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replace into fedregorigdata (url, contents, filedate) values ('http://edocket.access.gpo.gov/2008/08-1135.htm', '[Federal Register: April 30, 2008 (Volume 73, Number 84)] [Proposed Rules] [Page 23527-23938] From the Federal Register Online via GPO Access [wais.access.gpo.gov] [DOCID:fr30ap08-26] [[Page 23527]] ----------------------------------------------------------------------- Part II Department of Health and Human Services ----------------------------------------------------------------------- Centers for Medicare & Medicaid ----------------------------------------------------------------------- 42 CFR Parts 411, 412, 413 et al. Medicare Program; Proposed Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2009 Rates; Proposed Changes to Disclosure of Physician Ownership in Hospitals and Physician Self-Referral Rules; Proposed Collection of Information Regarding Financial Relationships Between Hospitals and Physicians; Proposed Rule [[Page 23528]] ----------------------------------------------------------------------- DEPARTMENT OF HEALTH AND HUMAN SERVICES Centers for Medicare & Medicaid Services 42 CFR Parts 411, 412, 413, 422, and 489 [CMS-1390-P] RIN 0938-AP15 Medicare Program; Proposed Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2009 Rates; Proposed Changes to Disclosure of Physician Ownership in Hospitals and Physician Self-Referral Rules; Proposed Collection of Information Regarding Financial Relationships Between Hospitals and Physicians AGENCY: Centers for Medicare and Medicaid Services (CMS), HHS. ACTION: Proposed rule. ----------------------------------------------------------------------- SUMMARY: We are proposing to revise the Medicare hospital inpatient prospective payment systems (IPPS) for operating and capital-related costs to implement changes arising from our continuing experience with these systems, and to implement certain provisions made by the Deficit Reduction Act of 2005, the Medicare Improvements and Extension Act, Division B, Title I of the Tax Relief and Health Care Act of 2006, and the TMA, Abstinence Education, and QI Programs Extension Act of 2007. In addition, in the Addendum to this proposed rule, we describe the proposed changes to the amounts and factors used to determine the rates for Medicare hospital inpatient services for operating costs and capital-related costs. These proposed changes would be applicable to discharges occurring on or after October 1, 2008. We also are setting forth the proposed update to the rate-of-increase limits for certain hospitals and hospital units excluded from the IPPS that are paid on a reasonable cost basis subject to these limits. The proposed updated rate-of-increase limits would be effective for cost reporting periods beginning on or after October 1, 2008. Among the other policy decisions and changes that we are proposing to make are changes related to: Limited proposed revisions of the classification of cases to Medicare severity diagnosis-related groups (MS-DRGs), proposals to address charge compression issues in the calculation of MS-DRG relative weights, the proposed revisions to the classifications and relative weights for the Medicare severity long- term care diagnosis-related groups (MS-LTC-DRGs); applications for new medical services and technologies add-on payments; wage index reform changes and the wage data, including the occupational mix data, used to compute the proposed FY 2009 wage indices; submission of hospital quality data; proposed changes to the postacute care transfer policy relating to transfers to home for the furnishing of home health services; and proposed policy changes relating to the requirements for furnishing hospital emergency services under the Emergency Medical Treatment and Labor Act of 1986 (EMTALA). In addition, we are proposing policy changes relating to disclosure to patients of physician ownership or investment interests in hospitals and soliciting public comments on a proposed collection of information regarding financial relationships between hospitals and physicians. We are also proposing changes or soliciting comments on issues relating to policies on physician self-referrals. DATES: To be assured consideration, comments must be received at one of the addresses provide below, no later than 5 p.m. E.S.T. on June 13, 2008. ADDRESSES: When commenting on issues presented in this proposed rule, please refer to filecode CMS-1390-P. Because of staff and resource limitations, we cannot accept comments by facsimile (FAX) transmission. You may submit comments in one of four ways (please choose only one of the ways listed): 1. Electronically. You may submit electronic comments on this regulation to http://www.regulations.gov. Follow the instructions for ``Comment or Submission\'\' and enter the file code CMS-1390-P to submit comments on this proposed rule. 2. By regular mail. You may mail written comments (one original and two copies) to the following address ONLY: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-1390-P, P.O. Box 8011, Baltimore, MD 21244-1850. Please allow sufficient time for mailed comments to be received before the close of the comment period. 3. By express or overnight mail. You may send written comments (one original and two copies) to the following address ONLY: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-1390-P, Mail Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850. 4. By hand or courier. If you prefer, you may deliver (by hand or courier) your written comments (one original and two copies) before the close of the comment period to either of the following addresses: a. Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., Washington, DC 20201. (Because access to the interior of the HHH Building is not readily available to persons without Federal Government identification, commenters are encouraged to leave their comments in the CMS drop slots located in the main lobby of the building. A stamp-in clock is available for persons wishing to retain a proof of filing by stamping in and retaining an extra copy of the comments being filed.) b. 7500 Security Boulevard, Baltimore, MD 21244-1850. If you intend to deliver your comments to the Baltimore address, please call telephone number (410) 786-7195 in advance to schedule your arrival with one of our staff members. Comments mailed to the addresses indicated as appropriate for hand or courier delivery may be delayed and received after the comment period. Submission of comments on paperwork requirements. You may submit comments on this document\'s paperwork requirements by following the instructions at the end of the ``Collection of Information Requirements\'\' section in this document. For information on viewing public comments, see the beginning of the SUPPLEMENTARY INFORMATION section. FOR FURTHER INFORMATION, CONTACT: Michele Hudson, (410) 786-4487, Operating Prospective Payment, MS- DRGs, Wage Index, New Medical Service and Technology Add-On Payments, Hospital Geographic Reclassifications, and Postacute Care Transfer Issues. Tzvi Hefter, (410) 786-4487, Capital Prospective Payment, Excluded Hospitals, Direct and Indirect Graduate Medical Education, MS-LTC-DRGs, EMTALA, Hospital Emergency Services, and Hospital-within-Hospital Issues. Siddhartha Mazumdar, (410) 786-6673, Rural Community Hospital Demonstration Program Issues. Sheila Blackstock, (410) 786-3502, Quality Data for Annual Payment Update Issues. Thomas Valuck, (410) 786-7479, Hospital Value-Based Purchasing and Readmissions to Hospital Issues. Anne Hornsby, (410) 786-1181, Collection of Managed Care Encounter Data Issues. Jacqueline Proctor, (410) 786-8852, Disclosure of Physician Ownership in [[Page 23529]] Hospitals and Financial Relationships between Hospitals and Physicians Issues. Lisa Ohrin, (410) 786-4565, and Don Romano, (410) 786-1404, Physician Self-Referral Issues. SUPPLEMENTARY INFORMATION: Inspection of Public Comments: All comments received before the close of the comment period are available for viewing by the public, including any personally identifiable or confidential business information that is included in a comment. We post all comments received before the close of the comment period on the following Web site as soon as possible after they have been received: http:// www.regulations.gov. Follow the search instructions on that Web site to view public comments. Comments received timely will also be available for public inspection, generally beginning approximately 3 weeks after publication of a document, at the headquarters of the Centers for Medicare & Medicaid Services, 7500 Security Boulevard, Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 a.m. to 4 p.m. To schedule an appointment to view public comments, phone 1-800-743-3951. Electronic Access This Federal Register document is also available from the Federal Register online database through GPO Access, a service of the U.S. Government Printing Office. Free public access is available on a Wide Area Information Server (WAIS) through the Internet and via asynchronous dial-in. Internet users can access the database by using the World Wide Web (the Superintendent of Documents\' home page address is http://www.gpoaccess.gov/), by using local WAIS client software, or by telnet to swais.access.gpo.gov, then login as guest (no password required). Dial-in users should use communications software and modem to call (202) 512-1661; type swais, then login as guest (no password required). Acronyms AARP American Association of Retired Persons AAHKS American Association of Hip and Knee Surgeons AAMC Association of American Medical Colleges ACGME Accreditation Council for Graduate Medical Education AF Artrial fibrillation AHA American Hospital Association AICD Automatic implantable cardioverter defibrillator AHIMA American Health Information Management Association AHIC American Health Information Community AHRQ Agency for Healthcare Research and Quality AMA American Medical Association AMGA American Medical Group Association AMI Acute myocardial infarction AOA American Osteopathic Association APR DRG All Patient Refined Diagnosis Related Group System ASC Ambulatory surgical center ASITN American Society of Interventional and Therapeutic Neuroradiology BBA Balanced Budget Act of 1997, Pub. L. 105-33 BBRA Medicare, Medicaid, and SCHIP [State Children\'s Health Insurance Program] Balanced Budget Refinement Act of 1999, Pub. L. 106-113 BIPA Medicare, Medicaid, and SCHIP [State Children\'s Health Insurance Program] Benefits Improvement and Protection Act of 2000, Pub. L. 106-554 BLS Bureau of Labor Statistics CAH Critical access hospital CARE [Medicare] Continuity Assessment Record & Evaluation [Instrument] CART CMS Abstraction & Reporting Tool CBSAs Core-based statistical areas CC Complication or comorbidity CCR Cost-to-charge ratio CDAC [Medicare] Clinical Data Abstraction Center CDAD Clostridium difficile-associated disease CIPI Capital input price index CMI Case-mix index CMS Centers for Medicare & Medicaid Services CMSA Consolidated Metropolitan Statistical Area COBRA Consolidated Omnibus Reconciliation Act of 1985, Pub. L. 99- 272 CoP [Hospital] condition of participation CPI Consumer price index CY Calendar year DFRR Disclosure of financial relationship report DRA Deficit Reduction Act of 2005, Pub. L. 109-171 DRG Diagnosis-related group DSH Disproportionate share hospital DVT Deep vein thrombosis ECI Employment cost index EMR Electronic medical record EMTALA Emergency Medical Treatment and Labor Act of 1986, Pub. L. 99-272 FAH Federation of Hospitals FDA Food and Drug Administration FHA Federal Health Architecture FIPS Federal information processing standards FQHC Federally qualified health center FTE Full-time equivalent FY Fiscal year GAAP Generally Accepted Accounting Principles GAF Geographic Adjustment Factor GME Graduate medical education HACs Hospital-acquired conditions HCAHPS Hospital Consumer Assessment of Healthcare Providers and Systems HCFA Health Care Financing Administration HCRIS Hospital Cost Report Information System HHA Home health agency HHS Department of Health and Human Services HIC Health insurance card HIPAA Health Insurance Portability and Accountability Act of 1996, Pub. L. 104-191 HIPC Health Information Policy Council HIS Health information system HIT Health information technology HMO Health maintenance organization HPMP Hospital Payment Monitoring Program HSA Health savings account HSCRC [Maryland] Health Services Cost Review Commission HSRV Hospital-specific relative value HSRVcc Hospital-specific relative value cost center HQA Hospital Quality Alliance HQI Hospital Quality Initiative HWH Hospital-within-a hospital ICD-9-CM International Classification of Diseases, Ninth Revision, Clinical Modification ICD-10-PCS International Classification of Diseases, Tenth Edition, Procedure Coding System ICR Information collection requirement IHS Indian Health Service IME Indirect medical education IOM Institute of Medicine IPF Inpatient psychiatric facility IPPS [Acute care hospital] inpatient prospective payment system IRF Inpatient rehabilitation facility LAMCs Large area metropolitan counties LTC-DRG Long-term care diagnosis-related group LTCH Long-term care hospital MA Medicare Advantage MAC Medicare Administrative Contractor MCC Major complication or comorbidity MCE Medicare Code Editor MCO Managed care organization MCV Major cardiovascular condition MDC Major diagnostic category MDH Medicare-dependent, small rural hospital MedPAC Medicare Payment Advisory Commission MedPAR Medicare Provider Analysis and Review File MEI Medicare Economic Index MGCRB Medicare Geographic Classification Review Board MIEA-TRHCA Medicare Improvements and Extension Act, Division B of the Tax Relief and Health Care Act of 2006, Pub. L. 109-432 MMA Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Pub. L. 108-173 MPN Medicare provider number MRHFP Medicare Rural Hospital Flexibility Program MRSA Methicillin-resistant Staphylococcus aureus MSA Metropolitan Statistical Area MS-DRG Medicare severity diagnosis-related group MS-LTC-DRG Medicare severity long-term care diagnosis-related group NAICS North American Industrial Classification System NCD National coverage determination [[Page 23530]] NCHS National Center for Health Statistics NCQA National Committee for Quality Assurance NCVHS National Committee on Vital and Health Statistics NECMA New England County Metropolitan Areas NQF National Quality Forum NTIS National Technical Information Service NVHRI National Voluntary Hospital Reporting Initiative OES Occupational employment statistics OIG Office of the Inspector General OMB Executive Office of Management and Budget O.R. Operating room OSCAR Online Survey Certification and Reporting [System] PE Pulmonary embolism 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 PSF Provider-Specific File PS&R Provider Statistical and Reimbursement (System) QIG Quality Improvement Group, CMS QIO Quality Improvement Organization RCE Reasonable compensation equivalent RHC Rural health clinic RHQDAPU Reporting hospital