Medicare Program; Changes to the Hospital Outpatient Prospective Payment System and Calendar Year 2006 Payment Rates, 68516-68980 [05-22136]

Agencies

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

[Federal Register Volume 70, Number 217 (Thursday, November 10, 2005)]
[Rules and Regulations]
[Pages 68516-68980]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-22136]



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Part II

Book 2 of 2 Books

Pages 68515-69040





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Parts 419 and 485



Medicare Program; Changes to the Hospital Outpatient Prospective 
Payment System and Calendar Year 2006 Payment Rates; Final Rule

Federal Register / Vol. 70, No. 217 / Thursday, November 10, 2005 / 
Rules and Regulations

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 419 and 485

[CMS-1501-FC]
RIN 0938-AN46


Medicare Program; Changes to the Hospital Outpatient Prospective 
Payment System and Calendar Year 2006 Payment Rates

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

ACTION: Final rule with comment period.

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SUMMARY: This final rule with comment period revises the Medicare 
hospital outpatient prospective payment system to implement applicable 
statutory requirements and changes arising from our continuing 
experience with this system and to implement certain related provisions 
of the Medicare Prescription Drug, Improvement, and Modernization Act 
(MMA) of 2003. In addition, the final rule with comment period 
describes changes to the amounts and factors used to determine the 
payment rates for Medicare hospital outpatient services paid under the 
prospective payment system. This final rule with comment period also 
changes the requirement for physician oversight of mid-level 
practitioners in critical access hospitals (CAHs).
    In this final rule with comment period, we also are responding to 
public comments received on the November 15, 2004, final rule with 
comment period pertaining to the ambulatory payment classification 
(APC) group assignment of Healthcare Common Procedure Coding System 
(HCPCS) codes identified in Addendum B of that rule with the new 
interim (NI) comment indicator. These changes are applicable to 
services furnished on or after January 1, 2006.

DATES: Effective Date: This final rule with comment period is effective 
on January 1, 2006.
    Comment Date: We will consider comments on the payment 
classification assigned to HCPCS codes identified in Addendum B with 
the NI comment code and other areas specified through the preamble if 
we receive them at the appropriate address, as provided below, no later 
than 5 p.m. on January 9, 2006.

ADDRESSES: In commenting, please refer to file code CMS-1501-FC. 
Because of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    You may submit comments in one of four ways (no duplicates, 
please):
    1. Electronically. You may submit electronic comments on specific 
issues in this final rule with comment period to https://
www.cms.hhs.gov/regulations/ecomments. (Attachments should be in 
Microsoft Word, WordPerfect, or Excel; however, we prefer Microsoft 
Word).
    2. By regular mail. You may mail written comments (one original and 
two copies) to the following address ONLY: Centers for Medicare & 
Medicaid Services, Department of Health and Human Services, Attention: 
CMS-1501-FC, P.O. Box 8016, Baltimore, MD 21244-8018.
    3. By express or overnight mail. You may send written comments (one 
original and two copies) to the following address ONLY:
    Centers for Medicare & Medicaid Services, Department of Health and 
Human Services, Attention: CMS-1501-FC, Mail Stop C4-26-05, 7500 
Security Boulevard, Baltimore, MD 21244-1850.
    4. By hand or courier. If you prefer, you may deliver (by hand or 
courier) your written comments (one original and two copies) before the 
close of the comment period to one of the following addresses. If you 
intend to deliver your comments to the Baltimore address, please call 
telephone number (410) 786-7195 in advance to schedule your arrival 
with one of our staff members. Room 445-G, Hubert H. Humphrey Building, 
200 Independence Avenue, SW., Washington, DC 20201, or 7500 Security 
Boulevard, Baltimore, MD 21244-1850.
    (Because access to the interior of the Hubert H. Humphrey Building 
is not readily available to persons without Federal Government 
identification, commenters are encouraged to leave their comments in 
the CMS drop slots located in the main lobby of the building. A stamp-
in clock is available for persons wishing to retain proof of filing by 
stamping in and retaining an extra copy of the comments being filed.)
    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and received after the comment 
period.
    Inspection of Public Comments: All comments received before the 
close of the comment period are available for viewing by the public, 
including any personally identifiable or confidential business 
information that is included in a comment. CMS posts all electronic 
comments received before the close of the comment period on its public 
Web site as soon as possible after they have been received. Hard copy 
comments received timely will be available for public inspection as 
they are received, generally beginning approximately 3 weeks after 
publication of a document, at the headquarters of the Centers for 
Medicare & Medicaid Services, 7500 Security Boulevard, Baltimore, MD 
21244-1850, Monday through Friday of each week from 8:30 a.m. to 4 p.m. 
To schedule an appointment to view public comments, phone 1-800-743-
3951.
    Requirements for Issuance of Regulations: Section 902 of the 
Medicare Prescription Drug, Improvement, and Modernization Act of 2003 
(MMA), Pub. L. 108-173, 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 Pub. L. 108-173 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 with comment period finalizes provisions set forth 
in the CY 2006 OPPA proposed rule (70 FR 42674, July 25, 2005). In 
addition, this final rule has been published within the 3-year time 
limit imposed by section 902 of Pub. L. 108-173. This final rule also 
finalizes the November 15, 2004 final rule with comment period (69 FR 
65681) to address public comments pertaining to the APC group 
assignment of HCPCS codes identified in Addendum B of that rule with 
the NI comment indicator. Again, we finalized the rule within the 3-
year timeframe imposed under section 902 of Pub. L. 108-173. Therefore, 
we believe that the final rule is in accordance with the Congress' 
intent to ensure timely publication of final regulations.

FOR FURTHER INFORMATION, CONTACT: Rebecca Kane, (410) 786-0378, 
Outpatient prospective payment issues and Suzanne Asplen, (410) 786-
4558, Partial hospitalization and community mental health centers 
issues.

SUPPLEMENTARY INFORMATION:

Electronic Access

    This Federal Register document is available from the Federal 
Register online database through GPO Access, a service of the U.S. 
Government Printing Office. The Web site address is: https://
www.gpoaccess.gov/fr/.

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Alphabetical List of Acronyms Appearing in the Final Rule With Comment 
Period

