Medicare Program; Inpatient Psychiatric Facilities Prospective Payment System-Update for Rate Year Beginning July 1, 2011 (RY 2012), 4998-5051 [2011-1507]

Agencies

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

[Federal Register Volume 76, Number 18 (Thursday, January 27, 2011)]
[Proposed Rules]
[Pages 4998-5051]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-1507]



[[Page 4997]]

Vol. 76

Thursday,

No. 18

January 27, 2011

Part II





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; Inpatient Psychiatric Facilities Prospective Payment 
System--Update for Rate Year Beginning July 1, 2011 (RY 2012); Proposed 
Rule

Federal Register / Vol. 76 , No. 18 / Thursday, January 27, 2011 / 
Proposed Rules

[[Page 4998]]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 412

[CMS-1346-P]
RIN 0938-AQ23


Medicare Program; Inpatient Psychiatric Facilities Prospective 
Payment System--Update for Rate Year Beginning July 1, 2011 (RY 2012)

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule would update the prospective payment rates 
for Medicare inpatient hospital services provided by inpatient 
psychiatric facilities (IPFs) for discharges occurring during the rate 
year beginning July 1, 2011 through September 30, 2012. The proposed 
rule would also change the IPF prospective payment system (PPS) payment 
rate update period to a rate year (RY) that coincides with a fiscal 
year (FY). In addition, the rule proposes policy changes affecting the 
IPF PPS teaching adjustment. It would also rebase and revise the 
Rehabilitation, Psychiatric, and Long-Term Care (RPL) market basket, 
and make some clarifications and corrections to terminology and 
regulations text.

DATES: To be assured consideration, comments must be received at one of 
the addresses provided in the ADDRESSES section no later than 5 p.m. 
EST on March 22, 2011.

ADDRESSES: In commenting, please refer to file code CMS-1346-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 this 
regulation to https://www.regulations.gov. Follow the instructions under 
the ``More Search Options'' tab.
    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-1346-P, P.O. Box 8010, Baltimore, MD 21244-1850.
    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By express or overnight mail. You may send written comments to 
the following address ONLY: Centers for Medicare & Medicaid Services, 
Department of Health and Human Services, Attention: CMS-1346-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 before the close of the comment period 
to either of the following addresses:
    a. For delivery in Washington, DC--Centers for Medicare & Medicaid 
Services, Department of Health and Human Services, Room 445-G, Hubert 
H. Humphrey Building, 200 Independence Avenue, SW., Washington, DC 
20201.
    (Because access to the interior of the Hubert H. Humphrey Building 
is not readily available to persons without Federal government 
identification, commenters are encouraged to leave their comments in 
the CMS drop slots located in the main lobby of the building. A stamp-
in clock is available for persons wishing to retain a proof of filing 
by stamping in and retaining an extra copy of the comments being 
filed.)
    b. For delivery in Baltimore, MD--Centers for Medicare & Medicaid 
Services, Department of Health and Human Services, 7500 Security 
Boulevard, Baltimore, MD 21244-1850.
    If you intend to deliver your comments to the Baltimore address, 
please call telephone number (410) 786-9994 in advance to schedule your 
arrival with one of our staff members.
    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and received after the comment 
period.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: Dorothy Myrick or Jana Lindquist, 
(410) 786-4533 (for general information). Mary Carol Barron, (410) 786-
7943, or Bridget Dickensheets, (410) 786-8670, (for information 
regarding the market basket and labor-related share). Theresa Bean, 
(410) 786-2287 (for information regarding the regulatory impact 
analysis).

SUPPLEMENTARY INFORMATION: Inspection of Public Comments: All comments 
received before the close of the comment period are available for 
viewing by the public, including any personally identifiable or 
confidential business information that is included in a comment. We 
post all comments received before the close of the comment period on 
the following Web site as soon as possible after they have been 
received: https://www.regulations.gov. Follow the search instructions on 
that Web site to view public comments.
    Comments received timely will also be available for public 
inspection as they are received, generally beginning approximately 3 
weeks after publication of a document, at the headquarters of the 
Centers for Medicare & Medicaid Services, 7500 Security Boulevard, 
Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 
a.m. to 4 p.m. To schedule an appointment to view public comments, 
phone 1-800-743-3951.

Table of Contents

    To assist readers in referencing sections contained in this 
document, we are providing the following table of contents.

I. Background
    A. Annual Requirements for Updating the IPF PPS
    B. Overview of the Legislative Requirements of the IPF PPS
    C. IPF PPS-General Overview
    D. Transition Period for Implementation of the IPF PPS
II. Proposal to Revise the IPF PPS Payment Rate Update Period from a 
Rate Year to a Fiscal Year
III. Proposed Rebasing and Revising of the Rehabilitation, 
Psychiatric, and Long-Term Care (RPL) Market Basket for Inpatient 
Psychiatric Facilities
    A. Background
    B. Overview of the Proposed FY 2008-Based RPL Market Basket
    C. Proposed Rebasing and Revising of the RPL Market Basket
    1. Development of Cost Categories and Weights
    a. Medicare Cost Reports
    b. Other Data Sources
    2. Final Cost Category Computation
    3. Selection of Price Proxies
    a. Wages and Salaries
    b. Employee Benefits
    c. Electricity
    d. Fuel, Oil, and Gasoline
    e. Water and Sewage
    f. Professional Liability Insurance
    g. Pharmaceuticals
    h. Food: Direct Purchases
    i. Food: Contract Services
    j. Chemicals
    k. Medical Instruments
    l. Photographic Supplies
    m. Rubber and Plastics
    n. Paper and Printing Products
    o. Apparel
    p. Machinery and Equipment
    q. Miscellaneous Products
    r. Professional Fees: Labor-Related
    s. Administrative and Business Support Services
    t. All Other: Labor-Related Services
    u. Professional Fees: Nonlabor-Related
    v. Financial Services
    w. Telephone Services
    x. Postage
    y. All Other: Nonlabor-Related Services

[[Page 4999]]

