Medicare Program; Proposed Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2008 Rates, 24680-25135 [07-1920]
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[Federal Register Volume 72, Number 85 (Thursday, May 3, 2007)] [Proposed Rules] [Pages 24680-25135] From the Federal Register Online via the Government Printing Office [www.gpo.gov] [FR Doc No: 07-1920] [[Page 24679]] ----------------------------------------------------------------------- Part II Department of Health and Human Services ----------------------------------------------------------------------- Centers for Medicare & Medicaid Services ----------------------------------------------------------------------- 42 CFR Parts 411, 412, 413, and 489 Medicare Program; Proposed Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2008 Rates; Proposed Rule Federal Register / Vol. 72, No. 85 / Thursday, May 3, 2007 / Proposed Rules [[Page 24680]] ----------------------------------------------------------------------- DEPARTMENT OF HEALTH AND HUMAN SERVICES Centers for Medicare & Medicaid Services 42 CFR Parts 411, 412, 413, and 489 [CMS-1533-P] RIN 0938-AO70 Medicare Program; Proposed Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2008 Rates AGENCY: Centers for Medicare and Medicaid Services (CMS), HHS. ACTION: Proposed rule. ----------------------------------------------------------------------- SUMMARY: We are proposing to revise the Medicare hospital inpatient prospective payment systems (IPPS) for operating and capital-related costs to implement changes arising from our continuing experience with these systems, and to implement certain provisions made by the Deficit Reduction Act of 2005 (Pub. L. 109-171), the Medicare Improvements and Extension Act under Division B, Title I of the Tax Relief and Health Care Act of 2006 (Pub. L. 109-432), and the Pandemic and All-Hazards Preparedness Act (Pub. L. 109-417). In addition, in the Addendum to this proposed rule, we describe the proposed changes to the amounts and factors used to determine the rates for Medicare hospital inpatient services for operating costs and capital-related costs. We also are setting forth proposed rate-of-increase limits for certain hospitals and hospital units excluded from the IPPS that are paid in full or in part on a reasonable cost basis subject to these limits or that have a portion of a prospective payment system payment based on reasonable cost principles. These proposed changes would be applicable to discharges occurring on or after October 1, 2007. In this proposed rule, we discuss our proposals to further refine the diagnosis-related group (DRG) system under the IPPS to better recognize severity of illness among patients--for FY 2008, we are proposing to adopt a Medicare Severity DRG (MS-DRG) classification system for the IPPS. We are also proposing to use the structure of the proposed MS-DRG system for the LTCH prospective payment system (referred to as MS-LTC-DRGs) for FY 2008. Among the other policy changes that we are proposing to make are changes related to: Limited revisions of the reclassification of cases to proposed MS-DRGs, the proposed relative weights for the proposed MS- LTC-DRGs; the wage data, including the occupational mix data, used to compute the wage index; applications for new technologies and medical services add-on payments; payments to hospitals for the indirect costs of graduate medical education; submission of hospital quality data; provisions governing application of sanctions relating to the Emergency Medical Treatment and Labor Act of 1986 (EMTALA); provisions governing disclosure of physician ownership in hospitals and patient safety measures; and provisions relating to services furnished to beneficiaries in custody of penal authorities. DATES: To be assured consideration, comments must be received at one of the addresses provided below, no later than 5 p.m. on June 12, 2007. ADDRESSES: In commenting, please refer to file code CMS-1533-P. Because of staff and resource limitations, we cannot accept comments by facsimile (FAX) transmission. You may submit comments in one of three 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-1533-P, P.O. Box 8011, Baltimore, MD 21244-1850. 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-1533-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 Building is not readily available to persons without Federal Government identification, commenters are encouraged to leave their comments in the CMS drop slots located in the main lobby of the building. A stamp- in clock is available for persons wishing to retain proof of filing by stamping in and retaining an extra copy of the comments being filed.) Comments mailed to the addresses indicated as appropriate for hand or courier delivery may be delayed and received after the comment period. Submission of comments on paperwork requirements. You may submit comments on this document's paperwork requirements by mailing your comments to the addresses provided at the end of the ``Collection of Information Requirements'' section in this document. For information on viewing public comments, see the beginning of the SUPPLEMENTARY INFORMATION section. FOR FURTHER INFORMATION CONTACT: Marc Hartstein, (410) 786-4548, Operating Prospective Payment, Diagnosis-Related Groups (DRGs), Wage Index, New Medical Services and Technology Add-On Payments, and Hospital Geographic Reclassifications Issues Tzvi Hefter, (410) 786-4487, Capital Prospective Payment, Excluded Hospitals, Graduate Medical Education, Critical Access Hospitals, and Long-Term Care (LTC)-DRG Issues Siddhartha Mazumdar, (410) 786-6673, Rural Community Hospital Demonstration Issues Sheila Blackstock, (410) 786-3502, Quality Data for Annual Payment Update Issues Thomas Valuck, (410) 786-7479, Hospital Value-Based Purchasing Issues Jacqueline Proctor, (410) 786-8852, Disclosure of Physician Ownership in Hospitals and Patient Safety Measures Issues Fred Grabau, (410) 786-0206, Services to Beneficiaries in Custody of Penal Authorities Issues 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-1533-P [[Page 24681]] 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. Electronic Access This Federal Register document is also available from the Federal Register online database through GPO Access, a service of the U.S. Government Printing Office. Free public access is available on a Wide Area Information Server (WAIS) through the Internet and via asynchronous dial-in. Internet users can access the database by using the World Wide Web; the Superintendent of Documents' home page address is https://www.gpoaccess.gov/, by using local WAIS client software, or by telnet to swais.access.gpo.gov, then login as guest (no password required). Dial-in users should use communications software and modem to call (202) 512-1661; type swais, then login as guest (no password required). Acronyms AHA American Hospital Association AHIMA American Health Information Management Association AHRQ Agency for Health Care Research and Quality AMI Acute myocardial infarction AOA American Osteopathic Association APR DRG All Patient Refined Diagnosis Related Group System ASC Ambulatory surgical center ASP Average sales price AWP Average wholesale price 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 CAH Critical access hospital CART CMS Abstraction & Reporting Tool CBSAs Core-based statistical areas CC Complication or comorbidity CCR