Medicare Program; Hospice Wage Index for Fiscal Year 2010, 39384-39433 [E9-18553]

Agencies

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

[Federal Register Volume 74, Number 150 (Thursday, August 6, 2009)]
[Rules and Regulations]
[Pages 39384-39433]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-18553]



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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 405 and 418



Medicare Program; Hospice Wage Index for Fiscal Year 2010; Final Rule

Federal Register / Vol. 74, No. 150 / Thursday, August 6, 2009 / 
Rules and Regulations

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 405 and 418

[CMS-1420-F]
RIN 0938-AP45


Medicare Program; Hospice Wage Index for Fiscal Year 2010

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

ACTION: Final rule.

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SUMMARY: This final rule will set forth the hospice wage index for 
fiscal year 2010. The final rule adopts a MedPAC recommendation 
regarding a process for certification and recertification of terminal 
illness. In addition, this final rule will also revise the phase-out of 
the wage index budget neutrality adjustment factor (BNAF), with a 10 
percent BNAF reduction in FY 2010. The BNAF phase-out will continue 
with successive 15 percent reductions from FY 2011 through FY 2016.

DATES: Effective Date: These regulations are effective on October 1, 
2009.

FOR FURTHER INFORMATION CONTACT: Randy Throndset, (410) 786-0131.
    Katie Lucas, (410) 786-7723.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Background
    A. General
    1. Hospice Care
    2. Medicare Payment for Hospice Care
    B. Hospice Wage Index
    1. Raw Wage Index Values (Pre-floor, Pre-reclassified Hospital 
Wage Index)
    2. Changes to Core-Based Statistical Area (CBSA) Designations
    3. Definition of Urban and Rural Areas
    4. Areas Without Hospital Wage Data
    5. CBSA Nomenclature Changes
    6. Wage Data for Multi-campus Hospitals
    7. Hospice Payment Rates
II. Provisions of the Proposed Rule and Analysis of and Responses to 
Public Comments
    A. FY 2010 Hospice Wage Index
    1. Background
    2. Areas without Hospital Wage Data
    3. FY 2010 Wage Index with Reduced Budget Neutrality Adjustment 
Factor (BNAF)
    4. Effects of Phasing out the BNAF
    B. Change to the Physician Certification and Recertification 
Process, Sec.  418.22
    C. Update of Covered Services, Sec.  418.202(f)
    D. Clarification of Payment Procedures for Hospice Care, Sec.  
418.302
    E. Clarification of Intermediary Determination and Notice of 
Amount of Program Reimbursement, Sec.  405.1803
    F. Technical and Clarifying Changes
III. Comments on Other Policy Issues
    A. Recertification Visits, Sec.  418.22
    B. Hospice Aggregate Calculation
    C. Hospice Payment Reform
IV. Update on Additional Hospice Data Collection
V. Provisions of the Final Regulations
VI. Collection of Information Requirements
VII. Regulatory Impact Analysis


I. Background

A. General

1. Hospice Care
    Hospice care is an approach to treatment that recognizes that the 
impending death of an individual warrants a change in the focus from 
curative care to palliative care for relief of pain and for symptom 
management. The goal of hospice care is to help terminally ill 
individuals continue life with minimal disruption to normal activities 
while remaining primarily in the home environment. A hospice uses an 
interdisciplinary approach to deliver medical, nursing, social, 
psychological, emotional, and spiritual services through use of a broad 
spectrum of professional and other caregivers, with the goal of making 
the individual as physically and emotionally comfortable as possible. 
Counseling services and inpatient respite services are available to the 
family of the hospice patient. Hospice programs consider both the 
patient and the family as a unit of care. Section 1861(dd) of the 
Social Security Act (the Act) provides for coverage of hospice care for 
terminally ill Medicare beneficiaries who elect to receive care from a 
participating hospice. Section 1814(i) of the Act provides payment for 
Medicare participating hospices.
2. Medicare Payment for Hospice Care
    Sections 1812(d), 1813(a)(4), 1814(a)(7), 1814(i) and 1861(dd) of 
the Act, and our regulations at 42 CFR part 418, establish eligibility 
requirements, payment standards and procedures, define covered 
services, and delineate the conditions a hospice must meet to be 
approved for participation in the Medicare program. Part 418, subpart G 
provides for payment in one of four prospectively-determined rate 
categories (routine home care, continuous home care, inpatient respite 
care, and general inpatient care) to hospices based on each day a 
qualified Medicare beneficiary is under a hospice election.

B. Hospice Wage Index

    Our regulations at Sec.  418.306(c) require that the wage index for 
all labor markets in which Medicare-participating hospices do business 
be established using the most current hospital wage data available, 
including any changes by Office of Management and Budget (OMB) to the 
Metropolitan Statistical Areas (MSAs) definitions. OMB revised the MSA 
definitions beginning in 2003 with new designations called the Core 
Based Statistical Areas (CBSAs). For the purposes of the hospice 
benefit, the term ``MSA-based'' refers to wage index values and 
designations based on the previous MSA designations before 2003. 
Conversely, the term ``CBSA-based'' refers to wage index values and 
designations based on the OMB revised MSA designations in 2003, which 
now include CBSAs. In the August 11, 2004 IPPS final rule (69 FR 
49026), the revised labor market area definitions were adopted at Sec.  
412.64(b), which were effective October 1, 2004 for acute care 
hospitals. We also revised the labor market areas for hospices using 
the new OMB standards that included CBSAs. In the FY 2006 hospice wage 
index final rule (70 FR 45130), we finalized a 1-year transition policy 
using a 50/50 blend of the CBSA-based wage index values and the MSA-
based wage index values for FY 2006. The one-year transition policy 
ended on September 30, 2006. For FY 2007, FY 2008, and FY 2009, we used 
wage index values based on CBSA designations.
    The hospice wage index is used to adjust payment rates for hospice 
agencies under the Medicare program to reflect local differences in 
area wage levels. The original hospice wage index was based on the 1981 
Bureau of Labor Statistics hospital data and had not been updated since 
1983. In 1994, because of disparity in wages from one geographical 
location to another, a committee was formulated to negotiate a wage 
index methodology that could be accepted by the industry and the 
government. This committee, functioning under a process established by 
the Negotiated Rulemaking Act of 1990, was comprised of national 
hospice associations; rural, urban, large and small hospices; multi-
site hospices; consumer groups; and a government representative. On 
April 13, 1995, the Hospice Wage Index Negotiated Rulemaking Committee 
signed an agreement for the methodology to be used for updating the 
hospice wage index.
    In the August 8, 1997 Federal Register (62 FR 42860), we published 
a final rule promulgating a new methodology for calculating the hospice 
wage index based on the recommendations of the negotiated rulemaking 
Committee, using a hospital wage index rather than continuing to use 
the Bureau of Labor Statistics (BLS) data. The committee statement was

