Medicare Program; Prospective Payment System for Long-Term Care Hospitals RY 2007: Annual Payment Rate Updates, Policy Changes, and Clarification, 27798-27939 [06-4240]

Agencies

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

[Federal Register Volume 71, Number 92 (Friday, May 12, 2006)]
[Rules and Regulations]
[Pages 27798-27939]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-4240]



[[Page 27797]]

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Part II





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Part 412



Medicare Program; Prospective Payment System for Long-Term Care 
Hospitals RY 2007: Annual Payment Rate Updates, Policy Changes, and 
Clarification; Final Rule

Federal Register / Vol. 71, No. 92 / Friday, May 12, 2006 / Rules and 
Regulations

[[Page 27798]]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 412

[CMS-1485-F]
RIN 0938-AO06


Medicare Program; Prospective Payment System for Long-Term Care 
Hospitals RY 2007: Annual Payment Rate Updates, Policy Changes, and 
Clarification

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

ACTION: Final Rule.

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SUMMARY: This final rule updates the annual payment rates for the 
Medicare prospective payment system (PPS) for inpatient hospital 
services provided by long-term care hospitals (LTCHs). The payment 
amounts and factors used to determine the updated Federal rates that 
are described in this final rule have been determined for the LTCH PPS 
rate year July 1, 2006 through June 30, 2007. The annual update of the 
long-term care diagnosis-related group (LTC-DRG) classifications and 
relative weights remains linked to the annual adjustments of the acute 
care hospital inpatient diagnosis-related group system, and will 
continue to be effective each October 1. The outlier threshold for July 
1, 2006, through June 30, 2007, is also derived from the LTCH PPS rate 
year calculations. We are also finalizing policy changes and making 
clarifications.

DATES: This final rule is effective July 1, 2006.

FOR FURTHER INFORMATION CONTACT: 
    Tzvi Hefter, (410) 786-4487 (General information).
    Judy Richter, (410) 786-2590 (General information, payment 
adjustments for special cases, and onsite discharges and readmissions, 
interrupted stays, co-located providers, and short-stay outliers).
    Michele Hudson, (410) 786-5490 (Calculation of the payment rates, 
LTC-DRGs, relative weights and case-mix index, market basket, wage 
index, budget neutrality, and other payment adjustments).
    Ann Fagan, (410) 786-5662 (Patient classification system).
    Miechal Lefkowitz, (410) 786-5316 (High-cost outliers and cost-to-
charge ratios).
    Linda McKenna, (410) 786-4537 (Payment adjustments, interrupted 
stay, and transition period).
    Nancy Kenly, (410) 786-7792 (Federal rate update and case-mix 
index).

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Background
    A. Legislative and Regulatory Authority
    B. Criteria for Classification as a LTCH
    1. Classification as a LTCH
    2. Hospitals Excluded from the LTCH PPS
    C. Transition Period for Implementation of the LTCH PPS
    D. Limitation on Charges to Beneficiaries
    E. Administrative Simplification Compliance Act (ASCA) and 
Health Insurance Portability and Accountability Act (HIPAA) 
Compliance
II. Publication of Proposed Rulemaking
III. Summary of Major Contents of this Final Rule
    A. Update Changes
    B. Policy Changes
    C. MedPAC Recommendations
    D. Impact
IV. Long-Term Care Diagnosis-Related Group (LTC-DRG) Classifications 
and Relative Weights
    A. Background
    B. Patient Classifications into DRGs
    C. Organization of DRGs
    D. Update of LTC-DRGs
    E. ICD-9-CM Coding System
    1. Uniform Hospital Discharge Data Set (UHDDS) Definitions
    2. Maintenance of the ICD-9-CM Coding System
    3. Coding Rules and Use of ICD-9-CM Codes in LTCHs
    F. Method for Updating the LTC-DRG Relative Weights
V. Changes to the LTCH PPS Payment Rates for the 2007 LTCH PPS Rate 
Year
    A. Overview of the Development of the Payment Rates
    B. LTCH PPS Market Basket
    1. Overview of the RPL Market Basket
    2. Methodology for the Operating Portion of the RPL LTCH PPS 
Market Basket
    3. Methodology for the Capital Portion of the RPL Market Basket
    4. Market Basket Estimate for the 2007 LTCH PPS Rate Year
    C. Standard Federal Rate for the 2007 LTCH PPS Rate Year
    1. Background
    2. Description of a Preliminary Model of an Update Framework 
under the LTCH PPS
    3. Update to the Standard Federal Rate for the 2007 LTCH PPS 
Rate Year
    4. Standard Federal Rate for the 2007 LTCH PPS Rate Year
    D. Calculation of LTCH Prospective Payments for the 2007 LTCH 
PPS Rate Year
    1. Adjustment for Area Wage Levels
    a. Background
    b. Geographic Classifications/Labor Market Area Definitions
    c. Labor-Related Share
    d. Wage Index Data
    2. Adjustment for Cost-of-Living in Alaska and Hawaii
    3. Adjustment for High-Cost Outliers (HCOs)
    a. Background
    b. Cost-to-charge ratios (CCRs)
    c. Establishment of the Fixed-Loss Amount
    d. Reconciliation of Outlier Payments Upon Cost Report 
Settlement
    4. Other Payment Adjustments
    5. Budget Neutrality Offset to Account for the Transition 
Methodology
    6. One-time Prospective Adjustment to the Standard Federal Rate.
VI. Other Policy Changes for the 2007 LTCH PPS Rate Year
    A. Adjustments for Special Cases
    1. Adjustment of Short-Stay Outlier (SSO) Cases
    a. Changes to the Method for Determining the Payment Amount for 
SSO Cases
    b. Changes to the Determination of Cost-to-Charge Ratios (CCRs) 
and Reconciliation of SSO Cases
    2. The 3-day or Less Interruption of Stay Policy
    B. Special payment provisions for LTCH hospitals within 
hospitals (HwHs) and LTCH satellites
VII. Computing the Adjusted Federal Prospective Payments for the 
2007 LTCH PPS Rate Year
VIII. Transition Period
IX. Payments to New LTCHs
X. Method of Payment
XI. Monitoring
XII. MedPAC Recommendations
    A. Discussion of MedPAC's March 2006 Report to Congress: 
Medicare Payment Policy
    B. RTI Report on MedPAC's June 2004 Recommendations
XIII. Health Care Information Transparency Initiative
XIV. Collection of Information Requirements
XV. Regulatory Impact Analysis

Addendum--Tables

Appendix A--Description of a Preliminary Model of an Update Framework 
Under the LTCH PPS

Acronyms

    Because of the many terms to which we refer by acronym in this 
final rule, we are listing the acronyms used and their corresponding 
terms in alphabetical order below:
3M 3M Health Information Systems
AHA American Hospital Association
AHIMA American Health Information Management Association
ALOS Average length of stay
APR All patient refined
ASCA Administrative Simplification Compliance Act of 2002 (Pub. L. 
107-105)
BBA Balanced Budget Act of 1997 (Pub. L. 105-33)
BBRA Medicare, Medicaid, and SCHIP [State Children's Health 
Insurance Program] Balanced Budget Refinement Act of 1999 (Pub. L. 
106-113)
BIPA Medicare, Medicaid, and SCHIP [State Children's Health 
Insurance Program] Benefits Improvement and Protection Act of 2000 
(Pub. L. 106-554)
BLS Bureau of Labor Statistics
CBSA Core-based statistical area
CC Complications and comorbidities
CCR Cost-to-charge ratio
C&M Coordination and maintenance
CMI Case-mix index