Cost-to-charge ratio CDAC Clinical Data Abstraction Center CIPI Capital input price index CPI Consumer price index CMI Case-mix index CMS Centers for Medicare & Medicaid Services CMSA Consolidated Metropolitan Statistical Area COBRA Consolidated Omnibus Reconciliation Act of 1985, Pub. L. 99- 272 CPI Consumer price index CY Calendar year DRA Deficit Reduction Act of 2005, Pub. L. 109-171 DRG Diagnosis-related group DSH Disproportionate share hospital ECI Employment cost index EMR Electronic medical record EMTALA Emergency Medical Treatment and Labor Act of 1986, Pub. L. 99-272 FDA Food and Drug Administration FFY Federal fiscal year FIPS Federal information processing standards FQHC Federally qualified health center FTE Full-time equivalent FY Fiscal year GAAP Generally Accepted Accounting Principles GAF Geographic Adjustment Factor GME Graduate medical education HCAHPS Hospital Consumer Assessment of Healthcare Providers and Systems HCFA Health Care Financing Administration HCRIS Hospital Cost Report Information System HHA Home health agency HHS Department of Health and Human Services HIC Health insurance card HIPAA Health Insurance Portability and Accountability Act of 1996, Pub. L. 104-191 HIPC Health Information Policy Council HIS Health information system HIT Health information technology HMO Health maintenance organization HSA Health savings account HSCRC Maryland Health Services Cost Review Commission HSRV Hospital-specific relative value HSRVcc Hospital-specific relative value cost center HQA Hospital Quality Alliance HQI Hospital Quality Initiative ICD-9-CM International Classification of Diseases, Ninth Revision, Clinical Modification ICD-10-PCS International Classification of Diseases, Tenth Edition, Procedure Coding System IHS Indian Health Service IME Indirect medical education IOM Institute of Medicine IPF Inpatient psychiatric facility IPPS Acute care hospital inpatient prospective payment system IRF Inpatient rehabilitation facility JCAHO Joint Commission on Accreditation of Healthcare Organizations LAMCs Large area metropolitan counties LTC-DRG Long-term care diagnosis-related group LTCH Long-term care hospital MAC Medicare Administrative Contractor MCC Major complication or comorbidity MCE Medicare Code Editor MCO Managed care organization MCV Major cardiovascular condition MDC Major diagnostic category MDH Medicare-dependent, small rural hospital MedPAC Medicare Payment Advisory Commission MedPAR Medicare Provider Analysis and Review File MEI Medicare Economic Index MGCRB Medicare Geographic Classification Review Board MIEA-TRHCA Medicare Improvements and Extension Act, Division B of the Tax Relief and Health Care Act of 2006, Pub. L. 109-432 MMA Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Pub. L. 108-173 MPN Medicare provider number MRHFP Medicare Rural Hospital Flexibility Program MSA Metropolitan Statistical Area NAICS North American Industrial Classification System NCD National coverage determination NCHS National Center for Health Statistics NCQA National Committee for Quality Assurance NCVHS National Committee on Vital and Health Statistics NECMA New England County Metropolitan Areas NQF National Quality Forum NTIS National Technical Information Service NVHRI National Voluntary Hospital Reporting Initiative OES Occupational employment statistics OIG Office of the Inspector General OMB Executive Office of Management and Budget O.R. Operating room OSCAR Online Survey Certification and Reporting (System) PRM Provider Reimbursement Manual PPI Producer price index PMSAs Primary metropolitan statistical areas PPS Prospective payment system PRA Per resident amount ProPAC Prospective Payment Assessment Commission PRRB Provider Reimbursement Review Board PS&R Provider Statistical and Reimbursement (System) QIG Quality Improvement Group, CMS QIO Quality Improvement Organization RHC Rural health clinic RHQDAPU Reporting hospital quality data for annual payment update RNHCI Religious nonmedical health care institution [[Page 24682]] RRC Rural referral center RUCAs Rural-urban commuting area codes RY Rate year SAF Standard Analytic File SCH Sole community hospital SFY State fiscal year SIC Standard Industrial Classification SNF Skilled nursing facility SOCs Standard occupational classifications SOM State Operations Manual SSA Social Security Administration SSI Supplemental Security Income TEFRA Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97- 248 UHDDS Uniform hospital discharge data set VBP Value-based purchasing Table of Contents I. Background A. Summary 1. Acute Care Hospital Inpatient Prospective Payment System (IPPS) 2. Hospitals and Hospital Units Excluded From the IPPS a. Inpatient Rehabilitation Facilities (IRFs) b. Long-Term Care Hospitals (LTCHs) c. Inpatient Psychiatric Facilities (IPFs) 3. Critical Access Hospitals (CAHs) 4. Payments for Graduate Medical Education (GME) B. Provisions of the Deficit Reduction Act of 2005 (DRA) C. Provisions of the Medicare Improvements and Extension Act Under Division B of the Tax Relief and Health Care Act of 2006 D. Provisions of the Pandemic and All-Hazards Preparedness Act E. Major Contents of this Proposed Rule 1. Proposed DRG Reclassifications and Recalibrations of Relative Weights 2. Proposed Changes to the Hospital Wage Index 3. Other Decisions and Proposed Changes to the IPPS for Operating Costs and GME Costs 4. Proposed Changes to the IPPS for Capital-Related Costs 5. Proposed Changes to the Payment Rate for Excluded Hospitals and Hospital Units: Rate-of-Increase Percentages 6. Services Furnished to Beneficiaries in Custody of Penal Authorities 7. Determining Proposed Prospective Payment Operating and Capital Rates and Rate-of-Increase Limits 8. Impact Analysis 9. Recommendation of Update Factors for Operating Cost Rates of Payment for Inpatient Hospital Services 10. Discussion of Medicare Payment Advisory Commission Recommendations II. Proposed Changes to DRG Classifications and Relative Weights A. Background B. DRG Reclassifications 1. General 2. Yearly Review for Making DRG Changes C. MedPAC Recommendations for Revisions to the IPPS DRG System D. Refinement of DRGs Based on Severity of Illness 1. Evaluation of Alternative Severity-Adjusted DRG Systems a. Overview of Alternative DRG Classification Systems b. Comparative Performance in Explaining Variation in Resource Use c. Payment Accuracy and Case-Mix Impact d. Issues for Future Consideration 2. Development of Proposed Medicare Severity DRGs (MS-DRGs) a. Comprehensive Review of the CC List b. Chronic Diagnosis Codes c. Acute Diagnosis Codes d. Prior Research on Subdivisions of CCs Into Multiple Categories e. Proposed Medicare Severity DRGs (MS-DRGs) 3. Dividing Proposed MS-DRGs on the Basis of the CCs and MCCs 4. Conclusion 5. Impact of the Proposed MS-DRGs 6. Changes to Case-Mix Index (CMI) from the Proposed MS-DRGs 7. Effect of the Proposed MS-DRGs on the Outlier Threshold 8. Effect of the Proposed MS-DRGs on the Postacute Care Transfer Policy E. Refinement of the Relative Weight Calculation 1. Summary of RTI's Report on Charge Compression 2. RTI Recommendations a. Short-Term Recommendations b. Medium-Term Recommendations c. Long-Term Recommendations F. Hospital-Acquired Conditions, Including Infections 1. General 2. Legislative Requirements 3. Public Input 4. Collaborative Effort 5. Criteria for Selection of the Hospital-Acquired Conditions 6. Proposed Selection of