[Federal Register Volume 78, Number 160 (Monday, August 19, 2013)]
[Rules and Regulations]
[Pages 50495-51040]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-18956]



[[Page 50495]]

Vol. 78

Monday,

No. 160

August 19, 2013

Part II





Department of Health and Human Services





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Center for Medicare & Medicaid Services





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42 CFR Parts 412, 413, 414, 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 2014 Rates; Quality Reporting 
Requirements for Specific Providers; Hospital Conditions of 
Participation; Payment Policies Related to Patient Status; Final Rule

Federal Register / Vol. 78, No. 160 / Monday, August 19, 2013 / Rules 
and Regulations

[[Page 50496]]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 412, 413, 414, 419, 424, 482, 485, and 489

[CMS-1599-F; CMS-1455-F]
RINs 0938-AR53 and 0938-AR73


Medicare Program; Hospital Inpatient Prospective Payment Systems 
for Acute Care Hospitals and the Long-Term Care Hospital Prospective 
Payment System and Fiscal Year 2014 Rates; Quality Reporting 
Requirements for Specific Providers; Hospital Conditions of 
Participation; Payment Policies Related to Patient Status

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

ACTION: Final rules.

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SUMMARY: We are revising the Medicare hospital inpatient prospective 
payment systems (IPPS) for operating and capital-related costs of acute 
care hospitals to implement changes arising from our continuing 
experience with these systems. Some of the changes 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 will be applicable to discharges occurring on or after 
October 1, 2013, unless otherwise specified in this final rule. We also 
are updating 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 will be effective for cost 
reporting periods beginning on or after October 1, 2013.
    We also are updating the payment policies 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 that were applied to the LTCH 
PPS by the Affordable Care Act. Generally, these updates and statutory 
changes will be applicable to discharges occurring on or after October 
1, 2013, unless otherwise specified in this final rule.
    In addition, we are making a number of changes relating to direct 
graduate medical education (GME) and indirect medical education (IME) 
payments. We are establishing new requirements or have 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 are updating policies relating to the Hospital Value-Based 
Purchasing (VBP) Program and the Hospital Readmissions Reduction 
Program. In addition, we are revising the conditions of participation 
(CoPs) for hospitals relating to the administration of vaccines by 
nursing staff as well as the CoPs for critical access hospitals 
relating to the provision of acute care inpatient services.
    We are finalizing proposals issued in two separate proposed rules 
that included payment policies related to patient status: payment of 
Medicare Part B inpatient services; and admission and medical review 
criteria for payment of hospital inpatient services under Medicare Part 
A.

DATES: Effective Date: These final rules are effective on October 1, 
2013.

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, and Medicare 
Disproportionate Share Hospital (DSH) 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 and Bridget Dickensheets, (410) 786-8670, 
Market Basket for IPPS Hospitals and LTCHs Issues.
Siddhartha Mazumdar, (410) 786-6673, Rural Community Hospital 
Demonstration Program Issues.
James Poyer, (410) 786-2261, Hospital Inpatient Quality Reporting and 
Hospital Value-Based Purchasing--Program Administration, Validation, 
and Reconsideration Issues.
Shaheen Halim, (410) 786-0641, Hospital 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, Hospital Inpatient Quality 
Reporting--Hospital Consumer Assessment of Healthcare Providers and 
Systems Measures Issues.
Mary Pratt, (410) 786-6867, LTCH Quality Data Reporting Issues.
Kim Spalding Bush, (410) 786-3232, Hospital Value-Based Purchasing 
Efficiency Measures Issues.
James Poyer, (410) 786-2261, PPS-Exempt Cancer Hospital Quality 
Reporting Issues.
Allison Lee, (410) 786-8691 and Jeffrey Buck, (410) 786-0407, Inpatient 
Psychiatric Facility Quality Reporting Issues.
Sarah Fahrendorf, (410) 786-3112, Conditions of Participation (CoPs) 
for CAHs Issues.
Commander Scott Cooper, USPHS, (410) 786-9465, Hospital Conditions of 
Participation (CoPs)--Pneumococcal Vaccine Issues.
Ann Marshall, (410) 786-3059, Medicare Part B Inpatient Billing: 
Payable Part B Inpatient and Part B Outpatient Services and Beneficiary 
Utilization Days; and Physician Order and Certification for Payment of 
Hospital Inpatient Services under Medicare Part A Issues.
Susanne Seagrave, (410) 786-0044, Physician Order and Certification for 
Payment of Inpatient Rehabilitation Facility Services under Medicare 
Part A Issues.
Jennifer Dupee, (410) 786-6537, and Jennifer Phillips, (410) 786-1023, 
Medical Review Criteria for Payment of Hospital Inpatient Services 
under Medicare Part A Issues.
David Danek, (617) 565-2682, Medicare Part B Inpatient Billing: 
Hospital and Beneficiary Appeals Issues.
Fred Grabau, (410) 786-0206, Medicare Part B Inpatient Billing: Time 
Limits for Filing Claims Issues.
Brian Pabst, (410) 786-2487, Medicare Part B Inpatient Billing: 
Coordination of Benefits Issues.
Anthony Hodge, (410) 786-6645, Qualification for Coverage of Skilled 
Nursing Facilities Services Issues.

SUPPLEMENTARY INFORMATION:

Electronic Access

    This Federal Register document is also available from the Federal 
Register online database through Federal Digital System (FDsys), a 
service of the U.S. Government Printing Office. This database can be 
accessed via the Internet at: http://www.gpo.gov/fdsys.

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 the proposed rule and the final rule 
were published in the Federal Register as part of the annual proposed 
and final rules. However, beginning in FY 2012, some of

[[Page 50497]]

the IPPS tables and LTCH PPS tables are no longer published in the 
Federal Register. Instead, these tables will be available only through 
the Internet. The IPPS tables for this final rule are available only 
through the Internet on the CMS Web site at: http://www.cms.hhs.gov/Medicare/medicare-Fee-for-Service-Payment/AcuteInpatientPPS/index.html. 
Click on the link on the left side of the screen titled, ``FY 2014 IPPS 
Final Rule Home Page'' or ``Acute Inpatient--Files for Download''. The 
LTCH PPS tables for this FY 2014 final rule are available only through 
the Internet on the CMS Web site at: http://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/LongTermCareHospitalPPS/index.html 
under the list item for Regulation Number CMS-1599-F. For complete 
details on the availability of the tables referenced in this final 
rule, we refer readers to section VI. of the Addendum to this final 
rule.
    Readers who experience any problems accessing any of the tables 
that are posted on the CMS Web sites identified above should contact 
Michael Treitel at (410) 786-4552.

Acronyms

3M 3M Health Information System
AAMC Association of American Medical Colleges
ACGME Accreditation Council for Graduate Medical Education
ACoS American College of Surgeons
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
APRN Advanced practice registered nurse
ARRA American Recovery and Reinvestment Act of 2009, Public Law 111-
5
ASCA Administrative Simplification Compliance Act of 2002, Public 
Law 107-105
ASITN American Society of Interventional and Therapeutic 
Neuroradiology
ATRA American Taxpayer Relief Act of 2012, Public Law 112-240
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
CAUTI Catheter-associated urinary tract infection
CBSAs Core-based statistical areas
CC Complication or comorbidity
CCN CMS Certification Number
CCR Cost-to-charge ratio
CDAC [Medicare] Clinical Data Abstraction Center
CDAD Clostridium difficile-associated disease
CDC Center for Disease Control and Prevention
CERT Comprehensive error rate testing
CDI Clostridium difficile
CFR Code of Federal Regulations
CLABSI Central line-associated bloodstream infection
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
DACA Data Accuracy and Completeness Acknowledgement
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
EMTALA Emergency Medical Treatment and Labor Act of 1986, Public Law 
99-272
FAH Federation of American Hospitals
FDA Food and Drug Administration
FFY Federal fiscal year
FPL Federal poverty line
FQHC Federally qualified health center
FR Federal Register
FTE Full-time equivalent
FUH Follow-up after hospitalization for mental illness
FY Fiscal year
GAAP Generally Accepted Accounting Principles
GAF Geographic Adjustment Factor
GME Graduate medical education
HAC Hospital-acquired condition
HAI Healthcare-associated infection
HBIPS Hospital-based inpatient psychiatric services
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 Health Insurance Portability and Accountability Act of 1996, 
Public Law 104-191
HIPC Health Information Policy Council
HIS Health information system
HIT Health information technology
HMO Health maintenance organization
HPMP Hospital Payment Monitoring Program
HSA Health savings account
HSCRC [Maryland] Health Services Cost Review Commission
HSRV Hospital-specific relative value
HSRVcc Hospital-specific relative value cost center
HQA Hospital Quality Alliance
HQI Hospital Quality Initiative
ICD-9-CM International Classification of Diseases, Ninth Revision, 
Clinical Modification
ICD-10-CM International Classification of Diseases, Tenth Revision, 
Clinical Modification
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
IPFQR Inpatient Psychiatric Facility Quality Reporting [Program]
IPPS [Acute care hospital] inpatient prospective payment system
IRF Inpatient rehabilitation facility
IQR Inpatient Quality Reporting
IVR Interactive voice response
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
MAP Measure Application Partnership
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

[[Page 50498]]

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
NOP Notice of Participation
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 1986, 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
OQR [Hospital] Outpatient Quality Reporting
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
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]
PQRS Physician Quality Reporting 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
SCIP Surgical Care Improvement Project
SFY State fiscal year
SIC Standard Industrial Classification
SNF Skilled nursing facility
SOCs Standard occupational classifications
SOM State Operations Manual
SSI Surgical site infection
SSI Supplemental Security Income
SSO Short-stay outlier
SUD Substance use disorder
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
VBP [Hospital] Value Based Purchasing [Program]
VTE Venous thromboembolism

Table of Contents

I. Executive Summary and Background
    A. Executive Summary
    1. Purpose and Legal Authority
    2. Summary of the Major Provisions
    3. Summary of Costs and Benefits
    B. Summary
    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), the Health Care and Education Reconciliation Act 
of 2010 (Pub. L. 111-152), and the American Taxpayer Relief Act of 
2012 (Pub. L. 112-240)
    D. Issuance of a Notice of Proposed Rulemaking
    E. Public Comments Received in Response to the FY 2014 IPPS/LTCH 
PPS Proposed Rule
    F. Finalization of the Proposed Rule on Medicare Part B 
Inpatient Billing in Hospitals
II. Changes to Medicare Severity Diagnosis-Related Group (MS-DRG) 
Classifications and Relative Weights
    A. Background
    B. MS-DRG Reclassifications
    C. Adoption of the MS-DRGs in FY 2008
    D. FY 2014 MS-DRG Documentation and Coding Adjustment
    1. Background on the Prospective MS-DRG Documentation and Coding 
Adjustments for FY 2008 and FY 2009 Authorized by Public Law 110-90
    2. Adjustment to the Average Standardized Amounts Required by 
Public Law 110-90
    a. Prospective Adjustment Required by Section 7(b)(1)(A) of 
Public Law 110-90
    b. Recoupment or Repayment Adjustments in FYs 2010 through 2012 
Required by Section 7(b)(1)(B) Public Law 110-90
    3. Retrospective Evaluation of FY 2008 and FY 2009 Claims Data
    4. Prospective Adjustments for FY 2008 and FY 2009 Authorized by 
Section 7(b)(1)(A) of Public Law 110-90
    5. Recoupment or Repayment Adjustment Authorized by Section 
7(b)(1)(B) of Public Law 110-90
    6. Recoupment or Repayment Adjustment Authorized by Section 631 
of the American Taxpayer Relief Act of 2012 (ATRA).
    7. Additional Prospective Adjustments for the MS-DRG 
Documentation and Coding Effect through FY 2010 Authorized under 
Section 1886(d)(3)(A)(vi) of the Act
    E. Refinement of the MS-DRG Relative Weight Calculation
    1. Background
    2. Discussion and Policies for FY 2014
    F. Adjustment to MS-DRGs for Preventable Hospital-Acquired 
Conditions (HACs), Including Infections
    1. Background
    2. HAC Selection
    3. Present on Admission (POA) Indicator Reporting
    4. HACs and POA Reporting in ICD-10-CM and ICD-10-PCS
    5. Current HACs and Previously Considered Candidate HACs
    6. RTI Program Evaluation
    7. Current and Previously Considered Candidate HACs--RTI Report 
on Evidence-Based Guidelines
    G. Changes to Specific MS-DRG Classifications
    1. Pre-Major Diagnostic Categories (Pre-MDCs): Heart Transplants 
and Liver Transplants
    2. MDC 1(Diseases and Disorders of the Nervous System): Tissue 
Plasminogen Activator (tPA) (rtPA) Administration within 24 Hours 
Prior to Admission
    3. MDC 4 (Diseases and Disorders of the Ear, Nose, Mouth and 
Throat)
    a. Endoscopic Placement of a Bronchial Valve
    b. Pulmonary Thromboendarterectomy (PTE) with Full Circulatory 
Arrest
    4. MDC 5 (Diseases and Disorders of the Circulatory System)
    a. Discharge/Transfer to Designated Disaster Alternative Care 
Site
    b. Discharges/Transfers with a Planned Acute Care Hospital 
Inpatient Readmission
    5. MDC 8 (Diseases and Disorders of the Musculoskeletal System 
and Connective Tissue)
    a. Reverse Shoulder Procedures
    b. Total Ankle Replacement Procedures
    6. MDC 15 (Newborns and Other Neonates with Conditions 
Originating in the Perinatal Period)

[[Page 50499]]

    a. Persons Encountering Health Services for Specific Procedures, 
Not Carried Out
    b. Discharges/Transfers of Neonates with a Planned Acute Care 
Hospital Inpatient Readmission
    7. Medicare Code Editor (MCE) Changes
    a. Age Conflict Edit
    b. Discharge Status Code Updates
    8. Surgical Hierarchies
    9. Complications or Comorbidity (CC) Exclusions List
    a. Background of the CC List and the CC Exclusion List
    b. CC Exclusions List for FY 2014
    10. 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
    11. 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 FY 2014 MS-DRG Relative Weights
    1. Data Sources for Developing the Relative Weights
    2. Methodology for Calculation of the Relative Weights
    3. Development of National Average CCRs
    4. Bundled Payments for Care Improvement (BPCI) Initiative
    I. 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 2014 Status of Technology Approved for FY 2013 Add-On 
Payments
    a. AutoLaser Interstitial Therapy (Auto LITT[supreg]) System
    b. Glucarpidase (Trade Brand Voraxaze[supreg])
    c. DIFICID[supreg] (Fidaxomicin) Tablets
    d. Zenith[supreg] Fenestrated Abdominal Aortic Aneurysm (AAA) 
Endovascular Graft
    4. FY 2014 Applications for New Technology Add-On Payments
    a. Kcentra[supreg]
    b. Argus[supreg] II Retinal Prosthesis System
    c. Responsive Neurostimulator (RNS) System
    d. Zilver[supreg] PTX[supreg] Drug Eluting Stent
    e. MitraClip[supreg] System
III. 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 FY 2014 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 FY 2014 Unadjusted Wage Index
    F. Occupational Mix Adjustment to the FY 2014 Wage Index
    1. Development of Data for the FY 2014 Occupational Mix 
Adjustment Based on the 2010 Occupational Mix Survey
    2. New 2013 Occupational Mix Survey for the FY 2016 Wage Index
    3. Calculation of the Occupational Mix Adjustment for FY 2014
    G. Analysis and Implementation of the Occupational Mix 
Adjustment and the FY 2014 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
    c. Frontier Floor
    3. FY 2014 Wage Index Tables
    H. Revisions to the Wage Index Based on Hospital Redesignations 
and Reclassifications
    1. General Policies and Effects of Reclassification/
Redesignation
    2. FY 2014 MGCRB Reclassifications
    a. FY 2014 Reclassification Requirements and Approvals
    b. Applications for Reclassifications for FY 2015
    3. Redesignations of Hospitals under Section 1886(d)(8)(B) of 
the Act
    4. Reclassifications under Section 1886(d)(8)(B) of the Act 
Seeking Reclassification by the MGCRB
    5. Waiving Lugar Redesignation for the Out-Migration Adjustment
    I. FY 2014 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 Proposed FY 2014 Wage Index
IV. Rebasing and Revision of the Hospital Market Baskets for Acute 
Care Hospitals
    A. Background
    B. Rebasing and Revising the IPPS Market Basket
    1. Development of Cost Categories and Weights
    2. Cost Category Computation
    3. Selection of Price Proxies
    4. Labor-Related Share
    C. Market Basket for Certain Hospitals Presently Excluded from 
the IPPS
    D. Rebasing and Revising the Capital Input Price Index (CIPI)
V. Other Decisions and Changes to the IPPS for Operating Costs and 
Graduate Medical Education (GME) Costs
    A. Inpatient Hospital Updates for FY 2014 (Sec. Sec.  412.64(d) 
and 412.211(c))
    1. FY 2014 Inpatient Hospital Update
    2. FY 2014 Puerto Rico Hospital Update
    B. Rural Referral Centers (RRCs): Annual Update to Case-Mix 
Index (CMI) and Discharge Criteria (Sec.  412.96)
    1. Case-Mix Index (CMI)
    2. Discharges
    C. Payment Adjustment for Low-Volume Hospitals (Sec.  412.101)
    1. Background
    a. Original Implementation of the Low-Volume Hospital Payment 
Adjustment
    b. Affordable Care Act Provisions for FYs 2011 and 2012
    2. Provisions of the ATRA for FY 2013
    a. Background
    b. Conforming Regulatory Changes
    3. Low-Volume Hospital Definition and Payment Adjustment for FY 
2014 and Subsequent Years
    D. Indirect Medical Education (IME) Adjustment (Sec.  412.105)
    1. IME Adjustment Factor for FY 2014
    2. Other Policy Changes Affecting GME
    E. Payment Adjustment for Medicare Disproportionate Share 
Hospitals (DSHs) Sec.  412.106)
    1. Background
    2. Counting of Patient Days Associated with Patients Enrolled in 
Medicare Advantage Plans in the Medicare and Medicaid Fractions of 
the Disproportionate Share Patient Percentage (DPP) Calculation
    3. New Payment Adjustment Methodology for Medicare DSH under 
Section 3133 of the Affordable Care Act
    F. Medicare-Dependent, Small Rural Hospital (MDH) Program (Sec.  
412.108)
    1. Background
    2. Provisions of the ATRA for FY 2013
    a. Background
    b. Conforming Regulatory Changes
    c. Expiration of the MDH Program
    G. Hospital Readmissions Reduction Program (Sec. Sec.  412.150 
through 412.154)
    1. Statutory Basis for the Hospital Readmissions Reduction 
Program
    2. Overview
    3. FY 2014 Policies for the Hospital Readmissions Reduction 
Program
    a. Overview
    b. Refinement of the Readmission Measures and Related 
Methodology for FY 2014 and Subsequent Years Payment Determinations
    c. Expansion of the Applicable Conditions for FY 2015
    d. Hospitals Paid under Section 1814(b)(3) of the Act, Including 
the Process to be Exempt from the Hospital Readmissions Reduction 
Program and Definition of ``Base Operating DRG Payment Amount'' for 
Such Hospitals (Sec.  412.152 and Sec.  412.154(d))
    e. Floor Adjustment Factor for FY 2014 (Sec.  412.154(c)(2))
    f. Applicable Period for FY 2014
    g. Refinements of the Methodology to Calculate the Aggregate 
Payments for Excess Readmissions
    h. Clarification of Reporting Hospital-Specific Information, 
Including Opportunity to Review and Submit Corrections
    H. Hospital Value-Based Purchasing Program (Sec. Sec.  412.160 
through 412.165)
    1. Statutory Background
    2. Overview of the FY 2013 Hospital VBP Program
    3. FY 2014 Payment Details

[[Page 50500]]

    4. FY 2014 Hospital VBP Program Measures
    5. FY 2015 Hospital VBP Program Measures
    6. FY 2016 Hospital VBP Program Measures
    a. Measures Previously Adopted and Removal of AMI-8a, PN-3b, and 
HF-1 Measures
    b. New Measures for the FY 2016 Hospital VBP Program
    c. Future Measures for the Efficiency Domain
    7. Performance Periods and Baseline Periods
    a. Background
    b. Clinical Process of Care Domain Performance Period and 
Baseline Periods for the FY 2016 Hospital VBP Program
    c. Experience of Care Domain Performance Period and Baseline 
Period for the FY 2016 Hospital VBP Program
    d. Efficiency Domain Measure Performance Period and Baseline 
Period for the FY 2016 Hospital VBP Program
    e. Outcome Domain Performance Periods and Baseline Periods for 
the FY 2017 through FY 2019 Hospital VBP Programs
    8. Performance Standards for the Hospital VBP Program
    a. Background
    b. Performance Standards for the FY 2016 Hospital VBP Program 
Measures
    c. Certain Performance Standards for the FY 2017, FY 2018, and 
FY 2019 Hospital VBP Programs
    9. FY 2016 Hospital VBP Program Scoring Methodology
    a. General Hospital VBP Program Scoring Methodology
    b. Domain Weighting for the FY 2016 Hospital VBP Program for 
Hospitals That Receive a Score on All Domains
    c. Domain Weighting for the FY 2016 Hospital VBP Program for 
Hospitals Receiving Scores on Fewer than Four Domains
    d. Domain Reclassification and Domain Weighting for the FY 2017 
Hospital VBP Program
    e. Disaster/Extraordinary Circumstance Waivers under the 
Hospital VBP Program
    10. Applicability of the Hospital VBP Program to Hospitals
    a. Background
    b. Minimum Numbers of Cases and Measures for the FY 2016 
Hospital VBP Program Outcome Domain
    c. Hospitals Paid under Section 1814(b)(3) of the Act
    I. Hospital-Acquired Condition (HAC) Reduction Program
    1. Background
    2. Statutory Basis for the HAC Reduction Program
    3. Implementation of the HAC Reduction Program
    a. Definitions
    b. Payment Adjustment under the HAC Reduction Program, Including 
Exemptions
    c. Measure Selection and Conditions, Including a Proposed Risk-
Adjustment Scoring Methodology
    d. Criteria for Applicable Hospitals and Performance Scoring
    e. Reporting Hospital-Specific Information, Including the Review 
and Correction of Information
    f. Limitation on Administrative and Judicial Review
    J. Payment for Graduate Medical Education (GME) and Indirect 
Medical Education (IME) Costs (Sec. Sec.  412.105, 413.75 through 
413.83)
    1. Background
    2. Inclusion of Labor and Delivery Days in the Calculation of 
Medicare Utilization for Direct GME Payment Purposes and for Other 
Medicare Purposes
    3. Notice of Closure of Teaching Hospital and Opportunity to 
Apply for Available Slots
    4. Payments for Residents Training in Approved Residency 
Programs at CAHs
    a. Background
    b. Residents in Approved Medical Residency Training Programs 
That Train at CAHs
    5. Expiration of Inflation Update Freeze for High Per Resident 
Amounts (PRAs)
    K. Rural Community Hospital Demonstration Program
    1. Background
    2. FY 2014 Budget Neutrality Offset Amount
    L. Hospital Emergency Services under EMTALA: Technical Change 
(Sec.  489.24(f))
    M. Hospital Services Furnished under Arrangements
VI. 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. Other Changes for FY 2014--Adjustment to Offset the Cost of 
the Policy Proposal on Admission and Medical Review Criteria for 
Hospital Inpatient Services under Medicare Part A
    D. Annual Update for FY 2014
VII. Changes for Hospitals Excluded from the IPPS
    A. Rate-of-Increase in Payments to Excluded Hospitals for FY 
2014
    B. Report of Adjustment (Exceptions) Payments
    C. Critical Access Hospitals (CAHs): Changes to Conditions of 
Participation (CoPs)
    1. Background
    2. Policy Changes
VIII. Changes to the Long-Term Care Hospital Prospective Payment 
System (LTCH PPS) for FY 2014
    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. Medicare Severity Long-Term Care Diagnosis-Related Group (MS-
LTC-DRG) Classifications and Relative Weights for FY 2014
    1. Background
    2. Patient Classifications into MS-LTC-DRGs
    a. Background
    b. Changes to the MS-LTC-DRGs for FY 2014
    3. Development of the FY 2014 MS-LTC-DRG Relative Weights
    a. General Overview of the Development of the MS-LTC-DRG 
Relative Weights
    b. Development of the MS-LTC-DRG Relative Weights for FY 2014
    c. Data
    d. Hospital-Specific Relative Value (HSRV) Methodology
    e. Treatment of Severity Levels in Developing the MS-LTC-DRG 
Relative Weights
    f. Low-Volume MS-LTC-DRGs
    g. Steps for Determining the FY 2014 MS-LTC-DRG Relative Weights
    C. LTCH PPS Payment Rates for FY 2014
    1. Overview of Development of the LTCH Payment Rates
    2. FY 2014 LTCH PPS Annual Market Basket Increase
    a. Overview
    b. Revision of Certain Market Basket Updates as Required by the 
Affordable Care Act
    c. Adjustment to the Annual Update to the LTCH PPS Standard 
Federal Rate under the Long-Term Care Hospital Quality Reporting 
(LTCHQR) Program
    1. Background
    2. Reduction to the Annual Update to the LTCH PPS Standard 
Federal Rate under the LTCHQR Program
    d. Market Basket Under the LTCH PPS for FY 2014
    e. Annual Market Basket Update for LTCHs for FY 2014
    3. Adjustment for the Second Year of the Phase-In of the One-
Time Prospective Adjustment to the Standard Federal Rate under Sec.  
412.523(d)(3)
    D. Expiration of Certain Payment Rules for LTCH Services--The 
25-Percent Threshold Payment Adjustment
    E. Research on the Development of a Patient Criteria-Based 
Payment Adjustment under the LTCH PPS
    1. Overview
    2. MedPAC's 2004 Report to Congress
    3. LTCHs in the Medicare Program
    4. CMS' Research: The RTI Report
    5. CMS' Report to Congress: Determining Medical Necessity and 
Appropriateness of Care for Medicare Long-Term Care Hospitals
    6. Current Practices in LTCHs
    7. Identification of Chronically Critically Ill/Medically 
Complex (CCI/MC) Patients
    8. LTCH PPS Payments for CCI/MC Patients
IX. 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

[[Page 50501]]

    a. Considerations in Removing Quality Measures from the Hospital 
IQR Program
    b. Hospital IQR Program Measures Removed in Previous Rulemaking
    c. Removal of Hospital IQR Program Measures for the FY 2016 
Payment Determination and Subsequent Years
    d. Suspension of Data Collection for the FY 2014 Payment 
Determination and Subsequent Years
    3. Process for Retaining Previously Adopted Hospital IQR Program 
Measures for Subsequent Payment Determinations
    4. Additional Considerations in Expanding and Updating Quality 
Measures under the Hospital IQR Program
    5. Changes to Hospital IQR Program Measures Previously Adopted 
for the FY 2015 and FY 2016 Payment Determinations and Subsequent 
Years
    a. Previously Adopted Hospital IQR Program Measures for the FY 
2015 Payment Determination and Subsequent Years
    b. Refinements to Existing Measures in the Hospital IQR Program
    6. Additional Hospital IQR Program Measures for the FY 2016 
Payment Determination and Subsequent Years
    a. Hospital 30-Day, All-Cause, Risk-Standardized Readmission 
Rate (RSRR) Following Chronic Obstructive Pulmonary Disease (COPD) 
Hospitalization Measure (NQF 1891)
    b. Hospital 30-Day, All-Cause, Risk-Standardized Mortality Rate 
(RSMR) Following Chronic Obstructive Pulmonary Disease (COPD) 
Hospitalization Measure (NQF 1893)
    c. Hospital 30-day, All-Cause Risk-Standardized Rate of 
Readmission Following Acute Ischemic Stroke (Stroke Readmission) 
Measure
    d. Hospital 30-Day, All-Cause Risk-Standardized Rate of 
Mortality Following an Admission for Acute Ischemic Stroke (Stroke 
Mortality) Measure
    e. Hospital Risk-Standardized Payment Associated with a 30-day 
Episode-of-Care for Acute Myocardial Infarction (AMI) Measure
    7. Electronic Clinical Quality Measures
    8. Possible New Quality Measures and Measure Topics for Future 
Years
    9. Form, Manner, and Timing of Quality Data Submission
    a. Background
    b. Procedural Requirements for the FY 2016 Payment Determination 
and Subsequent Years
    c. Data Submission Requirements for Chart-Abstracted Measures
    d. Data Submission Requirements for Quality Measures That May be 
Voluntarily Electronically Reported for the FY 2016 Payment 
Determination
    e. Sampling and Case Thresholds for the FY 2016 Payment 
Determination and Subsequent Years
    f. HCAHPS Requirements for the FY 2017 Payment Determination and 
Subsequent Years
    g. Data Submission Requirements for Structural Measures for the 
FY 2015 and FY 2016 Payment Determinations
    h. Data Submission and Reporting Requirements for Healthcare-
Associated Infection (HAI) Measures Reported via NHSN
    10. Modifications to the Validation Process for Chart-Abstracted 
Measures under the Hospital IQR Program
    a. Timing and Number of Quarters Included in Validation
    b. Selection of Measures and Sampling of Charts to be Included 
in Validation
    c. Procedures for Scoring Records for Validation
    d. Procedures to Select Hospitals for Validation
    e. Procedures for Submitting Records for Validation
    11. Data Accuracy and Completeness Acknowledgement Requirements 
for the FY 2015 Payment Determination and Subsequent Years
    12. Public Display Requirements for the FY 2016 Payment 
Determination and Subsequent Years
    13. Reconsideration and Appeal Procedures for the FY 2015 
Payment Determination and Subsequent Years
    14. Hospital IQR Program Extraordinary Circumstances Extensions 
or Waivers
    B. PPS-Exempt Cancer Hospital Quality Reporting (PCHQR) Program
    1. Statutory Authority
    2. Covered Entities
    3. Previously Finalized Quality Measures for PCHs for the FY 
2014 Program Year and Subsequent Years
    4. Considerations in the Selection of the Quality Measures
    5. New Quality Measures
    a. New Measure Beginning for the FY 2015 Program Year and 
Subsequent Years--NHSN Healthcare-Associated Infection (HAI) 
Measure: Surgical Site Infection (SSI) (NQF 0753)
    b. New Measures Beginning for the FY 2016 PQHQR Program Year and 
Subsequent Years
    6. Possible New Quality Measure Topics for Future Years
    7. Maintenance of Technical Specifications for Quality Measures
    8. Public Display Requirements for the FY 2014 Program Year and 
Subsequent Years
    9. Form, Manner, and Timing of Data Submission Beginning with FY 
2015 Program Year and Subsequent Years
    a. Background
    b. Waivers from Program Requirements
    c. Reporting Periods and Submission Timelines for the Finalized 
SSI Measure
    d. Exceptions to Reporting and Data Submission for HAI Measures 
(CAUTI, CLABSI, and SSI)
    e. Reporting and Data Submission Requirements for the Finalized 
Clincial Process/Oncology Care Measures
    f. Reporting and Data Submission Requirements for the Finalized 
SCIP Measures
    g. HCAHPS Requirements
    C. Long-Term Care Hospital Quality Reporting (LTCHQR) Program
    1. Statutory History
    2. General Considerations Used for Selection of Quality Measures 
for the LTCHQR Program
    3. Process for Retention of LTCHQR Program Measures Adopted in 
Previous Payment Determinations
    4. Process for Adopting Changes to LTCHQR Program Measures
    5. Previously Adopted Quality Measures for the FY 2014 and FY 
2015 Payment Determinations and Subsequent Years
    6. Previously Adopted Quality Measures for the FY 2016 Payment 
Determination and Subsequent Years
    7. Revisions to Previously Adopted Quality Measures
    a. Revisions for Influenza Vaccination Coverage among Healthcare 
Personnel (NQF 0431)
    b. Revisions for Percent of Residents or Patients Who Were 
Assessed and Appropriately Given the Seasonal Influenza Vaccine 
(Short-Stay) (NQF 0680) for the FY 2016 Payment 
Determination and Subsequent Years
    c. Revisions for Percent of Residents or Patients with Pressure 
Ulcers That Are New or Worsened (Short-Stay) (NQF 0678) for 
the FY 2015 Payment Determination and Subsequent Years
    8. New LTCHQR Program Quality Measures Affecting the FY 2017 an 
FY 2018 Payment Determinations and Subsequent Years
    a. Considerations in Updating and Expanding Quality Measures 
under the LTCHQR Program for the FY 2017 Payment Determination and 
Subsequent Years
    b. New LTCHQR Program Quality Measures for the FY 2017 Payment 
Determination and Subsequent Years
    c. New LTCHQR Program Quality Measure for the FY 2018 Payment 
Determination and Subsequent Years
    d. LTCHQR Program Quality Measures and Concepts under 
Consideration for Future Years Payment Determinations
    9. Form, Manner, and Timing of Quality Data Submission for the 
FY 2016 Payment Determination and Subsequent Years
    a. Background
    b. Finalized Timeline for Data Submission under the LTCHQR 
Program for the FY 2016 Payment Determination
    c. Timeline for Data Submission for the NQF 0431 
Influenza Vaccination Coverage Among Healthcare Personnel Measure 
for the FY 2016 Payment Determination and Subsequent Years
    d. Timeline for Data Submission for the NQF 0680 
Percent of Residents or Patients Who Were Assessed and Appropriately 
Given the Seasonal Influenza Vaccine (Short Stay) Measure for the FY 
2016 Payment Determination and Subsequent Years
    e. Timeline for Data Submission under the LTCHQR Program for the 
FY 2017 Payment Determination and Subsequent Years
    f. Timeline for Data Submission under the LTCHQR Program for the 
FY 2018 Payment Determination and Subsequent Years
    10. Public Display of Data Quality Measures for the LTCHQR 
Program

[[Page 50502]]

    11. LTCHQR Program Submission Waiver Requirements for the FY 
2015 Payment Determination and Subsequent Years
    12. LTCHQR Program Reconsideration and Appeals for the FY 2015 
Payment Determination and Subsequent Years
    a. LTCHQR Program Reconsideration and Appeals for the FY 2014 
Payment Determination
    b. LTCHQR Program Reconsideration and Appeals for the FY 2015 
Payment Determination
    D. Inpatient Psychiatric Facilities Quality Reporting (IPFQR) 
Program
    1. Statutory Authority
    2. Application of the Payment Update Reduction for Failure to 
Report for the FY 2014 Payment Determination and Subsequent Years
    3. Covered Entities
    4. Considerations in Selecting Quality Measures
    5. Quality Measures for the FY 2015 Payment Determination and 
Subsequent Years
    a. Background
    b. New Quality Measures for the FY 2016 Payment Determination 
and Subsequent Years
    c. Maintenance of Technical Specifications for Quality Measures
    6. Request for Voluntary Information--IPF Assessment of Patient 
Experience of Care
    7. Request for Recommendations for New Quality Measures for 
Future Years
    8. Public Display Requirements for the FY 2014 Payment 
Determination and Subsequent Years
    9. Form, Manner, and Timing of Quality Data Submission for the 
FY 2014 Payment Determination and Subsequent Years
    a. Background
    b. Procedural Requirements
    c. Submission Requirements for the FY 2016 Payment Determination 
and Subsequent Years
    d. Reporting Requirements for the FY 2016 Payment Determination 
and Subsequent Years
    e. Population, Sampling, and Minimum Case Threshold for the FY 
2016 Payment Determination and Subsequent Years
    f. Data Accuracy and Completeness Acknowledgement (DACA) 
Requirements
    10. Reconsideration and Appeals Procedures for the FY 2014 
Payment Determination and Subsequent Years
    11. Waivers from Quality Reporting Requirements for the FY 2014 
Payment Determination and Subsequent Years
    12. Electronic Health Records (EHRs)
    E. Electronic Health Records (EHRs) Incentive Program and 
Meaningful Use (MU)
    1. Background
    2. Expanded Electronic Submission Period for CQMs
    3. Quality Reporting Data Architecture Category III (QRDA-III) 
Option in 2014
    4. Case Number Threshold Exemption--Requirements Regarding Data 
Submission
X. Change to the Medicare Hospital Conditions of Participation 
(CoPs) Relating to the Administration of Pneumococcal Vaccines
XI. Payment Policies Related to Patient Status
    A. Background
    B. Payment of Medicare Part B Hospital Inpatient Services
    1. Payable Medicare Part B Inpatient Services
    a. Payment Methodology
    b. Other Revisions Resulting from Our Review of the Regulations
    2. Billing for Part B Outpatient Services in the 3-Day Payment 
Window
    3. Applicability: Hospital Self-Audit
    4. Applicability: Types of Hospitals
    5. Beneficiary Liability under Section 1879 of the Act
    6. Applicable Beneficiary Liability: Hospital Services
    7. Applicable Beneficiary Liability: Skilled Nursing Facility 
Services
    8. Time Limits for Filing Claims
    9. Appeal Procedures
    10. Coordination of Benefits with Supplemental Insurers
    11. Public Comments on Other Issues
    a. Application to Disproportionate Share Hospital (DSH) 
Payments, Indirect Medical Education (IME) and Graduate Medical 
Education (GME) Payments, and Other IPPS Adjustments
    b. Application to Beneficiary Utilization Days under Medicare 
Part A
    c. Applicability to the Medicare Advantage (MA) Program
    12. Regulatory Impact Analysis: Final Part B Inpatient Payment 
Policy
    a. Statement of Need
    b. Overall Impact
    c. Estimated Impacts of the Final Part B Inpatient Payment 
Policy
    d. Alternatives Considered
    e. Accounting Statement and Table
    f. Conclusion
    13. Collection of Information Requirements
    C. Admission and Medical Review Criteria for Hospital Inpatient 
Services under Medicare Part A
    1. Background
    2. Requirements for Physician Orders and Physician Certification
    a. Applicability for All Hospitals
    b. Applicability to Inpatient Rehabilitation Facilities (IRFs)
    3. Inpatient Admission Guidelines
    a. Correct Coding Reviews
    b. Complete and Accurate Documentation
    c. Medical Necessity Reviews
    4. Impacts of Changes in Admission and Medical Review Criteria
XII. MedPAC Recommendations
XIII. 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 2014 Wage 
Index (Hospital Wage Index Occupational Mix Survey)
    4. Hospital Applications for Geographic Reclassifications by the 
MGCRB
    5. ICRs for Application for GME 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 Long-Term Care Hospital Quality Reporting 
(LTCHQR) Program
    10. ICRs for the Inpatient Psychiatric Facilities Quality 
Reporting (IPFQR) Program

Regulation Text
    Addendum--Schedule of Standardized Amounts, Update Factors, and 
Rate-of-Increase Percentages Effective with Cost Reporting Periods 
Beginning on or after October 1, 2013 and Payment Rates for LTCHs 
Effective with Discharges Occurring on or after October 1, 2013
I. Summary and Background
II. Changes to the Prospective Payment Rates for Hospital Inpatient 
Operating Costs for Acute Care Hospitals for FY 2014
    A. Calculation of the Adjusted Standardized Amount
    B. Adjustments for Area Wage Levels and Cost-of-Living
    C. Calculation of the Prospective Payment Rates
III. Changes to Payment Rates for Acute Care Hospital Inpatient 
Capital-Related Costs for FY 2014
    A. Determination of Federal Hospital Inpatient Capital-Related 
Prospective Payment Rate Update
    B. Calculation of the Inpatient Capital-Related Prospective 
Payments for FY 2014
    C. Capital Input Price Index
IV. Changes to Payment Rates for Excluded Hospitals: Rate-of-
Increase Percentages for FY 2014
V. Updates to the Payment Rates for the LTCH PPS for FY 2014
    A. LTCH PPS Standard Federal Rate for FY 2014
    B. Adjustment for Area Wage Levels under the LTCH PPS for FY 
2014
    1. Background
    2. Geographic Classifications/Labor Market Area Definitions
    3. LTCH PPS Labor-Related Share
    4. LTCH PPS Wage Index for FY 2014
    5. Budget Neutrality Adjustment for Changes to the Area Wage 
Level Adjustment
    C. LTCH PPS Cost-of-Living Adjustment (COLA) for LTCHs Located 
in Alaska and Hawaii
    D. Adjustment for LTCH PPS High-Cost Outlier (HCO) Cases
    E. Computing the Adjusted LTCH PPS Federal Prospective Payments 
for FY 2014
VI. Tables Referenced in this Final 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
    E. Hospitals Included in and Excluded from the IPPS
    F. Effects on Hospitals and Hospital Units Excluded from the 
IPPS

[[Page 50503]]

    G. Quantitative Effects of the 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 Other Policy Changes
    1. Effects of Policy on MS-DRGs for Preventable HACs, Including 
Infections
    2. Effects of Policy Relating to New Medical Service and 
Technology Add-On Payments
    3. Effects of Payment Adjustment for Low-Volume Hospitals for FY 
2014
    4. Effects of Extension of the MDH Program
    5. Effects of Changes under the FY 2014 Hospital Value-Based 
Purchasing (VBP) Program
    6. Effects of the Implementation of the HAC Reduction Program
    7. Effects of Policy Changes Relating to Payments for Direct GME 
and IME Costs
    8. Effects of Implementation of Rural Community Hospital 
Demonstration Program
    9. Effects of the Extended Effective Date for Policy on Hospital 
Services Furnished under Arrangements
    I. Effects of Policy Relating to the Furnishing of Acute Care 
Inpatient Services by CAHs
    J. Effects of Changes to the COPs for Hospitals Relating to the 
Administration of Pneumococcal Vaccines
    K. Effects of Changes in the Capital IPPS
    1. General Considerations
    2. Results
    L. Effects of Payment Rate Changes and Policy Changes under the 
LTCH PPS
    1. Introduction and General Considerations
    2. Impact on Rural Hospitals
    3. Anticipated Effects of LTCH PPS Payment Rate Changes and 
Policy Changes
    4. Effect on the Medicare Program
    5. Effect on Medicare Beneficiaries
    M. Effects of Requirements for Hospital Inpatient Quality 
Reporting (IQR) Program
    N. Effects of Changes in the PPS-Exempt Cancer Hospital Quality 
Reporting (PCHQR) Program
    O. Effects of Changes in the LTCH Quality Reporting (LTCHQR) 
Program
    P. Effects of Changes in the Requirements for the Inpatient 
Psychiatric Facilities Quality Reporting (IPFQR) Program
II. Alternatives Considered
III. Overall Conclusion
    1. Acute Care Hospitals
    2. LTCHs
IV. Accounting Statements and Tables
    A. Acute Care Hospitals
    B. LTCHs
    C. Part B Inpatient Hospital Services
V. Regulatory Flexibility Act (RFA) Analysis
VI. Impact on Small Rural Hospitals
VII. Unfunded Mandate Reform Act (UMRA) Analysis
VIII. 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 2014
    A. FY 2014 Inpatient Hospital Update
    B. Update for SCHs for FY 2014
    C. FY 2014 Puerto Rico Hospital Update
    D. Update for Hospitals Excluded from the IPPS
    E. Update for LTCHs for FY 2014
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 final rule makes 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 makes 
payment and policy changes for inpatient hospital services provided by 
long-term care hospitals (LTCHs) under the long-term care hospital 
prospective payment system (LTCH PPS). It also makes policy changes to 
programs associated with Medicare IPPS hospitals, IPPS-excluded 
hospitals, and LTCHs.
    Under various statutory authorities, we are making changes to the 
Medicare IPPS, to the LTCH PPS, and to other related payment 
methodologies and programs for FY 2014 and subsequent fiscal years. 
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 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 1866(k) of the Act, as added by section 3005 of 
the Affordable Care Act, which establishes a quality reporting program 
for hospitals described in section 1886(d)(1)(B)(v) of the Act, 
referred to as ``PPS-Exempt Cancer Hospitals.''
     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

[[Page 50504]]

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.
     Section 1886(p) of the Act, as added by section 3008 of 
the Affordable Care Act, which establishes an adjustment to hospital 
payments for hospital-acquired conditions (HACs), or a Hospital-
Acquired Condition (HAC) Reduction Program, under which payments to 
applicable hospitals are adjusted to provide an incentive to reduce 
hospital-acquired conditions, effective for discharges beginning on 
October 1, 2014.
     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 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(r) of the Act, as added by section 3313 of 
the Affordable Care Act, which provides for a reduction to 
disproportionate share payments under section 1886(d)(5)(F) of the Act 
and for a new uncompensated care payment to eligible hospitals. 
Specifically, section 1886(r) of the Act now requires that, for 
``fiscal year 2014 and each subsequent fiscal year,'' ``subsection (d) 
hospitals'' that would otherwise receive a ``disproportionate share 
payment . . . made under subsection (d)(5)(F)'' will receive two 
separate payments: (1) 25 percent of the amount they previously would 
have received under subsection (d)(5)(F) for DSH (``the empirically 
justified amount''), and (2) an additional payment for the DSH 
hospital's proportion of uncompensated care, determined as the product 
of three factors. These three factors are: (1) 75 percent of the 
payments that would otherwise be made under subsection (d)(5)(F); (2) 1 
minus the percent change in the percent of individuals under the age of 
65 who are uninsured (minus 0.1 percentage points for FY 2014, and 
minus 0.2 percentage points for FY 2015 through FY 2017); and (3) a 
hospital's uncompensated care amount relative to the uncompensated care 
amount of all DSH hospitals expressed as a percentage.
     Section 1886(s)(4) of the Act, as added and amended by 
section 3401(f) and 10322(a) of the Affordable Care Act, respectively, 
which requires the Secretary to implement a quality reporting program 
for inpatient psychiatric hospitals and psychiatric units. Under this 
program, known as the Inpatient Psychiatric Facility Quality Reporting 
(IPFQR) Program, beginning with FY 2014, the Secretary must reduce any 
annual update to a standard Federal rate for discharges occurring 
during a fiscal year by 2.0 percentage points for any inpatient 
psychiatric hospital or psychiatric unit that does not comply with 
quality data submission requirements with respect to an applicable 
fiscal year.
2. Summary of the Major Provisions
a. MS-DRG Documentation and Coding Adjustment
    Section 631 of the American Taxpayer Relief Act (ATRA, Pub. L. 112-
240) amended section 7(b)(1)(B) of Public Law 110-90 to require the 
Secretary to make a recoupment adjustment to the standardized amount of 
Medicare payments to acute care hospitals to account for changes in MS-
DRG documentation and coding that do not reflect real changes in case-
mix, totaling $11 billion over a 4-year period of FYs 2014, 2015, 2016, 
and 2017. This adjustment represents the amount of the increase in 
aggregate payments as a result of not completing the prospective 
adjustment authorized under section 7(b)(1)(A) of Public Law110-90 
until FY 2013. Prior to the ATRA, this amount could not have been 
recovered under Public Law 110-90.
    While our actuaries estimate that a -9.3 percent adjustment to the 
standardized amount would be necessary if CMS were to fully recover the 
$11 billion recoupment required by section 631 of the ATRA in FY 2014, 
it is often our practice to delay or phase in rate adjustments over 
more than one year, in order to moderate the effects on rates in any 
one year. Therefore, consistent with the policies that we have adopted 
in many similar cases, we are making a -0.8 percent recoupment 
adjustment to the standardized amount in FY 2014. Although we are not 
making an additional prospective adjustment in FY 2014 for the 
cumulative MS-DRG documentation and coding effects through FY 2010, we 
solicited public comments as to whether any portion of the proposed -
0.8 percent recoupment adjustment to the operating IPPS standardized 
amount should be reduced and instead applied as a prospective 
adjustment to the operating IPPS standardized amount (and hospital-
specific rates) for the cumulative MS-DRG documentation and coding 
effect through FY 2010. The public comments that we received are 
addressed in section II.C. of the preamble of this final rule.
b. Refinement of the MS-DRG Relative Weight Calculation
    Beginning in FY 2007, we implemented relative weights for DRGs 
based on cost report data instead of charge information. To address the 
issue of charge compression (the hospital practice of applying higher 
charges to lower cost items and applying lesser charges to higher cost 
items) when using cost report data to set the MS-DRG relative weights, 
in FYs 2009 and 2010, we created additional cost centers on the 
Medicare cost report to distinguish implantable devices from other 
medical supplies, MRIs and CT scans, respectively, from other radiology 
services, and cardiac catheterization from other cardiology services. 
As compared to previous years, we currently have a significant volume 
of hospitals completing all, or some, of these new cost centers on the 
Medicare cost report. Therefore, beginning in FY 2014, we are 
calculating the MS-DRG relative weights using 19 CCRs, creating 
distinct CCRs from cost report data for implantable devices, MRIs, CT 
scans, and cardiac catheterization.
c. Rebasing and Revision of the Hospital Market Baskets for Acute Care 
Hospitals
    In section IV. of the preamble of this final rule, we are rebasing 
and revising the acute care hospital operating and capital market 
baskets used to update IPPS payment rates. For both market baskets, we 
are updating the base year cost weights from a FY 2006 base year to a 
FY 2010 base year. We also are recalculating the labor-related share 
using the FY 2010-based hospital market basket, for discharges 
occurring on or after October 1, 2013. We used the FY 2010-based market 
baskets in developing the FY 2014 update factor for the operating and 
capital prospective payment rates and the FY 2014 update factor for the 
excluded hospital rate-of-increase limits. We also are setting forth 
the data sources used to determine the revised market basket costs 
weights.
d. Reduction of Hospital Payments for Excess Readmissions
    We are making a number of changes in policies to implement section 
1886(q) of the Act, as added by section 3025 of the Affordable Care 
Act, which

[[Page 50505]]

establishes the Hospital Readmissions Reduction Program. The Hospital 
Readmissions Reduction Program requires a reduction to a hospital's 
base operating DRG payment to account for excess readmissions of 
selected applicable conditions. For FYs 2013 and 2014, these conditions 
are acute myocardial infarction, heart failure, and pneumonia. For FY 
2014, we are establishing additional exclusions to the three existing 
readmission measures (that is, the excess readmission ratio) to account 
for additional planned readmissions. We also are establishing 
additional readmissions measures to be used in the Hospital 
Readmissions Reduction Program for FY 2015. In addition, we are 
specifying that the readmissions payment adjustment factors for FY 2014 
can be no more than a 2-percent reduction (there is a 1-percent cap in 
FY 2013), in accordance with the statute. We are making a change in the 
methodology we use to calculate the readmissions payment adjustment 
factors to make it more consistent with the calculation of the excess 
readmissions ratio.
e. Hospital Value-Based Purchasing (VBP) Program
    Section 1886(o) of the Act 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.
    In this final rule, we are outlining payment details for the FY 
2014 Hospital VBP Program. In addition, we are establishing numerous 
policies for the FY 2016 Hospital VBP Program, including measures, 
performance standards, and performance and baseline periods. We also 
are establishing a disaster/extraordinary circumstances exceptions 
process, domain reclassification and weighting based on CMS' National 
Quality Strategy for the FY 2017 Hospital VBP Program, and certain 
measures, performance and baseline periods, and performance standards 
for the FY 2017 through FY 2019 Programs.
f. Hospital-Acquired Condition (HAC) Reduction Program
    In this final rule, we are establishing measures, scoring, and risk 
adjustment methodology to implement the FY 2015 payment adjustment 
under the HAC Reduction Program. Section 1886(p) of the Act, as added 
under section 3008(a) of the Affordable Care Act, establishes an 
adjustment to hospital payments for HACs, or a HAC Reduction program, 
under which payments to applicable hospitals are adjusted to provide an 
incentive to reduce HACs, effective for discharges beginning on October 
1, 2014 and for subsequent program years. The amount of payment shall 
be equal to 99 percent of the amount of payment that would otherwise 
apply to such discharges under section 1886(d) or 1814(b)(3) of the 
Act, as applicable.
g. Counting of Inpatient Days for Medicare Payment or Eligibility 
Purposes
    In response to a comment we received on the FY 2013 IPPS/LTCH PPS 
final rule and consistent with the inpatient day counting rules for DSH 
as clarified in the FY 2010 IPPS/RY 2010 LTCH PPS final rule, we are 
providing that patient days associated with maternity patients who were 
admitted as inpatients and were receiving ancillary labor and delivery 
services at the time the inpatient routine census is taken, regardless 
of whether the patient actually occupied a routine bed prior to 
occupying an ancillary labor and delivery bed and regardless of whether 
the patient occupies a ``maternity suite'' in which labor, delivery 
recovery, and postpartum care all take place in the same room, would be 
included in the Medicare utilization calculation. We understand that 
including labor and delivery inpatient days in the Medicare utilization 
calculation invariably will reduce direct GME payments because direct 
GME payments are based, in part, on a hospital's Medicare utilization 
ratio and the denominator of that ratio, which includes the hospital's 
total inpatient days, will increase at a higher rate than the numerator 
of the ratio, which includes the hospital's Medicare inpatient days. 
However, because the Medicare utilization ratio is a comparison of a 
hospital's total Medicare inpatient days to its total inpatient days, 
we believe that revising the ratio to include labor and delivery days 
is appropriate because they are inpatient days and therefore should be 
counted as such. We are including labor and delivery days as inpatient 
days in the Medicare utilization calculation effective for cost 
reporting periods beginning on or after October 1, 2013.
h. Changes to the DSH Payment Adjustment and the Provision of 
Additional Payment for Uncompensated Care
    Section 3133 of the Affordable Care Act modified the Medicare 
disproportionate share hospital (DSH) payment methodology beginning in 
FY 2014. Currently, Medicare DSHs qualify for a DSH payment adjustment 
under a statutory formula that considers their Medicare utilization due 
to beneficiaries who also receive Supplemental Security Income benefits 
and their Medicaid utilization. Under section 1886(r) of the Act, which 
was added by section 3133 of the Affordable Care Act, starting in FY 
2014, DSHs will receive 25 percent of the amount they previously would 
have received under the current statutory formula for Medicare DSH 
payments. The remaining amount, equal to 75 percent of what otherwise 
would have been paid as Medicare DSH payments, will be paid as 
additional payments after the amount is reduced for changes in the 
percentage of individuals that are uninsured. Each Medicare DSH 
hospital will receive its additional amount based on its share of the 
total amount of uncompensated care for all Medicare DSH hospitals for a 
given time period. In this final rule, we are implementing these 
statutory changes.
i. Medicare Part B Inpatient Billing in Hospitals
    We are finalizing our proposal that when a Medicare Part A claim 
for hospital inpatient services is denied because the inpatient 
admission was determined not reasonable and necessary, or if a hospital 
determines under 42 CFR 482.30(d) or Sec.  485.641 after a beneficiary 
is discharged that his or her inpatient admission was not reasonable 
and necessary, the hospital may be paid for the Part B services that 
would have been reasonable and necessary if the beneficiary had been 
treated as a hospital outpatient rather than admitted as an inpatient, 
provided the beneficiary is enrolled in Medicare Part B. We are 
finalizing our proposal to continue applying the timely filing 
restriction to the billing of all Part B inpatient services, under 
which claims for Part B services must be filed within 1 year from the 
date of service. However, we are modifying what we stated in the 
preamble of the proposed rule regarding the applicability of the CMS 
Ruling 1455-R to certain claims. We will permit hospitals to follow the 
Part B billing timeframes established in the Ruling after the effective 
date of this rule, provided (1) the Part A claim denial was one to 
which the Ruling originally applied; or (2) the Part A inpatient claims 
has a date of admission before October 1, 2013, and is denied after 
September 30, 2013 on the grounds that although the medical care was 
reasonable and necessary, the inpatient admission was not. In this 
final rule, we

[[Page 50506]]

also describe the beneficiary liability and other impacts of our final 
policies.
j. Admission and Medical Review Criteria for Hospital Inpatient 
Services Under Medicare Part A
    To reduce uncertainty regarding the requirements for payments to 
hospitals and CAHs under Medicare Part A related to when a Medicare 
beneficiary should be admitted as a hospital inpatient, in this final 
rule, we are clarifying the rules governing physician orders of 
hospital inpatient admissions for payment under Medicare Part A. We are 
clarifying and specifying in the regulations that an individual becomes 
an inpatient of a hospital, including a CAH, when formally admitted as 
such pursuant to an order for inpatient admission by a physician or 
other qualified practitioner described in the final regulations. The 
order is required for payment of hospital inpatient services under 
Medicare Part A. We are specifying that for those hospital stays in 
which the physician expects the beneficiary to require care that 
crosses 2 midnights and admits the beneficiary based upon that 
expectation, Medicare Part A payment is generally appropriate. 
Conversely, we are specifying that hospital stays in which the 
physician expects the patient to require care less than 2 midnights, 
payment under Medicare Part A is generally inappropriate. This will 
revise our guidance to hospitals and physicians relating to when 
hospital inpatient admissions are determined reasonable and necessary 
for payment under Part A. We also are using our exceptions and 
adjustments authority under section 1886(d)(5)(I)(i) of the Act to 
offset the additional IPPS expenditures under this policy change by 
reducing the standardized amount, the hospital-specific amount, and the 
Puerto Rico-specific standardized amount by 0.2 percent.
LTCH PPS Standard Federal Rate
    In section VIII.A. of the preamble of this final rule, we present 
the LTCH PPS standard Federal rate for FY 2014, which includes an 
adjustment factor of 0.98734 for the second year of the 3-year phase-in 
of the permanent one-time adjustment to the standard Federal rate. In 
addition, under the LTCH Quality Reporting (LTCHQR) Program, the annual 
update to the standard Federal rate will be reduced by 2 percentage 
points for LTCHs that fail to submit data for FY 2014 on specific 
measures under section 3004 of the Affordable Care Act.
l. Expiration of Certain Payment Rules for LTCH Services and Research 
on the Development of a Patient Criteria-Based Payment Adjustment Under 
the LTCH PPS
    In section VIII.D. of the preamble of this final rule, we note the 
expiration of the moratorium on the full implementation of the ``25 
percent threshold'' payment adjustment to LTCHs under the LTCH PPS for 
cost reporting periods beginning on or after October 1, 2013.
    In section VIII.E. of the preamble of this final rule, we discuss 
the ongoing research being done by a CMS contractor, Kennell and 
Associates (Kennell) and its subcontractor, Research Triangle 
Institute, International (RTI), on the development of a payment 
adjustment under the LTCH PPS based on the establishment of LTCH 
patient criteria that was described in the proposed rule.
m. Hospital Inpatient Quality Reporting (IQR) Program
    Under section 1886(b)(3)(B)(viii) 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 final rule, we are making several changes to: (1) The 
measure set, including the removal of some measures, the suspension of 
one measure, the refinement of some measures, and the adoption of 
several new measures; (2) the administrative processes; and (3) the 
validation methodologies. We also are allowing hospitals the option of 
reporting up to four measure sets electronically for the FY 2016 
payment determination. These changes will improve the timeliness and 
efficiency of the Hospital IQR Program and begin the process of 
incorporating electronic reporting into the Hospital IQR Program.
n. Inpatient Psychiatric Facility Quality Reporting (IPFQR) Program
    Section 1886(s)(4) of the Act authorizes the Secretary to implement 
a quality reporting program for inpatient psychiatric hospitals and 
psychiatric units. Section 1886(s)(4) of the Act, as added and amended 
by sections 3401(f) and 10322(a) of the Affordable Care Act, requires 
the Secretary to implement a quality reporting program for inpatient 
psychiatric hospitals and psychiatric units. Section 1886(s)(4)(A)(i) 
of the Act requires that, for rate year 2014 and each subsequent rate 
year, the Secretary shall reduce any annual update to a standard 
Federal rate for discharges occurring during such rate year by 2.0 
percentage points for any inpatient psychiatric hospital or psychiatric 
unit that does not comply with quality data submission requirements 
with respect to an applicable rate year.
    In this final rule, we are establishing new measures and related 
policies for the IPFQR Program beginning with FY 2016.
3. Summary of Costs and Benefits
     Adjustment for MS-DRG Documentation and Coding Changes. We 
are making a -0.8 percent recoupment adjustment to the standardized 
amount for FY 2014 to implement, in part, the requirement of section 
631 of the ATRA that the Secretary make an adjustment totaling $11 
billion over a 4-year period of FYs 2014, 2015, 2016, and 2017. This 
recoupment adjustment represents the amount of the increase in 
aggregate payments as a result of not completing the prospective 
adjustment authorized under section 7(b)(1)(A) of Public Law 110-90 
until FY 2013. Prior to the ATRA, this amount could not have been 
recovered under Public Law 110-90.
    While our actuaries estimate that a -9.3 percent recoupment 
adjustment to the standardized amount would be necessary if CMS were to 
fully recover the $11 billion recoupment required by section 631 of the 
ATRA in FY 2014, it is often our practice to delay or phase in rate 
adjustments over more than one year, in order to moderate the effects 
on rates in any one year. Therefore, consistent with the policies that 
we have adopted in many similar cases, we are making a -0.8 percent 
recoupment adjustment to the standardized amount in FY 2014. We 
estimate that this level of adjustment would recover $0.96 billion in 
FY 2014, with approximately $10.04 billion remaining to be addressed. 
We are not making any future adjustments at this time but note that if 
recoupment adjustments of approximately -0.8 percent are implemented in 
FYs 2014, 2015, 2016, and 2017, we estimate that the entire $11 billion 
will be recovered by the end of the statutory 4-year timeline.
     Refinement of the MS-DRG Relative Weight Calculation. We 
refer readers to section VI.C. of Appendix A of this final rule for the 
overall IPPS operating impact, which includes the impact for the 
refinement of the MS-DRG relative weight calculation. This impact 
models payments to various hospital types using relative weights 
developed from 19 CCRs as compared to 15 CCRs. As

[[Page 50507]]

with other changes to the MS-DRGs, these changes are to be implemented 
in a budget neutral manner.
     Rebasing and Revision of the Hospital Market Baskets for 
Acute Care Hospitals.
    The finalized FY 2010-based IPPS market basket update (as measured 
by percentage increase) for FY 2014 is currently forecasted to be the 
same as the market basket update based on the FY 2006-based IPPS market 
basket at 2.5 percent (currently used under the IPPS). Therefore, we 
are projecting that there will be no fiscal impact on the IPPS 
operating payment rates in FY 2014 as a result of the rebasing and 
revision of the IPPS market basket.
    The FY 2010-based IPPS capital input price index update (as 
measured by percentage increase) for FY 2014 is currently forecasted to 
be 1.2 percent, 0.2 percentage point lower than the update based on the 
FY 2006-based capital input price index. Therefore, we are projecting 
that there will be a fiscal impact of -$16 million to the IPPS capital 
payments in FY 2014 as a result of this policy (0.2 percentage point * 
annual capital IPPS payments of approximately $8 billion).
    In addition, we are updating the labor-related share under the IPPS 
for FY 2014 based on the final FY 2010-based IPPS market basket, which 
will result in a labor-related share of 69.6 percent (compared to the 
FY 2013 labor-related share of 68.8 percent) or 62 percent, depending 
on which results in higher payments to the hospital. For FY 2014, the 
labor-related share for the Puerto Rico-specific standardized amount 
will be either 63.2 percent or 62 percent, depending on which results 
in higher payments to the hospital. We are projecting that there will 
be no impact on aggregate IPPS payments as a result of this policy due 
to the statutory requirement that any changes to the IPPS area wage 
adjustment (including the labor-related share) are adopted in a budget 
neutral manner.
     Reduction to Hospital Payments for Excess Readmissions. 
The provisions of section 1886(q) of the Act which establishes the 
Hospital Readmissions Reduction Program are not budget neutral. For FY 
2014, a hospital's readmissions payment adjustment factor is the higher 
of a ratio of a hospital's aggregate payments for excess readmissions 
to its aggregate payments for all discharges, or 0.98 (that is, or a 2-
percent reduction). In this final rule, we estimate that the reduction 
to a hospital's base operating DRG payment amount to account for excess 
readmissions of selected applicable conditions under the Hospital 
Readmissions Reduction Program will result in a 0.2 percent decrease, 
or approximately -$227 million, in payments to hospitals for FY 2014.
     Value-Based Incentive Payments under the Hospital Value-
Based Purchasing (VBP) Program. We estimate that there will be no net 
financial impact to the Hospital VBP Program for FY 2014 in the 
aggregate because, by law, the amount available for value-based 
incentive payments under the program in a given fiscal year must be 
equal to the total amount of base operating DRG payment amount 
reductions for that year, as estimated by the Secretary. The estimated 
amount of base operating DRG payment amount reductions for FY 2014, and 
therefore the estimated amount available for value-based incentive 
payments for FY 2014 discharges, is approximately $1.1 billion. We 
believe that the program's benefits will be seen in improved patient 
outcomes, safety, and in the patient's experience of care. However, we 
cannot estimate these benefits in actual dollar and patient terms.
     Implementation of the HAC Reduction Program for FY 2014. 
We note that there is no payment impact for FY 2014 for implementing 
the HAC Reduction Program. For FY 2015, we are presenting the overall 
impact of the HAC Reduction Program provision along with other IPPS 
payment provision impacts in section I.G. of Appendix A of this final 
rule.
     Counting of Inpatient Days in the Medicare Utilization 
Calculation. We believe our policy change to include labor and delivery 
days as inpatient days in the Medicare utilization calculation will 
result in a savings of approximately $19 million for FY 2014.
     Changes to the Medicare DSH Payment Adjustment and 
Provision of Additional Payment for Uncompensated Care. Under section 
1886(r) of the Act (as added by section 3313 of the Affordable Care 
Act), disproportionate share payments to hospitals under section 
1886(d)(5)(F) of the Act are reduced and an additional payment to 
eligible hospitals will be made beginning in FY 2014. Hospitals that 
receive Medicare DSH payments will receive 25 percent of the amount 
they previously would have received under the current statutory formula 
for Medicare DSH payments. The remainder, equal to 75 percent of what 
otherwise would have been paid as Medicare DSH payments, will be the 
basis for additional payments after the amount is reduced for changes 
in the percentage of individuals that are uninsured and additional 
statutory adjustments. Each hospital that receives Medicare DSH 
payments will receive an additional payment based on its share of the 
total uncompensated care amount reported by Medicare DSHs. The 
reduction to Medicare DSH payments is not budget neutral.
    We are specifying that 75 percent of what otherwise would have been 
paid for Medicare DSH payments is adjusted to 94.3 percent of that 
amount for changes in the percentage of individuals that are uninsured 
and additional statutory adjustments. In other words, Medicare DSH 
payments prior to the application of section 3133 of the Affordable 
Care Act are adjusted to 70.7 percent (the product of 75 percent and 
94.3 percent) and that resulting payment amount is used to create an 
additional payment for a hospital's relative uncompensated care. As a 
result, we project that the reduction of Medicare DSH payments and the 
inclusion of the additional payments will reduce payments overall by 
0.4 percent as compared to Medicare DSH payments prior to the 
implementation of section 3133 of the Affordable Care Act. The 
additional payments have redistributive effects based on a hospital's 
uncompensated care amount relative to the uncompensated care amount for 
all hospitals that are estimated to receive Medicare DSH payments. 
These additional payments will be made through the claims processing 
system for each hospital discharge.
     Part B Hospital Inpatient Payment Policy. In this final 
rule, we are revising Medicare's policy for payment of Part B hospital 
inpatient services following the denial of a Part A hospital inpatient 
claim on the basis that the inpatient admission was not reasonable and 
necessary, but hospital outpatient services would have been reasonable 
and necessary in treating the beneficiary. We estimate that the final 
policy will result in an approximately $4.6 billion decrease in 
Medicare program expenditures over 5 years. In section XI. of the 
preamble of this final rule, we set forth a detailed analysis of the 
regulatory and Federalism impacts that the policy changes are expected 
to have on affected entities and beneficiaries.
     Admission and Medical Review Criteria for Hospital 
Inpatient Services under Medicare Part A. In this final rule, we are 
making changes relating to admission and medical review criteria for 
hospital inpatient admissions under Medicare Part A. One aspect of 
these changes is that hospital inpatient admissions spanning 2 
midnights in the hospital will generally qualify as appropriate for 
payment under Medicare Part A. Our actuaries estimate

[[Page 50508]]

that the change will increase IPPS expenditures by approximately $220 
million due to an expected net increase in inpatient encounters. We are 
using our exceptions and adjustments authority under section 
1886(d)(5)(I)(i) of the Act to make a reduction of 0.2 percent to the 
standardized amount, the Puerto Rico standardized amount, and the 
hospital-specific payment rate to offset this estimated $200 million in 
additional IPPS expenditures. We also are applying that 0.2 percent 
reduction to the capital Federal rates using our authority under 
section 1886(g) of the Act.
     Hospital Inpatient Quality Reporting (IQR) Program. We are 
providing that hospitals participating in the Hospital IQR Program will 
have the option to report a subset of measures electronically in CY 
2014 for the FY 2016 payment determination. Under this policy, 
hospitals may choose to report the measures in four measure sets 
electronically or as chart-abstracted measures in CY 2014. For the FY 
2016 payment determination, we also are removing seven measures (six 
chart-abstracted measures and one structural measure) and suspending 
one measure. We also are adopting five new claims-based measures for 
the FY 2016 payment determination and subsequent years. For the FY 2016 
payment determination and subsequent years, we will validate two 
additional chart-abstracted HAI measures: MRSA bacteremia, and C. 
difficile. We also are reducing the number of records used for HAI 
validation from 48 records per year to 36 records per year beginning 
with the FY 2015 payment determination. Finally, we are allowing 
hospitals to submit patient charts for purposes of validation either in 
paper form or by means of electronic transmission. We believe the 
changes to the measure set, processes, and validation methodologies, 
the electronic submission of records for validation, as well as 
allowing hospitals to report certain measures electronically for the FY 
2016 payment determination will result in improved program efficiency 
and begin the process of incorporating electronic reporting into the 
program. We estimate that the combination of these changes and the 
reduction in measures mentioned above will reduce burden hours by 
700,000 hours annually.
     Update to the LTCH PPS Standard Federal Rate and Other 
Payment Factors. Based on the best available data for the 425 LTCHs in 
our database, we estimate that the changes we are presenting in the 
preamble and Addendum of this final rule, including the update to the 
standard Federal rate for FY 2014, the changes to the area wage 
adjustment for FY 2014, and the changes to short-stay outliers and 
high-cost outliers, will result in an increase in estimated payments 
from FY 2013 of approximately $72 million (or 1.3 percent). Although we 
generally project an increase in payments for all LTCHs in FY 2014 as 
compared to FY 2013, we expect rural LTCHs to experience slightly lower 
increases than the national average due to decreases in their wage 
index for FY 2014 compared to FY 2013. In addition, under current law, 
our moratoria on the full implementation of the ``25-percent 
threshold'' payment adjustment policy will expire for certain LTCHs for 
cost reporting periods beginning on or after October 1, 2013. These 
regulatory moratoria extended, for an additional year, the 5-year 
statutory 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, which expired for cost reporting 
periods beginning on or after October 1, 2012 (``October LTCHs''), and 
for other LTCHs and LTCH satellite facilities for cost reporting 
periods beginning on or after July 1, 2012 (``July LTCHs'') (77 FR 
53483 through 53484, as amended by the FY 2013 IPPS/LTCH PPS correcting 
amendment (77 FR 63751 through 63753)), as explained in section VIII.D. 
of the preamble of this proposed rule. We estimate that the expiration 
of the regulatory moratoria will result in a reduction in payments of 
$90 million to LTCHs. Overall, we estimate that the effect of the 
changes we are making for FY 2014 in conjunction with the expiration of 
the regulatory moratoria would result in a decrease in aggregate LTCH 
PPS payments in FY 2014 relative to FY 2013 of approximately -$18 
million (that is, the estimated increase of $72 million plus the 
estimated reduction of $90 million, as described above).

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. The Affordable Care Act revised 
the Medicare DSH payment methodology and provides for a new additional 
Medicare payment that considers the amount of uncompensated care 
beginning on October 1, 2013.
    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.

[[Page 50509]]

    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, 2013, 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 2013, that is, on September 30, 2013.) 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 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 of the 
BBRA and section 307(b) of the BIPA (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 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), the Health Care and Education Reconciliation Act of 2010 
(Pub. L. 111-152), and the American Taxpayer Relief Act of 2012 (ATRA) 
(Pub. L. 112-240)

    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

[[Page 50510]]

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).
    The American Taxpayer Relief Act of 2012 (ATRA) (Pub. L. 112-240), 
enacted on January 2, 2013, also made a number of changes that affect 
the IPPS. We announced changes related to certain IPPS provisions for 
FY 2013 pursuant to sections 605 and 606 of Public Law 112-240 in a 
notice issued in the Federal Register on March 7, 2013 (78 FR 14689).
1. 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)
    In this final rule, we are implementing, or continuing in FY 2014 
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(a) of Public Law 111-148, which requires the 
establishment of a hospital inpatient value-based purchasing program 
under which value-based incentive payments are made in a fiscal year to 
hospitals that meet performance standards for the performance period 
for that fiscal year.
     Section 3004 of Public Law 111-148, which provides for the 
submission of quality data by LTCHs in order for them to receive the 
full annual update to the payment rates beginning with the FY 2014 rate 
year.
     Section 3005 of Public Law 111-148, which provides for the 
establishment of a quality reporting program for PPS-exempt cancer 
hospitals beginning with FY 2014, and for subsequent program years.
     Section 3008 of Public Law 111-148, which establishes the 
Hospital-Acquired Condition (HAC) Reduction Program and requires the 
Secretary to make an adjustment to hospital payments for applicable 
hospitals, effective for discharges beginning on October 1, 2014, 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 3133 of Public Law 111-148, as amended by section 
10316 of Public Law 111-148 and section 1104 of Pub. L. 111-152, which 
modifies the methodologies for determining Medicare DSH payments and 
creates a new additional payment for uncompensated care.
     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 IPPS and LTCH PPS payment rates for FY 2014.
     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.
2. American Taxpayer Relief Act of 2012 (ATRA) (Pub. L. 112-240)
    In this final rule, we are implementing or making conforming 
changes to regulation text in accordance with the following provisions 
(or portions of the following provisions) of the American Taxpayer 
Relief Act of 2012 that are applicable to the IPPS:
     Section 605, which amended sections 1886(d)(12)(B), 
(C)(i), and (D) of the Act to extend changes to the payment methodology 
for the Medicare inpatient hospital payment adjustment for low-volume 
hospitals through September 30, 2013 (FY 2013). Beginning with FY 2014, 
the preexisting low-volume hospital qualifying criteria and payment 
adjustment, as implemented in FY 2005, will resume.
     Section 606(a), which amended sections 1886(d)(5)(G)(i) 
and (ii)(II) of the Act to extend the MDH program through September 30, 
2013 (FY 2013), and section 606(b), which made conforming amendments to 
sections 1886(b)(3)(D)(i) and (iv) of the Act and amended section 
13501(e)(2) of the Omnibus Budget Reconciliation Act of 1993 to permit 
hospitals to decline reclassification through FY 2013.
     Section 631, which amended section 7(b)(1)(B) of Public 
Law 110-90 and requires a recoupment adjustment to the standardized 
amounts under section 1886(d) of the Act based upon the Secretary's 
estimates for discharges occurring in FY 2014 through FY 2017 to fully 
offset $11 billion (which represents the amount of the increase in 
aggregate payments from FYs 2008 through 2013 for which an adjustment 
was not previously applied).

D. Issuance of a Notice of Proposed Rulemaking

    On May 10, 2013, we published in the Federal Register (78 FR 27486) 
a proposed rule that set forth proposed changes to the Medicare IPPS 
for operating costs and for capital-related costs of acute care 
hospitals for FY 2014. We also set forth proposed changes relating to 
payments for IME and GME costs and payments to certain hospitals that 
continue to be excluded from the IPPS and paid on a reasonable cost 
basis. In addition, in the proposed rule, we set forth proposed changes 
to the payment rates, factors, and other payment rate policies under 
the LTCH PPS for FY 2014.
    Below is a summary of the major changes that we proposed to make:
1. Proposed Changes to MS-DRG Classifications and Recalibrations of 
Relative Weights
    In section II. of the preamble of the proposed rule, we included--
     Proposed changes to MS-DRG classifications based on our 
yearly review.
     Proposed application of the documentation and coding 
adjustment for FY 2014 resulting from implementation of the MS-DRG 
system.
     A discussion of the Research Triangle Institute, 
International (RTI) reports and analyses relating to charge 
compression, including a proposal to calculate the MS-DRG relative 
weights using 19 CCRs.
     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 2014.
     A discussion of the FY 2014 status of new technologies 
approved for add-on payments for FY 2013 and a presentation of our 
evaluation and

[[Page 50511]]

analysis of the FY 2014 applicants for add-on payments for high-cost 
new medical services and technologies (including public input, as 
directed by Pub. L. 108-173, obtained in a town hall meeting).
2. Proposed Changes to the Hospital Wage Index for Acute Care Hospitals
    In section III. of the preamble to the proposed rule, we proposed 
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 2014 wage index update using wage data 
from cost reporting periods beginning in FY 2010.
     Analysis and implementation of the proposed FY 2014 
occupational mix adjustment to the wage index for acute care hospitals, 
including the proposed application of the rural floor, the imputed 
rural floor calculated under the original and alternative 
methodologies, and the frontier State floor.
     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 2014 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 2014 hospital wage index.
     Determination of the labor-related share for the proposed 
FY 2014 wage index.
3. Proposed Rebasing and Revision of the Hospital Market Baskets for 
Acute Care Hospitals
    In section IV. of the preamble of the proposed rule, we proposed to 
rebase and revise the acute care hospital operating and capital market 
baskets to be used in developing the FY 2014 update factor for the 
operating and capital prospective payment rates and the FY 2014 update 
factor for the excluded hospital rate-of-increase limits. We also set 
forth the data sources used to determine the proposed revised market 
basket costs weights.
4. Other Decisions and Proposed Changes to the IPPS for Operating Costs 
and GME Costs
    In section V. of the preamble of the proposed rule, we discussed 
proposed changes or clarifications of a number of the provisions of the 
regulations in 42 CFR Parts 412 and 413, including the following:
     Proposed changes to the inpatient hospital update for FY 
2014, including incorporation of a productivity adjustment.
     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 2014.
     The statutorily required IME adjustment factor for FY 
2014.
     Proposed changes to the methodologies for determining 
Medicare DSH payments and proposals to implement the new additional 
payments for uncompensated care.
     Discussion of the extension of the MDH program through FY 
2013.
     Proposed changes to the 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 changes to the requirements and provision of 
value-based incentive payments under the Hospital Value-Based 
Purchasing Program.
     Proposed requirements for payment adjustments to hospitals 
under the HAC Reduction Program.
     Proposal for counting labor and delivery inpatient days in 
the calculation of Medicare utilization for direct GME purposes and for 
other payment and eligibility purposes.
     Announcement of an additional closed hospital and 
redistribution of resident cap slots relating to direct GME and IME 
payments.
     Proposed clarifications of policies on payments for 
residents training in approved residency programs at CAHs.
     Announcement of the expiration of the inflation update 
freeze for high per resident amounts (PRAs).
     Discussion of the Rural Community Hospital Demonstration 
Program and a proposal for making a budget neutrality adjustment for 
the demonstration program.
     Extending the effective date of policies relating to 
hospital services furnished under arrangements.
     Proposed medical review policy that hospital stays in 
which the physician expects the patient to require a stay that crosses 
2 midnights are generally appropriate for payment under Medicare Part 
A, while hospital stays in which the physician expects the patient to 
require a stay that does not cross 2 midnights are generally 
inappropriate for payment under Medicare Part A.
5. Proposed FY 2014 Policy Governing the IPPS for Capital-Related Costs
    In section VI. of the preamble to the proposed rule, we discussed 
the proposed payment policy requirements for capital-related costs and 
capital payments to hospitals for FY 2014 and other related proposed 
policy changes.
6. Proposed Changes to the Payment Rates for Certain Excluded 
Hospitals: Rate-of-Increase Percentages
    In section VII. of the preamble of the proposed rule, we 
discussed--
     Proposed changes to payments to certain excluded hospitals 
for FY 2014.
     Proposed changes to the conditions of participation (CoPs) 
relating to administration of pneumococcal vaccine and CAH payment for 
acute care inpatient services.
7. Proposed Changes to the LTCH PPS
    In section VIII. of the preamble of the proposed rule, we set forth 
proposed changes to the payment rates, factors, and other payment rate 
policies under the LTCH PPS for FY 2014. We also noted that the 
moratorium on the full implementation of the ``25-percent threshold'' 
payment adjustment will expire for certain cost reporting periods 
beginning on or after October 1, 2013. In addition, in this section, we 
discussed the research being done by Kennell and Associates (Kennell) 
and its subcontractor, Research Triangle Institute, International 
(RTI), under a contract with CMS that is intended to inform the 
development of a payment adjustment under the LTCH PPS based on the 
establishment of LTCH patient criteria which were described in the 
proposed rule at 78 FR 27668 through 27676.
8. Proposed Changes Relating to Quality Data Reporting for Specific 
Providers and Suppliers
    In section IX. of the preamble of the proposed rule, we addressed--
     Proposed requirements for the Hospital Inpatient Quality 
Reporting (IQR) Program as a condition for receiving the full 
applicable percentage increase.
     Proposed changes to the requirements for the quality 
reporting program for PPS-exempt cancer hospitals (PCHQR Program).
     Proposed changes to the requirements under the LTCH 
Quality Reporting (LTCHQR) Program.
     Proposed changes to the requirements under the Inpatient 
Psychiatric Facility Quality Reporting (IPFQR) Program.
9. Determining Prospective Payment Operating and Capital Rates and 
Rate-of-Increase Limits for Acute Care Hospitals
    In the Addendum to the proposed rule, we set forth proposed changes 
to

[[Page 50512]]

the amounts and factors for determining the proposed FY 2014 
prospective payment rates for operating costs and capital-related costs 
for acute care hospitals. We proposed to establish the threshold 
amounts for outlier cases. In addition, we addressed the proposed 
update factors for determining the rate-of-increase limits for cost 
reporting periods beginning in FY 2014 for certain hospitals excluded 
from the IPPS.
10. Determining Prospective Payment Rates for LTCHs
    In the Addendum to the proposed rule, we set forth proposed changes 
to the amounts and factors for determining the proposed FY 2014 
prospective standard Federal rate. We proposed to establish the 
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.
11. Impact Analysis
    In Appendix A of the proposed rule, we set forth an analysis of the 
impact that the proposed changes would have on affected acute care 
hospitals, LTCHs, PCHs, and IPFs.
12. Recommendation of Update Factors for Operating Cost Rates of 
Payment for Hospital Inpatient Services
    In Appendix B of the proposed rule, as required by sections 
1886(e)(4) and (e)(5) of the Act, we provided our recommendations of 
the appropriate percentage changes for FY 2014 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.
13. Discussion of Medicare Payment Advisory Commission Recommendations
    Under section 1805(b) of the Act, MedPAC is required to submit a 
report to Congress, no later than March 15 of each year, in which 
MedPAC reviews and makes recommendations on Medicare payment policies. 
MedPAC's March 2013 recommendations concerning hospital inpatient 
payment policies address the update factor for hospital inpatient 
operating costs and capital-related costs for hospitals under the IPPS. 
We addressed these recommendations in Appendix B of the proposed rule. 
For further information relating specifically to the MedPAC March 2013 
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.

E. Public Comments Received in Response to the FY 2014 IPPS/LTCH PPS 
Proposed Rule

    We received approximately 721 timely pieces of correspondence 
containing multiple comments on the FY 2014 IPPS/LTCH PPS proposed 
rule. We note that some of these public comments were outside of the 
scope of the proposed rule. These out-of-scope public comments are not 
addressed with policy responses in this final rule. Summaries of the 
public comments that are within the scope of the proposed rule and our 
responses to those public comments are set forth in the various 
sections of this final rule under the appropriate heading.

F. Finalization of the Proposed Rule on Medicare Part B Inpatient 
Billing in Hospitals

    On March 18, 2013, we issued in the Federal Register (78 FR 16632) 
a proposed rule that proposed to revise Medicare's payment policies 
under Part B when a Part A hospital inpatient claim is denied because 
the inpatient admission was not reasonable and necessary, but hospital 
outpatient services would have been reasonable and necessary in 
treating the beneficiary. We received 392 timely pieces of 
correspondence in response to this proposed rule. In section XI. of 
this document, we summarize and respond to these public comments and 
discuss our final policies after taking into consideration the public 
comments we received.

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

A. Background

    Section 1886(d) of the Act specifies that the Secretary shall 
establish a classification system (referred to as diagnosis-related 
groups (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), the FY 2012 IPPS/LTCH PPS final rule (76 FR 51485 
through 51487), and the FY 2013 IPPS/LTCH PPS final rule (77 FR 53273).

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).

D. FY 2014 MS-DRG Documentation and Coding Adjustment

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.) 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.

[[Page 50513]]

    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 Law 110-90 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 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. Adjustment to the Average Standardized Amounts Required by Public 
Law 110-90
a. Prospective Adjustment 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.
b. Recoupment or Repayment Adjustments in FYs 2010 Through 2012 
Required by Section 7(b)(1)(B) 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.
3. 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 IPPS/RY 2010 LTCH PPS 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 was sound.
    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.gov/Research-Statistics-Data-and-Systems/Files-for-Order/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.

[[Page 50514]]

4. Prospective Adjustments for FY 2008 and FY 2009 Authorized by 
Section 7(b)(1)(A) of Public Law 110-90
    In the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43767 
through 43777), we opted to delay the implementation of any 
documentation and coding adjustment until a full analysis of case-mix 
changes based on FY 2009 claims data could be completed. We refer 
readers to the FY 2010 IPPS/RY 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 the law provided some discretion as to the manner in which we 
applied the prospective adjustment of -3.9 percent. As we discussed 
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 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 implemented the requisite adjustment) would 
be higher than they would have been if we had implemented an adjustment 
under section 7(b)(1)(A) of Public Law 110-90.
    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 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.
    In the FY 2013 IPPS/LTCH PPS final rule (77 FR 53274 through 
53276), we completed the prospective portion of the adjustment required 
under section 7(b)(1)(A) of Public Law 110-90 by finalizing a -1.9 
percent adjustment to the standardized amount for FY 2013. We stated 
that 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 was 
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 note again that delaying full implementation of the prospective 
portion of the adjustment required under section 7(b)(1)(A) of Public 
Law 110-90 until FY 2013 resulted in payments in FY 2010 through FY 
2012 being overstated. These overpayments could not be recovered by CMS 
as section 7(b)(1)(B) of Public Law 110-90 limited recoupments to 
overpayments made in FY 2008 and FY 2009.
5. Recoupment or Repayment Adjustment Authorized by Section 7(b)(1)(B) 
of Public Law 110-90
    As discussed in section II.D.3. of the preamble of this final rule, 
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). 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. In the FY 2013 IPPS/LTCH PPS final rule (77 FR 53276), we made a 
final +2.9 percent adjustment to the standardized amount, completing 
the recoupment portion of section 7(b)(1)(B) of Public Law 110-90. We 
note that with this positive adjustment, according to our estimates, 
all overpayments made in FY 2008 and FY 2009 have been fully recaptured 
with appropriate interest, and the standardized amount has been 
returned to the appropriate baseline.

