Medicare Program; Inpatient Rehabilitation Facility Prospective Payment System for Federal Fiscal Year 2007, 28106-28165 [06-4409]

Agencies

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

[Federal Register Volume 71, Number 93 (Monday, May 15, 2006)]
[Proposed Rules]
[Pages 28106-28165]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-4409]



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Part III





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Part 412



Medicare Program; Inpatient Rehabilitation Facility Prospective Payment 
System for Federal Fiscal Year 2007; Proposed Rule

Federal Register / Vol. 71, No. 93 / Monday, May 15, 2006 / Proposed 
Rules

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 412

[CMS-1540-P]
RIN 0938-AO16


Medicare Program; Inpatient Rehabilitation Facility Prospective 
Payment System for Federal Fiscal Year 2007

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule would update the prospective payment rates 
for inpatient rehabilitation facilities (IRFs) for Federal fiscal year 
(FY) 2007 (for discharges occurring on or after October 1, 2006 and on 
or before September 30, 2007) as required under section 1886(j)(3)(C) 
of the Social Security Act (the Act). Section 1886(j)(5) of the Act 
requires the Secretary to publish in the Federal Register on or before 
the August 1 that precedes the start of each fiscal year, the 
classification and weighting factors for the inpatient rehabilitation 
facility prospective payment system's case-mix groups and a description 
of the methodology and data used in computing the prospective payment 
rates for that fiscal year.
    We are proposing to revise existing policies regarding the 
prospective payment system within the authority granted under section 
1886(j) of the Act. In addition, we are proposing to revise the current 
regulation text at 42 CFR 412.23(b)(2)(i) and (b)(2)(ii) to reflect the 
changes enacted under section 5005 of the Deficit Reduction Act of 
2005.

DATES: To be assured consideration, comments must be received at one of 
the addresses provided below, no later than 5 p.m. on July 7, 2006.

ADDRESSES: In commenting, please refer to file code CMS-1540-P. 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 regulation to https://www.cms.hhs.gov/eRulemaking. Click 
on the link ``Submit electronic comments on CMS regulations with an 
open comment period.'' (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-1540-P, P.O. Box 8012, Baltimore, MD 21244-8012.
    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By express or overnight mail. You may send written comments (one 
original and two copies) to the following address only: Centers for 
Medicare & Medicaid Services, Department of Health and Human Services, 
Attention: CMS-1540-P, Mail Stop C4-26-05, 7500 Security Boulevard, 
Baltimore, MD 21244-1850.
    4. By hand or courier. If you prefer, you may deliver (by hand or 
courier) your written comments (one original and two copies) before the 
close of the comment period to 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 (HHH) 
Building is not readily available to persons without Federal Government 
identification, commenters are encouraged to leave their comments in 
the Centers for Medicare & Medicaid Services (CMS) drop slots located 
in the main lobby of the building. A stamp-in clock is available for 
persons wishing to retain a proof of filing by stamping in and 
retaining an extra copy of the comments being filed.)

    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and received after the comment 
period.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT:

Pete Diaz, (410) 786-1235, for information regarding the 75 percent 
rule.
Susanne Seagrave, (410) 786-0044, for information regarding the new 
payment policy proposals.
Zinnia Ng, (410) 786-4587, for information regarding the wage index and 
prospective payment rate calculation.

SUPPLEMENTARY INFORMATION:
    Submitting Comments: We welcome comments from the public on all 
issues set forth in this rule to assist us in fully considering issues 
and developing policies. You can assist us by referencing the file code 
CMS-1540-P and the specific ``issue identifier'' that precedes the 
section on which you choose to comment.
    Inspection of Public Comments: All comments received before the 
close of the comment period are available for viewing by the public, 
including any personally identifiable or confidential business 
information that is included in a comment. We post all comments 
received before the close of the comment period on the following Web 
site as soon as possible after they have been received: https://
www.cms.hhs.gov/eRulemaking. Click on the link ``Electronic Comments on 
CMS Regulations'' on that Web site to view public comments.
    Comments received timely will also 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, Maryland 21244, Monday through Friday of each week from 8:30 
a.m. to 4 p.m. To schedule an appointment to view public comments, 
phone 1-800-743-3951.

Table of Contents

I. Background
    A. Historical Overview of the Inpatient Rehabilitation Facility 
Prospective Payment System (IRF PPS) for Fiscal Years (FYs) 2002 
Through 2005
    B. Revisions Made by the IRF PPS Final Rule for FY 2006
    C. Requirements for Updating the IRF PPS Rates
    D. Operational Overview of the Current IRF PPS
    E. Brief Summary of Proposed Revisions to the IRF PPS for FY 
2007
II. Refinements to the Patient Classification System
    A. Proposed Changes to the Existing List of Tier Comorbidities
    B. Proposed Changes to the CMG Relative Weights
    1. Development of CMG Relative Weights
    2. Overview of the Methodology for Calculating the CMG Relative 
Weights
    3. Proposed Changes to the CMG Relative Weights and Average 
Lengths of Stay
III. Proposed FY 2007 Federal Prospective Payment Rates
    A. Proposed Reduction of the Standard Payment Amount to Account 
for Coding Changes
    B. Proposed FY 2007 IRF Market Basket Increase Factor and Labor-
Related Share
    C. Area Wage Adjustment

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    D. Description of the Proposed Methodology Used to Implement the 
Changes in a Budget Neutral Manner
    E. Proposed Budget Neutrality Factor Methodology for Fiscal Year 
2007
    F. Description of the Proposed IRF Standard Payment Conversion 
Factor and Proposed Payment Rates for FY 2007
    G. Example of the Methodology for Adjusting the Proposed Federal 
Prospective Payment Rates
 IV. Proposed Update to Payments for High-Cost Outliers Under the 
IRF PPS
    A. Proposed Update to the Outlier Threshold Amount for FY 2007
    B. Update to the IRF Cost-to-Charge Ratio Ceilings and Proposed 
Clarification to the Regulation Text for FY 2007
V. Other Issues
VI. Proposed Revisions to the Classification Criteria Percentage for 
IRFs
VII. Provisions of the Proposed Rule
    A. Section 412.23 Excluded Hospitals: Classifications
    B. Section 412.624 Methodology for Calculating the Federal 
Prospective Payment Rates
    C. Additional Proposed Changes
VIII. Collection of Information Requirements
IX. Response to Comments
X. Regulatory Impact Analysis
    A. Overall Impact
    B. Anticipated Effects of the Proposed Rule
    C. Accounting Statement
    D. Alternatives Considered
    E. Conclusion
Regulation Text
Addendum
Acronyms