    4. Proposed Methodology for Capital Portion of the RPL Market 
Basket
    5. Proposed RY 2012 Market Basket Update
    6. Proposed Labor-Related Share
IV. Updates to the IPF PPS for RY Beginning July 1, 2011
    A. Determining the Standardized Budget-Neutral Federal Per Diem 
Base Rate
    1. Standardization of the Federal Per Diem Base Rate and 
Electroconvulsive Therapy (ECT) Rate
    2. Calculation of the Budget Neutrality Adjustment
    a. Outlier Adjustment
    b. Stop-Loss Provision Adjustment
    c. Behavioral Offset
    B. Proposed Update of the Federal Per Diem Base Rate and 
Electroconvulsive Therapy Rate
V. Proposed Update of the IPF PPS Adjustment Factors
    A. Overview of the IPF PPS Adjustment Factors
    B. Proposed Patient-Level Adjustments
    1. Proposed Adjustment for MS-IPF-DRG Assignment
    2. Proposed Payment for Comorbid Conditions
    3. Proposed Patient Age Adjustments
    4. Proposed Variable Per Diem Adjustments
    C. Facility-Level Adjustments
    1. Proposed Wage Index Adjustment
    a. Background
    b. Proposed Wage Index for RY 2012
    c. OMB Bulletins
    2. Proposed Adjustment for Rural Location
    3. Proposed Teaching Adjustment
    a. Proposed Temporary Adjustment to FTE Cap to Reflect Residents 
Affected by Hospital Closure
    b. Proposed Temporary Adjustment to FTE Cap to Reflect Residents 
Affected By Residency Program Closure
    4. Proposed Cost of Living Adjustment for IPFs Located in Alaska 
and Hawaii
    5. Proposed Adjustment for IPFs with a Qualifying Emergency 
Department (ED)
    D. Other Payment Adjustments and Policies
    1. Proposed Outlier Payments
    a. Proposed Update to the Outlier Fixed Dollar Loss Threshold 
Amount
    b. Proposed Statistical Accuracy of Cost-to-Charge Ratios
    2. Expiration of the Stop-Loss Provision
    3. Future Refinements
VI. Proposed Regulations Text Corrections
VII. Provisions of the Proposed Regulations
VIII. Collection of Information Requirements
IX. Regulatory Impact Analysis
Regulations Text
Addenda

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 
meanings in alphabetical order below:

BBRA Medicare, Medicaid and SCHIP [State Children's Health Insurance 
Program] Balanced Budget Refinement Act of 1999, (Pub. L. 106-113)
CBSA Core-Based Statistical Area
CCR Cost-to-charge ratio
CAH Critical access hospital
DSM-IV-TR Diagnostic and Statistical Manual of Mental Disorders 
Fourth Edition--Text Revision
DRGs Diagnosis-related groups
FY Federal fiscal year (October 1 through September 30)
ICD-9-CM International Classification of Diseases, 9th Revision, 
Clinical Modification
IPFs Inpatient psychiatric facilities
IRFs Inpatient rehabilitation facilities
LTCHs Long-term care hospitals
MedPAR Medicare provider analysis and review file
RPL Rehabilitation, Psychiatric, and Long-Term Care
RY Rate Year (July 1 through June 30)
TEFRA Tax Equity and Fiscal Responsibility Act of 1982, (Pub. L. 97-
248)

I. Background

A. Annual Requirements for Updating the IPF PPS

    In November 2004, we implemented the inpatient psychiatric 
facilities (IPF) prospective payment system (PPS) in a final rule that 
appeared in the November 15, 2004 Federal Register (69 FR 66922). In 
developing the IPF PPS, in order to ensure that the IPF PPS is able to 
account adequately for each IPF's case-mix, we performed an extensive 
regression analysis of the relationship between the per diem costs and 
certain patient and facility characteristics to determine those 
characteristics associated with statistically significant cost 
differences on a per diem basis. For characteristics with statistically 
significant cost differences, we used the regression coefficients of 
those variables to determine the size of the corresponding payment 
adjustments.
    In that final rule, we explained that we believe it is important to 
delay updating the adjustment factors derived from the regression 
analysis until we have IPF PPS data that includes as much information 
as possible regarding the patient-level characteristics of the 
population that each IPF serves. Therefore, we indicated that we did 
not intend to update the regression analysis and recalculate the 
Federal per diem base rate and the patient- and facility-level 
adjustments until we complete that analysis. Until that analysis is 
complete, we stated our intention to publish a notice in the Federal 
Register each spring to update the IPF PPS (71 FR 27041). We are 
proposing to change the payment rate update period to a RY that 
coincides with a FY. If we finalize this proposal, future update 
notices would be published in the Federal Register in the summer. See 
section II. of this proposed rule.
    Updates to the IPF PPS as specified in 42 CFR 412.428 include the 
following:
     A description of the methodology and data used to 
calculate the updated Federal per diem base payment amount.
     The rate of increase factor as described in Sec.  
412.424(a)(2)(iii), which is based on the Excluded Hospital With 
Capital market basket under the update methodology of section 
1886(b)(3)(B)(ii) of the Social Security Act (the Act) for each year 
(effective from the implementation period until June 30, 2006).
     For discharges occurring on or after July 1, 2006, the 
rate of increase factor for the Federal portion of the IPF's payment, 
which is based on the Rehabilitation, Psychiatric, and Long-Term Care 
(RPL) market basket.
     The best available hospital wage index and information 
regarding whether an adjustment to the Federal per diem base rate is 
needed to maintain budget neutrality.
     Updates to the fixed dollar loss threshold amount in order 
to maintain the appropriate outlier percentage.
     Description of the International Classification of 
Diseases, 9th Revision, Clinical Modification (ICD-9-CM) coding and 
diagnosis-related groups (DRGs) classification changes discussed in the 
annual update to the hospital inpatient prospective payment system 
(IPPS) regulations.
     Update to the electroconvulsive therapy (ECT) payment by a 
factor specified by CMS.
     Update to the national urban and rural cost-to-charge 
ratio medians and ceilings.
     Update to the cost of living adjustment factors for IPFs 
located in Alaska and Hawaii, if appropriate.
    Our most recent IPF PPS annual update occurred in the April 30, 
2010 Federal Register notice (75 FR 23106) (hereinafter referred to as 
the April 2010 IPF PPS notice) that set forth updates to the IPF PPS 
payment rates for RY 2011. This notice updated the IPF PPS per diem 
payment rates that were published in the May 2009 IPF PPS notice in 
accordance with our established policies.
    Since implementation of the IPF PPS, we have explained that we 
believe it is important to delay updating the adjustment factors 
derived from the regression analysis until we have IPF PPS data that 
include as much information as possible regarding the patient-level 
characteristics of the population that each IPF serves. Now that we are 
approximately 5 years into the system, we believe that we have enough 
data to begin that process. Therefore, we have begun the necessary

[[Page 5000]]

analysis in order to make future refinements. While we are not 
proposing to make refinements in this rulemaking, as explained in 
section V.D.3 below, we believe that in the next rulemaking, for RY 
2013, we will be ready to propose potential refinements.

