Medicare Program; Prospective Payment System for Long-Term Care Hospitals RY 2009: Proposed Annual Payment Rate Updates, Policy Changes, and Clarifications, 5342-5419 [08-297]

Agencies

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

[Federal Register Volume 73, Number 19 (Tuesday, January 29, 2008)]
[Proposed Rules]
[Pages 5342-5419]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 08-297]



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Part III





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Part 412



Medicare Program; Prospective Payment System for Long-Term Care 
Hospitals RY 2009: Proposed Annual Payment Rate Updates, Policy 
Changes, and Clarifications; Proposed Rule

Federal Register / Vol. 73, No. 19 / Tuesday, January 29, 2008 / 
Proposed Rules

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 412

[CMS-1393-P]
RIN 0938-AO94


Medicare Program; Prospective Payment System for Long-Term Care 
Hospitals RY 2009: Proposed Annual Payment Rate Updates, Policy 
Changes, and Clarifications

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule would update the annual payment rates for 
the Medicare prospective payment system (PPS) for inpatient hospital 
services provided by long-term care hospitals (LTCHs). In addition, we 
are proposing to consolidate the annual July 1 update for payment rates 
and the October 1 update for Medicare severity long-term care diagnosis 
related group (MS-LTC-DRG) weights to a single fiscal year (FY) update.
    In this proposed rule, we are also clarifying various policy 
issues.
    This proposed rule would also describe our evaluation of the 
possible one-time adjustment to the Federal payment rate.

DATES: To be assured consideration, comments must be received at one of 
the addresses provided below, no later than 5 p.m. on March 24, 2008.

ADDRESSES: In commenting, please refer to file code CMS-1393-P. Because 
of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    You may submit comments in one of four ways (please choose only one 
of the ways listed):
    1. Electronically. You may submit electronic comments on specific 
issues in this regulation to https://www.regulations.gov/. Follow the 
instructions for ``Comment or Submission'' and enter the filecode to 
find the document accepting comment.
    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-1393-P, P.O. Box 8013, Baltimore, MD 
21244-8013.
    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-1393-P, Mail Stop C4-26-05, 7500 
Security Boulevard, Baltimore, MD 21244-1850.
    4. By hand or courier. If you prefer, you may deliver (by hand or 
courier) your written comments (one original and two copies) before the 
close of the comment period to one of the following addresses. If you 
intend to deliver your comments to the Baltimore address, please call 
telephone number (410) 786-7195 in advance to schedule your arrival 
with one of our staff members.
    Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue, 
SW., Washington, DC 20201; or 7500 Security Boulevard, Baltimore, MD 
21244-1850.
    (Because access to the interior of the HHH 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 a proof of filing by stamping 
in and retaining an extra copy of the comments being filed.)
    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and received after the comment 
period.
    Submission of comments on paperwork requirements. You may submit 
comments on this document's paperwork requirements by mailing your 
comments to the addresses provided at the end of the ``Collection of 
Information Requirements'' section in this document.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT:
    Tzvi Hefter, (410) 786-4487 (General information).
    Judy Richter, (410) 786-2590 (General information, payment 
adjustments for special cases, onsite discharges and readmissions, 
interrupted stays, co-located providers, and short-stay outliers).
    Michele Hudson, (410) 786-5490 (Calculation of the payment rates, 
MS-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).
    Linda McKenna, (410) 786-4537 (Payment adjustments and interrupted 
stay).
    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 This Proposed Rule
III. Medicare Severity Long-Term Care Diagnosis-Related Group (LTC-
DRG) Classifications and Relative Weights
    A. Background
    B. Patient Classifications into MS-LTC-DRGs
    C. Organization of MS-LTC-DRGs
    D. Method for Updating the MS-LTC-DRG Classifications and 
Relative Weights
    1. Background
    2. FY 2008 MS-LTC-DRG Relative Weights
IV. Proposed Changes to the LTCH PPS Payment Rates and other 
Proposed Changes for the 2009 LTCH PPS Rate Year
    A. Overview of the Development of the Payment Rates
    B. Proposed Consolidation of the Annual Updates for Payment and 
MS-LTC-DRG Weights to One Annual Update
    C. LTCH PPS Market Basket
    1. Overview of the RPL Market Basket
    2. Market Basket Estimate for the 2009 LTCH PPS Rate Year
    D. Discussion of a One-time Prospective Adjustment to the 
Standard Federal Rate
    E. Proposed Standard Federal Rate for the 2009 LTCH PPS Rate 
Year
    1. Background
    2. Proposed Standard Federal Rate for the 2009 LTCH PPS Rate 
Year
    F. Calculation of Proposed LTCH Prospective Payments for the 
2009 LTCH PPS Rate Year
    1. Proposed Adjustment for Area Wage Levels
    a. Background
    b. Proposed Updates to the Geographic Classifications/Labor 
Market Area Definitions
    (1) Background
    (2) Proposed Update to the CBSA-based Labor Market Area 
Definitions
    (3) New England Deemed Counties
    (4) Proposed Codification of the Definitions of urban and rural 
under 42 CFR Part 412, subpart O
    c. Proposed Labor-Related Share
    d. Proposed Wage Index Data
    2. Proposed Adjustment for Cost-of-Living in Alaska and Hawaii