[[Page 27799]]

CMS Centers for Medicare & Medicaid Services
CMSA Consolidated metropolitan statistical area
COLA Cost-of-living adjustment
COPS Medicare conditions of participation
CPI Consumer Price Indexes
DSH Disproportionate share of low-income patients
DRGs Diagnosis-related groups
ECI Employment Cost Indexes
FI Fiscal intermediary
FY Federal fiscal year
HCO High-cost outlier
HCRIS Hospital cost report information system
HHA Home health agency
HHS (Department of) Health and Human Services
HIPAA Health Insurance Portability and Accountability Act (Pub. L. 
104-191)
HIPC Health Information Policy Council
HwHs Hospitals within hospitals
ICD-9-CM International Classification of Diseases, Ninth Revision, 
Clinical Modification (codes)
IME Indirect medical education
I-O Input-Output
IPF Inpatient psychiatric facility
IPPS Acute Care Hospital Inpatient Prospective Payment System
IRF Inpatient rehabilitation facility
LOS Length of stay
LTC-DRG Long-term care diagnosis-related group
LTCH Long-term care hospital
MCE Medicare code editor
MDC Major diagnostic categories
MedPAC Medicare Payment Advisory Commission
MedPAR Medicare provider analysis and review file
MMA Medicare Prescription Drug, Improvement, and Modernization Act 
of 2003 (Pub. L. 108-173)
MSA Metropolitan statistical area
NAICS North American Industrial Classification System
NCHS National Center for Health Statistics
OPM U.S. Office of Personnel Management
O.R. Operating room
OSCAR Online Survey Certification and Reporting (System)
PIP Periodic interim payment
PLI Professional liability insurance
PMSA Primary metropolitan statistical area
PPI Producer Price Indexes
PPS Prospective payment system
QIO Quality Improvement Organization (formerly Peer Review 
organization (PRO))
RIA Regulatory impact analysis
RPL Rehabilitation psychiatric long-term care (hospital)
RTI Research Triangle Institute, International
RY Rate year (begins July 1 and ends June 30)
SIC Standard industrial code
SNF Skilled nursing facility
SSO Short-stay outlier
TEFRA Tax Equity and Fiscal Responsibility Act of 1982 (Pub. L. 97-
248)
UHDDS Uniform hospital discharge data set

I. Background

A. Legislative and Regulatory Authority

    Section 123 of the Medicare, Medicaid, and SCHIP [State Children's 
Health Insurance Program] Balanced Budget Refinement Act of 1999 (BBRA) 
(Pub. L. 106-113) as amended by section 307(b) of the Medicare, 
Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 
(BIPA) (Pub. L. 106-554) provides for payment for both the operating 
and capital-related costs of hospital inpatient stays in long-term care 
hospitals (LTCHs) under Medicare Part A based on prospectively set 
rates. The Medicare prospective payment system (PPS) for LTCHs applies 
to hospitals described in section 1886(d)(1)(B)(iv) of the Social 
Security Act (the Act), effective for cost reporting periods beginning 
on or after October 1, 2002.
    Section 1886(d)(1)(B)(iv)(I) of the Act defines a LTCH as ``a 
hospital which has an average inpatient length of stay (as determined 
by the Secretary) of greater than 25 days.'' Section 
1886(d)(1)(B)(iv)(II) of the Act also provides an alternative 
definition of LTCHs: Specifically, a hospital that first received 
payment under section 1886(d) of the Act in 1986 and has an average 
inpatient length of stay (LOS) (as determined by the Secretary of 
Health and Human Services (the Secretary)) of greater than 20 days and 
has 80 percent or more of its annual Medicare inpatient discharges with 
a principal diagnosis that reflects a finding of neoplastic disease in 
the 12-month cost reporting period ending in FY 1997.
    Section 123 of the BBRA requires the PPS for LTCHs to be a per 
discharge system with a diagnosis-related group (DRG) based patient 
classification system that reflects the differences in patient 
resources and costs in LTCHs while maintaining budget neutrality.
    Section 307(b)(1) of the BIPA, among other things, mandates that 
the Secretary shall examine, and may provide for, adjustments to 
payments under the LTCH PPS, including adjustments to DRG weights, area 
wage adjustments, geographic reclassification, outliers, updates, and a 
disproportionate share adjustment.
    In a Federal Register document issued on August 30, 2002, we 
implemented the LTCH PPS authorized under BBRA and BIPA (67 FR 55954). 
This system uses information from LTCH patient records to classify 
patients into distinct long-term care diagnosis-related groups (LTC-
DRGs) based on clinical characteristics and expected resource needs. 
Payments are calculated for each LTC-DRG and provisions are made for 
appropriate payment adjustments. Payment rates under the LTCH PPS are 
updated annually and published in the Federal Register.
    The LTCH PPS replaced the reasonable cost-based payment system 
under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) 
(Pub. L. 97-248) for payments for inpatient services provided by a LTCH 
with a cost reporting period beginning on or after October 1, 2002. 
(The regulations implementing the TEFRA reasonable cost-based payment 
provisions are located at 42 CFR part 413.) With the implementation of 
the PPS for acute care hospitals authorized by the Social Security 
Amendments of 1983 (Pub. L. 98-21), which added section 1886(d) to the 
Act, certain hospitals, including LTCHs, were excluded from the PPS for 
acute care hospitals and were paid their reasonable costs for inpatient 
services subject to a per discharge limitation or target amount under 
the TEFRA system. Generally, for each cost reporting period, a 
hospital-specific ceiling on payments was determined by multiplying the 
hospital's updated target amount by the number of total current year 
Medicare discharges. The August 30, 2002 final rule further details the 
payment policy under the TEFRA system (67 FR 55954).
    In the August 30, 2002 final rule, we also presented an in-depth 
discussion of the LTCH PPS, including the patient classification 
system, relative weights, payment rates, additional payments, and the 
budget neutrality requirements mandated by section 123 of the BBRA. The 
same final rule that established regulations for the LTCH PPS under 
part 412, subpart O, also contained LTCH provisions related to covered 
inpatient services, limitation on charges to beneficiaries, medical 
review requirements, furnishing of inpatient hospital services directly 
or under arrangement, and reporting and recordkeeping requirements. We 
refer readers to the August 30, 2002 final rule for a comprehensive 
discussion of the research and data that supported the establishment of 
the LTCH PPS (67 FR 55954).
    On June 6, 2003, we published a final rule in the Federal Register 
(68 FR 34122) that set forth the FY 2004 annual update of the payment 
rates for the Medicare PPS for inpatient hospital services furnished by 
LTCHs. It also changed the annual period for which the payment rates 
are effective. The annual updated rates are now effective from July 1 
through June 30 instead of from October 1 through September 30.

[[Page 27800]]

We refer to the July through June time period as a ``long-term care 
hospital rate year'' (LTCH PPS rate year). In addition, we changed the 
publication schedule for the annual update to allow for an effective 
date of July 1. The payment amounts and factors used to determine the 
annual update of the LTCH PPS Federal rate is based on a LTCH PPS rate 
year. While the LTCH payment rate update is effective July 1, the 
annual update of the LTC-DRG classifications and relative weights are 
linked to the annual adjustments of the acute care hospital inpatient 
DRGs and are effective each October 1.
    On May 6, 2005, we published the Prospective Payment System for 
Long-Term Care Hospitals: Annual Payment Rate Updates, Policy Changes, 
and Clarifications final rule (70 FR 24168) (hereinafter referred to as 
the RY 2006 LTCH PPS final rule). In this rule, we set forth the 2006 
LTCH PPS rate year annual update of the payment rates for the Medicare 
PPS for inpatient hospital services provided by LTCHs. We also 
discussed clarification of the notification policy for co-located LTCHs 
and satellite facilities. The RY 2006 LTCH PPS final rule also included 
a provision to extend the surgical DRG exception in the 3-day or less 
interruption of stay policy at Sec.  412.531, as well as a provision 
that clarified and modified existing notification requirements for the 
purpose of implementing Sec.  412.532.