ACEP American College of Emergency Physicians
AHA American Hospital Association
AHIMA American Health Information Management Association
AMA American Medical Association
APC Ambulatory payment classification
AMP Average manufacturer price
ASP Average sales price
ASC Ambulatory surgical center
AWP Average wholesale price
BBA Balanced Budget Act of 1997, Pub. L. 105-33
BIPA Medicare, Medicaid, and SCHIP Benefits Improvement and 
Protection Act of 2000, Pub. L. 106-554
BBRA Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 
1999, Pub. L. 106-113
CAH Critical access hospital
CBSA Core-Based Statistical Areas
CCR (Cost center specific) Cost-to-charge ratio
CMHC Community mental health center
CMS Centers for Medicare & Medicaid Services (formerly known as the 
Health Care Financing Administration)
CNS Clinical nurse specialist
CORF Comprehensive outpatient rehabilitation facility
CPT [Physicians'] Current Procedural Terminology, Fourth Edition, 
2005, copyrighted by the American Medical Association
CRNA Certified registered nurse anesthetist
CY Calendar year
DMEPOS Durable medical equipment, prosthetics, orthotics, and 
supplies
DMERC Durable medical equipment regional carrier
DRGY Diagnosis-related group
DSH Disproportionate share hospital
EACH Essential Access Community Hospital
E/M Evaluation and management
EPO Erythropoietin
ESRD End-stage renal disease
FACA Federal Advisory Committee Act, Pub. L. 92-463
FDA Food and Drug Administration
FI Fiscal intermediary
FSS Federal Supply Schedule
FY Federal fiscal year
GAO Government Accountability Office
HCPCS Healthcare Common Procedure Coding System
HCRIS Hospital Cost Report Information System
HHA Home health agency
HIPAA Health Insurance Portability and Accountability Act of 1996, 
Pub. L. 104-191
ICD-9-CM International Classification of Diseases, Ninth Edition, 
Clinical Modification
IME Indirect medical education
IPPS (Hospital) Inpatient prospective payment system
IVIG Intravenous immune globulin
LTC Long-term care
MedPAC Medicare Payment Advisory Commission
MDH Medicare-dependent hospital
MMA Medicare Prescription Drug, Improvement, and Modernization Act 
of 2003, Pub. L. 108-173
MSA Metropolitan Statistical Area
NCCI National Correct Coding Initiative
NCD National Coverage Determination
NP Nurse practitioner
OCE Outpatient Code Editor
OMB Office of Management and Budget
OPD (Hospital) Outpatient department
OPPS (Hospital) Outpatient prospective payment system
PA Physician assistant
PHP Partial hospitalization program
PM Program memorandum
PPI Producer Price Index
PPS Prospective payment system
PPV Pneumococcal pneumonia (virus)
PRA Paperwork Reduction Act
QIO Quality Improvement Organization
RFA Regulatory Flexibility Act
RRC Rural referral center
SBA Small Business Administration
SCH Sole community hospital
SDP Single drug pricer
SI Status indicator
TEFRA Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-
248
TOPS Transitional outpatient payments
USPDI United States Pharmacopoeia Drug Information

    To assist readers in referencing sections contained in this 
document, we are providing the following outline of contents:

Outline of Contents

I. Background
    A. Legislative and Regulatory Authority for the Hospital 
Outpatient Prospective Payment System
    B. Excluded OPPS Services and Hospitals
    C. Prior Rulemaking
    D. APC Advisory Panel
    1. Authority for the APC Panel
    2. Establishment of the APC Panel
    3. APC Panel Meetings and Organizational Structure
    E. Provisions of the Medicare Prescription Drug, Improvement, 
and Modernization Act of 2003 That Will Be Implemented in CY 2006
    1. Hold Harmless Provisions
    2. Study and Authorization of Adjustment for Rural Hospitals
    3. Payment for ``Specified Covered Outpatient Drugs''
    4. Adjustment in Payment Rates for ``Specified Covered 
Outpatient Drugs'' for Overhead Costs
    5. Budget Neutrality Adjustment
    F. CMS' Commitment to New Technologies
    G. Summary of the Provisions of the CY 2006 OPPS Proposed Rule
    H. Public Comments Received on the CY 2006 OPPS Proposed Rule
    I. Public Comments Received on the November 15, 2004 OPPS Final 
Rule With Comment Period
II. Updates Affecting Payments for CY 2006
    A. Recalibration of APC Relative Weights for CY 2006
    1. Database Construction
    a. Database Source and Methodology
    b. Use of Single and Multiple Procedure Claims
    2. Calculation of Median Costs for CY 2006
    3. Calculation of Scaled OPPS Payment Weights
    4. Changes to Packaged Services
    a. Background
    b. Responses to the APC Panel Recommendations
    B. Payment for Partial Hospitalization
    1. Background
    2. PHP APC Update for CY 2006
    3. Separate Threshold for Outlier Payments to CMHCs
    C. Conversion Factor Update for CY 2006
    D. Wage Index Changes for CY 2006
    E. Statewide Average Default Cost-to-Charge Ratios (CCRs)
    F. Expiring Hold Harmless Provision for Transitional Corridor 
Payments for Certain Rural Hospitals
    G. Adjustment for Rural Hospitals
    1. Factors Contributing to Unit Cost Differences Between Rural 
Hospitals and Urban Hospitals and Associated Explanatory Variables
    2. Results
    H. Hospital Outpatient Outlier Payments
    I. Calculation of the National Unadjusted Medicare Payment
    J. Beneficiary Copayments for CY 2006
    1. Background
    2. Copayment for CY 2006
    3. Calculation of the Unadjusted Copayment Amount for CY 2006
III. Ambulatory Payment Classification (APC) Group Policies
    A. Introduction
    1. Treatment of New HCPCS Codes Discussed in the CY 2006 OPPS 
Proposed Rule
    2. Treatment of New CY 2006 HCPCS Codes
    3. Treatment of New Mid-Year Category III CPT Codes
    B. Variations within APCs
    1. Background
    2. Application of the 2 Times Rule
    a. APC 0146: Level I Sigmoidoscopy
    b. APC 0342: Level I Pathology
    c. Other Comments on the Proposed List of APC Assignments to 
Address 2 Times Violations
    3. Exceptions to the 2 Times Rule
    C. New Technology APCs
    1. Introduction
    2. Refinement of New Technology Cost Bands
    3. Requirements for Assigning Services to New Technology APCs
    4. New Technology Services
    a. Ablation of Bone Tumors
    b. Breast Brachytherapy
    c. Enteryx Procedure
    d. Extracorporeal Shock Wave Treatment
    e. GreenLight Laser
    f. Magnetoencephalography (MEG)
    g. Positron Emission Tomography (PET) Scans
    h. Proton Beam Treatment
    i. Smoking Cessation Counseling
    j. Stereoscopic Kv X-ray
    k. Stereotactic Radiosurgery (SRS)
    D. APC-Specific Policies
    1. Cardiac and Vascular Procedures
    a. Acoustic Heart Sound Recording and Analysis

