Medicare Program; Home Health Prospective Payment System Rate Update for Calendar Year 2006, 68132-68215 [05-22084]

Agencies

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

[Federal Register Volume 70, Number 216 (Wednesday, November 9, 2005)]
[Rules and Regulations]
[Pages 68132-68215]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-22084]



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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 484



Medicare Program; Home Health Prospective Payment System Rate Update 
for Calendar Year 2006; Final Rule

Federal Register / Vol. 70, No. 216 / Wednesday, November 9, 2005 / 
Rules and Regulations

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 484

[CMS-1301-F]
RIN 0938-AN44


Medicare Program; Home Health Prospective Payment System Rate 
Update for Calendar Year 2006

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

ACTION: Final rule.

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SUMMARY: This final rule sets forth an update to the 60-day national 
episode rates and the national per-visit amounts under the Medicare 
prospective payment system for home health agencies. This final rule is 
the first update of the home health prospective payment system (HH PPS) 
rates that uses the revised area labor market Metropolitan Statistical 
Area designations for calendar year 2006. In implementing the new area 
labor market designations, we are allowing for a one-year transition 
period. This transition consists of a blend of 50 percent of the new 
area labor market designations' wage index and 50 percent of the 
previous area labor market designations' wage index. In addition, we 
are revising the fixed dollar loss ratio, which is used in the 
calculation of outlier payments.

EFFECTIVE DATE: These regulations are effective on January 1, 2006.

FOR FURTHER INFORMATION CONTACT: Randy Throndset, (410) 786-0131. 
Sharon Ventura, (410) 786-1985.

SUPPLEMENTARY INFORMATION: 

I. Background

A. Statutory Background

    The Balanced Budget Act of 1997 (BBA) (Pub. L. 105-33), enacted on 
August 5, 1997, significantly changed the way Medicare pays for 
Medicare home health services. Until the implementation of a home 
health prospective payment system (HH PPS) on October 1, 2000, home 
health agencies (HHAs) received payment under a cost-based 
reimbursement system. Section 4603 of the BBA governed the development 
of the HH PPS.
    Section 4603(a) of the BBA provides the authority for the 
development of a PPS for all Medicare-covered home health services 
provided under a plan of care that were paid on a reasonable cost basis 
by adding section 1895, entitled ``Prospective Payment For Home Health 
Services,'' to the Social Security Act (the Act).
    Section 1895(b)(1) of the Act requires the Secretary to establish a 
PPS for all costs of home health services paid under Medicare.
    Section 1895(b)(3)(A) of the Act requires that (1) the computation 
of a standard prospective payment amount include all costs of home 
health services covered and paid for on a reasonable cost basis and be 
initially based on the most recent audited cost report data available 
to the Secretary, and (2) the prospective payment amounts be 
standardized to eliminate the effects of case-mix and wage levels among 
HHAs.
    Section 1895(b)(3)(B) of the Act addresses the annual update to the 
standard prospective payment amounts by the home health applicable 
increase percentage as specified in the statute.
    Section 1895(b)(4) of the Act governs the payment computation. 
Sections 1895(b)(4)(A)(i) and (b)(4)(A)(ii) of the Act require the 
standard prospective payment amount to be adjusted for case-mix and 
geographic differences in wage levels. Section 1895(b)(4)(B) of the Act 
requires the establishment of an appropriate case-mix adjustment factor 
that explains a significant amount of the variation in cost among 
different units of services. Similarly, section 1895(b)(4)(C) of the 
Act requires the establishment of wage adjustment factors that reflect 
the relative level of wages and wage-related costs applicable to the 
furnishing of home health services in a geographic area compared to the 
national average applicable level. These wage-adjustment factors may be 
the factors used by the Secretary for the different area wage levels 
for purposes of section 1886(d)(3)(E) of the Act.
    Section 1895(b)(5) of the Act gives the Secretary the option to 
grant additions or adjustments to the payment amount otherwise made in 
the case of outliers because of unusual variations in the type or 
amount of medically necessary care. Estimated total outlier payments in 
a given year cannot exceed 5 percent of total payments projected or 
estimated.
    On December 8, 2003, the Congress enacted the Medicare Prescription 
Drug, Improvement, and Modernization Act (MMA) of 2003 (Pub. L. 108-
173). This legislation affected how we make updates to HH payment 
rates.
    Section 701 of the MMA changed the yearly update cycle of the HH 
PPS rates from that of a fiscal year to a calendar year update cycle 
for 2004 and any subsequent year. Generally, section 701(a) of the MMA 
changed the references in the statute to refer to the calendar year for 
2004 and any subsequent year. The changes resulted in updates to the HH 
PPS rates described as ``fiscal year'' updates for 2002 and 2003 and as 
``calendar year'' updates for 2004 and any subsequent year (section 
1895(b)(3)(B)(i) of the Act. Beginning on January 1, 2005, the HH PPS 
will be updated on a calendar year update cycle.
    In addition to changing the update cycle for HH PPS rates, section 
701 of the MMA made adjustments to the home health applicable increase 
percentage for 2004, 2005, and 2006. Specifically, section 701(a)(2)(D) 
of the MMA left unchanged the home health market basket update for the 
last calendar year quarter of 2003 and the first calendar year quarter 
of 2004 (section 1895(b)(3)(B)(ii)(II) of the Act).
    Furthermore, section 701(b)(4) of the MMA set the home health 
applicable percentage increase for the last 3 quarters of 2004 as the 
home health market basket (3.1 percent) minus 0.8 percentage point 
(section 1895(b)(3)(B)(ii)(III) of the Act). We implemented this 
provision through Pub. 100-20, One Time Notification, Transmittal 59, 
issued February 20, 2004. Section 701(b)(4) of the MMA also provided 
that updates for CY 2005 and CY 2006 will equal the applicable home 
health market basket percentage increase minus 0.8 percentage point. 
Lastly, section 701(b)(3) of the MMA revised the statute to provide 
that HH PPS rates for CY 2007 and any subsequent year will be updated 
by that year's home health market basket percentage increase (section 
1895(b)(3)(B)(ii)(IV) of the Act).

B. Updates

1. 2000 Final Rule
    On July 3, 2000, we published a final rule (65 FR 41128) in the 
Federal Register to implement the HH PPS legislation. That final rule 
established requirements for the new PPS for HHAs as required by 
section 4603 of the BBA, and as subsequently amended by section 5101 of 
the Omnibus Consolidated and Emergency Supplemental Appropriations Act 
(OCESAA) for Fiscal Year 1999 (Pub. L. 105-277), enacted on October 21, 
1998; and by sections 302, 305, and 306 of the Medicare, Medicaid, and 
SCHIP Balanced Budget Refinement Act (BBRA) of 1999 (Pub. L. 106-113), 
enacted on November 29, 1999. The requirements include the 
implementation of a PPS for HHAs, consolidated billing requirements, 
and a number of other related changes. The PPS described in that rule 
replaced the retrospective reasonable-cost-based

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system that was used by Medicare for the payment of home health 
services under Part A and Part B.
2. 2004 Final Rule
    On October 22, 2004, we published a final rule (69 FR 62124), which 
set forth an update to the 60-day national episode rates and the 
national per-visit amounts under the Medicare prospective payment 
system for home health agencies. As part of that final rule, we rebased 
and revised the home health market basket to ensure it continues to 
adequately reflect the price changes of efficiently providing home 
health services. In addition, we revised the fixed dollar loss (FDL) 
ratio, which is used in the calculation of outlier payments. That final 
rule was also the first update of the HH PPS rates on a calendar year 
update cycle. HH PPS was moved to a calendar year update cycle as a 
result the MMA.