quality data for annual payment update RNHCI Religious nonmedical health care institution RRC Rural referral center RUCAs Rural-urban commuting area codes RY Rate year SAF Standard Analytic File SCH Sole community hospital SFY State fiscal year SIC Standard Industrial Classification SNF Skilled nursing facility SOCs Standard occupational classifications SOM State Operations Manual TEFRA Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97- 248 TMA TMA [Transitional Medical Assistance], Abstinence Education, and QI [Qualifying Individuals] Programs Extension Act of 2007, Pub. L. 110-09 TJA Total joint arthroplasty UHDDS Uniform hospital discharge data set VAP Ventilator-associated pneumonia VBP Value-based purchasing Table of Contents I. Background A. Summary 1. Acute Care Hospital Inpatient Prospective Payment System (IPPS) 2. Hospitals and Hospital Units Excluded From the IPPS a. Inpatient Rehabilitation Facilities (IRFs) b. Long-Term Care Hospitals (LTCHs) c. Inpatient Psychiatric Facilities (IPFs) 3. Critical Access Hospitals (CAHs) 4. Payments for Graduate Medical Education (GME) B. Provisions of the Deficit Reduction Act of 2005 (DRA) C. Provisions of the Medicare Improvements and Extension Act under Division B, Title I of the Tax Relief and Health Care Act of 2006 (MIEA-TRHCA) D. Provision of the TMA, Abstinence Education, and QI Programs Extension Act of 2007 E. Major Contents of this Proposed Rule 1. Proposed Changes to MS-DRG Classifications and Recalibrations of Relative Weights 2. Proposed Changes to the Hospital Wage Index 3. Other Decisions and Proposed Changes to the IPPS for Operating Costs and GME Costs 4. Proposed Changes to the IPPS for Capital-Related Costs 5. Proposed Changes to the Payment Rates for Excluded Hospitals and Hospital Units: Rate-of-Increase Percentages 6. Proposed Changes Relating to Disclosure of Physician Ownership in Hospitals 7. Proposed Changes and Solicitation of Comments on Physician Self-Referral Provisions 8. Proposed Collection of Information Regarding Financial Relationships between Hospitals and Physicians 9. Determining Proposed Prospective Payment Operating and Capital Rates and Rate-of-Increase Limits 10. Impact Analysis 11. Recommendation of Update Factors for Operating Cost Rates of Payment for Inpatient Hospital Services 12. Disclosure of Financial Relationships Report (DFRR) Form 13. Discussion of Medicare Payment Advisory Commission Recommendations F. Public Comments Received on Issues in Related Rules 1. Comments on Phase-Out of the Capital Teaching Adjustment under the IPPS Included in the FY 2008 IPPS Final Rule with Comment Period 2. Policy Revisions Related to Medicare GME Group Affiliations for Hospitals in Certain Declared Emergency Areas II. Proposed Changes to Medicare Severity DRG (MS-DRG) Classifications and Relative Weights A. Background B. MS-DRG Reclassifications 1. General 2. Yearly Review for Making MS-DRG Changes C. Adoption of the MS-DRGs in FY 2008 D. MS-DRG Documentation and Coding Adjustment, Including the Applicability to the Hospital-Specific Rates and the Puerto Rico- Specific Standardized Amount 1. MS-DRG Documentation and Coding Adjustment 2. Application of the Documentation and Coding Adjustment to the Hospital-Specific Rates 3. Application of the Documentation and Coding Adjustment to Puerto Rico-Specific Standardized Amount 4. Potential Additional Payment Adjustments in FYs 2010 through 2012 E. Refinement of the MS-DRG Relative Weight Calculation 1. Background 2. Refining the Medicare Cost Report 3. Timeline for Revising the Medicare Cost Report 4. Revenue Codes used in the MedPAR File F. Preventable Hospital-Acquired Conditions (HACs), Including Infections 1. General 2. Statutory Authority 3. Public Input 4. Collaborative Process 5. Selection Criteria for HACs 6. HACs Selected in FY 2008 and Proposed Changes to Certain Codes a. Foreign Object Retained After Surgery: Proposed Inclusion of ICD-9-CM Code 998.7 (CC) b. Pressure Ulcers: Proposed Changes in Code Assignments 7. HACs Under Consideration as Additional Candidates a. Surgical Site Infections Following Elective Surgeries b. Legionnaires\' Disease c. Glycemic Control d. Iatrogenic Pneumothorax e. Delirium f. Ventilator-Associated Pneumonia (VAP) g. Deep Vein Thrombosis (DVT)/Pulmonary Embolism (PE) h. Staphylococcus aureus Septicemia i. Clostridium Difficile-Associated Disease (CDAD) j. Methicillin-Resistant Staphylococcus aureus (MRSA) 8. Present on Admission (POA) Indicator Reporting 9. Enhancement and Future Issues a. Risk Adjustment b. Rates of HACs c. Use of POA Information d. Transition to ICD-10-PCS e. Application of Nonpayment for HACs to Other Settings f. Relationship to NQF\'s Serious Reportable Adverse Events G. Proposed Changes to Specific MS-DRG Classifications 1. Pre-MDCs: Artificial Heart Devices 2. MDC 1 (Diseases and Disorders of the Nervous System) a. Transferred Stroke Patients Receiving Tissue Plasminogen Activator (tPA) b. Intractable Epilepsy with Video Electroencephalogram (EEG) 3. MDC 5 (Diseases and Disorders of the Circulatory System) a. Automatic Implantable Cardioverter-Defibrillators (AICD) Lead and Generator Procedures b. Left Atrial Appendage Device 4. MDC 8 (Diseases and Disorders of the Musculoskeletal System and Connective Tissue): Hip and Knee Replacements and Revisions a. Brief History of Development of Hip and Knee Replacement Codes b. Prior Recommendations of the AAHKS c. Adoption of MS-DRGs for Hip and Knee Replacements for FY 2008 and AAHKS\' Recommendations d. AAHKS\' Recommendations for FY 2009 e. CMS\' Response to AAHKS\' Recommendations f. Conclusion 5. MDC 18 (Infections and Parasitic Diseases Systemic or Unspecified Sites): Severe Sepsis [[Page 23531]] 6. MDC 21 (Injuries, Poisonings and Toxic Effects of Drugs): Traumatic Compartment Syndrome 7. Medicare Code Editor (MCE) Changes a. List of Unacceptable Principal Diagnoses in MCE b. Diagnoses Allowed for Male Only Edit c. Limited Coverage Edit 8. Surgical Hierarchies 9. CC Exclusions List a. Background b. CC Exclusions List for FY 2009 10. Review of Procedure Codes in MS-DRGs 981, 982, and 983; 984, 985, and 986; and 987, 988, and 989 a. Moving Procedure Codes from MS-DRG 981 through 983 or MS-DRG 987 through 989 to MDCs b. Reassignment of Procedures among MS-DRGs 981 through 983, 984 through 986, and 987 through 989 c. Adding Diagnosis or Procedure Codes to MDCs 11. Changes to the ICD-9-CM Coding System H. Recalibration of MS-DRG Weights I. Proposed Medicare Severity Long-Term Care Diagnosis-Related Group (MS-LTC-DRG) Reclassifications and Relative Weights for LTCHs for FY 2009 1. Background 2. Proposed Changes in the MS-LTC-DRG Classifications a. Background b. Patient Classifications into MS-LTC-DRGs 3. Development of the Proposed FY 2009 MS-LTC-DRG Relative Weights a. General Overview of Development of the MS-LTC-DRG Relative Weights b. Data c. Hospital-Specific Relative Value (HSRV) Methodology d. Treatment of Severity Levels in Developing Proposed Relative Weights e. Proposed Low-Volume MS-LTC-DRGs 4. Steps for Determining the Proposed FY 2009 MS-LTC-DRG Relative Weights J. Proposed Add-On Payments for New Services and Technologies 1. Background 2. Public Input Before Publication of a Notice of Proposed Rulemaking on Add-On Payments 3. FY 2009 Status of Technologies Approved for FY 2008 Add-On Payments 4. FY 2009 Applications for New Technology Add-On Payments a. CardioWest^TM Temporary Total Artificial Heart System (CardioWest^TM TAH-t) b. Emphasys Medical Zephyr[supreg] Endobronchial Valve (Zephyr[supreg] EBV) c. Oxiplex[supreg] d. TherOx Downstream[supreg] System 5. Proposed Regulatory Change III. Proposed Changes to the Hospital Wage Index A. Background B. Requirements of Section 106 of the MIEA-TRHCA 1. Wage Index Study Required Under the MIEA-TRHCA 2. CMS Proposals in Response to Requirements Under Section 106(b) of the MIEA-TRHCA a. Proposed Revision of the Reclassification Average Hourly Wage Comparison Criteria b. Within-State Budget Neutrality Adjustment for the Rural and Imputed Floors c. Within-State Budget Neutrality Adjustment for Geographic Reclassification C. Core-Based Statistical Areas for the Hospital Wage Index D. Proposed Occupational Mix Adjustment to the Proposed FY 2009 Wage Index 1. Development of Data for the Proposed FY 2009 Occupational Mix Adjustment 2. Calculation of the Proposed Occupational Mix Adjustment for FY 2009 3. 2007-2008 Occupational Mix Survey for the FY 2010 Wage Index E. Worksheet S-3 Wage Data for the Proposed FY 2009 Wage Index 1. Included Categories of Costs 2. Excluded Categories of Costs 3. Use of Wage Index Data by Providers Other Than Acute Care Hospitals Under the IPPS F. Verification of Worksheet S-3 Wage Data 1. Wage Data for Multicampus Hospitals 2. New Orleans\' Post-Katrina Wage Index G. Method for Computing the Proposed FY 2009 Unadjusted Wage Index H. Analysis and Implementation of the Proposed Occupational Mix Adjustment and the Proposed FY 2009 Occupational Mix Adjustment Wage Index I. Proposed Revisions to the Wage Index Based on Hospital Redesignations 1. General 2. Effects of Reclassification/Redesignation 3. FY 2009 MGCRB Reclassifications 4. FY 2008 Policy Clarifications and Revisions 5. Redesignations of Hospitals under Section 1886(d)(8)(B) of the Act 6. Reclassifications under Section 1886(d)(8)(B) of the Act J. Proposed FY 2009 Wage Index Adjustment Based on Commuting Patterns of Hospital Employees K. Process for Requests for Wage Index Data Corrections L. Labor-Related Share for the Proposed Wage Index for FY 2009 IV. Other Decisions and Proposed Changes to the IPPS for Operating Costs and GME Costs A. Proposed Changes to the Postacute Care Transfer Policy 1. Background 2. Proposed Policy Change Relating to Transfers to Home with a Written Plan for the Provision of Home Health Services 3. Evaluation of MS-DRGs under Postacute Care Transfer Policy for FY 2009 B. Reporting of Hospital Quality Data for Annual Hospital Payment Update 1. Background a. Overview b. Voluntary Hospital Quality Data Reporting c. Hospital Quality Data Reporting under Section 501(b) of Pub. L. 108-173 d. Hospital Quality Data Reporting under Section 5001(a) of Pub. L. 109-171 2. Proposed Quality Measures for FY 2010 and Subsequent Years a. Proposed Quality Measures for FY 2010 b. Possible New Quality Measures, Measure Sets, and Program Requirements for FY 2011 and Subsequent Years c. Considerations in Expanding and Updating Quality Measures Under the RHQDAPU Program 3. Form and Manner and Timing of Quality Data Submission 4. Current and Proposed RHQDAPU Program Procedures a. RHQDAPU Program Procedures for FY 2009 b. Proposed RHQDAPU Program Procedures for FY 2010 5. Current and Proposed HCAHPS Requirements a. FY 2009 HCAHPS Requirements b. Proposed FY 2010 HCAHPS Requirements 6. Current and Proposed Chart Validation Requirements a. Chart Validation Requirements for FY 2009 b. Proposed Chart Validation Requirements for FY 2010 c. Chart Validation Methods and Requirements Under Consideration for FY 2011 and Subsequent Years 7. Data Attestation Requirements a. Proposed Change to Requirements for FY 2009 b. Proposed Requirements for FY 2010 8. Public Display Requirements 9. Proposed Reconsideration and Appeal Procedures 10. Proposed RHQDAPU Program Withdrawal Deadline for FYs 2009 and 2010 11. Requirements for New Hospitals 12. Electronic Medical Records C. Medicare Hospital Value-Based Purchasing (VBP) 1. Medicare Hospital VBP Plan Report to Congress 2. Testing and Further Development of the Medicare Hospital VBP Plan D. Sole Community Hospitals (SCHs) and Medicare-Dependent, Small Rural Hospitals (MDHs): Volume Decrease Adjustment 1. Background 2. Volume Decrease Adjustment for SCHs and MDHs: Data Sources for Determining Core Staff Values a. Occupational Mix Survey b. AHA Annual Survey E. Rural Referral Centers (RRCs) 1. Case-Mix Index 2. Discharges F. Indirect Medical Education (IME) Adjustment 1. Background 2. IME Adjustment Factor for FY 2009 G. Medicare GME Affiliation Provisions for Teaching Hospitals in Certain Emergency Situations; Technical Correction 1. Background 2. Technical Correction H. Payments to Medicare Advantage Organizations: Collection of Risk Adjustment Data I. Hospital Emergency Services under EMTALA [[Page 23532]] 1. Background 2. EMTALA Technical Advisory Group (TAG): Recommendations 3. Proposed Changes Relating to Applicability of EMTALA Requirements to Hospital Inpatients 4. Proposed Changes to the EMTALA Physician On-Call Requirements a. Relocation of Regulatory Provisions b. Shared/Community Call 5. Proposed Technical Change to Regulations J. Application of Incentives To Reduce Avoidable Readmissions to Hospitals 1. Introduction 2. Measurement 3. Accountability 4. Interventions 5. Financial Incentive: Direct Payment Adjustment 6. Financial Incentive: Performance-Based Payment Adjustment 7. Nonfinancial Incentive: Public Reporting 8. Conclusion K. Rural Community Hospital Demonstration Program V. Proposed Changes to the IPPS for Capital-Related Costs A. Background 1. Exception Payments 2. New Hospitals 3. Hospitals Located in Puerto Rico B. Revisions to the Capital IPPS Based on Data on Hospitals Medicare Capital Margins 1. Elimination of the Large Add-On Payment Adjustment 2. Changes to the Capital IME Adjustment a. Background and Changes Made for FY 2008 b. Public Comments Received on Phase Out of Capital IPPS Teaching Adjustment Provisions Included in the FY 2008 Final Rule With Comment Period and Further Solicitation of Public Comments VI. Proposed Changes for Hospitals and Hospital Units Excluded From the IPPS A. Proposed Payments to Excluded Hospitals and Hospital Units B. IRF PPS C. LTCH PPS D. IPF PPS E. Determining Proposed LTCH Cost-to-Charge Ratios (CCRs) under the LTCH PPS F. Proposed Change to the Regulations Governing Hospitals- Within-Hospitals VII. Disclosure Required of Certain Hospitals and Critical Access Hospitals Regarding Physician Ownership VIII. Physician Self-Referrals Provisions A. Stand in the Shoes Provisions 1. Physician ``Stand in the Shoes\'\' Provisions a. Background b. Proposals 2. DHS Entity ``Stand in the Shoes\'\' Provisions 3. Application of the Physician ``Stand in the Shoes\'\' and the Entity ``Stand in the Shoes\'\' Provisions 4. Definitions: ``Physician\'\' and ``Physician Organization\'\' B. Period of Disallowance C. Gainsharing Arrangements 1. Background 2. Statutory Impediments to Gainsharing Arrangements 3. Office of Inspector General (OIG) Approach Towards Gainsharing Arrangements 4. MedPAC Recommendation 5. Demonstration Programs 6. Solicitation of Comments D. Physician-Owned Implant and Other Medical Device Companies 1. Background 2. Solicitation of Comments IX. Financial Relationships between Hospitals and Physicians A. Background B. Section 5006 of the Deficit Reduction Act (DRA) of 2005 C. Disclosure of Financial Relationships Report (DFRR) D. Civil Monetary Penalties E. Uses of Information Captured by the DFRR F. Solicitation of Comments X. MedPAC Recommendations XI. Other Required Information A. Requests for Data from the Public B. Collection of Information Requirements 1. Legislative Requirement for Solicitation of Comments 2. Solicitation of Comments on Proposed Requirements in Regulatory Text a. ICRs Regarding Physician Reporting Requirements b. ICRs Regarding Risk Adjustment Data c. ICRs Regarding Basic Commitments of Providers 3. Associated Information Collections Not Specified in Regulatory Text a. Present on Admission (POA) Indicator Reporting b. Proposed Add-On Payments for New Services and Technologies c. Reporting of Hospital Quality Data for Annual Hospital Payment Update d. Occupational Mix Adjustment to the FY 2009 Index (Hospital Wage Index Occupational Mix Survey) 4. Addresses for Submittal of Comments on Information Collection Requirements C. Response to Public Comments Regulation Text Addendum--Proposed Schedule of Standardized Amounts, Update Factors, and Rate-of-Increase Percentages Effective With Cost Reporting Periods Beginning On or After October 1, 2008 I. Summary and Background II. Proposed Changes to the Prospective Payment Rates for Hospital Inpatient Operating Costs for FY 2009 A. Calculation of the Adjusted Standardized Amount B. Proposed Adjustments for Area Wage Levels and Cost-of-Living C. Proposed MS-DRG Relative Weights D. Calculation of the Proposed Prospective Payment Rates III. Proposed Changes of Payment Rates for Acute Care Hospital Inpatient Capital-Related Costs for FY 2009 A. Determination of Proposed Federal Hospital Inpatient Capital- Related Prospective Payment Rate Update B. Calculation of the Proposed Inpatient Capital-Related Prospective Payments for FY 2009 C. Capital Input Price Index IV. Proposed Changes to Payment Rates for Excluded Hospitals and Hospital Units: Rate-of-Increase Percentages V. Tables Table 1A.