Medicare Program; Prospective Payment System for Long-Term Care Hospitals RY 2008: Annual Payment Rate Updates, and Policy Changes; and Hospital Direct and Indirect Graduate Medical Education Policy Changes, 26870-27029 [07-2206]

Agencies

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

[Federal Register Volume 72, Number 91 (Friday, May 11, 2007)]
[Rules and Regulations]
[Pages 26870-27029]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 07-2206]



[[Page 26869]]

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Part II





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Parts 412 and 413



Medicare Program; Prospective Payment System for Long-Term Care 
Hospitals RY 2008: Annual Payment Rate Updates, and Policy Changes; and 
Hospital Direct and Indirect Graduate Medical Education Policy Changes; 
Final Rule

Federal Register / Vol. 72, No. 91 / Friday, May 11, 2007 / Rules and 
Regulations

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 412 and 413

[CMS-1529-F]
RIN 0938-AO30


Medicare Program; Prospective Payment System for Long-Term Care 
Hospitals RY 2008: Annual Payment Rate Updates, and Policy Changes; and 
Hospital Direct and Indirect Graduate Medical Education Policy Changes

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

ACTION: Final Rule.

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SUMMARY: This final rule updates the annual payment rates for the 
Medicare prospective payment system (PPS) for inpatient hospital 
services provided by long-term care hospitals (LTCHs). The final 
payment amounts and factors used to determine the updated Federal rates 
that are described in this final rule were determined based on the LTCH 
PPS rate year July 1, 2007 through June 30, 2008. The annual update of 
the long-term care diagnosis-related group (LTC-DRG) classifications 
and relative weights remains linked to the annual adjustments of the 
acute care hospital inpatient diagnosis-related group system, and 
continue to be effective each October 1. The final outlier threshold 
for July 1, 2007, through June 30, 2008, is derived from the LTCH PPS 
rate year calculations. We are also finalizing policy changes which 
include revisions to the GME and IME policies. In addition, we are 
adding a technical amendment correcting the regulations text at Sec.  
412.22.

EFFECTIVE DATE: These regulations are effective on July 1, 2007.

FOR FURTHER INFORMATION CONTACT:
Tzvi Hefter, (410) 786-4487 (General information).
Judy Richter, (410) 786-2590 (General information, payment adjustments 
for special cases, and onsite discharges and readmissions, interrupted 
stays, co-located providers, and short-stay outliers).
Michele Hudson, (410) 786-5490 (Calculation of the payment rates, LTC-
DRGs, relative weights and case-mix index, market basket, wage index, 
budget neutrality, and other payment adjustments).
Ann Fagan, (410) 786-5662 (Patient classification system).
Miechal Lefkowitz, (410) 786-5316 (Graduate Medical Education 
payments).
Linda McKenna, (410) 786-4537 (Payment adjustments, interrupted stay, 
and transition period).
Renate Rockwell, (410) 786-4645 (Graduate Medical Education payments).
Elizabeth Truong, (410) 786-6005 (Federal rate update, budget 
neutrality, other adjustments, and calculation of the payment rates).
Michael Treitel, (410) 786-4552 (High cost outliers and cost-to-charge 
ratios).

Table of Contents

I. Background
    A. Legislative and Regulatory Authority
    B. Criteria for Classification as a LTCH
    1. Classification as a LTCH
    2. Hospitals Excluded from the LTCH PPS
    C. Transition Period for Implementation of the LTCH PPS
    D. Limitation on Charges to Beneficiaries
    E. Administrative Simplification Compliance Act (ASCA) and 
Health Insurance Portability and Accountability Act (HIPAA) 
Compliance
II. Summary of the Provisions of the Final Rule
    A. Summary of Major Contents of this Final Rule
    B. Responses to Comments
III. Long-Term Care Diagnosis-Related Group (LTC-DRG) 
Classifications and Relative Weights
    A. Background
    B. Patient Classifications into DRGs
    C. Organization of DRGs
    D. Update of LTC-DRGs
    1. Background
    2. Method for Updating the LTC-DRG Relative Weights
    3. Budget Neutrality (BN) Requirement for the Annual LTC-DRG 
Update
    E. ICD-9-CM Coding System
    1. Uniform Hospital Discharge Data Set (UHDDS) Definitions
    2. Maintenance of the ICD-9-CM Coding System
    3. Coding Rules and Use of ICD-9-CM Codes in LTCHs
IV. Changes to the LTCH PPS Payment Rates for the 2008 LTCH PPS Rate 
Year
    A. Overview of the Development of the Payment Rates
    B. LTCH PPS Market Basket
    1. Overview of the RPL Market Basket
    2. Market Basket Estimate for the 2008 LTCH PPS Rate Year
    C. Standard Federal Rate for the 2008 LTCH PPS Rate Year
    1. Background
    2. Update to the Standard Federal Rate for the 2008 LTCH PPS 
Rate Year
    3. Standard Federal Rate for the 2008 LTCH PPS Rate Year
    D. Calculation of LTCH Prospective Payments for the 2008 LTCH 
PPS Rate Year
    1. Adjustment for Area Wage Levels
    a. Background
    b. Geographic Classifications/Labor Market Area Definitions
    c. Labor-Related Share
    d. Wage Index Data
    2. Adjustment for Cost-of-Living in Alaska and Hawaii
    3. Adjustment for High-Cost Outliers (HCOs)
    a. Background
    b. Cost-to-charge ratios (CCRs)
    c. Establishment of the Fixed-Loss Amount
    d. Reconciliation of Outlier Payments Upon Cost Report 
Settlement
    e. Application of Outlier Policy to Short-Stay Outlier (SSO) 
Cases
    4. Other Payment Adjustments
    5. Budget Neutrality (BN) Offset to Account for the Transition 
Methodology
    6. One-time Prospective Adjustment to the Standard Federal Rate
V. Other Policy Changes for the 2008 LTCH PPS Rate Year
    A. Short-Stay Outlier (SSO) Cases
    1. Background
    2. Additional Discussion of the SSO Payment Formula (Includes 
Technical Correction)
    3. Determination of Cost-to-Charge Ratios (CCRs)
    4. Reconciliation of SSO Cases
    B. Expansion of Special Payment Provisions for LTCH Hospitals 
within Hospitals (HwHs) and LTCH Satellites: Expansion of the 25 
Percent Rule to Certain Situations Not Currently Covered Under 
Existing Sec.  412.534
VI. Computing the Adjusted Federal Prospective Payments for the 2008 
LTCH PPS Rate Year
VII. Transition Period
VIII. Payments to New LTCHs
IX. Method of Payment
X. Monitoring
XI. MedPAC Recommendations: The RTI Contract
XII. Graduate Medical Education (GME)
    A. GME Background
    B. Resident Training in Nonhospital Settings
    1. Background
    2. Moratorium on Disallowances of Allopathic or Osteopathic 
Family Practice Residents Training Time in Nonhospital Settings, and 
Questions and Answers (Qs&As) on CMS Web site (Section 713 of the 
MMA and Sec.  413.78)
    3. Requirements for Written Agreements for Residency Training in 
Nonhospital Settings (Sec.  413.78(e))
    4. Modification of the Definition of ``All or Substantially All 
of the Costs for the Training Program in the Nonhospital Setting''
    5. Implementation of a 90 Percent Cost Threshold
    C. Other Issues to be Considered
    D. Summary of Final Provisions
XIII. Technical Amendment
XIV. Collection of Information Requirements
XV. Regulatory Impact Analysis
    A. Introduction
    1. Executive Order 12866
    2. Regulatory Flexibility Act (RFA)
    3. Impact on Rural Hospitals
    4. Unfunded Mandates
    5. Federalism