Hospital-Acquired Conditions 7. Other Issues G. Proposed Changes to the Specific DRG Classifications 1. Pre-MDC: Intestinal Transplantations 2. MDC 1 (Diseases and Disorders of the Nervous System) a. Implantable Neurostimulators b. Intracranial Stents 3. MDC 3 (Diseases and Disorders of the Ear, Nose, Mouth, and Throat)--Cochler Implants 4. MDC 8 (Diseases and Disorders of the Musculoskeletal System and Connective Tissue) a. Hip and Knee Replacements b. Spinal Fusions c. Spinal Disc Devices d. Other Spinal DRGs 5. MDC 17 (Myeloproliferative Diseases and Disorders, Poorly Differentiated Neoplasm): Endoscopic Procedures 6. Medicare Code Editor (MCE) Changes a. Non-Covered Procedure Edit: Code 00.62 (Percutaneous Angioplasty or Atherectomy of Intracranial Vessel(s)) b. Non-Specific Principal Diagnosis Edit 7 and Non-Specific O.R. Procedures Edit 10 c. Limited Coverage Edit 17 7. Surgical Hierarchies 8. CC Exclusion List Proposed for FY 2008 a. Background b. Proposed CC Exclusions List for FY 2008 9. Review of Procedure Codes in CMS DRGs 468, 476, and 477 a. Moving Procedure Codes From CMS DRG 468 (Proposed MS-DRGs 981 Through 983) or CMS DRG 477 (Proposed MS-DRGs 987 Through 989) to MDCs b. Reassignment of Procedures Among CMS DRGs 468, 476, and 477 (Proposed MS-DRG 981 Through 983, 984 Through 986, and 987 Through 989) c. Adding Diagnosis or Procedure Codes to MDCs 10. Changes to the ICD-9-CM Coding System 11. Other Issues a. Seizures and Headaches b. Devices That Are Replaced Without Cost or Where Credit for a Replaced Device Is Furnished to the Hospital H. Recalibration of DRG Weights I. Proposed MS-LTC-DRG Reclassifications and Relative Weights for LTCHs for FY 2008 1. Background 2. Proposed Changes in the LTC-DRG Classifications a. Background b. Patient Classifications Into DRGs 3. Development of the Proposed FY 2008 MS-LTC-DRG Relative Weights a. General Overview of Development of the Proposed MS-LTC-DRG Relative Weights b. Data c. Hospital-Specific Relative Value Methodology d. Proposed Treatment of Severity Levels in Developing Relative Weights e. Proposed Low-Volume MS-LTC-DRGs 4. Steps for Determining the Proposed FY 2008 MS-LTC-DRG Relative Weights J. Proposed Add-On Payments for New Services and Technologies 1. Background 2. Public Input Before Publication of a Notice of Proposed Rulemaking on Add-On Payments 3. FY 2008 Status of Technologies Approved for FY 2007 Add-On Payments a. Endovascular Graft Repair of the Thoracic Aorta b. Restore[reg] Rechargeable Implantable Neurostimulators c. X STOP Interspinous Process Decompression System 4. FY 2008 Application for New Technology Add-On Payments 5. Technical Correction III. Proposed Changes to the Hospital Wage Index A. Background B. Core-Based Statistical Areas for the Hospital Wage Index C. Proposed Occupational Mix Adjustment to the Proposed FY 2008 Wage Index 1. Development of Data for the Proposed FY 2008 Occupational Mix Adjustment 2. Timeline for the Collection, Review, and Correction of the Occupational Mix Data 3. Calculation of the Proposed Occupational Mix Adjustment for FY 2008 4. Proposed 2007-2008 Occupational Mix Survey for the FY 2010 Wage Index D. Worksheet S-3 Wage Data for the Proposed FY 2008 Wage Index 1. Included Categories of Costs [[Page 24683]] 2. Contract Labor for Indirect Patient Care Services 3. Excluded Categories of Costs 4. Use of Wage Index Data by Providers Other Than Acute Care Hospitals Under the IPPS E. Verification of Worksheet S-3 Wage Data F. Wage Index for Multicampus Hospitals G. Computation of the Proposed FY 2008 Unadjusted Wage Index 1. Method for Computing the Proposed FY 2008 Unadjusted Wage Index 2. Expiration of the Imputed Floor 3. CAHs Reverting Back to IPPS Hospitals and Raising the Rural Floor 4. Application of Rural Floor Budget Neutrality H. Analysis and Implementation of the Proposed Occupational Mix Adjustment and the Proposed FY 2008 Occupational Mix Adjusted Wage Index I. Revisions to the Proposed Wage Index Based on Hospital Redesignations 1. General 2. Effects of Reclassification/Redesignation 3. FY 2008 MGCRB Reclassifications 4. Hospitals That Applied for Reclassification Effective in FY 2008 and Reinstating Reclassifications in FY 2008 5. Clarification of Policy on Reinstating Reclassifications 6. ``Fallback'' Reclassifications 7. Geographic Reclassification Issues for Multicampus Hospitals 8. Redesignations of Hospitals under Section 1886(d)(8)(B) of the Act 9. Reclassifications Under Section 1886(d)(8)(B) of the Act 10. New England Deemed Counties 11. Reclassifications under Section 508 of Pub. L. 108-173 12. Other Issues J. Proposed FY 2008 Wage Index Adjustment Based on Commuting Patterns of Hospital Employees K. Process for Requests for Wage Index Data Corrections L. Labor-Related Share for the Proposed Wage Index for FY 2008 M. Wage Index Study Required Under Pub. L. 109-432 N. Proxy for the Hospital Market Basket IV. Other Decisions and Proposed Changes to the IPPS for Operating Costs and GME Costs A. Reporting of Hospital Quality Data for Annual Hospital Payment Update 1. Background 2. FY 2008 Quality Measures 3. New Quality Measures and Data Submission Requirements for FY 2009 and Subsequent Years a. Proposed New Quality Measures for FY 2009 and Subsequent Years b. Data Submission 4. Retiring or Modifying RHQDAPU Program Quality Measures 5. Procedures for the RHQDAPU Program for FY 2008 and FY 2009 a. Procedures for Participating in the RHQDAPU Program b. Chart Validation Requirements c. Data Validation and Attestation d. Public Display e. Reconsideration and Appeal Procedures f. RHQDAPU Program Withdrawal Requirements 6. Electronic Medical Records 7. New Hospitals B. Development of the Medicare Hospital Value-Based Purchasing Plan C. Rural Referral Centers (RRCs) 1. Proposed Annual Update of RRC Status Criteria a. Case-Mix Index b. Discharges 2. Acquired Rural Status of RRCs D. Indirect Medical Education (IME) Adjustment 1. Background 2. IME Adjustment Factor for FY 2008 3. Time Spent by Residents on Vacation or Sick Leave and in Orientation a. Background b. Vacation and Sick Leave Time c. Orientation Activities d. Proposed Regulation Changes E. Hospital Emergency Services Under EMTALA 1. Background 2. Recent Legislation Affecting EMTALA Implementation a. Secretary's Authority to Waive Requirements During National Emergencies b. Provisions of the Pandemic and All-Hazards Preparedness Act c. Proposed Revisions to the EMTALA Regulations F. Disclosure of Physician Ownership in Hospitals and Patient Safety Measures 1. Disclosure of Physician Ownership in Hospitals 2. Patient Safety Measures G. Rural Community Hospital Demonstration Program V. Proposed Changes to the IPPS for Capital-Related Costs A. Background B. Proposed Policy Change VI. Proposed Changes for Hospitals and Hospital Units Excluded From the IPPS A. Payments to Existing and New Excluded Hospitals and Hospital Units B. Separate PPS for IRFs C. Separate PPS for LTCHs D. Separate PPS for IPFs E. Determining Proposed LTCH Cost-to-Charge Ratios (CCRs) Under the LTCH PPS VII. Services Furnished to Beneficiaries in Custody of Penal Authorities VIII. MedPAC Recommendations IX. Other Required Information A. Requests for Data From the Public B. Collection of Information Requirements C. Response to Public Comments Regulation Text Addendum--Proposed Schedule of Standardized Amounts, Update Factors, and Rate-of-Increase Percentages