--National Adjusted Operating Standardized Amounts, Labor/Nonlabor (69.7 Percent Labor Share/30.3 Percent Nonlabor Share If Wage Index Is Greater Than 1) Table 1B.--National Adjusted Operating Standardized Amounts, Labor/Nonlabor (62 Percent Labor Share/38 Percent Nonlabor Share If Wage Index Is Less Than or Equal to 1) Table 1C.--Adjusted Operating Standardized Amounts for Puerto Rico, Labor/Nonlabor Table 1D.--Capital Standard Federal Payment Rate Table 2.--Hospital Case-Mix Indexes for Discharges Occurring in Federal Fiscal Year 2007; Hospital Wage Indexes for Federal Fiscal Year 2009; Hospital Average Hourly Wages for Federal Fiscal Years 2007 (2003 Wage Data), 2008 (2004 Wage Data), and 2009 (2005 Wage Data); and 3-Year Average of Hospital Average Hourly Wages Table 3A.--FY 2009 and 3-Year Average Hourly Wage for Urban Areas by CBSA Table 3B.--FY 2009 and 3-Year Average Hourly Wage for Rural Areas by CBSA Table 4A.--Wage Index and Capital Geographic Adjustment Factor (GAF) for Urban Areas by CBSA and by State--FY 2009 Table 4B.--Wage Index and Capital Geographic Adjustment Factor (GAF) for Rural Areas by CBSA and by State--FY 2009 Table 4C.--Wage Index and Capital Geographic Adjustment Factor (GAF) for Hospitals That Are Reclassified by CBSA and by State--FY 2009 Table 4D-1.--Rural Floor Budget Neutrality Factors--FY 2009 Table 4D-2.--Urban Areas with Hospitals Receiving the Statewide Rural Floor or Imputed Floor Wage Index--FY 2009 Table 4E.--Urban CBSAs and Constituent Counties--FY 2009 Table 4F.--Puerto Rico Wage Index and Capital Geographic Adjustment Factor (GAF) by CBSA--FY 2009 Table 4J.--Out-Migration Wage Adjustment--FY 2009 Table 5.--List of Medicare Severity Diagnosis-Related Groups (MS-DRGs), Relative Weighting Factors, and Geometric and Arithmetic Mean Length of Stay Table 6A.--New Diagnosis Codes Table 6B.--New Procedure Codes Table 6C.--Invalid Diagnosis Codes Table 6D.--Invalid Procedure Codes Table 6E.--Revised Diagnosis Code Titles Table 6F.--Revised Procedure Code Titles Table 6G.--Additions to the CC Exclusions List (Available through the Internet on the CMS Web site at: http://www.cms.hhs.gov/ AcuteInpatientPPS/) Table 6H.--Deletions From the CC Exclusions List (Available Through the [[Page 23533]] Internet on the CMS Web site at: http://www.cms.hhs.gov/ AcuteInpatientPPS/) Table 6I.--Complete List of Complication and Comorbidity (CC) Exclusions (Available Only Through the Internet on the CMS Web site at: http:/www.cms.hhs.gov/AcuteInpatientPPS/) Table 6J.--Major Complication and Comorbidity (MCC) List (Available Through the Internet on the CMS Web Site at: http:// www.cms.hhs.gov/AcuteInpatientPPS/) Table 6K.--Complication and Comorbidity (CC) List (Available Through the Internet on the CMS Web site at: http://www.cms.hhs.gov/ AcuteInpatientPPS/) Table 7A.--Medicare Prospective Payment System Selected Percentile Lengths of Stay: FY 2007 MedPAR Update--December 2007 GROUPER V25.0 MS-DRGs Table 7B.--Medicare Prospective Payment System Selected Percentile Lengths of Stay: FY 2007 MedPAR Update--December 2007 GROUPER V26.0 MS-DRGs Table 8A.--Proposed Statewide Average Operating Cost-to-Charge Ratios--March 2008 Table 8B.--Proposed Statewide Average Capital Cost-to-Charge Ratios--March 2008 Table 8C.--Proposed Statewide Average Total Cost-to-Charge Ratios for LTCHs--March 2008 Table 9A.--Hospital Reclassifications and Redesignations--FY 2009 Table 9B.--Hospitals Redesignated as Rural under Section 1886(d)(8)(E) of the Act--FY 2009 Table 10.--Geometric Mean Plus the Lesser of .75 of the National Adjusted Operating Standardized Payment Amount (Increased to Reflect the Difference Between Costs and Charges) or .75 of One Standard Deviation of Mean Charges by Medicare Severity Diagnosis-Related Groups (MS-DRGs)--March 2008 Table 11.--Proposed FY 2009 MS-LTC-DRGs, Proposed Relative Weights, Proposed Geometric Average Length of Stay, and Proposed Short-Stay Outlier Threshold Appendix A--Regulatory Impact Analysis I. Overall Impact II. Objectives III. Limitations on Our Analysis IV. Hospitals Included in and Excluded From the IPPS V. Effects on Excluded Hospitals and Hospital Units VI. Quantitative Effects of the Proposed Policy Changes Under the IPPS for Operating Costs A. Basis and Methodology of Estimates B. Analysis of Table I C. Effects of the Proposed Changes to the MS-DRG Reclassifications and Relative Cost-Based Weights (Column 2) D. Effects of Proposed Wage Index Changes (Column 3) E. Combined Effects of Proposed MS-DRG and Wage Index Changes (Column 4) F. Effects of MGCRB Reclassifications (Column 5) G. Effects of the Proposed Rural Floor and Imputed Rural Floor, Including the Proposed Application of Budget Neutrality at the State Level (Column 6) H. Effects of the Proposed Wage Index Adjustment for Out- Migration (Column 7) I. Effects of All Proposed Changes with CMI Adjustment Prior to Estimated Growth (Column 8) J. Effects of All Proposed Changes with CMI Adjustment and Estimated Growth (Column 9) K. Effects of Policy on Payment Adjustment for Low-Volume Hospitals L. Impact Analysis of Table II VII. Effects of Other Proposed Policy Changes A. Effects of Proposed Policy on HACs, Including Infections B. Effects of Proposed MS-LTC-DRG Reclassifications and Relative Weights for LTCHs C. Effects of Proposed Policy Change Relating to New Medical Service and Technology Add-On Payments D. Effects of Proposed Policy Change Regarding Postacute Care Transfers to Home Health Services E. Effects of Proposed Requirements for Hospital Reporting of Quality Data for Annual Hospital Payment Update F. Effects of Proposed Policy Change to Methodology for Computing Core Staffing Factors for Volume Decrease Adjustment for SCHs and MDHs G. Effects of Proposed Clarification of Policy for Collection of Risk Adjustment Data From MA Organizations H. Effects of Proposed Policy Changes Relating to Hospital Emergency Services under EMTALA I. Effects of Implementation of Rural Community Hospital Demonstration Program J. Effects of Proposed Policy Changes Relating to Payments to Hospitals-Within-Hospitals K. Effects of Proposed Policy Changes Relating to Requirements for Disclosure of Physician Ownership in Hospitals L. Effects of Proposed Changes Relating to Physician Self- Referral Provisions M. Effects of Proposed Changes Relating to Reporting of Financial Relationships Between Hospitals and Physicians VIII. Effects of Proposed Changes in the Capital IPPS A. General Considerations B. Results IX. Alternatives Considered X. Overall Conclusion XI. Accounting Statement XII. Executive Order 12866 Appendix B--Recommendation of Update Factors for Operating Cost Rates of Payment for Inpatient Hospital Services I. Background II. Inpatient Hospital Update for FY 2009 III. Secretary\'s Recommendation IV. MedPAC Recommendation for Assessing Payment Adequacy and Updating Payments in Traditional Medicare Appendix C--Disclosure of Financial Relationships Report (DFRR) Form I. Background A. Summary 1. Acute Care Hospital Inpatient Prospective Payment System (IPPS) Section 1886(d) of the Social Security Act (the Act) sets forth a system of payment for the operating costs of acute care hospital inpatient stays under Medicare Part A (Hospital Insurance) based on prospectively set rates. Section 1886(g) of the Act requires the Secretary to pay for the capital-related costs of hospital inpatient stays under a prospective payment system (PPS). Under these PPSs, Medicare payment for hospital inpatient operating and capital-related costs is made at predetermined, specific rates for each hospital discharge. Discharges are classified according to a list of diagnosis- related groups (DRGs). The base payment rate is comprised of a standardized amount that is divided into a labor-related share and a nonlabor-related share. The labor-related share is adjusted by the wage index applicable to the area where the hospital is located. If the hospital is located in Alaska or Hawaii, the nonlabor-related share is adjusted by a cost-of- living adjustment factor. This base payment rate is multiplied by the DRG relative weight. If the hospital treats a high percentage of low-income patients, it receives a percentage add-on payment applied to the DRG-adjusted base payment rate. This add-on payment, known as the disproportionate share hospital (DSH) adjustment, provides for a percentage increase in Medicare payments to hospitals that qualify under either of two statutory formulas designed to identify hospitals that serve a disproportionate share of low-income patients. For qualifying hospitals, the amount of this adjustment may vary based on the outcome of the statutory calculations. If the hospital is an approved teaching hospital, it receives a percentage add-on payment for each case paid under the IPPS, known as the indirect medical education (IME) adjustment. This percentage varies, depending on the ratio of residents to beds. Additional payments may be made for cases that involve new technologies or medical services that have been approved for special add-on payments. To qualify, a new technology or medical service must demonstrate that it is a substantial clinical improvement over technologies or services otherwise available, and that, absent an add- on [[Page 23534]] payment, it would be inadequately paid under the regular DRG payment. The costs incurred by the hospital for a case are evaluated to determine whether the hospital is eligible for an additional payment as an outlier case. This additional payment is designed to protect the hospital from large financial losses due to unusually expensive cases. Any outlier payment due is added to the DRG-adjusted base payment rate, plus any DSH, IME, and new technology or medical service add-on adjustments. Although payments to most hospitals under the IPPS are made on the basis of the standardized amounts, some categories of hospitals are paid in whole or in part based on their hospital-specific rate based on their costs in a base year. For example, sole community hospitals (SCHs) receive the higher of a hospital-specific rate based on their costs in a base year (the higher of FY 1982, FY 1987, or FY 1996) or the IPPS rate based on the standardized amount. Until FY 2007, a Medicare-dependent, small rural hospital (MDH) has received the IPPS rate plus 50 percent of the difference between the IPPS rate and its hospital-specific rate if the hospital-specific rate based on their costs in a base year (the higher of FY 1982, FY 1987, or FY 2002) is higher than the IPPS rate. As discussed below, for discharges occurring on or after October 1, 2007, but before October 1, 2011, an MDH will receive the IPPS rate plus 75 percent of the difference between the IPPS rate and its hospital-specific rate, if the hospital-specific rate is higher than the IPPS rate. SCHs are the sole source of care in their areas, and MDHs are a major source of care for Medicare beneficiaries in their areas. Both of these categories of hospitals are afforded this special payment protection in order to maintain access to services for beneficiaries. Section 1886(g) of the Act requires the Secretary to pay for the capital-related costs of inpatient hospital services ``in accordance with a prospective payment system established by the Secretary.