B. Overview of the Legislative Requirements of the IPF PPS

    Section 124 of the Medicare, Medicaid, and SCHIP (State Children's 
Health Insurance Program) Balanced Budget Refinement Act of 1999, (Pub. 
L. 106-113) (BBRA) required implementation of the IPF PPS. 
Specifically, section 124 of the BBRA mandated that the Secretary 
develop a per diem PPS for inpatient hospital services furnished in 
psychiatric hospitals and psychiatric units that includes an adequate 
patient classification system that reflects the differences in patient 
resource use and costs among psychiatric hospitals and psychiatric 
units.
    Section 405(g)(2) of the Medicare Prescription Drug, Improvement, 
and Modernization Act of 2003 (MMA) (Pub. L. 108-173) extended the IPF 
PPS to distinct part psychiatric units of critical access hospitals 
(CAHs).
    To implement these provisions, we published various proposed and 
final rules in the Federal Register. For more information regarding 
these rules, see the CMS Web sites https://www.cms.hhs.gov/InpatientPsychFacilPPS/ and https://www.cms.hhs.gov/InpatientpsychfacilPPS/02_regulations.asp.
    Section 3401(f) of the Patient Protection and Affordable Care Act 
(Pub. L. 111-148) as amended by section 10319(e) of that Act and by 
section 1105(d) of the Health Care and Education Reconciliation Act of 
2010 (Pub. L. 111-152) (hereafter referred to as ``The Affordable Care 
Act'') added subsection (s) to section 1886 of the Act.
    Section 1886(s)(1) is titled ``Reference to Establishment and 
Implementation of System'' and it refers to section 124 of the 
Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999, 
which relates to the establishment of the IPF PPS.
    Section 1886(s)(2)(A)(i) of the Act requires the application of the 
productivity adjustment described in Sec.  1886(b)(3)(B)(xi)(II) of the 
Act to the IPF PPS for the rate year beginning in 2012 and each 
subsequent rate year. Section 1886(s)(2)(A)(ii) of the Act requires the 
application of an ``other adjustment'' that reduces any update to an 
IPF PPS base rate by percentages specified in section 1886(s)(3) of the 
Act for rate years beginning in 2010 through the rate year beginning in 
2019. For the rate year beginning in 2011, the reduction is 0.25 
percentage point. We are proposing to implement that provision for RY 
2012 in this proposed rule.
    Section 1886(s)(4) of the Act requires the establishment of a 
quality data reporting program for the IPF PPS beginning in RY 2014.

C. IPF PPS-General Overview

    The November 2004 IPF PPS final rule (69 FR 66922) established the 
IPF PPS, as authorized under section 124 of the BBRA and codified at 
subpart N of part 412 of the Medicare regulations. The November 2004 
IPF PPS final rule set forth the per diem Federal rates for the 
implementation year (the 18-month period from January 1, 2005 through 
June 30, 2006), and it provided payment for the inpatient operating and 
capital costs to IPFs for covered psychiatric services they furnish 
(that is, routine, ancillary, and capital costs, but not costs of 
approved educational activities, bad debts, and other services or items 
that are outside the scope of the IPF PPS). Covered psychiatric 
services include services for which benefits are provided under the 
fee-for-service Part A (Hospital Insurance Program) Medicare program.
    The IPF PPS established the Federal per diem base rate for each 
patient day in an IPF derived from the national average daily routine 
operating, ancillary, and capital costs in IPFs in FY 2002. The average 
per diem cost was updated to the midpoint of the first year under the 
IPF PPS, standardized to account for the overall positive effects of 
the IPF PPS payment adjustments, and adjusted for budget neutrality.
    The Federal per diem payment under the IPF PPS is comprised of the 
Federal per diem base rate described above and certain patient- and 
facility-level payment adjustments that were found in the regression 
analysis to be associated with statistically significant per diem cost 
differences.
    The patient-level adjustments include age, DRG assignment, 
comorbidities, and variable per diem adjustments to reflect higher per 
diem costs in the early days of an IPF stay. Facility-level adjustments 
include adjustments for the IPF's wage index, rural location, teaching 
status, a cost of living adjustment for IPFs located in Alaska and 
Hawaii, and presence of a qualifying emergency department (ED).
    The IPF PPS provides additional payment policies for: outlier 
cases; stop-loss protection (which was applicable only during the IPF 
PPS transition period); interrupted stays; and a per treatment 
adjustment for patients who undergo ECT.
    A complete discussion of the regression analysis appears in the 
November 2004 IPF PPS final rule (69 FR 66933 through 66936).
    Section 124 of BBRA does not specify an annual update rate strategy 
for the IPF PPS and is broadly written to give the Secretary discretion 
in establishing an update methodology. Therefore, in the November 2004 
IPF PPS final rule, we implemented the IPF PPS using the following 
update strategy:
     Calculate the final Federal per diem base rate to be 
budget neutral for the 18-month period of January 1, 2005 through June 
30, 2006.
     Use a July 1 through June 30 annual update cycle.
     Allow the IPF PPS first update to be effective for 
discharges on or after July 1, 2006 through June 30, 2007.

D. Transition Period for Implementation of the IPF PPS

    In the November 2004 IPF PPS final rule, we provided for a 3-year 
transition period. During this 3-year transition period, an IPF's total 
payment under the PPS was based on an increasing percentage of the 
Federal rate with a corresponding decreasing percentage of the IPF PPS 
payment that is based on reasonable cost concepts. However, effective 
for cost reporting periods beginning on or after January 1, 2008, IPF 
PPS payments are based on 100 percent of the Federal rate.

II. Proposal To Revise the IPF PPS Payment Rate Update Period From a 
Rate Year to a Fiscal Year

    In this proposed rule, we are proposing a change to the current 
period for the annual updates of the IPF PPS Federal payment rates. We 
propose to revise the IPF PPS payment rate update period by switching 
from a RY that begins on July 1 and goes through June 30 to a period 
that coincides with a fiscal year (FY), that is, October 1 through 
September 30. We would also refer to the update period as a FY 
beginning with the update period that begins in 2012, that is, FY 2013. 
This change in the annual update period would allow us to consolidate 
Medicare publications by aligning the IPF PPS update with the annual 
update of the ICD-9-CM codes, which are effective on October 1 of each 
year. Currently, in addition to our annual proposed and final 
rulemaking documents, we publish a change request transmittal every 
August updating the ICD-9-CM codes related to the DRG and comorbidity 
adjustments. By aligning the IPF PPS

