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

AGENCY:

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

ACTION:

Proposed rule.

SUMMARY:

This rule proposes an update to the annual payment rates for the Medicare prospective payment system (PPS) for inpatient hospital services provided by long-term care hospitals (LTCHs). The payment amounts and factors used to determine the proposed updated Federal rates that are described in this proposed rule have been determined based on the LTCH PPS rate year. The annual update of the long-term care diagnosis-related groups (LTC-DRG) classifications and relative weights remains linked to the annual adjustments of the acute care hospital inpatient diagnosis-related group system, and will continue to be effective each October 1. The proposed outlier threshold for July 1, 2004, through June 30, 2005, would also be derived from the LTCH PPS rate year calculations. In this proposed rule, we also are proposing to make clarifications to the existing policy regarding the designation of a satellite of a LTCH as an independent LTCH. In addition, we are proposing to expand the existing interrupted stay policy and proposing a change in the procedure for counting days in the average length of stay calculation for Medicare patients for hospitals qualifying as LTCHs.

DATES:

We will consider comments if we receive them at the appropriate address, as provided below, no later than 5 p.m. on March 23, 2004.

ADDRESSES:

In commenting, please refer to file code CMS-1263-P. Because of staff and resource limitations, we cannot accept comments by facsimile (FAX) transmission.

Submit electronic comments to http://www.accessdata.fda.gov/scripts/oc/dockets/comments/commentdocket.cfm?AGENCY=CMS or to http://www.regulations.gov. 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-1263-P, P.O. Box 8010, Baltimore, MD 21244-1850.

If you prefer, you may deliver, by hand or courier, your written comments (an original and three copies) to one of the following addresses:

Room 443-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., Washington, DC 20201, or

Room C5-14-03, Central Building, 7500 Security Boulevard, Baltimore, MD 21244-1850.

(Because access to the interior of the 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 commenters who wish to retain proof of filing by stamping in and keeping an extra copy of the comments being filed.)

Comments mailed to the addresses indicated as appropriate for hand or courier delivery may be delayed and could be considered late.

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. After the close of the comment period, CMS posts all electronic comments received before the close of the comment period on its public Web site.

For information on viewing public comments, see the beginning of the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT:

Tzvi Hefter, (410) 786-4487 (General information);

Judy Richter, (410) 786-2590 (General information, transition payments, payment adjustments, and onsite discharges and readmissions, interrupted stays, co-located providers, and short-stay outliers);

Michele Hudson, (410) 786-5490 (Calculation of the payment rates, relative weights and case-mix index, market basket update, and payment adjustments);

Ann Fagan, (410) 786-5662 (Patient classification system);

Miechal Lefkowitz, (410) 786-5316 (High-cost outliers and budget neutrality);

Linda McKenna, (410) 786-4537 (Payment adjustments, interrupted stay, and transition period);

Kathryn McCann, (410) 786-7623 (Medigap);

Robert Nakielny, (410) 786-4466 (Medicaid).

SUPPLEMENTARY INFORMATION:

Submitting Comments: We welcome comments from the public on all issues set forth in this rule to assist us in fully considering issues and developing policies. You can assist us by referencing the file code CMS-1263-P and the specific “issue identifier” that precedes the section on which you choose to comment.

Inspection of Public Comments: Comments received timely will be available for public inspection as they are processed, generally beginning approximately 4 weeks after publication of a document, in Room C5-12-08 of the Centers for Medicare & Medicaid Services, 7500 Security Blvd., Baltimore, MD, on Monday through Friday of each week from 8:30 a.m. to 5 p.m. Please call (410) 786-7197 to schedule an appointment to view public comments.

Availability of Copies and Electronic Access

Copies: To order copies of the Federal Register containing this document, send your request to: New Orders, Superintendent of Documents, P.O. Box 371954, Pittsburgh, PA 15250-7954. Specify the date of the issue requested and enclose a check or money order payable to the Superintendent of Documents, or enclose your Visa or Master Card number and expiration date. Credit card orders can also be placed by calling the order desk at (202) 512-1800 or by faxing to (202) 512-2250. The cost for each copy is $10. As an alternative, you can view and photocopy the Federal Register document at most libraries designated as Federal Depository Libraries and at many other public and academic libraries throughout the country that receive the Federal Register.

This Federal Register document is also available from the Federal Register online database through GPO Access, a service of the U.S. Government Printing Office. The Web site address is: http://www.access.gpo.gov/nara/index.html.

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

Table of Contents

I. Background

A. Legislative and Regulatory Authority

B. Criteria for Classification as a LTCH

1. Classification as a LTCH

2. Hospitals Excluded from the LTCH PPS

C. Transition Period for Implementation of the LTCH PPS

D. Limitation on Charges to Beneficiaries

E. Health Insurance Portability and Accountability Act Compliance

II. Summary of Major Contents of This Proposed Rule

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

A. Background

B. Patient Classifications into DRGs

C. Organization of DRGs

D. Update of LTC-DRGs

E. ICD-9-CM Coding System

1. Uniform Hospital Discharge Data Set (UHDDS) Definitions

2. Maintenance of the ICD-9-CM Coding System

3. Coding Rules and Use of ICD-9-CM Codes in LTCHs

F. The Method for Updating the LTC-DRG Relative Weights

IV. Proposed Changes to the LTCH PPS Rates and Proposed Changes in Policy for the 2005 LTCH PPS Rate Year

A. Overview of the Development of the Payment Rates

B. Proposed Update to the Standard Federal Rate for the 2005 LTCH PPS Rate Year

1. Proposed Standard Federal Rate Update

a. Description of the Market Basket for the Proposed 2005 LTCH PPS Rate Year

b. Proposed LTCH Market Basket Increase for the 2005 LTCH PPS Rate Year

2. Proposed Standard Federal Rate for the 2005 LTCH PPS rate year

C. Calculation of Proposed LTCH Prospective Payments for the 2005 LTCH PPS rate year

1. Proposed Adjustment for Area Wage Levels

a. Background

b. Wage Index Data

c. Proposed Labor-Related Share

2. Proposed Adjustment for Cost-Of-Living in Alaska and Hawaii

3. Proposed Adjustment for High-Cost Outliers

a. Background

b. Establishment of the Proposed Fixed-Loss Amount

c. Reconciliation of Outlier Payments Upon Cost Report Settlement

d. Application of Outlier Policy to Short-Stay Outlier Cases

4. Proposed Adjustments for Special Cases

a. General

b. Adjustment for Short-Stay Outlier Cases

c. Proposed Extension of the Interrupted Stay Policy

d. Onsite Discharges and Readmittances

5. Other Payment Adjustments

6. Proposed Budget Neutrality Offset to Account for the Transition Methodology

7. Proposed Changes in the Procedure for Counting Days in the Average Length of Stay Calculation

8. Clarification of the Requirements for a Satellite Facility or a Remote Location to Qualify as a LTCH and Proposed Changes to the Requirements for Certain Satellite Facilities and Remote Locations

V. Computing the Proposed Adjusted Federal Prospective Payments for the 2005 LTCH PPS Rate Year

VI. Transition Period

VII. Payments to New LTCHs

VIII. Method of Payment

IX. Monitoring

X. Collection of Information Requirements

XI. Regulatory Impact Analysis

A. Introduction

1. Executive Order 12866

2. Regulatory Flexibility Act (RFA)

3. Impact on Rural Hospitals

4. Unfunded Mandates

5. Federalism

B. Anticipated Effects of Proposed Payment Rate Changes

1. Budgetary Impact

2. Impact on Providers

3. Calculation of Prospective Payments

4. Results

5. Effect on the Medicare Program

6. Effect on Medicare Beneficiaries

C. Impact of Proposed Policy Changes

1. Clarification of the Requirements for Satellite Facilities and Remote Locations of Hospitals to Qualify as Long-Term Care Hospitals

a. Proposed Policy Change for Certain Satellite Facilities and Remote Locations of a Hospital

b. Technical Correction

2. Proposed Change in Interruption of a Stay in a LTCH Policy

3. Proposed Change in Procedure for Counting Covered and Noncovered Days in a Stay that Crosses Two Consecutive Cost Reporting Periods

D. Executive Order 12866

Regulations Text

Addendum—Tables

Acronyms

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

BBA Balanced Budget Act of 1997, Pub. L. 105-33

BBRA Medicare, Medicaid, and SCHIP [State Children's Health Insurance Program] Balanced Budget Refinement Act of 1999, Pub. L. 106-113

BIPA Medicare, Medicaid, and SCHIP [State Children's Health Insurance Program] Benefits Improvement and Protection Act of 2000, Pub. L. 106-554

CMS Centers for Medicare & Medicaid Services

COPS Medicare conditions of participation

DRGs Diagnosis-related groups

FY Federal fiscal year

HCRIS Hospital Cost Report Information System

HHA Home health agency

HIPAA Health Insurance Portability and Accountability Act, Pub. L. 104-191

IPPS Acute Care Hospital Inpatient Prospective Payment System

IRF Inpatient rehabilitation facility

LTC-DRG Long-term care diagnosis-related group

LTCH Long-term care hospital

MedPAC Medicare Payment Advisory Commission

MedPAR Medicare provider analysis and review file

OSCAR Online Survey Certification and Reporting (System)

PPS Prospective Payment System

QIO Quality Improvement Organization (formerly Peer Review organization (PRO))

SNF Skilled nursing facility

TEFRA Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248

I. Background

(If you choose to comment on issues in this section, please include the caption “BACKGROUND” at the beginning of your comments.)

A. Legislative and Regulatory Authority

The Medicare, Medicaid, and SCHIP (State Children's Health Insurance Program) Balanced Budget Refinement Act of 1999 (BBRA) (Pub. L. 106-113) and the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA) (Pub. L. 106-554) provide for payment for both the operating and capital-related costs of hospital inpatient stays in long-term care hospitals (LTCHs) under Medicare Part A based on prospectively set rates. The Medicare prospective payment system (PPS) for LTCHs applies to hospitals described in section 1886(d)(1)(B)(iv) of the Social Security Act (the Act), effective for cost reporting periods beginning on or after October 1, 2002.

Section 1886(d)(1)(B)(iv)(I) of the Act defines a LTCH as “a hospital which has an average inpatient length of stay (as determined by the Secretary) of greater than 25 days.” Section 1886(d)(1)(B)(iv)(II) of the Act also provides an alternative definition of LTCHs: specifically, a hospital that first received payment under section 1886(d) of the Act in 1986 and has an average inpatient length of stay (as determined by the Secretary) of greater than 20 days and has 80 percent or more of its annual Medicare inpatient discharges with a principal diagnosis that reflects a finding of neoplastic disease in the 12-month cost reporting period ending in FY 1997.

Section 123 of Pub. L. 106-113 requires the PPS for LTCHs to be a per discharge system with a diagnosis-related group (DRG) based patient classification system that reflects the differences in patient resources and costs in LTCHs while maintaining budget neutrality.

Section 307(b)(1) of Pub. L. 106-554, among other things, mandates that the Secretary shall examine and may provide for adjustments to payments under the LTCH PPS, including adjustments to DRG weights, area wage adjustments, geographic reclassification, outliers, updates, and a disproportionate share adjustment.

In a Federal Register document issued on August 30, 2002 (67 FR 55954), we implemented the LTCH PPS authorized under Pub. L. 106-113 and Pub. L. 106-554. This system uses information from LTCH patient records to classify patients into distinct long-term care diagnosis-related groups (LTC-DRGs) based on clinical characteristics and expected resource needs. Payments are calculated for each LTC-DRG and provisions are made for appropriate payment adjustments. Payment rates under the LTCH PPS are updated annually and published in the Federal Register.

The LTCH PPS replaced the reasonable cost-based payment system under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, for payments for inpatient services provided by a LTCH with a cost reporting period beginning on or after October 1, 2002. (The regulations implementing the TEFRA (reasonable cost-based) payment provisions are located at 42 CFR part 413.) With the implementation of the prospective payment system for acute care hospitals authorized by the Social Security Amendments of 1983 (Pub. L. 98-21), which added section 1886(d) to the Act, certain hospitals, including LTCHs, were excluded from the PPS for acute care hospitals and were paid their reasonable costs for inpatient services subject to a per discharge limitation or target amount under the TEFRA system. For each cost reporting period, a hospital-specific ceiling on payments was determined by multiplying the hospital's updated target amount by the number of total current year Medicare discharges. The August 30, 2002, final rule further details payment policy under the TEFRA system (67 FR 55954).

In the August 30, 2002, final rule, we presented an in-depth discussion of the LTCH PPS, including the patient classification system, relative weights, payment rates, additional payments, and the budget neutrality requirements mandated by section 123 of Pub. L. 106-113. The same final rule, that established regulations for the LTCH PPS under 42 CFR part 412, subpart O, also contained provisions related to covered inpatient services, limitation on charges to beneficiaries, medical review requirements, furnishing of inpatient hospital services directly or under arrangement, and reporting and recordkeeping requirements.

We refer readers to the August 30, 2002, final (67 FR 55954) rule for a comprehensive discussion of the research and data that supported the establishment of the LTCH PPS.

On June 6, 2003, we published a final rule in the Federal Register (68 FR 34122) that set forth the annual update of the payment rates for the Medicare PPS for inpatient hospital services furnished by LTCHs. It also changed the annual period for which the payment rates are effective. The annual updated rates are now effective from July 1 to June 30 instead of from October 1 through September 30. We refer to this time period as a “long-term care hospital rate year” (LTCH PPS rate year). In addition, we changed the publication schedule for these updates to allow for an effective date of July 1. The payment amounts and factors used to determine the annual update of the Federal rates are based on a LTCH PPS rate year. The annual update of the LTC-DRG classifications and relative weights are linked to the annual adjustments of the acute care hospital inpatient diagnosis-related groups and are effective each October 1.

B. Criteria for Classification as a LTCH

1. Classification as a LTCH

Under the existing regulations at §§ 412.23(e)(1) and (2)(i), which implement section 1886(d)(1)(B)(iv)(I) of the Act, to qualify to be paid under the LTCH PPS, a hospital must have a provider agreement with Medicare and must have an average Medicare inpatient length of stay of greater than 25 days. Alternatively, for cost reporting periods beginning on or after August 5, 1997, a hospital that was first excluded from the PPS in 1986, and can demonstrate that at least 80 percent of its annual Medicare inpatient discharges in the 12-month cost reporting period ending in FY 1997 have a principal diagnosis that reflects a finding of neoplastic disease must have an average inpatient length of stay for all patients, including both Medicare and non-Medicare inpatients, of greater than 20 days (§ 412.23(e)(2)(ii)).

Existing § 412.23(e)(3) provides that the average Medicare inpatient length of stay is determined based on all covered and noncovered days of stay of Medicare patients as calculated by dividing the total number of covered and noncovered days of stay of Medicare inpatients (less leave or pass days) by the number of total Medicare discharges for the hospital's most recent complete cost reporting period. Fiscal intermediaries verify that LTCHs meet the average length of stay requirements. We note that the inpatient days of a patient who is admitted to a LTCH without any remaining Medicare days of coverage, regardless of the fact that the patient is a Medicare beneficiary, will not be included in the above calculation. Because Medicare would not be paying for any of the patient's treatment, the patient is not a “Medicare inpatient” and data on the patient's stay would not be included in the Medicare claims processing systems. In order for both covered and noncovered days of a LTCH hospitalization to be included, for purposes of the average length of stay calculation, a patient admitted to the LTCH must have at least one remaining benefit day as described in § 409.61.

The fiscal intermediary's determination of whether or not a hospital qualifies as an LTCH is based on the hospital's discharge data from its most recent cost reporting period and is effective at the start of the hospital's next cost reporting period (§ 412.22(d)). If a hospital does not meet the length of stay requirement, the hospital may provide the intermediary with data indicating a change in the hospital's average length of stay by the same method for the period of at least 5 months of the immediately preceding 6-month period (§ 412.23(e)(3)(ii)). (See 68 FR 45464, August 1, 2003.) Requirements for hospitals seeking classification as LTCHs that have undergone a change in ownership, as described in § 489.18, are set forth in § 412.23(e)(3)(iii).

LTCHs that exist as hospitals-within-hospitals or satellite facilities of LTCHs must also meet the criteria set forth in § 412.22(e) or § 412.22(h), respectively, for the LTCH to be excluded from the acute care hospital inpatient prospective payment system (IPPS) and paid under the LTCH PPS.

2. Hospitals Excluded From the LTCH PPS

The following hospitals are paid under special payment provisions, as described in § 412.22(c) and, therefore, are not subject to the LTCH PPS rules:

• Veterans Administration hospitals.
• Hospitals that are reimbursed under State cost control systems approved under 42 CFR part 403.
• Hospitals that are reimbursed in accordance with demonstration projects authorized under section 402(a) of Public Law 90-248 (42 U.S.C. 1395b-1) or section 222(a) of Public Law 92-603 (42 U.S.C. 1395b-1 (note)) (statewide all-payer systems, subject to the rate-of-increase test at section 1814(b) of the Act).
• Nonparticipating hospitals furnishing emergency services to Medicare beneficiaries.

C. Transition Period for Implementation of the LTCH PPS

In the August 30, 2002, final rule, we provided for a 5-year transition period from reasonable cost-based reimbursement to fully Federal prospective payment for LTCHs (67 FR 56038). During the 5-year period, two payment percentages are to be used to determine a LTCH's total payment under the PPS. The blend percentages are as follows:

D. Limitation on Charges to Beneficiaries

In the August 30, 2002, final rule, we presented an in-depth discussion of beneficiary liability under the LTCH prospective payment system (67 FR 55974-55975). Under § 412.507, as consistent with other established hospital prospective payment systems, a LTCH may not bill a Medicare beneficiary for more than the deductible and coinsurance amounts as specified under §§ 409.82, 409.83, and 409.87 and for items and services as specified under § 489.30(a), if the Medicare payment to the LTCH is the full LTC-DRG payment amount. However, under the LTCH PPS, Medicare will only pay for days for which the beneficiary has coverage until the short-stay outlier threshold is exceeded. (See section IV.C.4.b.) Therefore, if the Medicare payment was for a short-stay outlier case (§ 412.529) that was less than the full LTC-DRG payment amount because the beneficiary had insufficient remaining Medicare days, the LTCH could also charge the beneficiary for services delivered on those uncovered days. (§ 412.507).

Since the origin of the Medicare system, the intent of our regulations has been to set limits on beneficiary liability and to clearly establish the circumstances under which the beneficiary would be required to assume responsibility for payment, that is, upon exhausting benefits described in 42 CFR part 409, subpart F. The discussion in the August 30, 2002, final rule was not meant to establish rates or payments for, or define, Medicare-eligible expenses. While we regulate beneficiary liability for coinsurance and deductibles for hospital stays that are covered by Medicare, payments from Medigap insurers to providers for inpatient hospital coverage after Medicare benefits are exhausted are not regulated by us. Furthermore, regulations beginning at § 403.200 and the 1991 National Association of Insurance Commissioners (NAIC) Model Regulation for Medicare Supplemental Insurance, which was incorporated by reference into section 1882 of the Act, govern the relationship between Medigap insurers and beneficiaries.

E. Health Insurance Portability and Accountability Act Compliance

We note that as of October 16, 2002, a LTCH that was required to comply with the Administrative Simplification Standards under the Health Insurance Portability and Accountability Act (HIPAA) (Pub. L. 104-191) and that had not obtained an extension in compliance with the Administrative Compliance Act (Pub. L. 107-105) is obligated to comply with the standards for submitting claim forms to the LTCH's Medicare fiscal intermediary (45 CFR 162.1002 and 45 CFR 162.1102). Beginning October 16, 2003, LTCHs that obtained an extension and that are required to comply with the HIPAA Administrative Simplification Standards must start submitting electronic claims in compliance with the HIPAA regulations cited above, among others.

II. Summary of Major Contents of This Proposed Rule

We are proposing an annual update of the payment rates for the Medicare PPS for inpatient hospital services provided by LTCHs for the 2005 LTCH PPS rate year. (The annual update of the LTC-DRG classifications and relative weights for FY 2005 remains linked to the annual adjustments of the acute care hospital inpatient DRG system and will be effective October 1, 2004.)

We are proposing an outlier threshold for July 1, 2004, through June 30, 2005, derived from the LTCH PPS rate year calculations.

As discussed in section I.B.2. of this preamble, we are proposing a change in the procedure for counting the days in the inpatient average length of stay for hospitals to qualify as LTCHs.

In section I.B.3. of this preamble, we discuss and clarify existing policies regarding the classification of a satellite facility, or a remote location, of a LTCH as an independent LTCH and propose new policies for certain satellite facilities and remote locations.

In section IV.C.4.c. of this preamble, we are proposing to revise existing interrupted stay policy applicable under the LTCH PPS.

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

(If you choose to comment on issues in this section, please include the caption “LTC-DRG CLASSIFICATIONS AND RELATIVE WEIGHTS” at the beginning of your comments.)

A. Background

Section 123 of Pub. L. 106-113 specifically requires that the PPS for LTCHs be a per discharge system with a DRG-based patient classification system reflecting the differences in patient resources and costs in LTCHs while maintaining budget neutrality. Section 307(b)(1) of Pub. L. 106-554 modified the requirements of section 123 of Pub. L. 106-113 by specifically requiring that the Secretary examine “the feasibility and the impact of basing payment under such a system [the LTCH PPS] on the use of existing (or refined) hospital DRGs that have been modified to account for different resource use of LTCH patients as well as the use of the most recently available hospital discharge data.”

In accordance with section 307(b)(1) of Pub. L. 106-554 and § 412.515 of our existing regulations, the LTCH PPS uses information from LTCH patient records to classify patient cases into distinct LTC-DRGs based on clinical characteristics and expected resource needs. The LTC-DRGs used as the patient classification component of the LTCH PPS correspond to the hospital inpatient DRGs in the IPPS. We apply weights to the existing hospital inpatient DRGs to account for the difference in resource use by patients exhibiting the case complexity and multiple medical problems characteristic of LTCHs.

In a departure from the IPPS, we use low volume LTC-DRGs (less than 25 LTCH cases) in determining the LTC-DRG weights, since LTCHs do not typically treat the full range of diagnoses as do acute care hospitals. In order to deal with the large number of low volume DRGs (all DRGs with fewer than 25 cases), we group low volume DRGs into 5 quintiles based on average charge per discharge. (A listing of the composition of low volume quintiles appears in the August 30, 2002, LTCH PPS final rule at 67 FR 55986.) We also take into account adjustments to payments for cases in which the stay at the LTCH is five-sixths of the geometric average length of stay and classify these cases as short-stay outlier cases. (A detailed discussion of the application of the Lewin Group model that was used to develop the LTC-DRGs appears in the August 30, 2002 LTCH PPS final rule at 67 FR 55978.)

B. Patient Classifications Into DRGs

Generally, under the LTCH PPS, Medicare payment is made at a predetermined specific rate for each discharge; that payment varies by the LTC-DRG to which a beneficiary's stay is assigned. Cases are classified into LTC-DRGs for payment based on the following six data elements:

(1) Principal diagnosis.

(2) Up to eight additional diagnoses.

(3) Up to six procedures performed.

(4) Age.

(5) Sex.

(6) Discharge status of the patient.

Upon the discharge of the patient from a LTCH, the LTCH must assign appropriate diagnosis and procedure codes from the International Classification of Diseases, Ninth Revision, Clinical Modification (ICD-9-CM). As of October 16, 2002, a LTCH that was required to comply with the HIPAA Administrative Simplification Standards and that had not obtained an extension in compliance with the Administrative Compliance Act (Pub. L. 107-105) is obligated to comply with the standards at 45 CFR 162.1002 and 45 CFR 162.1102. Completed claim forms are to be submitted to the LTCH's Medicare fiscal intermediary.

