Medicare Program; Inpatient Rehabilitation Facility Prospective Payment System for FY 2003

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) 2003 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, 2002 and on or before September 30, 2003 (FY 2003).

FOR FURTHER INFORMATION CONTACT:

Robert Kuhl, (410) 786-4597, Nora Hoban, (410) 786-0675.

SUPPLEMENTARY INFORMATION:

Availability of Copies and Electronic Access

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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. IRF Prospective Payment—General Overview

C. Classification System for the IRF PPS

D. IRF Market Basket Index

E. Update of Payment Rates Under the PPS for IRFs for FY 2003

F. Area Wage Adjustment

G. Examples of Computing the Total Adjusted IRF Prospective Payments

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) and Impact on Small Hospitals

3. Unfunded Mandates Reform Act

4. Executive Order 13132

5. Overall Impact

B. Anticipated Effects of the Notice

1. Budgetary Impact

2. Impact on Providers

3. Calculation of the Estimated FY 2002 IRF Prospective Payments

4. Calculation of the Estimated FY 2003 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 per discharge Federal rates for FY 2002 that provided payment for 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 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 this notice, we set forth the prospective payment rates applicable for IRFs for discharges occurring during FY 2003 as mandated by the Act. In establishing these payment rates, we update the IRF per discharge payment rates that were published in the August 7, 2001 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. In this notice, we are using the same classifications and weighting factors for the IRF CMGs that were set forth in the August 7, 2001 final rule. Although the statute permits the Secretary to adjust the classification and weighting factors for IRF CMGs from time to time, we are not making any adjustments at this time because the data are not available as discussed in section I.C of this notice. Further, the case and facility level adjustments described in the August 7, 2001 final rule will apply to the FY 2003 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 2003 IRF PPS rates set forth in this notice.

Specifically, we multiply an increase factor, described in section I.D of this notice, by the FY 2002 IRF standardized payment amount (also referred to as the budget neutral conversion factor in the August 7, 2001 final rule (66 FR 41364 through 41367) to develop the FY 2003 standardized payment amount. Then we multiply the FY 2003 budget neutral conversion factor by the relative weights presented in the August 7, 2001 final rule and in Table 1 of this notice to develop the FY 2003 Federal unadjusted IRF PPS payment rates.

B. IRF 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 (66 FR 41316), we provide below a general description of the IRF PPS.

The IRF PPS uses information from a patient assessment instrument, the Inpatient Rehabilitation—Patient Assessment Instrument (IRF-PAI), to classify patients into distinct case-mix groups (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 uses Federal prospective payment rates across 100 distinct CMGs. In addition, the existence of a specific comorbidity may affect the calculation of the Federal prospective payment rate. In general, however, the FY 2002 Federal prospective payment rates were established using a standardized payment amount. A set of relative payment weights (which account for the relative difference in resource use across CMGs) are applied to the budget neutral conversion factor, and finally, a number of facility level and case level adjustments may apply. 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 § 412.626 of the regulations provide that IRFs transition into the PPS receiving a “blended payment.” For cost reporting periods beginning on or after January 1, 2002 and before October 1, 2002, these blended payments consist 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 may 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), however, payments for all IRFs will consist of 100 percent of the Federal IRF PPS rate.

C. Classification System for the IRF PPS

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 have awarded a contract to the Rand Corporation (RAND) to conduct additional research that will, in the initial(1), P. 9 of the signature package version, stages, 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.

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 through 41396). 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 are described in detail in the August 7, 2001 final rule (66 FR 41350 through 41353).

D. IRF Market Basket Index

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 2003 payment rates set forth in this notice, we apply an appropriate increase factor to the FY 2002 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 Appendix D of the August 7, 2001 final rule. For this notice, the projected FY 2003 IRF market basket increase factor is 3 percent.

E. Update of Payment Rates Under the PPS for IRFs for FY 2003

Once we calculate the increase factor, we can determine the updated Federal prospective payments for FY 2003. In accordance with § 412.624(c)(3)(ii), we apply the increase factor (3 percent) to the budget neutral conversion factor for FY 2002 ($11,838). This results in an updated standardized payment amount for FY 2003 of $12,193. The FY 2003 standardized payment amount is applied to each CMG weight shown in Table 1 to compute the unadjusted IRF prospective payment rates for FY 2003.

Table 2, Federal Prospective Payments for Case-Mix Groups (CMGs) for FY 2003, displays the CMGs, the comorbidity tiers, and the corresponding unadjusted IRF prospective payment rates for FY 2003.

