Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2008 Rates, 47568-48175 [07-3820]

Agencies

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

[Federal Register Volume 72, Number 162 (Wednesday, August 22, 2007)]
[Rules and Regulations]
[Pages 47568-48175]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 07-3820]



[[Page 47129]]

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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 411, 412, 413, and 489



Medicare Program; Changes to the Hospital Inpatient Prospective Payment 
Systems and Fiscal Year 2008 Rates; Final Rule

Federal Register / Vol. 72, No. 162 / Wednesday, August 22, 2007 / 
Rules and Regulations

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 411, 412, 413, and 489

[CMS-1533-FC]
RIN 0938-AO70


Medicare Program; Changes to the Hospital Inpatient Prospective 
Payment Systems and Fiscal Year 2008 Rates

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

ACTION: Final rule with comment period.

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SUMMARY: We are revising 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 final rule with comment period, we describe the 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 the rate of increase limits for certain 
hospitals and hospital units excluded from the IPPS that are paid 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 changes are applicable to discharges occurring on or 
after October 1, 2007.
    In this final rule with comment period, as part of our efforts 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 adopting a Medicare Severity DRG (MS DRG) classification system for 
the IPPS. We are also adopting the structure of the MS-DRG system for 
the LTCH prospective payment system (referred to as MS-LTC-DRGs) for FY 
2008.
    Among the other policy decisions and changes that we are making, we 
are making changes related to: limited revisions of the 
reclassification of cases to MS-DRGs, the relative weights for the MS-
LTC-DRGs; applications for new technologies and medical services add-on 
payments; the wage data, including the occupational mix data, used to 
compute the FY 2008 wage indices; payments to hospitals for the 
indirect costs of graduate medical education; submission of hospital 
quality data; provisions governing the application of sanctions 
relating to the Emergency Medical Treatment and Labor Act of 1986 
(EMTALA); provisions governing the disclosure of physician ownership in 
hospitals and patient safety measures; and provisions relating to 
services furnished to beneficiaries in custody of penal authorities.

DATES: Effective Date: This final rule with comment period is effective 
October 1, 2007 and applies to discharges occurring on or after that 
date.
    Comment Date: We will consider public comments only on the 
provisions of section V., Changes to the IPPS for Capital Related 
Costs, of the preamble of this final rule with comment period, if we 
receive them at one of the addresses provided below, no later than 5 
p.m. on November 20, 2007.

ADDRESSES: In commenting on the provisions of section V. of the 
preamble of this final rule with comment period, please refer to file 
code CMS-1533-FC.
    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-FC, 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-FC, Mail Stop C4-26-05, 7500 Security Boulevard, 
Baltimore, MD 21244-1850.
    4. By hand or courier. If you prefer, you may deliver (by hand or 
courier) your written comments (one original and two copies) before the 
close of the comment period to one of the following addresses. If you 
intend to deliver your comments to the Baltimore address, please call 
telephone number (410) 786-7195 in advance to schedule your arrival 
with one of our staff members. Room 445-G, Hubert H. Humphrey Building, 
200 Independence Avenue, SW., Washington, DC 20201, or 7500 Security 
Boulevard, Baltimore, MD 21244-1850.
    (Because access to the interior of the Hubert H. Humphrey Building 
is not readily available to persons without Federal Government 
identification, commenters are encouraged to leave their comments in 
the CMS drop slots located in the main lobby of the building. A stamp-
in clock is available for persons wishing to retain proof of filing by 
stamping in and retaining an extra copy of the comments being filed.)
    Comments mailed to the addresses indicated as appropriately for 
hand or courier delivery may be delayed and received after the comment 
period.
    Submitting Comments: You can assist us by referencing the file code 
CMS-1533-FC and the specific ``issue identifier'' that precedes section 
V., Changes to the IPPS for Capital Related Costs.
    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, 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 4:00 p.m. To 
schedule an appointment to view public comments, phone 1-800-743-3951.

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.

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    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.
    Marilyn Dahl, (410) 786-8665, Patient Safety Measures Issues.
    Fred Grabau, (410) 786-0206, Services to Beneficiaries in Custody 
of Penal Authorities Issues.