[[Page 5001]]

with the same update period as the ICD-9-CM codes, we will eliminate 
the need to publish a transmittal off-cycle.
    We maintain the same diagnostic coding and DRG classification for 
IPFs that are used under the IPPS for providing the psychiatric care. 
When the IPF PPS was implemented, we adopted the same diagnostic code 
set and DRG patient classification systems (that is, the CMS DRGs) that 
were utilized at the time under the hospital IPPS. Every year, changes 
to the ICD-9-CM coding system are addressed in the IPPS proposed and 
final rules. These changes are effective October 1 of each year and 
must be used by acute care hospitals as well as other providers to 
report diagnostic and procedure information. The IPF PPS has always 
incorporated ICD-9-CM coding changes made in the annual IPPS update. 
This proposed change to the annual payment rate update period would 
allow the annual update to the rates and the ICD-9-CM coding update to 
occur on the same schedule and appear in the same Federal Register 
document.
    Our intent in making the change in the payment rate update schedule 
is to place the IPF PPS on the same update cycle as other PPSs, making 
it administratively efficient. In order to smoothly transition to a 
payment update period that runs from October 1 through September 30, we 
propose that the RY 2012 period run from July 1, 2011 to September 30, 
2012 such that RY 2012 would be 15 months. Under this proposal, after 
RY 2012, the rate update period for the IPF PPS payment rates and other 
policy changes would begin on October 1 and go through September 30. 
The next update to the IPF PPS rates after RY 2012 would be the FY 2013 
update cycle, which would begin on October 1, 2012 and go through 
September 30, 2013. In addition, we are proposing to make a change to 
the regulations at Sec.  412.402 to add the term ``IPF Prospective 
Payment System Rate Year'' which would mean October 1 through September 
30. We are proposing that the RY would be referred to as a FY. The 
discussion of the proposed 15-month market basket update for the 
proposed 2012 rate year can be found in section III.C.5. of this 
proposed rule.

III. Proposed Rebasing and Revising of the Rehabilitation, Psychiatric, 
and Long-Term Care (RPL) Market Basket for Inpatient Psychiatric 
Facilities

A. Background

    The input price index (that is, the market basket) that was used to 
develop the IPF PPS was the Excluded Hospital with Capital market 
basket. This market basket was based on 1997 Medicare cost report data 
and included data for Medicare participating IPFs, inpatient 
rehabilitation facilities (IRFs), long-term care hospitals (LTCHs), 
cancer hospitals, and children's hospitals. Although ``market basket'' 
technically describes the mix of goods and services used in providing 
hospital care, this term is also commonly used to denote the input 
price index (that is, cost category weights and price proxies combined) 
derived from that market basket. Accordingly, the term ``market 
basket'' as used in this document refers to a hospital input price 
index.
    Beginning with the May 2006 IPF PPS final rule (71 FR 27046 through 
27054), IPF PPS payments were updated using a FY 2002-based market 
basket reflecting the operating and capital cost structures for IRFs, 
IPFs, and LTCHs (hereafter referred to as the Rehabilitation, 
Psychiatric, and Long-Term Care (RPL) market basket).
    We excluded cancer and children's hospitals from the RPL market 
basket because their payments are based entirely on reasonable costs 
subject to rate-of-increase limits established under the authority of 
section 1886(b) of the Act, which are implemented in regulations at 
Sec.  413.40. They are not reimbursed through a PPS. Also, the FY 2002 
cost structures for cancer and children's hospitals are noticeably 
different than the cost structures of the IRFs, IPFs, and LTCHs. A 
complete discussion of the FY 2002-based RPL market basket appears in 
the May 2006 IPF PPS final rule (71 FR 27046 through 27054).
    In the May 1, 2009 IPF PPS notice (74 FR 20362), we expressed our 
interest in exploring the possibility of creating a stand-alone IPF 
market basket that reflects the cost structures of only IPF providers. 
We note that, of the available options, one would be to join the 
Medicare cost report data from freestanding IPF providers (presently 
incorporated into the FY 2002-based RPL market basket) with data from 
hospital-based IPF providers. We indicated that an examination of the 
Medicare cost report data comparing freestanding and hospital-based 
IPFs revealed considerable differences between the two with respect to 
cost levels and cost structures. At that time, we were unable to fully 
understand the differences between these two types of IPF providers. As 
a result, we felt that further research was required and we solicited 
public comment for additional information that might help us to better 
understand the reasons for the variations in costs and cost structures, 
as indicated by the cost report data, between freestanding and 
hospital-based IPFs (74 FR 20376).
    We summarized the public comments we received and our responses in 
the April 2010 IPF PPS notice (75 FR 23111 through 23113). Despite 
receiving comments from the public on this issue, we remain unable to 
sufficiently understand the observed differences in costs and cost 
structures between hospital-based and freestanding IPFs, and therefore 
we do not feel it is appropriate at this time to incorporate data from 
hospital-based IPFs with those of freestanding IPFs to create a stand-
alone IPF market basket.
    Although we do not feel it would be appropriate to propose a stand-
alone IPF market basket, we are currently exploring the viability of 
creating two separate market baskets from the current RPL, one of which 
would include freestanding IPFs and freestanding IRFs and would be used 
to update payments under both the IPF and IRF payment systems. The 
other would be a stand-alone LTCH market basket. Depending on the 
outcome of our research, we anticipate the possibility of proposing a 
rehabilitation and psychiatric (RP) market basket in the next update 
cycle. We welcome public comment on the possibility of using this type 
of market basket to update IPF payments in the future.
    For this update cycle, we are proposing to rebase and revise the FY 
2002-based RPL market basket by creating a proposed FY 2008-based RPL 
market basket as described below. In the following discussion, we 
provide an overview of the market basket and describe the methodologies 
we propose to use for purposes of determining the operating and capital 
portions of the proposed FY 2008-based RPL market basket.

B. Overview of the Proposed FY 2008-Based RPL Market Basket

    The proposed FY 2008-based RPL market basket is a fixed weight, 
Laspeyres-type price index. A Laspeyres price index measures the change 
in price, over time, of the same mix of goods and services purchased in 
the base period. Any changes in the quantity or mix of goods and 
services (that is, intensity) purchased over time are not measured.
    The index itself is constructed in three steps. First, a base 
period is selected (in this proposed rule, the base period is FY 2008) 
and total base period expenditures are estimated for a set of mutually 
exclusive and exhaustive spending categories with the proportion of 
total costs that each category

[[Page 5002]]

represents being calculated. These proportions are called cost or 
expenditure weights. Second, each expenditure category is matched to an 
appropriate price or wage variable, referred to as a price proxy. In 
nearly every instance, these price proxies are derived from publicly 
available statistical series that are published on a consistent 
schedule (preferably at least on a quarterly basis). Finally, the 
expenditure weight for each cost category is multiplied by the level of 
its respective price proxy. The sum of these products (that is, the 
expenditure weights multiplied by their price levels) for all cost 
categories yields the composite index level of the market basket in a 
given period. Repeating this step for other periods produces a series 
of market basket levels over time. Dividing an index level for a given 
period by an index level for an earlier period produces a rate of 
growth in the input price index over that timeframe.
    As noted above, the market basket is described as a fixed-weight 
index because it represents the change in price over time of a constant 
mix (quantity and intensity) of goods and services needed to furnish 
hospital services. The effects on total expenditures resulting from 
changes in the mix of goods and services purchased subsequent to the 
base period are not measured. For example, a hospital hiring more 
nurses to accommodate the needs of patients would increase the volume 
of goods and services purchased by the hospital, but would not be 
factored into the price change measured by a fixed-weight hospital 
market basket. Only when the index is rebased would changes in the 
quantity and intensity be captured, with those changes being reflected 
in the cost weights. Therefore, we rebase the market basket 
periodically so the cost weights reflect recent changes in the mix of 
goods and services that hospitals purchase (hospital inputs) to furnish 
inpatient care between base periods.

