Medicare Program; Inpatient Rehabilitation Facility Prospective Payment System for Fiscal Year 2005

AGENCY:

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

ACTION:

Notice.

SUMMARY:

This notice updates prospective payment rates for inpatient rehabilitation facilities for Federal fiscal year (FY) 2005 as authorized under section 1886(j)(3)(C) of the Social Security Act (the Act). Section 1886(j)(5) of the Act requires the Secretary to publish in the Federal Register on or before August 1 before each fiscal year, the classifications and weighting factors for the inpatient rehabilitation facility (IRF) case-mix groups and a description of the methodology and data used in computing the prospective payment rates for that fiscal year.

DATES:

Effective Date: The updated IRF prospective payment rates are effective for discharges occurring on or after October 1, 2004, and on or before September 30, 2005 (FY 2005).

FOR FURTHER INFORMATION CONTACT:

Pete Diaz, (410) 786-1235, Jeanette Kranacs, (410) 786-9385, or Robert Kuhl, (410) 786-4597.

SUPPLEMENTARY INFORMATION:

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Table of Contents

I. Background

A. Requirements of the Statute for Updating the Prospective Payment System (PPS) for Inpatient Rehabilitation Facilities (IRFs)

B. Inpatient Rehabilitation Facility Prospective Payment—General Overview

C. Classification System for the Inpatient Rehabilitation Facility Prospective Payment System

D. Inpatient Rehabilitation Facility Market Basket Index

E. Area Wage Adjustment

F. Update of Payment Rates Under the Prospective Payment System for Inpatient Rehabilitation Facilities for Fiscal Year 2005

G. Examples of Computing the Total Adjusted Inpatient Rehabilitation Facility Prospective Payments

H. Outlier Payment Provision

II. Future Updates

III. Collection of Information Requirements

IV. Waiver of Proposed Rulemaking

V. Regulatory Impact Analysis

A. Introduction

1. Executive Order 12866

2. Regulatory Flexibility Act (RFA)

3. Impact on Rural Hospitals

1. Unfunded Mandates Reform Act

5. Executive Order 13132

6. Overall Impact

B. Anticipated Effects of the Notice

1. Budgetary Impact

2. Impact on Providers

3. Calculation of the Estimated FY 2004 IRF Prospective Payments

4. Calculation of the Estimated FY 2005 IRF Prospective Payments

I. Background

A. Requirements of the Statute for Updating the Prospective Payment System (PPS) for Inpatient Rehabilitation Facilities (IRFs)

On August 7, 2001, we published a final rule entitled “Medicare Program; Prospective Payment System for Inpatient Rehabilitation Facilities (CMS-1069-F)” in the Federal Register (66 FR 41316), that established a prospective payment system (PPS) for inpatient rehabilitation facilities (IRFs) as authorized under section 1886(j) of the Social Security Act (the Act) and codified at subpart P of part 412 of the Medicare regulations. In the August 7, 2001, final rule, we set forth the per discharge Federal rates for fiscal year (FY) 2002 that provided payment for the inpatient operating and capital costs to IRFs for the covered rehabilitation services they furnished (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 IRF PPS. Covered rehabilitation services include services for which benefits are provided under the fee-for-service Part A (Hospital Insurance Program) of the Medicare program.

Annual updates to the IRF PPS rates are required by section 1886(j)(3)(C) of the Act. In the August 1, 2002, notice (67 FR 49928), we set forth the per discharge Federal rates for FY 2003. In the August 1, 2003, final rule (68 FR 45674), we set forth the per discharge Federal rates for FY 2004.

In this notice, we set forth the prospective payment rates applicable for IRFs for discharges occurring during FY 2005. In establishing these payment rates, we update the IRF per discharge payment rates that were published in the August 1, 2003, final rule.

Section 1886(j)(5) of the Act requires the Secretary to publish in the Federal Register, on or before August 1 of the preceding fiscal year, the classifications and weighting factors for the IRF case-mix groups (CMGs) and a description of the methodology and data used in computing the prospective payment rates for the upcoming fiscal year. The statute also permits the Secretary to adjust the classification and weighting factors for the IRF CMGs from time to time. However, we continue to perform research on potential improvements to the methods used to establish the CMGs, facility adjustments (such as, teaching, rural, and low-income adjustments), and comorbidities. Because sufficient data from this research supporting potential improvements are currently not available, we are not making any adjustments at this time. Thus, in this notice, we are using the same classifications and weighting factors for the IRF CMGs that were originally set forth in the August 7, 2001, final rule and republished in the August 1, 2003, final rule. Further, the case and facility level adjustments described in the August 7, 2001, final rule will apply to the FY 2005 IRF PPS payment rates described in this notice.