SUPPLEMENTARY INFORMATION:

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

ACGME--Accreditation Council for Graduate Medical Education
AMGA--American Medical Group Association
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
CoP--[Hospital] Condition of participation
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
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
GMEC--Graduate Medical Education Committee
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)
PMSAs--Primary metropolitan statistical areas
PPI--Producer price index
PPS--Prospective payment system
PRA--Per resident amount
PRM--Provider Reimbursement Manual
ProPAC--Prospective Payment Assessment Commission
PRRB--Provider Reimbursement Review Board
PSF--Provider Specific File
PS&R--Provider Statistical and Reimbursement (System)
QIG--Quality Improvement Group, CMS
QIO--Quality Improvement Organization
RCE--Reasonable compensation equivalent
RHC--Rural health clinic
RHQDAPU--Reporting hospital quality data for annual payment update
RNHCI--Religious nonmedical health care institution

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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, Title I of the Tax Relief and Health Care Act of 
2006
    D. Provisions of the Pandemic and All-Hazards Preparedness Act
    E. Issuance of a Notice of Proposed Rulemaking
    1. 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 Rates 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
    F. Public Comments Received on the Proposed Rule
II. 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. Other Issues for Consideration
    2. Development of the 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. Medicare Severity DRGs (MS-DRGs)
    3. Dividing MS DRGs on the Basis of the CCs and MCCs
    4. Conclusion
    5. Impact of the MS-DRGs
    6. Changes to Case-Mix Index (CMI) from the MS-DRGs
    7. Effect of the MS-DRGs on the Outlier Threshold
    8. Effect of the 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 Requirement
    3. Public Input
    4. Collaborative Effort
    5. Criteria for Selection of the Hospital-Acquired Conditions
    6. Selection of Hospital-Acquired Conditions
    7. Other Issues
    G. Changes to Specific DRG Classifications
    1. Pre-MDCs: Intestinal Transplantation
    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)--Cochlear 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
    d. Revision to Part 1, Pancreas Transplant Edit A
    7. Surgical Hierarchies
    8. CC Exclusions List
    a. Background
    b. 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 (MS-DRGs 981 through 
983) or CMS DRG 477 (MS-DRGs 987 through 989) to MDCs
    b. Reassignment of Procedures Among CMS DRGs 468, 476, and 477 
(MS-DRGs 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 DRG Issues Addressed in the FY 2008 IPPS Proposed Rule
    a. Seizures and Headaches
    b. Devices That are Replaced Without Cost or Where Credit for a 
Replaced Device is Furnished to the Hospital
    12. Other MS-DRG Issues Raised in the Public Comments on the 
Proposed Rule
    a. Heart Transplants or Implants of Heart Assist System and 
Liver Transplants (Pre-MDC)
    b. Gliadel[reg] Wafer (MDC 1)
    c. Myasthenia Gravis and Acute and Chronic Inflammatory 
Demyelinating Neuropathies (AIDP-CIDP) (MDC 1)
    d. Peripheral and Spinal Neurostimulators (MDC 1 and MDC 8)
    e. Stroke and Administration of Tissue Plasminogen Activator 
(tPA) (MDC 1)
    f. Gliasite[reg] Radiation Therapy System (RTS) (MDC 1)
    g. Noninvasive Ventilation (MDC 4)
    h. Heart Assist Devices (MDC 5)
    i. Automatic Implantable Cardioverter-Defibrillators (ACID) Lead 
and Generator Procedures (MDC 5)
    j. Artificial Heart (MDC 5)
    k. Vascular Procedures (MDC 5)
    l. Coronary Artery Stents (MDC 5)
    m. Endovascular Repair of Aortic and Thoracic Aneurysms (MDC 5)
    n. O.R. Procedures for Obesity (MDC 10)
    o. Penile Restorative Procedures (MDC 12)
    p. Female Reproductive System Reconstruction Procedures (MDC 13)
    q. Urological and Gynecological Disorders with Grafts or 
Prosthesis (MDCs 13 and 14)
    r. High Dose Interleukin-2 (HD-IL-2) (MDC 17)
    s. Computer Assisted Surgery
    13. Changes to MS-DRG Logic As a Result of Public Comments
    H. Recalibration of DRG Weights
    I. MS-LTC-DRG Reclassifications and Relative Weights for LTCHs 
for FY 2008
    1. Background
    2. Changes in the LTC-DRG Classifications
    a. Background
    b. Patient Classifications into DRGs
    3. Development of the FY 2008 MS-LTC-DRG Relative Weights
    a. General Overview of Development of the MS-LTC-DRG Relative 
Weights
    b. Data
    c. Hospital-Specific Relative Value Methodology
    d. Treatment of Severity Levels in Developing Relative Weights
    e. Low-Volume MS-LTC-DRGs
    4. Steps for Determining the FY 2008 MS-LTC-DRG Relative Weights