Medicare fiscal intermediaries enter the clinical and demographic information into their claims processing systems and subject this information to a series of automated screening processes called the Medicare Code Editor (MCE). These screens are designed to identify cases that require further review before assignment into a DRG can be made. During this process, the following types of cases are selected for further development:

• Cases that are improperly coded. (For example, diagnoses are shown that are inappropriate, given the sex of the patient. Code 68.6, Radical abdominal hysterectomy, would be an inappropriate code for a male.)
• Cases including surgical procedures not covered under Medicare. (For example, organ transplant in a nonapproved transplant center.)
• Cases requiring more information. (For example, ICD-9-CM codes are required to be entered at their highest level of specificity. There are valid 3-digit, 4-digit, and 5-digit codes. That is, code 136.3, Pneumocystosis, contains all appropriate digits, but if it is reported with either fewer or more than 4 digits, the claim will be rejected by the MCE as invalid.)
• Cases with principal diagnoses that do not usually justify admission to the hospital. (For example, code 437.9, Unspecified cerebrovascular disease. While this code is valid according to the ICD-9-CM coding scheme, a more precise code should be used for the principal diagnosis.)

After screening through the MCE, each claim will be classified into the appropriate LTC-DRG by the Medicare LTCH GROUPER. The LTCH GROUPER is specialized computer software based on the same GROUPER used by the IPPS. The GROUPER software was developed as a means of classifying each case into a DRG on the basis of diagnosis and procedure codes and other demographic information (age, sex, and discharge status). Following the LTC-DRG assignment, the Medicare fiscal intermediary will determine the prospective payment by using the Medicare PRICER program, which accounts for hospital-specific adjustments. As provided for under the IPPS, we provide an opportunity for the LTCH to review the LTC-DRG assignments made by the fiscal intermediary and to submit additional information within a specified timeframe (§ 412.513(c)).

The GROUPER is used both to classify past cases in order to measure relative hospital resource consumption to establish the DRG weights and to classify current cases for purposes of determining payment. The records for all Medicare hospital inpatient discharges are maintained in the MedPAR file. The data in this file are used to evaluate possible DRG classification changes and to recalibrate the DRG weights during our annual update. DRG weights are based on data for the population of LTCH discharges, reflecting the fact that LTCH patients represent a different patient-mix than patients in short-term acute care hospitals.

C. Organization of DRGs

The DRGs are organized into 25 Major Diagnostic Categories (MDCs), most of which are based on a particular organ system of the body; the remainder involve multiple organ systems (such as MDC 22, Burns). Accordingly, the principal diagnosis determines MDC assignment. Within most MDCs, cases are then divided into surgical DRGs and medical DRGs. Surgical DRGs are assigned based on a surgical hierarchy that orders operating room (O.R.) procedures or groups of O.R. procedures by resource intensity. The GROUPER does not recognize all ICD-9-CM procedure codes as procedures that affect DRG assignment, that is, procedures which are not surgical (for example, EKG), or minor surgical procedures (for example, 86.11, Biopsy of skin and subcutaneous tissue).

The medical DRGs are generally differentiated on the basis of diagnosis. Both medical and surgical DRGs may be further differentiated based on age, sex, discharge status, and presence or absence of complications or comorbidities (CC). We note that CCs are defined by certain secondary diagnoses not related to, or not inherently a part of, the disease process identified by the principal diagnosis. (For example, the GROUPER would not recognize a code from the 800.0x series, Skull fracture, as a CC when combined with principal diagnosis 850.4, Concussion with prolonged loss of consciousness, without return to preexisting conscious level.) In addition, we note that the presence of additional diagnoses does not automatically generate a CC, as not all DRGs recognize a comorbid or complicating condition in their definition. (For example, DRG 466, Aftercare without History of Malignancy as Secondary Diagnosis, is based solely on the principal diagnosis, without consideration of additional diagnoses for DRG determination.)

In its June 2000 Report to Congress, MedPAC recommended that the Secretary “* * * improve the hospital inpatient prospective payment system by adopting, as soon as practicable, diagnosis-related group refinements that more fully capture differences in severity of illness among patients.” (Recommendation 3A, p. 63) We have determined it is not practical at this time to develop a refinement to inpatient hospital DRGs based on severity due to time and resource requirements. However, this does not preclude us from development of a severity-adjusted DRG refinement in the future. That is, a refinement to the list of comorbidities and complications could be incorporated into the existing DRG structure. It is also possible a more comprehensive severity adjusted structure may be created if a new code set is adopted. That is, if ICD-9-CM is replaced by ICD-10-CM (for diagnostic coding) and ICD-10-PCS (for procedure coding) or by other code sets, a severity concept may be built into the resulting DRG assignments. Of course any change to the code set would be adopted through the process established in the HIPAA Administrative Simplification Standards provisions.

D. Update of LTC-DRGs

For FY 2004, the LTC-DRG patient classification system was based on LTCH data from the FY 2002 MedPAR file, which contained hospital bills data from the December 2002 update. The patient classification system consisted of 518 DRGs that formed the basis of the FY 2004 LTCH PPS GROUPER. The 518 LTC-DRGs included two “error DRGs”. As in the IPPS, we included two error DRGs in which cases that cannot be assigned to valid DRGs will be grouped. These two error DRGs are DRG 469 (Principal Diagnosis Invalid as a Discharge Diagnosis) and DRG 470 (Ungroupable). (See the August 1, 2001, Medicare Program final rule, Changes to the Hospital Inpatient Prospective Payment Systems and Rates and Costs of Graduate Medical Education; Fiscal Year 2002 Rates (66 FR 40062).) The other 516 LTC-DRGs are the same DRGs used in the IPPS GROUPER for FY 2004 (Version 21.0).

In the health care industry, annual changes to the ICD-9-CM codes are effective for discharges occurring on or after October 1 each year. Thus, the manual and electronic versions of the GROUPER software, which are based on the ICD-9-CM codes, are also revised annually and effective for discharges occurring on or after October 1 each year. As discussed earlier, the patient classification system for the LTCH PPS (LTC-DRGs) is based on the IPPS patient classification system (CMS-DRGs), which is updated annually and effective for discharges occurring on or after October 1 through September 30 each year. The updated DRGs and GROUPER software are based on the latest revision to the ICD-9-CM codes, which are published annually in the IPPS proposed rule and final rule. The new or revised ICD-9-CM codes are not used by the industry for either the IPPS or the LTCH PPS until the beginning of the next Federal fiscal year (effective for discharges occurring on or after October 1 through September 30). (The use of the ICD-9-CM codes in this manner is consistent with current usage and the HIPAA regulations.) October 1 is also when the changes to the CMS-DRGs and the next version of the GROUPER software becomes effective.

As indicated in the June 3, 2002, LTCH PPS and the August 1, 2003, IPPS final rules (68 FR 34122 and 68 FR 45374), we make the annual update to the LTCH PPS effective from July 1 through June 30 each year. As a result, the LTCH PPS uses two GROUPERS during the course of a 12-month period: one GROUPER for 3 months (from July 1 through September 30); and an updated GROUPER for 9 months (from October 1 through June 30). The need to use two GROUPERs is based upon the October 1 effective date of the updated ICD-9-CM coding system. As previously discussed, new ICD-9-CM codes may result in changes to the structure of the DRGs. In order for the industry to be on the same schedule (for both the IPPS and the LTCH PPS) for the use of the most current ICD-9-CM codes, it is necessary for us to apply two GROUPER programs to the LTCH PPS. LTCHs will continue to code diagnosis and procedures using the most current version of the ICD-9-CM coding system.

Currently, for Federal FY 2004, we are using Version 21.0 of the GROUPER software for both the IPPS and the LTCH PPS. Discharges beginning on October 1, 2003, and before October 1, 2004 (Federal FY 2004), will use Version 21.0 of the GROUPER software for both the IPPS and the LTCH PPS. Thus, changes to the CMS-DRGs (the DRGs on which the LTC-DRGs are based) and their relative weights, as well as the LTC-DRGs and their relative weights, that will be effective for October 1, 2004, through September 30, 2005, will be presented in the IPPS FY 2005 proposed rule that will be published in the Federal Register in the spring of 2004 and finalized in a final rule to be published by August 1, 2004. Accordingly, we will notify LTCHs of any revised LTC-DRG relative weights based on the final DRGs and the applicable GROUPER version for the IPPS that will be effective October 1, 2004.

E. ICD-9-CM Coding System

1. Uniform Hospital Discharge Data Set (UHDDS) Definitions

Because the assignment of a case to a particular LTC-DRG will help determine the amount that will be paid for the case, it is important that the coding is accurate. Classifications and terminology used in the LTCH PPS are consistent with the ICD-9-CM and the UHDDS, as recommended to the Secretary by the National Committee on Vital and Health Statistics (“Uniform Hospital Discharge Data: Minimum Data Set, National Center for Health Statistics, April 1980”) and as revised in 1984 by the Health Information Policy Council (HIPC) of the U.S. Department of Health and Human Services.

We point out that the ICD-9-CM coding terminology and the definitions of principal and other diagnoses of the UHDDS are consistent with the requirements of the HIPAA Administrative Simplification Act of 1996 (45 CFR Part 162). Furthermore, the UHDDS has been used as a standard for the development of policies and programs related to hospital discharge statistics by both governmental and nongovernmental sectors for over 30 years. In addition, the following definitions (as described in the 1984 Revision of the UHDDS, approved by the Secretary of Health and Human Services for use starting January 1986) are requirements of the ICD-9-CM coding system, and have been used as a standard for the development of the CMS-DRGs:

• Diagnoses include all diagnoses that affect the current hospital stay.
• Principal diagnosis is defined as the condition established after study to be chiefly responsible for occasioning the admission of the patient to the hospital for care.
• Other diagnoses (also called secondary diagnoses or additional diagnoses) are defined as all conditions that coexist at the time of admission, that develop subsequently, or that affect the treatment received or the length of stay or both. Diagnoses that relate to an earlier episode of care that have no bearing on the current hospital stay are excluded.
• All procedures performed will be reported. This includes those that are surgical in nature, carry a procedural risk, carry an anesthetic risk, or require specialized training.

We provide LTCHs with a 60-day window after the date of the notice of the initial LTC-DRG assignment to request review of that assignment. Additional information may be provided by the LTCH to the fiscal intermediary as part of that review.

2. Maintenance of the ICD-9-CM Coding System

The ICD-9-CM Coordination and Maintenance (C&M) Committee is a Federal interdepartmental committee, co-chaired by the National Center for Health Statistics (NCHS) and CMS, that is charged with maintaining and updating the ICD-9-CM system. The C&M Committee is jointly responsible for approving coding changes, and developing errata, addenda, and other modifications to the ICD-9-CM to reflect newly developed procedures and technologies and newly identified diseases. The C&M Committee is also responsible for promoting the use of Federal and non-Federal educational programs and other communication techniques with a view toward standardizing coding applications and upgrading the quality of the classification system.

The NCHS has lead responsibility for the ICD-9-CM diagnosis codes included in the Tabular List and Alphabetic Index for Diseases, while CMS has lead responsibility for the ICD-9-CM procedure codes included in the Tabular List and Alphabetic Index for Procedures.

The C&M Committee encourages participation by health-related organizations in the above process and holds public meetings for discussion of educational issues and proposed coding changes twice a year at the CMS Central Office located in Baltimore, Maryland. The agenda and dates of the meetings can be accessed on the CMS Web site at: http://www.cms.gov/paymentsystems/icd9.

All changes to the ICD-9-CM coding system affecting DRG assignment are addressed annually in the IPPS proposed and final rules. Because the DRG-based patient classification system for the LTCH PPS is based on the IPPS DRGs, these changes will also affect the LTCH PPS LTC-DRG patient classification system.

As discussed above, the ICD-9-CM coding changes that have been adopted by the C&M Committee become effective at the beginning of each Federal fiscal year, October 1. Regardless of the annual update of the LTCH PPS on July 1 of each year, coders will use the most current updated ICD-9-CM coding book, which is effective from October 1 through September 30 of each year. This means that coders and LTCHs that use the updated ICD-9-CM coding system will be on the same schedule (effective October 1) as the rest of the health care industry. The newest version of ICD-9-CM is not available for use until October 1 of each year, which is 5 months after the date that we publish the LTCH annual payment rate update final rule. The new codes on which the LTC-DRGs are based will go into effect and be available for use for discharges occurring on or after October 1 through September 30 of each year. This annual schedule of the revision to the ICD-9-CM coding system and the change of the ICD-9-CM coding books or electronic coding programs has been in effect since the adoption of Revision 9 of the ICD in 1979.

Of particular note to LTCHs will be the invalid diagnosis codes (Table 6C) and the invalid procedure codes (Table 6D) located in the annual proposed and final rules for the IPPS. Claims with invalid codes will not be processed by the Medicare claims processing system.

3. Coding Rules and Use of ICD-9-CM Codes in LTCHs

We emphasize the need for proper coding by LTCHs. Inappropriate coding of cases can adversely affect the uniformity of cases in each LTC-DRG and produce inappropriate weighting factors at recalibration. We continue to urge LTCHs to focus on improved coding practices. Because of concerns raised by LTCHs concerning correct coding, we have asked the American Hospital Association (AHA) to provide additional clarification or instruction on proper coding in the LTCH setting. The AHA will provide this instruction via their established process of addressing questions through their publication “Coding Clinic for ICD-9-CM”. Written questions or requests for clarification may be addressed to the Central Office on ICD-9-CM, American Hospital Association, One North Franklin, Chicago, IL 60606. A form for the question(s) is available to be downloaded and mailed on AHA's Web site at: http://www.ahacentraloffice.org. In addition, current coding guidelines are available at the National Center for Health Statistics (NCHS) Web site: www.cdc.gov/nchs.icd9.htm.

In conjunction with the cooperating parties (AHA, the American Health Information Management Association (AHIMA), and NCHS), we have reviewed actual medical records and are concerned about the quality of the documentation under the LTCH PPS, as was the case at the beginning of the IPPS. We fully believe that, with experience, the quality of the documentation and coding will improve, just as it did for the IPPS. As noted above, the cooperating parties have plans to assist their members with improvement in documentation and coding issues for the LTCHs through specific questions and coding guidelines. The importance of good documentation is emphasized in the revised ICD-9-CM Official Guidelines for Coding and Reporting (October 1, 2002): “A joint effort between the attending physician and coder is essential to achieve complete and accurate documentation, code assignment, and reporting of diagnoses and procedures. The importance of consistent, complete documentation in the medical record cannot be overemphasized. Without such documentation, the application of all coding guidelines is a difficult, if not impossible, task. (Coding Clinic for ICD-9-CM, Fourth Quarter 2002, page 115)

To improve medical record documentation, LTCHs should be aware that if the patient is being admitted for continuation of treatment of an acute or chronic condition, guidelines at Section I.B.10 of the Coding Clinic for ICD-9-CM, Fourth Quarter 2002 (page 129) are applicable concerning selection of principal diagnosis. To clarify coding advice issued in the August 30, 2002, final rule (67 FR 55979-55981), we would like to point out that at Guideline I.B.12, Late Effects, a late effect is considered to be the residual effect (condition produced) after the acute phase of an illness or injury has terminated (Coding Clinic for ICD-9-CM, Fourth Quarter 2002, page 129). Regarding whether a LTCH should report the ICD-9-CM code(s) for an unresolved acute condition instead of the code(s) for late effect of rehabilitation, we emphasize that each case must be evaluated on its unique circumstances and coded appropriately. Depending on the documentation in the medical record, either a code reflecting the acute condition or rehabilitation could be appropriate in a LTCH.

Since implementation of the LTCH PPS, our Medicare fiscal intermediaries have been conducting training and providing assistance to LTCHs in correct coding. We have also issued manuals containing procedures as well as coding instructions to LTCHs and fiscal intermediaries. We will continue to conduct such training and provide guidance on an as-needed basis. We also refer readers to the detailed discussion on correct coding practices in the August 30, 2002, LTCH PPS final rule (67 FR 55979-55981). Additional coding instructions and examples will be published in Coding Clinic for ICD-9-CM.

F. The Method for Updating the LTC-DRG Relative Weights

As discussed in the June 6, 2003, LTCH PPS final rule (68 FR 34131), under the LTCH PPS each LTCH will receive a payment that represents an appropriate amount for the efficient delivery of care to Medicare patients. The system must be able to account adequately for each LTCH's case-mix in order to ensure both fair distribution of Medicare payments and access to adequate care for those Medicare patients whose care is more costly. Therefore, in accordance with section 412.523(c), we adjust the standard Federal PPS rate by the LTC-DRG relative weights in determining payment to LTCHs for each case.

Under this payment system, relative weights for each LTC-DRG are a primary element used to account for the variations in cost per discharge and resource utilization among the payment groups (section 412.515). To ensure that Medicare patients who are classified to each LTC-DRG have access to an appropriate level of services and to encourage efficiency, we calculate a relative weight for each LTC-DRG that represents the resources needed by an average inpatient LTCH case in that LTC-DRG. For example, cases in a LTC-DRG with a relative weight of 2 will, on average, cost twice as much as cases in a LTC-DRG with a weight of 1.

As we discussed in the August 1, 2003, IPPS final rule (68 FR 45374-45384), the LTC-DRG relative weights effective under the LTCH PPS for Federal FY 2004 were calculated using the December 2002 update of FY 2002 MedPAR data and Version 21.0 of the CMS GROUPER software. We use total days and total charges in the calculation of the LTC-DRG relative weights.

By nature, LTCHs often specialize in certain areas, such as ventilator-dependent patients and rehabilitation and wound care. Some case types (DRGs) may be treated, to a large extent, in hospitals that have, from a perspective of charges, relatively high (or low) charges. Such distribution of cases with relatively high (or low) charges in specific LTC-DRGs has the potential to inappropriately distort the measure of average charges. To account for the fact that cases may not be randomly distributed across LTCHs, we use a hospital-specific relative value method to calculate relative weights. We believe this method removes this hospital-specific source of bias in measuring average charges. Specifically, we reduce the impact of the variation in charges across providers on any particular LTC-DRG relative weight by converting each LTCH's charge for a case to a relative value based on that LTCH's average charge. (See the August 1, 2003, IPPS final rule (68 FR 45376) for further information on the hospital-specific relative value methodology.)

In order to account for LTC-DRGs with low volume (that is, with fewer than 25 LTCH cases), we grouped those low volume LTC-DRGs into one of five categories (quintiles) based on average charges, for the purposes of determining relative weights. For FY 2004 based on the FY 2002 MedPAR data, we identified 173 LTC-DRGs that contained between 1 and 24 cases. This list of low volume LTC-DRGs was then divided into one of the five low volume quintiles, each containing a minimum of 34 LTC-DRGs (173/5 = 34 with 1 LTC-DRG as a remainder). Each of the low volume LTC-DRGs grouped to a specific quintile received the same relative weight and average length of stay using the formula applied to the regular LTC-DRGs (25 or more cases), as described below. (See the August 1, 2003, final rule (68 FR 45376-45380) for further explanation of the development and composition of each of the five low volume quintiles for FY 2004.)

After grouping the cases in the appropriate LTC-DRG, we calculate the relative weights by first removing statistical outliers and cases with a length of stay of 7 days or less. Next, we adjust the number of cases in each LTC-DRG for the effect of short-stay outlier cases under § 412.529. The short-stay adjusted discharges and corresponding charges were used to calculate “relative adjusted weights” in each LTC-DRG using the hospital-specific relative value method described above. (See August 1, 2003, final rule (68 FR 45376-45385) for further details on the steps for calculating the LTC-DRG relative weights.)

We also adjust the LTC-DRG relative weights to account for nonmonotonically increasing relative weights. That is, we make an adjustment if cases classified to the LTC-DRG “with comorbidities (CCs)” of a “with CC”/“without CC” pair had a lower average charge than the corresponding LTC-DRG “without CCs” by assigning the same weight to both LTC-DRGs in the “with CC”/“without CC” pair. (See August 1, 2003, final rule, 68 FR 45381-45382.) In addition, of the 518 LTC-DRGs in the LTCH PPS for FY 2004, based on the FY 2002 MedPAR data, we identified 167 LTC-DRGs for which there were no LTCH cases in the database. That is, no patients who would have been classified to those DRGs were treated in LTCHs during FY 2002 and, therefore, no charge data were reported for those DRGs. Thus, in the process of determining the relative weights of LTC-DRGs, we were unable to determine weights for these 167 LTC-DRGs using the method described above. However, since patients with a number of the diagnoses under these LTC-DRGs may be treated at LTCHs beginning in FY 2004, we assigned relative weights to each of the 167 “no volume” LTC-DRGs based on clinical similarity and relative costliness to one of the remaining 351 (518 − 167 = 351) LTC-DRGs for which we were able to determine relative weights, based on the FY 2002 claims data. (A list of the no volume LTC-DRGs and further explanation of their relative weight assignment can be found in the August 1, 2003, IPPS final rule (68 FR 45374-45385).)

Furthermore, for FY 2004 we established LTC-DRG relative weights of 0.0000 for heart, kidney, liver, lung, pancreas, and simultaneous pancreas/kidney transplants (LTC-DRGs 103, 302, 480, 495, 512 and 513, respectively) because Medicare will only cover these procedures if they are performed at a hospital that has been certified for the specific procedures by Medicare and presently no LTCH has been so certified. If in the future, however, a LTCH applies for certification as a Medicare-approved transplant center, we believe that the application and approval procedure would allow sufficient time for us to propose appropriate weights for the LTC-DRGs effected. At the present time, though, we include these six transplant LTC-DRGs in the GROUPER program for administrative purposes. As the LTCH PPS uses the same GROUPER program for LTCHs as is used under the IPPS, removing these DRGs would be administratively burdensome.

As we stated in the August 1, 2003, IPPS final rule, we will continue to use the same LTC-DRGs and relative weights for FY 2004 until October 1, 2004. Accordingly, Table 3 in the Addendum to this proposed rule lists the LTC-DRGs and their respective relative weights and arithmetic mean length of stay that we will continue to use for the period of July 1, 2004, through September 30, 2004. (This table is the same as Table 3 of the Addendum to the August 1, 2003, IPPS final rule (68 FR 45650-45658), except that it includes the proposed five-sixth of the average length of stay for short-stay outliers under § 412.529.) As we noted earlier, the final DRGs and GROUPER for FY 2005 that will be used for the IPPS and the LTCH PPS, effective October 1, 2004, will be presented in the IPPS FY 2005 proposed and final rule in the Federal Register.

Accordingly, we will notify LTCHs of the revised LTC-DRG relative weights for use in determining payments for discharges occurring between October 1, 2004, and September 30, 2005, based on the final DRGs and the applicable GROUPER version that will be published in the IPPS rule by August 1, 2004.

IV. Proposed Changes to the LTCH PPS Rates and Proposed Changes in Policy for the 2005 LTCH PPS Rate Year

(If you choose to comment on issues in this section, please include the caption “PROPOSED CHANGES TO LTCH PPS RATES AND POLICY FOR THE 2005 LTCH PPS RATE YEAR” at the beginning of your comments.)

A. Overview of the Development of the Payment Rates

The LTCH PPS was effective for a LTCH's first cost reporting period beginning on or after October 1, 2002. Effective with that cost reporting period, LTCHs are paid, during a 5-year transition period, on the basis of an increasing proportion of the LTCH PPS Federal rate and a decreasing proportion of a hospital's payment under reasonable cost-based payment system, unless the hospital makes a one-time election to receive payment based on 100 percent of the Federal rate (see § 412.533). New LTCHs (as defined at § 412.23(e)(4)) are paid based on 100 percent of the Federal rate, with no phase-in transition payments.

The basic methodology for determining LTCH PPS Federal prospective payment rates is set forth in the regulations at §§ 412.515 through 412.532. Below we discuss the proposed factors used to update the LTCH PPS standard Federal rate for the 2005 LTCH PPS rate year that will be effective for LTCHs discharges occurring on or after July 1, 2004, through June 30, 2005.

When we implemented the LTCH PPS in the August 30, 2002, final rule (67 FR 56029-56031), we computed the LTCH PPS standard Federal payment rate for FY 2003 by updating the best available (FY 1998 or FY 1999) Medicare inpatient operating and capital costs per case data, using the excluded hospital market basket.

