Medicare Program; Supplemental Proposed Changes to the Hospital Inpatient Prospective Payment Systems for Acute Care Hospitals and the Long-Term Care Hospital Prospective Payment System and Supplemental Proposed Fiscal Year 2011 Rates

Summary:

This proposed rule is a supplement to the fiscal year (FY) 2011 hospital inpatient prospective payment systems (IPPS) and long-term care prospective payment system (LTCH PPS) proposed rule published in the May 4, 2010Federal Register. This supplemental proposed rule would implement certain statutory provisions relating to Medicare payments to hospitals for inpatient services that are contained in the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively known as the Affordable Care Act). It would also specify statutorily required changes to the amounts and factors used to determine the rates for Medicare acute care hospital inpatient services for operating costs and capital-related costs, and for long-term care hospital costs.

Table of Contents

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Addresses:

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You may submit comments in one of four ways (please choose only one of the ways listed):

1. Electronically. You may submit electronic comments on this regulation to http://www.regulations.gov. Follow the instructions for submitting a comment.

2. By regular mail. You may mail written comments to the following address ONLY: Centers for Medicare Medicaid Services, Department of Health and Human Services, Attention: CMS-1498-P2, P.O. Box 8011, Baltimore, MD 21244-1850.

Please allow sufficient time for mailed comments to be received before the close of the comment period.

3. By express or overnight mail. You may send written comments to the following address ONLY: Centers for Medicare Medicaid Services, Department of Health and Human Services,Attention: CMS-1498-P2, Mail Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850.

4. By hand or courier. If you prefer, you may deliver (by hand or courier) your written comments before the close of the comment period to either of the following addresses:

a. For delivery in Washington, DC—Centers for Medicare Medicaid Services, Department of Health and Human Services, Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW.,Washington, DC 20201.

(Because access to the interior of the Hubert H. Humphrey Building is not readily available to persons without Federal government identification, commenters are encouraged to leave their comments in the CMS drop slots located in the main lobby of the building. A stamp-in clock is available for persons wishing to retain a proof of filing by stamping in and retaining an extra copy of the comments being filed.)

b. For delivery in Baltimore, MD—Centers for Medicare Medicaid Services, Department of Health and Human Services, 7500 Security Boulevard,Baltimore, MD 21244-1850.

If you intend to deliver your comments to the Baltimore address, please call telephone number (410) 786-7195 in advance to schedule your arrival with one of our staff members.

Comments mailed to the addresses indicated as appropriate for hand or courier delivery may be delayed and received after the comment period.

Submission of comments on paperwork requirements. You may submit comments on this document's paperwork requirements by following the instructions at the end of the “Collection of Information Requirements” section in this document.

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

For further information contact:

Tzvi Hefter, (410) 786-4487, and Ing-Jye Cheng, (410) 786-4548, Operating Prospective Payment, Wage Index, Hospital Geographic Reclassifications, Capital Prospective Payment, Critical Access Hospital (CAH).

Michele Hudson, (410) 786-4487, and Judith Richter, (410) 786-2590, Long-Term Care Hospital Prospective Payment.

Siddhartha Mazumdar, (410) 786-6673, Rural Community Hospital Demonstration Program Issues.

Supplementary information:

Inspection of Public Comments: All comments received before the close of the comment period are available for viewing by the public, including any personally identifiable or confidential business information that is included in a comment. We post all comments received before the close of the comment period on the following Web site as soon as possible after they have been received:http://www.regulations.gov. Follow the search instructions on that Web site to view public comments.

Comments received timely will also be available for public inspection as they are received, generally beginning approximately 3 weeks after publication of a document, at the headquarters of the Centers for Medicare Medicaid Services, 7500 Security Boulevard, Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 a.m. to 4 p.m. To schedule an appointment to view public comments, phone 1-800-743-3951.

Electronic Access

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I. Background

On March 23, 2010, the Patient Protection and Affordable Care Act (Pub. L. 111-148) was enacted. Following the enactment of Public Law 111-148, the Health Care and Education Reconciliation Act of 2010 Public Law 111-152 (enacted on March 30, 2010), amended certain provisions of Public Law 111-148. These public laws are collectively known as the Affordable Care Act. A number of the provisions of Public Law 111-148, affect the IPPS and the LTCH PPS and the providers and suppliers addressed in this proposedrule. However, due to the timing of the passage of the legislation, were unable to address those provisions in the FY 2011 IPPS and LTCH PPS proposed rule that appeared in the May 4, 2010Federal Register(75 FR 23852). Therefore, the proposed policies and payment rates in that proposed rule did not reflect the new legislation. We noted in that proposed rule that we would issue separate Federal Register documents addressing the provisions of Public Law 111-148 that affect our proposed policies and payment rates for FY 2010 and FY 2011 under the IPPS and the LTCH PPS. This supplementary proposed rule addresses the following provisions of the new legislation that affect the following FY 2011 proposed policies:

• Hospital wage index improvement related to geographic reclassification criteria for FY 2011 (section 3137 of Pub. L. 111-148).

• National budget neutrality in the calculation of the rural floor for hospital wage index (section 3141 of Pub. L. 111-148).