Accordingly, the CMGs, comorbidity tiers, and the corresponding relative weights presented in the August 7, 2001, final rule will be used as the basis for developing the FY 2005 IRF PPS payment rates set forth in this notice.

Specifically, we multiply an increase factor, described in section II.D of this notice, by the FY 2004 IRF standard payment amount. Then we apply the budget neutral wage adjustment to develop the FY 2005 standard payment conversion factor. The FY 2005 standard payment conversion factor is then multiplied by the relative weights presented in Table 1 of this notice, and in the August 7, 2001, final rule, to develop the FY 2005 Federal unadjusted IRF PPS payment rates.

B. Inpatient Rehabilitation Facility Prospective Payment—General Overview

Section 4421 of the Balanced Budget Act of 1997 (BBA) (Pub. L. 105-33), as amended by section 125 of the Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 (BBRA) (Pub. L. 106-113), and by section 305 of the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA) (Pub. L. 106-554), provides for the implementation of a per discharge PPS, through new section 1886(j) of the Act, for IRFs—inpatient rehabilitation hospitals and rehabilitation units. Although a complete discussion of the IRF PPS provisions appears in the August 7, 2001, final rule, we provide below a general description of the IRF PPS.

The IRF PPS uses information from the Inpatient Rehabilitation—Patient Assessment Instrument (IRF-PAI), to classify patients into distinct CMGs based on clinical characteristics and expected resource needs. The CMGs were constructed using rehabilitation impairment categories, functional status (both motor and cognitive), age, comorbidities, and other factors that we deemed appropriate to improve the explanatory power of the groups.

Payment for services furnished to a Medicare patient consists of a predetermined, per-discharge amount for each CMG with applicable case and facility level adjustments. Payments under the IRF PPS encompass inpatient operating and capital costs of furnishing covered rehabilitation services (that is, routine, ancillary, and capital costs) but not costs of approved educational activities, bad debts, and other services or items outside the scope of the IRF PPS.

The IRF PPS is comprised of 100 distinct CMGs, and each CMG is associated with a specific payment rate. The existence of a comorbidity may affect the calculation of the Federal prospective payment rate. In general, Federal prospective payment rates are established using a standard payment conversion factor. A set of relative payment weights (which account for the relative difference in resource use across the CMGs) are applied to the standard payment conversion factor. The resulting payment rate may then be modified due to the application of a number of facility level and case level adjustments. The facility level adjustments include those that account for geographic variations in wages (wage index), the percentage of low-income patients (LIPs), and location in a rural area. Case level adjustments include those that apply for transfers, short-stays, interrupted stays, outliers, and cases in which the beneficiary expires.

For cost reporting periods beginning on or after January 1, 2002, and before October 1, 2002, section 1886(j)(1) of the Act and 42 CFR 412.626 of the regulations provided that IRFs transition into the PPS by receiving a “blended payment.” For cost reporting periods beginning on or after January 1, 2002, and before October 1, 2002, these blended payments consisted of 662/3 percent of the Federal IRF PPS rate and 331/3 percent of the payment the IRF would have been paid had the IRF PPS not been implemented. However, during the transition period, an IRF with a cost reporting period beginning on or after January 1, 2002, and before October 1, 2002, could elect to bypass this blended payment and be paid 100 percent of the Federal IRF PPS rate. For cost reporting periods beginning on or after October 1, 2002 (FY 2003), payments for all IRFs consist of 100 percent of the Federal IRF PPS payment rate.

C. Classification System for the Inpatient Rehabilitation Facility Prospective Payment System

As previously stated, in this notice, we are using the same case-mix classification system that was set forth in the August 7, 2001, final rule. It is our intention to pursue the development of refinements to the case-mix classification system that will improve the ability of the PPS to more accurately pay IRFs. We awarded a contract to the Rand Corporation (RAND) to conduct additional research that will provide us with the data necessary to address the feasibility of developing and implementing refinements. When the study has been completed, we plan to review various approaches so that we can propose an appropriate methodology to develop and apply refinements. Any specific refinement proposal resulting from this research will be published in the Federal Register for public review and comment.