B. Criteria for Classification as a LTCH

1. Classification as a LTCH
    Under the existing regulations at Sec.  412.23(e)(1) and (e)(2)(i), 
which implement section 1886(d)(1)(B)(iv)(I) of the Act, to qualify to 
be paid under the LTCH PPS, a hospital must have a provider agreement 
with Medicare and must have an average Medicare inpatient LOS of 
greater than 25 days. Alternatively, Sec.  412.23(e)(2)(ii) states that 
for cost reporting periods beginning on or after August 5, 1997, a 
hospital that was first excluded from the PPS in 1986 and can 
demonstrate that at least 80 percent of its annual Medicare inpatient 
discharges in the 12-month cost reporting period ending in FY 1997 have 
a principal diagnosis that reflects a finding of neoplastic disease, 
must have an average inpatient LOS for all patients, including both 
Medicare and non-Medicare inpatients, of greater than 20 days.
    Section 412.23(e)(3) provides that, subject to the provisions of 
paragraphs (e)(3)(ii) through (e)(3)(iv) of this section, the average 
Medicare inpatient LOS, specified under Sec.  412.23(e)(2)(i) is 
calculated by dividing the total number of covered and noncovered days 
of stay of Medicare inpatients (less leave or pass days) by the number 
of total Medicare discharges for the hospital's most recent complete 
cost reporting period. Section 412.23 also provides that subject to the 
provisions of paragraphs (e)(3)(ii) through (e)(3)(iv) of this section, 
the average inpatient LOS specified under Sec.  412.23(e)(2)(ii) is 
calculated by dividing the total number of days for all patients, 
including both Medicare and non-Medicare inpatients (less leave or pass 
days) by the number of total discharges for the hospital's most recent 
complete cost reporting period.
    In the RY 2005 LTCH PPS final rule (69 FR 25674), we specified the 
procedure for calculating a hospital's inpatient average length of stay 
(ALOS) for purposes of classification as a LTCH. That is, if a 
patient's stay includes days of care furnished during two or more 
separate consecutive cost reporting periods, the total days of a 
patient's stay would be reported in the cost reporting period during 
which the patient is discharged (69 FR 25705). Therefore, we revised 
the regulations at Sec.  412.23(e)(3)(ii) to specify that, effective 
for cost reporting periods beginning on or after July 1, 2004, in 
calculating a hospital's ALOS, if the days of an inpatient stay involve 
days of care furnished during two or more separate consecutive cost 
reporting periods, the total number of days of the stay are considered 
to have occurred in the cost reporting period during which the 
inpatient was discharged.
    Fiscal intermediaries (FIs) verify that LTCHs meet the ALOS 
requirements. We note that the inpatient days of a patient who is 
admitted to a LTCH without any remaining Medicare days of coverage, 
regardless of the fact that the patient is a Medicare beneficiary, will 
not be included in the above calculation. Because Medicare would not be 
paying for any of the patient's treatment, data on the patient's stay 
would not be included in the Medicare claims processing systems. As 
described in Sec.  409.61, in order for both covered and noncovered 
days of a LTCH hospitalization to be included, a patient admitted to 
the LTCH must have at least one remaining benefit day (68 FR 34123).
    The FI's determination of whether or not a hospital qualified as a 
LTCH is based on the hospital's discharge data from the hospital's most 
recent complete cost reporting period (Sec.  412.23(e)(3)) and is 
effective at the start of the hospital's next cost reporting period 
(Sec.  412.22(d)). However, if the hospital does not meet the ALOS 
requirement as specified in Sec.  412.23(e)(2)(i) and (ii), the 
hospital may provide the intermediary with data indicating a change in 
the ALOS by the same method for the period of at least 5 months of the 
immediately preceding 6-month period (69 FR 25676). Our interpretation 
of the current regulations at Sec.  412.23(e)(3) was to allow hospitals 
to submit data using a period of at least 5 months of the most recent 
data from the immediately preceding 6-month period.
    As we stated in the FY 2004 Inpatient Prospective Payment System 
(IPPS) final rule, published August 1, 2003, prior to the 
implementation of the LTCH PPS, we did rely on data from the most 
recently submitted cost report for purposes of calculating the ALOS (68 
FR 45464). The calculation to determine whether an acute care hospital 
qualifies for LTCH status was based on total days and discharges for 
LTCH inpatients. However, with the implementation of the LTCH PPS, for 
the ALOS specified under Sec.  412.23(e)(2)(i), we revised Sec.  
412.23(e)(3)(i) to only count total days and discharges for Medicare 
inpatients (67 FR 55970 through 55974). In addition, the ALOS specified 
under Sec.  412.23(e)(2)(ii) is calculated by dividing the total number 
of days for all patients, including both Medicare and non-Medicare 
inpatients (less leave or pass days) by the number of total discharges 
for the hospital's most recent complete cost reporting period. As we 
discussed in the FY 2004 IPPS final rule, we are unable to capture the 
necessary data from our present cost reporting forms (68 FR 45464). 
Therefore, we have notified FIs and LTCHs that until the cost reporting 
forms are revised, for purposes of calculating the ALOS, we will be 
relying upon census data extracted from Medicare Provider Analysis and 
Review (MedPAR) files that reflect each LTCH's cost reporting period 
(68 FR 45464). Requirements for hospitals seeking classification as 
LTCHs that have undergone a change in ownership, as described in Sec.  
489.18, are set forth in Sec.  412.23(e)(3)(iv).
2. Hospitals Excluded from the LTCH PPS
    The following hospitals are paid under special payment provisions, 
as described in Sec.  412.22(c) and, therefore, are not subject to the 
LTCH PPS rules:
     Veterans Administration hospitals.
     Hospitals that are reimbursed under State cost control 
systems approved under 42 CFR part 403.
     Hospitals that are reimbursed in accordance with 
demonstration projects

[[Page 27801]]

authorized under section 402(a) of the Social Security Amendments of 
1967 (Pub. L. 90-248) (42 U.S.C. 1395b-1) or section 222(a) of the 
Social Security Amendments of 1972 (Pub. L. 92-603) (42 U.S.C. 1395b-1 
(note)) (Statewide all-payer systems, subject to the rate-of-increase 
test at section 1814(b) of the Act).
     Nonparticipating hospitals furnishing emergency services 
to Medicare beneficiaries.

C. Transition Period for Implementation of the LTCH PPS

    In the August 30, 2002 final rule, we provided for a 5-year 
transition period from reasonable cost-based reimbursement to a full 
Federal prospective payment based on 100 percent of the Federal rate 
for LTCHs (67 FR 56038). However, existing LTCHs and LTCHs that are not 
defined as new in Sec.  412.533(d) have the option to elect to be paid 
based on 100 percent of the Federal prospective payment. During the 5-
year period, two payment percentages are to be used to determine a 
LTCH's total payment under the PPS. The blend percentages are as shown 
in Table 1.