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

ADC Average Daily Census
SCA Adminstrative 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
CBSA Core-Based Statistical Area
CCR Cost-to-Charge Ratio
CFR Code of Federal Regulations
CMG Case-Mix Group
DRA Deficit Reduction Act of 2005, Pub. L. 109-171
DRG Diagnosis-Related Group
DSH Disproportionate Share Hospital
ECI Employment Cost Indexes
FI Fiscal Intermediary
FR Federal Register
FY Federal Fiscal Year
GDP Gross Domestic Product
HHH Hubert H. Humphrey Building
HIPAA Health Insurance Portability and Accountability Act, Pub. L. 
104-191
HIT Health Information Technology
IFMC Iowa Foundation for Medical Care
IPPS Inpatient Prospective Payment System
IRF Inpatient Rehabilitation Facility
IRF-PAI Inpatient Rehabilitation Facility-Patient Assessment 
Instrument
IRF PPS Inpatient Rehabilitation Facility Prospective Payment System
IRVEN Inpatient Rehabilitation Validation and Entry
LIP Low-Income Percentage
MEDPAR Medicare Provider Analysis and Review
MMA Medicare Prescription Drug, Improvement, and Modernization Act 
of 2003 (Pub. L. 108-173)
MSA Metropolitan Statistical Area
NAICS North American Industrial Classification System
OMB Office of Management and Budget
PAC Post Acute Care
PAI Patient Assessment Instrument
PPS Prospective Payment System
RAND RAND Corporation
RFA Regulatory Flexibility Act, Pub. L. 96-354
RIA Regulation Impact Analysis
RIC Rehabilitation Impairment Category
RPL Rehabilitation, Psychiatric, and Long-Term Care Hospital Market 
Basket
SCHIP State Children's Health Insurance Program
SIC Standard Industrial Code
TEFRA Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-
248

I. Background

    [If you choose to comment on issues in this section, please 
include the caption ``Background'' at the beginning of your 
comments.]

A. Historical Overview of the Inpatient Rehabilitation Facility 
Prospective Payment System (IRF PPS) for Fiscal Years (FYs) 2002 
Through 2005

    Section 4421 of the Balanced Budget Act of 1997 (BBA, Pub. L. 105-
33), as amended by section 125 of the Medicare, Medicaid, and SCHIP 
[State Children's Health Insurance Program] Balanced Budget Refinement 
Act of 1999 (BBRA, Pub. L. 106-113), and by section 305 of the 
Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act 
of 2000 (BIPA, Pub. L. 106-554), provides for the implementation of a 
per discharge prospective payment system (PPS), through section 1886(j) 
of the Social Security Act (the Act), for inpatient rehabilitation 
hospitals and inpatient rehabilitation units of a hospital (hereinafter 
referred to as IRFs).
    Payments under the IRF PPS encompass inpatient operating and 
capital costs of furnishing covered rehabilitation services (that is, 
routine, ancillary, and capital costs) but not costs of approved 
educational activities, bad debts, and other services or items outside 
the scope of the IRF PPS. Although a complete discussion of the IRF PPS 
provisions appears in the August 7, 2001 final rule (66 FR 41316) as 
revised in the FY 2006 IRF PPS final rule (70 FR 47880), we are 
providing below a general description of the IRF PPS for fiscal years 
(FYs) 2002 through 2005.
    Under the IRF PPS from FY 2002 through FY 2005, as described in the 
August 7, 2001 final rule, the Federal prospective payment rates were 
computed across 100 distinct case-mix groups (CMGs). We constructed 95 
CMGs using rehabilitation impairment categories (RICs), functional 
status (both motor and cognitive), and age (in some cases, cognitive 
status and age may not be a factor in defining a CMG). In addition, we 
constructed five special CMGs to account for very short stays and for 
patients who expire in the IRF.
    For each of the CMGs, we developed relative weighting factors to 
account for a patient's clinical characteristics and expected resource 
needs. Thus, the weighting factors accounted for the relative 
difference in resource use across all CMGs. Within each CMG, we created 
tiers based on the estimated effects that certain comorbidities would 
have on resource use.
    We established the Federal PPS rates using a standardized payment 
conversion factor (formerly referred to as the budget neutral 
conversion factor). For a detailed discussion of the budget neutral 
conversion factor, please refer to our August 1, 2003 final rule (68 FR 
45674, 45684 through 45685). In the FY 2006 IRF PPS final rule (70 FR 
47880), we discussed in detail the methodology for determining the 
standard payment conversion factor.
    We applied the relative weighting factors to the standard payment 
conversion factor to compute the unadjusted Federal prospective payment 
rates. Under the IRF PPS from FYs 2002 through 2005, we then applied 
adjustments for geographic variations in wages (wage index), the 
percentage of low-income patients, and location in a rural area (if 
applicable) to the IRF's unadjusted Federal prospective payment rates. 
In addition, we made adjustments to account for short-stay transfer 
cases, interrupted stays, and high cost outliers.
    For cost reporting periods that began on or after January 1, 2002 
and before October 1, 2002, we determined the final prospective payment 
amounts using the transition methodology prescribed in section 
1886(j)(1) of the Act. Under this provision, IRFs transitioning into 
the PPS were paid a blend of the Federal IRF PPS rate and the payment 
that the IRF would have received had the IRF PPS not been implemented. 
This provision also

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allowed IRFs to elect to bypass this blended payment and immediately be 
paid 100 percent of the Federal IRF PPS rate. The transition 
methodology expired as of cost reporting periods beginning on or after 
October 1, 2002 (FY 2003), and payments for all IRFs now consist of 100 
percent of the Federal IRF PPS rate.
    We established a CMS Web site as a primary information resource for 
the IRF PPS. The Web site URL is https://www.cms.hhs.gov/
InpatientRehabFacPPS/ and may be accessed to download or view 
publications, software, data specifications, educational materials, and 
other information pertinent to the IRF PPS.