Effective With Cost Reporting Periods Beginning On or After October 1, 2007 I. Summary and Background II. Proposed Changes to the Prospective Payment Rates for Hospital Inpatient Operating Costs for FY 2008 A. Calculation of the Proposed Adjusted Standardized Amount 1. Standardization of Base-Year Costs or Target Amounts 2. Computing the Proposed Average Standardized Amount 3. Updating the Proposed Average Standardized Amount 4. Other Adjustments to the Average Standardized Amount a. Proposed Recalibration of DRG Weights and Updated Wage Index--Budget Neutrality Adjustment b. Reclassified Hospitals--Budget Neutrality Adjustment c. Case-Mix Budget Neutrality Adjustment d. Outliers e. Proposed Rural Community Hospital Demonstration Program Adjustment (Section 410A of Pub. L. 108-173) 5. Proposed FY 2008 Standardized Amount B. Proposed Adjustments for Area Wage Levels and Cost-of-Living 1. Proposed Adjustment for Area Wage Levels 2. Proposed Adjustment for Cost-of-Living in Alaska and Hawaii C. Proposed DRG Relative Weights D. Calculation of the Proposed Prospective Payment Rates for FY 2008 1. Federal Rate 2. Hospital-Specific Rate (Applicable Only to SCHs and MDHs) a. Calculation of Hospital-Specific Rate b. Updating the FY 1982, FY 1987, FY 1996, and FY 2002 Hospital- Specific Rates for FY 2008 3. General Formula for Calculation of Proposed Prospective Payment Rates for Hospitals Located in Puerto Rico Beginning On or After October 1, 2007 and Before October 1, 2008 a. Puerto Rico Rate b. National Rate III. Proposed Changes to Payment Rates for Acute Care Hospital Inpatient Capital-Related Costs for FY 2008 A. Determination of Proposed Federal Hospital Inpatient Capital- Related Prospective Payment Rate Update 1. Projected Capital Standard Federal Rate Update a. Description of the Update Framework b. Comparison of CMS and MedPAC Update Recommendation 2. Proposed Outlier Payment Adjustment Factor 3. Proposed Budget Neutrality Adjustment Factor for Changes in DRG Classifications and Weights and the GAF 4. Proposed Exceptions Payment Adjustment Factor 5. Proposed Capital Standard Federal Rate for FY 2008 6. Proposed Special Capital Rate for Puerto Rico Hospitals B. Calculation of the Proposed Inpatient Capital-Related Prospective Payments for FY 2008 C. Capital Input Price Index 1. Background 2. Forecast of the CIPI for FY 2008 IV. Proposed Changes to Payment Rates for Excluded Hospitals and Hospital Units: Rate-of-Increase Percentages A. Payments to Existing Excluded Hospitals and Units B. New Excluded Hospitals and Units [[Page 24684]] V. Tables Table 1A--National Adjusted Operating Standardized Amounts, Labor/Nonlabor (69.7 Percent Labor Share/30.3 Percent Nonlabor Share If Wage Index Is Greater Than 1) Table 1B--National Adjusted Operating Standardized Amounts, Labor/Nonlabor (62 Percent Labor Share/38 Percent Nonlabor Share If Wage Index Is Less Than or Equal to 1) Table 1C--Adjusted Operating Standardized Amounts for Puerto Rico, Labor/Nonlabor Table 1D--Capital Standard Federal Payment Rate Table 2--Hospital Case-Mix Indexes for Discharges Occurring in Federal Fiscal Year 2006; Hospital Wage Indexes for Federal Fiscal Year 2008; Hospital Average Hourly Wages for Federal Fiscal Years 2006 (2002 Wage Data), 2007 (2003 Wage Data), and 2008 (2004 Wage Data); and 3-Year Average of Hospital Average Hourly Wages Table 3A--FY 2008 and 3-Year Average Hourly Wage for Urban Areas by CBSA Table 3B--FY 2008 and 3-Year Average Hourly Wage for Rural Areas by CBSA Table 4A--Wage Index and Capital Geographic Adjustment Factor (GAF) for Urban Areas by CBSA--FY 2008 Table 4B--Wage Index and Capital Geographic Adjustment Factor (GAF) for Rural Areas by CBSA--FY 2008 Table 4C--Wage Index and Capital Geographic Adjustment Factor (GAF) for Hospitals That Are Reclassified by CBSA--FY 2008 Table 4F--Puerto Rico Wage Index and Capital Geographic Adjustment Factor (GAF) by CBSA--FY 2008 Table 4J--Out-Migration Wage Adjustment--FY 2008 Table 5--List of Proposed Medicare Severity Diagnosis-Related Groups (MS-DRGs), Relative Weighting Factors, and Geometric and Arithmetic Mean Length of Stay Table 6A--New Diagnosis Codes Table 6B--New Procedure Codes Table 6C--Invalid Diagnosis Codes Table 6D--Invalid Procedure Codes Table 6E--Revised Diagnosis Code Titles Table 6F--Revised Procedure Code Titles Table 6G--Additions to the CC Exclusion List (Available only through the Internet on the CMS Web site at: https://www.cms.hhs.gov/AcuteInpatientPPS/) Table 6H--Deletions from the CC Exclusion List (Available only through the Internet on the CMS Web site at: https://www.cms.hhs.gov/AcuteInpatientPPS/) Table 6I--Complete List of Complication and Comorbidity (CC) Exclusions (Available only through the Internet on the CMS Web site at: https://www.cms.hhs.gov/AcuteInpatientPPS/) Table 6J--Major Complication and Comorbidity (MCC) List Table 6K--Complications and Comorbidity (CC) List Table 7A--Medicare Prospective Payment System Selected Percentile Lengths of Stay: FY 2006 MedPAR Update--December 2006 GROUPER V24.0 CMS-DRGs Table 7B--Medicare Prospective Payment System Selected Percentile Lengths of Stay: FY 2006 MedPAR Update--December 2006 GROUPER V25.0 CMS DRGs Table 8A--Proposed Statewide Average Operating Cost-to-Charge Ratios--March 2007 Table 8B--Proposed Statewide Average Capital Cost-to-Charge Ratios--March 2007 Table 8C--Proposed Statewide Average Total Cost-to-Charge Ratios for LTCHs--March 2007 Table 9A--Hospital Reclassifications and Redesignations--FY 2008 Table 9C--Hospitals Redesignated as Rural under Section 1886(d)(8)(E) of the Act--FY 2008 Table 10--Geometric Mean Plus the Lesser of .75 of the National Adjusted Operating Standardized Payment Amount (Increased to Reflect the Difference Between Costs and Charges) or .75 of One Standard Deviation of Mean Charges by Proposed Medicare Severity Diagnosis- Related Groups (MS-DRGs)--March 2007 Table 11--Proposed FY 2008 MS-LTC-DRGs, Relative Weights, Geometric Average Length of Stay, and 5/6ths of the Geometric Average Length of Stay Appendix A--Regulatory Impact Analysis I. Overall Impact II. Objectives III. Limitations on Our Analysis IV. Hospitals Included In and Excluded From the IPPS V. Effects on Excluded Hospitals and Hospital Units VI. Quantitative Effects of the Proposed Policy Changes Under the IPPS for Operating Costs A. Basis and Methodology of Estimates B. Analysis of Table I C. Effects of the Proposed Changes to the DRG Reclassifications and Relative Cost-Based Weights (Column 2) D. Effects of Proposed Wage Index Changes (Column 3) E. Combined Effects of Proposed DRG and Wage Index Changes (Column 4) F. Effects of the Expiration of the 3-Year Provision Allowing Urban Hospitals That Were Converted to Rural as a Result of the FY 2005 Labor Market Area Changes to Maintain the Wage Index of the Urban Labor Market Area in Which They Were Formerly Located (Column 5) G. Effects of MGCRB Reclassifications (Column 6) H. Effects of the Adjustment to the Application of the Rural Floor (Column 7) I. Effects of Expiration of the Imputed Rural Floor (Column 8) J. Effects of the Expiration of Section 508 of Pub. L. 108-173 (Column 9) K. Effects of the Proposed Wage Index Adjustment for Out- Migration (Column 10) L. Effects of All Proposed Changes With CMI Adjustment Prior to Assumed Growth (Column 11) M. Effects of All Proposed Changes With CMI Adjustment and Assumed Growth (Column 