• Protections for frontier States (section 10324 of Pub. L. 111-148).

• Revisions of certain market basket updates (sections 3401 and 10319 of Pub. L. 111-148 and section 1105 of Pub. L. 111-152).

• Temporary improvements to the low-volume hospital adjustment (sections 3125 and 10314 of Pub. L. 111-148).

• Extension of Medicare-dependent hospitals (MDHs) (section 3124 of Pub. L. 111-148).

• Additional payments in FYs 2011 and 2012 for qualifying hospitals in the lowest quartile of per capital Medicare spending (section 1109 of Pub. L. 111-152).

• Extension of the rural community hospital demonstration (section 3123 of Pub. L. 111-148).

• Technical correction related to critical access hospital (CAH) services (section 3128 of Pub. L. 111-148).

• Extension of certain payment rules for long-term care hospital services and of moratorium on the establishment of certain hospitals and facilities (sections 3106 and 10312 of Pub. L. 111-148).

We also noted that we plan to issue further instructions implementing the provisions of Public Law 111-148 that affect the policies and payment rates for FY 2010 under the IPPS and for RY 2010 under the LTCH PPS in a separate document published elsewhere in this Federal Register.

II. Provisions of the Proposed Regulations

In this section of this supplementary proposed rule, we address the provisions of Public Law 111-148, that affect our proposed policies and payment rates for FY 2011 under the IPPS and the LTCH PPS.

A. Changes to the Acute Care Hospital Wage Index

1. Plan for Reforming the Wage Index

Section 3137(b) of Public Law 111-148 requires the Secretary of Health and Human Services to submit to Congress, not later than December 31, 2011, a report that includes a plan to reform the Medicare wage index applied under the Medicare IPPS. In developing the plan, the Secretary of Health and Human Services must take into consideration the goals for reforming the wage index that were set forth by the MedPAC in its June 2007 report entitled, “Report to Congress: Promoting Greater Efficiency in Medicare”, including establishing a new system that —

• Uses Bureau of Labor of Statistics (BLS) data, or other data or methodologies, to calculate relative wages for each geographic area;

• Minimizes wage index adjustments between and within MSAs and statewide rural areas;

• Includes methods to minimize the volatility of wage index adjustments while maintaining budget neutrality in applying such adjustments;

• Takes into account the effect that implementation of the system would have on health care providers and on each region of the country;

• Addresses issues related to occupational mix, such as staffing practices and ratios, and any evidence on the effect on quality of care or patient safety as a result of the implementation of the system; and

• Provides for a transition.

In addition, section 3137(b)(3) of Public Law 111-148 requires the Secretary of Health and Human Services to consult with relevant affected parties in developing the plan. Although the provisions of section 3137(b) of Public Law 111-148 will not have an actual impact on the FY 2011 wage, we are notifying the public of the provisions so that they may provide comments and suggestions on how they may participate in developing the plan.

2. Provisions on Wage Comparability and Rural/Imputed Floor Budget Neutrality

Sections 3137(c) and 3141 of Public Law 111-148 affect reclassification average hourly wage comparison criteria and rural and imputed floor budget neutrality provisions for FY 2011.

a. Reclassification Average Hourly Wage Comparison Criteria

In the FY 2009 IPPS final rule, we adopted the policy to adjust the reclassification average hourly wage standard, comparing a reclassifying hospital's (or county hospital group's) average hourly wage relative to the average hourly wage of the area to which it seeks reclassification. (We refer readers to the FY 2009 IPPS final rule for a full discussion of the basis for the proposals the public comments received and the FY 2009 final policies.) We provided for a phase-in of the adjustment over 2 years. For applications for reclassification for the first transitional year, FY 2010, the average hourly wage standards were set at 86 percent for urban hospitals and group reclassifications, and 84 percent for rural hospitals. For applications for reclassification for FY 2011 (for which the application deadline was September 1, 2009) and for subsequent fiscal years, the average hourly wage standards were 88 percent for urban and group reclassifications and 86 percent for rural hospitals. Sections 412.230, 412.232, and 412.234 of the regulations were revised accordingly. These policies were adopted in the FY 2009 IPPS final rule and were reflected in the wage index in the Addendum to the FY 2011 IPPS proposed rule, which appeared in the Federal Register on May 4, 2010.

However, provisions of section 3137(c) of Public Law 111-148 recently revised the average hourly wage standards. Specifically, section 3137(c) restores the average hourly wage standards that were in place for FY 2008 (that is, 84 percent for urban hospitals, 85 percent for group reclassifications, and 82 percent for rural hospitals) for applications for reclassification for FY 2011 and for each subsequent fiscal year until the first fiscal year beginning on or after the date that is one year after the Secretary of Health and Human Services submits a report to Congress on a plan for reforming the wage index under 3137(b) of Public Law 111-148. Section 3137(c) of Public Law 111-148 also requires the revised average hourly wage standards to be applied in a budget neutral manner. We note that section 3137(c) of Public Law 111-148 does not provide for the revised average hourly wage standards to be applied retroactively, nor does it change the statutory deadline for applications for reclassification for FY 2011. Under section 1886(d)(10) of the Act, the Medicare Geographic Classification Review Board (MGCRB) considersapplications by hospitals for geographic reclassification for purposes of payment under the IPPS. Hospitals must apply to the MGCRB to reclassify 13 months prior to the start of the fiscal year for which reclassification is sought (generally by September 1). For reclassifications for the FY 2011 wage index, the deadline for applications was September 1, 2009 (74 FR 43838).