[[Page 26871]]

    6. Alternatives Considered
    B. Anticipated Effects of Payment Rate Changes
    1. Budgetary Impact
    2. Impact on Providers
    3. Calculation of Prospective Payments
    4. Results
    5. Effects on the Medicare Program
    C. Impact of Other Policy Changes
    1. Effects of Policy Expansion of the Special Payment Provisions 
for LTCH HwHs and LTCH Satellites to Certain Situations Not 
Presently Covered by Existing Sec.  412.534 for Subclause (I) LTCHs
    2. Effects of Policy Change Relating to Payment for Direct 
Graduate Medical Education (GME)
    D. Accounting Statement
Addendum: Tables

Acronyms

    Because of the many terms to which we refer by acronym in this 
final rule, we are listing the acronyms used and their corresponding 
terms in alphabetical order below:
AAMC Association of American Medical Colleges
AFMAA Academic Family Medicine Advocacy Alliance
AHA American Hospital Association
AHIMA American Health Information Management Association
ALOS Average length of stay
ALTHA Acute Long Term Hospital Association
AMGA American Medical Group Association
AMPRA American Medical Peer Review Association
AOA American Osteopathic Association
APR All patient refined
ASCA Administrative Simplification Compliance Act of 2002 (Pub. L. 107-
105)
BBA Balanced Budget Act of 1997 (Pub. L. 105-33)
BBRA Medicare, Medicaid, and SCHIP [State Children's Health Insurance 
Program] Balanced Budget Refinement Act of 1999 (Pub. L. 106-113)
BIPA Medicare, Medicaid, and SCHIP [State Children's Health Insurance 
Program] Benefits Improvement and Protection Act of 2000 (Pub. L. 106-
554)
BN Budget neutrality
CBSA Core-based statistical area
CCR Cost-to-charge ratio
C&M Coordination and maintenance
CMI Case-mix index
CMS Centers for Medicare & Medicaid Services
COLA Cost of living adjustment
CS Consolidated severity-adjusted
CY Calendar year
DSH Disproportionate share of low-income patients
DRGs Diagnosis-related groups
FI Fiscal intermediary
FMC Family Medicine Center
FTE Full-time equivalent
FY Federal fiscal year
GME Graduate medical education
HCO High-cost outlier
HCRIS Hospital cost report information system
HHA Home health agency
HHS (Department of) Health and Human Services
HIPAA Health Insurance Portability and Accountability Act (Pub. L. 104-
191)
HIPC Health Information Policy Council
HwHs Hospitals within hospitals
ICD-9-CM International Classification of Diseases, Ninth Revision, 
Clinical Modification (codes)
IME Indirect medical education
I-O Input-Output
IPF Inpatient psychiatric facility
IPPS [Acute Care Hospital] Inpatient Prospective Payment System
IRF Inpatient rehabilitation facility
LOS Length of stay
LTC-DRG Long-term care diagnosis-related group
LTCH Long-term care hospital
MCE Medicare code editor
MDC Major diagnostic categories
MedPAC Medicare Payment Advisory Commission
MedPAR Medicare provider analysis and review
MMA Medicare Prescription Drug, Improvement, and Modernization Act of 
2003 (Pub. L. 108-173)
MSA Metropolitan statistical area
NAICS North American Industrial Classification System
NALTH National Association of Long Term Hospitals
NCHS National Center for Health Statistics
OACT [CMS'] Office of the Actuary
OBRA 86 Omnibus Budget Reconciliation Act of 1986 (Pub. L. 99-509)
OMB Office of Management and Budget
OPM U.S. Office of Personnel Management
O.R. Operating room
OSCAR Online Survey Certification and Reporting (System)
OTN One-Time Notification
PIP Periodic interim payment
PLI Professional liability insurance
PMSA Primary metropolitan statistical area
PPI Producer Price Indexes
PPS Prospective payment system
PRA Per resident amount
PSF Provider specific file
QIO Quality Improvement Organization (formerly Peer Review organization 
(PRO))
RIA Regulatory impact analysis
RPL Rehabilitation psychiatric long-term care (hospital)
RTI Research Triangle Institute, International
RY Rate year (begins July 1 and ends June 30)
SIC Standard industrial code
SNF Skilled nursing facility
SSO Short-stay outlier
TEFRA Tax Equity and Fiscal Responsibility Act of 1982 (Pub. L. 97-248)
TEP Technical expert panel
UHDDS Uniform hospital discharge data set

I. Background

A. Legislative and Regulatory Authority

    Section 123 of the Medicare, Medicaid, and SCHIP [State Children's 
Health Insurance Program] Balanced Budget Refinement Act of 1999 (BBRA) 
(Pub. L. 106-113) as amended by section 307(b) of the Medicare, 
Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 
(BIPA) (Pub. L. 106-554) provides for payment for both the operating 
and capital-related costs of hospital inpatient stays in long-term care 
hospitals (LTCHs) under Medicare Part A based on prospectively set 
rates. The Medicare prospective payment system (PPS) for LTCHs applies 
to hospitals described in section 1886(d)(1)(B)(iv) of the Social 
Security Act (the Act), effective for cost reporting periods beginning 
on or after October 1, 2002.
    Section 1886(d)(1)(B)(iv)(I) of the Act defines a LTCH as ``a 
hospital which has an average inpatient length of stay (as determined 
by the Secretary) of greater than 25 days.'' Section 
1886(d)(1)(B)(iv)(II) of the Act also provides an alternative 
definition of LTCHs: Specifically, a hospital that first received 
payment under section 1886(d) of the Act in 1986 and has an average 
inpatient length of stay (LOS) (as determined by the Secretary of 
Health and Human Services (the Secretary)) of greater than 20 days and 
has 80 percent or more of its annual Medicare inpatient discharges with 
a principal diagnosis that reflects a finding of neoplastic disease in 
the 12-month cost reporting period ending in fiscal year (FY) 1997.
    Section 123 of the BBRA requires the PPS for LTCHs to be a ``per 
discharge'' system with a diagnosis-related group (DRG) based patient 
classification system that reflects the differences in patient 
resources and costs in LTCHs. It also requires that the ``per 
discharge'' system maintain budget neutrality (BN). We believe the 
statutory mandate for BN applies only to the first year of the

