH were receiving 100 percent of 
its billed charges prior to SCH reform and it had a CCR of 0.32, then 
its billed charges would be multiplied by factors of 0.85, 0.70, 0.55, 
and 0.40 in the first 4 years respectively, so that each year the ratio 
declined by 15 percentage points. In the fifth year, the ratio would be 
set at 0.32, the hospital's CCR. (The actual number of years of 
transition will depend on the hospital's CCR and could be more or less 
than the 4 years in this example as the ratio will never be less than 
the CCR.) In each year, the aggregate level of allowed amounts produced 
using the CCR approach at each SCH would be compared with the aggregate 
level of DRG-allowed amounts at the SCH and the SCH would be paid the 
greater of the two aggregate amounts. This type of transition ensures 
that there is a manageable reduction in the level of payments each year 
for each hospital. We selected this option for SCHs not in the TRICARE 
network.
2. Alternatives Considered for SCHs in the TRICARE Network
    We were concerned there might be access problems at some hospitals 
with a high concentration of TRICARE patients if their payments were 
decreased significantly. In particular, we were concerned that some 
hospitals might leave the TRICARE network if payments were reduced too 
quickly. This was a particular concern because 24 of the 25 SCHs with 
the highest levels of TRICARE-allowed amounts in the first 6 months of 
Calendar Year 2010 were in the TRICARE network. Thus, the SCHs that 
would face the largest reductions in the level of TRICARE-allowed 
amounts from TRICARE's SCH reform would be network hospitals.
    An option we considered, and the one we adopt in this rule, is to 
provide a 10 percent-per-year reduction in the allowed amounts for SCHs 
in the TRICARE network. This option would modify the CCR portion of the 
approach using the most recent adjudicated Medicare cost report. During 
the transition period, the billed charges on each claim at an SCH in 
the TRICARE network would be multiplied by a factor so that the ratio 
decreased by 10 percentage points each year from a FY 2012 base year 
(in contrast to 15 percentage points for non-network hospitals). For 
example, if a TRICARE network SCH had allowed amounts equal to 92 
percent of its billed charges prior to SCH reform, and it had a CCR of 
0.35, then its billed charges would be multiplied by factors of 0.82, 
0.72, 0.62, 0.52, and 0.42 in the first 5 years, respectively, to 
calculate the allowed amounts. Under this approach, each year the ratio 
for network SCHs would decline by ten percentage points. In the sixth 
year, the ratio would be set at 0.35, the hospital's CCR (assuming that 
the hospital's CCR had remained at 0.35). In each year, the aggregate 
level of allowed amounts produced using the CCR approach at each SCH 
would be compared with the aggregate level of DRG-allowed amounts at 
the SCH, and the SCH would be paid the greater of the two aggregate 
amounts. This type of transition ensures that there is a manageable 
reduction in the level of payments each year for each hospital. We 
selected this option for SCHs in the TRICARE network. The impact 
assessment of implementation of SCH during the first year appears in 
Table 1. The estimates of reduction are based on TRICARE claims data.

D. Effects on SCHs

    Table 1 shows the impact of revised SCH inpatient reimbursement 
during FY 2013. Table 2 shows projected TRICARE reduction in 
reimbursement for the top 20 SCHs. Table 3 shows the full amount of the 
reduction without phase-in and transitional payments.

[[Page 48309]]



  Table 1--Estimated Impact of SCH Reforms on TRICARE-Allowed Amounts at Sole Community Hospitals During the FY
                             2013 First Year of Phase-In (With Transition Payments)
                    [Excludes any General Temporary Military Contingency Payment Adjustments]
----------------------------------------------------------------------------------------------------------------
                                                                                         SCH reform allowed as
  Estimated allowed under     Allowed amounts under  SCH     Reduction in allowed      percent of current policy
    current policy  ($M)             reform  ($M)                amounts  ($M)                  allowed
----------------------------------------------------------------------------------------------------------------
                 $365                         $328                          $37                          90
----------------------------------------------------------------------------------------------------------------