12) N. Effects of Proposed Policy on Payment Adjustment for Low- Volume Hospitals O. Impact Analysis of Table II VII. Effects of Other Proposed Policy Changes A. Effects of Proposed Policy on Hospital-Acquired Conditions, Including Infections B. Effects of Proposed MS-LTC-DRG Reclassifications and Relative Weights for LTCHs C. Effects of Proposed New Technology Add-On Payments D. Effects of Requirements for Hospital Reporting of Quality Data for Annual Hospital Payment Update E. Effects of Proposed Policy on Cancellation of Classification of Acquired Rural Status and Rural Referral Centers F. Effects of Proposed Policy Change on Payment for Indirect Graduate Medical Education G. Effects of Proposed Policy Changes Relating to Emergency Services Under EMTALA H. Effects of Proposed Policy on Disclosure of Physician Ownership in Hospitals and Patient Safety Measures I. Effects of Implementation of Rural Community Hospital Demonstration Program J. Effects of Proposed Policy Changes on Services Furnished to Beneficiaries in Custody of Penal Authorities VIII. Effects of Proposed Changes in the Capital IPPS A. General Considerations B. Results IX. Alternatives Considered X. Overall Conclusion XI. Accounting Statement XII. Executive Order 12866 Appendix B--Recommendation of Update Factors for Operating Cost Rates of Payment for Inpatient Hospital Services I. Background II. Inpatient Hospital Update for FY 2008 III. Secretary's Recommendation IV. MedPAC Recommendation for Assessing Payment Adequacy and Updating Payments in Traditional Medicare I. Background A. Summary 1. Acute Care Hospital Inpatient Prospective Payment System (IPPS) Section 1886(d) of the Social Security Act (the Act) sets forth a system of payment for the operating costs of acute care hospital inpatient stays under Medicare Part A (Hospital Insurance) based on prospectively set rates. Section 1886(g) of the Act requires the Secretary to pay for the capital-related costs of hospital inpatient stays under a prospective payment system (PPS). Under these PPSs, Medicare payment for hospital inpatient operating and capital-related costs is made at [[Page 24685]] predetermined, specific rates for each hospital discharge. Discharges are classified according to a list of diagnosis-related groups (DRGs). The base payment rate is comprised of a standardized amount that is divided into a labor-related share and a nonlabor-related share. The labor-related share is adjusted by the wage index applicable to the area where the hospital is located; and if the hospital is located in Alaska or Hawaii, the nonlabor-related share is adjusted by a cost-of- living adjustment factor. This base payment rate is multiplied by the DRG relative weight. If the hospital treats a high percentage of low-income patients, it receives a percentage add-on payment applied to the DRG-adjusted base payment rate. This add-on payment, known as the disproportionate share hospital (DSH) adjustment, provides for a percentage increase in Medicare payments to hospitals that qualify under either of two statutory formulas designed to identify hospitals that serve a disproportionate share of low-income patients. For qualifying hospitals, the amount of this adjustment may vary based on the outcome of the statutory calculations. If the hospital is an approved teaching hospital, it receives a percentage add-on payment for each case paid under the IPPS, known as the indirect medical education (IME) adjustment. This percentage varies, depending on the ratio of residents to beds. Additional payments may be made for cases that involve new technologies or medical services that have been approved for special add-on payments. To qualify, a new technology or medical service must demonstrate that it is a substantial clinical improvement over technologies or services otherwise available, and that, absent an add- on payment, it would be inadequately paid under the regular DRG payment. The costs incurred by the hospital for a case are evaluated to determine whether the hospital is eligible for an additional payment as an outlier case. This additional payment is designed to protect the hospital from large financial losses due to unusually expensive cases. Any outlier payment due is added to the DRG-adjusted base payment rate, plus any DSH, IME, and new technology or medical service add-on adjustments. Although payments to most hospitals under the IPPS are made on the basis of the standardized amounts, some categories of hospitals are paid the higher of a hospital-specific rate based on their costs in a base year (the higher of FY 1982, FY 1987, FY 1996, or FY 2002) or the IPPS rate based on the standardized amount. For example, sole community hospitals (SCHs) are the sole source of care in their areas, and Medicare-dependent, small rural hospitals (MDHs) are a major source of care for Medicare beneficiaries in their areas. Both of these categories of hospitals are afforded this special payment protection in order to maintain access to services for beneficiaries. (Until FY 2007, an MDH has received the IPPS rate plus 50 percent of the difference between the IPPS rate and its hospital-specific rate if the hospital- specific rate is higher than the IPPS rate. In addition, an MDH does not have the option of using FY 1996 as the base year for its hospital- specific rate. As discussed below, for discharges occurring on or after October 1, 2007, but before October 1, 2011, an MDH will receive the IPPS rate plus 75 percent of the difference between the IPPS rate and its hospital-specific rate, if the hospital-specific rate is higher than the IPPS rate.) Section 1886(g) of the Act requires the Secretary to pay for the capital-related costs of inpatient hospital services ``in accordance with a prospective payment system established by the Secretary.'' The basic methodology for determining capital prospective payments is set forth in our regulations at 42 CFR 412.308 and 412.312. Under the capital IPPS, payments are adjusted by the same DRG for the case as they are under the operating IPPS. Capital IPPS payments are also adjusted for IME and DSH, similar to the adjustments made under the operating IPPS. In addition, hospitals may receive outlier payments for those cases that have unusually high costs. The existing regulations governing payments to hospitals under the IPPS are located in 42 CFR part 412, subparts A through M. 2. Hospitals and Hospital Units Excluded From the IPPS Under section 1886(d)(1)(B) of the Act, as amended, certain specialty hospitals and hospital units are excluded from the IPPS. These hospitals and units are: rehabilitation hospitals and units; long-term care hospitals (LTCHs); psychiatric hospitals and units; children's hospitals; and cancer hospitals. Religious nonmedical health care institutions (RNHCIs) are also excluded from the IPPS. Various sections of the Balanced Budget Act of 1997 (Pub. L. 105-33), the Medicare, Medicaid and SCHIP [State Children's Health Insurance Program] Balanced Budget Refinement Act of 1999 (Pub. L. 106-113), and the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (Pub. L. 106-554) provide for the implementation of PPSs for rehabilitation hospitals and units (referred to as inpatient rehabilitation facilities (IRFs)), LTCHs, and psychiatric hospitals and units (referred to as inpatient psychiatric facilities (IPFs)), as discussed below. Children's hospitals, cancer