[[Page 26872]]

implementation of the LTCH PPS such that estimated payments in the 
first year of the PPS were projected to equal payments that would have 
been paid for operating and capital-related costs of LTCHs had this new 
payment system not been enacted.
    Section 307(b)(1) of the BIPA, among other things, mandates that 
the Secretary shall examine, and may provide for, adjustments to 
payments under the LTCH PPS, including adjustments to DRG weights, area 
wage adjustments, geographic reclassification, outliers, updates, and a 
disproportionate share adjustment.
    In the August 30, 2002 Federal Register, we issued a final rule 
that implemented the LTCH PPS authorized under BBRA and BIPA (67 FR 
55954). This system uses information from LTCH patient records to 
classify patients into distinct long-term care diagnosis-related groups 
(LTC-DRGs) based on clinical characteristics and expected resource 
needs. Payments are calculated for each LTC-DRG and provisions are made 
for appropriate payment adjustments. Payment rates under the LTCH PPS 
are updated annually and published in the Federal Register.
    The LTCH PPS replaced the reasonable cost-based payment system 
under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) 
(Pub. L. 97-248) for payments for inpatient services provided by a LTCH 
with a cost reporting period beginning on or after October 1, 2002. 
(The regulations implementing the TEFRA reasonable cost-based payment 
provisions are located at 42 CFR part 413.) With the implementation of 
the PPS for acute care hospitals authorized by the Social Security 
Amendments of 1983 (Pub. L. 98-21), which added section 1886(d) to the 
Act, certain hospitals, including LTCHs, were excluded from the PPS for 
acute care hospitals and were paid their reasonable costs for inpatient 
services subject to a per discharge limitation or target amount under 
the TEFRA system. For each cost reporting period, a hospital-specific 
ceiling on payments was determined by multiplying the hospital's 
updated target amount by the number of total current year Medicare 
discharges. (Generally, in this document when we refer to discharges, 
the intent is to describe Medicare discharges.) The August 30, 2002 
final rule further details the payment policy under the TEFRA system 
(67 FR 55954).
    In the August 30, 2002 final rule, we also presented an in-depth 
discussion of the LTCH PPS, including the patient classification 
system, relative weights, payment rates, additional payments, and the 
BN requirements mandated by section 123 of the BBRA. The same final 
rule that established regulations for the LTCH PPS under 42 CFR part 
412, subpart O, also contained LTCH provisions related to covered 
inpatient services, limitation on charges to beneficiaries, medical 
review requirements, furnishing of inpatient hospital services directly 
or under arrangement, and reporting and recordkeeping requirements. We 
refer readers to the August 30, 2002 final rule for a comprehensive 
discussion of the research and data that supported the establishment of 
the LTCH PPS (67 FR 55954).
    In the June 6, 2003 Federal Register, we published a final rule 
that set forth the FY 2004 annual update of the payment rates for the 
Medicare PPS for inpatient hospital services furnished by LTCHs (68 FR 
34122). It also changed the annual period for which the payment rates 
are effective. The annual updated rates are now effective from July 1 
through June 30 instead of from October 1 through September 30. We 
refer to the July through June time period as a ``long-term care 
hospital rate year'' (LTCH PPS rate year). In addition, we changed the 
publication schedule for the annual update to allow for an effective 
date of July 1. The payment amounts and factors used to determine the 
annual update of the LTCH PPS Federal rate is based on a LTCH PPS rate 
year. While the LTCH payment rate update is effective July 1, the 
annual update of the LTC-DRG classifications and relative weights are 
linked to the annual adjustments of the acute care hospital inpatient 
DRGs and are effective each October 1.
    In the Prospective Payment System for Long-Term Care Hospitals RY 
2007: Annual Payment Rate Updates, Policy Changes, and Clarifications 
final rule (71 FR 27798) (hereinafter referred to as the RY 2007 LTCH 
PPS final rule), we set forth the 2007 LTCH PPS rate year annual update 
of the payment rates for the Medicare PPS for inpatient hospital 
services provided by LTCHs. We also adopted the ``Rehabilitation, 
Psychiatric, Long-Term Care (RPL)'' market basket under the LTCH PPS in 
place of the excluded hospital with capital market basket. In addition, 
we implemented a zero percent update to the LTCH PPS Federal rate for 
RY 2007. We also revised the existing payment adjustment for short stay 
outlier (SSO) cases by reducing part of the current payment formula and 
adding a fourth component to that payment formula. In addition, we 
sunsetted the surgical DRG exception to the payment policy established 
under the 3-day or less interruption of stay policy. Finally, we 
clarified the policy at Sec.  412.534(c) for adjusting the LTCH PPS 
payment so that the LTCH PPS payment is equivalent to what would 
otherwise be payable under Sec.  412.1(a).

B. Criteria for Classification as a LTCH

1. Classification as a LTCH
    Under the existing regulations at Sec.  412.23(e)(1) and (e)(2)(i), 
which implement section 1886(d)(1)(B)(iv)(I) of the Act, to qualify to 
be paid under the LTCH PPS, a hospital must have a provider agreement 
with Medicare and must have an average Medicare inpatient LOS of 
greater than 25 days. Alternatively, Sec.  412.23(e)(2)(ii) states that 
for cost reporting periods beginning on or after August 5, 1997, a 
hospital that was first excluded from the PPS in 1986 and can 
demonstrate that at least 80 percent of its annual Medicare inpatient 
discharges in the 12-month cost reporting period ending in FY 1997 have 
a principal diagnosis that reflects a finding of neoplastic disease 
must have an average inpatient LOS for all patients, including both 
Medicare and non-Medicare inpatients, of greater than 20 days.
    Section 412.23(e)(3) provides that, subject to the provisions of 
paragraphs (e)(3)(ii) through (e)(3)(iv) of this section, the average 
Medicare inpatient LOS, specified under Sec.  412.23(e)(2)(i) is 
calculated by dividing the total number of covered and noncovered days 
of stay for Medicare inpatients (less leave or pass days) by the number 
of total Medicare discharges for the hospital's most recent complete 
cost reporting period. Section 412.23 also provides that subject to the 
provisions of paragraphs (e)(3)(ii) through (e)(3)(iv) of this section, 
the average inpatient LOS specified under Sec.  412.23(e)(2)(ii) is 
calculated by dividing the total number of days for all patients, 
including both Medicare and non-Medicare inpatients (less leave or pass 
days) by the number of total discharges for the hospital's most recent 
complete cost reporting period.
    In the RY 2005 LTCH PPS final rule (69 FR 25674), we specified the 
procedure for calculating a hospital's inpatient average length of stay 
(ALOS) for purposes of classification as a LTCH. That is, if a 
patient's stay includes days of care furnished during two or more 
separate consecutive cost reporting periods, the total days of a 
patient's stay would be reported in the cost reporting period during 
which the patient is discharged (69 FR 25705). Therefore, we revised 
Sec.  412.23(e)(3)(ii) to specify that,

[[Page 26873]]