                                 Table 1
------------------------------------------------------------------------
                                                            Reasonable
                                            Prospective     cost-based
 Cost reporting periods beginning on or       payment      reimbursement
                  after                    federal rate        rate
                                            percentage      percentage
------------------------------------------------------------------------
October 1, 2002.........................              20              80
October 1, 2003.........................              40              60
October 1, 2004.........................              60              40
October 1, 2005.........................              80              20
October 1, 2006.........................             100               0
------------------------------------------------------------------------

D. Limitation on Charges to Beneficiaries

    In the August 30, 2002 final rule, we presented an in-depth 
discussion of beneficiary liability under the LTCH PPS (67 FR 55974 
through 55975). In the RY 2005 LTCH PPS final rule (69 FR 25676), we 
clarified that the discussion of beneficiary liability in the August 
30, 2002 final rule was not meant to establish rates or payments for, 
or define Medicare-eligible expenses. Under Sec.  412.507, as 
consistent with other established hospital prospective payment systems, 
a LTCH may not bill a Medicare beneficiary for more than the deductible 
and coinsurance amounts as specified under Sec.  409.82, Sec.  409.83, 
and Sec.  409.87 and for items and services as specified under Sec.  
489.30(a) if the Medicare payment to the LTCH is the full LTC-DRG 
payment amount. However, under the LTCH PPS, Medicare will only pay for 
days for which the beneficiary has coverage until the short-stay 
outlier (SSO) threshold is exceeded. (See section V.A.1.a. of this 
preamble.) Therefore, if the Medicare payment was for a SSO case (Sec.  
412.529) that was less than the full LTC-DRG payment amount because the 
beneficiary had insufficient remaining Medicare days, the LTCH could 
also charge the beneficiary for services delivered on those uncovered 
days (Sec.  412.507).

E. Administrative Simplification Compliance Act (ASCA) and Health 
Insurance Portability and Accountability Act (HIPAA) Compliance

    Claims submitted to Medicare must comply with both the 
Administrative Simplification Compliance Act (ASCA) (Pub. L. 107-105), 
and Health Insurance Portability and Accountability Act (HIPAA) (Pub. 
L. 104-191). Section 3 of the ASCA requires that the Medicare Program 
deny payment under Part A or Part B for any expenses for items or 
services ``for which a claim is submitted other than in an electronic 
form specified by the Secretary.'' Section 1862(h) of the Act (as added 
by section 3(a) of the ASCA) provides that the Secretary shall waive 
such denial in two types of cases and may also waive such denial ``in 
such unusual cases as the Secretary finds appropriate.'' (Also, see 68 
FR 48805, August 15, 2003, implementing section 3 of the ASCA.) Section 
3 of the ASCA operates in the context of the Administrative 
Simplification provisions of HIPAA, which include, among other 
provisions, the transactions and code sets standards requirements 
codified as 45 CFR parts 160 and 162, subparts A and I through R 
(generally known as the Transactions Rule). The Transactions Rule 
requires covered entities, including covered providers, to conduct 
covered electronic transactions according to the applicable 
transactions and code sets standards.

II. Publication of Proposed Rulemaking

    On January 27, 2006, we published the RY 2007 LTCH PPS proposed 
rule in the Federal Register (71 FR 4648 through 4779) that set forth 
the proposed annual update to the payments for the Medicare prospective 
payment system (PPS) for inpatient hospital services provided by long-
term care hospitals (LTCHs) for the 2007 LTCH PPS rate year. (The 
annual update of the LTC-DRG classifications and relative weights for 
FY 2007 remains linked to the annual adjustments of the acute care 
hospital inpatient DRG system, which will be published by August 1, 
2006 and will be effective October 1, 2006.
    In the RY 2007 LTCH PPS proposed rule (71 FR 4648 through 4779), we 
discussed the proposed annual update to the payment rates for the 
Medicare LTCH PPS, as well as other proposed policy changes. The 
following is a summary of the major areas that we addressed in the 
proposed rule.
    In the proposed rule, we discussed the LTCH PPS patient 
classification and the relative weights which remain linked to the 
annual adjustments of the acute care hospital inpatient DRG system, and 
are based on the annual revisions to the International Classification 
of Diseases, Ninth Revision, Clinical Modification (ICD-9-CM) codes 
effective each October 1. (See section IV. of this preamble.)
    In addition, we proposed to adopt the ``Rehabilitation, 
Psychiatric, Long-Term Care (RPL)'' market basket under the LTCH PPS in 
place of the excluded hospital with capital market basket. (See section 
V.B. of this preamble.)
    We also proposed a zero percent update to the LTCH PPS Federal rate 
for the 2007 LTCH PPS rate year instead of the most recent estimate of 
the LTCH

[[Page 27802]]

PPS market basket. (See section V.C. of this preamble.)
    In that same proposed rule, we discussed the proposed prospective 
payment rate for RY 2007, and the applicable adjustments to the 
proposed payment rates, including the proposed revisions to the wage 
index, the proposed cost-of-living adjustment factors, the proposed 
outlier threshold, and the proposed transition period budget neutrality 
factor for the 2007 LTCH PPS rate year. We also proposed revisions to 
the cost-to-charge ratio and reconciliation provisions as they apply to 
LTCH outlier payment policies. (See section V.C. and V.D. of this 
preamble.)
    In addition, we discussed our proposal to revise the LTCH PPS 
labor-related share based on RPL market basket and our proposal to 
revise the labor-related and non-labor related shares of the Federal 
rate based on the RPL market basket. We also proposed to postpone the 
deadline for making the one-time prospective adjustment for the Federal 
rate at Sec.  412.523(d)(3). (See section V.D. of this preamble.)
    Also, we proposed to revise the existing payment adjustment for SSO 
cases by reducing the part of the current payment formula that is based 
on costs and adding a fourth component to the current payment formula. 
We also proposed to sunset the surgical DRG exception to the payment 
policy established under the 3-day or less interruption of stay 
regulations at Sec.  412.531(a)(1). (See section VI.A. of this 
preamble.)
    For LTCH hospitals within hospitals (HwHs) and LTCH satellites, we 
proposed to clarify at Sec.  412.534(c) that under the policy for 
adjusting the LTCH PPS payment based on the amount that would be 
determined under the IPPS payment methodology, we will calculate the 
LTCH PPS payment amount that is equivalent to what would otherwise be 
paid under the IPPS. We also proposed to codify in regulations the 
general formula we currently use to give affect to the regulations as 
they pertain to calculating an amount under subpart O that is 
equivalent to an amount that would be determined under Sec.  412.1(a). 
(See section VI.B. of this preamble.)
    In the same proposed rule, we discussed our on-going monitoring 
protocols under the LTCH PPS. (See section XI. of this preamble.)
    In addition, we discussed the recommendations made by the Research 
Triangle Institute, International's (RTI) evaluation of the feasibility 
of adopting recommendations made in the June 2004 MedPAC Report. (See 
section XII. of this preamble.)
    We also analyzed the impact of the proposed changes presented in 
the proposed rule on Medicare expenditures, Medicare-participating 
LTCHs, and Medicare beneficiaries. (See section XIV. of this preamble.)
    In Appendix A of the proposed rule, we presented a description of a 
preliminary model of an update framework under the LTCH PPS that we may 
propose to use in the future for purposes of the annual updating of the 
LTCH PPS Federal rate in future years.
    We received a total of 860 timely comments on the proposed rule. 
The major issues addressed by the commenters included: The proposed 
update framework; the proposed RPL framework; the proposed update to 
the Federal rate for RY 2007; the proposed high cost outlier (HCO) 
threshold for RY 2007; the proposed revision to the cost-to-charge 
ratios and reconciliation provisions as they apply to LTCH outlier 
payment policies; the proposed sunsetting of the surgical-DRG exception 
to the 3-day or less interruption of stay policy; the proposed SSO 
policy; the proposed postponement of the one-time prospective 
adjustment to the standard Federal rate; the proposed clarification of 
the present policy for adjusting the LTCH PPS payment for LTCH HwHs and 
LTCH satellites; and discussion of the recommendations made by RTI.
    Summaries of the public comments received and our responses to 
those comments are described below under the appropriate heading.