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    3. Proposed Adjustment for High-Cost Outliers (HCOs)
    a. Background
    b. Cost-to-Charge Ratios (CCRs)
    c. Establishment of the Fixed-Loss Amount
    d. Application of Outlier Policy to Short-Stay Outlier (SSO) 
Cases
    4. Other Proposed Payment Adjustments
    5. Technical Correction to the Budget Neutrality Requirement at 
Sec.  412.523(d)(2)
    G. Proposed Conforming Changes
V. Computing the Proposed Adjusted Federal Prospective Payments for 
the 2009 LTCH PPS Rate Year
VI. Monitoring
VII. Method of Payment
VIII. RTIs Research
IX. Collection of Information Requirements
X. Regulatory Impact Analysis
    A. Introduction
    1. Executive Order 12866
    2. Regulatory Flexibility Act (RFA)
    3. Impact on Rural Hospitals
    4. Unfunded Mandates
    5. Federalism
    6. Alternatives Considered
    B. Anticipated Effects of Proposed Payment Rate Changes
    1. Budgetary Impact
    2. Impact on Providers
    3. Calculation of Prospective Payments
    4. Results
    a. Location
    b. Participation Date
    c. Ownership Control
    d. Census Region
    e. Bed size
    5. Effects on the Medicare Program
    6. Effects on Medicare Beneficiaries
    C. Accounting Statement
Regulations Text
Addendum

    Table 1: Proposed Long-Term Care Hospital Wage Index for Urban 
Areas for Discharges Occurring from July 1, 2008 through September 
30, 2009.
    Table 2: Proposed Long-Term Care Hospital Wage Index for Rural 
Areas for Discharges Occurring from July 1, 2008 through September 
30, 2009.
    Table 3: FY 2008 MS-LTC-DRG Relative Weights, Geometric Average 
Length of Stay, Short-Stay Outlier Threshold and IPPS-Comparable 
Threshold (for Short-Stay Outlier Cases).

Acronyms

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

3M 3M Health Information System
AHA American Hospital Association
AHIMA American Health Information Management Association
ALOS Average length of stay
ALTHA Acute Long Term Hospital Association
ASCA Administrative Simplification Compliance Act of 2002 (Pub. L. 
107-105)
BBA Balanced Budget Act of 1997 (Pub. L. 105-33)
BBRA Medicare, Medicaid, and SCHIP [State Children's Health 
Insurance Program] Balanced Budget Refinement Act of 1999 (Pub. L. 
106-113)
BIPA Medicare, Medicaid, and SCHIP [State Children's Health 
Insurance Program] Benefits Improvement and Protection Act of 2000 
(Pub. L. 106-554)
BLS Bureau of Labor Statistics
BN Budget neutrality
CBSA Core-based statistical area
CC Complications and comorbidities
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
COP Condition of participation
CPI Consumer Price Index
CY Calendar year
DSH Disproportionate share of low-income patients
DRGs Diagnosis-related groups
ECI Employment Cost Index
FI Fiscal intermediary
FY Fiscal year
FFY Federal fiscal year
HCO High-cost outlier
HCRIS Hospital cost report information system
HHA Home health agency
HHS (Department of) Health and Human Services
HIPAA Health Insurance Portability and Accountability Act (Pub. L. 
104-191)
HIPC Health Information Policy Council
HwHs Hospitals within hospitals
ICD-9-CM International Classification of Diseases, Ninth Revision, 
Clinical Modification (codes)
IME Indirect medical education
I-O Input-Output
IPF Inpatient psychiatric facility
IPPS [Acute Care Hospital] Inpatient Prospective Payment System
IRF Inpatient rehabilitation facility
LOS Length of stay
LTC-DRG Long-term care diagnosis-related group
LTCH Long-term care hospital
MAC Medicare Administrative Contractor
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)
MMSEA Medicare, Medicaid, and SCHIP Extension Act of 2007 (Pub. L. 
110-173)
MSA Metropolitan statistical area
MS-DRG Medicare severity diagnosis-related group
MS-LTC-DRG Medicare severity long-term care diagnosis-related group
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)
PIP Periodic interim payment
PLI Professional liability insurance
PMSA Primary metropolitan statistical area
PPI Producer Price Indexes
PPS Prospective payment system
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''