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included in the appendix of that final rule (62 FR 42883). The 
reduction in overall Medicare payments if a new wage index were adopted 
was noted in the November 29, 1995 notice transmitting the 
recommendations of the negotiated rulemaking committee (60 FR 61264). 
Therefore, the Committee also decided that for each year in updating 
the hospice wage index, aggregate Medicare payments to hospices would 
remain budget neutral to payments as if the 1983 wage index had been 
used.
    As decided upon by the Committee, budget neutrality means that, in 
a given year, estimated aggregate payments for Medicare hospice 
services using the updated hospice wage index values will equal 
estimated payments that would have been made for these services if the 
1983 hospice wage index values had remained in effect. Although 
payments to individual hospice programs may change each year, the total 
payments each year to hospices would not be affected by using the 
updated hospice wage index because total payments would be budget 
neutral as if the 1983 wage index had been used. To implement this 
policy, a BNAF would be computed and applied annually to the pre-floor, 
pre-reclassified hospital wage index, when deriving the hospice wage 
index.
    The BNAF is calculated by computing estimated payments using the 
most recent completed year of hospice claims data. The units (days or 
hours) from those claims are multiplied by the updated hospice payment 
rates to calculate estimated payments. For this final rule, that means 
estimating payments for FY 2010 using FY 2008 hospice claims data, and 
applying the FY 2010 hospice payment rates (updating the FY 2009 rates 
by the FY 2010 hospital market basket update factor). The FY 2010 
hospice wage index values are then applied to the labor portion of the 
payment rates only. The procedure is repeated using the same claims 
data and payment rates, but using the 1983 BLS-based wage index instead 
of the updated pre-floor, pre-reclassified hospital wage index (note 
that both wage indices include their respective floor adjustments). The 
total payments are then compared, and the adjustment required to make 
total payments equal is computed; that adjustment factor is the BNAF.
    The hospice wage index is updated annually. Our most recent update, 
published in the Federal Register (73 FR 46464) on August 8, 2008, set 
forth updates to the hospice wage index for FY 2009. That update also 
finalized a provision for a 3-year phase-out of the BNAF, which was 
applied to the wage index values. As discussed in detail in section 
I.B.1 below, the update was later revised with the February 17, 2009 
passage of the American Recovery and Reinvestment Act (ARRA), which 
eliminated the BNAF phase-out for FY 2009.
1. Raw Wage Index Values (Pre-floor, Pre-reclassified Hospital Wage 
Index)
    As described in the August 8, 1997 hospice wage index final rule 
(62 FR 42860), the pre-floor and pre-reclassified hospital wage index 
is used as the raw wage index for the hospice benefit. These raw wage 
index values are then subject to either a BNAF or application of the 
hospice floor calculation to compute the hospice wage index used to 
determine payments to hospices.
    Pre-floor, pre-reclassified hospital wage index values of 0.8 or 
greater are adjusted by the BNAF. Pre-floor, pre-reclassified hospital 
wage index values below 0.8 are adjusted by the greater of: (1) The 
hospice BNAF; or (2) the hospice 15 percent floor adjustment, which is 
a 15 percent increase subject to a maximum wage index value of 0.8. For 
example, if County A has a pre-floor, pre-reclassified hospital wage 
index (raw wage index) value of 0.4000, we would perform the following 
calculations using the BNAF (which for this example is 0.060988; we 
added 1 to simplify the calculation) and the hospice floor to determine 
County A's hospice wage index:
    Pre-floor, pre-reclassified hospital wage index value below 0.8 
multiplied by the BNAF: (0.4000 x 1.060988 = 0.4244).
    Pre-floor, pre-reclassified hospital wage index value below 0.8 
multiplied by the hospice 15 percent floor adjustment: (0.4000 x 1.15 = 
0.4600).
    Based on these calculations, County A's hospice wage index would be 
0.4600.
    The BNAF has been computed and applied annually to the labor 
portion of the hospice payment. Currently, the labor portion of the 
payment rates is as follows: for Routine Home Care, 68.71 percent; for 
Continuous Home Care, 68.71 percent; for General Inpatient Care, 64.01 
percent; and for Respite Care, 54.13 percent. The non-labor portion is 
equal to 100 percent minus the labor portion for each level of care. 
Therefore the non-labor portion of the payment rates is as follows: for 
Routine Home Care, 31.29 percent; for Continuous Home Care, 31.29 
percent; for General Inpatient Care, 35.99 percent; and for Respite 
Care, 45.87 percent.
    The August 8, 2008 FY 2009 Hospice Wage Index final rule (73 FR 
46464) promulgated a phase-out of the hospice BNAF over 3 years, 
beginning with a 25 percent reduction in the BNAF in FY 2009, an 
additional 50 percent reduction for a total of 75 percent in FY 2010, 
and complete phase-out of the BNAF in FY 2011. However, subsequent to 
the publication of the FY 2009 rule, the American Recovery and 
Reinvestment Act of 2009 (P.L. 111-5) (ARRA) eliminated the BNAF 
reduction for FY 2009. Specifically, division B, section 4301(a) of 
ARRA prohibited the Secretary from beginning the phasing-out or 
eliminating of the BNAF in the Medicare hospice wage index before 
October 1, 2009, and instructed the Secretary to recompute and apply 
the final Medicare hospice wage index for FY 2009 as if there had been 
no reduction in the BNAF. We did so in an administrative instruction to 
our intermediaries, which was issued as Change Request (CR) 
6418 (Transmittal 1701, dated 3/13/2009). CR 6418 is 
available on the Web at https://www.cms.hhs.gov/Hospice/Transmittals/itemdetail.asp?filterType=none&filterByDID=0&sortByDID=1&sortOrder=descending&itemID=CMS1222448&intNumPerPage=10.
    While ARRA eliminated the BNAF phase-out for FY 2009, it neither 
changed the 75 percent reduction in the BNAF for FY 2010, nor 
prohibited the elimination of the BNAF in FY 2011, as set out in the 
August 8, 2008 Hospice Wage Index final rule. The provision in the ARRA 
that eliminated the FY 2009 BNAF reduction provided the hospice 
industry additional time to prepare for the FY 2010 75 percent BNAF 
reduction and the FY 2011 BNAF elimination. Therefore, in accordance 
with the August 8, 2008 FY 2009 Hospice Wage Index final rule, the 
rationale presented in that final rule, and consistent with section 
4301(a) of ARRA, in our proposed rule we said we planned to reduce the 
BNAF by 75 percent in FY 2010 and ultimately eliminate the BNAF in 
2011. We accepted comments on the BNAF reductions.
2. Changes to Core Based Statistical Area (CBSA) Designations
    The annual update to the hospice wage index is published in the 
Federal Register and is based on the most current available hospital 
wage data, as well as any changes by OMB to the definitions of MSAs, 
which now include CBSA designations. The August 4, 2005 hospice wage 
index final rule (70 FR 45130) set forth the adoption of the changes 
discussed in the OMB Bulletin No. 03-04 (June 6, 2003),