III. Summary of the Major Contents of This Final Rule

    In this final rule, we are setting forth the annual update to the 
payment rates for the Medicare LTCH PPS, as well as finalizing other 
policy changes. The following is a summary of the major areas that we 
are addressing in this final rule.

A. Update Changes

    In section IV of this preamble, we discuss the LTCH PPS patient 
classification and the relative weights which remain linked to the 
annual adjustments of the acute care hospital inpatient DRG system, 
which are based on the annual revisions to the International 
Classification of Diseases, Ninth Revision, Clinical Modification (ICD-
9-CM) codes effective each October 1.
    In section V. through XII. of this preamble, we specify the factors 
and adjustments used to determine the LTCH PPS rates that are 
applicable to the 2007 LTCH PPS rate year, including revisions to the 
wage index, the applicable adjustments to payments, cost-of-living 
adjustment factors, the outlier threshold, the budget neutrality 
factor, MedPAC recommendations and monitoring.
    In section V.B. of this preamble, we are adopting the 
``Rehabilitation, Psychiatric, Long-Term Care (RPL)'' market basket 
under the LTCH PPS in place of the excluded hospital with capital 
market basket. We are also revising the labor-related share (and non-
labor related share) of the Federal rate based on the RPL market 
basket. (See section V.D.1.c. of this preamble).
    As discussed in section V.C. of this preamble, we are implementing 
a zero percent update to the LTCH PPS Federal rate for the 2007 LTCH 
PPS rate year based on an adjustment to the most recent estimate of the 
LTCH PPS market basket to account for apparent case-mix increase.
    While we proposed to revise the cost-to-charge ratio and 
reconciliation provisions as they apply to LTCH outlier payment 
policies, we are not making these changes in this final rule; rather, 
in response to comments, we are again proposing these policies in the 
FY 2007 IPPS proposed rule, and we are including additional data 
requested by commenters.

B. Policy Changes

    In section V.D.6. of this preamble, we are postponing the deadline 
for making the one-time prospective adjustment for the Federal rate at 
Sec.  412.523(d)(3).
    In section VI.A. of this preamble, we are revising the existing 
payment adjustment for SSO cases. Also in section VI.A. of this 
preamble, we are sunsetting the surgical DRG exception to the payment 
policy established under the 3-day or less interruption of stay 
regulations at Sec.  412.531(a)(1).
    In section VI.B. of this preamble, for LTCH hospitals within 
hospitals (HwHs) and LTCH satellites, we are clarifying at Sec.  
412.534(c) the policy for adjusting the LTCH PPS payment based on the 
amount that would be determined under the IPPS methodology. We state 
the methodology used for calculating the LTCH PPS payment amount that 
is equivalent to what would otherwise be paid under the IPPS. We are 
also codifying in regulations the general formula we currently use to 
give affect to the regulations as they pertain to calculating an amount 
under subpart O that is equivalent to an amount that would be 
determined under Sec.  412.1(a).

C. MedPAC Recommendations

    In section XII.A. of this preamble, we discuss the recommendation 
made in

[[Page 27803]]

the March 2006 Report to Congress: Medicare Payment Policy to eliminate 
an update to payment rates for long-term care services for RY 2007.
    In section XII.B. of this preamble, we discuss Research Triangle 
Institute, International's (RTI) evaluation of the feasibility of 
adopting recommendations made in the June 2004 MedPAC report.
    In Appendix A of this final rule, we present a description of a 
preliminary model of an update framework under the LTCH PPS that we may 
propose to use in the future for purposes of the annual updating of the 
LTCH PPS Federal rate in future years.

D. Impact

    In section XV. of this preamble, we analyze the impact of the 
changes presented in this final rule on Medicare expenditures, 
Medicare-participating LTCHs, and Medicare beneficiaries.

IV. Long-Term Care Diagnosis-Related Group (LTC-DRG) Classifications 
and Relative Weights

A. Background

    Section 123 of the BBRA specifically requires that the Secretary 
implement a PPS for LTCHs (that is, a per discharge system with a DRG-
based patient classification system reflecting the differences in 
patient resources and costs in LTCHs while maintaining budget 
neutrality). Section 307(b)(1) of the BIPA modified the requirements of 
section 123 of the BBRA by specifically requiring that the Secretary 
examine ``the feasibility and the impact of basing payment under such a 
system [the LTCH PPS] on the use of existing (or refined) hospital DRGs 
that have been modified to account for different resource use of LTCH 
patients as well as the use of the most recently available hospital 
discharge data.''
    In accordance with section 123 of the BBRA as amended by section 
307(b)(1) of the BIPA and Sec.  412.515, we use information derived 
from LTCH PPS patient records to classify these cases into distinct 
LTC-DRGs based on clinical characteristics and estimated resource 
needs. The LTC-DRGs used as the patient classification component of the 
LTCH PPS correspond to the hospital inpatient DRGs in the IPPS. We 
assign an appropriate weight to the LTC-DRGs to account for the 
difference in resource use by patients exhibiting the case complexity 
and multiple medical problems characteristic of LTCHs.
    In a departure from the IPPS, we use low volume LTC-DRGs (less than 
25 LTCH cases) in determining the LTC-DRG weights, since LTCHs do not 
typically treat the full range of diagnoses as do acute care hospitals. 
In order to manage the large number of low volume DRGs (all DRGs with 
fewer than 25 cases), we group low volume DRGs into 5 quintiles based 
on average charge per discharge. (A listing of the current composition 
of low volume quintiles used in determining the FY 2006 LTC-DRG 
relative weights appears in the FY 2006 IPPS final rule (70 FR 47329 
through 47332). A listing of the composition of proposed low volume 
quintiles used in determining the proposed FY 2007 LTC-DRG relative 
weights appears in the FY 2007 IPPS proposed rule (71 FR 24054 through 
24058). We also account for adjustments to payments for cases in which 
the stay at the LTCH is less than or equal to five-sixths of the 
geometric ALOS and classify these cases as SSO cases. (A detailed 
discussion of the application of the Lewin Group model that was used to 
develop the LTC-DRGs appears in the August 30, 2002 LTCH PPS final rule 
(67 FR 55978).)