hospitals, and RNHCIs continue to be paid solely under a reasonable cost-based system. The existing regulations governing payments to excluded hospitals and hospital units are located in 42 CFR parts 412 and 413. a. Inpatient Rehabilitation Facilities (IRFs) Under section 1886(j) of the Act, as amended, rehabilitation hospitals and units (IRFs) have been transitioned from payment based on a blend of reasonable cost reimbursement subject to a hospital-specific annual limit under section 1886(b) of the Act and the adjusted facility Federal prospective payment rate for cost reporting periods beginning on or after January 1, 2002 through September 30, 2002, to payment at 100 percent of the Federal rate effective for cost reporting periods beginning on or after October 1, 2002. IRFs subject to the blend were also permitted to elect payment based on 100 percent of the Federal rate. The existing regulations governing payments under the IRF PPS are located in 42 CFR part 412, subpart P. b. Long-Term Care Hospitals (LTCHs) Under the authority of sections 123(a) and (c) of Pub. L. 106-113 and section 307(b)(1) of Pub. L. 106-554, the LTCH PPS was effective for a LTCH's first cost reporting period beginning on or after October 1, 2002. LTCHs that do not meet the definition of ``new'' under Sec. 412.23(e)(4) are paid, during a 5-year transition period, a LTCH prospective payment that is comprised of an increasing proportion of the LTCH Federal rate and a decreasing proportion based on reasonable cost principles. Those LTCHs that did not meet the definition of ``new'' could elect to be paid based on 100 percent of the Federal prospective payment rate instead of a blended payment in any year during the 5-year transition. For cost reporting periods beginning on or after October 1, 2006, all LTCHs are paid 100 percent of the Federal rate. The existing regulations governing payment under the LTCH PPS are located in 42 CFR part 412, subpart O. c. Inpatient Psychiatric Facilities (IPFs) Under the authority of sections 124(a) and (c) of Pub. L. 106-113, inpatient [[Page 24686]] psychiatric facilities (IPFs) (formerly psychiatric hospitals and psychiatric units of acute care hospitals) are paid under the IPF PPS. Under the IPF PPS, some IPFs are transitioning from being paid for inpatient hospital services based on a blend of reasonable cost-based payment and a Federal per diem payment rate, effective for cost reporting periods beginning on or after January 1, 2005. For cost reporting periods beginning on or after January 1, 2008, all IPFs will be paid 100 percent of the Federal per diem payment amount. The existing regulations governing payment under the IPF PPS are located in 42 CFR 412, subpart N. 3. Critical Access Hospitals (CAHs) Under sections 1814, 1820, and 1834(g) of the Act, payments are made to critical access hospitals (CAHs) (that is, rural hospitals or facilities that meet certain statutory requirements) for inpatient and outpatient services based on 101 percent of reasonable cost. Reasonable cost is determined under the provisions of section 1861(v)(1)(A) of the Act and existing regulations under 42 CFR parts 413 and 415. 4. Payments for Graduate Medical Education (GME) Under section 1886(a)(4) of the Act, costs of approved educational activities are excluded from the operating costs of inpatient hospital services. Hospitals with approved graduate medical education (GME) programs are paid for the direct costs of GME in accordance with section 1886(h) of the Act; the amount of payment for direct GME costs for a cost reporting period is based on the hospital's number of residents in that period and the hospital's costs per resident in a base year. The existing regulations governing payments to the various types of hospitals are located in 42 CFR part 413. B. Provisions of the Deficit Reduction Act of 2005 (DRA) The Deficit Reduction Act of 2005 (DRA), Pub. L. 109-171, made a number of changes to the Act relating to prospective payments to hospitals and other providers for inpatient services. This proposed rule would implement amendments made by (1) section 5001(a), which, effective for FY 2007 and subsequent years, expands the requirements for hospital quality data reporting; and (2) section 5001(c), which requires the Secretary to select, by October 1, 2007, at least two hospital-acquired conditions that meet certain specified criteria that will be subject to a quality adjustment in DRG payments during FY 2008. In this proposed rule, we also discuss our development of a plan to implement, beginning with FY 2009, a value-based purchasing plan for section 1886(d) hospitals, in accordance with the requirements of section 5001(b) of Pub. L. 109-171. C. Provisions of the Medicare Improvements and Extension Act Under Division B of the Tax Relief and Health Care Act of 2006 In this proposed rule, we discuss the provisions of section 106(b)(1) of the Medicare Improvements and Extensions Act under Division B, Title I of the Tax Relief and Health Care Act of 2006 (MIEA-TRHCA), Pub. L. 109-432, which requires MedPAC to submit to Congress, not later than June 30, 2007, a report on the Medicare wage index classification system applied under the Medicare Prospective Payment System. Section 106(b) of the MIEA-TRHCA requires the report to include any alternatives that MedPAC recommends to the method to compute the wage index under section 1886(d)(3)(E) of the Act. In addition, we discuss the provisions of section 106(b)(2) of the MIEA-TRHCA, which instructs the Secretary of Health and Human Services, taking into account MedPAC's recommendations on the Medicare wage index classification system, to include in the FY 2009 IPPS proposed rule one or more proposals to revise the wage index adjustment applied under section 1886(d)(3)(E) of the Act for purposes of the IPPS. We note that we published a notice in the Federal Register on March 23, 2007 (72 FR 13799) that addressed the provisions of section 106(a) of the MIEA-TRHCA relating to the extension of geographic reclassifications of hospitals under section 508 of Pub. L. 108-173 (that expired on March 31, 2007) through September 30, 2007. D. Provisions of the Pandemic and All-Hazards Preparedness Act On December 19, 2006, Congress enacted the Pandemic and All-Hazards Preparedness Act, Pub. L. 109-417. Section 302(b) of Pub. L. 109-417 makes two specific changes that affect EMTALA implementation in emergency areas during an emergency period. Specifically section 302(b)(1)(A) of Pub. L. 109-417 amended section 1135(b)(3)(B) of the Act to state that sanctions may be waived for the direction or relocation of an individual for screening where, in the case of a public health emergency that involves a pandemic infections disease, that direction or relocation occurs pursuant to a State pandemic preparedness plan. In addition, sections 302(b)(1)(B) and (b)(1)(C) of Pub. L. 109-417 amended section 1135(b)(3)(B) of the Act to state that, if a public health emergency involves a pandemic infectious disease (such as pandemic influenza), the duration of a waiver or modification under section 1135(b)(3) of the Act (relating to EMTALA) shall be determined in accordance with section 1135(e) of the Act as that subsection applies to public health emergencies. In this proposed rule, we are proposing to make changes to the EMTALA regulations to conform them to the sanction waiver provisions of section 302(b) of