    Table 2--Impact of First Year for Top 20 Sole Community Hospitals
      [Excludes any General Temporary Military Contingency Payment
                              Adjustments]
------------------------------------------------------------------------
                                                        Reduction in  FY
           Hospital                  City        State     2013  ($M)
------------------------------------------------------------------------
Onslow Memorial Hospital.....  Jacksonville...  FL                   2.0
Rapid City Regional Hospital.  Rapid City.....  SD                   1.6
Cheyenne Regional Medical      Cheyenne.......  WY                   1.6
 Center.
Sierra Vista Regional Health   Sierra Vista...  AZ                   1.5
 Center.
Beaufort County Memorial       Beaufort.......  SC                   1.8
 Hospital.
Carolina East Health System..  New Bern.......  NC                   1.6
Benefis Health System........  Great Falls....  MT                   1.4
Yuma Regional Medical Center.  Yuma...........  AZ                   1.6
Trinity Medical Center.......  Minot..........  ND                   1.1
Gerald Champion Hospital.....  Alamogordo.....  NM                   0.7
Phelps County Regional         Rolla..........  MO                   0.7
 Medical Center.
Altru Hospital...............  Grand Forks....  ND                   0.7
Wayne Memorial Hospital......  Goldsboro......  NC                   0.7
Samaritan Medical Center.....  Watertown......  NY                   1.5
Western Missouri Medical       Warrensburg....  MO                   0.6
 Center.
Fairbanks Memorial Hospital..  Fairbanks......  AK                   0.6
Lower Keys Medical Center....  Key West.......  FL                   0.6
Matsu Regional Hospital......  Palmer.........  AK                   0.5
Camden Medical Center........  St. Marys......  GA                   0.5
Flagstaff Medical Center.....  Flagstaff......  AZ                   0.7
------------------------------------------------------------------------


  Table 3--Estimated Hypothetical FY 2013 Impact of Cost-Based Reimbursement on TRICARE-Allowed Amounts at Sole
                                 Community Hospitals WITHOUT Transition Payments
                    [Excludes any General Temporary Military Contingency Payment Adjustments]
----------------------------------------------------------------------------------------------------------------
                                                                                      Allowed amount under cost-
                               Cost-based reimbursement      Reduction in TRICARE-      based reimbursement as
    Current policy ($M)                  ($M)                allowed amounts ($M)     percent of  current policy
                                                                                                allowed
----------------------------------------------------------------------------------------------------------------
                 $365                         $157                         $208                          43
----------------------------------------------------------------------------------------------------------------

List of Subjects in 32 CFR Part 199

    Claims, Dental health, Health care, Health insurance, Individuals 
with disabilities, Military personnel.

    Accordingly, 32 CFR Part 199 is amended as follows:

PART 199--[AMENDED]

0
1. The authority citation for part 199 continues to read as follows:

     Authority: 5 U.S.C. 301; 10 U.S.C. Chapter 55.


0
2. Paragraph 199.2(b) is amended by adding definitions for ``Essential 
Access Community Hospital (EACH)'' and ``Sole community hospital 
(SCH)'' in alphabetical order to read as follows:


Sec.  199.2  Definitions.

* * * * *
    (b) * * *
    Essential Access Community Hospital (EACH). A hospital that is 
designated by the Centers for Medicare and Medicaid Services (CMS) as 
an EACH and meets the applicable requirements established by Sec.  
199.14(a)(7)(vi).
* * * * *
    Sole community hospital (SCH). A hospital that is designated by CMS 
as an SCH and meets the applicable requirements established by Sec.  
199.6(b)(4)(xvii).
* * * * *

0
3. Section 199.6 is amended by adding new paragraph (b)(4)(xvii) to 
read as follows:


Sec.  199.6  TRICARE--authorized providers.

* * * * *
    (b) * * *
    (4) * * *
    (xvii) Sole community hospitals (SCHs). SCHs must meet all the 
criteria for classification as an SCH under 42 CFR 412.92, in order to 
be considered an SCH under the TRICARE program.
* * * * *

0
4. Section 199.14 is amended by:
    a. Revising paragraph (a)(1)(ii)(D)(6), paragraph (a)(2)(viii)(D), 
paragraph (a)(3), the first sentence of paragraph (a)(4), and the 
introductory text of paragraph (a)(6); and
    b. Adding new paragraphs (a)(7) and (8).
    The revisions and additions read as follows:

[[Page 48310]]

Sec.  199.14  Provider reimbursement methods.