B. Revisions Made by the IRF PPS Final Rule for FY 2006

    Section 1886(j) of the Act confers broad statutory authority to 
propose refinements to the IRF PPS. The refinements described in this 
section were finalized in the FY 2006 IRF PPS final rule (70 FR 47880). 
The provisions of the FY 2006 IRF PPS final rule became effective for 
discharges beginning on or after October 1, 2005. We published 
correcting amendments to the FY 2006 IRF PPS final rule in the Federal 
Register on September 30, 2005 (70 FR 57166). Any reference to the FY 
2006 IRF PPS final rule in this proposed rule also includes the 
provisions effective in the correcting amendments.
    In the FY 2006 final rule (70 FR 47880 and 70 FR 57166), we 
finalized a number of refinements to the IRF PPS case-mix 
classification system (the CMGs and the corresponding relative weights) 
and the case-level and facility-level adjustments. These refinements 
were based on analyses by the RAND Corporation (RAND), a non-partisan 
economic and social policy research group, using calendar year 2002 and 
FY 2003 data. These were the first significant refinements to the IRF 
PPS since its implementation. In conducting the analysis, RAND used 
claims and clinical data for services furnished after the 
implementation of the IRF PPS. These newer data sets were more 
complete, and reflected improved coding of comorbidities and patient 
severity by IRFs. The researchers were able to use new data sources for 
imputing missing values and more advanced statistical approaches to 
complete their analyses. The RAND reports supporting the refinements 
made to the IRF PPS are available on the CMS Web site at: https://
www.cms.hhs.gov/InpatientRehabFacPPS/09_Research.asp.
    The final key policy changes, effective for discharges occurring on 
or after October 1, 2005, are discussed in detail in the FY 2006 IRF 
PPS final rule (70 FR 47880 and 70 FR 57166). The following is a brief 
summary of the key policy changes:
    The FY 2006 IRF PPS final rule (70 FR 47880, 47917 through 47928) 
included the adoption of the Office of Management and Budget's (OMB's) 
Core-Based Statistical Area (CBSA) market area definitions in a budget 
neutral manner. This geographic adjustment was made using the most 
recent final wage data available (that is, pre-reclassification and 
pre-floor hospital wage index based on FY 2001 hospital wage data). In 
addition, we implemented a budget-neutral three-year hold harmless 
policy for rural IRFs in FY 2005 that became urban in FY 2006, as 
described in the FY 2006 IRF PPS final rule (70 FR 47880, 47923 through 
47925).
    The FY 2006 final rule (70 FR 47880, 47904) also implemented a 
payment adjustment to account for changes in coding that did not 
reflect real changes in case mix. In that final rule, we reduced the 
standard payment amount by 1.9 percent to account for such changes in 
coding following implementation of the IRF PPS. Our contractors 
conducted a series of analyses to identify real case mix change over 
time and the effect of this change on aggregate IRF PPS payments. The 
contractors identified the impact of changing case mix on the IRF PPS 
payment ranges. From calendar year 1999 through calendar year 2002, the 
real change in IRFs' case mix ranged from negative 2.4 percent to 
positive 1.5 percent. They attributed the remaining change in IRF 
payments (between 1.9 percent and 5.8 percent) to coding changes. For 
FY 2006, we implemented a reduction in the standard payment amount 
based on the lowest of these estimates. At the time, we stated that we 
would continue to analyze the data and would make additional coding 
adjustments, as needed.
    In addition, in the FY 2006 final rule (70 FR 47880, 47886 through 
47904), we made modifications to the CMGs, tier comorbidities, and 
relative weights in a budget-neutral manner. The final rule included a 
number of adjustments to the IRF classification system that are 
designed to improve the system's ability to predict IRF costs. The data 
indicated that moving or eliminating some comorbidity codes from the 
tiers, redefining the CMGs, and other minor changes to the system would 
improve the ability of the classification system to ensure that 
Medicare payments to IRFs continue to be aligned with the costs of 
care. These refinements resulted in 87 CMGs using Rehabilitation 
Impairment Categories (RICs), functional status (motor and cognitive 
scores), and age (in some cases, cognitive status and age may not be 
factors in defining CMGs). The five special CMGs remained the same as 
they had been before FY 2006 and continue to account for very short 
stays and for patients who expire in the IRF.
    In addition, the FY 2006 IRF PPS final rule (70 FR 47928 through 
47932) implemented a new teaching status adjustment for IRFs, similar 
to the one adopted for inpatient psychiatric facilities. We implemented 
the teaching status adjustment in a budget neutral manner.
    The FY 2006 IRF PPS final rule (70 FR 47880, 47908 through 47917) 
also revised and rebased the market basket. We finalized the use of a 
new market basket reflecting the operating and capital cost structures 
for rehabilitation, psychiatric, and long term care (RPL) hospitals to 
update IRF payment rates. The RPL market basket excludes data from 
cancer hospitals, children's hospitals, and religious non-medical 
institutions. In addition, we rebased the market basket to account for 
2002-based cost structures for RPL hospitals. Further, we calculated 
the labor-related share using the RPL market basket. The FY 2006 IRF 
market basket increase factor was 3.6 percent and the RPL labor-related 
share was 75.865 percent.
    In the FY 2006 final rule (70 FR 47880, 47932 through 47933), we 
updated the rural adjustment (from 19.14 percent to 21.3 percent), the 
low-income percentage (LIP) adjustment (from an exponent of 0.484 to an 
exponent of 0.6229), and the outlier threshold amount (from $11,211 to 
$5,129, as further revised in the FY 2006 IRF PPS correction notice (70 
FR 57166, 57168)). We implemented the changes to the rural and the LIP 
adjustments in a budget neutral manner.
    The final FY 2006 standard payment conversion factor, accounting 
for the refinements, was $12,762 (as discussed in the FY 2006 IRF PPS 
correction notice (70 FR 57166, 57168)).

C. Requirements for Updating the IRF PPS Rates

    On August 7, 2001, we published a final rule entitled ``Medicare 
Program; Prospective Payment System for Inpatient Rehabilitation 
Facilities'' in the Federal Register (66 FR 41316) that established a 
PPS for IRFs as authorized under section 1886(j) of the Act and 
codified at subpart P of part 412 of the Medicare regulations. In the 
August 7,