\'\' The basic methodology for determining capital prospective payments is set forth in our regulations at 42 CFR 412.308 and 412.312. Under the capital IPPS, payments are adjusted by the same DRG for the case as they are under the operating IPPS. Capital IPPS payments are also adjusted for IME and DSH, similar to the adjustments made under the operating IPPS. However, as discussed in section V.B.2. of this preamble, we are phasing out the IME adjustment beginning with FY 2008. In addition, hospitals may receive outlier payments for those cases that have unusually high costs. The existing regulations governing payments to hospitals under the IPPS are located in 42 CFR Part 412, Subparts A through M. 2. Hospitals and Hospital Units Excluded From the IPPS Under section 1886(d)(1)(B) of the Act, as amended, certain specialty hospitals and hospital units are excluded from the IPPS. These hospitals and units are: Rehabilitation hospitals and units; long-term care hospitals (LTCHs); psychiatric hospitals and units; children\'s hospitals; and cancer hospitals. Religious nonmedical health care institutions (RNHCIs) are also excluded from the IPPS. Various sections of the Balanced Budget Act of 1997 (Pub. L. 105-33), the Medicare, Medicaid and SCHIP [State Children\'s Health Insurance Program] Balanced Budget Refinement Act of 1999 (Pub. L. 106-113), and the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (Pub. L. 106-554) provide for the implementation of PPSs for rehabilitation hospitals and units (referred to as inpatient rehabilitation facilities (IRFs)), LTCHs, and psychiatric hospitals and units (referred to as inpatient psychiatric facilities (IPFs)), as discussed below. Children\'s hospitals, cancer hospitals, and RNHCIs continue to be paid solely under a reasonable cost-based system. The existing regulations governing payments to excluded hospitals and hospital units are located in 42 CFR Parts 412 and 413. a. Inpatient Rehabilitation Facilities (IRFs) Under section 1886(j) of the Act, as amended, rehabilitation hospitals and units (IRFs) have been transitioned from payment based on a blend of reasonable cost reimbursement subject to a hospital-specific annual limit under section 1886(b) of the Act and the adjusted facility Federal prospective payment rate for cost reporting periods beginning on or after January 1, 2002 through September 30, 2002, to payment at 100 percent of the Federal rate effective for cost reporting periods beginning on or after October 1, 2002. IRFs subject to the blend were also permitted to elect payment based on 100 percent of the Federal rate. The existing regulations governing payments under the IRF PPS are located in 42 CFR Part 412, Subpart P. b. Long-Term Care Hospitals (LTCHs) Under the authority of sections 123(a) and (c) of Pub. L. 106-113 and section 307(b)(1) of Pub. L. 106-554, the LTCH PPS was effective for a LTCH\'s first cost reporting period beginning on or after October 1, 2002. LTCHs that do not meet the definition of ``new\'\' under Sec. 412.23(e)(4) are paid, during a 5-year transition period, a LTCH prospective payment that is comprised of an increasing proportion of the LTCH Federal rate and a decreasing proportion based on reasonable cost principles. Those LTCHs that did not meet the definition of ``new\'\' under Sec. 412.23(e)(4) could elect to be paid based on 100 percent of the Federal prospective payment rate instead of a blended payment in any year during the 5-year transition. For cost reporting periods beginning on or after October 1, 2006, all LTCHs are paid 100 percent of the Federal rate. The existing regulations governing payment under the LTCH PPS are located in 42 CFR Part 412, Subpart O. c. Inpatient Psychiatric Facilities (IPFs) Under the authority of sections 124(a) and (c) of Pub. L. 106-113, inpatient psychiatric facilities (IPFs) (formerly psychiatric hospitals and psychiatric units of acute care hospitals) are paid under the IPF PPS. For cost reporting periods beginning on or after January 1, 2008, all IPFs are paid 100 percent of the Federal per diem payment amount established under the IPF PPS. (For cost reporting periods beginning on or after January 1, 2005, and ending on or before December 31, 2007, some IPFs received transitioned payments for inpatient hospital services based on a blend of reasonable cost-based payment and a Federal per diem payment rate.) The existing regulations governing payment under the IPF PPS are located in 42 CFR part 412, Subpart N. 3. Critical Access Hospitals (CAHs) Under sections 1814, 1820, and 1834(g) of the Act, payments are made to critical access hospitals (CAHs) (that is, rural hospitals or facilities that meet certain statutory requirements) for inpatient and outpatient services are based on 101 percent of reasonable cost. Reasonable cost is determined under the provisions of section 1861(v)(1)(A) of the Act and existing regulations under 42 CFR Parts 413 and 415. 4. Payments for Graduate Medical Education (GME) Under section 1886(a)(4) of the Act, costs of approved educational activities are excluded from the operating costs of inpatient hospital services. Hospitals with approved graduate medical education (GME) programs are paid for the direct costs of GME in accordance with section 1886(h) of the Act. The amount of payment for direct GME costs [[Page 23535]] for a cost reporting period is based on the hospital\'s number of residents in that period and the hospital\'s costs per resident in a base year. The existing regulations governing payments to the various types of hospitals are located in 42 CFR Part 413. B. Provisions of the Deficit Reduction Act of 2005 (DRA) Section 5001(b) of the Deficit Reduction Act of 2005 (DRA), Pub. L. 109-171, requires the Secretary to develop a plan to implement, beginning with FY 2009, a value-based purchasing plan for section 1886(d) hospitals defined in the Act. In section IV.C. of the preamble of this proposed rule, we discuss the report to Congress on the Medicare value-based purchasing plan and the current testing of the plan. C. Provisions of the Medicare Improvements and Extension Act Under Division B, Title I of the Tax Relief and Health Care Act of 2006 (MIEA-TRHCA) Section 106(b)(2) of the MIEA-TRHCA instructs the Secretary of Health and Human Services to include in the FY 2009 IPPS proposed rule one or more proposals to revise the wage index adjustment applied under section 1886(d)(3)(E) of the Act for purposes of the IPPS. The Secretary was also instructed to consider MedPAC\'s recommendations on the Medicare wage index classification system in developing these proposals. In section III. of the preamble of this proposed rule, we discuss MedPAC\'s recommendations in a report to Congress and present our proposed changes to the FY 2009 wage index in response to those recommendations. D. Provision of the TMA, Abstinence Education, and QI Programs Extension Act of 2007 Section 7 of the TMA [Transitional Medical Assistance], Abstinence Education, and QI [Qualifying Individuals] Programs Extension Act of 2007 (Pub. L. 110-90) provides for a 0.9 percent prospective documentation and coding adjustment in the determination of standardized amounts under the IPPS (except for MDHs and SCHs) for discharges occurring during FY 2009. The prospective documentation and coding adjustment was established in FY 2008 in response to the implementation of an MS-DRG system under the IPPS that resulted in changes in coding and classification that did not reflect real changes in case-mix under section 1886(d) of the Act. We discuss our proposed implementation of this provision in section II.D. of the preamble of this proposed rule and in the Addendum and in Appendix A to this proposed rule. E. Major Contents of This Proposed Rule In this proposed rule, we are setting forth proposed changes to the Medicare IPPS for operating costs and for capital-related costs in FY 2009. We also are setting forth proposed changes relating to payments for IME costs and payments to certain hospitals and units that continue to be excluded from the IPPS and paid on a reasonable cost basis. In addition, we are presenting proposed changes relating to disclosure to patients of physician ownership and investment interests in hospitals, proposed changes to our physician self-referral regulations, and a solicitation of public comments on a proposed collection of information regarding financial relationships between hospitals and physicians. The following is a summary of the major changes that we are proposing to make: 1. Proposed Changes to MS-DRG Classifications and Recalibrations of Relative Weights In section II. of the preamble to this proposed rule, we are including-- Proposed changes to MS-DRG reclassifications based on our yearly review. Proposed application of the documentation and coding adjustment to hospital-specific rates resulting from implementation of the MS-DRG system. Proposed changes to address the RTI reporting recommendations on charge compression. Proposed recalibrations of the MS-DRG relative weights. We also are proposing to refine the hospital cost reports so that charges for relatively inexpensive medical supplies are reported separately from the costs and charges for more expensive medical devices. This proposal would be applied to the determination of both the IPPS and the OPPS relative weights as well as the calculation of the ambulatory surgical center payment rates. We are presenting a listing and discussion of additional hospital- acquired conditions (HACs), including infections, that are being proposed to be subject to the statutorily required quality adjustment in MS-DRG payments for FY 2009. We are presenting our evaluation and analysis of the FY 2009 applicants for add-on payments for high-cost new medical services and technologies (including public input, as directed by Pub. L. 108-173, obtained in a town hall meeting). We are proposing the annual update of the MS-LTC-DRG classifications and relative weights for use under the LTCH PPS for FY 2009. 2. Proposed Changes to the Hospital Wage Index In section III. of the preamble to this proposed rule, we are proposing revisions to the wage index and the annual update of the wage data. Specific issues addressed include the following: Proposed wage index reform changes in response to recommendations made to Congress as a result of the wage index study required under Pub. L. 109-432. We discuss changes related to reclassifications criteria, application of budget neutrality in reclassifications, and the rural floor and imputed floor budget neutrality at the State level. Changes to the CBSA designations. The methodology for computing the proposed FY 2009 wage index. The proposed FY 2009 wage index update, using wage data from cost reporting periods that began during FY 2006. Analysis and implementation of the proposed FY 2009 occupational mix adjustment to the wage index. Proposed revisions to the wage index based on hospital redesignations and reclassifications. The proposed adjustment to the wage index for FY 2009 based on commuting patterns of hospital employees who reside in a county and work in a different area with a higher wage index. The timetable for reviewing and verifying the wage data used to compute the proposed FY 2009 wage index. The proposed labor-related share for the FY 2009 wage index, including the labor-related share for Puerto Rico. 3. Other Decisions and Proposed Changes to the IPPS for Operating Costs and GME Costs In section IV. of the preamble to this proposed rule, we discuss a number of the provisions of the regulations in 42 CFR Parts 412, 413, and 489, including the following: Proposed changes to the postacute care transfer policy as it relates to transfers to home with the provision of home health services. The reporting of hospital quality data as a condition for receiving the full annual payment update increase. Proposed changes in the collection of Medicare Advantage (MA) encounter data that are used for computing the risk payment adjustment made to MA organizations. Discussion of the report to Congress on the Medicare value-based purchasing [[Page 23536]] plan and current testing and further development of the plan. Proposed changes to the methodology for determining core staff values for the volume decrease payment adjustment for SCHs and MDHs. The proposed updated national and regional case-mix values and discharges for purposes of determining RRC status. The statutorily-required IME adjustment factor for FY 2009 and technical changes to the GME payment policies. Proposed changes to policies on hospital emergency services under EMTALA to address EMTALA Technical Advisory Group (TAG) recommendations. Solicitation of public comments on Medicare policies relating to incentives for avoidable readmissions to hospitals. Discussion of the fifth year of implementation of the Rural Community Hospital Demonstration Program. 4. Proposed Changes to the IPPS for Capital-Related Costs In section V. of the preamble to this proposed rule, we discuss the payment policy requirements for capital-related costs and capital payments to hospitals. We acknowledge the public comments that we received on the phase-out of the capital teaching adjustment included in the FY 2008 IPPS final rule with comment period, and again are soliciting public comments on this phase-out in this proposed rule. 5. Proposed Changes to the Payment Rates for Excluded Hospitals and Hospital Units: Rate-of-Increase Percentages In section VI. of the preamble to this proposed rule, we discuss proposed changes to payments to excluded hospitals and hospital units, proposed changes for determining LTCH CCRs under the LTCH PPS, including a discussion regarding changing the annual payment rate update schedule for the LTCH PPS, and proposed changes to the regulations on hospitals-within-hospitals. 6. Proposed Changes Relating to Disclosure of Physician Ownership in Hospitals In section VII. of the preamble of this proposed rule, we present proposed changes to the regulations relating to the disclosure to patients of physician ownership or investment interests in hospitals. 7. Proposed Changes and Solicitation of Comments on Physician Self- Referrals Provisions In section VIII. of the preamble of this proposed rule, we present proposed changes to the policies on physician self-referrals relating to the ``Stand in Shoes\'\' provision, In addition, we solicit public comments regarding physician-owned implant companies and gainsharing arrangements. 8. Proposed Collection of Information Regarding Financial Relationships Between Hospitals and Physicians In section IX. of the preamble of this proposed rule, we solicit public comments on our proposed collection of information regarding financial relationships between hospitals and physicians. 9. Determining Proposed Prospective Payment Operating and Capital Rates and Rate-of-Increase Limits In the Addendum to this proposed rule, we set forth proposed changes to the amounts and factors for determining the FY 2009 prospective payment rates for operating costs and capital-related costs. We also establish the proposed threshold amounts for outlier cases. In addition, we address the proposed update factors for determining the rate-of-increase limits for cost reporting periods beginning in FY 2009 for hospitals and hospital units excluded from the PPS. 10. Impact Analysis In Appendix A of this proposed rule, we set forth an analysis of the impact that the proposed changes would have on affected hospitals. 11. Recommendation of Update Factors for Operating Cost Rates of Payment for Inpatient Hospital Services In Appendix B of this proposed rule, as required by sections 1886(e)(4) and (e)(5) of the Act, we provided our recommendations of the appropriate percentage changes for FY 2009 for the following: A single average standardized amount for all areas for hospital inpatient services paid under the IPPS for operating costs (and hospital-specific rates applicable to SCHs and MDHs). Target rate-of-increase limits to the allowable operating costs of hospital inpatient services furnished by hospitals and hospital units excluded from the IPPS. 12. Disclosure of Financial Relationships Report (DFRR) Form In Appendix C of this proposed rule, we present the reporting form that we are proposing to use for the proposed collection of information on financial relationships between hospitals and physicians discussed in section IX, of the preamble of this proposed rule. 13. Discussion of Medicare Payment Advisory Commission Recommendations Under section 1805(b) of the Act, MedPAC is required to submit a report to Congress, no later than March 1 of each year, in which MedPAC reviews and makes recommendations on Medicare payment policies. MedPAC\'s March 2008 recommendations concerning hospital inpatient payment policies address the update factor for inpatient hospital operating costs and capital-related costs under the IPPS and for hospitals and distinct part hospital units excluded from the IPPS. We address these recommendations in Appendix B of this proposed rule. For further information relating specifically to the MedPAC March 2008 reports or to obtain a copy of the reports, contact MedPAC at (202) 220-3700 or visit MedPAC\'s Web site at: www.medpac.gov. F. Public Comments Received on Issues in Related Rules 1. Comments on Phase-Out of the Capital Teaching Adjustment Under the IPPS Included in the FY 2008 IPPS Final Rule With Comment Period In the FY 2008 IPPS final rule with comment period, we solicited public comments on our policy changes related to phase-out of the capital teaching adjustment to the capital payment update under the IPPS (72 FR 47401). We received approximately 90 timely pieces of correspondence in response to our solicitation. (These public comments may be viewed on the following Web site: http://www.cms.hhs.gov/ eRulemaking/ECCMSR/list.asp under file code CMS-1533-FC.) In section V. of the preamble of this proposed rule, we acknowledge receipt of these public comments and again solicit public comments on the phase-out in this proposed rule. We will respond to the public comments received in response to both the FY 2008 IPPS final rule with comment period and this proposed rule in the FY 2009 IPPS final rule, which is scheduled to be published in August 2008. 