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    b. Cardiac Electrophysiologic Services (APC 0087)
    c. Cardioverter-Defibrillator Implantation (APCs 0107 and 0108)
    d. Endovenous Ablation (APC 0092)
    e. External Counterpulsation Therapy (APC 0678)
    f. Intracardiac Echocardiography (APC 0670)
    g. Percutaneous Thrombectomy and Thrombolysis (APC 0676)
    h. Coronary Flow Reserve (APCs 0416 and 0670)
    i. Vascular Access Procedures (APCs 0621, 0622, and 0623)
    2. Radiology, Radiation Oncology, and Nuclear Medicine
    a. Angiography and Venography (APCs 0279, 0280, and 0668)
    b. Brachytherapy (APCs 0312, 0313, and0651)
    c. Computed Tomography (APCs 0283 and 0333)
    d. Computed Tomographic Angiography (APC 0333)
    e. Computed Tomographic Guidance (APC 0332)
    f. Computerized Reconstruction (APC 0417)
    g. Diagnostic Computed Tomographic Colonography (APC 0333)
    h. Intensity Modulated Radiation Therapy (IMRT) (APCs 0310 and 
0412)
    i. Kidney Imaging (APC 0267)
    j. Magnetic Resonance Guided Focused Ultrasound Ablation (APC 
0193)
    k. Non-Imaging Nuclear Medicine Studies (APC 0389)
    l. Therapeutic Radiation Treatment (APC 0304)
    m. Urinary Bladder Study (APC 0340)
    3. Gastrointestinal and Genitourinary Procedures
    a. Cystourethroscopy with Lithotripsy (APC 0163)
    b. GI Stenting (APC 0384)
    c. Insertion of Uterine Tandems and/or Vaginal Ovoids for 
Clinical Brachytherapy (APC 0192)
    d. Laparoscopic Ablation Procedures (APC 0131)
    e. Plicator Procedure (APC 0422)
    f. Prostate Cryosurgery (APC 0674)
     g. Stretta Procedure (APC 0422)
    h. Urological Stenting Procedures (APCs 0163 and 0164)
    4. Other Surgical Services
    a. Excision-Malignant Lesions (APCs 0019 and 0020)
    b. External Fixation (APCs 0046 and 0050)
    c. Intradiscal Annuloplasty (APC 0203)
    d. Kyphoplasty (APC 0051)
    e. Neurostimulator Electrode Implantation (APCs 0040 and 0225)
    f. Neurostimulator Generator Implantation (APC 0222)
    g. Thoracentesis/Lavage (APC 0070)
    5. Other Services
    a. Allergy Testing (APC 0370)
    b. Apheresis (APC 0112)
    c. Audiology (APCs 0364, 0365, and 0366)
    d. Bone Marrow Harvesting (APC 0111)
    e. Computer Assisted Navigational Procedures
    f. Hyperbaric Oxygen Therapy (APC 0659)
    g. Ophthalmology Examinations (APC 0601)
    h. Pathology Services
    i. Photodynamic Therapy of the Skin (APC 0013)
    j. Wound Care
IV. Payment Changes for Devices
    A. Device-Dependent APCs
    1. Public Comments and Our Responses on the November 15, 2004 
Final Rule With Comment Period
    2. CY 2006 Proposal, APC Panel Recommendations, and Responses to 
Public Comments Received
    a. APC Panel Recommendations
    b. Public Comments Received and Our Responses
    (1) Adjustment of Median Costs
    (2) Effects of Inconsistent Markup of Charges
    (3) Effects of Multiple Procedure Reduction
    (4) Impact of Proposed Rates on Access to Care
    (5) Addition of Other APCs as Device-Dependent APCs
    (6) Instructions on Reporting Device Charges
    (7) Application of Wage Index to Package Containing Device
    (8) Recalls of High Cost Devices
    (9) Separate Payment for High Cost Devices
    B. Pass-Through Payments for Devices
    1. Expiration of Transitional Pass-Through Payments for Certain 
Devices
    2. Proposed and Final Policy for CY 2006
    C. Other Policy Issues Relating to Pass-Through Device 
Categories
    1. Provisions for Reducing Transitional Pass-Through Payments to 
Offset Costs Packaged into APC Groups
    a. Background
    b. Policy for CY 2006
    2. Criteria for Establishing New Pass-Through Device Categories
    a. Surgical Insertion and Implantation Criterion
    (1) Public Comments Received on November 15, 2004 OPPS Final 
Rule with Comment Period and Our Responses
    (2) Public Comments Received on the CY 2006 OPPS Proposed Rule 
and Our Responses
    b. Existing Device Category Criterion
V. Payment Changes for Drugs, Biologicals, and Radiopharmaceutical 
Agents
    A. Transitional Pass-Through Payment for Additional Costs of 
Drugs and Biologicals
    1. Background
    2. Expiration in CY 2005 of Pass-Through Status for Drugs and 
Biologicals
    3. Drugs and Biologicals With Pass-Through Status in CY 2006
    B. Payment for Drugs, Biologicals, and Radiopharmaceutical 
Agents Without Pass-Through Status
    1. Background
    2. Criteria for Packaging Payment for Drugs, Biologicals, and 
Radiopharmaceutical Agents
    3. Payment for Drugs, Biologicals, and Radiopharmaceutical 
Agents Without Pass-Through Status That Are Not Packaged
    a. Payment for Specified Covered Outpatient Drugs
    (1) Background
    (2) Changes for CY 2006 Related to Pub. L. 108-173
    (3) Data Sources Available for Setting CY 2006 Payment Rates
    (4) CY 2006 Payment Policy for Radiopharmaceutical Agents
    (5) MedPAC Report on APC Payment Rate Adjustment of Specified 
Covered Outpatient Drugs
    b. CY 2006 Payment for Nonpass-Through Drugs, Biologicals, and 
Radiopharmaceutical Agents With HCPCS Codes But Without OPPS 
Hospital Claims Data
    C. Coding and Billing Changes for Specified Covered Outpatient 
Drugs
    1. Background
    2. CY 2006 Payment Policy
    D. Payment for New Drugs, Biologicals, and Radiopharmaceutical 
Agents Before HCPCS Codes Are Assigned
    1. Background
    2. CY 2006 Payment Policy
    E. Payment for Vaccines
    F. Changes in Payments for Single Indication Orphan Drugs
VI. Estimate of Transitional Pass-Through Spending in CY 2006 for 
Drugs, Biologicals, and Devices
    A. Total Allowed Pass-Through Spending
    B. Estimate of Pass-Through Spending for CY 2006
VII. Brachytherapy Payment Changes
    A. Background
    B. Changes Related to Pub. L. 108-173
    C. CY 2006 Payment Policy
VIII. Coding and Payment for Drug Administration
    A. Background
    B. Policy Changes for Drug Administration for CY 2006
    C. Policy Changes for Vaccine Administration for CY 2006
IX. Hospital Coding for Evaluation and Management (E/M) Services
X. Payment for Blood and Blood Products
    A. Background
    B. Policy Changes for CY 2006
XI. Payment for Observation Services
    A. Background
    B. CY 2006 Coding Changes for Observation Services and Direct 
Admission to Observation
    C. Criteria for Separate Payment for Direct Admission to 
Observation
    D. Criteria for Separately Payable Observation Services (APC 
0339)
    1. Diagnosis Requirements
    2. Observation Time
    3. Additional Hospital Services
    4. Physician Evaluation
XII. Procedures That Will Be Paid Only as Inpatient Procedures
    A. Background
    B. Policy Changes to the Inpatient List
    C. Ancillary Outpatient Services When Patient Expires
XIII. Indicator Assignments
    A. Status Indicator Assignments
    B. Comment Indicators for the CY 2006 OPPS Final Rule
XIV. Nonrecurring Policy Changes
    A. Payment for Multiple Diagnostic Imaging Procedures
    B. Interrupted Procedure Payment Policies (Modifiers -52, -73, 
and -74)

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XV. OPPS Policy and Payment Recommendations
    A. MedPAC Recommendations
    1. Report to the Congress: Medicare Payment Policy (March 2005)
    2. Report to the Congress: Issues in a Modernized Medicare 
Program--Payment for Pharmacy Handling Costs in Hospitals
    B. APC Panel Recommendations
    C. GAO Recommendations
XVI. Physician Oversight of Nonphysician Practitioners in Critical 
Access Hospitals
    A. Background
    B. Proposed Policy Change in Proposed Rule
    C. Public Comments Received on Proposed Rule and Our Responses
    D. Final Policy
XVII. Files Available to the Public via the Internet
XVIII. Collection of Information Requirements
XIX. Regulatory Impact Analysis
    A. OPPS: General
    1. Executive Order 12866
    2. Regulatory Flexibility Act (RFA)
    3. Small Rural Hospitals
    4. Unfunded Mandates
    5. Federalism
    B. Impact of Changes in this Final Rule with Comment Period
    C. Alternatives Considered
    1. Option Considered for Payment Policy for Separately Payable 
Drugs and Biologicals
    2. Payment Adjustment for Rural SCHs
    3. Change in the Percentage of Total OPPS Payments Dedicated to 
Outlier Payments
    D. Limitations of Our Analysis
    E. Estimated Impacts of this Final Rule with Comment Period on 
Hospitals
    F. Estimated Impact of the Change in Outlier Policy
    G. Accounting Statement
    H. Estimated Impacts of this Final Rule with Comment Period on 
Beneficiaries
XX. Waiver of Proposed Rulemaking