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which announced revised definitions for Micropolitan Statistical Areas 
and the creation of MSAs and Combined Statistical Areas. In adopting 
the OMB CBSA geographic designations, we provided for a 1-year 
transition with a blended hospice wage index for all hospices for FY 
2006. Subsequent fiscal years have used the full CBSA-based hospice 
wage index.
3. Definition of Rural and Urban Areas
    Each hospice's labor market is determined based on definitions of 
MSAs issued by OMB. In general, an urban area is defined as an MSA or 
New England County Metropolitan Area (NECMA) as defined by OMB. Under 
Sec.  412.64(b)(1)(ii)(C), a rural area is defined as any area outside 
of the urban area. The urban and rural area geographic classifications 
are defined in Sec.  412.64(b)(1)(ii)(A) through (C), and have been 
used for the Medicare hospice benefit since implementation.
    In the August 22, 2007 FY 2008 Inpatient Prospective Payment System 
(IPPS) final rule with comment period (72 FR 47130), Sec.  
412.64(b)(1)(ii)(B) was revised such that the two ``New England deemed 
Counties'' that had been considered rural under the OMB definitions 
(Litchfield County, CT and Merrimack County, NH) but deemed urban, were 
no longer considered urban effective for discharges occurring on or 
after October 1, 2007. Therefore, these two counties are considered 
rural in accordance with Sec.  412.64(b)(1)(ii)(C). The recommendations 
to adjust payments to reflect local differences in wages are codified 
in Sec.  418.306(c) of our regulations; however there had been no 
explicit reference to Sec.  412.64 in Sec.  418.306(c) before the 
promulgation of the August 8, 2008 FY 2009 Hospice Wage Index final 
rule. Although Sec.  412.64 had not been explicitly referred to, the 
hospice program has used the definition of urban in Sec.  
412.64(b)(1)(ii)(A) and (b)(1)(ii)(B), and the definition of rural as 
any area outside of an urban area in Sec.  412.64(b)(1)(ii)(C). With 
the promulgation of the August 8, 2008 FY 2009 Wage Index final rule, 
we now explicitly refer to those provisions in Sec.  412.64 to make it 
absolutely clear how we define urban and rural for purposes of the 
hospice wage index. Litchfield County, CT and Merrimack County, NH are 
considered rural areas for hospital IPPS purposes in accordance with 
Sec.  412.64. Effective October 1, 2008, Litchfield County, CT was no 
longer considered part of urban CBSA 25540 (Hartford-West Hartford-East 
Hartford, CT), and Merrimack County, NH was no longer considered part 
of urban CBSA 31700 (Manchester-Nashua, NH). Rather, these counties are 
now considered to be rural areas within their respective States under 
the hospice payment system. When the pre-floor, pre-reclassified 
hospital wage index was adopted for use in deriving the hospice wage 
index, it was decided not to take into account IPPS geographic 
reclassifications. This policy of following OMB designations of rural 
or urban, rather than considering some Counties to be ``deemed'' urban, 
is consistent with our policy of not taking into account IPPS 
geographic reclassifications in determining payments under the hospice 
wage index.
4. Areas Without Hospital Wage Data
    When adopting OMB's new labor market designations in FY 2006, we 
identified some geographic areas where there were no hospitals, and 
thus, no hospital wage index data on which to base the calculation of 
the hospice wage index. Beginning in FY 2006, we adopted a policy to 
use the FY 2005 pre-floor, pre-reclassified hospital wage index value 
for rural areas when no hospital wage data were available. We also 
adopted the policy that for urban labor markets without a hospital from 
which hospital wage index data could be derived, all of the CBSAs 
within the State would be used to calculate a statewide urban average 
pre-floor, pre-reclassified hospital wage index value to use as a 
reasonable proxy for these areas. Consequently, in subsequent fiscal 
years, we applied the average pre-floor, pre-reclassified hospital wage 
index data from all urban areas in that state, to urban areas without a 
hospital. The only affected CBSA is 25980, Hinesville-Fort Stewart, 
Georgia.
    Under the CBSA labor market areas, there are no hospitals in rural 
locations in Massachusetts and Puerto Rico. Since there was no rural 
proxy for more recent rural data within those areas, in the FY 2006 
hospice wage index proposed rule (70 FR 22394, 22398), we proposed 
applying the FY 2005 pre-floor, pre-reclassified hospital wage index 
value to rural areas where no hospital wage data were available. In the 
FY 2006 final rule and in the FY 2007 update notice, we applied the FY 
2005 pre-floor, pre-reclassified hospital wage index data to areas 
lacking hospital wage data in rural Massachusetts and rural Puerto 
Rico.
    In the FY 2008 hospice wage index final rule (72 FR 50217), we 
considered alternatives to our methodology to update the pre-floor, 
pre-reclassified hospital wage index for rural areas without hospital 
wage data. We indicated that we believed that the best imputed proxy 
for rural areas would--(1) use pre-floor, pre-reclassified hospital 
data; (2) use the most local data available to impute a rural pre-
floor, pre-reclassified hospital wage index; (3) be easy to evaluate; 
and (4) be easy to update from year-to-year.
    Therefore, in FY 2008, and again in FY 2009, in cases where there 
was a rural area without rural hospital wage data, we used the average 
pre-floor, pre-reclassified hospital wage index data from all 
contiguous CBSAs to represent a reasonable proxy for the rural area. 
This approach does not use rural data; however, the approach uses pre-
floor, pre-reclassified hospital wage data, is easy to evaluate, is 
easy to update from year-to-year, and uses the most local data 
available. In the FY 2008 hospice wage index final rule (72 FR 50217), 
we noted that in determining an imputed rural pre-floor, pre-
reclassified hospital wage index, we interpret the term ``contiguous'' 
to mean sharing a border. For example, in the case of Massachusetts, 
the entire rural area consists of Dukes and Nantucket Counties. We 
determined that the borders of Dukes and Nantucket Counties are 
contiguous with Barnstable and Bristol Counties. Under the adopted 
methodology, the pre-floor, pre-reclassified hospital wage index values 
for the Counties of Barnstable (CBSA 12700, Barnstable Town, MA) and 
Bristol (CBSA 39300, Providence-New Bedford-Fall River, RI-MA) would be 
averaged resulting in an imputed pre-floor, pre-reclassified rural 
hospital wage index for FY 2008. We noted in the FY 2008 final hospice 
wage index rule that while we believe that this policy could be readily 
applied to other rural areas that lack hospital wage data (possibly due 
to hospitals converting to a different provider type, such as a 
Critical Access Hospital, that does not submit the appropriate wage 
data), if a similar situation arose in the future, we would re-examine 
this policy.
    We also noted that we do not believe that this policy would be 
appropriate for Puerto Rico, as there are sufficient economic 
differences between hospitals in the United States and those in Puerto 
Rico, including the payment of hospitals in Puerto Rico using blended 
Federal/Commonwealth-specific rates. Therefore, we believe that a 
separate and distinct policy for Puerto Rico is necessary. Any 
alternative methodology for imputing a pre-floor, pre-reclassified 
hospital wage index for rural Puerto Rico would need to take into 
account the economic differences between hospitals in the United States 
and those in Puerto Rico. Our policy of imputing a rural pre-floor, 
pre-reclassified