In implementing section 3137(c) of Public Law 111-148, we requested the assistance of the MGCRB in determining, for applications received by September 1, 2009, whether additional hospitals would qualify for reclassification for FY 2011 based on the revised average hourly wage standards of 84 percent for urban hospitals, 85 percent for group reclassifications, and 82 percent for rural hospitals. We determined that 18 additional hospitals would qualify for reclassification for FY 2011. Also, 5 hospitals, for which the MGCRB granted reclassifications to their secondary requested areas for FY 2011, would qualify for reclassifications instead to their primary requested areas because they now meet the average hourly wage criteria to reclassify to those areas. Therefore, in accordance with § 412.278 of the regulations, in which paragraph (c) provides the Administrator discretionary authority to review any final decision of the MGCRB, we submitted a letter to the Administrator requesting that she review and amend the MGCRB's decision and grant the 23 hospitals their requested reclassifications (or primary reclassifications) for FY 2011.

The wage index in the Addendum to this supplemental FY 2011 IPPS proposed rule reflects these changes in hospital reclassifications, although the Administrator had not issued all of her decisions by the date of this proposed rule. In calculating the wage index in this proposed rule, we made assumptions that the Administrator would grant the 23 hospitals their requested reclassifications (or primary reclassifications) and that the hospitals would not request the Administrator to amend her decisions. Generally, these reclassifications would result in the highest possible wage index for the hospitals. Any changes to the wage index, as a result of the Administrator's actual decision issued under § 412.278(c), or an amendment of the Administrator's decision issued under paragraph (g), will be reflected in the FY 2011 IPPS final rule.

In accordance with the requirements in section 3137(c) of Affordable Care Act, we are modifying § 412.230, § 412.232, and § 412.234 of the regulations to codify the revised average hourly wage standards.

b. Budget Neutrality Adjustment for the Rural and Imputed Floors

In the FY 2009 IPPS final rule (73 FR 48574 through 48575), we adopted State level budget neutrality (rather than the national budget neutrality adjustment) for the rural and imputed floors, effective beginning with the FY 2009 wage index and incorporated this policy in our regulation at § 412.64(e)(4). Specifically, the regulations specified that CMS makes an adjustment to the wage index to ensure that aggregate payments after implementation of the rural floor under section 4410 of the Balanced Budget Act of 1997 (Pub. L. 105-33) and the imputed floor under § 412.64(h)(4) are made in a manner that ensures that aggregate payments to hospitals are not affected and that, beginning October 1, 2008, we would transition from a nationwide adjustment to a statewide adjustment, with a statewide adjustment fully in place by October 1, 2010.

These policies for the rural and imputed floors were adopted in the FY 2009 IPPS final rule and were reflected in the wage index in the Addendum to the FY 2011 IPPS/LTCH PPS proposed rule, published in the Federal Register on May 4, 2010. However, these policies were recently changed by the provisions of section 3141 of Public Law 111-148. Specifically, section 3141 of Affordable Care Act rescinds our policy establishing a statewide budget neutrality adjustment for the rural and imputed floors and, instead, restores it to a uniform, national adjustment, beginning with the FY 2011 wage index. Additionally, the imputed floor, is set to expire on September 30, 2011. We do not read section 3141 of Public Law 111-148 as altering this expiration date. Section 3141 of Public Law 111-148 requires that we “administer subsection (b) of such section 4410 and paragraph (e) of * * * section 412.64 in the same manner as the Secretary administered such subsection (b) and paragraph (e) for discharges occurring during fiscal year 2008 (through a uniform, national adjustment to the area wage index).” Thus, section 3141 of Public Law 111-148 is governing how we apply budget neutrality, under the authorities of § 412.64(e) and section 4410(b) of the Balanced Budget Act, but it does not alter § 412.64(h) of our regulations (which includes the imputed floor and its expiration date). To the extent there is an imputed floor, section 3141 of Public Law 111-148 governs budget neutrality for that floor, but it does not continue the imputed floor beyond the expiration date already included in our regulations.

Therefore, the wage index in the Addendum to this supplemental FY 2011 IPPS proposed rule reflects a uniform, national budget neutrality adjustment for the rural and imputed floors, which is a factor of 0.995425.

3. Frontier States Floor (§ 412.64)

In accordance with section 10324(a) of Affordable Care Act, beginning in FY 2011, the statute provides for establishing an adjustment to create a wage index floor of 1.00 for all hospitals located in States determined to be Frontier States. The statute defines any State as a Frontier State if at least 50 percent of the State's counties are determined to be Frontier Counties. The statute defines as counties that have a population density less than 6 persons per square mile. The law requires that this provision shall not apply to hospitals in Alaska or Hawaii receiving a non-labor related share adjustment under section 1886(d)(5)(H) of the Act.