[[Page 50515]]

6. Recoupment or Repayment Adjustment Authorized by Section 631 of the 
American Taxpayer Relief Act of 2012 (ATRA)
    Section 631 of the ATRA amended section 7(b)(1)(B) of Public Law 
110-90 to require the Secretary to make a recoupment adjustment or 
adjustments totaling $11 billion by FY 2017. This adjustment represents 
the amount of the increase in aggregate payments as a result of not 
completing the prospective adjustment authorized under section 
7(b)(1)(A) of Public Law 110-90 until FY 2013. As discussed earlier, 
this delay in implementation resulted in overstated payment rates in 
FYs 2010, 2011, and 2012. The resulting overpayments could not have 
been recovered under Public Law 110-90.
    Similar to the adjustments authorized under section 7(b)(1)(B) of 
Public Law 110-90, the adjustment required under section 631 of the 
ATRA is a one-time recoupment of a prior overpayment, not a permanent 
reduction to payment rates. Therefore, any adjustment made to reduce 
rates in one year would eventually be offset by a positive adjustment, 
once the necessary amount of overpayment is recovered.
    As we stated in the FY 2014 IPPS/LTCH PPS proposed rule (78 FR 
27504 through 27505), our actuaries estimate that a -9.3 percent 
adjustment to the standardized amount would be necessary if CMS were to 
fully recover the $11 billion recoupment required by section 631 of the 
ATRA in FY 2014. In its March 2013 ``Report to Congress: Medicare 
Payment Policy,'' MedPAC estimates that a -2.4 percent adjustment made 
in FY 2014, and not removed until FY 2018, also would recover the 
required recoupment amount. It is often our practice to delay or 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 2014 
IPPS/LTCH PPS proposed rule (78 FR 27504 through 27505), we proposed a 
-0.8 percent recoupment adjustment to the standardized amount in FY 
2014. As we stated in the proposed rule, we estimate that this level of 
adjustment would recover up to $0.96 billion in FY 2014, with at least 
$10.04 billion remaining to be recovered by FY 2017. If adjustments of 
approximately -0.8 percent are implemented in FYs 2014, 2015, 2016, and 
2017, using standard inflation factors, we estimate that the entire $11 
billion would be accounted for by the end of the statutory 4-year 
timeline. As estimates of any future adjustments are subject to slight 
variations in total savings, we did not propose specific adjustments 
for FYs 2015, 2016, or 2017 at that time. We stated that we believe 
that this level of adjustment for FY 2014 is a reasonable and fair 
approach that satisfies the requirements of the statute while 
mitigating extreme annual fluctuations in payment rates. In addition, 
we again noted that this -0.8 percent recoupment adjustment, and future 
adjustments under this authority, will be eventually offset by an 
equivalent positive adjustment once the full $11 billion recoupment 
requirement has been realized.
    We discuss the comments we received on this proposal and our final 
policy for FY 2014 in the section below.
7. Additional Prospective Adjustments for the MS-DRG Documentation and 
Coding Effect Through FY 2010 Authorized 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 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 public 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 
appropriate to ensure that the introduction of MS-DRGs was implemented 
in a budget neutral manner. 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 additional prospective documentation and coding effect of 0.8 
percent through FY 2010 and found that this effect was present for both 
IPPS hospitals paid with the standardized amount and IPPS hospitals 
paid using their hospital-specific payment rates.
    In the FY 2013 IPPS/LTCH PPS proposed rule (77 FR 27890), we 
proposed an additional -0.8 percent prospective adjustment to the 
standardized amount to account for this effect. We indicated that this 
additional prospective adjustment of -0.8 percent, when combined with 
the other prospective MS-DRG documentation and coding adjustments 
already made or proposed would eliminate the future effect of MS-DRG 
documentation and coding that did not reflect real changes in case-mix 
for discharges occurring through FY 2010. As discussed in the FY 2013 
IPPS/LTCH PPS final rule (77 FR 53278 through 53280), numerous 
commenters objected to the CMS proposal to make an adjustment to 
account for payment increases due to MS-DRG documentation and coding 
that did not reflect real changes in case-mix for discharges occurring 
through FY 2010. Many commenters continued to assert that our estimates 
of documentation and coding were overstated, and could be explained by 
other factors. These commenters also focused on part of the analysis 
provided by MedPAC in its FY 2012 public comment letter indicating that 
a slightly smaller additional prospective adjustment of -0.55 percent 
rather than -0.8 percent might be required to offset the cumulative MS-
DRG documentation and coding effect through FY 2010. Specifically, 
while MedPAC supported the overall methodology, it suggested that it 
was possible that changes in documentation and coding to optimize 
payments under the MS-DRG GROUPERs and relative weights may have 
resulted in slightly less than optimal payments under the FY 2007 
GROUPER and relative weights (the denominator of the documentation and 
coding change estimate). Many commenters requested that, given the 
MedPAC analysis, if CMS were to apply an additional prospective 
adjustment to the MS-DRG documentation and coding effect through FY 
2010, it should subtract 0.25 percentage points from its estimate, for 
an adjustment of -0.55 percent.
    After considering the public comments, we recognized that the issue 
of the estimate to use for the cumulative MS-DRG documentation and 
coding effect through FY 2010 may merit further consideration. 
Therefore, as discussed in the FY 2013 IPPS/LTCH PPS final rule (77 FR 
53278 through 53280), we decided not to finalize the proposed -0.8 
percent adjustment to the standardized amount and the hospital-specific 
rate until more analysis could be completed.
    CMS is continuing to consider whether MedPAC's recommendation that 
an adjustment to offset the cumulative documentation and coding effects 
through FY 2010 under section 1886(d)(3)(A)(vi) of the Act is 
appropriate and supported by a review of the claims data. After further 
consideration of the MedPAC analysis and the request by many public 
commenters, if we were to apply an additional prospective adjustment 
for the cumulative MS-DRG documentation

[[Page 50516]]

and coding effect through FY 2010, we believe the most appropriate 
additional adjustment is -0.55 percent.
    As discussed in section II.D.6. of the preamble of the FY 2014 
IPPS/LTCH PPS proposed rule (78 FR 27505), because we proposed a -0.8 
percent recoupment adjustment, we did not propose a prospective 
adjustment in FY 2014 for the cumulative MS-DRG documentation and 
coding effect through FY 2010. However, we solicited public comments as 
to whether any portion of the proposed -0.8 percent recoupment 
adjustment should be reduced and instead applied to a prospective 
adjustment for the cumulative MS-DRG documentation and coding effect 
through FY 2010. For example, we could apply a -0.25 percent recoupment 
adjustment, and a -0.55 prospective adjustment, for a total FY 2014 
adjustment of -0.8 percent. Reducing the recoupment adjustment in FY 
2014 would require relatively larger adjustments for FYs 2015, 2016, 
and/or 2017, but making a prospective adjustment of -0.55 percent would 
eliminate future payment increases due to MS-DRG documentation and 
coding that did not reflect real changes in case-mix for discharges 
occurring through FY 2010. As we discuss above, because the 
documentation and coding effect through FY 2010 was found for both IPPS 
hospitals paid with the standardized amount and IPPS hospitals paid 
under their hospital-specific payment rate, if we were to apply a 
prospective adjustment to remove this effect, we also would apply such 
an adjustment to the hospital-specific payment rate, using the 
Secretary's broad authority under section 1886(d)(5)(I)(i) of the Act 
(77 FR 53276 through 53277). Therefore, if we attribute a portion of 
the -0.8 percent adjustment for FY 2014 to the prospective adjustment, 
we also would make appropriate adjustments to the hospital-specific 
payment rates. Puerto Rico-specific rates would not be affected, as we 
previously found no significant additional MS-DRG documentation and 
coding effect for FY 2010 that would warrant any additional adjustment 
to the Puerto Rico-specific rate (77 FR 53279).
    Comment: The majority of commenters were satisfied with CMS' 
proposal to phase in the $11 billion adjustment required under section 
631 of the ATRA. Commenters encouraged CMS to continue to implement the 
required adjustment gradually through FY 2017.
    Response: We concur with commenters that a gradual implementation 
of this adjustment is the most prudent course of action. We believe 
that the proposed level of adjustment for FY 2014 is a reasonable and 
fair approach that satisfies the requirements of the statute while 
mitigating extreme annual fluctuations in payment rates. Therefore, we 
are finalizing a -0.8 percent documentation and coding adjustment to 
the standardized amount for FY 2014.
    Comment: Many commenters, including a national hospital 
association, were appreciative that CMS has reduced its original 
estimate of FY 2010 documentation and coding effects from 0.8 percent 
to 0.55 percent and believed that the 0.8 estimate was overstated. 
However, some commenters contended that this overstatement was not 
limited to FY 2010 alone. These commenters, while continuing to 
fundamentally disagree with the validity of underlying methodology 
employed by CMS, as previously described in the FY 2013 IPPS/LTCH PPS 
final rule (77 FR 53274-53275), requested that a prospective adjustment 
for any documentation and coding effect determined to have occurred in 
FY 2010 be partially or wholly offset by any similar overstatement that 
occurred in the adjustments made for documentation and coding effects 
that occurred during FY 2008 and FY 2009.
    Response: In the proposed rule (78 FR 27505), we acknowledged that, 
after further consideration of the MedPAC analysis of claims data, if 
we were to apply an additional prospective adjustment for the 
cumulative MS-DRG documentation and coding effect through FY 2010, we 
believe the most appropriate additional adjustment is -0.55 percent, 
rather than the adjustment proposed in prior rulemaking of -0.8 
percent. With respect to our previously finalized recoupment 
adjustments for documentation and coding effects in FY 2008 and FY 
2009, however, we note, as discussed earlier, that section 7(b)(1)(B) 
of Public Law 110-90 required the Secretary to make the FY 2008 and FY 
2009 recoupment adjustments based on estimates and also required that 
the Secretary make these adjustments for discharges occurring only in 
FYs 2010, 2011, and/or 2012. The Secretary made the FY 2008 and FY 2009 
recoupment adjustments to the standardized amounts for discharges 
occurring in FY 2011 and FY 2012 based on the best estimates available 
at the time. We also note that section 631 of the ATRA states that the 
$11 billion recoupment figure ``represents the amount of the increase 
in aggregate payments from fiscal years 2008 through 2013 for which an 
adjustment was not previously applied.'' Any adjustment to the FY 2008 
and FY 2009 recoupment, therefore, is subsumed in the $11 billion 
recoupment figure.
    Comment: Many commenters requested that CMS not apply any of the 
proposed -0.8 percent recoupment adjustment as a prospective adjustment 
to account for any MS-DRG documentation and coding effect that occurred 
in FY 2010. In addition to overall concerns with CMS' methodology, 
commenters indicated that any prospective adjustment in addition to the 
recoupment required by section 631 of the ATRA would be too financially 
burdensome, and would be contrary to the agency's stated goal of 
mitigating extreme fluctuations in payment rates.
    MedPAC recommended that CMS implement the full -0.55 percent 
prospective adjustment for FY 2010 documentation and coding in FY 2014, 
reducing the FY 2014 recoupment adjustment to -0.25 percent. While 
MedPAC acknowledged that such an action would require relatively larger 
adjustments in FYs 2015 through 2017 to satisfy the $11 billion 
recoupment requirement, it pointed out that further delay of FY 2010 
documentation and coding adjustments would lead to overpayments in 
future fiscal years, and that, in general, prospective adjustments 
should be prioritized over retroactive adjustments.
    Response: We have considered all of the comments received. While we 
are firmly committed to ensuring that changes in documentation and 
coding do not lead to increases in payments, we have decided not to 
apply a prospective adjustment to account for any documentation and 
coding effect that occurred in FY 2010 at this time. We note that the 
$11 billion recoupment required by section 631 of the ATRA will require 
additional documentation and coding adjustments between FY 2014 and FY 
2017. If we were to apply a -0.55 percent prospective documentation and 
coding adjustment for FY 2014, we would be concerned that additional 
larger adjustments will be needed in future years to recoup the $11 
billion required by ATRA. We will continue to take into account public 
input and any future legislation on this issue.
    Comment: Several commenters opposed the implementation of any 
prospective adjustment to the hospital-specific rate. Similar to 
comments submitted in response to the FY 2013 IPPS/LTCH PPS proposed 
rule, as summarized in the FY 2013 IPPS/LTCH PPS final rule (77 FR 
53277),

[[Page 50517]]

commenters stated that the broad authority granted to the Secretary in 
section 1886(d)(5)(I)(i) of the Act is not so broad as to extend the 
scope of a legislative directive that was specifically limited to 
hospitals paid under a prospective payment system. Commenters also 
contended that the plain language of section 7(b)(1) of Public Law 110-
90, as amended by the ATRA, provides clear instructions that the 
documentation and coding adjustment is only intended to apply to the 
standardized amounts.
    Response: We continue to disagree that we do not have the authority 
to make prospective documentation and coding adjustments to the 
hospital-specific rates. We do not believe that the language in section 
7(b)(1) of Public Law 110-90, as amended by the ATRA, or in section 
1886(d)(3)(A)(iv) of the Act creates a limit on the broad authority 
granted under section 1886(d)(5)(I) of the Act. We have discussed the 
basis for applying any such prospective adjustment to the hospital-
specific rate in our prior rules, beginning with the FY 2009 IPPS/LTCH 
PPS final rule (73 FR 48448). We also note that the proposed -0.8 
percent recoupment adjustment for FY 2014 pursuant to section 631 of 
ATRA, which we are finalizing in this final rule, applies only to the 
standardized amount and not to the hospital-specific rates. Section 631 
of the ATRA does not provide authority for a recoupment adjustment to 
the hospital-specific rate. However, as discussed in the FY 2010 IPPS/
LTCH final rule (74 FR 24098), the FY 2011 IPPS/LTCH PPS final rule (75 
FR 50067 through 50071), the FY 2012 IPPS/LTCH PPS (76 FR 51498 through 
51499), and the FY 2013 IPPS/LTCH PPS final rule (75 FR 53277 through 
53278), we continue to believe that any prospective documentation and 
coding adjustments applied to the standardized amount should also be 
similarly applied to the hospital-specific rate. As discussed in the 
previous response, we are not making any prospective adjustment in FY 
2014 to account for FY 2010 documentation and coding effects. 
Therefore, no documentation and coding adjustment will be applied to 
the hospital-specific rate in FY 2014.

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 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 addition, we refer readers to RTI's July 2008 final 
report titled ``Refining Cost to Charge Ratios for Calculating APC and 
MS-DRG Relative Payment Weights'' (http://www.rti.org/reports/cms/HHSM-500-2005-0029I/PDF/Refining_Cost_to_Charge_Ratios_200807_Final.pdf).
    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 
for ``Implantable Devices Charged to Patients'' was created in July 
2009. 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) 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 
cost centers for CT scans, MRIs, 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, MRIs, 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, MRIs, 
and cardiac catheterization.) The new standard cost centers for CT 
scans, MRIs, and cardiac catheterization are effective for cost 
reporting periods beginning on or after May 1, 2010, on the revised 
cost report Form CMS-2552-10.
    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

[[Page 50518]]

43782), due to delays in the issuance of the revised cost report Form 
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, MRIs, 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). In preparation for the FY 2012 IPPS 
rulemaking, 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 Devices 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.
    During the development of the FY 2013 IPPS/LTCH PPS proposed and 
final rules, hospitals were still in the process of transitioning from 
the previous cost report Form CMS-2552-96 to the new cost report Form 
CMS-2552-10. Therefore, we were 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; that is, those cost reports on Form 
CMS-2552-96. Data from the Form CMS-2552-10 cost reports were not 
available because cost reports filed on the Form CMS-2552-10 were not 
accessible in the HCRIS. Further complicating matters was that, due to 
additional unforeseen technical difficulties, the corresponding 
information regarding charges for implantable devices on hospital 
claims was 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 believed that we had no choice but to continue computing the 
relative weights with the current CCR that combines the costs and 
charges for supplies and implantable devices. We stated in the FY 2013 
IPPS/LTCH PPS final rule (77 FR 53281 through 53283) that when we do 
have the necessary data for supplies and implantable devices on the 
claims in the MedPAR file to create distinct CCRs for the respective 
cost centers for supplies and implantable devices, we hoped that we 
would also have data for an analysis of creating distinct CCRs for CT 
scans, MRIs, and cardiac catheterization, which could then be finalized 
through rulemaking.
2. Discussion of Proposed and Final Policy for FY 2014
    As we stated in the FY 2014 IPPS/LTCH PPS proposed rule (78 FR 
27506-27507), to calculate the proposed FY 2014 MS-DRG relative 
weights, we proposed to continue our current methodology of using the 
two most recent data sources: The December 2012 update of the FY 2012 
MedPAR file as the claims data source and the December 2012 update of 
FY 2011 HCRIS as the cost data source. At the time of the development 
of the proposed rule, we had a substantial number of hospitals 
completing all, or some, of these new cost centers on the FY 2011 
Medicare cost reports, compared to prior years. Specifically, using the 
December 2012 update of FY 2011 HCRIS, we were able to calculate a 
valid implantable device CCR for 2,285 IPPS hospitals, a valid MRI CCR 
for 1,402 IPPS hospitals, a valid CT scan CCR for 1,470 IPPS hospitals, 
and a valid cardiac catheterization CCR for 1,022 IPPS hospitals. In 
the FY 2013 IPPS/LTCH PPS final rule (77 FR 53281), we stated that 
prior to proposing to create these CCRs, we would first thoroughly 
analyze and determine the impacts of the data, and that distinct CCRs 
for these new cost centers would be used in the calculation of the 
relative weights only if they were first finalized through rulemaking.
    In the FY 2014 IPPS/LTCH PPS proposed rule (78 FR 27507), we stated 
that we believe that there is a sufficient amount of data in the FY 
2011 cost reports from which to generate a meaningful analysis of using 
distinct CCRs for implantable devices, MRIs, CT scans, and cardiac 
catheterization. In addition, the corresponding charge data on hospital 
claims for implantable devices, MRIs, CT scans, and cardiac 
catheterization are available in the FY 2012 MedPAR file. Therefore, in 
the proposed rule, we provided various data analyses based on 
comparison of the FY 2014 relative weights computed using 15 CCRs, as 
we have done in the past, and the FY 2014 relative weights computed 
using 19 CCRs, with distinct CCRs for implantable devices, MRIs, CT 
scans, and cardiac catheterization. Specifically, rather than having a 
single CCR for ``Supplies and Equipment'' which includes low-cost 
supplies and high-cost implantable devices, we proposed that a distinct 
CCR would be carved out of the ``Supplies and Equipment'' CCR, leaving 
one CCR for ``Supplies'' and one CCR for ``Implantable Devices.'' 
Regarding the Radiology CCR, which currently is comprised of general 
radiology ancillary services and MRIs and CT scans, we proposed that 
the costs for MRIs and CT scans would be separated from general 
radiology, creating two distinct CCRs, one for MRIs and one for CT 
scans, respectively. Finally, by separating the costs of cardiac 
catheterization out of the CCR for general cardiology, we proposed that 
a distinct CCR would be created for cardiac catheterization. Thus, by 
breaking out these 4 additional CCRs, the number of CCRs used to 
calculate the relative weights would increase from 15 to 19.
    In the FY 2014 IPPS/LTCH PPS proposed rule (78 FR 27507), for 
comparison purposes, we included the following table to show the final 
FY 2013 CCRs, the potential FY 2014 CCRs computed with the existing 15 
cost centers, and the potential FY 2014 CCRs computed with 19 cost 
centers, with 4 new CCRs for implantable devices, MRIs, CT scans, and 
cardiac catheterization.

----------------------------------------------------------------------------------------------------------------
                                                            Final FY 2013 15    Potential FY      Potential FY
                           Group                                  CCRs          2014 15 CCRs      2014 19 CCRs
----------------------------------------------------------------------------------------------------------------
Routine days..............................................             0.514             0.502             0.502
Intensive days............................................             0.442             0.423             0.423
Drugs.....................................................             0.199             0.193             0.193
Supplies & Equipment......................................             0.335             0.327             0.293
Implantable Devices.......................................               n/a               n/a             0.361
Therapy Services..........................................             0.370             0.355             0.355
Laboratory................................................             0.143             0.133             0.133

[[Page 50519]]

 
Operating Room............................................             0.238             0.225             0.225
Cardiology................................................             0.145             0.134             0.132
Cardiac Catheterization...................................               n/a               n/a             0.135
Radiology.................................................             0.136             0.128             0.170
MRI.......................................................               n/a               n/a             0.091
CT Scans..................................................               n/a               n/a             0.045
Emergency Room............................................             0.226             0.207             0.207
Blood.....................................................             0.389             0.371             0.371
Other Services............................................             0.397             0.399             0.399
Labor & Delivery..........................................             0.450             0.445             0.445
Inhalation Therapy........................................             0.189             0.187             0.187
Anesthesia................................................             0.109             0.120             0.120
----------------------------------------------------------------------------------------------------------------

    In order to model the effects on the relative weights in medical 
MS-DRGs versus surgical MS-DRGs, in the FY 2014 IPPS/LTCH PPS proposed 
rule (78 FR 27507-8), we compared a set of relative weights calculated 
with 15 CCRs and 19 CCRs. Based on the data available at the time of 
the development of the proposed rule, overall, if the 19 CCRs would be 
used to calculate the proposed relative weights for FY 2014, relative 
weights for medical MS-DRGs would be expected to decrease by 
approximately 1.1 percent, and those for surgical MS-DRGs would be 
expected to increase by approximately 1.2 percent. In addition, as 
shown in the table below included in the FY 2014 IPPS/LTCH PPS proposed 
rule (78 FR 27508), at the MDC level, we expected payments to increase 
by approximately 0.64 percent (0.39+0.25) within orthopedic and cardiac 
MDCs, with most of the reductions in payment resulting to the medical 
MS-DRGs in the nervous system, digestive system, and respiratory system 
MDCs.

------------------------------------------------------------------------
                                                            Estimated
                                                           percentage
            MDC                     Description           change within
                                                               MDC
------------------------------------------------------------------------
08........................  Musculoskeletal System And              0.39
                             Connective Tissue.
05........................  Circulatory System........              0.25
01........................  Nervous System............             -0.16
06........................  Digestive System..........             -0.10
04........................  Respiratory System........             -0.08
------------------------------------------------------------------------

    In the FY 2014 IPPS/LTCH PPS proposed rule (78 FR 27508), we stated 
that the largest estimated increase in MS-DRG relative weights would 
likely occur for MS-DRGs associated with cardiac catheterization and 
implantable cardiac devices. We also stated that the largest estimated 
reductions in MS-DRG relative weights would likely occur for MS-DRGs 
associated with traumatic head injury and concussion, which are high 
users of CT scanning and MRI services. We included in the FY 2014 IPPS/
LTCH PPS proposed rule (78 FR 27508) the table below, which showed, 
based on data available at the time of the development of the proposed 
rule, the top 10 (nonlabor and delivery) MS-DRGs that we predicted 
would experience the largest increases and decreases in relative 
weights through use of the expanded 19 CCRs, as compared to previous 15 
CCRs.

----------------------------------------------------------------------------------------------------------------
                                                                     Potential       Potential
                                                                     relative        relative       Percentage
            MS-DRG                   Type             Title       weight with 15   weights with       change
                                                                       CCRs           19 CCRs
----------------------------------------------------------------------------------------------------------------
                      MS-DRGS THAT WOULD EXPERIENCE THE LARGEST DECREASE IN RELATIVE WEIGHT
----------------------------------------------------------------------------------------------------------------
090..........................  MED.............  Concussion               0.7614          0.7013            -7.9
                                                  without CC/MCC.
084..........................  MED.............  Traumatic                0.9137          0.8516            -6.8
                                                  Stupor & Coma,
                                                  Coma >1 Hour
                                                  without CC/MCC.
087..........................  MED.............  Traumatic                0.7899          0.7369            -6.7
                                                  Stupor & Coma,
                                                  Coma <1 Hour
                                                  without CC/MCC.
965..........................  MED.............  Other Multiple           1.0450           0.980            -6.1
                                                  Significant
                                                  Trauma without
                                                  CC/MCC.
185..........................  MED.............  Major Chest              0.7281          0.6845            -6.0
                                                  Trauma without
                                                  CC/MCC.
089..........................  MED.............  Concussion with          0.9959          0.9366            -6.0
                                                  CC.
123..........................  MED.............  Neurological             0.7355          0.6920            -5.9
                                                  Eye Disorder.
343..........................  SURG............  Appendectomy             0.9880          0.9517            -5.7
                                                  without
                                                  Complicated
                                                  Principal
                                                  Diagnosis
                                                  without CC/MCC.
053..........................  MED.............  Spinal                   0.9355          0.8825            -5.7
                                                  Disorders &
                                                  Injuries
                                                  without CC/MCC.
066..........................  MED.............  Intracranial             0.8034          0.7579            -5.7
                                                  Hemorrhage or
                                                  Cerebral
                                                  Infarction
                                                  without CC/MCC.
----------------------------------------------------------------------------------------------------------------

[[Page 50520]]

 
                      MS-DRGS THAT WOULD EXPERIENCE THE LARGEST INCREASE IN RELATIVE WEIGHT
----------------------------------------------------------------------------------------------------------------
454..........................  SURG............  Combined                 7.6399          8.0563             5.5
                                                  Anterior/
                                                  Posterior
                                                  Spinal Fusion
                                                  with CC.
455..........................  SURG............  Combined                 5.9862          6.3133             5.5
                                                  Anterior/
                                                  Posterior
                                                  Spinal Fusion
                                                  Without CC/MCC.
484..........................  SURG............  Major Joint &            2.1211          2.2380             5.5
                                                  Limb
                                                  Reattachment
                                                  Procedure of
                                                  Upper
                                                  Extremity
                                                  without CC/MCC.
225..........................  SURG............  Cardiac                  5.6298          5.9530             5.7
                                                  Defibrillator
                                                  Implant with
                                                  Cardiac
                                                  Catheterizatio
                                                  n without AMI/
                                                  HF/Shock
                                                  without MCC.
223..........................  SURG............  Cardiac                  6.0956          6.4482             5.8
                                                  Defibrillator
                                                  Implant with
                                                  Cardiac
                                                  Catheterizatio
                                                  n with AMI/HF/
                                                  Shock without
                                                  MCC.
458..........................  SURG............  Spinal Fusion            4.8794          5.1630             5.8
                                                  Except
                                                  Cervical with
                                                  Spinal Curve/
                                                  Malignant/
                                                  Infection OR
                                                  9+ Fusion
                                                  without CC/MCC.
245..........................  SURG............  AICD Generator           4.4627          4.7320             6.0
                                                  Procedures.
849..........................  MED.............  Radiotherapy...          1.3423          1.4258             6.2
946..........................  MED.............  Rehabilitation           1.1295          1.2024             6.5
                                                  without CC/MCC.
227..........................  SURG............  Cardiac                  5.2193          5.5714             6.7
                                                  Defibrillator
                                                  Implant
                                                  without
                                                  Cardiac
                                                  Catheterizatio
                                                  n without MCC.
----------------------------------------------------------------------------------------------------------------

    During development of the FY 2014 proposed rule, after computing 
the analyses described above by comparing both sets of MS-DRG relative 
weights computed with FY 2011 cost report data, we revisited RTI's July 
2008 final report. We noted that the impacts on relative weight and at 
the MDC level are generally consistent with those estimated by RTI in 
its modeling. RTI found that disaggregating the CCRs for medical 
supplies and devices would have the most impact on reducing charge 
compression, and that the largest impact was for MS-DRG 227. Similarly, 
as shown in the chart above, we estimated that the potential relative 
weight for MS-DRG 227 would experience the largest increase, 6.7 
percent. Cardiac implants and spinal fusion procedures accounted for 
most of the 10 MS-DRGs with the largest incremental increases. In 
addition, RTI's July 2008 final report (pages 103 through 107) 
indicates that among the largest expected reductions are the MS-DRG 
relative weights for MS-DRGs associated with traumatic head injury and 
concussion, which are high users of CT scanning and MRI services. RTI's 
analyses were highly predictive for many of the MS-DRGs most sensitive 
to the effects of charge compression.
    In the FY 2014 IPPS/LTCH PPS proposed rule (78 FR 27508), we 
indicated that as we stated in prior rulemaking (77 FR 53281 through 
53283), once we determined that cost report data were available for 
analysis, we would propose, if appropriate, to use the distinct CCRs 
described above in the calculation of the MS-DRG relative weights. We 
believed that the analytic findings described above using the FY 2011 
cost report data and FY 2012 claims data supported our original 
decision to break out and create new cost centers for implantable 
devices, MRIs, CT scans, and cardiac catheterization, and we saw no 
reason to further delay proposing to implement the CCRs of each of 
these cost centers. Therefore, beginning in FY 2014, we proposed to 
calculate the MS-DRG relative weights using 19 CCRs, creating distinct 
CCRs from cost report data for implantable devices, MRIs, CT scans, and 
cardiac catheterization. We welcomed public comments on the proposal 
and the impacts that it may have. We referred readers to section VI.C. 
of Appendix A of the proposed rule for the overall IPPS operating 
impact of our proposal, which modeled payments to various hospital 
types using relative weights developed from 19 CCRs (as compared to the 
previous 15 CCRs). In addition, as part of the FY 2014 IPPS/LTCH PPS 
proposed rule, in addition to providing Table 5, which listed the 
proposed MS-DRGs and their relative weights using 19 CCRs (available 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 2014 IPPS Proposed Rule Home Page'' or ``Acute Inpatient--Files 
for Download''), we provided a separate table that listed all MS-DRGs 
and their relative weights if computed using 15 CCRs (available at the 
same CMS Web site cited above). We believed that these two formats 
would allow readers to compare our proposal to calculate the MS-DRG 
relative weights using 19 CCRs with the relative weights of MS-DRGs if 
computed using 15 CCRs.
    Comment: Several commenters noted that CMS concluded that there is 
sufficient data in the FY 2011 cost reports to support a meaningful 
analysis of using distinct CCRs, but did not share how it arrived at 
that conclusion. In particular, the commenters were unclear if 1,022 
hospitals reporting cardiac catheterization are a representative 
sample, because they make up less than a third of the total hospitals. 
The commenters urged CMS to clarify how it determined the level of 
reporting on these new cost centers is sufficient.
    Response: In the FY 2014 IPPS/LTCH PPS proposed rule (78 FR 27507), 
we stated that, as compared to previous years, we have a substantial 
number of hospitals completing all, or some, of the MRI, CT scan, and 
cardiac catheterization cost centers on the FY 2011 Medicare cost 
reports. For the FY 2014 IPPS/LTCH PPS proposed rule, we used cost 
report data from the December 2012 update of the FY 2011 HCRIS, and 
found that ``we were able to calculate a valid implantable device CCR 
for 2,285 IPPS hospitals, a valid MRI CCR for 1,402 IPPS hospitals, a 
valid CT scan CCR for 1,470 IPPS hospitals, and a valid cardiac 
catheterization CCR for 1,022 IPPS hospitals (78 FR 27507).'' As part 
of our methodology for calculating the proposed relative weights, we 
first apply various trims to the cost report data of all IPPS hospitals 
(we refer readers to the description of the calculation of the relative 
weights in the FY 2014 IPPS LTCH PPS proposed rule

[[Page 50521]]

(78 FR 27529 through 27530)). After applying these data trims, the CCRs 
in the proposed rule were based on data from 2,697 remaining IPPS 
hospitals. Therefore, our use of the term ``valid'' CCRs in the FY 2014 
proposed rule meant that these CCRs were the ones associated with the 
2,697 IPPS hospitals remaining after the usual trims were applied. 
Although the number of hospitals with valid cardiac catheterization 
CCRs is less than the number of hospitals with ``valid'' implantable 
device, MRI, or CT scan CCRs, it still represented about 38 percent of 
the available IPPS hospitals after application of our usual data trims 
(that is, 1,022/2,697 = .38). We note that many smaller hospitals do 
not separately report cardiac catheterization costs and charges. (This 
issue was raised in the FY 2011 IPPS/LTCH PPS final rule, (75 FR 
50078), where, in recognition of the fact that not all hospitals 
separately account for cardiac catheterization costs and charges, we 
stated that hospitals that do not currently maintain distinct 
departments or accounts in their internal accounting systems for CT 
scanning, MRI, or cardiac catheterization are not required to create 
distinct departments or accounts.) Given that not all hospitals would 
even have a cardiac catheterization CCR, we considered 38 percent to be 
a substantial number, albeit, not a majority, of IPPS hospitals, from 
which to base our FY 2014 proposal to calculate the relative weights 
with a distinct cardiac catheterization CCR.
    We reviewed our data analyses from previous years and note that 
typically, because the proposed CCRs for a given year are based on cost 
report data from the December update of the applicable HCRIS year, the 
proposed CCRs are based on data from less than 3,000 IPPS hospitals. 
Then, once the data for each final rule are available, which are 
derived from the subsequent March update of the applicable HCRIS year, 
the final CCRs are typically based on cost report data of more than 
3,000 IPPS hospitals. This is the case for FY 2014 as well. Although 
the proposed CCRs were based on data of 2,697 IPPS hospitals, the March 
2013 update of FY 2011 HCRIS yields: 3,207 IPPS hospitals (after 
various trims are applied--we refer readers to the description of the 
relative weight calculation in section II.H. of the preamble of this 
final rule); 2,707 IPPS hospitals with an implantable device CCR; 1,717 
IPPS hospitals with an MRI CCR; 1,785 IPPS hospitals with a CT scan 
CCR; and 1,263 IPPS hospitals with a cardiac catheterization CCR. For 
this FY 2014 final rule, although the number of hospitals with cardiac 
catheterization CCRs is less than the number of hospitals with 
``valid'' implantable device, MRI, or CT scan CCRs, it still represents 
approximately 39 percent of the available IPPS hospitals after 
application of our usual data trims (that is, 1,263/3,207 = .39). 
Accordingly, we believe it is appropriate to use the cardiac 
catheterization CCR in the calculation of the FY 2014 relative weights.
    Comment: Commenters were generally supportive of the proposals to 
implement additional CCRs for implantable devices and cardiac 
catheterization. However, many commenters requested that CMS 
``reconsider the impact of'' distinct CCRs for MRIs and CT scans 
``before adopting them.'' Various commenters representing the medical 
imaging industry opposed implementation of distinct MRI and CT scan 
CCRs at this point, expressing concern that doing so would result in 
very low CCRs for these services because of hospital cost reporting 
practices that allocate capital costs for MRIs and CT scan across the 
entire hospital, rather than to the appropriate individual radiology 
cost centers. Specifically, the commenters reported that some hospitals 
currently use an imprecise ``square footage'' allocation methodology 
for the costs of large moveable equipment like CT scan and MRI 
machines. They indicated that while CMS recommends using two 
alternative allocation methods, ``direct assignment'' or ``dollar 
value,'' as a more accurate methodology for directly assigning 
equipment costs, industry analysis suggests that approximately only 
half of the reported cost centers for CT scan and MRI rely on these 
preferred methodologies. The commenters expressed concern that ``square 
footage'' allocation results in CCRs that ``lack face validity,'' 
because the proposed CCRs for CT scans and MRIs are less than the 
proposed CCR for general radiology, inaccurately reflecting the higher 
resources used for MRIs and CT scans relative to the less expensive 
plain film x-rays. Commenters asserted that more time is needed by 
hospitals to modify their cost reporting practices, and urged CMS to 
explore how to develop more accurate data without unduly increasing the 
complexity of the cost report. Some other commenters suggested that if 
CMS were to finalize the new CCRs, CMS should only use cost report data 
that meet minimum data quality standards. For example, these commenters 
recommended that CMS adopt the following standards for assuring 
validity of CT and MRI cost data:
     Check that the hospital uses direct assignment or dollar 
value allocation of capital costs.
     Check that the hospital's CT scan and MRI cost centers 
each have total costs of at least $250,000.
     Check that there is evidence that the hospital 
reclassified overhead costs from the diagnostic radiology cost center 
to the CT scan and/or MRI cost centers.
    A different commenter's analysis used cost report data from 
hospitals that employ ``procedural accounting,'' also known as 
``activity-based costing,'' which the commenter stated is a more 
accurate way to determine costs. The commenter's analysis showed 
results that were in ``close agreement'' with CMS' proposed CCRs, 
giving ``some comfort that the new cost centers are capturing costs as 
intended.'' Nevertheless, the commenter urged caution before 
proceeding, noting large swings in certain DRG relative weights, and 
that many of the negatively affected DRGs are trauma related, and many 
of the positively affected DRGs are cardiac and orthopedic related. The 
commenter was concerned that specific types of hospitals have more to 
gain or lose under the policy based on their mix of services, and CMS 
should consider whether finalizing 19 CCRs ``would unduly incent volume 
growth'' in certain procedures. The commenter requested that CMS 
implement a ``dampening policy'' or a 70/30 transition blend for FY 
2014 to give hospitals an opportunity to budget for such shifts and 
avoid unintended consequences.
    Although many commenters expressed concern about the impact of 
implementing distinct CCRs for MRIs and CT scans under the IPPS, they 
noted that since MS-DRGs are bundled services, only a fraction of the 
negative impact would be manifested in the IPPS MS-DRGs, and that 
payment rates for the Ambulatory Patient Classifications (APCs) under 
the Hospital Outpatient Prospective Payment System (OPPS) would be 
affected more dramatically by the use of inaccurate CCRs. The 
commenters mentioned that the Deficit Reduction Act (DRA) of 2005 sets 
the technical component (TC) of advanced imaging services to the lesser 
of: (1) The Medicare Physician Fee Schedule (MPFS); or (2) the OPPS. 
The commenters stated that, as proposed, the separate cost centers for 
MRIs and CT scans would result in significant cuts to the MPFS 
technical component payments. Another commenter noted

[[Page 50522]]

that as CMS proceeds with cost center refinement, services become 
unbundled, and may cause payment swings from year to year. The 
commenters urged CMS not to use the proposed CCRs for MRIs and CT scans 
in the IPPS, the OPPS, or the MPFS until the effects on all three 
systems have been thoroughly analyzed.
    Response: We thank the commenters for their analyses and 
suggestions regarding use of distinct CCRs for implantable devices, 
MRIs, CT scans, and cardiac catheterization. We appreciate the support 
for our proposal to use distinct CCRs for implantable devices and 
cardiac catheterization, and we have carefully reviewed the comments 
objecting to implementation of distinct CCRs for MRIs and CT scans. The 
new standard cost centers for CT scans, MRIs, and cardiac 
catheterization have been in effect since cost reporting periods 
beginning on or after May 1, 2010, on the revised cost report Form CMS-
2552-10. Thus, FY 2011, which is the cost reporting year that CMS is 
using to calculate the CCRs for the FY 2014 MS-DRG relative weights, 
was either the first or the second opportunity for hospitals to submit 
cost reports with the new CT scan and MRI cost centers (lines 57 and 58 
of Worksheets A and C, Part I of the Form CMS-2552-10), depending on 
the hospital's fiscal year end (FYE). (For example, a hospital with a 
June 30 FYE would have completed these lines on its FY 2010 July 1, 
2010-June 30, 2011 cost report, and again on its FY 2011 July 1, 2011-
June 30, 2012 cost report, whereas a hospital with a December 31 FYE 
would have first completed these cost centers on its FY 2011 January 1, 
2011-December 31, 2011 cost report). However, simultaneous with first 
implementing the new CT scan and MRI cost centers in the FY 2011 IPPS/
LTCH PPS final rule (75 FR 50077), we also notified hospitals of the 
need and importance of properly reporting the capital costs of moveable 
equipment on the Medicare cost report. Specifically, in the FY 2011 
IPPS/LTCH PPS final rule (75 FR 50078), we explained that, in 
accordance with Section 104 of CMS Pub. 15-1, Chapter 1, CT scans and 
MRIs are major moveable equipment, and the costs should be reported 
together with the rest of the hospital's major moveable equipment cost 
in the Capital-Related Costs--Moveable Equipment cost centers on 
Worksheet A (lines 2 and 4 on the Form CMS-2552-96 and line 2 on the 
Form CMS-2552-10). The costs in these cost centers are allocated to all 
the hospital's cost centers that use major moveable equipment 
(including CT and MRI), using ``dollar value'' (which is the 
``recommended'' or default statistical basis, per the cost reporting 
instructions at CMS Pub. 15-2, Section 4095 for the Form CMS 2552-10). 
Alternatively, the hospital may have obtained the contractor's approval 
under Section 2313 of CMS Pub. 15-1 to use the simplified cost 
allocation methodology, ``square feet.'' However, a hospital that 
historically has been using ``square feet'' and is concerned that this 
method of allocation may result in inaccurate CCRs (on Worksheet C, 
Part I) for the CT scan, MRI, and other ancillary cost centers may 
request contractor approval in accordance with Section 2307 of the CMS 
Pub. 15-1 to use the ``direct assignment'' allocation method, and 
directly assign the cost of moveable equipment to all of the hospital's 
cost centers that use moveable equipment, including CT and MRIs, using 
the provider's routine accounting process. This would ensure that the 
high cost of the CT scanning and MRI equipment would be reflected in 
the CCR that would be calculated for those departments and that would 
be used to estimate the cost of CT scanning and MRI services. In any 
case, hospitals should correct their cost reporting practices to come 
into compliance with CMS' longstanding policy regarding the ``Capital-
Related Costs--Moveable Equipment'' cost center, by either using the 
recommended statistical allocation method of ``dollar value'' for costs 
in Worksheet A, Column 2 for Capital-Related Costs--Moveable Equipment, 
or by requesting contractor approval in accordance with Section 2307 of 
CMS Pub. 15-1 to use the ``direct assignment'' allocation method. In 
the FY 2013 IPPS/LTCH PPS final rule (77 FR 53283), we reiterated this 
policy, and added that ``Hospitals that still need to correct their 
cost reporting practices in this regard should do so soon, so that when 
we propose distinct CCRs for MRI and CT scans, hopefully for FY 2014, 
these CCRs will represent fairly accurately the cost of these radiology 
services.'' Therefore, while the CCRs for CT scan and MRIs may appear 
to ``lack face validity,'' as the commenters asserted, these CCRs 
nevertheless reflect the cost reporting practices of many IPPS 
hospitals as of FY 2011, the cost reports used to calculate the CCRs 
for the FY 2014 MS-DRG relative weights. Furthermore, we are unsure of 
how the cost reporting practices of hospitals that employ the square 
feet allocation method result in CCRs that ``lack face validity'' when 
CCRs are calculated separately for CT scan, MRI, and radiology, but 
would result in CCRs that are more ``valid'' when aggregated into a 
single CCR for all radiology services.
    We have considered the public comments recommending that if CMS 
does finalize distinct CCRs for CT scans and MRIs for the IPPS MS-DRG 
relative weights, CMS should adopt certain minimum quality standards, 
such as using only cost report data of hospitals that use either direct 
assignment or the dollar value statistical allocation method, have at 
least $250,000 of cost in the CT scan or MRI cost center, and have 
reclassified overhead costs from the diagnostic radiology cost center 
to the CT scan and/or MRI cost centers. We do not agree with adoption 
of these minimum data standards because doing so would ignore the fact 
that many hospitals have chosen (at least up to this point) to employ 
the square feet statistical allocation methodology, perhaps for reasons 
unrelated to the costs of MRIs and CT scans, and, therefore, these data 
reflect, in large part, the best available data that we have. It also 
is not administratively feasible for CMS to determine, using HCRIS 
data, whether hospitals have reclassified overhead costs from the 
diagnostic radiology cost center to the CT scan and/or MRI cost 
centers. However, we appreciate the one commenter's analysis of cost 
reports using procedural accounting (another more precise method) that 
yielded CCRs that were close to the CCRs that CMS proposed.
    We took note of the many comments regarding the ramifications of CT 
scan and MRI CCRs under the OPPS and the MPFS. Specifically, commenters 
seemed even more concerned about an impending proposal to implement 
distinct MRI and CT scan CCRs under the OPPS, which, they asserted, 
when coupled with recent payment reductions to MRI and CT scan services 
under the Deficit Reduction Act of 2005, are detrimental to hospitals. 
(We note that at the time of the comment period for the FY 2014 IPPS/
LTCH PPS proposed rule, the CY 2014 OPPS/ASC proposed rule had not yet 
been issued.) We understand that any such change could have significant 
payment impacts under the MPFS where the technical component payment 
for many imaging services is capped at the OPPS payment. While we 
appreciate the concern regarding other Medicare payment systems, we 
wish to point out that our decision to implement additional CCRs in 
this FY 2014 IPPS/LTCH PPS final rule does not predict what CMS may 
finalize for the CY 2014 OPPS/ASC relative payment weights. We will 
separately evaluate the impacts of

[[Page 50523]]

implementing any additional CCRs under the OPPS as part of the OPPS 
rulemaking process. We note that the public comment periods for both 
the CY 2014 MPFS proposed rule and the CY 2014 OPPS/ASC proposed rule 
end on September 6, 2013.
    We appreciate the concerns expressed by the commenters related to 
the swings in the relative weights of certain MS-DRGs, and the 
importance of not providing an incentive for hospitals to furnish, or 
not furnish, certain services. However, we are not convinced that 
further delay or further trimming of CCR values is necessary in order 
to implement all of the proposed CCRs. This is consistent with our 
historical approach to use cost report data from HCRIS that is 3 years 
prior to the IPPS fiscal year that is under development (that is, for 
the FY 2014 IPPS relative weights, the CCRs are calculated from FY 2011 
HCRIS). Although hospitals have been permitted to use the alternative 
basis cost allocation (that is, ``square feet'') under Section 2313 of 
CMS Pub. 15-1, this methodology does not ensure precise CCRs for CT 
scans and MRIs. Therefore, we encouraged hospitals over the past 
several years to use the most precise cost reporting methods in 
response to the new cost report lines. Specifically, the longstanding 
cost report instructions at CMS Pub. 15-2, Section 4020 (previously at 
Section 3617), state that ``The statistical basis shown at the top of 
each column on Worksheet B-1 is the recommended basis of allocation of 
the cost center indicated which must be used by all providers 
completing this form (Form CMS-2552-10), even if a basis of allocation 
other than the recommended basis of allocation was used in the previous 
iteration of the cost report (Form CMS-2552-96).'' Under Table 1 of the 
Medicare cost report, which lists the Record Specifications for the 
cost centers on Worksheet B-1, ``dollar value'' is specified as the 
recommended statistical allocation method for Column 2, Capital-Related 
Costs--Moveable Equipment. While the ``dollar value'' statistical 
allocation method is more precise than ``square feet,'' to ensure even 
more precise CCRs for CT scans and MRIs, 90 days prior to the beginning 
of their next cost reporting period, hospitals may request permission 
from their Medicare contractors in accordance with Section 2307 of CMS 
Pub. 15-1 to use the ``direct assignment'' allocation method on 
Worksheet B, Part II, Column 0. Although ``direct assignment'' is the 
preferred and most precise allocation method, hospitals that do not 
have the resources to directly assign the costs of every cost center 
are strongly encouraged to instead use the ``dollar value'' statistical 
allocation method. (We note that, under Section 2313 of CMS Pub. 15-1, 
hospitals not currently using ``dollar value'' should notify their 
contractor of their intention to switch their statistical allocation 
basis to ``dollar value'' at least 90 days prior to the end of a cost 
reporting period.) We also intend to communicate with the Medicare 
contractors to facilitate approval of hospitals' requests to switch 
from the square feet statistical allocation method to the ``direct 
assignment'' or ``dollar value'' allocation method for the costs of 
major moveable equipment. We believe that by adopting more refined 
CCRs, we are fostering more careful cost reporting. Therefore, we do 
not believe that the concerns expressed by the commenters warrant 
further delay in implementing the proposed CCRs for CT scans and MRIs 
for the FY 2014 IPPS/LTCH PPS final rule, nor do we believe that any 
type of phase-in methodology is warranted.
    As we have stated in prior rulemaking (77 FR 53281 through 53283), 
once we determined that cost report data were available for analysis, 
we would propose, and finalize, if appropriate, the use of the distinct 
CCRs described above in the calculation of the MS-DRG relative weights. 
We believe that the analytic findings described in the proposed rule, 
and the volume of hospitals that have ``valid'' CCRs described above, 
computed using the March 2013 update of FY 2011 HCRIS and the March 
2013 update of the FY 2012 MedPAR claims data, support our original 
decision to break out and create new cost centers for implantable 
devices, MRIs, CT scans, and cardiac catheterization, and we see no 
reason to further delay implementation of the CCRs of each of these 
cost centers. Therefore, beginning in FY 2014, as we proposed, we are 
calculating the MS-DRG relative weights using 19 CCRs, creating 
distinct CCRs for implantable devices, MRIs, CT scans, and cardiac 
catheterization. We refer readers to section I.G. of Appendix A of this 
final rule for the overall IPPS operating impact of our policy, which 
models payments to various hospital types using relative weights 
developed from 19 CCRs (as compared to the previous 15 CCRs). The 
description of the calculation of the CCRs and the MS-DRG relative 
weights, including the final 19 CCRs used to calculate the relative 
weights for FY 2014, is included in section II.H. of the preamble of 
this final rule.

F. Adjustment to MS-DRGs for 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, 
under the

[[Page 50524]]

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 affected in a 
manner shown in the diagram below.
[GRAPHIC] [TIFF OMITTED] TR19AU13.000

BILLING CODE 4120-01-C
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); 
the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25810 through 25816) and 
final rule (76 FR 51504 through 51522); and the FY 2013 IPPS/LTCH PPS 
proposed rule (77 FR 27892 through 27898) and final rule (77 FR 53283 
through 53303). A complete list of the 11 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.
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).
    Currently, as we discussed in the prior rulemaking cited above, the 
POA indicator reporting requirement only applies to IPPS hospitals 
because they are subject to this HAC provision. Non-IPPS hospitals, 
including CAHs, LTCHs, IRFs, IPFs, cancer hospitals, children's 
hospitals, hospitals in Maryland operating under waivers, RNHCIs, and 
the Department of Veterans Affairs/Department of Defense hospitals, are 
exempt from POA reporting. We note that hospitals in Maryland operating 
under their waiver are not paid under the IPPS but rather are paid 
under the provisions of section 1814(b)(3) of the Act. This waiver 
applies to the amount paid to providers of services, and does not 
extend to billing requirements and other reporting requirements. In 
fact, hospitals in Maryland are required to submit Medicare claims for 
Medicare payment and also to submit the same information on their 
Medicare claims as hospitals in other parts of the country paid under 
the IPPS. Therefore, we believe it is inappropriate to continue to 
exempt hospitals in Maryland from the POA indicator reporting 
requirement. Under current policy, hospitals in Maryland will continue 
to be exempt from the application of this HAC provision so long as they 
are not paid under the IPPS. However, we believe it is appropriate to 
require them to use POA indicator reporting on their claims so that we 
can include their data and have as complete a dataset as possible when 
we analyze trends and make further payment policy determinations, such 
as those authorized under section 1886(p) of the Act. (We refer readers 
to section V.I. of the preamble of this final rule for a discussion of 
our FY 2014 proposals and final policies to implement section 1886(p) 
of the Act.) Therefore, in the FY 2014 IPPS/LTCH

[[Page 50525]]

PPS proposed rule (78 FR 27510), we proposed that hospitals in Maryland 
operating under their waiver under section 1814(b)(3) of the Act would 
no longer be exempted from the POA indicator reporting requirement 
beginning with claims submitted on or after October 1, 2013, including 
all claims for discharges on or after October 1, 2013. We invited 
public comment regarding this proposal.
    Comment: Commenters supported the CMS proposal. One commenter noted 
that Maryland hospitals have been required to report accurate and 
complete POA information on secondary diagnoses in the quarterly 
discharge abstract data they submit to the state for discharges 
beginning on July 1, 2007.
    Response: We appreciate the commenters' support. Accordingly, we 
are finalizing our proposal to require hospitals in Maryland currently 
paid under section 1814(b)(3) to report the POA indicator on their 
claims beginning with discharges on October 1, 2013. We note that while 
this requirement will not be effective until that date, hospitals in 
Maryland may submit data with present on admission indicators before 
that time with the expectation that these data will be accepted by 
Medicare's claims processing systems.
    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); 
the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25812 through 25813) and 
final rule (76 FR 51506 through 51507); and the FY 2013 IPPS/LTCH PPS 
proposed rule (77 FR 27893 through 27894) and final rule (77 FR 53284 
through 53285).

------------------------------------------------------------------------
        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.
------------------------------------------------------------------------

    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.
    In addition, as discussed elsewhere in section III.G.10. of the 
preamble of this final 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 and the September 19, 2012 meetings 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/Medicare/Coding/ICD10/ICD-10-MS-DRG-Conversion-Project.html. The translations can be found under 
the link titled ``ICD-10-CM/PCS MS-DRG v30 Definitions Manual Table of 
Contents--Full Titles--HTML Version in Appendix I--Hospital Acquired 
Conditions (HACs).'' The above CMS Web site regarding the ICD-10-MS-DRG 
Conversion Project is also available on the CMS Web site 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. Current HACs and Previously Considered Candidate HACs
    In the FY 2014 IPPS/LTCH PPS proposed rule (78 FR 27511), we did 
not propose to add or remove categories of HACs. However, we indicated 
that we continue to encourage public dialogue about refinements to the 
HAC list by written stakeholder comments about both previously selected 
and potential candidate HACs. We refer readers to section II.F.6. of 
the FY 2008 IPPS final

[[Page 50526]]

rule with comment period (72 FR 47202 through 47218) and to section 
II.F.7. of the FY 2009 IPPS final rule (73 FR 48774 through 48491) for 
detailed discussion supporting our determination regarding each of 
these conditions. We also refer readers to section III.F.5. of the FY 
2013 IPPS/LTCH PPS proposed rule (77 FR 27892 through 27898) and the FY 
2013 IPPS/LTCH PPS final rule (77 FR 53285 through 53292) for the HAC 
policy for FY 2013, which will continue for FY 2014. In addition, 
readers may find updated information on evidence-based guidelines on 
the CMS Web site at: http://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/HospitalAcqCond/Hospital-Acquired_Conditions.html.
    Comment: Some commenters stated they were pleased that CMS did not 
propose to expand the list of categories or conditions subject to the 
Deficit Reduction Act of 2005 provisions that would reduce payment for 
hospital acquired conditions not present on admission. However, 
commenters made the following suggestions and recommendations:
     One commenter recommended CMS expand the HAC list in 
future IPPS rulemaking to include iatrogenic pneumothorax with 
paracentesis and thoracentesis.
     One commenter requested that CMS reconsider its decision 
to include ``Surgical Site Infections (SSIs) Following Cardiac 
Implantable Electronic Device (CIED)'' under this program. The 
commenter also urged CMS to explore how information learned from POA 
coding and other data sources, such as EHRs and clinical data 
registries, could be used to better understand and prevent HACs.
     One commenter suggested that CMS include ``diaper rash'' 
as a DRA HAC.
     One commenter suggested that CMS include ``Surgical Site 
Infections (SSIs) Following Hip and Knee Replacement'' as a DRA HAC.
     One commenter suggested that CMS include ``Surgical Site 
Infections (SSIs) Following Cesarean Section Births'' as a DRA HAC.
     Although existing colon and hysterectomy surgical site 
infections are not current DRA HACs, one commenter requested that 
additional consideration be given to include the following exclusions 
for existing colon and hysterectomy surgical site infections: 
Chemotherapy for cancer diagnosis, penetrating trauma, obesity, and 
transplant. The commenter also requested that additional consideration 
be given to excluding trauma (de-gloving/avulsion wounds, burns, 
penetrating trauma), chemotherapy, and transplants from the following 
HAC categories: post CABG mediastinitis, orthopedic surgery of the 
spine/neck/shoulder/elbow and the three existing gastric bypass 
surgeries. The commenter indicated that these additional exclusions 
will better meet the intent of identifying appropriate HACs, without 
unnecessary penalization.
     One commenter recommended that ``. . . Where medical 
technology can play a role in supporting the goals of improving patient 
care in a cost effective manner, such consideration should be made when 
reflecting on whether to expand upon the list of preventable HACs, 
particularly in relation to infection control prevention and 
management.''
    Response: We value and appreciate these public comments regarding 
the DRA HACs, and we will take all of the public comments and 
suggestions we received into consideration in future rulemaking.
    Comment: One commenter recommended that two titles of the current 
DRA HACs be revised: that ``Catheter-Associated Urinary Tract Infection 
(UTI)'' be revised to ``Symptomatic Urinary Tract Infection due to an 
Indwelling Urinary Catheter'' and ``Vascular Catheter-Associated 
Infection'' be revised to ``Infections due to Central Venous 
Catheter'', with the ICD-9-CM codes shown in the following table.

------------------------------------------------------------------------
                DRA HACs                     CC/MCC (ICD-9-CM Codes)
------------------------------------------------------------------------
Catheter-Associated Urinary Tract        996.64 (CC).
 Infection (UTI).
                                         Also excludes the following
                                          from acting as a CC/MCC: 112.2
                                          (CC), 590.10 (CC), 590.11
                                          (MCC), 590.2 (MCC), 590.3
                                          (CC), 590.80 (CC), 590.81
                                          (CC), 595.0 (CC), 597.0 (CC),
                                          599.0 (CC).
Vascular Catheter-Associated Infection.  999.31 (CC), 999.32 (CC),
                                          999.33 (CC).
------------------------------------------------------------------------

    Response: We appreciate the commenter's recommendations. However, 
we believe the titles correctly identify the selected HACs, as 
reflected in the chart above, particularly because we have included the 
specified codes within the HAC logic.
    Comment: One commenter recommended that CMS remove the DRA HAC 
category ``Falls and Trauma.'' The commenter stated that ``Falls, 
particularly for the vulnerable older population, can be reduced 
through interventions; however, they cannot be completely avoided.'' 
Another commenter noted that some patients, particularly high-risk, 
comorbid individuals, may still develop the conditions on the HAC list.
    Response: We refer readers to section 1886(d)(4)(D) of the Act 
which states that a DRA HAC is one that ``(c) could reasonably have 
been prevented through the application of evidence-based guidelines.'' 
We believe in the appropriate use of guidelines that we have adopted to 
support our DRA HAC policy. These evidence-based guidelines are posted 
on the DRA HAC Web site at: http://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/HospitalAcqCond/Downloads/Evidence-Based-Guidelines.pdf and are reviewed regularly to ensure that if there are 
any changes in the status of these guidelines, they are reflected in 
the DRA HAC policy.
    Comment: One commenter noted that, ``In previous rulemaking cycles, 
CMS has proposed adding delirium to the list of HACs [FY 2009 IPPS 
proposed rule]. While we support reasonable steps to provide hospitals 
with incentives to recognize and treat delirium, we continue to have 
significant concerns about adding delirium to the list of `preventable' 
HACs to be excluded from the calculation of a hospital's MS-DRG 
reimbursement rate.''
    Response: We note that this comment regarding delirium is outside 
of the scope of the proposals included in the FY 2014 IPPS/LTCH PPS 
proposed rule. In the FY 2009 IPPS final rule (73 FR 48482), regarding 
delirium, we stated that ``After consideration of the public comments 
received, we have decided not to select delirium as an HAC in this 
final rule. We will continue to monitor the evidence-based guidelines 
surrounding prevention of delirium. If evidence warrants, we may 
consider proposing delirium as an HAC in the future.''
6. RTI Program Evaluation
    On September 30, 2009, a contract was awarded to RTI to evaluate 
the

[[Page 50527]]

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 was an intra-agency 
project with funding and technical support from CMS, OPHS, AHRQ, and 
CDC. The evaluation also examined the implementation of the program and 
evaluated additional conditions for future selection. The contract with 
RTI ended on November 30, 2012. Summary reports of RTI's analysis of 
the FYs 2009, 2010, and 2011 MedPAR data files for the HAC-POA program 
evaluation were included in the FY 2011 IPPS/LTCH PPS final rule (75 FR 
50085 through 50101), the FY 2012 IPPS/LTCH PPS final rule (76 FR 51512 
through 51522), and the FY 2013 IPPS/LTCH PPS final rule (77 FR 53292 
through 53302). Summary and detailed data also 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/.
    In addition to the evaluation of HAC and POA MedPAR claims data, 
RTI also conducted analyses on readmissions due to HACs, the 
incremental costs of HACs to the healthcare system, a study of 
spillover effects and unintended consequences, as well 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.
7. Current and Previously Considered Candidate HACs--RTI Report on 
Evidence-Based Guidelines
    The RTI program evaluation includes a report that provides 
references for all evidence-based guidelines available for each of the 
selected and previously considered candidate HACs that provide 
recommendations for the prevention of the corresponding conditions. 
Guidelines were primarily identified using the AHRQ National Guidelines 
Clearing House (NGCH) and the CDC, along with relevant professional 
societies. Guidelines published in the United States were used, if 
available. In the absence of U.S. guidelines for a specific condition, 
international guidelines were included.
    Evidence-based guidelines that included specific recommendations 
for the prevention of the condition were identified for each of the 
selected conditions. In addition, evidence-based guidelines also were 
found for the previously considered candidate conditions. RTI prepared 
a final report to summarize its findings regarding evidence-based 
guidelines. This report can be found on the CMS Web site at: http://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/HospitalAcqCond/Hospital-Acquired_Conditions.html. Subsequent to this final report, 
RTI has been awarded an FY 2014 Evidence-Based Guidelines Monitoring 
contract. Under the contract, RTI will provide a summary report of all 
evidence-based guidelines available for each of the selected and 
previously considered candidate HACs that provide recommendations for 
the prevention of the corresponding conditions. Updates to the 
guidelines will be made available to the public.

G. Changes to Specific MS-DRG Classifications

    In the FY 2014 IPPS/LTCH PPS proposed rule (78 FR 27512 through 
27529), we invited 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 also are discussed 
below. In some cases, we proposed changes to the MS-DRG classifications 
based on our analysis of claims data. In other cases, we proposed to 
maintain the existing MS-DRG classification based on our analysis of 
claims data. The public comments that we received on each of the 
proposals and our response, with statements of final policies, are 
included below.
    CMS encourages input from our stakeholders concerning the annual 
IPPS updates when that input is made available to us by early December 
of the year prior to the next annual proposed rule update. For example, 
to be considered for any updates or changes in FY 2014, comments and 
suggestions should have been submitted by early December 2012. The 
comments that were submitted in a timely manner are discussed below in 
this section.
1. Pre-Major Diagnostic Categories (Pre-MDCs): Heart Transplants and 
Liver Transplants
    We received a request from an organization that represents 
transplant surgeons to eliminate the severity levels for the heart and 
liver transplants MS-DRGs. The MS-DRGs for heart transplants are: 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). The MS-DRGs for liver transplants are: MS-DRG 005 (Liver 
Transplant with MCC or Intestinal Transplant) and MS-DRG 006 (Liver 
Transplant without MCC). We received this comment during the comment 
period for the FY 2013 IPPS/LTCH PPS proposed rule. We referred to this 
comment briefly in the FY 2013 IPPS/LTCH PPS final rule (77 FR 53325), 
but we did not address the issue because we considered this comment 
outside of the scope of the proposed rule. However, we addressed this 
issue in the FY 2014 IPPS/LTCH PPS proposed rule.
    The commenter stated that there are no ``uncomplicated'' heart 
transplants or liver transplants, and indicated that all of these 
transplant procedures are highly complex, involving numerous 
complicating conditions, only some of which may be recognized by the 
MS-DRGs. The commenter expressed concern that the continued bifurcation 
of the MS-DRGs for heart and liver transplants will result in 
unsustainable payment for these cases that are assigned to the 
``without MCC'' MS-DRGs 002 and 006. According to the commenter, in 
light of the relatively small number of Medicare patients involved and 
the significant cost variation involved, it would be preferable to 
eliminate the bifurcation of these procedures, thereby increasing the 
stability of the DRG weights for these procedures.
    For the FY 2014 IPPS/LTCH PPS proposed rule, we examined claims 
data from the FY 2012 MedPAR file for heart and liver transplant cases 
assigned to MS-DRGs 001, 002, 005, and 006. The following table 
illustrates our findings:

----------------------------------------------------------------------------------------------------------------
                                                                     Number of        Average
                             MS-DRGs                                   cases      length of stay  Average  costs
----------------------------------------------------------------------------------------------------------------
MS-DRG 001......................................................           1,247           33.27        $158,556
MS-DRG 002......................................................             284           18             97,932
MS-DRGs 001 and 002--All cases..................................           1,531           30.4          147,310
MS-DRG 005......................................................             828           19             66,746

[[Page 50528]]

 
MS-DRG 006......................................................             282            8.75          30,873
MS-DRGs 005 and 006--All cases..................................           1,110           16.3           57,632
----------------------------------------------------------------------------------------------------------------

    The data showed that the majority of the heart transplant cases, a 
total of 1,247, are assigned to MS-DRG 001, with average costs of 
approximately $158,556 and an average length of stay of approximately 
33.27 days. There were 284 cases assigned to MS-DRG 002, with average 
costs of approximately $97,932 and an average length of stay of 
approximately 18 days.
    This table shows that there are significant differences in average 
lengths of stay and average costs for the severity level for the heart 
transplant MS-DRGs that justify the existing split in MS-DRGs 001 and 
002. If we were to combine the heart transplant cases in MS-DRGs 001 
and 002 as suggested by the commenter, the payment for the majority of 
cases with an MCC would be lower.
    The majority of the liver transplant cases, 828 cases, were 
assigned to MS-DRG 005, with average costs of approximately $66,746 and 
an average length of stay of approximately 19 days. There were 282 
cases assigned to MS-DRG 006, with average costs of approximately 
$30,873 and an average length of stay of approximately 8.75 days. The 
data showed that there are significant differences in average costs and 
average lengths of stay in the severity levels for the liver transplant 
MS-DRGs. Again, if we were to combine all the liver transplant cases 
into one MS-DRG as requested by the commenter, the majority of the 
cases would receive lower payment.
    Based on these findings, we stated in the proposed rule that we 
believe that it would not be prudent to eliminate the severity levels 
for the heart and liver transplant MS-DRGs. Our clinical advisors 
concurred with this analysis that two severity levels are justified for 
the heart and liver transplant MS-DRGs. Therefore, for FY 2014, we did 
not propose to make any changes to the severity levels for heart and 
liver transplant MS-DRGs 001, 002, 005, and 006. We invited public 
comments on this issue.
    Comment: Several commenters agreed with CMS' proposal to maintain 
the current structure for heart and liver transplant MS-DRGs. The 
commenters stated that the proposal seems reasonable based on the data 
and information provided. One commenter agreed with CMS that creating 
only one MS-DRG for heart transplants or implants of heart assist 
systems, regardless of whether or not there is a major complication or 
comorbidity (MCC) present, would greatly underpay the complex cases 
which currently represent the majority of the volume and overpay for 
those less severe cases.
    Response: We appreciate the commenters' support for maintaining the 
severity levels for the heart and liver transplant MS-DRGs based on 
data and our analysis.
    After consideration of the public comments we received, we are not 
making any changes to MS-DRGs 001, 002, 005, and 006 for FY 2014.
2. MDC 1 (Diseases and Disorders of the Nervous System): Tissue 
Plasminogen Activator (tPA) (rtPA) Administration Within 24 Hours Prior 
to Admission
    During the comment period for the FY 2013 IPPS/LTCH PPS proposed 
rule, we received a public comment that we considered to be outside the 
scope of that proposed rule. We stated in the FY 2013 IPPS/LTCH PPS 
final rule (77 FR 53325) that we would consider this issue in future 
rulemaking as part of our annual review process. The commenter 
requested that CMS conduct an analysis of diagnosis code V45.88 (Status 
post administration of tPA (rtPA) in a different facility within the 
last 24 hours prior to admission to current facility). Diagnosis code 
V45.88 was created for use beginning October 1, 2008, to identify 
patients who are given tissue plasminogen activator (tPA) at one 
institution and then transferred and admitted to a comprehensive stroke 
center for further care. This situation has been referred to as the 
``drip-and-ship'' issue and was discussed at length in the FY 2009 IPPS 
proposed rule (73 FR 23563 through 23564) and final rule (73 FR 48493 
through 48495), as well as the FY 2011 IPPS/LTCH PPS proposed rule (75 
FR 23899 through 23900) and final rule (75 FR 50102 through 50106). We 
refer readers to these previous discussions for detailed background 
information regarding this topic.
    Similar to previous requests, according to the commenter, the 
concern at the receiving facilities is that the costs associated with 
[caring for] more complex stroke patients that receive tPA are much 
higher than the cost of the drug, presumably because stroke patients 
initially needing tPA have more complicated strokes and outcomes. 
However, because these patients do not receive the tPA at the second or 
transfer hospital, the receiving hospital will not be able to assign 
the case to one of the higher-weighted tPA stroke MS-DRGs when it 
admits these patients whose care requires the use of intensive 
resources. The MS-DRGs that currently include the diagnosis code for 
the use of tPA are: MS-DRG 061 (Acute Ischemic Stroke with Use of 
Thrombolytic Agent with MCC); MS-DRG 062 (Acute Ischemic Stroke with 
Use of Thrombolytic Agent with CC); and MS-DRG 063 (Acute Ischemic 
Stroke with Use of Thrombolytic Agent without CC/MCC). These MS-DRGs 
have higher relative weights than the other MS-DRGs relating to stroke 
or cerebral infarction. The commenter requested an analysis of 
diagnosis code V45.88 to determine whether new claims data warrant any 
change in the MS-DRG structure.
    For the FY 2014 IPPS/LTCH PPS proposed rule, we analyzed MedPAR 
claims data from FY 2012. We included claims for patient cases assigned 
to the following MS-DRGs:
     061 (Acute Ischemic Stroke with Use of Thrombolytic Agent 
with MCC)
     062 (Acute Ischemic Stroke with Use of Thrombolytic Agent 
with CC)
     063 (Acute Ischemic Stroke with Use of Thrombolytic Agent 
without CC/MCC)
     064 (Intracranial Hemorrhage or Cerebral Infarction with 
MCC)
     065 (Intracranial Hemorrhage or Cerebral Infarction with 
CC)
     066 (Intracranial Hemorrhage or Cerebral Infarction 
without CC/MCC).
    Our data analysis included MS-DRGs 064, 065, and 066 because claims 
involving diagnosis code V45.88 also would be properly reported in the 
data for these MS-DRGs. The following table reflects the results of our 
analysis of the MedPAR data in which diagnosis code V45.88 was reported 
as a secondary diagnosis for FY 2012.

[[Page 50529]]



----------------------------------------------------------------------------------------------------------------
                                                                                      Average
                             MS-DRG                                  Number of       length of     Average costs
                                                                       cases           stay
----------------------------------------------------------------------------------------------------------------
MS-DRG 061--All cases...........................................           3,369            7.48         $18,556
MS-DRG 061--Cases with secondary diagnosis code V45.88..........             140            7.51          19,008
MS-DRG 062--All cases...........................................           5,277            4.92          12,935
MS-DRG 062--Cases with secondary diagnosis code V45.88..........             179            5.03          13,317
MS-DRG 063--All cases...........................................           1,709            3.45          10,363
MS-DRG 063--Cases with secondary diagnosis code V45.88..........              48            3.15           9,372
MS-DRG 064--All cases...........................................          64,095            6.30          11,654
MS-DRG 064--Cases with secondary diagnosis code V45.88..........             955            7.06          14,432
MS-DRG 065--All cases...........................................         101,011            4.29           7,414
MS-DRG 065--Cases with secondary diagnosis code V45.88..........           1,259            4.91           9,471
MS-DRG 066--All cases...........................................          56,620            2.92           5,414
MS-DRG 066--Cases with secondary diagnosis code V45.88..........             493            3.28           6,682
----------------------------------------------------------------------------------------------------------------

    Based on our review of the data for all of the cases in MS-DRGs 
064, 065, and 066, compared to the subset of cases containing diagnosis 
code V45.88 as the secondary diagnosis, we again concluded that the 
movement of cases with diagnosis code V45.88 as a secondary diagnosis 
from MS-DRGs 064, 065, and 066 to MS-DRGs 061, 062, and 063 is not 
warranted. We determined that the differences in the average lengths of 
stay and the average costs are too small to warrant an assignment to 
the higher-weighted MS-DRGs.
    However, the data do reflect that the average costs for cases 
reporting diagnosis code V45.88 as a secondary diagnosis in MS-DRG 066 
are more similar to the average costs of higher severity level cases in 
MS-DRG 065. Therefore, for FY 2014, we proposed to move cases with 
diagnosis code V45.88 from MS-DRG 066 to MS-DRG 065, and to revise the 
title of MS-DRG 065 to reflect the patients status post tPA 
administration within 24 hours (78 FR 27513 through 27514). The 
proposed revised MS-DRG title was: MS-DRG 065 (Intracranial Hemorrhage 
or Cerebral Infarction with CC or tPA in 24 Hours). We invited public 
comments on our proposal.
    Comment: Several commenters supported CMS' proposal to reassign 
cases reporting ICD-9-CM diagnosis code V45.88 from MS-DRG 66 to MS-DRG 
65. The commenters stated this proposal would allow for more 
appropriate payment and recognition of the resources required to care 
for stroke patients who are transferred. Several other commenters 
stated that the proposal was reasonable considering the data and 
clinical information provided.
    Response: We appreciate the commenters' support. We agree that this 
modification to the MS-DRGs involving stroke patients will better 
reflect the increased costs of caring for these transfer cases.
    Comment: One commenter who supported the proposal to reassign cases 
reporting ICD-9-CM diagnosis code V45.88 from MS-DRG 66 to MS-DRG 65 
also urged CMS to move cases reporting ICD-9-CM diagnosis code V45.88 
from MS-DRG 64 (Intracranial Hemorrhage or Cerebral Infarction with 
MCC) to MS-DRG 62 (Acute Ischemic Stroke with Use of Thrombolytic Agent 
with CC). The commenter noted that ``It is essential that hospitals are 
fairly reimbursed for the additional resources associated with caring 
for patients treated with IV tPA even when the tPA is administered at 
another hospital before transfer. Without adequate reimbursement 
through the MS-DRG system, receiving hospitals are financially 
penalized for accepting patients and giving them advanced stroke care 
which is detrimental to stroke systems and patients suffering 
strokes.''
    Response: We also acknowledge the commenter's concern regarding 
appropriate payment for the additional resources required in caring for 
patients treated with tPA and subsequently transferred to another 
facility. As stated in the FY 2014 IPPS/LTCH PPS proposed rule (78 FR 
27513), we concluded that the movement of cases with diagnosis code 
V45.88 as a secondary diagnosis from MS-DRGs 064, 065, and 066 to MS-
DRGs 061, 062, and 063 is not warranted based on our review of the 
data. In addition, our clinical advisors did not support movement of 
these non-tPA cases into the MS-DRGs where tPA is administered as it 
violates the clinical cohesiveness of these two sets of DRGs.
    After consideration of the public comments we received, we are 
adopting as final policy for FY 2014, our proposal to move cases with 
diagnosis code V45.88 from MS-DRG 066 to MS-DRG 065 and to revise the 
title to MS-DRG 065 (Intracranial Hemorrhage or Cerebral Infarction 
with CC or tPA in 24 Hours).
3. MDC 4 (Diseases and Disorders of the Ear, Nose, Mouth and Throat)
a. Endoscopic Placement of a Bronchial Value
    In response to the FY 2013 IPPS/LTCH PPS proposed rule, we received 
a request to modify the MS-DRG assignment for bronchial valve(s) 
insertion, which we considered to be outside of the scope of that 
proposed rule (77 FR 53325 through 53326). The requestor asked that 
cases in MS-DRGs 190, 191, and 192 (Chronic Obstructive Pulmonary 
Disease with MCC, with CC, and without MCC/CC, respectively) that 
involve insertion of a bronchial valve be assigned instead to MS-DRGs 
163, 164, and 165 (Major Chest Procedures with MCC, with CC, and 
without MCC/CC, respectively). The procedures are captured by procedure 
codes 33.71 (Endoscopic insertion or replacement of bronchial valve(s), 
single lobe) and 33.73 (Endoscopic insertion or replacement of 
bronchial valve(s), multiple lobes), which are considered nonoperating 
procedures and do not affect the MS-DRG assignment. When reported 
without any other operating room (OR) procedure code, the admission 
would be assigned to a medical MS-DRG.
    The Spiration[supreg] IBV Valve System device, a bronchial valve, 
was approved for new technology add-on payments in the FY 2010 IPPS/RY 
2010 LTCH PPS final rule (74 FR 43819 through 43823) with a maximum 
payment rate of $3,437.50. In the FY 2012 IPPS/LTCH PPS final rule, the 
new technology add-on payments were discontinued for FY 2012 (76 FR 
51575 through 51576). The bronchial valve device is used to place, via 
bronchoscopy, small, one-way valves into selected small airways in the 
lung in order to limit airflow into selected portions of lung tissue 
that have prolonged air leaks following surgery while still allowing 
mucus, fluids, and air to exit, and thereby reducing the amount of air 
that enters

[[Page 50530]]

the pleural space. The device is intended to control prolonged air 
leaks following three specific surgical procedures: lobectomy, 
segmentectomy, or lung volume reduction surgery (LVRS). According to 
Spiration[supreg], an air leak that is present on postoperative day 7 
is considered ``prolonged'' unless present only during forced 
exhalation or cough. In order to help prevent valve migration, there 
are five anchors with tips that secure the valve to the airway. The 
implanted valves are intended to be removed no later than 6 weeks after 
implantation.
    New technology add-on payments were limited to cases involving 
prolonged air leaks following lobectomy, segmentectomy, and LVRS in MS-
DRGs 163, 164, and 165 in the FY 2010 IPPS/RY 2010 LTCH PPS final rule 
(74 FR 43823). This limitation was based on the indications for use 
approved by the FDA in the FDA Humanitarian Device Exemption (HDE) 
approval process set forth in section 520(m) of the Federal Food, Drug 
& Cosmetic Act. A humanitarian use device (HUD) is a device that is 
intended to benefit patients by treating or diagnosing a disease or 
condition that affects or is manifested in fewer than 4,000 individuals 
in the United States per year. Devices that receive HUD designation may 
be eligible for marketing approval, subject to certain restrictions, 
under an HDE application. To obtain marketing approval for an HUD, an 
HDE application must be submitted to the FDA. An HDE application is a 
premarket approval (PMA) application submitted to the FDA under 21 CFR 
814.104 that seeks exemption from the PMA requirement under 21 CFR 
814.20 demonstrating a reasonable assurance of effectiveness. A device 
that has received HUD designation may receive HDE approval if, among 
other things, the FDA determines that the device will not expose 
patients to an unreasonable or significant risk of illness or injury 
and the probable benefit to health from use of the device 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. In addition, the applicant must 
demonstrate that no comparable devices are available to treat or 
diagnose the disease or condition (other than another device approved 
under an HDE application or a device under an approved Investigational 
Device Exemption), and that the device would not otherwise be available 
unless an HDE is granted. An approved HDE authorizes marketing of the 
HUD. However, an HUD generally may be used in facilities only after 
prior approval by an Institutional Review Board (IRB).
    FDA's approval of the HDE application limited the use of the 
Spiration[supreg] IBV Valve System device to cases involving prolonged 
air leaks following lobectomy, segmentectomy, or LVRS.
    The requested MS-DRG change would initiate the same payment for 
chronic obstructive pulmonary disease (COPD) cases with a bronchial 
valve inserted without a major chest procedure as for cases where both 
a major chest procedure and a bronchial valve insertion were performed. 
The following table shows the COPD cases that involved the insertion of 
a bronchial valve as well as data on cases assigned to MS-DRGs 163, 
164, and 165.

----------------------------------------------------------------------------------------------------------------
                                                                                      Average
                             MS-DRGs                                 Number of       length of    Average  costs
                                                                       cases           stay
----------------------------------------------------------------------------------------------------------------
                                                   COPD Cases
----------------------------------------------------------------------------------------------------------------
MS-DRG 190--All cases...........................................         133,566            5.07          $7,815
MS-DRG 190--Cases with procedure code 33.71.....................               0               0               0
MS-DRG 190--Cases with procedure code 33.73.....................               2            14.0          47,034
MS-DRG 191--All cases...........................................         129,231            4.18           6,245
MS-DRG 191--Cases with procedure code 33.71.....................               0               0               0
MS-DRG 191--Cases with procedure code 33.73.....................               0               0               0
MS-DRG 192--All cases...........................................          93,507            3.32           4,776
MS-DRG 192--Cases with procedure code 33.71.....................               0               0               0
MS-DRG 192--Cases with procedure code 33.73.....................               0               0               0
----------------------------------------------------------------------------------------------------------------
                                             Major Chest Procedures
----------------------------------------------------------------------------------------------------------------
MS-DRG 163--All cases...........................................          11,287           13.33          32,728
MS-DRG 164--All cases...........................................          16,113            6.69          17,494
MS-DRG 165--All cases...........................................           9,280            3.94          12,209
----------------------------------------------------------------------------------------------------------------

    Based on our analysis of FY 2012 Medicare claims data, there were 
only two COPD cases that had bronchial valves inserted in MS-DRGs 190, 
191, and 192. While the charges were high, these cases were assigned to 
the highest severity level MS-DRG (MS-DRG 190 with MCC). Given the 
small number of cases, it is not possible to determine if the high 
average costs were due to the bronchial valve insertion or to other 
factors such as other secondary diagnoses. The average length of stay 
for these two cases was approximately 14 days compared to approximately 
5.07 days for all other cases within MS-DRG 190. Because the additional 
10 days cannot be clinically attributed to the bronchial valve 
insertion, our clinical advisors have determined that other factors 
must have impacted these two cases.
    Cases in MS-DRGs 163, 164, and 165 include those cases with a major 
chest procedure and those cases with both a major chest procedure as 
well as a bronchial valve insertion as discussed above. Our clinical 
advisors do not support moving COPD cases that have only a bronchial 
valve insertion and no other major chest procedure from MS-DRGs 190, 
191, and 192 to MS-DRGs 163, 164, and 165. They do not believe the 
bronchial valve procedures are clinically similar to other major chest 
procedures that require significantly more resources to perform. Our 
clinical advisors pointed out that the limited circumstances where this 
procedure would be used led the sponsor to seek HDE approval from the 
FDA rather than a standard PMA. The indications for use approved by the 
FDA are still limited to post-surgery. Our clinical advisors 
recommended that we not modify the

[[Page 50531]]

MS-DRG logic so that COPD cases with bronchial valve insertions would 
be assigned to MS-DRGs 163, 164, and 165.
    Given the limited number of cases for this procedure and the advice 
from our clinical advisors, in the FY 2014 IPPS/LTCH PPS proposed rule 
(78 FR 27514 through 27515), we did not propose any MS-DRG changes for 
bronchial valve(s) insertion for FY 2014. We also did not propose to 
change the MS-DRG assignment for procedures involving bronchial 
valve(s) insertion (procedure codes 33.71 and 33.73) within MS-DRGs 
190, 191, and 192. We invited public comment on this issue.
    Comment: A number of commenters supported CMS' proposal not to 
change the MS-DRG assignment for procedures involving bronchial 
valve(s) insertion (procedure codes 33.71 and 33.73) which are 
currently assigned to MS DRGs 190, 191, and 192 and to move them to MS-
DRGs 163, 164, and 165. Several of these commenters stated that the 
proposal not to propose any MS-DRG changes for bronchial valve(s) 
insertion was reasonable given the data and information provided. Other 
commenters agreed with the proposal not to change the MS-DRG assignment 
for bronchial valve insertions.
    Response: We appreciate the commenters' support.
    Comment: One commenter disagreed with the proposal not to change 
the MS-DRG assignment for bronchial valves. The commenter recommended 
reclassifying bronchial valve procedure codes 33.71 and 33.73 as 
operating room procedures rather than nonoperating procedures so that 
they will map to a surgical MS-DRG for inpatient hospitalizations. The 
commenter also recommended reassigning cases that currently map to 
medical MS-DRGs 190, 191, and 192 (Chronic Obstructive Pulmonary 
Disease with MCC, with CC, and without MCC/CC, respectively) that 
involve insertion of bronchial valves (ICD-9 CM procedures codes 33.71 
and 33.73) to surgical MS-DRGs 163, 164, and 165 (Major Chest 
Procedures with MCC, with CC, or without MCC/CC, respectively). The 
commenter stated that currently, bronchial valve procedures are 
performed under a Humanitarian Device Exemption (HDE) under the Food 
and Drug Administration (FDA) and indicated for patients with a 
prolonged air leak, or air leak likely to become prolonged, following 
lobectomy, segmentectomy, or lung volume reduction surgery. The 
commenter stated that bronchial valves also are being investigated for 
emphysema, but this indication has not yet been approved by the FDA. 
The commenter stated that bronchial valve cases are more clinically 
complex and costly compared to other types of cases with MS-DRGs 190-
192 and are more appropriately assigned to MS-DRGs 163, 164, and 165.
    The commenter acknowledged that there were only two cases involving 
bronchial valves within MS-DRGs 190, 191, and 192. However, the 
commenter stated that other MS-DRGs such as those for deep brain 
stimulation therapy in MS-DRGs 023 and 024 (Craniotomy with Major 
Device Implant/Acute Complex CNS PDX with MCC or Chemo Implant and 
Craniotomy with Major Device Implant/Acute Complex CNS PDX with MCC or 
Chemo Implant without MCC, respectively) and liver and intestinal 
transplantation in MS-DRG 005 and 006 (Liver Transplant and/or 
Intestinal Transplant with MCC and Liver Transplant and/or Intestinal 
Transplant without MCC) contain a small number of cases. The commenter 
believed that the two bronchial valve cases currently assigned to the 
medical MS-DRG 190 would be better aligned in terms of complexity, 
length of stay, and costs to a surgical MS-DRG set.
    Response: As stated earlier, our clinical advisors do not believe 
the bronchial valve procedures are clinically similar to other major 
chest procedures that require significantly more resources to perform. 
We once again point out the limited circumstances where the FDA has 
approved the bronchial valve are still limited to postsurgery use. The 
two cases that were assigned to MS-DRG 190 could have had higher costs 
due to a number of other factors other than the bronchial valve. Our 
clinical advisors noted the long length of stay for these two cases, 
which would not have been the result of the bronchial valve. Therefore, 
we do not believe it is appropriate to reclassify the bronchial valve 
procedure codes as operating room procedures and reassign the cases 
from MS-DRGs 190, 191, and 192 to MS-DRGs 163, 164, and 165.
    After consideration of the public comments we received, we are 
finalizing our proposal not to change the MS-DRG assignments for 
procedures involving bronchial valve(s) insertion (procedure codes 
33.71 and 33.75) within MS-DRGs 190, 191, and 192.
b. Pulmonary Thromboendarterectomy (PTE) With Full Circulatory Arrest
    We received a request from a university medical center to create a 
new MS-DRG or to reassign cases reporting a unique approach to 
pulmonary thromboendarterectomy (PTE) surgery performed with full 
cardiac arrest and hypothermia. The requestor asked that we move cases 
from MS-DRGs 163, 164, and 165 (Major Chest Procedures with MCC, with 
CC, and without CC/MCC, respectively) to MS-DRGs 228, 229, and 230 
(Other Cardiothoracic Procedures with MCC, with CC, and without CC/MCC, 
respectively). Currently, MS-DRGs 163, 164, and 165 are grouped within 
MDC 4 (Diseases and Disorders of the Respiratory System) while MS-DRGs 
228, 229, and 230 are grouped within MDC 5 (Diseases and Disorders of 
the Circulatory System).
    The requestor identified two conditions for which a pulmonary 
endarterectomy procedure is typically performed. These conditions are 
identified by ICD-9-CM diagnosis codes 415.19 (Other pulmonary embolism 
and infarction) and 416.2 (Chronic pulmonary embolism). However, the 
requestor noted that diagnosis code 415.19 is usually associated with 
traditional PTE for acute pulmonary embolism while diagnosis code 416.2 
is associated with the medical center's unique approach to PTE 
performed with full cardiac arrest and hypothermia.
    Currently, there is not a specific ICD-9-CM procedure code to 
accurately describe PTE surgery performed with full cardiac arrest and 
hypothermia. Rather, a subset of existing ICD-9-CM procedure codes may 
be used to identify the various components involved in this unique 
approach to PTE surgery; for example, ICD-9-CM procedure codes 38.15 
(Endarterectomy, other thoracic vessels); 39.61 (Extracorporeal 
circulation auxiliary to open heart surgery); 39.62 (Hypothermia 
(systemic) incidental to open heart surgery); and 39.63 (Cardioplegia). 
However, it is not clear if the requestor reports any of these codes or 
a combination of these codes to identify its unique approach to the 
procedure.
    According to the requestor, its approach to PTE surgery is 
significantly different from traditional pulmonary endarterectomy 
procedures in terms of complexity, resource use, and the population for 
which the procedure is performed. The requestor noted that the surgery 
is ``conducted under profound hypothermia and circulatory arrest which 
involves placing the patient on cardiopulmonary bypass and cooling the 
body to 20 degrees centigrade or lower.'' In addition, the requestor 
explained that ``during this period of cooling and cardiac arrest, the 
heart is arrested and all of the patient's blood is removed from the 
body.'' Following this, circulation is stopped completely allowing for 
``optimal and extensive dissection of the pulmonary arteries and

[[Page 50532]]

identification of an endarterectomy plane which can be delicately 
incised into the deepest pulmonary vasculature.'' The requestor further 
noted that ``due to the complexity of the surgical technique, a very 
high degree of skill is required and the procedure is currently only 
performed by a handful of surgeons world-wide.'' Lastly, the requestor 
stated the average operating time for a traditional PTE is 
approximately 3 to 4 hours compared to the university medical center's 
approach to PTE, which averages approximately 10 to 12 hours.
    For the FY 2014 IPPS/LTCH PPS proposed rule, we analyzed claims 
data from the FY 2012 MedPAR file for cases reporting a principal 
diagnosis code of 415.19 or a principal diagnosis code of 416.2 along 
with procedure codes 38.15, 39.61, 39.62, and 39.63. As displayed in 
the table below, there were a total of 11,287 cases in MS-DRG 163 with 
an average length of stay of approximately 13.33 days and average costs 
of approximately $32,728. Using the combination of diagnosis and 
procedure codes as described above, the total number of cases found in 
MS-DRG 163 was 12, with average costs ranging from approximately 
$46,959 to $53,048 and an average length of stay ranging from 
approximately 13.50 days to 16.20 days. We acknowledge that the average 
length of stay and average costs for these cases are somewhat higher in 
comparison to the average lengths of stay and average costs of all the 
other cases in MS-DRG 163. However, the volume of cases was very low. 
The data reflect similar results for MS-DRG 164. Only 4 cases were 
identified in the analysis, with average costs ranging from 
approximately $21,669 to $37,447 and average lengths of stay ranging 
from approximately 7 days to 10 days.
    In total, there were only 16 cases reflected in the data using the 
combination of diagnosis codes and proxy procedure codes. We believe 
there may be other factors contributing to the increased lengths of 
stay and costs. (We note that there were no cases found for a principal 
diagnosis code of 415.19 with procedure code 38.15 only. There also 
were no cases found in MS-DRG 165 using the combination of diagnosis 
and procedure codes.)