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hospital wage index based on the pre-floor, pre-reclassified hospital 
wage index(es) of CBSAs contiguous to the rural area in question does 
not recognize the unique circumstances of Puerto Rico. While we have 
not yet identified an alternative methodology for imputing a pre-floor, 
pre-reclassified hospital wage index for rural Puerto Rico, we will 
continue to evaluate the feasibility of using existing hospital wage 
data and, possibly, wage data from other sources. For FY 2008 and FY 
2009, we used the most recent pre-floor, pre-reclassified hospital wage 
index available for Puerto Rico, which is 0.4047.
5. CBSA Nomenclature Changes
    The Office of Management and Budget (OMB) regularly publishes a 
bulletin that updates the titles of certain CBSAs. In the FY 2008 
hospice wage index final rule (72 FR 50218) we noted that the FY 2008 
rule and all subsequent hospice wage index rules and notices would 
incorporate CBSA changes from the most recent OMB bulletins. The OMB 
bulletins may be accessed at https://www.whitehouse.gov/omb/bulletins/.
6. Wage Data From Multi-Campus Hospitals
    Historically, under the Medicare hospice benefit, we have 
established hospice wage index values calculated from the pre-floor, 
pre-reclassified hospital wage data (also called the IPPS wage index) 
without taking into account geographic reclassification under sections 
1886(d)(8) and (d)(10) of the Act. The wage adjustment established 
under the Medicare hospice benefit is based on the location where 
services are furnished without any reclassification.
    For FY 2010, the data collected from cost reports submitted by 
hospitals for cost reporting periods beginning during FY 2005 were used 
to compute the 2009 pre-floor, pre-reclassified hospital wage index 
data without taking into account geographic reclassification under 
sections 1886(d)(8) and (d)(10) of the Act. This 2009 pre-floor, pre-
reclassified hospital wage index was used to derive the applicable wage 
index values for the hospice wage index because these data (FY 2005) 
are the most recent complete cost data.
    Beginning in FY 2008, the IPPS apportioned the wage data for multi-
campus hospitals located in different labor market areas (CBSAs) to 
each CBSA where the campuses are located (see the FY 2008 IPPS final 
rule with comment period (72 FR 47317 through 47320)). We are 
continuing to use the pre-floor, pre-reclassified hospital wage data as 
a basis to determine the hospice wage index values for FY 2010 because 
hospitals and hospices both compete in the same labor markets, and 
therefore, experience similar wage-related costs. We note that the use 
of pre-floor, pre-reclassified hospital (IPPS) wage data, used to 
derive the FY 2010 hospice wage index values, reflects the application 
of our policy to use that data to establish the hospice wage index. The 
FY 2010 hospice wage index values presented in this notice were 
computed consistent with our pre-floor, pre-reclassified hospital 
(IPPS) wage index policy (that is, our historical policy of not taking 
into account IPPS geographic reclassifications in determining payments 
for hospice). As finalized in the August 8, 2008 FY 2009 Hospice Wage 
Index final rule, for the FY 2009 Medicare hospice benefit, the hospice 
wage index was computed from IPPS wage data (submitted by hospitals for 
cost reporting periods beginning in FY 2004 (as was the FY 2008 IPPS 
wage index)), which allocated salaries and hours to the campuses of two 
multi-campus hospitals with campuses that are located in different 
labor areas, one in Massachusetts and another in Illinois. Thus, the FY 
2009 hospice wage index values for the following CBSAs were affected by 
this policy: Boston-Quincy, MA (CBSA 14484), Providence-New Bedford-
Falls River, RI-MA (CBSA 39300), Chicago-Naperville-Joliet, IL (CBSA 
16974), and Lake County-Kenosha County, IL-WI (CBSA 29404).
7. Hospice Payment Rates
    Section 4441(a) of the Balanced Budget Act of 1997 (BBA) amended 
section 1814(i)(1)(C)(ii) of the Act to establish updates to hospice 
rates for FYs 1998 through 2002. Hospice rates were to be updated by a 
factor equal to the percentage increase in the hospital market basket 
index, minus 1 percentage point. However, neither the BBA nor 
subsequent legislation specified alteration to the hospital market 
basket adjustment to be used to compute hospice payments for fiscal 
years beyond 2002. Payment rates for FYs since 2002 have been updated 
according to section 1814(i)(1)(C)(ii)(VII) of the Act, which states 
that the update to the payment rates for subsequent fiscal years will 
be the market basket percentage for the fiscal year. It has been 
longstanding practice to use the inpatient hospital market basket as a 
proxy for a hospice market basket. In the FY 2010 Inpatient Prospective 
Payment System/Rate Year (RY) 2010 Long Term Care Hospital Prospective 
Payment System proposed rule (74 FR 24154), we proposed to rebase and 
revise the inpatient hospital operating market basket.
    Historically, the rate update has been published through a separate 
administrative instruction issued annually, in the summer, to provide 
adequate time to implement system change requirements. Hospices 
determine their payments by applying the hospice wage index in this 
final rule to the labor portion of the published hospice rates.

II. Provisions of the Proposed Rule and Analysis of and Responses to 
Public Comments

    On April 24, 2009 we published a proposed rule in the Federal 
Register (74 FR 18912) that set forth the proposed hospice wage index 
for FY 2010. We received 729 timely items of correspondence. In 
general, those who commented strongly opposed the policy to reduce the 
BNAF adjustment in hospice and were supportive of modifications to the 
hospice certification and recertification of the terminal illness 
process. An in-depth summary of the public comments and our responses 
to those comments are set forth under the appropriate headings.

A. FY 2010 Hospice Wage Index

1. Background
    The hospice final rule published in the Federal Register on 
December 16, 1983 (48 FR 56008) provided for adjustment to hospice 
payment rates to reflect differences in area wage levels. We apply the 
appropriate hospice wage index value to the labor portion of the 
hospice payment rates based on the geographic area where hospice care 
was furnished. As noted earlier, each hospice's labor market area is 
based on definitions of MSAs issued by the OMB. For this final rule, we 
will use the pre-floor, pre-reclassified hospital wage index, based 
solely on the CBSA designations, as the basis for determining wage 
index values for the FY 2010 hospice wage index.
    As noted above, our hospice payment rules utilize the wage 
adjustment factors used by the Secretary for purposes of section 
1886(d)(3)(E) of the Act for hospital wage adjustments. We will again 
use the pre-floor and pre-reclassified hospital wage index data as the 
basis to determine the hospice wage index, which is then used to adjust 
the labor portion of the hospice payment rates based on the geographic 
area where the beneficiary receives hospice care. We believe the use of 
the pre-floor, pre-reclassified hospital wage index data, as a basis 
for the hospice wage index, results in the appropriate