C. Proposed Rebasing and Revising of the RPL Market Basket

    We are inviting public comments on our proposed methodological 
changes to the RPL market basket. The terms ``rebasing'' and 
``revising,'' while often used interchangeably, actually denote 
different activities. ``Rebasing'' means moving the base year for the 
structure of costs of an input price index (for example, in this 
proposed rule, we are proposing to shift the base year cost structure 
for the RPL market basket from FY 2002 to FY 2008). ``Revising'' means 
changing data sources, price proxies, or methods, used to derive the 
input price index. We propose to rebase and revise the market basket 
used to update the IPF PPS.
1. Development of Cost Categories and Weights
a. Medicare Cost Reports
    The proposed FY 2008-based RPL market basket consists of several 
major cost categories derived from the FY 2008 Medicare cost reports 
for freestanding IRFs, freestanding IPFs, and LTCHs including wages and 
salaries, pharmaceuticals, professional liability insurance, capital, 
and a residual. These FY 2008 cost reports include providers whose cost 
report begin date is on or between October 1, 2007 and September 30, 
2008. We choose to use FY 2008 as the base year because we believe that 
the Medicare cost reports for this year represent the most recent, 
complete set of Medicare cost report data available for IRFs, IPFs, and 
LTCHs. However, there is an issue with obtaining data specifically for 
benefits and contract labor from this set of FY 2008 Medicare cost 
reports since IRFs, IPFs, and LTCHs were not required to complete the 
Medicare cost report worksheet from which these data were collected 
(Worksheet S-3, part II). As a result, only a small number of providers 
(less than 30 percent) reported data for these categories, and we do 
not expect these FY 2008 data to improve over time. Furthermore, since 
IRFs, IPFs, and LTCHs were not required to submit data for Worksheet S-
3, part II in previous cost reporting years, we have always had this 
issue of incomplete Medicare cost report data for benefits and contract 
labor (including when we finalized the FY 2002-based RPL market 
basket). Due to the incomplete benefits and contract labor data for 
IRFs, IPFs, and LTCHs, we propose to develop these cost weights using 
FY 2008 Medicare cost report data for IPPS hospitals (similar to the 
method that was used for the FY 2002-based RPL market basket). 
Additional detail is provided later in this section.
    Since our goal is to measure cost shares that are reflective of 
case mix and practice patterns associated with providing services to 
Medicare beneficiaries, we are proposing to limit our selection of 
Medicare cost reports to those from hospitals that have a Medicare 
average length of stay (LOS) that is within a comparable range of their 
total facility average LOS. We believe this provides a more accurate 
reflection of the structure of costs for Medicare covered days. We 
propose to use the cost reports of IRFs and LTCHs with Medicare average 
LOS within 15 percent (that is, 15 percent higher or lower) of the 
total facility average LOS for the hospital. This is the same edit 
applied to derive the FY 2002-based RPL market basket and generally 
includes those LTCHs and IRFs with Medicare LOS within approximately 5 
days of the facility average LOS of the hospital.
    We are proposing to use a less stringent measure of Medicare LOS 
for IPFs. For this provider-type, and in order to produce a robust 
sample size, we propose to use those facilities' Medicare cost reports 
whose average LOS is within 30 or 50 percent (depending on the total 
facility average LOS) of the total facility average LOS. This is the 
same edit applied to derive the FY 2002-based RPL market basket.
    We applied these LOS edits to first obtain a set of cost reports 
for facilities that have a Medicare LOS within a comparable range of 
their total facility LOS. Using this set of Medicare cost reports, we 
then calculated cost weights for four cost categories directly from the 
FY 2008 Medicare cost reports for freestanding IRFs, freestanding IPFs, 
and LTCHs (found in Table 1 below). These Medicare cost report cost 
weights were then supplemented with information obtained from other 
data sources (explained in more detail below) to derive the proposed FY 
2008-based RPL market basket cost weights.

   Table 1--Major Cost Categories and Their Respective Cost Weights as
         Calculated Directly From FY 2008 Medicare Cost Reports
------------------------------------------------------------------------
                                                            Proposed FY
                                                          2008-based RPL
                  Major cost categories                    market basket
                                                             (percent)
------------------------------------------------------------------------
Wages and salaries......................................          47.371
Professional liability insurance (Malpractice)..........           0.764
Pharmaceuticals.........................................           6.514
Capital.................................................           8.392
All other...............................................          36.959
------------------------------------------------------------------------

b. Other Data Sources
    In addition to the IRF, IPF and LTCH Medicare cost reports for 
freestanding IRFs and freestanding IPFs, and LTCHs, the other data 
sources we used to develop the proposed FY 2008-based RPL market basket 
cost weights were the FY 2008 IPPS Medicare cost reports and the 
Benchmark Input-Output (I-O) Tables created by the Bureau of Economic 
Analysis (BEA), U.S. Department of Commerce. The FY 2008 Medicare cost 
reports include providers whose cost report begin date is on or

[[Page 5003]]