2. Policy Revisions Related to Medicare GME Group Affiliations for Hospitals in Certain Declared Emergency Areas We have issued two interim final rules with comment periods in the Federal Register that modified the GME [[Page 23537]] regulations as they apply to Medicare GME affiliated groups to provide for greater flexibility in training residents in approved residency programs during times of disasters: on April 12, 2006 (71 FR 18654) and on November 27, 2007 (72 FR 66892). We received a number of timely pieces of correspondence in response to these interim final rules with comment period. (The public comments that we received may be viewed on the Web site at: http://www.cms.hhs.gov/eRulemaking/ECCMSR/list.asp under the file codes CMS-1531-IFC1 and CMS-1531-IFC2, respectively.) We will summarize and address these public comments in the FY 2009 IPPS final rule, which is scheduled to be published in August 2008. II. Proposed Changes to Medicare Severity DRG (MS-DRG) Classifications and Relative Weights A. Background Section 1886(d) of the Act specifies that the Secretary shall establish a classification system (referred to as DRGs) for inpatient discharges and adjust payments under the IPPS based on appropriate weighting factors assigned to each DRG. Therefore, under the IPPS, we pay for inpatient hospital services on a rate per discharge basis that varies according to the DRG to which a beneficiary\'s stay is assigned. The formula used to calculate payment for a specific case multiplies an individual hospital\'s payment rate per case by the weight of the DRG to which the case is assigned. Each DRG weight represents the average resources required to care for cases in that particular DRG, relative to the average resources used to treat cases in all DRGs. Congress recognized that it would be necessary to recalculate the DRG relative weights periodically to account for changes in resource consumption. Accordingly, section 1886(d)(4)(C) of the Act requires that the Secretary adjust the DRG classifications and relative weights at least annually. These adjustments are made to reflect changes in treatment patterns, technology, and any other factors that may change the relative use of hospital resources. B. MS-DRG Reclassifications 1. General As discussed in the preamble to the FY 2008 IPPS final rule with comment period (72 FR 47138), we focused our efforts in FY 2008 on making significant reforms to the IPPS consistent with the recommendations made by MedPAC in its ``Report to the Congress, Physician-Owned Specialty Hospitals\'\' in March 2005. MedPAC recommended that the Secretary refine the entire DRG system by taking into account severity of illness and applying hospital-specific relative value (HSRV) weights to DRGs.\\1\\ We began this reform process by adopting cost-based weights over a 3-year transition period beginning in FY 2007 and making interim changes to the DRG system for FY 2007 by creating 20 new CMS DRGs and modifying 32 others across 13 different clinical areas involving nearly 1.7 million cases. As described below in more detail, these refinements were intermediate steps towards comprehensive reform of both the relative weights and the DRG system that is occurring as we undertook further study. For FY 2008, we adopted 745 new Medicare Severity DRGs (MS-DRGs) to replace the CMS DRGs. We refer readers to section II.D. of the FY 2008 IPPS final rule with comment period for a full detailed discussion of how the MS-DRG system was established based on severity levels of illness (72 FR 47141). --------------------------------------------------------------------------- \\1\\ Medicare Payment Advisory Commission: Report to the Congress, Physician-Owned Specialty Hospitals, March 25, page viii. --------------------------------------------------------------------------- Currently, cases are classified into MS-DRGs for payment under the IPPS based on the principal diagnosis, up to eight additional diagnoses, and up to six procedures performed during the stay. In a small number of MS-DRGs, classification is also based on the age, sex, and discharge status of the patient. The diagnosis and procedure information is reported by the hospital using codes from the International Classification of Diseases, Ninth Revision, Clinical Modification (ICD-9-CM). The process of forming the MS-DRGs was begun by dividing all possible principal diagnoses into mutually exclusive principal diagnosis areas, referred to as Major Diagnostic Categories (MDCs). The MDCs were formed by physician panels to ensure that the DRGs would be clinically coherent. The diagnoses in each MDC correspond to a single organ system or etiology and, in general, are associated with a particular medical specialty. Thus, in order to maintain the requirement of clinical coherence, no final MS-DRG could contain patients in different MDCs. Most MDCs are based on a particular organ system of the body. For example, MDC 6 is Diseases and Disorders of the Digestive System. This approach is used because clinical care is generally organized in accordance with the organ system affected. However, some MDCs are not constructed on this basis because they involve multiple organ systems (for example, MDC 22 (Burns)). For FY 2008, cases are assigned to one of 745 MS-DRGs in 25 MDCs. The table below lists the 25 MDCs. Major Diagnostic Categories (MDCs) ------------------------------------------------------------------------ ------------------------------------------------------------------------ 1.............................. Diseases and Disorders of the Nervous System. 2.............................. Diseases and Disorders of the Eye. 3.............................. Diseases and Disorders of the Ear, Nose, Mouth, and Throat. 4.............................. Diseases and Disorders of the Respiratory System. 5.............................. Diseases and Disorders of the Circulatory System. 6.............................. Diseases and Disorders of the Digestive System. 7.............................. Diseases and Disorders of the Hepatobiliary System and Pancreas. 8.............................. Diseases and Disorders of the Musculoskeletal System and Connective Tissue. 9.............................. Diseases and Disorders of the Skin, Subcutaneous Tissue and Breast. 10............................. Endocrine, Nutritional and Metabolic Diseases and Disorders. 11............................. Diseases and Disorders of the Kidney and Urinary Tract. 12............................. Diseases and Disorders of the Male Reproductive System. 13............................. Diseases and Disorders of the Female Reproductive System. 14............................. Pregnancy, Childbirth, and the Puerperium. 15............................. Newborns and Other Neonates with Conditions Originating in the Perinatal Period. 16............................. Diseases and Disorders of the Blood and Blood Forming Organs and Immunological Disorders. 17............................. Myeloproliferative Diseases and Disorders and Poorly Differentiated Neoplasms. 18............................. Infectious and Parasitic Diseases (Systemic or Unspecified Sites). 19............................. Mental Diseases and Disorders. 20............................. Alcohol/Drug Use and Alcohol/Drug Induced Organic Mental Disorders. 21............................. Injuries, Poisonings, and Toxic Effects of Drugs. 22............................. Burns. 23............................. Factors Influencing Health Status and Other Contacts with Health Services. 24............................. Multiple Significant Trauma. 25............................. Human Immunodeficiency Virus Infections. ------------------------------------------------------------------------ In general, cases are assigned to an MDC based on the patient\'s principal diagnosis before assignment to an MS-DRG. However, under the most recent version of the Medicare GROUPER (Version 26.0), there are 9 MS-DRGs to [[Page 23538]] which cases are directly assigned on the basis of ICD-9-CM procedure codes. These MS-DRGs are for heart transplant or implant of heart assist systems, liver and/or intestinal transplants, bone marrow transplants, lung transplants, simultaneous pancreas/kidney transplants, pancreas transplants, and for tracheostomies. Cases are assigned to these MS-DRGs before they are classified to an MDC. The table below lists the nine current pre-MDCs. Pre-Major Diagnostic Categories (Pre-MDCs) ------------------------------------------------------------------------ ------------------------------------------------------------------------ MS-DRG 103............................. Heart Transplant or Implant of Heart Assist System. MS-DRG 480............................. Liver Transplant and/or Intestinal Transplant. MS-DRG 481............................. Bone Marrow Transplant. MS-DRG 482............................. Tracheostomy for Face, Mouth, and Neck Diagnoses. MS-DRG 495............................. Lung Transplant. MS-DRG 512............................. Simultaneous Pancreas/Kidney Transplant. MS-DRG 513............................. Pancreas Transplant. MS-DRG 541............................. ECMO or Tracheostomy with Mechanical Ventilation 96+ Hours or Principal Diagnosis Except for Face, Mouth, and Neck Diagnosis with Major O.R. MS-DRG 542............................. Tracheostomy with Mechanical Ventilation 96+ Hours or Principal Diagnosis Except for Face, Mouth, and Neck Diagnosis without Major O.R. ------------------------------------------------------------------------ Once the MDCs were defined, each MDC was evaluated to identify those additional patient characteristics that would have a consistent effect on the consumption of hospital resources. Because the presence of a surgical procedure that required the use of the operating room would have a significant effect on the type of hospital resources used by a patient, most MDCs were initially divided into surgical DRGs and medical DRGs. Surgical DRGs are based on a hierarchy that orders operating room (O.R.) procedures or groups of O.R. procedures by resource intensity. Medical DRGs generally are differentiated on the basis of diagnosis and age (0 to 17 years of age or greater than 17 years of age). Some surgical and medical DRGs are further differentiated based on the presence or absence of a complication or comorbidity (CC) or a major complication or comorbidity (MCC). Generally, nonsurgical procedures and minor surgical procedures that are not usually performed in an operating room are not treated as O.R. procedures. However, there are a few non-O.R. procedures that do affect MS-DRG assignment for certain principal diagnoses. An example is extracorporeal shock wave lithotripsy for patients with a principal diagnosis of urinary stones. Lithotripsy procedures are not routinely performed in an operating room. Therefore, lithotripsy codes are not classified as O.R. procedures. However, our clinical advisors believe that patients with urinary stones who undergo extracorporeal shock wave lithotripsy should be considered similar to other patients who undergo O.R. procedures. Therefore, we treat this group of patients similar to patients undergoing O.R. procedures. Once the medical and surgical classes for an MDC were formed, each diagnosis class was evaluated to determine if complications or comorbidities would consistently affect the consumption of hospital resources. Each diagnosis was categorized into one of three severity levels. These three levels include a major complication or comorbidity (MCC), a complication or comorbidity (CC), or a non-CC. Physician panels classified each diagnosis code based on a highly iterative process involving a combination of statistical results from test data as well as clinical judgment. As stated earlier, we refer readers to section II.D. of the FY 2008 IPPS final rule with comment period for a full detailed discussion of how the MS-DRG system was established based on severity levels of illness (72 FR 47141). A patient\'s diagnosis, procedure, discharge status, and demographic information is entered into the Medicare claims processing systems and subjected to a series of automated screens called the Medicare Code Editor (MCE). The MCE screens are designed to identify cases that require further review before classification into an MS-DRG. After patient information is screened through the MCE and any further development of the claim is conducted, the cases are classified into the appropriate MS-DRG by the Medicare GROUPER software program. The GROUPER program was developed as a means of classifying each case into an MS-DRG on the basis of the diagnosis and procedure codes and, for a limited number of MS-DRGs, demographic information (that is, sex, age, and discharge status). After cases are screened through the MCE and assigned to an MS-DRG by the GROUPER, the PRICER software calculates a base MS-DRG payment. The PRICER calculates the payment for each case covered by the IPPS based on the MS-DRG relative weight and additional factors associated with each hospital, such as IME and DSH payment adjustments. These additional factors increase the payment amount to hospitals above the base MS-DRG payment. The records for all Medicare hospital inpatient discharges are maintained in the Medicare Provider Analysis and Review (MedPAR) file. The data in this file are used to evaluate possible MS-DRG classification changes and to recalibrate the MS-DRG weights. However, in the FY 2000 IPPS final rule (64 FR 41500), we discussed a process for considering non-MedPAR data in the recalibration process. In order for us to consider using particular non-MedPAR data, we must have sufficient time to evaluate and test the data. The time necessary to do so depends upon the nature and quality of the non-MedPAR data submitted. Generally, however, a significant sample of the non-MedPAR data should be submitted by mid-October for consideration in conjunction with the next year\'s proposed rule. This date allows us time to test the data and make a preliminary assessment as to the feasibility of using the data. Subsequently, a complete database should be submitted by early December for consideration in conjunction with the next year\'s proposed rule. As we indicated above, for FY 2008, we made significant improvement in the DRG system to recognize severity of illness and resource usage by adopting MS-DRGs. The changes we adopted were reflected in the FY 2008 GROUPER, Version 25.0, and were effective for discharges occurring on or after October 1, 2007. Our DRG analysis for the FY 2008 final rule with comment period was based on data from the March 2007 update of the FY 2006 MedPAR file, which contained hospital bills received through March 31, 2007, for discharges occurring through September 30, 2006. For this proposed rule, for FY 2009, our DRG analysis is based on data from the September 2007 update of the FY 2007 MedPAR file, which contains hospital bills received through September 30, 2007, for discharges through September 30, 2007. 