[[Page 39388]]

adjustment to the labor portion of the costs. For the FY 2010 update to 
the hospice wage index, we will continue to use the most recent pre-
floor, pre-reclassified hospital wage index available at the time of 
publication.
    Comment: A commenter noted that the hospital-based wage index has 
undergone multiple changes over the past 10 years and that providers 
were not invited to provide comment for CMS to consider when 
formalizing these changes. This commenter stated that CMS previously 
cited the BNAF as a mitigating factor that offset some of the adverse 
impacts on hospice of changes in the hospital wage index. A few 
commenters wrote that the existence of exceptions to the hospital wage 
index system in the form of reclassifications demonstrates the 
unfairness and inadequacy of the hospital-based wage index system, and 
one suggested it puts hospices at a disadvantage in attracting and 
retaining employees. One commenter suggested that limits be established 
on the allowable annual changes in index values from one year to the 
next to achieve wage index stability. Several commenters mentioned that 
a 2007 MedPAC report on the hospital wage index suggested that CMS 
repeal the existing hospital wage index and develop a new one. The 
commenter stated that MedPAC recommended that CMS evaluate the use of 
the revised wage index in other Medicare payment systems, which 
includes hospice.
    Response: The pre-floor, pre-reclassified hospital wage index was 
adopted in 1998 as the wage index from which the hospice wage index is 
derived. The Negotiated Rulemaking Committee considered several wage 
index options: (1) Continuing with Bureau of Labor Statistics data; (2) 
using updated hospital wage data; (3) using hospice-specific data; and 
(4) using data from the physician payment system. The Committee 
determined that the pre-floor, pre-reclassified hospital wage index was 
the best option for hospice. The pre-floor, pre-reclassified hospital 
wage index is updated annually, and reflects the wages of highly 
skilled hospital workers.
    We agree that the hospital-based wage index has undergone some 
changes in the past 10 years. Those changes were implemented through 
rulemaking, which provided the public an opportunity to provide 
comments. Therefore, we disagree that hospice providers have not had an 
opportunity to comment on hospital wage index changes.
    The reclassification provision provided at section 1886(d)(10) of 
the Act is specific to hospitals. We believe the use of the most recent 
available pre-floor and pre-reclassified hospital wage index results in 
the most appropriate adjustment to the labor portion of hospice costs 
as required in 42 CFR 418.306(c). Additionally, use of the pre-floor, 
pre-reclassified hospital wage data avoids further reductions in 
certain rural statewide wage index values that result from 
reclassification. We also note that the wage index adjustment is based 
on the geographic area where the beneficiary is located, and not where 
the hospice is located.
    We continue to believe that the pre-floor, pre-reclassified 
hospital wage index, which is updated yearly and is used by many other 
CMS payments systems including home health, appropriately accounts for 
geographic variances in labor costs for hospices. Home health agencies 
and hospices are Medicare's only home-based benefits, and home health 
agencies and hospices share labor pools. Home health agencies 
experience the same wage index fluctuations, but do not receive an 
adjustment such as the BNAF. We believe that in the interest of parity, 
both home-based benefits should use a hospital-based wage index without 
a BNAF applied. In the future, when looking into reforming the hospice 
payment system, we will consider wage index alternatives, to include 
those recommended by MedPAC.
2. Areas Without Hospital Wage Data
    In adopting the CBSA designations, we identified some geographic 
areas where there are no hospitals, and no hospital wage data on which 
to base the calculation of the hospice wage index. These areas are 
described in section I.B.4 of this final rule. Beginning in FY 2006, we 
adopted a policy that, for urban labor markets without an urban 
hospital from which a pre-floor, pre-reclassified hospital wage index 
can be derived, all of the urban CBSA pre-floor, pre-reclassified 
hospital wage index values within the State would be used to calculate 
a statewide urban average pre-floor, pre-reclassified hospital wage 
index to use as a reasonable proxy for these areas. Currently, the only 
CBSA that would be affected by this policy is CBSA 25980, Hinesville, 
Georgia. We will to continue this policy for FY 2010.
    Currently, the only rural areas where there are no hospitals from 
which to calculate a pre-floor, pre-reclassified hospital wage index 
are Massachusetts and Puerto Rico. In August 2007 (72 FR 50217) we 
adopted a methodology for imputing rural pre-floor, pre-reclassified 
hospital wage index values for areas where no hospital wage data are 
available as an acceptable proxy; that methodology is also described in 
section I.B.4 of this final rule. In FY 2010, Dukes and Nantucket 
Counties are the only areas in rural Massachusetts which are affected. 
We are again applying this methodology for imputing a rural pre-floor, 
pre-reclassified hospital wage index for those rural areas without 
rural hospital wage data in FY 2010.
    However, as noted in section I.B.4 of this final rule, we do not 
believe that this policy is appropriate for Puerto Rico. For FY 2010, 
we are continuing to use the most recent pre-floor, pre-reclassified 
hospital wage index value available for Puerto Rico, which is 0.4047. 
This pre-floor, pre-reclassified hospital wage index value will then be 
adjusted upward by the hospice 15 percent floor adjustment in the 
computing of the FY 2010 hospice wage index.
    We received no comments on this section of the proposed rule.
3. FY 2010 Wage Index With a Reduced Budget Neutrality Adjustment 
Factor (BNAF)
    The hospice wage index set forth in this final rule will be 
effective October 1, 2009 through September 30, 2010. We are not 
incorporating any modifications to the hospice wage index methodology. 
In accordance with our regulations at 42 CFR 418.306(c) and the 
agreement signed with other members of the Hospice Wage Index 
Negotiated Rulemaking Committee, we are using the most current hospital 
data available. For this final rule, the FY 2009 hospital wage index 
was the most current hospital wage data available for calculating the 
FY 2010 hospice wage index values. We used the FY 2009 pre-floor, pre-
reclassified hospital wage index data for this calculation.
    As noted above, for FY 2010, the hospice wage index values will be 
based solely on the adoption of the CBSA-based labor market definitions 
and the hospital wage index. We continue to use the most recent pre-
floor and pre-reclassified hospital wage index data available (based on 
FY 2005 hospital cost report wage data). A detailed description of the 
methodology used to compute the hospice wage index is contained in the 
September 4, 1996 hospice wage index proposed rule (61 FR 46579), the 
August 8, 1997 hospice wage index final rule (62 FR 42860), and the 
August 8, 2008 FY 2009 Hospice Wage Index final rule (73 FR 46464).
    The August 8, 2008 FY 2009 Hospice Wage Index final rule finalized 
a provision to phase out the BNAF over 3 years, starting with a 25 
percent reduction in the BNAF in FY 2009, an

[[Page 39389]]