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    J. 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. Changes to the Hospital Wage Index
    A. Background
    B. Core-Based Statistical Areas for the Hospital Wage Index
    C. Occupational Mix Adjustment to the FY 2008 Wage Index
    1. Development of Data for the FY 2008 Occupational Mix 
Adjustment
    2. Timeline for the Collection, Review, and Correction of the 
Occupational Mix Data
    3. Calculation of the Occupational Mix Adjustment for FY 2008
    4. 2007-2008 Occupational Mix Survey for the FY 2010 Wage Index
    D. Worksheet S-3 Wage Data for the FY 2008 Wage Index
    1. Included Categories of Costs
    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 FY 2008 Unadjusted Wage Index
    1. Method for Computing the 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 Occupational Mix 
Adjustment and the FY 2008 Occupational Mix Adjusted Wage Index
    I. Revisions to the 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. 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 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 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 Program Requirements for FY 2009 and 
Subsequent Years
    a. New Quality Measures for FY 2009 and Subsequent Years
    b. Data Submission
    4. Retiring or Replacing 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. Procedures for Participating in the RHQDAPU Program for FY 
2009
    c. Chart Validation Requirements
    d. Data Validation and Attestation
    e. Public Display
    f. Reconsideration and Appeal Procedures
    g. 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. 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. Regulation Changes
    E. Payments to Disproportionate Share Hospitals (DSHs): 
Technical Correction
    1. Background
    2. Technical Correction: Inclusion of Medicare Advantage Days in 
the Medicare Fraction of the Medicare DSH Calculation
    F. 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. Revisions to the EMTALA Regulations
    G. Disclosure of Physician Ownership in Hospitals and Patient 
Safety Measures
    1. Disclosure of Physician Ownership in Hospitals
    2. Patient Safety Measures
    H. Rural Community Hospital Demonstration Program
V. Changes to the IPPS for Capital-Related Costs
    A. Background
    B. Policy Change
VI. 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 LTCH Cost-to-Charge Ratios (CCRs) under the LTCH 
PPS
    F. Report of Adjustment (Exceptions) Payments
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. Waiver of Notice of Proposed Rulemaking

Regulation Text

Addendum--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. Changes to the Prospective Payment Rates for Hospital Inpatient 
Operating Costs for FY 2008
    A. Calculation of the Adjusted Standardized Amount
    1. Standardization of Base-Year Costs or Target Amounts
    2. Computing the Average Standardized Amount
    3. Updating the Average Standardized Amount
    4. Other Adjustments to the Average Standardized Amount
    a. Recalibration of DRG Weights and Updated Wage Index Budget 
Neutrality Adjustment
    b. Reclassified Hospitals--Budget Neutrality Adjustment
    c. Imputed Rural Floor--Budget Neutrality Adjustment
    d. Case-Mix Budget Neutrality Adjustment
    e. Outliers
    f. Rural Community Hospital Demonstration Program Adjustment 
(Section 410A of Pub. L. 108-173)
    5. FY 2008 Standardized Amount
    B. Adjustments for Area Wage Levels and Cost-of-Living
    1. Adjustment for Area Wage Levels
    2. Adjustment for Cost-of-Living in Alaska and Hawaii
    C. DRG Relative Weights
    D. Calculation of the Prospective Payment Rates
    1. Federal Rate
    2. Hospital Specific Rate (Applicable Only to SCHs and MDHs)
    a. Calculation of Hospital Specific Rate