Below Table 1, Relative Weights for Case-Mix Groups (CMGs), presents the CMGs, comorbidity tiers, and the corresponding Federal relative weights. We also present the average length of stay for each CMG. As we discussed in the August 7, 2001, final rule, the average length of stay for each CMG is used to determine when an IRF discharge meets the definition of a transfer, which results in a per diem case level adjustment. Because these data elements are not changing as a result of this notice, Table 1 shown below is identical to Table 1 that was published in the August 7, 2001, final rule (66 FR 41394-41396), and the August 1, 2003, final rule (68 FR 45704-45708). The relative weights reflect the inclusion of cases with an interruption of stay (patient returns on day of discharge or either of the next 2 days). The methodology we used to construct the data elements in Table 1 is described in detail in the August 7, 2001, final rule (66 FR 41350-41353).

D. Inpatient Rehabilitation Facility Market Basket Index and Labor-Related Share

Section 1886(j)(3)(C) of the Act requires the Secretary to establish an increase factor that reflects changes over time in the prices of an appropriate mix of goods and services included in the covered IRF services, which is referred to as a market basket index. Accordingly, in updating the FY 2005 payment rates set forth in this notice, we apply an appropriate increase factor to the FY 2004 IRF PPS payment rates that is equal to the IRF market basket. In constructing the IRF market basket, we use the methodology set forth in the August 1, 2003 final rule (68 FR 45685-45688). For this notice, the projected FY 2005 IRF market basket increase factor is 3.1 percent.

In addition, we have used the methodology described in the August 1, 2003 final rule (68 FR 45688-45689) to update the labor-related share for FY 2005. In FY 2004, we updated the 1992 market basket data to 1997. We believe that the 1997 market basket data is still the most accurate base year data available. Therefore, for FY 2005, we continue to use the 1997-based excluded hospital market basket with capital costs to determine the FY 2005 labor-related share. As shown in Table 2 the total FY 2005 labor-related share is 72.359 percent.

E. Area Wage Adjustment

Section 1886(j)(6) of the Act requires the Secretary to adjust the proportion (as estimated by the Secretary from time to time) of rehabilitation facilities' costs that are attributable to wages and wage-related costs for area differences in wage levels by a factor (established by the Secretary) reflecting the relative hospital wage level in the geographic area of the rehabilitation facility compared to the national average wage level for those facilities. Not later than October 1, 2001, and at least every 36 months thereafter, the Secretary is required to update the factor under the preceding sentence on the basis of information available to the Secretary (and updated as appropriate) of the wages and wage-related costs incurred in furnishing rehabilitation services. Any adjustments or updates made under section 1886(j)(6) of the Act must be made in a budget neutral manner.

In the August 1, 2003, final rule, we established an IRF wage index based on FY 1999 acute care hospital wage data to adjust the FY 2004 IRF payment rates. For the FY 2005 IRF PPS payment rates set forth in this notice, we are using an IRF wage index based on more recent FY 2000 acute care hospital wage data. The methodology for calculating the wage index remains the same and can be found at 66 FR 41358.

To calculate the wage-adjusted facility payments for the payment rates set forth in this notice, the Federal prospective payment is multiplied by the labor-related share (72.359 percent) to determine the labor-related portion of the Federal prospective payments. This labor-related portion is then multiplied by the applicable IRF wage index shown in Table 3A for urban areas and Table 3B for rural areas.

In addition, because any adjustment or update to the IRF wage index made under section 1886(j)(6) of the Act must be made in a budget neutral manner, we have calculated a budget neutral wage adjustment factor as established in the August 1, 2003 final rule and codified at 42 CFR 412.624(e)(1). We use the following steps to ensure that the FY 2005 IRF standard payment conversion factor reflects the update to the wage indices and to the labor-related share in a budget neutral manner:

Step 1. We determine the total amount of the FY 2004 IRF PPS rates using the FY 2004 standard payment conversion factor and the labor-related share and the wage indices from FY 2004 (as published in the August 1, 2003 final rule).

Step 2. We then calculate the total amount of IRF PPS payments using the FY 2004 standard payment conversion factor and the updated FY 2005 labor-related share and wage indices described above.

Step 3. We divide the amount calculated in step 1 by the amount calculated in step 2, which equals the FY 2005 budget neutral wage adjustment factor of 1.0035.