additional 50 percent reduction for a total of a 75 percent reduction 
in FY 2010, and complete phase out in FY 2011. However, on February 17, 
2009, the President signed ARRA (Pub. L. 111-5); Section 4301(a) of 
ARRA eliminated the BNAF phase-out for FY 2009. Therefore, in an 
administrative instruction (Change Request 6418, Transmittal 1701, 
dated 3/13/2009) entitled ``Revision of the Hospice Wage Index and the 
Hospice Pricer for FY 2009,'' we instructed CMS contractors to use the 
revised FY 2009 hospice Pricer, which included a revised hospice wage 
index to reflect a full (unreduced) BNAF rather than the 25 percent 
reduced BNAF promulgated in the August 8, 2008 FY 2009 Hospice Wage 
Index final rule.
    While ARRA eliminated the BNAF phase-out for FY 2009, it did not 
change the 75 percent reduction in the BNAF for FY 2010, or the 
complete phase-out of the BNAF in FY 2011 that was previously 
promulgated in the August 8, 2008 FY 2009 Hospice Wage Index final 
rule.
    The history of the BNAF and a detailed discussion of the events 
which led to its application to the hospice wage index were included in 
the August 8, 2008 FY 2009 Hospice Wage Index final rule. We proposed 
and finalized the BNAF reduction in that final rule based on the 
following rationale.
    First, the original purpose of the BNAF was to prevent reductions 
in payments to the majority of hospices whose wage index was based on 
the original hospice wage index, which was artificially high due to 
flaws in the 1981 BLS data. Additionally, the BNAF was adopted to 
ensure that aggregate payments made to the hospice industry would not 
be decreased or increased as a result of the wage index change. While 
incorporating a BNAF into hospice wage indices could be rationalized in 
1997 as a way to smooth the transition from an old wage index to a new 
one, since hospices have had plenty of time to adjust to the then new 
wage index, it is difficult to justify maintaining in perpetuity a BNAF 
which was in part compensating for artificially high data to begin 
with.
    Second, the new wage index adopted in 1997 resulted in increases in 
wage index values for hospices in certain areas. The BNAF applies to 
hospices in all areas. Thus, hospices in areas that would have had 
increases without the BNAF received an artificial boost in the wage 
index for the past 11 years. We believe that continuation of this 
excess payment can no longer be justified.
    Third, an adjustment factor that is based on 24-year-old wage index 
values is not in keeping with our goal of using a hospice wage index 
that is as accurate, reliable, and equitable as possible in accounting 
for geographic variation in wages. We believe that those goals can be 
better achieved by using the pre-floor, pre-reclassified hospital wage 
index, without the outdated BNAF, which would be consistent with other 
providers. For instance, Medicare payments to home health agencies, 
that utilize a similar labor mix, are adjusted by the pre-floor, pre-
reclassified hospital wage index without any budget neutrality 
adjustment. We believe that using the pre-floor, pre-reclassified 
hospital wage index provides a good measure of area wage differences 
for both these home-based reimbursement systems.
    Fourth, in the 13 years since concerns about the impact of 
switching from an old to a new wage index were voiced, the hospice 
industry and hospice payments have grown substantially. Hospice 
expenditures in 2006 were $9.2 billion, compared to about $2.2 billion 
in 1998. Aggregate hospice expenditures are increasing at a rate of 
about $1 billion per year. MedPAC reports that expenditures are 
expected to grow at a rate of 9 percent per year through 2015, 
outpacing the growth rate of projected expenditures for hospitals, 
skilled nursing facilities, and physician and home health services. We 
believe that this growth in Medicare spending for hospice indicates 
that the original rationale of the BNAF, to cushion the impact of using 
the new wage index, is no longer justified. These spending growth 
figures also indicate that any negative financial impact to the hospice 
industry as a result of eliminating the BNAF is no longer present, and 
thus the need for a transitional adjustment has passed.
    Fifth, 13 years ago the industry also voiced concerns about the 
negative financial impact on individual hospices that could occur by 
adopting a new wage index. In August 1994 there were 1,602 hospices; 
currently there are 3,328 hospices. Clearly any negative financial 
impact from adopting a new wage index in 1997 is no longer present, or 
we would not have seen this growth in the industry. The number of 
Medicare-certified hospices has continued to increase, with a 26 
percent increase in the number of hospice providers from 2001 to 2005. 
This ongoing growth in the industry also suggests that phasing out the 
BNAF would not have a negative impact on access to care. Therefore, for 
these reasons, we believe that continuing to apply a BNAF for the 
purpose of mitigating any adverse financial impact on hospices or 
negative impact on access to care is no longer necessary. In the April 
24, 2009 proposed rule, we stated that we intended to continue the 
phase-out of the BNAF with a 75 percent reduction in FY 2010 and 
complete elimination in FY 2011.
    Comment: All but one of those who commented on the BNAF were 
opposed to the BNAF phase-out. One commenter felt that any reductions 
in payment, such as the BNAF, need to be in ``sync'' with overall 
health care reform as it relates to hospice. Others felt that any 
phase-out should be delayed to see if or how the BNAF fits into future 
hospice payment reform. Another commenter noted inconsistent levels of 
per-capita health care spending across states, particularly at the end 
of life.
    One commenter believed that CMS proposed to reduce the BNAF by 75 
percent in the FY 2010 hospice wage index proposed rule, and believes 
that this proposal is contrary to the intent of Congress. This 
commenter believed that the provision in ARRA which eliminated the FY 
2009 25 percent BNAF reduction, showed that Congress intended CMS to 
delay the first year of the three-year BNAF phase-out to begin the 25 
percent reduction of the BNAF in FY 2010 instead of FY 2009. While this 
commenter strongly recommended that CMS withdraw its proposal to phase 
out the BNAF, he also suggested that at a minimum we should spread the 
phase out over a 3-year period, starting in FY 2010 with a 25 percent 
reduction. A number of commenters also suggested different phase-out 
options from the current policy that we described in the proposed rule. 
One suggested a 7-year phase-out, with a 10 percent reduction in FY 
2010, and an additional 15 percent reduction over each of the following 
6 fiscal years. Another suggested a 4-year phase-out, at 25 percent per 
year, starting in FY 2010. Another suggested that we phase out the BNAF 
over 2 years, at 50 percent per year, starting in FY 2010. Another 
commenter suggested an even phase-out over 3 years starting in FY 2010. 
Several commenters noted that a more gradual phase-out would minimize 
the impact on hospices given the economic downturn, and the increased 
costs that hospices would incur in complying with the new CoPs, which 
were published on June 5, 2008 (73 FR 32088) and effective December 2, 
2008; and with the new data collection requirements.
    Response: The FY 2010 hospice wage index proposed rule did not re-
propose the 75 percent BNAF reduction, though we did accept comments on 
the BNAF reductions. Instead, we promulgated the

[[Page 39390]]