C. System for Payment of Home Health Services

    Generally, Medicare makes payment under the HH PPS on the basis of 
a national standardized 60-day episode payment, adjusted for case mix 
and wage index. For episodes with four or fewer visits, Medicare pays 
on the basis of a national per-visit amount by discipline, referred to 
as a low utilization payment adjustment (LUPA). Medicare also adjusts 
the 60-day episode payment for certain intervening events that give 
rise to a partial episode payment adjustment (PEP adjustment) or a 
significant change in condition adjustment (SCIC). For certain cases 
that exceed a specific cost threshold, an outlier adjustment may also 
be available. For a complete and full description of the HH PPS as 
required by the BBA and as amended by OCESAA and BBRA, see the July 3, 
2000 HH PPS final rule (65 FR 41128).

D. Requirements for Issuance of Regulations

    Section 902 of the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (MMA) amended section 1871(a) of the Act and 
requires the Secretary, in consultation with the Director of the Office 
of Management and Budget, to establish and publish timelines for the 
publication of Medicare final regulations based on the previous 
publication of a Medicare proposed or interim final regulation. Section 
902 of the MMA also states that the timelines for these regulations may 
vary but shall not exceed 3 years after publication of the preceding 
proposed or interim final regulation except under exceptional 
circumstances.
    This final rule finalizes provisions set forth in the July 14, 2005 
proposed rule (70 FR 40788). In addition, this final rule has been 
published within the 3-year time limit imposed by section 902 of the 
MMA. Therefore, we believe that the final rule is in accordance with 
the Congress' intent to ensure timely publication of final regulations.

II. Provisions of the Proposed Regulations

    We published a proposed rule in the Federal Register on July 14, 
2005 (70 FR 40788) that set forth a proposed update to the 60-day 
national episode rates and the national per-visit amounts under the 
Medicare prospective payment system for home health agencies. We also 
proposed to implement the revised area labor market Metropolitan 
Statistical Area designations for calendar year 2006.

A. National Standardized 60-Day Episode Rate

    Medicare HH PPS has been effective since October 1, 2000. As set 
forth in the final rule published July 3, 2000 in the Federal Register 
(65 FR 41128), the unit of payment under Medicare HH PPS is a national 
standardized 60-day episode rate. As set forth in 42 CFR 484.220, we 
adjust the national standardized 60-day episode rate by a case mix 
grouping and a wage index value based on the site of service for the 
beneficiary. The proposed CY 2006 HH PPS rates used the same case-mix 
methodology and application of the wage index adjustment to the labor 
portion of the HH PPS rates as set forth in the July 3, 2000 final 
rule. In the October 22, 2004 final rule, we rebased and revised the 
home health market basket, resulting in a labor related share of 76.775 
percent and a non-labor portion of 23.225 percent (69 FR 62126). We 
multiply the national 60-day by the patient's applicable case-mix 
weight. We divide the case-mix adjusted amount into a labor and non-
labor portion. We multiply the labor portion by the applicable wage 
index based on the site of service of the beneficiary. As the home 
health market basket was rebased and revised last year, we did not 
propose to rebase it for CY 2006.
    As required by section 1895(b)(3)(B) of the Act, we have updated 
the HH PPS rates annually in a separate Federal Register document. 
Section 484.225 sets forth the specific percentage update for fiscal 
years 2001 through 2008. As amended by section 701 of the MMA, Sec.  
484.225(f) sets the CY 2006 unadjusted national prospective 60-day 
episode payment rate equal to the rate from the previous calendar year 
(CY 2005), increased by the applicable home health market basket minus 
0.8 percentage point.
    For CY 2006, we proposed to use again the design and case-mix 
methodology described in section III.G of the HH PPS July 3, 2000 final 
rule (65 FR 41192 through 41203). For CY 2006, we will base the wage 
index adjustment to the labor portion of the PPS rates on the most 
recent pre-floor and pre-reclassified hospital wage index as discussed 
in section II.D of this final rule (not including any reclassifications 
under section 1886(d)(8)(B)) of the Act.
    As discussed in the July 3, 2000 HH PPS final rule, for episodes 
with four or fewer visits, Medicare pays the national per-visit amount 
by discipline, referred to as a LUPA. We update the national per-visit 
amounts by discipline annually by the applicable home health market 
basket percentage. We adjust the national per-visit amount by the 
appropriate wage index based on the site of service for the beneficiary 
as set forth in Sec.  484.230. We will adjust the labor portion of the 
updated national per-visit amounts by discipline used to calculate the 
LUPA by the most recent pre-floor and pre-reclassified hospital wage 
index, as discussed in section II.D of the July 14, 2005 proposed rule.
    Medicare pays the 60-day case-mix and wage-adjusted episode payment 
on a split percentage payment approach. The split percentage payment 
approach includes an initial percentage payment and a final percentage 
payment as set forth in Sec.  484.205(b)(1) and (b)(2). We may base the 
initial percentage payment on the submission of a request for 
anticipated payment and the final percentage payment on the submission 
of the claim for the episode, as discussed in Sec.  409.43. The claim 
for the episode that the HHA submits for the final percentage payment 
determines the total payment amount for the episode and whether we make 
an applicable adjustment to the 60-day case-mix and wage-adjusted 
episode payment. The end date of the 60-day episode as reported on the 
claim determines the rate level at which Medicare will pay the claim 
for the fiscal period.
    We may also adjust the 60-day case-mix and wage-adjusted episode 
payment based on the information submitted on the claim to reflect the 
following:
     A low utilization payment provided on a per-visit basis as 
set forth in Sec.  484.205(c) and Sec.  484.230.

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     A partial episode payment adjustment as set forth in Sec.  
484.205(d) and Sec.  484.235.
     A significant change in condition adjustment as set forth 
in Sec.  484.205(e) and Sec.  484.237.
     An outlier payment as set forth in Sec.  484.205(f) and 
Sec.  484.240.
    The July 14, 2005 proposed rule reflected the proposed updated CY 
2006 rates, effective January 1, 2006.