Regulation Text

Addenda

    Addendum A--List of Ambulatory Payment Classification (APCs) 
with Status Indicators, Relative Weights, Payment Rates, and 
Copayment Amounts--CY 2006
    Addendum B--Payment Status by HCPCS Code and Related 
Information--CY 2006
    Addendum D1--Payment Status Indicators for the Hospital 
Outpatient Prospective Payment System
    Addendum D2--Comment Indicators
    Addendum E--CPT Codes That Are Paid Only as Inpatient Procedures
    Addendum L-Out-Migration Wage Adjustment for CY 2006

I. Background

A. Legislative and Regulatory Authority for the Hospital Outpatient 
Prospective Payment System

    When the Medicare statute was originally enacted, Medicare payment 
for hospital outpatient services was based on hospital-specific costs. 
In an effort to ensure that Medicare and its beneficiaries pay 
appropriately for services and to encourage more efficient delivery of 
care, the Congress mandated replacement of the reasonable cost-based 
payment methodology with a prospective payment system (PPS). The 
Balanced Budget Act of 1997 (BBA) (Pub. L. 105-33), enacted on August 
5, 1997, added section 1833(t) to the Social Security Act (the Act) 
authorizing implementation of a PPS for hospital outpatient services. 
The Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 
1999 (BBRA) (Pub. L. 106-113), enacted on November 29, 1999, made major 
changes that affected the hospital outpatient PPS (OPPS). The Medicare, 
Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 
(BIPA) (Pub. L. 106-554), enacted on December 21, 2000, made further 
changes in the OPPS. Section 1833(t) of the Act was also amended by the 
Medicare Prescription Drug, Improvement, and Modernization Act of 2003 
(MMA), Pub. L. 108-173, enacted on December 8, 2003. (Discussion of 
provisions related specifically to the CY 2006 OPPS is included in 
sections II.C., II.F., II.G., and V.B.3.a.(2) of this final rule with 
comment period.) The OPPS was first implemented for services furnished 
on or after August 1, 2000. Implementing regulations for the OPPS are 
located at 42 CFR Part 419.
    Under the OPPS, we pay for hospital outpatient services on a rate-
per-service basis that varies according to the ambulatory payment 
classification (APC) group to which the service is assigned. We use 
Healthcare Common Procedure Coding System (HCPCS) codes (which include 
certain Current Procedural Terminology (CPT) codes) and descriptors to 
identify and group the services within each APC group. The OPPS 
includes payment for most hospital outpatient services, except those 
identified in section I.B. of this final rule with comment period. 
Section 1833(t)(1)(B)(ii) of the Act provides for Medicare payment 
under the OPPS for certain services designated by the Secretary that 
are furnished to inpatients who have exhausted their Part A benefits or 
who are otherwise not in a covered Part A stay. Section 611 of Pub. L. 
108-173 provided for Medicare coverage of an initial preventive 
physical examination, subject to the applicable deductible and 
coinsurance, as an outpatient department service, payable under the 
OPPS. In addition, the OPPS includes payment for partial 
hospitalization services furnished by community mental health centers 
(CMHCs).
    The OPPS rate is an unadjusted national payment amount that 
includes the Medicare payment and the beneficiary copayment. This rate 
is divided into a labor-related amount and a nonlabor-related amount. 
The labor-related amount is adjusted for area wage differences using 
the inpatient hospital wage index value for the locality in which the 
hospital or CMHC is located.
    All services and items within an APC group are comparable 
clinically and with respect to resource use (section 1833(t)(2)(B) of 
the Act). In accordance with section 1833(t)(2) of the Act, subject to 
certain exceptions, services and items within an APC group cannot be 
considered comparable with respect to the use of resources if the 
highest median (or mean cost, if elected by the Secretary) for an item 
or service in the APC group is more than 2 times greater than the 
lowest median cost for an item or service within the same APC group 
(referred to as the ``2 times rule''). In implementing this provision, 
we use the median cost of the item or service assigned to an APC group.
    Special payments under the OPPS may be made for new technology 
items and services in one of two ways. Section 1833(t)(6) of the Act 
provides for temporary additional payments or ``transitional pass-
through payments'' for certain drugs, biological agents, brachytherapy 
devices used for the treatment of cancer, and categories of medical 
devices for at least 2 but not more than 3 years. For new technology 
services that are not eligible for pass-through payments and for which 
we lack sufficient data to appropriately assign them to a clinical APC 
group, we have established special APC groups based on costs, which we 
refer to as ``APC cost bands.'' These cost bands allow us to price 
these new procedures more appropriately and consistently. Similar to 
pass-through payments, these special payments for new technology 
services are also temporary; that is, we retain a service within a new 
technology APC group until we acquire adequate data to assign it to a 
clinically appropriate APC group.

B. Excluded OPPS Services and Hospitals

    Section 1833(t)(1)(B)(i) of the Act authorizes the Secretary to 
designate the hospital outpatient services that are paid under the 
OPPS. While most hospital outpatient services are payable under the 
OPPS, section 1833(t)(1)(B)(iv) of the Act excluded payment for 
ambulance, physical and occupational therapy, and speech-

[[Page 68520]]

language pathology services, for which payment is made under a fee 
schedule. Section 614 of Pub. L. 108-173 amended section 
1833(t)(1)(B)(iv) of the Act to exclude OPPS payment for screening and 
diagnostic mammography services. The Secretary exercised the broad 
authority granted under the statute to exclude from the OPPS those 
services that are paid under fee schedules or other payment systems. 
Such excluded services include, for example, the professional services 
of physicians and nonphysician practitioners paid under the Medicare 
Physician Fee Schedule (MPFS); laboratory services paid under the 
clinical diagnostic laboratory fee schedule; services for beneficiaries 
with end-stage renal disease (ESRD) that are paid under the ESRD 
composite rate; services and procedures that require an inpatient stay 
that are paid under the hospital inpatient prospective payment system 
(IPPS); and certain services furnished to inpatients of hospitals that 
do not submit claims for outpatient services under Medicare Part B. We 
set forth the services that are excluded from payment under the OPPS in 
Sec.  419.22 of the regulations.
    Under Sec.  419.20 of the regulations, we specify the types of 
hospitals and entities that are excluded from payment under the OPPS. 
These excluded entities include Maryland hospitals, but only for 
services that are paid under a cost containment waiver in accordance 
with section 1814(b)(3) of the Act; critical access hospitals (CAHs); 
hospitals located outside of the 50 States, the District of Columbia, 
and Puerto Rico; and Indian Health Service hospitals.