Section 123(a)(1) of Pub. L. 106-113 requires that the PPS developed for LTCHs be budget neutral. Therefore, in calculating the standard Federal rate under § 412.523(d)(2), we set total estimated PPS payments equal to estimated payments that would have been made under the reasonable cost-based payment methodology had the PPS for LTCHs not been implemented. Section 307(a) of Pub. L. 106-554 specified that the increases to the hospital-specific target amounts and cap on the target amounts for LTCHs for FY 2002 provided for by section 307(a)(1) of Pub. L. 106-554 shall not be taken into account in the development and implementation of the LTCH PPS. In addition, the statute as amended by section 122 of Pub. L. 106-113 provides for enhanced bonus payments for LTCHs for 2 years, FY 2001 and FY 2002. Furthermore, as specified at § 412.523(d)(1), the standard Federal rate is reduced by an adjustment factor to account for the estimated proportion of outlier payments under the LTCH PPS to total LTCH PPS payments (8 percent). For further details on the development of the FY 2003 standard Federal rate, see the August 30, 2002, final rule (67 FR 56027-56037) and for the 2004 LTCH PPS rate year rate, see the June 6, 2003, final rule (68 FR 34122-34190).

Under the existing regulations at § 412.523(c)(3)(ii), we update the standard Federal rate annually to adjust for the most recent estimate of the projected increases in prices for LTCH inpatient hospital services.

B. Proposed Update to the Standard Federal Rate for the 2005 LTCH PPS Rate Year

As established in the June 6, 2003, final rule (68 FR 34122), based on the most recent estimate of the excluded hospital with capital market basket, adjusted to account for the change in the LTCH PPS rate year update cycle, the LTCH PPS standard Federal rate effective from July 1, 2003, through June 30, 2004, (the 2004 LTCH PPS rate year), is $35,726.18.

In the discussion that follows, we explain how we developed the proposed standard Federal rate for the 2005 LTCH PPS rate year. The proposed standard Federal rate for the 2005 LTCH PPS rate year would be calculated based on the proposed update factor of 1.029. Thus, we estimate that the proposed standard Federal rate for the 2005 LTCH PPS rate year would increase 2.9 percent compared to the 2004 LTCH PPS rate year standard Federal rate.

1. Proposed Standard Federal Rate Update

Under § 412.523, the annual update to the LTCH PPS standard Federal rate must be equal to the percentage change in the excluded hospital with capital market basket (described in further detail below). As we discussed in the August 30, 2002, final rule (67 FR 56087), in the future we may propose to develop a framework to update payments to LTCHs that would account for other appropriate factors that affect the efficient delivery of services and care provided to Medicare patients. As we discussed in the June 6, 2003, final rule (68 FR 34122), because the LTCH PPS has only been implemented for less than 2 years (for cost reporting periods beginning on or after October 1, 2002), we have not yet collected sufficient data to allow for the analysis and development of an update framework under the LTCH PPS. Therefore, we are not proposing an update framework for the 2005 LTCH PPS rate year in this proposed rule. However, we noted that a conceptual basis for the proposal of developing an update framework in the future can be found in Appendix B of the August 30, 2002, final rule (67 FR 56086-56090).

a. Description of the Proposed Market Basket for LTCHs for the 2005 LTCH PPS Rate Year

A market basket has historically been used in the Medicare program to account for price increases of the services furnished by providers. The market basket used for the LTCH PPS includes both operating and capital-related costs of LTCHs because the LTCH PPS uses a single payment rate for both operating and capital-related costs. The development of the LTCH PPS standard Federal rate is discussed in further detail in the August 30, 2002, final rule (67 FR 56027-56037).

Under the reasonable cost-based payment system, the excluded hospital market basket was used to update the hospital-specific limits on payment for operating costs of LTCHs. The excluded hospital market basket is based on operating costs from FY 1992 cost report data and includes data from Medicare-participating long-term care, rehabilitation, psychiatric, cancer, and children's hospitals. Since LTCHs' costs are included in the excluded hospital market basket, this market basket index, in part, also reflects the costs of LTCHs. However, in order to capture the total costs (operating and capital-related) of LTCHs, we added a capital component to the excluded hospital market basket for use under the LTCH PPS. We refer to this index as the excluded hospital with capital market basket.

As we discussed in the August 30, 2002, final rule (67 FR 56016 and 56086), beginning with the implementation of the LTCH PPS in FY 2003, the excluded hospital with capital market basket based on FY 1992 Medicare cost report data has been used for updating payments to LTCHs. In the June 6, 2003, final rule (68 FR 34137), we revised and rebased the excluded hospital with capital market basket, using more recent data, that is, using FY 1997 base year data beginning with the 2004 LTCH PPS rate year. (For further details on the development of the FY 1997-based LTCH PPS market basket, see the June 6, 2003, final rule (68 FR 34134-34137).

In the August 30, 2002, LTCH PPS final rule (67 FR 56016 and 56085-56086), we discussed why we believe the excluded hospital with capital market basket provides a reasonable measure of the price changes facing LTCHs. However, as we discussed in the June 6, 2003, final rule (68 FR 34137), we have been researching the feasibility of developing a market basket specific to LTCH services. This research has included analyzing data sources for cost category weights, specifically the Medicare cost reports, and investigating other data sources on cost, expenditure, and price information specific to LTCHs. Based on this research, we did not develop a market basket specific to LTCH services.

As we also discussed in the June 6, 2003, final rule (68 FR 34137), our analysis of the Medicare cost reports indicates that the distribution of costs among major cost report categories (wages, pharmaceuticals, capital) for LTCHs is not substantially different from the 1997-based excluded hospital with capital market basket. Data on other major cost categories (benefits, blood, contract labor) that we would like to analyze were excluded by many LTCHs in their Medicare cost reports. An analysis based on only the data available to us for these cost categories presented a potential problem since no other major cost category weight would be based on LTCH data.

Furthermore, as we also discussed in that same final rule (68 FR 34137), we conducted a sensitivity analysis of annual percent changes in the market basket when the weights for wages, pharmaceuticals, and capital in LTCHs were substituted into the excluded hospital with capital market basket. Other cost categories were recalibrated using ratios available from the IPPS market basket. On average between FY 1995 and FY 2002, the excluded hospital with capital market basket shows increases at nearly the same average annual rate (2.9 percent) as the market basket with LTCH weights for wages, pharmaceuticals, and capital (2.8 percent). This difference is less than the 0.25 percentage point criterion that determines whether a forecast error adjustment is warranted under the IPPS update framework.

We continue to believe that an excluded hospital with capital market basket adequately reflects the price changes facing LTCHs. We continue to solicit comments about issues particular to LTCHs that should be considered in relation to the FY 1997-based excluded hospital with capital market basket and to encourage suggestions for additional data sources that may be available. Accordingly, in this proposed rule, we are proposing to use the FY 1997-based excluded hospital with capital market basket as the LTCH PPS market basket for determining the proposed update to the LTCH PPS standard Federal rate for the 2005 LTCH PPS rate year.

b. Proposed LTCH Market Basket Increase for the 2005 LTCH Rate Year

As we discussed in the June 6, 2003, final rule (68 FR 34137), for LTCHs paid under the LTCH PPS, we stated that the 2004 rate year update would apply to discharges occurring from July 1, 2003, through June 30, 2004. Because we changed the timeframe of the LTCH PPS standard Federal rate annual update from October 1 to July 1, as we explained in that same final rule, we calculated an update factor that reflected that change in the update cycle. For the update to the 2004 LTCH PPS rate year, we calculated the estimated increase between FY 2003 and the 2004 LTCH PPS rate year (July 1, 2003, through June 30, 2004). Accordingly, based on Global Insight's forecast of the revised and rebased FY 1997-based excluded hospital with capital market basket using data from the fourth quarter of 2002, we used a market basket update of 2.5 percent for the 2004 LTCH PPS rate year (68 FR 34138).

Consistent with our historical practice of estimating market basket increases based on Global Insight's forecast of the FY 1997-based excluded hospital with capital market basket using more recent data from the third quarter of 2003, we are proposing a 2.9 percent update to the Federal rate for the 2005 LTCH PPS rate year.

In accordance with § 412.523, this update represents the most recent estimate of the increase in the excluded hospital with capital market basket for the 2005 LTCH PPS rate year.

2. Proposed Standard Federal Rate for the 2005 LTCH PPS Rate Year

In the June 6, 2003, final rule (68 FR 34140), we established a standard Federal rate of $35,726.18 for the 2004 LTCH PPS rate year. For the 2005 LTCH PPS rate year, we are proposing a standard Federal rate of $36,762.24. Since the proposed 2005 LTCH PPS rate year standard Federal rate has already been adjusted for differences in case-mix, wages, cost-of-living, and high-cost outlier payments, we are not proposing to make any additional adjustments in the proposed standard Federal rate for these factors.

C. Calculation of Proposed LTCH Prospective Payments for the 2005 LTCH PPS Rate Year

The basic methodology for determining prospective payment rates for LTCH inpatient operating and capital-related costs is set forth in § 412.515 through § 412.532. In accordance with § 412.515, we assign appropriate weighting factors to each LTC-DRG to reflect the estimated relative cost of hospital resources used for discharges within that group as compared to discharges classified within other groups. The amount of the prospective payment is based on the standard Federal rate, established under § 412.523, and adjusted for the LTC-DRG relative weights, differences in area wage levels, cost-of-living in Alaska and Hawaii, high-cost outliers, and other special payment provisions (short-stay outliers under § 412.529 and interrupted stays under § 412.531).

In accordance with § 412.533, during the 5-year transition period, payment is based on the applicable transition blend percentage of the adjusted Federal rate and the reasonable cost-based payment rate unless the LTCH makes a one-time election to receive payment based on 100 percent of the Federal rate. A LTCH defined as “new” under § 412.23(e)(4) is paid based on 100 percent of the Federal rate with no blended transition payments (§ 412.533(d)). As discussed in the August 30, 2002 final rule (67 FR 56038) and in accordance with § 412.533(a), the applicable transition blends are as follows:

Accordingly, for cost reporting periods beginning during FY 2004 (that is, on or after October 1, 2003, and before September 30, 2004), blended payments under the transition methodology are based on 60 percent of the LTCH's reasonable cost-based payment rate and 40 percent of the adjusted LTCH PPS Federal rate. For cost reporting periods that begin during FY 2005 (that is, on or after October 1, 2004, and before September 30, 2005), blended payments under the transition methodology will be based on 40 percent of the LTCH's reasonable cost-based payment rate and 60 percent of the adjusted LTCH PPS Federal rate.

1. Adjustment for Area Wage Levels

a. Background

Under the authority of section 307(b) of Pub. L. 106-554, we established an adjustment to account for differences in LTCH area wage levels under § 412.525(c) using the labor-related share estimated by the excluded hospital market basket with capital and wage indices that were computed using wage data from inpatient acute care hospitals without regard to reclassification under section 1886(d)(8) or section 1886(d)(10) of the Act. Furthermore, as we discussed in the August 30, 2002, final rule (67 FR 56015-56019), we established a 5-year transition to the full wage adjustment. The applicable wage index phase-in percentages are based on the start of a LTCH's cost reporting period as shown in the following table:

For example, for cost reporting periods beginning on or after October 1, 2004, and before September 30, 2005 (FY 2005), the applicable LTCH wage index value would be three-fifths of the applicable full wage index value without taking into account geographic reclassification under sections 1886(d)(8) and (d)(10) of the Act.

In that same final rule (67 FR 56018), we stated that we would continue to reevaluate LTCH data as they become available and would propose to adjust the phase-in if subsequent data support a change. As we discussed in the June 6, 2003, final rule (68 FR 34140), because the LTCH PPS has only been implemented for less than 2 years, sufficient new data have not been generated that would enable us to conduct a comprehensive reevaluation of the appropriateness of adjusting the phase-in. However, in that same final rule, we explained that we had reviewed the most recent data available at that time and did not find any evidence to support a change in the 5-year phase-in of the wage index.

Because of the recent implementation of the LTCH PPS and the lag time in availability of cost report data, we still do not yet have sufficient new data to allow us to conduct a comprehensive reevaluation of the appropriateness of the phase-in of the wage index adjustment. Again, we have reviewed the most recent data available and did not find any evidence to support a change in the 5-year phase-in of the wage index. Therefore, at this time, we are not proposing to adjust the phase-in of the wage index adjustment in this proposed rule.

b. Wage Index Data

In the June 6, 2003, final rule (68 FR 34142), for the 2004 LTCH PPS rate year, we established that we would use the same data that was used to compute the FY 2003 acute care hospital inpatient wage index without taking into account geographic reclassifications under sections 1886(d)(8) and (d)(10) of the Act because that was the best available data at that time. The acute care hospital inpatient wage index data is also used in the inpatient rehabilitation PPS (IRF PPS), the home health agency PPS (HHA PPS), and the skilled nursing facility PPS (SNF PPS). As we discussed in the August 30, 2002, final rule (67 FR 56019), since hospitals that are excluded from the IPPS are not required to provide wage-related information on the Medicare cost report and we would need to establish instructions for the collection of such LTCH data in order to establish a geographic reclassification adjustment under the LTCH PPS, the wage adjustment established under the LTCH PPS is based on a LTCH's actual location without regard to the urban or rural designation of any related or affiliated provider.

In this proposed rule, we are proposing that for the 2005 LTCH PPS rate year, the same data used to compute the FY 2004 acute care hospital inpatient wage index without taking into account geographic reclassifications under sections 1886(d)(8) and (d)(10) of the Act would be used to determine the applicable wage index values under the LTCH PPS, because these are the most recent available complete data. These data are the same wage data that were used to compute the FY 2003 wage indices currently used under the IPPS and SNF PPS. The proposed LTCH wage index values that would be used for discharges occurring on or after July 1, 2004, through June 30, 2005, are shown in Table 1 (for urban areas) and Table 2 (for rural areas) in the Addendum to this proposed rule.

As noted above, the applicable wage index phase-in percentages are based on the start of a LTCH's cost reporting period beginning on or after October 1st of each year during the 5-year transition period. For cost reporting periods beginning on or after October 1, 2003, and before September 30, 2004 (FY 2004), the labor portion of the proposed standard Federal rate would be adjusted by two-fifths of the applicable LTCH wage index value. Specifically, for a LTCH's cost reporting period beginning during FY 2004, for discharges occurring on or after July 1, 2004, through June 30, 2005, the applicable wage index value would be two-fifths of the full FY 2004 acute care hospital inpatient wage index data, without taking into account geographic reclassifications under sections 1886(d)(8) and (d)(10) of the Act) as shown in Tables 1 and 2 in the Addendum to this proposed rule. Similarly, for cost reporting periods beginning on or after October 1, 2004, and before October 1, 2005 (FY 2005), the labor portion of the proposed standard Federal rate would be adjusted by three-fifths of the applicable LTCH wage index value. Specifically, for a LTCH's cost reporting period beginning during FY 2005, for discharges occurring on or after July 1, 2004, through June 30, 2005, the applicable wage index value would be three-fifths of the full FY 2005 acute care hospital inpatient wage index data, without taking into account geographic reclassification under sections 1886(d)(8) and (d)(10) of the Act as shown in Tables 1 and 2 in the addendum to this proposed rule.

Because the phase-in of the wage index does not coincide with the LTCH PPS rate year (July 1st through June 30th), most LTCHs will experience a change in the wage index phase-in percentages during the LTCH PPS rate year. For example, during the 2005 LTCH PPS rate year, for a LTCH with a January 1st fiscal year, the two-fifths wage index would be applicable for the first 6 months of the 2005 LTCH PPS rate year (July 1, 2004, through December 31, 2004) and the three-fifths wage index would be applicable for the second 6 months of the 2005 LTCH PPS rate year (January 1, 2005, through June 30, 2005). We also note that some providers will still be in the first year of the 5-year phase-in of the LTCH wage index (that is, those LTCHs with cost reporting periods that began during FY 2003 and are ending during the first 3 months of the 2005 LTCH PPS rate year (July 1, 2004, through September 30, 2004). For the remainder of those LTCHs' FY 2003 cost reporting periods, for discharges occurring on or after July 1, 2004, through June 30, 2005, the applicable wage index value would be one-fifth of the full FY 2005 acute care hospital inpatient wage index data, without taking into account geographic reclassification under sections 1886(d)(8) and (d)(10) of the Act as shown in Tables 1 and 2 in the Addendum to this proposed rule.

c. Labor-Related Share

In the August 30, 2002, final rule (67 FR 56016), we established a labor-related share of 72.885 percent based on the relative importance of the labor-related share of operating and capital costs of the excluded hospital with capital market basket based on FY 1992 data. In the June 6, 2003, final rule (68 FR 34142), in conjunction with our revision and rebasing of the excluded hospital with capital market basket from an FY 1992 to an FY 1997 base year, we used a labor-related share that is determined based on the relative importance of the labor-related share of operating costs (wages and salaries, employee benefits, professional fees, postal services, and all other labor-intensive services) and capital costs of the excluded hospital with capital market basket based on FY 1997 data. While we adopted the revised and rebased FY 1997-based LTCH PPS market basket as the LTCH PPS update factor for the 2004 LTCH PPS rate year, we decided not to update the labor-related share under the LTCH PPS pending further analysis. Accordingly, the labor-share for the 2004 LTCH PPS rate year was 72.885 percent.

In the August 1, 2003, IPPS final rule (68 FR 50041-50042), we did not use a revised labor-related share for FY 2004 because we had not yet completed our research into the appropriateness of this updated measure. In that rule, we discussed two methods that we were reviewing for establishing the labor-related share—(1) updating the regression analysis that was done when the IPPS was originally developed and (2) reevaluating the methodology we currently use for determining the labor-related share using the hospital market basket. We also explained that we would continue to explore all options for alternative data and a methodology for determining the labor-related share, and would propose to update the IPPS and excluded hospital labor-related shares, if necessary, once our research is complete.

As we explained in the August 30, 2002, final rule, which implemented the LTCH PPS, the June 6, 2003, LTCH PPS final rule, and the June 9, 2003, high-cost outlier final rule, the LTCH PPS was modeled after the IPPS for short-term, acute care hospitals. Specifically, the LTCH PPS uses the same patient classification system (CMS-DRGs) as the IPPS, and many of the case-level and facility-level adjustments explored or adopted for the LTCH PPS are payment adjustments under the IPPS (that is, wage index, high-cost outliers, and the evaluation of adjustments for indirect teaching costs and the treatment of a disproportionate share of low-income patients).

Furthermore, as discussed in greater detail in the August 30, 2002, LTCH PPS final rule (67 FR 55960), LTCHs are certified as acute care hospitals that meet the criteria set forth in section 1861(e) of the Act to participate as a hospital in the Medicare program, and in general, hospitals qualify for payment under the LTCH PPS instead of the IPPS solely because their inpatient average length of stay is greater than 25 days in accordance with section 1886(d)(1)(B)(iv)(I) of the Act, implemented in § 412.23(e). In the June 6, 2003, LTCH PPS final rule (68 FR 34144), we explained that prior to qualifying as a LTCH under § 412.23(e)(2)(i), hospitals generally are paid as acute care hospitals under the IPPS during the period in which they demonstrate that they have an average Medicare inpatient length of stay of greater than 25 days.

The primary reason that we did not update the LTCH PPS labor-related share for the 2004 LTCH PPS rate year was due to the same reason that we explained for not updating the labor-related share under the IPPS for FY 2004 in the August 1, 2003, IPPS (68 FR 27226) which are equally applicable to the LTCH PPS. We did not revise the labor-related share under the IPPS based on the revised and rebased FY 1997 hospital market basket and the excluded hospital market basket because of data and methodological concerns. We indicated that we would conduct further analysis to determine the most appropriate methodology and data for determining the labor-related share. Section 403 of the Medicare Prescription Drug and Modernization Act of 2003 (enacted December 8, 2003, Pub. L. 108-173) amends section 1886(d) of the Act to provide that for discharges occurring on or after October 1, 2004, the labor-related share under the IPPS is reduced to 62 percent if such a change would result in higher total payments to the hospital. While the statute provides the option to hospitals of using an alternative to the current IPPS labor-related share (71 percent), the statute does not address updating the current IPPS labor-related share. We intend to discuss the details of implementing this provision in the IPPS proposed rule for FY 2005.

Although section 403 of Pub. L. 108-173 provides for an alternative labor share percentage, this alternative only applies to hospitals paid under the IPPS and not to LTCHs. Consequently, since we have not yet implemented a change in the labor-share methodology used under the IPPS, and the alternative provided at section 403 does not apply to LTCHs, we are not proposing to change the LTCH PPS labor-share at this time.

Accordingly, we are not proposing to update the labor-related share for the 2005 LTCH PPS rate year; it would remain at 72.885 percent. As is the case under the IPPS, once our research on the labor-related share is complete, any future revisions to the LTCH PPS labor-related share will be proposed and subject to public comment.

2. Proposed Adjustment for Cost-of-Living in Alaska and Hawaii

Under § 412.525(b), we make a cost-of-living adjustment (COLA) for LTCHs located in Alaska and Hawaii to account for the higher costs incurred in those States. For the 2005 LTCH PPS rate year, we are proposing to make a COLA to payments for LTCHs located in Alaska and Hawaii by multiplying the standard Federal payment rate by the appropriate factor listed in Table I. below. These factors are obtained from the U.S. Office of Personnel Management (OPM) and are currently used under the IPPS. In addition, in this proposed rule, we are proposing that if OPM releases revised COLA factors before March 1, 2004, we would use them for the development of payments and publish them in the LTCH PPS final rule.

3. Proposed Adjustment for High-Cost Outliers

a. Background

Under § 412.525(a), we 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 LTCH PPS in determining resource costs at the patient and hospital 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. We set the outlier threshold before the beginning of the applicable rate year so that total outlier payments are projected to equal 8 percent of total payments under the LTCH PPS. Outlier payments under the LTCH PPS are determined consistent with the IPPS outlier policy.

Under section 412.525(a), we make outlier payments for any discharges if the estimated cost of a case exceeds the adjusted LTCH PPS payment for the LTC-DRG plus a fixed-loss amount. The fixed-loss amount is the amount used to limit the loss that a hospital will incur under an outlier policy. This results in Medicare and the LTCH sharing financial risk in the treatment of extraordinarily costly cases. The LTCH's loss is limited to the fixed-loss amount and the percentage of costs above the marginal cost factor. We calculate the estimated cost of a case by multiplying the overall hospital cost-to-charge ratio by the Medicare allowable covered charge. In accordance with section 412.525(a), we pay outlier cases 80 percent of the difference between the estimated cost of the patient case and the outlier threshold (the sum of the adjusted Federal prospective payment for the LTC-DRG and the fixed-loss amount).

We determine a fixed-loss amount, that is, the maximum loss that a LTCH can incur under the LTCH PPS for a case with unusually high costs before the LTCH will receive any additional payments. We calculate the fixed-loss amount by simulating aggregate payments with and without an outlier policy. The fixed-loss amount would result in estimated total outlier payments being projected to be equal to 8 percent of projected total LTCH PPS payments.

Currently, under both the LTCH PPS and the IPPS, only a maximum cost-to-charge ratio threshold (ceiling) is applied to a hospital's cost-to-charge ratio and, as discussed in the June 9, 2003, high-cost outlier final rule (68 FR 34506-34507) for discharges occurring on or after August 8, 2003, a minimum cost-to-charge ratio threshold (floor) is no longer applicable. Thus, if a LTCH's cost-to-charge ratio is above the ceiling, the applicable statewide average cost-to-charge ratio is assigned to the LTCH. In addition, for LTCHs for which we are unable to compute a cost-to-charge ratio, we also assign the applicable statewide average cost-to-charge ratio. Currently, MedPAR claims data and cost-to-charge ratios based on the latest available cost report data from Hospital Cost Report Information System (HCRIS) and corresponding MedPAR claims data are used to establish a fixed-loss threshold amount under the LTCH PPS.