B. Patient Classifications into DRGs

    Generally, under the LTCH PPS, a Medicare payment is made at a 
predetermined specific rate for each discharge; that payment varies by 
the LTC-DRG to which a beneficiary's stay is assigned. Cases are 
classified into LTC-DRGs for payment based on the following six data 
elements:
    (1) Principal diagnosis.
    (2) Up to eight additional diagnoses.
    (3) Up to six procedures performed.
    (4) Age.
    (5) Sex.
    (6) Discharge status of the patient.
    As indicated in the August 30, 2002 LTCH PPS final rule, upon the 
discharge of the patient from an LTCH, the LTCH must assign appropriate 
diagnosis and procedure codes from the most current version of the ICD-
9-CM. HIPAA transactions and code sets standards regulations (45 CFR 
parts 160 and 162) require that no later than October 16, 2003, all 
covered entities must comply with the applicable requirements of 
subparts A and I through R of part 162. Among other requirements, those 
provisions direct covered entities to use the ASC X12N 837 Health Care 
Claim: Institutional, Volumes 1 and 2, version 4010, and the applicable 
standard medical data code sets for the institutional health care claim 
or equivalent encounter information transaction. (See 45 CFR 162.1002 
and 45 CFR 162.1102).
    Medicare FIs enter the clinical and demographic information into 
their claims processing systems and subject this information to a 
series of automated screening processes called the Medicare Code Editor 
(MCE). These screens are designed to identify cases that require 
further review before assignment into a DRG can be made. During this 
process, the following types of cases are selected for further 
development:
     Cases that are improperly coded. (For example, diagnoses 
are shown that are inappropriate, given the sex of the patient. Code 
68.6, Radical abdominal hysterectomy, would be an inappropriate code 
for a male.)
     Cases including surgical procedures not covered under 
Medicare. (For example, organ transplant in a non-approved transplant 
center.)
     Cases requiring more information. (For example, ICD-9-CM 
codes are required to be entered at their highest level of specificity. 
There are valid 3-digit, 4-digit, and 5-digit codes. That is, code 262, 
Other severe protein-calorie malnutrition, contains all appropriate 
digits, but if it is reported with either fewer or more than 3 digits, 
the claim will be rejected by the MCE as invalid.)
     Cases with principal diagnoses that do not usually justify 
admission to the hospital. (For example, code 437.9, unspecified 
cerebrovascular disease. While this code is valid according to the ICD-
9-CM coding scheme, a more precise code should be used for the 
principal diagnosis.)
    After screening through the MCE, each claim will be classified into 
the appropriate LTC-DRG by the Medicare LTCH GROUPER software. As 
indicated in the August 30, 2002 LTCH PPS final rule, the Medicare 
GROUPER software, which is used under the LTCH PPS, is specialized 
computer software, and is the same GROUPER software program used under 
the IPPS. The GROUPER software was developed as a means of classifying 
each case into a DRG on the basis of diagnosis and procedure codes and 
other demographic information (age, sex, and discharge status). 
Following the LTC-DRG assignment, the Medicare FI determines the 
prospective payment by using the Medicare PRICER program, which 
accounts for hospital-specific adjustments. Under the LTCH PPS, we 
provide an opportunity for the LTCH to review the LTC-DRG assignments 
made by the FI and to submit additional information within a specified 
timeframe as specified in Sec.  412.513(c).
    The GROUPER software is used both to classify past cases in order 
to measure relative hospital resource consumption to establish the DRG 
weights and to classify current cases for purposes of determining 
payment. The records for all Medicare hospital inpatient discharges are 
maintained in the

[[Page 27804]]

MedPAR file. The data in this file are used to evaluate possible DRG 
classification changes and to recalibrate the DRG weights during our 
annual update under both the IPPS (Sec.  412.60(e)) and the LTCH PPS 
(Sec.  412.517). As discussed in greater detail in sections IV.D. and 
E. of this preamble, with the implementation of section 503(a) of the 
Medicare Prescription Drug, Improvement, and Modernization Act of 2003 
(MMA) (Pub. L. 108-173), there is the possibility that one feature of 
the GROUPER software program may be updated twice during a Federal 
fiscal year (FY) (October 1 and April 1) as required by the statute for 
the IPPS (69 FR 48954 through 48957). Specifically, as we discussed in 
the FY 2006 IPPS final rule, ICD-9-CM diagnosis and procedure codes for 
new medical technology may be created and added to existing DRGs in the 
middle of the Federal FY on April 1 (70 FR 47323). However, this policy 
change will have no effect on the LTC-DRG relative weights, which will 
continue to be updated only once a year (October 1), nor will there be 
any impact on Medicare payments under the LTCH PPS. The use of the ICD-
9-CM code set is also compliant with the current requirements of the 
Transactions and Code Sets Standards regulations at 45 CFR parts 160 
and 162, published in accordance with HIPAA.

C. Organization of DRGs

    The DRGs are organized into 25 major diagnostic categories (MDCs), 
most of which are based on a particular organ system of the body; the 
remainder involve multiple organ systems (such as MDC 22, Burns). 
Accordingly, the principal diagnosis determines MDC assignment. Within 
most MDCs, cases are then divided into surgical DRGs and medical DRGs. 
Surgical DRGs are assigned based on a surgical hierarchy that orders 
operating room (O.R.) procedures or groups of O.R. procedures by 
resource intensity. The GROUPER software program does not recognize all 
ICD-9-CM procedure codes as procedures that affect DRG assignment, that 
is, procedures which are not surgical (for example, EKG), or minor 
surgical procedures (for example, 86.11, Biopsy of skin and 
subcutaneous tissue).
    The medical DRGs are generally differentiated on the basis of 
diagnosis. Both medical and surgical DRGs may be further differentiated 
based on age, sex, discharge status, and presence or absence of 
complications or comorbidities (CC). We note that CCs are defined by 
certain secondary diagnoses not related to, or not inherently a part 
of, the disease process identified by the principal diagnosis. (For 
example, the GROUPER software would not recognize a code from the 
800.0x series, Skull fracture, as a CC when combined with principal 
diagnosis 850.4, Concussion with prolonged loss of consciousness, 
without return to preexisting conscious level.) In addition, we note 
that the presence of additional diagnoses does not automatically 
generate a CC, as not all DRGs recognize a comorbid or complicating 
condition in their definition. (For example, DRG 466, Aftercare without 
History of Malignancy as Secondary Diagnosis, is based solely on the 
principal diagnosis, without consideration of additional diagnoses for 
DRG determination.)
    In its June 2000, Report to Congress, MedPAC recommended that the 
Secretary ``* * * improve the hospital inpatient prospective payment 
system by adopting, as soon as practicable, diagnosis-related group 
refinements that more fully capture differences in severity of illness 
among patients'' (Recommendation 3A, p. 63). In response to that 
recommendation, we determined at that time that it was not practical to 
develop a refinement to inpatient hospital DRGs based on severity due 
to time and resource requirements. However, this does not preclude us 
from development of a severity-adjusted DRG refinement in the future. 
That is, a refinement to the list of CCs could be incorporated into the 
existing DRG structure. It is also possible that a more comprehensive 
severity adjusted structure may be created if a new code set is 
adopted. That is, if ICD-9-CM is replaced by ICD-10-CM (for diagnostic 
coding) and ICD-10-PCS (for procedure coding) or by other code sets, a 
severity concept may be built into the resulting DRG assignments. Of 
course, any change to the code set would be adopted through the process 
established in the HIPAA Administrative Simplification Standards 
provisions.
    In its March 2005 Report to Congress, ``Physician-Owned Specialty 
Hospitals,'' MedPAC recommended that the Secretary improve payment 
accuracy in the hospital IPPS by, among other things, ``refining the 
current DRGs to more fully capture differences in severity of illness 
among patients'' (Recommendation 1, p. 93). In the FY 2006 IPPS final 
rule (70 FR 47474 through 47479), we stated that we expected to make 
changes to the DRGs to better reflect severity of illness and we 
indicated that we plan to conduct a comprehensive review of the CCs 
list for FY 2007. We also indicated that we are considering the 
possibility of proposing to use the All Patient Refined (APR) DRGs 
under the IPPS for FY 2007. We explained that we did not propose to 
adopt the APR-DRGS under the IPPS for FY 2006 because it would 
represent a significant undertaking that could have a substantial 
effect on all hospitals and there was insufficient time to fully 
analyze a change of that magnitude. However, as an interim step to 
better recognize severity in the DRG system for FY 2006, until we could 
complete a more comprehensive analysis of the APR-DRG system and CC 
list as part of a complete analysis of the MedPAC recommendations that 
we planned to perform over the next year, we established cardiovascular 
DRGs 547 through 558 as described in the FY 2006 IPPS final rule (70 FR 
47474 through 47478).
    In the FY 2007 IPPS proposed rule, we present the proposed changes 
to the DRG system for FY 2007 (71 FR 24049). In that rule, we proposed 
to use the IPPS GROUPER Version 24.0 for FY 2007 to process LTCH PPS 
claims for LTCH discharges occurring from October 1, 2006 through 
September 30, 2007 (71 FR 24049). As we also noted in that proposed 
rule, in its March 1, 2005 Report to Congress on Medicare Payment 
Policy (page 64) and Recommendation 1 in the 2005 Report to Congress on 
Physician-Owned Specialty Hospitals, MedPAC recommended that CMS, among 
other things, refine the current DRGs under the IPPS to more fully 
capture differences in severity of illness among patients. In 
evaluating this MedPAC recommendation for the IPPS, we are evaluating 
the APR-DRG Grouper used by MedPAC in its analysis. Based on this 
analysis, we developed a consolidated severity adjusted DRG system that 
we believe could be a better alternative for recognizing severity of 
illness among the Medicare population that we are considering to 
propose for future use under the IPPS. As discussed above in this 
section, the LTCH PPS uses the same patient classification system (that 
is, DRGs). In response to MedPAC recommendations that severity adjusted 
DRGs be adopted under the IPPS, we are examining the possibility of 
adopting a consolidated version of the APR-DRGs. In the event that 
severity adjusted DRGs, such as the consolidated severity adjusted 
DRGs, are adopted under the IPPS, we would need to consider whether to 
revise the patient classification system under the LTCH PPS. Any 
proposed changes to the patient classification system would be done 
through notice and comment rulemaking.