B. CY 2006 Update to the Home Health Market Basket Index

    Section 1895(b)(3)(B) of the Act, as amended by section 701 of the 
MMA, requires for CY 2006 that the standard prospective payment amounts 
be increased by a factor equal to the applicable home health market 
basket update minus 0.8 percentage point.
CY 2006 Adjustments
    In calculating the annual update for the CY 2006 60-day episode 
rates, we first look at the CY 2005 rates as a starting point. The CY 
2005 national 60-day episode rate, as published in the Federal Register 
(69 FR 62124) is $2,264.28.
    In order to calculate the CY 2006 national 60-day episode rate, we 
multiply the CY 2005 national 60-day episode rate ($2,264.28) by the 
estimated home health market basket update of 3.6 percent for CY 2006 
minus 0.8 percentage point.
    We increase the CY 2005 60-day episode payment rate by the 
estimated home health market basket update (3.6 percent) minus 0.8 
percentage point ($2,264.28 x 2.8 percent) to yield the updated CY 2006 
national 60-day episode rate ($2,327.68) (see Table 1).

 Table 1.--National 60-Day Episode Amounts Updated by the Estimated Home
  Health Market Basket Update for CY 2006, Minus 0.8 Percentage Point,
 Before Case-Mix Adjustment, Wage Index Adjustment Based on the Site of
      Service for the Beneficiary or Applicable Payment Adjustment
------------------------------------------------------------------------
                             Multiply by the
   Total  prospective     estimated home health      CY 2006  updated
payment amount per  60-    market basked update      national  60-day
  day  episode for CY    (3.6 percent) minus 0.8       episode rate
          2005             percentage point \1\
------------------------------------------------------------------------
        $2,264.28                  x 1.028              $2,327.68
------------------------------------------------------------------------
\1\ The estimated home health market basket update of 3.6 percent for CY
  2006 is based on Global Insight, Inc., 3rd Qtr, 2005 forecast with
  historical data through 2nd Qtr, 2005.

    National Per-visit Amounts Used to Pay LUPAs and Compute Imputed 
Costs Used in Outlier Calculations
    As discussed previously in the July 14, 2005 proposed rule, the 
policies governing the LUPAs and outlier calculations set forth in the 
July 3, 2000 HH PPS final rule will continue during CY 2006. In 
calculating the annual update for the CY 2006 national per-visit 
amounts we use to pay LUPAs and to compute the imputed costs in outlier 
calculations, we look again at the CY 2005 rates as a starting point. 
We then multiply those amounts by the estimated home health market 
basket update minus 0.8 percentage point for CY 2006 to yield the 
updated per-visit amounts for each home health discipline for CY 2006 
(see Table 2).

 Table 2.--National Per-Visit Amounts for LUPAs and Outlier Calculations
 Updated by the Estimated Home Health Market Basket Update for CY 2006,
  Minus 0.8 Percentage Point, Before Wage Index Adjustment Based on the
                   Site of Service for the Beneficiary
------------------------------------------------------------------------
                                                Multiply by
                                                    the
                                   Final  per-   estimated    Per-visit
                                      visit     home health    payment
                                   amounts per     market     amount per
   Home health discipline type        60-day    basket (3.6   discipline
                                   episode for    percent)   for CY 2006
                                   CY 2005 for   minus 0.8    for LUPAs
                                      LUPAs      percentage
                                                  point\1\
------------------------------------------------------------------------
Home Health Aide.................       $44.76      x 1.028       $46.01
Medical Social Services..........       158.45      x 1.028       162.89
Occupational Therapy.............       108.81      x 1.028       111.86
Physical Therapy.................       108.08      x 1.028       111.11
Skilled Nursing..................        98.85      x 1.028       101.62
Speech-Language Pathology........       117.44      x 1.028      120.73
------------------------------------------------------------------------
\1\ The estimated home health market basket update of 3.6 percent for CY
  2006 is based on Global Insight, Inc., 3rd Qtr, 2005 forecast with
  historical data through 2nd Qtr, 2005.

C. Outliers & the Fixed Dollar Loss Ratio

    Outlier payments are payments made in addition to regular 60-day 
case-mix and wage-adjusted episode payments for episodes that incur 
unusually large costs due to patient home health care needs. Outlier 
payments are made for episodes for which the estimated cost exceeds a 
threshold amount. The episode's estimated cost is the sum of the 
national wage-adjusted per-visit payment amounts for all visits 
delivered during the episode. The outlier threshold for each case-mix 
group, PEP adjustment, or total SCIC adjustment is defined as the 60-
day episode payment amount, PEP adjustment, or total SCIC adjustment 
for that group plus an FDL amount. Both components of the outlier 
threshold are wage-adjusted.
    The wage-adjusted FDL amount represents the amount of loss that an 
agency must bear before an episode becomes eligible for outlier 
payments. The FDL is computed by multiplying the wage-adjusted 60-day 
episode payment amount by the FDL ratio, which is a proportion 
expressed in terms of the national standardized episode payment amount. 
The outlier payment is defined to be a proportion of