In the June 9, 2003, high-cost outlier final rule (68 FR 34507), consistent with the outlier policy changes for acute care hospitals under the IPPS discussed in that same final rule, we no longer assign the applicable statewide average cost-to-charge ratio when a LTCH's cost-to-charge ratio falls below the minimum cost-to-charge ratio threshold (floor). We made this policy change because, as is the case for acute care hospitals, we believe LTCHs could arbitrarily increase their charges in order to maximize outlier payments. Even though this arbitrary increase in charges should result in a lower cost-to-charge ratio in the future (due to the lag time in cost report settlement), previously when a LTCH's actual cost-to-charge ratio fell below the floor, the LTCH's cost-to-charge ratio was raised to the applicable statewide average cost-to-charge ratio. This application of the statewide average resulted in inappropriately higher outlier payments. Accordingly, for LTCH PPS discharges occurring on or after August 8, 2003, in making outlier payments under § 412.525 (and short-stay outlier payments under § 412.529), we apply the LTCH's actual cost-to-charge ratio to determine the cost of the case, even where the LTCH's actual cost-to-charge ratio falls below the floor.

Also, in the June 9, 2003, high-cost outlier final rule (68 FR 34507), consistent with the policy change for acute care hospitals under the IPPS, under § 412.525(a)(4), by cross-referencing § 412.84(i), we established that we will continue to apply the applicable statewide average cost-to-charge ratio when a LTCH's cost-to-charge ratio exceeds the maximum cost-to-charge ratio threshold (ceiling) by adopting the policy at § 412.84(i)(3)(ii). As we explained in that same final rule, cost-to-charge ratios above this range are probably due to faulty data reporting or entry. Therefore, these cost-to-charge ratios should not be used to identify and make payments for outlier cases because such data are clearly errors and should not be relied upon. In addition, we made a similar change to the short-stay outlier policy at § 412.529. Since cost-to-charge ratios are also used in determining short-stay outlier payments, the rationale for that change mirrors that for high-cost outliers.

b. Establishment of the Proposed Fixed-Loss Amount

In the June 6, 2003, final rule (68 FR 34144), for the 2004 LTCH PPS rate year, we used the March 2002 update of the FY 2001 MedPAR claims data to determine a fixed-loss threshold that would result in outlier payments projected to be equal to 8 percent of total payments, based on the policies described in that final rule, because these data were the best data available. We calculated cost-to-charge ratios for determining the fixed-loss amount based on the latest available cost report data in HCRIS and corresponding MedPAR claims data from FYs 1998, 1999, and 2000.

In that same final rule, in determining the fixed-loss amount for the 2004 LTCH PPS rate year (using the outlier policy under § 412.525(a) in effect on July 1, 2003), we used the current combined operating and capital cost-to-charge ratio floor and ceiling under the IPPS of 0.206 and 1.421, respectively (as explained in the IPPS final rule (67 FR 50125, August 1, 2002)). As we discussed in the June 9, 2003, high-cost outlier final rule (68 FR 34508), we concluded that it was not necessary to recalculate a new fixed-loss amount once the changes to the outlier policy discussed in that final rule became effective because the difference between the fixed-loss amount determined with or without the application of the floor would be negligible.

If a LTCH's cost-to-charge ratio was below this floor or above this ceiling, we assigned the applicable IPPS statewide average cost-to-charge ratio. We also assigned the applicable statewide average for LTCHs for which we are unable to compute a cost-to-charge ratio, such as for new LTCHs. Therefore, based on the methodology and data described above, in the June 6, 2003, final rule (68 FR 34144), for the 2004 LTCH PPS rate year, we established a fixed-loss amount of $19,590. Thus, during the 2004 LTCH PPS rate year, we pay an outlier case 80 percent of the difference between the estimated cost of the case and the outlier threshold (the sum of the adjusted Federal LTCH payment for the LTC-DRG and the fixed-loss amount of $19,590).

Also, in the June 6, 2003, final rule (68 FR 34145), we established that beginning with the 2004 LTCH PPS rate year, we will calculate a single fixed-loss amount for each LTCH PPS rate year based on the version of the GROUPER that is in effect as of the beginning of the LTCH PPS rate year (that is, July 1, 2003, for the 2004 LTCH PPS rate year). Therefore, for the 2004 LTCH PPS rate year, we established a single fixed-loss amount based on the Version 20.0 of the GROUPER, which was in effect at the start of the 2004 LTCH PPS rate year (July 1, 2003). As we noted above, the fixed-loss amount for the 2004 LTCH PPS rate year is $19,590.

In calculating the proposed fixed-loss amount for the 2005 LTCH PPS rate year, we applied the current outlier policy under § 412.525(a); that is, we assigned the applicable statewide average cost-to-charge ratio only to LTCHs whose cost-to-charge ratios exceeded the ceiling (and not when they fell below the floor). Accordingly, we used the current IPPS combined operating and capital cost-to-charge ratio ceiling of 1.366 (as explained in the IPPS final rule (68 FR 45478, August 1, 2003)). We believed that using the current combined IPPS operating and capital cost-to-charge ratio ceiling for LTCHs is appropriate for the same reasons we stated above regarding the use of the current combined operating and capital cost-to-charge ratio ceiling under the IPPS.

In this proposed rule, for the 2005 LTCH PPS rate year, we used the December 2002 update of the FY 2002 MedPAR claims data to determine a proposed fixed-loss amount that would result in outlier payments projected to be equal to 8 percent of total payments, based on the policies described in this proposed rule, because these data are the best LTCH data available. We considered using claims data from the September 2003 update of the FY 2003 MedPAR to determine the proposed fixed-loss amount (and the budget neutrality offset discussed below in section IV.C.6.) for the 2005 LTCH PPS rate year. However, initial analysis has shown that the FY 2003 MedPAR data contain coding errors. As in the case with the FY 2002 MedPAR, we have learned that a large hospital chain of LTCHs has continued to consistently code diagnoses inaccurately on the claims it submitted, and these coding errors are reflected in the FY 2003 MedPAR data. The coding inaccuracies in the MedPAR claims data can cause significant skewing of the fixed-loss amount and would impact the determination of the budget neutrality offset. While we have corrected the coding inaccuracies in the FY 2002 MedPAR, we were unable to correct the coding errors in the FY 2003 MedPAR in time for publication of this proposed rule since the correction process requires extensive programming work. Accordingly, we are using the December 2002 update of the FY 2002 MedPAR claims data to determine a proposed fixed-loss amount for the 2005 LTCH PPS rate year for this proposed rule. We expect to be able to use the corrected FY 2003 MedPAR to calculate a revised fixed-loss amount for the final rule. Furthermore, as noted above, we determined the proposed fixed-loss amount based on the version of the GROUPER that would be in effect as of the beginning of the 2005 LTCH PPS rate year (July 1, 2004), that is, Version 21.0 of the LTCH PPS GROUPER (68 FR 45374-45385). We also computed cost-to-charge ratios for determining the proposed fixed-loss amount for the 2005 LTCH PPS rate year based on the latest available cost report data in HCRIS and corresponding MedPAR claims data from FYs 1999, 2000, and 2001. As we explained above, the current applicable IPPS statewide average cost-to-charge ratios were applied when a LTCH's cost-to-charge ratio exceeded the ceiling (1.366). In addition, we assigned the applicable statewide average to LTCHs for which we were unable to compute a cost-to-charge ratio. (Currently, the applicable IPPS statewide averages can be found in Tables 8A and 8B of the August 1, 2003, IPPS final rule (68 FR 45637-45638).)

Accordingly, based on the data and policies described above, we are proposing a fixed-loss amount of $21,864 for the 2005 LTCH PPS rate year. Thus, we would pay an outlier case 80 percent of the difference between the estimated cost of the case and the proposed outlier threshold (the sum of the adjusted proposed Federal LTCH payment for the LTC-DRG and the proposed fixed-loss amount of $21,864).

c. Reconciliation of Outlier Payments Upon Cost Report Settlement

In the June 9, 2003, high-cost outlier final rule (68 FR 34508-34512), we made changes to the LTCH outlier policy consistent with those made for acute care hospitals under the IPPS because, as we discussed in that same final rule, we became aware that payment vulnerabilities existed in the previous IPPS outlier policy. Because the LTCH PPS high-cost outlier and short-stay policies are modeled after the outlier policy in the IPPS, we believe they were susceptible to the same payment vulnerabilities and, therefore, also merited revision. Consistent with the change made for acute care hospitals under the IPPS at § 412.84(m), we established under § 412.525(a)(4)(ii), by cross-referencing § 412.84(m), that effective for LTCH PPS discharges occurring on or after August 8, 2003, any reconciliation of outlier payments may be made upon cost report settlement to account for differences between the actual cost-to-charge ratio and the estimated cost-to-charge ratio for the period during which the discharge occurs. As is the case with the changes made to the outlier policy for acute care hospitals under the IPPS, the instructions for implementing these regulations are discussed in further detail in Program Memorandum Transmittal A-03-058. In addition, in that same final rule (68 FR 34513), we established a similar change to the short-stay outlier policy at § 412.529(c)(5)(ii).

We also discussed in the June 9, 2003, IPPS high-cost outlier final rule (68 FR 34507-34512) that only using cost-to-charge ratios based on the latest settled cost report does not reflect any dramatic increases in charges during the payment year when making outlier payments. Because a LTCH has the ability to increase its outlier payments through a dramatic increase in charges and because of the lag time in the data used to calculate cost-to-charge ratios, in that same final rule (68 FR 34494-34515), consistent with the policy change for acute care hospitals under the IPPS at § 412.84(i)(2), we established that, for LTCH PPS discharges occurring on or after October 1, 2003, fiscal intermediaries will use more recent data when determining a LTCH's cost-to-charge ratio. Therefore, by cross-referencing § 412.84(i)(2) under § 412.525(a)(4)(iii), we established that fiscal intermediaries will use either the most recent settled cost report or the most recent tentative settled cost report, whichever is from the later period. In addition, in that same final rule, we established a similar change to the short-stay outlier policy at § 412.529(c)(5)(iii).

d. Application of Outlier Policy to Short-Stay Outlier Cases

As we discussed in the August 30, 2002, final rule (67 FR 56026), under some rare circumstances, a LTCH discharge could qualify as a short-stay outlier case (as defined under § 412.529 and discussed in section IV.B.4.b. of this preamble) and also as a high-cost outlier case. In such a scenario, a patient could be hospitalized for less than five-sixths of the geometric average length of stay for the specific LTC-DRG, and yet incur extraordinarily high treatment costs. If the costs exceeded the outlier threshold (that is, the short-stay outlier payment plus the fixed-loss amount), the discharge would be eligible for payment as a high-cost outlier. Thus, for a short-stay outlier case in the 2005 LTCH PPS rate year, the high-cost outlier payment would be 80 percent of the difference between the estimated cost of the case and the outlier threshold (the sum of the proposed fixed-loss amount of $21,864 and the amount paid under the short-stay outlier policy).

4. Proposed Adjustments for Special Cases

a. General

As discussed in the August 30, 2002, final rule (67 FR 55995), under section 123 of Pub. L. 106-113, the Secretary generally has broad authority in developing the PPS for LTCHs, including whether (and how) to provide for adjustments to reflect variations in the necessary costs of treatment among LTCHs.

Generally, LTCHs, as described in section 1886(d)(1)(B)(iv) of the Act, are distinguished from other inpatient hospital settings by maintaining an average inpatient length of stay of greater than 25 days. However, LTCHs may have cases that have stays of considerably less than the average length of stay and that receive significantly less than the full course of treatment for a specific LTC-DRG. As we explained in the August 30, 2002, final rule (67 FR 55995), such cases would be paid inappropriately if the hospital were to receive the full LTC-DRG payment. Below we discuss the payment methodology for these special cases as implemented in the August 30, 2002, final rule (67 FR 55955-56010).

b. Proposed Adjustment for Short-Stay Outlier Cases

A short-stay outlier case may occur when a beneficiary receives less than the full course of treatment at the LTCH before being discharged. These patients may be discharged to another site of care or they may be discharged and not readmitted because they no longer require treatment. Furthermore, patients may expire early in their LTCH stay.

As noted above, generally LTCHs are defined by statute as having an average inpatient length of stay of greater than 25 days. We believe that a payment adjustment for short-stay outlier cases results in more appropriate payments, because these cases most likely would not receive a full course of treatment in such a short period of time and a full LTC-DRG payment may not always be appropriate. Payment-to-cost ratios simulated for LTCHs, for the cases described above, show that if LTCHs receive a full LTC-DRG payment for those cases, they would be significantly “overpaid” for the resources they have actually expended.

Under § 412.529, in general, we adjust the per discharge payment to the least of 120 percent of the cost of the case, 120 percent of the LTC-DRG specific per diem amount multiplied by the length of stay of that discharge, or the full LTC-DRG payment, for all cases with a length of stay up to and including five-sixths of the geometric average length of stay of the LTC-DRG.

As we noted in section IV.C.3. of this preamble, in the June 9, 2003, high-cost outlier final rule (68 FR 34494-34515), we revised the methodology for determining cost-to-charge ratios for acute care hospitals under the IPPS because we became aware that payment vulnerabilities existed in the previous IPPS outlier policy. As we also explained in that same final rule, because the LTCH PPS high-cost outlier and short-stay outlier policies are modeled after the outlier policy in the IPPS, we believe they were susceptible to the same payment vulnerabilities and, therefore, merited revision. Consistent with the policy established for acute care hospitals under the IPPS at § 412.84(i) and (m) in the June 9, 2003, high-cost outlier final rule (68 FR 34515), and similar to the policy change described above for LTCH PPS high-cost outlier payments at § 412.525(a)(4)(ii), we established under § 412.529(c)(5)(ii) that for discharges on or after August 8, 2003, short-stay outlier payments are subject to the provisions in the regulations at § 412.84(i)(1), (i)(3) and (i)(4), and (m). In addition, short-stay outlier payments are subject to the provisions in the regulations at § 412.84(i)(2) for discharges on or after October 1, 2003, in accordance with § 412.529(c)(5)(iii). Therefore, in the June 9, 2003, high-cost outlier final rule (68 FR 34548-34513), under § 412.529(c)(5)(ii), by cross-referencing proposed § 412.84(i)(2), we established that fiscal intermediaries will use either the most recent settled cost report or the most recent tentative settled cost report, whichever is from the later period, in determining a LTCH's cost-to-charge ratio.

In addition, by cross-referencing § 412.84(i), we established that the applicable statewide average cost-to-charge ratio is only applied when a LTCH's cost-to-charge ratio exceeds the ceiling. Thus, the applicable statewide average cost-to-charge ratio is no longer applied when a LTCH's cost-to-charge ratio falls below the floor. Furthermore, by cross-referencing § 412.84(i)(4), we established that any reconciliation of payments for short-stay outliers may be made upon cost report settlement to account for differences between the estimated cost-to-charge ratio and the actual cost-to-charge ratio for the period during which the discharge occurs. As noted above, in the discussion of the high-cost outlier policy in section IV.C.3. of this preamble, the instructions for implementing these regulations are discussed in further detail in Program Memorandum Transmittal A-03-058. In the June 6, 2003, final rule (68 FR 34146-34148), for certain hospitals that qualify as LTCHs under section 1886(d)(1)(B)(iv)(II) of the Act (“subclause (II)” LTCHs) as added by section 4417(b) of Pub. L. 105-33, and implemented in § 412.23(e)(2)(ii), we established a temporary adjustment to the short-stay outlier policy during the 5-year transition period. Under § 412.529(c)(4), effective for discharges from a “subclause (II)” LTCH occurring on or after July 1, 2003, the short-stay outlier percentage is 195 percent during the first year of the hospital's 5-year transition. For the second cost reporting period, the short-stay outlier percentage is 193 percent; for the third cost reporting period, the percentage is 165 percent; for the fourth cost reporting period, the percentage is 136 percent; and for the final cost reporting period of the 5-year transition (and future cost reporting periods), the short-stay outlier percentage is 120 percent, that is, the same as it is for all other LTCHs under the LTCH PPS.

As we discussed in the June 6, 2003, final rule (68 FR 34147), we established this formula with the expectation that an adjustment to short-stay outlier payments during the transition will result in reducing the difference between payments and costs for a “subclause (II)” LTCH for the period of July 1, 2003, through the end of the transition period, when the LTCH PPS will be fully phased-in.

As we stated in that same final rule, we also expect that during this 5-year period, “subclause (II)” LTCHs will make every attempt to adopt the type of efficiency enhancing policies that generally result from the implementation of prospective payment systems in other health care settings. We are not proposing any changes to the short-stay outlier policy in this proposed rule.

c. Proposed Extension of the Interrupted Stay Policy

At existing § 412.531(a), we define an “interruption of a stay” as a stay at a LTCH during which a Medicare inpatient is transferred upon discharge to an acute care hospital, an IRF, or a SNF for treatment or services that are not available in the LTCH and returns to the same LTCH within applicable fixed-day periods. (We also include transfers to swing beds under this interrupted stay policy for LTCH payment policy determinations, consistent with the SNF PPS payment policy. That is, a readmission to a LTCH from post-hospital SNF care being provided in a swing bed that is located either in the LTCH itself or in another onsite Medicare provider has the same policy consequence as a readmission to the LTCH from an onsite SNF (June 6, 2003, 68 FR 34149).)

As defined above, an interrupted stay is treated as one discharge from the LTCH. The day-count of the applicable fixed-day period of an interrupted stay begins on the day of discharge from the LTCH (which is also the day of admission to the other site of care). For a discharge to an acute care hospital, the applicable fixed-day period is 9 days, for an IRF, 27 days, and for a SNF 45 days. The counting of the days begins on the day of discharge from the LTCH and ends on the 9th, 27th, or 45th day for an acute care hospital, an IRF, or a SNF, respectively, after the discharge.

If the patient is readmitted to the LTCH within the fixed-day threshold, return to the LTCH is considered part of the first admission and only a single LTCH PPS payment will be made. For example, if a LTCH patient is discharged to an acute hospital and is readmitted to the LTCH on any day up to and including the 9th day following the original day of discharge from the LTCH, one LTC-DRG payment will be made. If the patient is readmitted to the LTCH from the acute care hospital on the 10th day after the original discharge or later, Medicare will pay for the second admission as a separate stay with an additional LTC-DRG assignment. In implementing this policy, we provide that, in the event a Medicare inpatient is discharged from a LTCH and is readmitted and the stay qualifies as an interrupted stay, the provider should cancel the claim generated by the original stay in the LTCH and submit one claim for the entire stay. (For further details, see Medicare Program Memorandum Transmittal A-02-093, September 2002.)

On the other hand, if the patient stay exceeds the total fixed-day threshold outside of the LTCH at another facility before being readmitted, two separate payments would be made. One would be based on the principal diagnosis and length of stay for the first admission and the other based on the principal diagnosis and length of stay for the second admission. Depending upon their lengths of stay, both stays could result in payments as a short-stay outlier (§ 412.529), a full LTC-DRG, or even a high-cost outlier. Further, if the principal diagnosis is the same for both admissions, the hospital could receive two similar payments.

When we introduced the interrupted stay policy for LTCHs in the August 30, 2002, final rule (67 FR 56002-56006), we noted that we would consider expanding or revising the policy based on information received from the provider community or information gained from our ongoing monitoring activities. During the first year of the LTCH PPS, it has come to our attention, from both of these sources, that certain LTCHs are discharging patients during the course of their treatment for the sole purpose of receiving specific tests or procedures from another facility (that should have been furnished under arrangements by the LTCHs), and then readmitting the patient to the LTCH following the administration of the test or procedure. In other words, these patients do not stop receiving medical care that should be considered LTCH inpatient services during the period between their discharge from and readmission to the LTCH. On the contrary, they continue to receive care, often of a highly specialized type, from the other facility before being readmitted for further inpatient care at the LTCH. This sequence of care suggests that the original discharge from the LTCH may be motivated by financial considerations rather than by clinical judgment and, therefore, would be inappropriate.

Existing regulations at § 412.509(c) require a LTCH to furnish all necessary covered services for a Medicare beneficiary who is an inpatient of the hospital either directly or under arrangements (as defined in § 409.3). Under § 409.3, when services are furnished under arrangements, Medicare payments made to the provider that arranged for the services discharges the liability of the beneficiary or any other person to pay for those services. The “under arrangements” policy set forth in § 412.509 for LTCHs derives from the regulations at § 411.15(m), which implement section 1862(a)(14) of the Act. Section 1862(a) of the Act specifies the services for which no payment may be made under Medicare Part A and Part B. Section 1862(a)(14) of the Act specifies the exception for certain services to be furnished “under arrangements” by providers.

If a LTCH obtains, from another facility “under arrangements,” a specific test or procedure for one of its inpatients that is not available on the LTCH's premises, as contemplated by § 412.509, a discharge and a subsequent readmission would be unnecessary and inappropriate. This is true even if it is necessary to transport the patient to another facility to receive the arranged-for service. Furthermore, no additional claim should be submitted to Medicare by the other entity that actually furnished the test or procedure because, under § 412.509(c), the LTCH must furnish all necessary covered services to the Medicare beneficiary who is an inpatient of the hospital either directly or under arrangements. In such a situation, generally, the LTCH would include the medically necessary test or procedure on its patient claim to Medicare (which could have an effect on the assignment of the LTC-DRG and thus the Medicare payment to the LTCH) and the LTCH would be responsible for paying the provider directly for the test or procedure.

Patient discharges from the LTCH for tests or procedures that should have been provided under arrangements, followed by LTCH readmission, result in an inappropriate increase in Medicare costs in three ways:

First, the Medicare payment associated with the LTC-DRG that would be assigned to the patient's stay will typically already include the costs of the test or procedure. (The August 30, 2002, LTCH PPS final rule (67 FR 55977-55985), includes an in-depth description of the derivation of LTC-DRGs from ICD-9-CM codes on Medicare claims and a discussion of the development and calculation of LTC-DRG relative weights.) Second, the intervening provider will bill Medicare separately for the test or procedure. Thus, if services that should have been furnished directly or under arrangements by the LTCH are instead unbundled and billed separately, Medicare would pay the other provider for the service that should have been paid for “under arrangements” by the LTCH under § 412.509.

Third, a discharge for outpatient services and a subsequent readmission to the LTCH is not currently covered under the interrupted stay policy at existing § 412.531. Section 412.531(a) only includes discharges from a LTCH to an acute care hospital, an IRF, and a SNF for treatment or services not available in the LTCH and subsequent readmission to the same LTCH. If a patient is discharged and readmitted to the LTCH following an outpatient test or procedure, under current policy, after making a LTCH PPS payment for the first discharge, there would be a second Medicare payment to the LTCH when the patient is finally discharged.

In order to address these concerns, we are proposing to revise the definition of an interruption of a stay under § 412.531 to add situations in which a patient is discharged from the LTCH and readmitted to the same LTCH within 3 days of the discharge (proposed revised § 412.531(a)(1)). We believe that if a patient is discharged from a LTCH for any reason and is then readmitted within 3 days, in general, the patient's original admitting diagnoses would not change significantly during those 3 days. Therefore, such a readmission would not constitute a new episode of care. We question whether a patient who was discharged and then returned to the same LTCH within 3 days should have been discharged in the first place. Since LTCHs are designed to treat patients with a high level of acuity and multicomorbidities, we believe that a 3-day period is a reasonable window during which necessary offsite medical care might be delivered, under arrangements, as contemplated under § 412.509, without an appreciable change in the original admitting diagnoses. Moreover, this 3-day period is consistent with the interrupted stay policy under the IRF PPS under which the maximum period of time that a patient could be away from the IRF is 3 days before a new patient assessment is required. Therefore, under our proposal, if a patient were discharged on Monday, and readmitted either on that Monday (the first day), Tuesday (the second day), or Wednesday (the third day), the subsequent readmission would not be considered a new admission and Medicare would pay the LTCH for only one discharge based on the combined length of stay for the period prior to and after the absence from the LTCH.