Step 4. We then apply the FY 2005 budget neutral wage adjustment factor from step 3 to the FY 2004 IRF PPS standard payment conversion factor after the application of the market basket update, described above, to determine the FY 2005 standard payment conversion factor.

F. Update of Payment Rates Under the Prospective Payment System for Inpatient Rehabilitation Facilities for Fiscal Year 2005

Once we calculate the IRF market basket increase factor and determine the budget neutral wage adjustment factor, this calculation enables us to determine the updated Federal prospective payments for FY 2005. In accordance with § 412.624(c)(3)(ii), we apply the market basket increase factor (3.1 percent) to the standard payment conversion factor for FY 2004 ($12,525) which equals $12,913. Then, we apply the budget neutral wage adjustment of 1.0035 to $12,913, which results in a final updated standard payment conversion factor for FY 2005 of $12,958. The FY 2005 standard payment conversion factor is applied to each CMG weight shown in Table 1, Relative Weights for Case-Mix Groups (CMGs), to compute the unadjusted IRF prospective payment rates for FY 2005 shown in Table 4.

Table 4, Federal Prospective Payments for Case-Mix Groups (CMGs) for FY 2005, displays the CMGs, and the comorbidity tiers, for FY 2005.

G. Examples of Computing the Total Adjusted Inpatient Rehabilitation Facility Prospective Payments

We will adjust the Federal prospective payments, described above, to account for geographic wage variation, low-income patients and, if applicable, facilities located in rural areas.

To illustrate the methodology that we will use for adjusting the Federal prospective payments, we provide the following example. One beneficiary is in rehabilitation facility A and another beneficiary is in rehabilitation facility B.

Rehabilitation facility A's disproportionate share hospital (DSH) adjustment is 5 percent, with a low-income patient (LIP) adjustment of 1.0239 and a wage index of 0.8946, and the facility is located in a rural area with an adjustment of 1.1914 percent.

Rehabilitation facility B's DSH is 15 percent, with a LIP adjustment of 1.0700 and a wage index of 1.4414, and the facility is located in an urban area. Both Medicare beneficiaries are classified to CMG 0111 (without comorbidities). This CMG represents a stroke with motor scores in the 27 to 33 range and the patient is between 82 and 88 years old. To calculate each IRF's total adjusted Federal prospective payment, we compute the wage-adjusted Federal prospective payment and multiply the result by the appropriate LIP adjustment and the rural adjustment (if applicable). The following table illustrates the components of the adjusted payment calculation.

Thus, the adjusted payment for facility A will be $ 24,634.33, and the adjusted payment for facility B will be $ 30,862.89.

The FY 2005 IRF PPS rates set forth in this notice will apply to all discharges on or after October 1, 2004 and on or before September 30, 2005.

H. Outlier Payment Provision

Section 1886(j)(4) of the Act provides the Secretary with the authority to make payments in addition to the basic IRF prospective payments for cases incurring extraordinarily high costs. In the August 7, 2001 IRF PPS final rule, we codified at § 412.624(e)(4) of the regulations the provision to make an adjustment for additional payments for outlier cases that have extraordinarily high costs relative to the costs of most discharges. Providing additional payments for outliers strongly improves the accuracy of the IRF PPS in determining resource costs at the patient and facility level. These additional payments reduce the financial losses that would otherwise be caused by treating patients who require more costly care and, therefore, reduce the incentives to underserve these patients.

Under § 412.624(e)(4), we make outlier payments for any discharges if the estimated cost of a case exceeds the adjusted IRF PPS payment for the CMG plus the adjusted threshold amount ($11,211 which is then adjusted for each IRF by the facility's wage adjustment, its low-income patient adjustment, and its rural adjustment, if applicable). We calculate the estimated cost of a case by multiplying the IRF's overall cost-to-charge ratio by the Medicare allowable covered charge. In accordance with § 412.624(e)(4), we pay outlier cases 80 percent of the difference between the estimated cost of the case and the outlier threshold (the sum of the adjusted IRF PPS payment for the CMG and the adjusted threshold amount).