----------------------------------------------------------------------------------------------------------------
                                                                                      Average
                             MS-DRG                                  Number of       length of     Average costs
                                                                       cases           stay
----------------------------------------------------------------------------------------------------------------
MS-DRG 163--All cases...........................................          11,287           13.33         $32,728
MS-DRG 163--Cases with principal diagnosis code 415.19 with                    4           13.50          46,959
 procedure code 38.15 and 39.61 or 39.62 or 39.63...............
MS-DRG 163--Cases with principal diagnosis code 416.2 with                     3           14.33          53,048
 procedure code 38.15 only......................................
MS-DRG 163--Cases with principal diagnosis code 416.2 with                     5           16.20          50,393
 procedure code 38.15 and 39.61 or 39.62 or 39.63...............
MS-DRG 164--All cases...........................................          16,113            6.69          17,494
MS-DRG 164--Cases with principal diagnosis code 415.19 with                    2           10.00          37,447
 procedure code 38.15 with 39.61 or 39.62 or 39.63..............
MS-DRG 164--Cases with principal diagnosis code 416.2 with                     0               0               0
 procedure code 38.15 only......................................
MS-DRG 164--Cases with principal diagnosis code 416.2 with                     2            7.00          21,669
 procedure code 38.15 and 39.61 or 39.62 or 39.63...............
----------------------------------------------------------------------------------------------------------------

    As stated in previous rulemaking discussion, 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, 
our clinical advisors agree that the current MS-DRG assignment for this 
unique procedure is appropriate.
    We also analyzed claims data from the FY 2012 MedPAR file for MS-
DRGs 228, 229, and 230 as illustrated below.

----------------------------------------------------------------------------------------------------------------
                                                                                      Average
                             MS-DRG                                  Number of       length of     Average costs
                                                                       cases           stay
----------------------------------------------------------------------------------------------------------------
MS-DRG 228--Other cardiothoracic procedures with MCC............           1,643           13.26         $46,758
MS-DRG 229--Other cardiothoracic procedures with CC.............           1,841            7.77          30,432
MS-DRG 230--Other cardiothoracic procedures without CC/MCC......             506            5.08          25,068
----------------------------------------------------------------------------------------------------------------

    ICD-9-CM procedure code 38.15 is designated as an operating room 
(OR) procedure code and currently groups to MS-DRGs 163, 164, and 165 
in MDC 4 when either diagnosis code 415.19 or 416.2 are reported as the 
principal diagnosis. As diagnosis codes can only be assigned to one MDC 
within the GROUPER logic, it is not possible for a patient to have 
diagnosis code 415.19 or diagnosis code 416.2 reported along with 
procedure code 38.15 and grouped to MDC 5, which is where MS-DRGs 228, 
229, and 230 are assigned.
    Therefore, another aspect of this MS-DRG request involved the 
evaluation of moving ICD-9-CM diagnosis code 416.2 from MDC 4 to MDC 5. 
Our clinical advisors do not support moving diagnosis code 416.2 from 
MDC 4 to MDC 5 in order to accommodate this rare procedure performed by 
only a small number of physicians worldwide. They pointed out that a 
basic change such as moving diagnosis code 416.2 from MDC 4 to MDC 5 
would impact a large number of patients who do not undergo this 
procedure. It also would disrupt trend data from over 30 years of DRG 
and MS-DRG reporting. Given the very small number of potential cases, 
and the advice of our clinical advisors, we determined that an MS-DRG 
modification was not warranted for FY 2014. Therefore, we did not 
propose to create a new MS-DRG or to reassign cases reporting this 
university medical center's approach to pulmonary 
thromboendarterectomy. We invited public comments on this issue.
    Comment: Several commenters supported CMS' proposal to not create a 
new MS-DRG or to reassign cases for this alternative approach to 
pulmonary

[[Page 50533]]

thromboendarterectomy. The commenters stated that the proposal was 
reasonable, given the data and information provided.
    Response: We appreciate the commenters' support.
    After consideration of the public comments we received, we are 
finalizing our proposal to not create a new MS-DRG or to reassign cases 
for this alternative approach to pulmonary thromboendarterectomy.
4. MDC 5 (Diseases and Disorders of the Circulatory System)
a. Discharge/Transfer to Designated Disaster Alternative Care Site
    In the FY 2014 IPPS/LTCH PPS proposed rule (78 FR 27516), we 
proposed to add new patient discharge status code 69 (Discharged/
transferred to a designated disaster alternative care site) to the MS-
DRG GROUPER logic for MS-DRGs 280 (Acute Myocardial Infarction 
Discharged Alive with MCC), 281 (Acute Myocardial Infarction Discharged 
Alive with CC), and 282 (Acute Myocardial Infarction Discharged Alive 
without CC/MCC) to identify patients who are discharged or transferred 
to an alternative site that will provide basic patient care during a 
disaster response. As discussed in section II.G.7. of the preamble of 
the proposed rule, we also proposed to add this new discharge status 
code to the Medicare Code Editor (MCE) software. We invited public 
comments on this proposal.
    Comment: Several commenters supported CMS' proposal to add the new 
patient discharge status code 69 to the MS-DRG GROUPER logic for MS-
DRGs 280, 281, and 282 to identify patients who are discharged or 
transferred to an alternative site that will provide basic patient care 
during a disaster response. One commenter noted that this discharge 
status code would seldom be used. However, the commenter believed that 
the code is needed.
    Response: We appreciate the commenters' support. We agree that this 
new discharge status code will be beneficial to identify patients who 
are involved in those disaster situations.
    Comment: One commenter expressed concern with the proposal and 
questioned the purpose of implementing the new patient discharge status 
code 69 to only MS-DRGs 280, 281, and 282 within MDC 5.
    Response: We take this opportunity to point out that the new 
discharge status code 69 was created and approved by the National 
Uniform Billing Committee (NUBC) for implementation on October 1, 2013. 
The purpose of adding this discharge status code 69 specifically to the 
GROUPER logic for MS-DRGs 280, 281, and 282 is to identify those 
patients diagnosed with an acute myocardial infarction (AMI) who were 
discharged/transferred to a designated disaster alternative care site 
alive. The GROUPER logic for these MS-DRGs differs from the GROUPER 
logic for MS-DRGs 283, 284, and 285 (Acute Myocardial Infarction, 
Expired with MCC, with CC, and without CC/MCC, respectively) where the 
patient has expired.
    To further clarify, as discussed in section II.G.7.b. of the 
preamble of the proposed rule (78 FR 27520), this new discharge status 
code was also proposed to be added to the GROUPER and MCE logic. 
Therefore, it may be assigned to other MS-DRGs.
    However, when the logic for an MS-DRG is defined by specific 
requirements, such as discharge status designation, the logic must be 
updated if a new discharge status is created to appropriately group a 
claim. Within MDC 5, for MS-DRGs 280, 281, and 282, the software logic 
is specifically defined by a patient who has been diagnosed with an AMI 
and is discharged alive. Assignment of the proposed new discharge 
status code 69 would not be valid for MS-DRGs 283, 284, and 285 where 
the patient has been diagnosed with an AMI and has expired. In other 
words, an AMI patient who has expired would not be discharged/
transferred to a designated disaster alternative care site. Therefore, 
the addition of discharge status code 69 to the software logic for 
those MS-DRGs (283, 284, and 285) is not applicable within MDC 5. 
Alternatively, a patient who has been diagnosed with an AMI and is 
discharged alive would clearly have the opportunity to be discharged/
transferred to a designated disaster alternative care site in a given 
disaster scenario or circumstance. Therefore, to ensure proper MS-DRG 
assignment, we proposed to add discharge status code 69 to MS-DRGs 280, 
281, and 282 within MDC 5.
    After consideration of the public comments we received, we are 
finalizing our proposal to add new patient discharge status code 69 to 
the MS-DRG GROUPER logic for MS-DRGs 280, 281, and 282.
b. Discharges/Transfers With a Planned Acute Care Hospital Inpatient 
Readmission
    In the FY 2014 IPPS/LTCH PPS proposed rule (78 FR 27516), we also 
proposed to add 15 new discharge status codes to the MS-DRG GROUPER 
logic for MS-DRGs 280, 281, and 282 that will identify patients who are 
discharged with a planned acute care hospital inpatient readmission. As 
discussed in section II.G.7.b. of the preamble of the proposed rule, 
these new discharge status codes was proposed for addition to the MCE 
as well.
    Shown in the table below are the current discharge status codes 
that are assigned to the GROUPER logic for MS-DRGs 280, 281, and 282, 
along with the proposed new discharge status codes and their titles.

------------------------------------------------------------------------
                        New
    Current code       code           Discharge status code title
------------------------------------------------------------------------
01..................      81  Discharged to home or self-care with a
                               planned acute care hospital inpatient
                               readmission.
02..................      82  Discharged/transferred to a short term
                               general hospital for inpatient care with
                               a planned acute care hospital inpatient
                               readmission.
03..................      83  Discharged/transferred to a skilled
                               nursing facility (SNF) with Medicare
                               certification with a planned acute care
                               hospital inpatient readmission.
04..................      84  Discharged/transferred to a facility that
                               provides custodial or supportive care
                               with a planned acute care hospital
                               inpatient readmission.
05..................      85  Discharged/transferred to a designated
                               cancer center or children's hospital with
                               a planned acute care hospital inpatient
                               readmission.
06..................      86  Discharged/transferred to home under care
                               of organized home health service
                               organization with a planned acute care
                               hospital inpatient readmission.
21..................      87  Discharged/transferred to court/law
                               enforcement with a planned acute care
                               hospital inpatient readmission.
43..................      88  Discharged/transferred to a federal health
                               care facility with a planned acute care
                               hospital inpatient readmission.
61..................      89  Discharged/transferred to a hospital-based
                               Medicare approved swing bed with a
                               planned acute care hospital inpatient
                               readmission.

[[Page 50534]]

 
62..................      90  Discharged/transferred to an inpatient
                               rehabilitation facility (IRF) including
                               rehabilitation distinct part units of a
                               hospital with a planned acute care
                               hospital inpatient readmission.
63..................      91  Discharged/transferred to a Medicare
                               certified long term care hospital (LTCH)
                               with a planned acute care hospital
                               inpatient readmission.
64..................      92  Discharged/transferred to a nursing
                               facility certified under Medicaid but not
                               certified under Medicare with a planned
                               acute care hospital inpatient
                               readmission.
65..................      93  Discharged/transferred to a psychiatric
                               distinct part unit of a hospital with a
                               planned acute care hospital inpatient
                               readmission.
66..................      94  Discharged/transferred to a critical
                               access hospital (CAH) with a planned
                               acute care hospital inpatient
                               readmission.
70..................      95  Discharged/transferred to another type of
                               health care institution not defined
                               elsewhere in this code list with a
                               planned acute care hospital inpatient
                               readmission.
------------------------------------------------------------------------

    We invited public comments on our proposal to add the above listed 
new discharge status codes to the GROUPER logic for MS-DRGs 280, 281, 
and 282.
    Comment: Commenters supported CMS' proposal to add the 15 new 
discharge status codes to the MS-DRG GROUPER logic for MS-DRGs 280, 
281, and 282 that will identify patients who are discharged with a 
planned acute care hospital inpatient readmission. The commenters noted 
that these new discharge status codes will enable providers to better 
track AMI patients with planned versus unplanned readmissions.
    Response: We appreciate the commenters' support. We agree that 
these new discharge status codes will assist in tracking patients 
diagnosed with an acute myocardial infarction who are discharged alive 
and expect to be readmitted at a later date.
    Comment: One commenter stated that the addition of these 15 new 
discharge status codes to MS-DRGs 280-282 is unwarranted and believed 
that it will create a burden for providers to report and update 
systems. The commenter questioned if there is a timeframe associated 
with the use of these new discharge status codes and if this timeframe 
involves reporting a new discharge status code if the planned 
readmission is to treat the same condition as the current stay. In 
addition, the commenter questioned how CMS would verify that providers 
are applying these proposed discharge status codes appropriately. The 
commenter stated there are ``plenty of descriptive discharge status 
codes that describe where the patient is going upon discharge. To add 
more to clarify what is planned seems burdensome and unnecessary.'' 
Another commenter expressed concern with ``targeting only a small 
number of DRGs for a large increase in applicable discharge status 
codes.''
    Response: The new discharge status codes related to a planned acute 
care hospital inpatient readmission were developed and approved by the 
National Uniform Billing Committee (NUBC) in response to a request by 
the provider community. The purpose of the new codes is to allow 
providers to track these types of situations when they occur. According 
to meeting notes from the NUBC, there is not a designated timeframe (or 
limitation) in reporting these new codes.
    With respect to ensuring that providers apply these proposed new 
discharge status codes correctly, we would like to point out that the 
American Health Information Management Association (AHIMA) has 
promulgated Standards of Ethical Coding that require accurate coding 
that includes the reporting of all health care data elements (for 
example, diagnosis and procedure codes, present on admission indicator, 
discharge status) required for external reporting purposes (for 
example, reimbursement and other administrative uses, population 
health, quality and patient safety measurement, and research) 
completely and accurately, in accordance with regulatory and 
documentation standards and requirements and applicable official coding 
conventions, rules, and guidelines. In addition, Medicare program 
integrity initiatives closely monitor for inaccurate coding, as well as 
coding inconsistent with medical record documentation.
    In regard to the commenter's concern with targeting a small number 
of MS-DRGs with a large increase in discharge status codes, the 
discharge status codes were proposed to be added specifically to the 
GROUPER logic for MS-DRGs 280, 281, and 282 to identify those patients 
diagnosed with an acute myocardial infarction (AMI) who were 
discharged/transferred to another facility with a planned acute care 
hospital inpatient readmission alive. The GROUPER logic for these MS-
DRGs differs from the GROUPER logic for MS-DRGs 283, 284, and 285 
(Acute Myocardial Infarction, Expired with MCC, with CC, and without 
CC/MCC, respectively) where the patient has expired.
    Similar to the discussion of discharge status code 69 in section 
II.G.4.a. of the preamble of this final rule, the planned readmission 
discharge status codes can also be reported for other MS-DRGs. We 
reiterate that, as discussed in section II.G.7.b. of the preamble of 
the proposed rule (78 FR 27520), these new discharge status codes were 
proposed for addition to the GROUPER and MCE logic as well.
    When the logic for an MS-DRG is defined by specific requirements, 
such as a discharge status designation, the logic must be updated if a 
new discharge status is created to appropriately group a claim. Within 
MDC 5, for MS-DRGs 280, 281, and 282, the software logic is 
specifically defined by a patient who has been diagnosed with an AMI 
and is discharged alive. As such, the GROUPER logic requires that these 
discharge status codes for planned readmissions be added to the 
specific AMI DRGs where the patient has been discharged alive. An AMI 
patient who expired would not have a planned readmission. Therefore, 
these discharge status codes would not apply to MS-DRGs 283, 284, and 
285 within MDC 5. Therefore, to ensure proper MS-DRG assignment, we 
proposed to add the 15 discharge status codes describing a planned 
readmission to MS-DRGs 280, 281, and 282 within MDC 5.
    After consideration of the public comments we received, we are 
finalizing our proposal to add the above listed 15 new patient 
discharge status codes describing a planned acute care hospital 
inpatient readmission to the MS-DRG GROUPER logic for MS-DRGs 280, 281, 
and 282, effective October 1, 2013.
5. MDC 8 (Diseases and Disorders of the Musculoskeletal System and 
Connective Tissue)
a. Reverse Shoulder Procedures
    We received a request to change the MS-DRG assignment for reverse 
shoulder replacement procedures which

[[Page 50535]]

is captured with procedure code 81.88 (Reverse total shoulder 
replacement). The requestor did not suggest a specific new MS-DRG 
assignment, but requested that reverse shoulder replacement procedures 
be reassigned from MS-DRGs 483 and 484 (Major Joint/Limb Reattachment 
Procedure of, Upper Extremities with CC/MCC and without CC/MCC, 
respectively) or that we create a new MS-DRG for reverse shoulder 
replacement procedures.
    Biomechanically, the reverse shoulder devices move the center of 
rotation of the arm laterally and change the direction of the pull of 
the deltoid muscle, allowing the deltoid muscle to elevate the arm 
without functioning rotator cuff tendons. The requestor stated that the 
use of traditional total shoulder devices in patients with a 
nonfunctioning rotator cuff frequently leads to long-term complications 
and unsatisfactory functional results. Patients with damaged rotator 
cuffs or rotator cuff syndrome have poor outcomes with traditional 
shoulder replacement devices. The reverse shoulder replacement 
procedure was created to address the clinical needs for patients who 
would have poor outcomes with a traditional shoulder replacement. The 
requestor stated that reverse shoulder replacement devices were 
designed to provide a superior functionality and outcomes for patients 
with damaged rotator cuffs.
    The requestor stated that the reverse shoulder replacement 
procedure is technically more complex and requires a higher level of 
expertise than traditional shoulder procedures and involves several 
issues that make the surgery more complex. Patients who have had prior 
rotator cuff surgery have anchors and scar tissue that must be 
surgically addressed. Often, there also are severe deformities that 
must be addressed in order to establish stability.
    The requestor acknowledged that the reverse shoulder replacement 
procedure is an upper extremity procedure like other procedures 
assigned to MS-DRGs 483 and 484. These MS-DRGs include the longstanding 
total shoulder replacement procedures as well as partial shoulder 
replacements. While the procedure is similar to other procedures in MS-
DRGs 483 and 484, the requestor stated there are significant 
differences between the technical complexity and indications for usage 
from the other procedures. The requestor stated there are significant 
differences in resource usage and clinical coherence between 
longstanding approaches to shoulder replacement and other procedures 
assigned to MS-DRGs 483 and 484 and the reverse shoulder replacement 
procedure. The requestor stated not only was the resource consumption 
significantly higher, the individual supply costs for reserve shoulder 
replacement procedures were higher than the costs of other procedures 
assigned to MS-DRGs 483 and 484.
    MS-DRGs 483 and 484 contain the following procedures:
     81.73 (Total wrist replacement)
     81.80 (Other total shoulder replacement)
     81.81 (Partial shoulder replacement)
     81.84 (Total elbow replacement)
     81.88 (Reverse total shoulder replacement)
     84.23 (Forearm, wrist, or hand reattachment)
     84.24 (Upper arm reattachment).
    As can be seen from this list, MS-DRGs 483 and 484 contain total 
and partial shoulder replacements, as well as replacement and 
attachment procedures on the wrist and upper arm. Both the newer 
shoulder replacement techniques as well as the longstanding shoulder 
replacement techniques are included in these MS-DRGs.

----------------------------------------------------------------------------------------------------------------
                                                                     Number of    Average length
                             MS-DRG                                    cases          of stay      Average costs
----------------------------------------------------------------------------------------------------------------
MS-DRG 483--All cases...........................................          13,113            3.33         $17,039
MS-DRG 483--Cases with procedure code 81.88.....................           5,690            3.30          19,023
MS-DRG 484--All cases...........................................          21,073            2.01          14,448
MS-DRG 484--Cases with procedure code 81.88.....................           7,505            2.08          16,890
----------------------------------------------------------------------------------------------------------------

    As the above table illustrates, the average costs for reverse total 
shoulder replacement are approximately $2,000 higher than the average 
costs for all other procedures within MS-DRGs 483 and 484 and have 
similar average lengths of stays. While the average costs were higher, 
each MS-DRG has some cases that are higher and some cases that are 
lower than the average costs for the entire MS-DRG. We believe the 
average costs for the reverse shoulder replacement procedures are not 
inappropriately high compared to other procedures grouped within MS-
DRGs 483 and 484. Therefore, the claims data do not support reassigning 
these cases or creating a new MS-DRG.
    Our clinical advisors reviewed this issue and determined that the 
cases are appropriately assigned to MS-DRGs 483 and 484. As stated 
earlier, MS-DRGs 483 and 484 contain other types of shoulder 
replacements. Our clinical advisors believe it is appropriate to have 
all total shoulder replacement procedures within the same set of MS-
DRGs. They do not believe it is appropriate to reassign those that use 
a different technique to accomplish the same goal, a total shoulder 
replacement. Therefore, our clinical advisors determined that this is 
an appropriate assignment for reverse shoulder replacement procedures 
from a clinical perspective. They also do not believe it is appropriate 
to move these cases to any other surgical, orthopedic MS-DRGs because 
of differences in the clinical makeup of the other surgical orthopedic 
MS-DRGs. Our clinical advisors recommended not creating a new MS-DRG 
for reverse shoulder replacement procedures because they believe the 
procedures are appropriately assigned to MS-DRGs 483 and 484. 
Therefore, based on claims data and clinical analysis, in the FY 2014 
IPPS/LTCH PPS proposed rule (78 FR 27517 through 27518), we did not 
propose to reassign these cases to any other MS-DRGs or to create a new 
MS-DRG.
    Based on the claims data and our clinical analysis, we did not 
propose to reassign cases reporting procedure code 81.88 from their 
current assignment to MS-DRGs 483 and 484 or to create a new MS-DRG. We 
invited public comments on this issue.
    Comment: Several commenters supported CMS' proposal not to reassign 
reverse shoulder procedure cases reporting procedure code 81.88 from 
their current assignment to MS DRGs 483 and 484 or to create a new MS-
DRG. Several commenters stated the proposal was reasonable given the 
data and information provided.
    Other commenters disagreed with our recommendation of making no MS-
DRG modifications for reverse shoulder procedures. One commenter stated 
that the procedure is unique enough in approach and cost to justify 
reassignment, or as an alternative, reassignment of all reverse 
shoulder cases to MS-DRG 483, even if the cases do not have a CC or MCC 
as a secondary

[[Page 50536]]

diagnosis. The commenter stated that it is important to take into 
consideration the high volume of reverse shoulder procedures cases that 
have occurred in a very short period of time since this code was 
created. The commenter stated that, in the first year of this new code, 
more than one-third of the cases in each MS-DRG (483 and 484) are 
reverse shoulder procedures. For a newly created code, the commenter 
believed that this was extraordinary utilization and should indicate 
the importance of this unique procedure. The commenter stated that, 
without an examination of each case and the reason why some cases 
showed lower costs, it does not seem reasonable to dismiss the 
substantially higher average costs of the procedures. The commenter 
further stated that while CMS clinical advisors stated that reverse 
shoulder is a simply a different technique to accomplish the same goal 
of a total shoulder replacement, the procedure (and the device used in 
the procedure) is meeting an unmet need, uses significantly different 
techniques to implant the device, and requires additional skill, 
experience, and time to implant. Another commenter recommended that CMS 
create a new MS-DRG for reverse shoulder procedures because the 
procedure is used to treat some of the most complex patients and use 
greater resources.
    Response: We agree with the commenters who stated that the data and 
our clinical analysis support the recommendation of making no MS-DRG 
changes for reverse shoulder procedures. Our clinical advisors continue 
to believe the procedure is a different technique to accomplish the 
same goal, a total shoulder replacement. We do not believe the data or 
a clinical analysis would support moving all reverse shoulder 
procedures into a new MS-DRG or moving all the reverse shoulder 
procedures to MS DRG 483. The difference in average costs for reverse 
shoulder procedures with a CC/MCC versus those without a CC/MCC is 
$2,133. The difference in average costs for all cases in MS-DRG 483 and 
MS-DRG 484 is $2,591. Clearly the presence of a CC or MCC has a 
consistent impact on the average costs of shoulder replacements. Our 
clinical advisors believe that it is important to maintain the clinical 
cohesion of MS-DRGs 483 and 484 to maintain severity levels for all 
shoulder replacement procedures.
    The commenter who disagreed with our proposal pointed out that this 
procedure is being adopted at a rapid rate with one-third of the 
shoulder replacements using this new technique. Any growth in this 
approach of performing total shoulder replacements will be reflected in 
our claims data and will impact relative weights. Because the data and 
clinical analysis support keeping the reverse shoulder procedure in the 
same MS-DRG as other shoulder replacements, we are not modifying the 
MS-DRGs for reverse shoulder procedures.
    After consideration of the public comments we received, we are 
finalizing our proposal to not reassign reverse shoulder cases 
reporting procedure code 81.88 from their current assignment in MS DRGs 
483 and 484 or to create a new MS-DRG.
b. Total Ankle Replacement Procedures
    In response to the FY 2013 IPPS/LTCH PPS proposed rule, we received 
a request to develop a new MS-DRG for total ankle replacements, which 
we considered to be outside the scope of that proposed rule (77 FR 
53325). We are addressing this request as part of the FY 2014 IPPS/LTCH 
PPS rulemaking. The cases are captured by procedure code 81.56 (Total 
ankle replacement) and are assigned to MS-DRGs 469 and 470 (Major Joint 
Replacement or Reattachment of Lower Extremity with MCC and without 
MCC, respectively).
    The commenter stated that total ankle procedures are much more 
clinically complex than total hip or total knee replacement procedures, 
which have their own distinct MS-DRGs. The commenter also stated that 
total ankle replacement is surgery that involves the replacement of the 
damaged parts of the three bones that make up the ankle joint, as 
compared to two bones in most other total joint procedures such as hip 
or knee replacement. The commenter stated that average costs of total 
ankle replacements are higher than those for total knee and hip 
replacements. Therefore, the commenter recommended that a new MS-DRG 
should be created for total ankle replacements. As an alternative, the 
commenter suggested that these cases be reassigned to MS-DRG 469 even 
if the cases do not have an MCC as a secondary diagnosis.
    MS-DRGs 469 and 470 include a variety of procedures of the lower 
extremities including the procedures listed below. This group of lower 
extremity joint replacement and reattachment procedures was developed 
because they were considered to be clinically cohesive and to have 
similar resource consumptions.
     00.85 (Resurfacing hip, total, acetabulum and femoral 
head)
     00.86 (Resurfacing hip, partial, femoral head)
     00.87 (Resurfacing hip, partial, acetabulum)
     81.51 (Total hip replacement)
     81.52 (Partial hip replacement)
     81.54 (Total knee replacement)
     81.56 (Total ankle replacement)
     84.26 (Foot reattachment)
     84.27 (Lower leg or ankle reattachment)
     84.28 (Thigh reattachment)
    As the table below shows, there were 1,275 cases reporting total 
ankle replacements with 21 cases in MS-DRG 469 and 1,254 cases in MS-
DRG 470. The 1,254 cases in MS-DRG 470 have higher costs than other 
cases in MS-DRG 470 (approximately $17,242 compared to approximately 
$13,984). The 21 cases in MS-DRG 469 had average costs of approximately 
$23,360 compared to approximately $21,186 in average costs for all 
cases within MS-DRG 469. While these procedures are higher in average 
costs than other procedures within the MS-DRGs, we point out that cases 
are grouped together based on similar clinical and resource criteria. 
Some cases will have average costs higher than the overall average 
costs for the MS-DRG, while other cases will have lower average costs. 
Total ankle replacements represent 0.3 percent of the total number of 
cases within MS-DRGs 469 and 470.

----------------------------------------------------------------------------------------------------------------
                                                                     Number of    Average length
                             MS-DRGs                                   cases          of stay      Average costs
----------------------------------------------------------------------------------------------------------------
MS-DRG 469--All cases...........................................          25,618            7.33         $21,186
MS-DRG 469--Cases with procedure code 81.56.....................              21            6.81          23,360
MS-DRG 470--All cases...........................................         390,518            3.37          13,984
MS-DRG 470--Cases with procedure code 81.56.....................           1,254            2.19          17,242
    Total--All cases............................................  ..............  ..............         416,136
    Total--Cases with procedure code 81.56......................  ..............  ..............           1,275
----------------------------------------------------------------------------------------------------------------


[[Page 50537]]

    Our clinical advisors reviewed this issue and determined that the 
total ankle replacements are appropriately classified within MS-DRGs 
469 and 470. They do not support the commenter's contention that these 
cases are significantly more complex than knee and hip replacements. 
They believe that total ankle replacements are clinically consistent 
with other types of lower extremity joint replacements within MS-DRGs 
469 and 470. Our clinical advisors do not support creating a new MS-DRG 
for total ankle replacements. After considering the results of 
examination of the claims data, the recommendations from our clinical 
advisors, and the small number of total ankle replacements, in the FY 
2014 IPPS/LTCH PPS proposed rule (78 FR 27518 through 27519), we did 
not propose to create a new MS-DRG.
    We also examined the request to move all total ankle replacements 
to the highest severity level, MS-DRG 469, even when no secondary 
diagnosis on the MCC list was reported. Moving all total ankle 
replacements to MS-DRG 469 would lead to overpayments of approximately 
$3,944 per case because the average costs of total ankle replacements 
in MS-DRG 470 was approximately $17,242, while the average costs of all 
cases in MS-DRG 469 was approximately $21,186. After considering the 
claims data as well as the input from our clinical advisors, in the FY 
2014 IPPS/LTCH PPS proposed rule (78 FR 27518 through 27519), we did 
not propose that all total ankle procedures be assigned to MS-DRG 469 
even when the case does not have an MCC reported as a secondary 
diagnosis. We believe the current MS-DRGs are appropriate for total 
ankle replacements.
    In the FY 2014 IPPS/LTCH PPS proposed rule, we did not propose to 
create a new total ankle replacement MS-DRG or to reassign all total 
ankle replacements to MS DRG 469. We proposed to maintain the current 
MS-DRG assignments for total ankle replacements. We invited public 
comment on our proposals.
    Comment: Several commenters supported CMS' recommendation to 
maintain the current MS-DRG assignments for total ankle replacements. 
Several commenters stated that the proposal not to create a new total 
ankle replacement MS-DRG or to reassign all total ankle replacements to 
MS DRG 469 was reasonable given the data and information provided. 
Other commenters offered support for our recommendation to maintain the 
current MS-DRG assignments for total ankle replacements.
    Response: We appreciate the commenters' support.
    Comment: Several commenters disagreed with the proposal. One 
commenter stated that total ankle procedures are more clinically 
complex than total hip or total knee replacement procedures, and that 
the higher average cost for total ankle procedures should qualify it 
for reassignment. Another commenter stated that the proposed policy is 
detrimental to hospitals' ability to provide in a cost effective manner 
clinically-proven intervention, and thus jeopardizes beneficiary access 
to total ankle replacement procedures. The commenter pointed out that 
CMS suggests that under the MS-DRG system in general, some cases will 
have average costs higher than the overall average costs for the MS-
DRG, while other cases will have lower average costs. However, the 
commenter believed that, due to the wide variation of procedures that 
map to MS-DRGs 469 and 470, this is an insufficient rationale to 
systematically underpay for the average cost of the vast majority of 
total knee procedures by 28 percent. The commenter stated that total 
ankle replacement is a complex surgical procedure involving the 
replacement of the damaged parts of the three bones (talus, tibia and 
fibula) that make up the articulations of the ankle, as compared to two 
bones in most other total joint replacement procedures (for example, 
hip or knee). The commenter stated that establishing a separate MS-DRG 
for total ankle procedures is the best solution to ensuring that all 
joint replacement MS-DRGs are clinically coherent, and similar in 
resource use. The commenter recommended that if a separate MS-DRG could 
not be created, CMS reassign all total ankle replacements to MS-DRG 469 
even if the cases do not report a MCC. Other commenters asked that 
total ankle replacements be reassigned to higher paying MS-DRGs because 
the procedures were clinically more complex and have higher average 
costs than other procedures within the current MS-DRGs.
    Response: We disagree with the commenters who stated that the 
clinical complexity of total ankle procedures justifies reassigning the 
cases. As stated earlier, our clinical advisors reviewed this issue and 
determined that the total ankle replacements are appropriately 
classified with other lower joint procedures within MS-DRGs 469 and 
470. They do not support the commenters' contention that these cases 
are significantly more complex than knee and hip replacements. Our 
clinical advisors believe that total ankle replacements are clinically 
consistent with other types of lower extremity joint replacements 
within MS-DRGs 469 and 470. As we also mentioned earlier, moving all 
total ankle replacements to MS-DRG 469 would lead to overpayments of 
approximately $3,944 per case because the average costs of total ankle 
replacements in MS-DRG 470 was approximately $17,242, while the average 
costs of all cases in MS DRG 469 was approximately $21,186. Our 
clinical advisors do not support creating a new MS-DRG for total ankle 
procedures or moving the cases to MS-DRG 469.
    After consideration of the public comments we received, we are 
finalizing our proposal to maintain the current MS-DRG assignments for 
total ankle replacements captured by procedure code 81.56 and assigned 
to MS-DRGs 469 and 470.
6. MDC 15 (Newborns and Neonates With Conditions Originating in the 
Neonatal Period)
a. Persons Encountering Health Services for Specific Procedures, Not 
Carried Out
    We received a request to evaluate the MS-DRG assignment of ICD-9-CM 
diagnosis codes V64.00 through V64.04, and V64.06 through V64.43 in MS-
DRG 794 (Neonate with Other Significant Problems) under MDC 15. The 
requestor noted that the assignment of diagnosis code V64.05 
(Vaccination not carried out because of caregiver refusal) was 
addressed in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50111 through 
50112). We removed diagnosis code V64.05 from MS-DRG 794 and added it 
to the ``only secondary diagnosis'' list for MS-DRG 795 (Normal 
Newborn). The requestor asked that we consider the reassignment of 
these diagnosis codes from MS-DRG 794 to MS-DRG 795. The codes under 
existing MS-DRG 794 include:
     V64.00 (Vaccination not carried out, unspecified reason)
     V64.01 (Vaccination not carried out because of acute 
illness)
     V64.02 (Vaccination not carried out because of chronic 
illness or condition)
     V64.03 (Vaccination not carried out because of immune 
compromised state)
     V64.04 (Vaccination not carried out because of allergy to 
vaccine or component)
     V64.06 (Vaccination not carried out because of patient 
refusal)
     V64.07 (Vaccination not carried out for religious reasons)
     V64.08 (Vaccination not carried out because patient had 
disease being vaccinated against)
     V64.09 (Vaccination not carried out for other reason)

[[Page 50538]]

     V64.1 (Surgical or other procedure not carried out because 
of contraindication)
     V64.2 (Surgical or other procedure not carried out because 
of patient's decision)
     V64.3 (Procedure not carried out for other reasons)
     V64.41 (Laparoscopic surgical procedure converted to open 
procedure)
     V64.42 (Thoracoscopic surgical procedure converted to open 
procedure)
     V64.43 (Arthroscopic surgical procedure converted to open 
procedure).
    In a newborn case with one of these diagnosis codes reported as a 
secondary diagnosis, the case would be assigned to MS-DRG 794. The 
commenter believed that these diagnosis codes, when reported as a 
secondary diagnosis for a newborn case, should be assigned to MS-DRG 
795 instead of MS-DRG 794.
    Our clinical advisors reviewed this request and concur with the 
commenter that diagnosis codes V64.00 through V64.04, and V64.06 
through V64.3 should not continue to be assigned to MS-DRG 794, as 
there is no clinically usable information reported in those codes 
identifying significant problems. However, our clinical advisors 
recommend that diagnosis codes V64.41, V64.42, and V64.43, which 
identify that a surgical procedure converted to an open procedure, 
continue to be assigned to MS-DRG 794. These diagnosis codes may 
indicate a more significant encounter that required a surgical 
intervention.
    Therefore, for FY 2014, we proposed to reassign diagnosis codes 
V64.00 through V64.04, and V64.06 through V64.3 from MS-DRG 794 to MS-
DRG 795 (78 FR 27519). Diagnosis codes V64.00 through V64.04, and 
V64.06 through V64.3 would be added to the ``only secondary diagnosis'' 
list for MS-DRG 795. Diagnosis codes V64.41, V64.42, and V64.43 would 
continue to be assigned to MS-DRG 794. We invited public comments on 
this proposal.
    Comment: Several commenters supported CMS' proposal to reassign 
diagnosis codes V64.00 through V64.04 and V64.06 through V64.3 from MS-
DRG 794 to MS-DRG 795. The commenters stated that the proposed 
reassignments were reasonable given the data and information provided.
    Response: We appreciate the commenters' support.
    After consideration of the public comments we received, we are 
finalizing our proposal of reassigning diagnosis codes V64.00 through 
V64.04 and V64.06 through V64.3 from MS-DRG 794 to MS-DRG 795.
b. Discharges/Transfers of Neonates With a Planned Acute Care Hospital 
Inpatient Readmission
    In the FY 2014 IPPS/LTCH PPS proposed rule (78 FR 27519 and 27520), 
we proposed to add the patient discharge status codes shown in the 
table below to the MS-DRG GROUPER logic for MS-DRG 789 (Neonates, Died 
or Transferred to Another Acute Care Facility) to identify neonates 
that are transferred to a designated facility with a planned acute care 
hospital inpatient readmission.

------------------------------------------------------------------------
           New code                              Title
------------------------------------------------------------------------
82...........................  Discharged/transferred to a short term
                                general hospital for inpatient care with
                                a planned acute care hospital inpatient
                                readmission.
85...........................  Discharged/transferred to a designated
                                cancer center or children's hospital
                                with a planned acute care hospital
                                inpatient readmission.
94...........................  Discharged/transferred to a critical
                                access hospital (CAH) with a planned
                                acute care hospital inpatient
                                readmission.
------------------------------------------------------------------------

    Currently, the GROUPER logic for MS-DRG 789 contains discharge 
status codes 02 (Discharged/transferred to a short term general 
hospital for inpatient care), 05 (Discharged/transferred to a 
designated cancer center or children's hospital), and 66 (Discharged/
transferred to a critical access hospital (CAH)).
    As discussed in section II.G.7. of the preamble of the proposed 
rule, these new discharge status codes were also proposed for addition 
to the Medicare Code Editor (MCE). We invited public comments on our 
proposal.
    Comment: Several commenters supported CMS' proposal to add the 
three new discharge status codes to the MS-DRG GROUPER logic for MS-DRG 
789 (Neonates, Died or Transferred to Another Acute Care Facility) to 
identify neonates that are transferred to a designated facility with a 
planned acute care hospital inpatient readmission. The commenters noted 
the proposal was reasonable given the data and information provided.
    Response: We appreciate the commenters' support.
    Comment: One commenter expressed concern that the addition of these 
new discharge status codes to MS-DRG 789 would create a burden to 
providers in updating their systems and was unnecessary.
    Response: As noted in the previous section, these new discharge 
status codes related to a planned acute care hospital inpatient 
readmission were developed and approved by the NUBC in response to a 
request by the provider community. For the commenters' benefit, we 
would like to point out how the GROUPER logic for MS-DRG 789 is 
designed. When the logic for an MS-DRG is defined by specific 
requirements, such as a discharge status designation, the logic must be 
updated if a new discharge status is created to appropriately group a 
claim.
    With regard to the burden on providers for updating their systems, 
effective October 1 of each year, providers have gone through the 
process of updating their systems based on changes that were approved 
and finalized for the upcoming IPPS fiscal year.
    After consideration of the public comments we received, we are 
finalizing our proposal to add new discharge status codes 82, 85, and 
94 to the MS-DRG GROUPER logic for MS-DRG 789 for FY 2014.
7. 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.
a. Age Conflict Edit
    We received a request to review three ICD-9-CM diagnosis codes 
currently listed under the age conflict edit within the MCE. The age 
conflict edit detects inconsistencies between a patient's age and any 
diagnosis on the patient's record. Specifically, the requestor 
recommended that CMS consider the removal of diagnosis codes 751.1 
(Atresia and stenosis of small intestine), 751.2 (Atresia and stenosis 
of large intestine, rectum, and anal canal), and 751.61 (Biliary 
atresia) from the

[[Page 50539]]

pediatric age conflict edit. Generally, diagnoses included in the list 
for the pediatric age conflict edit are applicable for ages 0 through 
17.
    The requestor noted that diagnosis code 751.1 was removed from the 
Integrated Outpatient Code Editor (IOCE) effective January 1, 2006. Our 
clinical advisors agree that patients described with any one of the 
above listed codes, although congenital anomalies, may require a 
revision procedure in adulthood. Therefore, we believe that the removal 
of these codes appears appropriate and also would be consistent with 
the IOCE.
    We invited public comments on our proposal to remove diagnosis 
codes 751.1, 751.2, and 751.61 from the pediatric age conflict edit 
effective October 1, 2013.
    Comment: Commenters supported the proposal to remove diagnosis 
codes 751.1, 751.2, and 751.61 from the pediatric age conflict edit 
effective October 1, 2013.
    Response: We appreciate the commenters' support.
    After consideration of the public comments we received, we are 
finalizing our proposal to remove diagnosis codes 751.1, 751.2, and 
751.61 from the pediatric age conflict edit effective October 1, 2013.
b. Discharge Status Code Updates
    To reflect changes in the UB-04 code set maintained by the National 
Uniform Billing Committee (NUBC), in the FY 2014 IPPS/LTCH PPS proposed 
rule (78 FR 27520), we proposed to add the following new discharge 
status codes to the CMS GROUPER and the MCE logic effective October 1, 
2013.
    One of the new discharge status codes corresponds to an alternative 
care site. This alternative care site discharge status code is intended 
to identify patients being discharged or transferred to an alternative 
site that will provide basic patient care during a disaster response. 
The new discharge status code is 69 (Discharged/transferred to a 
designated disaster alternative care site).
    In addition, 15 new discharge status codes correspond with 
identifying planned acute care hospital inpatient readmissions. Shown 
below are the existing ``base'' discharge status codes and the new 
codes that will better identify patients who are discharged with a 
planned readmission.

----------------------------------------------------------------------------------------------------------------
              Base code                        New code                               Title
----------------------------------------------------------------------------------------------------------------
01...................................  81.....................  Discharged to home or self-care with a planned
                                                                 acute care hospital inpatient readmission.
02...................................  82.....................  Discharged/transferred to a short term general
                                                                 hospital for inpatient care.
03...................................  83.....................  Discharged/transferred to a skilled nursing
                                                                 facility (SNF) with Medicare certification with
                                                                 a planned acute care hospital inpatient
                                                                 readmission.
04...................................  84.....................  Discharged/transferred to a facility that
                                                                 provides custodial or supportive care with a
                                                                 planned acute care hospital inpatient
                                                                 readmission.
05...................................  85.....................  Discharged/transferred to a designated cancer
                                                                 center or children's hospital with a planned
                                                                 acute care hospital inpatient readmission.
06...................................  86.....................  Discharged/transferred to home under care of
                                                                 organized home health service organization with
                                                                 planned acute care hospital inpatient
                                                                 readmission.
21...................................  87.....................  Discharged/transferred to court/law enforcement
                                                                 with a planned acute care hospital inpatient
                                                                 readmission.
43...................................  88.....................  Discharged/transferred to federal health care
                                                                 facility with a planned acute care hospital
                                                                 inpatient readmission.
61...................................  89.....................  Discharged/transferred to a hospital-based
                                                                 Medicare approved swing bed with a planned
                                                                 acute care hospital inpatient readmission.
62...................................  90.....................  Discharged/transferred to an inpatient
                                                                 rehabilitation facility (IRF) including
                                                                 rehabilitation distinct part units of a
                                                                 hospital with a planned acute care hospital
                                                                 inpatient readmission.
63...................................  91.....................  Discharged/transferred to a Medicare certified
                                                                 long term care hospital (LTCH) with a planned
                                                                 acute care hospital inpatient readmission.
64...................................  92.....................  Discharged/transferred to a nursing facility
                                                                 certified under Medicaid but not certified
                                                                 under Medicare with a planned acute care
                                                                 hospital inpatient readmission.
65...................................  93.....................  Discharged/transferred to a psychiatric distinct
                                                                 part unit of a hospital with a planned acute
                                                                 care hospital inpatient readmission.
66...................................  94.....................  Discharged/transferred to a critical access
                                                                 hospital (CAH) with a planned acute care
                                                                 hospital inpatient readmission.
70...................................  95.....................  Discharged/transferred to another type of health
                                                                 care institution not defined elsewhere in this
                                                                 code list with a planned acute care hospital
                                                                 inpatient readmission.
----------------------------------------------------------------------------------------------------------------

    We invited public comments on our proposal to add the above listed 
new discharge status codes to the GROUPER and the MCE logic effective 
October 1, 2013 (FY 2014).
    Comment: Several commenters supported CMS' proposal to add the 
above listed discharge status codes to the GROUPER and the MCE logic. 
However, some commenters asked CMS to clarify how it intends to use the 
new discharge status codes for planned acute care hospital inpatient 
readmissions. One commenter stated that, based on the description of a 
planned readmission algorithm in the FY 2014 IPPS/LTCH PPS proposed 
rule (78 FR 27595), it appears that CMS is planning to use an algorithm 
to identify planned readmissions for part of the Hospital Readmissions 
Reduction Program, rather than relying on the proposed new planned 
readmission discharge status codes reported on claims. This commenter 
suggested that CMS work with the NUBC to develop additional guidance on 
the proper use of the discharge status codes. The commenter noted: 
``for example, it is not clear if there is a limitation on the 
timeframe when the planned readmission is expected to occur in order to 
use these discharge status codes. It is also not clear whether these 
codes are limited to planned readmissions related to the current 
admission. For example, the plan of care might mention that the patient 
is returning in the future for scheduled treatment of a condition 
unrelated to the current hospitalization.''
    Response: We appreciate the commenters' support. The new discharge 
status codes related to a planned acute care hospital inpatient 
readmission were developed and approved by the NUBC in response to a 
request by the provider community. Currently, the purpose of the new 
codes is to allow providers to track these types of situations when 
they occur.

[[Page 50540]]

According to meeting notes from the NUBC, there is not a designated 
timeframe (or limitation) in reporting these new codes, and they define 
a readmission as ``an intentional readmission after discharge from an 
acute care hospital that is a scheduled part of a patient's plan of 
care.''
    The commenter is correct in its understanding that, under the 
Hospital Readmissions Reduction Program, CMS proposed in the FY 2014 
IPPS/LTCH PPS proposed rule, and is finalizing in this final rule, an 
algorithm to identify planned versus unplanned readmissions and will 
continue to utilize this algorithm for the program. Therefore, at this 
time, these new discharge status codes are not related in any way to 
the Hospital Readmissions Reduction Program and will not be taken into 
account in the readmissions measures for that program.
    After consideration of the public comments received, we are 
finalizing our proposal to add new discharge status code 69 
(Discharged/transferred to a designated disaster alternative care 
site), as well as the 15 new discharge status codes related to a 
planned acute care hospital inpatient readmission listed above.
8. Surgical Hierarchies
    Some inpatient stays entail multiple surgical procedures, each one 
of which, occurring by itself, could result in assignment of the case 
to a different MS-DRG within the MDC to which the principal diagnosis 
is assigned. Therefore, it is necessary to have a decision rule within 
the GROUPER by which these cases are assigned to a single MS-DRG. The 
surgical hierarchy, an ordering of surgical classes from most resource-
intensive to least resource-intensive, performs that function. 
Application of this hierarchy ensures that cases involving multiple 
surgical procedures are assigned to the MS-DRG associated with the most 
resource-intensive surgical class.
    Because the relative resource intensity of surgical classes can 
shift as a function of MS-DRG reclassification and recalibrations, for 
FY 2014, 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 001 and 002 and surgical class B includes MS-
DRGs 003, 004, and 005. Assume also that the average costs of MS-DRG 
001 are higher than that of MS-DRG 003, but the average costs of MS-
DRGs 004 and 005 are higher than the average costs of MS-DRG 002. 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 with cases assigned to 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.
    In the FY 2014 IPPS/LTCH PPS proposed rule, we proposed limited 
changes to the MS-DRG classifications for FY 2014, as discussed in 
sections II.G.2. and 5. of the preamble of the proposed rule. In our 
review of these proposed changes, we did not identify any needed 
changes to the surgical hierarchy. Therefore, in the proposed rule (78 
FR 27521), we did not propose any changes to the surgical hierarchy for 
Pre-MDCs and MDCs for FY 2014.
    Comment: Several commenters stated that the CMS proposal to make no 
changes to the surgical hierarchy seems reasonable given the data and 
information provided.
    Response: Based on these public comments and our review of the 
proposal to make no revisions to the surgical hierarchy using the March 
2013 update of the FY 2012 MedPAR file and the revised GROUPER 
software, we found that the proposal to make no revisions is still 
supported by the data. Therefore, in this final rule, we are making no 
changes to the surgical hierarchy for FY 2104.
9. Complications or Comorbidity (CC) Exclusions List
a. Background of the CC List and the CC Exclusions List
    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. However, depending on the 
principal diagnosis of the patient, some diagnoses on the basic list of 
complications and comorbidities may be excluded if they are closely 
related to the principal diagnosis. In FY 2008, we evaluated each 
diagnosis code to determine its impact on resource use and to determine 
the most appropriate CC subclassification (non-CC, CC, or MCC) 
assignment. We refer readers to sections II.D.2. and 3. of the preamble 
of the FY

[[Page 50541]]

2008 IPPS final rule with comment period for a discussion of the 
refinement of CCs in relation to the MS-DRGs we adopted for FY 2008 (72 
FR 47152 through 47171).
b. CC Exclusions List for FY 2014
    In the September 1, 1987 final notice (52 FR 33143) concerning 
changes to the DRG classification system, we modified the GROUPER logic 
so that certain diagnoses included on the standard list of CCs would 
not be considered valid CCs in combination with a particular principal 
diagnosis. We created the CC Exclusions List for the following reasons: 
(1) To preclude coding of CCs for closely related conditions; (2) to 
preclude duplicative or inconsistent coding from being treated as CCs; 
and (3) to ensure that cases are appropriately classified between the 
complicated and uncomplicated DRGs in a pair. As we indicated above, we 
developed a list of diagnoses, using physician panels, to include those 
diagnoses that, when present as a secondary condition, would be 
considered a substantial complication or comorbidity. In previous 
years, we have made changes to the list of CCs, either by adding new 
CCs or deleting CCs already on the list.
    In the May 19, 1987 proposed notice (52 FR 18877) and the September 
1, 1987 final notice (52 FR 33154), we explained that the excluded 
secondary diagnoses were established using the following five 
principles:
     Chronic and acute manifestations of the same condition 
should not be considered CCs for one another;
     Specific and nonspecific (that is, not otherwise specified 
(NOS)) diagnosis codes for the same condition should not be considered 
CCs for one another;
     Codes for the same condition that cannot coexist, such as 
partial/total, unilateral/bilateral, obstructed/unobstructed, and 
benign/malignant, should not be considered CCs for one another;
     Codes for the same condition in anatomically proximal 
sites should not be considered CCs for one another; and
     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.\1\
---------------------------------------------------------------------------

    \1\ We refer readers to 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); the FY 2012 final rule (76 FR 
51542); and the FY 2013 final rule (77 FR 53315). 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 2014
    In the FY 2014 IPPS/LTCH PPS proposed rule (78 FR 27522), we stated 
that, for FY 2014, there were no changes made to the ICD-9-CM coding 
system effective October 1, 2013, due to the partial code freeze. 
However, we did note that there may be ICD-9-CM coding changes 
finalized after the proposed rule (78 FR 27526). We are finalizing, for 
FY 2014, there were no changes made to the ICD-9-CM diagnosis codes. 
However, there are changes made to the ICD-9-CM procedure codes for FY 
2014 due to new technology. (We refer readers to section II.G.11. of 
the preamble of the FY 2014 IPPS/LTCH PPS proposed rule and this final 
rule for a discussion of the ICD-9-CM coding system.)
(2) Changes to the MS-DRG Diagnosis Codes for FY 2014
(A) Coronary Atherosclerosis Due to Calcified Coronary Lesion
    We received a request that we consider changing the severity levels 
for the following ICD-9-CM diagnosis code: 414.4 (Coronary 
atherosclerosis due to calcified coronary lesion). The requestor 
suggested that we change the severity level for diagnosis code 414.4 
from a non-CC to an MCC.
    The following chart shows the analysis of the MedPAR claims data 
for FY 2012 for ICD-9-CM diagnosis code 414.4.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                    Diagnosis
             Code                  description          CC level          Cnt 1     Cnt 1 impact      Cnt 2     Cnt 2 impact      Cnt 3     Cnt 3 impact
--------------------------------------------------------------------------------------------------------------------------------------------------------
414.4.........................  Coronary           Non-CC...........        1,390          1.58         2,174          2.31         2,001          3.11
                                 atherosclerosis
                                 due to calcified
                                 lesion.
--------------------------------------------------------------------------------------------------------------------------------------------------------

    We ran the above data as described in the 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 an 
MCC. The C3 value reflects a patient with at least one other secondary 
diagnosis that is an MCC.
    The chart above shows that the C1 finding is 1.58. A value close to 
1.0 in the C1 field suggests that the diagnosis 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 a 
non-CC.
    The C2 finding was 2.31. A C2 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 when there is at least one other secondary 
diagnosis that is a CC but none that is an MCC.
    While the C1 value of 1.58 is above the 1.0 value for a non-CC, it 
does not support reclassification to an MCC. As stated earlier, a value 
close to 3.0 suggests the condition is expected to

[[Page 50542]]

consume resources more similar to an MCC than a CC or a non-CC. The C2 
finding of 2.31 also does not support reclassifying this diagnosis code 
to an MCC. We also considered reclassifying the severity level of 
diagnosis code 414.4 to a CC; however, the C1 finding of 1.58 also does 
not support reclassifying the severity level to a CC. Our clinical 
advisors reviewed the data and evaluated this condition. They 
recommended that we not change the severity level of diagnosis code 
414.4 from a non-CC to an MCC or a CC. They did not believe that this 
diagnosis would increase the severity level of patients. They pointed 
out that a similar code, diagnosis code 414.2 (Chronic total occlusion 
of coronary artery), is a non-CC. Our clinical advisors believe that 
diagnosis code 414.4 represents patients who are less severe than 
diagnosis code 414.2. Considering the C1 and C2 ratings and the input 
from our clinical advisors, in the FY 2014 IPPS/LTCH PPS proposed rule 
(78 FR 27522), we did not propose to reclassify diagnosis code 414.4 to 
an MCC; the diagnosis code would continue to be considered a non-CC.
    Therefore, based on the data and clinical analysis, we proposed to 
maintain diagnosis code 414.4 as a non-CC. We invited public comment on 
our proposal.
    Comment: Commenters supported the CMS proposal not to change 
diagnosis code 414.4 from a non-CC to an MCC. Several commenters stated 
that the changes seem reasonable given the data and information 
provided.
    Response: We appreciate the commenters' support.
    Comment: Several commenters disagreed with the proposal, stating 
that these patients are more expensive to treat.
    Response: The claims data mentioned above do not support that 
patients with this condition require treatment with average costs at 
the MCC level. As stated above, the claims data support maintaining 
this code as a non-CC. Our clinical advisors once again reviewed this 
issue after reviewing the public comments. Based on their clinical 
review, our clinical advisors continue to support our proposal not to 
change diagnosis code 414.4 from a non-CC to an MCC.
    Comment: One commenter asked CMS to rerun the data but did not 
provide a reason why it believed the data are in error nor point out 
any errors in the methodology. The commenter purchased the FY 2012 
MedPAR data file and tried to replicate this analysis. The commenter 
found more cases in its data analysis. The commenter asked for 
clarification as to whether CMS used average costs or average charges 
in its computations, and why its findings might have been different.
    Response: Our analysis is based on average costs. As we stated 
earlier, the December 2012 update of the FY 2012 MedPAR file is the 
claims data source for our data analysis. Because the commenter used a 
later file (the March 2013 update), its data included more cases. 
However, our data and clinical analysis support maintaining diagnosis 
code 414.4 as a non-CC and not changing it to a MCC.
    After consideration of the public comments we received, we are 
finalizing our proposal to maintain diagnosis code 414.4 as a non-CC 
for FY 2014.
(B) Acute Cholecystitis Diagnosis Code
    We received a comment recommending that we add diagnosis code 575.0 
(Acute cholecystitis) to the CC Exclusion List when reported as a 
secondary diagnosis code with a principal diagnosis code 574.00 
(Calculus of gallbladder with acute cholecystitis without mention of 
obstruction). We note that there is an ``excludes note'' under 
diagnosis code 575.0 which excludes ``that with cholelithiasis 
(574.00)''. Therefore, diagnosis codes 575.0 and 574.00 should not be 
reported on the same claim. However, the commenter stated that there 
may be double reporting.
    Our clinical advisors agree with the commenter that diagnosis codes 
575.0 and 574.00 capture the same clinical context. Therefore, in the 
FY 2014 IPPS/LTCH PPS proposed rule (78 FR 27522), we proposed to add 
diagnosis code 575.0 to the CC Exclusion List when reported as a 
secondary diagnosis code with a principal diagnosis code 574.00. We 
invited public comments on our proposal.
    Comment: Several commenters stated that the proposal to add 
diagnosis code 575.0 to the CC Exclusion List when reported as a 
secondary diagnosis code with principal diagnosis code 574.00 seems 
reasonable given the data and information provided.
    Response: We appreciate the commenters' support.
    After consideration of the public comments we received, we are 
finalizing our proposal to add diagnosis code 575.0 to the CC Exclusion 
List when reported as a secondary diagnosis code with principal 
diagnosis code 574.00 for FY 2014.
(C) Chronic Total Occlusion (CTO) of Artery of the Extremities 
Diagnosis Code
    We received a request to consider removing atherosclerosis and 
aneurysm codes from the CC Exclusion List for diagnosis code 440.4 
(Chronic total occlusion of artery of the extremities). For FY 2013, we 
changed the designation of diagnosis code 440.4 from a non-CC level to 
a CC level. The CC Exclusion List for diagnosis code 440.4 includes the 
following diagnosis codes:

------------------------------------------------------------------------
        Diagnosis code                      Code description
------------------------------------------------------------------------
440.20.......................  Atherosclerosis of native arteries of the
                                extremities, unspecified.
440.21.......................  Atherosclerosis of native arteries of the
                                extremities with intermittent
                                claudication.
440.22.......................  Atherosclerosis of native arteries of the
                                extremities with rest pain.
440.23.......................  Atherosclerosis of native arteries of the
                                extremities with ulceration.
440.24.......................  Atherosclerosis of native arteries of the
                                extremities with gangrene.
440.29.......................  Other atherosclerosis of native arteries
                                of the extremities.
440.30.......................  Atherosclerosis of unspecified bypass
                                graft of the extremities.
440.31.......................  Atherosclerosis of autologous vein bypass
                                graft of the extremities.
440.32.......................  Atherosclerosis of nonautologous
                                biological bypass graft of the
                                extremities.
440.4........................  Chronic total occlusion of artery of the
                                extremities.
441.00.......................  Dissection of aorta, unspecified site.
441.01.......................  Dissection of aorta, thoracic.
441.02.......................  Dissection of aorta, abdominal.
441.03.......................  Dissection of aorta, thoracoabdominal.
441.1........................  Thoracic aneurysm, ruptured.
441.2........................  Thoracic aneurysm without mention of
                                rupture.
441.3........................  Abdominal aneurysm, ruptured.
441.4........................  Abdominal aneurysm without mention of
                                rupture.

[[Page 50543]]

 
441.5........................  Aortic aneurysm of unspecified site,
                                ruptured.
441.6........................  Thoracoabdominal aneurysm, ruptured.
441.7........................  Thoracoabdominal aneurysm, without
                                mention of rupture.
441.9........................  Aortic aneurysm of unspecified site
                                without mention of rupture.
442.0........................  Aneurysm of artery of upper extremity.
442.2........................  Aneurysm of iliac artery.
442.3........................  Aneurysm of artery of lower extremity.
442.9........................  Aneurysm of unspecified site.
443.22.......................  Dissection of iliac artery.
443.29.......................  Dissection of other artery.
443.81.......................  Peripheral angiopathy in diseases
                                classified elsewhere.
443.82.......................  Erythromelalgia.
443.89.......................  Other specified peripheral vascular
                                diseases.
443.9........................  Peripheral vascular disease, unspecified.
444.01.......................  Saddle embolus of abdominal aorta.
444.09.......................  Other arterial embolism and thrombosis of
                                abdominal aorta.
444.1........................  Embolism and thrombosis of thoracic
                                aorta.
444.21.......................  Arterial embolism and thrombosis of upper
                                extremity.
444.22.......................  Arterial embolism and thrombosis of lower
                                extremity.
444.81.......................  Embolism and thrombosis of iliac artery.
444.89.......................  Embolism and thrombosis of other
                                specified artery.
444.9........................  Embolism and thrombosis of unspecified
                                artery.
445.01.......................  Atheroembolism of upper extremity.
445.02.......................  Atheroembolism of lower extremity.
445.81.......................  Atheroembolism of kidney.
445.89.......................  Atheroembolism of other site.
447.0........................  Arteriovenous fistula, acquired.
447.1........................  Stricture of artery.
447.2........................  Rupture of artery.
447.5........................  Necrosis of artery.
447.6........................  Arteritis, unspecified.
447.70.......................  Aortic ectasia, unspecified site.
447.71.......................  Thoracic aortic ectasia.
447.72.......................  Abdominal aortic ectasia.
447.73.......................  Thoracoabdominal aortic ectasia.
449..........................  Septic arterial embolism.
------------------------------------------------------------------------

    Diagnosis code 440.4 is a CC except if one of the diagnosis codes 
listed above is reported as a principal diagnosis. If one of the 
diagnosis codes listed above is reported on a claim as a principal 
diagnosis and code 440.4 is reported as a secondary diagnosis, code 
440.4 would not be counted as a CC. The commenter requested that we 
remove atherosclerosis codes 440.20 through 440.32, 443.22, 443.29, 
443.81 through 443.9, and aneurysm codes 441.00 through 441.03, 441.1 
through 441.7, 441.9, 442.0, 442.2, 442.3, and 442.9 from the CC 
Exclusion List for diagnosis code 440.4.
    According to the commenter, aneurysm diagnoses are not closely 
related clinically to peripheral CTOs. Aneurysm physiology, clinical 
symptomology, and patient risk profile are fundamentally different than 
CTOs. Aneurysms result from the weakening of an artery wall and 
manifest in an out-pouched pocket of the lumen. Conversely, patients 
with CTOs present with extended segments of diseased and narrowed 
vessels and in most cases, complex lesions containing fibro-calcified 
plaques.
    The commenter stated that CTOs represent a high severity 
complication, which is not closely related to basic atherosclerosis.
    Our clinical advisors agree with the commenter that the aneurysm 
and most of the atherosclerosis codes should be removed from the CC 
Exclusion List for diagnosis code 440.4. A case with a principal 
diagnosis of aneurysm with CTO adds substantial complexity and does not 
necessarily have the same immediate cause. A case with a principal 
diagnosis of atherosclerosis with CTO reported represents a more severe 
form of the disease and, therefore, is more complex. Our clinical 
advisors do not agree with the commenter that diagnosis codes 443.81 
through 443.9 (Other and unspecified peripheral vascular diseases) 
should be removed from the CC Exclusion List. These cases are more 
likely related to CTO and meet one of the principles for exclusion that 
we previously outlined above.
    Therefore, in the FY 2014 IPPS/LTCH PPS proposed rule (78 FR 
27524), we proposed to remove the following diagnosis codes from the CC 
Exclusion List for diagnosis code 440.4 for FY 2014: atherosclerosis 
codes 440.20 through 440.32, 443.22, and 443.29, and aneurysm codes 
441.00 through 441.03, 441.1 through 441.7, 441.9, 442.0, 442.2, 442.3, 
and 442.9. Diagnosis codes 443.81 through 443.9 would remain on the CC 
Exclusion List for diagnosis code 440.4. We invited public comments on 
this proposal.
    Comment: Several commenters supported CMS' proposal to remove 
atherosclerosis codes 440.20 through 440.32, 443.22, and 443.29, and 
aneurysm codes 441.00 through 441.03, 441.1 through 441.7, 441.9, 
442.0, 442.2, 442.3, and 442.9 from the CC Exclusion List for diagnosis 
code 440.4. Several commenters agreed with CMS' clinical advisors' 
assessment on aneurysm and atherosclerosis cases with CTO in that a 
case with a principal diagnosis of aneurysm with CTO adds substantial 
complexity and does not necessarily have the same immediate cause, and 
a case with a principal diagnosis of atherosclerosis with CTO reported 
represents a more severe form of the disease and, therefore, is more 
complex. Several commenters stated that this proposed change will 
compensate hospitals appropriately for the high cost

[[Page 50544]]

and resource use associated with CTO treatment. Several commenters 
stated that the proposal seems reasonable given the data and 
information provided.
    Response: We appreciate the commenters' support and agree that the 
change is warranted for these cases.
    After consideration of the public comments we received, we are 
finalizing our proposal to remove atherosclerosis codes 440.20 through 
440.32, 443.22, and 443.29, and aneurysm codes 441.00 through 441.03, 
441.1 through 441.7, 441.9, 442.0, 442.2, 442.3, and 442.9 from the CC 
Exclusion List for diagnosis code 440.4. Diagnosis codes 443.81 through 
443.9 would remain on the CC Exclusion List for diagnosis code 440.4 
for FY 2014.
    For FY 2014, we proposed changes to Table 6G (Additions to the CC 
Exclusion List) and Table 6H (Deletions from the CC Exclusion List) (78 
FR 27524). As we discussed earlier, we are finalizing those changes for 
acute cholecystitis and chronic total occlusion of artery of the 
extremities diagnosis codes for FY 2014. As we discussed in the FY 2014 
IPPS/LTCH PPS proposed rule, we did not propose any changes to the 
severity level for diagnosis code 414.4. In this final rule, we are 
finalizing our decision to maintain diagnosis code 414.4 as a non-CC. 
These two tables, which contain codes that are effective for discharges 
occurring on or after October 1, 2013, were not published in the 
Addendum to the proposed rule (nor are they being published in this 
final rule) because of the length of the two tables. Instead, we are 
making them available through the Internet on the CMS Web site at: 
http://www.cms.hhs.gov/Medicare/Medicare-Fee-for-Service-Payment/
AcuteInpatientPPS/index.html. Each of these principal diagnosis codes 
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/
Medicare/Medicare-Fee-for-Service-Payment/AcuteInpatientPPS/index.html. 
Beginning with discharges on or after October 1 of each fiscal year, 
the indented diagnoses are not recognized by the GROUPER as valid CCs 
for the asterisked principal diagnosis.
    There are no new, revised, or deleted diagnosis codes for FY 2014. 
Therefore, there are no Tables 6A, 6C, and 6E published for FY 2014.
    There are no additions or deletions to the MS-DRG MCC List for FY 
2014. There also are no additions or deletions to the MS-DRG CC List 
for FY 2014. Therefore, there are no Tables 6I.1 through 6I.2 and 6J.1 
through 6J.2 published for FY 2014.
    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 30.0, is available on a CD 
for $225.00. Version 31.0 of this manual, which includes the final FY 
2014 MS-DRG changes, is 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.
10. 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.\2\
---------------------------------------------------------------------------

    \2\ 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 the FY 2000 (64 FR 41496), in the FY 
2001 (65 FR 47064), or in the 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 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, 
2010, 2011, 2012, and 2013, no procedures were moved, as noted in 
the FY 2008 final rule with comment period (72 FR 46241), in the FY 
2009 final rule (73 FR 48513), in the FY 2010 final rule (74 FR 
43796), in the FY 2011 final rule (75 FR 50122), in the FY 2012 
final rule (76 FR 51549), and in the FY 2013 final rule (77 FR 
53321).

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

[[Page 50545]]

    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. Therefore, for FY 2014, we did not propose to change the 
procedures assigned among these MS-DRGs.
    We did not receive any public comments on this proposal. Therefore, 
as we proposed, we are not making any changes to the procedures 
assigned to MS-DRGs 981 through 983, MS-DRGs 984 through 986, and MS-
DRGs 987 through 989 for FY 2014.
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 2014, we did not propose 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.
    We did not receive any public comments on our proposal. Therefore, 
as we proposed, we are not making any changes to the procedures 
assigned to MS-DRGs 981 through 983 or MS-DRGs 987 through 989 for FY 
2014.
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 costs 
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 2014, we did not 
propose to move any procedure codes among these MS-DRGs.
    We did not receive any public comments on our proposal. Therefore, 
as we proposed, we are not moving any procedures assigned to MS-DRGs 
981 through 983, MS-DRGs 984 through 986, and MS-DRGs 987 through 989 
for FY 2014.
c. Adding Diagnosis or Procedure Codes to MDCs
    Based on the review of cases in the MDCs as described above in 
sections II.G.1. through 6. of this preamble, we did not propose to add 
any diagnosis or procedure codes to MDCs for FY 2014. We did not 
receive any public comments on our proposal. Therefore, as we proposed, 
we are not adding any diagnosis or procedure codes to MDCs for FY 2014.
11. 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 list of valid ICD-9-CM diagnosis and procedure codes 
can be found on the CMS Web site at: http://cms.hhs.gov/Medicare/Coding/ICD9ProviderDiagnosticCodes/codes.html.
    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 2014 at a public meeting held on September 19, 
2012, and finalized the coding changes after consideration of comments 
received at the meetings and in writing by November 16, 2012. In the FY 
2014 IPPS/LTCH PPS proposed rule (78 FR 27525), we stated that there 
were no changes to the ICD-9-CM coding system for FY 2014. There were 
no new,

[[Page 50546]]

revised or deleted diagnosis or procedure codes for FY 2014 identified 
at the time of the publication of the proposed rule. However, we noted 
that there may be ICD-9-CM coding changes finalized after the proposed 
rule based on public comments that we receive after the March 5, 2013 
ICD-9-CM Coordination and Maintenance Committee meeting.
    The Committee held its 2013 meeting on March 5, 2013. Any new codes 
for which there was consensus of public support and for which complete 
tabular and indexing changes were made by May 2013 are included in the 
October 1, 2013 update to ICD-9-CM. Any code revisions that were 
discussed at the March 5, 2013 Committee meeting but that could not be 
finalized in time to include them in the tables listed in section VI. 
of the Addendum to the proposed rule are included in Table 6B, which is 
listed in section VI. of the Addendum to this final rule and available 
via the Internet on the CMS Web site, and are marked with an asterisk 
(*).
    In the FY 2014 IPPS/LTCH PPS proposed rule (78 FR 27526), we stated 
that, for FY 2014, there were no changes to the ICD-9-CM coding system 
due to the partial code freeze or for new technology. However, at the 
March 5, 2013 ICD-9-CM Coordination and Maintenance meeting, there were 
two requests for codes for new technology. As discussed below, only 
codes for new technologies or new diagnoses are being considered during 
the partial code freeze. After discussions at the March 5, 2013 meeting 
and public comments we received after the meeting, it was decided that 
there will be four new procedure codes effective for October 1, 2014. 
There are no new, revised, or deleted diagnosis codes and no revised or 
deleted procedure codes that are usually announced in Tables 6A (New 
Diagnosis Codes), 6C (Invalid Diagnosis Codes), 6D (Invalid Procedure 
Codes), 6E (Revised Diagnosis Code Titles), and 6F (Revised Procedure 
Codes). The new procedure codes are listed in Table 6B (New Procedure 
Codes) for this final rule, which is available via the Internet on the 
CMS Web site. Therefore, there are no Tables 6A and 6C through 6F 
published as part of this final rule for FY 2014.
    Copies of the minutes of the procedure codes discussions at the 
Committee's September 19, 2012 meeting and March 5, 2013 meeting can be 
obtained from the CMS Web site at: http://cms.hhs.gov/Medicare/Coding/ICD9ProviderDiagnosticCodes/index.html?redirect=/icd9ProviderDiagnosticCodes/03_meetings.asp. The minutes of the 
diagnosis codes discussions at the September 19, 2012 meeting and March 
5, 2013 meeting are found at: http://www.cdc.gov/nchs/icd.htm. These 
Web sites also provide detailed information about the Committee, 
including information on requesting a new code, attending a Committee 
meeting, and timeline requirements and meeting dates.
    We encourage commenters to address suggestions on coding issues 
involving diagnosis codes to: Donna Pickett, Co-Chairperson, ICD-9-CM 
Coordination and Maintenance Committee, NCHS, Room 2402, 3311 Toledo 
Road, Hyattsville, MD 20782. Comments may be sent by Email 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 Email 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 Meeting 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

[[Page 50547]]

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, 2013 implementation of an 
ICD-9-CM code at the September 19, 2012 Committee meeting. Therefore, 
there were no new ICD-9-CM codes implemented on April 1, 2013.
    Current addendum and code title information is published on the CMS 
Web site at: http://www.cms.hhs.gov/Medicare/Coding/ICD9ProviderDiagnosticCodes/index.html?redirect=/
icd9ProviderDiagnosticCodes/01overview.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. 
Therefore, 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 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 of 1996 (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 
issued a final rule that delays, 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 
final rule, CMS-0040-F, was published in the Federal Register on 
September 5, 2012 (77 FR 54664) and is available for viewing on the 
Internet at: http://www.gpo.gov/fdsys/pkg/FR-2012-09-05/pdf/2012-21238.pdf.
    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.
    HHS 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, HHS 
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. The Committee also considered the delay in implementation of 
ICD-10 until October 1, 2014. There was an announcement at the 
September 19, 2012 ICD-9-CM Coordination and Maintenance Committee 
meeting 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 and October 1, 2013, 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, 2014, 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 Public Law 108-173. There were to be no 
updates to ICD-9-CM on October 1, 2014, as the system would no longer 
be a HIPAA standard and, therefore, no longer be used for reporting.
     On October 1, 2015, one year after the implementation of 
ICD-10, regular updates to ICD-10 will begin.
    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

[[Page 50548]]

after October 1, 2015, 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.hhs.gov/Medicare/Coding/ICD9ProviderDiagnosticCodes/meetings.html. A summary of the September 19, 2012 Committee meeting, 
along with both written and audio transcripts of this meeting, are 
posted on the Web site at: http://www.cms.hhs.gov/Medicare/Coding/ICD9ProviderDiagnosticCodes/ICD-9-CM-C-and-M-Meeting-Materials-Items/2012-09-19-MeetingMaterials.html.
    Comment: Several commenters supported the partial code freeze which 
is limited to the creation of new ICD-9-CM and ICD-10-CM/PCS codes to 
capture new technologies and diseases through FY 2015. The commenters 
stated that if new codes can still be introduced into ICD-10-CM/PCS in 
FY 2015, it will make the resolution of any issues more complex and 
costly. Specifically, they stated that successful implementation of 
ICD-10-CM/PCS will require significant planning, education, and systems 
modifications. The commenters stated that while the adoption of ICD-10-
CM/PCS is welcome and long overdue, implementation of the new system 
must be carefully orchestrated to minimize the administrative burden on 
providers. At a time when in the health care field, all payers and 
other stakeholders are struggling to meet deadlines to change their 
systems and test their changes with all their trading partners, the 
commenters believed it would be catastrophic to have to make additional 
changes during nationwide implementation of ICD-10.
    Response: We agree with the commenters that the partial code freeze 
has been extremely beneficial in minimizing the administrative burden 
on providers that are preparing for the implementation of ICD-10 on 
October 1, 2014. This partial code freeze has dramatically decreased 
the number of codes created each year as shown by the following 
information.

                   Total Number of Codes and Changes in Total Number of Codes per Fiscal Year
----------------------------------------------------------------------------------------------------------------
                        ICD-9-CM Codes                                   ICD-10-CM and ICD-10-PCS Codes
----------------------------------------------------------------------------------------------------------------
         Fiscal Year               Number           Change         Fiscal Year        Number          Change
----------------------------------------------------------------------------------------------------------------
FY 2009 (October 1, 2008):                                      FY 2009:
Diagnoses....................          14,025             348   ICD-10-CM.......          68,069              +5
Procedures...................           3,824              56   ICD-10-PCS......          72,589         -14,327
FY 2010 (October 1, 2009):                                      FY 2010:
Diagnoses....................          14,315             290   ICD-10-CM.......          69,099          +1,030
Procedures...................           3,838              14   ICD-10-PCS......          71,957            -632
FY 2011 (October 1, 2010):
Diagnoses....................          14,432             117   ICD-10-CM.......          69,368            +269
Procedures...................           3,859              21   ICD-10-PCS......          72,081            +124
FY 2012 (October 1, 2011):                                      FY 2012:
Diagnoses....................          14,567             135   ICD-10-CM.......          69,833            +465
Procedures...................           3,877              18   ICD-10-PCS......          71,918            -163
FY 2013 (October 1, 2012):                                      FY 2013:
Diagnoses....................          14,567               0   ICD-10-CM.......          69,832              -1
Procedures...................           3,878               1   ICD-10-PCS......          71,920              +2
FY 2014 (October 1, 2013):                                      FY 2014:
Diagnoses....................          14,567               0   ICD-10-CM.......          69,823              -9
Procedures...................           3,882               4   ICD-10-PCS......          71,924              +4
----------------------------------------------------------------------------------------------------------------

    As mentioned earlier, the public is provided the opportunity to 
comment on any requests for new diagnosis or procedure codes discussed 
at the ICD-9-CM Coordination and Maintenance Committee meeting. The 
public has supported only a limited number of new codes during this 
partial code freeze, as can be seen by data shown above. We have gone 
from creating several hundred new codes each year to creating only a 
limited number of new ICD-9-CM and ICD-10 codes. At the September 18-
19, 2013 and March 19-20, 2014 Committee meetings, we will be 
discussing any requests for new ICD-10-CM diagnosis and ICD-10-PCS 
procedure codes to be implemented on October 1, 2014. We will not be 
discussing ICD-9-CM codes because we will not be using ICD-9-CM for 
encounters occurring on or after October 1, 2014. The public will be 
given the opportunity to comment on whether or not new ICD-10-CM and 
ICD-10-PCS codes should be created effective October 1, 2014, based on 
the partial code freeze criteria as to whether they are needed to 
capture new diagnoses or new technologies, or whether the codes should 
be created after the partial code freeze ends on October 1, 2015. We 
welcome public comments on any code requests discussed at the September 
18-19, 2013 and March 19-20, 2014 Committee meetings for implementation 
on October 1, 2014.
    Comment: One commenter requested that CMS publish the list of any 
new ICD-10-CM and ICD-10-PCS codes in the IPPS final rule. The 
commenter pointed out that annual ICD-9-CM updates are currently 
included in the IPPS proposed and final rules. The commenter mentioned 
that the ICD-9-CM Coordination and Maintenance Committee is addressing 
requests for new ICD-10 codes that would be created during the code 
freeze as well as codes that would be created after the code freeze 
ends. The commenter wanted to receive interim decisions on any new ICD-
10 codes that might be created after the code freeze ends on October 1, 
2015. The commenter also requested that CMS assign ICD-9-CM codes or 
temporary Healthcare Common Procedure Coding System (HCPCS) codes to 
procedures provided in connection with newly approved ICD-10-PCS codes. 
Finally, the commenter requested that CMS establish October 1, 2014 as 
the effective date for all ICD-10 code set updates.
    Response: We will address the commenter's last request first. As 
discussed earlier, October 1, 2014 has been established as the 
implementation date for ICD-10. This date was established through 
rulemaking (77 FR 54664). We have provided this information on our ICD-
10 Web site at:

[[Page 50549]]

http://www.cms.hhs.gov/Medicare/Coding/ICD10/index.html.
    CMS currently posts updates of ICD-9-CM procedure codes in June of 
each year on its Web page at: http://www.cms.hhs.gov/Medicare/Coding/ICD9ProviderDiagnosticCodes/index.html . CMS also includes information 
on ICD-9-CM code updates within the IPPS proposed and final rules 
because these codes are used to determine the MS-DRG assignment. Any 
new, revised, or deleted ICD-9-CM diagnoses or procedure codes are 
described in Tables 6A through 6F. We include this information along 
with the proposed and final MS-DRG assignment for new ICD-9-CM codes in 
our rules because it impacts inpatient payment. CDC posts updates of 
ICD-9-CM diagnosis codes in June of each year on its Web site at: 
http://www.cdc.gov/nchs/icd/icd9cm.html. We do not include new, 
revised, or deleted ICD-10-CM/PCS codes in the current IPPS rule 
because the ICD-10 codes are not currently used with the MS-DRGs. Once 
ICD-10 is implemented, and the MS-DRGs are based on ICD-10 codes, we 
will provide information on new, revised, or deleted ICD-10 codes in 
Tables 6A through 6F.
    CMS posts annual updates to ICD-10-CM and ICD-10-PCS codes in June 
of each year on its ICD-10 Web page at: http://www.cms.hhs.gov/Medicare/Coding/ICD10/index.html. CDC also posts annual updates to ICD-
10-CM codes in June of each year on its Web site at: http://www.cdc.gov/nchs/icd/icd10cm.htm . We believe we provide the public 
complete and regular updates on any annual updates to both ICD-9-CM and 
ICD-10 codes. Any new, revised, or deleted ICD-10-CM/PCS codes as part 
of the FY 2016 (October 1, 2015) updates will be posted on CMS' ICD-10 
Web site in June 2015. No final decisions have been made at this time 
on the October 1, 2015 ICD-10 code updates.
    On the issue of CMS assigning ICD-9-CM codes or temporary HCPCS 
codes to procedures provided in connection with newly approved ICD-10-
PCS codes, we would point out that mapping between ICD-10-PCS and ICD-
9-CM procedure codes is provided in the annual updates to the General 
Equivalence Mappings (GEMs). The GEMs are updated annually based on 
updates to ICD-10 codes and are posted on our ICD-10 Web site in 
October of each year. The ICD-10 Web site can be found at: http://www.cms.hhs.gov/Medicare/Coding/ICD10/index.html. The GEMs map between 
ICD-9-CM and ICD-10 codes because the ICD-10 codes will replace ICD-9-
CM codes. The GEMs do not map between ICD-10 and HCPCS codes because 
ICD-10 will not replace HCPCS codes. HCPCS codes will continue to be 
used for reported ambulatory and physician services.
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 diagnoses 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 stated earlier, the Secretary of Health and Human Services has 
delayed the compliance date of ICD-10 from October 1, 2013 to October 
1, 2014 (77 FR 54664). 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://cms.hhs.gov/Medicare/Coding/ICD10/ICD-10-MS-DRG-Conversion-Project.html. 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 on the CMS Web site at: http://www.cms.hhs.gov/Medicare/Coding/ICD9ProviderDiagnosticCodes/index.html.
    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.hhs.gov/Medicare/Coding/ICD9ProviderDiagnosticCodes/index.html.
    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://cms.hhs.gov/Medicare/Coding/ICD10/ICD10-MS-DRG-Conversion-Project.html. 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

[[Page 50550]]

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-DRG Conversion Project 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.
    CMS prepared the ICD-10 MS-DRGs Version 30.0 based on the FY 2013 
MS-DRGs (Version 30.0) that we finalized in the FY 2013 IPPS/LTCH PPS 
final rule. We posted a Definitions Manual of the ICD-10 MS-DRGs 
Version 30.0 on our ICD-10 MS-DRG Conversion Project Web site at: 
http://www.cms.hhs.gov/Medicare/Coding/ICD10/ICD-10-MS-DRG-Conversion-Project.html. We also prepared a document that describes changes made 
from Version 29.0 to Version 30.0 to facilitate a review. We produced 
mainframe and computer software for Version 30.0, which was made 
available to the public in February 2013. Information on ordering the 
mainframe and computer software through NTIS can be found on the CMS 
Web site at: http://cms.hhs.gov/Medicare/Coding/ICD10/ICD-10-MS-DRG-Conversion-Project.html under the ``Related Links'' section. This ICD-
10 MS-DRGs Version 30.0 computer software should facilitate additional 
review of the ICD-10 MS-DRGs conversion.
    We provided information on a study conducted on the impact on 
converting MS-DRGs to ICD-10. Information on this study is summarized 
in a paper entitled ``Impact of the Transition to ICD-10 on Medicare 
Inpatient Hospital Payments.'' This paper was posted on the CMS ICD-10 
MS-DRGs Conversion Project Web site and was distributed and discussed 
at the September 15, 2010 ICD-9-CM Coordination and Maintenance 
Committee meeting. The paper described 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 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.
    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.hhs.gov/Medicare/Coding/ICD9ProviderDiagnosticCodes/index.html. 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 of the impact 
study was presented at the March 5, 2013 ICD-9-CM Coordination and 
Maintenance Committee meeting. The updated paper is posted on CMS' Web 
site at: http://cms.hhs.gov/Medicare/Coding/ICD10/ICD-10-MS-DRG-Conversion-Project.html under the ``Downloads'' section. Information on 
the March 5, 2013 ICD-9-CM Coordination and Maintenance Committee 
meeting can be found on the CMS Web site at: http://cms.hhs.gov/Medicare/Coding/ICD9ProviderDiagnosticCodes/ICD-9-CM-C-and-M-Meeting-Materials.html. This update of the impact paper and the ICD-10 MS-DRG 
Version 30.0 software will provide additional information to the public 
who are evaluating the conversion of the MS-DRGs to ICD-10 MS-DRGs.
    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.
    Comment: Several commenters complimented CMS on making available 
the Version 30.0 ICD-10 MS-DRGs software and Definitions Manual. The 
commenters found these tools to be useful as hospitals prepare for ICD-
10 implementation. The commenters stated that this information allowed 
hospitals to analyze the impact of these changes, including thorough 
financial analysis and modeling, and allowed for hands-on training of 
medical coders. The commenters stated that information from other 
payment systems, such as those for CAHs, IPFs, and IRFs would also be 
helpful as hospitals prepare for ICD-10-CM/PCS implementation.
    Response: We appreciate the positive feedback on our efforts to 
develop an ICD-10 version of the MS-DRGs and to use this approach in 
updating other ICD-9-CM based payment systems from ICD-9-CM to ICD-10-
CM/PCS codes.
12. Public Comments on Issues Not Addressed in the Proposed Rule
    We received two public comments regarding MS-DRG issues that were 
outside of the scope of the proposals included in the FY 2014 IPPS/LTCH 
PPS proposed rule. We have summarized these public comments below. 
However, because these public comments were outside of the scope of the 
proposed rule, we are not addressing them in this final rule. As stated 
in section II.G. of the preamble of this final rule, we encourage 
individuals with comments about MS-DRG classifications to submit these 
comments no later than December of each year so they can be considered 
for possible inclusion in the annual proposed rule and, if included, 
may be subjected to public review and comment. We will consider these 
comments for possible proposals in future rulemaking as part of our 
annual review process.
a. Intracerebral Therapies
    One commenter requested that CMS create a new MS-DRG for 
intracerebral therapies, including implantation of chemotherapeutic 
agents.
b. Porphyria
    One commenter requested that a new MS-DRG be created for porphyria 
cases.