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system with a diagnosis-related group (DRG) based patient 
classification system that reflects the differences in patient 
resources and costs in LTCHs.
    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 MS-long-term care diagnosis-related 
groups (MS-LTC-DRGs) based on clinical characteristics and expected 
resource needs. Payments are calculated for each MS-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 are based on a LTCH PPS rate 
year. While the LTCH payment rate update is effective July 1, the 
annual update of the DRG classifications and relative weights for LTCHs 
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 existing payment formula 
and adding a fourth component to that payment formula. We also 
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).
    The Medicare, Medicaid and SCHIP Extension Act of 2007 (MMSEA) 
(Pub.L. 110-173) was enacted on December 29, 2007 and has various 
effects on the LTCH PPS. The new law's provisions also have varying 
time frames of applicability. First, we note that certain provisions of 
the MMSEA provided that Secretary shall not apply, for cost reporting 
periods beginning on or after the date of the enactment of the Act 
(December 29, 2007) for a 3-year period: the extension of payment 
adjustments at Sec.  412.534 to ``grandfathered LTCHs'' (a long term 
care hospital identified by the amendment made by section 4417(a) of 
Pub. L. 105-33); and the payment adjustment at Sec.  412.536 to 
``freestanding'' LTCHs. In addition, the new law provides that the 
Secretary shall not apply, for the 3-year period beginning on the date 
of enactment of the Act the revision to the SSO policy at Sec.  
412.529(c)(3)(i) that was finalized in 72 FR 26904 and 26992 and the 
one-time adjustment to the payment rates provided for in Sec.  
412.523(d)(3). The statute also provides that the base rate for RY 2008 
be the same as the base rate for RY 2007 (the revised base rate, 
however, does not apply to discharges occurring on or after July 1, 
2007 and before April 1, 2008); for a 3-year moratorium (with specified 
exceptions) on the establishment of new LTCHs, LTCH satellites, and on 
the increase in the number of LTCH beds. The new law also revises in 
the threshold percentages for certain co-located LTCHs and LTCH 
satellites governed under Sec.  412.534. Finally, the Act provides for 
an expanded review of medical necessity for admission and continued 
stay at LTCHs. In this proposed rule we are proposing to establish the 
applicable Federal rates for RY 2009 consistent with section 1886(m)(2) 
of the Act as amended by MMSEA. We are also proposing to amend our 
regulations at Sec.  412.523(d)(3) to change the methodology for the 
one-time budget neutrality adjustment and to comply with section 
114(c)(4) of Pub. L. 110-173. We intend to address all other policy 
revisions necessitated by the statutory changes of the new law in the 
future.

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

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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, 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. 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 1 
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) or (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 Hospital 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 
existing cost reporting forms (68 FR 45464). Therefore, we 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

[[Page 5346]]

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. 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 of 1996 (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 HIPAA regulations, 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 providers, to 
conduct certain electronic healthcare transactions according to the 
applicable transactions and code sets standards.

II. Summary of the Provisions of This Proposed Rule

    In this proposed rule, we propose to revise the LTCH PPS payment 
rate update cycle and make other policy changes and clarifications. The 
following is a summary of the major areas that we are addressing in 
this proposed rule.
    In section III. of this proposed rule, we discuss the LTCH PPS 
patient classification and the relative weights which are 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. In this section, we also summarize the 
severity adjusted MS-LTC-DRGs and the development of the relative 
weights for FY 2008 as established in the FY 2008 IPPS final rule with 
comment period.
    In section IV.B. of this proposed rule, we are proposing to extend 
the rate year cycle for RY 2009 to a 15-month period, from July 1, 2008 
through September 30, 2009. We would continue to have an update to the 
MS-LTC-DRG classifications and weights effective for October 1, 2008. 
We are proposing to have one consolidated annual update to both the 
rates and the classifications and weights beginning October 1, 2009.
    As discussed in section IV.E.2. of this proposed rule, we are 
proposing a 3.5 percent market basket update to the LTCH PPS Federal 
rate for the 2009 LTCH PPS rate year based on the most recent market 
basket estimate for the proposed 15-month 2009 LTCH PPS rate year. Also 
in section IV. of this proposed rule, we discuss the prospective 
payment rate for RY 2009.
    In section IV. D. of this proposed rule, we discuss the possible 
one-time adjustment to the Federal payment rate under Sec.  
412.523(d)(3). Consistent with section 114(c)(4) of Public Law 110-173, 
we are not proposing any adjustment under Sec.  412.523(d)(3). However, 
at this time, we are proposing to make a change to the methodology and 
changes reflecting the requirements of section 114(c)(4) of Public Law 
110-173 to the regulatory text.
    In section VI. of this proposed rule, we discuss the proposed 
updates to the payment rates, including the proposed revisions to the 
wage index, the labor-related share, the cost-of-living adjustment 
(COLA) factors, and the outlier threshold, for the 2009 LTCH PPS rate 
year.
    In section IX. of this proposed rule, we discuss our on-going 
monitoring protocols under the LTCH PPS.
    In section X. of this proposed rule, we present an update of 
Research Triangle Institute's (RTI) analysis relating to the 
development of LTCH patient- and facility-level criteria.
    In section XII. of this proposed rule, we analyze the impact of the 
proposed changes presented in this proposed rule on Medicare 
expenditures, Medicare-participating LTCHs, and Medicare beneficiaries.