BNAF reductions in the FY 2009 hospice wage index final rule. At that 
time, we announced a 25 percent reduction in FY 2009, an additional 50 
percent reduction for a total of 75 percent in FY 2010, and complete 
elimination of the BNAF in FY 2011. ARRA eliminated the BNAF reduction 
in FY 2009, but the bill's language did not address the reduction in FY 
2010 and the elimination of the BNAF in FY 2011 that were finalized in 
the FY 2009 hospice wage index final rule. Though the BNAF phase-out 
was finalized in the FY 2009 rule, we accepted comments on it in this 
rule. While we explained in the FY 2010 hospice wage index proposed 
rule that ARRA's delay allowed additional time to prepare for the BNAF 
reduction, ARRA's delay was not our rationale for the 75 percent 
reduction. Our rationale for the BNAF phase-out was presented in the FY 
2009 hospice wage index proposed and final rules and was discussed 
above.
    We appreciate the commenters' concerns about how the BNAF phase-out 
would fit into the larger scenario of health care reform. Health care 
reform is a major agenda item for the Administration, and may affect 
the Medicare hospice benefit. We are not clear what the commenter is 
referring to regarding inconsistent health care spending by state, and 
believe this comment is outside the scope of our rule. While we cannot 
speak to the various health care reform measures under discussion in 
Congress, we continue to believe that the BNAF is an outdated 
adjustment, for the reasons previously mentioned in this section. 
However, we concur with the commenter that we should evaluate the 
impact of the BNAF reduction in the context of how this type of 
adjustment will fit into our plans for future hospice payment reform.
    A more gradual phase-out provides additional opportunity to 
evaluate the impact of the BNAF reduction in the context of how this 
type of adjustment will fit into hospice payment reform. As we describe 
in section IV of this final rule, we are moving forward with our plans 
to collect additional data from hospices to advance our goals for 
increasing the accuracy of hospice payments. This longer BNAF phase-out 
allows us the opportunity to more thoroughly assess the impact of 
iterative BNAF reductions while we are performing our hospice payment 
reform analyses. As such, we believe that a more gradual phase-out 
would be appropriate at this time. Therefore, in response to public 
comments recommending this course of action, we are finalizing a phase-
out of the BNAF over 7 years, with a 10 percent reduction in FY 2010, 
and additional 15 percent reduction for a total of 25 percent in FY 
2011, an additional 15 percent reduction for a total 40 percent in FY 
2012, an additional 15 percent reduction for a total of 55 percent in 
FY 2013, an additional 15 percent reduction for a total of 70 percent 
in FY 2014, an additional 15 percent reduction for a total of 85 
percent in FY 2015, and an additional 15 percent reduction for complete 
elimination in FY 2016. We will continue to evaluate the impact of the 
BNAF. To move reform forward, we look to the industry for their 
participation (for example, in providing technical assistance and/or 
offering to serve as pilot or demonstration sites in testing a new 
payment system). We reserve the right to revisit the BNAF phase-out 
should plans for hospice payment reform be delayed, or for other 
reasons the Secretary deems appropriate.
    Comment: One commenter wrote in support of the BNAF reduction, 
citing possibly fraudulent behaviors by a specific hospice, and citing 
what the commenter believed to be inappropriate spending by that 
hospice, including trips to Las Vegas and dinners at five-star 
restaurants.
    Response: We appreciate the support for the BNAF phase-out, but 
note that we proposed and finalized the phase-out based on the 
rationale presented earlier in this section. We cannot comment on the 
discretionary spending patterns of individual hospices. We have 
forwarded the comment to our Program Integrity group for review and 
possible action.
    Comment: A commenter believes that the BNAF phase-out was advanced 
to meet short-term budget goals, without collecting and analyzing data 
to determine if substantive changes to the hospice payment system were 
needed, and how any proposed changes would affect hospice programs and 
beneficiaries. He added that MedPAC had made recommendations related to 
reform of the hospice payment system, and that MedPAC had suggested 
that those changes be undertaken in a budget neutral fashion, with a 
transition period, and that the changes would require Congressional 
action. The commenter wrote that MedPAC had pointed out the lack of 
sufficient data to accurately model payment changes, and suggested that 
those changes could not be implemented before 2013 at the earliest. The 
commenter felt that the payment reduction resulting from the BNAF 
reduction would disproportionately impact some segments of the hospice 
community more than others and that CMS did not have the data to 
determine whether improvements in the rate structure could be made, and 
what such changes should look like. The commenter felt that 
implementing an across-the-board cut is inappropriate and unfounded. 
Some asked that no reduction in the BNAF occur until a full review of 
the data related to the cost of providing services is completed. 
Finally, one commenter suggested we do a full study of the utility and 
efficacy of hospice.
    Response: MedPAC's discussion of payment reform refers to an 
evaluation of and possible change to the entire hospice payment system. 
We agree with MedPAC's assessment that we do not have sufficient data 
yet to reform the entire hospice payment system, which would require 
legislative authority to do, and we are in the process of collecting 
the data that MedPAC has recommended. The BNAF phase-out was not 
included in MedPAC's discussion on reform of the entire hospice payment 
system. We proposed and finalized the policy to phase out the BNAF to 
remove an outdated adjustment from the wage index, to increase accuracy 
of payments, and to bring about parity with the home health wage index, 
since both home health agencies and hospices compete in the same labor 
market.
    The rationale for the BNAF phase-out in the FY 2009 proposed and 
final rules is set out in section II.A.3 of this final rule. Discussion 
of the regulatory and economic impacts of the BNAF phase-out were set 
out in the FY 2009 proposed and final rules, in the FY 2010 proposed 
rule, and are in this final rule.
    Comment: Several commenters wrote that CMS should use negotiated 
rulemaking to collaborate fully with hospice stakeholders before 
reducing or eliminating the BNAF. Some commenters noted that there is 
no requirement to phase out the BNAF, and that the negotiated 
rulemaking was not intended to be temporary or transitional. Several 
suggested that the BNAF should not be phased out without going through 
a negotiated rulemaking process. One commenter noted that CMS never 
suggested that the BNAF had ever been calculated inappropriately or 
that it was not achieving its intended goal of keeping total hospice 
payments under the new wage index the same as they would have been 
under the old BLS wage index. This commenter wrote that since the BNAF 
is achieving its intended purpose, CMS has no legal requirement or 
policy reason to eliminate it. This commenter also wrote that CMS 
insists on budget neutrality in all of its payment systems, and 
therefore

[[Page 39391]]