F. 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 such 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 shall be made in a budget neutral manner.

For the FY 2003 IRF PPS payment rates set forth in this notice, we are applying the same wage adjustment as used for the FY 2002 IRF PPS rates. This includes both the labor-related share and wage indices as specified in the August 7, 2001 final rule. In the August 7, 2001 final rule, we established a wage index based on FY 1997 acute care hospital wages to adjust the FY 2002 IRF payment rates. Although the statute permits the Secretary to adjust the labor-related share and wage index from time to time, we are not adjusting these figures at this time. It is our intention to update the annual wage index and the labor-related share as soon as feasible. However, we must first develop a methodology to incorporate a budget neutrality adjustment for calculating these figures in order to be consistent with the statute. Once we have developed a proposed methodology, we plan to discuss it in a future proposed rule allowing the public an opportunity to comment on its design and application. We believe that continuing to apply the wage index and labor-related share used in FY 2002, provides an appropriate adjustment to account for geographic variation in wage levels, consistent with the statute.

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 percentage (72.395) 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. These tables shown below are identical to Table 3A and 3B that were published in the August 7, 2001 final rule (66 FR 41397 through 41404).

The resulting wage-adjusted labor-related portion is added to the nonlabor-related portion, resulting in a wage-adjusted payment. The following example illustrates how a Medicare fiscal intermediary would calculate the wage-adjusted Federal prospective payment for IRF services with a hypothetical Federal prospective payment of $10,000 for services provided in the rehabilitation facility located in Heartland, USA. The IRF wage index value for facilities located in Heartland, USA is 1.0234. The labor-related portion (72.395 percent) of the Federal prospective payment is $7,239.50 = ($10,000*72.395 percent), and the nonlabor related portion (27.605 percent) of the Federal prospective payment is $2,760.50 = ($10,000*27.605 percent). Therefore, the wage-adjusted payment calculation is as follows: $10,169.40 = ($7,239.50*1.0234) + $2,760.50.

G. Examples of Computing the Total Adjusted IRF 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 0.987, and the facility is located in a rural area.

Rehabilitation facility B's DSH is 15 percent, with a LIP adjustment of 1.0700 and a wage index of 1.234, 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 DSH 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 $24,857.64, and the adjusted payment for facility B will be $25,739.48.

Computing Total Payments Under the IRF PPS for the Transition Period

Section 1886(j)(1) of the Act and § 412.626 describe how to compute a facility's payment during a transition period. Under the transition period, the prospective payment amount consists of a portion of the amount the facility would have been paid if the PPS had not been implemented (the facility-specific payment) and a portion of the adjusted Federal prospective payment. Under § 412.626, for cost reporting periods beginning on or after January 1, 2002 and before October 1, 2002, payment would consist of 331/3 percent of the amount of the facility-specific payment and 662/3 percent of the IRF adjusted Federal prospective payment. For cost reporting periods beginning on or after October 1, 2002, payment would be 100 percent of the adjusted Federal prospective payment.

Section 305(b)(1)(C) of the BIPA added section 1886(j)(1)(F) to the Act, which allows an IRF to elect to be paid 100 percent of the adjusted Federal prospective payment for each cost reporting period to which the blended payment methodology would otherwise apply. This provision of the BIPA is effective as though it were included upon enactment of the BBA.

The FY 2003 IRF PPS rates set forth in this notice will apply to all discharges on or after October 1, 2002 and before October 1, 2003. Payment for IRFs with cost reporting periods under the transition methodology will consist of 662/3 percent of the FY 2003 Federal prospective payment and 331/3 percent of the facility-specific payment. Payment for IRFs that elected not to be paid under the transition methodology will consist of 100 percent of the FY 2003 Federal prospective payment. Payment for IRFs with cost reporting periods beginning on or after October 1, 2002 and before October 1, 2003 will consist of 100 percent of the FY 2003 Federal prospective payment.

Based on the information used to develop the impact analysis for the August 7, 2001 final rule, we estimate that 48 percent of the IRFs have elected not to be paid under the transition payment methodology. Since the implementation of the IRF PPS, the number of these facilities has increased. Currently, there are approximately 1,181 Medicare certified IRFs. Using the above percentage, we estimate that 567 IRFs have elected not to be paid under the transition payment methodology.

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 2003, 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

The current Medicare patient assessment requirements under the IRF PPS are based on section 1886 (j)(2)(D) of the Act and subpart P of section 412 of the regulations. We published the requirements of the IRF patient assessment instrument (PAI) in the August 7, 2001 final rule. Subsequent to the publication of the final rule OMB approved the use of the IRF PAI with modifications that reduced the number of required items to be completed. These requirements will remain in effect for FY 2003 and are not being changed by the updates set forth in this notice.