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

[If you choose to comment on issues in this section, please include the 
caption ``MS-LTC-DRG CLASSIFICATIONS AND RELATIVE WEIGHTS'' at the 
beginning of your comments.]

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 resources 
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.''
    When the LTCH PPS was implemented for cost reporting periods 
beginning on or after October 1, 2002, we adopted the same DRG patient 
classification system (that is, the CMS DRGs) that was utilized at that 
time under the hospital inpatient prospective payment system (IPPS). As 
a component of the LTCH PPS, we refer to the patient classification 
system as the ``LTC-DRGs.'' As discussed in greater detail below, 
although the patient classification system used under both the LTCH PPS 
and the IPPS are the same, the relative weights are different. The 
established relative weight methodology and data used under the LTCH 
PPS result in LTC-DRG relative weights that reflect ``the different 
resource use of long-term care hospital patients consistent with the 
statute''.
    As part of our efforts to better recognize severity of illness 
among patients, in the FY 2008 IPPS final rule with comment period (72 
FR 47130), the Medicare Severity diagnosis related groups (MS-DRGs) and 
the Medicare Severity long-term care diagnosis related groups (MS-LTC-
DRGs) were adopted for the IPPS and the LTCH PPS, respectively, 
effective October 1, 2007 (FY 2008). For a full description of the 
development and implementation of the MS-DRGs and MS-LTC-DRGs, see the 
FY 2008 IPPS final rule with comment period (72 FR 47141 through 47175 
and 47277 through 47299). (We note that in that same final rule, we 
revised the regulations at Sec.  412.503 to specify that for LTCH 
discharges occurring on or

[[Page 5347]]

after October 1, 2007, when applying the provisions of this subpart for 
policy descriptions and payment calculations, all references to LTC-
DRGs would be considered a reference to MS-LTC-DRGs. For the remainder 
of this section, we present the discussion in terms of the current MS-
LTC-DRG patient classification unless specifically referring to the 
previous LTC-DRG patient classification system (that was in effect 
before October 1, 2007).) We believe the MS-DRGs (and by extension, the 
MS-LTC-DRGs) represent a substantial improvement over the previous CMS 
DRGs in their ability to differentiate cases based on severity of 
illness and resource consumption.
    The MS-DRGs represent an increase in the number of DRGs by 207 
(that is, from 538 to 745) (72 FR 47171). In addition to improving the 
DRG system's recognition of severity of illness, we believe the MS-DRGs 
are responsive to the public comments that were made on the FY 2007 
IPPS proposed rule with respect to how we should undertake further DRG 
reform. The MS-DRGs use the CMS DRGs as the starting point for revising 
the DRG system to better recognize resource complexity and severity of 
illness. We have generally retained all of the refinements and 
improvements that have been made to the base DRGs over the years that 
recognize the significant advancements in medical technology and 
changes to medical practice.
    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 LTCH discharges into distinct 
MS-LTC-DRGs based on clinical characteristics and estimated resource 
needs. As stated above, the MS-LTC-DRGs used as the patient 
classification component of the LTCH PPS correspond to the hospital 
inpatient MS-DRGs in the IPPS. We assign an appropriate weight to the 
MS-LTC-DRGs to account for the difference in resource use by patients 
exhibiting the case complexity and multiple medical problems 
characteristic of LTCHs.
    In a departure from the IPPS, we use low volume MS-LTC-DRGs (less 
than 25 LTCH cases) in determining the MS-LTC-DRG relative 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 MS-LTC-
DRGs (all MS-LTC-DRGs with fewer than 25 LTCH cases), for purposes of 
determining the relative weights, we group low volume MS-LTC-DRGs into 
5 quintiles based on average charge per discharge. (A detailed 
discussion of the application of the Lewin Group ``quintile'' model 
that was used to develop the LTC-DRGs appears in the August 30, 2002 
LTCH PPS final rule (67 FR 55978).) We also account for adjustments to 
payments for short-stay outlier (SSO) cases (that is, cases where the 
covered length of stay (LOS) at the LTCH is less than or equal to five-
sixths of the geometric ALOS for the MS-LTC-DRG), and we make 
adjustments to account for nonmonotonicity, when necessary (as 
described below in this section).