Pub. L. 109-417. E. Major Contents of This Proposed Rule In this proposed rule, we are setting forth proposed changes to the Medicare IPPS for operating costs and for capital-related costs in FY 2008. We also are setting forth proposed changes relating to payments for IME costs and payments to certain hospitals and units that continue to be excluded from the IPPS and paid on a reasonable cost basis. The changes being proposed would be effective for discharges occurring on or after October 1, 2007, unless otherwise noted. The following is a summary of the major changes that we are proposing to make: 1. Proposed DRG Reclassifications and Recalibrations of Relative Weights We are proposing to adopt a Medicare Severity DRG (MS-DRG) classification system for the IPPS to better recognize severity of illness. We present the methodology we used to establish the proposed MS-DRGs and discuss our efforts to further analyze alternative severity-adjusted DRG systems and to refine the relative weight calculations for DRGs. We present a proposed listing and discussion of hospital-acquired conditions, including infections, which we have evaluated and are considering for selection to be subject to the statutorily required quality adjustment in DRG payments for FY 2008. We are proposing limited annual revisions to the DRG classification system in the following areas: intestinal transplants, neurostimulators, intracranial stents, cochlear implants, knee and hip replacements, spinal fusions and spinal disc devices, and endoscopic procedures. We are presenting our reevaluation of certain FY 2007 applicants for add-on payments for high-cost new medical services and technologies, and our analysis of the FY 2008 applicant [[Page 24687]] (including public input, as directed by Pub. L. 108-173, obtained in a town hall meeting). We are proposing the annual update of the long-term care diagnosis- related group (LTC-DRG) classifications and relative weights for use under the LTCH PPS for FY 2008. We are proposing that the LTC-DRGs would be revised to mirror the proposed MS-DRGs for the IPPS. 2. Proposed Changes to the Hospital Wage Index In section III. of the preamble to this proposed rule, we are proposing revisions to the wage index and the annual update of the wage data. Specific issues addressed include the following:The FY 2008 wage index update, using wage data from cost reporting periods that began during FY 2004. Analysis and implementation of the proposed FY 2008 occupational mix adjustment to the wage index. Proposed changes relating to expiration of the imputed floor for the wage index and application of budget neutrality for the rural floor. Proposed changes in determining the wage index for multicampus hospitals. The proposed revisions to the wage index based on hospital redesignations and reclassifications, including reclassifications for multicampus hospitals. The proposed adjustment to the wage index for FY 2008 based on commuting patterns of hospital employees who reside in a county and work in a different area with a higher wage index. The timetable for reviewing and verifying the wage data that will be in effect for the proposed FY 2008 wage index. The labor-related share for the FY 2008 wage index, including the labor-related share for Puerto Rico. 3. Other Decisions and Proposed Changes to the IPPS for Operating Costs and GME Costs In section IV. of the preamble to this proposed rule, we discuss a number of provisions of the regulations in 42 CFR Parts 412, 413, and 489, including the following: The reporting of hospital quality data as a condition for receiving the full annual payment update increase. Development of the Medicare value-based purchasing plan and scheduled ``listening sessions.'' The proposed updated national and regional case-mix values and discharges for purposes of determining RRC status and a proposed policy change relating to the acquired rural status of RRCs. The statutorily-required IME adjustment factor for FY 2008 and a proposed policy change relating to determining counts of residents on vacation or sick leave and in orientation for IME and direct GME purposes. Proposed changes relating to waiver of sanctions for requirements for emergency services for hospitals under EMTALA during national emergency. Proposed policy changes relating to disclosure to patients of physician ownership of hospitals and patient safety measures. Discussion of the fourth year of implementation of the Rural Community Hospital Demonstration Program. 4. Proposed Changes to the IPPS for Capital-Related Costs In section V. of the preamble to this proposed rule, we discuss the payment policy requirements for capital-related costs and capital payments to hospitals and propose changes relating to adjustments to the Federal capital rate to address continuous large positive margins. 5. Proposed Changes to the Payment Rates for Excluded Hospitals and Hospital Units: Rate-of-Increase Percentages In section VI. of the preamble to this proposed rule, we discuss payments to excluded hospitals and hospital units, and proposed changes for determining LTCH CCRs under the LTCH PPS. 6. Services Furnished to Beneficiaries in Custody of Penal Authorities In section VII. of the preamble to this proposed rule, we clarify when individuals are considered to be in ``custody'' for purposes of Medicare payment for services furnished to beneficiaries who are under penal authorities. 7. Determining Proposed Prospective Payment Operating and Capital Rates and Rate-of-Increase Limits In the Addendum to this proposed rule, we set forth proposed changes to the amounts and factors for determining the FY 2008 prospective payment rates for operating costs and capital-related costs. We also establish the proposed threshold amounts for outlier cases. In addition, we address the proposed update factors for determining the rate-of-increase limits for cost reporting periods beginning in FY 2008 for hospitals and hospital units excluded from the PPS. 8. Impact Analysis In Appendix A of this proposed rule, we set forth an analysis of the impact that the proposed changes would have on affected hospitals. 9. Recommendation of Update Factors for Operating Cost Rates of Payment for Inpatient Hospital Services In Appendix B of this proposed rule, as required by sections 1886(e)(4) and (e)(5) of the Act, we provided our recommendations of the appropriate percentage changes for FY 2008 for the following: A single average standardized amount for all areas for hospital inpatient services paid under the IPPS for operating costs (and hospital-specific rates applicable to SCHs and MDHs). Target rate-of-increase limits to the allowable operating costs of hospital inpatient services furnished by hospitals and hospital units excluded from the IPPS. 10. Discussion of Medicare Payment Advisory Commission Recommendations Under section 1805(b) of the Act, MedPAC is required to submit a report to Congress, no later than March 1 of each year, in which MedPAC reviews and makes recommendations on Medicare payment policies. MedPAC's March 2007 recommendation concerning hospital inpatient payment policies addressed the update factor for inpatient hospital operating costs and capital-related costs under the IPPS and for hospitals and distinct part hospital units excluded from the IPPS. This recommendation is addressed in Appendix B of this proposed rule. For further information