In the August 1, 2003, final rule, we stated that we will continue to pay outlier cases at 80 percent of the difference between the estimated cost of the case and the outlier threshold (the sum of the adjusted IRF PPS payment for the CMG and the adjusted threshold amount) (68 FR 45692). However, using the methodology stated in the August 1, 2003, final rule (68 FR 45692-45693), we will apply a ceiling to an IRF's cost-to-charge ratios (CCR). Also, in the August 1, 2003, final rule (68 FR 45693-45694), we stated the methodology we will use to adjust IRF outlier payments and the methodology we will use to make these adjustments. We indicated that the methodology is codified in § 412.624(e)(4) and § 412.84(i)(3).

On February 6, 2004, CMS issued manual instructions in Change Request 2998 stating that we would set forth the upper threshold (ceiling) and the national CCRs applicable to IRFs in each year's annual notice of prospective payment rates published in the Federal Register. The upper threshold CCR for IRFs for FY 2005 is 1.461.

In addition, we are updating the national urban and rural CCRs for IRFs. Pursuant to § 412.624(e)(4) and § 412.84(i)(3), the national CCR is applied to the following situations:

• New IRFs that have not yet submitted their first Medicare cost report.
• IRFs whose operating or capital CCR is in excess of 3 standard deviations above the corresponding national geometric mean.
• Other IRFs for whom the fiscal intermediary obtains accurate data with which to calculate either an operating or capital CCR (or both) are not available.

The national CCR based on the facility location of either urban or rural will be used in each of the three situations cited above. Specifically, for FY 2005, we have estimated a national CCR of 0.636 for rural IRFs and 0.531 for urban IRFs. For new facilities, these national ratios will be used until the facility's actual CCR can be computed using the first tentative settled or final settled cost report data, which will then be used for the subsequent cost report period.

II. Future Updates

Medicare payments to IRFs are based on a predetermined national payment rate per discharge. Annual updates to these payment rates are required by section 1886(j)(3)(C) of the Act. These updates are based on increases to the IRF market basket amount. For FY 2005, the update is established at the market basket amount. The IRF market basket, or input price index, developed by our Office of the Actuary (OACT), is just one component in determining a change to the IRF cost per discharge amount. It captures only the pure price change of inputs (labor, materials, and capital) used by an IRF to produce a constant quantity and quality of care. Other factors also contribute to the change in costs per discharge, which include changes in case-mix, intensity, and productivity.

An update framework, used in combination with the market basket, seeks to enhance the system for updating payments by addressing factors beyond changes in pure input price. Such a framework has been used under the inpatient hospital PPS for years by both CMS and the Medicare Payment Advisory Commission (MedPAC).

In general, an update framework in the context of the IRF PPS would provide a tool for measuring and understanding changes in cost per discharge. This has the potential to support the continued accuracy of IRF payments and ensure that the IRF PPS keeps pace with changing economic and health care market trends. Accordingly, we are examining the potential for developing and using an update framework under the IRF PPS. It has the potential to provide information useful to policy makers in determining the magnitude of the annual updates.

III. Collection of Information Requirements

This document does not impose information collection and recordkeeping requirements. Consequently, it need not be reviewed by the Office of Management and Budget under the authority of the Paperwork Reduction Act of 1995.

IV. Waiver of Proposed Rulemaking

We ordinarily publish a proposed notice in the Federal Register to provide a period for public comment before the provisions of a notice such as this take effect. We can waive this procedure, however, if we find good cause that a notice-and-comment procedure is impracticable, unnecessary, or contrary to the public interest and we incorporate a statement of finding and its reasons in the notice issued. We find it is unnecessary to undertake notice and comment rulemaking as the statute requires annual updates, and this notice does not make any substantive changes in policy, but merely reflects the application of previously established methodologies. Therefore, under 5 U.S.C. 553(b)(B), for good cause, we waive notice and comment procedures.

V. Regulatory Impact Analysis

A. Introduction

The August 7, 2001 final rule established the IRF PPS for the payment of Medicare services for cost reporting periods beginning on or after January 1, 2002. We incorporated a number of elements into the IRF PPS, such as case-level adjustments, a wage adjustment, an adjustment for the percentage of low-income patients, a rural adjustment, and outlier payments. This notice sets forth updates of the IRF PPS rates contained in the August 7, 2001 final rule.

The purpose of this notice is not to initiate policy changes with regard to the IRF PPS; rather, it is to provide an update to the IRF payment rates for discharges during FY 2005. We note that some individual providers may experience larger increases in payments than others due to the distributional impact of the FY 2005 wage indices.