B. Patient Classifications Into MS-LTC-DRGs

    Generally, under the LTCH PPS, a Medicare payment is made at a 
predetermined specific rate for each discharge; that payment varies by 
the MS-LTC-DRG to which a beneficiary's stay is assigned. Cases are 
classified into MS-LTC-DRGs for payment based on the following six data 
elements:
     Principal diagnosis.
     Up to eight additional diagnoses.
     Up to six procedures performed.
     Age.
     Sex.
     Discharge status of the patient.
    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). For additional 
information on the ICD-9-CM Coding System, refer to the FY 2008 IPPS 
final rule with comment period (72 FR 47241 through 47243 and 47277 
through 47281). We also refer readers to the detailed discussion on 
correct coding practices in the August 30, 2002 LTCH PPS final rule (67 
FR 55981 through 55983). Additional coding instructions and examples 
are published in the Coding Clinic for ICD-9-CM.
    Medicare contractors (that is, fiscal intermediaries (FIs), now 
called Medicare Administrative Contractors (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 MS-
LTC-DRG can be made. During this process, the following types of cases 
are selected for further development:
     Cases that are improperly coded. (For example, diagnoses 
are shown that are inappropriate, given the sex of the patient. Code 
68.69, Other and unspecified 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 is classified into the 
appropriate MS-LTC-DRG by the Medicare LTCH GROUPER software. 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 MS-LTC-DRG on the basis of diagnosis and 
procedure codes and other demographic information (age, sex, and 
discharge status). Following the MS-LTC-DRG assignment, the Medicare 
contractor (FI or MAC) determines the prospective payment amount 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 MS-LTC-DRG assignments made by the Medicare contractor 
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 
MS-DRG classification changes and to recalibrate the MS-DRG and MS-LTC-
DRG relative

[[Page 5348]]

weights during CMS' annual update under both the IPPS (Sec.  412.60(e)) 
and the LTCH PPS (Sec.  412.517), respectively. As discussed in greater 
detail in section III.D. 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 (FFY) (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 2008 IPPS final rule with 
comment period (72 FR 47227 through 47278), diagnosis and procedure 
codes for new medical technology have the potential to be created and 
added to existing MS-DRGs (and MS-LTC-DRGs) in the middle of the FFY on 
April 1. New codes would be added to their predecessor MS-DRGs and MS-
LTC-DRGs; no new MS-DRGs would be created. Additionally, this policy 
change will have no effect on the MS-LTC-DRG relative weights (during 
the FY), which will continue to be updated only once a year (October 
1), nor will there be any impact on Medicare payments under the LTCH 
PPS during the FY as 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.

C. Organization of the MS-LTC-DRGs

    The MS-DRGs (used under the IPPS) and the MS-LTC-DRGs (used under 
the LTCH PPS) are based on the CMS DRG structure. As noted above in 
this section, we refer to the DRGs under the LTCH PPS as MS-LTC-DRGs 
although they are structurally identical to the DRGs used under the 
IPPS. The MS-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). 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 affecting 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).
    In developing Version 25.0 of the GROUPER program (the FY 2008 MS-
DRGs), the diagnoses comprising the CC list were completely redefined. 
The revised CC list is primarily comprised of significant acute 
disease, acute exacerbations of significant chronic diseases, advanced 
or end stage chronic diseases, and chronic diseases associated with 
extensive debility. In general, most chronic diseases were not included 
on the revised CC list. For a patient with a chronic disease, a 
significant acute manifestation of the chronic disease was required to 
be present and coded for the patient to be assigned a CC.
    In addition to the revision of the CC list, each CC was also 
categorized as a major CC (MCC) or a CC based on relative resource use. 
Approximately 12 percent of all diagnoses codes were classified as a 
major CC (MCC), 24 percent as a CC, and 64 percent as a non CC. 
Diagnoses closely associated with mortality (ventricular fibrillation, 
cardiac arrest, shock, and respiratory arrest) were assigned as an MCC 
if the patient lived but as a non CC if the patient died.
    The MCC, CC, and non CC categorization was used to subdivide the 
surgical and medical DRGs into up to three levels, with a case being 
assigned to the most resource intensive level (for example, a case with 
two secondary diagnoses that are categorized as an MCC and a CC is 
assigned to the MCC level). To create the MS-DRGs (and by extension, 
the MS-LTC-DRGs) individual DRGs were subdivided into three, two, or 
one level, depending on the CC impact on resources used for those 
cases.
    As noted above in this section, further information on the 
development and implementation of the MS-DRGs and MS-LTC-DRGs can be 
found in the FY 2008 IPPS final rule with comment period (72 FR 47138 
through 47175 and 47277 through 47299).

