Medicare Program; Inpatient Rehabilitation Facility Prospective Payment System for FY 2006, 47880-48006 [05-15419]

Agencies

• Centers for Medicare & Medicaid Services
• DEPARTMENT OF HEALTH AND HUMAN SERVICES

[Federal Register Volume 70, Number 156 (Monday, August 15, 2005)]
[Rules and Regulations]
[Pages 47880-48006]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-15419]



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Part II





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Part 412



Medicare Program; Inpatient Rehabilitation Facility Prospective Payment 
System for FY 2006; Final Rule

Federal Register / Vol. 70, No. 156 / Monday, August 15, 2005 / Rules 
and Regulations

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 412

[CMS-1290-F]
RIN 0938-AN43


Medicare Program; Inpatient Rehabilitation Facility Prospective 
Payment System for FY 2006

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

ACTION: Final rule.

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SUMMARY: This final rule will update the prospective payment rates for 
inpatient rehabilitation facilities for Federal fiscal year 2006 as 
required under section 1886(j)(3)(C) of the Social Security Act (the 
Act). Section 1886(j)(5) of the Act requires the Secretary to publish 
the classification and weighting factors for the inpatient 
rehabilitation facilities case-mix groups and a description of the 
methodology and data used in computing the prospective payment rates 
for that fiscal year.
    In addition, we are implementing new policies and are changing 
existing policies regarding the prospective payment system within the 
authority granted under section 1886(j) of the Act.

DATES: These regulations are effective October 1, 2005. The updated IRF 
prospective payment rates are applicable for discharges on or after 
October 1, 2005 and on or before September 30, 2006 (FY 2006).

FOR FURTHER INFORMATION CONTACT: Pete Diaz, (410) 786-1235. Susanne 
Seagrave, (410) 786-0044. Mollie Knight, (410) 786-7948 for information 
regarding the market basket and labor-related share. August Nemec, 
(410) 786-0612 for information regarding the tier comorbidities. Zinnia 
Ng, (410) 786-4587 for information regarding the wage index and Core-
Based Statistical Areas (CBSAs).

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
    A. General Overview of the Current Inpatient Rehabilitation 
Facility Prospective Payment System (IRF PPS)
    B. Requirements for Updating the Prospective Payment Rates for 
IRFs
    C. Operational Overview of the Current IRF PPS
    D. Summary of the FY 2006 Proposed Update to the IRF PPS
II. Provisions of the Proposed Regulations
III. Analysis of and Responses to Public Comments
IV. Research to Support Refinements of the Current IRF PPS
V. Refinements to the Patient Classification System
    A. Changes to the IRF Classification System
    1. Development of the IRF Classification System
    2. Description and Methodology Used To Develop the IRF 
Classification System in the August 7, 2001 Final Rule
    a. Rehabilitation Impairment Categories
    b. Functional Status Measures and Age
    c. Comorbidities
    d. Development of CMG Relative Weights
    e. Overview of Development of the CMG Relative Weights
    B. Changes to the Existing List of Tier Comorbidities
    1. Changes to Remove Codes That Are Not Positively Related to 
Treatment Costs
    2. Changes to Move Dialysis to Tier One
    3. Changes to Move Comorbidity Codes Based on Their Marginal 
Cost
    C. Changes to the CMGs
    1. Changes for Updating the CMGs
    2. Use of a Weighted Motor Score Index and Correction to the 
Treatment of Unobserved Transfer to Toilet Values
    3. Changes for Updating the Relative Weights
VI. FY 2006 Federal Prospective Payment Rates
    A. Reduction of the Standard Payment Amount to Account for 
Coding Changes
    B. Adjustments to Determine the FY 2006 Standard Payment 
Conversion Factor
    1. Market Basket Used for IRF Market Basket Index
    a. Overview of the RPL Market Basket
    b. Methodology for Operating Portion of the RPL Market Basket
    c. Methodology for Capital Proportion of the RPL Market Basket
    d. Labor-Related Share
    2. Area Wage Adjustment
    a. Revisions of the IRF PPS Geographic Classification
    b. Current IRF PPS Labor Market Areas Based on MSAs
    c. Core-Based Statistical Areas (CBSAs)
    d. Revisions of the IRF PPS Labor Market Areas
    i. New England MSAs
    ii. Metropolitan Divisions
    iii. Micropolitan Areas
    e. Implementation of the CBSA-Based Labor Market Areas
    f. Wage Index Data
    3. Teaching Status Adjustment
    4. Adjustment for Rural Location
    5. Adjustment for Disproportionate Share of Low-Income Patients
    6. Update to the Outlier Threshold Amount
    7. Budget Neutrality Factor Methodology for Fiscal Year 2006
    8. Description of the Methodology Used to Implement the Changes 
in a Budget Neutral Manner
    9. Description of the IRF Standard Payment Conversion Factor for 
Fiscal Year 2006
    10. Example of the Methodology for Adjusting the Federal 
Prospective Payment Rates
VII. Quality of Care in IRFs
VIII. Miscellaneous Comments Within the Scope of the Proposed Rule
IX. Miscellaneous Comments Outside the Scope of the Proposed Rule
X. Provisions of the Final Regulations
XI. Collection of Information Requirements
XII. Regulatory Impact Analysis

Acronyms

    Because of the many terms to which we refer by acronym in this 
final rule, we are listing the acronyms used and their corresponding 
terms in alphabetical order below.

ADC Average Daily Census
AHA American Hospital Association
AMI Acute Myocardial Infarction
BBA Balanced Budget Act of 1997 (BBA), 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
CART Classification and Regression Trees
CBSA Core-Based Statistical Areas
CCR Cost-to-charge ratio
CMGs Case-Mix Groups
CMI Case Mix Index
CMSA Consolidated Metropolitan Statistical Area
CPI Consumer Price Index
DSH Disproportionate Share Hospital
ECI Employment Cost Index
FI Fiscal Intermediary
FIM Functional Independence Measure (FIMTM is a 
registered trademark of UDSMR)
FIM-FRGs Functional Independence Measures-Function Related Groups
FRG Function Related Group
FTE Full-time equivalent
FY Federal Fiscal Year
GME Graduate Medical Education
HCRIS Healthcare Cost Report Information System
HIPAA Health Insurance Portability and Accountability Act
HHA Home Health Agency
IME Indirect Medical Education
IFMC Iowa Foundation for Medical Care
IPF Inpatient Psychiatric Facility
IPPS Inpatient Prospective Payment System
IRF Inpatient Rehabilitation Facility
IRF-PAI Inpatient Rehabilitation Facility-Patient Assessment 
Instrument
IRF-PPS Inpatient Rehabilitation Facility-Prospective Payment System
IRVEN Inpatient Rehabilitation Validation and Entry
LIP Low-income percentage
MEDPAR Medicare Provider Analysis and Review
MSA Metropolitan Statistical Area
NECMA New England County Metropolitan Area
NOS Not Otherwise Specified
NTIS National Technical Information Service
OMB Office of Management and Budget
OSCAR Online Survey, Certification, and Reporting
PAI Patient Assessment Instrument
PLI Professional Liability Insurance

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PMSA Primary Metropolitan Statistical Area
PPI Producer Price Index
PPS Prospective Payment System
RIC Rehabilitation Impairment Category
RPL Rehabilitation Hospital, Psychiatric Hospital, and Long-Term 
Care Hospital Market Basket
TEFRA Tax Equity and Fiscal Responsibility Act
TEP Technical Expert Panel

I. Background

    We received approximately 55 timely items of correspondence on the 
Inpatient Rehabilitation Facility Prospective Payment System for FY 
2006 proposed rule (70 FR 30188). Summaries of the public comments and 
our responses to those comments are set forth below under the 
appropriate section heading of this final rule.