H. Recalibration of the FY 2014 MS-DRG Relative Weights

1. Data Sources for Developing the Relative Weights
    In developing the FY 2014 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 2012 MedPAR data used in this final rule include 
discharges occurring on October 1, 2011, through September 30, 2012, 
based on bills received by CMS through March 31,

[[Page 50551]]

2013, 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 2012 MedPAR file used in 
calculating the relative weights includes data for approximately 
10,363,200 Medicare discharges from IPPS providers. Discharges for 
Medicare beneficiaries enrolled in a Medicare 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 March 31, 2013 update of the FY 2012 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 relative weights for FY 2014 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. Specifically, we used 
cost report data from the March 31, 2013 update of the FY 2011 HCRIS 
for calculating the FY 2014 cost-based relative weights.
2. Methodology for Calculation of the Relative Weights
    As we explain in section II.E.2. of the preamble of this final 
rule, as we proposed in the FY 2014 IPPS/LTCH PPS proposed rule, we are 
calculating the relative weights based on 19 CCRs, instead of the 15 
CCRs previously used. The methodology we used to calculate the FY 2014 
MS-DRG cost-based relative weights based on claims data in the FY 2012 
MedPAR file and data from the FY 2011 Medicare cost reports is as 
follows:
     To the extent possible, all the claims were regrouped 
using the FY 2014 MS-DRG classifications discussed in sections II.B. 
and II.G. of the preamble of this final rule.
     The transplant cases that were used to establish the 
relative weights for heart and heart-lung, liver and/or intestinal, and 
lung transplants (MS-DRGs 001, 002, 005, 006, and 007, respectively) 
were limited to those Medicare-approved transplant centers that have 
cases in the FY 2011 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 92.7 percent of the providers in the MedPAR file 
had charges for 14 of the 19 cost centers. All claims of providers that 
did not have charges greater than zero for at least 14 of the 19 cost 
centers were deleted. In other words, a provider must have no more than 
five blank cost centers. If a provider did not have charges greater 
than zero in more than five cost centers, the claims for the provider 
were deleted. For FY 2014, as explained in section II.E.2. of the 
preamble of this final rule, we are calculating the relative weights 
using 19 cost centers instead of the 15 cost centers previously used in 
calculating the FY 2013 relative weights. In the FY 2014 IPPS/LTCH PPS 
proposed rule, we proposed, in calculating the FY 2014 relative 
weights, to continue to remove claims of providers with more than five 
blank cost centers from the dataset used to calculate the relative 
weights. (We refer readers to the FY 2013 IPPS/LTCH PPS final rule (77 
FR 53326) for the edit threshold related to FY 2013 and prior fiscal 
years). In recent years, this trim kept approximately 96 percent of 
IPPS providers in the MedPAR file upon which we base our relative 
weight calculations. (For examples of our FYs 2012 and 2013 relative 
weight calculations, we refer readers to the FY 2012 IPPS/LTCH PPS 
final rule (76 FR 51558) and the FY 2013 IPPS/LTCH PPS final rule 77 FR 
53326).) However, under the proposal to add 4 cost centers to the 
relative weight calculations, which we are finalizing in this final 
rule, this trim kept approximately 92.7 percent of the IPPS providers 
in the MedPAR file upon which we base our final FY 2014 relative weight 
calculations.
    Although this trim is now removing a greater percentage of 
providers' claims from the relative weight calculations than were 
previously removed in prior years, we stated in the proposed rule our 
belief that it is appropriate to propose to continue to remove 
providers' claims that do not have charges greater than zero in more 
than five cost centers. We stated that we believe that this proposal is 
appropriate because we are not introducing new costs into the relative 
weight calculation; we are only making use of more refined, granular 
costs by breaking out implantable devices from the Supplies and 
Equipment CCR, MRIs and CT scans from the Radiology CCR, and cardiac 
catheterization from the Cardiology CCR. Furthermore, because we are 
making use of more refined cost report data for these cost centers, we 
believe that it is also appropriate to edit the claims with a more 
refined threshold. We invited public comments on the proposal to trim 
the data used in our relative weight calculations. However, we did not 
receive any public comments on this proposal. Therefore, for the 
reasons described above, we are finalizing this policy as proposed.
     Statistical outliers were eliminated by removing all cases 
that were beyond 3.0 standard deviations from the geometric 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

[[Page 50552]]

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. 
Therefore, 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 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 19 cost groups for each claim were 
standardized to remove the effects of differences in area wage levels, 
IME and DSH payments, and for hospitals located 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 19 cost groups so that each MS-DRG had 19 standardized charge 
totals. These charges were then adjusted to cost by applying the 
national average CCRs developed from the FY 2011 cost report data.
    The 19 cost centers that we used in the final 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 19 national cost center CCRs. (We note that we have made 
several changes to the table, most importantly, to remove the columns 
listing the cost centers from the CMS Form 2552-96 cost reports. 
Because we are using data from FY 2011 cost reports, which were filed 
on the CMS Form 2552-10, the columns referencing the CMS Form 2552-96 
cost report are no longer relevant. We also have updated and refined 
the table to reflect the 19 CCRs, instead of the previous 15 CCRs, and 
we have made some minor corrections to revenue codes and cost report 
cost centers that are grouped with each CCR.)
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[[Page 50569]]

    In the table above, revenue code 0274 is listed among the revenue 
codes included in the Supplies and Equipment CCR. In the actual 
calculation of the Supplies and Equipment CCR for the FY 2014 proposed 
rule, we inadvertently included charges from MedPAR associated with 
revenue 0274 in the Implantable Devices CCR. For this final rule, we 
have corrected this oversight and included the MedPAR charges 
associated with revenue code 0274 in the calculation of the Supplies 
and Equipment CCR. (We refer readers to the FY 2009 IPPS/LTCH PPS final 
rule (73 FR 48462) for a discussion on the revenue codes included in 
the Supplies and Equipment and Implantable Devices CCRs, respectively.)
3. Development of National Average CCRs
    We developed the national average CCRs as follows:
    Using the FY 2011 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-3 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-3. 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 19 cost centers by the corresponding national average CCR, we 
summed the 19 ``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 FY 2014 cost-based relative weights were then normalized by an 
adjustment factor of 1.615238977 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 19 national average CCRs for FY 2014 are as follows:

------------------------------------------------------------------------
                             Group                                 CCR
------------------------------------------------------------------------
Routine Days...................................................    0.500
Intensive Days.................................................    0.414
Drugs..........................................................    0.193
Supplies & Equipment...........................................    0.300
Implantable Devices............................................    0.356
Therapy Services...............................................    0.356
Laboratory.....................................................    0.134
Operating Room.................................................    0.221
Cardiology.....................................................    0.130
Cardiac Catheterization........................................    0.136
Radiology......................................................    0.171
MRIs...........................................................    0.090
CT Scans.......................................................    0.045
Emergency Room.................................................    0.206
Blood and Blood Products.......................................    0.365
Other Services.................................................    0.400
Labor & Delivery...............................................    0.424
Inhalation Therapy.............................................    0.186
Anesthesia.....................................................    0.119
------------------------------------------------------------------------

    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 the FY 2014 IPPS/LTCH PPS proposed 
rule, we proposed to use that same case threshold in recalibrating the 
MS-DRG weights for FY 2014. Using data from the FY 2012 MedPAR file, 
there were 7 MS-DRGs that contain fewer than 10 cases. Under the MS-
DRGs, we have fewer low-volume DRGs than under the CMS DRGs because we 
no longer have separate DRGs for patients 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 2014, because we do not have sufficient MedPAR data to set 
accurate and stable cost weights for these low-volume MS-DRGs, we 
proposed to compute weights for the low-volume MS-DRGs by adjusting 
their FY 2013 weights by the percentage change in the average weight of 
the cases in other MS-DRGs. The crosswalk table is shown below:

------------------------------------------------------------------------
                                                       Crosswalk to MS-
     Low[dash]volume MS-DRG          MS-DRG Title             DRG
------------------------------------------------------------------------
789.............................  Neonates, Died or   FY 2013 FR weight
                                   Transferred to      (adjusted by
                                   Another Acute       percent change in
                                   Care Facility.      average weight of
                                                       the cases in
                                                       other MS-DRGs).
790.............................  Extreme Immaturity  FY 2013 FR weight
                                   or Respiratory      (adjusted by
                                   Distress            percent change in
                                   Syndrome, Neonate.  average weight of
                                                       the cases in
                                                       other MS-DRGs).
791.............................  Prematurity with    FY 2013 FR weight
                                   Major Problems.     (adjusted by
                                                       percent change in
                                                       average weight of
                                                       the cases in
                                                       other MS-DRGs).
792.............................  Prematurity         FY 2013 FR weight
                                   without Major       (adjusted by
                                   Problems.           percent change in
                                                       average weight of
                                                       the cases in
                                                       other MS-DRGs).

[[Page 50570]]

 
793.............................  Full-Term Neonate   FY 2013 FR weight
                                   with Major          (adjusted by
                                   Problems.           percent change in
                                                       average weight of
                                                       the cases in
                                                       other MS-DRGs).
794.............................  Neonate with Other  FY 2013 FR weight
                                   Significant         (adjusted by
                                   Problems.           percent change in
                                                       average weight of
                                                       the cases in
                                                       other MS-DRGs).
795.............................  Normal Newborn....  FY 2013 FR weight
                                                       (adjusted by
                                                       percent change in
                                                       average weight of
                                                       the cases in
                                                       other MS-DRGs).
------------------------------------------------------------------------

    We did not receive any public comments on this proposal and, 
therefore, are finalizing it for FY 2014 as proposed.
4. Bundled Payments for Care Improvement (BPCI) Initiative
    The Bundled Payments for Care Improvement (BPCI) initiative, 
developed under the authority of section 3021 of the Affordable Care 
Act (codified at section 1115A of the Act), is comprised of four 
broadly defined models of care, which link payments for multiple 
services beneficiaries receive during an episode of care. Under the 
BPCI initiative, organizations enter into payment arrangements that 
include financial and performance accountability for episodes of care. 
On January 31, 2013, CMS announced the health care organizations 
selected to participate in the BPCI initiative. For additional 
information on the BPCI initiative, we refer readers to the CMS' Center 
for Medicare and Medicaid Innovation's Web site at http://innovation.cms.gov/initiatives/Bundled-Payments/index.html and to 
section IV.H.4. of the preamble of the FY 2013 IPPS/LTCH PPS final rule 
(77 FR 53341 through 53343) for a discussion on the BPCI initiative.
    In the FY 2013 IPPS/LTCH PPS final rule, for FY 2013 and subsequent 
fiscal years, we finalized a policy to treat hospitals that participate 
in the BPCI initiative the same as prior fiscal years for the IPPS 
payment modeling and ratesetting process without regard to a hospital's 
participation within these bundled payment models (that is, as if a 
hospital were not participating in those models under the BPCI 
initiative). Therefore, for FY 2014, we proposed to continue to include 
all applicable data from subsection (d) hospitals participating in BPCI 
Models 1, 2, and 4 in our IPPS payment modeling and ratesetting 
calculations. We did not receive any public comments on this proposal 
and, therefore, are finalizing it for FY 2014 as proposed. We refer 
readers to the FY 2013 IPPS/LTCH PPS final rule for a complete 
discussion on our final policy for the treatment of hospitals 
participating in the BPCI initiative in our ratesetting process.

I. 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 Sec.  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 the 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 2013 IPPS/LTCH PPS final rule contains 
the final thresholds that we used to evaluate applications for new 
technology add-on payments for FY 2014. We refer readers to the CMS Web 
site at: http://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/AcuteInpatientPPS/FY-2013-IPPS-Final-Rule-Home-Page.html for a complete 
viewing of Table 10 from the FY 2013 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.

[[Page 50571]]

    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 more detailed 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, the additional 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 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 Center for Clinical Standards and 
Quality (CCSQ) 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, CCSQ, 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 2015 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.gov/Medicare/Medicare-Fee-for-Service-Payment/AcuteInpatientPPS/newtech.html. To allow interested parties to identify the new medical 
services or technologies under review before the publication of the 
proposed rule for FY 2015, 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

[[Page 50572]]

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 2014 prior 
to publication of the FY 2014 IPPS/LTCH PPS proposed rule, we published 
a notice in the Federal Register on November 23, 2012 (77 FR 70163 
through 70165), and held a town hall meeting at the CMS Headquarters 
Office in Baltimore, MD, on February 5, 2013. 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 2014 new medical service and 
technology add-on payment applications before the publication of the FY 
2014 proposed rule.
    Approximately 60 individuals registered to attend the town hall 
meeting in person, while additional individuals listened over an open 
telephone line. 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 February 26, 2013, 
in our evaluation of the new technology add-on payment applications for 
FY 2014 in the proposed rule. In response to the published notice and 
the new technology town hall meeting, commenters submitted and 
presented public comments that were unrelated to the substantial 
clinical improvement criterion in regard to the new technology 
applications for FY 2014. We also received public comments in response 
to the proposed rule relating to topics such as marginal cost factors 
for new technology add-on payments, and the use of external data in 
determining the cost threshold and mapping new technologies to the 
appropriate MS-DRG. Because we did not request public comments nor 
propose to make any changes to any of the issues above, we are not 
summarizing these public comments nor responding to them in this final 
rule.
    We also live-streamed the town hall meeting over the Internet and 
received very positive feedback from the public on use of this option. 
In the FY 2014 IPPS/LTCH PPS proposed rule, we stated that we are 
considering no longer holding an in-person town hall meeting in 
Baltimore, MD, and instead holding a virtual town hall meeting that 
would be live-streamed on the Internet. We invited public comments on 
the possibility of holding a virtual town hall meeting instead of an 
in-person town hall meeting in Baltimore, MD.
    Comment: Some commenters expressed concern that limiting the town 
hall meeting to a virtual town hall meeting may give less of a voice to 
applicants. The commenters supported the option to observe the town 
hall meeting via live stream on line but recommended that we maintain 
the in-person option as well.
    Response: In the proposed rule, we noted that we received positive 
comments concerning the virtual town hall meeting. We expect that 
applicants would still be an integral part of the virtual town hall 
meeting as it is typical for applicants to make presentations at the 
annual town hall meeting about their technologies and why their 
technologies represent a substantial clinical improvement over existing 
technologies. However, we note that some applicants have either chosen 
not to make a presentation at the town hall meeting and/or to make all 
or part of their presentation by phone. Therefore, we do not believe a 
virtual town hall would offer less of a voice to applicants. The 
purpose of a virtual town hall meeting would be to continue to provide 
the information to the public in advance of the proposed rule while 
reducing the burden and providing greater access for all applicants and 
interested parties by eliminating the need to make special travel 
arrangements or by mitigating any other issue that would limit the 
public from attending the meeting in person. For example, in 2010, we 
postponed the town hall meeting due to inclement weather. We will 
consider the issues raised by these commenters as we consider whether 
to transition to a virtual town hall meeting. Further information 
regarding the mechanism we use to engage the public for future town 
hall meetings will be provided via public notice.
3. FY 2014 Status of Technologies Approved for FY 2013 Add-On Payments
a. 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 510(k) 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. After 
evaluation of the newness, costs, and substantial clinical improvement 
criteria for new technology add-on payments for the AutoLITT\TM\ and 
consideration of the public comments we received in response to the FY 
2011 IPPS/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. In the FY 2013 IPPS/LTCH PPS proposed rule (77 FR 27935 through 
27936), based on the original information provided by the applicant, we 
believed that the newness date for the AutoLITT\TM\ began in December 
2009. However, as summarized in the FY 2013 IPPS/LTCH PPS final rule 
(77 FR 53345 through 53346), the applicant submitted a public

[[Page 50573]]

comment (in response to the FY 2013 proposed rule) demonstrating that 
the AutoLITT\TM\ was first available on May 11, 2010. The manufacturer 
explained that some of the sterile disposable products were not 
released from quarantine until May 11, 2010, which prevented the 
AutoLITT\TM\ from being used prior to May 11, 2010. Therefore, the 
manufacturer asserted that the first time the AutoLITT\TM\ was 
available on the market was May 11, 2010. As a result of this 
information, we continued to make new technology add-on payments for 
the AutoLITT\TM\ in FY 2013. (We refer readers to the FY 2013 IPPS/LTCH 
PPS final rule for a complete discussion on this issue).
    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 Major Complications or 
Comorbidities (MCC)), 026 (Craniotomy and Endovascular Intracranial 
Procedures with Complications or Comorbidities (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 service or technology'' (Sec.  
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 AutoLITT\TM\, as stated above, we consider 
the beginning of the newness period for the device to commence when the 
AutoLITT\TM\ was first available on May 11, 2010. Because the 3-year 
anniversary date of the AutoLITT\TM\'s entry onto the market will occur 
on May 11, 2013, which is prior to the beginning of FY 2014, we 
proposed to discontinue new technology add-on payments for the 
AutoLITT\TM\ for FY 2014.
    We invited public comments on this proposal. However, we did not 
receive any public comments in response to our invitation. Therefore, 
we are finalizing our proposal to discontinue new technology add-on 
payments for the AutoLITT\TM\ for FY 2014.
b. 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 of result of 
renal impairment. The administration of Glucarpidase causes a rapid and 
sustained reduction of toxic MTX concentrations.
    Voraxaze[supreg] 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 the 
FY 2013 IPPS/LTCH PPS final rule (77 FR 53346 through 53350). 
Voraxaze[supreg] was available on the market in the United States as a 
commercial product to the larger population as of April 30, 2012. In 
the FY 2013 IPPS/LTCH PPS proposed rule (77 FR 27936 through 27939), we 
expressed concerns about whether Voraxaze[supreg] could be considered 
new for FY 2013. After consideration of all of the public comments 
received, in the FY 2013 IPPS/LTCH PPS final rule, we stated that we 
considered Voraxaze[supreg] to be ``new'' as of April 30, 2012, which 
is the date of market availability.
    After evaluation of the newness, costs, and substantial clinical 
improvement criteria for new technology payments for Voraxaze[supreg] 
and consideration of the public comments we received in response to the 
FY 2013 IPPS/LTCH PPS proposed rule, we approved Voraxaze[supreg] for 
new technology add-on payments for FY 2013. Cases of Voraxaze[supreg] 
are identified with ICD-9-CM procedure code 00.95 (Injection or 
infusion of glucarpidase). The cost of Voraxaze[supreg] is $22,500 per 
vial. The applicant stated that an average of four vials is used per 
Medicare beneficiary. Therefore, the average cost per case for 
Voraxaze[supreg] is $90,000 ($22,500 x 4). Under Sec.  412.88(a)(2), 
new technology add-on payments are limited to the lesser of 50 percent 
of the average cost of the technology or 50 percent of the costs in 
excess of the MS-DRG payment for the case. As a result, the maximum new 
technology add-on payment for Voraxaze[supreg] is $45,000 per case.
    As stated above, 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 service or 
technology'' (Sec.  412.87(b)(2)). With regard to the newness criterion 
for Voraxaze[supreg], as stated above, we consider the beginning of the 
newness period to commence when Voraxaze[supreg] was first available on 
the market on April 30, 2012. Because Voraxaze[supreg] is still within 
the 3-year newness period, we proposed to continue new technology add-
on payments for this technology for FY 2014. We invited public comments 
on this proposal.
    Comment: Several commenters supported the continuation of making 
new technology add-on payments for Voraxaze[supreg] in FY 2014.
    Response: We appreciate the commenters' support.
    After consideration of the public comments we received, we are 
finalizing our proposal to continue to make new technology add-on 
payments for Voraxaze[supreg] in FY 2014.

[[Page 50574]]

c. DIFICID\TM\ (Fidaxomicin) Tablets
    Optimer Pharmaceuticals, Inc. submitted an application for new 
technology add-on payments for FY 2013 for the use of DIFICID\TM\ 
tablets. 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 asserted 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 asserted 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 asserted that Fidaxomicin 
does not alter this native intestinal microflora.
    In the FY 2013 IPPS/LTCH PPS proposed rule (77 FR 27939 through 
27941), we expressed concern that DIFICID\TM\ may not be eligible for 
new technology add-on payments because eligibility is limited to new 
technologies associated with procedures described by ICD-9-CM codes. We 
further stated that drugs that are only taken orally (such as 
DIFICID\TM\) may not 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). In the FY 2013 IPPS/LTCH PPS 
final rule (77 FR 53350 through 53358), after consideration of the 
public comments received, we revised our policy to allow the use of 
National Drug Codes (NDCs) to identify oral medications that have no 
inpatient procedure for the purposes of new technology add-on payments. 
The revised policy is effective for payments for discharges occurring 
on or after October 1, 2012. We refer readers to the FY 2013 IPPS/LTCH 
PPS final rule for a complete discussion on this issue.
    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. In the FY 2013 IPPS/LTCH PPS final rule, we 
established that the beginning of the newness period for this 
technology is its FDA approval date of May 27, 2011.
    After evaluation of the newness, costs, and substantial clinical 
improvement criteria for new technology add-on payments for DIFICID\TM\ 
and consideration of the public comments we received in response to the 
FY 2013 IPPS/LTCH PPS proposed rule, we approved DIFICID\TM\ for new 
technology add-on payments for FY 2013. Cases of DIFICID\TM\ are 
identified with ICD-9-CM diagnosis code 008.45 (Intestinal infection 
due to Clostridium difficile) in combination with NDC code 52015-0080-
01. Providers must report the NDC on the 837i Health Care Claim 
Institutional form (in combination with ICD-9-CM diagnosis code 008.45) 
in order to receive the new technology add-on payment. According to the 
applicant, the cost of DIFICID\TM\ is $2,800 for a 10-day dosage. The 
average cost per day for DIFICID\TM\ is $280 ($2,800/10). Cases of 
DIFICID\TM\ within the inpatient setting typically incur an average 
dosage of 6.2 days, which results in an average cost per case for 
DIFICID\TM\ of $1,736 ($280 x 6.2). Under Sec.  412.88(a)(2), new 
technology add-on payments are limited to the lesser of 50 percent of 
the average cost of the technology or 50 percent of the costs in excess 
of the MS-DRG payment for the case. As a result, the maximum new 
technology add-on payment for FY 2013 for DIFICID\TM\ is $868.
    As stated above, 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 service or 
technology'' (Sec.  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 DIFICID\TM\, as stated above, we consider the 
beginning of the newness period to commence when DIFICID\TM\ was first 
approved by the FDA on May 27, 2011. Because the 3-year anniversary 
date of DIFICID\TM\ will occur in the second half of the fiscal year 
(after April 1, 2014), we proposed to continue new technology add-on 
payments for DIFICID\TM\ for FY 2014. We invited public comments on 
this proposal.
    Comment: Several commenters supported the continuation of making 
new technology add-on payments for DIFICID\TM\ in FY 2014. In addition, 
the applicant submitted a comment stating that the new technology add-
on payment for DIFICID\TM\ has expanded Medicare beneficiary access for 
DIFICID\TM\ in the acute care setting. The manufacturer also provided 
supplemental data demonstrating that cases of DIFICID\TM\ within the 
inpatient setting continue to incur an average dosage of 6.2 days. 
Based on this supplemental data, the manufacturer recommended that we 
continue to consider 6.2 days of inpatient administration of 
DIFICID\TM\ in its calculations for the cost criterion and the add-on 
payment.
    Response: We appreciate the commenters' support. We agree that the 
supplemental data submitted by the manufacturer continues to support 
the use of 6.2 days for the cost criterion and the add-on payment.
    After consideration of the public comments we received, we are 
finalizing our proposal to continue to make new technology add-on 
payments for DIFICID\TM\ in FY 2014.
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.
    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. In 
the FY 2013 IPPS/LTCH PPS final rule (77 FR 53360 through 53365), we 
stated that because the Zenith[supreg] F. Graft was approved by the FDA 
on April 4, 2012, we believed that the Zenith[supreg] F. Graft met the 
newness criterion as of that date.

[[Page 50575]]

    After evaluation of the newness, costs, and substantial clinical 
improvement criteria for new technology add-on payments for the 
Zenith[supreg] F. Graft and consideration of the public comments we 
received in response to the FY 2013 IPPS/LTCH PPS proposed rule, we 
approved the Zenith[supreg] F. Graft for new technology add-on payments 
for FY 2013. Cases involving the Zenith[supreg] F. Graft that are 
eligible for new technology add-on payments are identified by ICD-9-CM 
procedure code 39.78 (Endovascular implantation of branching or 
fenestrated graft(s) in aorta). In the application, the applicant 
provided a breakdown of the costs of the Zenith[supreg] F. Graft. The 
total cost of the Zenith[supreg] F. Graft utilizing bare metal (renal) 
alignment stents was $17,264. Of the $17,264 in costs for the 
Zenith[supreg] F. Graft, $921 are for components that are used in a 
standard Zenith AAA Endovascular Graft procedure. Because the costs for 
these components are already reflected within the MS-DRGs (and are no 
longer ``new''), in the FY 2013 IPPS/LTCH PPS final rule, we stated 
that we do not believe it is appropriate to include these costs in our 
calculation of the maximum cost to determine the maximum add-on payment 
for the Zenith[supreg] F. Graft. Therefore, the total maximum cost for 
the Zenith[supreg] F. Graft is $16,343 ($17,264-$921). Under Sec.  
412.88(a)(2), 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 Zenith[supreg] F. Graft 
is $8,171.50.
    As stated above, 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 service or 
technology'' (Sec.  412.87(b)(2)). With regard to the newness criterion 
for the Zenith[supreg] F. Graft, as stated above, we consider the 
beginning of the newness period to commence when the Zenith[supreg] F. 
Graft was approved by the FDA on April 4, 2012. Because the 
Zenith[supreg] F. Graft is still within the 3-year newness period, we 
proposed to continue new technology add-on payments for this technology 
for FY 2014. We invited public comments on this proposal.
    Comment: Several commenters supported the continuation of new 
technology add-on payments for the Zenith[supreg] F. Graft in FY 2014.
    Response: We appreciate the commenters' support.
    After consideration of the public comments we received, we are 
finalizing our proposal to continue to make new technology add-on 
payments for the Zenith[supreg] F. Graft in FY 2014.
4. FY 2014 Applications for New Technology Add-On Payments
    We received five applications for new technology add-on payments 
for FY 2014. In accordance with the regulations under Sec.  412.87(c), 
applicants for new technology add-on payments must have FDA approval by 
July 1 of each year prior to the beginning of the fiscal year that the 
application is being considered. Two of the five technologies for which 
we received applications for new technology add-on payments, the 
NeuroPace Responsive Neurostimulator System (RNS) System and the Abbott 
Vascular MitraClip[supreg] System, did not receive FDA approval by the 
July 1 deadline. Therefore, these applications are not eligible for 
consideration for new technology add-on payments for FY 2014. In 
addition, the applicant for the NeuroPace RNS System withdrew its 
application prior to publication of this final rule. We note that we 
did receive public comments concerning these two applications. However, 
as stated above, because these two technologies did not receive FDA 
approval by the July 1 deadline and, therefore, cannot be considered 
for new technology add-on payments for FY 2014, we are not summarizing 
or responding to these comments in this final rule. We refer readers to 
the FY 2014 IPPS/LTCH PPS proposed rule (78 FR 27543 through 27545 and 
27547 through 27552) for summaries of these two applications. A 
discussion of the remaining three applications is presented below.
a. Kcentra\TM\
    CSL Behring submitted an application for new technology add-on 
payments for Kcentra\TM\ for FY 2014. Kcentra\TM\ is a replacement 
therapy for fresh frozen plasma (FFP) for patients with an acquired 
coagulation factor deficiency due to warfarin and who are experiencing 
a severe bleed. Kcentra\TM\ contains the Vitamin K dependent 
coagulation factors II, VII, IX and X, together known as the 
prothrombin complex, and antithrombotic proteins C and S. Factor IX is 
the lead factor for the potency of the preparation. The product is a 
heat-treated, non-activated, virus filtered and lyophilized plasma 
protein concentrate made from pooled human plasma. Kcentra\TM\ is 
available as a lyophilized powder that needs to be reconstituted with 
sterile water prior to administration via intravenous infusion. The 
product is dosed based on Factor IX units. Concurrent Vitamin K 
treatment is recommended to maintain blood clotting factor levels once 
the effects of Kcentra\TM\ have diminished.
    Kcentra\TM\ was approved by the FDA on April 29, 2013. The 
applicant applied for a new ICD-9-CM procedure code for consideration 
at the March 5, 2013 ICD-9-CM Coordination and Maintenance Committee 
Meeting. In this final rule, we have approved new ICD-9-CM procedure 
code 00.96 (Infusion of 4-Factor Prothrombrin Complex Concentrate) 
which uniquely identifies Kcentra\TM\. More information on this request 
and approval can be found on the CMS Web site at: http://cms.gov/Medicare/Coding/ICD9ProviderDiagnosticCodes/ICD-9-CM-C-and-M-Meeting-Materials-Items/2013-03-05-MeetingMaterials.html and http://cms.hhs.gov/Medicare/Coding/ICD9ProviderDiagnosticCodes/addendum.html.
    In the FY 2014 IPPS/LTCH PPS proposed rule, we noted that we were 
concerned that Kcentra\TM\ may be substantially similar to FFP and/or 
Vitamin K therapy. If so, Kcentra\TM\ would not meet the newness 
criterion because costs associated with FFP and/or Vitamin K therapy 
are already reflected within the MS-DRGs. In the FY 2010 IPPS/RY 2010 
LTCH PPS final rule (74 FR 43813 through 43814), we established 
criteria for evaluating whether a new technology is substantial similar 
to an existing technology, specifically: (1) Whether a product uses the 
same or a similar mechanism of action to achieve a therapeutic outcome; 
(2) whether a product is assigned to the same or a different MS-DRG; 
and (3) whether the new use of the technology involves the treatment of 
the same or similar type of disease and the same or similar patient 
population. If a technology meets all three of the criteria above, it 
would be considered substantially similar to an existing technology and 
would not be considered ``new'' for purposes of new technology add-on 
payments.
    In evaluating the first criterion, we stated in the FY 2014 IPPS/
LTCH PPS proposed rule that we believe that both FFP and Kcentra\TM\ 
use the same mechanism of action of Vitamin K dependent coagulation to 
reverse the anti-coagulation effects of warfarin. With respect to the 
second criterion, we believe that cases involving both FFP and 
Kcentra\TM\ would be assigned to the same MS-DRGs. Finally, with 
respect to the third criterion, we stated that we believe that both 
technologies treat the same condition and patient population. 
Specifically, the patient population for both Kcentra\TM\ and FFP are 
patients

[[Page 50576]]

with an iatrogenically acquired coagulation factor deficiency due to 
warfarin and who are experiencing severe bleeding. Delay of treatment 
of these patients can lead to an increase in complications as well as 
an increase of the severity of the blood loss. Although FFP needs to 
thaw before it can be administered and can delay treatment compared to 
Kcentra\TM\, which can be used in a more timely manner, we stated that 
we believe that both Kcentra\TM\ and FFP treat the same patient 
population. Based on evaluation of the similarity criteria, we stated 
that it appears that Kcentra\TM\ is substantially similar to FFP with 
regard to being able to reverse the Warfarin effect of blood 
coagulation. Therefore, we stated in the proposed rule that Kcentra\TM\ 
may not be considered ``new'' for purposes of new technology add-on 
payments. We invited public comments regarding whether Kcentra\TM\ is 
substantially similar to existing technologies and whether Kcentra\TM\ 
meets the newness criterion.
    Comment: One commenter, the applicant and manufacturer, submitted a 
public comment stating that Kcentra\TM\ meets the newness criterion 
because it was approved by the FDA and no data on the product will be 
available in the DRG payment system until FY 2014. In addition, the 
applicant asserted that because a new ICD-9-CM procedure code for 
Kcentra\TM\ was created that will be effective October 1, 2013, 
Kcentra\TM\ fulfills the regulatory requirements.
    Response: As discussed in the proposed rule, because Kcentra\TM\ 
may be substantially similar to FFP, it is possible that the costs 
associated with Kcentra\TM\ may already be reflected in the MS-DRGs. 
Below we summarize the applicant's comments and our response concerning 
substantial similarity.
    With regard to considering the technology ``new'' due to the 
issuance of a new ICD-9-CM procedure code, in the FY 2005 IPPS final 
rule (69 FR 49002), we discussed how, generally, we use the FDA 
approval as the indicator of the time when a technology begins to 
become available on the market and data reflecting the costs of the 
technology begin to become available for recalibration of the DRGs. In 
some specific circumstances, we have recognized a date later than the 
FDA approval as the appropriate starting point for the 2-year to 3-year 
period. Using the ICD-9-CM code alone is not an appropriate test of 
newness because technologies that are new to the market are 
automatically placed into the closest ICD-9-CM category when they first 
become available on the market, unless the manufacturer requests the 
assignment of a new ICD-9-CM code because existing codes do not 
adequately reflect or describe the medical service or device. We refer 
readers to the FY 2005 IPPS final rule for a complete discussion 
concerning the issuance of an ICD-9-CM code and the newness criterion.
    Comment: The manufacturer submitted a public comment stating that 
Kcentra\TM\ has a different mechanism of action than FFP in the same 
way that we determined that the AutoLITT\TM\ had a different mechanism 
of action than the Visual-ase in the FY 2011 IPPS/LTCH PPS final rule 
(75 FR 50144).
    Response: The commenter did not provide any details regarding the 
perceived similarities between the AutoLITT\TM\ and the Kcentra\TM\ 
applications in correlation with the comparison presented in its 
comment. For example, in the FY 2011 IPPS/LTCH PPS final rule, we 
determined that the AutoLITT\TM\ was different than the Visual-ase due 
to its side-firing laser versus elliptical-firing. In addition, the 
AutoLITT\TM\ contained a proprietary probe cooling system that removes 
heat from tissue not directly in the path of the laser beam, while the 
Visual-ase did not contain this cooling system. Therefore, without more 
information detailing the comparable differences in mechanism of action 
and/or the perceived similarities between these two applications, we 
are unable to provide further response to the comment.
    Comment: The manufacturer submitted a public comment asserting that 
Kcentra\TM\ has a different mechanism of action than FFP. The commenter 
explained that Kcentra\TM\'s mechanism of action for Vitamin K 
antagonist (VKA) reversal is different from FFP. Kcentra\TM\ is 
purified, heat treated, nanofiltered, non-activated four factor 
prothorbin complex concentrate. It contains coagulation factors (II, 
VII, IX, X) and anti-coagulation proteins (C and S) that are 25 times 
more concentrated than plasma. Kcentra\TM\ provides a simple and rapid 
repletion within 30 minutes. Unlike FPP, it does not require ABO typing 
as it does not contain ABO antibodies, thereby reducing the risk of a 
transfusion reaction. The absence of additional proteins removes the 
risk of transfusion related acute lung injury or TRALI.
    Conversely, the manufacturer stated that FFP is isolated from the 
whole blood by the removal of cellular components (erythrocytes, 
granulocytes, lymphocytes and platelets), therefore it contains all the 
protein components in blood including coagulation proteins among others 
at a physiologic level of 1 IO/ml. In addition, FFP is a non-specific 
therapy which does not achieve the goal of repleting all coagulation 
factors to therapeutic levels. The manufacturer explained that factors 
II and X and Protein C remain below 50 percent at 3 hours. The 
manufacturer maintained that the reason for lack of correction of these 
factors is unclear and suggests that plasma cannot provide simple 
repletion or that there is another mechanism resulting in a plateau of 
some of the factors at a sub-therapeutic level. In contrast, the 
manufacturer noted that Kcentra\TM\ increases all coagulation factors 
(II, VII, IX, X) and anti-coagulation proteins (C and S). The 
manufacturer added that modest reversal of VKA is also reflected in the 
slow return to normal of the International Normalized Ratio (INR). The 
manufacturer compared FFP to Kcentra\TM\ and noted that early INR 
reduction was achieved in 62 percent of Kcentra\TM\ patients versus 
less than 10 percent of FFP patients. The manufacturer also contended 
that the different method of production of Kcentra\TM\ contributes to 
its distinct mechanism of action by providing a highly specific, highly 
concentrated product available on an urgent basis. The manufacturer 
explained that Kcentra\TM\'s blood factor constituents are 25 more 
times concentrated than those contained in a standard unit of FFP 
allowing for markedly decrease of infusion time and infusion of smaller 
volumes compared to equivalent doses of FFP; Kcentra\TM\ provides 
standardized and known concentrations of factors compared to variable 
concentrations for FFP; Kcentra\TM\ is a targeted therapy replacing 
only what is deficient in vitamin K antagonists reversal resulting in 
rapid reversal without impact of nonspecific protein content; 
Kcentra\TM\ does not require ABO typing compared to FFP; and 
Kcentra\TM\ is lyophilized powder for reconstitution and is stable for 
up to 36 months at room temperature making it ideal for emergency use 
compared to FFP.
    Response: We appreciate the details provided in the manufacturer's 
comment that reference the different reasons why Kcentra\TM\ uses a 
different mechanism of action than FFP. We appreciate the issues that 
the manufacturer raises that Kcentra\TM\ provides a simple and rapid 
repletion relative to FFP and reduces the risk of a transfusion 
reaction relative to FFP because it does not contain ABO or RH 
antibodies, which require blood typing prior to administration. 
However,

[[Page 50577]]

despite the arguments presented in the public comment, we remain 
concerned that Kcentra\TM\ still uses the same mechanism of action as 
FFP because they both use coagulation factors and proteins to improve 
blood coagulation, in the context of an acquired coagulation 
deficiency.
    Comment: The manufacturer also submitted a public comment asserting 
that Kcentra\TM\ provides a therapeutic option for new patient 
populations and patient populations not recommended for FFP. The 
manufacturer listed the following patient populations that would be 
eligible to use Kcentra\TM\ but not FFP:
     ``Jehovah's Witnesses: Certain religious groups' beliefs 
prevent patients from accepting transfusion of whole blood or its 
primary components which includes plasma. Fractionated factor 
concentrates are considered `secondary components', and thus they may 
be acceptable to some followers'' (with these beliefs who would 
otherwise not be eligible for FFP).
     Immunoglobulin A (IgA) deficient patients can have severe 
anaphylactoid reactions due to the formation of anti-IgA antibodies. 
Plasma contains immunoglobulins and plasma in amounts as small as 10 
ml, which can result in severe reaction. Kcentra\TM\ provides a 
treatment option for these patients who were not eligible for FFP.
     Rapid reversal of bleeding is important for patients with 
intracranial hemorrhaging (ICH) in order to restrict hematoma 
enlargement and allow timely neurosurgical intervention. The 
manufacturer believed that Kcentra\TM\ provides a therapy for this 
population because plasma is not ideal because Warfarin increases the 
risk of ICH, which could lead to stroke. The manufacturer cited a study 
noting that intervention for ICH within the first hour may improve 
outcomes and protocol driven treatment can facilitate timely and 
efficient care. The manufacturer also noted that for patients receiving 
VKA therapy with an INR less than 1.4, protocol recommends 
administering agents to normalize the INR within minutes; Kcentra\TM\ 
provides a readily available treatment compared to FFP which takes time 
to thaw, type the patient and then infuse.
     The manufacturer also noted that the most significant 
limitations of plasma are the volume and time required to increase 
factor levels. Because Kcentra\TM\ is concentrated, schemes can be 
designed to achieve targeted factor level for patients, especially 
those with cardiac impairment, rather than a maximum tolerated volume. 
The manufacturer further explained that plasma volume, rate of 
infusion, left ventricular dysfunction and VKA reversal have been 
identified as risk factors for the development of Transfusion 
Associated Circulatory Overload (TACO). The manufacturer cited data 
from its clinical trial that demonstrated that plasma should not be 
administered to patients with cardiac impairment or risk of cardiac 
overload. The manufacturer asserted that Kcentra\TM\ provides a therapy 
for patients with cardiac impairment for whom plasma would not be 
ideal.
     The manufacturer explained that given the logistical 
issues of managing, typing and storing supplies of plasma (fresh/
thawed) as well as the limited supply of AB universal blood plasma, 
Kcentra\TM\ provides a new treatment option for hospitals, regardless 
of size (small, rural, community) or trauma level, to handle urgent 
warfarin reversals. Plasma requires blood-type matching, thawing and is 
often located away from the point of care. The applicant cited a study 
conducted at a large, urban, tertiary care facility, where the median 
time from time of diagnosis to plasma infusion was 90 minutes 
(Goldstein STROKE 2006). This did not include time to infuse the 
plasma, which can take hours. The manufacturer further explained that 
even at leading hospitals, the logistics around obtaining units of 
plasma for urgent transfusions is difficult, making good outcomes 
difficult to obtain (Goldstein STROKE 2006). Smaller hospitals without 
the resources of a Level 1 trauma center find plasma even more 
difficult to manage resulting in under-treatment and slow treatment 
(Menzin Thromb and Hemostasis 2012). Particularly for smaller, 
community, rural, and hospitals less than Level One Trauma Centers, 
Kcentra\TM\ represents the best opportunity for providing quality care 
to patients with Warfarin-related bleeding.
    Response: We agree that Kcentra\TM\ may be used in a patient 
population that is experiencing an acquired coagulation factor 
deficiency due to Warfarin and who are experiencing a severe bleed 
currently but are ineligible for FFP, particularly for use by IgA 
deficient patients and other patient populations that have no other 
treatment option to resolve severe bleeding in the context of an 
acquired Vitamin K deficiency. In addition, as mentioned above, FFP is 
limited because it requires special storage conditions while 
Kcentra\TM\ is stable for up to 36 months at room temperature thus 
allowing hospitals that otherwise would not have access to FFP (for 
example, small rural hospitals as discussed by the applicant in its 
comments) to keep a supply of Kcentra\TM\ and treat patients who would 
possibly have no access to FFP. We note that, FFP is considered 
perishable and can be scarce by nature (due to production and other 
market limitations) thus making some hospitals unable to store FFP, 
which limits access to certain patient populations in certain 
locations. Therefore, we believe that Kcentra\TM\ provides a 
therapeutic option for a new patient population and is not 
substantially similar to FFP. Also, as stated above, we give credence 
to the information presented by the manufacturer in its comment that 
Kcentra\TM\ provides a simple and rapid repletion relative to FFP and 
reduces the risk of a transfusion reaction relative to FFP because it 
does not contain ABO antibodies and does not require ABO typing. 
Because Kcentra\TM\ is not substantially similar to FFP, we believe 
that Kcentra\TM\ meets the newness criterion.
    Comment: One commenter recommended that CMS eliminate the 
substantial similarity criterion. The commenter believed that there are 
several benefits to this proposal including eliminating the risk that 
patients would be denied access to new therapies that provide 
substantial clinical improvement, improving clarity and predictability 
of the add-on rules and conforming to the statutory and regulatory 
provisions governing add-on payments, which do not mention substantial 
similarity and allowing technologies that enter the market subsequent 
to similar products receiving the add-on payment to be eligible for the 
add-on payment as well and not giving an advantage to the first product 
on the market representing a specific technology.
    Response: We appreciate the commenter's suggestion. However, we 
note that we did not propose to eliminate the substantial similarity 
criterion in the proposed rule. In regard to the commenter's assessment 
of the benefits of eliminating the substantial similarity criterion, we 
refer readers to the FY 2006 IPPS final rule (70 FR 47351) and the FY 
2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43813 and 43814), where we 
explain our policy and reasoning regarding substantial similarity in 
detail.
    According to the applicant, the technology is eligible to be used 
across all MS-DRGs. To demonstrate that it meets the cost criterion, 
the applicant searched the FY 2011 MedPAR file (across all MS DRGs) for 
cases reporting a primary or secondary diagnosis of E934.2 (Adverse 
events due to anticoagulants), V58.61 (Long term

[[Page 50578]]

(current) use of anticoagulants), or 964.2 (Poisoning by 
anticoagulants) in combination with procedure code 99.07 (Transfusion 
of the serum). The applicant believed that this combination identified 
cases that suggest the use of a Vitamin K antagonist therapy as well as 
a major bleed.
    The applicant found 66,749 cases across all MS-DRGs and noted that 
18 percent of all cases would map to MS-DRGs 377 (Gastrointestinal 
Hemorrhage with MCC), 378 (Gastrointestinal Hemorrhage with CC), and 
379 (Gastrointestinal Hemorrhage without CC/MCC), while the top 20 MS-
DRGs would account for 41 percent of all cases. The applicant 
standardized charges (for all 66,749 cases) and removed charges for FFP 
therapy, which equated to a case-weighted average standardized charge 
per case of $49,748. The applicant calculated a case-weighted threshold 
of $46,068 across all MS-DRGs. The applicant asserted that the average 
case-weighted standardized charge per case without including charges 
for Kcentra\TM\ exceeded the case-weighted threshold of $46,068. 
Therefore, the applicant maintained that it meets the cost criterion. 
We invited public comments regarding whether Kcentra\TM\ meets the cost 
criterion, particularly with regard to the assumptions and methodology 
used in the applicant's analysis. However, we did not receive any 
public comments concerning the cost criterion and, therefore, we 
believe that Kcentra\TM\ meets the cost criterion.
    With regard to substantial clinical improvement, according to the 
applicant, Kcentra\TM\ is the first prothrombin complex concentrate 
(PCC) that will be FDA-approved for rapid Warfarin reversal in patients 
experiencing an acute major bleed. The applicant maintained that 
Kcentra\TM\ represents a substantial clinical improvement in the 
treatment of patients with acute severe bleeding who require immediate 
reversal of their VKA therapy by (1) providing a rapid, beneficial 
resolution of the patient's blood clotting factor deficiency, (2) 
decreasing the risk of exposure to blood borne pathogens, and (3) 
reducing the rate of transfusion-associated complications.
    The applicant cited its pivotal study (a randomized clinical trial) 
\3\ and noted that Kcentra\TM\ was noninferior in its ability to 
reverse the effects of Warfarin to a target INR of less than or equal 
to 1.3 within 30 minutes in 62 percent of patients compared to less 
than 10 percent success for plasma. Also, serum levels of the key 
coagulant and anti-thrombotic proteins were normalized in less than an 
hour with Kcentra\TM\, but these levels remained depressed with plasma 
for hours after dosing with FFP.
---------------------------------------------------------------------------

    \3\ Sarode R, et al., Efficacy and Safety of a Four Factor 
Prothrombin Complex Concentrate in Patients on Vitamin K Antagonists 
Presenting with Major Bleeding: A Randomized, Plasma Controlled, 
Phase IIIb Study. Circulation. Submitted October 31, 2012. Copy to 
be provided upon acceptance.
---------------------------------------------------------------------------

    The applicant also explained that Kcentra\TM\ undergoes a dedicated 
pathogen detection and removal process as well as purification steps to 
produce its specific components and plasma does not. The applicant 
asserted that this drastically reduces the risk of transmitting both 
known and unknown blood borne pathogens. The applicant cited a 
retrospective analysis of scientific publications \4\ on the use of 
Kcentra\TM\ in the European Union (EU), including the pharmacovigilance 
database from 1996 through 2008. The applicant noted that an estimated 
350,000 patients have been treated with Kcentra\TM\ (known as Beriplex 
in the EU) with no documented cases of viral transmission.
---------------------------------------------------------------------------

    \4\ Hanke A, et al., Efficacy and Long-Term Safety of a 
Pasteurized Nanofiltrated Prothrombin Complex Concentrate 
(BERIPLEX[supreg] P/N), 2009, J Thromb Haemost, Vol. 7 (Suppl.2) PP-
WE-697.
---------------------------------------------------------------------------

    The applicant also stated that, in the United States, blood 
suppliers follow a strict set of regulations for screening and testing 
the blood supply, but these tests and donor questionnaires do not 
account for emerging pathogens that could contaminate the blood supply. 
The applicant explained that parasitic infections and bacterial 
diseases (such as babesiosis and Chaga's disease) have already been 
documented in U.S. patients as a result of FFP transfusion. However, 
there is no screening test to date for some of these parasitic 
infections and diseases. The applicant believed that the multi-step 
manufacturing process for Kcentra\TM\, including heat treatment and 
nanofiltration, reduces the risk of transmitting such infections and 
diseases.
    The applicant also noted that another benefit of Kcentra\TM\ is the 
ability to rapidly prepare and administer the product in an emergency 
situation. In addition to the benefit of room temperature storage, 
Kcentra\TM\ can be rapidly reconstituted and administered. In the 
clinical study, the applicant found that the average administration 
time for Kcentra\TM\ was less than 30 minutes. However, the applicant 
stated, other treatments such as FFP and intravenous Vitamin K 
therapies act more slowly, and FFP can be difficult to use. The 
applicant explained that FFP therapy requires blood-type matching, 
usually requires thawing, and is often located away from the point of 
care. The applicant also cited a study \5\ that demonstrated the median 
time from time of diagnosis to plasma infusion was 90 minutes, which 
did not include the time to infuse the FFP which can take hours.
---------------------------------------------------------------------------

    \5\ Goldstein, Joshua N., et al., Timing of Fresh Frozen Plasma 
Administration and Rapid Correction of Coagulopathy in Warfarin-
Related Intracerebral Hemorrhage, Stroke 37.1 (2006):151-155.
---------------------------------------------------------------------------

    The applicant further noted that essential blood coagulation 
factors in one vial of Kcentra\TM\ are approximately 25 times more 
concentrated than those in the equivalent plasma dose. According to the 
applicant, this translated to an infusion volume that was 87 percent 
greater in the FFP group of patients as seen in the pivotal study. The 
applicant explained that high transfusion volumes of treatments such as 
FFP therapy can lead to TACO. According to the applicant, when TACO 
occurs, acute left ventricular failure may occur resulting in shortness 
of breath, tachypnea (rapid breathing), and result in other harmful 
effects.
    Finally, the applicant noted that Kcentra\TM\ is recommended as the 
standard of care in the new guidelines issued by the American College 
of Chest Physicians (ACCP) for patients needing emergent Warfarin 
reversal. In addition, the applicant noted that the American 
Association of Blood Banks (AABB) stated that plasma should no longer 
be used to reverse Warfarin in bleeding patients when specific factor 
concentrates are available.
    In conclusion, the applicant maintained that Kcentra\TM\ represents 
a substantial clinical improvement over existing technologies. We 
invited public comments regarding whether Kcentra\TM\ meets the 
substantial clinical improvement criterion.
    Comment: Several commenters supported making new technology add-on 
payments for Kcentra\TM\. One commenter stated that Kcentra\TM\ is a 
new, significantly more rapid way to provide substantial improvement 
over existing technologies. The commenter noted that compared to FFP, 
Kcentra\TM\ is concentrated and includes natural anticoagulants. In 
addition, the commenter noted that Kcentra\TM\ is more targeted than 
FFP because it does not contain the full range of proteins and other 
molecules found in FFP and believed that this targeted therapy provides 
high levels of coagulation factors at a faster rate and a more rapid 
correction of deficiencies induced by Warfarin. The commenter further 
stated

[[Page 50579]]

that Kcentra\TM\ can be infused in minutes compared to the hours needed 
to infuse FFP. The commenter expressed the opinion that this saved time 
can be critical when treating patients in a trauma or intensive care 
setting, including patients requiring urgent surgical intervention. The 
commenter also noted that Vitamin K therapy requires new factor 
synthesis/modification, which is dependent on optimal organ function, 
which in the context of patient injury or disease, may occur only after 
substantial delay, while Kcentra\TM\ provides immediate functioning 
factors.
    The commenter also noted that a common use of FFP and/or Vitamin K 
is sometimes a prophylactic measure for Warfarin reversal prior to an 
invasive procedure. The commenter believes that once Kcentra\TM\ is 
widely available, it will likely be used in a broader subset of 
patients than FFP and/or Vitamin K. The commenter finally noted that 
another benefit of Kcentra\TM\ is the low transfusion volume compared 
to FFP which decreases the risk of exposure to TACO.
    Another commenter noted that FFP has not been prospectively studied 
in controlled randomized trials for urgent Warfarin reversal while 
current guidelines for Vitamin K antagonist reversal recommend the use 
of 4-factor PCC over plasma.
    Response: We agree that KcentraTM represents a 
substantial clinical improvement over existing technologies. 
Specifically, KcentraTM provides (1) a rapid, beneficial 
resolution of the patient's blood clotting factor deficiency, (2) 
decreases the risk of exposure to blood borne pathogens, and (3) 
reduces the rate of transfusion-associated complications.
    KcentraTM meets all of the new technology add-on payment 
policy criteria. Therefore, we are approving KcentraTM for 
new technology add-on payments in FY 2014. Cases involving 
KcentraTM that are eligible for new technology add-on 
payments will be identified by ICD-9-CM procedure code 00.96. In the 
application, the applicant estimated that the average Medicare 
beneficiary would require an average dosage of 2500 International Units 
(IU). Vials contain 500 IU at a cost of $635 per vial. Therefore, cases 
of KcentraTM would incur an average cost per case of $3,175 
($635 x 5). Under Sec.  412.88(a)(2), new technology add-on payments 
are limited to the lesser of 50 percent of the average cost of the 
technology 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 of 
KcentraTM is $1,587.50.
    In the FY 2014 IPPS/LTCH PPS proposed rule, we noted that, if 
KcentraTM were to be approved for new technology add-on 
payments, we did not believe such payments would be available with 
respect to discharges for which the hospital receives an add-on payment 
for blood clotting factor administered to a Medicare beneficiary with 
hemophilia who is a hospital inpatient. Under section 
1886(d)(1)(A)(iii) of the Act, the national adjusted DRG prospective 
payment rate is ``the amount of the payment with respect to the 
operating costs of inpatient hospital services (as defined in 
subsection (a)(4) of this section)'' for discharges on or after April 
1, 1988. Section 1886(a)(4) of the Act excludes from the term 
``operating costs of inpatient hospital services'' the costs with 
respect to administering blood clotting factors to individuals with 
hemophilia. The costs of administering blood clotting factor to 
Medicare beneficiaries who have hemophilia and are hospital inpatients 
are paid separately from the IPPS. (For information on how the blood 
clotting factor add-on payment is made, we refer readers to section 
20.7.3 of Chapter Three of the Medicare Claims Processing Manual, which 
can be downloaded from the CMS Web site at: http://cms.gov/Regulations-and-Guidance/Guidance/Manuals/Downloads/clm104c03.pdf.) In addition, we 
stated that if KcentraTM is approved by the FDA as a blood 
clotting factor, we believe that it may be eligible for blood clotting 
factor add-on payments when administered to Medicare beneficiaries with 
hemophilia. We would make an add-on payment for KcentraTM 
for such discharges in accordance with our policy for payment of blood 
clotting factor, and it would be excluded from the operating costs of 
inpatient hospital services as set forth in section 1886(a)(4) of the 
Act.
    Section 1886(d)(5)(K)(i) of the Act requires the Secretary to 
``establish a mechanism to recognize the costs of new medical services 
and technologies under the payment system established under this 
subsection'' beginning with discharges on or after October 1, 2001. We 
believe that it is reasonable to interpret this requirement to mean 
that the payment mechanism established by the Secretary recognizes only 
costs for those items that would otherwise be paid based on the 
prospective payment system (that is, ``the payment system established 
under this subsection''). As noted above, under section 
1886(d)(1)(A)(iii) of the Act, the national adjusted DRG prospective 
payment rate is the amount of payment for the operating costs of 
inpatient hospital services, as defined in section 1886(a)(4) of the 
Act, for discharges on or after April 1, 1988. We understand this to 
mean that a new medical service or technology must be an operating cost 
of inpatient hospital services paid based on the prospective payment 
system, and not excluded from such costs, in order to be eligible for 
the new technology add-on payment. We point out that new technology 
add-on payments are based on the operating costs per case relative to 
the prospective payment rate as described in Sec.  412.88. Therefore, 
we believe that new technology add-on payments are appropriate only 
when the new technology is an operating cost of inpatient hospital 
services and are not appropriate when the new technology is excluded 
from such costs.
    We stated that if KcentraTM were to be approved for new 
technology add-on payments, we believe that hospitals may only receive 
that add-on payment for discharges where KcentraTM is an 
operating cost of inpatient hospital services. In other words, we do 
not believe that a hospital could be eligible to receive the new 
technology add-on payment when it is administering KcentraTM 
in treating a Medicare beneficiary who has hemophilia. In those 
instances, KcentraTM is specifically excluded from the 
operating costs of inpatient hospital services in accordance with 
section 1886(a)(4) of the Act and paid separately from the IPPS. 
However, when a hospital administers KcentraTM to a Medicare 
beneficiary who does not have hemophilia, the hospital could be 
eligible for a new technology add-on payment because 
KcentraTM would not be excluded from the operating costs of 
inpatient hospital services. Therefore, we do not believe that 
discharges where the hospital receives a blood clotting factor add-on 
payment are eligible for a new technology add-on payment for the blood 
clotting factor.
    To summarize, we believe that it would be inappropriate to make an 
add-on payment for new technology for a blood clotting factor when a 
blood clotting factor add-on payment has been made. We invited public 
comments on our proposal to only make new technology add-on payments 
for KcentraTM in cases when it is included in the operating 
costs of inpatient hospital services (that is, when no add-on payment 
is made for blood clotting factor). We did not receive any public 
comments concerning this proposal. Because we are approving new 
technology add-on payments for KcentraTM, we are finalizing 
our

[[Page 50580]]

proposal not to make a new technology add-on payment for cases of 
KcentrawTM in treating a Medicare beneficiary who has 
hemophilia. We refer readers to Chapter three, section 20.7.3 of the 
Medicare Claims Processing Manual for a complete discussion on when a 
blood clotting factor add-on payment is made. The manual can be 
downloaded from the CMS Web site at: http://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Downloads/clm104c03.pdf.
b. Argus[supreg] II Retinal Prosthesis System
    Second Sight Medical Products, Inc. submitted an application for 
new technology add-on payments for the Argus[supreg] II Retinal 
Prosthesis System (Argus[supreg] II System) for FY 2014. The 
Argus[supreg] II System is an active implantable medical device that is 
intended to provide electrical stimulation of the retina to induce 
visual perception in patients who are profoundly blind due to retinitis 
pigmentosa (RP). These patients have bare or no light perception in 
both eyes. The system employs electrical signals to bypass dead photo-
receptor cells and stimulate the overlying neurons according to a real-
time video signal that is wirelessly transmitted from an externally 
worn video camera. The Argus[supreg] II implant is intended to be 
implanted in a single eye, typically the worse-seeing eye. Currently, 
bilateral implants are not intended for this technology. According to 
the applicant, the surgical implant procedure takes approximately 4 
hours and is performed under general anesthesia.
    The Argus[supreg] II System consists of three primary components: 
(1) An implant which is an epiretinal prosthesis that is fully 
implanted on and in the eye (that is, there are no percutaneous leads); 
(2) external components worn by the user; and (3) a ``fitting'' system 
for the clinician that is periodically used to perform diagnostic tests 
with the system and to custom-program the external unit for use by the 
patient. We describe these components more fully below.
     Implant: The retinal prosthesis implant is responsible for 
receiving information from the external components of the system and 
electrically stimulating the retina to induce visual perception. The 
retinal implant consists of: (a) A receiving coil for receiving 
information and power from the external components of the Argus[supreg] 
II System; (b) electronics to drive stimulation of the electrodes; and 
(c) an electrode array. The receiving coil and electronics are secured 
to the outside of the eye using a standard scleral band and sutures, 
while the electrode array is secured to the surface of the retina 
inside the eye by a retinal tack. A cable, which passes through the eye 
wall, connects the electronics to the electrode array. A pericardial 
graft is placed over the extra-ocular portion on the outside of the 
eye.
     External Components: The implant receives power and data 
commands wirelessly from an external unit of components, which include 
the Argus II Glasses and Video Processing Unit (VPU). A small 
lightweight video camera and transmitting coil are mounted on the 
glasses. The telemetry coils and radio-frequency system are mounted on 
the temple arm of the glasses for transmitting data from the VPU to the 
implant. The glasses are connected to the VPU by a cable. This VPU is 
worn by the patient, typically on a belt or a strap, and is used to 
process the images from the video camera and convert the images into 
electrical stimulation commands, which are transmitted wirelessly to 
the implant.
     ``Fitting System'': To be able to use the Argus[supreg] II 
System, a patient's VPU needs to be custom-programmed. This process, 
which the applicant called ``fitting'', occurs in the hospital/clinic 
shortly after the implant surgery and then periodically thereafter as 
needed. The clinician/physician also uses the ``Fitting System'' to run 
diagnostic tests (for example, to obtain electrode and impedance 
waveform measurements or to check the radio-frequency link between the 
implant and external unit). This ``Fitting System'' can also be 
connected to a ``Psychophysical Test System'' to evaluate patients' 
performance with the Argus[supreg] II System on an ongoing basis.
    These three components work together to stimulate the retina and 
allow a patient to perceive phosphenes (spots of light), which they 
then need to learn to interpret. While using the Argus[supreg] II 
System, the video camera on the patient-worn glasses captures a video 
image. The video camera signal is sent to the VPU, which processes the 
video camera image and transforms it into electrical stimulation 
patterns. The electrical stimulation data are then sent to a 
transmitter coil mounted on the glasses. The transmitter coil sends 
both data and power via radio-frequency (RF) telemetry to the implanted 
retinal prosthesis. The implant receives the RF commands and delivers 
stimulation to the retina via an array of electrodes that is secured to 
the retina with a retinal tack.
    In patients with RP, the photoreceptor cells in the retina, which 
normally transduce incoming light into an electro-chemical signal, have 
lost most of their function. The stimulation pulses delivered to the 
retina via the electrode array of the Argus[supreg] II Retinal 
Prosthesis System are intended to mimic the function of these 
degenerated photoreceptors cells. These pulses induce cellular 
responses in the remaining, viable retinal nerve cells that travel 
through the optic nerve to the visual cortex where they are perceived 
as phosphenes (spots of light). Patients learn to interpret the visual 
patterns produced by these phosphenes.
    With respect to the newness criterion, according to the applicant, 
the FDA designated the Argus[supreg] II System a Humanitarian Use 
Device in May 2009 (HUD designation 09-0216). The applicant 
submitted a Humanitarian Device Exemption (HDE) application 
(H110002) to the FDA in May 2011 to obtain market approval for 
the Argus[supreg] II System. The HDE was referred to the Ophthalmic 
Devices Panel of the FDA's Medical Devices Advisory Committee for 
review and recommendation. At the Panel's meeting held on September 28, 
2012, the Panel voted 19 to 0 that the probable benefits of the 
Argus[supreg] II System outweigh the risks of the system for the 
proposed indication for use. The applicant received the HDE approval 
from the FDA on February 14, 2013. Currently there are no other 
approved treatments for patients with severe to profound RP. The 
Argus[supreg] II System has an IDE number of G050001 and is a Class III 
device. The applicant applied for three new ICD-9-CM procedure codes 
for consideration at the March 5, 2013 ICD-9-CM Coordination and 
Maintenance Committee meeting. For this final rule, we have approved 
new ICD-9-CM procedure code 14.81 (Implantation of Epiretinal Visual 
Prosthesis) which uniquely identifies the Argus [supreg]II System. The 
other two codes approved by CMS are for removal, revision or 
replacement of the device. More information on these codes can be found 
on the CMS Web site at: http://cms.gov/Medicare/Coding/ICD9ProviderDiagnosticCodes/ICD-9-CM-C-and-M-Meeting-Materials-Items/2013-03-05-MeetingMaterials.html. We invited public comments on whether 
the Argus[supreg] II System meets the newness criterion.
    Comment: Many commenters expressed their opinion that the 
Argus[supreg] II System meets the newness criterion. The commenters 
noted that this technology is the first available treatment approved by 
the FDA for profoundly blind RP patients, pointing out that it 
``enables patients to interpret the visual patterns and gain 
independence and mobility,'' which has not been possible previously for 
these

[[Page 50581]]

patients with any other treatment modality. The commenters also noted 
that the Argus[supreg] II System has not been sold in the United States 
at this time.
    Response: We appreciate the commenters' support. We agree that the 
Argus[supreg]II System meets the newness criterion based on its FDA 
approval date and due to the fact that we are unaware of any other 
existing technologies that are substantially similar to it that would 
allow Medicare beneficiaries with severe to profound Retinitis 
Pigmentosa (RP) who have no vision to have some functional vision.
    With regard to the cost criterion, the applicant identified all 
discharges from claims in the FY 2011 MedPAR file for MS-DRGs 116 
(Intraocular Procedures with CC/MCC) and 117 (Intraocular Procedures 
without CC/MCC) with the presence of ICD-9-CM procedure code 14.73 
(Anterior vitrectomy), or 14.74 (Posterior vitrectomy). (We note that 
because no procedure code previously existed for this technology, these 
cases would include patients that are not eligible for or would not 
otherwise receive this technology.) The applicant found 199 cases (47.6 
percent of all cases) in MS-DRG 116 and 219 cases (52.3 percent of all 
cases) in MS-DRG 117. This resulted in an average charge per case of 
$40,957 for MS-DRG 116 and $20,621 for MS-DRG 117, equating to a case-
weighted average charge per case of $24,011.
    The applicant then standardized the charges using the FY 2011 final 
rule impact file and converted the cost of the device to a charge by 
dividing the operating costs by a CCR of 0.50 (which equates to a 100 
percent markup). Although the applicant submitted data related to the 
estimated cost of the Argus[supreg] II System, the applicant noted that 
the cost of the technology was proprietary information. The applicant 
then added the charges related to the device to the case-weighted 
average standardized charge per case and determined a final case-
weighted average standardized charge per case of $311,180. Using the FY 
2014 Table 10 thresholds, the case-weighted threshold for MS-DRGs 116 
and 117 was $30,328 (all calculations above were performed using 
unrounded numbers). Because the final case-weighted average 
standardized charge per case for the applicable MS-DRGs exceed the 
case-weighted threshold amount, the applicant maintained that the 
Argus[supreg] II System would meet the cost criterion. We invited 
public comments on whether the Argus[supreg] II System meets the cost 
criterion, particularly based on the assumptions and methodology used 
in the applicant's analysis. We did not receive any public comments 
concerning the cost criterion and, therefore, we believe that the 
Argus[supreg] II System meets the cost criterion.
    In the FY 2014 IPPS/LTCH PPS proposed rule, we noted that, although 
we could not disclose the cost of the technology, the device is very 
costly. Because of its high costs, the technology would easily exceed 
the case-weighted threshold. In addition, because of the high cost of 
the device it is likely that claims with the device would receive an 
outlier payment. The applicant anticipates that approximately 65 
Argus[supreg] II Systems will be sold in FY 2014, of which 
approximately 50 systems would be provided to Medicare patients. The 
target disease population is extremely limited as required and 
supported by the HDE application. Most patients for whom this 
technology is indicated may be eligible for Medicare based on their 
age, blindness, or a disability that is associated with profound 
blindness.
    We also noted that these types of procedures are often performed in 
the outpatient setting. We expressed concern that if new technology 
add-on payments were to be approved, this would serve as a financial 
incentive to inappropriately shift utilization from an outpatient to an 
inpatient setting, although medical review may result in very few of 
these cases being paid as inpatient hospital services if the patient 
can be appropriately treated as an outpatient. We emphasized that it is 
critical that physicians use their clinical judgment in determining the 
medical necessity of an inpatient admission and stress that care should 
be provided in the appropriate setting. We invited public comments on 
whether the Argus[supreg] II System meets the cost criterion, 
particularly based on the assumptions and methodology used in the 
applicant's analysis. We also expressed general concerns relating to 
the descriptions of the medical necessity of performing this procedure 
on an inpatient basis. Therefore, we invited public comments to further 
our understanding regarding whether approving new technology add-on 
payments for the Argus[supreg] II System would create a financial 
incentive that would shift utilization inappropriately from an 
outpatient to an inpatient setting.
    Comment: Some commenters stated that approving new technology add-
on payments for the Argus[supreg] II System would not create a 
financial incentive for inappropriate inpatient utilization because 
these patients are treated in both inpatient and outpatient settings. 
These commenters stated that the complex clinical judgment of the 
physician must be the basis for determining inpatient status and/or the 
site of care. The commenters added that ``decisions on the appropriate 
site of service must be based on the individual patient's health status 
and expected treatment. . . .''
    Response: We appreciate the commenters' input, feedback, and 
opinions that the appropriate setting and appropriate patients should 
be based on a complex clinical judgment of the physician and note that 
this would need to be supported by clinical documentation in the 
medical record to maintain appropriate use of inpatient and outpatient 
care settings.
    With regard to the substantial clinical improvement criterion, the 
Argus[supreg] II System is intended to provide electrical stimulation 
of the retina to induce visual perception in blind patients with the 
indication of severe to profound RP with bare or no light perception in 
both eyes. According to the applicant, an estimated 1 in 3,037 
Americans suffers from RP, and the incidence of people with severe to 
profound RP is significantly lower. According to the applicant, the 
need for treatments for RP is high, given the impact of loss of vision.
    According to the applicant, numerous experimental research programs 
are currently underway to slow, stop, or reverse the progress of RP, 
including gene therapy, tissue and cell transplants, and some 
pharmacologic neuroprotection therapies. However, these approaches so 
far have had fairly limited success in treating RP patients, and some 
approaches are intended for an extremely small segment of the RP 
population. Currently there are no other approved treatments for 
patients with severe to profound RP. Therefore, the Argus[supreg] II 
device treats a patient population that has no other treatment options.
    The applicant submitted the results of a clinical trial to 
demonstrate substantial clinical improvement. This clinical trial 
enrolled 30 patients. The median age of patients was 57.9 years at the 
time of implantation and the range was 28 to 77 years of age. Thirty 
percent of the patients were female, and 70 percent were male. All of 
the patients had bare or no light perception in both eyes. Fourteen of 
the patients were Medicare eligible. As part of the methods for the 
study, the applicant stated that while working within the framework of 
clinical trials for other ophthalmic devices, the manufacturer and its 
team of scientific advisors selected or designed several tests that 
would address the main elements of the

[[Page 50582]]

system that should be assessed for these types of devices--visual 
function (that is, how the eye as an organ works [for example, visual 
acuity]), functional vision (that is, how the patient performs in 
vision-related activities of daily living), and quality of life. The 
endpoints that were selected provided a mixture of objective and 
subjective data. The study design was strengthened by the fact that 
controlled observations could be obtained by performing assessments 
with the Argus[supreg] II System ``on'' and ``off'' (that is, control 
was available at each time point).
    According to the applicant, there were no unexpected adverse 
events. Non-serious adverse events represented the majority of events. 
The safety review concluded that the Argus[supreg] II System has a 
reasonable safety profile for an ophthalmic device that requires 
vitreoretinal surgery to implant. In addition, the applicant noted that 
the device can be extracted and is reversible. The Argus[supreg] II 
System provided all 30 patients with benefit as measured by high-
contrast visual function tests. The applicant stated that the degree of 
benefit varied from patient to patient and provided the following 
results:
     All subjects were able to see visual percepts when the 
Argus[supreg] II System was electrically activated.
     On the Square Localization Test (that is, object 
localization), patients (on average) performed better with the system 
``on'' rather than ``off'' at all follow-up time points. At 24 months, 
on average, patients missed the target by approximately 50 pixels with 
the system ``on'' versus approximately 250 pixels with the system 
``off.''
     On the Direction of Motion Test, which tested the 
patients' ability to determine the direction of a moving bar, patients 
had higher mean accuracy with the system ``on'' than they did with the 
system ``off'' at all follow-up time points, indicating that the 
Argus[supreg] II System improved their performance on a spatial vision 
task. At 24 months, the mean response error was approximately 60[deg] 
with the system ``on'' versus more than 80[deg] with the system 
``off.'' According to the applicant, this is nearly the error expected 
by chance.
     On the Grating Visual Acuity Test, which assessed the 
patients' visual acuity using the principles of acuity charts designed 
for extremely low vision patients, 27 percent of the patients were able 
to score on the scale (between 1.6 and 2.9 log MAR) at least once with 
the system ``on,'' while none of the Argus[supreg] II patients were 
able to score on the scale with the system ``off.''
     A large number of patients were able to recognize large 
letters and numbers with the system ``on'' (but not with the system 
``off''), and some of the patients were able to read short words. The 
median percent correct with the system ``on'' was approximately 50 
percent higher than with the system ``off.''
     The trial also measured objectively-scored functional 
vision tests. The patients performed better with the Argus[supreg] II 
System ``on'' versus ``off'' on orientation and mobility tests (finding 
a door and following a line) and on functional vision tasks (sorting 
white, black, and gray socks, following an outdoor sidewalk, and 
determining the direction of a person walking by).
     Analysis of the Functional Low-vision Observer Rated 
Assessment (FLORA) results showed that three-quarters of the patients 
received a positive benefit in terms of well-being and/or functional 
vision, while none of the patients experienced a negative effect.
    We also noted that we were concerned that the study did not have 
pre-specified endpoints and changed measurements mid-trial. In 
addition, we expressed concern about the reliability of the measures 
used for the tests and the inconsistency of the results across 
different patients, which lead us to question the long-term benefits 
associated with this device. We received two comments on the 
Argus[supreg]II System during the town hall meeting's public comment 
period. These comments were summarized and responded to in the FY 2014 
IPPS/LTCH PPS proposed rule. We refer readers to the proposed rule for 
a summary of these comments and our detailed responses (78 FR 27542 
through 27543). In addition, we invited public comments on whether the 
Argus[supreg] II System meets the substantial clinical improvement 
criterion, specifically in regard to the measures used in the study and 
the lack of pre-specified endpoints.
    Comment: One commenter, the applicant, submitted a public comment 
in response to CMS' concern about the lack of pre-specified end points 
and evolving measures in their studies, noting that at the beginning of 
its studies, ``it was clear that there was an absence of measures that 
were validated for the intended treatment population (e.g., no 
functional vision).'' The commenter noted that as the trial progressed, 
new measures were introduced to address the applicability of clinical 
results to everyday life, and measurements changed to make the testing 
more challenging for the subjects (for example, with both the system 
``off'' and ``on'') and to reduce the likelihood of success based on 
chance. The applicant further stated that the selection and 
modification of endpoint measures was done with a ``tremendous amount 
of input from independent third party experts (ophthalmologists, 
surgeons, optometrists, retinal degeneration specialists, and low 
vision experts) and the FDA (and many times at the request of the 
FDA).'' The applicant believed that ``the resulting trial design and 
execution was the best possible trial for this target population given 
the novelty of the Argus II Retinal Prosthesis System.'' The commenter 
asserted that, ``Furthermore, the results of this study clearly 
indicate a beneficial effect for the Argus[supreg]II.'' Another 
commenter noted that because the target population for this technology 
had not previously been studied, there were no pre-existing endpoints. 
This commenter opined that the new instruments and methods added during 
the study strengthened the results because they each added difficulty 
to the tests. Another commenter supported the study design and 
responded to our concerns that having no fixed endpoints or lack of 
validation for some of the clinical trial measures is an inevitable 
consequence of applying this new technology to a population that has 
had no other options. This commenter expressed its opinion that the 
measures needed to be designed, and refined, because very few tests 
existed that could assess such limited vision in quantitative terms.
    Response: We appreciate the commenters' views and explanation of 
the study design, measures, and endpoints in light of the small and 
rare population of patients with severe to profound Retinitis 
Pigmentosa being studied for this Argus[supreg]II System. We agree with 
the commenters that, in view of these difficulties that very few tests 
existed that could assess such limited vision in quantitative terms for 
this population of blind patients with the indication of severe to 
profound RP with bare or no light perception in both eyes, the 
applicant presented data that demonstrated that the Argus[supreg]II 
System represents a substantial clinical improvement over existing 
technologies.
    The Argus[supreg]II System meets all of the new technology add-on 
payment policy criteria. Therefore, we are approving the 
Argus[supreg]II System for new technology add-on payments in FY 2014. 
Cases involving the Argus[supreg]II System that are eligible for new 
technology add-on payments will be identified by ICD-9-CM procedure 
code 14.81. We note that section 1886(d)(5)(K)(i) of the Act requires 
that the Secretary establish a

[[Page 50583]]

mechanism to recognize the costs of new medical services or 
technologies under the payment system established under that 
subsection, which establishes the system for paying for the operating 
costs of inpatient hospital services. The system of payment for capital 
costs is established under section 1886(g) of the Act, which makes no 
mention of any add-on payments for a new medical service or technology. 
Therefore, it is not appropriate to include capital costs in the add-on 
payments for a new medical service or technology. In the application, 
the applicant provided a breakdown of the costs of the Argus[supreg]II 
System. The total operating cost of the Argus[supreg]II System is 
$144,057.50. Under Sec.  412.88(a)(2), 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 Argus[supreg]II System is $72,028.75.
c. Zilver[supreg] PTX[supreg] Drug Eluting Peripheral Stent
    Cook[supreg] Medical submitted an application for new technology 
add-on payments for the Zilver[supreg] PTX[supreg] Drug Eluting 
Peripheral Stent (Zilver[supreg] PTX[supreg]) for FY 2014. 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 stated 
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 
indicated 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 applicant received FDA approval on November 15, 2012, for the 
Zilver[supreg] PTX[supreg]. The applicant maintains that the 
Zilver[supreg] PTX[supreg] is the first drug-eluting stent used for 
superficial femoral arteries. 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 invited public comments regarding 
how the Zilver[supreg] PTX[supreg] meets the newness criterion. 
However, we did not receive any public comments concerning the newness 
criterion and, therefore, we believe that the Zilver[supreg] 
PTX[supreg] meets the newness criterion.
    With regard to the cost criterion, the applicant believed 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 2010 MedPAR file for cases reporting 
procedure code 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), or 440.24 (Atherosclerosis of the 
extremities with gangrene). The applicant noted that the Zilver[supreg] 
PTX[supreg] is available in an 80 mm size and is approved for lesions 
in native vascular disease of the above-the-knee femoropopliteal 
arteries having reference vessel diameter from 4 mm to 9 mm and total 
lesion lengths up to 140 mm per limb. The applicant further noted that 
bare metal stents typically are available up to lengths of 200 mm. 
Therefore, in order to target cases eligible for the Zilver[supreg] 
PTX[supreg], the applicant believed that it was only appropriate to 
target those cases with one or two bare metal stents. The applicant was 
able to identify the amount of stents used per claim by searching for 
ICD-9-CM procedure codes 00.45 (Insertion of one vascular stent) and 
00.46 (Insertion of two vascular stents). The applicant submitted two 
methodologies: one with cases that received one bare metal stent and 
the other with cases that received one or two bare metal stents.
    Under the first methodology (one bare metal stent), the applicant 
found 2,062 cases (or 19.7 percent of all cases) in MS-DRG 252, 3,385 
cases (or 32.3 percent of all cases) in MS-DRG 253, and 5,019 cases (or 
48 percent of all cases) in MS-DRG 254. The average charge per case was 
$89,194 for MS-DRG 252, $67,965 for MS-DRG 253, and $46,539 for MS-DRG 
254, equating to a case-weighted average charge per case of $60,855.
    The case-weighted average charge per case above does not include 
charges related to the Zilver[supreg] PTX[supreg]. Therefore, it was 
first necessary to remove the amount of charges related to the non-
drug-eluting peripheral vessel stent and replace them with charges 
related to the Zilver[supreg] PTX[supreg]. The applicant multiplied the 
use of the single stent used per case by the average market price for 
non-drug-eluting peripheral vessel stents and then converted the cost 
of the stents used per case to a charge by dividing the results by the 
hospital-specific CCR (from the FY 2010 IPPS impact file). The 
applicant removed the appropriate amount of charges per case and then 
standardized the charges per case.
    Because the applicant used FY 2010 MedPAR data, it was necessary to 
inflate the charges from FY 2010 to FY 2013. 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 7 
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.\6\ 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 non-drug-eluting peripheral vessel stent typically ranges 
from 80 mm 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]). 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 2010 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 inflated case-weighted average 
standardized charge per case of $58,419. Although the applicant 
submitted data that related to the estimated cost of the Zilver[supreg] 
PTX[supreg], the applicant noted that the cost of the technology was 
proprietary information. Using the FY 2014 Table 10 thresholds, the 
case-weighted threshold for MS-DRGs 252, 253, and 254 was $54,547 (all 
calculations above were performed using unrounded numbers). Because the 
final inflated case-weighted average

[[Page 50584]]

standardized charge per case for the applicable MS-DRGs exceeded the 
case-weighted threshold amount, the applicant maintained that the 
Zilver[supreg] PTX[supreg] would meet the cost criterion.
---------------------------------------------------------------------------

    \6\ 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 applicant used the same methodology above to demonstrate that 
it meets the cost criterion with the only difference being that it 
included cases that used one or two bare metal stents instead of just 
one bare metal stent. Using this methodology, the applicant determined 
a final inflated case-weighted average standardized charge per case of 
$62,455. Using the FY 2014 Table 10 thresholds, the case-weighted 
threshold for MS-DRGs 252, 253, and 254 was $54,474 (all calculations 
above were performed using unrounded numbers). Because the final 
inflated case-weighted average standardized charge per case for the 
applicable MS-DRGs exceeded the case-weighted threshold amount, the 
applicant maintained that the Zilver[supreg] PTX[supreg] would meet the 
cost criterion.
    We invited public comments on whether or not the Zilver[supreg] 
PTX[supreg] meets the cost criterion. In addition, we invited public 
comments 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 and the number of stents required 
for each case. However, we did not receive any public comments 
concerning the cost criterion and, therefore, we believe that the 
Zilver[supreg] PTX[supreg] meets the cost criterion.
    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 asserted that the Zilver[supreg] 
PTX[supreg] meets the substantial clinical improvement criterion 
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 479-patient, multicenter, multinational 
randomized controlled trial that compared the Zilver[supreg] 
PTX[supreg] to balloon angioplasty \7\; an additional component of the 
study allowed a direct comparison of the Zilver[supreg] PTX[supreg] to 
a bare (uncoated) metal Zilver[supreg] stent. Patients were randomized 
to treatment with the Zilver[supreg] PTX[supreg] stent (treatment 
group) or with a percutaneous transluminal balloon angioplasty (PTA, 
control group). Recognizing that balloon angioplasty may not be 
successful acutely, the trial design mandated provisional stent 
placement immediately after failure of balloon angioplasty in instances 
of acute PTA failure. Therefore, patients with suboptimal (failed) PTA 
underwent a secondary randomization to stenting with either 
Zilver[supreg] PTX[supreg] or bare Zilver[supreg] stents. This 
secondary randomization allows evaluation of the Zilver[supreg] 
PTX[supreg] stent compared to a bare metal 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 re-narrowing). In the FY 2014 IPPS/LTCH PPS proposed rule, we 
noted that we were concerned that other endpoints such as walking, 
walking speed, and climbing were not considered as primary endpoints to 
demonstrate the effectiveness of the Zilver[supreg] PTX[supreg].
---------------------------------------------------------------------------

    \7\ 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), 
Paclitaxeleluting 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.
---------------------------------------------------------------------------

    According to the applicant, the Zilver[supreg] PTX[supreg] had an 
EFS of 90.4 percent compared to balloon angioplasty, which had an EFS 
of 83.9 percent, at 12 months demonstrating that the Zilver[supreg] 
PTX[supreg] is as safe or safer than balloon angioplasty. The applicant 
further stated that this benefit was maintained at 24 months. 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 for the Zilver[supreg] PTX[supreg] was 82.7 
percent, which compared favorably to the balloon angioplasty patency 
rate of 32.7 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 (87.3 
percent versus 72.3 percent at 12 months). 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 submitted 3 years of follow-up data, which 
the applicant maintained support that the Zilver[supreg] PTX[supreg] is 
more effective in maintaining primary patency.\8\
---------------------------------------------------------------------------

    \8\ Dake, MD., VIVA 2012, October 10, 2012; Las Vegas, Nevada.
---------------------------------------------------------------------------

    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. According to the applicant, 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 further stated 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.\9\
---------------------------------------------------------------------------

    \9\ 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.
---------------------------------------------------------------------------

    In the FY 2014 IPPS/LTCH PPS proposed rule, we also expressed 
concern that on April 24, 2013, the FDA announced that, based on its 
investigation into a small number of complaints that the delivery 
system of the device had separated at the tip of the inner catheter, 
Cook Medical has initiated a nationwide/global voluntary recall of its 
Zilver[supreg] PTX[supreg] Drug Eluting Peripheral Stent. We refer 
readers to http://www.fda.gov/Safety/Recalls/ucm349421.htm?source=govdelivery for more information regarding this 
announcement.
    We note that we did not receive any public comments on the 
Zilver[supreg] PTX[supreg] during the new technology town hall 
meeting's public comment period. However, we invited public comments

[[Page 50585]]

regarding whether the Zilver[supreg] PTX[supreg] meets the substantial 
clinical improvement criterion.
    Comment: One commenter, the manufacturer and applicant, submitted a 
public comment responding to our concerns presented in the proposed 
rule. With regard to our first concern that other endpoints such as 
walking, walking speed, and climbing were not considered as primary 
endpoints, the manufacturer noted that in addition to the primary 
endpoint of primary patency at 12 months, the study investigators (for 
the Zilver[supreg] PTX[supreg] Global Registry Clinical Study) 
understood the importance of including other effective endpoints in the 
study. Specifically, the commenter noted that the study included 
Rutherford classification, walking ability, and quality of life. Also, 
a composite clinical endpoint defined as ``freedom from symptoms of 
ischemia'' was calculated based on freedom from worsening claudication, 
worsening Rutherford class, tissue loss, and other symptoms indicating 
the need for reintervention.
    The commenter added that similar improvements in the Rutherford 
score, and walking and quality of life scores were observed in both the 
PTA control and Zilver[supreg] PTX[supreg] treatment groups of the 
Zilver[supreg] PTX[supreg] Global Registry Clinical Study. The 
commenter noted that the study was designed to allow ongoing, 
clinically indicated care to optimize each patient's health status and 
quality of life throughout the course of the study, which would result 
in improved clinical outcomes. The commenter asserted that while 
allowing for ongoing care within the clinical trial, the study design 
confounded the comparison of clinical benefit between the PTA control 
and Zilver[supreg] PTX[supreg] treatment groups due to the additional 
study and/or non-study related procedures that were performed during 
the study and subsequent to the index procedure(s). The commenter 
concluded that this confounding aspect of the study design, though in 
the patient's best interest, argued against using these clinical 
effectiveness endpoints as primary endpoints.
    The commenter also explained that because these standard clinical 
effectiveness outcomes were not ideally suited to discriminate 
differences between treatment arms in clinical trial, a secondary 
clinical benefit index of freedom from symptoms of ischemia was 
calculated (as described above). The commenter believed that measuring 
freedom from symptoms of ischemia provides an important measure of 
clinical benefit of the Zilver[supreg] PTX[supreg]. The commenter noted 
that freedom from symptoms of ischemia was maintained in 88.5 percent 
of the Zilver[supreg] PTX[supreg] treatment group at 12 month versus 
75.3 percent of PTA control group patients. The commenter also pointed 
out that at the time of submission of the application, only 12-month 
data had been published in the peer review literature. Since that time, 
the 2-year safety and effectiveness outcomes have been published \10\ 
and can be accessed on the Internet at: http://www.sciencedirect.com/science/article/pii/S0735109713014149.
---------------------------------------------------------------------------

    \10\ Dake, M. D., Ansel, G. M., Jaff, M. R., Takao, O., Saxon, 
R. R., Smouse, H. B., Snyder, S. A., O'leary, E. E., Tepe, G., 
Scheinert, D., Zeller, T., (June 18, 2013) Sustained Safety and 
Effectiveness of Paclitaxel-Eluting Stents for Femoropopliteal 
Leasions: 2 Year-Follow-Up from the Zilver PTX Randomized and 
Single-Arm Clinical Studies. Journal of American College of 
Cardiology, Vol. 61, Issue 24.
---------------------------------------------------------------------------

    With regard to our concerns concerning the recall of the device, 
the commenter stated that it has ``identified the root cause of the 
underlying failure mode to the delivery device and corrective action 
has been implemented'' with the anticipated return of the 
Zilver[supreg] PTX[supreg] to the market in early August 2013. The 
commenter noted that there are no issues with the Zilver[supreg] 
PTX[supreg] itself, only the delivery system to implant the 
Zilver[supreg] PTX[supreg].
    Response: After consideration of the public comments received in 
response to our concerns and proposals presented in the proposed rule, 
we agree that the Zilver[supreg] PTX[supreg] represents a substantial 
clinical improvement over existing technologies 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. 
We also believe that the commenter has sufficiently responded to our 
concerns presented in the proposed rule. However, we will continue to 
monitor the long-term clinical trial data concerning the primary and 
secondary endpoints as it becomes available.
    Comment: Several commenters supported making new technology add-on 
payments for the Zilver[supreg] PTX[supreg] in FY 2014.
    Response: We appreciate the commenters' support. The Zilver[supreg] 
PTX[supreg] meets all of the new technology add-on payment policy 
criteria. Therefore, we are approving the Zilver[supreg] PTX[supreg] 
for new technology add-on payments in FY 2014. Cases involving the 
Zilver[supreg] PTX[supreg] that are eligible for new technology add-on 
payments will be identified by ICD-9-CM procedure code 00.60. As stated 
above, 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, the applicant used an average of 1.9 stents per case 
based on the Zilver[supreg] PTX[supreg] Global Registry Clinical Study. 
The applicant stated in its application that the anticipated cost per 
stent is approximately $1,795. Therefore, cases of the Zilver[supreg] 
PTX[supreg] would incur an average cost per case of $3,410.50 ($1,795 x 
1.9). Under Sec.  412.88(a)(2), 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 of the 
Zilver[supreg] PTX[supreg] is $1,705.25.