    (a) * * *
    (1) * * *
    (ii) * * *
    (D) * * *
    (6) Sole community hospitals (SCHs). Prior to implementation of the 
SCH reimbursement method described in paragraph (a)(7) of this section, 
any hospital that has qualified for special treatment under the 
Medicare prospective payment system as an SCH (see subpart G of 42 CFR 
part 412) and has not given up that classification is exempt from the 
CHAMPUS DRG-based payment system.
* * * * *
    (2) * * *
    (viii) * * *
    (D) Sole community hospitals (SCHs). Prior to implementation of the 
SCH reimbursement method described in paragraph (a)(7) of this section, 
any hospital that has qualified for special treatment under the 
Medicare prospective payment system as an SCH and has not given up that 
classification is exempt.
* * * * *
    (3) Reimbursement for inpatient services provided by a CAH. (i) For 
admissions on or after December 1, 2009, inpatient services provided by 
a CAH, other than services provided in psychiatric and rehabilitation 
distinct part units, shall be reimbursed at allowable cost (i.e., 101 
percent of reasonable cost) under procedures, guidelines and 
instructions issued by the TMA Director, or designee. This does not 
include any costs of physician services or other professional services 
provided to CAH inpatients. Inpatient services provided in psychiatric 
distinct part units would be subject to the CHAMPUS mental health 
payment system. Inpatient services provided in rehabilitation distinct 
part units would be subject to billed charges.
    (ii) The percentage amount stated in paragraph (a)(3)(i) of this 
section is subject to possible upward adjustment based on a inpatient 
GTMCPA for TRICARE network hospitals deemed essential for military 
readiness and support during contingency operations under paragraph 
(a)(8) of this section.
    (4) Billed charges and set rates. The allowable costs for 
authorized care in all hospitals not subject to the CHAMPUS DRG-based 
payment system, the CHAMPUS mental health per-diem system, the 
reasonable cost method for CAHs, or the reimbursement rules for SCHs 
shall be determined on the basis of billed charges or set rates. * * *
* * * * *
    (6) Hospital outpatient services. This paragraph (a)(6) identifies 
and clarifies payment methods for certain outpatient services, 
including emergency services, provided by hospitals.
* * * * *
    (7) Reimbursement for inpatient services provided by an SCH. (i) In 
accordance with 10 U.S.C. 1079(j)(2), TRICARE payment methods for 
institutional care shall be determined, to the extent practicable, in 
accordance with the same reimbursement rules as those that apply to 
payments to providers of services of the same type under Medicare. 
TRICARE's SCH reimbursements approximate Medicare's for SCHs. Inpatient 
services provided by an SCH, other than services provided in 
psychiatric and rehabilitation distinct part units, shall be reimbursed 
through a two-step process.
    (ii) The first step referred to in paragraph (a)(7)(i) of this 
section will be to calculate the TRICARE allowable cost by multiplying 
the applicable TRICARE percentage by the billed charge amount on each 
institutional inpatient claim. The applicable TRICARE percentage is the 
greater of: the SCH's most recently available cost-to-charge ratio 
(CCR) from the Centers for Medicare and Medicaid Services' (CMS') 
inpatient Provider Specific File (after the ratio has been converted to 
a percentage), or the TRICARE allowed-to-billed ratio, defined as the 
ratio of the TRICARE allowed amounts (including discounts) to the 
amount of billed charges for TRICARE inpatient admissions at the SCH in 
FY 2012 (after it has been converted to a percentage). The TRICARE 
allowed-to-billed ratio in FY 2012 shall be reduced as follows (after 
the ratio has been converted to a percentage):
    (A) In the first year of implementation, 10 percentage points for 
network SCHs and 15 percentage points for non-network SCHs.
    (B) In the second year of implementation, 20 percentage points for 
network SCHs and 30 percentage points for non-network SCHs.
    (C) In the third year of implementation, 30 percentage points for 
network SCHs and 45 percentage points for non-network SCHs.
    (D) In the fourth year of implementation, 40 percentage points for 
network SCHs and 60 percentage points for non-network SCHs.
    (E) In the fifth year of implementation, 50 percentage points for 
network SCHs and 75 percentage points for non-network SCHs.
    (F) In the sixth year of implementation, 60 percentage points for 
network SCHs and 90 percentage points for non-network SCHs.
    (G) In the seventh year of implementation, 70 percentage points for 
network SCHs and 100 percentage points for non-network SCHs.
    (H) In the eighth year of implementation, 80 percentage points for 
network SCHs and 100 percentage points for non-network SCHs.
    (I) In the ninth year of implementation, 90 percentage points for 
network SCHs and 100 percentage points for non-network SCHs.
    (J) In the tenth year of implementation, 100 percentage points for 
network SCHs and 100 percentage points for non-network SCHs.
    (iii) The second step referred to in paragraph (a)(7)(i) of this 
section is a year-end adjustment. The year-end adjustment will compare 
the aggregate allowable costs over a 12-month period under paragraph 
(a)(7)(ii) of this section to the aggregate amount that would have been 
allowed for the same care using the TRICARE DRG-method (under paragraph 
(a)(1) of this section). In the event that the DRG method amount is the 
greater, the year-end adjustment will be the amount by which it exceeds 
the aggregate allowable costs. In addition, the year-end adjustment 
also may incorporate a possible upward adjustment for inpatient 
services based on a GTMCPA for TRICARE network hospitals under 
paragraph (a)(8) of this section.
    (iv) At the end of an SCH's transition period, when the SCH reaches 
its Medicare CCR, a special allowable cost shall be applicable for 
discharges that group to inpatient nursery and labor/delivery DRGs. For 
these discharges, instead of using the percentage of the SCH's Medicare 
cost-to-charge ratio (as described in paragraph (a)(7)(ii) of this 
section), the percentage will be 130 percent of the Medicare CCR.
    (v) The SCH reimbursement provisions of paragraphs (a)(7)(i) 
through (iv) of this section do not apply to any costs of physician 
services or other professional services provided to SCH inpatients 
(which are subject to individual provider payment provisions of this 
section), inpatient services provided in psychiatric distinct part 
units (which are subject to the CHAMPUS mental health per-diem payment 
system), or inpatient services provided in rehabilitation distinct part 
units (which are reimbursed on the basis of billed charges or set 
rates).
    (vi) The SCH payment system under this paragraph (a)(7) applies to 
hospitals classified by CMS as Essential Access Community Hospitals 
(EACHs).