A. General Overview of the Current Inpatient Rehabilitation Facility 
Prospective Payment System (IRF PPS)

    Section 4421 of the Balanced Budget Act of 1997 (BBA) (Pub. L. 105-
33), as amended by section 125 of the Medicare, Medicaid, and SCHIP 
[State Children's Health Insurance Program] Balanced Budget Refinement 
Act of 1999 (BBRA) (Pub. L. 106-113), and by section 305 of the 
Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act 
of 2000 (BIPA) (Pub. L. 106-554), provides for the implementation of a 
per discharge prospective payment system (PPS), through section 1886(j) 
of the Social Security Act (the Act), for inpatient rehabilitation 
hospitals and inpatient rehabilitation units of a hospital (hereinafter 
referred to as IRFs).
    Payments under the IRF PPS encompass inpatient operating and 
capital costs of furnishing covered rehabilitation services (that is, 
routine, ancillary, and capital costs) but not costs of approved 
educational activities, bad debts, and other services or items outside 
the scope of the IRF PPS. Although a complete discussion of the IRF PPS 
provisions appears in the August 7, 2001 final rule, we are providing 
below a general description of the IRF PPS.
    The IRF PPS, as described in the August 7, 2001 final rule, uses 
Federal prospective payment rates across 100 distinct case-mix groups 
(CMGs). Ninety-five CMGs were constructed using rehabilitation 
impairment categories, functional status (both motor and cognitive), 
and age (in some cases, cognitive status and age may not be a factor in 
defining a CMG). Five special CMGs were constructed to account for very 
short stays and for patients who expire in the IRF.
    For each of the CMGs, we developed relative weighting factors to 
account for a patient's clinical characteristics and expected resource 
needs. Thus, the weighting factors account for the relative difference 
in resource use across all CMGs. Within each CMG, the weighting factors 
were ``tiered'' based on the estimated effects that certain 
comorbidities have on resource use.
    The Federal PPS rates were established using a standardized payment 
amount (previously referred to as the budget-neutral conversion 
factor). The standardized payment amount was previously called the 
budget neutral conversion factor because it reflected a budget 
neutrality adjustment for FYs 2001 and 2002, as described in Sec.  
412.624(d)(2) of our regulations. However, the statute requires a 
budget neutrality adjustment only for FYs 2001 and 2002. Accordingly, 
for subsequent years we believe it is more consistent with the statute 
to refer to the standardized payment as the standardized payment 
conversion factor, rather than refer to it as a budget neutral 
conversion factor (see 68 FR 45674, 45684 and 45685). Therefore, we 
will refer to the standardized payment amount in this final rule as the 
standard payment conversion factor.
    For each of the tiers within a CMG, the relative weighting factors 
were applied to the standard payment conversion factor to compute the 
unadjusted Federal prospective payment rates. Under the current system, 
adjustments that accounted for geographic variations in wages (wage 
index), the percentage of low-income patients, and location in a rural 
area were applied to the IRF's unadjusted Federal prospective payment 
rates. In addition, adjustments were made to account for the early 
transfer of a patient, interrupted stays, and high cost outliers.
    Lastly, the IRF's final prospective payment amount was determined 
under the transition methodology prescribed in section 1886(j) of the 
Act. Specifically, for cost reporting periods that began on or after 
January 1, 2002 and before October 1, 2002, section 1886(j)(1) of the 
Act and as specified in Sec.  412.626 provide that IRFs transitioning 
into the PPS would receive a ``blended payment.'' For cost reporting 
periods that began on or after January 1, 2002 and before October 1, 
2002, these blended payments consisted of 66\2/3\ percent of the 
Federal IRF PPS rate and 33\1/3\ percent of the payment that the IRF 
would have been paid had the IRF PPS not been implemented. However, 
during the transition period, an IRF with a cost reporting period 
beginning on or after January 1, 2002 and before October 1, 2002 could 
have elected to bypass this blended payment and be paid 100 percent of 
the Federal IRF PPS rate. For cost reporting periods beginning on or 
after October 1, 2002 (FY 2003), the transition methodology expired, 
and payments for all IRFs consist of 100 percent of the Federal IRF PPS 
rate.
    We established a CMS Web site that contains useful information 
regarding the IRF PPS. The Web site URL is https://www.cms.hhs.gov/
providers/irfpps/default.asp and may be accessed to download or view 
publications, software, and other information pertinent to the IRF PPS.
B. Requirements for Updating the Prospective Payment Rates for IRFs
    On August 7, 2001, we published a final rule entitled ``Medicare 
Program; Prospective Payment System for Inpatient Rehabilitation 
Facilities'' in the Federal Register (66 FR at 41316), that established 
a PPS for IRFs as authorized under section 1886(j) of the Act and 
codified at subpart P of part 412 of the Medicare regulations. In the 
August 7, 2001 final rule, we set forth the per discharge Federal 
prospective payment rates for fiscal year (FY) 2002 that provided 
payment for inpatient operating and capital costs of furnishing covered 
rehabilitation services (that is, routine, ancillary, and capital 
costs) but not costs of approved educational activities, bad debts, and 
other services or items that are outside the scope of the IRF PPS. The 
provisions of the August 7, 2001 final rule were effective for cost 
reporting periods beginning on or after January 1, 2002. On July 1, 
2002, we published a correcting amendment to the August 7, 2001 final 
rule in the Federal Register (67 FR at 44073). Any references to the 
August 7, 2001 final rule in this final rule include the provisions 
effective in the correcting amendment.
    Section 1886(j)(5) of the Act and Sec.  412.628 of the regulations 
require the Secretary to publish the classifications and weighting 
factors for the IRF CMGs and a description of the methodology and data 
used in computing the prospective payment rates for the upcoming FY. On 
August 1, 2002, we published a notice in the Federal Register (67 FR at 
49928) to update the IRF Federal prospective payment rates from FY 2002 
to FY 2003 using the methodology as described in Sec.  412.624. As 
stated in the August 1, 2002 notice, we used the same classifications 
and weighting factors for the IRF CMGs that were set forth in the 
August 7, 2001 final rule to update the IRF Federal prospective payment 
rates from FY 2002

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to FY 2003. We have continued to update the prospective payment rates 
each year in accordance with the methodology set forth in the August 7, 
2001 final rule.
    We published a proposed rule in the Federal Register (70 FR 30189) 
to update the IRF Federal prospective payment rates from FY 2005 to FY 
2006, and we proposed revisions to the methodology described in Sec.  
412.624.