To implement this provision, we propose to identify Frontier Counties by analyzing population data and county definitions based upon the most recent annual Population Estimates published by the U.S. Census Bureau. We will divide each county's population total by each county's reported land area (according to the decennial census) in square miles to establish population density. We also propose to update this analysis from time to time, such as upon publication of a subsequent decennial census, and if necessary, add or remove qualifying States from the list of Frontier States based on the updated analysis.

For a State that qualifies as a Frontier State, in accordance with section 10324(a) of Public Law 111-148, all PPS hospitals located within that State will receive either the higher of its post-reclassification wage index rate, or a minimum value of 1.00. We propose that, for a hospital that is geographically located in a Frontier State and is reclassified under section 1886(d)(10) of the Act to a CBSA in a non-Frontier State, the hospital will receive a wage index that is the higher of the reclassified area wage index or the minimum wage index of 1.00. In accordance with section 10324(a) of Public Law 111-148, the Frontier State adjustment will not be subject to budget neutrality under section 1886(d)(3)(E) of the Act, and will only be extended to hospitals geographically located within a Frontier State. We propose to calculate and apply the Frontier State floor adjustments after rural and imputed floor budget neutrality adjustments arecalculated for all labor market areas, so as to ensure that no hospital in a Frontier State will receive a wage index lesser than 1.00 due to the rural and imputed floor adjustment. We invite public comment on these proposals regarding our methods for determining Frontier States, and for calculation and application of the adjustment.

For the proposed FY 2011 IPPS wage index, the Frontier States are the following: Reflected in the following table:

Table 1—Frontier States Under Section 10324(a)
StateTotalcounties Frontier countiesPercent frontier counties
Frontier States are identified by a footnote in Table 4D-2 of the Addendum to this supplemental proposed rule. Population Data set:http://www.census.gov/popest/estimates.html(2009 County Total Population Estimates).
Land Area Dataset http://factfinder.census.gov/(Decennial: Census Geographic Comparison Tables:“United States—County by State and for Puerto Rico”).
Montana 56 45 80
Wyoming 23 17 74
North Dakota 53 36 68
Nevada 17 11 65
South Dakota 66 34 52

4. Revised FY 2011 IPPS Proposed Rule Wage Index Tables

The revised IPPS proposed wage index values for FY 2011, reflecting the provisions of sections 3137(c), 3141, and 10324 of Public Law 111-148, are included in Tables 2, 4A, 4B, 4C, and 4D-2 of the Addendum to this supplemental FY 2011 IPPS/LTCH PPS proposed rule.

Table 4D-1, which listed the statewide rural and imputed floor budget neutrality factors, is eliminated from the Addendum to this supplemental FY 2011 IPPS/LTCH PPS proposed rule and is no longer applicable for the wage index because section 3141 of Public Law 111-148 instead requires the application of a national adjustment.

Table 4J, which lists the out-migration adjustment for a qualifying county, is revised due to the above provisions of Affordable Care Act. Additionally, Table 9A, the list of hospitals that are reclassified or redesignated for FY 2011, is revised according to section 3137(c) of Public Law 111-148. Both revised tables are included in the Addendum to this supplemental FY 2011 IPPS/LTCH PPS proposed rule.

Tables 3A and 3B, which list the 3-year average hourly wage for each labor market area before the redesignation or reclassification of hospitals, Table 4E, the list of urban CBSAs and constituent counties, Table 4F, the Puerto Rico wage index, and Table 9C, the list of hospitals redesignated under section 1886(d)(8)(E) of the Act, are unaffected by the above provisions of Affordable Care Act. Therefore, these tables are unchanged from the initial FY 2011 IPPS/LTCH PPS proposed rule and are not included in the Addendum to this supplemental FY 2011 IPPS/LTCH PPS proposed rule.

5. Procedures for Withdrawing Reclassifications in FY 2011

Section 1886(d)(10)(D)(v) of the Act states that the Secretary should establish procedures under which a subsection (d) hospital may elect to terminate a reclassification before the end of a 3-year period, but does not contain any other specifics regarding how such termination should occur. Our rules at 42 CFR 412.273 state that hospitals that have been reclassified by the MGCRB are permitted to withdraw their applications within 45 days of the publication of CMS's annual notice of proposed rulemaking. For purposes of this supplementary proposed rule, we interpret our regulation as referring to the initial FY 2011 IPPS/LTCH PPS proposed rule (which appeared in the May 4, 2010Federal Register), and our procedure for this supplementary proposed rule is to start the time period for requesting a withdrawal or termination from publication of that initial proposed rule. Were we not to use such a time period, requests for termination and withdrawal would be received too late to include in our final rule. Thus, all requests for withdrawal of an application for reclassification or termination of an existing 3-year reclassification that would be effective in FY 2011 must be received by the MGCRB by June 18, 2010.