III. 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 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.'' 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 FY 2014 hospital wage index based on the 
statistical areas appears under section III.B. of the preamble of this 
final rule.
    Section 1886(d)(3)(E) of the Act requires the Secretary to update 
the wage index annually and to base the update on a survey of wages and 
wage-related costs of short-term, acute care hospitals. This provision 
also requires that any updates or adjustments to the wage index be made 
in a manner that ensures that aggregate payments to hospitals are not 
affected by the change in the wage index. The adjustment for FY 2014 is 
discussed in section II.B. of the Addendum to this final 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),

[[Page 50586]]

1886(d)(8)(C), and 1886(d)(10) of the Act are equal to the aggregate 
prospective payments that would have been made absent these provisions. 
The budget neutrality adjustment for FY 2014 is discussed in section 
II.A.4.b. of the Addendum to this final rule.
    Section 1886(d)(3)(E) of the Act also provides for the collection 
of data every 3 years on the occupational mix of employees for short-
term, acute care hospitals participating in the Medicare program, in 
order to construct an occupational mix adjustment to the wage index. A 
discussion of the occupational mix adjustment that we are applying 
beginning October 1, 2013 (the FY 2014 wage index) appears under 
section III.F. of the preamble of this final rule.

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. 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. The current statistical areas are based on 
OMB standards published on December 27, 2000 (65 FR 82228) and Census 
2000 data and Census Bureau population estimates for 2007 and 2008 (OMB 
Bulletin No. 10-02). 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) 
and the FY 2013 IPPS/LTCH PPS final rule (77 FR 53365) that, in 2013, 
OMB planned to announce new area delineations based on new standards 
adopted in 2010 (75 FR 37246) and the 2010 Census of Population and 
Housing data. As stated in the FY 2014 IPPS/LTCH PPS proposed rule (78 
FR 27552), on February 28, 2013, OMB issued OMB Bulletin No. 13-01, 
which established revised delineations for Metropolitan Statistical 
Areas, Micropolitan Statistical Areas, and Combined Statistical Areas, 
and provided guidance on the use of the delineations of these 
statistical areas. A copy of this bulletin may be obtained at http://www.whitehouse.gov/sites/default/files/omb/bulletins/2013/b-13-01.pdf. 
According to OMB, ``[t]his bulletin provides the delineations of all 
Metropolitan Statistical Areas, Metropolitan Divisions, Micropolitan 
Statistical Areas, Combined Statistical Areas, and New England City and 
Town Areas in the United States and Puerto Rico based on the standards 
published on June 28, 2010, in the Federal Register (75 FR 37246-37252) 
and Census Bureau data.''
    In order to implement these changes for the IPPS, it is necessary 
to identify the new area designation for each county and hospital in 
the country. While the revisions OMB published on February 28, 2013 are 
not as sweeping as the changes OMB announced in 2003, the February 28, 
2013 bulletin does contain a number of significant changes. For 
example, there are new CBSAs, urban counties that become rural, rural 
counties that become urban, and existing CBSAs that have been split 
apart. In addition, the effect of the new designations on various 
hospital reclassifications, the out-migration adjustment (established 
by section 505 of Pub. L. 108-173), and treatment of hospitals located 
in certain rural counties (that is, ``Lugar'' hospitals) provided for 
under section 1886(d)(8)(B) of the Act must be considered. These are 
just a few of the many issues that need to be considered regarding the 
effects of the new designations prior to proposing and establishing 
policies.
    However, because the bulletin was not issued until February 28, 
2013, with supporting data not available until later, and because the 
changes made by the bulletin and their ramifications must be 
extensively reviewed and verified, we were unable to undertake such a 
lengthy process before publication of the FY 2014 IPPS/LTCH PPS 
proposed rule. By the time the bulletin was issued, the FY 2014 IPPS/
LTCH PPS proposed rule was in the advanced stages of development. We 
had already developed the FY 2014 proposed wage index based on the 
previous OMB definitions. We note that, in June 2003, OMB announced 
changes resulting from the 2000 Census, and at that time, CMS proposed 
and implemented the changes during the following year's rulemaking 
cycle for FY 2005. Although OMB published the data earlier than June 
this year, we still are in essentially the same situation as we were in 
2003 because the data are not available in time to be incorporated into 
this year's rulemaking cycle. To allow for sufficient time to assess 
the new changes and their ramifications, we intend to propose changes 
to the wage index based on the newest CBSA changes in the FY 2015 
proposed rule. We refer readers to the FY 2005 IPPS final rule (69 FR 
49026 through 49034) for those interested in learning about the issues 
we may need to address next year in proposing to implement the latest 
OMB update for FY 2015, and some of the policy decisions that we may 
consider making.
    Comment: Several commenters recommended that, if CMS were to 
implement OMB's MSAs in the FY 2015 final rule, the newly adopted 
definitions should not be effective until FY 2016, and even then, CMS 
should phase in the new MSAs. Other commenters specifically stated that 
CMS should provide a 3-year ``hold harmless'' period for those 
hospitals that maintain a specific status under the Medicare program 
that is jeopardized by changes to the MSAs. For example, two commenters 
suggested that rural hospitals that currently qualify for MDH and SCH 
status should be protected from the negative financial consequences of 
a change to urban status. Several other commenters urged CMS to hold an 
open-door call to review the CMSA changes and outline for hospitals 
what may or may not be the next steps for CMS as it plans to proceed, 
similar to the 2003 process. One commenter suggested that the Secretary 
allow rural teaching hospitals that will be redesignated to urban to 
start a new residency training program, and under the GME rules 
specific to rural hospitals, allow the hospital to count the FTEs for 
an additional time period of 2 years.
    Response: We appreciate the comments made by the commenters. As we 
indicated in the proposed rule, we intend to assess these new 
definitions, which require extensive review and verification to 
identify the new area designation for each county and hospital in the 
county, before adopting them. Any changes would be made through notice-
and-comment rulemaking. We will address the concerns raised in these 
comments and other issues at part of the FY 2015 rulemaking process.

C. Worksheet S-3 Wage Data for the FY 2014 Wage Index

    The FY 2014 wage index values are based on the data collected from 
the Medicare cost reports submitted by hospitals for cost reporting 
periods beginning in FY 2010 (the FY 2013 wage indices were based on 
data from cost reporting periods beginning during FY 2009).
1. Included Categories of Costs
    The FY 2014 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);

[[Page 50587]]

     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 through 47318)); and
     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 2013, the wage 
index for FY 2014 also excludes the direct and overhead salaries and 
hours for services not subject to IPPS payment, such as SNF services, 
home health services, costs related to GME (teaching physicians and 
residents) and certified registered nurse anesthetists (CRNAs), and 
other subprovider components that are not paid under the IPPS. The FY 
2014 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 through 
45398).
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 2014 wage index were obtained from 
Worksheet S-3 of the Medicare cost report for cost reporting periods 
beginning on or after October 1, 2009, and before October 1, 2010. For 
wage index purposes, we refer to cost reports during this period as the 
``FY 2010 cost report,'' the ``FY 2010 wage data,'' or the ``FY 2010 
data.'' Instructions for completing the wage index sections of 
Worksheet S-3 are included in the Provider Reimbursement Manual (PRM), 
Part 2 (Pub. No. 15-2), Chapter 36, Sections 3605.2 and 3605.3 for Form 
CMS-2552-96 and Chapter 40, Sections 4005.2 through 4005.4 for Form 
CMS-2552-10. Hospitals with cost reporting periods beginning on or 
after October 1, 2009 and before May 1, 2010 reported FY 2010 data on 
Form CMS-2552-96. Hospitals with cost reporting periods beginning on or 
after May 1, 2010 and before October 1, 2010 reported FY 2010 data on 
the new Form CMS-2552-10. The data file used to construct the final FY 
2014 wage index includes FY 2010 data submitted to us as of June 26, 
2013. As in past years, we performed an extensive 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 proposed FY 
2014 wage index, we identified and excluded 43 providers with data that 
were too aberrant to include in the proposed wage index, although we 
stated that if data elements for some of these providers are corrected, 
we intended to include some of these providers in the final FY 2014 
wage index. (We note that in the FY 2014 IPPS/LTCH PPS proposed rule, 
we inadvertently stated that we excluded 44 providers.) We have 
received corrected data for 11 providers, and therefore, we are 
including the data for these 11 providers in the final FY 2014 wage 
index. Therefore, in total, we are excluding the data of 32 providers 
from the final FY 2014 wage index.
    In constructing the proposed FY 2014 wage index, we included the 
wage data for facilities that were IPPS hospitals in FY 2010, 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 through 45398). For the proposed 
rule, we removed 4 hospitals that converted to CAH status on or after 
February 14, 2012, the cut-off date for CAH exclusion from the FY 2013 
wage index, and through and including February 14, 2013, the cut-off 
date for CAH exclusion from the FY 2014 wage index. After removing 
hospitals with aberrant data and hospitals that converted to CAH 
status, the final FY 2014 wage index is calculated based on 3,440 
hospitals.
    For the final FY 2014 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 that we allotted such 
hospitals' data in the FY 2013 wage index (77 FR 53366). Table 2 
containing the FY 2014 wage index associated with this final rule 
(available on the CMS Web site) includes separate wage data for the 
campuses of six multicampus hospitals (two additional multicampus 
hospitals have been added to the wage index calculation for FY 2014).

E. Method for Computing the FY 2014 Unadjusted Wage Index

    The method used to compute the FY 2014 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) and which we discussed and used 
for the FY 2013 final wage index without an occupational mix adjustment 
(77 FR 53366 through 53367).
    As discussed in the FY 2012 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, 2009, through April 15, 2011, 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 as we proposed, we are not making any changes to the usage 
for FY 2014. The factors used to adjust the hospital's data were based 
on the midpoint of the cost reporting period, as indicated below.

                    Midpoint of Cost Reporting Period
------------------------------------------------------------------------
                                                              Adjustment
                     After                         Before       factor
------------------------------------------------------------------------
10/14/2009....................................   11/15/2009      1.02682
11/14/2009....................................   12/15/2009      1.02490
12/14/2009....................................   01/15/2010      1.02299

[[Page 50588]]

 
01/14/2010....................................   02/15/2010      1.02116
02/14/2010....................................   03/15/2010      1.01941
03/14/2010....................................   04/15/2010      1.01768
04/14/2010....................................   05/15/2010      1.01591
05/14/2010....................................   06/15/2010      1.01412
06/14/2010....................................   07/15/2010      1.01235
07/14/2010....................................   08/15/2010      1.01064
08/14/2010....................................   09/15/2010      1.00898
09/14/2010....................................   10/15/2010      1.00738
10/14/2010....................................   11/15/2010      1.00584
11/14/2010....................................   12/15/2010      1.00434
12/14/2010....................................   01/15/2011      1.00288
01/14/2011....................................   02/15/2011      1.00143
02/14/2011....................................   03/15/2011      1.00000
03/14/2011....................................   04/15/2011      0.99860
------------------------------------------------------------------------

    For example, the midpoint of a cost reporting period beginning 
January 1, 2010, and ending December 31, 2010, is June 30, 2010. An 
adjustment factor of 1.01235 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 2013 IPPS/LTCH PPS 
final rule, the FY 2014 national average hourly wage (unadjusted for 
occupational mix) is $38.3998. The FY 2014 Puerto Rico overall average 
hourly wage (unadjusted for occupational mix) is $16.4890.

F. Occupational Mix Adjustment to the FY 2014 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 2014 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 2013 IPPS/LTCH PPS final rule (77 FR 53367 
through 53368), the occupational mix adjustment to the FY 2013 wage 
index was based on data collected on the 2010 Medicare Wage Index 
Occupational Mix Survey (Form CMS-10079 (2010)). For the FY 2014 wage 
index, as we proposed, we are again using occupational mix data 
collected on the 2010 survey to compute the occupational mix adjustment 
for FY 2014. We are including data for 3,201 hospitals that also have 
wage data included in the FY 2014 wage index.
2. New 2013 Occupational Mix Survey for the FY 2016 Wage Index
    As stated earlier, section 304(c) of Public Law 106-554 amended 
section 1886(d)(3)(E) of the Act to require CMS to collect data every 3 
years on the occupational mix of employees for each short-term, acute 
care hospital participating in the Medicare program. We used 
occupational mix data collected on the 2010 survey to compute the 
occupational mix adjustment for FY 2013 and the FY 2014 wage index 
associated with this final rule. We also plan to use the 2010 survey 
data for the FY 2015 wage index. Therefore, a new measurement of 
occupational mix will be required for FY 2016.
    On December 7, 2012, we published in the Federal Register a notice 
soliciting comments on the proposed 2013 Medicare Wage Index 
Occupational Mix Survey (77 FR 73032 through 73033). The new 2013 
survey, which will be applied to the FY 2016 wage index, includes the 
same data elements and definitions as the 2010 survey and provides for 
the collection of hospital-specific wages and hours data for nursing 
employees for calendar year 2013 (that is, payroll periods ending 
between January 1, 2013 and December 31, 2013). The comment period for 
the notice ended on February 5, 2013. After considering the public 
comments that we received on the December 2012 notice, we made a few 
minor editorial changes and published the 2013 survey in the Federal 
Register on February 28, 2013 (78 FR 13679). This survey was approved 
by OMB on May 14, 2013, and is available on the CMS Web site at: http://www.cms.hhs.gov/PaperworkReductionActof1995 by clicking on ``PRA 
Listings.'' (The OMB control number for this collection of information 
is 0938-0907.) Hospitals are required to submit their completed 2013 
surveys to their fiscal intermediaries/MACs by July 1, 2014. The 
preliminary, unaudited 2013 survey data will be released afterward, 
along with the FY 2012 Worksheet S-3 wage data, for the FY 2016 wage 
index review and correction process. The 2013 Occupational Mix Survey 
Hospital Form and Instructions and Definitions are available on the CMS 
Web site at: http://cms.gov/Medicare/Medicare-Fee-for-Service-Payment/AcuteInpatientPPS/Wage-Index-Files-Items/Medicare-Wage-Index-Occupational-Mix-Survey2013.html.
3. Calculation of the Occupational Mix Adjustment for FY 2014
    For FY 2014, we calculated the occupational mix adjustment factor 
using the same methodology that we used for the FY 2012 and FY 2013 
wage indices (76 FR 51582 through 51586, and 77 FR 53367 through 53368, 
respectively). As a result of applying this methodology, the FY 2014 
occupational mix adjusted national average hourly wage is $38.3698. The 
FY 2014 occupational mix adjusted Puerto Rico-specific average hourly 
wage is $16.5319.
    Because the occupational mix adjustment is required by statute, all 
hospitals that are subject to payments under the IPPS, or any hospital 
that would be subject to the IPPS if not granted a waiver, must 
complete the occupational mix survey, unless the hospital has no 
associated cost report wage data that are included in the FY 2014 wage 
index. For the FY 2010 survey, the response rate was 91.7 percent. In 
the FY 2014 wage index established in this final 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 rule and final rule (75 FR 
23943 and 75 FR 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 2010 occupational mix 
survey. We instructed fiscal intermediaries/MACs to continue gathering 
this information as part of the FY 2014 wage index desk review process. 
We will review these data for future analysis and consideration of 
potential penalties for noncompliant hospitals.

[[Page 50589]]

G. Analysis and Implementation of the Occupational Mix Adjustment and 
the FY 2014 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 2014, we 
apply the occupational mix adjustment to 100 percent of the FY 2014 
wage index. We calculated the final 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 2014 wage index 
results in a national average hourly wage of $38.3698 and a Puerto-Rico 
specific average hourly wage of $16.5319. After excluding data of 
hospitals that either submitted aberrant data that failed critical 
edits, or that do not have FY 2010 Worksheet S-3, Parts II and III, 
cost report data for use in calculating the FY 2014 wage index, we 
calculated the FY 2014 wage index using the occupational mix survey 
data from 3,201 hospitals. Using the Worksheet S-3, Parts II and III, 
cost report data of 3,440 hospitals and occupational mix survey data 
from 3,201 hospitals represents a 93.1 percent survey response rate. 
The FY 2014 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.............................................    37.430602011
National LPN and Surgical Technician....................    21.771626577
National Nurse Aide, Orderly, and Attendant.............    15.323325633
National Medical Assistant..............................      17.2056709
National Nurse Category.................................     31.80354668
------------------------------------------------------------------------

    The national average hourly wage for the entire nurse category as 
computed in Step 5 of the occupational mix calculation is $31.80354668. 
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 43.45 
percent, and the national percentage of hospital employees in the all 
other occupations category is 56.55 percent. At the CBSA level, the 
percentage of hospital employees in the nurse category ranged from a 
low of 21.9 percent in one CBSA, to a high of 62.0 percent in another 
CBSA.
    We compared the FY 2014 occupational mix adjusted wage indices for 
each CBSA to the unadjusted wage indices for each CBSA. As a result of 
applying the occupational mix adjustment to the wage data, the wage 
index values for 205 (52.4 percent) urban areas and 32 (66.7 percent) 
rural areas will increase. One hundred and twenty (30.7 percent) urban 
areas will increase by 1 percent or more, and 4 (1.02 percent) urban 
areas will increase by 5 percent or more. Thirteen (27.1 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 182 
(46.5 percent) urban areas and 16 (33.3 percent) rural areas will 
decrease. Eighty (20.5 percent) urban areas will decrease by 1 percent 
or more, and 1 urban area will decrease by 5 percent or more (0.26 
percent). Seven (14.6 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 are 6.61 percent for an urban area and 2.64 
percent for a rural area. The largest negative impacts are 5.28 percent 
for an urban area and 3.17 percent for a rural area. Four urban areas' 
wage indices, but no rural area wage indices, will remain unchanged by 
application of the occupational mix adjustment. These results indicate 
that a larger percentage of rural areas (66.7 percent) will benefit 
from the occupational mix adjustment than will urban areas (52.4 
percent). However, approximately one-third (33.3 percent) of rural 
CBSAs will 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(a) 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 2014 IPPS/LTCH PPS proposed rule (78 FR 27556), we estimated 
that 434 hospitals would receive an increase in their FY 2014 proposed 
wage index due to the application of the rural floor. Based on the 
final FY 2014 wage indices associated with this final rule and 
available on the CMS Web site, 424 hospitals are receiving an increase 
in their FY 2014 wage index due to the application of the rural floor. 
We received some comments concerning the application of the rural floor 
and additional tables. We respond to these public comments in Appendix 
A of this final rule.
b. Imputed Floor
    In the FY 2005 IPPS final rule (69 FR 49109 through 49111), 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, 
the last of which was adopted in the FY 2013 IPPS/LTCH PPS final rule 
and is set to expire on September 30, 2013 (we refer readers to the 
discussion in the FY 2013 IPPS/LTCH PPS final rule (77 FR 53368 through 
53369) and to our regulations at 42 CFR 412.64(h)(4)). 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 the preamble of this final rule). However, as we 
explain below, the method as of FY 2012 for computing the imputed 
floor, which we will refer to as the original methodology, benefitted 
only New Jersey, and not Rhode Island.
    In computing the imputed floor for an all-urban State under the 
original methodology, we calculated 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 compared the State's own 
ratio to the average ratio for all-urban States and whichever is higher 
was

[[Page 50590]]

multiplied by the highest CBSA wage index value in the State--the 
product of which established 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 
was equal to its original CBSA wage index value. Conversely, New Jersey 
has 10 CBSAs. Because the average ratio of New Jersey and Rhode Island 
was higher than New Jersey's own ratio, the original methodology 
provided a benefit for New Jersey, but not for Rhode Island.
    In the FY 2013 IPPS/LTCH PPS final rule (77 FR 53368 through 
53369), for the FY 2013 wage index, the final year of the extension of 
the imputed floor policy under Sec.  412.64(h)(4), we did not make any 
changes to the original methodology and we finalized a proposed 
alternative, temporary methodology for computing the imputed floor wage 
index to address the concern that the then-current imputed floor 
methodology guaranteed a benefit for one all-urban State with multiple 
wage indices but could not benefit the other. The alternative 
methodology for calculating the imputed floor was established using 
data from the application of the rural floor policy for FY 2013. We 
first determined 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 the 
FY 2013 final rule, which is available on the CMS Web site, included 
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 established the State's alternative imputed floor. 
We refer to this methodology as the alternative methodology. We also 
adopted a policy that, for discharges on or after October 1, 2012, and 
before October 1, 2013, the minimum wage index value for the State is 
the higher of the value determined under the original methodology or 
the value computed using the alternative methodology. We amended Sec.  
412.64(h)(4) of the regulations to add new paragraph (vi) to 
incorporate the finalized alternative methodology policies, and to make 
conforming changes.
    We stated that we intended 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. In the FY 2014 IPPS/LTCH PPS 
proposed rule (78 FR 27556), we proposed to extend the imputed floor 
policy (both the original methodology and the alternative methodology) 
for one additional year, through September 30, 2014, while we continue 
to explore potential wage index reforms. We proposed to revise the 
regulations at Sec.  412.64(h)(4) to reflect the proposed 1-year 
extension. We invited public comments on this extension.
    Comment: Many of the commenters supported the CMS proposal, stating 
that it provides a remedy to the financial and competitive 
disadvantages suffered by hospitals in all-urban States, and that 
preserving the current imputed floor policy is the sound course of 
action as CMS continues to explore potential wage index reforms. One 
commenter who supported the proposal advised CMS that the American 
Hospital Association's (AHA's) Medicare Area Wage Index Task Force has 
issued draft recommendations (including the imputed floor policy) and 
has requested comments from hospitals prior to finalizing the report. 
The commenter suggested that the industry have a chance to provide 
input to CMS prior to finalizing any decisions regarding the imputed 
floor policy. The commenter also suggested that, if CMS decides to 
finalize a policy that would result in the expiration of the imputed 
floor, CMS afford hospitals a multiyear phase out in order to offset 
their lost revenue.
    One commenter objected to the proposal and stated that it did not 
support the policy behind the imputed floor. The commenter stated that 
it agreed with the rationale that CMS previously provided in the FY 
2012 IPPS/LTCH PPS proposed rule (76 FR 25878 and 25879) for not 
proposing to extend the imputed floor policy, and urged CMS to let the 
policy expire. Another commenter opposed the proposal, stating that it 
supported CMS' position in the FY 2008 IPPS proposed rule (72 FR 24786) 
that the imputed floor policy should apply only when required by 
statute.
    Response: We appreciate the commenters' support. For those 
commenters who objected to the proposed policy and made further 
recommendations, we will further consider these comments while we 
continue to explore potential wage index reforms. In response to the 
commenter who advised that the AHA's Medicare Area Wage Index Task 
Force has requested comments from hospitals prior to finalizing its 
report and also suggested that the industry have a change to provide 
input to CMS prior to finalizing any decisions regarding the imputed 
floor policy, we are unclear on exactly what the commenter is 
requesting. We have allowed the industry to comment on the proposals 
regarding the imputed floor policy; specifically in the FY 2014 IPPS/
LTCH PPS proposed rule (78 FR 27556), we invited public comment on the 
proposed 1-year extension. With regard to the comment that requested 
that CMS afford hospitals a multiyear phase-out of the imputed floor 
policy, we did not propose to let the imputed floor policy expire for 
FY 2014. We will consider the commenter's suggestion in future 
rulemaking.
    After consideration of the public comments we received, in this 
final rule, as we proposed, we are providing an extension of the 
imputed floor policy (both the original methodology and the alternative 
methodology) for one additional year, through September 30, 2014, while 
we continue to explore potential wage index reform. We also are 
adopting as final the proposed conforming changes at Sec.  412.64(h)(4) 
to reflect the 1-year extension.
    The wage index and impact tables associated with this final 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 rural floor (which includes the imputed 
floor). There are 25 hospitals in New Jersey that will receive an 
increase in their FY 2014 wage index due to the imputed floor 
calculated under the original methodology. The wage index and impact 
tables for this final rule also reflect the application of the 
alternative methodology for computing the imputed floor, which will 
benefit 4 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 regulations at 42 CFR 412.64(m) and to a discussion of 
the implementation of this provision in the FY 2011 IPPS/LTCH PPS final 
rule (75 FR 50160 through 50161)). Forty-six hospitals are receiving 
the frontier floor value of 1.0000 for their FY 2014 wage index. These 
hospitals are located in Montana, North Dakota, South Dakota, and 
Wyoming. Although Nevada is also defined as a frontier State, its FY 
2014 rural floor value of 1.1454 was greater than 1.0000, and 
therefore, no Nevada hospitals will receive a frontier floor value for 
their FY 2014 wage index. We

[[Page 50591]]

did not receive any public comments concerning the frontier floor.
    The areas affected by the rural, imputed, and frontier floor 
policies for the FY 2014 wage index are identified in Table 4D 
associated with this final rule, which is available on the CMS Web 
site.
3. FY 2014 Wage Index Tables
    The wage index values for FY 2014 (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 occupational mix adjustment, geographic reclassification or 
redesignation as discussed in section III.H. of the preamble of this 
final rule, and the application of the rural, imputed, and frontier 
State floors as discussed in section III.G.2. of the preamble of this 
final rule.
    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 2008, 2009, and 2010 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 2008 and FY 2009 cost reporting 
periods, as well as the FY 2010 period used to calculate the FY 2014 
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 in Step 5 in section III.G. of the preamble of this final 
rule) 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 average hourly wages in Tables 2, 3A, and 3B, which are 
available on the CMS Web site, include the occupational mix adjustment. 
The wage index values in Tables 4A, 4B, 4C, and 4D also include the 
national rural floor budget neutrality adjustment (which includes the 
imputed floor). The wage index values in Table 2 also include the out-
migration 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 not later than 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 in the FY 2002 IPPS final rule (66 FR 39874 and 39875) 
regarding how the MGCRB defines mileage for purposes of the proximity 
requirements.) The general policies for reclassifications and 
redesignations that we are adopting for FY 2014, 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 in accordance with the provisions of 42 CFR 412.103.
    Comment: One commenter noted that CMS did not propose any 
amendments to Sec.  412.103, but requested that CMS retract the 
statement that hospitals that are geographically located in States 
without any rural areas are ineligible to apply for rural 
reclassification pursuant to 42 CFR 412.103; the commenter believed 
that this statement is a change in policy. The commenter believed that 
the statute and regulations permit a hospital in an all-urban State to 
be treated as if it were located in a rural area, and that no actual 
rural area in the State is necessary for such reclassification.
    Response: We disagree with commenter's request, and maintain our 
position that hospitals that are geographically located in States 
without any rural areas are ineligible for Sec.  412.103 
reclassification. This is consistent with the statute and CMS' 
longstanding policy, and we did not propose any changes to this policy.
    Comment: One commenter questioned the reclassification process 
concerning urban hospitals that redesignate from urban status to rural 
status under Sec.  412.103, then cancel their rural status and 
subsequently seek reclassification to another urban area through the 
MGCRB. The commenter also had questions concerning the process of MGCRB 
reclassification in the case of hospitals that currently have acquired 
rural status under Sec.  412.103.
    Response: We thank the commenter for the comments. We did not make 
any proposals to change any of the reclassification processes or 
criteria. The processes for Sec.  412.103 urban to rural redesignation 
and MGCRB reclassification are specified in 42 CFR 412.103 and 412.230 
et. seq. The regulations in the sections above clearly define the 
process and describe the criteria and conditions for these 
reclassifications. We refer the commenter to the regulations for 
complete details on wage index reclassifications.
2. FY 2014 MGCRB Reclassifications
a. FY 2014 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 final rule was constructed, the MGCRB had 
completed its review of FY 2014 reclassification requests. Based on 
such reviews, there were 296 hospitals approved for wage index 
reclassifications by the MGCRB for FY 2014. Because MGCRB wage index 
reclassifications are effective for 3 years, for FY 2014, hospitals 
reclassified during FY 2012 or FY 2013 are eligible to continue to be 
reclassified to a particular labor market area based on such prior 
reclassifications. There were 214 hospitals approved for wage index 
reclassifications in FY 2012, and 196 hospitals approved for wage index 
reclassifications in FY 2013. Of all the hospitals approved for 
reclassification for FY 2012, FY 2013, and FY 2014, based upon the 
review at the time of this final rule, 679 hospitals are in a 
reclassification status for FY 2014.
    Under the regulations at 42 CFR 412.273, hospitals that have been

[[Page 50592]]

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 through 39888) and the FY 2003 IPPS final rule (67 FR 
50065 through 50066). 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 2014 are incorporated 
into the wage index values published in this FY 2014 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 2015
    Applications for FY 2015 reclassifications are due to the MGCRB by 
September 3, 2013 (the first working day of September 2013). We note 
that this is also the deadline for canceling a previous wage index 
reclassification withdrawal or termination under 42 CFR 412.273(d). As 
mentioned in section III.B. of the preamble of this final rule, 
although OMB issued revisions on February 28, 2013 to its area 
delineations, we did not propose to adopt those revisions for the FY 
2014 wage index, and we will not be adopting the revisions before the 
September 3, 2013 deadline for applications for the FY 2015 wage index. 
Therefore, hospitals must apply for reclassifications based on the 
delineations we are using for FY 2014. Applications and other 
information about MGCRB reclassifications may be obtained via the 
Internet on the CMS Web site at: http://www.cms.gov/Regulations-and-Guidance/Review-Boards/MGCRB/index.html, 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. 
(We note that, as mentioned in section III.B. of the preamble of this 
final rule, although OMB issued revisions on February 28, 2013, to its 
area delineations based on 2010 census data, we did not propose to 
adopt these revisions for the FY 2014 wage index.) Hospitals located in 
these counties have been known as ``Lugar'' hospitals and the counties 
themselves are often referred to as ``Lugar'' counties. The FY 2014 
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. Hospitals Redesignated under Section 1886(d)(8)(B) of the Act 
Seeking Reclassification by the MGCRB
    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. Using Table 4C associated with the proposed rule (which is 
available via the Internet on the CMS Web site), affected hospitals 
were permitted to compare the reclassified wage index for the labor 
market area into which they would be reclassified by the MGCRB to the 
reclassified wage index for the area to which they are redesignated 
under section 1886(d)(8)(B) of the Act. Hospitals could have withdrawn 
from an MGCRB reclassification within 45 days of the publication of the 
FY 2014 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 the FY 2008 IPPS final rule with 
comment period (72 FR 47337 through 47338) for a discussion of this 
policy.)
5. 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 V.E. of the preamble of this final rule.)
    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 \11\) 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.
---------------------------------------------------------------------------

    \11\ 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.

[[Page 50593]]

I. FY 2014 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. For FY 2014, we are adopting the out-migration 
adjustment 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) 
of the Act to have waived the out-migration adjustment, in the FY 2012 
IPPS/LTCH PPS final rule (76 FR 51601 through 51602).) Table 4J, which 
is available via the Internet on the CMS Web site, lists the out-
migration adjustments for the FY 2014 wage index.
    We did not receive any public comments with regard to the out-
migration adjustment for FY 2014.

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 2014 wage index were made 
available on October 3, 2012, through the Internet on the CMS Web site 
at: http://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/AcuteInpatientPPS/Wage-Index-Files-Items/FY_2014_Wage_Index_Home_Page.html.
    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.gov/Outreach-and-Education/Outreach/OpenDoorForums/index.html.
    In a memorandum dated October 19, 2012, 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 3, 2012 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 10, 2012. (We 
note that this date was originally December 3, 2012. However, in a 
memorandum dated October 25, 2012, we instructed all fiscal 
intermediaries/MACs to inform the IPPS hospitals they service that we 
extended the deadline to December 10, 2012.) Hospitals were notified of 
this deadline and of all other deadlines and requirements, including 
the requirement to review and verify their data as posted in the 
preliminary wage index data files on the Internet, through the October 
19, 2012 memorandum referenced above.
    In the October 19, 2012 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 
documentation to its fiscal intermediary/MAC no later than December 10, 
2012.
    The fiscal intermediaries/MACs notified the hospitals by mid-
February 2013 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 2013. CMS published the proposed 
wage index public use files that included hospitals' revised wage index 
data on February 21, 2013. Hospitals had until March 4, 2013, 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 to CMS any additional 
revisions resulting from the hospitals' reconsideration requests by 
April 10, 2013. The deadline for a hospital to request CMS intervention 
in cases where the hospital disagreed with the fiscal intermediary's 
(or, if applicable, the MAC's) policy interpretations was April 17, 
2013.
    Hospitals were given the opportunity to examine Table 2, which was 
listed in section VI. of the Addendum to the proposed rule and 
available via the Internet on the CMS Web site at: http://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/AcuteInpatientPPS/Wage-Index-Files-Items/FY_2014_Wage_Index_Home_Page.html. Table 2 contained 
each hospital's adjusted average hourly wage used to construct the wage 
index values for the past 3 years, including the FY 2010 data used to 
construct the proposed FY 2014 wage index. We noted that the hospital 
average hourly wages shown in Table 2 only reflected changes made to a 
hospital's data that were transmitted to CMS by March 4, 2013.
    We released the final wage index data public use files in early May 
2013 on the Internet at: http://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/AcuteInpatientPPS/Wage-Index-Files-Items/FY_2014_Wage_Index_Home_Page.html. The May 2013 public use files were made 
available solely for the limited purpose of identifying any potential 
errors made by CMS or the fiscal intermediary/MAC in the entry of the 
final wage index data that resulted from the correction process 
described above (revisions submitted to CMS by the fiscal 
intermediaries/MACs by April 10, 2013). If, after reviewing the May 
2013 final public use files, a hospital believed that its wage or 
occupational mix data were incorrect due to a fiscal intermediary/MAC 
or CMS error in the entry or tabulation of the final data, the hospital 
was required to send a letter to both its fiscal intermediary/MAC and 
CMS that outlined why the hospital believed an error existed and 
provide all supporting information, including relevant dates (for 
example, when it first became aware of the error). The hospital was 
required to send the letter to CMS and its fiscal

[[Page 50594]]

intermediaries/MACs no later than June 3, 2013.
    After the release of the May 2013 wage index data files, changes to 
the wage and occupational mix data were only 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 approved the following types of requests:
     Requests for wage index data corrections that were 
submitted too late to be included in the data transmitted to CMS by 
fiscal intermediaries or the MACs on or before April 10, 2013.
     Requests for correction of errors that were not, but could 
have been, identified during the hospital's review of the February 21, 
2013 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 3, 2013) 
were incorporated into the final wage index in this FY 2014 IPPS/LTCH 
PPS final rule, which will be effective October 1, 2013.
    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 2014 payment rates. Accordingly, 
hospitals that did not meet the procedural deadlines set forth above 
will not be afforded a later opportunity to submit wage index data 
corrections or to dispute the fiscal intermediary's (or, if applicable, 
the MAC's) decision with respect to requested changes. Specifically, 
our policy is that hospitals that do not meet the procedural deadlines 
set forth above will not be permitted to challenge later, before the 
Provider Reimbursement Review Board, the failure of CMS to make a 
requested data revision. 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 2013, 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 2014 wage index by August 2013, and the 
implementation of the FY 2014 wage index on October 1, 2013. 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 3, 2013, 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 deadline for making corrections to 
the wage data for the following fiscal year's wage index (for example, 
June 3, 2013 for the FY 2014 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 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 through 47387 and 
47485), 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 CMS determines all of the following: 
(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 3, 
2013 deadline for the FY 2014 wage index); and (3) CMS agreed before 
October 1 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 3, 2013 deadline for the FY 2014 wage index), 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 situations where our policies would allow midyear corrections 
other than those specified in 42 CFR 412.64(k)(2)(ii), 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 final judicial decision reverses a CMS denial 
of a hospital's wage index data revision request.

K. Labor-Related Share for the FY 2014 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

[[Page 50595]]

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 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 ``would result 
in lower payments to a hospital than would otherwise be made.'' 
However, these provisions 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 results in a higher payment.
    Comment: Several commenters stated that CMS has not kept pace by 
adjusting the labor-related share of the standard rate to which the 
wage index is applied. The commenters explained that CMS has provided 
incentives for hospitals to reduce costs through a declining wage index 
while hospitals have responded and made strides in labor efficiency. 
The commenters recommended that CMS adjust the labor-related share of 
the standard rate to 42 percent from the current 62 percent for 
hospitals with a wage index of less than 1.0. The commenters believed 
that a 42-percent labor component is more reflective of hospitals 
seeking cost efficiencies in wages.
    Response: As stated above, 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. Therefore, any changes to the application of the 62 percent 
labor-related share would require a change to current law by Congress.
    In the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43850 
through 43857), we rebased and revised the IPPS market basket and the 
labor-related share, using FY 2006 as the base year. The labor-related 
share for FY 2010 through FY 2013 is 68.8 percent.
    For FY 2014, as proposed in the FY 2014 IPPS/LTCH PPS proposed rule 
(78 FR 27561 through 27572), and as described in section IV. of the 
preamble of this final rule, we are rebasing and revising the IPPS 
market basket using FY 2010 as the base year. Using the FY 2010-based 
IPPS market basket, we also recalculated the labor-related share and 
are finalizing a labor-related share of 69.6 percent for discharges 
occurring on or after October 1, 2013, as discussed in section IV.B.4. 
of the preamble of this final rule. As discussed in Appendix A of this 
final rule, we are implementing this revised and rebased labor-related 
share in a budget neutral manner. However, consistent with section 
1886(d)(3)(E) of the Act, we are not taking 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. For FY 2014, as proposed in the FY 2014 IPPS/LTCH PPS proposed 
rule (78 FR 27561 through 27572) and as described in section IV. of the 
preamble of this final rule, we are including in the labor-related 
share the national average proportion of operating costs that are 
attributable to wages and salaries, employee benefits, contract labor, 
the labor-related portion of professional fees, administrative and 
facilities support services, and all other labor-related services as 
measured in the FY 2010-based IPPS market basket.
    Therefore, for FY 2014, as discussed in section IV.B.4. of the 
preamble of this final rule, we are finalizing our proposals without 
modification and adopting a labor-related share of 69.6 percent for 
discharges occurring on or after October 1, 2013. Tables 1A and 1B, 
which are published in section VI. of the Addendum to this final rule 
and are available via the Internet, reflect this labor-related share. 
For FY 2014, for all IPPS hospitals whose wage indices are less than 
1.0000, we are applying 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, for FY 2014, we are 
applying the wage index to a labor-related share of 69.6 percent of the 
national standardized amount. We note that, for Puerto Rico hospitals, 
the national labor-related share is 62 percent because the national 
wage index for all Puerto Rico hospitals is less than 1.0.
    In the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43850 
through 43856), we also rebased and revised the labor-related share for 
the Puerto Rico-specific standardized amounts using FY 2006 as a base 
year. We finalized a labor-related share for the Puerto Rico-specific 
standardized amounts for FY 2010 through FY 2013 of 62.1 percent. As 
proposed in the FY 2014 IPPS/LTCH PPS proposed rule (78 FR 27566 
through 27568) and as described in section IV.B.4. of the preamble of 
this final rule, for FY 2014, we also are rebasing and revising the 
labor-related share for the Puerto Rico-specific standardized amounts 
using FY 2010 as a base year. In the FY 2014 IPPS/LTCH PPS proposed 
rule (78 FR 27566 through 27568), we proposed a labor-related share for 
the Puerto Rico-specific standardized amounts of 63.2 percent for 
discharges occurring on or after October 1, 2013. For FY 2014, we are 
finalizing our proposal and adopting a labor-related share for the 
Puerto Rico-specific standardized amounts of 63.2 percent for 
discharges occurring on or after October 1, 2013, as discussed in 
section IV.B.4. of the preamble of this final rule. Consistent with our 
methodology for determining the national labor-related share, we added 
the Puerto Rico-specific relative weights for wages and salaries, 
employee benefits, and contract labor, with the national proportion of 
costs for the labor-related portion of professional fees, 
administrative and facilities support services, and all other labor-
related services to determine the labor-related share. Puerto Rico 
hospitals are paid based on 75 percent of the national standardized 
amounts and 25 percent of the Puerto Rico-specific standardized 
amounts. For FY 2014, we are adopting that the labor-related share of a 
hospital's Puerto Rico-specific rate will be either the Puerto Rico-
specific labor-related share of 63.2 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 for FY 2014, 
we will set the hospital's rates using a labor-related share of 63.2 
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 for FY 2014 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 63.2 percent 
for FY 2014 is reflected in Table 1C, which is published in section VI. 
of the Addendum to this final rule and available via the Internet.
    Comment: Several commenters supported the proposed increase in the

[[Page 50596]]

labor-related share. We did not receive any public comments on the 
proposed Puerto Rico labor-related share.
    Response: We appreciate the commenters' support.
    As discussed in section IV.B.4. of the preamble of this final rule, 
we are finalizing the labor-related share of 69.6 percent as proposed 
for all IPPS hospitals whose wage indices are greater than 1.0000. We 
also are finalizing the Puerto Rico labor-related share of the labor-
related share of 63.2 percent as proposed. Further discussion of the FY 
2014 labor-related share for the national standardized amount and the 
Puerto Rico-specific standardized amount can be found in section 
IV.B.4. of the preamble of this final rule.

IV. Rebasing and Revision of the Hospital Market Baskets for Acute Care 
Hospitals

A. Background

    Effective for cost reporting periods beginning on or after July 1, 
1979, we developed and adopted a hospital input price index (that is, 
the hospital market basket for operating costs). Although ``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 document refers to the hospital input 
price index.
    The percentage change in the market basket reflects the average 
change in the price of goods and services hospitals purchase in order 
to provide inpatient care. We first used the market basket to adjust 
hospital cost limits by an amount that reflected the average increase 
in the prices of the goods and services used to provide hospital 
inpatient care. This approach linked the increase in the cost limits to 
the efficient utilization of resources.
    Since the inception of the IPPS, the projected change in the 
hospital market basket has been the integral component of the update 
factor by which the prospective payment rates are updated every year. 
An explanation of the hospital market basket used to develop the 
prospective payment rates was published in the Federal Register on 
September 1, 1983 (48 FR 39764). We also refer readers to the FY 2010 
IPPS/RY 2010 LTCH PPS final rule (74 FR 43843) in which we discussed 
the most recent previous rebasing of the hospital input price index.
    The hospital market basket is a fixed-weight, Laspeyres-type price 
index. A Laspeyres-type 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 of goods and services (that 
is, intensity) purchased over time are not measured.
    The index itself is constructed in three steps. First, a base 
period is selected (as we proposed, in this final rule, we are using FY 
2010 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 index 
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 provide 
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 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.
    We last rebased the hospital market basket cost weights effective 
for FY 2010 (74 FR 43843), with FY 2006 data used as the base period 
for the construction of the market basket cost weights. In the FY 2014 
IPPS/LTCH PPS proposed rule (78 FR 27561 through 27572), we proposed to 
rebase the cost structure for the IPPS hospital index from FY 2006 to 
FY 2010, as discussed below.

B. Rebasing and Revising the IPPS Market Basket

    The terms ``rebasing'' and ``revising,'' while often used 
interchangeably, actually denote different activities. ``Rebasing'' 
means moving the base year for the structure of costs of an input price 
index (for example, in this final rule, we are shifting the base year 
cost structure for the IPPS hospital index from FY 2006 to FY 2010). 
``Revising'' means changing data sources, or price proxies, used in the 
input price index. As published in the FY 2006 IPPS final rule (70 FR 
47387), in accordance with section 404 of Public Law 108-173, CMS 
determined a new frequency for rebasing the hospital market basket. We 
established a rebasing frequency of every 4 years and, therefore, for 
the FY 2014 IPPS update, as we proposed, we are rebasing and revising 
the IPPS market basket from FY 2006 to FY 2010. We invited public 
comments on our proposed methodology. A summary of the public comments 
we received and our responses are included under the appropriate 
subject area.
1. Development of Cost Categories and Weights
a. Medicare Cost Reports
    The major source of expenditure data for developing the rebased and 
revised hospital market basket cost weights is the FY 2010 Medicare 
cost reports. These FY 2010 Medicare cost reports are for cost 
reporting periods beginning on and after October 1, 2009 and before 
October 1, 2010. In the FY 2014 IPPS/LTCH PPS proposed rule (78 FR 
27562), we proposed to use FY 2010 as the base year because we believe 
that the FY 2010 Medicare cost reports represent the most recent, 
complete set of Medicare cost report data available for IPPS hospitals. 
As was done in previous rebasings, these cost reports are from IPPS 
hospitals only (hospitals excluded from the IPPS and CAHs are not 
included) and are based on IPPS Medicare-allowable operating costs. 
IPPS Medicare-allowable operating costs are costs that are eligible to 
be paid for under the IPPS. For example, the IPPS market basket 
excludes home health agency (HHA) costs as these costs would

[[Page 50597]]

be paid under the HHA PPS and, therefore, these costs are not IPPS 
Medicare-allowable costs.
    We proposed to obtain seven major expenditures or cost categories 
for the FY 2010 IPPS market basket from the Medicare cost reports--the 
same as in the FY 2006-based hospital market basket: Wages and 
salaries, employee benefits, contract labor, pharmaceuticals, 
professional liability insurance (malpractice), blood and blood 
products, and a residual ``all other.'' The proposed cost weights that 
were obtained directly from the Medicare cost reports were reported in 
Table IV01 of the proposed rule. We proposed to then supplement these 
Medicare cost report cost weights with information obtained from other 
data sources to derive the proposed IPPS market basket cost weights.
    Comment: One commenter supported the proposal to move to an FY 
2010-based market basket.
    Response: We appreciate the commenter's support. In this final 
rule, we are finalizing our calculation of the FY 2010-based IPPS cost 
weights using the Medicare cost reports as proposed and describe our 
methods in more detail below.
    Table IV01 below shows the major cost categories and their 
respective cost weights as calculated directly from the Medicare Cost 
Reports for this final rule.

 Table IV01--Major Cost Categories and Their Respective Cost Weights as
           Calculated Directly From the Medicare Cost Reports
------------------------------------------------------------------------
                                                           Proposed and
                                           FY 2006-based  final FY 2010-
          Major cost categories            market basket   based market
                                                              basket
------------------------------------------------------------------------
Wages and salaries......................          45.156          45.819
Employee benefits.......................          11.873          12.713
Contract labor..........................           2.598           1.806
Professional Liability Insurance                   1.661           1.330
 (Malpractice)..........................
Pharmaceuticals.........................           5.380           5.402
Blood and blood products................           1.078           1.069
All other...............................          32.254          31.861
------------------------------------------------------------------------

    From FY 2006 to FY 2010, the wages and salaries and employee 
benefits cost weights as calculated directly from the Medicare cost 
reports increased by approximately 0.7 and 0.8 percentage point, 
respectively, while the contract labor cost weight decreased by 0.8 
percentage point. As we did for the FY 2006-based IPPS market basket 
(74 FR 43847), we proposed to allocate contract labor costs to the 
wages and salaries and employee benefits cost weights based on their 
relative proportions for employed labor under the assumption that 
contract labor costs are comprised of both wages and salaries and 
employee benefits. The contract labor allocation proportion for wages 
and salaries is equal to the wages and salaries cost weight as a 
percent of the sum of the wages and salaries cost weight and the 
employee benefits cost weight. Using the FY 2010 Medicare cost report 
data, this percentage is 78.3 percent; therefore, we proposed to 
allocate approximately 78.3 percent of the contract labor cost weight 
to the wages and salaries cost weight. Table IV02 in the proposed rule 
showed the wages and salaries and employee benefit cost weights after 
contract labor allocation for both the FY 2006-based IPPS market basket 
and the proposed FY 2010-based IPPS market basket.
    We did not receive any specific public comment regarding the 
allocation of contract labor cost weight to the wages and salaries and 
employee benefits cost weights. In this final rule, we are finalizing 
our methodology of allocating the contract labor cost weight as we 
proposed. Table IV02 below shows the wages and salaries and employee 
benefit cost weights after contract labor allocation for the FY 2006-
based IPPS market basket and the proposed and final FY 2010-based IPPS 
market basket.

 Table IV02--Wages and Salaries and Employee Benefits Cost Weights After
                        Contract Labor Allocation
------------------------------------------------------------------------
                                                           Proposed and
                                           FY 2006-based  final FY 2010-
          Major cost categories            market basket   based market
                                                              basket
------------------------------------------------------------------------
Wages and salaries......................          47.213          47.233
Employee benefits.......................          12.414          13.105
------------------------------------------------------------------------

    After the allocation of contract labor, the final FY 2010-based 
wages and salaries cost weight is relatively similar to the FY 2006-
based wages and salaries cost weight while the final FY 2010-based 
employee benefits cost weight increased 0.7 percentage point. This is 
primarily a result of an increase in benefits costs relative to wages 
and salaries costs from the Medicare cost report data for employed 
workers; in 2006, the ratio of the employee benefits cost weight to the 
wages and salaries cost weight was 26.3 percent, while in 2010 this 
ratio increased to 27.8 percent.
b. Other Data Sources
    In addition to the data from the Medicare cost reports, the other 
data source we proposed to use to develop the FY 2010-based IPPS 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 proposed to use the 2002 BEA Benchmark I-O data to 
disaggregate the ``all other'' (residual) cost category (31.861 
percent) into more detailed hospital expenditure category shares. 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

[[Page 50598]]

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. At the time of development of the FY 2014 IPPS/LTCH PPS 
proposed rule, the most recent data available were 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. In the FY 2010 IPPS/RY 2010 LTCH 
PPS final rule (74 FR 43845), we used the 2002 Benchmark I-O data (aged 
to FY 2006) for the FY 2006-based IPPS market basket, to be effective 
for FY 2010. Because BEA had not yet released new Benchmark I-O data at 
the time we prepared our analysis for the proposed rule, and we believe 
the data to be comprehensive and complete as indicated above, we 
proposed to use the 2002 Benchmark I-O data in the FY 2010-based IPPS 
market basket for the FY 2014 IPPS/LTCH PPS proposed rule.
    Therefore, instead of using the less detailed, less accurate Annual 
I-O data, we proposed to age the 2002 Benchmark I-O data forward to FY 
2010. The methodology we proposed to use 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. In the FY 2014 IPPS/LTCH PPS proposed rule (78 FR 27563), we 
proposed that, if more recent BEA benchmark I-O data for 2007 was 
released between the proposed and final rule with sufficient time to 
incorporate such data into the final rule, we would incorporate these 
data into the FY 2010-based IPPS market basket for the final rule. The 
2007 BEA I-O data was expected to be released in the summer of 2013. 
However, at the time we prepared our analysis for this final rule, BEA 
had not published the 2007 Benchmark I-O data. Therefore, we were 
unable to incorporate any revised I-O data in the final FY 2010-based 
IPPS market basket.
    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 IPPS market basket.
    Following publication of the FY 2010 IPPS/RY 2010 LTCH PPS proposed 
rule, and in an effort to provide greater transparency, we posted on 
the CMS market basket Web page at: http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/MedicareProgramRatesStats/MarketBasketResearch.html an illustrative 
spreadsheet that shows how the detailed cost weights in the proposed 
rule (that is, those not calculated using Medicare cost reports) were 
determined using the 2002 Benchmark I-O data.
2. Cost Category Computation
    As stated previously, for the proposed FY 2010-based market basket, 
we proposed to use data from the Medicare cost reports to derive seven 
major cost categories that were the same detailed cost categories as 
used in the FY 2006-based IPPS market basket. Also, we did not propose 
to change our definition of the labor-related share. As discussed in 
more detail below and similar to the previous rebasings, 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.
    Comment: One commenter supported the use of 2002 BEA data if it is 
not possible to move to 2007 data in the final rule. We did not receive 
any public comments on the specific methodology for calculating the 
final cost weights.
    Response: Since the 2007 BEA I-O data has not been published, we 
are unable to incorporate the data into the FY 2010-based IPPS market 
basket. We appreciate the commenter's support to use the 2002 BEA I-O 
data, given these data limitations.
    In this final rule, we are finalizing the use of the 2002 I-O data 
as we proposed in the FY 2014 proposed rule. We also are finalizing our 
calculation of the final cost category weights as we proposed.
3. Selection of Price Proxies
    After computing the FY 2010 cost weights for the IPPS market 
basket, it was necessary to select appropriate wage and price proxies 
to reflect the rate of price change for each expenditure category. We 
proposed to use the same price proxies that were used in the FY 2006-
based IPPS market basket. A discussion of our rationale for selecting 
these price proxies can be found in the FY 2010 IPPS/RY 2010 LTCH PPS 
final rule (74 FR 43845).
    With the exception of the proxy for professional liability 
insurance (PLI), all the proxies we proposed were 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 proposed 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 proposed 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 faced by a 
producer, we proposed 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 
was 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 stated in the proposed rule that we believed the 
proposed PPIs, CPIs, and ECIs selected meet these criteria.
    Table IV03 below sets forth the final FY 2010-based IPPS market 
basket, including the cost categories and their respective weights and 
price proxies. For comparison purposes, the corresponding FY 2006-based 
IPPS market basket cost weights also are listed. A summary outlining 
the choice of the various proxies follows the table.

[[Page 50599]]



 Table IV03--FY 2010-Based IPPS Hospital Market Basket Cost Categories, Cost Weights, and Price Proxies Compared
                                to FY 2006-Based IPPS Market Basket Cost Weights
----------------------------------------------------------------------------------------------------------------
                                              FY 2006-based   FY 2010-based
                                                hospital        hospital        FY 2010-based hospital market
              Cost categories                 market basket   market basket          basket price proxies
                                              cost weights    cost weights
----------------------------------------------------------------------------------------------------------------
1. Compensation............................          59.627          60.338  ...................................
    A. Wages and Salaries \1\..............          47.213          47.233  ECI for Wages and Salaries,
                                                                              Civilian Hospital Workers.
    B. Employee Benefits \1\...............          12.414          13.105  ECI for Benefits, Civilian Hospital
                                                                              Workers.
2. Utilities...............................           2.180           2.246  ...................................
    A. Fuel, Oil, and Gasoline.............           0.418           0.447  PPI for Petroleum Refineries.
    B. Electricity.........................           1.645           1.666  PPI for Commercial Electric Power.
    C. Water and Sewage....................           0.117           0.133  CPI-U for Water and Sewerage
                                                                              Maintenance.
3. Professional Liability Insurance........           1.661           1.330  CMS Professional Liability
                                                                              Insurance Premium Index.
4. All Other...............................          36.533          36.086  ...................................
    A. All Other Products..................          19.473          19.458  ...................................
    (1.) Pharmaceuticals...................           5.380           5.402  PPI for Pharmaceuticals for Human
                                                                              Use, Prescription.
    (2.) Food: Direct Purchases............           3.982           4.206  PPI for Processed Foods & Feeds.
    (3.) Food: Contract Services...........           0.575           0.578  CPI-U for Food Away From Home.
    (4.) Chemicals \2\.....................           1.538           1.529  Blend of Chemical PPIs.
    (5.) Blood and Blood Products..........           1.078           1.069  PPI for Blood and Organ Banks.
    (6.) Medical Instruments...............           2.762           2.577  PPI for Medical, Surgical, and
                                                                              Personal Aid Devices.
    (7.) Rubber and Plastics...............           1.659           1.637  PPI for Rubber & Plastic Products.
    (8.) Paper and Printing Products.......           1.492           1.507  PPI for Converted Paper &
                                                                              Paperboard Products.
    (9.) Apparel...........................           0.325           0.299  PPI for Apparel.
    (10.) Machinery and Equipment..........           0.163           0.151  PPI for Machinery and Equipment.
    (11.) Miscellaneous Products...........           0.519           0.503  PPI for Finished Goods less Food
                                                                              and Energy.
    B. Labor-related Services..............           9.175           9.249  ...................................
    (1.) Professional Fees: Labor-related..           5.356           5.500  ECI for Compensation for
                                                                              Professional and Related
                                                                              Occupations.
    (2.) Administrative and Facilities                0.626           0.619  ECI for Compensation for Office and
     Support Services \3\.                                                    Administrative Services.
    (3.) All Other: Labor-Related Services.           3.193           3.130  ECI for Compensation for Private
                                                                              Service Occupations.
    C. Nonlabor-Related Services...........           7.885           7.379  ...................................
    (1.) Professional Fees: Nonlabor-                 4.074           3.687  ECI for Compensation for
     Related.                                                                 Professional and Related
                                                                              Occupations.
    (2.) Financial Services................           1.281           1.239  ECI for Compensation for Financial
                                                                              Activities.
    (3.) Telephone Services................           0.627           0.597  CPI-U for Telephone Services.
    (4.) Postage...........................           0.963           0.956  CPI-U for Postage.
    (5.) All Other: Nonlabor-Related                  0.940           0.900  CPI-U for All Items less Food and
     Services.                                                                Energy.
                                            --------------------------------
        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, see the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43845).
\3\ We note that this cost category in the FY 2006-based IPPS market basket was ``Administrative and Business
  Support Services.'' We changed the name slightly to be more clear what type of costs are included in this cost
  category, but we did not change the classification of which costs are included in the category.

    As stated above, we proposed to use the same price proxies used in 
the FY 2006-based IPPS market basket. A rationale for selecting these 
price proxies can be found in the FY 2010 IPPS/RY 2010 LTCH PPS final 
rule (74 FR 43845). The price proxies were selected to most closely 
match the costs included in each of the cost categories of the FY 2010-
based IPPS market basket. We did not receive any public comments on the 
price proxies we proposed to use in the FY 2010-based IPPS market 
basket. In this final rule, we are finalizing the use of the price 
proxies that we proposed. Below is a list of the price proxies we 
proposed, and are finalizing to use, for the FY 2010-based IPPS market 
basket.
a. Wages and Salaries
    We 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.
b. Employee Benefits
    We use the ECI for Employee Benefits for Hospital Workers (All 
Civilian) to measure the price growth of this cost category.
 c. Fuel, Oil, and Gasoline
    We use the PPI for Petroleum Refineries (BLS series code 
PCU324110324110) to measure the price growth of this cost category.
d. Electricity
    We use the PPI for Commercial Electric Power (BLS series code 
WPU0542) to measure the price growth of this cost category.
e. Water and Sewage
    We use the CPI for Water and Sewerage Maintenance (All Urban 
Consumers) (BLS series code

[[Page 50600]]

CUUR0000SEHG01) to measure the price growth of this cost category.
f. Professional Liability Insurance
    We proxy price changes in hospital professional liability insurance 
premiums (PLI) using percentage changes as estimated by the CMS 
Hospital Professional Liability Insurance Premium 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).
g. Pharmaceuticals
    We use the PPI for Pharmaceuticals for Human Use, Prescription (BLS 
series code WPUSI07003) to measure the price growth of this cost 
category. This is the same proxy that was used in the FY 2006-based 
IPPS market basket, although BLS since changed the naming convention 
for this series.
h. Food: Direct Purchases
    We use the PPI for Processed Foods and Feeds (BLS series code 
WPU02) to measure the price growth of this cost category.
i. Food: Contract Services
    We use the CPI for Food Away From Home (All Urban Consumers) (BLS 
series code CUUR0000SEFV) to measure the price growth of this cost 
category.
j. Chemicals
    We 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-).
k. Blood and Blood Products
    We use the PPI for Blood and Organ Banks (BLS series code 
PCU621991621991) to measure the price growth of this cost category.
l. Medical Instruments
    We use the PPI for Medical, Surgical, and Personal Aid Devices (BLS 
series code WPU156) to measure the price growth of this cost category.
m. Rubber and Plastics
    We use the PPI for Rubber and Plastic Products (BLS series code 
WPU07) to measure price growth of this cost category.
n. Paper and Printing Products
    We use the PPI for Converted Paper and Paperboard Products (BLS 
series code WPU0915) to measure the price growth of this cost category.
o. Apparel
    We use the PPI for Apparel (BLS series code WPU0381) to measure the 
price growth of this cost category.
p. Machinery and Equipment
    We use the PPI for Machinery and Equipment (BLS series code WPU11) 
to measure the price growth of this cost category.
q. Miscellaneous Products
    We use the PPI for Finished Goods Less Food and Energy (BLS series 
code WPUSOP3500) to measure the price growth of this cost category.
r. Professional Fees: Labor-Related and Professional Fees: Nonlabor-
Related
    We use the ECI for Compensation for Professional and Related 
Occupations (Private Industry) (BLS series code CIU2010000120000I) to 
measure the price growth of these cost categories.
s. Administrative and Facilities Support Services
    We 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.
t. All Other: Labor-Related Services
    We use the ECI for Compensation for Service Occupations (Private 
Industry) (BLS series code CIU2010000300000I) to measure the price 
growth of this cost category.
u. Financial Services
    We use the ECI for Compensation for Financial Activities (Private 
Industry) (BLS series code CIU201520A000000I) to measure the price 
growth of this cost category.
v. Telephone Services
    We use the CPI for Telephone Services (BLS series code 
CUUR0000SEED) to measure the price growth of this cost category.
w. Postage
    We use the CPI for Postage (BLS series code CUUR0000SEEC01) to 
measure the price growth of this cost category.
x. All Other: Nonlabor-Related Services
    We use the CPI for All Items Less Food and Energy (BLS series code 
CUUR0000SA0L1E) to measure the price growth of this cost category.
    Table IV04 in the proposed rule compared both the historical and 
forecasted percent changes in the FY 2006-based IPPS market basket and 
the proposed FY 2010 based IPPS market basket.
    Table IV04 below compares both the historical and forecasted 
percent changes in the FY 2006-based IPPS market basket and the final 
FY 2010-based IPPS market basket. As stated in the FY 2014 IPPS/LTCH 
PPS proposed rule (78 FR 27572), we are incorporating a more recent 
forecast of the market basket to determine the FY 2014 market basket 
updates and MFP adjustment in the final rule. Therefore, the forecasted 
growth rates in Table IV04 are based on IHS Global Insight, Inc.'s 
(IGI) most recent second quarter 2013 forecast with historical data 
through first quarter 2013. The proposed rule presented IGI's first 
quarter 2013 forecast with historical data through fourth quarter of 
2012.

Table IV04--FY 2006-Based and FY 2010-Based Prospective Payment Hospital
         Operating Index Percent Change, FY 2008 Through FY 2016
------------------------------------------------------------------------
                                          FY 2006- based  FY 2010- based
                                           IPPS  market    IPPS  market
                                              basket          basket
            Fiscal year (FY)                 operating       operating
                                           index percent   index percent
                                              change          change
------------------------------------------------------------------------
Historical data:
    FY 2008.............................             4.0             4.0
    FY 2009.............................             2.6             2.6
    FY 2010.............................             2.1             2.1

[[Page 50601]]

 
    FY 2011.............................             2.7             2.7
    FY 2012.............................             2.2             2.2
                                         -------------------------------
        Average FYs 2008-2012...........             2.7             2.7
Forecast:
    FY 2013.............................             2.2             2.1
    FY 2014.............................             2.5             2.5
    FY 2015.............................             2.7             2.7
    FY 2016.............................             3.0             3.0
                                         -------------------------------
        Average FYs 2013-2016...........             2.6             2.6
------------------------------------------------------------------------
Source: IHS Global Insight, Inc., 2nd Quarter 2013 forecast.

    There is no difference between the FY 2006-based and the FY 2010-
based IPPS market basket increases for 2008-2012. For FY 2014, the 
increase is 2.5 percent for both the FY 2006-based and FY 2010-based 
IPPS market baskets.
4. Labor-Related Share
    Under section 1886(d)(3)(E) of the Act, the Secretary estimates 
from time to time the proportion of payments 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 proportion of hospitals' costs that are 
attributable to wages and wage-related costs as the ``labor-related 
share.''
    The labor-related share is used to determine the proportion of the 
national PPS base payment rate to which the area wage index is applied. 
We include a cost category in the labor-related share if the costs are 
labor intensive and vary with the local labor market. Because of this 
approach, in the FY 2014 IPPS/LTCH PPS proposed rule (78 FR 27566), we 
proposed to include in the labor-related share the national average 
proportion of operating costs that are attributable to wages and 
salaries, employee benefits, contract labor, the labor-related portion 
of professional fees, administrative and facilities support services, 
and all other: Labor-related services, as we did in the FY 2010 IPPS/RY 
2010 LTCH PPS final rule (74 FR 43850). Consistent with previous 
rebasings, the ``all other: labor-related services'' cost category is 
mostly comprised of building maintenance and security services 
(including, but not limited to, commercial and industrial machinery and 
equipment repair, nonresidential maintenance and repair, and 
investigation and security services). Because these services tend to be 
labor-intensive and are mostly performed at the hospital facility (and, 
therefore, unlikely to be purchased in the national market), we believe 
that they meet our definition of labor-related services.
    Similar to the FY 2006-based IPPS market basket, we proposed that 
the professional fees: Labor-related cost category includes expenses 
associated with advertising and a proportion of legal services, 
accounting and auditing, engineering, management consulting, and 
management of companies and enterprises expenses. As was done in the FY 
2006-based IPPS market basket rebasing, we proposed to determine the 
proportion of legal, accounting and auditing, engineering, and 
management consulting services that meet our definition of labor-
related services based on a survey of hospitals conducted by CMS in 
2008. We notified the public of our intent to conduct this survey on 
December 9, 2005 (70 FR 73250) and received no comments (71 FR 8588).
    With approval from the OMB, we contacted the industry and received 
responses to our survey from 108 hospitals. Using data on FTEs to 
allocate responding hospitals across strata (region of the country and 
urban/rural status), we calculated poststratification weights. A more 
thorough discussion of the composition of the survey and 
poststratification can be found in the FY 2010 IPPS/RY 2010 LTCH PPS 
final rule (74 FR 43850 through 43856). Based on the weighted results 
of the survey, we determined that hospitals purchase, on average, the 
following portions of contracted professional services outside of their 
local labor market:
     34 percent of accounting and auditing services;
     30 percent of engineering services;
     33 percent of legal services; and
     42 percent of management consulting services.
    We proposed to apply each of these percentages to its respective 
Benchmark I-O cost category underlying the professional fees cost 
category. This is the methodology that we used to separate the FY 2006-
based IPPS market basket professional fees category into professional 
fees: Labor-related and professional fees: nonlabor-related cost 
categories. We proposed to use the same methodology and survey results 
to separate the FY 2010-based IPPS market basket professional fees 
category into professional fees: Labor-related and professional fees: 
nonlabor-related cost categories. We believe these survey results are 
appropriate to use for the FY 2010-based IPPS market basket rebasing as 
they empirically determine the proportion of contracted professional 
services purchased by the industry that is attributable to local firms 
and the proportion that is purchased from national firms.
    We did not receive any specific public comments on the use of the 
professional fees survey. Therefore, we are finalizing our methodology 
for allocating contracted professional services for FY 2014 as 
proposed. In the FY 2010-based IPPS market basket, nonmedical 
professional fees that were subject to allocation based on the survey 
results represent 2.059 percent of total costs (and are limited to 
those fees related to Accounting & Auditing, Legal, Engineering, and 
Management Consulting services). Based on our survey results, we are 
apportioning 1.301 percentage points of the 2.059 percentage point 
figure into the labor-

[[Page 50602]]

related share and designating the remaining 0.758 percentage point as 
nonlabor-related.
    In addition to the professional services listed above, we also 
classify a proportion of the expenses under NAICS 55, Management of 
Companies and Enterprises, into the professional fees: Labor-related 
cost category as was done in the previous rebasing. The NAICS 55 data 
are mostly comprised of corporate, subsidiary, and regional managing 
offices, or otherwise referred to as home offices. As was done for the 
FY 2006-based IPPS market basket and as we proposed for the FY 2010-
based IPPS market basket, for this final rule, we are including only a 
portion of the home office costs in the labor related share as not all 
hospitals are located in the same geographic area as their home office.
    We did not receive any specific public comments on our proposed 
methodology for allocating home office costs to the labor-related 
share. Therefore, we are finalizing this methodology as described in 
the proposed rule and provided below for FY 2014. Our methodology is 
based on data from the Medicare cost reports, as well as a CMS database 
of Home Office Medicare Records (HOMER) (a database that provides city 
and State information (addresses) for home offices). The Medicare cost 
report requires hospitals to report their home office provider numbers 
and locations. Using the data reported on the Medicare Cost Report as 
well as the HOMER database to determine the home office location for 
each home office provider number, we compared the location of the 
hospital with the location of the hospital's home office. We determined 
the proportion of costs that should be allocated to the labor-related 
share based on the percent of total hospital home office compensation 
costs for those hospitals that had home offices located in their 
respective local labor markets--defined as being in the same 
Metropolitan Statistical Area (MSA). We primarily determined a 
hospital's and home office's MSAs using their zip code information from 
the Medicare cost report. For any home offices for which we could not 
identify a MSA from the Medicare cost report, we used the Medicare 
HOMER database to identify the home office's city and State.
    As proposed, we determined the proportion of costs that should be 
allocated to the labor-related share based on the percent of hospital 
home office compensation as reported in Worksheet S-3, Part II. Using 
this methodology, we determined that 62 percent of hospitals' home 
office compensation costs were for home offices located in their 
respective local labor markets. Therefore, we are allocating 62 percent 
of NAICS 55 expenses to the labor-related share.
    In the FY 2010-based IPPS market basket, NAICS 55 expenses that 
were subject to allocation based on the home office allocation 
methodology represent 5.650 percent of the total operating costs. Based 
on the home office results, we are apportioning 3.503 percentage points 
of the 5.650 percentage points figure into the labor-related share and 
designating the remaining 2.147 percentage points as nonlabor-related. 
In sum, based on the two allocations mentioned above, we apportioned 
4.804 percentage points into the labor-related share. This amount is 
added to the 0.696 percentage point of professional fees that we 
already identified as labor-related, resulting in a professional fees: 
Labor-related cost weight of 5.500 percent.
    Below is a table comparing the FY 2010-based labor-related share 
and the FY 2006-based labor-related share. As discussed in section 
IV.B.3. of the preamble of this final rule, the wages and salaries and 
employee benefits cost weight reflect contract labor costs.

 Table IV05--Comparison of the FY 2010-Based Labor-Related Share and the
                    FY 2006-Based Labor-Related Share
------------------------------------------------------------------------
                                          FY 2006- based  FY 2010- based
                                           market basket   market basket
                                            cost weights    cost weights
------------------------------------------------------------------------
Wages and Salaries......................          47.213          47.233
Employee Benefits.......................          12.414          13.105
Professional Fees: Labor-Related........           5.356           5.500
Administrative and Facilities...........           0.626           0.619
Support Services........................
All Other: Labor-Related Services.......           3.193           3.130
                                         -------------------------------
    Total Labor-Related Share...........          68.802          69.587
------------------------------------------------------------------------

    Using the cost category weights from the FY 2010-based IPPS market 
basket, we calculated a labor-related share of 69.587 percent, 
approximately 0.8 percentage point higher than the current labor-
related share of 68.802. We continue to believe, as we have stated in 
the past, that these operating cost categories are related to, 
influenced by, or vary with the local markets. Therefore, our 
definition of the labor-related share continues to be consistent with 
section 1886(d)(3) of the Act. 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 62 percent ``would result in lower payments to a 
hospital than would otherwise be made.''
    Comment: Several commenters supported the proposed increase in the 
labor-related share.
    Response: We appreciate the commenters' support.
    In this final rule, we are finalizing the labor-related share of 
69.6 percent for FY 2014 as proposed.
    As we proposed, we also updated the labor-related share for Puerto 
Rico. Consistent with our methodology for determining the national 
labor-related share, we calculated the Puerto Rico-specific relative 
weights for wages and salaries, employee benefits, and contract labor 
using FY 2010 Medicare cost report data for IPPS hospitals located in 
Puerto Rico. Because there are no Puerto Rico-specific relative weights 
for professional fees and labor intensive services, we use the national 
weights as shown in Table IV05. This is the same methodology we used to 
determine the FY 2006-based Puerto Rico-specific labor-related share 
derived during the FY 2006-based IPPS market basket rebasing (74 FR 
43856).
    Below is a table comparing the FY 2010-based Puerto Rico-specific 
labor-

[[Page 50603]]

related share and the FY 2006-based Puerto Rico-specific labor-related 
share.

 Table IV06--Comparison of the FY 2010-Based Puerto Rico-Specific Labor-
Related Share and FY 2006-Based Puerto Rico-Specific Labor-Related Share
------------------------------------------------------------------------
                                          FY 2006- based  FY 2010- based
                                           market basket   market basket
                                            cost weights    cost weights
------------------------------------------------------------------------
Wages and Salaries......................          44.221          44.918
Benefits................................           8.691           8.990
Professional Fees: Labor-Related........           5.356           5.500
Administrative and Facilities: Support             0.626           0.619
 Services...............................
All Other: Labor-Related Services.......           3.193           3.130
                                         -------------------------------
    Total Labor-Related Share...........          62.087          63.157
------------------------------------------------------------------------

    Using the FY 2010-based Puerto Rico cost category weights, we 
calculated a labor-related share of 63.157 percent, approximately 1.1 
percentage points higher than the current Puerto-Rico specific labor-
related share of 62.087.
    We did not receive any public comments on the proposal to update 
the Puerto Rico labor-related share. Therefore, we are finalizing the 
Puerto Rico labor-related share of 63.2 percent for FY 2014 as 
proposed.

C. Market Basket for Certain Hospitals Presently Excluded From the IPPS

    In the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43857), we 
adopted the use of the FY 2006-based IPPS operating market basket 
percentage increase to update the target amounts for children's 
hospitals, PPS-excluded cancer hospitals and religious nonmedical 
health care institutions (RNHCIs). Children's hospitals and PPS-
excluded cancer hospitals and RNHCIs are still reimbursed solely under 
the reasonable cost-based system, subject to the rate-of-increase 
limits. Under these limits, an annual target amount (expressed in terms 
of the inpatient operating cost per discharge) is set for each hospital 
based on the hospital's own historical cost experience trended forward 
by the applicable rate-of-increase percentages.
    In the FY 2014 IPPS/LTCH PPS proposed rule (78 FR 27568), under the 
broad authority in sections 1886(b)(3)(A) and (B), 1886(b)(3)(E), and 
1871 of the Act and section 4454 of the BBA, consistent with our use of 
the IPPS operating market basket percentage increase to update target 
amounts, we proposed to use the FY 2010-based IPPS operating market 
basket percentage increase to update the target amounts for children's 
hospitals, 11 PPS-excluded cancer hospitals, and RNHCIs that are paid 
on the basis of reasonable cost subject to the rate-of-increase limits 
under Sec.  413.40.
    We did not receive any public comments on this proposal. In this 
final rule, we are finalizing the use of the FY 2010-based IPPS 
operating market basket percentage increase to update the target 
amounts for children's hospitals, 11 PPS-excluded cancer hospitals, and 
RNHCIs that are paid on the basis of reasonable cost as we proposed.
    Due to the small number of children's and cancer hospitals and 
RNHCIs that receive, in total, less than 1 percent of all Medicare 
payments to hospitals and because these hospitals provide limited 
Medicare cost report data, we are unable to create a separate market 
basket specifically for these hospitals. Due to the limited cost report 
data available, we believe that the FY 2010-based IPPS operating market 
basket most closely represents the cost structure of children's 
hospitals, PPS-excluded cancer hospitals, and RNHCIs. We believe this 
is appropriate as the IPPS operating market basket would reflect the 
input price growth for providing inpatient hospital services (similar 
to the services provided by the above excluded hospitals) based on the 
specific mix of goods and services required. Therefore, we believe that 
the percentage change in the FY 2010-based IPPS operating market basket 
is the best available measure of the average increase in the prices of 
the goods and services purchased by children hospitals, the 11 cancer 
hospitals, and RNHCIs in order to provide care.

D. Rebasing and Revising the Capital Input Price Index (CIPI)

    The CIPI was originally described in the FY 1993 IPPS final rule 
(57 FR 40016). There have been subsequent discussions of the CIPI 
presented in the IPPS proposed and final payment rules. The FY 2010 
IPPS/RY 2010 LTCH PPS final rule (74 FR 43857) discussed the most 
recent rebasing and revision of the CIPI to a FY 2006 base year, which 
reflected the capital cost structure of the hospital industry in that 
year.
    In the FY 2014 IPPS/LTCH PPS proposed rule (78 FR 27568), for the 
FY 2014 IPPS update, we proposed to rebase and revise the CIPI to a FY 
2010 base year to reflect the more current structure of capital costs 
in hospitals. As with the FY 2006-based index, we developed two sets of 
weights in order to calculate the FY 2010-based CIPI. The first set of 
weights identifies the proportion of hospital capital expenditures 
attributable to each expenditure category, while the second set of 
weights is a set of relative vintage weights for depreciation and 
interest. The set of vintage weights is used to identify the proportion 
of capital expenditures within a cost category that is attributable to 
each year over the useful life of the capital assets in that category. 
A more thorough discussion of vintage weights is provided later in this 
section.
    Both sets of weights were developed using the best data sources 
available. In reviewing source data, we determined that the Medicare 
cost reports provided accurate data for all capital expenditure cost 
categories. We used the FY 2010 Medicare cost reports for IPPS 
hospitals to determine weights for all three cost categories: 
depreciation, interest, and other capital expenses.
    Lease expenses are unique in that they are not broken out as a 
separate cost category in the CIPI, but rather are proportionally 
distributed among the cost categories of Depreciation, Interest, and 
Other, reflecting the assumption that the underlying cost structure and 
price movement of leases is similar to that of capital costs in 
general. As was done in previous rebasings of the CIPI, we first 
assumed 10 percent of lease expenses represents overhead and assigned 
those costs to the Other

[[Page 50604]]

category accordingly. The remaining lease expenses were distributed 
across the three cost categories based on the respective weights of 
Depreciation, Interest, and Other not including lease expenses.
    Depreciation contains two subcategories: (1) Building and Fixed 
equipment; and (2) Movable Equipment. The apportionment between 
building and fixed equipment and movable equipment was determined using 
the Medicare cost reports. This methodology was also used to compute 
the apportionment used in the FY 2006-based index.
    The total Interest cost category is split between government/
nonprofit interest and for-profit interest. The FY 2006-based CIPI 
allocated 85 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 15 percent of the interest cost 
weight was allocated to for-profit interest and was proxied by the 
average yield on Moody's Aaa bonds (74 FR 43857).
    For the FY 2010-based CIPI, as we proposed, we derived the split 
using the relative FY 2010 Medicare cost report data on interest 
expenses for government/nonprofit and for-profit hospitals. Based on 
these data, we calculated an 89/11 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.
    We did not receive any public comments on our proposed methodology 
for calculating the FY 2010-based CIPI cost weights.
    In this final rule, we are finalizing the FY 2010-based CIPI cost 
weights as proposed. Table IV07 presents a comparison of the FY 2010-
based CIPI cost weights and the FY 2006-based CIPI cost weights.

 Table IV07--FY 2010-Based CIPI Cost Categories, Weights, and Price Proxies With FY 2006-Based CIPI Included for
                                                   Comparison
----------------------------------------------------------------------------------------------------------------
                                                 FY 2006         FY 2010
              Cost categories                    weights         weights                 Price proxy
----------------------------------------------------------------------------------------------------------------
Total......................................          100.00          100.00  ...................................
Total depreciation.........................          75.154          74.011  ...................................
Building and fixed equipment depreciation..          35.789          36.153  BEA chained price index for
                                                                              nonresidential construction for
                                                                              hospitals and special care
                                                                              facilities--vintage-weighted (26
                                                                              years).
Movable equipment depreciation.............          39.365          37.858  PPI for machinery and equipment--
                                                                              vintage-weighted (12 years).
Total interest.............................          17.651          19.157  ...................................
Government/nonprofit interest..............          15.076          17.051  Average yield on domestic municipal
                                                                              bonds (Bond Buyer 20 bonds)--
                                                                              vintage-weighted (26 years).
For-profit interest........................           2.575           2.106  Average yield on Moody's Aaa bonds--
                                                                              vintage-weighted (26 years).
Other......................................           7.195           6.832  CPI-U for residential rent.
----------------------------------------------------------------------------------------------------------------

    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 CIPI 
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 used 
the vintage weights to compute vintage-weighted price changes 
associated with depreciation and interest expense. Following 
publication of the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, and in 
order to provide greater transparency, we posted on the CMS market 
basket Web page at: http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/MedicareProgramRatesStats/MarketBasketResearch.html an illustrative spreadsheet that contains an 
example of how the vintage-weighted price indexes are calculated.
    Vintage weights are an integral part of the CIPI. 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. The CIPI accurately 
reflects the annual price changes associated with capital costs, and is 
a useful simplification of the actual capital investment process. By 
accounting for the vintage nature of capital, we are able to provide an 
accurate, 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 CIPI reflects 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 a uniquely best 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, AHA does provide a 
consistent database back to 1963. 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 2010.
    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. We used FY 2010 Medicare cost reports to determine the 
expected life of building and fixed equipment and of movable equipment. 
The expected life of any piece of equipment 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 depreciation were to continue at 
current year levels,

[[Page 50605]]

assuming straight-line depreciation. From the FY 2010 Medicare cost 
reports, the expected life of building and fixed equipment was 
determined to be 26 years, and the expected life of movable equipment 
was determined to be 12 years. The FY 2006-based CIPI was based on an 
expected life of building and fixed equipment of 25 years and 12 years 
as the expected life for movable equipment.
    As we proposed, we used the building and fixed equipment and 
movable equipment weights derived from FY 2010 Medicare cost reports 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 from the FY 2010 Medicare cost reports. We 
then calculated a time series back to 1963 of annual capital purchases 
by subtracting the previous year asset costs from the current year 
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 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. Because building and fixed equipment have 
an expected life of 26 years, the vintage weights for building and 
fixed equipment are deemed to represent the average purchase pattern of 
building and fixed equipment over 26-year periods. With real building 
and fixed equipment purchase estimates available back to 1963, we 
averaged twenty-two 26-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 26-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 26-year period. This calculation 
is done for each year in the 26-year period, and for each of the 
twenty-two 26-year periods. We used the average of each year across the 
twenty-two 26-year periods to determine the average building and fixed 
equipment vintage weights for the FY 2010-based CIPI.
    For 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. Based on our 
determination that movable equipment has an expected life of 12 years, 
the vintage weights for movable equipment represent the average 
expenditure for movable equipment over a 12-year period. With real 
movable equipment purchase estimates available back to 1963, thirty-six 
12-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 12-year 
period are calculated by dividing the real movable capital purchase 
amount for any given year by the total amount of purchases in the 12-
year period. This calculation was done for each year in the 12-year 
period and for each of the thirty-six 12-year periods. We used the 
average of each year across the thirty-six 12-year periods to determine 
the average movable equipment vintage weights for the FY 2010-based 
CIPI.
    For 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. Because we have determined 
that hospital debt instruments have an expected life of 26 years, the 
vintage weights for interest are deemed to represent the average 
purchase pattern of total equipment over 26-year periods. With nominal 
total equipment purchase estimates available back to 1963, twenty-two 
26-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 26-year period are 
calculated by dividing the nominal total capital purchase amount for 
any given year by the total amount of purchases in the 26-year period. 
This calculation is done for each year in the 26-year period and for 
each of the twenty-two 26-year periods. We used the average of each 
year across the twenty-two 26-year periods to determine the average 
interest vintage weights for the proposed FY 2010-based CIPI.
    We did not receive any public comments on our proposed methodology 
for calculating the FY 2010-based CIPI vintage weights. In this final 
rule, we are finalizing the CIPI vintage weights as proposed. The 
vintage weights for the FY 2006-based CIPI and the FY 2010-based CIPI 
are presented in Table IV08.