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2001 final rule, we set forth the per discharge Federal prospective 
payment rates for FY 2002, which provided payment for inpatient 
operating and capital costs of furnishing covered rehabilitation 
services (that is, routine, ancillary, and capital costs) but not costs 
of approved educational activities, bad debts, and other services or 
items that are outside the scope of the IRF PPS. The provisions of the 
August 7, 2001 final rule were effective for cost reporting periods 
beginning on or after January 1, 2002. On July 1, 2002, we published a 
correcting amendment to the August 7, 2001 final rule in the Federal 
Register (67 FR 44073). Any references to the August 7, 2001 final rule 
in this proposed rule include the provisions effective in the 
correcting amendment.
    Section 1886(j)(5) of the Act and Sec.  412.628 of the regulations 
require the Secretary to publish in the Federal Register, on or before 
the August 1 that precedes the start of each new FY, the 
classifications and weighting factors for the IRF CMGs and a 
description of the methodology and data used in computing the 
prospective payment rates for the upcoming FY. On August 1, 2002, we 
published a notice in the Federal Register (67 FR at 49928) to update 
the IRF Federal prospective payment rates from FY 2002 to FY 2003 using 
the methodology as described in Sec.  412.624. As stated in the August 
1, 2002 notice, we used the same classifications and weighting factors 
for the IRF CMGs that were set forth in the August 7, 2001 final rule 
to update the IRF Federal prospective payment rates from FY 2002 to FY 
2003. We continued to update the prospective payment rates in 
accordance with the methodology set forth in the August 7, 2001 final 
rule for each succeeding FY up to and including FY 2005. For FY 2006, 
however, we published a final rule that revised several IRF PPS 
policies (70 FR 47880), as summarized in sections I.B and I.C of this 
proposed rule. The provisions of the FY 2006 IRF PPS final rule became 
effective for discharges occurring on or after October 1, 2005. We 
published correcting amendments to the FY 2006 IRF PPS final rule in 
the Federal Register (70 FR 57166). Any reference to the FY 2006 IRF 
PPS final rule in this proposed rule includes the provisions effective 
in the correcting amendments.
    In this proposed rule for FY 2007, we are proposing to update the 
IRF Federal prospective payment rates. In addition, we will update the 
cost-to-charge ratios from FY 2006 to FY 2007 and the outlier 
threshold. We are also proposing a one-time, 2.9 percent reduction to 
the FY 2007 standard payment amount to account for changes in coding 
practices that do not reflect real changes in case mix. (See section 
III.A of this proposed rule for further discussion of the proposed 
reduction of the standard payment amount to account for coding 
changes.)
    We are also proposing changes to the tier comorbidities and the 
relative weights to ensure that IRF PPS payments reflect, as closely as 
possible, the costs of caring for patients in IRFs. (See section II for 
a detailed discussion of these proposed changes.) The proposed FY 2007 
Federal prospective payment rates would be effective for discharges 
occurring on or after October 1, 2006 and on or before September 30, 
2007.
    In addition, we are proposing to revise the regulation text in 
Sec.  412.23(b)(2)(i) and Sec.  412.23(b)(2)(ii) to reflect the 
statutory changes in section 5005 of the Deficit Reduction Act of 2005 
(DRA, Pub. L. 109-171). The proposed regulation text change would 
prolong the overall duration of the phased transition to the full 75 
percent threshold established in current regulation text in Sec.  
412.23(b)(2)(i) and Sec.  412.23(b)(2)(ii), by extending the 
transition's current 60 percent phase for an additional 12 months.

D. Operational Overview of the Current IRF PPS

    As described in the August 7, 2001 final rule, upon the admission 
and discharge of a Medicare Part A fee-for-service patient, the IRF is 
required to complete the appropriate sections of a patient assessment 
instrument, the Inpatient Rehabilitation Facility-Patient Assessment 
Instrument (IRF-PAI). All required data must be electronically encoded 
into the IRF-PAI software product. Generally, the software product 
includes patient grouping programming called the GROUPER software. The 
GROUPER software uses specific Patient Assessment Instrument (PAI) data 
elements to classify (or group) patients into distinct CMGs and account 
for the existence of any relevant comorbidities.
    The GROUPER software produces a five-digit CMG number. The first 
digit is an alpha-character that indicates the comorbidity tier. The 
last four digits represent the distinct CMG number. (Free downloads of 
the Inpatient Rehabilitation Validation and Entry (IRVEN) software 
product, including the GROUPER software, are available at the CMS Web 
site at https://www.cms.hhs.gov/InpatientRehabFacPPS/06_Software. asp)
    Once a patient is discharged, the IRF completes the Medicare claim 
(UB-92 or its equivalent) using the five-digit CMG number and sends it 
to the appropriate Medicare fiscal intermediary (FI). Claims submitted 
to Medicare must comply with both the Administrative Simplification 
Compliance Act (ASCA, Pub. L. 107-105), and the Health Insurance 
Portability and Accountability Act of 1996 (HIPAA, Pub. L. 104-191). 
Section 3 of the ASCA amends section 1862(a) of the Act by adding 
paragraph (22) which requires the Medicare program, subject to section 
1862(h) of the Act, to deny payment under Part A or Part B for any 
expenses for items or services ``for which a claim is submitted other 
than in an electronic form specified by the Secretary.'' Section 
1862(h) of the Act, in turn, provides that the Secretary shall waive 
such denial in two types of cases and may also waive such denial ``in 
such unusual cases as the Secretary finds appropriate.'' See also the 
interim final rule on Electronic Submission of Medicare Claims (68 FR 
48805, August 15, 2003). Section 3 of the ASCA operates in the context 
of the administrative simplification provisions of HIPAA, which 
include, among others, the requirements for transaction standards and 
code sets 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 transaction 
standards. (See the program claim memoranda issued and published by CMS 
at: https://www.cms.hhs.gov/ElectronicBillingEDITrans/ and listed in the 
addenda to the Medicare Intermediary Manual, Part 3, section 3600. 
Instructions for the limited number of claims submitted to Medicare on 
paper are located in section 3604 of Part 3 of the Medicare 
Intermediary Manual.)
    The Medicare FI processes the claim through its software system. 
This software system includes pricing programming called the PRICER 
software. The PRICER software uses the CMG number, along with other 
specific claim data elements and provider-specific data, to adjust the 
IRF's prospective payment for interrupted stays, transfers, short 
stays, and deaths, and then applies the applicable adjustments to 
account for the IRF's wage index, percentage of low-income patients, 
rural location, and outlier payments. For discharges occurring on or 
after October 1, 2005, the IRF PPS payment also reflects the new 
teaching status adjustment that became effective

[[Page 28110]]

as of FY 2006, as discussed in the FY 2006 IRF PPS final rule (70 FR 
47880).

E. Brief Summary of Proposed Revisions to the IRF PPS for FY 2007

    In this proposed rule, we are proposing to make the following 
revisions and updates:
     Revise the IRF GROUPER software and the relative weight 
and average length of stay tables based on re-analysis of the data by 
CMS and our contractor, the RAND Corporation, as discussed in section 
II of this proposed rule.
     Reduce the standard payment amount by 2.9 percent to 
account for coding changes, as discussed in section III.A of this 
proposed rule.
     Update the FY 2007 IRF PPS payment rates by the proposed 
market basket, as discussed in section III.B of this proposed rule.
     Update the FY 2007 IRF PPS payment rates by the proposed 
labor related share, the wage indexes, and the second year of the hold 
harmless policy in a budget neutral manner, as discussed in sections 
III.C through G of this proposed rule.
     Update the outlier threshold for FY 2007 to $5,609, as 
discussed in section IV.A of this proposed rule.
     Update the urban and rural national cost-to-charge ratio 
ceilings for purposes of determining outlier payments under the IRF PPS 
and propose clarifications to the methodology described in the 
regulation text, as discussed in section IV.B of this proposed rule.
     Revise the regulation text at Sec.  412.23(b)(2)(i) and 
Sec.  412.23(b)(2)(ii) to reflect section 5005 of the DRA, which 
maintains the compliance percentage requirement transition at its 
current 60 percent phase for an additional 12 months, as discussed in 
section VI of this proposed rule.

II. Refinements to the Patient Classification System

    [If you choose to comment on issues in this section, please include 
the caption ``Refinements to the Patient Classification System'' at the 
beginning of your comments.]