We note that wage index values in the tables in the Addendum to this supplemental FY 2011 IPPS/LTCH PPS proposed rule may have changed somewhat from the initial, more comprehensive FY 2011 IPPS/LTCH PPS proposed rule (which appeared in the May 4, 2010Federal Register) due to the application of sections 3137(c), 3141, and 10324 of Affordable Care Act. In addition, as a result of section 3137(c) of Affordable Care Act, there may be additional hospitals listed as reclassified in Table 9A in the Addendum to this supplemental proposed rule. Hospitals have sufficient time between the display or publication date of this supplemental FY 2011 IPPS/LTCH PPS proposed rule in the Federal Register and the June 18, 2010 deadline for withdrawals and terminations to evaluate and make determinations regarding their reclassification for the FY 2011 wage index. As noted in the initial FY 2011 IPPS proposed rule, the mailing address of the MGCRB is: 2520 Lord Baltimore Drive, Suite L, Baltimore, MD 21244-2670.

B. Inpatient Hospital Market Basket Update

Below we discuss the adjustments to the FY 2010 and FY 2011 market basket as required by the Affordable Care Act. In this supplemental proposed rule we are not proposing to address the provisions of section 3401 of Public Law 111-148 providing for a productivity adjustment for FY 2012 and subsequent fiscal years; rather, this change will be addressed in future rulemaking.

1. FY 2010 Inpatient Hospital Update

In accordance with section 1886(b)(3)(B)(i) of the Act, each year we update the national standardized amount for inpatient operating costs by a factor called the “applicable percentage increase.” Prior to enactment of Public Law 111-148 and Public Law 111-152, section 1886(b)(3)(B)(i)(XX) of the Act set the applicable percentage increase equal to the rate-of-increase in the hospital market basket for IPPS hospitals in all areas, subject to the hospital submitting quality information under rules established by the Secretary in accordance with section 1886(b)(3)(B)(viii) of the Act. Forhospitals that do not provide these data, the update is equal to the market basket percentage increase less an additional 2.0 percentage points. In accordance with these statutory provisions, in the FY 2010 IPPS/LTCH PPS final rule (74 FR 43850), we finalized an applicable percentage increase equal to the full market basket update of 2.1 percent based on IHS Global Insight, Inc.'s second quarter 2009 forecast of the FY 2010 market basket increase, provided the hospital submits quality data in accordance with our rules. For hospitals that do not submit quality data, in the FY 2010 IPPS/LTCH PPS final rule we finalized an applicable percentage increase equal to 0.1 percent (that is, the FY 2010 estimate of the market basket rate-of-increase minus 2.0 percentage points).

Sections 3401(a) and 10319 of Public Law 111-148 amend section 1886(b)(3)(B)(i) of the Act. Specifically, sections 3401(a) and 10319(a) of Public Law 111-148 amend section 1886(b)(3)(B)(i) of the Act to set the FY 2010 applicable percentage increase for IPPS hospitals equal to the rate-of-increase in the hospital market basket for IPPS hospitals in all areas minus a 0.25 percentage point, subject to the hospital submitting quality information under rules established by the Secretary in accordance with section 1886(b)(3)(B)(viii) of the Act. For hospitals that do not provide these data, the update is equal to the market basket percentage increase minus 0.25 percentage point less an additional 2.0 percentage points. Section 3401(a)(4) of Public Law 111-148 further states that these amendments may result in the applicable percentage increase being less than zero. Although these amendments modify the applicable percentage increase applicable to the FY 2010 rates under the IPPS, section 3401(p) of Public Law 111-148 states that the amendments do not apply to discharges occurring prior to April 1, 2010. In other words, for discharges occurring on or after October 1, 2009 and prior to April 1, 2010, the rate for a hospital's inpatient operating costs under the IPPS will be based on the applicable percentage increase set forth in the FY 2010 IPPS/LTCH PPS final rule.

We are proposing to revise 42 CFR 412.64(d) to reflect current law. Specifically, in accordance with section 1886(b)(3)(B)(i) of the Act as amended by sections 3401(a) and 10319(a) of Public Law 111-148, we are proposing to revise § 412.64(d) to state that for the first half of FY 2010 (that is, discharges on or after October 1, 2009 through March 30, 2010), the applicable percentage change equals the market basket index for IPPS hospitals (which is defined under § 413.40(a)) in all areas for hospitals that submit quality data in accordance with our rules, and the market basket index for IPPS hospitals in all areas less 2.0 percentage for hospitals that fail to submit quality data in accordance with our rules. As noted above, in the FY 2010 IPPS/LTCH PPS final rule, we calculated that the full market basket update equals 2.1 percent based on IHS Global Insight, Inc.'s second quarter 2009 forecast of the FY 2010 market basket increase. In addition, we are proposing to revise § 412.64(d) to state that for the second half of FY 2010 (discharges on or after April 1, 2010 through September 30, 2010), in accordance with section 3401(a), we are proposing to set the applicable percentage change equal to the market basket index for IPPS hospitals in all areas reduced by 0.25 percentage points for hospitals that submit quality data in accordance with our rules. For those hospitals that fail to submit quality data, in accordance with our rules, we are proposing to reduce the market basket index for IPPS hospitals by an additional 2.0 percentage points (which is in addition to the 0.25 percentage point reduction required by section 1886(b)(3)(B)(i) of the Act as amended by section 3401(a) of Public Law 111-148 as amended by section 10319(a) of Public Law 111-148. Based on IHS Global Insight, Inc.'s second quarter 2009 forecast of the FY 2010 market basket increase, the FY 2010 applicable percentage change that applies to rates for inpatient hospital operating costs under the IPPS for discharges occurring in the second half of FY 2010 is 1.85 percent (that is, the FY 2010 estimate of the market basket rate-of-increase of 2.1 percent minus 0.25 percentage points) for hospitals in all areas, provided the hospital submits quality data in accordance with our rules. For hospitals that do not submit quality data, the payment update to the operating standardized amount is −0.15 percent (that is, the adjusted FY 2010 estimate of the market basket rate-of-increase of 1.85 percent minus 2.0 percentage points).