D. Method for Updating the MS-LTC-DRG Classifications and Relative 
Weights

1. Background
    Under the LTCH PPS, relative weights for each 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, 
the MS-LTC-DRGs). To ensure that Medicare patients classified to each 
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 MS-LTC-DRG that represents the 
resources needed by an average inpatient LTCH case in that MS-LTC-DRG. 
For example, cases in a MS-LTC-DRG with a relative weight of 2 will, on 
average, cost twice as much as cases in a MS-LTC-DRG with a relative 
weight of 1. Under Sec.  412.517, the 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.
    In the June 6, 2003 LTCH PPS final rule (68 FR 34122 through 
34125), we changed the LTCH PPS annual payment rate update cycle to be 
effective July 1 through June 30 instead of October 1 through September 
30. In addition, because the patient classification system utilized 
under the LTCH PPS is the same DRG system that is used under the IPPS, 
in that same final rule, we explained that the annual update of the 
LTC-DRG classifications and relative weights will continue to remain 
linked to the annual reclassification and recalibration of the CMS DRGs 
used under the IPPS (as is the case with the MS-DRGs effective for 
discharges occurring on or after October 1, 2007 (see Sec.  412.503)). 
Therefore, we specified that we will continue to update the LTC-DRG 
classifications and relative weights to be effective for discharges 
occurring on or after October 1 through September 30 each year. We 
further stated at that time that we will publish the annual proposed 
and final update of the LTC-DRGs in same notice as the proposed and 
final update for the IPPS (69 FR 34125). (We note that in section IV.B. 
of this preamble, we are proposing to revise Sec.  412.535 in order to 
consolidate the annual July 1 and October 1 LTCH PPS update cycles, so 
that beginning with FY 2010, both the annual update to the standard 
Federal rate (and other rate and policy changes) and the annual update 
to the MS-LTC-DRGs would be presented in a single Federal Register 
publication to be effective on October 1 each year.) Under existing 
Sec.  412.535(b), the FY 2008 update of the LTCH PPS patient 
classification system and relative weights was presented in the FY 2008 
IPPS final rule with comment (72 FR 47277 through 47299). For the 
reader's benefit, we are providing a summary of the discussion 
presented in that final rule with comment in section III.D.2. of this 
preamble.
    For FY 2008, the MS-LTC-DRG classifications and relative weights 
were updated based on LTCH data from the FY 2006 MedPAR file, which 
contained hospital bills data from the March 2007

[[Page 5349]]