In constructing these impacts, we do not attempt to predict behavioral responses, and we do not make adjustments for future changes in such variables as discharges or case-mix. We note that certain events may combine to limit the scope or accuracy of our impact analysis, because such an analysis is future-oriented and, thus, susceptible to forecasting errors due to other changes in the forecasted impact time period. Some examples of such possible events are newly legislated general Medicare program funding changes by the Congress, or changes specifically related to IRFs. In addition, changes to the Medicare program may continue to be made as a result of the BBA, the BBRA, the BIPA, or new statutory provisions. Although these changes may not be specific to the IRF PPS, the nature of the Medicare program is such that the changes may interact, and the complexity of the interaction of these changes could make it difficult to predict accurately the full scope of the impact upon IRFs.

We have examined the impacts of this notice as required by Executive Order 12866 (September 1993, Regulatory Planning and Review), the Regulatory Flexibility Act (RFA) and Impact on Small Hospitals (September 16, 1980, Pub. L. 96-354), section 1102(b) of the Social Security Act, the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4), and Executive Order 13132.

1. Executive Order 12866

Executive Order 12866 (as amended by Executive Order 13258, which merely reassigns responsibility of duties) directs agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). A regulatory impact analysis (RIA) must be prepared for major rules with economically significant effects ($100 million or more in any 1 year).

We estimate that the cost to the Medicare program for IRF services in FY 2005 will increase by $170 million over FY 2004 levels. The updates to the IRF labor-related share and wage indices are made in a budget neutral manner. Thus, updating the IRF labor-related share and the wage indices to FY 2005 have no overall effect on estimated costs to the Medicare program. Therefore, this estimated cost to the Medicare program is due to the application of the updated IRF market basket of 3.1 percent. Because the combined distributional effects and the cost to the Medicare program are greater than $100 million, this update notice is considered a major rule as defined above.

2. Regulatory Flexibility Act (RFA)

The RFA requires agencies to analyze the economic impact of our regulations on small entities. If we determine that the regulation will impose a significant burden on a substantial number of small entities, we must examine options for reducing the burden. For purposes of the RFA, small entities include small businesses, nonprofit organizations, and governmental agencies. Most hospitals are considered small entities, either by nonprofit status or by having receipts of $6 million to $29 million in any 1 year. (For details, see the Small Business Administration's regulation that set forth size standards for health care industries at 65 FR 69432.) Because we lack data on individual hospital receipts, we cannot determine the number of small proprietary IRFs. Therefore, we assume that all IRFs (approximate total of 1,200 IRFs of which approximately 60 percent are nonprofit facilities) are considered small entities for the purpose of the analysis that follows. Medicare fiscal intermediaries and carriers are not considered to be small entities. Individuals and States are not included in the definition of a small entity.

This notice establishes a 3.1 percent increase to the Federal PPS rates. We do not expect an incremental increase of 3.1 percent to the Medicare Federal rates to have a significant effect on the overall revenues of IRFs. Most IRFs are units of hospitals that provide many different types of services (for example, acute care, outpatient services) and the rehabilitation component of their business is relatively minor in comparison. In addition, IRFs provide services to (and generate revenues from) patients other than Medicare beneficiaries.

3. Impact on Rural Hospitals

Section 1102(b) of the Act requires us to prepare a regulatory impact analysis for any notice that will have a significant impact on the operations of a substantial number of small rural hospitals. This analysis must conform to the provisions of section 604 of the RFA. For purposes of section 1102(b) of the Act, we define a small rural hospital as a hospital that is located outside of a Metropolitan Statistical Area (MSA) and has fewer than 100 beds.

As indicated above, this notice establishes a 3.1 percent increase to the Federal PPS rates. We do not expect an incremental increase of 3.1 percent to the Federal rates to have a significant effect on overall revenues or operations since most rural hospitals provide many different types of services (for example, acute care, outpatient services) and we believe that the rehabilitation component of their business is relatively minor in comparison.

4. Unfunded Mandates Reform Act

Section 202 of the Unfunded Mandates Reform Act of 1995 also requires that agencies assess anticipated costs and benefits before issuing any rule that may result in an expenditure in any 1 year by State, local, or tribal governments, in the aggregate, or by the private sector, of at least $110 million. This notice will not have an effect on the governments mentioned nor will it affect private sector costs.