C. Prior Rulemaking

    On April 7, 2000, we published in the Federal Register a final rule 
with comment period (65 FR 18434) to implement a prospective payment 
system for hospital outpatient services. The hospital OPPS was first 
implemented for services furnished on or after August 1, 2000. Section 
1833(t)(9) of the Act requires the Secretary to review certain 
components of the OPPS not less often than annually and to revise the 
groups, relative payment weights, and other adjustments to take into 
account changes in medical practice, changes in technology, and the 
addition of new services, new cost data, and other relevant information 
and factors. Since implementing the OPPS, we have published final rules 
in the Federal Register annually to implement statutory requirements 
and changes arising from our experience with this system. For a full 
discussion of the changes to the OPPS, we refer readers to these 
Federal Register final rules.\1\
---------------------------------------------------------------------------

    \1\ Interim final rule with comment period, August 3, 2000 (65 
FR 47670); interim final rule with comment period, November 13, 2000 
(65 FR 67798); final rule and interim final rule with comment 
period, November 2, 2001 (66 FR 55850 and 55857); final rule, 
November 30, 2001 (66 FR 59856); final rule, December 31, 2001 (66 
FR 67494); final rule, March 1, 2002 (67 FR 9556); final rule, 
November 1, 2002 (67 FR 66718); final rule with comment period, 
November 7, 2003 (68 FR 63398); correction of the November 7, 2003 
final rule with comment period, December 31, 2003 (68 FR 75442); 
interim final rule with comment period, January 6, 2004 (69 FR 820); 
and final rule with comment period, November 15, 2004 (69 FR 65681).
---------------------------------------------------------------------------

    On November 15, 2004, we published in the Federal Register a final 
rule with comment period (69 FR 65681) that revised the OPPS to update 
the payment weights and conversion factor for services payable under 
the calendar year (CY) 2005 OPPS on the basis of claims data from 
January 1, 2003 through December 31, 2003, and to implement certain 
provisions of Pub. L. 108-173. In addition, we responded to public 
comments received on the January 6, 2004 interim final rule with 
comment period relating to Pub. L. 108-173 provisions that were 
effective January 1, 2004, and finalized those policies. Further, we 
responded to public comments received on the November 7, 2003 final 
rule with comment period pertaining to the APC assignment of HCPCS 
codes identified in Addendum B of that rule with the NI comment 
indicator; and public comments received on the August 16, 2004 OPPS 
proposed rule (69 FR 50448).
    Subsequent to publishing the November 15, 2004 final rule with 
comment period, we published a correction of final rule with comment 
period on December 30, 2004 (69 FR 78315). This document corrected 
technical errors that appeared in the November 15, 2004 final rule with 
comment period. It also provided additional information about the CY 
2005 wage indices for the OPPS that was not published in the November 
15, 2004 final rule with comment period.

D. APC Advisory Panel

1. Authority of the APC Panel
    Section 1833(t)(9)(A) of the Act, as amended by section 201(h) of 
the BBRA of 1999, requires that we consult with an outside panel of 
experts to review the clinical integrity of the payment groups and 
weights under the OPPS. The Advisory Panel on Ambulatory Payment 
Classification (APC) Groups (the APC Panel), discussed under section 
I.D.2. of this preamble, fulfills this requirement. The Act further 
specifies that the APC Panel will act in an advisory capacity. This 
expert panel, which may be composed of up to 15 representatives of 
hospitals and other Medicare providers subject to the OPPS (currently 
employed full-time and in their respective areas of expertise), reviews 
and advises CMS about the clinical integrity of the APC groups and 
their weights. For purposes of this Panel, consultants or independent 
contractors are not considered to be full-time employees. The APC Panel 
is not restricted to using our data and may use data collected or 
developed by organizations outside the Department in conducting its 
review.
2. Establishment of the APC Panel
    On November 21, 2000, the Secretary originally signed the charter 
establishing the APC Panel. The APC Panel is technical in nature and is 
governed by the provisions of the Federal Advisory Committee Act 
(FACA), as amended (Pub. L. 92-463). Since its initial chartering, the 
Secretary has twice renewed the APC Panel's charter: on November 1, 
2002, and on November 1, 2004. The renewed charter indicates that the 
APC Panel continues to be technical in nature; is governed by the 
provisions of FACA with a Designated Federal Official (DFO) to oversee 
the day-to-day administration of the FACA requirements and to provide 
to the Committee Management Officer all committee reports for 
forwarding to the Library of Congress; may convene up to three meetings 
per year; and is chaired by a Federal official who also serves as a CMS 
medical officer.
    Originally, in establishing the APC Panel, we solicited members in 
a notice published in the Federal Register on December 5, 2000 (65 FR 
75943). We received applications from more than 115 individuals who 
nominated either colleagues or themselves. After carefully reviewing 
the applications, we chose 15 highly qualified individuals to serve on 
the APC Panel. Because four APC Panel members' terms of office expired 
on March 31, 2004, we published a Federal Register notice on January 
23, 2004 (69 FR 3370) that solicited nominations for APC Panel 
membership. From the 24 nominations that we received, we chose four new 
members. Six members' terms expired on March 31, 2005; therefore, a 
Federal Register notice was published on February 25, 2005, requesting 
nominations to the APC Panel. We received only 13 nominations before 
the nomination period closed on March 15, 2005. Consequently, we 
extended the deadline for nominations to May 9, 2005, and announced the 
extension in the Federal Register on April 8, 2005 (70 FR 18028). From 
a total of 26 nominees from the two notices, we

[[Page 68521]]

chose 6 new members who were announced in the Federal Register on 
August 26, 2005 (70 FR 50358). The entire APC Panel membership and 
information pertaining to it, including Federal Register notices, 
meeting dates, agenda topics, and meeting reports are identified on the 
CMS Web site: https://www.cms.hhs.gov/faca/apc/apcmem.asp.
3. APC Panel Meetings and Organizational Structure
    The APC Panel first met on February 27, February 28, and March 1, 
2001. Since that initial meeting, the APC Panel has held seven 
subsequent meetings. The most recent meeting took place on August 17 
and 18, 2005, which was announced in the meeting notice published on 
July 8, 2005 (70 FR 39514). Prior to each of these biennial meetings, 
we published a notice in the Federal Register to announce each meeting 
and, when necessary, to solicit and announce nominations for APC Panel 
membership. For a more detailed discussion about these announcements, 
refer to the following Federal Register notices: December 5, 2000 (65 
FR 75943), December 14, 2001 (66 FR 64838), December 27, 2002 (67 FR 
79107), July 25, 2003 (68 FR 44089), December 24, 2003 (68 FR 74621), 
August 5, 2004 (69 FR 47446), December 30, 2004 (69 FR 78464), and July 
8, 2005 (70 FR 39514).
    During these meetings, the APC Panel established its operational 
structure that, in part, includes the use of three subcommittees to 
facilitate its required APC review process. Currently, the three 
subcommittees are the Data Subcommittee, the Observation Subcommittee, 
and the Packaging Subcommittee. The Data Subcommittee is responsible 
for studying the data issues confronting the APC Panel and for 
recommending viable options for resolving them. This subcommittee was 
initially established on April 23, 2001, as the Research Subcommittee 
and reestablished as the Data Subcommittee on April 13, 2004, February 
11, 2005, and August 15, 2005. The Observation Subcommittee, which was 
established on June 24, 2003, and reestablished with new members on 
March 8, 2004, February 11, 2005, and August 15, 2005, reviews and 
makes recommendations to the APC Panel on all issues pertaining to 
observation services paid under the OPPS, such as coding and 
operational issues. The Packaging Subcommittee, which was established 
on March 8, 2004, and reestablished with new members on February 11, 
2005, and August 15, 2005, studies and makes recommendations on issues 
pertaining to services that are not separately payable under the OPPS 
but are bundled or packaged APC payments. Each of these subcommittees 
was established by a majority vote of the APC Panel during a scheduled 
APC Panel meeting. All subcommittee recommendations are discussed and 
voted upon by the full APC Panel.
    For a detailed discussion of the APC Panel meetings, refer to the 
hospital OPPS final rules cited in section I.C. of this preamble. Full 
discussion of the recommendations resulting from the APC Panel's 
February 2005 and August 2005 meetings are included in the sections of 
this preamble that are specific to each recommendation.