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the wage-adjusted estimated costs beyond the wage-adjusted threshold. 
The proportion of additional costs paid as outlier payments is referred 
to as the loss-sharing ratio.
    Section 1895(b)(5) of the Act requires that estimated total outlier 
payments are no more than 5 percent of total estimated HH PPS payments. 
In response to the concerns about potential financial losses that might 
result from unusually expensive cases expressed in comments to the 
October 28, 1999 proposed rule (64 FR 58133), the July 3, 2000 final 
rule set the target for estimated outlier payments at the 5 percent 
level. The FDL ratio and the loss-sharing ratio were then selected so 
that estimated total outlier payments would meet the 5 percent target.
    For a given level of outlier payments, there is a trade-off between 
the values selected for the FDL ratio and the loss-sharing ratio. A 
high FDL ratio reduces the number of episodes that can receive outlier 
payments, but makes it possible to select a higher loss-sharing ratio 
and, therefore, increase outlier payments for outlier episodes. 
Alternatively, a lower FDL ratio means that more episodes can qualify 
for outlier payments, but outlier payments per episode must be lower. 
As a result of public comments on the October 28, 1999 proposed rule, 
in our July 3, 2000 final rule, we made the decision to set the FDL at 
a level estimated to cover a relatively high proportion of the costs of 
outlier cases for the most expensive episodes that would qualify for 
outlier payments within the 5 percent constraint.
    In the July 3, 2000 final rule, we chose a value of 0.80 for the 
loss-sharing ratio, which preserves incentives for agencies to attempt 
to provide care efficiently for outlier cases. A loss-sharing ratio of 
0.80 was also consistent with the loss-sharing ratios used in other 
Medicare PPS outlier policies. We still believe that a loss-sharing 
ratio of 0.80 is appropriate. Furthermore, we estimated the value of 
the FDL ratio that would yield estimated total outlier payments that 
were 5 percent of total home health PPS payments. The resulting value 
for the FDL ratio, for the July 3, 2000 final rule, was 1.13.
    In the CY 2005 update to the HH PPS rates (69 FR 62124), we revised 
the FDL ratio from the original 1.13 to 0.70 to allow more home health 
episodes to qualify for outlier payments and to better meet the 
estimated 5 percent target of outlier payments to total HH PPS 
payments. We stated in that CY 2005 update that we planned to continue 
to monitor the outlier expenditures on a yearly basis and to make 
adjustments as necessary (69 FR 62129). To do so, we planned on using 
the best Medicare data available at the time of publication. For the CY 
2005 update, we used CY 2003 home health claims data. At the time of 
publication of the CY 2006 proposed rule, we did not have more recent 
data, but noted that we may update the FDL ratio for CY 2006 depending 
on the availability of more recent data. We further noted that if we 
updated the FDL ratio for the CY 2006 update, we would use the same 
methodology performed in updating the current FDL ratio described in 
the October 22, 2004 final rule. Subsequent to publication of the CY 
2006 proposed rule, we have now obtained more recent data, that is, CY 
2004 home health claims data.
    Accordingly for this final rule, we have used the same methodology 
and performed an analysis on the CY 2004 HH PPS analytic data to update 
the FDL ratio for CY 2006. The results of this analysis indicate that 
an FDL ratio of 0.65 is consistent with the existing loss-sharing ratio 
of 0.80 and a projected target percentage of estimated outlier payments 
of 5 percent. Therefore, we are updating the FDL ratio from the current 
0.70 to 0.65 for CY 2006. As explained below, we believe reducing the 
FDL ratio will allow more episodes to qualify for outlier payments.
    Expressed in terms of a fixed dollar loss amount, an FDL ratio of 
0.65 indicates that providers would absorb approximately $1,513 of 
their costs (before wage adjustment), in addition to their loss-sharing 
portion of the estimated cost in excess of the outlier threshold. This 
fixed dollar loss amount of approximately $1,513 is computed by 
multiplying the standard 60-day episode payment amount ($2,327.68) by 
the FDL ratio (0.65). In contrast, using the current FDL ratio (0.70), 
the fixed dollar loss amount would be approximately $1,629 ($2,327.68 x 
0.70).
    Thus, we believe that an FDL ratio of 0.65 continues to preserve a 
reasonable degree of cost sharing, and continues to meet the statutory 
requirements while still allowing a greater number of episodes to 
qualify for outlier payments.

D. Hospital Wage Index

1. Revised OMB Definition for Geographical Statistical Areas
    Sections 1895(b)(4)(A)(ii) and (b)(4)(C) of the Act require the 
Secretary to establish area wage adjustment factors that reflect the 
relative level of wages and wage-related costs applicable to the 
furnishing of home health services and to provide appropriate 
adjustments to the episode payment amounts under HH PPS to account for 
area wage differences. We apply the appropriate wage index value to the 
labor portion (76.775 percent; see 60 FR 62126) of the HH PPS rates 
based on the geographic area in which the beneficiary received home 
health services as discussed in section II.A of the July 14, 2005 
proposed rule. Generally, we determine each HHA's labor market area 
based on definitions of Metropolitan Statistical Areas (MSAs) issued by 
the Office of Management and Budget (OMB).
    We acknowledged in our October 22, 2004 final rule that, on June 6, 
2003, the OMB issued an OMB Bulletin (No. 03-04) announcing revised 
definitions for MSAs, new definitions for Micropolitan Statistical 
Areas and Combined Statistical Areas, and guidance on using the 
statistical definitions. A copy of the Bulletin may be obtained at the 
following Internet address: https://www.whitehouse.gov/omb/bulletins/
b03-04.html. At that time, we did not propose to apply these new 
definitions known as Core-Based Statistical Areas (CBSAs). In the July 
14, 2005 proposed rule, we proposed to use the OMB-revised definitions 
to adjust the CY 2006 HH PPS payment rates and revise the regulations 
at 42 CFR 484.202 to reflect this proposed change. The Hospital 
Inpatient PPS (IPPS) applied these revised definitions as discussed in 
the August 11, 2004 IPPS final rule (68 FR 49207).
a. Background
    As discussed previously and set forth in the July 3, 2000 final 
rule, the statute provides that the wage adjustment factors may be the 
factors used by the Secretary for purposes of section 1886(d)(3)(E) of 
the Act for hospital wage adjustment factors. Again, as discussed in 
the July 3, 2000 final rule, we will use the pre-floor and pre-
reclassified hospital wage index data to adjust the labor portion of 
the HH PPS rates based on the geographic area in which the beneficiary 
receives the home health services. We believe the use of the pre-floor 
and pre-reclassified hospital wage index data results in the 
appropriate adjustment to the labor portion of the costs as required by 
statute. For the CY 2006 update to the home health payment rates, we 
will continue to use the most recent pre-floor and pre-reclassified 
hospital wage index available at the time of publication. See Addenda A 
and B of this final rule, respectively, for the rural and urban 
hospital wage indices using the new MSA designations. For HH PPS rates 
addressed in the July 14, 2005 proposed rule, we used preliminary 2006 
pre-floor and pre-reclassified hospital wage index data. We 
incorporated updated hospital

[[Page 68136]]

wage index data for the 2006 pre-floor and pre-reclassified hospital 
wage index to be used in the final rule for the CY 2006 HH PPS update 
(not including any reclassifications under section 1886(d)(8)(B) of the 
Act).
    As implemented under the HH PPS in the July 3, 2000 HH PPS final 
rule, each HHA's labor market is determined based on definitions of 
MSAs issued by OMB. In general, an urban area is defined as an MSA or 
New England County Metropolitan Area (NECMA) as defined by OMB. Under 
Sec.  412.62(f)(1)(iii), a rural area is defined as any area outside of 
the urban area. The urban and rural area geographic classifications are 
defined in Sec.  412.62(f)(1)(ii) and (f)(1)(iii), respectively, and 
have been used under HH PPS since it was implemented.
    Under the HH PPS, the wage index value used is based upon the 
location of the beneficiary's home. As has been our longstanding 
practice, any area not included in an MSA (urban area) is considered to 
be nonurban (Sec.  412.64(b)(1)(ii)(C)) and receives the statewide 
rural wage index value (see, for example, 65 FR 41173).
    In the August 11, 2004 IPPS final rule (69 FR 49206 through 49034), 
revised labor market area definitions were adopted under Sec.  
412.64(b), which were effective October 1, 2004 for acute care 
hospitals. The new standards, CBSAs, were announced by OMB in late 2000 
and were also discussed in greater detail in the July 14, 2005 HH PPS 
proposed rule. Recently other prospective payment systems such as the 
inpatient rehabilitation facility PPS (IRF PPS) and the skilled nursing 
facility PPS (SNF PPS) and Medicare payment for hospice care have been 
updated to utilize the new revised labor market area definitions. For 
the purposes of this rule, the term ``MSA-based'' refers to wage index 
values and designations based on the previous MSA designations. 
Conversely, the term ``CBSA-based'' refers to wage index values and 
designations based on the new OMB revised MSA designations which now 
include CBSAs.