2. Yearly Review for Making MS-DRG Changes Many of the changes to the MS-DRG classifications we make annually are the result of specific issues brought to our attention by interested parties. We encourage individuals with concerns about MS-DRG classifications to bring those concerns to our attention in a timely manner so they can be carefully considered for possible inclusion in the annual proposed rule and, if included, may be subjected to public review and comment. Therefore, similar to the [[Page 23539]] timetable for interested parties to submit non-MedPAR data for consideration in the MS-DRG recalibration process, concerns about MS- DRG classification issues should be brought to our attention no later than early December in order to be considered and possibly included in the next annual proposed rule updating the IPPS. The actual process of forming the MS-DRGs was, and will likely continue to be, highly iterative, involving a combination of statistical results from test data combined with clinical judgment. In the FY 2008 IPPS final rule (72 FR 47140 through 47189), we described in detail the process we used to develop the MS-DRGs that we adopted for FY 2008. In addition, in deciding whether to make further modification to the MS-DRGs for particular circumstances brought to our attention, we considered whether the resource consumption and clinical characteristics of the patients with a given set of conditions are significantly different than the remaining patients in the MS-DRG. We evaluated patient care costs using average charges and lengths of stay as proxies for costs and relied on the judgment of our medical advisors to decide whether patients are clinically distinct or similar to other patients in the MS-DRG. In evaluating resource costs, we considered both the absolute and percentage differences in average charges between the cases we selected for review and the remainder of cases in the MS- DRG. We also considered variation in charges within these groups; that is, whether observed average differences were consistent across patients or attributable to cases that were extreme in terms of charges or length of stay, or both. Further, we considered the number of patients who will have a given set of characteristics and generally preferred not to create a new MS-DRG unless it would include a substantial number of cases. C. Adoption of the MS-DRGs in FY 2008 In the FY 2006, FY 2007, and FY 2008 IPPS final rules, we discussed a number of recommendations made by MedPAC regarding revisions to the DRG system used under the IPPS (70 FR 47473 through 47482; 71 FR 47881 through 47939; and 72 FR 47140 through 47189). As we noted in the FY 2006 IPPS final rule, we had insufficient time to complete a thorough evaluation of these recommendations for full implementation in FY 2006. However, we did adopt severity-weighted cardiac DRGs in FY 2006 to address public comments on this issue and the specific concerns of MedPAC regarding cardiac surgery DRGs. We also indicated that we planned to further consider all of MedPAC\'s recommendations and thoroughly analyze options and their impacts on the various types of hospitals in the FY 2007 IPPS proposed rule. For FY 2007, we began this process. In the FY 2007 IPPS proposed rule, we proposed to adopt Consolidated Severity DRGs (CS DRGs) for FY 2008 (if not earlier). However, based on public comments received on the FY 2007 IPPS proposed rule, we decided not to adopt the CS DRGs. Rather, we decided to make interim changes to the existing DRGs for FY 2007 by creating 20 new DRGs involving 13 different clinical areas that would significantly improve the CMS DRG system\'s recognition of severity of illness. We also modified 32 DRGs to better capture differences in severity. The new and revised DRGs were selected from 40 existing CMS DRGs that contained 1,666,476 cases and represent a number of body systems. In creating these 20 new DRGs, we deleted 8 and modified 32 existing DRGs. We indicated that these interim steps for FY 2007 were being taken as a prelude to more comprehensive changes to better account for severity in the DRG system by FY 2008. In the FY 2007 IPPS final rule, we indicated our intent to pursue further DRG reform through two initiatives. First, we announced that we were in the process of engaging a contractor to assist us with evaluating alternative DRG systems that were raised as potential alternatives to the CMS DRGs in the public comments. Second, we indicated our intent to review over 13,000 ICD-9-CM diagnosis codes as part of making further refinements to the current CMS DRGs to better recognize severity of illness based on the work that CMS (then HCFA) did in the mid-1990\'s in connection with adopting severity DRGs. We describe below the progress we have made on these two initiatives, our actions for FY 2008, and our proposals for FY 2009 based on our continued analysis of reform of the DRG system. We note that the adoption of the MS-DRGs to better recognize severity of illness has implications for the outlier threshold, the application of the postacute care transfer policy, the measurement of real case-mix versus apparent case-mix, and the IME and DSH payment adjustments. We discuss these implications for FY 2009 in other sections of this preamble and in the Addendum to this proposed rule. In the FY 2007 IPPS proposed rule, we discussed MedPAC\'s recommendations to move to a cost-based HSRV weighting methodology using HSRVs beginning with the FY 2007 IPPS proposed rule for determining the DRG relative weights. Although we proposed to adopt the HSRV weighting methodology for FY 2007, we decided not to adopt the proposed methodology in the final rule after considering the public comments we received on the proposal. Instead, in the FY 2007 IPPS final rule, we adopted a cost-based weighting methodology without the HSRV portion of the proposed methodology. The cost-based weights are being adopted over a 3-year transition period in \\1/3\\ increments between FY 2007 and FY 2009. In addition, in the FY 2007 IPPS final rule, we indicated our intent to further study the HSRV-based methodology as well as other issues brought to our attention related to the cost-based weighting methodology adopted in the FY 2007 final rule. There was significant concern in the public comments that our cost- based weighting methodology does not adequately account for charge compression--the practice of applying a higher percentage charge markup over costs to lower cost items and services and a lower percentage charge markup over costs to higher cost items and services. Further, public commenters expressed concern about potential inconsistencies between how costs and charges are reported on the Medicare cost reports and charges on the Medicare claims. In the FY 2007 IPPS final rule, we used costs and charges from the cost report to determine departmental level cost-to-charge ratios (CCRs) which we then applied to charges on the Medicare claims to determine the cost-based weights. The commenters were concerned about potential distortions to the cost-based weights that would result from inconsistent reporting between the cost reports and the Medicare claims. After publication of the FY 2007 IPPS final rule, we entered into a contract with RTI International (RTI) to study both charge compression and to what extent our methodology for calculating DRG relative weights is affected by inconsistencies between how hospitals report costs and charges on the cost reports and how hospitals report charges on individual claims. Further, as part of its study of alternative DRG systems, the RAND Corporation analyzed the HSRV cost-weighting methodology. We refer readers to section II.E. of the preamble of this proposed rule for our proposals for addressing the issue of charge compression and the HSRV cost-weighting methodology for FY 2009. We believe that revisions to the DRG system to better recognize severity of [[Page 23540]] illness and changes to the relative weights based on costs rather than charges are improving the accuracy of the payment rates in the IPPS. We agree with MedPAC that these refinements should be pursued. Although we continue to caution that any prospective payment system based on grouping cases will always present some opportunities for providers to specialize in cases they believe have higher margins, we believe that the changes we have adopted and the continuing reforms we are proposing in this proposed rule for FY 2009 will improve payment accuracy and reduce financial incentives to create specialty hospitals. We refer readers to section II.D. of the FY 2008 IPPS final rule with comment period for a full discussion of how the MS-DRG system was established based on severity levels of illness (72 FR 47141). D. MS-DRG Documentation and Coding Adjustment, Including the Applicability to the Hospital-Specific Rates and the Puerto Rico- Specific Standardized Amount 1. MS-DRG Documentation and Coding Adjustment As stated above, we adopted the new MS-DRG patient classification system for the IPPS, effective October 1, 2007, to better recognize severity of illness in Medicare payment rates. Adoption of the MS-DRGs resulted in the expansion of the number of DRGs from 538 in FY 2007 to 745 in FY 2008. By increasing the number of DRGs and more fully taking into account severity of illness in Medicare payment rates, the MS-DRGs encourage hospitals to improve their documentation and coding of patient diagnoses. In the FY 2008 IPPS final rule with comment period (72 FR 47175 through 47186), which appeared in the Federal Register on August 22, 2007, we indicated that we believe the adoption of the MS- DRGs had the potential to lead to increases in aggregate payments without a corresponding increase in actual patient severity of illness due to the incentives for improved documentation and coding. In that final rule with comment period, using the Secretary\'s authority under section 1886(d)(3)(A)(vi) of the Act to maintain budget neutrality by adjusting the standardized amount to eliminate the effect of changes in coding or classification that do not reflect real change in case-mix, we established prospective documentation and coding adjustments of -1.2 percent for FY 2008, -1.8 percent for FY 2009, and -1.8 percent for FY 2010. On September 29, 2007, the TMA, Abstinence Education, and QI Programs Extension Act of 2007, Pub. L. 110-90, was enacted. Section 7 of Pub. L. 110-90 included a provision that reduces the documentation and coding adjustment for the MS-DRG system that we adopted in the FY 2008 IPPS final rule with comment period to -0.6 percent for FY 2008 and -0.9 percent for FY 2009. To comply with the provision of section 7 of Pub. L. 110-90, in a final rule that appeared in the Federal Register on November 27, 2007 (72 FR 66886), we changed the IPPS documentation and coding adjustment for FY 2008 to -0.6 percent, and revised the FY 2008 payment rates, factors, and thresholds accordingly, with these revisions effective October 1, 2007. For FY 2009, Pub. L. 110-90 requires a documentation and coding adjustment of -0.9 percent instead of the -1.8 percent adjustment specified in the FY 2008 IPPS final rule with comment period. As required by statute, we are applying a documentation and coding adjustment of -0.9 percent to the FY 2009 IPPS national standardized amounts. The documentation and coding adjustments established in the FY 2008 IPPS final rule with comment period are cumulative. As a result, the -0.9 percent documentation and coding adjustment in FY 2009 is in addition to the -0.6 percent adjustment in FY 2008, yielding a combined effect of -1.5 percent. 2. Application of the Documentation and Coding Adjustment to the Hospital-Specific Rates Under section 1886(d)(5)(D)(i) of the Act, SCHs are paid based on whichever of the following rates yields the greatest aggregate payment: The Federal national rate; the updated hospital-specific rate based on FY 1982 costs per discharge; the updated hospital-specific rate based on FY 1987 costs per discharge; or the updated hospital-specific rate based on FY 1996 costs per discharge. Under section 1886(d)(5)(G) of the Act, MDHs are paid based on the Federal national rate or, if higher, the Federal national rate plus 75 percent of the difference between the Federal national rate and the updated hospital-specific rate based on the greater of either the FY 1982, 1987, or 2002 costs per discharge. In the FY 2008 IPPS final rule with comment period, we established a policy of applying the documentation and coding adjustment to the hospital-specific rates. In that rule, we indicated that because SCHs and MDHs use the same DRG system as all other hospitals, we believe they should be equally subject to the budget neutrality adjustment that we are applying for adoption of the MS-DRGs to all other hospitals. In establishing this policy, we cited our authority under section 1886(d)(3)(A)(vi) of the Act, which provides the authority to adjust ``the standardized amount\'\' to eliminate the effect of changes in coding or classification that do not reflect real change in case-mix. However, in a final rule that appeared in the Federal Register on November 27, 2007 (72 FR 66886), we rescinded the application of the documentation and coding adjustment to the hospital- specific rates retroactive to October 1, 2007. In that final rule, we indicated that, while we still believe it would be appropriate to apply the documentation and coding adjustment to the hospital-specific rates, upon further review we decided that application of the documentation and coding adjustment to the hospital-specific rates is not consistent with the plain meaning of section 1886(d)(3)(A)(vi) of the Act, which only mentions adjusting ``the standardized amount\'\' and does not mention adjusting the hospital-specific rates. We continue to have concerns about this issue. Because hospitals paid based on the hospital-specific rate use the same MS-DRG system as other hospitals, we believe they have the potential to realize increased payments from coding improvements that do not reflect real increases in patients\' severity of illness. In section 1886(d)(3)(A)(vi) of the Act, Congress stipulated that hospitals paid based on the standardized amount should not receive additional payments based on the effect of documentation and coding changes that do not reflect real changes in case-mix. Similarly, we believe that hospitals paid based on the hospital-specific rate should not have the potential to realize increased payments due to documentation and coding improvements that do not reflect real increases in patients\' severity of illness. While we continue to believe that section 1886(d)(3)(A)(vi) of the Act does not provide explicit authority for application of the documentation and coding adjustment to the hospital-specific rates, we believe that we have the authority to apply the documentation and coding adjustment to the hospital-specific rates using our special exceptions and adjustment authority under section 1886(d)(5)(I)(i) of the Act. The special exceptions and adjustment authority authorizes us to provide ``for such other exceptions and adjustments to [IPPS] payment amounts * * * as the Secretary deems appropriate.