A. Proposed Changes to the Existing List of Tier Comorbidities

    As discussed in the FY 2006 IRF PPS final rule (70 FR 47880, 47888 
through 47892), we finalized several changes to the comorbidity tiers 
associated with the CMGs for FY 2006.
    A comorbidity is a specific patient condition that is secondary to 
the patient's principal diagnosis or impairment. We use the patient's 
principal diagnosis or impairment to classify the patient into a 
rehabilitation impairment category (RIC), and then we use the patient's 
secondary diagnoses (or comorbidities) to determine whether to classify 
the patient into a higher-paying tier. A patient could have one or more 
comorbidities present during the inpatient rehabilitation stay. Our 
analysis for the August 7, 2001 final rule (66 FR 41316) found that the 
presence of certain comorbidities could have a major effect on the cost 
of furnishing inpatient rehabilitation care. We also found that the 
effect of comorbidities varied across RICs, significantly increasing 
the costs of patients in some RICs, while having no effect in others. 
Therefore, in determining whether the presence of a certain comorbidity 
should trigger placement in a higher-paying tier, we considered whether 
the comorbidity was an inherent part of the diagnosis that assigned the 
patient to the RIC. If it was an inherent part of the diagnosis, we 
excluded it from the RIC.
    The changes for FY 2006 included removing several tier comorbidity 
codes that RAND's analysis found were no longer positively related to 
treatment costs, moving the comorbidity code for patients needing 
dialysis to tier 1, and moving certain comorbidity codes among tiers 
based on their marginal cost, as determined by RAND's regression 
analysis. In accordance with the final rule, we implemented these 
changes by updating the IRF PPS GROUPER software for discharges 
occurring on or after October 1, 2005.
    In the FY 2006 IRF PPS final rule (70 FR 47880, 47892), we 
explained that the purpose of these changes was to place comorbidity 
codes in tiers based on RAND's analysis of how much the associated 
comorbidity would increase the costs of care in the IRF. (RAND's 
detailed analysis and methodology can be found in their report 
``Preliminary Analyses for Refinement of the Tier Comorbidities in the 
Inpatient Rehabilitation Facility Prospective Payment System,'' which 
is available on their Web site at https://www.rand.org/pubs/
technicalreports/TR201/).
    After publishing the FY 2006 IRF PPS final rule, we continued to 
monitor the IRF classification system. As a result of our review and an 
analysis of recently updated data from RAND, we are proposing to 
implement some additional refinements (described below) to the 
comorbidity tiers for FY 2007 to ensure that IRF PPS payments continue 
to reflect as accurately as possible the costs of care in IRFs.
    Section 1886(j)(2)(C)(i) of the Act requires the Secretary from 
time to time to adjust the classifications and weighting factors for 
the IRF case-mix classification system as appropriate to reflect 
changes in treatment patterns, technology, case mix, number of payment 
units for which payment is made under the IRF PPS, and other factors 
which may affect the relative use of resources.
    Accordingly, as described below, we propose to revise the tier 
comorbidity list in the IRF GROUPER for FY 2007 to ensure that the list 
appropriately reflects current ICD-9-CM national coding guidelines (as 
discussed below) and to ensure that the comorbidity codes are in the 
most appropriate tiers, based on RAND's analysis of the amount the 
associated comorbidities add to treatment costs. We are proposing the 
following five types of changes to the list of tier comorbidities in 
the IRF PPS GROUPER for FY 2007:
     Adding four comorbidity codes, as shown in Table 1.
     Deleting five comorbidity codes, as shown in Table 2.
     Continuing to update the tier comorbidities in the IRF 
GROUPER, as appropriate, to reflect ICD-9-CM national coding 
guidelines, as discussed below.
     Moving nine comorbidity codes from tier 2 to tier 3, as 
shown in Table 3.
     Deleting all category codes from the IRF GROUPER, as shown 
in Table 4.
    We note that the proposed revisions to the IRF GROUPER described in 
this section are subject to change for the final rule based on the 
results of updated analysis.
    The proposed changes listed below in Tables 1 and 2 are related to 
the monitoring and updating of the comorbidity tiers that CMS has been 
doing on an annual basis since we first implemented the IRF PPS, as 
described in detail below. We will continue to provide ongoing 
monitoring of additions, deletions, and changes to the ICD-9 coding 
structure, in order to ensure that the list of tier comorbidities in 
the IRF GROUPER is as consistent as possible with current national 
coding guidelines (as discussed below).
    Each year since 1986, the National Center for Health Statistics 
(NCHS) and CMS have issued new diagnosis and procedure codes for the 
International Classification of Diseases, 9th Revision, Clinical 
Modification (ICD-9-CM). The ICD-9-CM Coordination and Maintenance 
Committee, sponsored jointly by NCHS and CMS, is responsible for 
determining these new code assignments each year. The new ICD-9 codes 
generally become effective on October 1 of each year, and replace 
previously assigned ``code equivalents.'' However, the ICD-9-CM 
Coordination and Maintenance Committee recently

[[Page 28111]]

indicated that it may begin updating the ICD-9 codes twice a year. A 
mid-year revision of the code assignments has not occurred yet, but we 
will monitor any such revisions that may occur and update the IRF 
coding instructions, as appropriate.
    In order to ensure that the list of tier comorbidities accurately 
reflects changes to the ICD-9-CM codes, we propose to continue to 
update the list of ICD-9 codes in the IRF GROUPER software, as 
appropriate. For example, to the extent that the ICD-9-CM Coordination 
and Maintenance Committee changes an ICD-9 code for a comorbid 
condition on our tier comorbidity list into one or more codes that 
provide additional detail, we are proposing (as a general rule) to 
update the IRF GROUPER software to reflect the new codes. However, we 
recognize that there may be situations in which the addition of one or 
more of these new codes to the list of tier comorbidities may not be 
appropriate. For example, a situation could occur in which an ICD-9 
code for a particular condition is divided into two more detailed 
codes, one of which represents a condition that generally increases the 
costs of care in an IRF and one of which does not. In such a case, we 
may propose through notice and comment procedures to delete the code 
that does not reflect increased costs of care in an IRF from the list 
of tier comorbidities in the IRF GROUPER software.
    We propose to continue to indicate changes to the GROUPER software 
that reflect national coding guidelines by posting a complete ICD-9 
table, including new, discontinued, and modified codes, on the IRF PPS 
Web site. We also propose to continue to report the complete list of 
ICD-9 codes associated with the tiers in the IRF GROUPER documentation, 
which is also posted on the IRF PPS Web site.
    In addition, we propose that the finalized list of tier 
comorbidities for FY 2007 that we are proposing to post on the IRF PPS 
website and in the IRF GROUPER documentation (also posted on the IRF 
PPS website) as of October 1, 2006 would generally reflect Appendix C 
of the August 7, 2001 final rule (66 FR 41316, 41414 through 41427) as 
modified by the tier comorbidity changes adopted in the FY 2006 IRF PPS 
final rule (70 FR 47880) and any tier comorbidity changes as adopted in 
the FY 2007 IRF PPS final rule, as well as changes adopted due to ICD-9 
national coding guideline updates. This version would constitute the 
baseline for any future updates to the tier comorbidities. Moreover, we 
note that, if we decide that a substantive change to the comorbid 
conditions on the list of tier comorbidities in the IRF GROUPER is 
appropriate, we will propose the change through notice and comment 
procedures.
    Accordingly, in Table 1, we propose to add comorbidity codes 
466.11, 466.19, 282.68, and 567.29 to the GROUPER for FY 2007 to be 
consistent with the national ICD-9-CM coding guidelines, as discussed 
above. In Table 1, on the basis of RAND's analysis, we also indicate 
the proposed tier assignment for each ICD-9 comorbidity code and any 
applicable RIC exclusions.