III. Analysis of and Responses to Public Comments

    We received approximately 35 comments on the HH PPS proposed rule 
published on July 14, 2005. A summary of the major issues and our 
responses follow:

Market Basket

    Comment: A commenter indicated that CMS institute a modification to 
the market basket index formula to allow for consideration of cost 
increases, specifically transportation costs related to rising gasoline 
prices. The commenter noted that the rising spike in gas prices 
highlights the unique costs and challenges in delivering home health 
services that are not faced by hospitals or other health care 
providers. The commenter further noted that HHAs are one of the few 
Medicare providers so reliant upon fuel to provide healthcare services 
and this is especially relevant in rural areas where distance between 
patients can exceed 50 miles.
    Response: As an input price index, the 2000-based HH market basket 
and CY 2006 HH update is intended to reflect the price increases 
associated with transportation, not cost increases. The transportation 
base year cost weight, derived from the 2000 HHA Medicare cost reports, 
represents 2.744 percent of the HH market basket. In determining the HH 
market basket percentage increase, these costs are proxied using the 
Consumer Price Index (CPI) for private transportation; therefore, we 
believe forecasts of this price proxy reflect the price changes of 
fuel.
    Comment: A commenter noted that CMS has chosen not to rebase and 
revise the home health market basket for 2006. The commenter stated 
that CMS should develop a timely process to rebase and revise the home 
health market basket. The commenter also stated that CMS should 
consider rebasing more frequently than previous years as more current 
data become available.
    Response: We note that we recently rebased the 2000-based HH market 
basket for the CY 2004 HH PPS update. As we noted in the October 22, 
2004 final rule, we typically rebase the market baskets on a 5-year 
cycle. We will continue to monitor the home health market basket to 
ensure that it continues to accurately reflect the cost structures of 
HHAs.
    Comment: A commenter recommended that CMS should establish a 
technical advisory group that includes economists who can review the 
costs going into the home health market basket. Technology costs, 
transportation costs, workers compensation insurance, and the cost of 
providing home health preparedness in emergency situations 
significantly impact the ability to provide adequate home health 
services. Another commenter urged CMS to review and consider more 
appropriate ways to reflect the true economic realities as they relate 
to home health services. More accurate reflection of the economic 
environment will also alleviate the large variations in changes to the 
wage index from year to year for home health providers.
    Response: The majority of the 2000 base year cost weights 
(accounting for more than 90 percent of the home health market basket 
cost structure) were derived using the 2000 Medicare cost reports for 
freestanding HHAs. The price increases associated with the individual 
cost weights are forecasted by Global Insight, Inc. (GII). GII is a 
nationally recognized economic and financial forecasting firm that 
forecasts the components of the market baskets. While we believe the HH 
forecast is a reliable measure of the costs of providing HH services, 
specific comments and suggestions by other technical experts on the 
market basket, cost structure, and price increases are appreciated.
    Comment: Although required by law, a commenter opposed 
implementation of the 0.8 percent reduction to the market basket.
    Response: We acknowledge the comment but believe we must fulfill 
the statutory mandate that requires that our update to the HH payment 
rate be the applicable HH market basket percentage increase minus 0.8 
percentage points.

Outlier Payment

    Comment: A commenter noted that, in the proposed rule, CMS proposes 
no change to the outlier payment formula and notes that if CMS is 
considering modifying the outlier formula for the final rule, CMS 
should issue a proposed rule on any such change to allow for full 
public review and comment. The commenter stated that making policy 
changes on the HH PPS final rule is improper, and doing so would not 
follow appropriate procedure for CMS inspection and assessment in 
developing policies. Moreover, the commenter believes that the outlier 
threshold should be reduced each year until expenditures equal the 5 
percent threshold specified in legislation and that when CMS determines 
that expenditures have reached the threshold, the evidence for making 
no further reductions in the threshold should be presented in the 
proposed rule and finalized after public comment.
    Response: We do not disagree with the commenter but, as we stated 
in the July 14, 2005 proposed rule, we did not propose any change to 
the outlier methodology. We are updating the FDL ratio using the same 
methodology described in the October 22, 2004 final rule using the most 
recent available data. Using the most available data, our analysis 
showed that the FDL ratio applied to the computation of outlier 
payments should be decreased. As such, the lower FDL ratio will benefit 
HHAs by allowing more episodes to qualify for

[[Page 68137]]

outlier payments. The updated FDL ratio is 0.65, which we believe 
results in the estimated total outlier payments meeting the 5 percent 
target.
    We will continue to analyze current and future data in order to 
ensure that the FDL ratio is effective at maintaining estimated total 
outlier payments at the 5 percent level.

Rural Add-On

    Comment: Several commenters urged CMS to either restore or advocate 
for the re-establishment of the rural add-on for home health services 
furnished to beneficiaries living in rural areas.
    Response: The rural add-on was a temporary add-on established by 
the MMA. Specifically, section 421 of the MMA required, for home health 
services furnished in a rural area with respect to episodes and visits 
ending on or after April 1, 2004 and before April 1, 2005, that we 
increase by 5 percent the payment amount that otherwise would be made 
for the services. The statute does not provide for a continuation of 
the add-on.

Wage Index Tables

    Comment: A commenter would like to see wage index tables that 
compare the proposed wage index with the current wage index and show 
the year to year change in each locality. The commenter suggested that 
tables be presented both in CBSA alphabetical order, as well as by 
county within the State, as was done in the July 14, 2005 proposed 
rule. Also, the commenter suggested that a table highlight those areas 
experiencing the largest increases and decreases in the wage index. If 
more complete tables cannot be published in the Federal Register 
itself, the commenter suggested contemporaneous publication on the CMS 
Web site.
    Response: The final rule presents the wage index values in several 
different table formats. The wage index values are presented in CBSA 
order in Addendum B and Addendum C. The wage index values are presented 
by State and county in Addendum A.