\'\' In light of this authority, for the FY 2010 rulemaking, we plan to [[Page 23541]] examine our FY 2008 claims data for hospitals paid based on the hospital-specific rate. If we find evidence of significant increases in case-mix for patients treated in these hospitals, we would consider proposing application of the documentation and coding adjustments to the FY 2010 hospital-specific rates under our authority in section 1886(d)(5)(I)(i) of the Act. As noted previously, the documentation and coding adjustments established in the FY 2008 IPPS final rule with comment period are cumulative. For example, the -0.9 percent documentation and coding adjustment to the national standardized amount in FY 2009 is in addition to the -0.6 percent adjustment made in FY 2008, yielding a combined effect of -1.5 percent in FY 2009. Given the cumulative nature of the documentation and coding adjustments, if we were to propose to apply the documentation and coding adjustment to the FY 2010 hospital-specific rates, it may involve applying the FY 2008 and FY 2009 documentation and coding adjustments (-1.5 percent combined) plus the FY 2010 documentation and coding adjustment, discussed in the FY 2008 IPPS final rule with comment period, to the FY 2010 hospital-specific rates. 3. Application of the Documentation and Coding Adjustment to the Puerto Rico-Specific Standardized Amount Puerto Rico hospitals are paid based on 75 percent of the national standardized amount and 25 percent of the Puerto Rico-specific standardized amount. As noted previously, the documentation and coding adjustment we adopted in the FY 2008 IPPS final rule with comment period relied upon our authority under section 1886(d)(3)(A)(vi) of the Act, which provides the authority to adjust ``the standardized amounts computed under this paragraph\'\' to eliminate the effect of changes in coding or classification that do not reflect real change in case-mix. Section 1886(d)(3)(A)(vi) of the Act applies to the national standardized amounts computed under section 1886(d)(3) of the Act, but does not apply to the Puerto Rico-specific standardized amount computed under section 1886(d)(9)(C) of the Act. In calculating the FY 2008 payment rates, we made an inadvertent error and applied the FY 2008 - 0.6 percent documentation and coding adjustment to the Puerto Rico- specific standardized amount, relying on our authority under section 1886(d)(3)(A)(vi) of the Act. We are currently in the process of developing a Federal Register notice to correct that error in the Puerto Rico-specific standardized amount for FY 2008 retroactive to October 1, 2007. While section 1886(d)(3)(A)(vi) of the Act is not applicable to the Puerto Rico-specific standardized amount, we believe that we have the authority to apply the documentation and coding adjustment to the Puerto Rico-specific standardized amount using our special exceptions and adjustment authority under section 1886(d)(5)(I)(i) of the Act. Similar to SCHs and MDHs that are paid based on the hospital-specific rate, discussed in section II.D.2. of this preamble, we believe that Puerto Rico hospitals that are paid based on the Puerto Rico-specific standardized amount should not have the potential to realize increased payments due to documentation and coding improvements that do not reflect real increases in patients\' severity of illness. Consistent with the approach described for SCHs and MDHs in section II.D.2. of the preamble of this proposed rule, for the FY 2010 rulemaking, we plan to examine our FY 2008 claims data for hospitals in Puerto Rico. If we find evidence of significant increases in case-mix for patients treated in these hospitals, we would consider proposing application of the documentation and coding adjustments to the FY 2010 Puerto Rico- specific standardized amount under our authority in section 1886(d)(5)(I)(i) of the Act. As noted previously, the documentation and coding adjustments established in the FY 2008 IPPS final rule with comment period are cumulative. Given the cumulative nature of the documentation and coding adjustments, if we were to propose to apply the documentation and coding adjustment to the FY 2010 Puerto Rico- specific standardized amount, it may involve applying the FY 2008 and FY 2009 documentation and coding adjustments (-1.5 percent combined) plus the FY 2010 documentation and coding adjustment, discussed in the FY 2008 IPPS final rule with comment period, to the FY 2010 Puerto Rico-specific standardized amount. 4. Potential Additional Payment Adjustments in FYs 2010 Through 2012 Section 7 of Pub. L.110-90 also provides for payment adjustments in FYs 2010 through 2012 based upon a retrospective evaluation of claims data from the implementation of the MS-DRG system. If, based on this retrospective evaluation, the Secretary finds that in FY 2008 and FY 2009, the actual amount of change in case-mix that does not reflect real change in underlying patient severity differs from the statutorily mandated documentation and coding adjustments implemented in those years, the law requires the Secretary to adjust payments for discharges occurring in FYs 2010 through 2012 to offset the estimated amount of increase or decrease in aggregate payments that occurred in FY 2008 and FY 2009 as a result of that difference, in addition to making an appropriate adjustment to the standardized amount under section 1886(d)(3)(A)(vi) of the Act. In order to implement these requirements of section 7 of Pub. L. 110-90, we are planning a thorough retrospective evaluation of our claims data. Results of this evaluation would be used by our actuaries to determine any necessary payment adjustments in FYs 2010 through 2012 to ensure the budget neutrality of the MS-DRG implementation for FY 2008 and FY 2009, as required by law. We are currently developing our analysis plans for this effort. We intend to measure and corroborate the extent of the overall national average changes in case-mix for FY 2008 and FY 2009. We expect part of this overall national average change would be attributable to underlying changes in actual patient severity and part would be attributable to documentation and coding improvements under the MS-DRG system. In order to separate the two effects, we plan to isolate the effect of shifts in cases among base DRGs from the effect of shifts in the types of cases within base DRGs. The shifts among base DRGs are the result of changes in principal diagnoses while the shifts within base DRGs are the result of changes in secondary diagnoses. Because we expect most of the documentation and coding improvements under the MS- DRG system will occur in the secondary diagnoses, the shifts among base DRGs are less likely to be the result of the MS-DRG system and the shifts within base DRGs are more likely to be the result of the MS-DRG system. We also anticipate evaluating data to identify the specific MS- DRGs and diagnoses that contributed significantly to the improved documentation and coding payment effect and to quantify their impact. This step would entail analysis of the secondary diagnoses driving the shifts in severity within specific base DRGs. While we believe that the data analysis plan described previously will produce an appropriate estimate of the extent of case-mix changes resulting from documentation and coding improvements, we may also decide, if feasible, to use historical data from our Hospital Payment Monitoring Program [[Page 23542]] (HPMP) to corroborate the within base DRG shift analysis. The HPMP is supported by the Medicare Clinical Data Abstraction Center (CDAC). From 1999 to 2007, the CDAC obtained medical records for a sample of discharges as part of our hospital monitoring activities. These data were collected on a random sample of between 30,000 to 50,000 hospital discharges per year. The historical CDAC data could be used to develop an upper bound estimate of the trend in real case-mix growth (that is, real change in underlying patient severity) prior to implementation of the MS-DRGs. We welcome public comments on our analysis plans, as well as suggestions on other possible approaches for conducting a retrospective analysis to identify the amount of case-mix changes that occurred in FY 2008 and FY 2009 that did not reflect real increases in patients\' severity of illness. Our analysis, findings, and any resulting proposals to adjust payments for discharges occurring in FYs 2010 through 2012 to offset the estimated amount of increase or decrease in aggregate payments that occurred in FY 2008 and FY 2009 will be discussed in future years\' rulemakings. E. Refinement of the MS-DRG Relative Weight Calculation 1. Background In the FY 2008 IPPS final rule with comment period (72 FR 47188), we continued to implement significant revisions to Medicare\'s inpatient hospital rates by basing relative weights on hospitals\' estimated costs rather than on charges. We continued our 3-year transition from charge- based relative weights to cost-based relative weights. Beginning in FY 2007, we implemented relative weights based on cost report data instead of based on charge information. We had initially proposed to develop cost-based relative weights using the hospital-specific relative value cost center (HSRVcc) methodology as recommended by MedPAC. However, after considering concerns raised in the public comments, we modified MedPAC\'s methodology to exclude the hospital-specific relative weight feature. Instead, we developed national CCRs based on distinct hospital departments and engaged a contractor to evaluate the HSRVcc methodology for future consideration. To mitigate payment instability due to the adoption of cost-based relative weights, we decided to transition cost- based weights over 3 years by blending them with charge-based weights beginning in FY 2007. In FY 2008, we continued our transition by blending the relative weights with one-third charge-based weights and two-thirds cost-based weights. Also, in FY 2008, we adopted severity-based MS-DRGs, which increased the number of DRGs from 538 to 745. Many commenters raised concerns as to how the transition from charge-based weights to cost- based weights would continue with the introduction of new MS-DRGs. We decided to implement a 2-year transition for the MS-DRGs to coincide with the remainder of the transition to cost-based relative weights. In FY 2008, 50 percent of the relative weight for each DRG was based on the CMS DRG relative weight and 50 percent was based on the MS-DRG relative weight. We refer readers to the FY 2007 IPPS final rule (71 FR 47882) for more detail on our final policy for calculating the cost- based DRG relative weights and to the FY 2008 IPPS final rule with comment period (72 FR 47199) for information on how we blended relative weights based on the CMS DRGs and MS-DRGs. As we transitioned to cost-based relative weights, some commenters raised concerns about potential bias in the weights due to ``charge compression,\'\' which is the practice of applying a higher percentage charge markup over costs to lower cost items and services, and a lower percentage charge markup over costs to higher cost items and services. As a result, the cost-based weights would undervalue high cost items and overvalue low cost items if a single CCR is applied to items of widely varying costs in the same cost center. To address this concern, in August 2006, we awarded a contract to RTI to study the effects of charge compression in calculating the relative weights and to consider methods to reduce the variation in the CCRs across services within cost centers. RTI issued an interim draft report in March 2007 which was posted on the CMS Web site with its findings on charge compression. In that report, RTI found that a number of factors contribute to charge compression and affect the accuracy of the relative weights. RTI found inconsistent matching of charges in the Medicare cost report and their corresponding charges in the MedPAR claims for certain cost centers. In addition, there was inconsistent reporting of costs and charges among hospitals. For example, some hospitals would report costs and charges for devices and medical supplies in the Medical Supplies Charged to Patients cost center, while other hospitals would report those costs and charges in their related ancillary departments such as Operating Room or Radiology. RTI also found evidence that certain revenue codes within the same cost center had significantly different markup rates. For example, within the Medicare Supplies Charged to Patients cost center, revenue codes for devices, implantables, and prosthetics had different markup rates than the other medical supplies in that cost center. RTI\'s findings demonstrated that charge compression exists in several CCRs, most notably in the Medical Supplies and Equipment CCR. RTI offered short-term, medium-term, and long-term recommendations to mitigate the effects of charge compression. RTI\'s short-term recommendations included expanding the distinct hospital CCRs to 19 by disaggregating the ``Emergency Room\'\' and ``Blood and Blood Products\'\' from the Other Services cost center and by estimating regression-based CCRs to disaggregate Medical Supplies, Drugs, and Radiology cost centers. RTI recommended, for the medium-term, to expand the MedPAR file to include separate fields that disaggregate several existing charge departments. In addition, RTI recommended improving hospital cost reporting instructions so that hospitals can properly report costs in the appropriate cost centers. RTI\'s long-term recommendations included adding new cost centers to the Medicare cost report, such as adding a ``Devices, Implants and Prosthetics\'\' line under ``Medical Supplies Charged to Patients\'\' and a ``CT Scanning and