E. Provisions of the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 That Will Be Implemented in CY 2006

    On December 8, 2003, the Medicare Prescription Drug, Improvement, 
and Modernization Act of 2003 (MMA), Pub. L. 108-173, was enacted. Pub. 
L. 108-173 made changes to the Act relating to the Medicare OPPS. In 
the January 6, 2004 interim final rule with comment period and the 
November 15, 2004 final rule with comment period, we implemented 
provisions of Pub. L. 108-173 relating to the OPPS that were effective 
for CY 2004 and CY 2005, respectively. Provisions of Pub. L. 108-173 
that were implemented in CY 2004 or CY 2005, and that are continuing in 
CY 2006, are discussed throughout this final rule with comment period. 
Moreover, in this final rule with comment period, we finalize our 
proposal to implement the following provisions of Pub. L. 108-173 that 
affect the OPPS beginning in CY 2006:
1. Hold Harmless Provisions
    Section 411 of Pub. L. 108-173 amended section 1833(t)(7)(D)(i) of 
the Act and extended the hold harmless provision for small rural 
hospitals having 100 or fewer beds through December 31, 2005. Section 
411 of Pub. L. 108-173 further amended section 1833(t)(7) of the Act to 
provide that hold harmless transitional corridor payments shall apply 
through December 31, 2005 to sole community hospitals (SCHs) (as 
defined in section 1886(d)(5)(D)(iii) of the Act) located in a rural 
area. In accordance with these provisions, effective January 1, 2006, 
we proposed to discontinue transitional corridor payments for small 
rural hospitals having 100 or fewer beds and for SCHs located in a 
rural area.
2. Study and Authorization of Adjustment for Rural Hospitals
    Section 411(b) of Pub. L. 108-173 added a new paragraph (13) to 
section 1833(t) of the Act to authorize an ``Adjustment for Rural 
Hospitals.'' This provision requires us to conduct a study to determine 
if costs incurred by hospitals located in rural areas by APCs exceed 
those costs incurred by hospitals located in urban areas. This 
provision further requires us to provide for an appropriate adjustment 
by January 1, 2006, if we find that the costs incurred by hospitals 
located in rural areas exceed those costs incurred by hospitals located 
in urban areas. In accordance with these provisions, effective January 
1, 2006, as we proposed, we are implementing an adjustment for rural 
sole community hospitals (SCHs), as discussed below.
3. Payment for ``Specified Covered Outpatient Drugs''
    Section 621(a)(1) of Pub. L. 108-173 added section 1833(t)(14) to 
the Act that specifies payments for certain ``specified covered 
outpatient drugs'' beginning in 2006. Specifically, section 
1833(t)(14)(A)(iii)(I) of the Act states that such payment shall be 
equal to what we determine to be the average acquisition cost for the 
drug, taking into account hospital acquisition cost survey data 
furnished by the Government Accountability Office (GAO). Section 
1833(t)(14)(A)(iii)(II) of the Act further notes that if hospital 
acquisition cost data are not available, payment for specified covered 
outpatient drugs shall equal the average price for the drug established 
under section 1842(o), section 1847(A), or section 1847(B) of the Act 
as calculated and adjusted by the Secretary as necessary. Both payment 
approaches are subject to adjustments under section 1833(t)(14)(E) of 
the Act as discussed below.
4. Adjustment in Payment Rates for ``Specified Covered Outpatient 
Drugs'' for Overhead Costs
    Section 621(a)(1) of Pub. L. 108-173 added section 1833(t)(14)(E) 
to the Act. Section 1833(t)(14)(E)(ii) of the Act authorizes us to make 
an adjustment to payments for ``specified covered outpatient drugs'' to 
take into account overhead and related expenses such as pharmacy 
services and handling costs, based on recommendations contained in a 
report prepared by the Medicare Payment Advisory Commission (MedPAC).
5. Budget Neutrality Adjustment
    Section 621(a)(1) of Pub. L. 108-173 amended the Act by adding 
section

[[Page 68522]]

1833(t)(14)(H), which requires that additional expenditures resulting 
from adjustments in APC payment rates for specified covered outpatient 
drugs be taken into account beginning in CY 2006 and continuing in 
subsequent years, in establishing the OPPS conversion, weighting, and 
other adjustment factors.

F. CMS' Commitment to New Technologies

    As we indicated in the CY 2006 proposed rule, CMS is committed to 
ensuring that Medicare beneficiaries will have timely access to new 
medical treatments and technologies that are well-evaluated and 
demonstrated to be effective. We launched the Council on Technology and 
Innovation (CTI) to provide the Agency with improved methods for 
developing practical information about the clinical benefits of new 
medical technologies to result in faster and more efficient coverage 
and payment of these medical technologies. The CTI supports CMS efforts 
to develop better evidence on the safety, effectiveness, and cost of 
new and approved technologies to help promote their more effective use.
    We want to provide doctors and patients with better information 
about the benefits of new medical treatments or technologies, or both, 
especially compared to other treatment options. We also want 
beneficiaries to have access to valuable new medical innovations as 
quickly and efficiently as possible. We note there are a number of 
payment mechanisms in the OPPS and the IPPS designed to achieve 
appropriate payment of promising new technologies. In the OPPS, 
qualifying new medical devices may be paid on a cost basis by means of 
transitional pass-through payments, in addition to the APC payments for 
the procedures which utilize the devices. In addition, qualifying new 
services may be assigned for payment to New Technology APCs or, if 
appropriate, to regular clinical APCs. In the IPPS, qualifying new 
technologies may receive add-on payments to the standard diagnosis-
related group (DRG) payments. We also note that collaborative efforts 
are underway to facilitate coordination between the Food and Drug 
Administration (FDA) and CMS with regard to streamlining the CMS 
coverage process by which new technologies come to the marketplace.
    To promote timely access to new medical treatments and 
technologies, in the CY 2006 OPPS proposed rule, we proposed 
enhancements to both the OPPS pass-through payment criteria for devices 
as discussed in section IV.D.2. of that rule and the qualifying process 
for assignment of new services to New Technology APCs or regular 
clinical APCs discussed in section III.C.3. of that rule. In the CY 
2006 OPPS proposed rule, we proposed to make device pass-through 
eligibility available to a broader range of qualifying devices. We also 
proposed to change the application and review process for assignment of 
new services to New Technology APCs to promote thoughtful review of the 
coding, clinical use and efficacy of new services by the wider medical 
community, encouraging appropriate dissemination of new technologies.
    We received a large number of public comments generally supporting 
our commitment to new technologies. Many of these comments in support 
of this commitment were stated in the context of our proposals to 
enhance the OPPS pass-through payment criteria for devices or the 
application requirements for assignment of a service to a New 
Technology APC. Specific comments are addressed in those respective 
sections.