Home Health Wage Index

    Comment: A commenter questioned how CMS' pre-floor, pre-
reclassified hospital wage index published in the July 14, 2005 Federal 
Register for the HH PPS proposed rule could be substantially different 
from the pre-floor, pre-reclassified hospital wage index published in 
the August 4, 2005 Federal Register for the SNF PPS final rule (70 FR 
45026).
    Response: The difference between ``Table 8.--FY2006 Wage Index for 
Urban Areas Based on CBSA Labor Market Areas'' contained in the August 
4, 2005 SNF PPS final rule and ``Addendum B.--Proposed CY 2006 Wage 
Index for Urban Areas by CBSA; Applicable Pre-Floor and Pre-
Reclassified Hospital Wage Index'' in the July 14, 2005 home health 
proposed rule is attributable to the fact that the SNF update and the 
HH proposed update are published at different times. In the July 14, 
2005 HH PPS proposed rule, the 2006 pre-floor, pre-reclassified 
hospital wage index was a preliminary version of the wage index. 
Between the time of publication of the July 14, 2005 home health PPS 
proposed rule and the time of publication of the SNF PPS final rule, a 
final version of the 2006 pre-floor, pre-reclassified hospital wage 
index became available and was subsequently published in the SNF PPS 
final rule.
    Comment: A number of commenters stated that the wage index formula 
is seriously flawed, claiming it does not reflect the cost of providing 
home health services. The commenters noted that providing home health 
services is unique from providing hospital services in that HHAs incur 
transportation costs (high gasoline costs) and auto insurance. 
Moreover, they stated that in the era of this nursing shortage, it is 
difficult to compete with hospitals to recruit and retain nursing 
staff. The commenters suggested that CMS should review its factors used 
in the wage index and communicate to providers how it applies the 
formulas to take into account the unique costs to HH that impact 
Medicare beneficiaries.
    Response: We disagree with the commenters' statement that the wage 
index formula is flawed. We believe the home health payment policy that 
utilizes hospital data as the input for calculating geographic area 
wage adjustments is the best available proxy for determining the 
related cost of home health wage and wage level costs. In addition, the 
home health payment rates incorporate a home health market basket 
update factor which reflects the unique costs of providing home health 
services as opposed to hospital or any other type of healthcare 
services.
    Comment: A commenter stated that future changes to the wage index 
should be accompanied by a comprehensive impact analysis and at least 
one year's notice in advance of the proposed change. Adaptations to 
large swings in reimbursement cannot be accommodated on short notice 
and threaten stability in providing services.
    Response: We believe that using the best available data, at the 
time of publication, for purposes of updating the HH payment rates is a 
valid reflection of the wage and wage level costs used in providing HH 
services.
    Comment: A commenter stated that the wage index listed in the 
proposed rule is based on preliminary 2006 pre-floor, pre-reclassified 
hospital wage data. In the proposed rule, CMS stated it will use the 
most recent pre-floor, pre-reclassified hospital wage index data 
available at the time of publication. The commenter suggested that CMS 
should update the wage index based on the final 2006 pre-floor and pre-
reclassified hospital wage data, not preliminary data. The preliminary 
data contained errors that were corrected when final hospital wage 
indexes were issued.
    Response: We are updating the HH payment rates using the most 
recent 2006 pre-floor, pre-reclassified hospital wage index data. As we 
noted in the July 14, 2005 proposed rule, because of the timing of the 
proposed rule, the most recent available data at that time were the 
preliminary 2006 pre-floor, pre-reclassified hospital wage index, and 
that more recent data would be used in the final rule.
    Comment: Several commenters supported the move to CBSAs. One 
commenter believes that CBSAs provide significantly better measures of 
individual labor markets and fully supports their adoption.
    Response: We appreciate the commenter's support. As we note later, 
we are adopting wage index values using CBSA designations.
    Comment: A commenter suggested that CMS should validate the 
accuracy and completeness of wage data submitted by hospitals to ensure 
that all hospitals in an area have reported.
    Response: We believe CMS employs current processes that accomplish 
this validation. All IPPS hospitals must complete the wage index survey 
(Worksheet S-3, Parts II and III) as part of their Medicare cost 
reports. Cost reports will be rejected if Worksheet S-3 is not 
completed. Additionally, intermediaries perform desk reviews on all 
hospitals' Worksheet S-3 wage data, and CMS runs edits on the wage data 
to further ensure the accuracy and validity of the wage data.
    Comment: A commenter suggested that CMS should provide a mechanism 
for HHAs to challenge the accuracy of wage index values for their 
areas, especially in cases where there are indications of an 
irregularity.
    Response: As we currently use hospital wage index data as the basis 
for the HH geographic wage adjustment, HHAs have the opportunity to 
submit comments on the hospital wage index data during the annual IPPS 
rulemaking period.

[[Page 68138]]

Transition

    Comment: We received a number of comments against using the new 
CBSA designations. We received a number of comments stating that at a 
minimum, CMS should institute a transition policy similar to that being 
implemented by SNFs, hospices, and inpatient rehabilitation facilities. 
Most commenters suggested a one-year transition period. Some of the 
commenters recommended a two-year or three-year transition period.
    Most commenters recommended a 50/50 blend of the previous and new 
labor market definitions. One commenter suggested a multi-year phase-in 
using a blend of previous and new with increasing reliance on the new 
wage index in each successive year (for example, 25 percent, 50 
percent, 75 percent, then 100 percent of the CBSA). Several commenters 
stated that the transition policy should be applied to wage areas that 
would experience a decrease in their wage index. Some commenters stated 
that wage index values for wage areas that would be subject to a 
decrease remain static. Other commenters suggested the use of a wage 
index floor to avoid large fluctuations in the wage index. Most 
commenters wanted a transition period for all wage areas.
    Response: We have considered all the comments, and we are adopting 
a wage index transition policy for HH PPS for CY 2006. The wage index 
transition policy for CY 2006 is a 50/50 blend of the CBSA-based wage 
index values and the MSA-based wage index values and will be applied to 
all wage areas. For CY 2007, the HH PPS will be solely based on a CBSA-
based wage index. We believe that the one-year transition policy using 
a 50/50 blend is responsive to the majority of comments that 
recommended a one-year transition and the majority that recommended a 
50/50 blend while still maintaining an appropriate adjustment to 
account for geographic wage differences. Addendum A displays the wage 
index in State and County order showing the MSA-based wage index 
values, the CBSA-based wage index values, and the blended wage index 
values. Addendum B and Addendum C display the wage index in CBSA order.
    Comment: A commenter suggested that CMS needs to revisit the 
assumption underlying the wage indices in micropolitan areas. The 
commenter stated that in any situation where a county of a micropolitan 
area is contiguous with the principal county of a metropolitan area, 
CMS must independently determine whether a unified labor market exists 
and allow for use of an urban rate calculation.
    Response: We refer readers to the explanation in the FY 2005 IPPS 
final rule published August 11, 2004 for our adoption of the new Census 
designations as well as the treatment of micropolitan areas as rural 
(69 FR 49026).
    Comment: A commenter recommended that the hospital wage index 
should not exclude CAHs when used for the specific purpose of 
determining rates for other providers that operate in the same areas 
served by the CAHs.
    Response: This comment is outside the scope of the HH PPS update 
final rule. Any comments regarding the specifics of the hospital wage 
index policy should be presented during the IPPS rulemaking period.
    Comment: A commenter requested that CMS review and reconsider the 
wage index calculation for Massachusetts' rural areas.
    Response: As the only hospitals left in rural Massachusetts are two 
critical access hospitals (CAHs), and data from CAHs are no longer 
included in the IPPS, there are no updated data from which to calculate 
a wage index for rural Massachusetts for use in the HH PPS update for 
CY 2006. In providing for an appropriate standard to account for area 
wage differences, for the purposes of the HH PPS update, we believe a 
reasonable proxy for the wage index for rural Massachusetts for CY 2006 
is the 2005 pre-floor, pre-reclassified hospital wage index data.
    Comment: Several commenters expressed concern about decreasing wage 
index values for specific counties.
    Response: We appreciate the detailed concerns sent by the 
commenters regarding the impact of the wage index update for their 
specific counties. We note that there will always be some areas that 
experience an increase in wage index values while others experience a 
decrease in wage index values. Variability in wage index values occurs 
each year as wage index values fluctuate from year to year based on the 
changes to the hospital wage data. As a result, wage index values 
within the system increase or decrease. We are aware of the changes to 
wage index values due in part to the adoption of the revised OMB 
designations and note we have provided a transition period for CY 2006.