We are further proposing that, under the proposed revision of the interruption of stay policy for LTCHs, any treatment or medical services furnished to the individual during the 3-day (or less) absence from the LTCH could not be billed separately to the Medicare program or to the beneficiary, but would be paid as “under arrangements” services to the LTCH. We calculate payments under the LTCH PPS using base year costs that include the numerous tests and procedures typical of the complicated medical conditions that characterize LTCH patients, including those furnished by other providers. Therefore, we believe that a readmission to the LTCH that triggers the proposed 3-day interrupted stay policy should be treated as a continuation of the episode of care that occasioned the first admission. Further, we believe that the readmission to the LTCH within 3 days establishes the presumption that any treatment or services furnished during the intervening 3 (or less) days should have been provided by the LTCH “either directly or under arrangements” (§ 412.509(b)). The entire stay would generate one LTC-DRG payment under the LTCH PPS, which would be “payment in full for all inpatient hospital services, as defined in § 409.10.” (§ 412.509(a)) Under § 409.10(a) inpatient hospital services means the following services furnished to an inpatient of a qualified hospital: (1) Bed and board; (2) nursing services and other related services; (3) use of hospital or CAH facilities; (4) medical social services; (5) drugs, biologicals, supplies, appliances, and equipment; (6) certain other diagnostic or therapeutic services; (7) medical or surgical services provided by certain interns or residents-in-training; and (8) transportation services, including transport by ambulance.

As explained above, we are proposing that a readmittance to the LTCH within 3 days after a discharge will result in one LTC-DRG payment for the entire stay. Since we are treating both parts of the stay as one episode of care, we are proposing that treatment or care provided during the “interruption” be considered to have occurred during that episode of care and that payment for such services are included in the LTC-DRG payment. We are also proposing to include the days of the 3-day interruption of stay in counting LTCH days to determine the total length of stay of the patient at the LTCH if medical treatment or care were provided during the 3 days because these services will be considered to have been paid for as part of the total LTCH stay (proposed § 412.531(b)(1)(iii)). We are further proposing that if a patient is discharged home, and within a 3-day period received no additional medical treatment or service, but is readmitted to the LTCH, the days away from the LTCH would not be included in the length of stay calculation. This is presently the day count methodology that we use in the existing interrupted stay policy at § 412.531(b)(1) as applied to acute care hospitals, IRFs, and SNFs.

We are proposing that this policy be applicable to all services or procedures provided to the patient either under Medicare Part A, or Part B, except for the services which are expressly excluded from bundling under section 1886(a)(1)(H)(i) of the Act and § 411.15(m), such as services furnished by physicians under § 415.102(a) and other specific health professionals. Failure to comply with this bundling requirement could lead to sanctions such as termination of the LTCH's Medicare provider agreement or civil money penalties (under section 1866(a)(1)(H)(i) of the Act).

Although we understand that, in good faith, a patient could be discharged from a LTCH, return home for a day or two, experience a setback, and then be readmitted to the LTCH, we believe that such a readmission to the LTCH should be considered an extension of the original hospitalization and that Medicare should not pay for two claims for what was, in effect, one episode of care. The proposed 3-day interrupted stay policy takes into account the profile of most LTCH patients, as typically very sick individuals with multicomorbidities. We believe that it is reasonable to presume that, should this type of patient be discharged and then readmitted to a LTCH with 3 days the readmission signifies a continuation of the original hospital stay and not a new episode of care. Furthermore, we are concerned about reports of LTCHs discharging and readmitting patients who are still undergoing active treatment rather than obtaining services for these patients “under arrangements” in accordance with section 1862(a)(14) of the Act and the regulations at § 412.509.

If the policy is finalized, we intend to collect data on any Medicare claims for outpatient services as well as inpatient services furnished during the time that the patients are away from the LTCH under the proposed 3-day interrupted stay policy. We would review data to determine whether we should expand the 3-day time period and we will consider proposing such a change in a future rule. Further, if it appears that additional patients are being discharged for the purpose of receiving tests or procedures at other Medicare settings, and then readmitted to the LTCH, in order for the LTCH to avoid paying for the procedure “under arrangements,” we may find it appropriate for our Quality Improvement Organizations (QIO) to evaluate the medical basis for the original discharge. A patient discharge that is not clinically justifiable could constitute potential violation of the LTCH's conditions of participation in the Medicare program for inadequate discharge planning or an inappropriate discharge from the LTCH under § 482.43. Moreover, as noted above, if a separate bill is submitted by an entity other than the LTCH for services furnished during this period, this could also be a violation of the LTCH's provider agreement obligation regarding bundled services.

In proposing this policy, we are not attempting to restrict a LTCH from pursuing necessary or more appropriate clinical care from another facility. As we designed the PPS for LTCHs, the original interrupted stay policy was created for situations where sound clinical judgment could suggest a different treatment setting for LTCH patients: a patient requiring emergency surgery at an acute care hospital; a patient who would appear to benefit from a specific therapy regimen at an IRF; or a patient who had improved and, therefore, could be appropriately cared for at a SNF. The policy accounted for a readmission to the LTCH after the emergency care or in the event of a change in the patient's condition, that is, for sound clinical reasons. Fundamentally, the interrupted stay policy resulted from our determination to allow considerable latitude to medical personnel in this regard without untoward payment consequences for the Medicare program.

We are proposing a revision to the existing interrupted stay policy because we believe that 3 days in most instances represents an appropriate interval for establishing whether or not the reason for the patient's readmission is directly connected to the original episode of care and whether or not Medicare-covered services were obtained during the interruption that should have otherwise been provided “under arrangements” by the LTCH.

All inpatient services, under Medicare, fall within the purview of the requirement of section 1862(a)(14) of the Act, and, therefore, what we have proposed is not a departure from existing policy. Under section 1862(a)(14) of the Act, notwithstanding any other provision of this title, “no payment may be made under Part A or Part B for any expenses incurred for items or services which are other than physicians' services (as defined in regulations promulgated specifically for purposes of this paragraph), services described by section 1861(s)(2)(K) of the Act (certified nurse-midwife services, qualified psychologist services, and services of a certified registered nurse anesthetist) and which are furnished to an individual who is a patient of a hospital or critical access hospital by an entity other than the hospital or critical access hospital unless the services are furnished under arrangements (as defined in section 1861(w)(1) of the Act with the entity made by the hospital or critical access hospital.” Section 1861(w)(1) of the Act states that “[t]he term ‘arrangements’ is limited to arrangements under which receipt of payment by the hospital, critical access hospital, skilled nursing facility, home health agency, or hospice program (whether in its own right or as agent), with respect to services for which an individual is entitled to have payment made under this title, discharges the liability of such individual or any other person to pay for the services.” We believe the objective of these statutory provisions, which were implemented for inpatient acute care hospitals in regulations at § 411.15(m) and subsequently at § 412.509 for LTCHs, was to discharge financial liability for inpatients who may have received additional care off-premises and to assign payment responsibility for such care to the hospital that is being paid for that beneficiary's total care for that spell of illness. The total care delivered by the hospital may be provided “directly” or “under arrangements” with other facilities (§ 412.509(c)) and was included in Medicare's payment to the hospital. Over the years, we have often referred to this as the “prohibition against unbundling” for purposes of emphasizing that if a Medicare provider “unbundles” specific components of a beneficiary's total inpatient care (provided either “directly” or “under arrangements”) and sends separate claims to Medicare for those tests or treatments, the provider would be acting in violation of the statute and applicable regulations. Since LTCHs treat patients with multicomorbidities who are often in need of a wide range of diagnostic and treatment modalities and lengthy hospitalizations, we believe that in this particular setting, this statutory requirement is particularly vulnerable to gaming. For that reason, we are taking this opportunity to clarify the existing general unbundling prohibition and to propose specific language on the unbundling prohibition as it applies to the interrupted stay policy under the LTCH PPS and are proposing to codify it in regulations. As noted above, we are concerned that LTCH patients, under active treatment, are being inappropriately discharged to other treatment sites, receiving tests or procedures related to one of the diagnoses for which the patient is being hospitalized and which otherwise should have been provided at the LTCH either directly or under arrangements under § 412.509 and then readmitted to the LTCH. Another claim is also being submitted to Medicare by the other treatment site for those tests or procedures. As stated earlier, under the LTCH PPS, payments associated with specific LTC-DRGs include all costs associated with rendering care to the type of patients treated in LTCHs and, therefore, additional Medicare payments for such services would be inappropriate.

We understand that during a particular hospitalization, a typical LTCH patient, with multicomorbidities, could suddenly require emergency care at an acute care hospital. This would be the case, for example, if a patient who was admitted to the LTCH with a principal diagnosis of chronic obstructive pulmonary disease and respirator dependence, with secondary diagnoses of hypertension, Type II diabetes mellitus, history of coronary artery disease, and history of bladder cancer suddenly exhibits symptoms consistent with a pneumothorax (lung collapse) and requires treatment that is beyond the scope of the LTCH. Services obtained at an acute care hospital, under the proposed policy would be considered related to the original diagnoses and submission of a separate claim by the acute hospital should be considered a violation of the unbundling requirement established by section 1862(a)(14) of the Act. Payment to the acute hospital for any services delivered would be the responsibility of the LTCH since the critical episode was directly related to the hospitalization at the LTCH. Conversely, if the same patient had instead suddenly suffered a myocardial infarction (heart attack) that requires a cardiac workup, evaluation, and possible implantation of a cardiac stent, it may be appropriate to discharge this patient for admission to an acute care facility for appropriate evaluation and the invasive cardiac procedure. Under these circumstances, the admission to the acute hospital was totally unrelated to the patient's diagnoses in the LTCH and arguably there may be no need to bundle the services. A discharge from the LTCH and a readmission following the procedure at the acute hospital in order to resume the treatment provided by the LTCH, for which the patient was originally hospitalized, could be entirely appropriate. (Notwithstanding the necessity of the discharge, under the proposed 3-day interrupted stay policy, there would be no additional LTC-DRG payment generated to the LTCH if the patient returns to the LTCH within the 3-day period.) It could be argued that in this type of a subsequent admission to the acute hospital, the acute care hospital should be able to submit a claim to Medicare for the procedure. (This payment to the acute hospital may be subject to the postacute care policy at § 412.4, depending upon the DRG to which it is assigned (68 FR 45404 and 45412, August 1, 2003).)

We are aware that there may be exceptions, and that in the example cited above, sound medical judgment could have dictated that the patient who needed the cardiac stent should first be discharged to the acute hospital and then readmitted to the LTCH within 3-days in order to continue necessary treatment at the LTCH. In such a case, notwithstanding our proposed 3-day interrupted stay policy, it is arguable that the implantation of the cardiac stent does not fall within the category of services that should be paid for by the LTCH under arrangements, and that the acute hospital should be able to submit a claim to Medicare.

Accordingly, while, arguably, it may be appropriate to attempt to limit the proposed unbundling requirement that services be provided under arrangement to those that are “related” to the admitting diagnoses of the LTCH patient, we have not been able to develop a methodology that would be administratively feasible and not subject to gaming, given the multiple comorbidities typical of LTCH patients. The prospective payment system for this particular setting was designed to capture all costs associated with treating these highly complicated cases and we believe that it will difficult to distinguish whether a particular critical episode can been seen as arising from one of the patient's many medical conditions for which the patient is presently at the LTCH. We are soliciting comments and suggestions that are consistent with the stated policy goals described above and that would be administratively feasible.

We understand that any policy that is adopted in the final regulation would need to be issued with detailed instructions to fiscal intermediaries on implementation procedures to ensure a correct and consistent interpretation of our policy objectives.

d. Onsite Discharges and Readmittances

Under § 412.532, generally, if more than 5 percent of all Medicare discharges during a cost reporting period are patients who are discharged to an onsite SNF, IRF, or psychiatric facility, or to an onsite acute care hospital and who are then directly readmitted to the LTCH, only one LTC-DRG payment will be made to the LTCH for these type of discharges and readmittances during the LTCH's cost reporting period. Therefore, payment for the entire stay will be paid either as one full LTC-DRG payment or a short-stay outlier, depending on the duration of the entire LTCH stay.

In applying the 5-percent threshold, we apply one threshold for discharges and readmittances with a co-located acute care hospital. There is also a separate 5-percent threshold for all discharges and readmittances with co-located SNFs, IRFs, and psychiatric facilities. In the case of a LTCH that is co-located with an acute care hospital, an IRF, or a SNF, the interrupted stay policy at § 412.531 applies until the 5-percent threshold is reached. However, once the applicable threshold is reached, all such discharges and readmittances to the applicable site(s) for that cost reporting period are paid as one discharge pursuant to § 412.532. This means that even if a discharged LTCH Medicare patient was readmitted to the LTCH following a stay in an acute care hospital of greater than 9 days, if the facilities share a common location and the 5-percent threshold were exceeded, the subsequent discharge from the LTCH will not represent a separate hospitalization for payment purposes. Only one LTC-DRG payment will be made for all such discharges during a cost reporting period to the acute care hospital, regardless of the length of stay at the acute care hospital, that are followed by readmittances to the onsite LTCH.

Similarly, if the LTCH has exceeded its 5-percent threshold for all discharges to an onsite IRF, SNF, or psychiatric hospital or unit, with readmittances to the LTCH, the subsequent LTCH discharge for patients from any of those sites for the entire cost reporting period will not be treated as a separate discharge for Medicare payment purposes. (As under the interrupted stay policy, payment to an acute care hospital under the IPPS, to an IRF under the IRF PPS, and to a SNF under the SNF PPS, will not be affected. Payments to the psychiatric facility also will not be affected.)

5. Other Payment Adjustments

As indicated earlier, we have broad authority under section 123 of Public Law 106-113, including whether (and how) to provide for adjustments to reflect variations in the necessary costs of treatment among LTCHs. Thus, in the August 30, 2002, final rule (67 FR 56014-56027), we discussed our extensive data analysis and rationale for not implementing an adjustment for geographic reclassification, rural location, treating a disproportionate share of low-income patients (DSH), or indirect medical education (IME) costs. In that same final rule, we stated that we would collect data and reevaluate the appropriateness of these adjustments in the future once more LTCH data become available after the LTCH PPS is implemented. Because the LTCH PPS has only been implemented for less than 2 years and the lag-time in data availability, sufficient new data have still not yet been generated that would enable us to conduct a comprehensive reevaluation of these payment adjustments. Nonetheless, we have reviewed the limited data that are available and found no evidence to support additional proposed policy changes. Therefore, in this proposed rule, we are not proposing an adjustment for geographic reclassification, rural location, DSH, or IME at this time. However, we will continue to collect and interpret new data as they become available in the future to determine if these data support proposing any additional payment adjustments.

6. Proposed Budget Neutrality Offset To Account for the Transition Methodology

Under § 412.533, we implemented a 5-year transition period from reasonable cost-based payment to prospective payment, during which a LTCH will be paid an increasing percentage of the LTCH PPS rate and a decreasing percentage of its payments under the reasonable cost-based payment methodology for each discharge. Furthermore, we allow a LTCH to elect to be paid based on 100 percent of the standard Federal rate in lieu of the blended methodology.

The standard Federal rate was determined as if all LTCHs will be paid based on 100 percent of the standard Federal rate. As stated earlier, we provide for a 5-year transition period that allows LTCHs to receive payments based partially on the reasonable cost-based methodology. In order to maintain budget neutrality as required by section 123(a)(1) of the Pub. L. 106-113 and § 412.523(d)(2) during the 5-year transition period, we reduce all LTCH Medicare payments (whether a LTCH elects payment based on 100 percent of the Federal rate or whether a LTCH is being paid under the transition blend methodology). Specifically, we reduce all LTCH Medicare payments during the 5-year transition by a factor that is equal to 1 minus the ratio of the estimated TEFRA reasonable cost-based payments that would have been made if the LTCH PPS had not been implemented, to the projected total Medicare program PPS payments (that is, payments made under the transition methodology and the option to elect payment based on 100 percent of the Federal rate).

In the June 6, 2003, final rule (68 FR 34512), based on the best available data, we projected that a certain percentage of LTCHs would elect to be paid based on 100 percent of the standard Federal rate rather than receive payment based on the transition blend methodology. As discussed in that same final rule, using the same methodology established in the August 30, 2002, final rule (67 FR 56034), this projection was based on our estimate that either: (1) a LTCH has already elected payment based on 100 percent of the Federal rate prior to the beginning of the 2004 LTCH PPS rate year (July 1, 2003); or (2) a LTCH will receive higher payments based on 100 percent of the standard Federal rate compared to the payments they would receive under the transition blend methodology. Similarly, we projected that the remaining LTCHs would choose to be paid based on the transition blend methodology at § 412.533 because those payments would be higher than if they were paid based on 100 percent of the standard Federal rate.

In the June 6, 2003, final rule (68 FR 34513), we projected that the full effect of the remaining 4 years of the transition period, including the election option, will result in a cost to the Medicare program of $310 million. Specifically, for the 2005 LTCH PPS rate year, we estimated that the cost of the transition would be $100 million. This cost would have necessitated an estimated budget neutrality offset of 4.6 percent (0.954) for payments to LTCHs in the 2005 rate year. Furthermore, in order to maintain budget neutrality, we indicated that, in the future, we would propose a budget neutrality offset for each of the remaining years of the transition period to account for the estimated payments for the respective fiscal year.

For the proposed 2005 LTCH PPS rate year, based on the best available data, we are projecting that approximately 69 percent of LTCHs would be paid based on 100 percent of the proposed standard Federal rate rather than receive payment under the transition blend methodology. Using the same methodology described in the August 30, 2002, final rule (67 FR 56034), this projection, which uses updated data and inflation factors, is based on our estimate that either—(1) a LTCH has already elected payment based on 100 percent of the Federal rate prior to the start of the 2005 LTCH PPS rate year (July 1, 2004); or (2) a LTCH would receive higher payments based on 100 percent of the proposed 2005 LTCH PPS rate year standard Federal rate compared to the payments it would receive under the transition blend methodology. Similarly, we are projecting that the remaining 31 percent of LTCHs would choose to be paid based on the applicable transition blend methodology (as set forth under § 412.533(a)) because they would receive higher payments than if they were paid based on 100 percent of the proposed 2005 LTCH PPS rate year standard Federal rate. The applicable transition blend percentage is applicable for a LTCH's entire cost reporting period beginning on or after October 1 (unless the LTCH elects payment based on 100 percent of the Federal rate).

In this proposed rule, based on the best available data and the proposed policy revisions described above, we project that the full effect of the remaining 4 years of the transition period (including the election option) would result in a cost to the Medicare program of $170 million as follows:

We note that although the transition period will have ended for most LTCHs by the 2008 LTCH PPS rate year, a small cost is projected for the 2008 LTCH PPS rate year (July 1, 2007, through June 30, 2008) because the applicable transition period percentages are based on a LTCH's individual cost reporting period and not the LTCH PPS rate year (July 1 through June 30). Specifically, LTCHs with cost reporting periods beginning July 1, 2006, through October 1, 2006 (during the 4th year of the transition period), where the applicable transition blend percentages are 20 percent based on reasonable cost and 80 percent based on the Federal rate (see § 412.533), will end during the first 3 months of the 2008 LTCH PPS rate year (July 1, 2007, through September 30, 2007). Therefore, a small cost is projected for the 2008 LTCH PPS rate year to account for those LTCHs that will still be receiving blended transition payments for a portion of the 2008 LTCH PPS rate year.

Accordingly, using the methodology established in the August 30, 2002, final rule (67 FR 56034) based on updated data and the proposed policies and rates discussed in this proposed rule, we are proposing a 3.0 percent reduction (0.970) to all LTCHs' payments for discharges occurring on or after July 1, 2004, and through June 30, 2005, to account for the estimated cost of the transition period methodology (including the option to elect payment based on 100 percent of the Federal rate) of the $80 million for the 2005 LTCH PPS rate year.

This offset of 3.0 percent has decreased relative to the estimate of 4.6 percent for several reasons. For this proposed rule, we have used data from more recent cost reports and were able to obtain data from more LTCHs (211 LTCHs as compared to 194 LTCHs in the June 6, 2003, final rule). In addition, in projecting the percentage of hospitals that would elect to be paid based on 100 percent of the proposed 2005 LTCH PPS rate year standard Federal rate, we used the Provider Specific File (PSF) in which LTCHs indicated whether they opted to be paid based on 100 percent of standard Federal rate or the transition blend methodology for the FY 2003 LTCH PPS payment year. However, based on information obtained from the PSF, we learned that, for those LTCHs that we projected would choose payment for FY 2003 based on 100 percent of the standard Federal rate (where payment based on the full Federal rate would be expected to be higher for those LTCHs than payment under the transition blend methodology), a significant number of those LTCHs chose to be paid under the transition blend methodology that is projected to result in payment lower than that using 100 percent of the standard Federal rate.

Similarly, a significant number of those LTCHs that we expected would choose payment under the transition blend methodology (where payment under the transition blend for those LTCHs would be expected to be higher than payment based on 100 percent of the standard Federal rate) chose to be paid using 100 percent of the standard Federal rate, which is projected to result in payment lower than that under the transition blend methodology. Since a number of LTCHs opted to be paid based on a methodology in which they would receive lower payments, we assume that the overall cost of $100 million to the Medicare program of the transition period would be less than what was projected in the June 6, 2003, final rule for the proposed 2005 LTCH PPS rate year. Thus, in the June 6, 2003, final rule, in estimating the $100 million cost to the transition, which would have necessitated a 4.6 percent reduction to all LTCHs' payments for the 2005 LTCH PPS rate year, we overstated our assumptions of the cost of the transition period. Accordingly, to account for the projected lower cost of the transition period due to those LTCHs that chose to be paid based on a methodology in which they would receive lower payments in FY 2003, for this proposed rule, we are proposing a 3.0 percent (0.970) reduction to all LTCHs' payments during the 2005 LTCH PPS rate year. We note that the proposed 0.970 transition period budget neutrality factor for the 2005 LTCH PPS rate year is 3 percentage points lower than the transition period budget neutrality factor for the 2004 LTCH PPS rate year (0.940). This smaller budget neutrality offset contributes to greater LTCH payment increases between the 2004 and 2005 LTCH PPS rate years compared to the increases seen between FY 2003 and the 2004 LTCH PPS rate year. We do not expect to see these large payment per discharge increases in future years as the majority of LTCHs will have transitioned fully to the LTCH PPS and, therefore, the transition period budget neutrality factor should remain more stable.

As noted above, in order to maintain budget neutrality, we indicated that we would propose a budget neutrality offset for each of the remaining years of the transition period to account for the estimated costs for the respective LTCH PPS rate years. In this proposed rule, based on the best available data, we are proposing the following budget neutrality offsets to the LTCH PPS during the remaining years of the transition period: 2.2 percent (0.978) for the 2006 LTCH PPS rate year, 1.1 percent (0.989) for the 2007 LTCH PPS rate year, and 0.1 percent (0.990) for the 2008 LTCH PPS rate year. As noted above, the small offset in the 2008 LTCH PPS rate year accounts for those LTCHs whose blended transition period payments will be concluding in the first 3 months of the 2008 LTCH PPS rate year (that is, July 1, 2007, through September 30, 2007).

As we discussed in the August 30, 2002, final rule (67 FR 56036), consistent with the statutory requirement for budget neutrality in section 123(a)(1) of Public Law 106-113, we intended for estimated aggregate payments under the LTCH PPS to equal the estimated aggregate payments that would be made if the LTCH PPS was not implemented. Our methodology for estimating payments for purposes of the budget neutrality calculations use the best available data at that time and necessarily reflect assumptions. As the LTCH PPS progresses, we are monitoring payment data and will evaluate the ultimate accuracy of the assumptions used in the budget neutrality calculations (for example, inflation factors, intensity of services provided, or behavioral response to the implementation of the LTCH PPS) described in the August 30, 2002, final rule (67 FR 56027-56037). To the extent these assumptions significantly differ from actual experience, the aggregate amount of actual payments may turn out to be significantly higher or lower than the estimates on which the budget neutrality calculations were based.

Section 123 of Pub. L. 106-113 and section 307 of Pub. L. 106-554 provide broad authority to the Secretary in developing the LTCH PPS, including the authority for appropriate adjustments. Under this broad authority, as implemented in the regulations at § 412.523(d)(3), we have provided for the possibility of making a one-time prospective adjustment to the LTCH PPS rates by October 1, 2006, so that the effect of any significant difference between actual payments and estimated payments for the first year of the LTCH PPS would not be perpetuated in the LTCH PPS rates for future years.

In the June 6, 2003, final rule (67 FR 34153), we estimated that total Medicare program payments for LTCH services over the next 5 LTCH PPS rate years would be $2.17 billion for the 2004 LTCH PPS rate year; $2.29 billion for the 2005 LTCH PPS rate year; $2.42 billion for the 2006 LTCH PPS rate year; $2.56 billion for the 2007 LTCH PPS rate year; and $2.71 billion for the 2008 LTCH PPS rate year.