[[Page 27805]]

D. Update of LTC-DRGs

    For FY 2006, the LTC-DRG patient classification system was based on 
LTCH data from the FY 2004 MedPAR file, which contained hospital bills 
data from the March 2005 update. The patient classification system 
consists of 526 DRGs that formed the basis of the FY 2006 LTCH PPS 
GROUPER program. The 526 LTC-DRGs included two ``error DRGs.'' As in 
the IPPS, we included two error DRGs in which cases that cannot be 
assigned to valid DRGs will be grouped. These two error DRGs are DRG 
469 (Principal Diagnosis Invalid as a Discharge Diagnosis) and DRG 470 
(Ungroupable). (See the FY 2006 IPPS final rule (70 FR 47323 through 
47341)). The other 524 LTC-DRGs are the same DRGs used in the IPPS 
GROUPER program for FY 2006 (Version 23.0).
    In the past, the annual update to the CMS DRGs was based on the 
annual revisions to the ICD-9-CM codes and was effective each October 
1. The ICD-9-CM coding update process was revised as discussed in 
greater detail in the FY 2005 IPPS final rule (69 FR 48954 through 
48957). Specifically, section 503(a) of the MMA includes a requirement 
for updating ICD-9-CM codes twice a year instead of the current process 
of annual updates on October 1 of each year. This requirement is 
included as part of the amendments to the Act relating to recognition 
of new medical technology under the IPPS. (For additional information 
on this provision, including its implementation and its impact on the 
LTCH PPS, refer to the FY 2005 IPPS final rule (69 FR 48952 through 
48957) and the RY 2006 LTCH PPS final rule (70 FR 24172 through 
24177).)
    As discussed in the RY 2006 LTCH PPS final rule, with the 
implementation of section 503(a) of the MMA, there is the possibility 
that one feature of the GROUPER software program may be updated twice 
during a Federal FY (October 1 and April 1) as required by the statute 
for the IPPS (70 FR 24173 through 24175). Specifically, ICD-9-CM 
diagnosis and procedure codes for new medical technology may be created 
and added to existing DRGs in the middle of the Federal FY on April 1. 
No new LTC-DRGs will be created or deleted. Consistent with our current 
practice, any changes to the DRGs or relative weights will be made at 
the beginning of the next Federal FY (October 1). Therefore, there will 
not be any impact on Medicare payments under the LTCH PPS. The use of 
the ICD-9-CM code set is also compliant with the current requirements 
of the Transactions and Code Sets Standards regulations at 45 CFR parts 
160 and 162, issued under HIPAA.
    As we explained in the FY 2006 IPPS final rule, historically in the 
health care industry annual changes to the ICD-9-CM codes were 
effective for discharges occurring on or after October 1 each year (70 
FR 47323). Thus, the manual and electronic versions of the GROUPER 
software, which are based on the ICD-9-CM codes, were also revised 
annually and effective for discharges occurring on or after October 1 
each year. The patient classification system used under the LTCH PPS 
(LTC-DRGs) is based on the DRG patient classification system used under 
the IPPS, which historically had been updated annually and effective 
for discharges occurring on or after October 1 through September 30 
each year. As we also mentioned, the ICD-9-CM coding update process was 
revised as a result of the implementation of section 503(a) of the MMA, 
which includes a requirement for updating ICD-9-CM codes as often as 
twice a year instead of the current process of annual updates on 
October 1 of each year. As discussed in the FY 2005 IPPS final rule, 
this requirement is included as part of the amendments to the Act 
relating to recognition of new medical technology under the IPPS (69 FR 
48954 through 48957). Section 503(a) of the MMA amended section 
1886(d)(5)(K) of the Act by adding a new paragraph (vii) which states 
that ``the Secretary shall provide for the addition of new diagnosis 
and procedure codes on April 1 [sic] of each year, but the addition of 
such codes shall not require the Secretary to adjust the payment (or 
diagnosis-related group classification) * * * until the fiscal year 
that begins after such date.'' This requirement will improve the 
recognition of new technologies under the IPPS by accounting for those 
ICD-9-CM codes in the MedPAR claims data at an earlier date.
    Despite the fact that aspects of the GROUPER software may be 
updated to recognize any new technology ICD-9-CM codes, there will be 
no impact on either LTC-DRG assignments or payments under the LTCH PPS 
at that time. That is, changes to the LTC-DRGs (such as the creation or 
deletion of LTC-DRGs) and the relative weights will continue to be 
updated in the manner and timing (October 1) as they are now.
    Updates to the GROUPER software for both the IPPS and the LTCH PPS 
(for relative weights and the creation or deletion of DRGs) are made in 
the annual IPPS proposed and final rules and are effective each October 
1. We also explained that since we do not publish a midyear IPPS rule, 
April 1 code updates will not be published in a midyear IPPS rule. 
Rather, we will assign any new diagnosis or procedure codes to the same 
DRG in which its predecessor code was assigned, so that there will be 
no impact on the DRG assignments until the following October 1. Any 
coding updates will be available through the websites provided in 
section IV.E. of this preamble and through the Coding Clinic for ICD-9-
CM. Publishers and software vendors currently obtain code changes 
through these sources in order to update their code books and software 
system. If new codes are implemented on April 1, revised code books and 
software systems, including the GROUPER software program, will be 
necessary because we must use current ICD-9-CM codes. Therefore, for 
purposes of the LTCH PPS, because each ICD-9-CM code must be included 
in the GROUPER algorithm to classify each case into an LTC-DRG, the 
GROUPER software program used under the LTCH PPS would need to be 
revised to accommodate any new codes.
    In implementing section 503(a) of the MMA, there will only be an 
April 1 update if new technology codes are requested and approved. We 
note that any new codes created for April 1 implementation will be 
limited to those diagnosis and procedure code revisions primarily 
needed to describe new technologies and medical services. However, we 
reiterate that the process of discussing updates to the ICD-9-CM has 
been an open process through the ICD-9-CM Coordination and Maintenance 
Committee since 1995. Requestors will be given the opportunity to 
present the merits for a new code and make a clear and convincing case 
for the need to update ICD-9-CM codes through an April 1 update.
    Discharges between October 1, 2005, and September 30, 2006, 
(Federal FY 2006) are using Version 23.0 of the GROUPER software for 
both the IPPS and the LTCH PPS. Consistent with our current practice, 
any changes to the DRGs or relative weights will be made at the 
beginning of the Federal FY (October 1). We will notify LTCHs of any 
revised LTC-DRG relative weights based on the final DRGs and the 
applicable version of the GROUPER software program that will be 
effective October 1, 2006, in the annual IPPS proposed and final rules. 
At the September 2005 ICD-9-CM Coordination and Maintenance Committee 
meeting, there were no requests for an April 1, 2006 implementation of 
ICD-9-CM codes, and therefore, the next update to the