effective for cost reporting periods beginning on or after July 1, 
2004, in calculating a hospital's ALOS, if the days of an inpatient 
stay involve days of care furnished during two or more separate 
consecutive cost reporting periods, the total number of days of the 
stay are considered to have occurred in the cost reporting period 
during which the inpatient was discharged.
    Fiscal intermediaries (FIs) verify that LTCHs meet the ALOS 
requirements. We note that the inpatient days of a patient who is 
admitted to a LTCH without any remaining Medicare days of coverage, 
regardless of the fact that the patient is a Medicare beneficiary, will 
not be included in the above calculation. Because Medicare would not be 
paying for any of the patient's treatment, data on the patient's stay 
would not be included in the Medicare claims processing systems. As 
described in Sec.  409.61, in order for both covered and noncovered 
days of a LTCH hospitalization to be included, a patient admitted to 
the LTCH must have at least one remaining benefit day (68 FR 34123).
    The FI's determination of whether or not a hospital qualifies as an 
LTCH is based on the hospital's discharge data from the hospital's most 
recent complete cost reporting period as specified in Sec.  
412.23(e)(3) and is effective at the start of the hospital's next cost 
reporting period as specified in Sec.  412.22(d). However, if the 
hospital does not meet the ALOS requirement as specified in Sec.  
412.23(e)(2)(i) and (ii), the hospital may provide the FI with data 
indicating a change in the ALOS by the same method for the period of at 
least 5 months of the immediately preceding 6-month period (69 FR 
25676). Our interpretation of Sec.  412.23(e)(3) was to allow hospitals 
to submit data using a period of at least 5 months of the most recent 
data from the immediately preceding 6-month period.
    As we stated in the FY 2004 Inpatient Prospective Payment System 
(IPPS) final rule, published in the August 1, 2003 Federal Register, 
prior to the implementation of the LTCH PPS, we did rely on data from 
the most recently submitted cost report for purposes of calculating the 
ALOS (68 FR 45464). The calculation to determine whether an acute care 
hospital qualifies for LTCH status was based on total days and 
discharges for LTCH inpatients. However, with the implementation of the 
LTCH PPS, for the ALOS specified under Sec.  412.23(e)(2)(i), we 
revised Sec.  412.23(e)(3)(i) to only count total days and discharges 
for Medicare inpatients (67 FR 55970 through 55974). In addition, the 
ALOS specified under Sec.  412.23(e)(2)(ii) is calculated by dividing 
the total number of days for all patients, including both Medicare and 
non-Medicare inpatients (less leave or pass days) by the number of 
total discharges for the hospital's most recent complete cost reporting 
period. As we discussed in the FY 2004 IPPS final rule, we are unable 
to capture the necessary data from our present cost reporting forms (68 
FR 45464). Therefore, we have notified FIs and LTCHs that until the 
cost reporting forms are revised, for purposes of calculating the ALOS, 
we will be relying upon census data extracted from Medicare Provider 
Analysis and Review (MedPAR) files that reflect each LTCH's cost 
reporting period (68 FR 45464). Requirements for hospitals seeking 
classification as LTCHs that have undergone a change in ownership, as 
described in Sec.  489.18, are set forth in Sec.  412.23(e)(3)(iv).
2. Hospitals Excluded From the LTCH PPS
    The following hospitals are paid under special payment provisions, 
as described in Sec.  412.22(c) and, therefore, are not subject to the 
LTCH PPS rules:
     Veterans Administration hospitals.
     Hospitals that are reimbursed under State cost control 
systems approved under 42 CFR part 403.
     Hospitals that are reimbursed in accordance with 
demonstration projects authorized under section 402(a) of the Social 
Security Amendments of 1967 (Pub. L. 90-248) (42 U.S.C. 1395b-1) or 
section 222(a) of the Social Security Amendments of 1972 (Pub. L. 92-
603) (42 U.S.C. 1395b-1 (note)) (Statewide all-payer systems, subject 
to the rate-of-increase test at section 1814(b) of the Act).
     Nonparticipating hospitals furnishing emergency services 
to Medicare beneficiaries.

C. Transition Period for Implementation of the LTCH PPS

    In the August 30, 2002 final rule (67 FR 55954), we provided for a 
5-year transition period. During this 5-year transition period, a 
LTCH's total payment under the PPS was based on an increasing 
percentage of the Federal rate with a corresponding decrease in the 
percentage of the LTCH PPS payment that is based on reasonable cost 
concepts. However, effective for cost reporting periods beginning on or 
after October 1, 2006, total LTCH PPS payments are based on 100 percent 
of the Federal rate.

D. Limitation on Charges to Beneficiaries

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

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

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

[[Page 26874]]

providers, to conduct the covered electronic transactions according to 
the applicable transactions and code sets standards.

II. Summary of the Provisions of the Final Rule

A. Major Contents of This Final Rule

    In this final rule, we are setting forth the annual update to the 
payment rates for the Medicare LTCH PPS, as well as, other policy 
changes. The following is a summary of the major areas that we have 
addressed in this final rule.
    In section III. of this preamble, we discuss the LTCH PPS patient 
classification and the relative weights which remain linked to the 
annual adjustments of the acute care hospital inpatient DRG system, and 
are based on the annual revisions to the International Classification 
of Diseases, Ninth Revision, Clinical Modification (ICD-9-CM) codes 
effective each October 1.
    Also, in section III. of this preamble, we have established a BN 
requirement for the annual update of the LTC-DRG classifications and 
relative weights to reflect changes in relative LTCH resource use. This 
requirement ensures that estimated aggregate LTCH PPS payments will not 
decrease or increase as a result of the annual update to the LTC-DRG 
classifications and relative weights based on the most recent available 
data. In this section, we also summarize the proposed severity adjusted 
MS-LTC-DRGs and the development of the proposed relative weights for FY 
2008 presented in the FY 2008 IPPS proposed rule.
    As discussed in section IV.C. of this preamble, we are implementing 
a 0.71 percent update to the LTCH PPS Federal rate for the 2008 LTCH 
PPS rate year based on an adjustment to account for changes in coding 
practices. Also in section IV. of this preamble, we discuss the 
prospective payment rate for RY 2008, and in section VI., we discuss 
the applicable adjustments to the payment rates, including the 
revisions to the wage index, the labor-related share, the cost-of-
living adjustment (COLA) factors, and the outlier threshold, for the 
2008 LTCH PPS rate year.
    In section V.A. of this preamble, we discuss our change to the 
current payment formula for certain SSO cases. That is, those cases 
with a LOS that is less than or equal to one standard deviation of the 
ALOS of an IPPS discharge that was grouped into the same DRG. However, 
in situations where the SSO cases would exceed the IPPS discharge that 
was grouped in the same DRG, payment would continue to be paid under 
the existing formula.
    In section V.B. of this preamble, we discuss the expansion of the 
present 25 percent admission policy at Sec.  412.534(c) to those 
certain situations not already affected by the existing policy. 
Previously, this policy only applied to co-located LTCHs and LTCH 
satellites whose percentage of discharges exceeded the 25 percent 
threshold (or the applicable percentage). This is extended to include 
an adjusted payment to LTCH discharges that were admitted from 
referring hospitals not co-located with the LTCH or the satellite of a 
LTCH where those discharges exceed the 25 percent (or applicable 
percentage) threshold. The final policy also applies to grandfathered 
LTCHs and satellite facilities of LTCHs that have Medicare discharges 
that were admitted from a hospital co-located with the LTCH or 
satellite facility of the grandfathered LTCH.
    In section X. of this preamble, we will discuss our on-going 
monitoring protocols under the LTCH PPS.
    In section XI. of this preamble, we discuss the recommendations 
made by the Research Triangle Institute, International's (RTI) 
evaluation of the feasibility of adopting recommendations made in the 
June 2004 Medicare Payment Advisory Commission (MedPAC) Report.
    In section XII. of this preamble, we discuss our revisions to 
redefine the statutory term ``all or substantially all of the costs for 
the training program in the nonhospital setting.'' The statute requires 
that hospitals must pay ``all or substantially all'' of the costs for a 
training program in a nonhospital setting in order to count FTE 
residents training in the nonhospital setting for Medicare graduate 
medical education (GME) payment purposes. We are revising Sec.  
413.75(b) to introduce a new definition of ``all or substantially all 
of the costs for the training program in the nonhospital setting'' to 
mean, at least 90 percent of the total of the costs of the residents' 
salaries and fringe benefits (including travel and lodging where 
applicable) and the portion of the cost of teaching physicians' 
salaries attributable to nonpatient care direct GME activities. In 
addition, we are revising Sec.  412.105(f)(1)(ii)(C) for IME and Sec.  
413.78 to reflect this new definition of ``all or substantially all'' 
of the GME costs in a nonhospital setting, effective for cost reporting 
periods beginning on or after July 1, 2007.
    In section XV. of this preamble, we analyze the impact of the 
changes presented in this final rule on Medicare expenditures, 
Medicare-participating LTCHs, and Medicare beneficiaries.