[[Page 48311]]

    (vii) The SCH payment system under this paragraph (a)(7) does not 
apply to hospitals in States that are paid by Medicare and TRICARE 
under a cost containment waiver.
    (8) General temporary military contingency payment adjustment for 
SCHs and CAHs. (i) Payments under paragraph (a) of this section for 
inpatient services provided by SCHs and CAHs may be supplemented by a 
GTMCPA. This is a year-end discretionary, temporary adjustment that the 
TMA Director may approve based on all the following criteria:
    (A) The hospital serves a disproportionate share of ADSMs and ADDs;
    (B) The hospital is a TRICARE network hospital;
    (C) The hospital's actual costs for inpatient services exceed 
TRICARE payments or other extraordinary economic circumstance exists; 
and,
    (D) Without the GTMCPA, DoD's ability to meet military contingency 
mission requirements will be significantly compromised.
    (ii) Policy and procedural instructions implementing the GTMCPA 
will be issued as deemed appropriate by the Director, TMA, or a 
designee. As with other discretionary authority under this Part, a 
decision to allow or deny a GTMCPA to a hospital is not subject to the 
appeal and hearing procedures of Sec.  199.10.
* * * * *

    Dated: July 29, 2013.
Patricia L. Toppings,
OSD Federal Register Liaison Officer, Department of Defense.
[FR Doc. 2013-19154 Filed 8-7-13; 8:45 am]
BILLING CODE 5001-06-P