C. Operational Overview of the Current IRF PPS

    As described in the August 7, 2001 final rule, upon the admission 
and discharge of a Medicare Part A fee-for-service patient, the IRF is 
required to complete the appropriate sections of a patient assessment 
instrument, the Inpatient Rehabilitation Facility-Patient Assessment 
Instrument (IRF-PAI). All required data must be electronically encoded 
into the IRF-PAI software product. Generally, the software product 
includes patient grouping programming called the GROUPER software. The 
GROUPER software uses specific Patient Assessment Instrument (PAI) data 
elements to classify (or group) the patient into a distinct CMG and 
account for the existence of any relevant comorbidities.
    The GROUPER software produces a 5-digit CMG number. The first digit 
is an alpha-character that indicates the comorbidity tier. The last 4 
digits represent the distinct CMG number. (Free downloads of the 
Inpatient Rehabilitation Validation and Entry (IRVEN) software product, 
including the GROUPER software, are available at the CMS Web site at 
https://www.cms.hhs.gov/providers/irfpps/default.asp).
    Once the patient is discharged, the IRF completes the Medicare 
claim (UB-92 or its equivalent) using an alphanumeric CMG code and 
sends it to the appropriate Medicare fiscal intermediary (FI). (Claims 
submitted to Medicare must comply with both the Administrative 
Simplification Compliance Act (ASCA), Pub. L. 107-105, and the Health 
Insurance Portability and Accountability Act of 1996 (HIPAA), Pub. L. 
104-191. Section 3 of ASCA requires the Medicare Program, subject to 
subsection (H), to deny payment under Part A or Part B for any expenses 
for items or services ``for which a claim is submitted other than in an 
electronic form specified by the Secretary.'' Subsection (h) provides 
that the Secretary shall waive such denial in two types of cases and 
may also waive such denial ``in such unusual cases as the Secretary 
finds appropriate.'' See also, 68 FR 48805 (August 15, 2003). Section 3 
of ASCA operates in the context of the Administrative Simplification 
provisions of HIPAA, which include, among others, the transactions and 
code sets standards requirements codified as 45 CFR part 160 and 162, 
subparts A and I through R (generally known as the Transactions Rule). 
The Transactions Rule requires covered entities, including covered 
providers, to conduct covered electronic transactions according to the 
applicable transaction standards. See the program claim memoranda 
issued and published by CMS at www.cms.hhs.gov/providers/edi/
default.asp (https://www.cms.hhs.gov/provider/edi/default.asp) and 
listed in the addenda to the Medicare Intermediary Manual, Part 3, 
section 3600. Instructions for the limited number of claims submitted 
to Medicare on paper are located in section 3604 of Part 3 of the 
Medicare Intermediary Manual.
    The Medicare Fiscal Intermediary (FI) processes the claim through 
its software system. This software system includes pricing programming 
called the PRICER software. The PRICER software uses the CMG code, 
along with other specific claim data elements and provider-specific 
data, to adjust the IRF's prospective payment for interrupted stays, 
transfers, short stays, and deaths and then applies the applicable 
adjustments to account for the IRF's wage index, percentage of low-
income patients, rural location, and outlier payments.

D. Summary of the FY 2006 Proposed Update to the IRF PPS

    In the FY 2006 proposed rule (70 FR 30188), we proposed a number of 
refinements to the IRF PPS case-mix classification system (the CMGs and 
the corresponding relative weights) and the case-level and facility-
level adjustments. The refinements that we proposed were based on 
analyses by RAND using calendar year 2002 and FY 2003 data.
    Several new developments warranted proposing these refinements, 
including--(1) The availability of more recent 2002 and 2003 data; (2) 
better coding of comorbidities and patient severity; (3) more complete 
data; (4) new data sources for imputing missing values; and (5) 
improved statistical approaches.
    Our proposals included the following key changes:
    The FY 2006 IRF PPS proposed rule (70 FR 30188, 30234 through 
30241) included a proposal to adopt OMB's Core Based Statistical Area 
(CBSA) market area definitions in a budget neutral manner. This 
geographic adjustment is made using a 1-year lag of the pre-
reclassification hospital wage index (FY 2001 hospital wage data).
    The FY 2006 proposed rule (70 FR 30188, 30222) also included a 
proposal to implement a payment adjustment to account for changes in 
coding. We proposed to reduce the standard payment amount by 1.9 
percent to account for changes in coding following implementation of 
the IRF PPS. The analysis conducted by CMS's contractor found that the 
real change in the case-mix was between negative 2.4 percent and 
positive 1.5 percent, with the rest of the change (between 1.9 percent 
and 5.8 percent) attributable to coding changes. CMS proposed to reduce 
the standard payment amount by the lowest of these estimates.
    In addition, in the FY 2006 proposed rule (70 FR 30188), we 
proposed modifications to the case mix groups, tier comorbidities, and 
relative weights. The proposed rule included a number of adjustments to 
the IRF classification system that are designed to improve the system's 
ability to predict IRF costs. The new data indicate that moving or 
eliminating some comorbidity codes from the tiers, redefining the case 
mix groups, and other minor changes to the system could improve the 
ability of the classification system to ensure that Medicare payments 
to IRFs continue to be aligned with the costs of care.
    In addition, the FY 2006 IRF PPS proposed rule (70 FR 30188, 30241) 
contained a proposal to implement a new teaching status adjustment for 
IRFs, similar to the one recently adopted for inpatient psychiatric 
facilities. We proposed to implement the teaching status adjustment in 
a budget neutral manner.
    The FY 2006 IRF PPS proposed rule (70 FR 30188, 30222) also 
contained a proposal to revise the market basket. We proposed to use a 
new market basket reflecting the operating and capital cost structures 
for rehabilitation, psychiatric, and long term care hospitals to update 
IRF payment rates. The proposed new market basket excludes cancer 
hospitals and children's hospitals. For the FY 2006 proposed rule (70 
FR 30188), we proposed a market basket increase for FY 2006 of 3.1 
percent.
    In the FY 2006 proposed rule (70 FR 30188, 30244 through 30246), we 
also proposed to update the rural adjustment (from 19.1 percent to 24.1 
percent), the low-income patient adjustment (from an exponent of 0.484 
to an exponent of 0.636), and the outlier threshold amount (from 
$11,211 to $4,911). We proposed to implement the changes to the rural 
and low-income percentage updates in a budget neutral manner.

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    Lastly, in the FY 2006 proposed rule (70 FR 30188), we estimated 
that the proposed changes would increase costs to the Medicare program 
for IRF services in FY 2006 by $180 million over FY 2005 levels. The 
estimated increased cost to the Medicare program was due to the 
estimated IRF market basket of 3.1 percent, the 1.9 percent reduction 
to the standard payment amount to account for changes in coding that 
affect total estimated aggregate payments, and the update to the 
outlier threshold amount. We proposed to make the changes to the IRF 
labor-related share and the wage indices, the case mix groups, tier 
comorbidities, and relative weights, the new IME adjustment, the 
updated rural adjustment, and the updated LIP adjustment in a budget 
neutral manner. Thus, these proposed changes would have no overall 
effect on estimated costs to the Medicare program.