B. Responses to Comments

    We received 270 comments on the RY 2007 LTCH PPS proposed rule. 
Comments and responses follow the appropriate policy section in this 
rule. The following is a comment we received regarding the schedule of 
the LTCH PPS update.
    Comment: One commenter urged CMS to consolidate the July 1 update 
of the LTCH PPS rates and the October 1 development of the LTC-DRG 
weights into one publication cycle, a step which the commenter states 
would be very beneficial for the LTCH industry.
    Response: We appreciate the commenter's suggestion and we will 
evaluate whether such a consolidation is a workable alternative to our 
present schedule.

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

A. Background

    Section 123 of the BBRA requires that the Secretary implement a PPS 
for LTCHs (that is, a per discharge system with a DRG-based patient 
classification system reflecting the differences in patient resource 
use and costs). Section 307(b)(1) of the BIPA modified the requirements 
of section 123 of the BBRA by requiring that the Secretary examine 
``the feasibility and the impact of basing payment under such a system 
[the LTCH PPS] on the use of existing (or refined) hospital DRGs that 
have been modified to account for different resource use of LTCH 
patients, as well as the use of the most recently available hospital 
discharge data.''
    In accordance with section 123 of the BBRA as amended by section 
307(b)(1) of the BIPA and Sec.  412.515, we use information derived 
from LTCH PPS patient records to classify these cases into distinct 
LTC-DRGs based on clinical characteristics and estimated resource 
needs. The LTC-DRGs used as the patient classification component of the 
LTCH PPS correspond to the hospital inpatient DRGs in the IPPS. (As 
discussed in greater detail below in this section, in the FY 2008 IPPS 
proposed rule, we have proposed to adopt the severity-weighted patient 
classification system, the proposed MS-LTC-DRGs, for the LTCH PPS 
beginning in FY 2008, which is the same patient classification system 
proposed for use under the IPPS for FY 2008.) We assign an appropriate 
weight to the LTC-DRGs to account for the difference in resource use by 
patients exhibiting the case complexity and multiple medical problems 
characteristic of LTCHs.

[[Page 26875]]

    In a departure from the IPPS, we use low volume LTC-DRGs (less than 
25 LTCH cases) in determining the LTC-DRG weights, since LTCHs do not 
typically treat the full range of diagnoses as do acute care hospitals. 
To manage the large number of low volume DRGs (all DRGs with fewer than 
25 cases), we group low volume DRGs into 5 quintiles based on average 
charge per discharge. (A listing of the current composition of low 
volume quintiles used in determining the FY 2007 LTC-DRG relative 
weights appears in the FY 2007 IPPS final rule (71 FR 47974 through 
47978). A listing of the proposed composition of low volume quintiles 
used in determining the proposed FY 2008 MS-LTC-DRG relative weights 
appears in the FY 2008 IPPS proposed rule.) We also account for 
adjustments to payments for cases in which the stay at the LTCH is less 
than or equal to five-sixths of the geometric ALOS and classify these 
cases as SSO cases. (A detailed discussion of the application of the 
Lewin Group model that was used to develop the LTC-DRGs appears in the 
August 30, 2002 LTCH PPS final rule (67 FR 55978).)

B. Patient Classifications Into DRGs

    Generally, under the LTCH PPS, a Medicare payment is made at a 
predetermined specific rate for each discharge; that payment varies by 
the LTC-DRG to which a beneficiary's stay is assigned. Consistent with 
our historical practice of having LTC-DRGs correspond to the DRGs 
applicable under the IPPS, we will continue to model the LTCH-DRGs 
after their predecessor CMS DRGs. In addition, we are proposing to use 
the FY 2008 GROUPER Version 25.0 to be effective for discharges 
occurring on or after October 1, 2007 through September 30, 2008.
    Cases are classified into LTC-DRGs for payment based on the 
following six data elements:
    (1) Principal diagnosis.
    (2) Up to eight additional diagnoses.
    (3) Up to six procedures performed.
    (4) Age.
    (5) Sex.
    (6) Discharge status of the patient.
    As indicated in the August 30, 2002 LTCH PPS final rule, upon the 
discharge of the patient from a LTCH, the LTCH must assign appropriate 
diagnosis and procedure codes from the most current version of the 
International Classification of Diseases, Ninth Revision, Clinical 
Modification (ICD-9-CM). HIPAA Transactions and Code Sets Standards 
regulations at 45 CFR parts 160 and 162 require that no later than 
October 16, 2003, all covered entities must comply with the applicable 
requirements of subparts A and I through R of part 162. Among other 
requirements, those provisions direct covered entities to use the ASC 
X12N 837 Health Care Claim: Institutional, Volumes 1 and 2, version 
4010, and the applicable standard medical data code sets for the 
institutional health care claim or equivalent encounter information 
transaction (see 45 CFR 162.1002 and 45 CFR 162.1102).
    Medicare FIs/MACs enter the clinical and demographic information 
into their claims processing systems and subject this information to a 
series of automated screening processes called the Medicare Code Editor 
(MCE). These screens are designed to identify cases that require 
further review before assignment into a DRG can be made. During this 
process, the following types of cases, among others, are selected for 
further development:
     Cases that are improperly coded. (For example, diagnoses 
are shown that are inappropriate, given the sex of the patient. Code 
68.6, Radical abdominal hysterectomy, would be an inappropriate code 
for a male.)
     Cases including surgical procedures not covered under 
Medicare. (For example, organ transplant in a non-approved transplant 
center.)
     Cases requiring more information. (For example, ICD-9-CM 
codes are required to be entered at their highest level of specificity. 
There are valid 3-digit, 4-digit, and 5-digit codes. That is, code 262, 
Other severe protein-calorie malnutrition, contains all appropriate 
digits, but if it is reported with either fewer or more than 3 digits, 
the claim will be rejected by the MCE as invalid.)
    After screening through the MCE, each claim will be classified into 
the appropriate LTC-DRG by the Medicare LTCH GROUPER software. As 
indicated in the August 30, 2002 LTCH PPS final rule, the Medicare 
GROUPER software, which is used under the LTCH PPS, is specialized 
computer software, and is the same GROUPER software program used under 
the IPPS. The GROUPER software was developed as a means of classifying 
each case into a DRG on the basis of diagnosis and procedure codes and 
other demographic information (age, sex, and discharge status). 
Following the LTC-DRG assignment, the Medicare FI/MAC determines the 
prospective payment by using the Medicare PRICER program, which 
accounts for hospital-specific adjustments. Under the LTCH PPS, we 
provide an opportunity for the LTCH to review the LTC-DRG assignments 
made by the FI and to submit additional information within a specified 
timeframe as specified in Sec.  412.513(c).
    The GROUPER software is used both to classify past cases to measure 
relative hospital resource consumption to establish the DRG weights and 
to classify current cases for purposes of determining payment. The 
records for all Medicare hospital inpatient discharges are maintained 
in the MedPAR file. The data in this file are used to evaluate possible 
DRG classification changes and to recalibrate the DRG weights during 
our annual update under both the IPPS (Sec.  412.60(e)) and the LTCH 
PPS (Sec.  412.517). As discussed in greater detail in sections III.D. 
and E. of this preamble, with the implementation of section 503(a) of 
the Medicare Prescription Drug, Improvement, and Modernization Act of 
2003 (MMA) (Pub. L. 108-173), there is the possibility that one feature 
of the GROUPER software program may be updated twice during a Federal 
FY (October 1 and April 1) as required by the statute for the IPPS (69 
FR 48954 through 48957). Specifically, as we discussed in the FY 2007 
IPPS final rule, diagnosis and procedure codes for new medical 
technology may be created and added to existing CMS DRGs in the middle 
of the Federal FY on April 1 (71 FR 47959 and 47971). However, this 
policy change will have no effect on the LTC-DRG relative weights 
during the FY, which will continue to be updated only once a year on 
October 1, nor will there be any impact on Medicare payments under the 
LTCH PPS during the FY as a result of this policy. The use of the ICD-
9-CM code set is also compliant with the current requirements of the 
Transactions and Code Sets Standards regulations at 45 CFR parts 160 
and 162, published in accordance with HIPAA.
    In the IPPS proposed rule, we proposed to create and implement MS-
DRGs for FY 2008; that is, the proposed MS-DRGs would be effective 
beginning with discharges on or after October 1, 2007 through September 
30, 2008. The proposed MS-DRGs are a severity-based system of DRGs in 
which all existing CMS DRGs were refined to better recognize severity 
of illness among patients. The details of this proposal can be reviewed 
online at https://www.cms.hhs.gov/AcuteInpatientPPS/downloads/CMS-1533-
P.pdf.
    Under the broad authority of section 123(a) of the BBRA as modified 
by section 307(b) of the BIPA, we intend to model the proposed MS-LTC-
DRGs on the corresponding CMS DRGs as described in the FY 2008 IPPS 
proposed rule if this DRG system is implemented for the IPPS in FY 
2008. In addition, as