                                             Table 1.--ICD-9 Codes We Propose To Add to the IRF PPS GROUPER
--------------------------------------------------------------------------------------------------------------------------------------------------------
                ICD-9-CM                                                  ICD-9-CM label                                    Tier       RIC  exclusion
--------------------------------------------------------------------------------------------------------------------------------------------------------
466.11..................................  ACU BRONCHOLITIS D/T RSV......................................................        3  15
466.19..................................  ACU BRNCHLTS D/T OTH ORG......................................................        3  15
282.68..................................  OTH SICKLE-CELL DISEASE W/O CRISIS............................................        3  None
567.29..................................  OTH SUPPURATIVE PERITONITIS...................................................        3  None
--------------------------------------------------------------------------------------------------------------------------------------------------------

    In Table 2, we list all of the comorbidity codes that we propose to 
delete from the IRF GROUPER for FY 2007. The clinical conditions that 
these codes represent were not part of the initial list of tier 
comorbidities in Appendix C of the August 7, 2001 final rule (66 FR 
41316, 41414 through 41427), but we inadvertently added these codes to 
the IRF GROUPER in our annual GROUPER updating process. Thus, we are 
proposing to delete these codes from the tier comorbidities for FY 
2007.

                                          Table 2.--Proposed ICD-9 Codes To Be Deleted From the IRF PPS GROUPER
--------------------------------------------------------------------------------------------------------------------------------------------------------
                  ICD-9-CM                                                             ICD-9-CM label                                             Tier
--------------------------------------------------------------------------------------------------------------------------------------------------------
453.40......................................  VEN EMBOL THRMBS UNSPEC DP VSLS LWR EXTREM......................................................         3
453.41......................................  VEN EMBOL THRMBS DP VSLS PROX LWR EXTREM........................................................         3
453.42......................................  VEN EMBOL THRMBS DP VSLS DIST LWR EXTREM........................................................         3
799.01......................................  ASPHYXIA........................................................................................         3
799.02......................................  HYPOXEMIA.......................................................................................         3
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Finally, in Table 3, we list the ICD-9 codes that we propose to 
move to a different tier to reflect the amount that the associated 
comorbidities increase the costs of care in the IRF. In the FY 2006 IRF 
GROUPER, we placed all of these codes in tier 2 based on the most up-
to-date list of tier comorbidities we had at the time CMS published the 
FY 2006 IRF PPS final rule. We have recently reanalyzed the data and 
found that these codes should be in tier 3, based on the amount that 
RAND's updated analysis shows that the associated comorbidities 
increase the costs of treatment in IRFs. Thus, we propose to move the 
ICD-9 codes listed in Table 3 from tier 2 to tier 3, so that IRF PPS 
payments will continue to reflect as closely as possible the costs of 
care.

[[Page 28112]]



             Table 3.--Proposed ICD-9 Codes To Be Moved From Tier 2 to Tier 3 in the IRF PPS GROUPER
----------------------------------------------------------------------------------------------------------------
                                                                                                         RIC
            ICD-9-CM                                  ICD-9-CM label                         Tier     exclusion
----------------------------------------------------------------------------------------------------------------
112.4...........................  CANDIDIASIS OF LUNG...................................          3           15
112.5...........................  DISSEMINATED CANDIDIASIS..............................          3         None
112.81..........................  CANDIDAL ENDOCARDITIS.................................          3           14
112.83..........................  CANDIDAL MENINGITIS...................................          3        03,05
112.84..........................  CANDIDAL ESOPHAGITIS..................................          3         None
785.4...........................  GANGRENE..............................................          3        10,11
995.90..........................  SIRS NOS..............................................          3         None
995.91..........................  SIRS INF W/O ORG DYS..................................          3         None
995.92..........................  SIRS INF W ORG DYS....................................          3         None
995.93..........................  SIRS NON-INF W/O ORG DYS..............................          3         None
995.94..........................  SIRS NON-INF W ORG DYS................................          3         None
----------------------------------------------------------------------------------------------------------------

    In our ongoing fiscal oversight of the IRF PPS, we will continue 
closely monitoring providers' use of the ICD-9 codes that increase IRF 
payments. To the extent that we find any inappropriate coding of 
particular ICD-9 codes that increase payments, we may reconsider the 
appropriateness of their inclusion on the list of tier comorbidities in 
the future.
    Finally, in order to clarify the ICD-9 comorbidity codes we use to 
increase payments to IRFs, we propose to remove the category codes 
listed in Appendix C of the August 7, 2001 final rule (66 FR 41316, 
41414 through 41427). We use the term ``category code'' to refer to a 
three-digit ICD-9 code for which one or more four- or five-digit ICD-9 
codes exist to describe the same condition.
    Appendix C of the August 7, 2001 final rule lists both ICD-9-CM 
codes and category codes to identify the comorbidity tiers. The 
category codes in that Appendix C are identified with an asterisk (*).
    ICD-9-CM diagnosis codes are composed of codes with three, four, or 
five digits. Occasionally, three digit codes are complete ICD-9-CM 
codes (examples include 037 (TETANUS) and 042 (HUMAN IMMUNODEFICIENCY 
VIRUS (HIV) DISEASE)), and thus should be used to code comorbidities on 
the IRF-PAI form. However, codes with three digits are generally 
included in the ICD-9-CM coding system as the heading of a category of 
codes that are further subdivided using a fourth and/or fifth digit to 
provide greater detail. In most cases, it is inappropriate for 
providers to use a category code to indicate a comorbidity on the IRF-
PAI form because the national ICD-9-CM coding guidelines require use of 
the more detailed codes. The national ICD-9-CM coding guidelines 
(published in the introduction to all releases of the ICD-9-CM codes 
themselves), were adopted, along with the ICD-9-CM codes themselves, as 
the standard medical data code set in compliance with the Health 
Insurance Portability and Accountability Act (HIPAA).
    To avoid any confusion regarding the fact that category codes 
should not be used to indicate comorbidities on the IRF-PAI form, we 
propose to remove the category codes from the tier comorbidities in the 
IRF GROUPER. This is consistent with the ICD-9-CM national coding 
guidelines. Table 4 contains the list of category codes we are 
proposing to delete from the list of tier comorbidities in the IRF 
GROUPER.
    We note that three of the codes listed in Table 4, 998.3 (POSTOP 
WOUND DISRUPTION), 567.2 (SUPPURAT PERITONITIS NEC), and 567.8 
(PERITONITIS NEC), were listed in Appendix C of the August 7, 2001 
final rule (70 FR 41316, 41414 through 41427) without asterisks because 
they were not category codes at the time, but we are proposing to 
delete them from the IRF GROUPER now because they became category codes 
in 2002 and 2005. In 2002, the ICD-9-CM Coordination and Maintenance 
Committee created ICD-9 codes 998.31 and 998.32 as more specific codes 
for the condition that was coded using 998.3 before 2002. Similarly, in 
2005, the committee created ICD-9 codes 567.21, 567.22, 567.23, and 
567.29 as more specific codes for the condition that was coded using 
567.2 before 2005, and codes 567.81, 567.82, and 567.89 as more 
specific codes for the condition that was coded using 567.8 before 
2005. Once the committee introduced these more specific codes, 998.3, 
567.2, and 567.8 became category codes. For this reason, we are 
proposing to delete them from the IRF GROUPER along with the other 
category codes. ICD-9 codes 998.31, 998.32, 567.21, 567.22, 567.23, 
567.29, 567.81, 567.82, and 567.89 will be included in the IRF GROUPER, 
but we will monitor these codes carefully to ensure that they are being 
used properly.