between October 1st, 2007 and September 30, 2008.
    As noted above, the proposed FY 2008-based RPL cost weights for 
benefits and contract labor were derived using FY 2008-based IPPS 
Medicare cost reports. We used these Medicare cost reports to calculate 
cost weights for Wages and Salaries, Benefits, and Contract Labor for 
IPPS hospitals for FY 2008. For the proposed Benefits cost weight for 
the FY 2008-based RPL market basket, the ratio of the FY 2008 IPPS 
Benefits cost weight to the FY 2008 IPPS Wages and Salaries cost weight 
was applied to the RPL Wages and Salaries cost weight. Similarly, the 
ratio of the FY 2008 IPPS Contract Labor cost weight to the FY 2008 
IPPS Wages and Salaries cost weight was applied to the RPL Wages and 
Salaries cost weight to derive a Contract Labor cost weight for the 
proposed FY 2008-based RPL market basket.
    The All Other cost category is divided into other hospital 
expenditure category shares using the 2002 BEA Benchmark I-O data 
following the removal of the portions of the All Other cost category 
provided in Table 1 that are attributable to Benefits and Contract 
Labor. The BEA Benchmark I-O data are scheduled for publication every 5 
years. The most recent data available are for 2002. BEA also produces 
Annual I-O estimates; however, the 2002 Benchmark I-O data represent a 
much more comprehensive and complete set of data that are derived from 
the 2002 Economic Census. The Annual I-O is simply an update of the 
Benchmark I-O tables. For the FY 2002-based RPL market basket, we used 
the 1997 Benchmark I-O data. We are proposing to use the 2002 Benchmark 
I-O data in the FY 2008-based RPL market basket. Instead of using the 
less detailed Annual I-O data, we aged the 2002 Benchmark I-O data 
forward to 2008. The methodology we used to age the data forward 
involves applying the annual price changes from the respective price 
proxies to the appropriate cost categories. We repeat this practice for 
each year.
    The All Other cost category expenditure shares are determined as 
being equal to each category's proportion to total ``all other'' in the 
aged 2002 Benchmark I-O data. For instance, if the cost for telephone 
services represented 10 percent of the sum of the ``all other'' 
Benchmark I-O hospital expenditures, then telephone services would 
represent 10 percent of the RPL market basket's All Other cost 
category.
2. Final Cost Category Computation
    As stated previously, for this rebasing we are proposing to use the 
FY 2008 Medicare cost reports for IRFs, IPFs, and LTCHs to derive four 
major cost categories. The proposed FY 2008-based RPL market basket 
includes two additional cost categories that were not broken out 
separately in the FY 2002-based RPL market basket: ``Administrative and 
Business Support Services'' and ``Financial Services''. The inclusion 
of these two additional cost categories, which are derived using the 
Benchmark I-O data, is consistent with the addition of these two cost 
categories to the FY 2006-based IPPS market basket (74 FR 43845). We 
are proposing to break out both categories so we can better match their 
respective expenses with more appropriate price proxies. A thorough 
discussion of our rationale for each of these cost categories is 
provided in the section III.C.3.s. of this proposed rule. Also, the 
proposed FY 2008-based RPL market basket excludes one cost category: 
Photo Supplies. The 2002 Benchmark I-O weight for this category is 
considerably smaller than the 1997 Benchmark I-O weight, presently 
accounting for less than one-tenth of one percentage point of the RPL 
market basket. Therefore, we are proposing to include the photo 
supplies costs in the Chemical cost category weight with other similar 
chemical products.
    We are not proposing to change our definition of the labor-related 
share. However, we are proposing to rename our aggregate cost 
categories from ``labor-intensive'' and ``nonlabor-intensive'' services 
to ``labor-related'' and ``nonlabor-related'' services. This is 
consistent with the FY 2006-based IPPS market basket (74 FR 43845). As 
discussed in more detail below and similar to the FY 2002-based RPL 
market basket, we classify a cost category as labor-related and include 
it in the labor-related share if the cost category is defined as being 
labor-intensive and its cost varies with the local labor market. In 
previous regulations, we grouped cost categories that met both of these 
criteria into labor-intensive services. We believe the proposed new 
labels more accurately reflect the concepts that they are intended to 
convey. We are not proposing to change our definition of the labor-
related share because we continue to classify a cost category as labor-
related if the costs are labor-intensive and vary with the local labor 
market.
3. Selection of Price Proxies
    After computing the FY 2008 cost weights for the proposed rebased 
RPL market basket, it was necessary to select appropriate wage and 
price proxies to reflect the rate of price change for each expenditure 
category. With the exception of the proxy for Professional Liability 
Insurance, all of the proxies for the operating portion of the proposed 
FY 2008-based RPL market basket are based on Bureau of Labor Statistics 
(BLS) data and are grouped into one of the following BLS categories:
    Producer Price Indexes--Producer Price Indexes (PPIs) measure price 
changes for goods sold in markets other than the retail market. PPIs 
are preferable price proxies for goods and services that hospitals 
purchase as inputs because these PPIs better reflect the actual price 
changes faced by hospitals. For example, we use a special PPI for 
prescription drugs, rather than the Consumer Price Index (CPI) for 
prescription drugs, because hospitals generally purchase drugs directly 
from a wholesaler. The PPIs that we use measure price changes at the 
final stage of production.
    Consumer Price Indexes--Consumer Price Indexes (CPIs) measure 
change in the prices of final goods and services bought by the typical 
consumer. Because they may not represent the price faced by a producer, 
we used CPIs only if an appropriate PPI was not available, or if the 
expenditures were more similar to those faced by retail consumers in 
general rather than by purchasers of goods at the wholesale level. For 
example, the CPI for food purchased away from home is used as a proxy 
for contracted food services.
    Employment Cost Indexes--Employment Cost Indexes (ECIs) measure the 
rate of change in employee wage rates and employer costs for employee 
benefits per hour worked. These indexes are fixed-weight indexes and 
strictly measure the change in wage rates and employee benefits per 
hour. Appropriately, they are not affected by shifts in employment mix.
    We evaluated the price proxies using the criteria of reliability, 
timeliness, availability, and relevance. Reliability indicates that the 
index is based on valid statistical methods and has low sampling 
variability. Timeliness implies that the proxy is published regularly, 
preferably at least once a quarter. Availability means that the proxy 
is publicly available. Finally, relevance means that the proxy is 
applicable and representative of the cost category weight to which it 
is applied. The

[[Page 5004]]

proposed CPIs, PPIs, and ECIs selected meet these criteria.
    Table 2 sets forth the proposed FY 2008-based RPL market basket 
including cost categories, and their respective weights and price 
proxies. For comparison purposes, the corresponding FY 2002-based RPL 
market basket cost weights are listed, as well. For example, Wages and 
Salaries are 49.447 percent of total costs in the proposed FY 2008-
based RPL market basket compared to 52.895 percent for the FY 2002-
based RPL market basket. Employee Benefits are 12.831 percent in the 
proposed FY 2008-based RPL market basket compared to 12.982 percent for 
the FY 2002-based RPL market basket. As a result, compensation costs 
(Wages and Salaries plus Employee Benefits) for the proposed FY 2008-
based RPL market basket are 62.278 percent of total costs compared to 
65.877 percent for the FY 2002-based RPL market basket.
    Following Table 2 is a summary outlining the choice of the proxies 
we propose to use for the operating portion of the FY 2008-based RPL 
market basket. The price proxies proposed for the capital portion are 
described in more detail in the capital methodology section (see 
section III.C.4. of this proposed rule).
    We note that the proxies for the operating portion of the FY 2008-
based RPL market basket are the same as those used for the FY 2006-
based IPPS operating market basket. Because these proxies meet our 
criteria of reliability, timeliness, availability, and relevance, we 
believe they are the best measures of price changes for the cost 
categories. For further discussion on the FY 2006-based IPPS market 
basket, see the IPPS final rule published in the Federal Register on 
August 27, 2009 (74 FR 43843).