Section 412.604(c) of the regulations requires an IRF to complete the IRF PAI for each Medicare fee-for-service patient who is admitted to or discharged (or who stopped receiving Medicare Part A inpatient rehabilitation services) from the IRF on or after January 1, 2002. Section 412.606(c) requires that an IRF clinician perform a comprehensive, accurate, standardized, and reproducible assessment of each Medicare fee-for-service patient using the CMS IRF patient assessment instrument as part of his or her assessment. The assessment must include direct patient observation and communication with the patient, and, when appropriate and to the extent feasible, patient data from the patient's physician(s), family, someone personally knowledgeable about the patient's clinical condition or capabilities, the patient's clinical record, and other sources. Section 412.610(c) of the regulations provides for an assessment upon admission, an assessment upon discharge, and, if the patient is not discharged but stops receiving Medicare Part A covered inpatient rehabilitation services, an assessment at the time he or she stops receiving these services. Section 412.614 of the regulations requires an IRF to encode and transmit the IRF PAI patient data electronically to CMS. The total time necessary to complete and administer all required items of the IRF PAI is estimated to be 269,250 hours. These information collection requirements associated with the Inpatient Rehabilitation Facility Prospective Payment System are currently approved by OMB through July 31, 2005 under OMB number 0938-0842. As we previously stated in this section, we are not proposing any changes to these requirements in this notice.

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 2003. While the updates set forth in this notice will have a positive effect upon all IRFs, some providers may experience decreases in payments. Specifically, a decrease in an IRF's FY 2003 payments compared to its FY 2002 payments is the result of the effects of eliminating, as required by section 1886(j)(1) of the BBA, the blended payments and transitioning to the full Federal PPS rates, and not the result of the update to the payment rates set forth in this notice.

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 rule as required by Executive Order 12866 (September 1993, Regulatory Planning and Review), the Regulatory lexibility 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 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 annually).

We estimate that the cost to the Medicare program for IRF services in FY 2003 will increase by $15 million over FY 2002 levels. This increase is due to the combined effect of the changes to the IRF payment rates from FY 2002 to FY 2003, including an increase in overall payments of $150 million (attributed to the 3 percent increase), and a decrease in overall payments of $135 million due to the transition to 100 percent of the IRF Federal payment rates. Because the cost to the Medicare program is less than $100 million, this notice is not considered a major rule as defined above.

2. Regulatory Flexibility Act (RFA) and Impact on Small Hospitals

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 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 percent increase to the Federal PPS rates. Although, as illustrated in Table 5, the combined effects of this update and the elimination of blended payments under the transition to the full Federal PPS rates results in a net decrease in aggregate Medicare payments to IRFs in FY 2003, the decreases associated with the transition's expiration are not a result of this notice, but rather, are specifically mandated in existing legislation. In addition, we do not expect an incremental increase of 3 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. Accordingly, we certify that this notice will not have a significant impact on small entities.

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.

This notice will not have a significant impact on the operations of small rural hospitals. As indicated above, this notice establishes a 3 percent increase to the Federal PPS rates. While the combined effects of this update and the elimination of blended payments under the transition to the full Federal PPS rates results in a net decrease in aggregate Medicare payments in FY 2003, the decreases associated with the transition's expiration are not a result of this notice, but again, are specifically mandated in existing legislation. In addition, we do not expect an incremental increase of 3 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 the rehabilitation component of their business is relatively minor in comparison. Accordingly, we certify that this notice will not have a significant impact on the operations small rural hospitals.

3. 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.

4. 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.

5. Overall Impact

For the reasons stated above, we have prepared an analysis under the RFA and section 1102(b) of the Act because we have determined that this notice will not have a significant impact on small entities or the operations of small rural hospitals.

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, 2002 and before October 1, 2003 will cost the Medicare program $15 million. The budgetary impact is the result of the combined effects associated with the payment updates and the effect of IRFs transitioning from the phase-in of the implementation payment rates to the full Federal IRF PPS payment rates.

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. These data are the same data that were used in constructing the impact analyses displayed in the August 7, 2001 final rule. Table 5, Projected Impact of FY 2003 Update to the IRF PPS, which appears in section V.B.4 of this notice, reflects the estimated monetary changes among the various classifications of IRFs for discharges occurring on or after October 1, 2002 and before October 1, 2003.