Section 1886(b)(3)(B)(iv) of the Act provides that the applicable percentage increase applicable to the hospital-specific rates for SCHs and MDHs equals the applicable percentage increase set forth in section 1886(b)(3)(B)(i) of the Act (that is, the same update factor as for all other hospitals subject to the IPPS). Because the Act sets the update factor for SCHs and MDHs equal to the update factor for all other IPPS hospitals, the update to the hospital specific rates for SCHs and MDHs is also subject to the amendments to section 1886(b)(3)(B)(i) made by section 3401(a) of Public Law 111-148. Accordingly, for hospitals paid for their inpatient operating costs on the basis of a hospital-specific rate, the rates paid to such hospitals for discharges occurring during the first half of FY 2010 will be based on an annual update estimated to be 2.1 percent for hospitals submitting quality data or 0.1 percent for hospitals that fail to submit quality data; and the rates paid to such hospitals for the second half of FY 2010 will be based on an update that is estimated to be 1.85 percent for hospitals submitting quality data or −0.15 percent for hospitals that fail to submit quality data. Similar to that stated above, we are proposing to update §§ 412.73(c)(15), 412.75(d), 412.77(e), 412.78(e), 412.79(d) to reflect current law.

2. FY 2011 Inpatient Hospital Update

As with the FY 2010 applicable percentage increase, section 3401(a) of Public Law 111-148 as amended by section 10319(a) of Public Law 111-148, amends section 1886(b)(3)(B)(i) of the Act to provide that the FY 2011 applicable percentage increase for IPPS hospitals equals the rate-of-increase in the hospital market basket for IPPS hospitals in all areas reduced by 0.25 percentage point, subject to the hospital submitting quality information under rules established by the Secretary in accordance with section 1886(b)(3)(B)(viii) of the Act. For hospitals that do not provide these data, the update is equal to the market basket percentage increase minus a 0.25 percentage point less an additional 2.0 percentage points. Section 3401(a)(4) of Public Law 111-148 further states that this amendment may result in the applicable percentage increase being less than zero.

In Appendix B of the FY 2011 IPPS/LTCH PPS proposed rule, we announced that due to the timing of the passage of Public Law 111-148, we were unable to address those provisions in the proposed rule. In that proposed rule, consistent with current law, based on IHS Global Insight, Inc.'s first quarter 2010 forecast, with historical data through the 2009 fourth quarter, of the FY 2011 IPPS market basket increase, we estimated that the FY 2011 update to the operating standardized amount would be 2.4 percent (that is, the current estimate of the market basket rate-of-increase) for hospitals in all areas, provided the hospital submits quality data in accordance with our rules. For hospitals that do not submitquality data, we estimated that the update to the operating standardized amount would be 0.4 percent (that is, the current estimate of the market basket rate-of-increase minus 2.0 percentage points). Since publication of the FY 2011 IPPS/LTCH PPS proposed rule our estimate of the market basket for FY 2011 has not changed. However, consistent with the amendments to section 1886(b)(3)(B)(i) of the Act made by section 3401 of Public Law 111-148, for FY 2011 we are required to reduce the hospital market basket update by 0.25 percentage points. Therefore, based on IHS Global Insight, Inc.'s first quarter 2010 forecast of the FY 2011 market basket increase, the estimated update to the FY 2011 operating standardized amount is 2.15 percent (that is, the FY 2011 estimate of the market basket rate-of-increase of 2.4 percent minus 0.25 percentage points) for hospitals in all areas, provided the hospital submits quality data in accordance with our rules. For hospitals that do not submit quality data, the estimated update to the operating standardized amount is 0.15 percent (that is, the adjusted FY 2011 estimate of the market basket rate-of-increase of 2.15 percent minus 2.0 percentage points). We are proposing to revise § 412.64(d) to reflect the provisions of section 3401(a) of Public Law 111-148.