MRI\'\' subscripted line under ``Radiology-Diagnostics\'\'. Among RTI\'s short-term recommendations, for FY 2008, we expanded the number of distinct hospital department CCRs from 13 to 15 by disaggregating ``Emergency Room\'\' and ``Blood and Blood Products\'\' from the Other Services cost center as these lines already exist on the hospital cost report. Furthermore, in an effort to improve consistency between costs and their corresponding charges in the MedPAR file, we moved the costs for cases involving electroencephalography (EEG) from the Cardiology cost center to the Laboratory cost center group which corresponds with the EEG MedPAR claims categorized under the Laboratory charges. We also agreed with RTI\'s recommendations to revise the Medicare cost report and the MedPAR file as a long-term solution for charge compression. We stated that, in the upcoming year, we would consider additional lines to the cost report and additional revenue codes for the MedPAR file. We did not adopt RTI\'s short-term recommendation to create four [[Page 23543]] additional regression-based CCRs for several reasons, even though we had received comments in support of the regression-based CCRs as a means to immediately resolve the problem of charge compression, particularly within the Medical Supplies and Equipment CCR. We were concerned that RTI\'s analysis was limited to charges on hospital inpatient claims while typically hospital cost report CCRs combine both inpatient and outpatient services. Further, because both the IPPS and OPPS rely on cost-based weights, we preferred to introduce any methodological adjustments to both payment systems at the same time. We have since expanded RTI\'s analysis of charge compression to incorporate outpatient services. RTI has been evaluating the cost estimation process for the OPPS cost-based weights, including a reassessment of the regression-based CCR models using both outpatient and inpatient charge data. The RTI report was finalized at the conclusion of our proposed rule development process and is expected to be posted on the CMS Web site in the near future. We welcome comments on this report. A second reason that we did not implement regression-based CCRs at the time of the FY 2008 IPPS final rule with comment period was our inability to investigate how regression-based CCRs would interact with the implementation of MS-DRGs. We stated that we would consider the results of the second phase of the RAND study as we prepared for the FY 2009 IPPS rulemaking process. The purpose of the RAND study was to analyze how the relative weights would change if we were to adopt regression-based CCRs to address charge compression while simultaneously adopting an HSRV methodology using fully phased-in MS- DRGs. We had intended to include a detailed discussion of RAND\'s study in this FY 2009 IPPS proposed rule. However, due to some delays in releasing identifiable data to the contractor under revised data security rules, the report on this second stage of RAND\'s analysis was not completed in time for the development of this proposed rule. Therefore, we continue to have the same concerns with respect to uncertainty about how regression-based CCRs would interact with the MS- DRGs or an HSRV methodology. Therefore, we are not proposing to adopt the regression-based CCRs or an HSRV methodology in this FY 2009 IPPS proposed rule. Nevertheless, we welcome public comments on our proposals not to adopt regression-based CCRs or an HSRV methodology at this time or in the future. The RAND report on regression-based CCRs and the HSRV methodology was finalized at the conclusion of our proposed rule development process and is expected to be posted on the CMS Web site in the near future. Although we are unable to include a discussion of the results of the RAND study in this proposed rule, we welcome public comment on the report. Finally, we received public comments on the FY 2008 IPPS proposed rule raising concerns on the accuracy of using regression-based CCR estimates to determine the relative weights rather than the Medicare cost report. Commenters noted that regression-based CCRs would not fix the underlying mismatch of hospital reporting of costs and charges. Instead, the commenters suggested that the impact of charge compression might be mitigated through an educational initiative that would encourage hospitals to improve their cost reporting. Commenters recommended that hospitals be educated to report costs and charges in a way that is consistent with how charges are grouped in the MedPAR file. In an effort to achieve this goal, hospital associations have launched an educational campaign to encourage consistent reporting, which would result in consistent groupings of the cost centers used to establish the cost-based relative weights. The commenters requested that CMS communicate to the fiscal intermediaries/MACs that such action is appropriate. In the FY 2008 IPPS final rule with comment period, we stated that we were supportive of the educational initiative of the industry, and we encouraged hospitals to report costs and charges consistently with how the data are used to determine relative weights (72 FR 47196). We would also like to affirm that the longstanding Medicare principles of cost apportionment at 42 CFR 413.53 convey that, under the departmental method of apportionment, the cost of each ancillary department is to be apportioned separately rather than being combined with another ancillary department (for example, combining the cost of Medical Supplies Charged to Patients with the costs of Operating Room or any other ancillary cost center. (We note that, effective for cost reporting periods starting on or after January 1, 1979, the departmental method of apportionment replaced the combination method of apportionment where all the ancillary departments were apportioned in the aggregate (Section 2200.3 of the Provider Reimbursement Manual (PRM), Part I).) Furthermore, longstanding Medicare cost reporting policy has been that hospitals must include the cost and charges of separately ``chargeable medical supplies\'\' in the Medical Supplies Charged to Patients cost center (line 55 of Worksheet A), rather than in the Operating Room, Emergency Room, or other ancillary cost centers. Routine services, which can include ``minor medical and surgical supplies\'\' (Section 2202.6 of the PRM, Part 1), and items for which a separate charge is not customarily made, may be directly assigned through the hospital\'s accounting system to the department in which they were used, or they may be included in the Central Services and Supply cost center (line 15 of Worksheet A). Conversely, the separately chargeable medical supplies should be assigned to the Medical Supplies Charged to Patients cost center on line 55. We note that not only is accurate cost reporting important for IPPS hospitals to ensure that accurate relative weights are computed, but hospitals that are still paid on the basis of cost, such as CAHs and cancer hospitals, and SCHs and MDHs must adhere to Medicare cost reporting principles as well. The CY 2008 OPPS/ASC final rule with comment period (72 FR 66601) also discussed the issue of charge compression and regression-based CCRs, and noted that RTI is currently evaluating the cost estimation process underpinning the OPPS cost-based weights, including a reassessment of the regression models using both outpatient and inpatient charges, rather than inpatient charges only. In responding to comments in the CY 2008 OPPS/ASC final rule with comment period, we emphasized that we ``fully support\'\' the educational initiatives of the industry and that we would ``examine whether the educational activities being undertaken by the hospital community to improve cost reporting accuracy under the IPPS would help to mitigate charge compression under the OPPS, either as an adjunct to the application of regression-based CCRs or in lieu of such an adjustment\'\' (72 FR 66601). However, as we stated in the FY 2008 IPPS final rule with comment period that we would consider the results of the RAND study before considering whether to adopt regression-based CCRs, in the CY 2008 OPPS/ASC final rule with comment period, we stated that we would determine whether refinements should be proposed, after reviewing the results of the RTI study. On February 29, 2008, we issued Transmittal 321, Change Request 5928, to inform the fiscal intermediaries/ [[Page 23544]] MACs of the hospital associations\' initiative to encourage hospitals to modify their cost reporting practices with respect to costs and charges in a manner that is consistent with how charges are grouped in the MedPAR file. We noted that the hospital cost reports submitted for FY 2008 may have costs and charges grouped differently than in prior years, which is allowable as long as the costs and charges are properly matched and the Medicare cost reporting instructions are followed. Furthermore, we recommended that fiscal intermediaries/MACs remain vigilant to ensure that the costs of items and services are not moved from one cost center to another without moving their corresponding charges. Due to a time lag in submittal of cost reporting data, the impact of changes in providers\' cost reporting practices occurring during FY 2008 would be reflected in the FY 2011 IPPS relative weights. 2. Refining the Medicare Cost Report In developing this FY 2009 proposed rule, we considered whether there were concrete steps we could take to mitigate the bias introduced by charge compression in both the IPPS and OPPS relative weights in a way that balance hospitals\' desire to focus on improving the cost reporting process through educational initiatives with device industry interest in adopting regression-adjusted CCRs. Although RTI recommended adopting regression-based CCRs, particularly for medical supplies and devices, as a short-term solution to address charge compression, RTI also recommended refinements to the cost report as a long-term solution. RTI\'s draft interim March 2007 report discussed a number of options that could improve the accuracy and precision of the CCRs currently being derived from the Medicare cost report and also reduce the need for statistically-based adjustments. As mentioned in the FY 2008 IPPS final rule with comment period (72 FR 47193), we believe that RTI and many of the public commenters on the FY 2008 IPPS proposed rule concluded that, ultimately, improved and more precise cost reporting is the best way to minimize charge compression and improve the accuracy of cost weights. Therefore, in this proposed rule, we are proposing to begin making cost report changes geared to improving the accuracy of the IPPS and OPPS relative weights. However, we also received comments last year asking that we proceed cautiously with changing the Medicare cost report to avoid unintended consequences for hospitals that are paid on a cost basis (such as CAHs and, to some extent, SCHs and MDHs), and to consider the administrative burden associated with adapting to new cost reporting forms and instructions. Accordingly, we are proposing to focus at this time on the CCR for Medical Supplies and Equipment because RTI found that the largest impact on the relative weights could result from correcting charge compression for devices and implants. When examining markup differences within the Medical Supplies Charged to Patients cost center, RTI found that its ``regression results provide solid evidence that if there were distinct cost centers for items, cost ratios for devices and implants would average about 17 points higher than the ratios for other medical supplies\'\' (January 2007 RTI report, page 59). This suggests that much of the charge compression within the Medical Supplies CCR results from inclusion of medical devices that have significantly different markups than the other supplies in that CCR. Furthermore, in the FY 2007 final rule and FY 2008 IPPS final rule with comment period, the Medical Supplies and Equipment CCR received significant attention by the public commenters. Although we are proposing to make improvements to lessen the effects of charge compression only on the Medical Supplies and Equipment CCR as a first step, we are inviting public comments as to whether to make other changes to the Medicare cost report to refine other CCRs. In addition, we are open to making further refinements to other CCRs in the future. Therefore, we are proposing at this time to add only one cost center to the cost report, such that, in general, the costs and charges for relatively inexpensive medical supplies would be reported separately from the costs and charges of more expensive devices (such as pacemakers and other implantable devices). We will consider public comments submitted on this proposed rule for purposes of both the IPPS and the OPPS relative weights and, by extension, the calculation of the ambulatory surgical center (ASC) payment rates. Under the IPPS for FY 2007 and FY 2008, the aggregate CCR for supplies and equipment was computed based on line 55 for Medical Supplies Charged to Patients and lines 66 and 67 for DME Rented and DME Sold, respectively. To compute the 15 national CCRs used in developing the cost-based weights under the IPPS (explained in more detail under section II.H. of the preamble of this proposed rule), we take the costs and charges for the 15 cost groups from Worksheet C, Part I of the Medicare cost report for all hospital patients and multiply each of these 15 CCRs by the Medicare charges on Worksheet D-4 for those same cost centers to impute the Medicare cost for each of the 15 cost groups. Under this proposal, the goal would be to split the current CCR for Medical Supplies and Equipment into one CCR for medical supplies, and another CCR for devices and DME Rented and DME Sold. In considering how to instruct hospitals on what to report in the cost center for supplies and the cost center for devices, we looked at the existing criteria for what type of device qualifies for payment as a transitional pass-through device category in the OPPS. (There are no such existing criteria for devices under the IPPS.) The provisions of the regulations under Sec. 419.66(b) state that for a medical device to be eligible for pass-through payment under the OPPS, the medical device must meet the following criteria: a. If required by the FDA, the device must have received FDA approval or clearance (except for a device that has received an FDA investigational device exemption (IDE) and has been classified as a Category B device by the FDA in accordance with Sec. Sec. 405.203 through 405.207 and 405.211 through 405.215 of the regulations) or another appropriate FDA exemption. b. The device is determined to be reasonable and necessary for the diagnosis or treatment of an illness or injury or to improve the functioning of a malformed body part (as required by section 1862(a)(1)(A) of the Act). c. The device is an integral and subordinate part of the service furnished, is used for one patient only, comes in contact with human tissues, and is surgically implant