Table 2--Proposed FY 2008-Based RPL Market Basket Cost Categories, Weights, and Price Proxies With FY 2002-Based
                             RPL Market Basket Cost Weights Included for Comparison
----------------------------------------------------------------------------------------------------------------
                                                      FY          Proposed FY
                                               2002[dash]based  2008[dash]based
               Cost categories                    RPL market       RPL market       Proposed FY 2008-based RPL
                                                 basket cost      basket cost      market basket price proxies
                                                   weights          weights
----------------------------------------------------------------------------------------------------------------
1. Compensation..............................           65.877           62.278
    A. Wages and Salaries \1\................           52.895           49.447  ECI for Wages and Salaries,
                                                                                  Civilian Hospital Workers.
    B. Employee Benefits \1\.................           12.982           12.831  ECI for Benefits, Civilian
                                                                                  Hospital Workers.
2. Utilities.................................            0.656            1.578
    A. Electricity...........................            0.351            1.125  PPI for Commercial Electric
                                                                                  Power.
    B. Fuel, Oil, and Gasoline...............            0.108            0.371  PPI for Petroleum Refineries.
    C. Water and Sewage......................            0.197            0.082  CPI-U for Water & Sewerage
                                                                                  Maintenance.
3. Professional Liability Insurance..........            1.161            0.764  CMS Hospital Professional
                                                                                  Liability Insurance
                                                                                 Premium Index.
4. All Other Products and Services...........           22.158           26.988
    A. All Other Products....................           13.325           15.574
    (1.) Pharmaceuticals.....................            5.103            6.514  PPI for Pharmaceutical
                                                                                  Preparations for Human Use
                                                                                  (Prescriptions).
    (2.) Food: Direct Purchases..............            0.873            2.959  PPI for Processed Foods &
                                                                                  Feeds.
    (3.) Food: Contract Services.............            0.620            0.392  CPI-U for Food Away From Home.
    (4.) Chemicals \2\.......................            1.100            1.100  Blend of Chemical PPIs.
    (5.) Medical Instruments.................            1.014            1.795  PPI for Medical, Surgical, and
                                                                                  Personal Aid Devices.
    (6.) Photographic Supplies...............            0.096
    (7.) Rubber and Plastics.................            1.052            1.131  PPI for Rubber & Plastic
                                                                                  Products.
    (8.) Paper and Printing Products.........            1.000            1.021  PPI for Converted Paper &
                                                                                  Paperboard Products.
    (9.) Apparel.............................            0.207            0.210  PPI for Apparel.
    (10.) Machinery and Equipment............            0.297            0.106  PPI for Machinery & Equipment.
    (11.) Miscellaneous Products.............            1.963            0.346  PPI for Finished Goods less
                                                                                  Food and Energy.
    B. All Other Services....................            8.833           11.414
    (1.) Labor-related Services..............            5.111            4.681
    (a.) Professional Fees: Labor-related \3\            2.892            2.114  ECI for Compensation for
                                                                                  Professional and Related
                                                                                  Occupations.
    (b.) Administrative and Business Support               n/a            0.422  ECI for Compensation for Office
     Services \4\.                                                                and Administrative Services.
    (c.) All Other: Labor-Related Services               2.219            2.145  ECI for Compensation for
     \5\.                                                                         Private Service Occupations.
    (2.) Nonlabor-Related Services...........            3.722            6.733
    (a.) Professional Fees: Nonlabor-Related               n/a            4.211  ECI for Compensation for
     \3\.                                                                         Professional and Related
                                                                                  Occupations.
    (b.) Financial Services \5\..............              n/a            0.853  ECI for Compensation for
                                                                                  Financial Activities.
    (c.) Telephone Services..................            0.240            0.416  CPI-U for Telephone Services.
    (d.) Postage.............................            0.682            0.630  CPI-U for Postage.
    (e.) All Other: Nonlabor-Related Services            2.800            0.623  CPI-U for All Items less Food
     \6\.                                                                         and Energy.
5. Capital-Related Costs.....................           10.149            8.392
    A. Depreciation..........................            6.187            5.519
    (1.) Fixed Assets........................            4.250            3.286  BEA chained price index for
                                                                                  nonresidential construction
                                                                                  for hospitals and special care
                                                                                  facilities--vintage weighted
                                                                                  (26 years).
    (2.) Movable Equipment...................            1.937            2.233  PPI for Machinery and
                                                                                  Equipment--vintage weighted
                                                                                  (11 years).
    B. Interest Costs........................            2.775            1.954
    (1.) Government/Nonprofit................            2.081            0.653  Average yield on domestic
                                                                                  municipal bonds (Bond Buyer 20
                                                                                  bonds)--vintage-weighted (26
                                                                                  years).

[[Page 5005]]

 
    (2.) For Profit..........................            0.694            1.301  Average yield on Moody's Aaa
                                                                                  bonds--vintage-weighted (26
                                                                                  years).
    C. Other Capital-Related Costs...........            1.187            0.919  CPI-U for Residential Rent.
                                              ----------------------------------
        Total................................          100.000          100.000
----------------------------------------------------------------------------------------------------------------
Note: Detail may not add to total due to rounding.
\1\ Contract Labor is distributed to Wages and Salaries and Employee Benefits based on the share of total
  compensation that each category represents.
\2\ To proxy the Chemicals cost category, we used a blended PPI composed of the PPI for Industrial Gases, the
  PPI for Other Basic Inorganic Chemical Manufacturing, the PPI for Other Basic Organic Chemical Manufacturing,
  and the PPI for Soap and Cleaning Compound Manufacturing. For more detail about this proxy, see section
  III.C.3.j. of the preamble of this proposed rule.
\3\ The Professional Fees: Labor-related and Professional Fees: Nonlabor-related cost categories were included
  in one cost category called Professional Fees in the FY 2002-based RPL market basket. For more detail about
  how these new categories were derived, we refer readers to sections III.C.6. of the preamble of this proposed
  rule, on the labor-related share.
\4\ The Administrative and Business Support Services cost category was contained within All Other: Labor-
  intensive Services cost category in the FY 2002-based RPL market basket. The All Other: Labor-intensive
  Services cost category is renamed the All Other: Labor-related Services cost category for the FY 2008-based
  RPL market basket.
\5\ The Financial Services cost category was contained within the All Other: Non-labor Intensive Services cost
  category in the FY 2002-based RPL market basket. The All Other: Non-labor Intensive Services cost category is
  renamed the All Other: Nonlabor-related Services cost category for the FY 2008-based RPL market basket.