Wage Index Reform

    Comment: A commenter recommended that in order to provide parity 
between hospitals and HHAs in areas where hospitals have reclassified 
to a higher wage index area, CMS should either authorize a similar wage 
index adjustment for HHAs or seek such authority from the Congress, as 
well as authority to put a floor on wage index reductions from one year 
to the next.
    The commenter also suggested that CMS should begin a wholesale 
revision and reform of the home health wage index. This reform should 
consider the impact on care access and financial stability of HHAs 
measured at the local level.
    Response: The statute does not provide authority to allow HHAs to 
apply for geographic reclassification. We also note that the HH PPS 
wage index adjustment is based on the geographic area where the 
beneficiary received home health services, not where the HHA is 
located. As to the revision and reform of the home health wage index, 
we further note that CMS has, along with the industry, explored the 
feasibility of developing a home health specific wage index. Because of 
the volatility of the home health wage data and the significant amount 
of resources that would be required to improve the quality of that 
data, we do not expect to propose a home health specific wage index 
until we can demonstrate that a home health specific wage index would 
be more reflective of the wages and salaries paid in a specific area, 
that it would significantly improve our ability to determine payment 
for home health agencies, and that we can justify the resources 
required to collect the data, as well as the increased burden on 
providers.
    Comment: A commenter recommended that there needs to be an ongoing 
dialogue between State and national home care associations and CMS in 
order to determine a more appropriate payment methodology for home 
care. A commenter stated that CMS should establish a home health 
technical advisory group to regularly review and update the multitude 
of parts of the HH PPS reimbursement methodology.
    Response: We appreciate the comment; however, we do not believe 
such a group is necessary as such a dialogue envisioned by the 
commenter currently exists. We have always received input from the 
industry on various aspects of our Medicare payment systems, and we 
anticipate this practice will continue into the future. Moreover, the 
``open-door'' forums, that we initiated, provide the public with an 
opportunity to provide input and comment on home health in general, 
including the payment policies used in the HH PPS.

[[Page 68139]]

LUPA

    Comment: We received a comment that LUPA reimbursement is 
inadequate for New York. The commenter stated that there should be a 
review and increase to the LUPA per visit rates to ensure that they 
cover the costs of providing care.
    Response: We believe the LUPA per-visit rates adequately account 
for the costs of providing care in such a situation. The per-visit 
rates used for the LUPA are adjusted by the appropriate wage index and 
updated annually by the home health market basket update minus 0.8 
percent as required by the statute.

Case Mix Weight

    Comment: Commenters stated that the HHRG case mix classification 
does not recognize the added costs of the dually eligible 
beneficiaries, noting that this population has more comorbidities and 
often lacks the informal supports non-dual eligible beneficiaries have. 
As these complexities add to the cost of providing care, the commenters 
suggested that an add-on for these patients should be implemented until 
refinements to the case mix system can be made.
    Response: We are currently analyzing possible refinements to the 
case mix system. Concerns such as those expressed by the commenters are 
included in our review and analysis. We note that our analysis includes 
not only review of statistical data but also review of operational 
feasibility and policy implications.
    Comment: We received a comment stating that the case-mix system 
does not adequately recognize the costs of wound care given the 
intensity of some of these patients and the newest supplies that can 
facilitate rapid healing.
    Response: We appreciate the comment and note that wound care's 
impact on case-mix is being addressed in our refinement review and 
analysis through a study of supplies' costs as a component of case mix 
and through other types of case-mix model refinements.
    Comment: A commenter recommended that CMS should institute ongoing 
analysis of the case-mix weights along with a mechanism to refine the 
case-mix adjustments. CMS has 3 years of data that should assist in 
this process.
    Response: We agree and our refinement review and analysis, which is 
currently under development, addresses a revision of the case-mix 
weights resulting from a refinement of the underlying case mix model 
and of the resulting set of groups.

IV. Provisions of the Final Regulations

    Generally, this final rule incorporates the provisions of the July 
14, 2005 proposed rule. Those provisions of this final rule that differ 
from the proposed rule are as follows:
    There will be a one-year transition period in implementing the new 
area labor market designations for purposes of adjusting for area wage 
differences. In calculating the wage index applicable to HH PPS for CY 
2006, the wage index will be a blend of 50 percent of wage index values 
based on CBSA designations and 50 percent of the wage index values 
based on MSA designations.
    In addition, we are revising the fixed-dollar loss ratio used in 
the calculation of outlier payments.

V. Collection of Information Requirements

    This document does not impose information collection and 
recordkeeping requirements. Consequently, it need not be reviewed by 
the Office of Management and Budget under the authority of the 
Paperwork Reduction Act of 1995 (44 U.S.C. 35).

VI. Regulatory Impact Analysis

A. Overall Impact

    We have examined the impacts of this rule as required by Executive 
Order 12866 (September 1993, Regulatory Planning and Review), the 
Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L. 96-354), 
section 1102(b) of the Social Security Act, the Unfunded Mandates 
Reform Act of 1995 (Pub. L. 104-4), and Executive Order 13132.
    Executive Order 12866 (as amended by Executive Order 13258, which 
merely reassigns responsibility of duties) directs agencies to assess 
all costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). A 
regulatory impact analysis (RIA) must be prepared for major rules with 
economically significant effects ($100 million or more in any 1 year). 
The update set forth in July 14, 2005 proposed rule applies to Medicare 
payments under HH PPS in CY 2006. Accordingly, the following analysis 
describes the impact in CY 2006 only. We estimate that there will be an 
additional $370 million in CY 2006 expenditures attributable to the CY 
2006 proposed estimated home health market basket update (3.6 percent) 
minus 0.8 percentage points, for a CY 2006 update of 2.8 percent.
    The RFA requires agencies to analyze options for regulatory relief 
of small businesses. For purposes of the RFA, small entities include 
small businesses, nonprofit organizations, and government 
jurisdictions. Most hospitals and most other providers and suppliers 
are small entities, either by nonprofit status or by having revenues of 
$6 million to $29 million in any 1 year. For purposes of the RFA, 
approximately 75 percent of HHAs are considered small businesses 
according to the Small Business Administration's size standards with 
total revenues of $11.5 million or less in any 1 year. Individuals and 
States are not included in the definition of a small entity. This final 
rule will have a significant positive effect upon small entities.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis if a rule may have a significant impact on 
the operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 604 of the RFA. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a Metropolitan 
Statistical Area and has fewer than 100 beds or a hospital located in a 
CBSA. We have determined that this final rule will not have a 
significant economic impact on the operations of a substantial number 
of small rural hospitals.
    Section 202 of the Unfunded Mandates Reform Act of 1995 also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule whose mandates require spending in any 1 year of $100 
million in 1995 dollars, updated annually for inflation. That threshold 
level is currently approximately $120 million. We believe this final 
rule will not mandate expenditures in that amount.
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a final rule that imposes 
substantial direct requirement costs on State and local governments, 
preempts State law, or otherwise has Federalism implications. We have 
reviewed this rule under the threshold criteria of Executive Order 
13132, Federalism. We have determined that this final rule will not 
have substantial direct effects on the rights, roles, and 
responsibilities of States.