                            Table IV08--FY 2006 Vintage Weights and FY 2010 Vintage Weights for Capital-Related Price Proxies
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                           Building and fixed equipment          Movable equipment                   Interest
                                                         -----------------------------------------------------------------------------------------------
                        Year \1\                            FY 2006  25     FY 2010  26     FY 2006  12     FY 2010  12     FY 2006  25     FY 2010  26
                                                               Years           Years           Years           Years           Years           Years
--------------------------------------------------------------------------------------------------------------------------------------------------------
1.......................................................           0.021           0.023           0.063           0.064           0.010           0.012
2.......................................................           0.023           0.024           0.067           0.068           0.012           0.013
3.......................................................           0.025           0.026           0.071           0.071           0.014           0.015
4.......................................................           0.027           0.028           0.075           0.073           0.016           0.017
5.......................................................           0.029           0.029           0.079           0.076           0.018           0.018
6.......................................................           0.031           0.031           0.082           0.078           0.020           0.021
7.......................................................           0.032           0.032           0.085           0.084           0.023           0.023
8.......................................................           0.033           0.034           0.086           0.088           0.025           0.025
9.......................................................           0.036           0.036           0.090           0.092           0.028           0.028
10......................................................           0.038           0.038           0.093           0.098           0.031           0.030
11......................................................           0.040           0.040           0.102           0.103           0.034           0.033
12......................................................           0.042           0.041           0.106           0.106           0.038           0.036

[[Page 50606]]

 
13......................................................           0.044           0.042  ..............  ..............           0.041           0.038
14......................................................           0.045           0.042  ..............  ..............           0.044           0.040
15......................................................           0.046           0.043  ..............  ..............           0.047           0.043
16......................................................           0.047           0.044  ..............  ..............           0.050           0.045
17......................................................           0.048           0.044  ..............  ..............           0.053           0.047
18......................................................           0.050           0.044  ..............  ..............           0.057           0.048
19......................................................           0.050           0.044  ..............  ..............           0.059           0.051
20......................................................           0.050           0.044  ..............  ..............           0.060           0.052
21......................................................           0.048           0.045  ..............  ..............           0.060           0.056
22......................................................           0.048           0.045  ..............  ..............           0.062           0.057
23......................................................           0.047           0.045  ..............  ..............           0.063           0.060
24......................................................           0.049           0.046  ..............  ..............           0.068           0.062
25......................................................           0.048           0.045  ..............  ..............           0.069           0.064
26......................................................  ..............           0.045  ..............  ..............  ..............           0.066
                                                         -----------------------------------------------------------------------------------------------
Total...................................................           1.000           1.000           1.000           1.000           1.000          1.000
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Detail may not add to total due to rounding.
\1\ Year 1 represents the vintage weight applied to the farthest year while the vintage weight for year 26, for example, would apply to the most recent
  year.

    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. As we proposed, in this final 
rule, we used the same price proxies for the FY 2010-based CIPI that 
were used in the FY 2006-based CIPI. The rationale for selecting the 
price proxies was explained more fully in the FY 1997 IPPS final rule 
(61 FR 46196) and the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 
43857). These price proxies are presented in Table IV07.
    Table IV09 below compares both the historical and forecasted 
percent changes in the FY 2006-based CIPI and the FY 2010-based CIPI. 
As stated in the FY 2014 IPPS/LTCH proposed rule (78 FR 27572), we are 
incorporating a more recent forecast of the market baskets in the final 
rule. Therefore, the forecasted growth rates in Table IV09 are based on 
IHS Global Insight Inc.'s (IGI) most recent second quarter 2013 
forecast with historical data through first quarter 2013. The proposed 
rule presented IGI's first quarter 2013 forecast with historical data 
through fourth quarter of 2012.

 Table IV09--Comparison of FY 2006-Based and FY 2010-Based Capital Input
          Price Index, Percent Change, FY 2008 through FY 2016
------------------------------------------------------------------------
                                          CIPI,  FY 2006- CIPI,  FY 2010-
               Fiscal year                     Based           Based
------------------------------------------------------------------------
FY 2008.................................             1.5             1.1
FY 2009.................................             1.5             1.2
FY 2010.................................             1.0             0.7
FY 2011.................................             1.2             0.9
FY 2012.................................             1.2             1.0
Forecast:...............................  ..............  ..............
FY 2013.................................             1.3             1.1
FY 2014.................................             1.4             1.2
FY 2015.................................             1.5             1.4
FY 2016.................................             1.7             1.6
Average:                                  ..............  ..............
    FYs 2008-2012.......................             1.3             1.0
    FYs 2013-2016.......................             1.5            1.3
------------------------------------------------------------------------
Source: IHS Global Insight, Inc., 2nd Quarter 2013 forecast.

    IHS Global Insight, Inc. forecasts a 1.2 percent increase in the FY 
2010-based CIPI for FY 2014, as shown in Table IV09. The underlying 
vintage-weighted price increases for depreciation (including building 
and fixed equipment and movable equipment) and interest (including 
government/nonprofit and for-profit) are included in Table IV10.

[[Page 50607]]



 Table IV10--CMS Capital Input Price Index Percent Changes, Total and Depreciation and Interest Components-- FYs
                                                2008 Through 2016
----------------------------------------------------------------------------------------------------------------
                           Fiscal year                                 Total       Depreciation      Interest
----------------------------------------------------------------------------------------------------------------
FY 2008.........................................................             1.1             2.0            -3.1
FY 2009.........................................................             1.2             2.0            -2.0
FY 2010.........................................................             0.7             1.7            -2.8
FY 2011.........................................................             0.9             1.7            -2.3
FY 2012.........................................................             1.0             1.7            -2.7
Forecast:.......................................................  ..............  ..............  ..............
FY 2013.........................................................             1.1             1.8            -2.7
FY 2014.........................................................             1.2             1.9            -2.3
FY 2015.........................................................             1.4             2.0            -1.8
FY 2016.........................................................             1.6             2.0           -0.8
----------------------------------------------------------------------------------------------------------------
Source: IHS Global Insight, Inc., 2nd Quarter 2013 forecast.

    Rebasing the CIPI from FY 2006 to FY 2010 decreased the percent 
change in the forecasted update for FY 2014 by 0.2 percentage point, 
from 1.4 percent to 1.2 percent, as shown in Table IV09. The difference 
in the forecasted market basket update for FY 2014 is primarily due to 
the rebasing of the index to FY 2010 and revising the base year cost 
weights to incorporate the FY 2010 Medicare cost report data.

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

A. Changes in the Inpatient Hospital Update for FY 2014 (Sec. Sec.  
412.64(d) and 412.211(c))

1. FY 2014 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.'' 
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 2014 as equal to the rate-of-increase in 
the hospital market basket for IPPS hospitals in all areas, 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 0.3 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 2014 adjustment of 0.3 percentage point may result in 
the applicable percentage increase being less than zero.
    We note, in compliance with section 404 of the MMA, in this final 
rule, as we proposed, we are replacing the FY 2006-based IPPS operating 
and capital market baskets with the revised and rebased FY 2010-based 
IPPS operating and capital market baskets for FY 2014. We also are 
rebasing the labor-related share to reflect the more recent base year. 
For FY 2014, we are adopting a labor-related share of 69.6 percent, 
which is based on the rebased and revised FY 2010-based IPPS market 
basket (as compared to the FY 2013 labor-related share of 68.8 percent, 
which is based on the FY 2006-based IPPS market basket). For a complete 
discussion on the rebasing of the market basket and labor-related 
share, we refer readers to section IV. of the preamble of this final 
rule.
    Based on the most recent data available for the FY 2014 proposed 
rule, in accordance with section 1886(b)(3)(B) of the Act, we proposed 
to base the proposed FY 2014 market basket update used to determine the 
applicable percentage increase for the IPPS on the IHS Global Insight, 
Inc. (IGI's) first quarter 2013 forecast of the FY 2010-based IPPS 
market basket rate-of-increase with historical data through fourth 
quarter 2012, which was estimated to be 2.5 percent. We also proposed 
that if more recent data become subsequently available (for example, a 
more recent estimate of the market basket and the MFP adjustment), we 
would use such data, if appropriate, to determine the FY 2014 market 
basket update and the MFP adjustment in the final rule. We did not 
receive any public comments on our proposal. Therefore, for this final 
rule, we based the final FY 2014 market basket update used to determine 
the applicable percentage increase for the IPPS on more recently 
available data, the IGI's second quarter 2013 forecast of the FY 2010-
based IPPS market basket rate-of-increase, which is estimated to be 2.5 
percent.
    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. We also stated in the FY 2014 IPPS/LTCH PPS proposed 
rule that, for FY 2014, we were not proposing to make any change in our 
methodology for calculating and applying the MFP adjustment. In the 
proposed rule, we proposed a MFP adjustment of 0.4 percent. Similar to 
the market basket adjustment, for this final rule, we are using the 
most recent data available to compute the MFP adjustment. We did not 
receive any public comments on our proposal. Therefore, for this final 
rule, using the most recent data available, we computed a MFP 
adjustment of 0.5 percent for FY 2014.
    In the FY 2014 IPPS/LTCH PPS proposed rule (78 FR 27572-27573), 
consistent with current law, and based on IGI's first quarter 2013 
forecast of the FY 2014 market basket increase, we proposed an 
applicable percentage increase to the FY 2014 operating standardized 
amount of 1.8 percent (that is, the FY 2014 estimate of the market 
basket rate-of-increase of 2.5 percent less an adjustment of 0.4 
percentage point for economy-wide productivity (that is, the MFP 
adjustment) and less 0.3 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. For hospitals 
that do not submit these quality data, we proposed an applicable 
percentage increase to the operating standardized amount of -0.2 
percent (that is, the FY 2014 estimate of the market basket rate-of-
increase of 2.5 percent, less 2.0 percentage points for failure to 
submit quality data, less an adjustment of 0.4 percentage point for the 
MFP adjustment, and less an additional adjustment of 0.3 percentage 
point). Lastly, as noted above, in the

[[Page 50608]]

proposed rule, we stated that if more recent data become subsequently 
available (for example, a more recent estimate of the market basket and 
the MFP adjustment), we would use such data, if appropriate, to 
determine the FY 2014 market basket update and MFP adjustment in the 
final rule. We did not receive any public comments on our proposal.
    For this final rule, using the most recent data available, 
consistent with current law, and based on IGI's second quarter 2013 
forecast of the FY 2014 market basket increase, we are finalizing an 
applicable percentage increase to the FY 2014 operating standardized 
amount of 1.7 percent (that is, the FY 2014 estimate of the market 
basket rate-of-increase of 2.5 percent less an adjustment of 0.5 
percentage point for economy-wide productivity (that is, the MFP 
adjustment) and less 0.3 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. For hospitals 
that do not submit these quality data, we are finalizing an applicable 
percentage increase to the operating standardized amount of -0.3 
percent (that is, the FY 2014 estimate of the market basket rate-of-
increase of 2.5 percent, less 2.0 percentage points for failure to 
submit quality data, less an adjustment of 0.5 percentage point for the 
MFP adjustment, and less an additional adjustment of 0.3 percentage 
point).
    In the proposed rule, we proposed to revise the existing 
regulations at 42 CFR 412.64(d) to reflect the current law for the FY 
2014 update. Specifically, in accordance with section 1886(b)(3)(B) of 
the Act, we proposed to add a new paragraph (v) to Sec.  412.64(d)(1) 
to reflect the applicable percentage increase to the FY 2014 operating 
standardized amount as the percentage increase in the market basket 
index less an MFP adjustment and less an additional reduction of 0.3 
percentage point. We did not receive any public comments on this 
proposal. Therefore, in this final rule, we are adopting as final, 
without modification, the proposed changes to Sec.  412.64(d)(1)(v) to 
reflect the current law.
    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, in the FY 2014 IPPS/LTCH PPS proposed rule (78 FR 27572-
27573), we proposed an update to the hospital-specific rates applicable 
to SCHs of 1.8 percent for hospitals that submit quality data or -0.2 
percent for hospitals that fail to submit quality data. For FY 2014, 
the existing regulations in Sec. Sec.  412.73(c)(16), 412.75(d), 
412.77(e) and 412.78(e) 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 did not 
propose to make any further changes to these four regulatory provisions 
to reflect the FY 2014 update factor for the hospital-specific rates of 
SCHs. We did not receive any public comments on this proposal. 
Therefore, for this final rule, we are finalizing an update to the 
hospital-specific rates applicable to SCHs of 1.7 percent for hospitals 
that submit quality data or -0.3 percent for hospitals that fail to 
submit quality data. As we noted above, for the proposed rule, we used 
the first quarter 2013 forecast of the FY 2010-based IPPS market basket 
with historical data through fourth quarter 2012. For this final rule, 
we used the most recent data available, which was the second quarter 
2013 forecast of the FY 2010-based IPPS market basket with historical 
data through first quarter 2013. Similarly, for the proposed rule, we 
used IGI's first quarter 2013 forecast of MFP. For this final rule, we 
used the most recent data available, which was IGI's second quarter 
2013 forecast of MFP.
    We note that, as discussed in section V.F. of this preamble, 
section 606 of the American Taxpayer Relief Act of 2012 extended the 
MDH program from the end of FY 2012 (that is, for discharges occurring 
before October 1, 2012) to the end of FY 2013 (that is, for discharges 
occurring before October 1, 2013). Under prior law, the MDH program was 
to be in effect through the end of FY 2012 only. Absent congressional 
action further extending the MDH program, the MDH program will expire 
for discharges beginning in FY 2014. Accordingly, we are not including 
MDHs in our update of the hospital-specific rates for FY 2014.
2. FY 2014 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 Public Law 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, in 
the FY 2014 IPS/LTCH PPS proposed rule (78 FR 27572 through 27573), we 
proposed an applicable percentage increase to the Puerto Rico-specific 
operating standardized amount of 1.8 percent for FY 2014. The 
regulations at Sec.  412.211(c) currently 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 to make any changes to the 
existing regulatory text.
    We did not receive any public comments on this proposal. Therefore, 
for this final rule, we are finalizing an applicable percentage 
increase to the Puerto Rico-specific operating standardized amount of 
1.7 percent for FY 2014. As we noted above, for the proposed rule, we 
used the first quarter 2013 forecast of the FY 2010-based IPPS market 
basket with historical data through fourth quarter 2012. For this final 
rule, we used the most recent data available, which was the second 
quarter 2013 forecast of the FY 2010-based IPPS market basket with 
historical data through first quarter 2013. Similarly, for the proposed 
rule, we used IGI's first quarter 2013 forecast of MFP. For this final 
rule, we used the most recent data available, which was IGI's second 
quarter 2013 forecast of MFP.

B. Rural Referral Centers (RRCs): Annual Updates to Case-Mix Index and 
Discharge Criteria (Sec.  412.96)

    Under the authority of section 1886(d)(5)(C)(i) of the Act, the

[[Page 50609]]

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 national median CMI 
value for FY 2014 includes data from all urban hospitals nationwide, 
and the regional values for FY 2014 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 values are based on discharges occurring during FY 2012 (October 
1, 2011 through September 30, 2012), and include bills posted to CMS' 
records through March 2013.
    In the FY 2014 IPPS/LTCH PPS proposed rule (78 FR 27573), we 
proposed 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, 
2013, they must have a CMI value for FY 2012 that is at least--
     1.5526; 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. (We refer readers to the table set forth 
in the FY 2014 IPPS/LTCH PPS proposed rule at 78 FR 27574.)
    The final CMI values for FY 2014 are based on the latest available 
data (FY 2012 bills received through March 2013). 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, 2013, they must have a CMI value for FY 2012 
that is at least--
     1.5560; 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 final 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).................          1.3319
2. Middle Atlantic (PA, NJ, NY).........................          1.4015
3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV)..          1.4808
4. East North Central (IL, IN, MI, OH, WI)..............          1.4618
5. East South Central (AL, KY, MS, TN)..................          1.4281
6. West North Central (IA, KS, MN, MO, NE, ND, SD)......          1.5355
7. West South Central (AR, LA, OK, TX)..................          1.5814
8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY)............          1.6438
9. Pacific (AK, CA, HI, OR, WA).........................          1.5605
------------------------------------------------------------------------

    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 2011 (that is, October 1, 
2010 through September 30, 2011), which would normally be the latest 
cost report data available at the time of the development of the 
proposed rule. However, in the FY 2014 IPPS/LTCH PPS proposed rule (78 
FR 27574), due to a transition in our data system, in lieu of a full 
year of FY 2011 cost report data, we proposed to use a combination of 
FY 2010 and FY 2011 cost report data in order to create a full fiscal 
year of cost report data for this

[[Page 50610]]

analysis. Due to CMS' transition to a new cost reporting form effective 
for cost reporting periods beginning on or after May 1, 2010, some FY 
2011 cost reports were not yet in our system for analysis at the time 
of the development of the proposed rule. Therefore, in order to have a 
complete fiscal year of cost report data, we utilized FY 2011 cost 
report data if available, and for those providers whose FY 2011 cost 
report data were not yet in our system, we utilized their FY 2010 cost 
report data. This is similar to the process we used to establish the 
median number of discharges for urban hospitals in the census region 
for FY 2013, where we utilized FY 2009 and 2010 cost report data (77 FR 
53406).
    At the time of the development of this final rule, a full year of 
FY 2011 cost report data became available in our system for analysis. 
Therefore, the final FY 2014 discharges criteria is based on only FY 
2011 cost reports, that is, data from cost reporting periods that began 
in FY 2011.
    In the FY 2014 PPS/LTCH PPS proposed rule, we proposed 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, 2013, must have, as the number of discharges for its cost 
reporting period that began during FY 2011 (based on a combination of 
FY 2010 and FY 2011 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. (We refer readers to 
the table set forth in the FY 2014 IPPS/LTCH PPS proposed rule at 78 FR 
27574.)
    Based on the latest discharge data available at this time (that is, 
based on FY 2011 cost report data as explained earlier in this 
section), the final median number of discharges for urban hospitals by 
census region are set forth in the following table:

------------------------------------------------------------------------
                                                             Number of
                         Region                             discharges
------------------------------------------------------------------------
1. New England (CT, ME, MA, NH, RI, VT).................           7,830
2. Middle Atlantic (PA, NJ, NY).........................          10,968
3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV)..          11,535
4. East North Central (IL, IN, MI, OH, WI)..............           8,507
5. East South Central (AL, KY, MS, TN)..................           7,397
6. West North Central (IA, KS, MN, MO, NE, ND, SD)......           7,792
7. West South Central (AR, LA, OK, TX)..................           5,374
8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY)............           9,024
9. Pacific (AK, CA, HI, OR, WA).........................           8.857
------------------------------------------------------------------------

    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 final rule.
    We reiterate that, if an osteopathic hospital is to qualify for RRC 
status for cost reporting periods beginning on or after October 1, 
2013, the hospital would be required to have at least 3,000 discharges 
for its cost reporting period that began during FY 2011 (based on FY 
2011 cost report data as explained earlier in this section).

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

1. Background
    Section 1886(d)(12) of the Act provides for an additional payment 
to each qualifying low-volume hospital under the IPPS beginning in FY 
2005. Section 1886(d)(12) of the Act sets forth the qualifying criteria 
for a qualifying low-volume hospital and the methodology for 
determining the low-volume hospital payment adjustment.
    Sections 3125 and 10314 of the Affordable Care Act provided for a 
temporary change in the low-volume hospital payment policy for FYs 2011 
and 2012 by expanding the definition of a low-volume hospital and 
modifying the methodology for determining the payment adjustment for 
hospitals meeting the definition. Therefore, prior to the enactment of 
the American Taxpayer Relief Act of 2012 (ATRA) (Pub. L. 112-240) on 
January 2, 2013, beginning with FY 2013, the low-volume hospital 
qualifying criteria and payment adjustment requirements would have 
reverted to the statutory requirements under section 1886(d)(12) of the 
Act that were in effect prior to FY 2011. Section 605 of the ATRA 
extended for an additional year, through FY 2013, the temporary changes 
in the low-volume hospital definition and methodology for determining 
the payment adjustment made by the Affordable Care Act for FYs 2011 and 
2012. Beginning with FY 2014, 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 and the ATRA. In section V.D.3. of this preamble, 
we discuss the low-volume hospital payment adjustment policies for FY 
2014.
a. Original Implementation of the Low-Volume Hospital Payment 
Adjustment
    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 ``[i]n 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 hospital payment adjustment is 
based on total per discharge payments made under section 1886 of the 
Act, including capital, DSH, IME, and outlier payments. For SCHs and 
MDHs, the low-volume hospital payment adjustment is based in part 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 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

[[Page 50611]]

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 hospital payment 
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 hospital payment adjustment implemented in FY 2005. 
Therefore, the low-volume hospital payment adjustment of an additional 
25 percent continued to be provided for qualifying hospitals with less 
than 200 discharges.
b. Affordable Care Act Provisions for FYs 2011 and 2012
    For FYs 2011 and 2012, sections 3125 and 10314 of 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. Specifically, those provisions of the 
Affordable Care Act amended the qualifying criteria for low-volume 
hospitals under section 1886(d)(12)(C)(i) of the Act to specify that, 
for FYs 2011 and 2012, a subsection (d) 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 the Affordable Care Act, provides that the low-volume hospital 
payment adjustment (that is, the 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 zero 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 the regulations at 42 CFR 412.101 to reflect the 
changes to the qualifying criteria and the payment adjustment for low-
volume hospitals made by sections 3125 and 10314 of the Affordable Care 
Act. In addition, we defined, at Sec.  412.101(a), the term ``road 
miles''' to mean ``miles'' as defined at Sec.  412.92(c)(1), and 
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 for FY 2011 (75 FR 50240). For the second year of the 
changes to the low-volume hospital payment adjustment provided for by 
section 3125 and 10314 of the Affordable Care Act (that is, FY 2012), 
consistent with the regulations at Sec.  412.101(b)(2)(ii), in the FY 
2012 IPPS/LTCH PPS final rule (76 FR 51677 through 51680), we updated 
the discharge data source used to identify qualifying low-volume 
hospitals and calculate the payment adjustment (percentage increase). 
Under Sec.  412.101(b)(2)(ii), for FYs 2011 and 2012, a hospital's 
Medicare discharges from the most recently available MedPAR data, as 
determined by CMS, are used to determine if the hospital meets the 
discharge criteria to receive the low-volume hospital payment 
adjustment in the current year. In that same final rule, we established 
that, for FY 2012, qualifying low-volume hospitals and their payment 
adjustment are determined using Medicare discharge data from the March 
2011 update of the FY 2010 MedPAR file, as these data were the most 
recent data available at that time. In addition, we noted that 
eligibility for the low-volume hospital payment adjustment for FY 2012 
was also dependent upon meeting (if the hospital was qualifying for the 
low-volume hospital payment adjustment for the first time in FY 2012), 
or continuing to meet (if the hospital qualified in FY 2011), the 
mileage criterion specified at Sec.  412.101(b)(2)(ii). Furthermore, we 
established a procedure for a hospital to request low-volume hospital 
status for FY 2012 (which was consistent with the process we employed 
for the low-volume hospital payment adjustment for FY 2011).
2. Provisions of the ATRA for FY 2013
a. Background
    Section 605 of the ATRA amended sections 1886(d)(12)(B), (C)(i), 
and (D) of the Act to extend, for FY 2013, the temporary changes in the 
low-volume hospital payment adjustment policy provided for in FYs 2011 
and 2012 by the Affordable Care Act. As we have noted previously, prior 
to the enactment of section 605 of the ATRA, beginning with FY 2013, 
the low-volume hospital definition and payment adjustment methodology 
would have reverted to the policy established under statutory 
requirements that were in effect prior to the amendments made by the 
Affordable Care Act.
    Prior to the enactment of the ATRA, in the FY 2013 IPPS/LTCH PPS 
final rule (77 FR 53406 through 53409), we discussed the low-volume 
hospital payment adjustment for FY 2013 and subsequent fiscal years. 
Specifically, we discussed that, in accordance with section 1886(d)(12) 
of the Act, beginning with FY 2013, the low-volume hospital definition 
and payment adjustment methodology would revert back to the statutory 
requirements that were in effect prior to the amendments made by the 
Affordable Care Act. Therefore, we explained, as specified under the 
existing regulations at Sec.  412.101, effective for FY 2013 and 
subsequent years, that 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 total discharges, including both Medicare and non-
Medicare discharges) during the fiscal year. We also established a 
procedure for hospitals to request low-volume hospital status for FY 
2013 (which was consistent with our previously established procedures 
for FYs 2011 and 2012).
    In a Federal Register notice published on March 7, 2013 (78 FR 
14689) (hereinafter referred to as the FY 2013 IPPS notice), we 
announced the extension of the Affordable Care Act amendments to the 
low-volume hospital payment adjustment requirements under section 
1886(d)(12) of the Act for FY 2013 pursuant to section 605 of the ATRA. 
The applicable low-volume hospital percentage increase provided for by 
the provisions of the Affordable Care Act and the ATRA is determined 
using a continuous linear sliding scale equation that results in a low-
volume hospital payment adjustment ranging from an additional 25 
percent for hospitals with 200 or fewer Medicare discharges to a zero 
percent additional payment adjustment for hospitals with 1,600 or more 
Medicare discharges.
    In the FY 2013 IPPS notice (78 FR 14689 through 14694), to 
implement the extension of the temporary change in the low-volume 
hospital payment adjustment policy for FY 2013 provided for by the 
ATRA, we updated the discharge data source used to identify

[[Page 50612]]

qualifying low-volume hospitals and calculate the payment adjustment 
(percentage increase). Consistent with our implementation of the low-
volume hospital payment adjustment policy for FYs 2011 and 2012 as set 
forth at existing Sec.  412.101(b)(2)(ii), we established that, for FY 
2013, qualifying low-volume hospitals and their payment adjustments are 
determined using Medicare discharge data from the March 2012 update of 
the FY 2011 MedPAR file, as these data were the most recent data 
available at the time of the development of the FY 2013 payment rates 
and factors established in the FY 2013 IPPS/LTCH PPS final rule. In 
addition, we noted that eligibility for the low-volume hospital payment 
adjustment for FY 2013 is also dependent upon meeting (in the case of a 
hospital that did not qualify for the low-volume hospital payment 
adjustment in FY 2012), or continuing to meet (in the case of a 
hospital that did qualify for the low-volume hospital payment 
adjustment in FY 2012), the mileage criterion specified at existing 
Sec.  412.101(b)(2)(ii). We also established a procedure for a hospital 
to request low-volume hospital status for FY 2013 (which is consistent 
with the process for the low-volume hospital payment adjustment for FYs 
2011 and 2012). Furthermore, we noted our intent to make conforming 
changes to the regulations text at Sec.  412.101 to reflect the changes 
to the qualifying criteria and the payment adjustment for low-volume 
hospitals in accordance with the amendments made by section 605 of the 
ATRA in future rulemaking. (We refer readers to the FY 2013 IPPS notice 
(78 FR 14689 through 14694) for additional information on the extension 
of the Affordable Care Act amendments to the low-volume hospital 
payment adjustment requirements under section 1886(d)(12) of the Act 
through FY 2013 in accordance with section 605 of the ATRA.)
b. Conforming Regulatory Changes
    In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50238 through 50275 
and 50414), we amended the regulations at Sec.  412.101 to specify 
that, beginning with FY 2013, the low-volume hospital definition and 
payment adjustment methodology reverted to the policy established under 
statutory requirements that were in effect prior to the amendments made 
by the Affordable Care Act. In the FY 2014 IPPS/LTCH PPS proposed rule 
(78 FR 27576), we proposed to make conforming changes to the existing 
regulations text at Sec.  412.101 to reflect the extension of the 
changes to the qualifying criteria and the payment adjustment 
methodology for low-volume hospitals through FY 2013 in accordance with 
section 605 of the ATRA, as announced in the FY 2013 IPPS notice (as 
discussed above). Specifically, we proposed to revise paragraphs 
(b)(2)(i), (b)(2)(ii), (c)(1), (c)(2), and (d). Under these proposed 
changes to Sec.  412.101, beginning with FY 2014, consistent with 
section 1886(d)(12) of the Act, as amended, the low-volume hospital 
qualifying criteria and payment adjustment methodology would revert to 
that which was in effect prior to the amendments made by the Affordable 
Care Act and the ATRA (that is, the low-volume hospital payment 
adjustment policy in effect for FYs 2005 through 2010).
    We did not receive any public comments on the proposed conforming 
changes to the existing regulations text at Sec.  412.101 to reflect 
the extension of the changes to the qualifying criteria and the payment 
adjustment methodology for low-volume hospitals through FY 2013 in 
accordance with section 605 of the ATRA. Therefore, in this final rule, 
we are adopting as final the proposed revisions to paragraphs 
(b)(2)(i), (b)(2)(ii), (c)(1), (c)(2), and (d) of Sec.  412.101 without 
modification.
3. Low-Volume Hospital Definition and Payment Adjustment for FY 2014 
and Subsequent Fiscal Years
    In accordance with section 1886(d)(12) of the Act, as amended, 
beginning with FY 2014, 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 and the ATRA. Therefore, as discussed in the FY 2014 IPPS/LTCH PPS 
proposed rule (78 FR 27576 through 27577), consistent with section 
1886(d)(12) of the Act, as amended, under the proposed conforming 
changes to Sec.  412.101(b)(2), effective for FY 2014 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. Under our existing policy, effective for FY 
2014 and subsequent years, qualifying hospitals would receive the low-
volume hospital payment adjustment of an additional 25 percent for 
discharges occurring during the fiscal year.
    Comment: A few commenters expressed concern about the financial 
impact of the expiration of the temporary expansion of the low-volume 
hospital payment adjustment provided for by the provisions of 
Affordable Care Act and the ATRA, which were similar to the comments we 
received on the FY 2013 IPPS/LTCH PPS proposed rule, prior to the 1-
year expansion of the low-volume hospital payment adjustment for FY 
2013 provided for by the ATRA. Some commenters supported legislative 
action that would continue the temporary expansion of the low-volume 
hospital payment adjustment. Other commenters requested that CMS use 
the existing statutory authority to make the low-volume adjustment to 
qualifying hospitals that have less than 800 total discharges rather 
than only to qualifying hospitals that have less than 200 total 
discharges. The commenters did not provide any data analysis in support 
of their comments to expand the low-volume hospital adjustment to 
qualifying hospitals that have less than 800 total discharges.
    Response: As noted previously in section V.I.C.a. of the preamble 
of this final rule and as discussed in response to public comments in 
the FY 2013 IPPS/LTCH PPS final rule (77 FR 53408 through 53409), to 
implement the original low-volume hospital payment adjustment 
provision, and as mandated by statute, we developed an empirically 
justified adjustment based on the relationship between costs and total 
discharges of hospitals with less than 800 total (Medicare and non-
Medicare) discharges. Specifically, we performed several regression 
analyses to evaluate the relationship between hospitals' costs per case 
and discharges, and found that an adjustment for hospitals with less 
than 200 total discharges is most consistent with the statutory 
requirement to provide for additional payments to low-volume hospitals 
where there is empirical evidence that higher incremental costs are 
associated with lower numbers of discharges (69 FR 49101 through 
49102). Based on these analyses, we established a low-volume hospital 
policy where qualifying hospitals with less than 200 total discharges 
receive a payment adjustment of an additional 25 percent. (Section 
1886(d)(12)(B)(iii) of the Act limits the applicable percentage 
increase adjustment to no more than 25 percent.) In the future, we may 
reevaluate the low-volume hospital adjustment policy; that is, the 
definition of a low-volume hospital and the payment adjustment. 
However, because we are not aware of any analysis or empirical evidence 
that would support expanding the originally established a low-volume 
hospital adjustment policy

[[Page 50613]]

and we did not make any proposals regarding the low-volume hospital 
payment adjustment for FY 2014, we are not making any changes to the 
low-volume hospital payment adjustment policy in this final rule. Thus, 
the low-volume hospital definition and payment adjustment methodology 
will revert back to the policy established under statutory requirements 
that were in effect prior to the amendments made by the Affordable Care 
Act and the ATRA.
    As described above, for FYs 2005 through 2010 and FY 2014 and 
subsequent fiscal years, the discharge determination will be 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 hospital 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. As we noted in the proposed rule, 
for FYs 2011, 2012, and 2013, we 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. In addition to a discharge 
criterion, the eligibility for the low-volume hospital payment 
adjustment also will be 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 hospital payment 
adjustment for FY 2014 and subsequent fiscal years, a hospital must be 
located more than 25 road miles from the nearest subsection (d) 
hospital.
    For FY 2014, as we stated in the proposed rule, we will continue to 
use the established process for requesting and obtaining the low-volume 
hospital payment adjustment. That is, 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 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. (For additional details on our 
established process for the low-volume hospital payment adjustment, we 
refer readers to the FY 2013 IPPS/LTCH PPS final rule (77 FR 53408).)
    Consistent with our previously established procedure, for FY 2014, 
a hospital must make its request for low-volume hospital status in 
writing to its fiscal intermediary or MAC by September 1, 2013, in 
order for the 25-percent low-volume hospital payment adjustment to be 
applied to payments for its discharges beginning on or after October 1, 
2013 (through September 30, 2014). If a hospital's request for low-
volume hospital status for FY 2014 is received after September 1, 2013, 
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 hospital payment adjustment 
to determine the payment for the hospital's FY 2014 discharges, 
effective prospectively within 30 days of the date of the fiscal 
intermediary's or MAC's low-volume hospital status determination.
    As we discussed previously in section V.C.2.b. of the preamble of 
this final rule, we are adopting as final our proposed conforming 
changes to the regulatory text at Sec.  412.101 to reflect the 
extension of the changes to the qualifying criteria and the payment 
adjustment methodology for low-volume hospitals through FY 2013 made by 
section 605 of the ATRA (78 FR 27576). Specifically, we are revising 
Sec.  412.101 to conform the regulations to the statutory requirements 
that, beginning with FY 2014, the low-volume hospital qualifying 
criteria and payment adjustment methodology revert to that which was in 
effect prior to the amendments made by the Affordable Care Act and the 
ATRA (that is, the low-volume hospital payment adjustment policy in 
effect for FYs 2005 through 2010). Under this revision, the low-volume 
hospital payment adjustment policy in effect prior for FYs 2005 through 
2010 will apply for FY 2014 and subsequent years. Thus, as noted above, 
the low-volume hospital definition and payment adjustment methodology 
will revert back to the policy established under statutory requirements 
that were in effect prior to the amendments made by the Affordable Care 
Act and the ATRA.

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

1. IME Adjustment Factor for FY 2014
    Under the IPPS, an additional payment amount is made to hospitals 
with 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 2014, the formula 
multiplier is 1.35. We estimate that application of this formula 
multiplier for the FY 2014 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.
    Comment: Two commenters supported the continuation of the IME 
adjustment factor. Both commenters stated that IME payments are vital 
to guaranteeing a strong surgery workforce in which there is currently 
a growing shortage. One commenter noted that this shortage is 
especially prevalent within the cardiothoracic surgery workforce.
    Response: We appreciate the commenters' support. We note that the 
IME formula multiplier is set by Congress. We are specifying in this 
final rule that the IME formula multiplier for FY 2014 is set at 1.35, 
which we estimate will result in an increase in IPPS payments of 5.5 
percent for every approximately 10-percent increase in the hospital's 
resident-to-bed ratio.
2. Other Policy Changes Affecting GME
    In section V.J. of the preamble of this final rule, we present 
other proposed and final policy changes relating to GME payment. We 
refer readers to that section of the preamble of this final rule where 
we present the proposed and final policies.

E. Payment Adjustment for Medicare Disproportionate Share Hospitals 
(DSHs) (Sec.  412.106)

1. Background
    Section 1886(d)(5)(F) of the Act provides for additional Medicare

[[Page 50614]]

payments to subsection (d) hospitals that serve a significantly 
disproportionate number of low-income patients. The Act specifies two 
methods by which a hospital may qualify for the Medicare 
disproportionate share hospital (DSH) adjustment. Under the first 
method, hospitals that are located in an urban area and have 100 or 
more beds may receive a Medicare DSH payment adjustment if the hospital 
can demonstrate that, during its cost reporting period, more than 30 
percent of its net inpatient care revenues are derived from State and 
local government payments for care furnished to needy patients with low 
incomes. This method is commonly referred to as the ``Pickle method.'' 
The second method for qualifying for the DSH payment adjustment, which 
is the most common, is based on a complex statutory formula under which 
the DSH payment adjustment is based on the hospital's geographic 
designation, the number of beds in the hospital, and the level of the 
hospital's disproportionate patient percentage (DPP). A hospital's DPP 
is the sum of two fractions: the ``Medicare fraction'' and the 
``Medicaid fraction.'' The Medicare fraction (also known as the ``SSI 
fraction'' or ``SSI ratio'') is computed by dividing the number of the 
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 in the same period.
    Because the DSH payment adjustment is part of the IPPS, the DSH 
statutory references (under section 1886(d)(5)(F) of the Act) to 
``days'' apply only to hospital acute care inpatient days. Regulations 
located at Sec.  412.106 govern the Medicare DSH payment adjustment and 
specify how the DPP is calculated as well as how beds and patient days 
are counted in determining the Medicare DSH payment adjustment. Under 
Sec.  412.106(a)(1)(i), the number of beds for the Medicare DSH payment 
adjustment is determined in accordance with bed counting rules for the 
IME adjustment under Sec.  412.105(b).
2. Counting of Patient Days Associated With Patients Enrolled in 
Medicare Advantage Plans in the Medicare and Medicaid Fractions of the 
Disproportionate Patient Percentage (DPP) Calculation
    The regulation at 42 CFR 422.2 defines Medicare Advantage (MA) plan 
to mean ``health benefits coverage offered under a policy or contract 
by an MA organization that includes a specific set of health benefits 
offered at a uniform premium and uniform level of cost-sharing to all 
Medicare beneficiaries residing in the service area of the MA plan. . . 
.'' Generally, each MA plan must at least provide coverage of all 
services that are covered by Medicare Part A and Part B, but also may 
provide for Medicare Part D benefits and/or additional supplemental 
benefits. However, certain items and services, such as hospice 
benefits, continue to be covered under Medicare fee-for-service (FFS). 
Under Sec.  422.50 of the regulations, an individual is eligible to 
elect an MA plan if he or she is entitled to Medicare Part A and 
enrolled in Medicare Part B. Dual eligible beneficiaries (individuals 
entitled to Medicare and eligible for Medicaid) also may choose to 
enroll in a MA plan, and, as an additional supplemental benefit, the MA 
plan may pay for Medicare cost-sharing not covered by Medicaid.
    In the FY 2004 IPPS proposed rule (68 FR 27208), in response to 
questions about whether the patient days associated with patients 
enrolled in an MA plan (then called a Medicare + Choice (M+C) plan) 
should be counted in the Medicare fraction or the Medicaid fraction of 
the disproportionate patient percentage (DPP) calculation, we proposed 
that once a beneficiary enrolls in an MA plan, those patient days 
attributable to the beneficiary would not be included in the Medicare 
fraction of the DPP. Instead, those patient days would be included in 
the numerator of the Medicaid fraction, if the patient also were 
eligible for Medicaid. In the FY 2004 IPPS final rule (68 FR 45422), we 
did not respond to public comments on this proposal, due to the volume 
and nature of the public comments we received, and we indicated that we 
would address those comments later in a separate document. In the FY 
2005 IPPS proposed rule (69 FR 28286), we stated that we planned to 
address the FY 2004 comments regarding MA days in the IPPS final rule 
for FY 2005. In the FY 2005 IPPS final rule (69 FR 49099), we 
determined that, under Sec.  412.106(b)(2)(i) of the regulations, MA 
patient days should be counted in the Medicare fraction of the DPP 
calculation. We explained that, even where Medicare beneficiaries elect 
Medicare Part C coverage, they are still entitled to benefits under 
Medicare Part A. Therefore, we noted that if a MA beneficiary is also 
an SSI recipient, the patient days for that beneficiary will be 
included in the numerator of the Medicare fraction (as well as in the 
denominator) and not in the numerator of the Medicaid fraction. We note 
that, despite our explicit statement in the final rule that the 
regulations also would be revised, due to a clerical error, the 
corresponding regulation at Sec.  412.106(b)(2)(i) was not amended to 
explicitly reflect this policy until 2007 (72 FR 47384).
    On November 15, 2012, in a ruling in the case of Allina Health 
Services v. Sebelius (Allina), the Federal District Court for the 
District of Columbia (the court) held that the final policy of putting 
MA patient days in the Medicare fraction adopted in the FY 2005 IPPS 
final rule was not a logical outgrowth of the FY 2004 IPPS proposed 
rule (904 F. Supp. 2d 75 (D.D.C. 2012), appeal docketed, No. 13-5011 
(D.C. Cir. Jan. 11, 2013). The court held that interested parties had 
not been put on notice that the Secretary might adopt a final policy of 
counting the days in the Medicare fraction and were not provided an 
adequate further opportunity for public comment.
    We continue to believe that individuals enrolled in MA plans are 
``entitled to benefits under part A'' as the phrase is used in the DSH 
provisions at section 1886(d)(5)(F)(vi)(I) of the Act. Section 226(a) 
of the Act provides that an individual is automatically ``entitled'' to 
Medicare Part A when the person reaches age 65 or becomes disabled, 
provided that the individual is entitled to Social Security benefits 
under section 202 of the Act. Beneficiaries who are enrolled in MA 
plans provided under Medicare Part C continue to meet all of the 
statutory criteria for entitlement to Medicare Part A benefits under 
section 226 of the Act. Moreover, in order to enroll in Medicare Part 
C, or to change from one MA plan to another MA plan offered under Part 
C, a beneficiary must be ``entitled to benefits under Part A and 
enrolled under Part B'' (section 1852(a)(1)(B)(i) of the Act). Thus, by 
definition, a beneficiary must be entitled to Part A to be enrolled in 
Part C. There is nothing in the Act that suggests that beneficiaries 
who enroll in a Medicare Part C plan forfeit their entitlement to 
Medicare Part A benefits. To the contrary, a beneficiary who enrolls in 
Medicare Part C is entitled to receive benefits under Medicare Part A 
through

[[Page 50615]]

the MA plan in which he or she is enrolled, and the MA organization's 
costs in providing such Part A benefits are paid for by CMS with money 
from the Medicare Part A Trust Fund. In addition, under certain 
circumstances, Medicare Part A pays directly for care furnished to 
patients enrolled in Medicare Part C plans, rather than indirectly 
through Medicare Part A Trust Fund payments to MA organizations. For 
example, if, during the course of the year, the scope of benefits 
provided under Medicare Part A expands beyond a certain cost threshold 
due to Congressional action or a national coverage determination, 
Medicare Part A will pay the provider directly for the cost of those 
services (section 1852(a)(5) of the Act). Similarly, Medicare Part A 
also pays directly for federally qualified health center services and 
hospice care furnished to MA patients (section 1853(a)(4) and section 
1853(h)(2) of the Act, respectively). Thus, we continue to believe that 
a patient enrolled in an MA plan remains entitled to benefits under 
Medicare Part A, and should be counted in the Medicare fraction of the 
DPP, and not the Medicaid fraction.
    We also believe that our policy of counting patients enrolled in MA 
plans in the Medicare fraction was a logical outgrowth of the FY 2004 
IPPS proposed rule, and, accordingly, have appealed the decision in 
Allina. However, in an abundance of caution and for the reasons 
discussed above, in the FY 2014 IPPS/LTCH PPS proposed rule (78 FR 
27578), we proposed to readopt the policy of counting the days of 
patients enrolled in MA plans in the Medicare fraction of the DPP. We 
sought public comments from interested parties that may support or 
oppose the proposal to include the MA patient days in the Medicare 
fraction of the DPP calculation for FY 2014 and subsequent years. We 
indicated in the proposed rule that we would evaluate these public 
comments and consider whether a further change in policy is warranted, 
and would include our final determination in the FY 2014 IPPS/LTCH PPS 
final rule. We did not propose any change to the regulation text 
because the current text reflects the policy being proposed.
    Comment: A few commenters supported CMS' proposal to readopt the 
policy of including MA patient days in the numerator and denominator of 
the Medicare fraction of the DPP calculation. One commenter 
recommended, for consistency purposes, that MA days continue to be 
included in the Medicare fraction. Another commenter stated that the 
proposal makes logical sense because these patients remain entitled to, 
and receive, Medicare Part A benefits, and have simply chosen to 
receive them through an MA plan offered under Medicare Part C. The 
commenter also opined that the effect on the Medicare fraction would 
likely be minimal because the commenter believed that the majority of 
patients who enroll in Medicare Part C would not be likely to meet the 
income eligibility requirement for SSI benefits. Other commenters 
supported CMS' proposal to readopt the policy, stating that CMS will 
have provided all interested parties with adequate time and information 
to meaningfully participate in the rulemaking process.
    Response: We appreciate the commenters' support. We agree with 
commenters that a patient enrolled in a MA plan remains entitled to 
benefits under Part A and should be included in the Medicare fraction 
of the DPP and not the Medicaid fraction. We also agree with commenters 
that we have provided adequate notice and opportunity for the public to 
comment on our proposal to readopt our policy of counting the days of 
patients enrolled in MA plans in the Medicare fraction for FY 2014 and 
subsequent years. Furthermore, as discussed in more detail below, we 
continue to believe that we also provided adequate notice and 
opportunity for review and comment prior to the original adoption of 
the policy in the FY 2005 IPPS rule; and, therefore, we have appealed 
the court's decision in Allina which concluded that we did not. In 
addition, with regard to the commenter's assertion that the majority of 
patients who enroll in Medicare Part C would not be likely to meet the 
income eligibility requirement for SSI benefits, we disagree and note 
that research, such as the findings from the Medicare Current 
Beneficiary Survey as listed in the table below, has shown that Part C 
enrollees tend to have lower incomes at similar rates as Medicare 
beneficiaries who are not enrolled in Part C.

                                     Percentage of Medicare Beneficiaries by Income Level, Fee for Service and Risk
                                                                   HMO: 2009-2011 \12\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                  2011 Fee-                        2010 Fee-                        2009 Fee-
                  Beneficiaries (%)                       2011       for-    2011 Risk     2010       for-    2010 Risk     2009       for-    2009 Risk
                                                         Total     service      HMO       Total     service      HMO       Total     service      HMO
--------------------------------------------------------------------------------------------------------------------------------------------------------
Less than $5,000.....................................       3.47       3.69       2.84       4.17       4.29       3.82       3.86       4.07       3.19
$5,000-$9,999........................................      10.92      11.03      10.61      10.94      11.00      10.78      11.75      12.01      10.92
$10,000-$14,999......................................      13.76      13.50      14.50      13.94      13.63      14.86      14.00      13.35      16.03
$15,000-$19,999......................................       9.51       8.48      12.34      10.13       9.01      13.46       9.97       9.20      12.38
$20,000-$24,999......................................       9.17       8.52      10.97       8.67       8.15      10.21       9.00       8.33      11.11
$25,000-$29,999......................................       7.88       7.65       8.53       8.02       7.85       8.53       8.80       8.40      10.03
$30,000-$39,999......................................      13.18      12.88      14.00      13.44      13.17      14.23      13.30      13.19      13.63
$40,000-$49,999......................................       9.92       9.96       9.82       9.83      10.21       8.70       9.65      10.02       8.49
$50,000 or more......................................      22.18      24.28      16.39      20.87      22.71      15.41      19.67      21.43      14.21
--------------------------------------------------------------------------------------------------------------------------------------------------------
\12\ Sources: Medicare Current Beneficiary Survey. 2011 Characteristics and Perceptions of the Medicare Population. 2010 Characteristics and Perceptions
  of the Medicare Population. 2009 Characteristics and Perceptions of the Medicare Population. Available at: http://www.cms.gov/Research-Statistics-Data-and-Systems/Research/MCBS/Data-Tables.html.
Note: As described in the sources, income estimates are derived from imputed income data. Standard errors of income estimates may be underestimated as
  they have not been adjusted to reflect the imputation of missing data.

    Comment: A few commenters stated that the policy proposal promotes 
the integrity of the 340B program. The commenters stated that the size 
of the 340B program has far exceeded Congress' intent to help safety-
net providers cover the costs of uncompensated pharmaceutical care; and 
including MA patient days in the Medicare fraction helps to ensure that 
a hospital's DPP is not artificially inflated, thereby helping to curb 
some of the recent abuse and promote the program's original goals. In 
addition, the commenters stated that, given that section 3133 of the 
Affordable Care Act reduces aggregate DSH funding beginning in FY 2014, 
providing oversight of the 340B program will be critical. The 
commenters stated that, with less DSH funds available, ensuring

[[Page 50616]]

that entities with inflated DPPs do not divert funds from truly DSH 
eligible providers is critical to maintain that the support is provided 
where it will be the most beneficial, as intended by Congress. In 
addition, one commenter stated that CMS has an opportunity to provide 
protection for DPP values for hospitals located in States where 
Medicaid was not expanded under the intent of the Affordable Care Act. 
The commenter recommended that CMS issue rules that grandfather current 
providers who qualify for 340B prescription drug discounting until 
further impacts of the Affordable Care Act can be reviewed and a new 
standard be determined for hospitals located in States that are not 
expanding the Medicaid program to levels prescribed under the 
Affordable Care Act.
    Response: Although we appreciate receiving the commenters' views on 
the 340B program, we note that this program is administered by HRSA and 
is not within the scope of this rulemaking. Additionally, we note that 
we believe the commenter that made the recommendation about issuing 
rules that would grandfather current providers who qualify for 340B 
prescription drug discounting until further impacts of the Affordable 
Care Act can be assessed for hospitals located in States that are not 
expanding the Medicaid program, may be confused about how the statute, 
specifically the Affordable Care Act, ``protects'' DPP values.
    Comment: Many commenters opposed CMS' proposal and urged CMS to 
exclude MA patient days from the Medicare fraction of the DPP 
calculation. These commenters disagreed that individuals enrolled in 
Medicare Advantage are ``entitled'' to benefits under Part A, and 
asserted that the policy proposal is not dictated by the statute and is 
inconsistent with their view of the intent of Congress. The commenters 
argued that, in examining the statute and CMS' regulations, it is clear 
to them that MA enrollees are not entitled to benefits under Part A 
and, therefore, should be excluded from the Medicare fraction. These 
commenters cited three provisions of the statute in support of this 
argument:
     Section 226(c)(1) of the Act, which states ``entitlement 
of an individual to hospital insurance benefits for a month [under Part 
A] shall consist of entitlement to have payment made under, and subject 
to the limitations in, [P]art A . . . .''
     Section 1851(a)(1) of the Act, which states that the 
persons eligible for Medicare Advantage are ``entitled to elect to 
receive benefits'' either ``through the original [M]edicare fee-for-
service program under [P]arts A and B, or through enrollment in a 
[Medicare Advantage] plan under [Part C].''
     Section 1851(i)(1) of the Act, which states that 
``payments under a contract with a [Medicare Advantage] organization . 
. . with respect to an individual electing a [Medicare Advantage] plan 
. . . shall be instead of the amounts which (in the absence of the 
contract) would otherwise be payable under [P]arts A and B . . . .''
    The commenters contended that because individuals who enroll in an 
MA plan receive benefits under Part C and not Part A, they cannot be 
``entitled'' to benefits under Part A because, in the commenters' view, 
they no longer receive benefits under Part A. They argued that 
beneficiaries are not ``entitled'' to benefits that the commenters 
believe the law denies them, and therefore, CMS' interpretation is 
unreasonable.
    Response: We disagree that Medicare beneficiaries enrolled in Part 
C no longer receive benefits under Part A and that, because the payment 
structure of Part C applies (that is, CMS pays the MA plans so that the 
plans may make payment to hospitals for the care of the beneficiaries), 
those beneficiaries are not entitled to Part A benefits. As we stated 
above, section 226(A) of the Act provides that an individual is 
automatically ``entitled'' to Medicare Part A when the person reaches 
age 65 or becomes disabled, provided that the individual is entitled to 
Social Security benefits under section 202 of the Act.
    This interpretation is consistent with our conclusion that Congress 
uses the phrase ``entitled to benefits under part A'' to consistently 
refer to an individual's status as a Medicare beneficiary. We agree 
with the United States Court of Appeals for the Sixth Circuit when it 
recently explained, ``the phrase `entitled to benefits under [Medicare] 
part A' appears in more than 30 other sections of the Medicare statute, 
indicating that the phrase has a specific, consistent meaning 
throughout the statutory scheme, rather than a varying, context-
specific meaning in each section and subsection. (We refer readers to 
Ali v. Fed. Bureau of Prisons, 552 U.S. 214, 222 (2008) (noting that 
statutory construction ``must, to the extent possible, ensure that the 
statutory scheme is coherent and consistent'') and Metro. Hosp. v. U.S. 
Dep't of Health & Human Servs., 712 F.3d 248, 260 (6th Cir. 2013) 
(holding that including patients who have exhausted inpatient benefits 
in the Medicare fraction is consistent with how ``entitled to benefits 
under part A'' is used throughout the Medicare statute).) Enrolling in 
Part C does not change an enrollee's status as a Medicare beneficiary 
and does not remove or reduce any benefits the beneficiary would 
otherwise have received; indeed, the MA plan must provide the benefits 
to which the beneficiary is entitled under Part A and may provide 
additional benefits as described by section 1852(a)(1)(A) of the Act. 
We agree with the Court of Appeals for the District of Columbia Circuit 
that ``Congress has not clearly foreclosed the Secretary's 
interpretation that [Part C] enrollees are entitled to benefits under 
Part A. Rather, it has left a statutory gap, and it is for the 
Secretary . . . to fill that gap'' (Northeast Hosp. Corp. v. Sebelius; 
657 F.3d 1, 13 (D.C. Cir. 2011)). We further note that the D.C. Circuit 
has already rejected many of the commenters' view that the agency's 
interpretation is inconsistent with the plain language of the statute 
(Id. at 6-13).
    Thus, for purposes of section 226(c)(1) of the Act, beneficiaries 
enrolled in Part C are having payment made under Part A for the month 
in question, via the Part A component of the monthly payment made to 
the MA organization, and are receiving Part A benefits subject to the 
limitations on such benefits provided for in Part A.
    For purposes of section 1851(a)(1) of the Act, the ``benefits'' 
referenced in the phrase quoted by the commenters (``entitled to elect 
to receive benefits'') are the benefits provided for in Part A and Part 
B. Thus, this language confirms that beneficiaries enrolled in Part C 
remain ``entitled to'' benefits under Part A, and thus supports our 
interpretation of the statute. It is only the vehicle ``through'' which 
such Part A benefits are received that changes, from the ``fee-for-
service'' method spelled out under Part A, to the capitation payment 
method spelled out in Part C.
    Section 1851(i)(1) of the Act similarly refers only to whether Part 
A benefits are provided via payments to, and by, the MA organization, 
or direct payments made under the ``fee-for-service'' payment 
procedures provided for in Part A and Part B. It is only the process 
for furnishing these benefits that is at issue, not entitlement to such 
benefits.
    Comment: Another commenter objecting to our proposal noted that 
section 1886(d)(5)(F) of the Act, which defines the Medicare and 
Medicaid fractions of the DPP calculation, has not undergone any 
significant amendments since its enactment, and was never amended to 
explicitly address the creation of Medicare Part C. As such, the 
commenter asserted that Part C days

[[Page 50617]]

should clearly be excluded from the Medicare fraction because the 
commenter believed that services paid for under Part C cannot also 
result in a patient being entitled to benefits for those services under 
Part A. However, the commenter asserted that Part C days are clearly 
not excluded from the Medicaid fraction because ``the numerator of the 
Medicaid fraction includes all hospital patient days (regardless of 
under which `Part' of Medicare) for which the patient was `eligible' 
for Medicaid as well as Medicare, but for which the patient was not 
entitled to receive benefits under Part A of Medicare . . . .''
    Response: The enactment of the current provisions in Medicare Part 
C authorizing an alternative way of receiving Part A benefits did not 
alter the criteria for entitlement to such benefits, any more than did 
earlier, similar provisions in section 1876 of the Act that were 
enacted in 1982. Indeed, language in section 1876 made clear that a 
beneficiary was still ``entitled to benefits under Part A'' while 
receiving Part A benefits through a private health plan paid by CMS to 
provide them because section 1876 provided for two classes of 
enrollees, one only enrolled in Part B, and another ``entitled to 
benefits under Part A'' and enrolled in Part B, and provided for Part A 
Trust Fund payments in the latter case, and only Part B payments in the 
former. There is no indication that Part C enrollees are not similarly 
``entitled to benefits under Part A'' on an ongoing basis.
    With regard to the Medicaid fraction, as stated in section 
1886(d)(5)(F) of the Act, the number of patient days for patients who, 
for those days, were eligible for medical assistance under a State plan 
approved under Title XIX (Medicaid) but who were not entitled to 
benefits under Medicare Part A is divided by the total number of 
patient days for that same period. MA enrollees are entitled to 
benefits under Medicare Part A, and therefore, these patient days 
should not be included in the Medicaid portion of the calculation. It 
is CMS' interpretation that the statute provides support to include MA 
days in the Medicare fraction. The statute requires that the inpatient 
days be attributable to inpatients entitled to benefits under Part A. 
Section 1851(a)(3) of the Act defines an individual that is eligible to 
enroll in an MA plan as an individual who is entitled to benefits under 
Part A and enrolled under Part B. We have concluded that, based on 
section 1886(d)(5)(F) of the Act, MA enrollee patient days should be 
included in calculating the DSH adjustment by finding that such 
enrollees are otherwise entitled to benefits under Part A. In other 
words, MA patients are entitled to Medicare Part A prior to and after 
selecting Part C, and because they do not lose that entitlement when 
they choose to enroll in a Part C plan, our position is that the 
Medicare Part C days should be included in the Medicare fraction, 
regardless of whether the beneficiary opts for Part C coverage.
    Comment: Another commenter argued that, while it is true that a 
patient must at some point be entitled to benefits under Part A in 
order to be eligible to enroll in Part C, once an enrollee has chosen 
Part C, he or she is no longer entitled to Part A benefits and instead, 
the payment structure in Part C applies, and CMS pays MA organizations 
for those beneficiaries, while the MA organizations pay the providers. 
The commenter also asserted that this was evidence that Congress did 
not intend to include Part C days in the Medicare fraction because if 
it had, Congress could have easily revised the DSH statute to indicate 
as such.
    Response: Again, this commenter confuses the method for covering 
Part A benefits with whether an individual is entitled to receive such 
benefits. We refer readers to the previous response for a fuller 
discussion.
    Comment: One commenter stated that the proposed policy would be 
inconsistent with prior practice and CMS' longstanding operational 
treatment of Part C days in Medicare Part A calculations because 
services furnished to Part C enrollees historically were recorded as 
non-Medicare days. The commenter further stated that, similarly, CMS 
has historically interpreted entitled to benefits under Part A to mean 
entitlement to payment for inpatient hospital care under the IPPS. The 
commenter also asserted that the proposed policy is inconsistent with 
CMS' interpretation of entitled to SSI benefits in the DSH statute 
because CMS construes this to mean including only those days for 
patients who were entitled to have SSI benefits actually paid to them 
on such days. Therefore, the commenter argued, even when an individual 
is entitled to payment of SSI benefits, CMS does not count the day as 
an SSI patient day if there is some other reason why the Social 
Security Administration does not make the payment owed to the 
individual.
    Response: While we acknowledge that in the past CMS has not always 
captured MA patient days as Medicare days, this was an operational 
issue, not the result of an authoritative agency legal interpretation 
or Medicare payment policy decision not to include MA days in the 
Medicare fraction. We note that these operational issues persisted for 
a time after we expressly concluded that MA days should be counted in 
the Medicare fraction in the FY 2005 IPPS rule. Contrary to the 
commenter's assertion, we have not, as a matter of either legal 
interpretation or policy, considered the days of patients enrolled in 
MA plans to be non-Medicare days. Patients enrolled in Medicare Part C 
must be entitled to Medicare Part A and enrolled in Part B. Moreover, 
the days of patients enrolled in Medicare HMOs are considered to be 
paid or covered days even though the payment may be made indirectly 
through a section 1876 HMO or through an MA plan. We note that the 
original Medicare DSH regulations indicated that patients receiving 
their Part A benefits under section 1876 of the Act were to count as 
Medicare patient days.
    We further disagree with the commenter that CMS' interpretation is 
unreasonable and inconsistently interprets the term ``entitled to 
benefits.'' To the contrary, we adopted this interpretation of 
``entitled to benefits under part A'' in large part in order to be 
consistent with how that phrase is used elsewhere in the Act. Section 
1886(d)(5)(F)(vi)(I) of the Act specifically notes that the numerator 
of the Medicare fraction must reflect patient days for patients 
``entitled to benefits under part A'' who are also ``entitled to 
supplementary security income benefits (excluding any State 
supplementation) under title XVI of this Act.'' Regarding entitlement 
to SSI benefits, we note that section 1602 of the Act states that 
``Every aged, blind, or disabled individual who is determined under 
part A to be eligible on the basis of his income and resources shall, 
in accordance with and subject to the provisions of this title, be paid 
benefits by the Commissioner of Social Security.'' Therefore, because 
SSI is a cash benefit, only a person who is actually paid these 
benefits can be considered entitled to these benefits. This differs 
from entitlement to Medicare benefits under Part A, which are a 
distinct set of health insurance benefits described under section 1812 
of the Act, including coverage of inpatient hospital, inpatient 
critical access hospital, and post-acute care services as well as post-
institutional home health and hospice services under certain 
conditions. We note that the agency has undertaken extensive effort and 
notice-and-comment rulemaking to establish a process to identify 
appropriately Medicare patient days for which a beneficiary was 
simultaneously eligible for SSI benefits in the FY 2011 IPPS/

[[Page 50618]]

LTCH PPS final rule (75 FR 50275 through 50286).
    Comment: One commenter noted that the Medicare fraction does not 
include patient days for Medicare beneficiaries enrolled in Medicare 
Part B only. The commenter further argued that, similarly, the Medicare 
fraction does not include all patient days for some individuals who are 
eligible for and enrolled in Part A because Part A patient days in 
hospital units excluded from the IPPS are not included in the Medicare 
fraction, even if actually paid under Part A. The commenter asserted 
that as the DPP calculation is limited to patient days in areas of the 
hospital that provide services that are paid for under the IPPS, in the 
same way, the Medicare fraction should exclude patient days for 
Medicare beneficiaries who have elected to receive benefits under Part 
C--because these days are not paid under the IPPS, they should not be 
included in the Medicare fraction.
    Response: In the case of a Medicare beneficiary enrolled only in 
Part B, we agree that such an individual is not ``entitled to benefits 
under Part A,'' and thus is clearly distinguishable from a beneficiary 
who is entitled to benefits under Part A, but has elected to enroll in 
a Part C plan.
    We note that commenters may be misunderstanding our policy when 
they asserted that the days of patients enrolled in Part C should not 
be included in the Medicare/SSI fraction because the DSH calculation 
does not include patient days in hospital units excluded from the IPPS 
but paid under Part A. The regulation at 42 CFR 412.106(a)(1)(ii) 
limits the patient days used in determining a hospital's DPPs to 
patient days ``attributable to units or wards of the hospital providing 
acute care services generally payable under the [inpatient] prospective 
payment system.'' Patient days associated with beds in excluded 
distinct part hospital units are explicitly excluded from the DPP 
calculation in accordance with 42 CFR 412.105(a)(1)(ii)(A). In 
contrast, the days for MA beneficiaries that are counted in the 
Medicare/SSI fraction are days on which those beneficiaries received 
care that would be (and in some cases actually was) payable under IPPS. 
Accordingly, CMS' policies regarding patient days in excluded distinct 
part units provide no reason to treat Part C enrollees differently than 
other patients also entitled to benefits under Part A.
    Comment: One commenter argued that the instances where a Part C 
beneficiary can have services paid under Part A are extremely limited, 
both in scope and duration, and asserted that CMS' descriptions of the 
exceptions overstate the extent to which Part A payments actually can 
be obtained by Part C beneficiaries. The commenter also contended that 
this illustrates that when Congress has wanted to explain how Part C 
and Part A benefits relate to one another, Congress has done so 
explicitly, and without ambiguity. Another commenter added that when 
Congress added Part C to the Medicare statute, it did not amend the DSH 
statute to require CMS to treat Part C days differently for DSH payment 
purposes, and that intent should be given effect by continuing to 
exclude Part C days from the Medicare fraction and including Medicaid 
eligible Part C days in the numerator of the Medicaid fraction.
    Response: While we appreciate the comments noting that instances 
where a Part C beneficiary can have services paid under Part A are 
limited, we disagree that our description of these exceptions 
overstates the extent to which Part A payments can be obtained by Part 
C beneficiaries. Under the commenters' view of the statute, 
beneficiaries enrolled in MA plans are not ``entitled to benefits under 
Part A,'' which would suggest that Medicare Part A should not make any 
payments on their behalf. However, as discussed above, there are 
instances where Part A is required to do just that. The hospice 
benefit, for instance, is a significant part of the benefits available 
under Part A that is always paid for on a fee-for-service basis, even 
if the beneficiary is enrolled in an MA plan. We find these 
circumstances impossible to reconcile with the commenter's assertion 
that beneficiaries enrolled in MA plans are not ``entitled to benefits 
under Part A.'' Rather, these payments make clear that beneficiaries 
enrolled in MA plans are ``entitled to benefits under Part A,'' 
regardless of the frequency or magnitude of these claims for payment.
    Comment: Commenters stated that CMS still does not discuss that 
including MA days in the Medicare fraction would be a reversal of its 
prior position and, therefore, is both substantively and procedurally 
flawed. Some commenters argued that CMS did not include a reasoned 
explanation for what they characterize as a reversal of policy.
    Some commenters contended that CMS, in both the FY 2004 proposed 
rule and the FY 2005 final rule, acknowledged that the statute is 
susceptible to multiple interpretations, including the agency's own 
previous position that individuals enrolled in the MA plans should not 
be included in the Medicare fraction, and that the FY 2014 proposed 
rule only slightly elaborates on the assertion in the FY 2005 final 
rule that individuals enrolled in MA plans ``are still, in some sense 
entitled to benefits under Medicare Part A.'' Commenters stated that, 
in Allina, the court found the FY 2005 final rule was flawed because 
CMS did not acknowledge that the policy was a reversal of the agency's 
prior interpretation, and did not give a sufficient explanation for 
that reversal in interpretation, and that the FY 2014 proposed rule 
does not correct those deficiencies, but instead just states that CMS 
``continues'' to believe that MA patient days should be included in the 
Medicare fraction.
    Response: We disagree that including the MA days in the Medicare 
fraction is a reversal of prior policy. No final regulation, 
administrative decision, or subregulatory guidance issued by the 
Secretary has ever taken the position that MA days were to be excluded 
from the Medicare fraction. Similarly, no final regulation, 
administrative decision, or subregulatory guidance issued by the 
Secretary has ever taken the position that MA days should be included 
in the numerator of the Medicaid fraction. Accordingly, commenters are 
incorrect insofar as they suggest that including MA days in the 
Medicare fraction represents a reversal of a prior policy. However, we 
acknowledge that, although the DC Circuit held in Northeast that the 
agency had a practice of excluding MA days from the Medicare fraction 
prior to the FY 2005 rule (657 F.3d at 17), the court did not hold that 
the Secretary had adopted a legal interpretation of the phrase 
``entitled to benefits under part A'' or an authoritative agency 
Medicare payment policy that would require excluding MA days from the 
Medicare fraction (Id. at 14-17).
    In fact, in the FY 1990 IPPS final rule (55 FR 35994), CMS made 
clear that its policy was to include the days of patients enrolled in 
managed care plans in the Medicare fraction:
    ``Based on the language of section 1886(d)(5)(F)(vi) of the Act, 
which states that the disproportionate share adjustment computations 
should include `patients who were entitled benefits under Part A', we 
believe it is appropriate to include the days associated with Medicare 
patients who receive care at a qualified [health maintenance 
organization (HMO)]. Prior to December 1, 1987, we were not able to 
isolate the days of care associated with Medicare patients in HMOs and, 
therefore, were unable to fold this number into the calculation. 
However, as of December 1, 1987, a field was

[[Page 50619]]

included on the Medicare Provider Analysis and Review (MedPAR) file 
that allows us to isolate those HMO days that are associated with 
Medicare patients. Therefore, since that time, we have been including 
HMO days in SSI/Medicare percentage.''
    We note that a recent review of our records from the years 
immediately before the implementation of Part C demonstrates that the 
MedPAR data used to calculate Medicare fractions for those years 
includes the days of patients enrolled in section 1876 HMOs.
    Prior to the FY 2004 proposed rule, this was the only authoritative 
agency interpretation relating to the treatment of patient days of 
individuals enrolled in managed care plans. When Congress created Part 
C in the Balanced Budget Act of 1997 (BBA) (Pub. L. 105-33, 111 Stat. 
251 (Aug. 5, 1997)), section 1876 HMO days were being counted in the 
Medicare fraction, and were correspondingly being excluded from the 
Medicaid fraction. On January 1, 1999, patients enrolled in risk HMOs 
under section 1876 of the Act were automatically enrolled in M+C plans. 
We issued no guidance discussing how the change in the type of HMO, 
from section 1876 to M+C, would have affected the DSH calculation. We 
see no reason why the reorganization in the managed care structure, 
from section 1876 HMOs into Part C, should have any bearing on how a 
day counts in the DSH calculation. The BBA does not specifically 
address DSH, and we thus believe it was appropriate that MA patients 
should have continued to be counted in the Medicare fraction after its 
enactment. Indeed, the BBA provided that to enroll in an MA plan, an 
individual must be ``entitled to benefits under part A''--the same 
language used in the DSH provision. Individuals enrolled in MA plans 
continue to meet the age and disability requirements for entitlement to 
benefits under Medicare Part A, and thus should be included in the 
Medicare fraction.
    Our contractors, having received no instructions to the contrary, 
continued to exclude the days of patients enrolled in Medicare HMOs 
(now mostly M+C) from the numerator of the Medicaid fraction. However, 
at this same time, and for reasons that are not clear to us now, the 
agency generally stopped collecting no-pay bills from hospitals and 
therefore lacked the data necessary to include Part C days in the 
Medicare fraction. We are aware of nothing to suggest that the failure 
to include Part C days in the Medicare fraction was the result of any 
reasoned decision making or even, in fact, that the relevant policy 
makers were aware the Part C days were not being counted in the 
Medicare fraction. Consequently, Medicare Part C days were largely not 
included in the DSH calculation at all, except for the denominator of 
the Medicaid fraction which includes all patient days.
    We further note that even when the agency promulgated the FY 2005 
IPPS final rule, which expressly stated that MA days should be included 
in Medicare fraction, the agency did not begin collecting the data that 
would have allowed for their inclusion. We believe that this suggests 
that relevant policymakers thought that MA days were being included in 
the Medicare fraction. However, as discussed in detail above, CMS has 
since taken action to ensure that we are collecting the data necessary 
to include these days in the Medicare fraction.
    In short, we disagree that the decision in the FY 2005 IPPS rule to 
include MA days in the Medicare fraction, and to exclude them from the 
numerator of the Medicaid fraction, was a reversal of prior policy. We 
had not (in rulemaking or through subregulatory guidance) specifically 
addressed the treatment of MA days prior to the FY 2004 proposed rule, 
although we acknowledge that, as a matter of practice, MA days 
generally had not been counted in either fraction. Accordingly, 
commenters are incorrect insofar as they suggested that including MA 
days in the Medicare fraction, and excluding them from the Medicaid 
fraction, represents a reversal of prior policy.
    In the FY 2005 IPPS final rule, CMS determined that M+C days should 
be included in the Medicare fraction because M+C beneficiaries ``. . . 
are still, in some sense, entitled to benefits under Medicare Part A'' 
(69 FR 49099). CMS acknowledged that, in the FY 2004 proposed rule, it 
had noted that although a beneficiary must be entitled to Medicare Part 
A to enroll in an M+C plan, when an individual enrolls in an M+C plan, 
his or her benefits are ``no longer administered under Part A,'' and 
had proposed to exclude M+C days from the Medicare fraction and to 
include them in the Medicaid fraction numerator if the M+C days 
enrollee was also eligible for Medicaid (69 FR 49099.) CMS further 
noted that the proposed rule recognized that whether MA days should be 
included in the Medicare or the Medicaid fraction ``stems from whether 
M+C plan enrollees are entitled to benefits under Medicare Part A'' (69 
FR 49099). CMS thus made clear its view that MA days should be counted 
in one fraction or the other. CMS explained that after considering 
comments received to its proposal--including the comment that M+C 
enrollees ``are just as much Medicare beneficiaries as those 
beneficiaries in the traditional fee-for-service program''--it 
ultimately agreed with those that opposed its proposal on the ground 
that M+C enrollees remain ``entitled to benefits under part A'' in the 
relevant sense for determining whether they should be included in the 
Medicare or Medicaid fraction.
    CMS thus responded to the comments that were most relevant to the 
question before the agency: how to interpret the phrase ``entitled to 
benefits under part A'' in the DSH provision and provided a reasoned 
explanation for including MA days in the Medicare fraction. As set 
forth above, CMS continues to believe that its interpretation reflects 
the statutory language and congressional intent. Indeed, when it 
enacted the DSH provision, Congress intended that the Medicare fraction 
serve as a proxy for the percentage of low-income Medicare patients and 
the Medicaid fraction serve as a proxy for the percentage of low-income 
non-Medicare patients. When Congress subsequently created Part C, it 
provided that to enroll in part C, an individual must be ``entitled to 
benefits under part A''--the same language that it used in the DSH 
provision. Thus, Part C enrollees are a subset of individuals 
``entitled to benefits under part A,'' and therefore should be included 
in the Medicare fraction.
    Comment: Some commenters added that it is unclear what CMS is 
actually proposing because the proposal to readopt the policy of 
counting MA patient days in the Medicare fraction is for FY 2014 and 
subsequent years, but CMS also stated that it believes the policy 
adopted in the FY 2005 final rule was a logical outgrowth of the FY 
2004 proposed rule. The commenters asserted that CMS' statements 
suggest that CMS is also planning to apply the policy to correct 
retroactively invalid past rulemaking. Some commenters stated that CMS 
cannot retroactively validate invalid rulemakings by restating the 
positions it adopted in FY 2005, through notice-and-comment rulemaking 
for FY 2014, and in the absence of a Congressional grant of retroactive 
rulemaking authority, an attempt to cure prior deficient proceedings is 
similarly invalid.
    Response: We disagree that the FY 2014 IPPS/LTCH PPS proposed rule 
seeks to validate retroactively an invalid rulemaking as the commenter 
asserted. We proposed to readopt the policy of counting the days of 
patients enrolled in MA plans in the Medicare fraction of the DPP for 
FY 2014 and subsequent years in an abundance of caution and have 
considered the public comments

[[Page 50620]]

received in support of and in opposition to our proposal in making our 
final determination.
    Comment: Commenters stated that CMS cannot finalize its new 
proposed policy for FY 2014 because CMS has not corrected the 
deficiencies cited by the court in Allina, and by doing so, CMS would 
be acting in an arbitrary and capricious manner in violation of the 
Administrative Procedure Act. The commenters added that, while they 
urge CMS not to finalize its proposal, if it does choose to move 
forward, the agency must provide a thorough discussion and allow 
stakeholder comment on it before deciding whether to finalize its 
proposal. Some commenters also stated that the ambiguity in CMS' 
proposal does not provide affected parties adequate notice to properly 
comment on the proposal. Commenters stated that a complete and thorough 
discussion is critical because, citing the decision in FCC v. Fox 
Television Stations (556 U.S. 502 (2009), when stakeholders come to 
rely on a certain policy, an agency must give a more detailed 
explanation for changing its policy than would be necessary for a 
policy created on a blank slate.
    Response: Our proposed rule did not propose a change in policy, but 
rather to readopt a policy that we finalized in the FY 2005 IPPS final 
rule. We believe that commenters favoring our proposal and those 
opposed have had a fair opportunity to comment both in response to the 
FY 2004 proposed rule and the present proposed rule. We also believe 
that we have fully explained why our proposal is an appropriate and 
consistent interpretation of the DSH statute.
    Comment: Commenters stated that the court in Northeast Hospital v. 
Sebelius (657 F.3d at 5) opined that the fiscal impact of this policy 
change was a number in the hundreds of millions of dollars, and they 
requested that CMS release data as to whether this estimate is correct 
and, if not, provide the dollar impact so that hospitals can 
meaningfully assess this policy change in advance of issuing the final 
rule.
    Response: We note that we proposed to readopt this policy for FY 
2014 and subsequent years. Because this proposal is consistent with our 
longstanding policy, it is not considered a change in our policy. 
Accordingly, we do not believe that there will be additional savings or 
costs to the Medicare program, and by inference, to hospitals, as a 
result of this policy.
    Comment: One commenter stated that the issue is further confused by 
the fact that, as discussed in the proposed budget presented by the 
President on April 10, 2013, the agency intends to ask Congress to 
``clarify that individuals who have exhausted inpatient benefits under 
Part A or who have elected to enroll in part C plans should be included 
in the calculation of the Medicare fraction of hospitals' [DPP 
calculation].'' The commenter stated that the agency's position 
regarding where such days should be counted has been rejected by the 
courts in several cases such as Northeast v. Sebelius and Allina v. 
Sebelius. The commenter asserted that asking Congress to clarify how 
these days should be treated in the DSH calculation is an attempt to 
reverse unfavorable court decisions. The commenter also asserted that 
from the beginning of the DSH program until the FY 2005 final rule, CMS 
administered the program exactly as the commenter asserted that it 
should have been administered then and today stating that: ``1. CMS did 
not count Medicare managed care days in the SSI fraction; 2. From the 
outset of the Medicare + Choice program CMS instructed hospitals not 
receiving IME/GME reimbursement to not shadow bill M+C claims, which is 
the very data CMS needed to include the days in the SSI fraction; 3. 
CMS' practice from the beginning of the program was to count all 
Medicaid paid days in the Medicaid fraction, which included Part A 
exhausted days.''
    Response: Although we appreciate receiving the commenter's views, 
proposals in the President's budget and/or pending legislation are 
outside the scope of this rulemaking. As we have previously stated, it 
has never been CMS policy that MA days were to be included in the 
Medicaid fraction. We remind commenters that CMS issued Change Request 
6329 on March 6, 2009, and Change Request 5647 on July 20, 2007, to 
instruct hospitals to submit informational claims for MA patients for 
FY 2006 and FY 2007 and subsequent periods when it was brought to our 
attention that hospitals were not submitting these claims, and contrary 
to our regulations, we were administratively unable to include these MA 
days in the Medicare fraction. Furthermore, we note that CMS issued 
Change Request 5647 to provide hospitals additional time to submit FY 
2007 claims when it was brought to our attention that compliance with 
our policy was uneven, partly due to the fact that teaching hospitals 
have a financial incentive to submit these claims because they receive 
IME payments for MA discharges while nonteaching hospitals receive no 
additional IME payment.
    Comment: One commenter stated that if CMS maintains its view that 
MA days properly belong in the Medicare fraction, then IPPS hospitals 
should receive a DSH add-on payment for every MA beneficiary discharge 
in the same manner that IPPS hospitals receive an IME payment add-on 
for every MA beneficiary discharge.
    Response: We appreciate receiving the commenters' views. However, 
we note that while section 1886(d)(11) of the Act explicitly provides 
for an IME payment add-on for each MA beneficiary discharge, section 
1886(d)(5)(F) of the Act does not provide for a similar DSH payment 
add-on for each MA beneficiary discharge. A legislative change would be 
necessary to authorize such DSH payments to IPPS hospitals that treat 
MA beneficiaries.
    After consideration of the public comments we received, we are 
finalizing our proposal to readopt the policy of counting the days of 
patients enrolled in MA plans in the Medicare fraction of the DPP for 
FY 2014 and subsequent years. We continue to believe this policy is 
most consistent with the language of the statute, congressional intent, 
and the structure of the DSH calculation.
3. New Payment Adjustment Methodology for Medicare Disproportionate 
Share Hospitals (DSHs) Under Section 3133 of the Affordable Care Act 
(Sec.  412.106)
a. General Discussion and Legislative Change
    Section 3133 of the Patient Protection and Affordable Care Act 
(PPACA), as amended by section 10316 of PPACA and section 1104 of the 
Health Care and Education Reconciliation Act (Pub. L. 111-152), added a 
new section 1886(r) to the Act that modifies the methodology for 
computing the Medicare DSH payment adjustment beginning in FY 2014. For 
purposes of this rule, we refer to these provisions collectively as 
section 3133 of the Affordable Care Act.
    Currently, Medicare DSH adjustment payments are calculated under a 
statutory formula that considers the hospital's Medicare utilization 
attributable to beneficiaries who also receive Supplemental Security 
Income (SSI) benefits and the hospital's Medicaid utilization. 
Beginning for discharges in FY 2014, hospitals that qualify for 
Medicare DSH payments under section 1886(d)(5)(F) will receive 25 
percent of the amount they previously would have received under the 
current statutory formula for Medicare DSH payments. This provision

[[Page 50621]]

applies equally to all hospitals that qualify for DSH payments under 
section 1886(d)(5)(F)(i)(II) of the Act. Section 1886(d)(5)(F)(i)(II) 
of the Act provides for a method known as the ``Pickle'' adjustment 
under which a hospital that is located in an urban area and has 100 or 
more beds may receive a Medicare DSH payment adjustment if the hospital 
can demonstrate that, during its cost reporting period, more than 30 
percent of its net inpatient care revenues are derived from State and 
local government payments for care furnished to needy patients with low 
incomes. Pursuant to new section 1886(r) of the Act, hospitals that 
qualify for the Pickle method of the DSH payment adjustment would 
receive 25 percent of the 35-percent add-on adjustment for which they 
would otherwise qualify under section 1886(d)(5)(F)(i)(II) of the Act. 
The remaining amount, equal to an estimate of 75 percent of what 
otherwise would have been paid as Medicare DSH payments, reduced to 
reflect changes in the percentage of individuals under age 65 who are 
uninsured, will become available to make additional payments to each 
hospital that qualifies for Medicare DSH payments and that has 
uncompensated care. The payments to each hospital for a fiscal year 
will be based on the hospital's amount of uncompensated care for a 
given time period relative to the total amount of uncompensated care 
for that same time period reported by all hospitals that receive 
Medicare DSH payments for that fiscal year.
    As provided by section 3133 of the Affordable Care Act, section 
1886(r) of the Act requires that, for ``fiscal year 2014 and each 
subsequent fiscal year,'' a ``subsection (d) hospital'' that would 
otherwise receive a ``disproportionate share hospital payment . . . 
made under subsection (d)(5)(F)'' will receive two separately 
calculated payments. Specifically, section 1886(r)(1) of the Act 
provides that the Secretary shall pay to such a subsection (d) hospital 
(including a Pickle hospital) 25 percent of the amount the hospital 
would have received under section 1886(d)(5)(F) of the Act for 
disproportionate share payments, which represents ``the empirically 
justified amount for such payment, as determined by the Medicare 
Payment Advisory Commission in its March 2007 Report to the Congress.'' 
We refer to this payment as the ``empirically justified Medicare DSH 
payment.''
    In addition to this payment, section 1886(r)(2) of the Act provides 
that, for fiscal year 2014 and each subsequent fiscal year, the 
Secretary shall pay to ``such subsection (d) hospital an additional 
amount equal to the product of'' three factors. The first factor is the 
difference between ``the aggregate amount of payments that would be 
made to subsection (d) hospitals under subsection (d)(5)(F) if this 
subsection did not apply'' and ``the aggregate amount of payments that 
are made to subsection (d) hospitals under paragraph (1)'' for each 
fiscal year. Therefore, this factor amounts to 75 percent of the 
payments that would otherwise be made under section 1886(d)(5)(F) of 
the Act.
    The second factor is, for FYs 2014 through 2017, 1 minus the 
percent change in the percent of individuals under the age of 65 who 
are uninsured, determined by comparing the percent of such individuals 
who are uninsured in 2013, the last year before coverage expansion 
under the Affordable Care Act (as calculated by the Secretary based on 
the most recent estimates available from the Director of the 
Congressional Budget Office before a vote in either House on the Health 
Care and Education Reconciliation Act of 2010 that, if determined in 
the affirmative, would clear such Act for enrollment), minus 0.1 
percentage point for FY 2014, and minus 0.2 percentage point for FYs 
2015 through 2017. For FYs 2014 through 2017, the baseline for the 
estimate of the change in uninsurance is fixed by the most recent 
estimate of the Congressional Budget Office before the final vote on 
the Health Care and Education Reconciliation Act of 2010, which is 
contained in a March 20, 2010 letter from the then Director of the 
Congressional Budget Office to the Speaker of the House. A link to this 
letter is included in section V.E.3.d.2. of the preamble of the 
proposed rule (and this final rule).
    For FY 2018 and subsequent years, the second factor is 1 minus the 
percent change in the percent of individuals who are uninsured, as 
determined by comparing the percent of individuals ``who are uninsured 
in 2013 (as estimated by the Secretary, based on data from the Census 
Bureau or other sources the Secretary determines appropriate, and 
certified by the Chief Actuary'' of CMS, and ``who are uninsured in the 
most recent period for which data is available (as so estimated and 
certified) minus 0.2 percentage points for FYs 2018 and 2019.'' Thus, 
for FY 2018 and subsequent years, the statute provides some greater 
flexibility in the choice of the data sources to be used in the 
estimate of the change in the percent of uninsured individuals.
    The third factor is a percent that, for each subsection (d) 
hospital, ``represents the quotient of . . . the amount of 
uncompensated care for such hospital for a period selected by the 
Secretary (as estimated by the Secretary, based on appropriate data . . 
.),'' including the use of alternative data ``where the Secretary 
determines that alternative data is available which is a better proxy 
for the costs of subsection (d) hospitals for . . . treating the 
uninsured,'' and ``the aggregate amount of uncompensated care for all 
subsection (d) hospitals that receive a payment under this 
subsection.'' Therefore, this third factor represents a hospital's 
uncompensated care amount for a given time period relative to the 
uncompensated care amount for that same time period for all hospitals 
that receive Medicare DSH payments in that fiscal year, expressed as a 
percent. For each hospital, the product of these three factors 
represents its additional payment for uncompensated care for the 
applicable fiscal year. We refer to the additional payment determined 
by these factors as the ``uncompensated care payment.''
    Section 1886(r) of the Act states that this provision is effective 
for ``fiscal year 2014 and each subsequent fiscal year.'' In the FY 
2014 IPPS/LTCH PPS proposed rule (78 FR 27578 through 27592), we set 
forth our proposals for implementing the required changes to the DSH 
payment methodology. We noted that, because section 1886(r) modifies 
the payment required under section 1886(d)(5)(F) of the Act, it affects 
only the DSH payment under the operating IPPS. It does not revise or 
replace the capital IPPS DSH payment provided under the regulations at 
42 CFR Part 412, Subpart M, which were established through the exercise 
of the Secretary's discretion in implementing the capital IPPS under 
section 1886(g)(1)(A) of the Act.
    Finally, section 1886(r)(3) of the Act provides that there shall be 
``no administrative or judicial review under section 1869, section 
1878, or otherwise'' of ``any estimate of the Secretary for purposes of 
determining the factors described in paragraph (2),'' or of ``any 
period selected by the Secretary'' for the purpose of determining those 
factors. Therefore, there can be no administrative or judicial review 
of the estimates developed for purposes of applying the three factors 
used to determine uncompensated care payments, or the periods selected 
in order to develop such estimates.
    Comment: Several commenters expressed concerns about the change in 
the payment methodology used to calculate Medicare DSH payments as a