[[Page 26876]]

stated above in this section, we intend to use the FY 2008 GROUPER 
Version 25.0, effective for discharges occurring on or after October 1, 
2007 through September 30, 2008 for the LTCH PPS if the IPPS system is 
implemented for FY 2008.
    To elaborate, if the proposed MS-DRGs are adopted for use by the 
IPPS, the LTC-DRGs will use the same structure as the proposed MS-DRGs, 
and will be referred to as the MS-LTC-DRGs. Cases will continue to be 
classified into MS-LTC-DRGs using the six data elements listed above, 
and will be subject to review by the MCE as they have in the past. 
After screening through the MCE, claims will be classified into the 
appropriate MS-LTC-DRG by the LTCH PPS GROUPER software. Following the 
MS-LTC-DRG assignment, the Medicare FI/MAC determines the appropriate 
payment using the Medicare PRICER program.

C. Organization of DRGs

    The DRGs are organized into 25 major diagnostic categories (MDCs), 
most of which are based on a particular organ system of the body; the 
remainder involve multiple organ systems (such as MDC 22, Burns). 
Accordingly, the principal diagnosis determines MDC assignment. Within 
most MDCs, cases are then divided into surgical DRGs and medical DRGs. 
Surgical DRGs are assigned based on a surgical hierarchy that orders 
operating room (O.R.) procedures or groups of O.R. procedures by 
resource intensity. The GROUPER software program does not recognize all 
ICD-9-CM procedure codes as procedures that affect DRG assignment, that 
is, procedures which are not surgical (for example, EKG), or minor 
surgical procedures (for example, 86.11, Biopsy of skin and 
subcutaneous tissue).
    The medical DRGs are generally differentiated on the basis of 
diagnosis. Both medical and surgical DRGs may be further differentiated 
based on age, sex, discharge status, and presence or absence of 
complications or comorbidities (CC). The proposed MS-DRGs, as defined 
in the FY 2008 IPPS proposed rule, and the MS-LTC-DRGs contain base 
DRGs that have been subdivided into one, two, or three severity levels. 
The most severe level has at least one code that is a major CC, 
referred to as ``with MCC''. The next lower severity level contains 
cases with at least one CC, referred to as ``with CC''. Those DRGs 
without an MCC or a CC are referred to as ``without CC/MCC''. When data 
did not support the creation of three severity levels, the base DRG was 
divided into either two levels or the base was not subdivided. The 
proposed two-level subdivisions consist of one of the following 
subdivisions:
     With CC/MCC.
     Without CC/MCC.
    In this type of subdivision, cases with at least one code that is 
on the CC or MCC list are assigned to the ``with CC/MCC'' DRG. Cases 
without a CC or an MCC are assigned to the ``without CC/MCC'' DRG.
    The other type of proposed two-level subdivision is as follows:
     With MCC.
     Without MCC.
    In this type of subdivision, cases with at least one code that is 
on the MCC list are assigned to the ``with MCC'' DRG. Cases that do not 
have an MCC are assigned to the ``without MCC'' DRG. This type of 
subdivision could include cases with a CC code, but no MCC.
    We note that CCs are defined by certain secondary diagnoses not 
related to, or not inherently a part of, the disease process identified 
by the principal diagnosis. (For example, the GROUPER software would 
not recognize a code from the 800.0x series, Skull fracture, as a CC 
when combined with principal diagnosis 850.4, Concussion with prolonged 
loss of consciousness, without return to preexisting conscious level.) 
In addition, we note that the presence of additional diagnoses does not 
automatically generate a CC, as not all MS-DRGs or MS-LTC-DRGs 
recognize comorbid or complicating conditions in their definition. (For 
example, proposed MS-DRG 069, Transient Ischemia (formerly CMS DRG 524, 
Transient Ischemia), is based solely on the principal diagnosis, 
without consideration of additional diagnoses for DRG determination.)
    As discussed in greater detail in the FY 2007 IPPS final rule (71 
FR 47898 through 47912 and 47973), in its March 2005 Report to 
Congress, ``Physician-Owned Specialty Hospitals,'' MedPAC recommended 
that the Secretary improve payment accuracy in the hospital IPPS by, 
among other things, ``refining the current DRGs to more fully capture 
differences in severity of illness among patients.'' (Recommendation 1, 
p. 93.) As we discussed in that same final rule (71 FR 47973), we did 
not adopt a new severity-adjusted patient classification system under 
the IPPS, for FY 2007, but we did refine the CMS DRG patient 
classification system for Version 24.0 of the GROUPER software to 
improve the CMS DRG system's recognition of severity of illness for FY 
2007. The updates to the CMS DRG patient classification system used 
under the IPPS for FY 2007 (GROUPER Version 24.0), were also applied to 
the LTC-DRGs used under the LTCH PPS for FY 2007.
    In the FY 2008 IPPS proposed rule, we presented the changes to the 
proposed MS-DRG patient classification system for FY 2008. In that 
rule, we proposed the IPPS GROUPER Version 25.0 for FY 2008 to process 
LTCH PPS claims for LTCH discharges occurring from October 1, 2007 
through September 30, 2008. As noted above in this section and as we 
also discussed in the FY 2007 IPPS final rule, in its March 1, 2005 
Report to Congress on Medicare Payment Policy (page 64) and in 
Recommendation 1 of the 2005 Report to Congress on Physician-Owned 
Specialty Hospitals, MedPAC recommended that CMS, among other things, 
refine the current DRGs under the IPPS to more fully capture 
differences in severity of illness among patients.