5. Executive Order 13132

We examined this notice in accordance with Executive Order 13132 and determined that it will not have any negative impact on the rights, roles, or responsibilities of State, local, or tribal governments.

6. Overall Impact

For the reasons stated above, we have not prepared an analysis under the RFA and section 1102(b) of the Act because we believe that the effect of this notice will not increase burden but will benefit most IRFs through the increase in the payment rates as shown in the regulatory impact analysis below.

B. Anticipated Effects of the Notice

We discuss below the impacts of this notice on the Federal budget and on IRFs.

1. Budgetary Impact

Section 1886(j)(3)(C) of the Act requires annual updates to the IRF PPS payment rates. We project that updating the IRF PPS for discharges occurring on or after October 1, 2004 and on or before September 30, 2005 will cost the Medicare program $170 million. The budgetary impact is the result of the application of the updated IRF market basket of 3.1 percent.

2. Impact on Providers

For the impact analyses shown in the August 7, 2001 final rule, we simulate payments for 1,024 facilities. To construct the impact analyses set forth in this notice, we use the latest available data. For FY 2005, we used 1999 and 2000 Medicare claims and Functional Independence Measure (FIM) data for the same facilities that were used in constructing the impact analyses provided in the August 7, 2001 IRF PPS final rule (66 FR 41364-41365, and 41372) which was effective for cost reporting periods beginning on or after January 1, 2002. We still do not have enough post-IRF PPS data to determine the distributional impact on providers. Further, we will need a sufficient amount of these data to be able to rely on them as the basis for the impact analysis. Because IRFs began to be paid under the IRF PPS based on their cost report start date that occurred on or after January 1, 2002, sufficient Medicare claims data will not be available for those facilities whose cost report start date occurs later in the calendar year. The estimated distributional impacts among the various classification of IRFs for discharges occurring on or after October 1, 2004 and on or before September 30, 2005 is reflected in Table 6, Projected Impact of FY 2005 Update to the IRF PPS, of this notice. These impacts reflect the updated IRF wage adjustment and the application of the 3.1 percent IRF market basket increase.

3. Calculation of the Estimated FY 2004 IRF Prospective Payments

To estimate payments under the IRF PPS for FY 2004, we multiplied each facility's case-mix index by the facility's number of Medicare discharges, the FY 2004 standard payment conversion factor, the applicable wage index, a low-income patient adjustment, and a rural adjustment (if applicable). The adjustments include the following:

The wage adjustment, calculated as follows:

((1-Labor Share) + (Labor Share × Wage Index)) = (.27641 + (.72359 × Wage Index))

The disproportionate share adjustment, calculated as follows:

(1 + Disproportionate Share Percentage) raised to the power of .4838)

The rural adjustment, if applicable, calculated by multiplying payments by 1.1914.

4. Calculation of the Estimated FY 2005 IRF Prospective Payments

To calculate FY 2005 payments, we use the payment rates described in this notice that reflect the 3.1 percent market basket increase factor. Further, we use the same facility level adjustments described above.

Table 6 illustrates the aggregate impact of the estimated FY 2005 updated payments among the various classifications of facilities compared to the estimated IRF PPS payment rates applicable for FY 2004.

The first column, Facility Classification, identifies the type of facility. The second column identifies the number of facilities for each classification type, and the third column lists the number of cases. The fourth column indicates the impact of the budget neutral wage adjustment. The last column reflects the combined changes including the update to the FY 2004 payment rates by 3.1 percent and the budget neutral wage adjustment (including the FY 2005 labor-related share and the FY 2005 wage indices).

As Table 6 illustrates, all IRFs will benefit from the 3.1 percent market basket increase that is applied to FY 2004 IRF PPS payment rates to develop the FY 2005 rates. However, there may be distributional impacts among various IRFs due to the application of the updates to the labor-related share and wage indices in a budget neutral manner.

To summarize, all facilities will receive a 3.1 percent increase in their unadjusted IRF PPS payments. The estimated positive impact for all IRFs reflected in Table 6 is due to the effect of the update to the IRF market basket index.

In accordance with the provisions of Executive Order 12866, this notice was reviewed by the Office of Management and Budget (OMB).

Authority: Section 1886 (j) of the Social Security Act (42 U.S.C. 1395ww(j)) (Catalog of Federal Domestic Assistance Program No. 93.773, Medicare—Hospital Insurance Program; and No. 93.774, Medicare—Supplementary Medical Insurance Program)