Consistent with the methodology discussed in the June 6, 2003, final rule (68 FR 34138), in this proposed rule, based on the most recent available data, we estimate that total Medicare program payments for LTCH services for the next 5 LTCH PPS rate years would be as follows:

As noted above, in accordance with the methodology established in the August 30, 2002, final rule (67 FR 56037), these estimates are based on the projection that 69 percent of LTCHs would elect to be paid based on 100 percent of the proposed 2005 LTCH PPS rate year standard Federal rate rather than the applicable transition blend, and our estimate of 2005 LTCH PPS rate year payments to LTCHs using our Office of the Actuary's most recent estimate of the excluded hospital with capital market basket of 2.9 percent for the 2005 LTCH PPS rate year, 3.2 percent for the 2006 LTCH PPS rate year, 3.1 percent for the 2007 LTCH PPS rate year, 3.0 percent for the 2008 LTCH PPS rate year, and 3.2 percent for the 2009 LTCH PPS rate year. We also took into account our Office of the Actuary's projection that there would be an increase in Medicare beneficiary enrollment of 2.1 percent in the 2005 LTCH PPS rate year, 2.4 percent in the 2006 LTCH PPS rate year, 2.1 percent in the 2007 LTCH PPS rate year, 2.0 percent in the 2008 LTCH PPS rate year, and 2.1 percent in the 2009 LTCH PPS rate year.

Because the LTCH PPS has only been implemented for less than 2 years, sufficient new data have not been generated that would enable us to conduct a comprehensive reevaluation of our budget neutrality calculations. Therefore, in this proposed rule, we are not proposing to make a one-time adjustment under § 412.523(d)(3) so that the effect of any significant difference between actual payments and estimated payments for the first year of the LTCH PPS is not perpetuated in the PPS rates for future years. However, we will continue to collect and interpret new data as the data become available in the future to determine if such an adjustment should be proposed.

7. Proposed Changes in the Procedure for Counting Days in the Average Length of Stay Calculation

Prior to the implementation of the PPS for LTCHs, Medicare paid LTCHs under the reasonable cost methodology subject to limitations on payments. Both the BBRA and BIPA required the development and implementation of a per discharge PPS for LTCHs based on DRGs for cost reporting periods beginning on or after October 1, 2002 (67 FR 55954, August 30, 2002).

Under the reasonable cost-based reimbursement system, the number of patient days that occurred during a cost reporting period and the costs associated with those days were reported on the hospital's cost report (Hospital and Hospital Health Care Complex Cost Report, CMS Form 2552-96), as were the number of patient discharges that occurred during that same period. This method of reporting and reimbursement did not require that all of the days of care to a patient be counted as occurring in the cost reporting period during which the patient was discharged. Under this method of reporting and reimbursement the days of care to a patient are counted in the cost reporting period in which it occurred.

With the FY 2003 implementation of the LTCH PPS, as in other discharge-based PPS”, such as those for acute care hospitals and for IRFs, all days of the patient's stay, even those occurring prior to the cost reporting period in which the discharge occurs are counted for payment purposes as occurring in the cost reporting period of the patient's discharge. An example of this distinction is as follows: A LTCH has a January 1 through December 31 cost reporting period; a Medicare patient is admitted on December 15 and discharged on February 5, 2004. Prior to the LTCH PPS, under the reasonable cost-based reimbursement system, costs and patient days occurring in December 2003 would be included in the January 1 through December 31, 2003, cost reporting period, even though the patient was not discharged until February of the next cost reporting period that began January 1, 2004. Those patient days occurring in January and February would be counted in the next cost reporting period (2004) in which the discharge occurred. Since the implementation of the LTCH PPS, for payment purposes, all patient days for this stay would be reported in the cost reporting period in which the discharge occurred. In the above example, therefore, all of the patient stay would be counted in the next cost reporting period which is the 2004 cost reporting period. Even if a LTCH is transitioning into fully Federal payments and a percentage of its payments is based upon what would have been paid under the former reasonable cost-based reimbursement system, under §§ 412.500 and 412.533, payment policy is governed by the LTCH PPS. At cost report settlement, payment is discharge-based. Therefore, once a LTCH is subject to the LTCH PPS, that is, for its first cost reporting period starting on or after October 1, 2002, the “days follow the discharge,” which means that both days and costs are linked to the patient's discharge, even when the days occurred in a previous cost reporting period.

In the August 30, 2002, final rule (67 FR 55972), which established the policies of the LTCH PPS, we stated that “[t]he procedure by which a LTCH will be evaluated by its fiscal intermediary to determine whether it will qualify as a LTCH * * * is the same procedure currently employed under the TEFRA system.” Currently, for determining whether a hospital meets the greater than 25 day average Medicare inpatient length of stay criterion, in the case of a Medicare patient who was admitted during one cost reporting period, but was discharged in a following cost reporting period, both covered and uncovered days are counted in the cost reporting period in which they occurred and not linked to the cost reporting period in which the patient is discharged.

Therefore, presently, for a LTCH with a January 1 through December 31 cost reporting period, if a patient was admitted on December 1, 2002, and discharged on January 15, 2003, patient days would be counted one way for payment purposes and another way for purposes of counting the average length of stay. For payment purposes, all 46 days of the stay and the costs associated with them would be reported during the cost reporting period that the discharge occurred, that is, January 1, 2003, through December 31, 2003. For purposes of determining whether a hospital meets the greater than 25 day length of stay criterion, under § 412.23(e)(2)(i), however, for the same patient, the 31 days in December would be counted as occurring during the January 1, 2002, to December 31, 2002, cost reporting period and the 15 days in January 2003 would be counted, along with the discharge, during the January 1, 2003, through December 31, 2003, cost reporting period.

We have received numerous inquiries from providers and fiscal intermediaries indicating that our two different ways of counting days under the LTCH PPS for payment and for average length of stay calculations have created considerable confusion. Therefore, in response to these inquiries and consistent with the payment system already in place for LTCHs as discussed above, in this proposed rule, we are proposing to revise § 412.23(e)(3)(i) of the regulations to specify that if a patient's stay includes days of care furnished during two or more separate consecutive cost reporting periods, the total days of a patient's stay would be reported in the cost reporting period during which the patient is discharged in calculating the average length of stay for hospitals that qualify as LTCHs under both § 412.23(e)(2)(i) and (ii). We are not proposing any changes to the formula of dividing the number of total days for Medicare patients by discharges for LTCHs in order to determine whether a hospital qualifies as a LTCH under § 412.23(e)(2)(i) or in the formula of dividing total days for all patients by discharges for LTCHs to qualify under § 412.23(e)(2)(ii).

In the August 1, 2003, final rule for the IPPS (68 FR 45464), we discussed the inability of the present cost report (Hospital and Hospital Health Care Complex Cost Report, CMS Form 2552-96) to capture total days for Medicare patients as required under §§ 412.23(e)(2) and (e)(3) for hospitals qualifying under § 412.23(e)(2)(i) and our present use of census data gathered from the Medicare provider analysis and review (MedPAR) files for this purpose. Prior to the October 1, 2002, implementation of the LTCH PPS, we relied on data from the most recently submitted hospital cost report in order to determine whether or not a hospital qualified as a LTCH. We would continue to utilize patient days and discharge data from MedPAR files for the qualification calculation under the proposed revised § 412.23(e)(3)(i) until the cost reporting form is revised to capture total days for Medicare inpatients.

As discussed earlier, for a hospital to qualify as a LTCH under § 412.23(e)(2)(i), it must demonstrate that the Medicare inpatients require care for an average Medicare inpatient length of stay of greater than 25 days for the hospital's most recent cost reporting period. Alternatively, for cost reporting periods beginning on or after August 5, 1997, a hospital that was first excluded from the PPS in 1986, and can demonstrate that at least 80 percent of its annual Medicare inpatient discharges in the 12-month cost reporting period ending in FY 1997 have a principal diagnosis that reflects a finding of neoplastic disease must have an average inpatient length of stay for all patients, including both Medicare and non-Medicare inpatients, of greater than 20 days (§ 412.23(e)(2)(ii)). As described above, under the previous reasonable cost-based reimbursement system to determine whether or not a hospital met this requirement, total days for all patients were divided by the total number of discharges that occurred during a cost reporting period. When we implemented the LTCH PPS on October 1, 2002, we limited this calculation to only Medicare patients for hospitals to qualify under § 412.23(e)(2)(i), but did not change the calculation for hospitals to qualify under § 412.23(e)(2)(ii). As we noted in the August 30, 2002, final rule, “[w]e believe that excluding non-Medicare patients in determining the average inpatient length of stay for purposes of subclause (I) would be more appropriate in identifying the hospitals that warrant exclusion under the general definition of LTCH in subclause (I). However in enacting subclause (II), the Congress provided an exception to the general definition of LTCH under subclause (I), and we have no reason to believe that the change in methodology for determining the average inpatient length of stay would better identify the hospitals that the Congress intended to exclude under subclause (II) (67 FR 55974). These hospitals will continue to have their greater than 20 days average length of stay calculated based on all days for all patients, whether Medicare or non-Medicare patients, and will continue to be determined based on the days of care provided during the cost reporting period and not based solely on the count of days for the patients discharged during the cost reporting period.

8. Clarification of the Requirements for a Satellite Facility or a Remote Location To Qualify as a LTCH and Proposed Changes to the Requirements for Certain Satellite Facilities and Remote Locations

a. Proposed Policy Change

In § 412.22(h)(1), we define a satellite as “a part of a hospital that provides inpatient services in a building also used by another hospital, or in one or more entire buildings located on the same campus as buildings used by another hospital.” Satellite arrangements exist when a IPPS excluded hospital is either a freestanding hospital or a hospital-within-a-hospital under § 412.22(e) that establishes an additional location by sharing space in a building also used by another hospital, or in one or more entire buildings located on the same campus as buildings used by another hospital. A detailed discussion of our policies regarding Medicare payments for satellite facilities of hospitals excluded from the IPPS was set forth in the IPPS final rules published on July 30, 1999 (64 FR 41532-41534), and August 1, 2003 (67 FR 49982).

We established Medicare regulations regarding satellite facilities for several reasons. First, we believe that whenever a facility that is co-located with an acute care hospital is presented as part of another IPPS-excluded hospital, it is necessary to ensure that the facility is, in fact, organized and operated as part of the IPPS-excluded hospital and is not simply a unit of the acute hospital with which it is co-located. Although we recognize that the co-location of Medicare providers, in the form of satellite facilities, hospitals-within-hospitals, and excluded units, may have some legitimate advantages from the standpoint of clinical care as well as medical efficiency, we continue to believe that the physical proximity inherent in such arrangements also has considerable potential for Medicare program payment abuse in that it may facilitate patient shifting for reasons related to payment rather than clinical benefits. In existing regulations at § 412.22(e) for hospitals-within-hospitals (59 FR 45330, September 1, 1994), at § 412.23(h) for hospital satellites (64 FR 41532-41534, July 30, 1999, and 67 FR 49982, August 1, 2002), and § 412.25(e) for satellite facilities, we promulgated “separateness and control” requirements governing the relationships between these facilities and their host hospitals.

Research by the Urban Institute on the universe of LTCHs that was used in developing the LTCH PPS pointed to the considerable growth of new LTCHs (or LTCH beds, as in the case of satellite facilities) that were co-located with other Medicare providers. Our more recent data confirm that this trend has continued. Even though our existing regulations governing hospitals-within-hospitals and satellite facilities established certain functional boundaries between these entities and their hosts, we instituted a policy under the LTCH regulations at § 412.532 to discourage inappropriate patient discharges and readmissions among co-located Medicare providers (67 FR 56007-56010, August 30, 2002). Furthermore, in the June 6, 2003, LTCH PPS final rule (68 FR 34157), we noted that we are monitoring the movement of patients among onsite providers for the purpose of determining whether we should consider proposing further changes to LTCH coverage and payment policy.

LTCH hospitals-within-hospitals and LTCH satellite facilities are similar in that both are located on the same campus or in the same building as another hospital, and many of the same separateness and control regulations exist for both types of facilities. However, there is an important distinction between them. A LTCH that is co-located with another Medicare hospital (generally an acute care hospital) is itself a distinct hospital (§ 412.22(e)). Section 412.23(e)(1) requires a LTCH to have a provider agreement as described under 42 CFR Part 489 to participate as a hospital. A satellite facility of a LTCH, like all satellite facilities of hospitals excluded from the IPPS (§ 412.22(h)), is not itself a separate hospital, but a “part of a hospital that provides inpatient services in a building also used by another hospital * * *” Consistent with its status as another hospital, a hospital-within-a-hospital has its own Medicare provider number. A satellite facility shares the provider number of the parent hospital.

Because a satellite facility is not considered a separate hospital under Medicare, if a LTCH with a satellite facility is interested in “spinning off” the satellite facility and establishing the previous satellite facility as an independent LTCH, the satellite must first be separately licensed by the State. The facility must further demonstrate compliance with the Medicare conditions of participation (COPS) under part 482 and other requirements for establishing a provider agreement under parts 482 and 489 to participate under Medicare as a hospital (§ 412.23(e)(1)). (Compliance with the COPS may be either demonstrated by a State agency survey or based on accreditation as a hospital by the Joint Commission on Accreditation of Healthcare Organizations (JCAHO or the American Osteopathic Association (AOA) (section 1865 of the Act).) Second, if the newly established hospital meets the provider agreement requirements under 42 CFR part 489, it must demonstrate that it has an average Medicare inpatient length of stay of greater than 25 days (§ 412.23(e)(2)(i)) by providing data of a period of at least 5 months of the preceding 6-month period (§ 412.22(e)(3)(ii) and (iii)). The data used by the fiscal intermediary to calculate the average length of stay would be from discharges from the newly established hospital and not from discharges attributable to stays at the previous satellite facility for the period prior to its participation as a separate hospital.

Although we believe that these requirements, under existing § 412.23(e)(1) and (2), are clear and unambiguous, we have been informed that due to misinterpretation, in some circumstances, application of this policy has been inconsistent. Therefore, some facilities operating as LTCH satellite facilities have been inappropriately granted autonomous status that has resulted in the assignment of their own Medicare provider numbers as LTCHs without first obtaining provider agreements to participate in Medicare as hospitals, under § 412.23(e)(1). Apparently, in these cases, the satellite facilities were able to demonstrate that as satellite facilities of LTCHs, Medicare patients at their location had an average length of stay of greater than 25 days, in compliance with § 412.22(h)(2)(ii) which required satellite facilities of hospitals excluded from the IPPS to comply with specific requirements for their provider category. In other situations, we understand that fiscal intermediaries correctly refused to accept data from LTCH satellite facilities for purposes of qualification as an autonomous LTCH and instead required the satellites to satisfy criteria for designation as a hospital, under § 412.23(e)(1). In these cases, the fiscal intermediary evaluated average length of stay data dating from that hospital designation forward, as required by § 412.23(e)(2).

We believe consistency in the application of this policy is needed, in compliance with existing regulations at § 412.23(e)(1) and (e)(2). We are emphasizing that a LTCH satellite facility that is “a part of a hospital that provides inpatient services in a building also used by another hospital * * *” that is seeking to become an independent LTCH, must comply with the requirements set forth in the definition of a new LTCH in existing § 412.23(e)(4). Therefore, we are proposing to revise § 412.23(e)(4) to include a new paragraph (e)(4)(ii) that specifies that only data reflecting the average length of stay for Medicare patients in the newly established hospital will be utilized in the qualifying calculation at § 412.23(e)(2). Thus, we are proposing clarifying language that emphasizes that if a satellite facility is reorganized as a separately participating hospital under Medicare with or without a concurrent change of ownership, the new hospital cannot be paid under Medicare as a LTCH until it demonstrates that it has an average Medicare inpatient length of stay in excess of 25 days based on discharges occurring on or after its effective date of participation as a hospital and not based on discharges at the satellite facility site when it was part of another hospital (proposed § 412.23(e)(4)(ii)).

This proposed policy clarification would also be applicable to remote locations of LTCHs that are being voluntarily separated from the parent LTCHs or sold and are seeking status as independent LTCHs. A remote location of a hospital (as defined at § 413.65(a)(2)) is similar to a satellite facility because it does not participate in Medicare as a separate hospital, but only as an integral and subordinate part of another hospital. However, unlike a satellite facility, a remote location is not one that is in the same building or on the same campus as another hospital. (Because a remote location has no “host” hospital, it is not required to meet the separateness criteria as hospitals-within-hospitals in § 412.22(e) that would arise for satellite facilities that become independent LTCHs, as discussed above.) Since the hospital would not be a LTCH until the fiscal intermediary reviews its documentation and determines that it qualifies, during those initial months, the hospital would be paid under the IPPS.

We emphasize that notwithstanding the fact that satellite facilities of LTCHs are required to independently meet the average Medicare inpatient length of stay requirement of greater than 25 days under § 412.22(h)(2)(ii)(D), we are proposing to evaluate length of stay data only from discharges occurring after the facility has become a hospital. This is the case as the prerequisite to designation as a LTCH is a provider agreement under part 489 of chapter IV to participate as a hospital in the Medicare program (§ 412.23(e)(1)). The requirement that a satellite facility independently meets the length of stay criterion was never intended as an alternative method of qualifying as a separate excluded hospital. Under § 412.23(h)(2)(ii), satellite facilities of psychiatric, rehabilitation, and children's hospitals, as well as LTCHs, are required to meet specific requirements for their provider category because we believed that it was essential to ensure that satellite facilities of excluded hospitals actually delivered the specialized care for which Medicare was paying (§ 412.23(h)(2)(ii)). Furthermore, those regulations were designed to ensure that there is both an appropriate financial and administrative linkage between the satellite facility and the parent hospital, and a clear separation of the satellite facility from the host hospital. These policies are set forth in the July 30, 1999, IPPS final rule (64 FR 41534). In the case of a LTCH, we believe that our existing requirement that a satellite facility independently meet the greater than 25-day average Medicare inpatient length of stay requirement is consistent with the guiding principles of the LTCH PPS. We do not believe patients who do not require long-term hospital-level care should be admitted to either a LTCH or its satellite facility. In addition, we were concerned that, without requiring separate compliance, shorter lengths of stay at either the LTCH or its satellite facility could be balanced by longer stays at the other. By establishing these distinct standards for satellite facilities of excluded hospitals, we also wanted to safeguard against the possibility of these facilities functioning as a part of an acute care hospital. In the case of a LTCH, that result would be inconsistent with section 1886(d)(1)(B) of the Act, which provides for excluded rehabilitation and psychiatric units to be established in acute care hospitals, but not long-term care units.

There is another situation that must be distinguished from the scenario discussed above in which a LTCH is voluntarily separating from or selling its satellite facility or remote location with the intent of the satellite facility or remote location converting into an independent hospital and eventually a LTCH. Our recent provider-based regulations under § 413.65 require a remote location of a hospital that fails to meet certain requirements at § 413.65(e)(3) to seek status as a separate hospital if it is to continue functioning and being paid by Medicare. Satellite facilities of excluded hospitals, such as LTCHs, may also be affected by these new provider-based requirements and, in those cases, the following procedure would also be applicable.

Under the provider-based regulations, which became effective for the main providers as defined in § 413.65(a)(2), for cost reporting periods beginning on or after July 1, 2003, certain facilities that were formerly treated for payment purposes by Medicare as remote locations or satellite facilities of hospitals, are now precluded from continuing in that status because they do not meet the “common service area” location requirement for provider-based facilities under § 413.65(e)(3) (67 FR 50078, August 1, 2002). It has come to our attention that certain satellite facilities and remote locations of LTCHs are being affected by this preclusion. Due to the compulsory nature of this separation requirement, we are proposing an exception for these affected satellite facilities and remote locations of LTCHs that will allow them to utilize length of stay data from the 5 months of the previous 6 months prior to when they were compelled to separate from their main provider under § 413.65(e)(3) (proposed § 412.23(e)(4)(iii)).

We want to emphasize that the only distinction that we are proposing between requirements proposed under § 412.23(e)(4)(ii), for satellite facilities and remote locations that voluntarily separate from their parent LTCHs and requirements in proposed § 412.23(e)(4)(iii) that apply to satellite facilities and remote locations compelled by provider-based location requirements at § 413.65(e)(3) to terminate their link to their main providers, is that we are proposing to allow the latter group to utilize data gathered prior to establishing themselves as distinct hospitals. Furthermore, this distinction only exists for satellite facilities and remote locations of LTCHs that are affected by (§ 413.65(e)(3)) and which were in existence prior to the effective date of the provider-based location requirements (July 1, 2003). Under the regulations at § 413.65(e)(3), we would not permit these entities to be established more than 35 miles from the main providers after June 30, 2003. We would assign new Medicare provider numbers to former remote locations of LTCH hospitals or satellite facilities that fail the new location requirement in § 413.65(e)(3), but want to become new LTCHs, if the following conditions are satisfied in proposed § 412.23(e)(4)(iii):

• The facility meets all Medicare COPs in 42 CFR Part 482 and other participation requirements set forth in 42 CFR Part 489.
• The facility provides data to its fiscal intermediary indicating that during 5 of the immediate 6 months preceding its separation from the main hospital, it has independently met the greater than 25-day average length of stay requirement for its Medicare patients (§ 412.23(e)(3)).

b. Technical Correction

In the August 30, 2002, LTCH PPS final rule (67 FR 56053), we issued regulations at § 412.532(i) that require a LTCH or a satellite of a LTCH to notify its fiscal intermediary and CMS in writing of its co-location and any changes in co-location status. In § 412.532(i), we include a cross-reference to the Medicare regulations that contain the requirements for a satellite facility to be paid under Medicare. We made an unintentional error in specifying this cross-reference as paragraphs (h)(1) through (h)(4) of § 412.532. The correct cross-reference to the requirements for satellite facilities is § 412.22(h)(1) through (h)(4). Therefore, we are proposing to revise § 412.532(i) to include the correct cross-reference to § 412.22(h)(1) through (h)(4).

V. Computing the Proposed Adjusted Federal Prospective Payments for the 2005 LTCH PPS Rate Year

(If you choose to comment on issues in this section, please include the caption “COMPUTING THE PROPOSED ADJUSTED FEDERAL PROSPECTIVE PAYMENTS” at the beginning of your comments.)

In accordance with § 412.525 and as discussed in section IV.C. of this proposed rule, the proposed standard Federal rate is adjusted to account for differences in area wages by multiplying the labor-related share of the proposed standard Federal rate by the appropriate proposed LTCH PPS wage index (as shown in Tables 1 and 2 of the Addendum to this proposed rule). The proposed standard Federal rate is also adjusted to account for the higher costs of hospitals in Alaska and Hawaii by multiplying the nonlabor-related share of the proposed standard Federal rate by the appropriate proposed cost-of-living factor (shown in Table I in section IV.C.2. of this preamble). In this proposed rule, as discussed in section IV.B. of this preamble, we are proposing a standard Federal rate of $36,762.24 for the 2005 LTCH PPS rate year. We illustrate the methodology used to adjust the proposed Federal prospective payments in the following example:

During the 2005 LTCH PPS rate year, a Medicare patient is in a LTCH located in Chicago, Illinois (MSA 1600) with a proposed two-fifths wage index value of 1.0357 (see Table 1 in the Addendum to this proposed rule). The Medicare patient is classified into LTC-DRG 9 (Spinal Disorders and Injuries), which has a relative weight of 1.5025 (see Table 3 of the Addendum to this proposed rule). To calculate the LTCH's total adjusted proposed Federal prospective payment for this Medicare patient, we compute the wage-adjusted proposed Federal prospective payment amount by multiplying the unadjusted proposed standard Federal rate ($36,762.24) by the labor-related share (72.885 percent) and the proposed wage index value (1.0357). (We note that the LTCH in this example is in the second year of the wage index phase-in, thus, the two-fifths wage index value is applicable.) This wage-adjusted amount is then added to the nonlabor-related portion of the unadjusted proposed standard Federal rate (27.115 percent; adjusted for cost of living, if applicable) to determine the adjusted proposed Federal rate, which is then multiplied by the LTC-DRG relative weight (1.5025) to calculate the total adjusted proposed Federal prospective payment for the 2005 LTCH PPS rate year ($56,672.48). In addition, as discussed in section IV.C.6. of this preamble, for the 2005 LTCH PPS rate year, we are proposing to reduce the LTCH PPS payment by 3.0 percent for the budget neutrality offset to account for the costs of the transition methodology. The following illustrates the components of the calculations in this example:

VI. Transition Period

(If you choose to comment on issues in this section, please include the caption “TRANSITION PERIOD” at the beginning of your comments.)