a. Wages and Salaries
    We are proposing to use the ECI for Wages and Salaries for Hospital 
Workers (All Civilian) (BLS series code CIU1026220000000I) to measure 
the price growth of this cost category. This same proxy was used in the 
FY 2002-based RPL market basket.
b. Employee Benefits
    We are proposing to use the ECI for Employee Benefits for Hospital 
Workers (All Civilian) to measure the price growth of this cost 
category. This same proxy was used in the FY 2002-based RPL market 
basket.
c. Electricity
    We are proposing to use the PPI for Commercial Electric Power (BLS 
series code WPU0542). This same proxy was used in the FY 2002-based RPL 
market basket.
d. Fuel, Oil, and Gasoline
    For the FY 2002-based RPL market basket, this category only 
included expenses classified under North American Industry 
Classification System (NAICS) 21 (Mining). We proxied this category 
using the PPI for Commercial Natural Gas (BLS series code WPU0552). For 
the proposed FY 2008-based market basket, we are proposing to add costs 
to this category that had previously been grouped in other categories. 
The added costs include petroleum-related expenses under NAICS 324110 
(previously captured in the miscellaneous category), as well as 
petrochemical manufacturing classified under NAICS 325110 (previously 
captured in the chemicals category). These added costs represent 80 
percent of the hospital industry's fuel, oil, and gasoline expenses (or 
80 percent of this category). Because the majority of the industry's 
fuel, oil, and gasoline expenses originate from petroleum refineries 
(NAICS 324110), we are proposing to use the PPI for Petroleum 
Refineries (BLS series code PCU324110324110) as the proxy for this cost 
category.
e. Water and Sewage
    We are proposing to use the CPI for Water and Sewerage Maintenance 
(All Urban Consumers) (BLS series code CUUR0000SEHG01) to measure the 
price growth of this cost category. This same proxy was used in the FY 
2002-based RPL market basket.
f. Professional Liability Insurance
    We are proposing to proxy price changes in hospital professional 
liability insurance premiums (PLI) using percentage changes as 
estimated by the CMS Hospital Professional Liability Index. To generate 
these estimates, we collect commercial insurance premiums for a fixed 
level of coverage while holding nonprice factors constant (such as a 
change in the level of coverage). This method is also used to proxy PLI 
price changes in the Medicare Economic Index (75 FR 73268). This same 
proxy was used in the FY 2002-based RPL market basket.
g. Pharmaceuticals
    We are proposing to use the PPI for Pharmaceuticals for Human Use, 
Prescription (BLS series code WPUSI07003) to measure the price growth 
of this cost category. We note that we are not making a change to the 
PPI that is used to proxy this cost category. There was a recent change 
to the BLS naming convention for this series; however this is the same 
proxy that was used in the FY 2002-based RPL market basket.
h. Food: Direct Purchases
    We are proposing to use the PPI for Processed Foods and Feeds (BLS 
series code WPU02) to measure the price growth of this cost category. 
This same proxy was used in the FY 2002-based RPL market basket.
i. Food: Contract Services
    We are proposing to use the CPI for Food Away From Home (All Urban 
Consumers) (BLS series code CUUR0000SEFV) to measure the price growth 
of this cost category. This same proxy was used in the FY 2002-based 
RPL market basket.
j. Chemicals
    We are proposing to use a blended PPI composed of the PPI for 
Industrial Gas Manufacturing (NAICS 325120) (BLS series code 
PCU325120325120P), the PPI for Other Basic Inorganic Chemical 
Manufacturing (NAICS 325180) (BLS series code PCU32518-32518-), the PPI 
for Other Basic Organic Chemical Manufacturing (NAICS 325190) (BLS

[[Page 5006]]

series code PCU32519-32519-), and the PPI for Soap and Cleaning 
Compound Manufacturing (NAICS 325610) (BLS series code PCU32561-32561-
). Using the 2002 Benchmark I-O data, we found that these NAICS 
industries accounted for approximately 90 percent of the hospital 
industry's chemical expenses.
    Therefore, we are proposing to use this blended index because we 
believe its composition better reflects the composition of the 
purchasing patterns of hospitals than does the PPI for Industrial 
Chemicals (BLS series code WPU061), the proxy used in the FY 2002-based 
RPL market basket. Table 3 below shows the weights for each of the four 
PPIs used to create the blended PPI, which we determined using the 2002 
Benchmark I-O data.

                  Table 3--Blended Chemical PPI Weights
------------------------------------------------------------------------
                                            Weights (in
                  Name                       percent)          NAICS
------------------------------------------------------------------------
PPI for Industrial Gas Manufacturing....              35          325120
PPI for Other Basic Inorganic Chemical                25          325180
 Manufacturing..........................
PPI for Other Basic Organic Chemical                  30          325190
 Manufacturing..........................
PPI for Soap and Cleaning Compound                    10          325610
 Manufacturing..........................
------------------------------------------------------------------------

k. Medical Instruments
    We are proposing to use the PPI for Medical, Surgical, and Personal 
Aid Devices (BLS series code WPU156) to measure the price growth of 
this cost category. In the 1997 Benchmark I-O data, approximately half 
of the expenses classified in this category were for surgical and 
medical instruments. Therefore, we used the PPI for Surgical and 
Medical Instruments and Equipment (BLS series code WPU1562) to proxy 
this category in the FY 2002-based RPL market basket. The 2002 
Benchmark I-O data show that surgical and medical instruments now 
represent only 33 percent of these expenses and that the largest 
expense category is surgical appliance and supplies manufacturing 
(corresponding to BLS series code WPU1563). Due to this reallocation of 
costs over time, we are proposing to change the price proxy for this 
cost category to the more aggregated PPI for Medical, Surgical, and 
Personal Aid Devices.
l. Photographic Supplies
    We are proposing to eliminate the cost category specific to 
photographic supplies for the proposed FY 2008-based RPL market basket. 
These costs would now be included in the Chemicals cost category 
because the costs are presently reported as all other chemical 
products. Notably, although we would be eliminating the specific cost 
category, these costs would still be accounted for within the RPL 
market basket.
m. Rubber and Plastics
    We are proposing to use the PPI for Rubber and Plastic Products 
(BLS series code WPU07) to measure price growth of this cost category. 
This same proxy was used in the FY 2002-based RPL market basket.
n. Paper and Printing Products
    We are proposing to use the PPI for Converted Paper and Paperboard 
Products (BLS series code WPU0915) to measure the price growth of this 
cost category. This same proxy was used in the FY 2002-based RPL market 
basket.
o. Apparel
    We are proposing to use the PPI for Apparel (BLS series code 
WPU0381) to measure the price growth of this cost category. This same 
proxy was used in the FY 2002-based RPL market basket.
p. Machinery and Equipment
    We are proposing to use the PPI for Machinery and Equipment (BLS 
series code WPU11) to measure the price growth of this cost category. 
This same proxy was used in the FY 2002-based RPL market basket.
q. Miscellaneous Products
    We are proposing to use the PPI for Finished Goods Less Food and 
Energy (BLS series code WPUSOP3500) to measure the price growth of this 
cost category. Using this index would remove the double-counting of 
food and energy prices, which would already be captured elsewhere in 
the market basket. This same proxy was used in the FY 2002-based RPL 
market basket.
r. Profession