[[Page 27806]]

ICD-9-CM coding system will not occur until October 1, 2006 (FY 2007). 
Presently, as there were no coding changes suggested for an April 1, 
2006 update, the ICD-9-CM coding set implemented on October 1, 2005, 
will continue through September 30, 2006 (FY 2006). The next update to 
the LTC-DRGs and relative weights for FY 2007 will be presented in the 
FY 2007 IPPS proposed and final rules. Furthermore, we would notify 
LTCHs of any revisions to the GROUPER software used under the IPPS and 
LTCH PPS that would be implemented April 1, 2007. As noted previously 
in this section, in the FY 2007 IPPS proposed rule (71 FR 24050), we 
proposed to use Version 24.0 of the CMS GROUPER, which would be used 
under the IPPS for FY 2007, to classify cases for LTCH PPS discharges 
that would occur on or after October 1, 2006 and on or before September 
30, 2007.

E. ICD-9-CM Coding System

1. Uniform Hospital Discharge Data Set (UHDDS) Definitions
    Because the assignment of a case to a particular LTC-DRG will help 
determine the amount that will be paid for the case, it is important 
that the coding is accurate. Classifications and terminology used in 
the LTCH PPS are consistent with the ICD-9-CM and the UHDDS, as 
recommended to the Secretary by the National Committee on Vital and 
Health Statistics (``Uniform Hospital Discharge Data: Minimum Data Set, 
National Center for Health Statistics, April 1980'') and as revised in 
1984 by the Health Information Policy Council (HIPC) of the Department 
of Health and Human Services (HHS).
    We note that the ICD-9-CM coding terminology and the definitions of 
principal and other diagnoses of the UHDDS are consistent with the 
requirements of the HIPAA Administrative Simplification Act of 1996 (45 
CFR part 162). Furthermore, the UHDDS was used as a standard for the 
development of policies and programs related to hospital discharge 
statistics by both governmental and nongovernmental sectors for over 30 
years. In addition, the following definitions (as described in the 1984 
Revision of the UHDDS, approved by the Secretary for use starting 
January 1986) are requirements of the ICD-9-CM coding system, and have 
been used as a standard for the development of the CMS DRGs:
     Diagnoses are defined to include all diagnoses that affect 
the current hospital stay.
     Principal diagnosis is defined as the condition 
established after study to be chiefly responsible for occasioning the 
admission of the patient to the hospital for care.
     Other diagnoses (also called secondary diagnoses or 
additional diagnoses) are defined as all conditions that coexist at the 
time of admission, that develop subsequently, or that affect the 
treatment received or the LOS or both. Diagnoses that relate to an 
earlier episode of care that have no bearing on the current hospital 
stay are excluded.
     All procedures performed will be reported. This includes 
those that are surgical in nature, carry a procedural risk, carry an 
anesthetic risk, or require specialized training.
    We provide LTCHs with a 60-day window after the date of the notice 
of the initial LTC-DRG assignment to request review of that assignment. 
Additional information may be provided by the LTCH to the FI as part of 
that review.
2. Maintenance of the ICD-9-CM Coding System
    The ICD-9-CM Coordination and Maintenance (C&M) Committee is a 
Federal interdepartmental committee, co-chaired by the National Center 
for Health Statistics (NCHS) and CMS, that is charged with maintaining 
and updating the ICD-9-CM system. The C&M Committee is jointly 
responsible for approving coding changes, and developing errata, 
addenda, and other modifications to the ICD-9-CM to reflect newly 
developed procedures and technologies and newly identified diseases. 
The C&M Committee is also responsible for promoting the use of Federal 
and non-Federal educational programs and other communication techniques 
with a view toward standardizing coding applications and upgrading the 
quality of the classification system.
    The NCHS has lead responsibility for the ICD-9-CM diagnosis codes 
included in the Tabular List and Alphabetic Index for Diseases, while 
we have the lead responsibility for the ICD-9-CM procedure codes 
included in the Tabular List and Alphabetic Index for Procedures. The 
C&M Committee encourages participation by health-related organizations 
in this process and holds public meetings for discussion of educational 
issues and proposed coding changes twice a year at the CMS Central 
Office located in Baltimore, Maryland. The agenda and dates of the 
meetings can be accessed on our Web site at: https://www.cms.hhs.gov/
ICD9ProviderDiagnosticCodes.
    As discussed previously in this section of the preamble, section 
503(a) of the MMA includes a requirement for updating ICD-9-CM codes 
twice a year instead of the current process of annual updates on 
October 1 of each year. This requirement will improve the recognition 
of new technologies under the IPPS by accounting for them in the 
GROUPER software at an earlier date. Because this new statutory 
requirement could have a significant impact on health care providers, 
coding staff, publishers, system maintainers, and software systems, 
among others, we solicited comments on our proposed provisions to 
implement this requirement as part of the FY 2005 IPPS proposed rule 
(69 FR 28220 through 28221). We responded to comments and published our 
new policy regarding the updating of ICD-9-CM codes in the FY 2005 IPPS 
final rule (69 FR 48954 through 48957).
    While this new requirement states that the Secretary shall not 
adjust the payment of the DRG classification for any codes created for 
use on April 1, DRG software and other systems will have to be updated 
in order to recognize and accept the new codes. If any coding changes 
were implemented on April 1, the Medicare GROUPER software program used 
under both the IPPS and the LTCH PPS would need to be revised to 
reflect the new ICD-9-CM codes because the LTC-DRGs are the same DRGs 
used under the IPPS. Furthermore, although the GROUPER software used 
under both the IPPS and the LTCH PPS would need to be revised to 
accommodate the new codes effective April 1, there would be no 
additions or deletions of DRGs nor would the relative weights used 
under the IPPS and the LTCH PPS, respectively, be changed until the 
annual update on October 1 (to the extent that those changes are 
warranted), just as they are historically updated. As the LTCH P