[[Page 50622]]

result of the implementation of section 3133 of the Affordable Care 
Act, which limits the Medicare DSH payment to 25 percent of what would 
have otherwise been paid prior to the enactment of section 3133 and 
establishes an uncompensated care payment calculated under a different 
payment methodology. The commenters were concerned about large 
redistributions in payments and hospitals experiencing large increases 
or decreases in payment with little notice. Some commenters requested 
that CMS implement a stop-loss and stop-gain policy that would limit 
the amount by which a hospital's Medicare DSH payments could change in 
a single year in order to minimize the effects of annual Medicare DSH 
payment adjustment changes. Some of these commenters suggested a stop-
loss and stop-gain policy that would limit the amount by which a 
hospital's Medicare DSH payments could change in a single year by no 
more than 2 percent. Other commenters suggested that CMS institute a 
cap on the annual payment adjustments, or phase in the transition from 
Medicare DSH payments calculated prior to the enactment of section 3133 
of the Affordable Care Act and Medicare DSH payments calculated under 
the new payment methodology mandated by section 3133 of the Affordable 
Care Act to mitigate drastic decreases in payments to eligible 
hospitals. The commenters noted that CMS has historically implemented 
transitions for policies that may cause significant changes in 
payments. The commenters recognized CMS' policy position regarding data 
finality, but expressed concern that significant increases or decreases 
in payments may suggest that the data are inaccurate. The commenters 
further stated that a stop-loss and stop-gain policy would protect 
against such problems. The commenters believed that the authority to 
implement a stop-loss and stop-gain policy is a logical extension of 
CMS' proxy authority granted under section 1886(r)(2)(C) of the Act to 
ensure data integrity.
    Response: We appreciate the commenters' input. We do not believe 
that we have the statutory authority to phase in the transition from 
Medicare DSH payments calculated prior to the enactment of section 3133 
of the Affordable Care Act to Medicare DSH payments calculated under 
the new payment methodology established by section 3133 of the 
Affordable Care Act, or to apply a cap on the change in Medicare DSH 
payments to eligible hospitals. Rather, we believe that we are required 
to reduce Medicare DSH payments to 25 percent of the amount that would 
otherwise be paid under section 1886(d)(5)(F) of the Act, effective for 
discharges occurring on or after October 1, 2013. In addition, we 
believe that we are required to make the additional payment for 
uncompensated care under the new payment methodology prescribed in 
section 1886(r)(2) of the Act effective for FY 2014. The change to the 
payment methodology for Medicare DSH payments for FY 2014 was designed 
to have redistributive effects in order to provide payments to eligible 
hospitals based upon their amount of uncompensated care relative to the 
total amount of uncompensated care furnished by all eligible hospitals. 
We also do not believe that the statute provides authority for adopting 
a stop-loss and stop-gain policy, or any other transitional 
methodology. Rather, the statute designates an effective date of 
October 1, 2013, for implementing both empirically justified Medicare 
DSH payments and uncompensated care payments.
    Comment: Some commenters requested that CMS delay the 
implementation of this provision. These commenters cited factors such 
as uncertainties over the rate of reduction in uninsurance due to the 
decisions of some States not to adopt Medicaid expansion as reasons for 
recommending a delay. Some of these commenters indicated that a delay 
until FY 2016 would allow time to assess the effect of health care 
reform on the rates of insured and uninsured Americans and, therefore, 
would allow implementation of this provision in a manner that would be 
least disruptive to hospitals, especially those vulnerable hospitals 
that provide large amounts of uncompensated care.
    Response: The statute provides that this provision will be 
effective ``for fiscal year 2014 and each subsequent fiscal year'' and, 
therefore, does not provide us with the flexibility to delay 
implementation.
b. Eligibility
    As indicated above, the new payment methodology applies to 
``subsection (d) hospitals'' that would otherwise receive a 
``disproportionate share payment . . . made under subsection 
(d)(5)(F).'' Therefore, eligibility for empirically justified Medicare 
DSH payments is unchanged under this new provision. Consistent with the 
law, hospitals must receive empirically justified Medicare DSH payments 
in FY 2014 or a subsequent year to receive an additional Medicare 
uncompensated care payment for that year. Specifically, section 
1886(r)(2) of the Act states that, ``[i]n addition to the payment made 
to a subsection (d) hospital under paragraph (1) . . . the Secretary 
shall pay to such subsection (d) hospital an additional amount . . .'' 
(Emphasis supplied.) Because paragraph (1) refers to empirically 
justified Medicare DSH payments, the additional payment under section 
1886(r)(2) of the Act is, therefore, limited to hospitals that receive 
empirically justified Medicare DSH payments pursuant to section 
1886(r)(1) of the Act for FY 2014 and subsequent years.
    In the FY 2014 IPPS/LTCH PPS proposed rule (78 FR 27580), we 
proposed that hospitals that are not eligible to receive empirically 
justified Medicare DSH payments in FY 2014 and subsequent years would 
not receive uncompensated care payments for those respective years. We 
also proposed to make a determination concerning eligibility for 
interim uncompensated care payments based on each hospital's estimated 
DSH status for FY 2014 or the applicable year (using the most recent 
data that are available). We indicated that our final determination on 
the hospital's eligibility for uncompensated care payments would be 
based on the hospital's actual DSH status on the cost report for that 
payment year. (We discuss these proposals and our final policies in 
more detail below.)
    In the course of developing the proposed policies for implementing 
section 1886(r) of the Act, we considered whether several specific 
classes of hospitals are included within the scope of the statutory 
provision. In particular, we considered whether the provision applies 
to (1) hospitals in the Commonwealth of Puerto Rico, (2) hospitals in 
the State of Maryland paid under a waiver as provided in section 
1814(b) of the Act, (3) sole community hospitals (SCHs), (4) hospitals 
participating in the Bundled Payments for Care Improvement Initiative 
developed by the Center for Medicare and Medicaid Innovation 
(Innovation Center), and (5) hospitals participating in the Rural 
Community Hospital demonstration. We discuss each of these specific 
classes of hospitals below.
(1) Puerto Rico Hospitals
    Under section 1886(d)(9)(A) of the Act, Puerto Rico hospitals 
subject to the IPPS are not ``subsection (d) hospitals,'' but rather 
constitute a distinct class of ``subsection (d) Puerto Rico 
hospitals.'' However, section 1886(d)(9)(D)(iii) of the Act specifies 
that subparagraph (d)(5)(F) (the provision governing the current DSH 
payment methodology) ``shall apply to subsection (d) Puerto

[[Page 50623]]

Rico hospitals . . . in the same manner and to the extent as [it 
applies] to subsection (d) hospitals.'' While the new section 1886(r) 
of the Act does not specifically address whether the methodology 
established there applies to ``subsection (d) Puerto Rico hospitals,'' 
section 3133 of the Affordable Care Act does make a revision to section 
1886(d)(5)(F)(i) of the Act that is crucial for determining the 
eligibility of Puerto Rico hospitals for empirically justified Medicare 
DSH payments and uncompensated care payments under the new provision. 
Specifically, section 3133 of the Affordable Care Act amended section 
1886(d)(5)(F)(i) of the Act to provide that this section is ``[s]ubject 
to subsection (r).'' One effect of this amendment is to provide that 
all hospitals subject to section 1886(d)(5)(F)(i) of the Act, including 
``subsection (d) Puerto Rico hospitals,'' also are subject to the new 
payment methodology established in section 1886(r) of the Act.
    In the FY 2014 IPPS/LTCH PPS proposed rule (78 FR 27580), we 
proposed that subsection (d) Puerto Rico hospitals that are eligible 
for DSH payments also would be eligible to receive empirically 
justified Medicare DSH payments and uncompensated care payments under 
the new payment methodology. We invited public comments on this 
proposal.
    Comment: Several commenters supported the proposal to include 
subsection (d) Puerto Rico hospitals that are eligible for Medicare DSH 
payments as hospitals eligible to receive empirically justified 
Medicare DSH payments and uncompensated care payments under the new 
payment methodology. However, some commenters, including hospitals from 
Puerto Rico and associations representing Puerto Rico hospitals, 
maintained that Puerto Rico hospitals have been unfairly deprived of 
''DSH money'' due to Puerto Rico's exclusion from the national SSI 
program. These commenters noted that because of the proposed 
methodologies for determining the empirically justified DSH payments 
and Factor 3 of the uncompensated care payment, Puerto Rico will 
continue to be unfairly deprived of DSH dollars despite having 
significant uncompensated care expenses.
    Response: We are finalizing our proposal to include subsection (d) 
Puerto Rico hospitals that are eligible for Medicare DSH payments as 
hospitals eligible to receive empirically justified Medicare DSH 
payments and uncompensated care payments under the new payment 
methodology. With respect to the comment that Puerto Rico hospitals 
will continue to be unfairly deprived of Medicare DSH payments because 
the new methodology continues to rely on SSI days, we acknowledge the 
commenters' concerns and note that it is our view that section 
1886(r)(1) of the Act requires us to use Medicare SSI days to determine 
the empirically justified Medicare DSH payments. We further note that, 
for the reasons discussed below, low-income insured days (which include 
Medicare SSI days) are currently the best data available that CMS can 
use as a proxy for the treatment costs of the uninsured and CMS intends 
to continue to develop an appropriate data source from which to 
determine the amount of uncompensated care provided by hospitals. 
However, we note that for FY 2014 the 51 hospitals in Puerto Rico are 
expected to experience a 41.3 percent increase in Medicare DSH payments 
(from approximately $8 million to $82 million, or a $74 million 
increase) due to the implementation of the changes to the DSH payment 
methodology under section 3133 of the Affordable Care Act, which 
represents a 41.8 percent increase in overall payments to these 
hospitals. Generally, Puerto Rico hospitals had a relatively low, less 
than 10 percent, Medicare utilization (as measured by a percentage of 
Medicare patient days to total patient days), therefore the changes in 
section 1886(r)(2) of the Act result in the significant increase for 
Puerto Rico. We refer readers to the appendix of this rule for a more 
detailed impact analysis.
(2) Hospitals Paid Under a Waiver Under Section 1814(b) of the Act
    Under section 1814(b) of the Act, hospitals in the State of 
Maryland are subject to a waiver from the Medicare payment 
methodologies under which they would otherwise be paid. We have taken 
the position in other contexts, for example, for purposes of EHR 
incentive payments (75 FR 44448), that Maryland acute care hospitals 
remain subsection (d) hospitals. This is because these hospitals are 
``located in one of the fifty States or the District of Columbia'' (as 
provided in the definition of subsection (d) hospitals) and do not meet 
the definitions of the hospitals that are specifically excluded from 
that category, such as cancer hospitals and psychiatric hospitals. 
However, section 1886(r) of the Act applies to hospitals that are both 
subsection (d) hospitals and hospitals that would otherwise receive a 
disproportionate share payment made under the previous DSH payment 
methodology. Because Maryland waiver hospitals are paid under section 
1814(b)(3) of the Act and not under section 1886(d)(5)(F) of the Act, 
they are not eligible to receive empirically justified Medicare DSH 
payments and uncompensated care payments under the new payment 
methodology of section 1886(r) of the Act.
    Comment: Several commenters supported the proposal to exclude 
Maryland hospitals, which are paid under section 1814(b)(3) of the Act 
and not under section 1886(d)(5)(F) of the Act, from hospitals eligible 
to receive empirically justified Medicare DSH payments and 
uncompensated care payments under the new payment methodology 
established under section 1886(r) of the Act.
    Response: We appreciate the commenters' support and are finalizing 
this policy, as proposed.
(3) Sole Community Hospitals (SCHs)
    SCHs are paid based on their hospital-specific rate from certain 
specified base years or the IPPS Federal rate, whichever yields the 
greatest aggregate payment for the hospital's cost reporting period. 
Payments based on the Federal rate are based on the IPPS standardized 
amount and include all applicable IPPS add-on payments, such as 
outliers, DSH, and IME, while payments based on the hospital-specific 
rate have no add-on payments. For each cost reporting period, the 
fiscal intermediary/MAC determines which of the payment options will 
yield the highest aggregate payment. Interim payments are automatically 
made on a claim-by-claim basis at the highest rate using the best data 
available at the time the fiscal intermediary/MAC makes the payment 
determination for each discharge. However, it may not be possible for 
the fiscal intermediary/MAC to determine in advance precisely which of 
the rates will yield the highest aggregate payment by year's end. In 
many instances, it is not possible to forecast outlier payments or the 
final amount of the DSH payment adjustment or the IME adjustment until 
cost report settlement. As noted above, these adjustment amounts are 
applicable only to payments based on the Federal rate and not to 
payments based on the hospital-specific rate. The fiscal intermediary/
MAC makes a final adjustment at cost report settlement after it 
determines precisely which of the payment rates would yield the highest 
aggregate payment to the hospital for its cost reporting period. This 
payment methodology makes SCHs unique as they can change on a yearly 
basis from receiving hospital-specific rate payments to receiving 
Federal rate payments, or vice versa.

[[Page 50624]]

    In order to implement the provisions of section 1886(r) of the Act, 
in the FY 2014 IPPS/LTCH PPS proposed rule (78 FR 27580), we proposed 
to continue to determine interim payments for SCHs based on what we 
estimate and project their DSH status to be prior to the beginning of 
the Federal fiscal year (based on the best available data at that 
time), subject to settlement through the cost report. We also proposed 
that SCHs that receive interim empirically justified Medicare DSH 
payments in a fiscal year would receive interim uncompensated care 
payments that fiscal year, subject as well to settlement through the 
cost report. Final eligibility determinations would be made at the end 
of the cost reporting period at settlement, and both interim 
empirically justified Medicare DSH payments and uncompensated care 
payments would be adjusted accordingly. Therefore, we proposed to 
follow the same processes of interim and final payments for SCHs that 
we proposed to follow for eligible IPPS DSH hospitals generally. (We 
discuss these processes in more detail below.)
    Comment: Many commenters supported the proposal to allow SCHs that 
receive interim empirically justified Medicare DSH payments in a fiscal 
year to receive interim uncompensated care payments that fiscal year, 
subject to settlement through the cost report. However, one commenter 
stated that even an SCH paid under the hospital-specific rate during a 
fiscal year that, therefore, would not receive empirically justified 
Medicare DSH payments in that year should still receive uncompensated 
care payments, provided that the SCH otherwise qualifies for 
empirically justified Medicare DSH payments under Sec.  412.106(c). The 
commenter stated that, ``Since such payments are not discharge-related 
payments, uncompensated care payments should be paid in addition to any 
discharge-related payments for an SCH, whether such discharge-related 
payments are calculated on the basis of the federal standardized 
amount, plus DSH payments, or on the basis of the HSP, without DSH 
payments. In other words, if an SCH has aggregate HSP payments that 
exceed the sum of federal standardized amount and DSH payments, the SCH 
should still receive uncompensated care payments under 42 CFR 
412.106(g)-(h), as long as it is DSH-eligible under 42 CFR 
412.106(c).''
    Response: We do not agree with the commenter who stated that SCHs 
paid under the hospital-specific rate during a fiscal year should still 
receive uncompensated care payments provided that the SCH otherwise 
qualifies for empirically justified Medicare DSH payments under Sec.  
412.106(c). As we have noted above, section 1886(r)(2) of the Act 
specifically states that, ``[i]n addition to the payment made to a 
subsection (d) hospital under paragraph (1) . . . the Secretary shall 
pay to such subsection (d) hospital an additional amount . . .'' 
(Emphases supplied.) Because paragraph (2) provides that the 
uncompensated care payment is to be made ``in addition to'' the 
empirically justified Medicare DSH payments made under paragraph (1), a 
hospital must receive empirically justified Medicare DSH payments under 
section 1886(r)(1) in order to receive the additional payment under 
section 1886(r)(2) of the Act for FY 2014 and subsequent years.
    As previously noted, under the SCH payment methodology, SCHs are 
paid the higher of the Federal rate or a hospital-specific payment 
rate. This payment methodology is defined under sections 
1886(d)(5)(D)(i) and 1886(d)(1)(A)(iii) of the Act. Section 1886(d)(3) 
of the Act specifically provides that SCH payments are to be made on a 
per-discharge basis. Accordingly, as we also note below, in the FY 2014 
IPPS/LTCH PPS proposed rule (78 FR 27581), we proposed that the 
uncompensated care payments would not be accounted for in determining 
whether an SCH is paid the higher of the Federal rate or the hospital-
specific rate. This is because we proposed that the uncompensated care 
payments would not be discharge-driven payments, but rather payments 
made on the basis of a hospital's overall share of uncompensated care 
during a payment year. The amount of a hospital's uncompensated care 
payments for a year is not directly affected by the number of the 
hospital's discharges for the year. Therefore, we did not believe that 
uncompensated care payments should be taken into account in a 
comparison based on discharge driven hospital-specific and Federal rate 
payments. Furthermore, as we proposed later in the proposed rule, we 
intended to make interim uncompensated care payments on a periodic 
basis rather than a per discharge basis in order to create more 
predictability for hospitals and to increase administrative efficiency. 
To the extent the payments are intended to reflect the relative amount 
of uncompensated care furnished by the hospital, we considered it both 
reasonable and appropriate to view this payment as an amount for the 
year, which in the interests of predictability and consistency is made 
periodically through interim payments.
    We invited public comments on all of these proposals affecting 
SCHs.
    Comment: Several commenters objected to the proposal not to take 
uncompensated care payments into account in the comparison of payments 
under the hospital-specific rate and the Federal rate that occurs on a 
discharge basis and at cost report settlement for SCHs. These 
commenters contended that the proposed policy amounted to imposing a 
payment cut on many SCHs. This is because the proposed policy would 
have the result that more SCHs would be paid under their hospital-
specific rate rather than the higher Federal rate because the 
equivalent of 75 percent of the former DSH payment amounts would no 
longer be included in the Federal rate side of the comparison. The 
commenters maintained that it was not the intention of the new payment 
adjustment methodology for disproportionate share hospitals to impose 
reductions in payments indirectly on hospitals paid under different 
provisions of the statute.
    Response: We agree with these commenters that it is not the 
intention of the new payment adjustment methodology for 
disproportionate share hospitals to impose reductions in payments 
indirectly on hospitals paid under different provisions of the statute. 
We continue to believe that the periodic biweekly payments approach 
would be consistent with the statute, and that it would be, in 
isolation, the most administratively efficient means to distribute the 
fixed amount of a hospital's uncompensated care payment in a manner 
that would avoid the potential for large over- and/or under- payments 
during the year and, therefore, limit the need for reconciliation at 
cost report settlement. However, after a thorough review of the above 
policy considerations reflected in the numerous public comments we 
received, we believe that distributing these payments on a per-
discharge basis would allow these payments to be considered in the 
comparison of payments under the Federal rate and the hospital-specific 
rate for SCHs. We believe that this is an appropriate policy because 
this approach provides all SCHs an opportunity to be eligible for 
uncompensated care payments. To the extent that their payments under 
their hospital-specific rate are higher, we believe that it is 
appropriate that they do not receive uncompensated care payments 
because they are no longer eligible for DSH payments, as we describe 
above. However, after consideration of the public comments we received, 
we believe that it is appropriate for the uncompensated care payment to 
be considered as part of an

[[Page 50625]]

SCH's payment under the Federal rate. For this and other reasons which 
we discuss later in this preamble, we have decided not to finalize our 
proposed policy to make interim uncompensated care payments on a 
periodic basis rather than a per-discharge basis for FY 2014. We 
discuss the operational details of including the uncompensated care 
amount in the payment for each IPPS hospital discharge in greater 
detail below in section V.E.3.f. of the preamble of this final rule. 
However, one result of including the uncompensated care payments in the 
payment for each hospital discharge is that such payments can now also 
be included in the comparison of the hospital-specific and Federal rate 
payments for SCHs. That is, we will now be able to employ the claims 
processing system to compare each SCH's payment under the hospital-
specific rate to its Federal rate, including uncompensated care 
payments.
(4) Hospitals Participating in the Bundled Payments for Care 
Improvement Initiative
    IPPS hospitals that have elected to participate in the Bundled 
Payments for Care Improvement initiative receive a payment that links 
multiple services furnished to a patient during an episode of care. We 
have stated in previous rulemaking that those hospitals continue to be 
paid under the IPPS (77 FR 53342). Hospitals that elect to participate 
in the initiative can still receive DSH payments while participating in 
the initiative, if they otherwise meet the requirements for receiving 
such payments.
    In the FY 2014 IPPS/LTCH PPS proposed rule (78 FR 27581), we 
proposed to apply the new DSH payment methodology to the hospitals in 
this initiative, so that eligible hospitals would receive empirically 
justified Medicare DSH payments and uncompensated care payments. We 
invited public comments on this proposal.
    Comment: Several commenters supported the proposal to apply the new 
Medicare DSH payment adjustment methodology to the hospitals in the 
Bundled Payments for Care Improvement initiative so that eligible 
hospitals would receive empirically justified Medicare DSH payments and 
uncompensated care payments.
    Response: We appreciate the commenters' support and are finalizing 
this policy, as proposed.
(5) Hospitals Participating in the Rural Community Hospital 
Demonstration
    Section 410A of the Medicare Modernization Act established the 
Rural Community Hospital Demonstration Program. After the initial 5-
year period, the demonstration was extended for an additional 5-year 
period by sections 3123 and 10313 of the Affordable Care Act. There are 
23 hospitals currently participating in the demonstration. Under the 
payment methodology provided in section 410A, participating hospitals 
receive payment for Medicare inpatient services on the basis of a cost 
methodology. Specifically, for discharges occurring in the hospitals' 
first cost reporting period of the initial 5-year demonstration or the 
first cost reporting period of the 5-year extension, they receive 
payments for the reasonable cost of providing such services. For 
discharges occurring in subsequent cost reporting periods during the 
applicable 5-year demonstration period, hospitals receive the lesser of 
the current year's reasonable cost amount, or the previous year's 
amount updated by the percentage increase in the IPPS market basket 
(the target amount). (We refer readers to section V.K. of the preamble 
of this final rule for further information on the demonstration.) The 
instructions (CR 5020 (April 14, 2006) and CR 7505 (July 22, 2011)) for 
the demonstration require that the fiscal intermediary/MAC not pay 
Medicare DSH payments in addition to the amount received under the 
cost-based payment methodology. Although the amounts that would 
otherwise be paid for Medicare DSH payments (absent the demonstration) 
are calculated and identified on the hospital cost report for 
statistical and research purposes, as in the case of Maryland waiver 
hospitals, hospitals in this demonstration do not receive a separate or 
identifiable DSH payment.
    Because hospitals participating in the Rural Community Hospital 
Demonstration do not receive DSH payments, these hospitals also are 
excluded from receiving empirically justified Medicare DSH payments and 
uncompensated care payments under the new payment methodology.
    Comment: Several commenters supported the proposal to exclude 
hospitals participating in the Rural Community Hospital Demonstration 
program from receiving empirically justified Medicare DSH payments and 
uncompensated care payments under the new payment methodology.
    Response: We appreciate the commenters' support and are finalizing 
this policy, as proposed.
c. Empirically Justified Medicare DSH Payments
    As we have discussed above, section 1886(r)(1) of the Act requires 
CMS to pay 25 percent of the ``amount of disproportionate share 
hospital payment that would otherwise be made under subsection 
(d)(5)(F) to a subsection (d) hospital.'' Currently, we have a system 
for interim payment and final settlement of DSH payments made under 
section 1886(d)(5)(F). Specifically, interim payments are made for each 
claim based on the best available data concerning each hospital's 
eligibility for DSH payments and the appropriate level of such 
payments. Final eligibility for Medicare DSH payments and the final 
amount of such payments for eligible hospitals are determined at the 
time of cost report settlement. Because section 1886(r)(1) of the Act 
merely requires the program to pay a designated percentage of these 
payments, without revising the criteria governing eligibility for DSH 
payments or the underlying payment methodology, we stated in the 
proposed rule that we did not believe that it is necessary to develop 
and propose any new operational mechanisms for making such payments.
    Therefore, in the FY 2014 IPPS/LTCH PPS proposed rule (78 FR 
27581), we proposed to implement this provision simply by revising the 
claims payment methodologies to adjust the interim claim payments to 
the requisite 25 percent of what would have otherwise been paid. We 
also indicated that we would make corresponding changes to the hospital 
cost report so that these empirically justified Medicare DSH payments 
can be settled at the appropriate level at the time of cost report 
settlement. We stated that we would provide more detailed operational 
instructions and cost report instructions following display of the 
final rule in the Federal Register.
    We proposed to implement this provision by adding a new paragraph 
(f) under the regulations at Sec.  412.106. This proposed new paragraph 
provides for reducing Medicare DSH payments by 75 percent beginning in 
FY 2014.
    We invited public comments on this proposal.
    Comment: Several commenters supported the proposal to implement 
this provision by revising the claims payment methodologies to adjust 
the interim claim payments to the requisite 25 percent of what would 
have otherwise been paid. The commenters also supported the proposal to 
make

[[Page 50626]]

corresponding changes to the hospital cost report so that these 
empirically justified Medicare DSH payment adjustments can be settled 
at the appropriate level at the time of cost report settlement.
    Response: We appreciate the commenters' support and are finalizing 
these policies, as proposed, by adding a new paragraph (f) under Sec.  
412.106 to reflect the policies.
    Comment: Several commenters requested that CMS undertake additional 
audits to verify the data used to compute the 25-percent empirically 
justified Medicare DSH payment adjustments. Other commenters requested 
that CMS grant additional time for hospitals to verify the data and 
adjust their cost reports to ensure that the data used to compute the 
adjustment are accurate and up to date. Some commenters requested that 
CMS establish procedures to allow a hospital initially determined not 
to be eligible for Medicare DSH payments to begin receiving empirically 
justified Medicare DSH payments if data become available that indicate 
that the hospital would be eligible.
    Response: As we have emphasized, we are maintaining the well-
established methodology and payment processes used under the current 
Medicare DSH payment adjustment methodology for purposes of making the 
empirically justified Medicare DSH payment adjustments. Hospitals are 
quite familiar with the cost reporting requirements and auditing 
procedures employed under the current Medicare DSH payment adjustment 
methodology. Hospitals are also familiar with the current process of 
determining interim eligibility for Medicare DSH payments with final 
determination at cost report settlement. Therefore, we do not believe 
that it would be warranted to add additional complexity to these 
procedures by adopting any of these recommendations.
    Comment: Several commenters noted that, under the Medicare 
Prescription Drug, Improvement, and Modernization Act of 2003, a 12-
percent cap was placed on DSH payment adjustment percentages for 
certain rural hospitals, including those with SCH status. These 
commenters also noted that CMS' proposal was silent about how this cap 
provision will apply to calculations under the revised Medicare DSH 
payment adjustment methodology. The commenters agreed that the cap 
should apply to the calculation of the empirically justified Medicare 
DSH payment adjustment amounts and the Factor 1 computation in the 
uncompensated care payment determination. However, the commenters 
expressed concern that the cap could be applied again when formulating 
the overall Medicare DSH payment adjustment amount that a hospital 
receives. If the cap were to apply to the overall Medicare DSH payment 
adjustment amount, the commenters asserted that hospitals would in 
effect be penalized twice, once when calculating the empirically 
justified Medicare DSH payment adjustment amount and the amount of 
Factor 1, which is equal to 75 percent of the DSH payments that would 
otherwise have been made under section 1886(d)(5)(F), and again when 
formulating the overall Medicare DSH payment adjustment amount that the 
hospital receives. Therefore, the commenters asked CMS to clarify and 
confirm that the cap provision will not be applied to the overall 
Medicare DSH payment adjustment amount that each hospital receives.
    Response: Under the Medicare DSH statute, certain hospitals are 
subject to a 12-percent cap on their DSH payment adjustment percentage. 
For these hospitals, the maximum DSH payment adjustment factor has 
historically been 12 percent, regardless of how high the DPP for these 
hospitals was. We note that the 12-percent cap only applies to the 
following hospital types: hospitals located in urban areas with less 
than 100 beds, and hospitals located in rural areas with less than 500 
beds (however, we note that the 12-percent cap does not apply to Rural 
Referral Centers or to Medicare Dependent Hospitals, regardless of bed 
size). We agree with the commenters that the cap should not be applied 
to payments under section 1886(r)(2) of the Act. Although we did not 
state so specifically, the commenters were correct to infer, from our 
proposal to continue employing the current Medicare DSH payment 
adjustment methodology in determining the empirically justified 
Medicare DSH payment amount, that the cap should and would be applied 
when calculating payments under section 1886(r)(1) of the Act (which is 
25 percent of the amount otherwise payable under section 1886(d)(5)(F). 
This is because the cap under section 1886(d)(5)(F)(xiv)(II) limits the 
amount of the payment adjustment under section 1886(d)(5)(F), and 
payments under section 1886(r)(1) are 25 percent of the payments that 
would otherwise be made under section 1886(d)(5)(F), we believe the cap 
necessarily applies to payments under section 1886(r)(1) as well. 
Similarly, the commenters were correct to infer that the application of 
the cap on Medicare DSH payment adjustments to those hospitals would be 
taken into account in determining Factor 1 of the uncompensated care 
payment determination, which is equal to 75 percent of the aggregate 
amount of payments that would otherwise be made under section 
1886(d)(5)(F). However, there is nothing in the statute that requires 
an application of this cap to the final amount of uncompensated care 
payments hospitals receive, beyond taking it into consideration in the 
estimate of Factor 1. Therefore, we are taking this opportunity to 
confirm that our proposal did not imply that the cap would be applied 
to payments to hospitals under section 1886(r)(2) of the Act.
    Comment: One commenter asked CMS to clarify how it will apply the 
cap to the empirically justified Medicare DSH payments. The commenter 
offered the following example:
    ``If a hospital subject to the twelve-percent cap has a 
disproportionate share patient percentage sufficient to generate a 
disproportionate share adjustment percentage of 16 percent pursuant to 
[section] 1886(d)(5)(F)(vii) [of the Act], under the proposed formula, 
CMS could use either 16 percent or 12 [percent] as the empirically 
justified amount. If the Agency uses 16 percent, then the empirically 
justified amount portion of the formula would be 4 percent (16 * 0.25); 
if the agency uses 12 percent, then the empirically justified amount 
portion of the formula would be 3 percent (12 * 0.25).''
    Response: Section 1886(r)(1) of the Act clearly provides that 
Medicare shall pay 25 percent of the amount that would otherwise be 
paid ``under subsection (d)(5)(F) to a subsection (d) hospital.'' The 
cap provision is stipulated under section 1886(d)(5)(F)(xiv)(II) of the 
Act. Therefore, for purposes of the empirically justified Medicare DSH 
payment adjustment amount under section 1886(r)(1) of the act, Medicare 
is only authorized to pay 25 percent of the amount otherwise payable 
under section 1886(d)(5)(F), subject to the 12-percent cap. We note 
that the 12-percent cap only applies to the following hospital types: 
hospitals located in urban areas with less than 100 beds, and hospitals 
located in rural areas with less than 500 beds (however, we note that 
the 12-percent cap does not apply to Rural Referral Centers or to 
Medicare Dependent Hospitals, regardless of bed size). In the 
commenter's example, the empirically justified Medicare DSH payment 
adjustment amount paid under section 1886(r)(1) of the Act would be 25 
percent of the maximum 12-percent

[[Page 50627]]

DSH adjustment factor under section 1886(d)(5)(F) of the Act, or 3 
percent (12 * 0.25). That is, the empirically justified Medicare DSH 
payment adjustment amount paid under section 1886(r)(1) of the Act 
could not exceed 25 percent of the maximum 12-percent DSH adjustment 
factor under section 1886(d)(5)(F) of the Act and, therefore, could not 
exceed 3 percent.
d. Uncompensated Care Payments
    As we have discussed above, section 1886(r)(2) of the Act provides 
that, for each eligible hospital in FY 2014 and subsequent years, the 
new uncompensated care payment is the product of three factors. These 
three factors represent our estimate of 75 percent of the amount of 
Medicare DSH payments that would otherwise have been paid, an 
adjustment to this amount for the percent change in the national rate 
of uninsurance compared to a base of 2013, and each eligible hospital's 
estimated uncompensated care amount relative to the estimated 
uncompensated care amount for all eligible hospitals. Below we discuss 
the proposed data sources and methodologies for computing each of these 
factors and our final policies.
    Before we begin to discuss these data sources and methodologies, it 
is necessary to discuss the timing and manner for determining the 
eligibility of hospitals for uncompensated care payments. The statute 
provides that subsection (d) hospitals that receive a payment under 
section 1886(d)(5)(F) of the Act are eligible to receive a payment 
under section 1886(r)(2) of the Act. Specifically, section 1886(r)(2) 
of the Act states that, ``[i]n addition to the payment made to a 
subsection (d) hospital under paragraph (1) . . . the Secretary shall 
pay to such subsection (d) hospitals an additional amount. . . .'' 
Therefore, because paragraph (1) refers to empirically justified 
Medicare DSH payments, the additional payment for FY 2014 and 
subsequent years is limited to hospitals that receive empirically 
justified Medicare DSH payments for the respective year. However, as we 
have discussed above, we currently have a system for interim payment 
and final settlement of DSH payments. Specifically, interim payments 
are made for each claim based on the best available data concerning 
each hospital's eligibility for DSH payments and the appropriate level 
of such payments. Final determination of eligibility for Medicare DSH 
payments and the final amount of such payments for eligible hospitals 
are determined at the time of cost report settlement.
    As we describe above, because section 1886(r)(1) of the Act does 
not revise the criteria governing eligibility for DSH payments or the 
underlying payment methodology, we do not believe that it is necessary 
to develop any new operational mechanisms for making such payments and, 
therefore, will continue using the existing system of interim 
eligibility and payment determination with final cost report settlement 
for the empirically justified Medicare DSH payments. In the FY 2014 
IPPS/LTCH PPS proposed rule (78 FR 27582), we proposed to adopt a 
similar system of interim eligibility and payment determination with 
final cost report settlement for purposes of uncompensated care 
payments. We discussed our proposals regarding the specific operational 
details of this system in section V.E.3.f. of the preamble of the 
proposed rule.
    We invited public comments on these proposals.
    Comment: Some commenters requested that if CMS has initially 
projected that a hospital is ineligible for uncompensated care 
payments, but data later become available to indicate that the hospital 
is eligible, the hospital be able to receive the uncompensated care 
payments prior to cost report settlement.
    Response: For the reasons discussed above regarding the empirically 
justified Medicare DSH payments, we do not believe that it is necessary 
or advisable to depart from our longstanding process of making interim 
eligibility determinations for Medicare DSH payments with final 
determination at cost report settlement. As we discuss in greater 
detail in section V.E.3.f. of the preamble to this final rule, we will 
make interim eligibility determinations based on data from the most 
recently available SSI ratios and Medicaid fractions prior to the 
beginning of the payment year. We will then make final determinations 
of eligibility at the time of settlement of each hospital's cost 
report. Therefore, if a hospital is initially determined to be 
ineligible for payments under sections 1886(r)(1) and 1886(r)(2) of the 
Act, but is later determined to indeed be eligible, we are adopting as 
final our proposal to make those payments at cost report settlement. We 
also note that, consistent with our decision, as discussed in the next 
section, to determine Factor 1 prospectively, we will not revise Factor 
1 retrospectively to account for the effects of these final 
determinations of eligibility for payments under sections 1886(r)(1) 
and 1886(r)(2) of the Act at cost report settlement.
(1) Methodology To Calculate Factor 1
    Section 1886(r)(2)(A) of the Act establishes Factor 1 in the 
calculation of the uncompensated care payment. Section 1886(r)(2)(A) of 
the Act states that it is a factor ``equal to the difference between 
(i) the aggregate amount of payments that would be made to subsection 
(d) hospitals under subsection (d)(5)(F) if this subsection did not 
apply for such fiscal year (as estimated by the Secretary); and (ii) 
the aggregate amount of payments that are made to subsection (d) 
hospitals under paragraph (1) for such a fiscal year (as so 
estimated).'' Therefore, section 1886(r)(2)(A)(i) of the Act represents 
the estimated Medicare DSH payment that would have been made under 
section 1886(d)(5)(F) if section 1886(r) of the Act did not apply for 
such fiscal year. Section 1886(r)(2)(A)(i) of the Act specifies that, 
for each fiscal year to which the provision applies, such amount is to 
be ``estimated by the Secretary.'' Under a prospective payment system, 
we would not know the precise aggregate Medicare DSH payment amount 
that would be paid for a Federal fiscal year until cost report 
settlement for all IPPS hospitals is completed, which occurs several 
years after the end of the Federal fiscal year. Therefore, the statute 
gives CMS authority to estimate this amount, by specifying that, for 
each fiscal year to which the provision applies, such amount is to be 
``estimated by the Secretary.'' Similarly, section 1886(r)(2)(A)(ii) of 
the Act represents the estimated empirically justified Medicare DSH 
payments to be made in FY 2014 and subsequent years, as prescribed 
under section 1886(r)(1) of the Act. Again, section 1886(r)(2)(A)(ii) 
of the Act gives CMS authority to estimate this amount.
    Therefore, Factor 1 is the difference between our estimates of: (1) 
The amount that would have been paid in Medicare DSH payments for FY 
2014 and subsequent years, in the absence of the new payment provision; 
and (2) the amount of empirically justified Medicare DSH payments that 
are made for FY 2014 and subsequent years, which takes into account the 
requirement to pay 25 percent of what would have otherwise been paid 
under section 1886(d)(5)(F) of the Act. In other words, this factor 
represents our estimate of 75 percent (100 percent minus 25 percent) of 
our estimate of Medicare DSH payments that would otherwise be made, in 
the absence of section 1886(r) of the Act, for FY 2014 and subsequent 
years.

[[Page 50628]]

    In order to determine Factor 1 in the uncompensated care payment 
formula, we proposed to develop final estimates of both the aggregate 
amount of Medicare DSH payments that would be made in the absence of 
section 1886(r)(1) and the aggregate amount of empirically justified 
Medicare DSH payments to hospitals under section 1886(r)(1) of the Act 
prior to each fiscal year to which the new provision applies. We 
believe this will create some level of predictability and finality for 
hospitals eligible for these payments, in addition to being 
administratively efficient. Specifically, in order to determine the two 
elements of Factor 1 (Medicare DSH payments prior to the application of 
section 1886(r)(1) of the Act, and empirically justified Medicare DSH 
payments after application of section 1886(r)(1)), we proposed to use 
the most recently available projections of Medicare DSH payments for FY 
2014 and each subsequent year, as calculated by CMS' Office of the 
Actuary. The Office of the Actuary projects Medicare DSH payments on a 
biannual basis, typically in February of each year (based on data from 
December of the previous year) as part of the President's Budget, and 
in July (based on data from June) as part of the Midsession Review. The 
estimates are based on the most recently filed Medicare hospital cost 
report with Medicare DSH payment information and the most recent 
Medicare DSH patient percentages and Medicare DSH payment adjustments 
provided in the IPPS Impact File.
    Therefore, for the Office of the Actuary's February 2013 estimate, 
the data are based on the December 2012 update of the Medicare Hospital 
Cost Report Information System (HCRIS) and the FY 2013 IPPS/LTCH PPS 
final rule IPPS Impact file, published in conjunction with the 
publication of the FY 2013 IPPS/LTCH PPS final rule. For the July 2013 
estimate, we anticipated that the data would be based on the March 2013 
update of the Medicare Hospital Cost Report data and the proposed 
rule's IPPS Impact file, published in conjunction with the proposed 
rule. For purposes of the proposed rule, we used the February 2013 
Medicare DSH estimates to calculate Factor 1 and to model the proposed 
impact of this provision. We stated that if our proposal to use the 
Office of the Actuary's projections for Factor 1 is finalized, we would 
use the July 2013 Medicare DSH estimates to determine Factor 1 for this 
FY 2014 IPPS/LTCH PPS final rule.
    In addition, because we proposed to exclude SCHs paid under their 
hospital-specific payment rate from the application of section 1886(r) 
of the Act, we also proposed to exclude these hospitals from our 
Medicare DSH estimate. Similarly, because Maryland hospitals and 
hospitals participating in the Rural Community Hospital Demonstration 
do not receive DSH payments, we also proposed to exclude these 
hospitals from our Medicare DSH estimate.
    Using the data sources discussed above, the Office of the Actuary 
uses the most recently submitted Medicare cost report data to identify 
current Medicare DSH payments and the most recent DSH payment 
adjustments provided in the IPPS Impact File, and applies inflation 
updates and assumptions for future changes in utilization and case-mix 
to estimate Medicare DSH payments for the upcoming fiscal year. The 
February 2013 Office of the Actuary estimate for Medicare DSH payments 
for FY 2014, without regard to the application of section 1886(r)(1) of 
the Act, was $12.338 billion. This estimate excludes Maryland 
hospitals, SCHs paid under their hospital-specific payment rate and 
hospitals participating in the Rural Community Hospital Demonstration 
as discussed above. Therefore, based on this estimate, the estimate for 
empirically justified Medicare DSH payments for FY 2014, with the 
application of section 1886(r)(1) of the Act, was $3.084 billion (25 
percent of the total amount estimated). Under our proposal, Factor 1 is 
the difference of these two estimates of the Office of the Actuary. 
Therefore, for the purpose of modeling Factor 1, we calculated Factor 1 
to be $9.2535 billion.
    We also proposed to develop and use the estimates necessary for 
Factor 1 on a purely prospective basis. We proposed to use the 
Actuary's most recent February Medicare DSH estimates each year to 
calculate Factor 1 and to model the impact of this provision for the 
IPPS/LTCH PPS proposed rule. Similarly, we proposed to use the 
Actuary's most recent July Medicare DSH estimates to determine Factor 1 
for the IPPS/LTCH PPS final rule each year. In other words, we would 
not revise or update our estimates after we know the final Medicare DSH 
payments for FY 2014 and subsequent years. As we discussed earlier, we 
do not know the aggregate Medicare DSH payment amount that would be 
paid for each federal fiscal year until the time of cost report 
settlements, which occur several years after the end of the fiscal 
year. Because the statute provides that CMS use estimates in order to 
determine Factor 1 each year, we stated that we believe that applying 
our best estimates prospectively would be most conducive to 
administrative efficiency, finality, and predictability in payments. We 
proposed to add a new paragraph (g)(1)(i) under Sec.  412.106 of our 
regulations to define the methodology for calculating Factor 1.
    We invited public comments on all the elements of this proposed 
methodology to calculate Factor 1.
    Comment: Some commenters pointed out that the summary analysis that 
CMS provided of the uncompensated care Factor 1 estimate indicates that 
the 2009 Medicare DSH payments were used as the starting point to 
project expected empirically justified Medicare DSH payment adjustments 
for FY 2014. The commenters noted that the current 2009 Medicare DSH 
payments do not reflect several key issues that have yet to be settled 
by the courts, such as dual eligible days and MA days, or issues that 
have already been settled such as labor and delivery room days. In 
addition, the commenters noted that the majority of the 2009 cost 
reports remain unaudited. Therefore, commenters maintained that we 
should not use 2009 as a base year for empirically justified Medicare 
DSH payment adjustment eligibility without finalizing all 2009 cost 
reports and appeals.
    Response: In this final rule, our Office of the Actuary has based 
its projections on cost reports for fiscal year 2010 as a starting 
point. This is the most recent year for which cost report data has been 
submitted by almost all the hospitals, which is very important for 
purposes of estimating the full amount of empirically justified 
Medicare DSH payments. We do not believe that we should employ a cost 
reporting period for which cost report data have all been audited 
because doing so would require using much earlier data as the basis for 
the projection. This would create the potential for much larger 
projection errors and would, therefore, not tend to increase the 
accuracy of the projection.
    Comment: Some commenters noted that CMS proposed to use 2009 cost 
report data as the base year for Factor 1, but to use 2010-2012 cost 
report data for purposes of the Factor 3 calculations. The commenters 
asked why the baseline information cannot be derived from the same 
period as the data used in the Factor 3 calculation and urged CMS to 
reconcile this discrepancy.
    Response: In order to determine the total amount of Medicare DSH 
spending for Factor 1, it is important to use the latest available data 
year for which almost all hospitals have submitted their cost reports, 
which for purposes of this final rule is 2010 cost report data. This is 
because we are computing a total

[[Page 50629]]

number that must include all hospitals and, therefore, to avoid 
discrepancies, we believe that it is important to use data from the 
same time period for all hospitals. Therefore, we believe that it is 
appropriate to use a data year that does not include some hospitals. 
However, for purposes of determining hospital-specific factors used to 
compute Factor 3, it is important to use the most recent data for each 
hospital. In this way, the projections for each hospital will be as 
accurate as possible because we use the most recent available data. It 
is more important in this case to provide for the most accurate 
projection for each hospital than to employ data from the same cost 
reporting period for each hospital. Therefore, using different years in 
making these two determinations actually enhances, rather than detracts 
from, the accuracy of these projections.
    Comment: One commenter maintained that we underestimated the 2009 
Medicare DSH amount by not including adjustments required by the recent 
decision in Allina v. Sebelius. The commenter estimated that the 
projected 2014 Medicare DSH payments, which are based on 2009 DSH 
payments, are understated by $1.1 billion as a result of the incorrect 
treatment of MA days. Therefore, the commenter argued that CMS must use 
proper 2009 Medicare DSH data, including corrections required as a 
result of court cases, before it can appropriately extrapolate the data 
for current year calculations.
    Response: The commenter is correct that we did not include the 
effects of any court cases that are not already reflected in the cost 
reports in developing our estimate for Factor 1. We continue to believe 
that Allina was wrongly decided and have appealed the decision. 
Therefore, a final decision has not yet been rendered in the case. We 
note that elsewhere in this final rule, we are finalizing our proposal 
to readopt our policy to include Medicare Advantage days in the 
Medicare SSI ratio, which we believe further makes it unnecessary to 
revise our Factor 1 estimate. A secondary reason for not including such 
an adjustment in our estimate is that we are not aware of a methodology 
that could accurately estimate the impact of any court cases and so 
introducing another estimate would likely reduce, not improve, the 
accuracy of our calculations. We appreciate that the commenter has 
offered an estimate but we are unable to verify the methodology and 
computations used to develop it.
    Comment: One commenter noted that the summary analysis of the 
uncompensated care Factor 1 estimate that we provided after the 
publication of the proposed rule includes a column for ``other'' 
adjustment factors used in developing the estimate. However, the 
commenter stated that CMS did not provide the detail explaining and 
supporting this factor. The commenter further noted that the footnote 
to the ``other'' column states: ``Other column includes impact of only 
IPPS discharges and impact of DSH payments increasing or decreasing at 
a different rate than other IPPS payments.'' The commenter requested 
that CMS provide the details behind this factor.
    Response: The ``other'' ``adjustment factors as mentioned in the 
data file supporting our estimate of Factor 1 reflect two identifiable 
factors: The impacts of (1) only including IPPS discharges in the 
calculation, and (2) of Medicare DSH payments increasing or decreasing 
at a different rate than other IPPS payments. In relation to the first 
factor, an adjustment is made to reflect the fact that IPPS discharges 
increase at a different rate than total inpatient hospital discharges 
(which are reflected in the discharge column of the data file). The 
second factor comes into play if the Medicare DSH payments under IPPS 
are increasing faster or slower than all payments to IPPS hospitals, 
which is determined by looking at prior year's impact files. We note 
that the application of these ``other'' adjustment factors has caused 
the total Medicare DSH estimate to increase. If we were to ignore these 
factors, the final Medicare DSH payment estimate used for purposes of 
estimating Factor 1 would be much lower.
    Comment: Some commenters stated that the same summary analysis of 
the Medicare DSH payments estimate includes an adjustment factor for 
discharges. However, the commenters noted that CMS had not provided the 
detail supporting the discharge factor it used. In addition, the 
commenters stated that the footnote to the discharge column states that 
all inpatient hospitals were included, not just IPPS hospitals. The 
commenters suggested that because the purpose of the projection is to 
estimate the amount of Medicare DSH payments that will go to a subset 
of all inpatient hospitals, CMS should use only the hospitals' 
projected share in the payments when determining the factors that drive 
the estimate.
    Response: We agree that the Medicare DSH payment projections 
ideally should reflect only the number of discharges for IPPS 
hospitals. However, the Office of the Actuary only has projections of 
total inpatient hospital discharges. As a result, in this calculation 
we have included an adjustment to reflect the impact of IPPS hospitals' 
discharges as part of the ``other'' adjustment factors that we have 
just discussed.
    Comment: Several commenters asserted that CMS' assumption that 
actual Medicare DSH payments made for FY 2012 amounted to only $11.59 
billion is illogical and unsupported by any substantial evidence. The 
commenters stated that, first, this assumption conflicts with other 
recent estimates by the same Actuary concerning total Medicare DSH 
payments for the same year, 2012. The commenters noted that within 1 
month of the release of the proposed rule, CMS released data, which it 
attributed to the Office of the Actuary indicating that aggregate 
Medicare DSH payments for FY 2012 totaled $11.93 billion. The 
commenters pointed out that this number is nearly $400 million greater 
than the 2012 estimate (extrapolated from 2009 data) used to calculate 
Factor 1 in the proposed rule.
    Response: The estimate of $11.93 billion in Medicare DSH payments 
for FY 2012 was based on all reported Medicare DSH payments, which are 
shown on the cost reports. We note that Maryland hospitals, SCHs, and 
hospitals participating in the Rural Community Hospital Demonstration 
program report DSH payments on their cost reports even if ultimately 
they are not paid a DSH payment adjustment. Therefore, this estimate 
included payments for three categories of hospitals that will not 
receive uncompensated care payments: Maryland hospitals; SCHs paid on a 
hospital-specific basis; and hospitals that are part of the Rural 
Community Hospital Demonstration program. Therefore, we removed the 
estimated DSH payments for these three categories of hospitals for 
purposes of determining Factor 1 in the proposed rule. The removal of 
these hospitals reduced the Factor 1 estimate to $11.59 billion 
compared to the $11.93 billion estimate of all reported Medicare DSH 
payments.
    Comment: Several commenters stated that the summary analysis of the 
Medicare DSH payment estimate includes an adjustment factor for case-
mix. However, the commenters noted that CMS had not provided the detail 
supporting the case-mix factor used. The commenters suggested that CMS 
provide the details behind this factor to allow for comprehensive 
comments. In addition, these commenters requested that CMS clarify how 
the case-mix change from year to year was derived as it relates to the 
documentation and coding adjustment. The commenters

[[Page 50630]]

pointed out that the trend in the change in case-mix from year to year 
does not seem to support the need for a documentation and coding 
adjustment and, in fact, the year-to-year change in two cases is a 
decrease. The commenters urged CMS to ensure that the case-mix being 
used does not already reflect the documentation and coding adjustment 
so providers can be certain the adjustment is not being made twice.
    Response: The case-mix increase is calculated using the weighted 
average of the relative weights for each year. These relative weights 
are weighted by the number of discharges in the first year. The case-
mix numbers used in the estimate of Medicare DSH payments do not 
include the documentation and coding adjustments. The years which have 
been adjusted for documentation and coding (as required by law) 
occurred before the years shown in this data file.
    Comment: Several commenters noted that, based on projections made 
by CBO, the number of uninsured people is projected to drop 11.2 
percentage points in 2014 compared to 2013. The commenters expressed 
the view that the projected decline in the uninsured rate is due in 
part to the potential addition of 9 million new Medicaid recipients, 
according to the May 2013 CBO projections to be used by CMS. However, 
the commenters stated that it does not appear that the projected 2014 
Medicare DSH amount includes expected additional Medicare DSH payments 
due to Medicaid expansion and requested that CMS provide additional 
information.
    Response: We agree with the commenters that the number of Medicaid 
days will likely increase as a result of Medicaid expansion, therefore 
likely increasing the aggregate amount of payments that would have been 
made to subsection (d) hospitals under section 1886(d)(5)(F) of the Act 
if section 1886(r) of the Act did not apply. Medicaid days are included 
as part of a hospital's disproportionate patient percentage as 
described at Sec.  412.106(b)(4) of the regulations. Accordingly, we 
have included an estimate of the impact of the Medicaid expansion in 
our projection of Factor 1 for this final rule.
    Comment: Several commenters objected to the proposal to apply our 
best estimates of Factor 1 on a prospective basis only. These 
commenters maintained that the administrative efficiency, finality, and 
predictability in payments that CMS cited in favor of the proposal were 
less important than accuracy in payments. The commenters noted that 
there were a number of questions and uncertainties about the Actuary's 
proposed projection for FY 2014, and that it would therefore be most 
appropriate to establish a final value for Factor 1 only at the time of 
final cost report settlements, using actual data or at a later time, 
when more informed projections will be available. Other commenters 
supported the proposal to employ prospective estimates from the Office 
of the Actuary and not to update these estimates once final data become 
available. However, some of these commenters urged CMS to publish final 
amounts of Factor 1 so that any consistent errors can be addressed to 
improve the accuracy of future projections.
    Response: As we noted in the proposed rule (78 FR 27583), we would 
not know the precise aggregate Medicare DSH payment amount that would 
be paid for a Federal fiscal year until cost report settlement for all 
IPPS hospitals is completed, which occurs several years after the end 
of the Federal fiscal year. The statute gives us authority to estimate 
this amount by specifying that, for each fiscal year to which the 
provision applies, such amount is to be ``estimated by the Secretary.'' 
We believe that it is, therefore, most consistent with the statute to 
employ estimates for purposes of determining Factor 1. Otherwise, final 
settlement of these payments could be delayed as much as 6 years or 
more after the payment year. As in the case of other payment factors 
that we determine on the basis of prospective estimates (for example, 
the aggregate amount of annual payments for outliers), we will 
continually examine our estimates compared to actual data for each year 
in order to improve our future projections.
    Comment: Several commenters pointed out that CMS assumed a 2-
percent documentation and coding adjustment for FY 2014 in estimating 
Factor 1 for the proposed rule, but that CMS actually proposed a 
documentation and coding adjustment of 0.8 percent. These commenters 
urged CMS to correct this assumption in the final rule.
    Response: We agree with these commenters. Accordingly, for this 
final rule, the Office of the Actuary has employed a documentation and 
coding adjustment of 0.8 percent for FY 2014 in developing our estimate 
of Factor 1 for FY 2014.
    After consideration of the public comments we received, we are 
finalizing our proposal to add a new paragraph (g)(1)(i) under Sec.  
412.106 of our regulations to define the methodology for calculating 
Factor 1. As we noted in the proposed rule (78 FR 27582 through 27583), 
the Office of the Actuary projects Medicare DSH payments on a biannual 
basis, typically in February of each year (based on data from December 
of the previous year) as part of the President's Budget, and in July 
(based on data from June) as part of the Midsession Review. The 
estimates are based on the most recently filed Medicare hospital cost 
report with Medicare DSH payment information and the most recent 
Medicare DSH patient percentages and Medicare DSH payment adjustments 
provided in the IPPS Impact File.
    Therefore, for the Office of the Actuary's February 2013 estimate, 
the data are based on the December 2012 update of the Medicare Hospital 
Cost Report Information System (HCRIS) and the FY 2013 IPPS/LTCH PPS 
final rule IPPS Impact file, published in conjunction with the 
publication of the FY 2013 IPPS/LTCH PPS final rule. For the July 2013 
estimate, we anticipated that the data would be based on the March 2013 
update of the Medicare Hospital Cost Report data and the IPPS Impact 
file published in conjunction with the proposed rule. For purposes of 
the proposed rule, we used the February 2013 Medicare DSH estimates to 
calculate Factor 1 and to model the proposed impact of this provision. 
We stated that if our proposal to use the Office of the Actuary's 
projections for Factor 1 is finalized, we would use the July 2013 
Medicare DSH estimates to determine Factor 1 for this FY 2014 IPPS/LTCH 
PPS final rule.
    For this final rule, the Office of the Actuary has used the July 
2013 Medicare DSH estimates, based on the March 2013 update of the 
Medicare Hospital Cost Report data and the proposed rule's IPPS Impact 
file, to determine Factor 1. The July 2013 Office of the Actuary 
estimate for Medicare DSH payments for FY 2014, without regard to the 
application of section 1886(r)(1) of the Act, is approximately $12.772 
billion (for purposes of the proposed rule, we estimated this amount to 
be approximately $12.338 billion). As in the proposed rule, this 
estimate excludes Maryland hospitals, SCHs paid under their hospital-
specific payment rate, and hospitals participating in the Rural 
Community Hospital Demonstration program. Therefore, based on this 
estimate, the estimate for empirically justified Medicare DSH payments 
for FY 2014, with the application of section 1886(r)(1) of the Act, is 
approximately $3.193 billion (25 percent of the total amount 
estimated). Under our proposal, Factor 1 is the difference of these two 
estimates of the Office of the Actuary.

[[Page 50631]]

Therefore, for the purpose of this final rule, we calculate Factor 1 to 
be approximately $9.579 billion (for purposes of the proposed rule, 
Factor 1 was estimated to be approximately $9.2535).
(2) Methodology To Calculate Factor 2
    Section 1886(r)(2)(B) of the Act establishes Factor 2 in the 
calculation of the uncompensated care payment. Specifically, section 
1886(r)(2)(B)(i) of the Act provides: ``For each of fiscal years 2014, 
2015, 2016, and 2017, a factor equal to 1 minus the percent change in 
the percent of individuals under the age of 65 who are uninsured, as 
determined by comparing the percent of such individuals (I) who are 
uninsured in 2013, the last year before coverage expansion under the 
Patient Protection and Affordable Care Act (as calculated by the 
Secretary based on the most recent estimates available from the 
Director of the Congressional Budget Office before a vote in either 
House on the Health Care and Education Reconciliation Act of 2010 that, 
if determined in the affirmative, would clear such Act for enrollment); 
and (II) who are uninsured in the most recent period for which data is 
available (as so calculated), minus 0.1 percentage points for fiscal 
year 2014 and minus 0.2 percentage points for each of fiscal years 
2015, 2016, and 2017.''
    Section 1886(r)(2)(B) of the Act establishes, as Factor 2 in the 
uncompensated care payment formula, the percent change in uninsurance, 
based on a comparison of the percent of individuals under 65 without 
insurance in 2013 to the percent of such individuals without insurance 
in the most recent period for which we have data, minus 0.1 percentage 
points for FY 2014 and 0.2 percentage points for each of FYs 2015, 
2016, and 2017.
    Section 1886(r)(2)(B)(i)(I) of the Act further indicates that the 
percent of individuals under 65 without insurance in 2013 must be the 
percent of such individuals ``who are uninsured in 2013, the last year 
before coverage expansion under the Patient Protection and Affordable 
Care Act (as calculated by the Secretary based on the most recent 
estimates available from the Director of the Congressional Budget 
Office before a vote in either House on the Health Care and Education 
Reconciliation Act of 2010 that, if determined in the affirmative, 
would clear such Act for enrollment).'' The Health Care and Education 
Reconciliation Act (Pub. L. 111-152) was enacted on March 30, 2010. It 
was passed in the House of Representatives on March 21, 2010, and by 
the Senate on March 25, 2010. Because the House of Representatives was 
the first House to vote on the Health Care and Education Reconciliation 
Act of 2010 on March 21, 2010, we have determined that the most recent 
estimate available from the Director of the Congressional Budget Office 
``before a vote in either House on the Health Care and Education 
Reconciliation Act of 2010 . . .'' appeared in a March 20, 2010 letter 
from the director of the CBO to the Speaker of the House. (Emphasis 
supplied.) Therefore, we believe that only the estimates in this March 
20, 2010 letter meet the statutory requirement under section 
1886(r)(2)(B)(i)(I) of the Act. (To view the March 20, 2010 letter, we 
refer readers to the Web site at: http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/113xx/doc11379/amendreconprop.pdf.
    In its March 20, 2010 CBO letter to the Speaker of the House of 
Representatives, the CBO provided two estimates of the ``post-policy 
uninsured population.'' The first estimate is of the ``Insured Share of 
the Nonelderly Population Including All Residents'' (which is 82 
percent) and the second estimate is of the ``Insured Share of the 
Nonelderly Population Excluding Unauthorized Immigrants'' (83 percent). 
In the FY 2014 IPPS/LTCH PPS proposed rule (78 FR 27583), we proposed 
to use the first estimate that includes all residents, including 
unauthorized immigrants. We stated that we believe this estimate is 
most consistent with the statute which requires us to measure ``the 
percent of individuals under the age of 65 who are uninsured,'' and 
provides no exclusions except for individuals over the age 65. In 
addition, we stated that we believe that this estimate would more fully 
reflect the levels of uninsurance in the United States that influence 
uncompensated care for hospitals than the estimate that reflects only 
legal residents. Therefore, using this estimate would seem more 
consistent with the statutory requirement of establishing a payment for 
uncompensated care. For these reasons, we proposed to use the estimate 
of the ``Insured Share of the Nonelderly Population Including All 
Residents'' for 2013 to calculate the baseline percentage of 
individuals under age 65 without insurance.
    We invited public comments on this proposal.
    Comment: Several commenters supported the proposal to use the CBO 
estimate of the ``Insured Share of the Nonelderly Population Including 
All Residents'' for purposes of determining Factor 2. The commenters 
agreed that this estimate more fully reflects the levels of uninsurance 
in the United States that influence uncompensated care for hospitals 
than the estimate that excludes unauthorized immigrants and is, 
therefore, more consistent with the statutory requirement of 
establishing a payment for uncompensated care.
    Response: We appreciate the commenters' support for this proposal, 
and we are finalizing our proposal to employ the CBO estimate of the 
``Insured Share of the Nonelderly Population Including All Residents'' 
contained in its March 20, 2010 letter to the Speaker of the House of 
Representatives to determine the percentage of individuals under age 65 
without insurance for purposes of Factor 2.
    The March 20, 2010 CBO letter reports these figures as the 
estimated percentage of individuals with insurance. However, because 
section 1886(r)(2)(B)(i) of the Act requires that we compare the 
percent of individuals ``who are uninsured in 2013,'' in the FY 2014 
IPPS/LTCH PPS proposed rule (78 FR 27584), we proposed to use the CBO 
insurance rate figure and subtract that amount from 100 percent (that 
is, the total population, without regard to insurance status) to 
estimate the 2013 baseline percentage of individuals without insurance. 
In its March 20, 2010 letter, the CBO reported its estimate of the 
``Insured Share of the Nonelderly Population Including All Residents'' 
as 82 percent. Therefore, we proposed that, for FYs 2014 through 2017, 
our estimate of the uninsurance percentage for 2013 would be 18 
percent. As provided for in the CBO March 20, 2010 letter, the CBO 
estimate for insurance for the nonelderly (under age of 65) population 
only includes residents of the 50 States and the District of Columbia, 
and the count of uninsured people includes unauthorized immigrants, as 
well as individuals who are eligible for, but not enrolled in, 
Medicaid. We note that, although we proposed that acute care hospitals 
located in Puerto Rico that receive DSH payments would be eligible to 
receive payments under section 1886(r) of the Act, this estimate for 
insurance does not account for residents in Puerto Rico. We believe 
that the impact of the exclusion of Puerto Rico from the insurance 
estimate is negligible.
    We invited public comments on this proposal.
    We did not receive any public comments on our proposal to employ an 
estimate for insurance among the nonelderly that includes only 
residents of the 50 States and the District of Columbia and, therefore, 
does not account for residents in Puerto Rico.

[[Page 50632]]

Therefore, we are finalizing the policy, as proposed.
    Section 1886(r)(2)(B)(i) of the Act requires that we compare the 
baseline uninsurance rate to the percent of such individuals ``who are 
uninsured in the most recent period for which data is available (as so 
calculated).'' In the FY 2014 IPPS/LTCH PPS proposed rule (78 FR 
27584), we proposed to use the same data source, CBO estimates, to 
calculate this percent of individuals without insurance. Section 
1886(r)(2)(B)(i)(I) of the Act refers to the percent of uninsured in 
2013 ``as calculated by the Secretary based on'' the CBO data. 
Similarly, section 1886(r)(2)(B)(i)(II) of the Act immediately 
afterwards refers to the percent of uninsured for 2014 ``as so 
calculated.'' (Emphasis supplied.) The phrase ``as so calculated'' in 
the latter section can be reasonably interpreted to require the 
calculation to similarly be based on CBO estimates. In addition, we 
believe that it is preferable from a statistical point of view to 
calculate a percent change in insurance over time using a consistent 
data source. Furthermore, rather than using the estimates included in 
the March 20, 2010 CBO letter, we believe it is appropriate to use more 
recent CBO estimates of the percent of individuals with insurance. The 
more recent CBO projections take into account changes in the 
environment that can impact insurance rates, such as more recent 
economic conditions and the Supreme Court's decision in National 
Federation of Independent Business. v. Sebelius--U.S.--, 132 S. Ct. 
2566 (2012), regarding Medicaid expansions authorized by the Affordable 
Care Act. Because the statute requires that we use ``the most recent 
period for which data is available'' to calculate the comparison 
percentage of individuals without insurance, we proposed to use the 
most recent update (that is, the most recent update available at the 
time of rulemaking with respect to a particular fiscal year) to the 
percent of individuals with insurance provided by the CBO to calculate 
this comparison figure.
    In addition, for FY 2014, we proposed to use CBO's most recent 
estimate for the percent of individuals with insurance in 2014 for 
purposes of section 1886(r)(2)(B)(i)(II) of the Act because this is the 
year in which this provision is effective. This figure is used for 
Factor 2 and later applied to Factor 1, which is also based on an 
estimate for FY 2014. On February 5, 2013, the CBO released its annual 
Budget and Economic Outlook. The report included updated economic and 
budget projections that incorporated the effects of the legislation 
enacted prior to the start of the year, a revised economic forecast 
consistent with the budget projections, and other changes to CBO's 
estimates. (To view the report, we referred readers to the Web site at: 
http://www.cbo.gov/sites/default/files/cbofiles/attachments/43900_ACAInsuranceCoverageEffects.pdf.)
    In the proposed rule (78 FR 27584), we used the February 5, 2013, 
CBO health insurance estimates in order to calculate the percentage of 
individuals without insurance for 2014. As we did for the uninsurance 
percentage estimate for 2013 (based on the March 20, 2010 CBO letter 
discussed above), we proposed to use the ``Insured Share of the 
Nonelderly Population Including All Residents'' to calculate the 
comparison of the percentage of people without insurance for 2014. 
Consistent with the CBO estimate used to calculate the baseline 
uninsurance estimate, this estimate for insurance only includes 
residents of the 50 States and the District of Columbia, and the count 
of uninsured people includes unauthorized immigrants, as well as 
individuals who are eligible for, but not enrolled in, Medicaid. The 
CBO report projects that the ``Insured Share of the Nonelderly 
Population Including All Residents'' for 2014 will be 84 percent. 
Therefore, in the same manner that we calculated the uninsurance 
percentage for the baseline, we proposed that the uninsurance 
percentage for 2014 would be 16 percent (that is, 100 percent minus 84 
percent) for the purpose of this proposed rule. We indicated that if 
our proposal was finalized, and there is a more recent estimate of the 
percentage of individuals with insurance in 2014 by the CBO available 
for the FY 2014 IPPS/LTCH PPS final rule, we would use that estimate to 
calculate Factor 2. However, we would not adjust Factor 2 retroactively 
to account for estimates that become available after publication of the 
final rule.
    Comment: Some commenters agreed with the proposal to use CBO 
estimates of rates of insurance coverage in 2014 and subsequent years 
as a basis for calculating Factor 2. One commenter stated that the CBO 
estimates were both sufficient and accurate for the purpose of 
determining Factor 2. However, other commenters expressed concern about 
the accuracy of CBO projections of insurance coverage in 2014 and 
subsequent years. These commenters mentioned uncertainties in the wake 
of the Supreme Court decision about Medicaid expansion. These 
commenters also noted that the statewide exchanges that are to be 
established under the Affordable Care Act will not be in operation 
until January 2014, so that the CBO projections of an increase in the 
rate of insurance coverage may be overstated. Other commenters stated 
that the CBO projections are unsupported by substantial data and 
requested that Factor 2 be reconciled on the basis of actual data for 
2014.
    Response: We continue to believe that the CBO projections of 
insurance coverage in 2014 and subsequent years are the most reliable 
and consistent basis on which to calculate Factor 2. As we noted in the 
proposed rule, section 1886(r)(2)(B)(i)(I) of the Act refers to the 
percent of uninsured in 2013 ``as calculated by the Secretary based 
on'' the CBO data. Similarly, section 1886(r)(2)(B)(i)(II) of the Act 
immediately afterwards refers to the percent of uninsured for 2014 ``as 
so calculated.'' (Emphasis supplied.) The phrase ``as so calculated'' 
in the latter section can be reasonably interpreted to require the 
calculation to similarly be based on CBO estimates. In addition, we 
continue to believe that it is preferable from a statistical point of 
view to calculate a percent change in insurance over time using a 
consistent data source. The more recent CBO projections take into 
account changes in the environment that can impact insurance rates, 
such as more recent economic conditions and the Supreme Court's 
decision in National Federation of Independent Business. v. Sebelius--
U.S.--, 132 S. Ct. 2566 (2012), regarding Medicaid expansions 
authorized by the Affordable Care Act. As is the case with regard to 
reconciling the estimates used to determine Factor 1, we believe that 
employing actual data as the basis for reconciling the projections 
employed to determine Factor 2 would impose an unacceptable delay in 
the final determination of uncompensated care payments. Actual data on 
the rates of insurance and uninsurance would not become available until 
several years after the payment year, and the initial data for the year 
would continue to be adjusted for several years after that as further 
data become available. Furthermore, by stating that the Secretary's 
calculations should be based on ``estimates'' provided by the CBO, the 
statute clearly contemplates the use of such estimates on a prospective 
basis without reconciliation. Therefore, we are finalizing our proposal 
to use the most recently available CBO estimates of insurance rates for 
each payment year, and not to adjust Factor 2 retroactively to account 
for estimates that become available after publication of the final 
rule.
    Section 1886(r)(2)(B)(i) of the Act states that Factor 2 for FY 
2014 is equal

[[Page 50633]]

to 1 minus the percent change in the percent of individuals under the 
age of 65 who are uninsured, as determined by comparing the percent of 
such individuals without insurance in the baseline and in the most 
recent period for which we have data (minus 0.1 percentage points for 
FY 2014). Therefore, in the FY 2014 IPPS/LTCH PPS proposed rule (78 FR 
27584), we proposed that Factor 2 is 1 minus the percent change between 
the baseline percentage of individuals without insurance in 2013 (which 
was, for the proposed rule, 18 percent) and the most recent percentage 
of individuals without insurance for 2014 (which was, for this proposed 
rule, 16 percent) minus 0.1 percentage points.
    Using the March 20, 2010 CBO projection for 2013 and the February 
5, 2013 CBO projection of uninsurance for all residents for 2014, we 
proposed to use the following computation for Factor 2 for FY 2014:

Percent of individuals without insurance for CY 2013 (March 2010 CBO 
estimate): 18 percent
Percent of individuals without insurance for CY 2014 (February 2013 
CBO estimate): 16 percent
1-[verbar][(0.16-0.18)/0.18][verbar] = 1-0.111 = 0.889 (88.9 
percent)
0.889 (88.9 percent)-0.001 (0.1 percentage points) = 0.888 (88.8 
percent)
0.888 = Factor 2.

    Accordingly, we proposed Factor 2 to be 88.8 percent for FY 2014. 
In conjunction with this proposal, we proposed that the amount 
available for uncompensated care payments for FY 2014 would be $8.217 
billion (0.888 times our proposed Factor 1 estimate of $9.2535 
billion). As we noted previously, in the FY 2014 IPPS/LTCH PPS proposed 
rule (78 FR 27585), we stated that our proposal for Factor 2 may be 
subject to change if more recent CBO estimates of the insurance rate 
for 2014 become available prior to the preparation of the final rule. 
In the proposed rule, we proposed to add a new paragraph (g)(1)(ii) 
under Sec.  412.106 of our regulations to define the methodology for 
calculating Factor 2.
    We invited public comment on our proposed methodology to calculate 
Factor 2.
    Comment: Many commenters noted that the CBO estimates of the effect 
of the Affordable Care Act on the level of insurance coverage are made 
on a calendar year basis (for example, calendar year 2014). However, 
the commenters stated, the new payment methodology for uncompensated 
care payments will go into effect for FY 2014 (that is, on October 1, 
2013). The commenters stated that, therefore, the CBO estimate for 
calendar year 2014 represents the first full year during which the 
exchanges and Medicaid expansion under the Affordable Care Act will be 
in effect. However, the commenters further stated, the new payment 
methodology will be in effect for 3 months of the previous calendar 
year before these Affordable Care Act provisions that should lower the 
uninsurance rate go into effect. Therefore, these commenters urged CMS 
to normalize the CBO estimate to reflect FY 2014 more accurately, 
specifically by calculating a weighted average of the CBO estimate for 
October-December 2013 and the estimate for January-September 2014. 
Several commenters illustrated the effect of calculating a weighted 
average using the February 5, 2013 CBO projections that CMS employed in 
the proposed rule as follows:

CY 2013 rate of insurance coverage (February 2013 CBO estimate): 80 
percent
CY 2014 rate of insurance coverage (February 2013 CBO estimate): 84 
percent
FY 2014 rate of insurance coverage: (80 percent * .25) + (84 percent 
* .75) = 83 percent.
Percent of individuals without insurance for CY 2013 (March 2010 CBO 
estimate): 18 percent
Percent of individuals without insurance for FY 2014 (weighted 
average): 17 percent
1-[verbar][(0.17-0.18)/0.18][verbar] = 1-0.056 = 0.944 (94.4 
percent)
0.944 (94.4 percent)-0.001 (0.1 percentage points) = 0.943 (94.3 
percent)
0.943 = Factor 2

    Response: We are finalizing our proposal to employ the most recent 
CBO estimates of the rates of insurance for FY 2014 and subsequent 
payment years. We agree with the recommendation of the commenters that 
we should normalize the estimate of uninsurance for FY 2014 by 
calculating a weighted average of the CBO estimates for CY 2013 and CY 
2014, respectively. We agree that normalizing the estimate to cover FY 
2014 rather than CY 2014 will more accurately reflect the actual rate 
of uninsurance that hospitals will experience during the FY 2014 
payment year. We also believe that we have sufficient discretion under 
the statute to employ a normalized estimate for FY 2014 in place of the 
CBO estimate for CY 2014 because section 1886(r)(2)(B)(i) of the Act 
merely requires us to develop such estimates ``based on the most recent 
estimates available from'' the CBO. (We note that the base year 
estimate for 2013 remains the same whether it is normalized to FY 2013 
or not. This is because the CBO estimates that the statute requires us 
to use for the base year indicate a rate of uninsurance of 18 percent 
for both CY 2012 and CY 2013, the calendar years which we would employ 
to normalize the estimate for FY 2013.)
    In this final rule, we are employing the most recent available 
estimate, specifically CBO's May 2013 estimates of the effects of the 
Affordable Care Act on health insurance coverage, which are available 
at http://www.cbo.gov/sites/default/files/cbofiles/attachments/44190_EffectsAffordableCareActHealthInsuranceCoverage_2.pdf, as amended by 
CBO's July 2013 estimates of changes in estimates of the effects of 
insurance coverage provisions in the Affordable Care Act issued in 
conjunction with a memo regarding ``Analysis of the Administration's 
Announced Delay of Certain Requirements Under the Affordable Care 
Act,'' which are available at http://www.cbo.gov/sites/default/files/cbofiles/attachments/44465-ACA.pdf. The CBO's May 2013 estimate of the 
rate of insurance for CY 2013 is 80 percent, and for CY 2014 is 84 
percent. (These estimates are unchanged from the February 5, 2013 CBO 
projections that we employed in the proposed rule.) The CBO's May 2013 
estimate includes an estimate of the change in the number of uninsured 
non-elderly people (including unauthorized immigrants) of -14 million 
in CY 2014. Based on this estimate of the change in the number of 
uninsured non-elderly people, in May 2013, the CBO estimated that in CY 
2014 there will be 44 million uninsured non-elderly people. In 
addition, the CBO's May 2013 estimate stated that there will be a total 
of 274 million non-elderly people in CY 2014. Accordingly, we concluded 
that in the May 2013 CBO estimates that there will be 230 million 
insured non-elderly people (that is, 274 million total non-elderly 
people minus 44 million uninsured non-elderly people), which supports 
their estimate that the insured share of the non-elderly population is 
84 percent (that is, 230 million insured non-elderly people divided by 
274 million total non-elderly people). The CBO's July 2013 estimates do 
not include a revised estimate of the insured share of the non-elderly 
population in CY 2014, and instead include estimates of the changes in 
the number of non-elderly people by type of insurance coverage. In 
other words, the CBO's July 2013 estimate includes an estimate of the 
change in the number of uninsured non-elderly people (including 
unauthorized immigrants). The CBO's July 2013 estimate includes a 
revised estimate of the change in the number of uninsured non-elderly 
people (including unauthorized immigrants) of -13 million in CY 2014.