[[Page 68140]]

B. Anticipated Effects

    This rule updates the HH PPS rates contained in the CY 2005 final 
rule (69 FR 62124, October 22, 2004). The impact analysis of this rule 
presents the projected effects of the change from MSA designations to a 
50/50 blend of MSA and CBSA designations in determining the wage index 
used to calculate the HH PPS rates for CY 2006. We estimate the effects 
by estimating payments while holding all other payment variables 
constant. We use the best data available, but we do not attempt to 
predict behavioral responses to these changes, and we do not make 
adjustments for future changes in such variables as days or case-mix.
    This analysis incorporates the latest estimates of growth in 
service use and payments under the Medicare home health benefit, based 
on the latest available Medicare claims from 2004. We note that certain 
events may combine to limit the scope or accuracy of our impact 
analysis, because such an analysis is future-oriented and, thus, 
susceptible to forecasting errors due to other changes in the 
forecasted impact time period. Some examples of such possible events 
are newly-legislated general Medicare program funding changes by the 
Congress, or changes specifically related to HHAs. In addition, changes 
to the Medicare program may continue to be made as a result of the BBA, 
the BBRA, the BIPA, the MMA, or new statutory provisions. Although 
these changes may not be specific to the HH PPS, the nature of the 
Medicare program is such that the changes may interact, and the 
complexity of the interaction of these changes could make it difficult 
to predict accurately the full scope of the impact upon HHAs.
    Our discussions for this final rule will focus on the impact of 
changes in the wage index, most notably the adoption of the CBSA 
designations. The impacts are shown in Table 3 below. The breakdown of 
the various impacts displayed in the table follows.
    The rows display the estimated effect of the proposed changes on 
different categories. The first row of figures represents the estimated 
effects on all facilities. The next 2 rows show the effect on urban and 
rural facilities. This is followed, in the next 4 rows, by impacts on 
urban and rural facilities based on whether they are a hospital-based 
or freestanding facility. The next 20 rows show the effect on urban and 
rural facilities based on the census region in which they are located.
    The first column shows the breakdown of all HHAs by urban or rural 
status, hospital-based or freestanding status, and census region.
    The second column in the table shows the number of facilities in 
the impact database. A facility is considered urban if it is located in 
an MSA and, conversely, rural if it is not located in an MSA.
    The third column of the table shows the effect of the updating the 
MSA-based wage index (without moving to CBSAs). This column represents 
the difference between the 2005 MSA-based wage index and the 2006 MSA-
based wage index.
    The fourth column of the table reflects the impact of using the new 
OMB geographic designations based on CBSAs, compared to using the MSA 
designations without a transition policy. As we are implementing a 
transition policy, this column is shown for reference purposes only.
    The fifth column of the table shows the effect of all of the 
changes on the CY 2006 payments without implementing a transition 
policy. The update of 2.8 percentage points (market basket increase of 
3.6 percent minus 0.8 percentage points, as mandated by the MMA) is 
constant for all providers and, though not shown individually, is 
included in this column. In essence, this column represents the sum of 
columns three and four, adding in the 2.8 percent increase with slight 
differences due to rounding. Again, as we are implementing a transition 
policy, this column is shown for reference purposes only.
    The sixth column of the table reflects the impact of using the new 
OMB geographic designations based on CBSAs, compared to using the MSA 
designations with a transition policy consisting of a 50/50 blend of 
the previous (MSA-based) and the new (CBSA-based) wage area 
designations. Specifically, the effect of using the blended wage index 
values in determining payment for facilities in urban areas is, on 
average, a decrease of 0.1 percent. On the other hand, facilities in a 
rural area show an average increase of 0.4 percent. Rural HHAs, by 
region, generally show an increase using the CBSA-determined wage index 
(ranging from an increase of 0.1 percent to 1.1 percent), except for 
facilities in the Middle Atlantic and the Mountain regions where 
payments are estimated to decrease by 0.3 percent and 0.2 percent 
respectively. The impact on urban HHAs, by region, is generally 
moderate using the 50/50 transition blend of MSA-based and CBSA-based 
wage index values (ranging from a 0.1 percent increase to a 0.3 percent 
decrease). By type of facility, the impact on rural facilities using 
the blended wage index is positive, with payments to freestanding 
facilities and hospital-based facilities estimated to increase by 0.4 
percent. Conversely, hospital-based urban facilities are estimated to 
experience no impact while freestanding urban facilities are estimated 
to see a decrease in payments by 0.1 percent.
    The seventh column of the table shows the total wage index change 
with the transition policy. This column represents the sum of the 
change due to the updated wage data (column 3) and the change due to 
the move to CBSAs using the transition policy (column 6) with slight 
differences due to rounding.
    The eighth column of the table shows the effect of all of the 
changes on the CY 2006 payments with a transition policy. The update of 
2.8 percentage points (market basket increase of 3.6 percent minus 0.8 
percentage points, as mandated by the MMA) is constant for all 
providers and, though not shown individually, is included in this 
column. It is projected that total aggregate payments would increase by 
2.7 percent; assuming facilities do not change their care delivery and 
billing practices in response.
    As can be seen from this table, the combined effects of all of the 
changes would vary by specific types of providers and by location. For 
example, HHAs in rural New England show the largest estimated increase 
in payment at 5.9 percent, while HHAs in the urban West North Central 
and East North Central regions show the smallest increases in payments 
at 1.5 percent and 1.7 percent respectively. Rural HHAs in the West 
North Central regions and East North Central regions differ from urban 
HHAs in those regions, seeing an estimated increase in payments of 2.7 
percent and 3.5 percent, respectively. Amongst the different type of 
facility categories, freestanding rural HHAs have the largest estimate