Section 1886(b)(3)(B)(iv) of the Act provides that the FY 2011 applicable percentage increase in the hospital-specific rates for SCHs and MDHs equals the applicable percentage increase set forth in section 1886(b)(3)(B)(i) of the Act (that is, the same update factor as for all other hospitals subject to the IPPS). Similar to the FY 2010 applicable percentage increase in the hospital-specific rates, because the Act requires us to apply to the hospital-specific rates the update factor for all other IPPS hospitals, the update to the hospital specific rates for SCHs and MDHs is also subject to section 1886(b)(3)(B)(i) as amended by the Affordable Care Act. Accordingly, the update to the hospital-specific rates applicable to SCHs and MDHs is estimated to be 2.15 for hospitals that submit quality data or 0.15 percent for hospitals that fail to submit quality data. Similar to above, we are proposing to update §§ 412.73(c)(15), 412.75(d), 412.77(e), 412.78(e), 412.79(d) to implement this provision.

3. FY 2010 and FY 2011 Puerto Rico Hospital Update

Puerto Rico hospitals are paid a blended rate for their inpatient operating costs based on 75 percent of the national standardized amount and 25 percent of the Puerto Rico-specific standardized amount. Section 1886(d)(9)(C)(i) of the Act is the basis for determining the applicable percentage increase applied to the Puerto Rico-specific standardized amount. Section 1886(d)(9)(C)(i) of the Act provides that the Puerto Rico standardized amount shall be adjusted in accordance with the final determination of the Secretary under section 1886(d)(4) of the Act. Section 1886(e)(4)(1) of the Act in turn directs the Secretary to recommend an appropriate change factor for Puerto Rico hospitals taking into account amounts necessary for the efficient and effective delivery of medically appropriate and necessary care of high quality, as well as the recommendations of MedPAC. In order to maintain consistency between the portion of the rates paid to Puerto Rico hospitals under the IPPS based on the national standardized amount and the portion based on the Puerto Rico-specific standardized rate, beginning in FY 2004 we have set the update to the Puerto Rico-specific operating standardized amount equal to the update to the national operating standardized amount for all IPPS hospitals. This policy is reflected in our regulations at 42 CFR 412.211.

The amendments to section 1886(b)(3)(B)(i) of the Act by sections 3401(a) and section 10319(a) of Public Law 111-148, affect only the update factor applicable to the national standardized rate for IPPS hospitals and the hospital-specific rates; they do not mandate any revisions to the update factor applicable to the Puerto Rico-specific standardized amount. Rather, as noted above, sections 1886(d)(9)(C)(i) and (e)(4) of the Act direct us to adopt an appropriate change factor for the FY 2010 Puerto Rico-specific standardized amount, which we did in the FY 2010 IPPS/LTCH PPS final rule after notice and consideration of public comments. Therefore, we do not believe we have the authority to now propose setting the FY 2010 update factor for the Puerto Rico-specific operating standardized amount for the second half of FY 2010 equal to the update factor applicable to the national standardized amount or the hospital-specific rates (that is the market basket minus 0.25 percentage points). Accordingly, the FY 2010 update to the Puerto Rico-specific operating standardized amount is 2.1 percent (that is, the FY 2010 estimate of the market basket rate-of-increase) for the entire FY 2010.

For FY 2011, consistent with our past practice of applying the same update factor to the Puerto Rico-specific standardized amount as applied to the national standardized amount, we are proposing to revise § 412.211(c) to set the update factor for the Puerto Rico-specific operating standardized amount equal to the update factor applied to the national standardized amount for all IPPS hospitals. Therefore, we are proposing an update factor for the Puerto Rico-specific standardized amount equal to the FY 2011 estimate of the IPPS operating market basket rate-of-increase of 2.4 percent minus 0.25 percentage points, or 2.15 percent, for FY 2011.

C. Payment Adjustment for Low-Volume Hospitals (§ 412.101)

Section 1886(d)(12) of the Act, as added by section 406 of Public Law 108-173, provides for a payment adjustment to account for the higher costs per discharge for low-volume hospitals under the IPPS, effective beginning FY 2005. Sections 3215 and 10314 of Public Law 111-148 amend the definition of a low-volume hospital under section 1886(d)(12)(C) of the Act. It also revises the methodology for calculating the payment adjustment for low-volume hospitals.

1. Background

Prior to being amended by the Affordable Care Act, section 1886(d)(12)(C)(i) of the Act defined a low-volume hospital as “a subsection (d) hospital (as defined in paragraph (1)(B)) that the Secretary determines is located more than 25 road miles from another subsection (d) hospital and that has less than 800 discharges during the fiscal year.” Section 1886(d)(12)(C)(ii) of the Act further stipulates that “the term “discharge” means an inpatient acute care discharge of an individual regardless of whether the individual is entitled to benefits under Part A.” Therefore, the term refers to total discharges, not merely Medicare discharges. Finally, under section 406, the provision requires the Secretary to determine an applicable percentage increase for these low-volume hospitals based on the “empirical relationship” between “the standardized cost-per-case for such hospitals and the total number of discharges of such hospitals and the amount of the additional incremental costs (if any) that are associated with such number of discharges.” The statute thus mandates that the Secretary develop an empirically justifiable adjustment based on the relationship between costs and discharges for these low-volume hospitals. The statute also limits the adjustment to no more than 25 percent.