3. Calculation of the Estimated FY 2002 IRF Prospective Payments

To estimate payments under the IRF PPS for FY 2002, we multiplied each facility's case-mix index by the facility's number of Medicare discharges, the budget neutral 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: (.27605 + (.72395 × 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.

After calculating the Federal rate payments for each facility, we blended together the appropriate percentages of the current payments (see discussion in August 7, 2001 final rule (66 FR 41368 through 41369)) and the new Federal rate payments to determine the appropriate amount for the first year of implementation of the IRF PPS. Specifically, to calculate payments for an IRF with a cost reporting period beginning on or after January 1, 2002 and before October 1, 2002, we combine 331/3 percent of the facility's historical payment amount with 662/3 percent of the new Federal rate payment amount. However, for those providers that would have received higher payments under 100 percent of the IRF PPS than they would have if the system had not been in effect, we simulated their payments as though they chose not to be paid under the transition payment methodology. (We estimated that 48 percent of the IRFs have elected not to be paid under the transition payment methodology.)

4. Calculation of the Estimated FY 2003 IRF Prospective Payments

To calculate FY 2003 payments, we use the payment rates described in this notice that reflect the 3 percent market basket increase factor. Further, we use the same facility level adjustments described above. The impacts also reflect the transition to the fully phased-in IRF prospective payments.

Table 5 illustrates the aggregate impact of the estimated FY 2003 updated payments among the various classifications of facilities compared to the estimated IRF PPS payment rates applicable for FY 2002.

The first column, Facility Classifications, 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 reflects the effect of IRFs transitioning from the phase-in of the implementation payment rates to the full Federal IRF PPS payment rates, and the last column reflects the combined changes including the update to the FY 2002 payment rates by 3 percent.

As Table 5 illustrates, all IRFs will benefit from the 3 percent market basket increase that is applied to FY 2002 IRF PPS payment rates to develop the FY 2003 rates. However, the overall increase in payments to IRFs is diminished to 0.3 percent due to the effect of IRFs transitioning from the phased-in implementation payment rates to the full Federal IRF PPS payment rates.

The estimated negative impacts displayed in this notice are due to the effect of section 1886(j)(1) of the Act that requires the elimination of the blended payments and transition to the full Federal PPS rate. The fourth column in Table 5 shows this change in estimated payments has an overall negative impact of 2.6 percent. This negative impact is due to the assumption used to develop the impact analyses. We assume that IRFs that would profit more under a fully Federal IRF PPS payment rate than under the blend methodology would have already opted to be paid 100 percent of the FY 2002 IRF PPS payment. Therefore, we presume that those IRFs that did not elect to be paid the full Federal IRF PPS payment rates did so because they would receive more payment under the blended method. Consequently, we believe the remaining IRFs that are transitioning from the blended payment to the full FY 2003 IRF PPS payment, are estimated to profit less than they would have if they were not paid under 100 percent of the Federal rate. This estimated effect is not due to the changes set forth in this notice, rather the impact is the result of the statutory requirements of section 1886(j)(1) of the Act that stipulates payment for IRFs with cost reporting periods beginning on or after October 1, 2002 will consist of 100 percent of the IRF PPS Federal prospective payment.

The estimated impact changes displayed in Table 5 need to be viewed in light of the limitations of the data we are able to present. Specifically, these impacts are based on historical data that do not reflect any changes resulting from the implementation of the IRF PPS. In general, the IRF PPS creates incentives for IRFs to reduce costs. As a result, IRF costs per case should be less than they would have been before the implementation of the IRF PPS. Because of this, we believe impacts would be more favorable to IRFs if we were able to compare estimated FY 2003 IRF costs to FY 2003 IRF payments rather than estimated FY 2002 IRF payments to FY 2003 payments.

In the August 7, 2001 final rule (66 FR 41359) we set forth the methodology for adjusting payments for IRFs located in rural areas. For these facilities, the IRF PPS payment rates are increased by 19.14 percent. This adjustment will remain in effect and continue to protect these facilities from being unduly harmed. Therefore, the impacts shown reflect the rural adjustment that is designed to minimize or eliminate the negative impact that the IRF PPS may otherwise have on rural facilities.

To summarize, all facilities will receive a favorable 3 percent increase in their unadjusted IRF PPS payments. The estimated negative impact among some of the classes of IRFs reflected in Table 5 are due to the effect of the existing statutory provision (to transition from the blended payment to the full Federal IRF PPS payment rate) rather than the updates set forth in this notice.

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)).