D. Update of LTC-DRGs

1. Background
    We propose to modify the existing LTC-DRGs so that they reflect the 
changes made to the CMS DRGs under the proposed IPPS notice. As 
discussed in greater detail in the FY 2008 IPPS proposed rule, under 
the LTCH PPS, relative weights for each proposed MS-LTC-DRG are a 
primary element used to account for the variations in cost per 
discharge and resource utilization among the payment groups (that is, 
proposed MS-LTC-DRGs). To ensure that Medicare patients classified to 
each proposed MS-LTC-DRG have access to an appropriate level of 
services and to encourage efficiency, each year based on the best 
available data, we calculate a relative weight for each proposed MS-
LTC-DRG that represents the resources needed by an average inpatient 
LTCH case in that proposed MS-LTC-DRG. For example, cases in a proposed 
MS-LTC-DRG with a relative weight of 2 will, on average, cost twice as 
much as cases in a proposed MS-LTC-DRG with a relative weight of 1. 
Under Sec.  412.517, the proposed MS-LTC-DRG classifications and 
weighting factors (that is, relative weights) are adjusted annually to 
reflect changes in factors affecting the relative use of LTCH 
resources, including treatment patterns, technology and number of 
discharges.
    For FY 2008, the proposed MS-LTC-DRG classifications and relative 
weights were updated based on LTCH data from the FY 2005 MedPAR file, 
which contained hospital bills data from the December 2006 update. The 
proposed MS-LTC-DRG patient classification system is based upon 745 MS-
DRGs that formed the structure of the FY 2008

[[Page 26877]]

LTCH PPS GROUPER program. The FY 2008 proposed MS-LTC-DRGs continues to 
include two ``error DRGs.'' As in the IPPS, we included two error DRGs 
in which cases that cannot be assigned to valid DRGs will be grouped. 
These two proposed error MS-LTC-DRGs are MS-LTC-DRG 999 (Principal 
Diagnosis Invalid as a Discharge Diagnosis) and MS-LTC-DRG 998 
(Ungroupable). The other 743 proposed MS-LTC-DRGs are the same MS-DRGs 
used in the IPPS GROUPER program for FY 2008 (Version 25.0).
    For FY 2008, as discussed in greater detail in the FY 2008 IPPS 
proposed rule, we proposed to adopt the MS-LTC-DRGs for the LTCH PPS 
for RY 2008. (Additional information on the proposed MS-LTC-DRG 
classifications and proposed MS-LTC-DRG relative weights can be found 
in the FY 2008 IPPS proposed rule.)
    In the past, the annual update to the CMS DRGs was based on the 
annual revisions to the ICD-9-CM codes and was effective each October 
1. The ICD-9-CM coding update process was revised as discussed in 
greater detail in the FY 2005 IPPS final rule (69 FR 48953 through 
48957). Specifically, section 503(a) of the MMA includes a requirement 
for updating diagnosis and procedure codes twice a year instead of the 
current process of annual updates on October 1 of each year. This 
requirement is included as part of the amendments to the Act relating 
to recognition of new medical technology under the IPPS. (For 
additional information on this provision, including its implementation 
and its impact on the LTCH PPS, refer to the FY 2005 IPPS final rule 
(69 FR 48953 through 48957), the RY 2006 LTCH PPS final rule (70 FR 
24172 through 24177), and the RY 2008 LTCH PPS proposed rule (72 FR 
4783 through 4784).)
    As discussed in the RY 2008 proposed rule (72 FR 4784), in 
implementing section 503(a) of the MMA, there will only be an April 1 
update if diagnosis and procedure codes are requested and approved. We 
note that any new codes created for April 1 implementation will be 
limited to those diagnosis and procedure code revisions primarily 
needed to describe new technologies and medical services. However, we 
reiterate that the process of discussing updates to the ICD-9-CM has 
been an open process through the ICD-9-CM Coordination and Maintenance 
(C&M) Committee since 1995. Requestors will be given the opportunity to 
present the merits for a new code and make a clear and convincing case 
for the need to update ICD-9-CM codes through an April 1 update.
    At the September 2006 ICD-9-CM C&M Committee meeting, there were no 
requests for an April 1, 2007 implementation of ICD-9-CM codes, and 
therefore, the next update to the ICD-9-CM coding system will not occur 
until October 1, 2007 (FY 2008). Presently, as there were no coding 
changes suggested for an April 1, 2007 update, the ICD-9-CM coding set 
implemented on October 1, 2006, will continue through September 30, 
2007 (FY 2007). As discussed above in this section, the next update to 
the proposed MS-LTC-DRGs and relative weights for proposed FY 2008 will 
be presented in the FY 2008 IPPS proposed rule. Furthermore, we will 
notify LTCHs of any revisions to the GROUPER software used under the 
IPPS and LTCH PPS that would be implemented April 1, 2008. As noted 
previously in this section, in the FY 2007 IPPS final rule (71 FR 
47973), we established the use of Version 24.0 of the CMS GROUPER, 
which is used under the IPPS for FY 2007, to classify cases for LTCH 
PPS discharges that would occur on or after October 1, 2006 and on or 
before September 30, 2007.
2. Method for Updating the LTC-DRG Relative Weights
    As discussed in the August 30, 2002 LTCH PPS final rule that 
implemented the LTCH PPS, under the LTCH PPS, each LTCH will receive a 
payment that represents an appropriate amount for the efficient 
delivery of care to Medicare patients (67 FR 55984). The system must be 
able to account adequately for each LTCH's case-mix to ensure both a 
fair distribution of Medicare payments and access to care for those 
Medicare patients whose care is more costly. Therefore, in Sec.  
412.523(c), we adjust the standard Federal PPS rate by the LTC-DRG 
relative weights in determining payment to LTCHs for each case. As we 
have noted above, we are proposing to adopt the MS-LTC-DRGs for the 
LTCH PPS for FY 2008. However, as discussed in the FY 2008 IPPS 
proposed rule, this proposed change in the patient classification 
system does not affect the basic principles of the development of 
relative weights under a DRG-based PPS. For purposes of clarity, in the 
general discussion below in which we describe the basic methodology of 
the patient classification system in use since the start of the LTCH 
PPS, we use the acronym ``MS-LTC-DRG'' to specify the proposed DRG 
patient classification system to be used by the LTCH PPS in FY 2008. 
Although the proposed adoption of the MS-LTC-DRGs would result in some 
modifications of existing procedures for assigning weights (for 
example, in cases of zero volume and/or nonmonotonicity, as discussed 
below), the basic methodology for developing the proposed FY 2008 MS-
LTC-DRG relative weights presented in the FY 2008 IPPS proposed rule 
continued to be determined in accordance with the general methodology 
established in the August 30, 2002 LTCH PPS final rule (67 FR 55989 
through 55991), which is discussed below. Therefore, in the discussion 
below, the term ``LTC-DRGs'' will be used in descriptions of the basic 
methodology established at the beginning of the LTCH PPS that will 
remain unchanged if we adopt the proposed MS-LTC-DRGs. The use of the 
term ``MS-LTC-DRGs'' in the following discussion will indicate a 
discussion of specifics aspects of our proposed adoption of the 
severity-weighted patient classification system for FY 2008 as 
presented in the FY 2008 IPPS proposed rule.)
    Under the LTCH PPS, relative weights for each LTC-DRG are a primary 
element used to account for the variations in cost per discharge and 
resource utilization among the payment groups as described in Sec.  
412.515. To ensure that Medicare patients who are classified to each 
LTC-DRG have access to services and to encourage efficiency, we 
calculate a relative weight for each LTC-DRG that represents the 
resources needed by an average inpatient LTCH case in that LTC-DRG. For 
example, cases in a LTC-DRG with a relative weight of 2 will, on 
average, cost twice as much as cases in a LTC-DRG with a weight of 1.
    As we discussed in the FY 2007 IPPS final rule, the LTC-DRG 
relative weights effective under the LTCH PPS for FY 2007 were 
calculated using the March 2006 update of FY 2005 MedPAR data and 
Version 24.0 of the GROUPER software (71 FR 47973). We use total days 
and total charges in the calculation of the LTC-DRG relative weights.
    LTCHs often specialize in certain areas, such as ventilator-
dependent patients and rehabilitation or wound care. Some case types 
(DRGs) may be treated, to a large extent, in hospitals that have (from 
a perspective of charges) relatively high (or low) charges. 
Distribution of cases with relatively high (or low) charges in specific 
LTC-DRGs has the potential to inappropriately distort the measure of 
average charges. To account for the fact that cases may not be randomly 
distributed across LTCHs, we use a hospital-specific relative value 
method to calculate relative weights. We believe this method removes 
this hospital-specific source of bias in measuring