II. Provisions of the Proposed Regulations

    In the FY 2006 proposed update to the IRF PPS (70 FR 30188), 
hereinafter referred to as the FY 2006 proposed rule, we proposed to 
make revisions to the regulations to implement the proposed PPS for 
IRFs for FY 2006 and subsequent fiscal years. Specifically, we proposed 
to make conforming changes in 42 CFR part 412. These proposed revisions 
and others are discussed in detail below.

A. Section 412.602 Definitions

    In Sec.  412.602, we proposed to revise the definitions of ``Rural 
area'' and ``Urban area'' to read as follows:
    Rural area means: For cost-reporting periods beginning on or after 
January 1, 2002, with respect to discharges occurring during the period 
covered by such cost reports but before October 1, 2005, an area as 
defined in Sec.  412.62(f)(1)(iii). For discharges occurring on or 
after October 1, 2005, rural area means an area as defined in Sec.  
412.64(b)(1)(ii)(C).
    Urban area means: For cost-reporting periods beginning on or after 
January 1, 2002, with respect to discharges occurring during the period 
covered by such cost reports but before October 1, 2005, an area as 
defined in Sec.  412.62(f)(1)(ii). For discharges occurring on or after 
October 1, 2005, urban area means an area as defined in Sec.  
412.64(b)(1)(ii)(A) and Sec.  412.64(b)(1)(ii)(B).

B. Section 412.622 Basis of Payment

    In this section, we proposed to correct the cross references in 
paragraphs (b)(1) and (b)(2)(i). In paragraph (b)(1), we proposed to 
remove the cross references ``Sec.  413.85 and Sec.  413.86 of this 
chapter'' and add in their place ``Sec.  413.75 and Sec.  413.85 of 
this chapter.'' In paragraph (b)(2)(i), we proposed to remove the cross 
reference ``Sec.  413.80 of this chapter'' and add in its place ``Sec.  
413.89 of this chapter.''

C. Section 412.624 Methodology for Calculating the Federal Prospective 
Payment Rates

    In this section, we proposed to make the following revisions:
     In paragraph (d)(1), remove the cross reference to 
``paragraph (e)(4)'' and add in its place ``paragraph (e)(5).''
     Add a new paragraph (d)(4).
     Redesignate paragraphs (e)(4) and (e)(5) as paragraphs 
(e)(5) and (e)(6).
     Add a new paragraph (e)(4).
     Revise newly redesignated paragraph (e)(5).
     Revise newly redesignated paragraph (e)(6).
     Add a new paragraph (e)(7).
     In paragraph (f)(2)(v), remove the cross references to 
``paragraphs (e)(1), (e)(2), and (e)(3) of this section'' and add in 
their place ``paragraphs (e)(2), (e)(3), (e)(4), and (e)(7) of this 
section.''

D. Additional Changes

    We also proposed the following changes:
     Reduce the standard payment amount by 1.9 percent to 
account for coding changes.
     Revise the comorbidity tiers and CMGs.
     Use a weighted motor score index in assigning patients to 
CMGs.
     Update the relative weights.
     Update payments for rehabilitation facilities using a 
market basket reflecting the operating and capital cost structures for 
the RPL market basket.
     Provide the weights and proxies to use for the FY 2002-
based RPL market basket.
     Indicate the methodology for the capital portion of the 
RPL market basket.
     Adopt the new geographic labor market area definitions as 
specified in Sec.  412.64(b)(1)(ii)(A)-(C).
     Use the New England MSAs as determined under the proposed 
new CBSA-based labor market area definitions.
     Implement a budget neutral 3 year hold harmless policy for 
FY 2005 rural IRFs redesignated as urban in FY 2006.
     Use FY 2001 acute care hospital wage data in computing the 
FY 2006 IRF PPS payment rates.
     Implement a teaching status adjustment.
     Update the formulas used to compute the rural and the LIP 
adjustments to IRF payments.
     Update the outlier threshold amount to maintain total 
estimated outlier payments at 3 percent of total estimated payments.
     Revise the methodology for computing the standard payment 
conversion factor (for FY 2006 only) to make the CMG and tier changes, 
the teaching status adjustment, and the updates to the rural and LIP 
adjustments in a budget neutral manner.

III. Analysis of and Responses to Public Comments

    As stated above, we received approximately 55 timely items of 
correspondence containing multiple comments on the FY 2006 proposed 
rule (70 FR 30188) from providers, health industry organizations, the 
Medicare Payment Advisory Commission, and others. In general, 
commenters expressed some concerns about our proposals in light of 
other changes occurring in the IRF PPS at this time and suggested that 
we wait to implement the proposals until other recent IRF policy 
changes are fully implemented. However, many commenters supported the 
proposed changes to the facility-level adjustments. Summaries of the 
public comments received on the proposed provisions and our responses 
to those comments are provided in the appropriate sections of the 
preamble of this final rule.

IV. Research To Support Refinements of the Current IRF PPS

    As described in the August 7, 2001 final rule, we contracted with 
the RAND Corporation to analyze IRF data to support our efforts in 
developing the CMG patient classification system and the IRF PPS. Since 
then, we have continued our contract with RAND to support us in 
developing potential refinements to the classification system and the 
PPS. RAND has also developed a system to monitor the effects of the IRF 
PPS on patients' access to IRF care and other post-acute care services.

1. History of RAND's Research on the IRF PPS

    In 1995, RAND began extensive research, sponsored by us, on the 
development of a per-discharge based PPS using a patient classification 
system known as Functional Independence Measures--Function Related 
Groups (FIM-FRGs) for IRFs. The results of RAND's earliest research, 
using 1994 data, were released in September 1997 and are contained in 
two reports available through the National Technical Information 
Service (NTIS). The reports are: Classification System

[[Page 47884]]

for Inpatient Rehabilitation Patients--A Review and Proposed Revisions 
to the Function Independence Measure--Function Related Groups, NTIS 
order number PB98-105992INZ, and Prospective Payment System for 
Inpatient Rehabilitation, NTIS order number PB98-106024INZ.
    In July 1999, we contracted with RAND to update its earlier 
research. The update included an analysis of Functional Independence 
Measure (FIM) data, the Function Related Groups (FRGs), and the model 
rehabilitation PPS using 1996 and 1997 data. The purpose of updating 
the earlier research was to develop the underlying data necessary to 
support the Medicare IRF PPS based on CMGs for the November 3, 2000 
proposed rule (65 FR at 66313). RAND expanded the scope of its earlier 
research to include the examination of several payment elements, such 
as comorbidities, facility-level adjustments, and implementation 
issues, including evaluation and monitoring. Then, to develop the 
provisions of the August 7, 2001 final rule (66 FR 41316, 41323), RAND 
did similar analysis on calendar year 1998 and 1999 Medicare Provider 
Analysis and Review (MedPAR) files and patient assessment data.
    We have continued to contract with RAND to help us identify 
potential refinements to the IRF PPS. The refinements we proposed to 
make to the IRF PPS, and which we are finalizing in this final rule, 
are based on the analyses and recommendations from RAND. In addition, 
RAND sought advice from a technical expert panel (TEP), which reviewed 
their methodology and findings.