                       Table 4.--Category Codes We Propose To Delete From the IRF GROUPER
----------------------------------------------------------------------------------------------------------------
                  Category code                                         Category code label
----------------------------------------------------------------------------------------------------------------
011..............................................  PULMONARY TUBERCULOSIS.
011.0............................................  TB OF LUNG, INFILTRATIVE.
011.1............................................  TB OF LUNG, NODULAR.
011.2............................................  TB OF LUNG W CAVITATION.
011.3............................................  TUBERCULOSIS OF BRONCHUS.
011.4............................................  TB FIBROSIS OF LUNG.
011.5............................................  TB BRONCHIECTASIS.
011.6............................................  TUBERCULOUS PNEUMONIA.
011.7............................................  TUBERCULOUS PNEUMOTHORAX.
011.8............................................  PULMONARY TB NEC.
011.9............................................  PULMONARY TB NOS.
012..............................................  OTHER RESPIRATORY TB.
012.0............................................  TUBERCULOUS PLEURISY.
012.1............................................  TB THORACIC LYMPH NODES.

[[Page 28113]]

 
012.2............................................  ISOLATED TRACH/BRONCH TB.
012.3............................................  TUBERCULOUS LARYNGITIS.
012.8............................................  RESPIRATORY TB NEC.
013..............................................  CNS TUBERCULOSIS.
013.0............................................  TUBERCULOUS MENINGITIS.
013.1............................................  TUBERCULOMA OF MENINGES.
013.2............................................  TUBERCULOMA OF BRAIN.
013.3............................................  TB ABSCESS OF BRAIN.
013.4............................................  TUBERCULOMA SPINAL CORD.
013.5............................................  TB ABSCESS SPINAL CORD.
013.6............................................  TB ENCEPHALITIS/MYELITIS.
013.8............................................  CNS TUBERCULOSIS NEC.
013.9............................................  CNS TUBERCULOSIS NOS.
014..............................................  INTESTINAL TB.
014.0............................................  TUBERCULOUS PERITONITIS.
014.8............................................  INTESTINAL TB NEC.
015..............................................  TB OF BONE AND JOINT.
015.0............................................  TB OF VERTEBRAL COLUMN.
015.1............................................  TB OF HIP.
015.2............................................  TB OF KNEE.
015.5............................................  TB OF LIMB BONES.
015.6............................................  TB OF MASTOID.
015.7............................................  TB OF BONE NEC.
015.8............................................  TB OF JOINT NEC.
015.9............................................  TB OF BONE & JOINT NOS.
016..............................................  GENITOURINARY TB.
016.0............................................  TB OF KIDNEY.
016.1............................................  TB OF BLADDER.
016.2............................................  TB OF URETER.
016.3............................................  TB OF URINARY ORGAN NEC.
016.4............................................  TB OF EPIDIDYMIS.
016.5............................................  TB MALE GENITAL ORG NEC.
016.6............................................  TB OF OVARY AND TUBE.
016.7............................................  TB FEMALE GENIT ORG NEC.
016.9............................................  GENITOURINARY TB NOS.
017..............................................  TUBERCULOSIS NEC.
017.0............................................  TB SKIN & SUBCUTANEOUS.
017.1............................................  ERYTHEMA NODOSUM IN TB.
017.2............................................  TB OF PERIPH LYMPH NODE.
017.3............................................  TB OF EYE.
017.4............................................  TB OF EAR.
017.5............................................  TB OF THYROID GLAND.
017.6............................................  TB OF ADRENAL GLAND.
017.7............................................  TB OF SPLEEN.
017.8............................................  TB OF ESOPHAGUS.
017.9............................................  TB OF ORGAN NEC.
018..............................................  MILIARY TUBERCULOSIS.
018.0............................................  ACUTE MILIARY TB.
018.8............................................  MILIARY TB NEC.
018.9............................................  MILIARY TUBERCULOSIS NOS.
038.1............................................  STAPHYLOCOCC SEPTICEMIA.
038.4............................................  GRAM-NEG SEPTICEMIA NEC.
115..............................................  HISTOPLASMOSIS.
115.0............................................  HISTOPLASMA CAPSULATUM.
115.1............................................  HISTOPLASMA DUBOISII.
115.9............................................  HISTOPLASMOSIS UNSPEC.
415.1............................................  PULMON EMBOLISM/INFARCT.
441.0............................................  DISSECTING ANEURYSM.
453..............................................  OTH VENOUS THROMBOSIS.
466.1............................................  ACUTE BRONCHIOLITIS.
482.8............................................  BACTERIAL PNEUMONIA NEC.
567.2............................................  SUPPURAT PERITONITIS NEC.
567.8............................................  PERITONITIS NEC.
682..............................................  OTHER CELLULITIS/ABSCESS.
998.3............................................  POSTOP WOUND DISRUPTION.
998.5............................................  POSTOPERATIVE INFECTION.
----------------------------------------------------------------------------------------------------------------


[[Page 28114]]

    As explained in detail below, we propose to apply all of these 
proposed changes to the tier comorbidities and the proposed changes to 
the CMG relative weights (described below) in a budget neutral manner. 
In the next section, we discuss our methodology for calculating the 
appropriate proposed budget neutrality factor.