update. The MS-LTC-DRG patient classification system for FY 2008 
consists of 745 DRGs that formed the basis of the Version 25.0 GROUPER 
program utilized under the LTCH PPS. The 745 MS-LTC-DRGs included two 
``error DRGs.'' As in the IPPS, we included two error DRGs in which 
cases that cannot be assigned to valid DRGs will be grouped. These two 
error DRGs are MS-LTC-DRG 998 (Principal Diagnosis Invalid as a 
Discharge Diagnosis) and MS-LTC-DRG 999 (Ungroupable). The other 743 
MS-LTC-DRGs are the same DRGs used in the IPPS GROUPER program for FY 
2008 (Version 25.0).
    In the past, the annual update to the CMS DRGs was based on the 
annual revisions to the ICD-9-CM codes and was effective each October 
1. The ICD-9-CM coding update process was revised as discussed in 
greater detail in the FY 2005 IPPS final rule (69 FR 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 
former 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) and the RY 2006 LTCH PPS final rule (70 FR 
24172 through 24177).) As noted above in this section, with the 
implementation of section 503(a) of the MMA, there is the possibility 
that one feature of the GROUPER software program may be updated twice 
during a FFY (October 1 and April 1) as required by the statute for the 
IPPS. Specifically, diagnosis and procedure codes for new medical 
technology may be created and added to existing DRGs in the middle of 
the FFY on April 1. No new MS-LTC-DRGs will be created or deleted. 
Consistent with our current practice, any changes to the MS-DRGs or 
relative weights will be made at the beginning of the next FFY (October 
1). Therefore, there will not be any impact on MS-LTC-DRG payments 
under the LTCH PPS until the following October 1 (although the new ICD-
9-CM diagnosis and procedure codes would be recognized April 1).
    As we explained in the FY 2008 IPPS final rule with comment period 
(72 FR 47277), annual changes to the ICD-9-CM codes historically were 
effective for discharges occurring on or after October 1 each year. 
Thus, the manual and electronic versions of the GROUPER software, which 
are based on the ICD-9-CM codes, were also revised annually and 
effective for discharges occurring on or after October 1 each year. The 
patient classification system used under the LTCH PPS (MS-LTC-DRGs) is 
the same DRG patient classification system used under the IPPS, which 
historically had been updated annually and was effective for discharges 
occurring on or after October 1 through September 30 each year. We have 
also explained that since we do not publish a mid-year IPPS rule, we 
will assign any new diagnosis or procedure codes implemented on April 1 
to the same DRG in which its predecessor code was assigned, so that 
there will be no impact on the DRG assignments until the following 
October 1. Any coding updates will be available through the Web sites 
provided in section II.G.10. of the preamble of the FY 2008 IPPS final 
rule with comment period (72 FR 47241 through 47243) and through the 
Coding Clinic for ICD-9-CM. Publishers and software vendors currently 
obtain code changes through these sources to update their code books 
and software system. If new codes are implemented on April 1, revised 
code books and software systems, including the GROUPER software 
program, will be necessary because we must use current ICD-9-CM codes. 
Therefore, for purposes of the LTCH PPS, because each ICD-9-CM code 
must be included in the GROUPER algorithm to classify each case into a 
MS-LTC-DRG, the GROUPER software program used under the LTCH PPS would 
need to be revised to accommodate any new codes.
    At the September 2007 ICD-9-CM C&M Committee meeting, there were no 
compelling requests for an April 1, 2008 implementation of new ICD-9-CM 
codes, and therefore, we expect that the next update to the ICD-9-CM 
coding system will not occur until October 1, 2008 (FY 2009). 
Therefore, we expect that the ICD-9-CM coding set implemented on 
October 1, 2007, will continue through September 30, 2008 (FY 2008). 
The next update to the MS-LTC-DRGs and relative weights for FY 2009 
will be presented in the FY 2009 IPPS proposed and final rules.
2. FY 2008 MS-LTC-DRG Relative Weights
    In accordance with Sec.  412.523(c), we adjust the LTCH PPS 
standard Federal rate by the MS-LTC-DRG relative weights in determining 
payment to LTCHs for each case. Relative weights for each MS-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 MS-LTC-DRG have access to services and to encourage 
efficiency, we calculate a relative weight for each MS-LTC-DRG that 
represents the resources needed by an average inpatient LTCH case in 
that MS-LTC-DRG. For example, cases in a MS-LTC-DRG with a relative 
weight of 2 will, on average, cost twice as much as cases in a MS-LTC-
DRG with a weight of 1.
    As we discussed in the FY 2008 IPPS final rule with comment period 
(72 FR 47282), the MS-LTC-DRG relative weights effective under the LTCH 
PPS for Federal FY 2008 were calculated using the March 2007 update of 
FY 2006 MedPAR data and Version 25.0 of the GROUPER software.
    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 
MS-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 
(HSRV) method to calculate relative weights. We believe this method 
removes this hospital-specific source of bias in measuring average 
charges. Specifically, we reduce the impact of the variation in charges 
across providers on any particular MS-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 2008 IPPS final rule with 
comment period for further information on the application of the HSRV 
methodology under the LTCH PPS (72 FR 47282).)
    To account for MS-LTC-DRGs with low volume (that is, with fewer 
than 25 LTCH cases), we grouped those ``low volume'' MS-LTC-DRGs into 1 
of 5 categories (quintiles) based on average charges for the purposes 
of determining relative weights. Each of the low volume MS-LTC-DRGs 
grouped to a specific quintile received the same relative weight and 
ALOS using the formula applied to the regular MS-LTC-DRGs (25 or more 
cases). (See the FY 2008 IPPS final rule with comment period for 
further explanation of the development and composition of each of the 5 
low volume quintiles for FY 2008 (72 FR 47283 through 47288).)
    After grouping the cases in the appropriate MS-LTC-DRG, generally, 
we calculated the relative weights by