[[Page 47134]]

    b. Updating the FY 1982, FY 1987, FY 1996, and FY 2002 Hospital 
Specific Rates for FY 2008
    3. General Formula for Calculation of Prospective Payment Rates 
for Hospitals Located in Puerto Rico Beginning On or After October 
1, 2007 and Before October 1, 200
    a. Puerto Rico Rate
    b. National Rate
III. Changes to Payment Rates for Acute Care Hospital Inpatient 
Capital-Related Costs for FY 2008
    A. Determination of Federal Hospital Inpatient Capital Related 
Prospective Payment Rate Update
    1. Projected Capital Standard Federal Rate Update
    a. Description of the Update Framework
    b. MedPAC Update Recommendation
    2. Outlier Payment Adjustment Factor
    3. Budget Neutrality Adjustment Factor for Changes in DRG 
Classifications and Weights and the GAF
    4. Exceptions Payment Adjustment Factor
    5. Capital Standard Federal Rate for FY 2008
    6. Special Capital Rate for Puerto Rico Hospitals
    B. Calculation of the Inpatient Capital-Related Prospective 
Payments for FY 2008
    C. Capital Input Price Index
    1. Background
    2. Forecast of the CIPI for FY 2008
IV. Changes to Payment Rates for Excluded Hospitals and Hospital 
Units: Rate-of-Increase Percentages
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 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 Exclusions List
    Table 6H--Deletions from the CC Exclusions List
    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 7A--Medicare Prospective Payment System Selected 
Percentile Lengths of Stay: FY 2006 MedPAR Update--March 2007 
GROUPER V24.0 CMS DRGs
    Table 7B--Medicare Prospective Payment System Selected 
Percentile Lengths of Stay: FY 2006 MedPAR Update--March 2007 
GROUPER V25.0 CMS DRGs
    Table 8A--Statewide Average Operating Cost-to-Charge Ratios--
July 2007
    Table 8B--Statewide Average Capital Cost-to-Charge Ratios--July 
2007
    Table 8C--Statewide Average Total Cost-to-Charge Ratios for 
LTCHs--July 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 Medicare Severity Diagnosis-Related 
Groups (MS-DRGs)--July 2007
    Table 11--FY 2008 MS-LTC-DRGs, Relative Weights, Geometric 
Average Length of Stay, Short-Stay Outlier Threshold, and IPPS 
Comparable Threshold

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 Policy Changes Under the IPPS for 
Operating Costs
    A. Basis and Methodology of Estimates
    B. Analysis of Table I
    C. Effects of the Changes to the DRG Reclassifications and 
Relative Cost-Based Weights (Column 2)
    D. Effects of Wage Index Changes (Column 3)
    E. Combined Effects of 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 Application of the Imputed Floor (Column 8)
    J. Effects of the Expiration of Section 508 of Pub. L. 108-173 
(Column 9)
    K. Effects of the Wage Index Adjustment for Out-Migration 
(Column 10)
    L. Effects of All Changes with CMI Adjustment Prior to Estimated 
Growth (Column 11)
    M. Effects of All Changes with CMI Adjustment and Assumed 
Estimated (Column 12)
    N. Effects of Policy on Payment Adjustments for Low-Volume 
Hospitals
    O. Impact Analysis of Table II
VII. Effects of Other Policy Changes
    A. Effects of Policy on Hospital-Acquired Conditions, Including 
Infections
    B. Effects of MS-LTC-DRG Reclassifications and Relative Weights 
for LTCHs
    C. Effects of New Technology Add-On Payments
    D. Effects of Requirements for Hospital Reporting of Quality 
Data for Annual Hospital Payment Update
    E. Effects of Policy on Cancellation of Classification of 
Acquired Rural Status and Rural Referral Centers
    F. Effects of Policy Change on Payment for IME and Direct GME
    G. Effects of Policy Changes Relating to Emergency Services 
under EMTALA During an Emergency Period
    H. Effects of Policy on Disclosure of Physician Ownership in 
Hospitals and Patient Safety Measures
    I. Effects of Implementation of the Rural Community Hospital 
Demonstration Program
    J. Effects of Policy Changes on Services Furnished to 
Beneficiaries in Custody of Penal Authorities
VIII. Impact of 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 Final Recommendation
IV. MedPAC Recommendation for Assessing Payment Adequacy and 
Updating Payments in Traditional Medicare