B. Proposed Changes to the CMG Relative Weights

1. Development of CMG Relative Weights
    Section 1886(j)(2)(B) of the Act requires that we assign an 
appropriate relative weight to each CMG. Relative weights account for 
the variance in cost per discharge and resource utilization among the 
payment groups and are a primary element of a case-mix adjusted PPS. 
Use of the most accurate CMG relative weights possible helps ensure 
that beneficiaries have access to care and receive the same appropriate 
services as other Medicare beneficiaries in the same CMG. In addition, 
prospective payments based on relative weights encourage provider 
efficiency and, therefore, help ensure a fair distribution of Medicare 
payments. Accordingly, as specified in Sec.  412.620(b)(1), we 
calculate a relative weight for each CMG that is proportional to the 
resources needed by an average inpatient rehabilitation case in that 
CMG. For example, cases in a CMG with a relative weight of 2, on 
average, will cost twice as much as cases in a CMG with a relative 
weight of 1.
2. Overview of the Methodology for Calculating the CMG Relative Weights
    As indicated in the original IRF PPS final rule (66 FR 41316) and 
the FY 2006 IRF PPS final rule (70 FR 47880, 47887 through 47888), in 
calculating the relative weights, we use a hospital-specific relative 
value method to estimate operating (routine and ancillary services) and 
capital costs of IRFs. For FY 2007, we have used this same methodology 
to recalculate the relative weights to reflect the changes in 
comorbidity coding discussed in the next section of this proposed rule. 
The process used to calculate the relative weights for this proposed 
rule is shown below.
    Step 1. We calculate the CMG relative weights by estimating the 
effects that comorbidities have on costs.
    Step 2. We adjust the cost of each Medicare discharge (case) to 
reflect the effects found in the first step.
    Step 3. We use the adjusted costs from the second step to calculate 
``relative adjusted weights'' in each CMG using the hospital-specific 
relative value method.
    Step 4. We calculate the CMG relative weights by modifying the 
``relative adjusted weight'' with the effects of the existence of the 
comorbidity tiers and normalizing the weights to 1.
3. Proposed Changes to the CMG Relative Weights and Average Lengths of 
Stay
    Relative weights that account for the variance in cost per 
discharge and resource utilization among payment groups are a primary 
element of a case-mix adjusted PPS. The accuracy of the relative 
weights helps to ensure that payments reflect as closely as possible 
the relative costs of IRF patients and, therefore, that beneficiaries 
have access to care and receive appropriate services.
    We are proposing to update the relative weights for FY 2007 based 
on a revised analysis of the data used to construct the relative 
weights for FY 2006. As part of CMS's ongoing monitoring of the IRF 
PPS, we recently reviewed the analysis for the FY 2006 final rule and 
discovered certain minor discrepancies. These discrepancies included 
ICD-9 codes in the 428.xx series that were not appropriately excluded 
from RIC 14, ICD-9 codes for tracheostomy that were incorrectly 
excluded from RIC 15, and two ICD-9 comorbidity codes--428.0 
(CONGESTIVE HEART FAILURE UNSPECIFIED) and V43.3 (HEART VALVE REPLACED 
BY OTHER MEANS)--that were incorrectly included in the analysis. Thus, 
we are proposing to revise the CMG relative weights for FY 2007 because 
the data file used in RAND's analysis was recently revised to correct 
these minor discrepancies so the file would comport with the policies 
outlined in the FY 2006 IRF PPS final rule and this proposed rule. This 
led to changes in the CMG relative weights.
    Based on RAND's reanalysis of the FY 2003 data using the corrected 
list of tier comorbidities and the same methodology we used to 
construct the CMG relative weights in the FY 2002 and FY 2006 IRF PPS 
final rules (66 FR 41316, 41351, and 70 FR 47880, 47887 through 47888), 
but using the correct tier comorbidities, we propose to update the CMG 
relative weights for FY 2007 to ensure that they continue to reflect as 
accurately as possible the costs of treatment for various types of 
patients in IRFs. Table 5 below contains the proposed new CMG relative 
weights and average lengths of stay for FY 2007. The proposed relative 
weights and average lengths of stay shown in Table 5 are subject to 
change for the final rule based on updated analysis and data.
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    We propose to make these revisions to the tier comorbidities and 
the CMG relative weights in a budget neutral manner, consistent with 
the budget neutral manner in which we implemented changes to the IRF 
classification system for FY 2006 as described in the FY 2006 IRF PPS 
final rule (70 FR 47880, 47900). The purpose of these proposed changes 
to the IRF classification system is to ensure that the existing 
resources in the IRF PPS are distributed as accurately as possible 
among IRFs according to the relative costliness of the types of 
patients they treat.
    To ensure that total estimated aggregate payments to IRFs do not 
change, we propose to apply a factor to the proposed standard payment 
amount to ensure that estimated aggregate payments due to the proposed 
changes to the tier comorbidities and the relative weights for FY 2007 
are not greater or less than those estimated payments that would have 
been made in FY 2007 without the proposed changes. To calculate an 
appropriate proposed budget neutrality factor to apply to the standard 
payment amount, we propose to use the following steps:
    Step 1. Calculate the estimated total amount of IRF PPS payments 
for FY 2007 (with no proposed changes to the tier comorbidities and the 
CMG relative weights).
    Step 2. Apply the proposed changes to the tier comorbidities and 
the CMG relative weights (as discussed above) to calculate the 
estimated total amount of IRF PPS payments for FY 2007.
    Step 3. Divide the amount calculated in step 1 by the amount 
calculated in step 2 to determine the proposed factor (1.0079) that 
would maintain the same total estimated aggregate payments in FY 2007 
with and without the proposed changes to the tier comorbidities and the 
CMG relative weights.
    Step 4. Apply the proposed budget neutrality factor (1.0079) to the 
FY 2006 IRF PPS standard payment amount after the application of the 
market basket update, the budget-neutral wage adjustment factor, and 
the proposed 2.9 percent reduction to account for coding changes that 
do not reflect real changes in case mix.
    In section III.D and section III.E of this proposed rule, we 
discuss the methodology and the factor we would apply to the proposed 
standard payment amount for FY 2007. The proposed budget neutrality 
factor for the proposed revisions to the tier comorbidities and the CMG 
relative weights is subject to change for the final rule based on 
updated analysis and data.

III. Proposed FY 2007 Federal Prospective Payment Rates

    [If you choose to comment on issues in this section, please 
include the caption ``Proposed FY 2007 Federal Prospective Payment 
Rates'' at the beginning of your comments.]

A. Proposed Reduction of the Standard Payment Amount To Account for 
Coding Changes

    Section 1886(j)(2)(C)(ii) of the Act requires the Secretary to 
adjust the per payment un