the public expected the BNAF implemented by the Committee to continue.
    Other commenters stated that while CMS asserted that the purpose of 
the BNAF was to smooth the transition from an outdated BLS-based wage 
index to the hospital-based wage index in 1998, the language in several 
payment rules suggested that the BNAF was not a time limited adjustment 
and was to be applied annually, during and after the transition to the 
hospital-based wage index. A few commenters noted that hospices have 
adjusted to the BNAF as an integral part of the wage index. A commenter 
said CMS' rationale for phasing out the BNAF suggested that eliminating 
the BNAF would restore fairness to the hospice wage index, when in 
reality no wage index methodology is perfect.
    Response: As we stated in the FY 2009 proposed and final rules, we 
continue to believe that the hospice wage index negotiating committee 
intended the BNAF to mitigate the negative financial impact of the 1998 
hospice wage index change. We continue to believe that because of the 
growth in the industry and the amount of time that has passed since the 
wage index change, the rationale for maintaining the BNAF is no longer 
justified and it is time for a policy change. In addition, from a 
parity perspective, we believe that a pre-floor, pre-reclassified 
hospital wage index is appropriate for use in adjusting rates for 
geographic variances in both of our home-based benefits, hospice and 
home health. Nothing in our data analysis has shown us that hospice 
labor costs differ substantially from home health labor costs. 
Therefore, we believe we cannot justify the 6 percent increase in the 
hospice wage index and the corresponding approximate 4 percent increase 
in aggregate payments as a result of the BNAF. We believe that the BNAF 
was originally put into place protect beneficiary access to hospice 
care. We believe the Negotiated Rulemaking Committee was primarily 
concerned about those areas of the country that would see their 
payments dramatically reduced as a result of the wage index change. The 
Committee was concerned that the payment reductions might affect the 
viability of hospices in these areas, thus ultimately risking access to 
care. The Committee also intended that aggregate payments to hospices 
not be reduced as a result of the wage index change. While we agree 
with the commenter that our 1998 regulation describes that the BNAF be 
applied during and after the transition to the new wage index, we also 
note that that same regulation describes that in the event that we 
decide to change this methodology, we would propose to do so in 
rulemaking. In the beginning of this section of the FY 2010 hospice 
wage index final rule, we cited our rationale from the FY 2009 hospice 
wage index final rule as to why we believe a policy change was 
warranted. However, as noted previously, we are phasing out the BNAF 
more gradually, over a 7 year period. We are reducing the BNAF in FY 
2010 by 10 percent, and then reducing it further by an additional 15 
percent for each of the next 6 years, so that it is fully phased-out by 
FY 2016. We will evaluate the impact of the BNAF reduction in the 
context of how this type of adjustment will fit into our plans for 
future hospice payment reform. As such, we believe that a more gradual 
phase-out is appropriate at this time.
    As previously noted, the decision to transition from the BLS-based 
wage index to the hospital-based wage index was a long process. In the 
October 14, 1994 proposed rule (59 FR 52130), we noted that both CMS 
(formally HCFA) and industry projections indicated that most hospices 
would have their wage indices lowered if a new wage index were based on 
unadjusted hospital data. The preamble of the final rule stated that, 
``During the discussions preliminary to developing a new wage index, 
the industry voiced concerns over the adverse financial impact of a new 
wage index on individual hospices and a possible reduction in overall 
Medicare hospice care payments'' (59 FR 52130). There were also 
concerns that access to hospice care could be affected. We noted that 
as a result of the impact of the lower payments to hospices in the 
aggregate, the new wage index would have to be at least budget neutral 
(59 FR 52131). The Committee Statement of April 13, 1995, which was 
published in a notice on November 29, 1995 (60 FR 61265), said that we 
would apply a factor to achieve budget neutrality, and noted that 
budget neutrality meant that aggregate Medicare hospice payments using 
the new hospital-based wage index would have to equal estimated 
payments that would have been made under the original hospice wage 
index.
    We disagree with the commenter who wrote that Medicare insists on 
budget neutrality in all of its payment systems, and therefore we 
should keep the BNAF. The commenter is correct that in many (but not 
all) of our other payment systems, we apply a budget neutrality 
adjustment each year when a wage index change occurs to ensure that 
aggregate payments made using the new wage index are the same as 
payments made using the prior year's wage index. A wage index is 
essentially an index of wage weights which are relative to 1, 
reflecting relative geographic differences in labor costs. Because the 
hospital wage data are updated each year, and these are the usual data 
upon which our wage indices are built, the year-to-year change in total 
Medicare benefit payments is minor. The yearly update enables the 
relative weight values of the wage indices to reflect current 
geographic wage fluctuations. The hospice budget neutrality adjustment 
factor differs from these budget neutrality adjustments in a 
significant way. Because the original, 1981 Bureau of Labor Statistics 
based hospice wage index wasn't updated since it was first created, the 
relative weights of the wage index values became inaccurate over the 
years, ultimately resulting in inaccurate hospice payments in most 
areas of the country, and erroneously low payments in other areas of 
the country. By the mid-1990s the weights were so distorted and 
inaccurate, that we were paying hospices more in the aggregate than we 
would have paid had a wage index which was reflective of more current 
geographic wage variances in labor costs been used, such as the yearly 
updated hospital wage index. This inaccuracy resulted in an unintended 
increase in payments. By continuing to apply the BNAF in perpetuity, we 
are no longer simply adjusting hospice payments for differences in 
geographic variances in labor costs; rather we are perpetrating 
artificially-inflated payments associated with inaccurate wage weights.
    As we described in the rationale provided at the beginning of this 
section, we do not believe that the Committee foresaw the tremendous 
growth in the hospice industry that has occurred in the past 12 years. 
As a result of this growth, the surge of new entrants into the industry 
over the past 12 years has benefited from this adjustment. We continue 
to believe that the Committee adopted the BNAF to help existing 
hospices transition to the 1998 wage index change. We note that in the 
late 1990's almost all hospices were not-for-profit. Impact analysis 
performed by participants in the negotiating process showed pockets of 
the country where the migration to the new hospital wage index would 
result in wage index values dramatically decreasing nearly 30 percent 
during the 3-year transition. The Committee was clearly concerned about 
hospice viability in those areas of the country, with a corresponding 
concern about access to care. We continue to believe that the unique 
BNAF

[[Page 39392]]

methodology, coupled with the 3-year transition period, served to 
address those concerns. It also continues to be our belief that because 
of the growth in the number of hospices, and the growth in the 
beneficiaries served that has occurred during the last decade, the 
Committee's goal to ensure that access to hospice care not be reduced 
as a result of the wage index change has been achieved. Therefore, we 
believe that this unique methodology for achieving budget neutrality 
has served its purpose and is no longer necessary, and we are phasing 
out this adjustment.
    We agree with the commenter that the language in the August 8, 1997 
final rule indicated that the BNAF would be applied during and after 
the transition period (62 FR 42862), which we believe we have done; 
however, this language did not imply that the BNAF could never be 
changed or eliminated. That same final rule clearly stated that if it 
became necessary to change the wage index methodology, we would do so 
through notice and comment rulemaking (62 FR 42863).
    Comment: A commenter wrote that CMS tried to diminish the size of 
the BNAF reduction by noting that they will be ``mitigated'' by market 
basket updates. The commenter said that market basket updates are 
essentially cost of living increases intended to keep providers' 
payments in line with increased costs. The commenter felt that by doing 
away with the BNAF through a regulatory process, CMS is essentially 
eliminating the hospice payment update, and then making a further cut, 
and making an end-run around the congressionally-established payment 
system for hospice services. He added that CMS had implemented the BNAF 
phase-out without seeking input from knowledgeable stakeholders, 
including Congress, and without relying on a deliberative and inclusive 
process, over a short three-month timeframe.
    Response: The commenter appears to suggest that, because Congress 
has determined that hospice payment rates are to be increased each year 
by the market basket update factor, it therefore follows that hospice 
payments must increase each year by the same percentage. We disagree, 
and believe that the commenter is looking at the market basket update 
alone, when instead Medicare payments to hospices are affected by other 
things--including the hospice wage index. Calculating the hospice 
payment rates for the four types of hospice services is merely the 
first step in determining how much hospices will be paid for services 
in any particular year. Once those rates are determined (by taking the 
prior year's rates and adjusting them by the market basket update 
factor), we apply the hospice wage index to the labor component of the 
payment rate. The values in that index change from year to year based 
on data CMS collects regarding hospital wages in different labor 
markets. Some hospices end up being paid at a rate lower than what they 
would have received based solely on the market basket update factor, 
while some end up being paid at a higher rate. These fluctuations occur 
every year, and they would continue to occur regardless of whether or 
not we phase out the BNAF. By requiring the hospice payment rates to be 
adjusted annually using the market basket update factor, Congress was 
not guaranteeing that hospices, individually or in the aggregate, would 
always receive an identical adjustment in payments. On the contrary, 
although Congress imposes a statutory cap on payments and sets the 
payment rates for the four categories of hospice services (based on the 
market basket update factor), it otherwise gives the Secretary the 
exceedingly broad authority to develop (and revise as necessary) the 
administrative tools used to calculate actual hospice payments under 
Medicare. See Section 1814(i)(1)(A) of the Act (``[T]he amount paid to 
a hospice program with respect to hospice care for which payment may be 
made under this part shall be an amount equal to the costs which are 
reaso