relating specifically to the MedPAC March 2007 reports or to obtain a copy of the reports, contact MedPAC at (202) 220-3700 or visit MedPAC's Web site at: https://www.medpac.gov. II. Proposed Changes to DRG Classifications and Relative Weights (If you choose to comment on issues in this section, please include the caption ``DRG Reclassifications'' at the beginning of your comment.) A. Background Section 1886(d) of the Act specifies that the Secretary shall establish a classification system (referred to as DRGs) for inpatient discharges and adjust payments under the IPPS based on appropriate weighting factors assigned to each DRG. Therefore, under the IPPS, we pay for inpatient hospital services on a rate per discharge basis that varies according to the DRG to [[Page 24688]] which a beneficiary's stay is assigned. The formula used to calculate payment for a specific case multiplies an individual hospital's payment rate per case by the weight of the DRG to which the case is assigned. Each DRG weight represents the average resources required to care for cases in that particular DRG, relative to the average resources used to treat cases in all DRGs. Congress recognized that it would be necessary to recalculate the DRG relative weights periodically to account for changes in resource consumption. Accordingly, section 1886(d)(4)(C) of the Act requires that the Secretary adjust the DRG classifications and relative weights at least annually. These adjustments are made to reflect changes in treatment patterns, technology, and any other factors that may change the relative use of hospital resources. B. DRG Reclassifications 1. General As discussed in the preamble to the FY 2007 IPPS final rule (71 FR 47881 through 47971), we are focusing our efforts in FY 2008 on making significant reforms to the IPPS consistent with the recommendations made by MedPAC in its ``Report to the Congress, Physician-Owned Specialty Hospitals'' in March 2005. MedPAC recommended that the Secretary refine the entire DRG system by taking into account severity of illness and applying hospital-specific relative value (HSRV) weights to DRGs.\1\ We began this reform process by adopting cost-based weights over a 3-year transition period beginning in FY 2007 and making interim changes to the DRG system for FY 2007 by creating 20 new CMS DRGs and modifying 32 others across 13 different clinical areas involving nearly 1.7 million cases. As described below in more detail, these refinements are intermediate steps towards comprehensive reform of both the relative weights and the DRG system that is occurring as we undertake further study. --------------------------------------------------------------------------- \1\ Medicare Payment Advisory Commission: Report to the Congress, Physician-Owned Specialty Hospitals, March 2005, page viii. --------------------------------------------------------------------------- Currently, cases are classified into CMS DRGs for payment under the IPPS based on the principal diagnosis, up to eight additional diagnoses, and up to six procedures performed during the stay. In a small number of DRGs, classification is also based on the age, sex, and discharge status of the patient. The diagnosis and procedure information is reported by the hospital using codes from the International Classification of Diseases, Ninth Revision, Clinical Modification (ICD-9-CM). The process of forming the DRGs was begun by dividing all possible principal diagnoses into mutually exclusive principal diagnosis areas, referred to as Major Diagnostic Categories (MDCs). The MDCs were formed by physician panels as the first step toward ensuring that the DRGs would be clinically coherent. The diagnoses in each MDC correspond to a single organ system or etiology and, in general, are associated with a particular medical specialty. Thus, in order to maintain the requirement of clinical coherence, no final DRG could contain patients in different MDCs. Most MDCs are based on a particular organ system of the body. For example, MDC 6 is Diseases and Disorders of the Digestive System. This approach is used because clinical care is generally organized in accordance with the organ system affected. However, some MDCs are not constructed on this basis because they involve multiple organ systems (for example, MDC 22 (Burns)). For FY 2007, cases are assigned to one of 538 DRGs in 25 MDCs. The table below lists the 25 MDCs. Major Diagnostic Categories (MDCs) ------------------------------------------------------------------------ ------------------------------------------------------------------------ 1................. Diseases and Disorders of the Nervous System. 2................. Diseases and Disorders of the Eye. 3................. Diseases and Disorders of the Ear, Nose, Mouth, and Throat. 4................. Diseases and Disorders of the Respiratory System. 5................. Diseases and Disorders of the Circulatory System. 6................. Diseases and Disorders of the Digestive System. 7................. Diseases and Disorders of the Hepatobiliary System and Pancreas. 8................. Diseases and Disorders of the Musculoskeletal System and Connective Tissue. 9................. Diseases and Disorders of the Skin, Subcutaneous Tissue and Breast. 10................ Endocrine, Nutritional and Metabolic Diseases and Disorders. 11................ Diseases and Disorders of the Kidney and Urinary Tract. 12................ Diseases and Disorders of the Male Reproductive System. 13................ Diseases and Disorders of the Female Reproductive System. 14................ Pregnancy, Childbirth, and the Puerperium. 15................ Newborns and Other Neonates with Conditions Originating in the Perinatal Period. 16................ Diseases and Disorders of the Blood and Blood Forming Organs and Immunological Disorders. 17................ Myeloproliferative Diseases and Disorders and Poorly Differentiated Neoplasms. 18................ Infectious and Parasitic Diseases (Systemic or Unspecified Sites). 19................ Mental Diseases and Disorders. 20................ Alcohol/Drug Use and Alcohol/Drug Induced Organic Mental Disorders. 21................ Injuries, Poisonings, and Toxic Effects of Drugs. 22................ Burns. 23................ Factors Influencing Health Status and Other Contacts with Health Services. 24................ Multiple Significant Trauma. 25................ Human Immunodeficiency Virus Infections. ------------------------------------------------------------------------ In general, cases are assigned to an MDC based on the patient's principal diagnosis before assignment to a DRG. However, for FY 2007, there are 9 DRGs to which cases are directly assigned on the basis of ICD-9-CM procedure codes. These DRGs are for heart transplant or implant of heart assist systems, liver and/or intestinal transplants, bone marrow transplants, lung transplants, simultaneous pancreas/kidney transplants, pancreas transplants, and [[Page 24689]] for tracheostomies. Cases are assigned to these DRGs before they are classified to an MDC. The table below lists the nine current pre-MDCs. Pre-Major Diagnostic Categories (Pre-MDCs) ------------------------------------------------------------------------ ------------------------------------------------------------------------ DRG 103.............. Heart Transplant o
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