G. Summary of the Provisions of the CY 2006 OPPS Proposed Rule

    On July 25, 2005, we published a proposed rule in the Federal 
Register (70 FR 42674) that set forth proposed changes to the Medicare 
hospital OPPS for CY 2006 to implement statutory requirements and 
changes arising from our continuing experience with the system, to 
implement provisions of Pub. L. 108-173 specified in sections II.C., 
II.F., II.G., and V.B.3.a.(2) of this preamble, and to change the 
requirement for physician oversight of nonphysician practitioners in 
CAHs that will be effective for services furnished on or after January 
1, 2006. Subsequent to publishing the proposed rule, we published a 
correction of the proposed rule on August 26, 2005 (70 FR 50679) that 
corrected technical errors that appeared in the proposed rule. The 
following is a summary of the major changes included in the CY 2006 
OPPS proposed rule that we proposed to make:
1. Updates to Payments for CY 2006
    In the proposed rule, we set forth--
     The methodology used to recalibrate the proposed APC 
relative payment weights and the proposed recalibration of the relative 
payment weights for CY 2006.
     The proposed payment for partial hospitalization, 
including the proposed separate threshold for outlier payments for 
CMHCs.
     The proposed update to the conversion factor used to 
determine payment rates under the OPPS for CY 2006.
     The proposed retention of our current policy to apply the 
IPPS wage indices to wage adjust the APC median costs in determining 
the OPPS payment rate and the copayment standardized amount for CY 
2006.
     The proposed update of statewide average default cost-to-
charge ratios.
     Proposed changes relating to the expiring hold harmless 
payment provision.
     Proposed changes to payment for rural SCHs for CY 2006.
     Proposed changes in the way we calculate hospital 
outpatient outlier payments for CY 2006.
     Calculation of the proposed national unadjusted Medicare 
OPPS payment.
     The proposed beneficiary copayment for OPPS services for 
CY 2006.
2. Ambulatory Payment Classification (APC) Group Policies
    In the proposed rule, we discussed establishing a number of new 
APCs and making changes to the assignment of HCPCS codes under a number 
of existing APCs based on our analyses of Medicare claims data and 
recommendations of the APC Panel. We also discussed the application of 
the 2 times rule and proposed exceptions to it; proposed changes for 
specific APCs; the proposed refinement of the New Technology cost 
bands; the proposed movement of procedures from the New Technology 
APCs; and the proposed additions of new procedure codes to the APC 
groups.
3. Payment Changes for Devices
    In the proposed rule, we discussed proposed changes to the device-
dependent APCs, to related regulations under Sec. Sec.  419.66(b)(3) 
and 419.66(c)(1), and to the pass-through payment for three categories 
of devices.
4. Payment Changes for Drugs, Biologicals, and Radiopharmaceutical 
Agents
    In the proposed rule, we discussed proposed payment changes for 
drugs, biologicals, radiopharmaceutical agents, and vaccines.
5. Estimate of Transitional Pass-Through Spending in CY 2006 for Drugs, 
Biologicals, and Devices
    In the proposed rule, we discussed the proposed methodology for 
estimating total pass-through spending and whether there should be a 
pro rata reduction for transitional pass-through drugs, biologicals, 
radiopharmacials, and categories of devices for CY 2006.

[[Page 68523]]

6. Brachytherapy Payment Changes
    In the proposed rule, we included a discussion of our proposal 
concerning coding and payment for the sources of brachytherapy.
7. Coding and Payment for Drug Administration
    In the proposed rule, we discussed our proposed coding and payment 
changes for drug administration services.
8. Hospital Coding for Evaluation and Management (E/M) Services
    In the proposed rule, we discussed our proposal for developing 
coding guidelines for evaluation and management services.
9. Payment for Blood and Blood Products
    In the proposed rule, we discussed our proposed payment changes for 
blood and blood products.
10. Payment for Observation Services
    In the proposed rule, we discussed our proposed criteria and coding 
changes for observation services.
11. Procedures That Will Be Paid Only as Inpatient Services
    In the proposed rule, we discussed the procedures that we proposed 
to remove from the inpatient list and assign to APCs.
12. Indicator Assignments
    In the proposed rule, we discussed proposed changes to the list of 
status indicators assigned to APCs and presented our comment indicators 
that we proposed to use in this final rule with comment period.
13. Nonrecurring Policy Changes
    In the proposed rule, we discussed proposed changes in payments for 
multiple diagnostic imaging procedures and proposed changes in payment 
policy for interrupted procedures.
14. OPPS Policy and Payment Recommendations
    In the proposed rule, we addressed recommendations made by MedPAC, 
the APC Panel, and the GAO regarding the OPPS for CY 2006.
15. Physician Oversight in Critical Access Hospitals
    In the proposed rule, we discussed physician oversight for services 
provided by nonphysician practitioners such as physician assistants, 
nurse practitioners, and clinical nurse specialists in CAHs.

H. Public Comments Received on the CY 2006 OPPS Proposed Rule

    We received over 1,000 timely pieces of correspondence containing 
multiple comments on the CY 2006 OPPS proposed rule. Summaries of the 
public comments and our responses to those comments are set forth in 
the various sections under the appropriate headings.
    Comment: One commenter objected to the short time between the end 
of the comment period and the effective date of the final rule. The 
commenter stated that the brief time period gives inadequate time for 
systems and software changes. The commenter asked that the proposed 
rule be published July 1 and that the final rule be published no later 
than October 1 of each year. The commenter indicated that hospitals 
need the extra month to implement the OPPS because it is much more 
complex for hospitals to implement than the IPPS.
    Response: We understand the commenter's concern about the 
difficulty of implementing the annual OPPS update in 60 days. We do our 
best to issue the proposed rule and the final rule as promptly as 
possible and to make all of the supporting documentation available on 
the CMS Web site as soon as we can. However, factors such as the use of 
the most recent claims data and cost report data on which we base the 
proposed and final rates delay the issuance of the proposed rule and 
the final rule. Hospital delays in submission of hospital bills are an 
important factor in timing of the OPPS updates as well, because we want 
to use as many claims as possible in setting the OPPS rates. Moreover, 
we cannot issue the final rule until the HCPCS code files for the 
forthcoming year are final because we assign a stataus indicator to 
each HCPCS code in the OPPS OCE. The HCPCS files are not final until 
they are published in October.
    Comment: Commenters asked that CMS include an indirect medical 
education adjustment in the OPPS because it is the only major Medicare 
payment system that does not include a teaching adjustment. One 
commenter asked that CMS conduct a study to determine the special roles 
and costs related to medical education and the appropriateness of 
including a teaching hospital adjustment.
    Response: We have not developed an indirect medical education add-
on payment made under the OPPS because the statute does not provide for 
this adjustment, and we are not convinced that it would be appropriate 
in a budget-neutral payment system where such changes would result in 
reduced payments to all other hospitals. Moreover, in the final rule, 
we have developed payment weights that we believe resolve many of the 
public concerns regarding appropriate payments for new technology 
services and device-dependent procedures, which we believe are 
furnished largely by teaching hospitals. In addition, the application 
of the wage index adjustment to 60 percent of the APC payment package 
(especially for APCs into which expensive devices are packaged) tends 
to benefit teaching hospitals, which are predominantly located in hgh-
cost areas. These and other payment changes should help ensure 
equitable payment for all hospitals within the constraints of the 
statute.