[[Page 50634]]

Based on this July 2013 revised estimate of the change in the number of 
uninsured non-elderly people and the May 2013 estimate of uninsured 
non-elderly people, we conclude that it is appropriate to infer that in 
CY 2014 there will be 45 million uninsured non-elderly people. We also 
believe that is appropriate to conclude that the CBO made no change to 
its estimates of total non-elderly people in July 2013, so that it 
remains the same as in their May 2013 estimates of 274 million. 
Accordingly, we believe that the number of insured non-elderly people 
based on the July 2013 CBO estimates for CY 2014 is 229 million (that 
is, 274 million total non-elderly people minus 45 million uninsured 
non-elderly people), which results in the insured share of the non-
elderly population of 84 percent (that is, 229 million insured non-
elderly people divided by 274 million total non-elderly people). 
Therefore, the calculation of Factor 2 for FY 2014, employing a 
weighted average of the CBO projections for CY 2013 and CY 2014, is as 
follows:

CY 2013 rate of insurance coverage (May 2013 CBO estimate): 80 
percent
CY 2014 rate of insurance coverage (May 2013 CBO estimate, updated 
with July 2013 CBO estimate): 84 percent
FY 2014 rate of insurance coverage: (80 percent * .25) + (84 percent 
* .75) = 83 percent.
Percent of individuals without insurance for 2013 (March 2010 CBO 
estimate): 18 percent
Percent of individuals without insurance for FY 2014 (weighted 
average): 17 percent
1-[verbar][(0.17-0.18)/0.18][verbar] = 1-0.056 = 0.944 (94.4 
percent)
0.944 (94.4 percent)-0.001 (0.1 percentage points) = 0.943 (94.3 
percent)
0.943 = Factor 2

    We note that, as a result of this change, we will reduce the total 
amount of uncompensated care payments by a smaller amount than the 
reductions that would have resulted from our proposed methodology for 
Factor 2.
    Therefore, in this final rule, we are adopting 0.943 as the final 
determination of Factor 2 for FY 2014. In conjunction with this 
determination, we have also determined, for the purpose of this final 
rule, that the amount available for uncompensated care payments for FY 
2014 will be approximately $9.033 billion (0.943 times our Factor 1 
estimate of $9.579 billion).
    Comment: One commenter opined that the new Medicare DSH payment 
adjustment policy will hurt Massachusetts hospitals, which will see no 
reduction in uninsured rates because the State has already expanded 
health insurance coverage under its own health care reform. The 
commenter requested that CMS exempt Massachusetts and any other State 
which expands health care coverage from any cuts driven by the 
reduction in uninsurance at the national level under the Affordable 
Care Act. At minimum, the commenter requested that CMS adjust Factor 2 
to account for changes in uninsurance at the State level so that 
hospitals in States that are not expected to see reductions in their 
uninsured rates--because they have already expanded access in alignment 
with the Affordable Care Act--will not see large reductions in their 
Medicare DSH payments.
    Response: We appreciate receiving the commenter's concerns. 
However, the statute provides no authority to exempt some States from 
the provision or to adjust the calculation of Factor 2 to reflect 
uninsurance rates at a State level. Therefore, we are unable to accept 
the commenter's recommendations.
(3) Methodology to Calculate Factor 3
    Section 1886(r)(2)(C) of the Act defines Factor 3 in the 
calculation of the uncompensated care payment. As we have discussed 
above, section 1886(r)(2)(C) of the Act states that Factor 3 is ``equal 
to the percent, for each subsection (d) hospital, that represents the 
quotient of (i) the amount of uncompensated care for such hospital for 
a period selected by the Secretary (as estimated by the Secretary, 
based on appropriate data (including, in the case where the Secretary 
determines alternative data is available which is a better proxy for 
the costs of subsection (d) hospitals for treating the uninsured, the 
use of such alternative data)); and (ii) the aggregate amount of 
uncompensated care for all subsection (d) hospitals that receive a 
payment under this subsection for such period (as so estimated, based 
on such data).''
    Therefore, Factor 3 is a hospital-specific value that expresses the 
proportion of the estimated uncompensated care amount for each 
subsection (d) hospital and subsection (d) Puerto Rico hospital with 
the potential to receive DSH payments relative to the estimated 
uncompensated care amount for all hospitals estimated to receive DSH 
payments in the fiscal year for which the uncompensated care payment is 
to be made. Factor 3 is applied to the product of Factor 1 and Factor 2 
to determine the amount of the uncompensated care payment that each 
eligible hospital will receive for FY 2014 and subsequent years. In 
order to implement the statutory requirements for this factor of the 
uncompensated care payment formula, we must determine the following: 
(1) The definition of uncompensated care, or in other words, the 
specific items that are to be included in the numerator (that is, the 
estimated uncompensated care amount for an individual hospital) and 
denominator (that is, the estimated uncompensated care amount for all 
hospitals estimated to receive DSH payments in the applicable FY); (2) 
the data source(s) for the estimated uncompensated care amount; and (3) 
the timing and manner of computing the quotient for each hospital 
estimated to receive DSH payments. The statute instructs the Secretary 
to estimate the amounts of uncompensated care for a period ``based on 
appropriate data.'' In addition, we note that the statute permits the 
Secretary to use alternative data ``in the case where the Secretary 
determines that alternative data is available,'' which is a better 
proxy for the costs of subsection (d) hospitals for treating uninsured 
individuals.
    In the course of considering how to determine Factor 3, we 
considered proposing to define the amount uncompensated care for a 
hospital as the uncompensated care costs of that hospital and 
considered potential data sources for those costs. In doing so, we 
first considered which costs should be included in the definition of 
``uncompensated care costs.'' We examined the broad literature on 
uncompensated care and the concepts of uncompensated care used in 
various public and private programs. We also considered input from 
stakeholders and public comments in various forums, including the 
national provider call that we held in January 2013. Our review of the 
information from these sources indicated that there is some variation 
in how different States, provider organizations, and Federal programs 
define ``uncompensated care.'' However, a common theme of almost all 
these definitions is that they include both ``charity care'' and ``bad 
debt'' as constituents of ``uncompensated care.'' After considering the 
various factors that are included in different definitions of 
``uncompensated care,'' we considered proposing to adopt a definition 
which incorporated those factors that are most commonly included within 
the term. Thus, we considered proposing to define ``uncompensated 
care'' as the cost of charity care plus bad debt which includes the 
cost of non-Medicare bad debt and non-reimbursed Medicare bad debt. In 
turn, we also considered proposing to define ``charity care costs'' as 
the cost of care for patients that meet hospitals' individual criteria 
for charity care net of any partial payment received by the hospital 
from patients for that

[[Page 50635]]

care, and to define ``non-Medicare bad debt costs'' as the cost of 
hospital care for non-Medicare patients that have the financial 
capacity to pay, but are unwilling to settle the claim. In addition, we 
considered proposing to define ``non-reimbursed Medicare bad debt 
costs'' as the amount of allowable coinsurance and deductible for 
Medicare patients from whom the hospital has sought to collect payment 
through reasonable collection efforts as described in Sec.  413.89(e) 
of the Medicare regulations and not reimbursed by Medicare. We 
discussed these possible elements of uncompensated care in more detail 
in the proposed rule (78 FR 27585)
    For purposes of selecting an appropriate data source for this 
possible definition of uncompensated care costs, we reviewed the 
literature and available data sources and determined that the Medicare 
cost report Worksheet S-10 could potentially provide the most complete 
data for Medicare hospitals. (We refer readers to the report 
``Improvements to Medicare Disproportionate Share (DSH) Payments'' for 
a full discussion and evaluation of the available data sources. The 
report can be found on the CMS Web site at: http://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/AcuteInpatientPPS/dsh.html.) 
However, we noted that Worksheet S-10 is a relatively new data source 
that has been used for specific payment purposes only in relatively 
restricted ways (for example, to provide a source of charity care 
charges in the computation of EHR incentive payments; 75 FR 44456.). We 
also noted that some stakeholders have expressed concern that hospitals 
have not had enough time to learn how to submit accurate and consistent 
data through this reporting mechanism. Other stakeholders have 
maintained that some instructions for Worksheet S-10 still require 
clarification in order to ensure standardized and consistent reporting 
by hospitals. We understand and appreciate the concerns of these 
stakeholders. At the same time, Worksheet S-10 is the only national 
data source that includes data for all Medicare hospitals and is 
designed to elicit data that are both accurate and consistent with the 
definition of uncompensated care costs that we considered proposing to 
use. We discussed the possible use of data reported on Worksheet S-10 
to determine uncompensated care costs in more detail in the proposed 
rule (78 FR 27586).
    In order to apply a definition of uncompensated care costs based 
upon information reported on the Worksheet S-10, it would be necessary 
to use the 2010/2011 cost reports, which were submitted on or after May 
1, 2010, when the new Worksheet S-10 went into effect. These are the 
most recently available full year of cost reports and the first cost 
reports with detailed uncompensated care data on the Worksheet S-10 
that would be available for use in implementing the new methodology for 
uncompensated care payments for FY 2014. Concerns about the 
standardization and completeness of the Worksheet S-10 data could be 
more acute for data collected in the first year of the Worksheet's use. 
Because of these concerns, we did not propose to define uncompensated 
care in a way that would require use of the Worksheet S-10 data. 
However, we stated our belief that Worksheet S-10 of the Medicare Cost 
Report would otherwise be an appropriate data source to determine 
uncompensated care costs. In particular, we noted that Worksheet S-10 
was developed specifically to collect information on uncompensated care 
costs in response to interest by MedPAC and other stakeholders 
regarding the topic (for example, MedPAC's March 2007 Report to 
Congress) and that it is not unreasonable to expect information on the 
cost report to be used for payment purposes. Furthermore, hospitals 
attest to the accuracy and completeness of the information reported in 
the cost report at the time of submission. While we realize that 
hospitals may wish to have a more specific understanding of how these 
data will be used, we believe that the discussion in the proposed rule 
will help to increase their understanding and also inform our efforts 
to refine the cost report and cost report instructions so that 
hospitals may continue to gain experience in reporting accurate 
information. We also expect reporting on Worksheet S-10 to improve over 
time, particularly in the area of charity care which is already being 
used and audited for payment determinations related to the electronic 
health record incentive program, and will continue to monitor these 
data. Accordingly, we stated in the proposed rule that we may proceed 
with a proposal to use data on the Worksheet S-10 to determine 
uncompensated care costs in the future, once hospitals are submitting 
accurate and consistent data through this reporting mechanism.
    As we describe above, in the FY 2014 IPPS/LTCH PPS proposed rule, 
we indicated that we were concerned about stakeholder input that the 
variations in the data reported on Worksheet S-10 of the Medicare cost 
report regarding uncompensated care may be due to hospitals' relative 
lack of experience reporting all of the data elements on that 
worksheet. A large number of stakeholders noted that there is 
considerable variation and numerous inconsistencies in how 
uncompensated care is calculated and reported in Worksheet S-10 and 
they point out that these inconsistencies can produce divergent 
results. Some stakeholders went as far as noting that data from 
Worksheet S-10 is ``flawed'' and many suggested more precision in 
reporting instructions to help hospitals report data in a more 
consistent manner. We noted that most of the data elements reported on 
Worksheet S-10 have been previously unused for payment purposes, with 
only some data elements recently being used for determining a 
hospital's electronic health record incentive payments, and these data 
elements have not been subject to audit prior to this time. We stated 
that we believe it is important that data used to determine Factor 3 
are data that have been historically publicly available, subject to 
audit, and used for payment purposes (or that the public understands 
will be used for payment purposes). We indicated that it is our belief 
that hospitals expend more resources to ensure data accuracy when data 
are publicly available and used for payments. For example, the National 
Quality Forum (NQF) first endorsed quality measures for readmissions 
for heart failure (HF) in May 2008 and acute myocardial infarction 
(AMI) and pneumonia (PN) in October 2008. HF was subsequently adopted 
in the Hospital Inpatient Quality Reporting (IQR) Program in the FY 
2009 IPPS rule and AMI and PN in the CY 2009 OPPS rule. All three were 
adopted for the FY 2010 Hospital IQR program and publicly reported in 
Hospital Compare in 2009. More recently, starting in FY 2013, all three 
were used to determine a payment adjustment under section 1886(q) of 
the Act. As the measures became linked with payment, CMS has received 
an increasing number of questions regarding and requests to refine 
these measures, leading us to believe that hospitals are increasingly 
focused on ensuring that their data are correct. Furthermore, it is 
also our belief that auditing plays an important role in ensuring data 
accuracy by identifying and remediating problem areas and/or hospitals 
as well as by having a sentinel effect in others. For example, each 
year, CMS and its intermediaries work with hospitals to review salary 
and wage data reported on Worksheet S-3 of the

[[Page 50636]]

Medicare cost report for use in determining the wage index. This 
extensive process identifies errors and ensures that anomalous data are 
reviewed, corrected as needed, and documented. Due to stakeholder 
concerns and our belief in the importance of using data that have been 
historically publicly available, subject to audit, and used for payment 
purposes (or that the public understands will be used for payment 
purposes), for FY 2014, we stated in the proposed rule that we had 
serious concerns about proposing to use Worksheet S-10 to determine the 
amount of uncompensated care.
    While the statute instructs the Secretary to estimate the amounts 
of uncompensated care for a period ``based on appropriate data,'' 
section 1886(r)(2)(C)(i) of the Act permits the Secretary to use 
alternative data ``in the case where the Secretary determines that 
alternative data is available which is a better proxy for the costs of 
subsection (d) hospitals for treating the uninsured'' for the numerator 
of Factor 3. For the denominator of that quotient, section 
1886(r)(2)(C)(ii) of the Act requires the Secretary to use ``the 
aggregate amount of uncompensated care for all subsection (d) hospitals 
that receive a payment under this subsection for such period (as so 
estimated, based on such data). (Emphasis added.) The phrase ``as so 
estimated, based on such data'' in the latter section can be reasonably 
interpreted to require the calculation to similarly be based on the 
same data as is used to estimate the numerator of the quotient in 
Factor 3, including any alternative data which is determined to be a 
better proxy for the costs of treating the uninsured.
    As a result of our concerns regarding variations in the data 
reported on the Worksheet S-10, we stated in the proposed rule that we 
believe it is appropriate to consider the use of alternative data, at 
least in FY 2014, the first year that this provision is effective, and 
possibly additional years until hospitals have adequate experience 
reporting all of the data elements on Worksheet S-10. We noted that 
this is consistent with input we received from some stakeholders in 
response to the CMS National Provider Call in January 2013, who stated 
their belief that existing FY 2010 and FY 2011 data from the Worksheet 
S-10 cannot be used for implementation of section 1886(r) and who 
requested the opportunity to re-submit the data once more specific 
instructions were issued by CMS. Accordingly, we examined alternative 
data sources that could be used to allow time for hospitals to gain 
experience with and to improve the accuracy of their S-10 reporting.
    In order to implement the statutory requirements for Factor 3 using 
alternative data, we must: (1) Determine whether alternative data would 
be a better proxy for the treatment costs of the uninsured than the 
information available on the Worksheet S-10; (2) identify a source for 
this alternative data; and (3) determine the timing and manner of 
computing the quotient for each hospital.
    We stated in the FY 2014 IPPS/LTCH PPS proposed rule that we 
believe that data on utilization for insured low-income patients can be 
a reasonable proxy for the treatment costs of uninsured patients. 
Moreover, due to the concerns regarding the accuracy and consistency of 
the data reported on the Worksheet S-10, we believe that this 
alternative data, which is currently reported on the Medicare cost 
report, would be a better proxy for the amount of uncompensated care 
provided by hospitals. Accordingly, in the FY 2014 IPPS/LTCH PPS 
proposed rule (78 FR 27587 through 27588), we proposed to use the 
utilization of insured low-income patients defined as inpatient days of 
Medicaid patients plus inpatient days of Medicare SSI patients as 
defined in 42 CFR 412.106(b)(4) and 412.106(b)(2)(i), respectively to 
determine Factor 3. We describe our proposal and rationale, on which we 
sought public comment, more fully below.
    As a preliminary matter, we noted that precise data on health care 
costs are difficult to obtain. For Medicare payment purposes, we 
estimate those costs using reported charges and cost-to-charge ratios. 
This approach to estimating costs is what is used on Worksheet S-10 to 
determine costs for charity care and bad debt. We do believe that the 
Medicare cost report is the most comprehensive data source regarding 
hospital costs reported to Medicare, and note that alternative data on 
uninsured patients are difficult to find in a comprehensive manner on a 
hospital-specific basis. In a September 2002 report, Analysis of the 
Joint Distribution of Disproportionate Share Hospital Payments, RAND 
and Urban Institute researchers describe this difficulty, citing as an 
example how detailed inpatient utilization data on self-pay patients 
were available only for the sample of hospitals (20 percent sample) 
from the 24 States included in AHRQ's HCUP database.\13\
---------------------------------------------------------------------------

    \13\ Wynn, B. et al. Analysis of the Joint Distribution of 
Disproportionate Share Hospital Payments. PM-1387-ASPE. September 
20, 2002. Available at: http://www.urban.org/UploadedPDF/410975_ASPEDSH_final.pdf.
---------------------------------------------------------------------------

    While Worksheet S-10 does contain some information regarding the 
treatment costs of the uninsured, most notably of those uninsured 
patients who qualify for charity care at an individual hospital, for 
the reasons described above, we stated that we were concerned about the 
use of information reported on the Worksheet S-10 as appropriate data 
for FY 2014 and possibly additional years. As a result of these 
concerns, in identifying alternative data that could serve as a proxy 
for the treatment costs of the uninsured, we acknowledged that we must 
consider methods other than costs to approximate the resources expended 
by hospitals to treat uninsured patients. One such method is 
utilization. A hospital's costs for treating uninsured patients are a 
function of its input costs and utilization of services. In accordance 
with the statute, in order to determine Factor 3, a hospital-level 
estimate of uncompensated care is required. Such an estimate can be 
constructed using detailed data regarding specific items or services. 
However, such data are not available to us. In contrast, hospital-level 
data measuring utilization as inpatient days or discharges are 
available. While we noted that inpatient days or discharges would be 
more precise if they took into account the relative resource 
utilization of individual patients, such as case-mix, no such data are 
available to us. In the September 2002 report discussed above, RAND and 
Urban Institute researchers asserted that without specific case-mix 
data for low-income populations, inpatient days are preferable to 
discharges as a way to measure utilization. Therefore, we stated our 
belief that utilization based upon inpatient days is an appropriate 
method to approximate costs for the treatment costs of the uninsured.
    We further stated that we believe that utilization by insured low-
income patients, such as Medicaid patients or Medicare patients that 
receive SSI benefits (Medicare SSI), can be a reasonable proxy for 
utilization by uninsured patients. In its 2000 report on American's 
Health Care Safety Net, the Institute of Medicine considers uninsured 
individuals, low-income underinsured individuals, Medicaid 
beneficiaries, and patients with special health care needs all as 
vulnerable populations.\14\ We note that when

[[Page 50637]]

studying access to care, researchers may study Medicaid and/or low-
income populations (for example, health outcomes, utilization, etc.) in 
order to understand more broadly the impact of similar policy 
interventions for other vulnerable populations.\15\ For example, 
recently, researchers have studied the effects of Medicaid expansions 
to gauge the effects of these expansions on health status and other 
indicators to inform policymakers as these expansion efforts 
continue.\16\ Researchers have also studied the ability of Medicaid 
patients to gain access to outpatient care in an effort to highlight 
the ramifications of various policy interventions, such as mandatory 
co-payments and utilization restrictions.\17\ We noted that we believe 
that this type research is often used by state and other policy makers 
to evaluate how Medicaid and other public health insurance can expand 
access to care to uninsured populations.
---------------------------------------------------------------------------

    \14\ Marion Ein Lewin and Stuart Altman, Editors; Committee on 
the Changing Market, Managed Care, and the Future Viability of 
Safety Net Providers, Institute of Medicine. America's Health Care 
Safety Net: Intact but Endangered. 2000. Available at: http://www.nap.edu/catalog/9612.html.
    \15\ John K. Iglehart. Medicaid. N Engl J Med 1993; 328:896-900. 
March 25, 1993.
    \16\ Benjamin D. Sommers, M.D., Ph.D., Katherine Baicker, Ph.D., 
and Arnold M. Epstein, M.D. Mortality and Access to Care among 
Adults after State Medicaid Expansions. N Engl J Med 2012; 367:1025-
1034. September 13, 2012.
    \17\ The Medicaid Access Study Group. Access of Medicaid 
Recipients to Outpatient Care. N Engl J Med 1994; 330:1426-1430. May 
19, 1994.
---------------------------------------------------------------------------

    While the report by RAND and the Urban Institute cited above found 
shortcomings in how well both Medicaid and Medicare DSH target funds 
towards safety net hospitals, another key finding of the report was 
that the allocation methods used by these programs target funds to 
safety net hospitals at least as well as the alternative allocation 
methods they examined. The allocation method used by Medicare for 
Medicare DSH is the sum of two computations. The first computation, 
defined at 42 CFR 412.106(b)(2), known as the SSI ratio or Medicare 
fraction, is the proportion of a hospital's Medicare SSI days relative 
to Medicare days. The second computation, defined at 42 CFR 
412.106(b)(4), known as the Medicaid fraction, is the proportion of a 
hospital's Medicaid days relative to total days. The RAND and the Urban 
Institute study also found that the choice of patient populations used 
to evaluate how well Medicare and Medicaid DSH funds are allocated is 
important. The study notes that including Medicare SSI beneficiaries 
along with all other low-income patients generally performed better, 
resulting in a better targeting of these payments towards safety net 
hospitals. Therefore, we indicated that we believe the utilization of 
insured low-income patients defined as insured low-income days, or 
inpatient days of Medicaid patients plus inpatient days of Medicare-SSI 
patients could be a proxy for the treatment costs of uninsured 
patients. Currently, for the Medicare DSH adjustment, hospitals report 
utilization for Medicaid and Medicare SSI patients in accordance with 
the regulations at 42 CFR 412.106(b)(4) and 412.106(b)(2)(i), 
respectively. Specifically, we would define inpatient days for Medicaid 
patients as they are defined in Sec.  412.106(b)(4) and inpatient days 
for Medicare-SSI patients as they are defined at Sec.  
412.106(b)(2)(i). A hospital's individual insured low-income insured 
days based on this calculation would represent that hospital's 
numerator for Factor 3. The sum of the low-income insured days under 
this calculation for all the hospitals that we estimate would receive 
DSH payments (and thus the uncompensated care payment) for FY 2014 
would represent the denominator of Factor 3.
    It is important to point out that when these insured low-income 
utilization data are used to determine Medicare DSH payments, they are 
subject to additional computations as described in 42 CFR 412.106(b) 
and 412.106(d). Therefore, using these data to determine Factor 3 will 
lead to a different set of results than using these data to determine 
hospitals' Medicare DSH payments.
    In the FY 2014 IPPS/LTCH PPS proposed rule, we stated that we 
believe the data in the Medicare cost report (and the data that are 
used to update the SSI ratios in the cost report) are acceptable for 
use as a source for this alternative data because they include data for 
all Medicare hospitals. For the reasons described above, we considered 
data elements from the Medicare cost report that have been historically 
publicly available, subject to audit, and used for payment purposes, as 
alternative data for the costs of subsection (d) hospitals for treating 
the uninsured. Worksheet S-3, Part I of the CMS-2552-96 version of the 
Medicare cost report and Worksheet S-2, Part I of the CMS 2552-10 
version of the Medicare cost report contain information on the 
utilization of Medicaid patients. Specifically, they contain 
information regarding Medicaid days (that is, the numerator of the 
Medicaid fraction). The SSI ratios can be found in Worksheet E, Part A 
and hospitals' SSI ratios are reported by CMS on the Medicare DSH Web 
site, by Federal fiscal year, and include a hospital's Medicare SSI 
days. We pointed out that CMS calculates the SSI ratios using the 
MedPAR claims data and updates them annually in accordance with the 
process and timing set forth in the FY 2011 IPPS/LTCH PPS final rule 
(75 FR 50282), generally issuing them in the Spring of each year for 
the Federal fiscal year 2 years prior. For instance, we would expect 
that the SSI ratios for FY 2011 would be made available in the Spring 
of 2013. SSI ratios can be downloaded from http://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/AcuteInpatientPPS/dsh.html. The SSI 
ratios for a Federal fiscal year are the data that would ultimately be 
used in Worksheet E, Part A to determine a hospital's Medicare DSH 
adjustment for that fiscal year. While a hospital may choose to have 
its DSH payments settled using an SSI ratio based on the hospital's 
cost reporting period, this choice will vary by hospital and the timing 
of this choice will vary. As a result, a hospital's decision whether to 
have its SSI ratio calculated on the basis of its cost reporting period 
may not be available at the time we determine Factor 3 for a specific 
federal fiscal year. Therefore, in an effort to balance consistency and 
administrative efficiency with precision, we stated our belief that it 
is appropriate to use the SSI ratios based on the Federal fiscal year.
    Except for the data on Worksheet S-10, the Medicare cost report 
does not currently include information that would allow calculation of 
the treatment costs of uninsured patients. For the reasons described 
previously, for FY 2014 and possibly additional years, we have concerns 
with using these data. Accordingly, in the FY 2014 IPPS/LTCH PPS 
proposed rule (78 FR 27589), we proposed to use Worksheet S-3 Part I of 
the CMS-2552-96 version of the Medicare cost report and Worksheet S-2, 
Part I of the CMS 2552-10 version of the Medicare cost report and data 
that are used to update the SSI ratios on that Worksheet E, Part A as 
the source of the alternative data to determine Factor 3 for FY 2014. 
In the proposed rule, we stated that we may propose to use data from 
Worksheet S-10 to determine uncompensated care costs in the future, 
once hospitals are submitting accurate and consistent data through this 
reporting mechanism.
    The statute also allows the Secretary the discretion to determine 
the time periods from which we will derive the data to estimate the 
numerator and the denominator of the Factor 3 quotient. Specifically, 
the statute defines the numerator of the quotient as ``the amount of 
uncompensated care for such hospital for a period selected by the 
Secretary * * *'' (Emphasis added.) The

[[Page 50638]]

statute defines the denominator as ``the aggregate amount of 
uncompensated care for all subsection (d) hospitals that receive a 
payment under this subsection for such period.'' (Emphasis added.) As 
we have discussed above, we proposed a process of making interim 
payments with final cost report settlement for both the empirically 
justified Medicare DSH payments and the uncompensated care payments 
required by section 3133 of the Affordable Care Act. Consistent with 
that proposed process, we also proposed to determine the time period 
from which to estimate the numerator and denominator of the Factor 3 
quotient in a way that will be consistent with making interim and final 
payments. Specifically, we must have Factor 3 values available for 
hospitals that we estimate will qualify for Medicare DSH payments using 
most recently available historical data and for those hospitals that we 
do not estimate will qualify for Medicare DSH payments but that may 
ultimately qualify for Medicare DSH payments at the time of cost report 
settlement.
    In the FY 2014 IPPS/LTCH PPS proposed rule (78 FR 27589), we 
proposed to estimate the numerator and the denominator of Factor 3 for 
hospitals based on the most recently available full year of Medicare 
cost report data (including the most recently available data that may 
be used to update the SSI ratios) with respect to a Federal fiscal 
year. In other words, we proposed to use data from the most recently 
available cost report for the Medicaid days and the most recently 
available SSI ratios (that is, latest available SSI ratios before the 
beginning of the Federal fiscal year) for the Medicare-SSI days. We 
noted that these data are publicly available, subject to audit, and 
used for payment purposes. While we recognized that older data also 
meet these criteria, we often use the most recently available data for 
payment determinations. Therefore, for FY 2014, we proposed to use data 
from the 2010/2011 cost reports for the Medicaid days and the FY 2011 
SSI ratios for the Medicare-SSI days (or, if the FY 2011 SSIs are 
unavailable, the FY 2010 SSI ratios) to estimate Factor 3 for FY 2014.
    To summarize, for FY 2014, in response to stakeholder concerns 
regarding data variability and lack of reporting experience with 
Worksheet S-10, we proposed to determine Factor 3 using insured low-
income patient days from the 2010/2011 cost reports (including the 
FY2011 or FY 2010 SSI ratios, whichever represents the most recently 
available inputs prior to October 1, 2013) as alternative data which 
are a better proxy for the treatment costs of uninsured patients. We 
further proposed to define insured low-income patient days as inpatient 
days of Medicaid patients plus inpatient days of Medicare SSI patients 
as defined in 42 CFR 412.106(b)(4) and 412.106(b)(2)(i), respectively.
    We proposed to add a new paragraph (g)(1)(iii) under Sec.  412.106 
of our regulations to define the methodology for calculating Factor 3.
    We invited public comments on this proposal. Notwithstanding our 
concerns regarding Worksheet S-10, we stated that we were interested in 
hearing commenters' views on the quality of the data reported on the 
Worksheet S-10, and whether it would be sufficient for use in 
determining uncompensated care amounts for fiscal year 2014, either by 
itself or in combination with other data. We also sought public comment 
on how fast we could transition to the use of Worksheet S-10 data based 
upon increased reliability over time, including whether the data could 
be used to determine uncompensated care in FY 2014 either alone or in 
combination with other data.
    Comment: Most commenters supported the proposal not to employ the 
Worksheet S-10 data to determine uncompensated care costs. These 
commenters agreed with CMS' assessment that, at the least, hospitals 
need more time to learn how to accurately and consistently report the 
Worksheet S-10 data before CMS employs the data to determine Factor 3 
in the uncompensated care cost calculation. Some commenters discouraged 
CMS from considering the use of these data at any point in the future, 
and asked CMS to provide sufficient notice that we may propose use of 
the Worksheet S-10 data so that stakeholders will have sufficient time 
to express remaining concerns about employing such data. Other 
commenters encouraged CMS to clarify and revise the reporting 
instructions as appropriate to ensure consistent and accurate reporting 
of Worksheet S-10 data so that it can eventually be employed in the 
determination of Factor 3.
    Response: We appreciate the comments in support of our proposal not 
to employ Worksheet S-10 data at this time for purposes of determining 
Factor 3. However, we remain convinced that the Worksheet S-10 could 
ultimately serve as an appropriate source of more direct data regarding 
uncompensated care costs. Therefore, we will review Worksheet S-10 in 
order to determine what revisions or clarifications may be necessary so 
that it can yield accurate and consistent data. We will consider the 
commenters' specific recommendations for such revisions and 
clarifications as we do so. It is our intention to propose introducing 
use of the Worksheet S-10 to determine Factor 3 within a reasonable 
amount of time.
    Comment: Some commenters objected to our proposal not to employ the 
Worksheet S-10 data to determine uncompensated care costs. These 
commenters noted that Worksheet S-10 was developed specifically to 
collect information on uncompensated care costs. In addition, MedPAC 
expressed reservations about CMS' proposal to employ insured low-income 
days as a proxy for uncompensated care costs, and recommended 
consideration of charity care and/or a blend of the insured low-income 
days and uncompensated care data over a transition of several years to 
sole use of the Worksheet S-10 uncompensated care data in determining 
Factor 3.
    Response: We agree with the commenters that the Worksheet S-10 was 
developed specifically to collect information on uncompensated care 
costs. However, we also agree with the many commenters who stated that 
the data reported on the Worksheet S-10 are not yet reported accurately 
and consistently enough to be adopted for purposes of determining 
Factor 3. Specifically, we agree that because this is the first year 
these data are being reported, confusion could exist about how to 
report information on Worksheet S-10. This confusion could affect the 
accuracy and completeness of the information reported on Worksheet S-
10. In addition, for the reasons described in the FY 2014 IPPS/LTCH PPS 
proposed rule and above, we believe that it would be most appropriate 
to use data elements that have been historically publicly available, 
subject to audit, and used for payment purposes (or that the public 
understands will be used for payment purposes) to determine the amount 
of uncompensated care. For FY 2014, we do not believe that data 
regarding uncompensated care from Worksheet S-10 meet these criteria 
and, therefore, are not reliable enough to use for determining FY 2014 
uncompensated care payments. We do not think they meet these criteria 
because it is the first year they are available and while we recognize 
that a limited portion of these data will be used for payment purposes 
(for example, for EHR payments) and, therefore, subject to audit for 
those purposes they are still not generally used for payment purposes 
and subject to audit. Accordingly, we continue to believe that 
alternative data will provide a better proxy for the amount of

[[Page 50639]]

uncompensated care during first year or years of implementation.
    As we discuss below, we will work on reviewing the instructions for 
Worksheet S-10 to determine whether any revisions or clarifications may 
be necessary to ensure that the data reported on this Worksheet can 
eventually be employed to determine Factor 3. We also appreciate 
MedPAC's recommendation that we consider alternative proxies and also a 
transition period of several years to sole use of the Worksheet S-10 
uncompensated care data in determining Factor 3, possibly with use of a 
blend of the insured low-income days and uncompensated care data. While 
we acknowledge the appeal of a transition to the sole use of the 
uncompensated care data, we believe that we would need to further 
analyze the appropriateness of blending Worksheet S-10 uncompensated 
care data with other data for use in determining Factor 3. We note that 
it is possible that we would consider a more refined proxy or other 
proxies for the treatment costs of the uninsured until such a time that 
we can propose a methodology to calculate Factor 3 based directly on 
reported amounts of uncompensated care. Regardless, we believe that 
hospitals should have a full opportunity to comment on any such 
proposals before their adoption. Therefore, we may consider including 
this recommendation among our proposals in future rulemaking.
    Comment: Most commenters supported CMS' proposal to employ each 
Medicare disproportionate share hospital's insured low-income inpatient 
days relative to the total insured low-income inpatient days provided 
by Medicare disproportionate share hospitals as a better proxy for the 
costs of the uninsured. These commenters agreed with CMS' assessment 
that the data reported on the Worksheet S-10 are not yet reported 
accurately and consistently enough to be adopted for purposes of 
determining Factor 3. Most commenters endorsed the adoption of the 
proxy approach as an interim measure as CMS proceeds to refine the 
definition of uncompensated care costs and the instructions for 
reporting data on the Worksheet S-10. An association representing 
hospitals in a major metropolitan area requested that CMS use the wage 
index to adjust insured low-income days to account for the differences 
in ``purchasing power'' in different regions of the country. The 
association, along with several other commenters, requested that CMS 
include insured low-income days from exempt units (for example, 
inpatient rehabilitation units paid under the IRF PPS or inpatient 
psychiatric units paid under the IPF PPS) of the hospital in order to 
better capture the treatment costs of the uninsured by the hospital. 
Some commenters, including a beneficiary advocacy organization and a 
hospital system, objected to CMS' proposal to use insured low-income 
inpatient days as the proxy for distributing uncompensated care 
payments. These commenters believed that the proposed method unfairly 
rewards States that expand Medicaid to the detriment of States that do 
not, despite their belief that the latter group of States should have 
larger relative uncompensated care costs. The commenters also believed 
that this approach was not an appropriate proxy for uncompensated care 
because, by definition, insured low-income days are not uncompensated.
    Response: We agree with the commenters who supported our proposal 
to employ insured low-income days as a proxy for uncompensated care 
costs. For the reasons we detailed in the proposed rule, we believe 
that this proxy provides a reasonable basis on which to determine 
Factor 3 during an interim period while we work with the hospital 
community to review and make any necessary revisions and clarifications 
to the instructions to ensure that the data on Worksheet S-10 is 
reported accurately and consistently enough to employ in the 
determination of this factor. As is noted above, it remains our 
intention to propose introducing use of the Worksheet S-10 to determine 
Factor 3 within a reasonable amount of time. We do not agree with the 
commenters who stated that our proposal inappropriately rewards States 
that expand Medicaid coverage to the detriment of States that do not. 
Using some of the uncompensated care data discussed in the proposed 
rule, we recognize it would be possible for hospitals in States that 
choose to expand Medicaid to receive lower uncompensated care payments 
because they are less likely to have uninsured patients than hospitals 
in a State that does not choose to expand Medicaid. Nevertheless, for 
the reasons discussed above, we believe that data on insured low-income 
days remains the best proxy for uncompensated care costs currently 
available to determine Factor 3.
    With respect to the comments requesting that we use the wage index 
to adjust low-income days, we agree that there may be regional 
variation in uncompensated care costs due to regional variations in the 
costs of care generally. However, we do not believe that there is 
sufficient basis for believing that the wage index reflects the 
variations in uncompensated care costs well enough to adopt it as the 
basis for adjusting Factor 3. The wage index reflects the relative 
hospital wage level in the geographic area of the hospital compared to 
the national average hospital wage level. In computing the wage index, 
we derive an average hourly wage for each labor market area (total wage 
costs divided by total hours for all hospitals in the geographic area) 
and a national average hourly wage (total wage costs divided by total 
hours for all hospitals surveyed in the nation). A labor market area's 
wage index value is the ratio of the area's average hourly wage to the 
national average hourly wage. We note that, for FY 2014, 69.6 percent 
of the standardized amount is considered to be the labor-related share 
and, therefore, adjusted by the wage index. However, in addition to the 
labor-related share of the standardized amount being adjusted by the 
wage index, the entire standardized amount is also adjusted for the 
relative weight of the MS-DRG for each individual patient. In other 
words, the wage index only adjusts for a portion of the variation in 
costs, and does not address variations in resource use and patient 
severity. Therefore, we think that there is insufficient basis for 
believing that adjusting low-income patient days by the wage index 
would better reflect variations in uncompensated care costs. 
Furthermore, as we discuss above, we are aware of no other data that 
may adequately capture these variations, such as case-mix.
    Finally, we believe that there may be some merit to the comments 
recommending inclusion of insured low-income days from exempt units of 
the hospital in order to better capture the full costs of the treatment 
of the uninsured by the hospital insofar as those data may be publicly 
available, subject to audit, and used for payment purposes. We believe 
that it would be prudent to more carefully consider the degree to which 
these data meet these conditions before adopting this recommendation. 
Therefore, we will consider including this recommendation among our 
proposals in future rulemaking.
    In the FY 2014 IPPS/LTCH PPS proposed rule, we proposed to estimate 
which hospitals would receive an empirically justified Medicare DSH 
payment in a given Federal fiscal year using the most recent data 
available. As we described previously, only hospitals that receive 
empirically justified Medicare DSH payments in a fiscal year may 
receive an uncompensated care payment. However, because whether or

[[Page 50640]]

not a hospital will actually receive an empirically justified Medicare 
DSH payment is not known until cost report settlement and cost report 
settlement occurs several years after end of the federal fiscal year, 
we stated that we believe it is necessary to estimate which hospitals 
will receive Medicare DSH payments for a given fiscal year. Because the 
uncompensated care amounts for these hospitals are used to determine 
the denominator of Factor 3, this allows for the calculation of Factor 
3 in advance of or during the federal fiscal year so that interim 
payments can begin during the fiscal year. We indicated in the proposed 
rule that we believe this will create some level of predictability and 
finality for hospitals eligible for these payments, in addition to 
being administratively efficient.
    Therefore, for FY 2014, we proposed that the denominator for Factor 
3 would reflect the estimated Medicaid and Medicare SSI patient days 
based on data from the 2010/2011 Medicare cost report (including the 
most recently available data that may be used to update the SSI ratios) 
for all hospitals that we estimate would receive an empirically 
justified Medicare DSH payment in FY 2014. The numerator of Factor 3 
would be the estimated Medicaid and Medicare SSI patient days for the 
individual hospital based on its most recent 2010/2011 Medicare cost 
report data (including the most recently available data that may be 
used to update the SSI ratios). We proposed to calculate a numerator 
for all subsection (d) hospitals and subsection (d) Puerto Rico 
hospitals that have the potential of receiving a DSH payment regardless 
of whether we estimate that the hospital would receive DSH payments in 
the respective Federal fiscal year. In that way, if a hospital becomes 
eligible to receive the empirically justified Medicare DSH payment and 
also an uncompensated care payment, we will be able to finalize its 
uncompensated care payment efficiently and without affecting the 
uncompensated care payments of other hospitals.
    We noted that we believe this proposed approach strikes an 
appropriate balance between administrative efficiency, finality, and 
predictability in payments. Therefore, we also proposed to publish a 
table or tables listing Factor 3 for all hospitals that we estimate 
would receive empirically justified Medicare DSH payments in a fiscal 
year (that is, hospitals that would receive interim uncompensated care 
payments during the fiscal year), and for the remaining subsection (d) 
and subsection (d) Puerto Rico hospitals that have the potential of 
receiving a DSH payment in the event that they receive an empirically 
justified Medicare DSH payment for the fiscal year as determined at 
cost report settlement. We also proposed that hospitals would have 60 
days from the date of display of the IPPS/LTCH PPS proposed rule to 
review these tables and notify CMS in writing of a change in a 
hospital's subsection (d) hospital status, such as if a hospital has 
closed or converted to a CAH. We stated that we would notify hospitals 
concerning the specifics of this process in program instructions after 
the final rule. For FY 2014, we stated that we would allow hospitals 60 
days from the date of display of the IPPS/LTCH PPS proposed rule to 
review these tables and notify CMS in writing of a change in a 
hospital's subsection (d) hospital status, and we indicated that we may 
allow an additional (perhaps shorter) such period after the publication 
of the final rule.
    For hospitals that were not estimated to receive an empirically 
justified Medicare DSH payment for a fiscal year, but ultimately 
qualify for such a payment at cost report settlement, we proposed to 
make the full uncompensated care payment at that time. In the case of 
hospitals that we estimated would receive an empirically justified 
Medicare DSH payment for a fiscal year and that received interim 
empirically justified Medicare DSH payments and uncompensated care 
payments, but are found to be ineligible for DSH payments at cost 
report settlement, we would recover the overpayment. However, we 
proposed only to calculate the denominator (that is, the estimated 
Medicaid and Medicare SSI patient days based on data from the 2010/2011 
Medicare cost report (including the most recently available data that 
may be used to update the SSI ratios) for all hospitals that we 
estimate would receive an empirically justified Medicare DSH payment in 
FY 2014) once, at the time of the IPPS/LTCH PPS final rule each year. 
We did not propose to recalculate the denominator at the time when cost 
reports are settled and final eligibility determinations for 
uncompensated care (and empirically justified Medicare DSH) payments 
are made. We discuss our proposals and final polices for interim 
payments and reconciliation processes below in section V.E.3.f. of the 
preamble of this final rule.
    For the purpose of the proposed rule, we posted proposed tables 
listing Factor 3 for the hospitals that we estimated would receive 
Medicare DSH payments for FY 2014 on the CMS Web site at: http://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/AcuteInpatientPPS/dsh.html. We requested that hospitals review these 
tables. In order to ensure that we would have sufficient time to 
incorporate any updated information in the tables for the final rule, 
we indicated that hospitals should notify CMS in writing within 60 days 
from the date of display of the proposed rule of any change in a 
hospital's subsection (d) hospital status. For FY 2014, we stated that 
we may allow an additional (perhaps shorter) such period after the 
publication of the final rule for hospitals to notify CMS of such 
changes.
    Comment: Several commenters questioned their hospitals' Medicare 
DSH eligibility because many of these hospitals, particularly SCHs, 
were projected not to receive empirically justified Medicare DSH 
payment adjustments in the FY 2014 IPPS/LTCH PPS proposed rule and, 
therefore, to be ineligible to receive uncompensated care payments. 
Many of the commenters submitted documentation that they had received 
Medicare DSH payments in the past, so the hospitals reasoned that they 
should be considered eligible for empirically justified Medicare DSH 
payment adjustments and uncompensated care payments.
    Response: For the FY 2014 IPPS/LTCH PPS proposed rule, we 
identified hospitals as being eligible for empirically justified 
Medicare DSH payment adjustments and, therefore, eligible to receive 
uncompensated care payments, based on our projections of whether a 
hospital would receive Medicare DSH payments for FY 2014. Many SCHs 
were determined to be ineligible for empirically justified Medicare DSH 
payment adjustments and uncompensated care payments because SCHs are 
paid the higher of the hospital-specific rate (which, by definition, 
excludes Medicare DSH payments), or the Federal rate (which includes 
Medicare DSH payments). With the 75-percent reduction to Medicare DSH 
payments in FY 2014 pursuant to section 1886(r)(1) of the Act, and 
because we did not propose to include the uncompensated care payment as 
part of the Federal payment rate in the proposed rule, more SCHs were 
projected to receive payments under their hospital-specific rate. As a 
result, these SCHs were determined to be ineligible for empirically 
justified Medicare DSH payment adjustments and, therefore, were also 
ineligible for uncompensated care payments.
    In the FY 2014 IPPS/LTCH PPS proposed rule, we noted that we would 
calculate a Factor 3 for hospitals found to be ineligible for 
empirically justified Medicare DSH payment adjustments in

[[Page 50641]]

our projections, in the event that they become eligible for empirically 
justified Medicare DSH payment adjustments at cost report settlement 
and, therefore, able to receive uncompensated care payments. However, 
unlike the hospitals projected to receive empirically justified 
Medicare DSH payment adjustments for FY 2014, those non-DSH hospitals 
would not receive uncompensated care payments on an interim basis.
    For the final rule, we are finalizing our methodology to identify 
hospitals eligible for empirically justified Medicare DSH payment 
adjustments and, therefore, eligible to receive interim uncompensated 
care payments based on our projections of whether the hospital would 
receive Medicare DSH payments for FY 2014. We will identify those 
subsection (d) and Puerto Rico subsection (d) hospitals that we project 
to have a disproportionate patient percentage (DPP) of at least 15 
percent, which is the minimum required DPP to be eligible for Medicare 
DSH payments under section 1886(d)(5)(F) of the Act and, by extension, 
under 1886(r)(1) of the Act (that is, empirically justified Medicare 
DSH payments). The DPP is the sum of a hospital's SSI fraction and 
Medicaid fraction. We are using the most recent data available to us at 
the time of this rulemaking to calculate the DPP for all subsection (d) 
hospitals and Puerto Rico subsection (d) hospitals and to identify 
those hospitals projected to be eligible for empirically justified 
Medicare DSH payment adjustments for FY 2014. For purposes of this 
final rule, the most recent SSI fraction is the FY 2011 SSI fraction. 
We posted the FY 2011 SSI fractions for each subsection (d) hospital on 
the CMS DSH Web site (http://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/AcuteInpatientPPS/dsh.html) on June 27, 2013. The most 
recently available Medicaid fraction is that reported on the March 2013 
update of the Provider Specific File.
    However, we are modifying our methodology so that an estimated 
uncompensated care payment amount will be included as part of the 
Federal rate when comparing payments under the hospital-specific rate 
versus the Federal rate for SCHs. Once we identify which SCHs we 
project will be paid on their hospital-specific rate, we will consider 
these hospitals to be ineligible to receive interim uncompensated care 
payments because we do not project them to be eligible for the 
empirically justified Medicare DSH payment adjustments.
    We will calculate Factor 3 for all hospitals that are eligible for 
empirically justified Medicare DSH payment adjustments under our 
revised methodology based on their proportion of low-income insured 
days relative to the low-income insured days for all hospitals 
projected to receive DSH payments, and the hospital will receive 
uncompensated care payments on an interim basis. As we describe more 
fully below, hospitals that receive uncompensated care payments on an 
interim basis but are not eligible for Medicare DSH payments at the 
time of cost report settlement would no longer be eligible to receive 
an uncompensated care payment and would need to repay those interim 
payments.
    However, we are adopting a policy to calculate Factor 3 for all 
subsection (d) hospitals, including hospitals that are projected to be 
ineligible to receive Medicare DSH payments (that is, those hospitals 
with a DPP less than 15 percent or SCHs that are projected to be paid 
based on their hospital-specific rate). If these hospitals are later 
determined to be eligible to receive Medicare DSH payments, those 
payments (under both sections 1886(r)(1) and 1886(r)(2) of the Act) 
would be made at the time of cost report settlement. We note that in 
calculating Factor 3, we include in the denominator data only for those 
hospitals that we estimate will be eligible to receive empirically 
justified Medicare DSH payments for FY 2014. As part of our estimation 
of the hospitals eligible for Medicare DSH payments, we consider 
whether a SCH is projected to receive Medicare DSH payments in FY 2014 
and exclude those SCHs we project to be paid on their hospital-specific 
rate. The remaining hospitals with an estimated DPP of 15 percent of 
higher are considered to be eligible for Medicare DSH payments and 
their SSI days and Medicaid days are included in the calculation of the 
denominator for Factor 3.
    Comment: Two hospitals submitted public comments regarding their 
subsection (d) status. One hospital, Missouri Baptist Sullivan (CCN: 
260115), commented that it converted to a CAH and is no longer a 
subsection (d) hospital and, therefore, not eligible for uncompensated 
care payments. Davie County Hospital submitted a public comment that 
stated it was converting from CAH status to become a subsection (d) 
hospital as of August 1, 2013, and the hospital requested to have a 
Factor 3 calculated so it could be determined eligible for 
uncompensated care payments.
    Response: As discussed earlier, a hospital is eligible for 
uncompensated care payments if the hospital is eligible for the 
empirically justified Medicare DSH payment adjustment. Only subsection 
(d) hospitals are eligible for these payments. We have removed Missouri 
Baptist Hospital as a subsection (d) hospital as we have documentation 
that it has converted to a CAH, and we have adjusted our calculation of 
Factor 3 to ensure that its data are excluded from the denominator of 
this calculation. We do not have documentation to confirm that Davie 
County Hospital has been approved to convert from a CAH to an IPPS 
hospital. Therefore, we are not calculating a Factor 3 amount for that 
provider. If the CAH has converted to an IPPS hospital with the 
appropriate supporting documentation, the new IPPS hospital would 
receive a new CCN and would be treated as a new hospital. We discuss 
how we will calculate uncompensated care payments for new hospitals 
later in this final rule.
    In the FY 2014 IPPS/LTCH PPS proposed rule our estimates of 
eligibility to receive FY 2014 Medicare DSH payments were based on the 
Medicaid fraction listed in the December 2012 update of the Provider 
Specific File and the FY 2010 SSI ratios. We stated in the proposed 
rule that we intended to update in the final rule the list of hospitals 
that we estimate will be eligible for Medicare DSH payments for FY 2014 
and our estimate of Factor 3 using more recent data and verified 
hospital notifications regarding hospital status for example, 
closures).
    Accordingly, we have updated our data, and, for this final rule, 
our estimates of eligibility to receive FY 2014 Medicare DSH payments 
are now based on the Medicaid fraction listed in the March 2013 update 
of the Provider Specific File and the FY 2011 SSI ratios published on 
June 27, 2013 on the CMS Web site. This is the most recently available 
data on the DPP for hospitals that are qualified to receive Medicare 
DSH payments. We identified 2,695 hospitals with a DPP greater than or 
equal to 15 percent and, therefore, eligible to receive Medicare DSH 
payments. However, we project that only 2,437 of these DSH-eligible 
hospitals would receive a Medicare DSH payment in FY 2014, as the 
remaining 257 hospitals are SCHs that we project would be paid under 
the hospital-specific rate and, therefore, ineligible for Medicare DSH 
and the uncompensated care payments. (As discussed above, in 
determining whether a SCH is projected to receive Medicare DSH payments 
in FY 2014, we included an estimated uncompensated care payment amount 
in the Federal rate when comparing payments under the hospital-specific

[[Page 50642]]

rate versus the Federal rate.) We estimate that 2,437 hospitals, or 72 
percent of all subsection (d) hospitals and subsection (d) Puerto Rico 
hospitals, would be eligible for Medicare DSH payments in FY 2014. The 
data from these 2,437 hospitals was used to determine the denominator 
for Factor 3. However, we will estimate a Factor 3 numerator for each 
subsection (d) and subsection (d) Puerto Rico hospital that has the 
potential of receiving Medicare DSH payments for FY 2014 and, 
therefore, qualifying for the uncompensated care payment in FY 2014.
    Comment: Several hospitals submitted public comments regarding the 
accuracy of the data used in the calculation of the hospital's Factor 3 
amount provided in the FY 2014 IPPS/LTCH PPS proposed rule. These 
hospitals either indicated that their Medicaid days were understated 
and had not been updated in the HCRIS database used to calculate the 
Medicaid days for Factor 3, or they indicated that the Medicaid days 
reported on Worksheet S-2 of the Medicare Hospital Cost Report version 
2552-10 did not match the Medicaid days reported on Worksheet S-3 of 
the Medicare Hospital Cost Report version 2552-10. Many hospitals 
submitted supporting documentation of the additional Medicaid days. The 
hospitals requested that their Medicaid days used in the calculation of 
Factor 3 be corrected for the final rule.
    Response: We appreciate the information submitted by commenters 
regarding the accuracy of the number of Medicaid days used in the 
calculation of Factor 3. For this final rule, we are using the March 
2013 update of HCRIS and we are identifying a hospital's Medicaid days 
based on the Medicaid days reported on the 2011, or if not available, 
the 2010 Medicare Hospital Cost Report. In addition, for hospitals that 
we project to be eligible to receive empirically justified Medicare DSH 
payment adjustments for FY 2014, we are using Medicaid days reported on 
Worksheet S-2 of the Medicare Hospital Cost Report version 2552-10 to 
determine Factor 3 and not Medicaid days reported on Worksheet S-3 of 
the Medicare Hospital Cost Report version 2552-10. The Medicaid days 
reported on Worksheet S-2 are used in the computation of the Medicaid 
fraction for Medicare DSH payments. Therefore, because they are used 
for the payment of Medicare DSH, we believe that these data are more 
reliable than data not used for payment purposes. We understand that 
there are inconsistencies between the reporting of the days on 
Worksheet S-2 and Worksheet S-3. We also understand that hospitals were 
not able to report their Medicaid days on Worksheet S-2 if they were 
not eligible to receive Medicare DSH payments on that cost report. A 
Transmittal has since been released allowing these hospitals to report 
their Medicaid days on Worksheet S-2 and to ensure that the Medicaid 
days reported on Worksheet S-3 align with the Medicaid days reported on 
Worksheet S-2, but those changes may not be reflected in the March 2013 
update of HCRIS. Accordingly, for hospitals that did not claim Medicare 
DSH payments on their CMS Form 2552-10 Medicare Hospital Cost Report 
for FY 2011 or FY 2010, we are calculating Medicaid days from Worksheet 
S-3 of the Medicare Hospital Cost Report from the most recently 
available cost report from 2011 or 2010. For disproportionate share 
hospitals, we are calculating Medicaid days from Worksheet S-2 of the 
Medicare Hospital Cost Report from the most recently available cost 
report from 2011 or 2010. By using this more updated data, we believe 
that we will address many of the issues and questions raised by 
commenters. We also remind hospitals that the data we are using are 
data that they submit and attest are accurate on the Medicare cost 
report.
    Comment: Two hospitals merged in 2011 with one surviving provider 
number. These hospitals had two cost reports and two SSI ratios in 
2011. However, in the proposed rule, CMS calculated Factor 3 using only 
the surviving hospital's cost report data and SSI ratio data. The 
hospital submitted a public comment requesting that we account for the 
merger and include both hospitals' data in the calculation of the 
Factor 3 amount.
    Response: A hospital's Factor 3 is calculated based on the data 
tied to its CCN. This is consistent with the treatment of other IPPS 
payment factors, where data used to calculate a hospital's Medicare DSH 
payment adjustment, CCRs for outlier payments, and wage index values is 
tied to a hospital's CCN. Data associated with a CCN that is no longer 
in use are not used to determine those IPPS hospital payments under the 
surviving CCN. Furthermore, data reported on the Medicare hospital cost 
report under the CCN associated with the old provider agreement would 
not necessarily be used to determine hospital payments for the CCN 
associated with the surviving provider agreement. Accordingly, in the 
case of a merger between two hospitals, Factor 3 will be calculated 
based on the low-income insured patient days (that is, Medicaid days 
and SSI days) under the surviving CCN, based on the most recent 
available data for that CCN from the cost report for 2011 or 2010.
    Comment: Several commenters asked how new providers will be treated 
in the calculation of Factor 3, specifically what data will be used for 
the Factor 3 calculation and how this approach will impact existing 
providers. In addition, the commenters questioned how providers 
``terminated'' from participation in the Medicare program as a 
subsection (d) hospital prior to 2014 would be treated and whether they 
would be removed from the Factor 3 calculation and how that would have 
an impact on the remaining providers.
    Response: In the FY 2014 IPPS/LTCH PPS proposed rule, we requested 
that the public verify the accuracy of the list of hospitals that we 
identified to be subsection (d) hospitals. As discussed above, one 
hospital submitted a public comment stating that it had converted to a 
CAH and was no longer a subsection (d) hospital. We have removed that 
hospital from our list and calculation of Factor 3. We are using this 
process of allowing the public to review the accuracy of our list of 
hospitals eligible to receive empirically justified Medicare DSH 
payment adjustments and uncompensated care payments as a mechanism of 
identifying and removing terminating providers, and adjusting the 
calculation of Factor 3 for the remaining providers accordingly. For 
the final rule, we have published an updated list of the hospitals we 
have identified to be subsection (d) hospitals and subsection (d) 
Puerto Rico hospitals eligible to receive empirically justified 
Medicare DSH payment adjustments and uncompensated care payments for FY 
2014. For FY 2014, we will allow the public an additional period after 
the issuance of this final rule to contact us with comments on whether 
any of these hospitals should be removed from the list or if any 
hospitals should be added to the list, based on their subsection (d) 
status. The public can submit input on these two topics via the 
Internet on the CMS Web site at: Section3133DSH@cms.hhs.gov. All 
information, including relevant documentation, must be received by 
August 31, 2013. If we identify changes to the list of hospitals, we 
will publish a revised list of hospitals and updated Factor 3 values on 
the CMS Medicare DSH Web site after August 31, 2013.
    For new providers, meaning hospitals with a CCN established after 
2011, we do not have data currently available to calculate a Factor 3 
amount and we do not have data to determine if the new hospital is 
eligible for empirically

[[Page 50643]]

justified Medicare DSH payment adjustments and, therefore, eligible for 
uncompensated care payments for FY 2014. Accordingly, we will treat new 
hospitals in the same manner as hospitals that are not found to be 
eligible to receive empirically justified Medicare DSH payment 
adjustments based upon the most recently available cost report from 
2011 or 2010, such that the hospital may not receive either interim 
empirically justified Medicare DSH payment adjustments or interim 
uncompensated care payments. However, should a hospital later be 
determined to be eligible to receive an empirically justified Medicare 
DSH payment adjustment based on its FY 2014 cost report, the hospital 
will also be eligible to receive uncompensated care payments. 
Consistent with our policy to calculate the Factor 3 for all subsection 
(d) hospitals regardless of whether or not they are projected to 
qualify for Medicare DSH payments, we will also calculate a Factor 3 
for new hospitals, although we note that new hospitals would only 
require a Factor 3 calculation to receive their uncompensated care 
payment if they are ultimately determined to be eligible for the 
empirically justified Medicare DSH payment at cost report settlement. 
The denominator of every hospital's Factor 3, including new hospitals, 
is set to be the sum of the low-income insured days for all hospitals 
projected to receive empirically justified Medicare DSH payment 
adjustments for FY 2014 as calculated in this final rule using the FY 
2011 SSI ratios and the 2011 cost reports. We do not have Medicaid days 
or SSI days for new hospitals at the time of this final rule and we do 
not know when we will have Medicaid days or SSI days for new hospitals. 
Accordingly, we will use the Medicaid days and SSI days for FY 2014 for 
new hospitals to serve as the numerator in their Factor 3 calculations 
for their FY 2014 uncompensated care payments because we believe that 
at minimum, all new hospitals will have data on Medicaid and SSI 
patient days for FY 2014.
e. Limitations on Review
    Section 1886(r)(3) of the Act provides that there will be no 
administrative or judicial review under section 1869 of the Act, 1878 
of the Act, or otherwise for any of the following:
     Any estimate of the Secretary for purposes of determining 
the factors described in paragraph (2) of section 1886(r) of the Act.
     Any period selected by the Secretary for such purposes.
    In the FY 2014 IPPS/LTCH PPS proposed rule (78 FR 27590), we 
proposed to codify this policy in new Sec.  412.106(g)(2) of our 
regulations. We invited public comment on this proposal.
    We did not receive any public comments on our proposal to implement 
the statutory limitations on administrative or judicial review.
    We are finalizing the proposed new provisions at Sec.  412.106(f) 
and (g) to codify these policies. We note, however, that we have made a 
minor change to the provision at Sec.  412.106(g)(1)(i) to clarify that 
we intend to revisit the issue of the data that should be used to 
determine hospitals' uncompensated care amounts for FY 2015. In 
addition, we have also made a minor technical correction to the 
provision at Sec.  412.106(g)(2)(iii).
f. Operational Considerations
    As discussed in section V.F.3.d. of the preamble of the proposed 
rule and this final rule, and in accordance with section 1886(r)(2) of 
the Act, only subsection (d) hospitals that receive empirically 
justified Medicare DSH payments in a given Federal fiscal year will 
also receive the uncompensated care payment (that is, Factor 1 times 
Factor 2 times Factor 3) for that given Federal fiscal year. In 
addition, as discussed above in this section, in the FY 2014 IPPS/LTCH 
PPS proposed rule (78 FR 27580), we proposed that subsection (d) Puerto 
Rico hospitals that receive empirically justified Medicare DSH payments 
in a given Federal fiscal year would also receive the uncompensated 
care payment (that is, Factor 1 times Factor 2 times Factor 3) for that 
given Federal fiscal year. As we discussed above, we proposed to 
estimate Factor 3 for each subsection (d) and subsection (d) Puerto 
Rico hospital with the potential to receive a DSH payment prior to the 
beginning of the Federal fiscal year and intend to make that 
information available via our Web site. http://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/AcuteInpatientPPS/dsh.html.
    Specifically, we proposed to make interim uncompensated care 
payments on the basis of our best available estimates concerning the 
eligibility of each hospital for empirically justified Medicare DSH 
payments and our best available calculations concerning the amount of 
the uncompensated care payments that the hospital is eligible to 
receive. We stated that we intended to make these interim uncompensated 
care payments on a periodic basis and not on a per discharge basis as 
Medicare DSH payments are currently made and as empirically justified 
Medicare DSH payments will be made. As discussed above, we made this 
proposal because we believed that this approach was more consistent 
with the language in the statute describing the additional payment, 
from which we inferred that the payment should not be made on a per-
discharge basis. We also believed that this would be the most 
administratively efficient means to distribute a set dollar amount to 
individual hospitals and would also create predictability for 
hospitals. In the proposed rule, we acknowledged that if we were to 
make these interim uncompensated care payments on a per-discharge basis 
as Medicare DSH payments are currently made, unless a hospital's 
Medicare utilization is identical to the period used to determine the 
per-discharge payment level, it is certain that Medicare would overpay 
or underpay. We stated further in the proposed rule that by making 
interim payments periodically, we could virtually eliminate the 
possibility that Medicare would pay a higher or lower amount than 
intended and limit the need for reconciliation to whether a hospital is 
eligible for Medicare DSH payments and, therefore, the entire 
uncompensated care payment at cost report settlement. In response to 
the comments on this suggested approach discussed below, in this final 
rule, we are instead adopting a policy to make the uncompensated care 
payment on a per-discharge basis, which will require reconciliation of 
the interim payments made during the year to the total uncompensated 
care payment derived as the product of Factors 1, 2, and 3.
    Comment: Many commenters, including national hospital associations, 
disagreed with CMS' proposal to make interim uncompensated care 
payments, and to distribute them on a periodic basis rather than a per-
discharge basis. The commenters expressed concern about the impact this 
proposal would have on certain providers, and stated that providers' 
cash flow would be adversely affected if payments are distributed on a 
periodic bi-weekly basis, as we proposed. Many commenters were 
specifically concerned about the potential effects of this proposal on 
hospitals treating MA enrollees. One of the commenters, a national 
hospital association stated that, ``[t]he contracts between the MA 
Plans and hospitals typically provide for payment based upon Medicare 
rates and reimbursements. Though the specific contract terms may vary, 
they often refer to Medicare DSH payments as one component of the 
Medicare reimbursement on which the MA Plan payments are based.'' The 
commenters

[[Page 50644]]

further noted that under such contracts MA organizations typically use 
vendor software that utilizes the CMS Medicare Inpatient PPS PC PRICER, 
as a claim adjudication tool for paying acute care hospital claims. The 
commenters also pointed out that MA organizations are required by 
statute to pay non-contracted hospitals a floor amount based on what 
the provider would have received under original Medicare (what a 
hospital would be paid if the beneficiary were not enrolled in an MA 
plan), and they understand that MA organizations use the CMS Medicare 
Inpatient PPS PC PRICER to determine what that floor amount is. The 
commenters expressed concern that if the uncompensated care payment is 
not distributed on a per-discharge basis, it would not be incorporated 
into the CMS Medicare Inpatient PPS PC PRICER and that because they 
believe MA plans employ tools that rely on this software, MA plans 
would not be able to calculate an appropriate payment amount, which the 
commenters believed should include an amount representing a given 
Medicare patient's share of the hospital's uncompensated care payment. 
Another commenter added that the proposal would lead to confusion and 
underpayment from MA plans to providers. Several commenters requested 
that CMS also add a line in the CMS Medicare Inpatient PPS PC PRICER 
software for additional DSH ``A-DSH'' that would represent the per-
discharge payment for Medicare Part A and the per-discharge payments 
for MA claims paid by MA plans when the MA-paid claim option is 
selected, and these commenters requested that the per-discharge 
payments be reconciled at cost report settlement. One commenter 
recommended that CMS calculate the interim payment by dividing each 
hospital's uncompensated care payment amount by the number of its 
transfer-adjusted cases.
    In addition, these commenters expressed concerns about the impact 
to SCHs under the proposal to make interim uncompensated care payments 
on a periodic basis because only the empirically justified Medicare DSH 
payment adjustments would be included in the comparison that determines 
whether an SCH is paid the Federal rate or the hospital-specific rate. 
Some commenters asserted under this approach that the comparison 
between payments under the Federal rate and under the hospital-specific 
rate would be inaccurate, causing several hospitals that were 
previously eligible for Medicare DSH payments to instead receive the 
hospital-specific rate. These commenters asserted that this would 
impose unwarranted payment cuts for SCHs because uncompensated care 
payments were not accounted for in determining whether SCHs are paid 
the Federal rate or hospital-specific rate. Therefore, the commenters 
reasoned that such SCHs would be unfairly penalized. One commenter 
expressed concern that a hospital-specific rate based on costs creates 
incentives for SCHs to have higher costs of operation. Several 
commenters discussed how the uncompensated care payment should be 
considered when determining outlier payments and the fixed-loss 
threshold, and expressed their concerns about the impact of excluding 
uncompensated care payments from these determinations. These comments 
will be summarized and addressed fully in section II.A.4.g. of Appendix 
A to this final rule under the discussion of outlier payments, where we 
finalize our policy decision that uncompensated care payments also 
should be included in the determination of outlier payments.
    Response: We appreciate the commenters' input with regard to fact 
that under our proposed approach, the new uncompensated care payments 
would not be accounted for in the CMS PC PRICER tool. While we 
acknowledge that many MA plans use this tool to estimate fee-for-
service payments, we note that there is no official CMS requirement 
that MA plans use this specific tool. For those MA plans that may elect 
to use the CMS PC PRICER, we acknowledge that our proposed interim 
payment approach would make it a more complex task for MA organizations 
to determine the amount of the uncompensated care payment that would be 
attributable to a given discharge. We agree with the commenters that 
the uncompensated care payment must be treated as part of a hospital's 
Medicare payment for purposes of section 1866(a)(1)(O) of the Act. We 
note that under section 1866(a)(1)(O) of the Act, hospitals treating MA 
enrollees are entitled to receive payment from an MA organization with 
which they have no contract governing payment of an amount representing 
the amount the hospital would have received from Medicare if the 
beneficiary were not enrolled in an MA plan. We understand the 
commenters' reasoning that because the new uncompensated care payments 
are intended to replace a portion of the DSH payments previously made 
by CMS, and MA organizations have always included the amount of 
applicable DSH payment in their payments to non-contracting hospitals 
under section 1866(a)(1)(O) of the Act and to contracting hospitals 
that contract to be paid at the section 1866(a)(1)(O) rate, MA 
organizations should similarly be required to include amounts 
representing these uncompensated care payments in their payments for 
inpatient services furnished to their MA plan enrollees. It was not our 
intention to suggest otherwise in the proposed rule. We also note that 
while some commenters expressed concern regarding the payment 
arrangements between MA organizations and contracted providers, section 
1854(a)(6)(B)(iii) of the Act prohibits CMS from interfering in the 
payment arrangements between MA organizations and contract providers 
and these arrangements are not within the scope of this rulemaking. We 
are only addressing an MA organization's obligations under section 
1866(a)(1)(O) of the Act with respect to payments to non-contracting 
hospitals. Of course, insofar as both parties to a contract agree that 
the contract provides for payment of the rate the MA organization is 
required under section 1866(a)(1)(O) to pay to non-contracting 
providers, that contract would be indirectly affected. However, this 
does not constitute an interference in the terms of the contracts, only 
on the indirect effects of our interpretation of section 1866(a)(1)(O) 
of the Act on those terms.
    We also recognize the potential impact on SCHs if the interim 
uncompensated care payments were to be paid on a periodic biweekly 
basis rather than a per-discharge basis. As we discuss previously in 
the preamble, after a thorough review of the above policy 
considerations reflected in the numerous public comments we received, 
we believe that distributing these payments on a per-discharge basis 
would allow these payments to be considered in the comparison of 
payments under the Federal rate and the hospital-specific rate for SCHs 
and that this would be an appropriate policy. We also note that we 
disagree with the commenter who stated that this could create an 
incentive for higher costs of operation for SCHs because hospital-
specific payment rates are based on costs in past years and would not 
be affected by higher costs of operation in the current or future 
years.
    Similarly, after a thorough review of the above policy 
considerations reflected in the numerous public comments we received, 
we believe that distributing these payments on a per-discharge basis 
would make it easier for MA organizations to take these payments into 
account when making payments to non-contracting hospitals

[[Page 50645]]

under section 1866(a)(1)(O) of the Act. We have always intended that 
this occur as current payments by MA organizations under this provision 
include 100 percent of DSH payments and the uncompensated care payment 
is intended to replace 75 percent of those payments, after adjusting 
for the uninsured percentage. The inclusion of amounts representing 
uncompensated care payments in MA organization payments to non-
contracting hospitals does not change the amount of CMS' uncompensated 
care payments nor overall IPPS payment, but ensures that payments by MA 
organizations under section 1866(a)(1)(O) of the Act reflect the full 
amount that would otherwise have been paid by CMS in the case of a 
given discharge. We also note that our decision to make uncompensated 
care payments on a per-discharge basis will make more SCHs eligible for 
uncompensated care payments and, therefore, also change the 
distribution of the uncompensated care payments.
    Accordingly, for FY 2014 we are finalizing a process to distribute 
interim uncompensated care payments under the IPPS on a per-discharge 
basis through our claims processing system, with a reconciliation of 
the hospital's payments at cost report settlement to ensure that 
hospitals receive no more than the estimated amount included in this 
final rule. We do not intend to reconcile Factor 3 using data from the 
FY 2014 cost reports because we believe that the statute provides the 
authority to make these payments on the basis of estimates for Factors 
1, 2, and 3, and that it is preferable to do so. If we were to use data 
from the FY2014 cost reports to recompute Factor 3, we would need to 
wait until such a time that all of these data were submitted by 
hospitals and then available to CMS, likely 2 years. Furthermore, it 
would be administratively difficult to recompute Factor 3 values for 
all hospitals. Under the methodology we are finalizing, because the 
per-discharge payment amounts are based on a hospital's historic 
Medicare utilization, we would expect the amount of over- or under- 
payments to reflect the year to year changes in a hospital's 
utilization patterns. We intend to calculate an estimated per-discharge 
amount (or per claim amount) for each hospital eligible to receive 
interim uncompensated care payments and we will pay that estimated 
amount on a per-discharge basis by adding it to the payment otherwise 
made on that claim. The estimated per-discharge amount is based on the 
amount of the uncompensated care payment that we have calculated for 
the hospital for a fiscal year divided by the average number of 
discharges, or claims, in the most recently available three fiscal 
years of the Medicare claims dataset. For FY 2014 payments, we will use 
the average number of claims from the most recent 3 years of MedPAR 
claims data, FY 2010, FY 2011 and FY 2012, as this is the most recently 
available data on hospital utilization. We believe that it is 
appropriate to use a 3-year average to reduce the degree to which we 
would over- or under-pay the uncompensated care payment on an interim 
basis. In any given year, a hospital could have low or high Medicare 
utilization that differs from other years. For example, if a hospital 
had two Medicare discharges in its most recent cost report but 
experienced four discharges in FY2014, during the fiscal year, we would 
pay two times the amount the hospital should receive and need to adjust 
for that at cost report settlement. Similarly, if a hospital had four 
Medicare discharges on its most recent cost report, but experienced two 
discharges in FY2014, during the fiscal year, we would only pay half 
the amount the hospital should receive and need to adjust for that at 
cost report settlement. We note that because this fee-for-service per-
claim payment will be reconciled against actual hospital utilization at 
the end of a hospital's cost year, it may be necessary to make 
actuarial adjustments so that the MA organizations can more accurately 
and appropriately take these payments into account when making payment 
to non-contracting hospitals under section 1866(a)(1)(O) of the Act.
    Furthermore, because we do not intend to reduce the uncompensated 
care payment based on any claim-specific factors, such as DRG weight or 
transfer status, for discharges that are transfers, we do not believe 
that it is appropriate to determine the per-discharge interim payment 
using the number of transfer-adjusted discharges. In other words, we 
will not be using transfer-adjusted discharges to determine per-claim 
payments. In order to determine per-claim payments, we will use the 3-
year average of the most recent periods to determine discharges. At 
cost report settlement, we will reconcile the total amounts paid on a 
per-discharge basis during the Federal fiscal year with the amount of 
the uncompensated care payment that we have calculated for the hospital 
for the fiscal year and issue further instructions as needed.
    Comment: MedPAC submitted a comment supporting the proposal to make 
interim uncompensated care payments on a periodic basis, and further 
stated that this payment approach was appropriate and would prevent 
unnecessary cash flow problems for the hospitals. Other commenters also 
supported the proposal. One commenter urged CMS to make direct lump sum 
uncompensated care payments to hospitals on a biweekly basis to avoid 
the need for hospital-specific reconciliations.
    Response: Although we appreciate the commenters' support for our 
proposal, for the reasons stated above, we are not adopting our 
proposed policy to make interim uncompensated care payments on a 
periodic basis. After consideration of the public comments we received, 
in this final rule, for FY2014, we are adopting a process to distribute 
interim uncompensated care payments on a per-discharge basis through 
the claims processing system. We believe that the inclusion of the 
uncompensated care per-claim amount on each claim paid will address 
MedPAC's concerns about cash flow problems for the hospitals. Because 
the per-discharge uncompensated care payments will be made on a claim-
by-claim basis in the claims processing system, we anticipate that the 
FY 2014 CMS Medicare Inpatient PPS PC PRICER software tool will also 
display the uncompensated care per-claim amount in the pricing 
information it calculates. This should assist those MA plans that opt 
to use the CMS Medicare Inpatient PPS PC PRICER tool to estimate fee-
for-service like payments.
    Comment: Some commenters urged CMS to clarify in the final rule 
that MA plans must include payment for uncompensated care in their 
payments to hospitals, and requested that CMS take steps to ensure MA 
plans have access to the information they need to make payments for 
uncompensated care costs as of October 1, 2013.
    Response: We appreciate receiving the commenters' feedback. As 
stated above, we agree with the commenters that MA organizations have 
the obligation to include these payment amounts for purposes of 
payments under section 1866(a)(1)(O) of the Act, and, as noted above, 
are taking steps to ensure that these amounts are included in the 
software used by MA organizations.
    After consideration of the public comments we received, in this 
final rule we are not adopting our proposed policy to make interim 
uncompensated care payments on a periodic basis, and instead for FY 
2014 are adopting a process to distribute interim uncompensated care 
payments on a per-discharge basis through the claims processing system, 
and also such tools

[[Page 50646]]

that we make available to the public, including MA organizations.
    In the FY 2014 IPPS/LTCH PPS proposed rule, we also proposed to 
make a final determination concerning eligibility for uncompensated 
care payments at the time of cost report settlement. As a result of 
this proposal, our operational system must be able to handle the 
various situations that may arise between interim and final eligibility 
determinations. For example, a hospital may receive empirically 
justified Medicare DSH payments and uncompensated care payments based 
on an initial determination that the hospital is eligible for such 
payments, but the hospital may then be determined to be ineligible for 
such payments at cost report settlement. In such situations, we must be 
prepared and able to recoup the interim empirically justified Medicare 
DSH payments and uncompensated care payments that the hospital 
received.
    For each Federal fiscal year, we proposed to estimate which 
hospitals will receive an empirically justified Medicare DSH payment 
(that is, eligible hospitals). We proposed to provide periodic payments 
to these hospitals during the relevant Federal fiscal year so that they 
can receive their uncompensated care payments on an interim basis. For 
a fiscal year, each eligible hospital's interim uncompensated care 
payments will be determined by multiplying the final values for Factor 
1, Factor 2, and Factor 3 for that year and dividing the amount by the 
number of periods over which the interim payments will be made.
    Because we would be using historical data to estimate each 
hospital's eligibility for empirically justified Medicare DSH payments 
in FY 2014 and subsequent years, we acknowledged that a reconciliation 
process would be necessary to account for cases in which a hospital's 
eligibility for such payments changes after we have published our 
estimates during the rulemaking process. For example, a hospital that 
had not been estimated to be eligible for these payments may become 
eligible during the course of a given payment period. In such cases, 
our estimates would have indicated that the hospital was ineligible for 
empirically justified Medicare DSH payments and, therefore, ineligible 
for uncompensated care payments. That hospital would not receive 
interim payments. However, if the data available at cost report 
settlement were to indicate that the hospital is eligible for an 
empirically justified Medicare DSH payment, the hospital would become 
eligible for an uncompensated care payment based on that hospital's 
Factor 3 value.
    Therefore, we proposed that, at cost report settlement, the fiscal 
intermediary/MAC will issue a notice of program reimbursement that 
includes a determination concerning whether each hospital is eligible 
for empirically justified Medicare DSH payments and, therefore, 
eligible for uncompensated care payments in FY 2014 and each subsequent 
year. In the case where a hospital received interim payments for its 
empirically justified Medicare DSH payments and uncompensated care 
payments for FY 2014 or a subsequent year on the basis of estimates 
prior to the payment year, but is determined to be ineligible for the 
empirically justified Medicare DSH payment at cost report settlement, 
the hospital would no longer be eligible for either payment and CMS 
would recoup those monies. For a hospital that did not receive interim 
payments for its empirically justified Medicare DSH payments and 
uncompensated care payments for FY 2014 or a subsequent year, but at 
cost report settlement is determined to be eligible for DSH payments, 
the uncompensated care payment for such a hospital is calculated based 
on the Factor 3 value determined prospectively for that fiscal year.
    We proposed to codify this policy regarding the manner and timing 
of payments in new Sec.  412.106(h) of our regulations.
    We invited public comment on this proposal.
    The reconciliations at cost report settlement would be based on the 
values for Factor 1, Factor 2, and Factor 3 that we have finalized 
prospectively for a Federal fiscal year. For example, a hospital that 
was estimated by CMS to receive empirically justified Medicare DSH 
payments for FY 2014 and received interim uncompensated care payments 
would not receive a different uncompensated care payment amount if the 
hospital remained eligible for empirically justified Medicare DSH 
payments at cost report settlement. In other words, we did not propose 
to include a reestimation of Factor 1, Factor 2, or Factor 3 in the 
reconciliation process. Rather, Factor 1, Factor 2, and Factor 3 are 
estimates determined prospectively using methodologies we establish 
through rulemaking. We recognize that, under this proposal, we may pay 
a total amount that could either be more or less than the product of 
Factor 1 and Factor 2. However, we believed this risk is inherent in 
the use of estimates to determine the Factors, similar to the manner in 
which we estimate the amount of total outlier payments under section 
1886(d)(5)(A)(iv) although, as in this case, the amount of actual total 
outlier payments might vary from that estimate. In the FY 2014 IPPS/
LTCH PPS proposed rule, we indicated that we do not know of any reason 
to believe that there will be a bias toward systematic overpayment or 
underpayment from year to year.
    We proposed to codify this policy at Sec.  412.106(g)(1)(iv) of our 
regulations.
    We invited public comments on this proposal, especially in regard 
to whether we should include Factor 3 within the reconciliation 
process. We stated that, depending on the public comments received, we 
may revise our proposed policy in the final rule so that at the time of 
cost report settlement and reconciliation a hospital's final 
uncompensated care payments could be based on Factor 3 numerators and 
denominators estimated using more recent cost report data (and 
associated inputs). In addition, we stated that we may revise our 
proposed reconciliation process, as appropriate, to account for any 
policy changes that we make in the final rule.
    We also note that the uncompensated care payment will be reported 
on the Medicare Hospital Cost Report. We recognized that hospitals have 
their own cost reporting periods that may differ from the Federal 
fiscal year and that may span more than one Federal fiscal year. In the 
FY 2014 IPPS/LTCH PPS proposed rule (78 FR 27592), we proposed that 
hospitals would receive their uncompensated care payments with respect 
to the fiscal year in which their cost report begins. For example, if a 
hospital is estimated to be eligible for the empirically justified DSH 
payment and also an uncompensated care payment in FY 2014 and has a 
cost report period of January 1, 2014 through December 31, 2014, this 
hospital would begin to receive interim payments for its uncompensated 
care on October 1, 2013. If, at cost report settlement, this hospital 
remained eligible for an empirically justified DSH payment, then the 
hospital would receive its FY 2014 uncompensated care payment on its 
cost report for the cost reporting period beginning on January 1, 2014 
(that is, the hospital would neither owe nor be owed monies for its 
uncompensated care payment). As another example, if that same hospital 
is no longer eligible for an empirically justified Medicare DSH payment 
at the time of settlement of its cost report for the cost reporting 
period beginning January 1, 2014, the hospital would be required to pay 
back the interim payments it received for its uncompensated care 
payments. We

[[Page 50647]]

noted that this methodology would not delay the full payment of FY 2014 
payments to hospitals with cost reporting periods that begin after 
October 1, 2013. While it is possible to align interim and final 
payments for the uncompensated care payment with individual hospital's 
cost reporting periods, we noted that we believe it would be 
administratively efficient and practical to pay the uncompensated care 
payment on the basis of the Federal fiscal year because that is how it 
is determined, and to reconcile that amount in the cost reporting 
period that begins in the respective Federal fiscal year. We stated in 
the proposed rule that if this proposal is finalized, we would revise 
the cost report accordingly. We invited public comments on our 
proposal.
    Comment: Many commenters, including national hospital associations, 
expressed concerns regarding the accuracy of the data used to determine 
insured low-income days and requested that we establish a limited time 
period after the final rule for data corrections to afford hospitals an 
opportunity to provide the most current and best available data. 
Specifically, the commenters were concerned about the accuracy and 
completeness of the HCRIS data used to calculate Factor 3 in the 
proposed rule, noting that the inaccuracies could be due to timing 
issues related to when the HCRIS files are created, revised, and 
reissued. Therefore, the commenters requested that we allow hospitals 
an opportunity to validate the estimates and data used to determine the 
uncompensated care payments. Some commenters also stated that the 
Worksheet S-2 and Worksheet S-3 data being used are primarily from 
unaudited cost reports and there are discrepancies between Medicaid 
days reported on Worksheet S-2 versus Worksheet S-3. The commenters 
also noted that many of the as-filed cost reports would not necessarily 
include the final count of Medicaid days due to the nature of 
retroactive Medicaid eligibility determination. These commenters 
pointed out that this is more problematic because some States have a 
longer Medicaid eligibility determination timeline than others, and 
believed that hospitals in these States rely on secondary research to 
identify a large volume of retroactive Medicaid eligible days. One 
commenter stated that providers should be given sufficient time to 
review SSI data before the Factor 3 percentages are used, and stated 
that the 2011 SSI data should be published to allow for this. In 
addition, some commenters urged us to allow a 30-day period after the 
publication of the final rule for hospitals to submit corrections to 
their cost reports; some commenters requested a 90-day period for 
corrections.
    Response: We understand the commenters' concerns regarding the 
accuracy of the data used to calculate Factor 3, and as discussed 
above, for this final rule we are taking several steps to address these 
inconsistencies, including using the March 2013 update of HCRIS and 
identifying a hospital's Medicaid days based on the Medicaid days 
reported on the 2011, or if not available 2010, Medicare Hospital Cost 
Report. For FY 2014 Factor 3 determinations, for hospitals filing CMS 
Form 2552-10 that claimed DSH on their cost reports, we will determine 
Medicaid days using Worksheet S-2, even if those data conflict with the 
Medicaid days reported on Worksheet S-3. We believe that this is 
appropriate because those hospitals' DSH payments are determined using 
the data from Worksheet S-2. We also note that we believe that there 
should be no discrepancy between the Medicaid days reported on 
Worksheet S-2 and Worksheet S-3 and, therefore, have updated our 
processes so that Medicaid days reported on Worksheet S-2 may no longer 
be inconsistent with Medicaid days reported on Worksheet S-3. However, 
we understand that for FY 2014 Factor 3 determinations for hospitals 
filing CMS Form 2552-10 for either 2011 or 2010, that did not claim DSH 
on their cost report, it may have been impossible for some of these 
hospitals to enter data on Worksheet S-2 due to Medicare systems 
issues. Therefore, for all hospitals that did not claim DSH on their 
cost report for either 2011 or 2010, for the FY 2014 Factor 3 
determination, we will use Medicaid days from Worksheet S-3. We believe 
that this is appropriate so as not to disadvantage any group of 
hospitals that were unable to report information on Worksheet S-2 for 
their FY 2011 (or FY 2010) cost reporting period. Hospitals certify the 
accuracy of the information on their cost reports at the time of 
submission. As a result, we do not agree that providing hospitals 
additional time to submit data will necessarily improve the accuracy of 
the estimate used to calculate Factor 3 because such data could not be 
audited in a meaningful timeframe and still allow payments to be made 
in FY 2014. Therefore, we are not providing additional time after the 
publication of the final rule for hospitals to submit changes to their 
data.
    In response to the comment requesting that CMS publish the 2011 SSI 
ratios, on June 27, 2013, the FY 2011 SSI ratios were posted on the CMS 
Web site at: https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/AcuteInpatientPPS/dsh.html. We note that CMS generally 
publishes SSI ratios annually in the spring.
    We are finalizing the proposed new provisions at Sec.  412.106(g) 
and (h) to codify these policies. However, we note that we have made a 
minor change to the provision at Sec.  412.106(h) to clarify that we 
intend to make interim payments during the year, and not interim 
payments on a periodic basis as we had proposed.

F. Medicare-Dependent, Small Rural Hospital (MDH) Program (Sec.  
412.108)

1. Backgound
    Section 1885(d)(5)(G) of the Act provides special payment 
protections, under the IPPS, to a Medicare-dependent, small rural 
hospital (MDH). (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.) As we discussed in the FY 2011 
IPPS/LTCH PPS final rule (75 FR 50287) and in the FY 2012 IPPS/LTCH PPS 
final rule (76 FR 51683 through 51684), section 3124 of the Affordable 
Care Act extended the expiration of 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 by striking out 
``October 1, 2011'' and inserting ``October 1, 2012''. Section 3124(b) 
of the Affordable Care Act made conforming amendments to sections 
1886(b)(3)(D) and 1886(b)(3)(D)(iv) of the Act.
    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 the MDH regulatory text for FY 
2012. As discussed below, the ATRA (Pub. L. 112-240) amended the Act to 
extend the MDH program through the end of FY 2013.

[[Page 50648]]

2. Provisions of the ATRA for FY 2013
    a. Background
    Prior to the enactment of the ATRA, under section 3124 of the 
Affordable Care Act, the MDH program authorized by section 
1886(d)(5)(G) of the Act was set to expire at the end of FY 2012. 
Section 606 of the ATRA amended sections 1886(d)(5)(G)(i) and 
1886(d)(5)(G)(ii)(II) of the Act to provide for an additional 1-year 
extension of the MDH program, effective from October 1, 2012 to 
September 30, 2013 (FY 2013). Section 606 of the ATRA also made 
conforming amendments to sections 1886(b)(3)(D)(i) and 
1886(b)(3)(D)(iv) of the Act. Prior to the enactment of the ATRA, in 
the FY 2013 IPPS/LTCH PPS final rule, we discussed the expiration of 
the MDH program at the end of FY 2012 (77 FR 53413 through 53414) and 
revised the SCH regulation at Sec.  412.92(b) to change the effective 
date of SCH status for MDHs that apply for SCH status with the 
expiration of the MDH program (77 FR 53404 through 53405).
    In a FY 2013 IPPS notice issued in the Federal Register on March 7, 
2013 (78 FR 14689), we announced the extension of the MDH program for 
FY 2013 in accordance with the provisions of section 606 of the ATRA. 
In that notice, we explained that, as a result of section 606 of the 
ATRA, the MDH program is now extended for 1 additional year, through 
the end of FY 2013 (that is, effective October 1, 2012 through 
September 30, 2013). The FY 2013 IPPS notice explained how providers 
may be affected by the ATRA extension of the MDH program and described 
the steps to reapply for MDH status for FY 2013, as applicable. 
Generally, a provider that was classified as an MDH at the end of FY 
2012 (that is, as of September 30, 2012) was reinstated as an MDH 
effective October 1, 2012, with no need to reapply for MDH 
classification. However, if the MDH had classified as a sole community 
hospital (SCH) or cancelled its rural classification under Sec.  
412.103(g) effective on or after October 1, 2012, the effective date of 
MDH status was not retroactive to October 1, 2012. In the FY 2013 IPPS 
notice, we also stated that we intended to make conforming changes to 
the regulations at Sec. Sec.  412.108(a)(1) and (c)(2)(iii) in future 
rulemaking to reflect the statutory changes made by section 606 of the 
ATRA. We refer readers to the FY 2013 IPPS notice (78 FR 14689 through 
14694) for additional information on the extension of the MDH program 
through FY 2013 pursuant to section 606 of the ATRA and for additional 
information on how and when MDH status was determined for hospitals 
classified as MDHs prior to the September 30, 2012 expiration of the 
program.
b. Conforming Regulatory Changes
    In the FY 2014 IPPS/LTCH PPS proposed rule (78 FR 27593), we 
proposed to make conforming changes to the regulations at Sec. Sec.  
412.108(a)(1) and (c)(2)(iii) to reflect the statutory extension of the 
MDH program through FY 2013 made by section 606 of the ATRA.
    We did not receive any public comments on the proposed conforming 
changes to the existing regulations text at Sec.  412.108 to reflect 
the extension of the MDH program through FY 2013 in accordance with 
section 606 of the ATRA. Therefore, in this final rule, we are adopting 
as final the proposed revisions to paragraphs (a)(1) and (c)(2)(iii) of 
Sec.  412.108 without modification.
c. Expiration of the MDH Program
    Since section 606 of the ATRA extended the MDH program through FY 
2013 only, the MDH program will no longer be in effect in FY 2014 
absent a change in law to extend the program. Therefore, beginning in 
FY 2014, all hospitals that previously qualified for MDH status will no 
longer have MDH status and will be paid based solely on the Federal 
rate.
    As noted earlier, in the FY 2013 IPPS/LTCH PPS final rule (77 FR 
53404 through 53405), we revised our SCH policies to allow MDHs to 
apply for SCH status and be paid as such under certain conditions, 
following expiration of the MDH program at the end of FY 2012. We 
codified these changes in the regulations at Sec.  412.92(b)(2)(i) and 
Sec.  412.92(b)(2)(v). For additional information, we refer readers to 
the FY 2013 IPPS/LTCH PPS final rule (77 FR 53404 through 53405 and 
53674). We note that those same conditions apply to MDHs that intend to 
apply for SCH status with the expiration of the MDH program at the end 
of FY 2013. Specifically, the existing regulations at Sec.  
412.92(b)(2)(i) and (b)(2)(v) allow for an effective date of approval 
of SCH status that is the day following the expiration date of the MDH 
program. In accordance with these regulations, in order for an MDH to 
receive SCH status effective October 1, 2013, it must apply for SCH 
status at least 30 days before the end of the MDH program; that is, the 
MDH must apply for SCH status by August 31, 2013. The MDH also must 
request that, if approved as an SCH, the SCH status be effective with 
the expiration of the MDH program provision; that is, the MDH must 
request that the SCH status, if approved, be effective October 1, 2013, 
immediately after its MDH status expires with the expiration of the MDH 
program at the end of FY 2013, on September 30, 2013.
    We note that an MDH that applies for SCH status in anticipation of 
the expiration of the MDH program would not qualify for the October 1, 
2013 effective date upon approval if it does not apply by the August 
31, 2013 deadline. The provider would instead be subject to the usual 
effective date for SCH classification, that is, 30 days after the date 
of CMS' written notification of approval as specified at Sec.  
412.92(b)(2)(i).
    Comment: Several commenters expressed concern with the expiration 
of the MDH program, citing serious detrimental effects that would 
result to patients, hospitals, and communities. The commenters 
encouraged the continuation of the MDH program.
    Response: The MDH program, which provides special treatment of and 
payment to small, rural, Medicare-dependent hospitals, is authorized by 
statute through FY 2013. Therefore, a change in law would be necessary 
in order for the MDH program to continue, or in order to reinstate it 
once it expires. While we understand the commenters' concerns, CMS does 
not have the authority under current law to continue the MDH program.
    Comment: Several commenters continued to express their support of 
the ``seamless transition'' policy we finalized in last year's rule. 
However, some commenters requested that, in the event that the MDH 
provision is reinstated, CMS allow providers that transitioned to SCH 
status to revert back to MDH status retrospectively without the need to 
reapply for MDH status. Similarly, these commenters requested that, if 
providers cancel their rural status in anticipation of the expiration 
of the MDH provision, CMS allow the providers to waive their 
cancellation and revert to MDH status retroactively should the MDH 
provision be reinstated. These commenters stated that CMS' current 
regulations, which do not allow providers that transition to SCH status 
or cancel their rural classification in anticipation of the expiration 
of the MDH provision to be reinstated as MDHs retroactively upon the 
reinstatement of the MDH provision, put providers in the unfair 
position of having to guess whether or not Congress will reinstate the 
MDH provision and weigh the effects of applying for SCH classification 
or cancelling their rural status. A few others commenters pointed out 
that CMS' policy to transition MDHs to SCH classification does not 
address the needs of many of

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the hospitals currently classified as an MDH because those hospitals do 
not meet the criteria for an SCH, and recommended that CMS revise the 
criteria for an MDH to become an SCH.
    Response: The statute specifies that, in order to be an MDH, among 
other requirements, a hospital must be located in a rural area and not 
classified as an SCH. Hospitals that convert to an SCH or canceled 
their rural status no longer meet the statutory criteria to be 
classified as an MDH. If legislation is passed to authorize the 
continuation of the MDH program, we will develop policy to implement 
the specific provisions of such legislation. While we understand the 
commenters' concerns about the expiration of the MDH program, the 
statute specifies the criteria for a hospital to be classified as an 
SCH and CMS does not have the authority to revise those statutory 
criteria as requested by the commenters.
    Comment: Some commenters requested that, if the MDH provision is 
reinstated after October 1, 2013, CMS expedite the MDH reinstatement 
process because many hospitals were not reinstated until several weeks 
after the enactment of the ATRA.
    Response: We understand those hospitals' concerns regarding the 
time involved in the implementation of the reinstatement of their MDH 
status after the enactment of the ATRA. While we have made every effort 
to issue public notification and instructions to the MACs on our 
implementation of the extension of the MDH program as provided for in 
the provisions of the ATRA in a timely manner, we also are limited by 
the time necessary to develop the policy and systems changes to 
implement the specific provisions of the newly enacted legislation, as 
well as the time required to undergo the issuance process. If 
legislation is enacted to continue the MDH program, we will keep these 
concerns in mind in the implementation of the specific provisions of 
such legislation.

G. Hospital Readmissions Reduction Program (Sec. Sec.  412.150 through 
412.154)

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 applicable hospitals may 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 a 
hospital-specific adjustment factor that accounts for the hospital's 
excess readmissions. 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 adjustment payments, and add-on 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).'' 
In the FY 2013 IPPS/LTCH PPS final rule (77 FR 53374), we finalized 
policies to implement the statutory provisions related to the 
definition of ``base operating DRG payment amount''.
    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 the 
terms ``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

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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 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
    The payment adjustment factor set forth in section 1886(q) of the 
Act did not apply to discharges until FY 2013. 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 the 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.
    In the FY 2013 IPPS/LTCH PPS final rule (77 FR 53374 through 
53401), we finalized our policies that relate to the calculation of the 
hospital readmission payment adjustment factor and the process by which 
hospitals can review and correct their data. Specifically, in the final 
rule, we addressed the portions of section 1886(q) of the Act related 
to the f