2. Data Files Used for Analysis of the Current IRF PPS

    RAND conducted updated analyses of the patient classification 
system, case mix and coding changes, and facility-level adjustments for 
the IRF PPS using data from calendar year 2002 and FY 2003. This is the 
first time CMS or RAND has had data generated by IRFs after the 
implementation of the IRF PPS that are available for data analysis.
    Public comments and our responses on RAND's research to support the 
proposed refinements are summarized below:
    Comment: Several commenters expressed concerns about basing the 
refinements that we proposed in the FY 2006 proposed rule (70 FR 30188) 
on analyses of calendar year 2002 and FY 2003 data, which do not 
reflect IRF case mix changes currently taking place in response to our 
recent enforcement of the classification criterion, commonly known as 
the ``75 percent rule.'' These commenters suggested that we wait for 
analysis of future data (CY 2005 or beyond) to become available before 
implementing refinements to the IRF PPS.
    Response: As discussed in the August 7, 2001 final rule (66 FR 
41316), we used RAND's analysis of calendar year 1998 and 1999 Medicare 
Provider Analysis and Review (MedPAR) files and patient assessment data 
to develop the initial classification system and prospective payment 
amounts for the IRF PPS. These data were from a period of time before 
the IRF PPS when IRFs' reimbursement was based on costs, subject to 
certain limits, rather than on prospective payment amounts. 
Furthermore, we used the best available 1998 and 1999 data from a time 
period that also preceded enforcement of the 75 percent rule 
requirements. Today, we have 2002 and 2003 data that represents all 
Medicare-covered IRF cases in a post-PPS environment and, therefore, 
portrays a recent and complete picture of IRFs' patient populations. In 
addition, the IRF payment system has undergone a major transformation 
since the 1998 and 1999 data in the form of a change from a cost-based 
payment system to a PPS that became effective with the cost reporting 
periods beginning on or after January 1, 2002. Because of this 
transformation, we believe the data we have on which to base 
refinements to the IRF PPS will help ensure that IRF PPS payments 
accurately reflect the costs of care in an IRF.
    This is because these data allow RAND to obtain precision in their 
analyses, and ensures that the data are not over- or under-representing 
particular types of facilities or patients. We believe it is 
appropriate and necessary to implement refinements to the IRF PPS at 
this time, based on the best available data we have from calendar year 
2002 and FY 2003. Since analysis of this data indicates that we have an 
opportunity at this time, through the proposed refinements, to improve 
the alignment between IRF payments and the cost of care, we believe it 
is important to proceed with the refinements discussed in this final 
rule.
    However, we agree with the commenters that we should continue to 
collect the best available data we can to monitor the IRF PPS and 
ensure that IRF payments are appropriately aligned with costs of care 
and that Medicare patients continue to have appropriate access to IRF 
services. We will, whenever necessary, use the best data available in 
the future to propose appropriate refinements that will further improve 
the alignment between IRF payments and the costs of care. Thus, to the 
extent changes in case mix occur due to enforcement of the 75 percent 
rule, these changes should appear in later data that we will use to 
propose refinements in the future.
    Comment: Several commenters noted that 98 IRF providers in RAND's 
analysis data affiliated with HealthSouth decided to omit home office 
cost data from the 2002 and 2003 cost reports that were filed with us. 
The commenters questioned whether this omission might have affected the 
results of RAND's analysis and, therefore, our proposed policies.
    Response: After publication of the FY 2006 proposed rule (70 FR 
30188), we learned that 98 providers in our data file that were 
affiliated with HealthSouth omitted home office cost data from the 2002 
and 2003 cost reports that were filed with us and that RAND used in the 
analysis of the FY 2006 proposed rule (70 FR 30188). These data were a 
voluntary omission on the part of these providers, but nevertheless 
affect some of the distributional policies (that is, the proposed 
teaching status adjustment, the proposed changes to the rural and LIP 
adjustments, and the proposed change to the outlier threshold) 
contained in the proposed rule. However, because RAND used the 
hospital-specific relative value method (that is, the methodology that 
effectively controls for inter-hospital variation while estimating the 
relative costs of different types of patients within each hospital) for 
all of the proposed changes to the classification system described in 
section V of this final rule (that is, the proposed changes to the tier 
comorbidities, the proposed changes to the CMG definitions, the 
proposed weighted motor score methodology, the proposed change to the 
coding of the transfer-to-toilet item, and the proposed update of the 
relative weights), these proposed changes would not have been affected 
by the omission of the home office cost data. In other words, RAND 
examined the relative costs of patients within each IRF, so the fact 
that the omission of HealthSouth's home office costs caused total costs 
to be understated in the cost report data would not have mattered for 
the proposed classification system changes described in section V of 
this final rule.
    In addition, the omission of the home office cost data would have 
no effect on the proposed 1.9 percent reduction to the standard payment 
amount (discussed in section VI.A of this final rule) because cost 
report data were not

[[Page 47885]]