I. Public Comments Received on the November 15, 2004 Final Rule With 
Comment Period

    We received approximately 55 timely pieces of correspondence on the 
November 5, 2004 final rule with comment period, some of which 
contained multiple comments on the APC assignment of HCPCS codes 
identified with the NI comment indicator in Addendum B of that final 
rule with comment period and on the surgical insertion and implantation 
device criterion. Summaries of those public comments and our responses 
to those comments are set forth in the various sections under the 
appropriate headings.

II. Updates Affecting Payments for CY 2006

A. Recalibration of APC Relative Weights for CY 2006

1. Database Construction
    a. Database Source and Methodology. Section 1833(t)(9)(A) of the 
Act requires that the Secretary review and revise the relative payment 
weights for APCs at least annually. In the April 7, 2000 OPPS final 
rule (65 FR 18482), we explained in detail how we calculated the 
relative payment weights that were implemented on August 1, 2000, for 
each APC group. Except for some reweighting due to a small number of 
APC changes, these relative payment weights continued to be in effect 
for CY 2001. This policy is discussed in the November 13, 2000 interim 
final rule (65 FR 67824 through 67827).
    In the CY 2005 OPPS proposed rule (70 FR 42680), we proposed to use 
the same basic methodology that we described in the April 7, 2000 final 
rule to recalibrate the APC relative payment

[[Page 68524]]

weights for services furnished on or after January 1, 2006, and before 
January 1, 2007. That is, we would recalibrate the relative payment 
weights for each APC based on claims and cost report data for 
outpatient services. We proposed to use the most recent available data 
to construct the database for calculating APC group weights. For the 
purpose of recalibrating APC relative payment weights for CY 2006, we 
used approximately 137 million final action claims for hospital OPD 
services furnished on or after January 1, 2004, and before January 1, 
2005. Of the 137 million final action claims for services provided in 
hospital outpatient settings, 109 million claims were of the type of 
bill potentially appropriate for use in setting rates for OPPS services 
(but did not necessarily contain services payable under the OPPS). Of 
the 109 million claims, we were able to use 52.7 million whole claims 
to set the proposed OPPS APC relative weights for CY 2006 OPPS. From 
the 52.7 million whole claims, we created 87.9 million single records, 
of which 54.9 million were ``pseudo'' single claims (created from 
multiple procedure claims using the process we discuss in this 
section).
    As we proposed, the final APC relative weights and payments for CY 
2006 in Addenda A and B to this final rule with comment period were 
calculated using claims from this period that had been processed before 
June 30, 2005, and continue to be based on the median hospital costs 
for services in the APC groups. We selected claims for services paid 
under the OPPS and matched these claims to the most recent cost report 
filed by the individual hospitals represented in our claims data.
    We received numerous public comments concerning our proposed data 
source and methodology for recalibrating the APC relative weights for 
CY 2006. A summary of the comments and our responses are discussed 
below.
    Comment: Commenters stated that many APC rates fluctuate 
dramatically, and the instability in the system makes it very hard for 
hospitals to budget and plan services from year to year. Among the 
services identified as issues of specific concern were clinic visits, 
application of brachytherapy sources, drugs and biologicals, and 
device-intensive APCs. Some commenters recommended that CMS limit 
increases and decreases for all APCs to no more than a 5-percent shift 
(increase or decrease) from one year to another. Commenters emphasized 
that fluctuations in payment rates for device-dependent procedures from 
year to year impact manufacturers' abilities to contract effectively 
with hospitals to provide a stable purchasing environment and, thereby, 
impede innovation and adversely impact beneficiaries.
    Response: We understand the commenters' concerns about the need for 
sufficient stability in the OPPS so that hospitals can plan and budget. 
We have given this issue much consideration. We recognize that reliance 
on single procedure claims may result in fewer claims for some services 
than for others. For example, median costs for services such as office 
visits, for which the volume of single bills is very high, would 
generally be more stable than the median costs for services for which 
we have very few single procedure claims. We will continue to explore 
changes we could effectuate to enable us to use even more claims on the 
premise that using more claims data will enhance stability.
    However, we note that the statutory design of the OPPS and the 
rapid evolution in the delivery of outpatient hospital services include 
many elements that may be responsible for some of the fluctuation in 
rates from year to year. For example, the ``2 times rule'' imposed by 
the law requires the movement of some procedures from one APC to 
another each year. Moreover, the OPPS is based on procedure coding for 
which there are hundreds of changes each year. In addition, the entry 
of new technology into a budget neutral payment system results in a 
shift of funds away from previously existing services to provide 
payments for new services. These systemic factors are valid reflections 
of the changes in services in the outpatient department, and shifts in 
payment legitimately mirror those changes.
    Comment: Commenters stated that the entire OPPS is underfunded 
because it pays only 87 percent of the costs of services to Medicare 
beneficiaries. One commenter indicated that the underfunding of 
services to Medicare patients is particularly severe for 
disproportionate share hospitals and hospitals with level I trauma 
centers and, therefore, will inhibit access to care for Medicare 
beneficiaries and other individuals.
    Response: Our early analyses indicated that the OPPS was, in its 
inception, based on payment that was less than cost due to statutory 
reductions in payment for hospital outpatient costs prior to the 
enactment of the BBA, which authorized the current OPPS. Certain 
fundamental statutory features of the OPPS dictate such a finding. For 
example, the base amounts upon which the OPPS was established, the 
rules concerning budget neutrality, and subsequent out-year adjustments 
such as annual reductions in coinsurance and adjustments to outlier and 
pass-through payment allocations are established in statute and, as 
such, would require legislation to amend.
    Comment: Commenters supported use of the most recent claims data 
for recalibrating the APC relative weights but in many cases wanted CMS 
to adjust the claims data for particular services of interest to them 
in ways that will result in higher payment for those specified 
services. Other commenters supported use of proprietary, confidential 
external data in lieu of claims data to set the median costs on which 
the rates are based for selected services because they believe that the 
use of claims data results in median costs that are less than the costs 
of the services being furnished. Some commenters asked CMS to establish 
a representative sample of hospitals from which data would be collected 
for use in place of claims data or to validate the data derived from 
claims.
    Response: We believe that, in a budget neutral relative payment 
system such as the OPPS, it is important that the relative weights be 
based on a uniform source of data processed in a standardized way. We 
believe that Medicare claims data are the most uniform data source 
available to us. Moreover, the weights derived from such a system are 
the vehicles for distributing Medicare payments for outpatient hospital 
services fairly among all hospitals that furnish outpatient hospital 
services to Medicare beneficiaries. We are committed to using claims 
data in a uniform manner, to the maximum extent possible, to develop 
the relative weights from which payment rates are calculated. We do not 
see a compelling need to use external data to set or adjust median 
costs for device-dependent APCs for the CY 2006 OPPS. Therefore, for 
the CY 2006 OPPS, we have not substituted external data for Medicare 
claims data for the purpose of setting the median costs on which the 
relative weights are based.
    After carefully considering all comments received, we are 
finalizing our data source and methodology for the recalibration of CY 
2006 APC relative weights as proposed without modificatio