[[Page 5350]]

first removing statistical outliers and cases with a LOS of 7 days or 
less. Next, we adjusted the number of cases remaining in each MS-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 MS-LTC-DRG using the HSRV method. 
In determining the FY 2008 MS-LTC-DRG relative weights, we also made 
adjustments, as necessary, to adjust for nonmonotonicity for the 
severity levels within a specific base MS-LTC-DRG. (Refer to the FY 
2008 IPPS final rule with comment period for further information on the 
treatment of severity levels and adjustments for nonmonotically 
increasing relative weights for FY 2008 (72 FR 47282 through 47283 and 
47293 through 47295).) Furthermore, we determined FY 2008 MS-LTC-DRG 
relative weights for the 185 MS-LTC-DRGs for which there were no LTCH 
cases in the database (that is, LTCH claims from the FY 2006 LTCH 
MedPAR files). (A list of the FY 2008 ``no-volume'' MS-LTC-DRGs and 
further explanation of their FY 2008 relative weight assignment can be 
found in the FY 2008 IPPS final rule with comment period (72 FR 47289 
through 47293).)
    In adopting the MS-LTC-DRGs beginning in FY 2008, we established a 
2-year transition. Specifically, for FY 2008, the first year of the 
transition, 50 percent of the relative weight for a MS-LTC-DRG is based 
on the average LTC-DRG relative weight under Version 24.0 of the LTC-
DRG GROUPER. The remaining 50 percent of the relative weight is based 
on the MS-LTC-DRG relative weight under Version 25.0 of the MS-LTC-DRG 
GROUPER. (See the FY 2008 IPPS final rule with comment period (72 FR 
47295) for additional details on the methodology used to determine the 
transition blended MS-LTC-DRG relative weights for FY 2008.)
    In the RY 2008 LTCH PPS final rule (72 FR 26882), under the broad 
authority conferred upon the Secretary under section 123 of Public Law 
106-113 as amended by section 307(b) of Public Law 106-554 to develop 
the LTCH PPS, we established that beginning with the update for FY 
2008, the annual update to the MS-LTC-DRG classifications and relative 
weights will be done in a budget neutral manner such that estimated 
aggregate LTCH PPS payments would be unaffected, that is, would be 
neither greater than nor less than the estimated aggregate LTCH PPS 
payments that would have been made without the MS-LTC-DRG 
classification and relative weight changes. Historically, we had not 
updated the LTC-DRGs in a budget neutral manner because we believed 
that past fluctuations in the relative weights were primarily due to 
changes in LTCH coding practices rather than changes in patient 
severity. In light of the most recently available LTCH claims data at 
that time, which indicated that LTCH claims data no longer appeared to 
significantly reflect changes in LTCH coding practices in response to 
the implementation of the LTCH PPS, we believed that, beginning with FY 
2008, it is appropriate to update the MS-LTC-DRGs in a budget neutral 
manner (that is, so that estimated aggregate LTCH PPS payments will 
neither increase nor decrease). Accordingly, in that same final rule 
with comment period, we established under Sec.  412.517(b) that the 
annual update to the MS-LTC-DRG classifications and relative weights be 
done in a budget neutral manner. (As noted above in section III.A. of 
this preamble, we revised the regulations at Sec.  412.503 to specify 
that ``MS-LTC-DRG'' is used in place of ``LTC-DRG'' for discharges 
occurring on or after October 1, 2007.) Consistent with that provision, 
we updated the MS-LTC-DRG classifications and relative weights for FY 
2008 based on the most recent available data and included a budget 
neutrality adjustment. For further details on the methodology and 
calculation of the FY 2008 MS-LTC-DRG budget neutrality factor, refer 
to the FY 2008 IPPS final rule with comment period (72 FR 47295 through 
47296).
    Table 11 of the Addendum to the FY 2008 IPPS final rule with 
comment period lists the MS-LTC-DRGs and their respective transition 
blended budget neutral relative weights, geometric mean LOS, ``short-
stay outlier threshold'' (that is, five-sixths of the geometric mean 
LOS), and the ``IPPS Comparable Threshold'' (that is, the IPPS 
geometric average length of stay plus one standard deviation) for each 
MS-LTC-DRG for FY 2008 (see (72 FR 48143 through 48157), and the 
technical correction made in the October 10, 2007 correction notice (72 
FR 57733), which has been reprinted in Table 3 of the Addendum of this 
proposed rule for convenience).
    As we noted previously in this section, there were no new ICD-9-CM 
code requests for an April 1, 2008 update. Therefore, we expect that 
Version 25.0 of the MS-DRG GROUPER software established in the FY 2008 
IPPS final rule with comment period will continue to be effective until 
October 1, 2008. Moreover, the MS-LTC-DRGs and relative weights for FY 
2008 established in Table 11 of that same IPPS final rule with comment 
period (78 FR 48143 through 48157) will continue to be effective until 
October 1, 2008, (just as they would have been even if there had been 
any new ICD-9-CM code requests for an April 1, 2008 update). We note 
that Table 11 was corrected in the FY 2008 IPPS correction notice that 
appeared in the October 10, 2007 Federal Register (72 FR 57733) and is 
hereinafter referred to as the second FY 2008 IPPS