[[Page 26878]]

average charges. Specifically, we reduce the impact of the variation in 
charges across providers on any particular LTC-DRG relative weight by 
converting each LTCH's charge for a case to a relative value based on 
that LTCH's average charge. (See the FY 2007 IPPS final rule for 
further information on the application of the hospital-specific 
relative value methodology under the LTCH PPS (71 FR 47974 through 
47975).)
    To account for LTC-DRGs with low volume (that is, with fewer than 
25 LTCH cases), we grouped those low volume LTC-DRGs into 1 of 5 
categories (quintiles) based on average charges, for the purposes of 
determining relative weights. For FY 2007 based on the FY 2005 MedPAR 
data, we identified 180 LTC-DRGs that contained between 1 and 24 cases. 
This list of low volume LTC-DRGs was then divided into 1 of the 5 low 
volume quintiles, each containing 36 LTC-DRGs (180/5 = 36). Each of the 
low volume LTC-DRGs grouped to a specific quintile received the same 
relative weight and ALOS using the formula applied to the regular LTC-
DRGs (25 or more cases). (See the FY 2007 IPPS final rule for further 
explanation of the development and composition of each of the 5 low 
volume quintiles for FY 2007 and their composition (71 FR 47975 through 
47978).)
    After grouping the cases in the appropriate LTC-DRG, we calculated 
the relative weights by first removing statistical outliers and cases 
with a LOS of 7 days or less. Next, we adjusted the number of cases 
remaining in each LTC-DRG for the effect of SSO cases under Sec.  
412.529. The short-stay adjusted discharges and corresponding charges 
were used to calculate ``relative adjusted weights'' in each LTC-DRG 
using the hospital-specific relative value method. We also adjusted the 
LTC-DRG relative weights to account for nonmonotonically increasing 
relative weights. That is, we made an adjustment if cases classified to 
the LTC-DRG ``with CCs'' of a ``with CC''/``without CC'' pair had a 
lower average charge than the corresponding LTC-DRG ``without CCs'' by 
assigning the same weight to both LTC-DRGs in the ``with CC''/``without 
CC'' pair. (See the FY 2007 IPPS final rule for further details on the 
steps for calculating the LTC-DRG relative weights (71 FR 47978 through 
47984).)
    In addition, of the 538 LTC-DRGs in the LTCH PPS for FY 2007, based 
on LTCH cases in the FY 2005 MedPAR files, we identified 183 LTC-DRGs 
for which there were no LTCH cases in the database. That is, no 
patients who would have been classified to those DRGs were treated in 
LTCHs during FY 2005, and therefore, no charge data were reported for 
those DRGs. Thus, in the process of determining the relative weights of 
LTC-DRGs, we were unable to determine weights for these 183 LTC-DRGs 
using the method described in this section of the preamble. However, 
since patients with a number of the diagnoses under these LTC-DRGs may 
be treated at LTCHs beginning in FY 2007, we assigned relative weights 
to each of the 183 ``no volume'' LTC-DRGs based on clinical similarity 
and relative costliness to one of the remaining 355 (538-183 = 355) 
LTC-DRGs for which we were able to determine relative weights, based on 
the FY 2005 claims data. (A list of the current no-volume LTC-DRGs and 
further explanation of their FY 2007 relative weight assignment can be 
found in the FY 2007 IPPS final rule (71 FR 47980 through 47984).)
    Furthermore, for FY 2007, we established LTC-DRG relative weights 
of 0.0000 for heart, kidney, liver/intestinal, lung, simultaneous 
pancreas/kidney, and pancreas transplants (LTC-DRGs 103, 302, 480, 495, 
512 and 513, respectively) because presently no LTCH meets the 
applicable requirements to perform Medicare covered transplant 
procedures. However, if in the future, a LTCH seeks to meet such 
requirements as a Medicare-approved transplant center to perform 
Medicare-covered transplant procedures, we believe that the application 
and approval procedure would allow sufficient time for us to propose 
appropriate weights for the LTC-DRGs affected. At the present time, we 
included these 6 transplant LTC-DRGs in the GROUPER software program 
for administrative purposes. As the LTCH PPS uses the same GROUPER 
software program for LTCHs as is used under the IPPS, removing these 
DRGs would be administratively burdensome.
    As we noted previously in this section, there were no new ICD-9-CM 
code requests for an April 1, 2007 update. Therefore, Version 24.0 of 
the DRG GROUPER software established in the FY 2007 IPPS final rule 
will continue to be effective until October 1, 2007. Moreover, the LTC-
DRGs and relative weights for FY 2007 established in Table 11 of that 
same IPPS final rule (71 FR 48321 through 48331) will continue to be 
effective until October 1, 2007, (just as they would have been even if 
there had been any new ICD-9-CM code requests for an April 1, 2007 
update). Accordingly, Table 3 in the Addendum to this final rule lists 
the LTC-DRGs and their respective relative weights, geometric ALOS, and 
five-sixths of the geometric ALOS that we will continue to use for the 
period of July 1, 2007 through September 30, 2007. (This table is the 
same as Table 11 of the Addendum to the FY 2007 IPPS final rule.) The 
next update to the ICD-9-CM coding system will be presented in the FY 
2008 IPPS proposed rule (since there will be no April 1, 2007 updates 
to the ICD-9-CM coding system).
    In addition, the proposed DRGs and GROUPER for FY 2008 that would 
be effective October 1, 2007, will be presented in the IPPS FY 2008 
proposed rule. Below we provide a summary of the development of the 
proposed LTC-DRG relative weights for FY 2008 presented in that same 
proposed rule. To calculate the proposed MS-LTC-DRG relative weights 
for FY 2008 in the FY 2008 IPPS proposed rule, we obtained total 
Medicare allowable charges from FY 2006 Medicare LTCH bill data from 
the December 2006 update of the MedPAR file, which are the best 
available data at this time, and we used the proposed Version 25.0 of 
the CMS GROUPER used under the IPPS (as discussed in section II.B. of 
the preamble of that proposed rule) to classify cases. To calculate the 
final MS-LTC-DRG relative weights for FY 2008, we proposed that, if 
more recent data are available (for example, data from the March 2007 
update of the MedPAR file), we would use those data and the finalized 
Version 25.0 of the CMS GROUPER used under the IPPS. We continued to 
use total days and total charges in the calculation of the proposed MS-
LTC-DRG relative weights. We also continued to use