used in the analysis that supports this proposed reduction.
    Although the omission of the home office cost data, in theory, 
could have had some effect on the estimates of the proposed FY 2002-
based RPL market basket (discussed in section VI.B.1 of this final 
rule), our Office of the Actuary conducted some preliminary analyses of 
the effects on the market basket calculation and, based on these 
analyses, determined that these effects would likely be small. Home 
office costs represent only one of many cost categories (including, but 
not limited to, salaries, benefits, professional liability insurance, 
and pharmacueticals) that are used to develop the cost category 
weights. We believe the absence of HealthSouth home office costs in 
this market basket has a minor impact on the distribution of these 
weights and, by extension, the final market basket update itself. Thus, 
we did not believe it was necessary to recalculate the market basket.
    Finally, since the facility-level adjustments we proposed in the FY 
2006 proposed rule (70 FR 30188) were calculated using regression 
analysis based on the relative total costs associated with care in 
different types of IRFs (that is, urban/rural, teaching/non-teaching, 
low DSH percentage/high DSH percentage), the omission of HealthSouth's 
home office costs had some effect on the results of these analyses. The 
largest example is for the cost differential between urban and rural 
facilities in our analysis. Since the providers that omitted the home 
office cost data were largely urban facilities, their lower reported 
total cost data caused the differential between urban and rural 
facilities to be larger in the initial analyses. The same was true, to 
a lesser extent, with the teaching status adjustment and the LIP 
adjustment.
    Furthermore, the omission of the home office cost data caused 
overall reported costs to be lower in these facilities and, therefore, 
affected the cost-to-charge ratios computed for these facilities for 
FYs 2002 and 2003. We used these cost-to-charge ratios to determine the 
proposed update to the outlier threshold amount. Therefore, analysis of 
the data indicates that the outlier threshold amount we proposed in the 
FY 2006 proposed rule (70 FR 30188) was affected by the omission of the 
home office cost data.
    Given that the facility-level adjustments, such as the rural, LIP, 
and teaching status adjustments, and the outlier threshold amount for 
all IRFs were likely affected by the decision of this one large for-
profit chain provider to omit home office cost data from the FY 2002 
and FY 2003 cost reports, we believe it is appropriate for us to 
recalculate the values for these adjustments and for the outlier 
threshold using data that accounts for the omitted home office costs. 
Thus, we obtained the FY 2004 HealthSouth home office cost statement 
and, from this cost report statement, compiled the home office cost 
data for each of the individual HealthSouth IRF providers listed. Of 
the 98 providers that omitted home office cost data for FYs 2002 and 
2003, 92 of the providers have had home office cost data reported on 
the FY 2004 home office cost statement; and six providers did not have 
any home office cost information for FY 2004.
    We considered several options with respect to incorporating the 
missing HealthSouth home office costs into the data RAND used to 
conduct the analyses for this final rule. First, we considered the 
option of removing all of the HealthSouth cost report data from the 
analysis and re-computing the facility-level adjustments (that is, the 
rural adjustment, the LIP adjustment, and the teaching status 
adjustment) and the outlier threshold without the HealthSouth cost 
report data. Dropping all of the cost report data for 98 of the 1,188 
facilities in RAND's analysis file, especially when they are large 
urban facilities, would seem to skew the data even further because we 
would be leaving out a substantial amount of cost report data connected 
with one specific type of IRF provider (i.e., urban IRFs). Leaving out 
the data for these facilities would make other types of IRFs that are 
left in the data appear to have more of an effect on the regression 
analysis than they actually do. Since we were hoping to reduce the bias 
in the data, rather than increase the bias, we generally rejected this 
option.
    The second option we considered was to update the analysis using FY 
2004 data for all providers and re-compute the facility-level 
adjustments and the outlier threshold using the FY 2004 cost report 
data. Unfortunately, the FY 2004 data have only recently been submitted 
by all IRF providers, and it would have been impossible for RAND and 
CMS to have completed all the necessary re-analysis of all of the 
proposed policies with the FY 2004 cost report data for all IRF 
providers in time for the proposed policies to be implemented in FY 
2006.
    The third option we considered was to use the FY 2004 home office 
cost data that we were able to obtain from the HealthSouth home office 
cost statement for 92 of the 98 HealthSouth IRF providers, standardize 
all of the other cost report data from FY 2003 for the 98 HealthSouth 
providers and the other non-HealthSouth providers using the most recent 
market basket for FY 2004, and fill in the FY 2004 home office cost 
data for the 92 HealthSouth providers for which we had data. This 
option enabled us to meet the October 1 implementation date of our 
updates as well as to make those updates and payment adjustments as 
accurate as possible. Next, we considered two options for treating the 
six HealthSouth facilities for which we did not have FY 2004 home 
office cost data: We considered leaving those six IRFs' cost data as 
is, without adding any home office cost data since we had none from FY 
2004 to add. The other option we considered for treating these six 
facilities was to take the average home office costs as a percentage of 
total costs for the 92 facilities (which came to approximately 13 
percent) and use this as an estimate of home office costs for the 6 
facilities. We chose the second of the two options, which meant that we 
inflated total costs for those six facilities by the average of about 
13 percent, because it seemed inappropriate to ignore the fact that 
cost data was missing for these six facilities and 13 percent appeared 
to be a reasonable estimate of home office costs generally for IRFs 
(from the general analysis we were able to perform).
    Because we believe the data file that results from the third option 
is more complete than the data RAND previously used to compute the 
proposed facility-level adjustments and the proposed outlier threshold 
amount for the FY 2006 proposed rule (70 FR 30188), we used the data 
from the third option described above to re-compute the values for the 
teaching status adjustment (described in more detail in section VI.B.3 
of this final rule), the rural adjustment (described in more detail in 
section VI.B.4 of this final rule), the LIP adjustment (described in 
more detail in section VI.B.5 of this final rule), and the outlier 
threshold amount (described in more detail in section VI.B.6 of this 
final rule). Because the values of these adjustments have changed, we 
also re-computed the budget neutrality factors and, thus, the standard 
payment conversion factor.
    Comment: Several commenters requested that we make IRF claims data, 
IRF-PAI data, patient-specific CMG data, and cost report files 
available to the public so that the public would have the opportunity 
to recreate the analyses used in developing the proposed refinements 
for the FY 2006 proposed rule (70 FR 30188).
    Response: The data files mentioned by the commenters are generally 
available (and were generally available

[[Page 47886]]

during the comment period for the FY 2006 proposed rule (70 FR 30188)) 
to the public through CMS's standard data distribution systems. More 
information on CMS's data distribution policies is available on CMS's 
website at https://www.cms.hhs.gov/researchers/statsdata.asp.
    Comment: A few commenters requested that we make available RAND's 
research using FY 2003 data. They noted that 3 of the 4 reports 
published on RAND's website for public access are based on analysis of 
calendar year 2002 data. One of RAND's publicly available reports is 
based on analysis of FY 2003 data.
    Response: We asked RAND to use the best available, most current 
data possible for the analyses contained in the FY 2006 proposed rule 
(70 FR 30188) and this final rule. This was generally FY 2003 data.
    The updated analysis is generally not contained in RAND's reports, 
and RAND has indicated to CMS that they have no plans to publish the 
updated analyses (using the FY 2003 data) after publication of the 
final rule. However, RAND informed us that, in all of the FY 2003 
analyses for the FY 2006 proposed rule (70 FR 30188) and for this final 
rule, they used the identical methodologies presented in the reports 
available on RAND's website and reviewed by RAND's technical expert 
panel. The only change was that RAND used updated data from FY 2003 
(and FY 2004 HealthSouth home office cost data, as discussed above). 
Thus, interested parties should examine the reports available on RAND's 
website for the detailed methodology used to develop the proposed and 
final revisions. In addition, interested parties may contact RAND 
directly for more information regarding the analysis of FY 2003 data.
    Comment: One commenter asked whether a large number of short period 
cost reports for periods ending in 2001 might have affected RAND's 
research findings and, if so, how RAND handled this issue in the data.
    Response: We were unable to find any reasons for the unusually 
large number of short period cost reports the commenter is indicating 
for cost report periods ending in 2001. However, since some of RAND's 
analysis for this final rule was based on calendar year 2002 data, and 
the majority of RAND's analysis for this final rule was based on FY 
2003 data, we do not believe that a spike in the number of short period 
cost reports in 2001 would have had an effect on RAND's analyses.