[[Page 47135]]

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 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

[[Page 47136]]

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'' under Sec.  412.23(e)(4) 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 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. The final rule 
implements 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 final rule with comment period, 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, Title I of the Tax Relief and Health Care Act of 2006

    In this final rule with comment period, 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 infectious 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 final rule with comment period, we are making changes to 
the EMTALA regulations to conform them to the sanction waiver 
provisions of section 302(b) of Pub. L. 109-417.

E. Issuance of a Notice of Proposed Rulemaking

    On May 3, 2007, we issued in the Federal Register (72 FR 24680) a 
notice of proposed rulemaking that set forth proposed changes to the 
Medicare IPPS for operating costs and for capital-related costs in FY 
2008. We also set forth proposed changes relating to payments for GME 
and IME costs and payments to certain hospitals and units that continue 
to be excluded from the IPPS and paid on a reasonable cost basis that 
would be effective for discharges occurring on or after October 1, 
2007. Below is a summary of the major changes that we proposed to make:
1. DRG Reclassifications and Recalibrations of Relative Weights
    We proposed to adopt a Medicare Severity DRG (MS-DRG) 
classification system for the IPPS to better recognize severity of 
illness. We presented the methodology we used to establish the MS-DRGs 
and discussed our efforts to

[[Page 47137]]

further analyze alternative severity-adjusted DRG systems and to refine 
the relative weight calculations for DRGs.
    We presented a proposed listing and discussion of hospital-acquired 
conditions, including infections, which were evaluated and proposed to 
be subject to the statutorily required quality adjustment in DRG 
payments for FY 2008.
    We proposed 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 presented 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 (including public input, as 
directed by Pub. L. 108-173, obtained in a town hall meeting).
    We proposed 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 proposed 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 the proposed rule, we proposed 
revisions to the wage index and the annual update of the wage data. 
Specific issues addressed included 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 
rural floor for the wage index and application of budget neutrality for 
the rural floor.
     Proposed changes in the determination of 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 were in effect for the 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 the proposed rule, we discussed a 
number of the 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 reports on the ``listening sessions'' held.
     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 the waiver of sanctions for 
requirements for emergency services for hospitals under EMTALA during 
national emergencies.
     Proposed policy changes relating to the 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 the proposed rule, we discussed 
the payment policy requirements for capital-related costs and capital 
payments to hospitals and proposed 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 the proposed rule, we discussed 
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 the proposed rule, we clarified 
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 the 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 
established the proposed threshold amounts for outlier cases. In 
addition, we addressed 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 the 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 the 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 recommendations 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. We 
addressed these recommendations in Appendix B of the proposed rule. For 
further information relating specifically to the MedPAC March 2007 
reports or to obtain a copy of the reports, contact

[[Page 47138]]

MedPAC at (202) 220-3700 or visit MedPAC's Web site at: www.medpac.gov.

F. Public Comments Received on the Proposed Rule

    We received approximately 900 timely pieces of correspondence in 
response to the FY 2008 IPPS proposed rule issued in the Federal 
Register on May 3, 2007. These public comments addressed issues on 
multiple topics in the proposed rule. We present a summary of the 
public comments and our responses to them in the applicable subject 
matter sections of this final rule with comment period.

II. Changes to DRG Classifications and Relative Weights

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 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 
were intermediate steps towards comprehensive reform of both the 
relative weights and the DRG system that is occurring as we undertook 
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 to ensure 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]
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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.