To provide a stable fiscal base for LTCHs, under § 412.533, we implemented a 5-year transition period from reasonable cost-based reimbursement under the TEFRA system to a prospective payment based on industry-wide average operating and capital-related costs. Under the average pricing system, payment is not based on the experience of an individual hospital. As discussed in the August 30, 2002 final rule (67 FR 56038), we believe that a 5-year phase-in provides LTCHs time to adjust their operations and capital financing to the LTCH PPS, which is based on prospectively determined Federal payment rates. Furthermore, we believe that the 5-year phase-in of the LTCH PPS also allows LTCH personnel to develop proficiency with the LTC-DRG coding system, which will result in improvement in the quality of the data used for generating our annual determination of relative weights and payment rates.

In accordance with § 412.533, the transition period for all hospitals subject to the LTCH PPS begins with the hospital's first cost reporting period beginning on or after October 1, 2002, and extends through the hospital's last cost reporting period beginning before October 1, 2006. During the 5-year transition period, a LTCH's total payment under the LTCH PPS is based on two payment percentages—one based on reasonable cost-based (TEFRA) payments and the other based on the standard Federal prospective payment rate. The percentage of payment based on the LTCH PPS Federal rate increases by 20 percentage points each year, while the reasonable cost-based payment rate percentage decreases by 20 percentage points each year, for the next 3 fiscal years. For cost reporting periods beginning on or after October 1, 2006, Medicare payment to LTCHs will be determined entirely under the Federal PPS methodology. The blend percentages as set forth in § 412.533(a) are as follows:

For cost reporting periods that begin on or after October 1, 2003, and before October 1, 2004 (FY 2004), the total payment for a LTCH is 60 percent of the amount calculated under reasonable cost principles for that specific LTCH and 40 percent of the Federal prospective payment amount. For cost reporting periods that begin on or after October 1, 2004, and before October 1, 2005 (FY 2005), the total payment for a LTCH will be 40 percent of the amount calculated under reasonable cost principles for that specific LTCH and 60 percent of the Federal prospective payment amount. As we noted in the June 6, 2003, final rule (68 FR 34155), the change in the effective date of the annual LTCH PPS rate update from October 1 to July 1 has no effect on the LTCH PPS transition period as set forth in § 412.533(a). That is, LTCHs paid under the transition blend under § 412.533(a) will receive those blend percentages for the entire 5-year transition period (unless they elect payments based on 100 percent of the Federal rate). Furthermore, LTCHs paid under the transition blend will receive the appropriate blend percentages of the Federal and reasonable cost-based rate for their entire cost reporting period as prescribed in § 412.533(a)(1) through (a)(5).

The reasonable cost-based rate percentage is a LTCH specific amount that is based on the amount that the LTCH would have been paid (under TEFRA) if the PPS were not implemented. Medicare fiscal intermediaries will continue to compute the LTCH reasonable cost-based payment amount according to § 412.22(b) of the regulations and sections 1886(d) and (g) of the Act.

In implementing the PPS for LTCHs, one of our goals is to transition hospitals to full prospective payments as soon as appropriate. Therefore, under § 412.533(c), we allow a LTCH, which is subject to a blended rate, to elect payment based on 100 percent of the Federal rate at the start of any of its cost reporting periods during the 5-year transition period rather than incrementally shifting from reasonable cost-based payments to prospective payments. Once a LTCH elects to be paid based on 100 percent of the Federal rate, it will not be able to revert to the transition blend. For cost reporting periods that began on or after December 1, 2002, and for the remainder of the 5-year transition period, a LTCH must notify its fiscal intermediary in writing of its election on or before the 30th day prior to the start of the LTCH's next cost reporting period. For example, a LTCH with a cost reporting period that begins on May 1, 2004, must notify its fiscal intermediary in writing of an election before April 1, 2004.

Under § 412.533(c)(2)(i), the notification by the LTCH to make the election must be made in writing to the Medicare fiscal intermediary. Under §§ 412.533(c)(2)(ii) and (c)(2)(iii), the intermediary must receive the request on or before the specified date (that is, on or before the 30th day before the applicable cost reporting period begins for cost reporting periods beginning on or after December 1, 2002 through September 30, 2006), regardless of any postmarks or anticipated delivery dates.

Notifications received, postmarked, or delivered by other means after the specified date will not be accepted. If the specified date falls on a day that the postal service or other delivery sources are not open for business, the LTCH will be responsible for allowing sufficient time for the delivery of the request before the deadline. If a LTCH's notification is not received timely, payment will be based on the transition period blend percentages.

VII. Payments to New LTCHs

(If you choose to comment on issues in this section, please include the caption “PAYMENTS TO NEW LTCHs” at the beginning of your comments.)

Under § 412.23(e)(4), for purposes of Medicare payment under the LTCH PPS, we define a new LTCH as a provider of inpatient hospital services that otherwise meets the qualifying criteria for LTCHs, set forth in § 412.23(e)(1) and (e)(2), under present or previous ownership (or both), and its first cost reporting period as a LTCH begins on or after October 1, 2002. We also specify in § 412.500 that the LTCH PPS is applicable to hospitals with a cost reporting period that began on or after October 1, 2002. (In section I.B.3. of this proposed rule, we clarify existing policy for the time frame for calculating the average length of stay of a new LTCH as it relates to a satellite facility or remote location of a LTCH that voluntarily seeks to become a separate LTCH. We are also proposing a policy for the time frame for calculating the average length of stay as it relates to a remote location of a hospital that fails to meet certain requirements at § 413.65 and is required to seek status as a separate LTCH.)

As we discussed in the August 30, 2002, final rule (67 FR 56040), this definition of new LTCHs should not be confused with those LTCHs first paid under the TEFRA payment system for discharges occurring on or after October 1, 1997, described in section 1886(b)(7)(A) of the Act, as added by section 4416 of Public Law 105-33. As stated in § 413.40(f)(2)(ii), for cost reporting periods beginning on or after October 1, 1997, the payment amount for a “new” (post-FY 1998) LTCH is the lower of the hospital's net inpatient operating cost per case or 110 percent of the national median target amount payment limit for hospitals in the same class for cost reporting periods ending during FY 1996, updated to the applicable cost reporting period (see 62 FR 46019, August 29, 1997). Under the LTCH PPS, those “new” LTCHs that meet the definition of “new” under § 413.40(f)(2)(ii) and that have their first cost reporting period as a LTCH beginning prior to October 1, 2002, will be paid under the transition methodology described in § 412.533.

As noted above and in accordance with § 412.533(d), new LTCHs will not participate in the 5-year transition from reasonable cost-based reimbursement to prospective payment. As we discussed in the August 30, 2002, final rule (67 FR 56040), the transition period is intended to provide existing LTCHs time to adjust to payment under the new system. Since these new LTCHs with cost reporting periods beginning on or after October 1, 2002, would not have received payment under reasonable cost-based reimbursement for the delivery of LTCH services prior to the effective date of the LTCH PPS, we do not believe that those new LTCHs require a transition period in order to make adjustments to their operations and capital financing, as will LTCHs that have been paid under the reasonable cost-based methodology.

VIII. Method of Payment

(If you choose to comment on issues in this section, please include the caption “METHOD OF PAYMENT” at the beginning of your comments.)

Under § 412.513, a Medicare LTCH patient is classified into a LTC-DRG based on the principal diagnosis, up to eight additional (secondary) diagnoses, and up to six procedures performed during the stay, as well as age, sex, and discharge status of the patient. The LTC-DRG is used to determine the Federal prospective payment that the LTCH will receive for the Medicare-covered Part A services the LTCH furnished during the Medicare patient's stay. Under § 412.541(a), the payment is based on the submission of the discharge bill. The discharge bill also provides data to allow for reclassifying the stay from payment at the full LTC-DRG rate to payment for a case as a short-stay outlier (under § 412.529) or as an interrupted stay (under § 412.531), or to determine if the case will qualify for a high-cost outlier payment (under § 412.525(a)).

Accordingly, the ICD-9-CM codes and other information used to determine if an adjustment to the full LTC-DRG payment is necessary (for example, length of stay or interrupted stay status) are recorded by the LTCH on the Medicare patient's discharge bill and submitted to the Medicare fiscal intermediary for processing. The payment represents payment in full, under § 412.521(b), for inpatient operating and capital-related costs, but not for the costs of an approved medical education program, bad debts, blood clotting factors, anesthesia services by hospital-employed nonphysician anesthetists or obtained under arrangement, or the costs of photocopying and mailing medical records requested by a QIO, which are costs paid outside the LTCH PPS.

As under the previous reasonable cost-based payment system, under § 412.541(b) a LTCH may elect to be paid using the periodic interim payment (PIP) method described in § 413.64(h) and may be eligible to receive accelerated payments as described in § 413.64(g).

For those LTCHs that are paid during the 5-year transition based on the blended transition methodology in § 412.533(a) for cost reporting periods that began on or after October 1, 2002, and before October 1, 2006, the PIP amount is based on the transition blend. For those LTCHs that are paid based on 100 percent of the standard Federal rate, the PIP amount is based on the estimated prospective payment for the year rather than on the estimated reasonable cost-based reimbursement. We exclude high-cost outlier payments that are paid upon submission of a discharge bill from the PIP amounts. In addition, Part A costs that are not paid for under the LTCH PPS, including Medicare costs of an approved medical education program, bad debts, blood clotting factors, anesthesia services by hospital-employed nonphysician anesthetists or obtained under arrangement, and the costs of photocopying and mailing medical records requested by a QIO, are subject to the interim payment provisions (§ 412.541(c)).

Under § 412.541(d), LTCHs with unusually long lengths of stay and that are not receiving payment under the PIP method may bill on an interim basis (60 days after an admission and at intervals of at least 60 days after the date of the first interim bill) and should include any high-cost outlier payment determined as of the last day for which the services have been billed.

IX. Monitoring

(If you choose to comment on issues in this section, please include the caption “MONITORING” at the beginning of your comments.)

In the August 30, 2002, final rule (67 FR 56014), we discussed our intent to develop a monitoring system that will assist us in evaluating the LTCH PPS. Specifically, we discussed the monitoring of the various policies that we believe would provide equitable payment for stays that reflect less than the full course of treatment and reduce the incentives for inappropriate admissions, transfers, or premature discharges of patients that are present in a discharge-based prospective payment system. We also stated our intent to collect and interpret data on changes in average lengths of stay under the LTCH PPS for specific LTC-DRGs and the impact of these changes on the Medicare program. We stated that if our data indicates that changes might be warranted, we may revisit these issues and consider proposing revisions to these policies in the future. To this end, we have designed system features utilizing MedPAR data that will enable CMS and the fiscal intermediary to track beneficiary movement to and from a LTCH and to and from another Medicare provider. As we discussed in the June 6, 2003, final rule (68 FR 34157), the MedPAC has endorsed this monitoring activity and is pursuing an independent research initiative that will evaluate all aspects of LTCHs, including the accuracy of data reporting, provision of equivalent services by other providers, growth in the number of LTCHs, and clinical outcomes. We are particularly concerned with the recent significant growth in the number of LTCHs. Since the implementation of LTCH PPS we have observed a growth of nearly 50 percent in the number of LTCHs, and that growth is almost exclusively in the number of LTCH that are hospitals within hospitals. We intend to focus our monitoring on this growth and the potential for gaming the IPPS by the co-located acute care hospital and the LTCH PPS by the LTC hospital within a hospital. Based on the outcome of that monitoring activity we may need to address either the criteria for qualifying for LTCH PPS payments for hospitals within hospitals, the payment rates for patients that are discharged from acute care hospitals and admitted to a co-located LTCH or other policy issues that may arise as a result of our monitoring activity.

Also, in the June 6, 2003, final rule (68 FR 34157), we explained that, given that the only unique requirement that distinguishes a LTCH from other acute care hospitals is an average inpatient length of stay of greater than 25 days, we continue to be concerned about the extent to which LTCH services and patients differ from those services and patients treated in other Medicare covered settings (for example, SNFs and IRFs) and how the LTCH PPS will affect the access, quality, and costs across the health care continuum. Thus, we will monitor trends in the supply and utilization of LTCHs and Medicare's costs in LTCHs relative to other Medicare providers. For example, we may conduct medical record reviews of Medicare patients to monitor changes in service use (for example, ventilator use) over a LTCH episode of care and to assess patterns in the average length of stay at the facility level.

We also are collecting data on patients staying for periods of 6 months or longer in LTCHs and may involve QIOs in evaluating whether or not such extensive stays may be indicative of LTCH patients who could be more appropriately served at a SNF.

Existing policy at § 412.509(c) provides that the LTCH must “furnish all necessary covered services to the Medicare beneficiary who is an inpatient of the hospital either directly or under arrangements.” In this proposed rule we are proposing to expand our interrupted stay policy, at § 412.531, to include LTCH discharges and readmissions within a period of 3 days.

We believe that such behavior by certain LTCHs may constitute gaming of the Medicare system, circumventing existing Medicare policy, and generating unnecessary Medicare payments. Therefore, we are proposing an expansion of our interrupted stay policy at § 412.531 to address this situation. (See section IV.C.4.c. of this proposed rule for additional information regarding the proposed expansion of our interrupted stay policy.)

X. Collection of Information Requirements

(If you choose to comment on issues in this section, please include the caption “COLLECTION OF INFORMATION REQUIREMENTS” at the beginning of your comments.)

Under the Paperwork Reduction Act (PRA) of 1995, we are required to provide 60-day notice in the Federal Register and solicit public comment before a collection of information requirement is submitted to the Office of Management and Budget (OMB) for review and approval. In order to fairly evaluate whether an information collection should be approved by OMB, section 3506(c)(2)(A) of the PRA of 1995 requires that we solicit comment on the following issues:

• The need for the information collection and its usefulness in carrying out the proper functions of our agency.
• The accuracy of our estimate of the information collection burden.
• The quality, utility, and clarity of the information to be collected.
• Recommendations to minimize the information collection burden on the affected public, including automated collection techniques.

Therefore, we are soliciting public comments on each of these issues for the information collection requirements discussed below.

The following information collection requirements and associated burdens are subject to the PRA:

§ 412.23 Excluded Hospitals: Classifications

Section 412.23(e)(3) proposes revisions to the procedure for calculating the average length of stay for purposes of qualifying as a LTCH, so that the “days follow discharge.” Therefore, the total number of inpatient days for Medicare patients under paragraph (e)(2)(i), and the total number of days for all patients (both Medicare and non-Medicare) under paragraph (e)(2)(ii), would be divided by the discharges for the hospital's most recent cost reporting period. If the days of a stay involve admission during one cost reporting period and discharge in a second consecutive cost reporting period, the total days of the stay are considered to have occurred in the cost reporting period during which the patient was discharged. Since this data was not captured on the cost reporting form, for cost reporting periods beginning on or after October 1, 2002, CMS retrieved data for the average length of stay calculation from MedPAR files for use by the fiscal intermediaries. If the days-follow-the-discharge policy is finalized, it may be possible to revise the cost reporting form and, thus, enable fiscal intermediaries to use the Medicare cost report for this calculation, as they did prior to the implementation of the LTCH PPS. We are presently analyzing whether use of the MedPAR for this purpose or revising the cost reporting form to capture all inpatient days for Medicare patients would be more appropriate. If we revert to using the cost report for this purpose, the task would require one calculation annually by fiscal intermediaries for each hospital: the division of the number of days by the number of discharges. We estimate that it would take approximately 5 minutes for each of the fiscal intermediaries to evaluate whether each of the 300 facilities meet the average length of stay requirement for a total one-time burden of 25 hours.

Section 412.23(e)(4)(ii) states that except as specified in paragraph (e)(4)(iii) of this section, a satellite facility (as defined in § 412.22(h)) or a remote location of a hospital (as defined in § 412.65(a)(2)) that voluntarily reorganizes as a separate Medicare participating hospital, with or without a concurrent change in ownership, and that seeks to qualify as a new long-term care hospital for Medicare payment purposes must demonstrate through documentation that it meets the average length of stay requirement specified under paragraphs (e)(2)(i) or (e)(2)(ii) of this section.

The burden associated with this requirement is the time required to maintain documentation to demonstrate that a satellite facility or a remote location of a hospital has an average length of stay as specified by this section. Since this requirement is a voluntary decision that is made by each facility, we do not know the number of facilities and remote locations that will seek to become new LTCHs. However, the information to be documented is currently being collected and maintained on each facility's cost report; therefore, this information collection requirement is currently approved under OMB control number 0938-0050.

Section 412.23(e)(4)(iii) states that satellite facilities and remote locations of hospitals that became subject to the provider-based status rules under § 412.65 as of July 1, 2003, that become separately participating hospitals, and that seek to qualify as long-term care hospitals for Medicare payment purposes may submit to the fiscal intermediary discharge data gathered during 5 months of the immediate 6 months preceding the facility's separation from the main hospital for calculation of the greater than 25-day average Medicare inpatient length of stay requirement specified under paragraph (e)(2) of this section.

The burden associated with this requirement is the time required of the satellite facilities and remote locations of hospitals that became subject to the provider-based status rules under as of July 1, 2003, to submit discharge data to the fiscal intermediary. We estimate that it will take approximately 5 minutes for each of the 300 facilities to submit the required information for a total one-time burden of 25 hours.

We have submitted a copy of this proposed rule to OMB for its review of the information collection requirements described above. These requirements are not effective until they have been approved by OMB.

If you comment on any of these information collection and record keeping requirements, please mail copies directly to the following:

Centers for Medicare & Medicaid Services, Office of Strategic Operations and Regulatory Affairs, Regulations Development and Issuances Group, Attn: Dawn Willinghan, CMS-1263-P, Room C5-14-03, 7500 Security Boulevard, Baltimore, MD 21244-1850; and

Office of Information and Regulatory Affairs, Office of Management and Budget, Room 10235, New Executive Office Building, Washington, DC 20503, Attn: Brenda Aguilar, CMS Desk Officer.

Comments submitted to OMB may also be emailed to the following address: email: baguilar@omb.eop.gov; or faxed to OMB at (202) 395-6974.

XI. Regulatory Impact Analysis

(If you choose to comment on issues in this section, please include the caption “REGULATORY IMPACT ANALYSIS” at the beginning of your comments.)

A. Introduction

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

1. Executive Order 12866

Executive Order 12866 (as amended by Executive Order 13258, which merely assigns 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 one year). In this proposed rule, we are using the most recent estimate of the LTCH PPS market basket and updated wage index values to estimate proposed payments for the 2005 LTCH PPS rate year. Based on the best available data for 211 LTCHs, we estimate that the proposed 2.9 percent increase in the standard Federal rate for the 2005 LTCH PPS rate year, in conjunction with the proposed decrease in the budget neutrality offset to account for the transition methodology (discussed in section IV.C.6. of this preamble), would result in an increase in payments from the 2004 LTCH PPS rate year of $118 million for the 211 LTCHs. (Section IV.C.6. of this preamble includes an estimate of Medicare program payments for LTCH services.) Because the combined distributional effects and costs to the Medicare program are greater than $100 million, this proposed rule is considered a major economic rule, as defined above.

2. Regulatory Flexibility Act (RFA)

The RFA requires agencies to analyze options for regulatory relief of small businesses. For purposes of the RFA, small entities include small businesses, nonprofit organizations, and government agencies. Most hospitals and most other providers and suppliers are small entities, either by nonprofit status or by having revenues of $26 million or less in any 1 year. For purposes of the RFA, all hospitals are considered small entities according to the Small Business Administration's latest size standards with total revenues of $26 million or less in any 1 year (for further information, see the Small Business Administration's regulation at 65 FR 69432, November 17, 2000). Because we lack data on individual hospital receipts, we cannot determine the number of small proprietary LTCHs. Therefore, we assume that all LTCHs are considered small entities for the purpose of the analysis that follows. Medicare fiscal intermediaries are not considered to be small entities. Individuals and States are not included in the definition of a small entity.

The provisions of this proposed rule represent a 5.4 percent increase in estimated payments in the 2005 LTCH PPS rate year (as shown in Table II below). We do not expect an incremental increase of 5.4 percent to the Medicare payment rates to have a significant effect on the overall revenues of most LTCHs. In addition, LTCHs also provide services to (and generate revenue from) patients other than Medicare beneficiaries. Accordingly, we certify that this proposed rule would not have a significant impact on a substantial number of small entities, in accordance with RFA.

3. Impact on Rural Hospitals

Section 1102(b) of the Social Security Act requires us to prepare a regulatory impact analysis if a proposed or final rule may 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 and has fewer than 100 beds. As discussed in detail below, the rates and policies set forth in this proposed rule would not have a substantial impact on the 8 rural hospitals for which data were available that have fewer than 100 beds and that are located in rural areas.

4. Unfunded Mandates

Section 202 of the UMRA requires that agencies assess anticipated costs and benefits before issuing any rule that may result in expenditure in any one year by State, local, or tribal governments, in the aggregate, or by the private sector, of $110 million or more. This proposed rule would not mandate any requirements for State, local, or tribal governments, nor would it result in expenditures by the private sector of $110 million or more in any one year.

5. Federalism

Executive Order 13132 establishes certain requirements that an agency must meet when it promulgates a proposed rule (and subsequent final rule) that imposes substantial direct requirement costs on State and local governments, preempts State law, or otherwise has Federalism implications.

We have examined this proposed rule under the criteria set forth in Executive Order 13132 and have determined that, based on the 20 State and local LTCHs in our database, this proposed rule would not have any significant impact on the rights, roles, and responsibilities of State, local, or tribal governments or preempt State law.

B. Anticipated Effects of Proposed Payment Rate Changes

We discuss the impact of the proposed payment rate changes in this proposed rule below in terms of their fiscal impact on the Medicare budget and on LTCHs.

1. Budgetary Impact

Section 123(a)(1) of Medicare, Medicaid and State Child Health Insurance Program (SCHIP) Balanced Budget Refinement Act of 1999 (BBRA) (Pub. L. 106-113) requires us to set the proposed payment rates contained in this proposed rule such that total payments under the LTCH PPS are projected to equal the amount that would have been paid if this PPS had not been implemented. However, as discussed in greater detail in the August 30, 2002, final rule (67 FR 56033-56036), the FY 2003 standard Federal rate ($34,956.15) was calculated as though all LTCHs will be paid based on 100 percent of the standard Federal rate in FY 2003. As discussed in section IV.C.6. of this proposed rule, we would apply a proposed budget neutrality offset to payments to account for the monetary effect of the 5-year transition period and the policy to permit LTCHs to elect to be paid based on 100 percent of the proposed standard Federal rate rather than a blend of proposed Federal prospective payments and reasonable cost-based payments during the transition. The amount of the proposed offset is equal to 1 minus the ratio of the estimated reasonable cost-based payments that would have been made if the LTCH PPS had not been implemented, to the projected total Medicare program payments that would be made under the transition methodology and the option to elect payment based on 100 percent of the Federal prospective payment rate.

2. Impact on Providers

The basic methodology for determining a LTCH PPS payment is set forth in the regulations at § 412.515 through § 412.525. In addition to the basic LTC-DRG payment (standard Federal rate × LTC-DRG relative weight), we make adjustments for differences in area wage levels, cost-of-living adjustment for Alaska and Hawaii, and short-stay outliers. In addition, LTCHs may also receive high-cost outlier payments for those cases that qualify under the threshold established each rate year. Section 412.533 provides for a 5-year transition to fully prospective payments from payment based on reasonable cost-based methodology. During the 5-year transition period, payments to LTCHs are based on an increasing percentage of the LTCH PPS Federal rate and a decreasing percentage of payment based on reasonable cost-based methodology. Section 412.533(c) provides for a one-time opportunity for LTCHs to elect payments based on 100 percent of the LTCH PPS Federal rate.