V. Refinements to the Patient Classification System

A. Changes to the IRF Classification System

1. Development of the IRF Classification System
    Section 1886(j)(2)(A)(i) of the Act, as amended by section 125 of 
the Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 
1999 requires the Secretary to establish ``classes of patient 
discharges of rehabilitation facilities by functional-related groups 
(each referred to as a case-mix group or CMG), based on impairment, 
age, comorbidities, and functional capability of the patients, and such 
other factors as the Secretary deems appropriate to improve the 
explanatory power of functional independence measure-function related 
groups.'' In addition, the Secretary is required to establish a method 
of classifying specific patients in IRFs within these groups as 
specified in Sec.  412.620.
    In the August 7, 2001 final rule (66 FR at 41342), we implemented a 
methodology to establish a patient classification system using CMGs. 
The CMGs are based on the FIM-FRG methodology and reflect refinements 
to that methodology.
    In general, a patient is first placed in a major group called a 
rehabilitation impairment category (RIC) based on the patient's primary 
reason for inpatient rehabilitation, (for example, a stroke). The 
patient is then placed into a CMG within the RIC, based on the 
patient's ability to perform specific activities of daily living, and 
sometimes the patient's cognitive ability and/or age. Other special 
circumstances, such as the occurrence of very short stays, or cases 
where the patient expired, are also considered in determining the 
appropriate CMG.
    We explained in the August 7, 2001 final rule that further analysis 
of FIM and Medicare data may result in refinements to CMGs. In the 
August 7, 2001 final rule, we used the most recent FIM and Medicare 
data available at that time (that is 1998 and 1999 data). Developing 
the CMGs with the 1998 and 1999 data resulted in 95 CMGs based on the 
FIM-FRG methodology. The data also supported the establishment of five 
additional special CMGs that improved the explanatory power of the FIM-
FRGs. We established one additional special CMG to account for very 
short stays and four additional special CMGs to account for cases where 
the patient expired. In addition, we established a payment of an 
additional amount for patients with at least one relevant comorbidity 
in certain CMGs.
2. Description and Methodology Used To Develop the IRF Classification 
System in the August 7, 2001 Final Rule

a. Rehabilitation Impairment Categories

    In the first step to develop the CMGs, the FIM data from 1998 and 
1999 were used to group patients into RICs. Specifically, the 
impairment code from the assessment instrument used by clients of UDSmr 
and Healthsouth indicates the primary reason for the inpatient 
rehabilitation admission. This impairment code is used to group the 
patient into a RIC. Currently, we use 21 RICs for the IRF PPS.

b. Functional Status Measures and Age

    After using the RIC to define the first division among the 
inpatient rehabilitation groups, we used functional status measures and 
age to partition the cases further. In the August 7, 2001 final rule, 
we used 1998 and 1999 Medicare bills with corresponding FIM data to 
create the CMGs and more thoroughly examine each item of the motor and 
cognitive measures. Based on the data used for the August 7, 2001 final 
rule, we found that we could improve upon the CMGs by making a slight 
modification to the motor measure. We modified the motor measure by 
removing the transfer to tub/shower item because we found that an 
increase in a patient's ability to perform functional tasks with less 
assistance for this item was associated with an increase in cost, 
whereas an increase in other functional items decreased costs. We 
describe below the statistical methodology (Classification and 
Regression Trees (CART)) that we used to incorporate a patient's 
functional status measures (modified motor score and cognitive score) 
and age into the construction of the CMGs in the August 7, 2001 final 
rule.
    We used the CART methodology to divide the rehabilitation cases 
further within each RIC. (Further information regarding the CART 
methodology can be found in the seminal literature on CART 
(Classification and Regression Trees, Leo Breiman, Jerome Friedman, 
Richard Olshen, Charles Stone, Wadsworth Inc., Belmont CA, 1984: pp. 
78-80).) We chose to use the CART method because it is useful in 
identifying statistical relationships among data and, using these 
relationships, constructing a predictive model for organizing and 
separating a large set of data into smaller, similar groups. Further, 
in constructing the CMGs, we analyzed the extent to which the 
independent

[[Page 47887]]

variables (motor score, cognitive score, and age) helped predict the 
value of the dependent variable (the log of the cost per case). The 
CART methodology creates the CMGs that classify patients with 
clinically distinct resource needs into groups. CART is an iterative 
process that creates initial groups of patients and then searches for 
ways to divide the initial groups to decrease the clinical and cost 
variances further and to increase the explanatory power of the CMGs. 
Our current CMGs are based on historical data. In order to develop a 
separate CMG, we need to have data on a sufficient number of cases to 
develop coherent groups. Therefore, we are removing these codes from 
the tiers that increase payment.

c. Comorbidities

    Under the statutory authority of section 1886(j)(2)(C)(i) of the 
Act, we proposed to make several changes to the comorbidity tiers 
associated with the CMGs for comorbidities that are not positively 
related to treatment costs, or their excessive use is questionable, or 
their condition could not be differentiated from another condition. 
Specifically, section 1886(j)(2)(C)(i) of the Act provides the 
following: The Secretary shall from time to time adjust the 
classifications and weighting factors established under this paragraph 
as appropriate to reflect changes in treatment patterns, technology, 
case mix, number of payment units for which payment is made under this 
title and other factors that may affect the relative use of resources. 
The adjustments shall be made in a manner so that changes in aggregate 
payments under the classification system are a result of real changes 
and are not a result of changes in coding that are unrelated to real 
changes in case mix.
    A comorbidity is a specific patient condition that is secondary to 
the patient's principal diagnosis or impairment that is used to place a 
patient into a RIC. A patient could have one or more comorbidities 
present during the inpatient rehabilitation stay. Our analysis for the 
August 7, 2001 final rule found that the presence of a comorbidity 
could have a major effect on the cost of furnishing inpatient 
rehabilitation care. We also stated that the effect of comorbidities 
varied across RICs, significantly increasing the costs of patients in 
some RICs, while having no effect in others. Therefore, for the August 
7, 2001 final rule, we linked frequently occurring comorbidities to 
impairment categories in order to ensure that all of the chosen 
comorbidities were not an inherent part of the diagnosis that assigns 
the patient to the RIC.
    Furthermore, in the August 7, 2001 final rule, we indicated that 
comorbidities can affect cost per case for some of the CMGs, but not 
all. When comorbidities substantially increased the average cost of the 
CMG and were determined to be clinically relevant (not inherent in the 
diagnosis in the RIC), we developed CMG relative weights adjusted for 
comorbidities (Sec.  412.620(b)).

d. Development of CMG Relative Weights

    Section 1886(j)(2)(B) of the Act requires that an appropriate 
relative weight be assigned to each CMG. Relative weights account for 
the variance in cost per discharge and resource utilization among the 
payment groups and are a primary element of a case-mix adjusted PPS. 
The establishment of relative weights helps ensure that beneficiaries 
have access to care and receive the appropriate services that are 
commensurate to other beneficiaries that are classified in the same 
CMG. In addition, prospective payments that are based on relative 
weights encourage provider efficiency and, hence, help ensure a fair 
distribution of Medicare payments. Accordingly, as specified in Sec.  
412.620(b)(1), we calculate a relative weight for each CMG that is 
proportional to the resources needed by an average inpatient 
rehabilitation case in that CMG. For example, cases in a CMG with a 
relative weight of 2, on average, will cost twice as much as cases in a 
CMG with a relative weight of 1. We discuss the details of developing 
the relative weights below.
    As indicated in the August 7, 2001 final rule, we believe that the 
RAND analysis has shown that CMGs based on function-related groups 
(adjusted for comorbidities) are effective predictors of resource use 
as measured by proxies such as length of stay and costs. The use of 
these proxies is necessary in developing the relative weights because 
data that measure actual nursing and therapy time spent on patient 
care, and other resource use data, are not available.

e. Overview of Development of the CMG Relative Weights

    As indicated in the August 7, 2001 final rule, to calculate the 
relative weights, we estimate operating (routine and ancillary 
services) and capital costs of IRFs. For this final rule as we 
indicated in the FY 2006 proposed rule (70 FR 30188), we use the same 
method for calculating the cost of a case that we outlined in the 
August 7, 2001 final (66 FR at 41351 through 43153). We obtained cost-
to-charge ratios for ancillary services and per diem costs for routine 
services from the most recent available cost report data. We then 
obtain charges from Medicare bill data and derived corresponding 
functional measures from the FIM data. We omit data from rehabilitation 
facilities that are classified as all-inclusive providers from the 
calculation of the relative weights, as well as from the parameters 
that we use to define transfer cases, because these facilities are paid 
a single, negotiated rate per discharge and therefore do not maintain a 
charge structure. For ancillary services, we calculate both operating 
and capital costs by converting charges from Medicare claims into costs 
using facility-specific, cost-center specific cost-to-charge ratios 
obtained from cost reports. Our data analysis for the August 7, 2001 
final rule showed that some departmental cost-to-charge ratios were 
missing or found to be outside a range of statistically valid values. 
For anesthesiology, a value greater than 10, or less than 0.01, is 
found not to be statistically valid. For all other cost centers, values 
greater than 10 or less than 0.5 are found not to be statistically 
valid. In the August 7, 2001 final rule, we replaced individual cost-
to-charge ratios outside of these thresholds. The replacement value 
that we used for these aberrant cost-to-charge ratios was the mean 
value of the cost-to-charge ratio for the cost-center within the same 
type of hospital (either freestanding or unit). For routine services, 
per diem operating and capital costs are used to develop the relative 
weights. In addition, per diem operating and capital costs for special 
care services are used to develop the relative weights. (Special care 
services are furnished in intensive care units. We note that less than 
1 percent of rehabilitation days are spent in intensive care units.) 
Per diem costs are obtained from each facility's Medicare cost report 
data. We use per diem costs for routine and special care services 
because, unlike for ancillary services, we could not obtain cost-to-
charge ratios for these services from the cost report data. To estimate 
the costs for routine and special care services included in developing 
the relative weights, we sum the product of routine cost per diem and 
Medicare inpatient days and the product of the special care per diem 
and the number of Medicare special care days.
    In the August 7, 2001 final rule, we used a hospital specific 
relative value method to calculate relative weights.

[[Page 47888]]

For the FY 2006 proposed rule (70 FR 30188) and this final rule, we 
used the following basic steps to calculate the relative weights as 
indicated in the August 7, 2001 final rule (at 66 FR 41316, 41351 
through 41352).
    The first step in calculating the CMG weights is to estimate the 
effect that comorbidities have on costs. The second step required us to 
adjust the cost of each Medicare discharge (case) to reflect the 
effects found in the first step. In the third step, the adjusted costs 
from the second step were used to calculate ``relative adjusted 
weights'' in each CMG using the hospital-specific relative value 
method. The final steps are to calculate the CMG relative weights by 
modifying the ``relative adjusted weight'' with the effects of the 
existence of the comorbidity tiers (explained below) and normalizing 
the weights to 1.
    Our methodology for determining the IRF classification system 
remains unchanged from the August 7, 2001 final rule.

B. Changes to the Existing List of Tier Comorbidities

1. Changes To Remove Codes That Are Not Positively Related to Treatment 
Costs
    While our methodology for this final rule for determining the tiers 
remains unchanged from the August 7, 2001 final rule, as we indicated 
in the FY 2006 proposed rule (70 FR 30188), RAND's analysis indicates 
that 1.6 percent of FY 2003 cases received a tier payment (often in 
tier one) that was not justified by any higher cost for the case. 
Therefore, under statutory authority section 1886(j)(2)(C)(i) of the 
Act, as we proposed in the FY 2006 proposed rule (70 FR 30188) we are 
implementing several technical changes to the comorbidity tiers 
associated with the CMGs. Specifically, the RAND analysis found that 
the first 17 diagnoses shown in Table 1 below are no longer positively 
related to treatment cost after controlling for CMG. The additional two 
codes were also problematic. According to RAND, code 410.91 (AMI, NOS, 
Initial) was not specific enough to be differentiated from other 
related codes and code 260, Kwashiorkor, was found to be 
unrealistically represented in the data according to the RAND technical 
expert panel.
    With respect to the eighteenth code in Table One, (410.X1) Specific 
AMI, initial), we note that RAND found there is no clinical reason to 
believe that this code differs in a rehabilitation environment from all 
of the specific codes for initial AMI of the form 410.X1, where X is an 
numeric digit. In other words, this code is indistinguishable from the 
seventeenth code in Table One (410.91 AMI, NOS, initial). Following 
this observation, RAND tested the other initial AMI codes as a single 
group and found that they have no positive effect on case cost. Thus, 
as we indicated in the FY 2006 proposed rule (70 FR 30188), we proposed 
to remove ``AMI, NOS, initial'' from the tier list because it is not 
positively related to treatment cost after controlling for the CMG. In 
addition, for similar reasons, we proposed in the FY 2006 proposed rule 
(70 FR 30188) to remove ``Specific AMI, initial from the tier list 
since it is indistinguishable from ``AMI, NOS, initial.''
    As we proposed in the FY 2006 proposed rule (70 FR 30188), with 
respect to the last code in Table One (Kwashiorkor), we are removing 
this code from the tier list as well. This comorbidity is positively 
related to cost in our data. However, RAND's technical expert panel 
(TEP) found the large number of cases coded with this rare disease to 
be unrealistic and recommended that it be removed from the tier list.
    Table 1 contains two malnutrition codes, and as we proposed in the 
FY 2006 proposed rule (70 FR 30188), we are removing these two 
malnutrition codes. As we stated in the FY 2006 Proposed Rule (70 FR 
30188), removal of these codes where use is concentrated in specific 
hospitals is particularly important because these hospitals are likely 
receiving unwarrantedly high payments due to the tier one assignment of 
these cases. Thus, because we believe the excess use of these two 
comorbid conditions is inappropriate based on the findings of RAND's 
TEP, they will be removed.
    The data indicate large variation in the rate of increase from the 
1999 data to the 2003 data across the conditions that make up the 
tiers. The greatest increases were for miscellaneous throat conditions 
and malnutrition, each of which were more than 10 times as frequent in 
2003 as in 1999. The growth in these two conditions was far larger than 
for any other condition. Many conditions, however, more than doubled in 
frequency, including dialysis, cachexia, obesity, and the non-renal 
complications of diabetes. The condition with the least growth, renal 
complications of diabetes, may have been affected by improved coding of 
dialysis.
    As we proposed in the FY 2006 proposed rule (70 FR 30188), we are 
finalizing changes to our initial list