In order to understand the impact of the changes to the LTCH PPS discussed in this proposed rule on different categories of LTCHs for the 2005 LTCH PPS rate year, it is necessary to estimate payments per discharge under the LTCH PPS rates and factors for the 2004 LTCH PPS rate year (see the June 6, 2003, final rule; 68 FR 34122-34190) and payments per discharge that would be made under the LTCH PPS rates and factors for the 2005 LTCH PPS rate year as discussed in the preamble of this proposed rule. We also evaluated the percent change in payments per discharge of estimated 2004 LTCH PPS rate year payments to estimated 2005 LTCH PPS rate year payments for each category of LTCHs.

Hospital groups were based on characteristics provided in the Online Survey Certification and Reporting (System) (OSCAR) data and FYs 1999 through 2001 cost report data. Hospitals with incomplete characteristics were grouped into the “unknown” category. Hospital groups include:

• Location: Large Urban/Other Urban/Rural;
• Participation Date;
• Ownership Control;
• Census Region;
• Bed Size.

To estimate the impacts among the various categories of providers during the transition period, it is imperative that reasonable cost-based methodology payments and prospective payments contain similar inputs. More specifically, in the impact analysis showing the impact reflecting the applicable transition blend percentages of proposed prospective payments and reasonable cost-based methodology payments and the option to elect payment based on 100 percent of the proposed Federal rate (Table III below), we estimated payments only for those providers for whom we are able to calculate payments based on reasonable cost-based methodology. For example, if we did not have at least 2 years of historical cost data for a LTCH, we were unable to determine an update to the LTCH's target amount to estimate payment under reasonable cost-based methodology.

Using LTCH cases from the FY 2002 MedPAR file and cost data from FYs 1996 through 2001 to estimate payments under the current reasonable cost-based principles, we have both case-mix and cost data for 211 LTCHs. Thus, for the impact analyses reflecting the applicable transition blend percentages of proposed prospective payments and reasonable cost-based methodology payments and the option to elect payment based on 100 percent of the proposed Federal rate (see Table II below), we used data from 211 LTCHs. While currently there are approximately 300 LTCHs, the most recent growth is predominantly in for-profit LTCHs that provide respiratory and ventilator-dependent patient care. We believe that the discharges from the MedPAR data for the 211 LTCHs in our database provide sufficient representation in the LTC-DRGs containing discharges for patients who received respiratory and ventilator-dependent care. However, using cases from the FY 2002 MedPAR file, we had case-mix data for 272 LTCHs. Cost data to determine current payments under reasonable cost-based methodology payments are not needed to simulate payments based on 100 percent of the proposed Federal rate. Therefore, for the impact analyses reflecting fully phased-in prospective payments (see Table III below), we used data from 272 LTCHs.

These impacts reflect the estimated “losses” or “gains” among the various classifications of providers for the 2004 LTCH PPS rate year (July 1, 2003, through June 30, 2004) compared to the 2005 LTCH PPS rate year (July 1, 2004, through June 30, 2005). Prospective payments for the 2004 LTCH rate year were based on the standard Federal rate of $35,726.18 and the hospital's estimated case-mix based on FY 2002 claims data. Prospective payments for the 2005 LTCH PPS rate year were based on the proposed standard Federal rate of $36,762.24 and the same FY 2002 claims data.

3. Calculation of Prospective Payments

To estimate payments under the LTCH PPS, we simulated payments on a case-by-case basis by applying the existing payment policy for short-stay outliers (as described in section IV.C.4.b. of this proposed rule) and the existing adjustments for area wage differences (as described in section IV.C.1. of this proposed rule) and for the cost-of-living for Alaska and Hawaii (as described in section IV.C.2. of this proposed rule). Additional payments would also be made for high-cost outlier cases (as described in section IV.C.3. of this proposed rule). As noted in section IV.C.5. of this proposed rule, we are not making adjustments for rural location, geographic reclassification, indirect medical education costs, or a disproportionate share of low-income patients.

We adjusted for area wage differences for estimated 2004 LTCH PPS rate year payments by computing a weighted average of a LTCH's applicable wage index during the period from July 1, 2003, through June 30, 2004, because some providers may experience a change in the wage index phase-in percentage during that period. For cost reporting periods beginning on or after October 1, 2002, and before September 30, 2003, the labor portion of the Federal rate is adjusted by one-fifth of the applicable “LTCH PPS wage index” (that is, the FY 2004 IPPS wage index data without geographic reclassification, under sections 1886(d)(8) and (d)(10)) of the Act. For cost reporting periods beginning on or after October 1, 2003, and before September 30, 2004, the labor portion of the Federal rate is adjusted by two-fifths of the applicable LTCH PPS wage index. Therefore, a provider with a cost reporting period that began October 1, 2003, will have 3 months of payments under the one-fifth wage index value and 9 months of payment under the two-fifths wage index value. For this provider, we computed a blended wage index of 25 percent (3 months/12 months) of the one-fifth wage index value and 75 percent (9 months/12 months) of the two-fifths wage index value. Similarly, we adjusted for area wage differences for estimated 2005 LTCH PPS rate year payments by computing a weighted average of a LTCH's applicable wage index during the period from July 1, 2004, through June 30, 2005, because some providers may experience a change in the wage index phase-in percentage during that period. For cost reporting periods beginning on or after October 1, 2003, and before September 30, 2004, the labor portion of the Federal rate is adjusted by two-fifths of the applicable LTCH PPS wage index. For cost reporting periods beginning on or after October 1, 2004, and before September 30, 2005, the labor portion of the Federal rate is adjusted by three-fifths of the applicable LTCH PPS wage index. The applicable proposed LTCH PPS wage index values for the 2005 LTCH PPS rate year are shown in Tables 1 and 2 of the Addendum to this proposed rule.

We also calculated payments using the applicable transition blend percentages. During the 2004 LTCH PPS rate year, based on the transition blend percentages set forth in § 412.533(a), some providers may experience a change in the transition blend percentage during the period from July 1, 2003, through June 30, 2004. That is, during the period from July 1, 2003, through June 30, 2004, a provider with a cost reporting period beginning on October 1, 2002 (which is paid under the 80/20 transition blend (80 percent of payments based on reasonable cost-based methodology and 20 percent of payments under the LTCH PPS), beginning October 1, 2002) had 3 months (July 1, 2003, through September 30, 2003) under the 80/20 blend and 9 months (October 1, 2003, through June 30, 2004) of payment under the 60/40-transition blend (60 percent of payments based on reasonable cost-based methodology and 40 percent of payments under the LTCH PPS). (The 60 percent/40 percent blend would continue until the provider's cost reporting period beginning on October 1, 2004.)

Similarly, during the 2005 LTCH PPS rate year, based on the transition blend percentages set forth in § 412.533(a), some providers may experience a change in the transition blend percentage during the period from July 1, 2004, through June 30, 2005. That is, during the period from July 1, 2004, through June 30, 2005, a provider with a cost reporting period beginning on October 1, 2003 (which is paid under the 60/40 transition blend), had 3 months (July 1, 2004, through September 30, 2004) under the 60/40 blend and 9 months (October 1, 2004, through June 30, 2005) of payment under the 40/60-transition blend (40 percent of payments based on reasonable cost-based methodology and 60 percent of payments under the LTCH PPS). (The 40 percent/60 percent blend would continue until the provider's cost reporting period beginning on October 1, 2005.)

In estimating blended transition payments, we estimated payments based on reasonable cost-based methodology in accordance with the methodology in section 1886(b) of the Act. We compared the estimated blended transition payment to the LTCH's estimated payment if it would elect payment based on 100 percent of the Federal rate. If we estimated that a LTCH would be paid more based on 100 percent of the Federal rate, we assumed that it would elect to bypass the transition methodology and to receive immediate prospective payments.

Then we applied the 6.0 percent budget neutrality reduction to payments to account for the effect of the 5-year transition methodology and election of payment based on 100 percent of the Federal rate on Medicare program payments established in the June 6, 2003, final rule (68 FR 34153) to each LTCH's estimated payments under the LTCH PPS for the 2004 LTCH PPS rate year. Similarly, we applied the proposed 3.0 percent budget neutrality reduction to payment to account for the effect of the 5-year transition methodology and election of payment based on 100 percent of the proposed Federal rate on Medicare program payments (see section IV.C.6. of this proposed rule) to each LTCH's estimated payments under the LTCH PPS for the 2005 LTCH PPS rate year. The impact based on our projection of whether a LTCH would be paid based on the transition blend methodology or would elect payment based on 100 percent of the Federal rate is shown below in Table II.

In Table III below, we also show the impact if the LTCH PPS were fully implemented; that is, as if there were an immediate transition to fully Federal prospective payments under the LTCH PPS for the 2004 LTCH PPS rate year and the 2005 LTCH PPS rate year. Accordingly, the 6.0 percent budget neutrality reduction to account for the 5-year transition methodology on LTCHs' Medicare program payments for the 2004 LTCH PPS rate year and the proposed 3.0 percent budget neutrality reduction to account for the 5-year transition methodology on LTCHs' Medicare program payments established for the 2005 LTCH PPS rate year were not applied to LTCHs' estimated payments under the PPS.

Tables II and III below illustrate the aggregate impact of the payment system among various classifications of LTCHs.

• The first column, LTCH Classification, identifies the type of LTCH.
• The second column lists the number of LTCHs of each classification type.
• The third column identifies the number of long-term care cases.
• The fourth column shows the estimated payment per discharge for the 2004 LTCH PPS rate year.
• The fifth column shows the estimated payment per discharge for the 2005 LTCH PPS rate year.
• The sixth column shows the percent change of 2004 LTCH PPS rate year compared to the 2005 LTCH PPS rate year.

4. Results

We have prepared the following summary of the impact (as shown in Table II) of the LTCH PPS set forth in this proposed rule.

a. Location

The majority of LTCHs are in urban areas. Approximately 4 percent of the LTCHs are identified as being located in a rural area, and approximately 3 percent of all LTCH cases are treated in these rural hospitals. Impact analysis in Table II shows that the percent change in estimated payments per discharge for the 2004 LTCH PPS rate year compared to the 2005 LTCH PPS rate year for rural LTCHs would be 5.3 percent, and would be 5.4 percent for urban LTCHs. Large urban LTCHs are projected to experience a 5.9 percent increase in payments per discharge from the 2004 LTCH PPS rate year compared to the 2005 LTCH PPS rate year, while other urban LTCHs projected to experience a 4.8 percent increase in payments per discharge from the 2004 LTCH PPS rate year compared to the 2005 LTCH PPS rate year. (See Table II.)

b. Participation Date

LTCHs are grouped by participation date into three categories: (1) Before October 1983; (2) between October 1983 and September 1993; and (3) after October 1993. We did not have sufficient OSCAR data on two LTCHs, which we labeled as an “Unknown” category. The majority, approximately 64 percent, of the LTCH cases are in hospitals that began participating after October 1993 and are projected to experience a 5.2 percent increase in payments per discharge from the 2004 LTCH PPS rate year compared to the 2005 LTCH PPS rate year. Approximately 10 percent of the cases are in LTCHs that began participating in Medicare before October 1983 and are projected to experience a 11.9 percent increase in payments per discharge from the 2004 LTCH PPS rate year compared to the 2005 LTCH PPS rate year. This relatively large increase in payments for the 2005 LTCH PPS rate year may be attributable to the fact that many of these LTCHs that began participating in Medicare prior to October 1983 are located in the New England census region (as explained below). In addition to the update in the standard Federal rate, these LTCHs are experiencing increases in payments because of an increasing wage index adjustment, which is two-fifths of the applicable LTCH PPS wage index for cost reporting periods beginning on or after October 1, 2003, and three-fifths of the applicable wage index for cost reporting periods beginning on or after October 1, 2004. In addition, as we discuss in section IV.C.6. of the preamble of this proposed rule, we are proposing a 3.0 percent budget neutrality reduction (0.970) to payments in the 2005 LTCH PPS rate year to account for the effect of the 5-year transition methodology. The proposed 0.970 transition period budget neutrality factor for the 2005 LTCH PPS rate year is 3 percentage points lower than the transition period budget neutrality factor for the 2004 LTCH PPS rate year (0.940). This smaller budget neutrality offset contributes to greater LTCH payment increases between the 2004 and 2005 LTCH PPS rate years compared to the increases seen between FY 2003 and the 2004 LTCH PPS rate year. We do not expect to see these large payment per discharge increases in future years as the majority of LTCHs will have transitioned fully to the LTCH PPS and, therefore, the transition period budget neutrality factor should remain more stable.

LTCHs that began participating between October 1983 and September 1993 are projected to experience a 4.3 percent increase in payments per discharge from the 2004 LTCH PPS rate year compared to the 2005 LTCH PPS rate year. (See Table II.)

c. Ownership Control

LTCHs are grouped into three categories based on ownership control type—(1) voluntary; (2) proprietary; and (3) government.

Approximately 4 percent of LTCHs are government run and we expect that they would “gain” from the changes based on our projection that they would experience a 2.5 percent increase in payments per discharge from the 2004 LTCH PPS rate year compared to the 2005 LTCH PPS rate year. Voluntary and proprietary LTCHs are projected to experience a 6.9 percent and 5.0 percent increase in payments per discharge from the 2004 LTCH PPS rate year compared to the 2005 LTCH PPS rate year, respectively. (See Table II.)

d. Census Region

LTCHs located in all regions are expected to experience an increase in payments per discharge from the 2004 LTCH PPS rate year compared to the 2005 LTCH PPS rate year. Specifically, of the nine census regions, we expect that LTCHs in the New England region would experience the largest percent increase in payments per discharge from the 2004 LTCH PPS rate year compared to the 2005 LTCH PPS rate year (13.5 percent). As explained above, under section B.4.b. (Participation Date), this relatively large increase in payments for the 2005 LTCH PPS rate year may be attributable to the update in the standard Federal rate, and the fact that these LTCHs are experiencing increases in payments because of an increasing wage index adjustment, which is two-fifths of the applicable LTCH PPS wage index for cost reporting periods beginning on or after October 1, 2003, and three-fifths of the applicable wage index for cost reporting periods beginning on or after October 1, 2004. In addition, as we discuss in section IV.C.6. of the preamble of this proposed rule, we are proposing a 3.0 percent budget neutrality reduction (0.970) to payments in the 2005 LTCH PPS rate year to account for the effect of the 5-year transition methodology. The proposed 0.970 transition period budget neutrality factor for the 2005 LTCH PPS rate year is 3 percentage points lower than the transition period budget neutrality factor for the 2004 LTCH PPS rate year (0.940). This smaller budget neutrality offset contributes to greater LTCH payment increases between the 2004 and 2005 LTCH PPS rate years compared to the increases seen between FY 2003 and the 2004 LTCH PPS rate year. We do not expect to see these large payment per discharge increases in future years as the majority of LTCHs will have transitioned fully to the LTCH PPS and, therefore, the transition period budget neutrality factor should remain more stable.

We expect LTCHs in the South Atlantic region would experience the smallest percent increase in payments per discharge from the 2004 LTCH PPS rate year compared to the 2005 LTCH PPS rate year (2.3 percent). (See Table II.)

e. Bed Size

LTCHs were grouped into six categories based on bed size—0-24 beds, 25-49 beds, 50-74 beds, 75-124 beds, 125-199 beds, and 200+ beds.

The percent increase in payments per discharge from the 2004 LTCH PPS rate year compared to the 2005 LTCH PPS rate year are projected to increase for all bed size categories.

Most LTCHs were in bed size categories where the percent increase in payments per discharge from the 2004 LTCH PPS rate year compared to the 2005 LTCH PPS rate year is estimated to be greater than 5.4 percent. LTCHs with 200 or more beds have the highest estimated percent change in payments per discharge from the 2004 LTCH PPS rate year compared to the 2005 LTCH PPS rate year (6.5 percent), while LTCHs with 75-124 beds have the lowest projected increase in the percent change in payments per discharge from the 2004 LTCH PPS rate year compared to the 2005 LTCH PPS rate year (4.3 percent). (See Table II.)

5. Effect on the Medicare Program

Based on actuarial projections, we estimate that Medicare spending (total Medicare program payments) for LTCH services over the next 5 years will be as follows:

These estimates are based on the current estimate of increase in the excluded hospital with capital market basket of 2.9 percent for the 2005 LTCH PPS rate year, 3.2 percent for the 2006 LTCH PPS rate year, 3.1 percent for the 2007 LTCH PPS rate year, 3.0 percent for the 2008 LTCH PPS rate year, and 3.2 percent for the 2009 LTCH PPS rate year. We estimate that there would be an increase in Medicare beneficiary enrollment of 2.1 percent in the 2005 LTCH PPS rate year, 2.4 percent in the 2006 LTCH PPS rate year, 2.1 percent in 2007 LTCH PPS rate year, 2.0 percent in the 2008 LTCH PPS rate year, 2.1 percent in the 2009 LTCH PPS rate year, and an estimated increase in the total number of LTCHs.

Consistent with the statutory requirement for budget neutrality, we intend for estimated aggregate payments under the LTCH PPS in FY 2003 to equal the estimated aggregate payments that will be made if the LTCH PPS were not implemented. Our methodology for estimating payments for purposes of the budget neutrality calculations uses the best available data and necessarily reflects assumptions. As we collect data from LTCHs, we will monitor payments and evaluate the ultimate accuracy of the assumptions used to calculate the budget neutrality calculations (that is, inflation factors, intensity of services provided, or behavioral response to the implementation of the LTCH PPS).

Section 123 of BBRA and section 307 of BIPA provide the Secretary with extremely broad authority in developing the LTCH PPS, including the authority for appropriate adjustments. In accordance with this broad authority, we may discuss in a future proposed rule a possible one-time prospective adjustment to the LTCH PPS rates to maintain budget neutrality so that the effect of the difference between actual payments and estimated payments for the first year of LTCH PPS is not perpetuated in the PPS rates for future years. Because the LTCH PPS was only recently implemented, we do not yet have sufficient complete data to determine whether such an adjustment is warranted.

6. Effect on Medicare Beneficiaries

Under the LTCH PPS, hospitals receive payment based on the average resources consumed by patients for each diagnosis. We do not expect any changes in the quality of care or access to services for Medicare beneficiaries under the LTCH PPS, but we expect that paying prospectively for LTCH services will enhance the efficiency of the Medicare program.

C. Impact of Proposed Policy Changes

1. Proposed Requirements for Satellite Facilities and Remote Locations of Hospitals To Qualify as Long-Term Care Hospitals

Under section I.B.3. of the preamble of this proposed rule, we discuss our proposal to clarify the procedures under which a satellite facility or a remote location of a hospital must meet the statutory and regulatory requirements to qualify as a distinct LTCH. Specifically, we are proposing to present in regulations the procedure for determining the period from which the fiscal intermediaries will use discharge data in calculating the average Medicare inpatient length of stay requirement for a new, separately participating hospital that seeks classification as a LTCH.

In this proposed rule, we are restating in regulations our existing policy that a satellite facility or remote location of a hospital (except for those that are subject to the location requirement under the provider-based rules at § 413.65) that voluntarily reorganizes itself as a separate hospital and meets the provider agreement requirements of 42 CFR part 489 and the Medicare conditions of participation under 42 CFR part 482 would have its average Medicare inpatient length of stay calculated based on discharges that occur after the satellite facility or remote location is established as a separate participating hospital.

The policy that we are proposing to incorporate in the regulations is already in existence. Therefore, complying with the proposed regulation amendments would pose no additional burden on LTCHs.

We are proposing to incorporate in regulations that govern requirements for LTCHs a provision that the average Medicare inpatient length of stay for satellite facilities and remote locations of hospitals that became subject to the revised location-based provider-based requirements on July 1, 2003, that reorganize as separate participating hospitals, and that seek classification as LTCHs, would continue to be based on discharge data during the 5 months of the immediate 6 months preceding the facility's separation from the main hospital. This proposed amendment to the regulation text would incorporate procedures that are already established under the regulations governing provider-based entities, but whose implementation applicable to LTCH classifications were not expounded in the specific regulations governing LTCHs. The proposed regulations apply only to those facilities or locations that became subject to the revised provider-based location rules on July 1, 2003, and that seek classification as LTCHs for Medicare payment purposes. Therefore, we are unable to quantify how many or when a facility or location would seek LTCH classification.

These proposed amendments to the regulations would not impose any additional requirements on providers. The data used in the calculation of the average length of stay are already being collected. The existing procedure for application of the discharge data in calculating the average length of stay in both circumstances is consistent with existing statutory and regulatory requirements.

2. Proposed Change in Policy on Interruption of a Stay in a LTCH

Under section IV.C.4.c. of the preamble of this proposed rule, we are proposing to expand the definition of an interruption of a stay to include an interruption in which the patient is discharged from the LTCH, and returns to the LTCH within 3 days of the original discharge. We have found, through monitoring activities and other sources, that certain LTCHs are discharging patients during the course of their treatment for the sole purpose of the patient receiving specific tests or procedures and then readmitting the patient following the administration of the test or procedure. We believe these situations are resulting in improper increases in Medicare costs through separate billings for services that are already included in the LTC-DRG payment made to the LTCH. The proposed regulation change would prevent these inappropriate Medicare payments. However, we do not have sufficient data at this time to quantify either the number of providers that would be affected by the proposed change nor the savings to the Medicare program.

3. Proposed Change in Procedure for Counting Covered and Noncovered Days in a Stay That Crosses Two Consecutive Cost Reporting Periods

Under section I.B.2. of the preamble to this proposed rule, we are proposing to specify the procedure for calculating a hospital's inpatient average length of stay for purposes of classification as a LTCH when covered and noncovered days of the stay involve admission in one cost reporting period and discharge in a second consecutive cost reporting period. Under this circumstance, we are proposing to count the total number of days of the stay in the cost reporting period during which the inpatient was discharged. We are proposing this revised procedure to make it consistent with reporting and payment procedures already in place for discharge-based payment systems that link patient days to discharges.

The proposed regulation imposes no additional requirements on providers. The discharge data are already being collected and the proposed revision would merely change the procedure for reporting it.

D. Executive Order 12866

In accordance with the provisions of Executive Order 12866, this proposed rule was reviewed by the Office of Management and Budget.

List of Subjects in 42 CFR Part 412

• Administrative practice and procedure
• Health facilities
• Medicare
• Puerto Rico
• Reporting and recordkeeping requirements

In accordance with the discussion in this preamble, the Centers for Medicare & Medicaid Services is proposing to amend 42 CFR chapter IV, part 412, as set forth below:

PART 412—PROSPECTIVE PAYMENT SYSTEMS FOR INPATIENT HOSPITAL SERVICES

1. The authority citation for part 412 continues to read as follows:

Authority:Secs. 1102 and 1871 of the Social Security Act (42 U.S.C. 1302 and 1395hh).

2. Section 412.23 is amended by—

A. Revising paragraphs (e)(3)(i) and (e)(3)(ii).

B. In paragraph (e)(3)(iii), removing the phrase “required Medicare average length of stay,” and adding in its place the phrase “required average length of stay,”.

C. Revising paragraph (e)(4).

The revisions and additions read as follows:

Addendum

This addendum contains the tables referred to throughout the preamble to this proposed rule. The tables presented below are as follows:

Table 1.—Long-Term Care Hospital Proposed Wage Index for Urban Areas for Discharges Occurring from July 1, 2004 through June 30, 2005;

Table 2.—Long-Term Care Hospital Proposed Wage Index for Rural Areas for Discharges Occurring from July 1, 2004 through June 30, 2005;

Table 3.—FY 2004 LTC-DRG Relative Weights, Geometric Mean Length of Stay, and Short-Stay Five-Sixths Average Length of Stay for Discharges Occurring from July 1, 2004 through September 30, 2004.

(Note: This is the same information provided in Table 11 of the August 1, 2003, IPPS final rule (68 FR 45650-45658), which has been reprinted here for convenience.)