Based on an analysis we conducted for the FY 2005 IPPS final rule (69 FR 49099 through 49102), a 25 percent low-volume adjustment to all qualifying hospitals with less than 200 discharges was found to be most consistent with the statutory requirement to provide relief to low-volume hospitals where there is empirical evidence that higher incremental costs are associated with low numbers of total discharges.

In the FY 2006 IPPS final rule (70 FR 47432 through 47434), we stated that a multivariate analyses supported the existing low-volume adjustment implemented in FY 2005. Therefore, the low-volume adjustment of an additional 25 percent would continue to be provided for qualifying hospitals with less than 200 discharges.

2. Temporary Changes for FYs 2011 and 2012

Section 1886(d)(12) of the Act was amended by sections 3125 and 10314 of Public Law 111-148. These changes are effective only for FYs 2011 and 2012. Beginning with FY 2013, the pre-existing low-volume hospital payment adjustment and qualifying criteria, as implemented in FY 2005, will resume.

Section 3125(3) and 10314(1) of Public Law 111-148 amend the qualifying criteria for low-volume hospitals under section 1886(d)(12)(C) of the Act to make it easier for hospitals to qualify for the low-volume adjustment. Specifically, the revised provision specifies that for FYs 2011 and 2012, a hospital qualifies as a low-volume hospital if it is “more than 15 road miles from another subsection (d) hospital and has less than 1,600 discharges of individuals entitled to, or enrolled for, benefits under Part A during the fiscal year.” In addition, section 1886(d)(12)(C) of the Act, as amended, provides that the payment adjustment (the applicable percentage increase) is to be determined “using a continuous linear sliding scale ranging from 25 percent for low-volume hospitals with 200 or fewer discharges of individuals entitled to, or enrolled for, benefits under Part A in the fiscal year to 0 percent for low-volume hospitals with greater than 1,600 discharges of such individuals in the fiscal year.”

Section 3125(3)(A) of Public Law 111-148 revises the distance requirement for FYs 2011 and 2012 from “25 road miles” to “15 road miles” such that a low volume hospital is required to be only more than 15 road miles, rather than more than 25 road miles, from another subsection (d) hospital for purposes of qualifying for the low-volume payment adjustment in FYs 2011 and 2012. We therefore are proposing to revise our regulations at 42 CFR 412.101(a)(2) to provide that to qualify for the low volume adjustment in FYs 2011 and 2012, a hospital must be more than 15 road miles from the nearest subsection (d) hospital. The statute specifies the 15 mile distance in “road miles”. The current regulations at 42 CFR 412.101 also specify the current 25 mile distance requirement in “road miles,” but do not provide a definition of the term “road miles.” We are proposing to define the term “road miles” consistent with the term “miles” as defined at § 412.92 for purposes of determining whether a hospital qualifies as a sole community hospital. Specifically, the regulations at 42 CFR 412.92(c)(i) define “miles” as “the shortest distance in miles measured over improved roads. An improved road for this purpose is any road that is maintained by a local, State, or Federal government entity and is available for use by the general public. An improved road includes the paved surface up to the front entrance of the hospital.” We note that while the proposed change in the qualifying criteria from 25 to 15 road miles is applicable only for FYs 2011 and 2012, the proposed definition of “road miles” would continue to apply even after the distance requirement reverts to 25 road miles beginning in FY 2013.

Sections 3125(3)(B) and (4)(D) and 10314(1) and (2) of Public Law 111-148, revise the discharge requirement for FYs 2011 and 2012 to less than 1,600 discharges of individuals entitled to, or enrolled for, benefits under Part A. Based on section 406 of Public Law 108-173, the discharge requirement to qualify as a low-volume hospital prior to FY 2011 and subsequent to FY 2012 is less than 800 discharges annually. For these fiscal years, the number of discharges is determined based on total discharges, which includes discharges of both Medicare and non-Medicare patients. However, under sections 3125 and 10314 of Public Law 111-148, for FYs 2011 and 2012, the discharge requirement has been increased to less than 1,600 discharges of individuals “entitled to, or enrolled for, benefits under Part A during the fiscal year.”

Section 226(a) of the Act (42 U.S.C. 426(a)) provides that an individual is automatically “entitled” to Medicare Part A when the person reaches age 65 or becomes disabled, provided that the individual is entitled to Social Security benefits under section 202 of the Act (42 U.S.C. 402). Once a person becomes entitled to Medicare Part A, the individual does not lose such entitlement simply because there is no Part A coverage of a specific inpatient stay. For example, a patient does not lose entitlement to Medicare Part A simply because the individual's Part A hospital benefits have been exhausted; other items and services (for example, skilled nursing services) still might be covered under Part A, and the patient would qualify for an additional 90 days of Part A hospital benefits if at least 60 days elapsed between the individual's first and second hospital stay. (See§ 409.60(a) and (b)(1) and § 409.61(a)(1) and (c).)

In addition, beneficiaries who are enrolled in Medicare Advantage (MA) plans provided under Medicare Part C continue to meet all of the statutory criteria for entitlement to Part A benefits under section 226. First, in order to enroll in Medicare Part C, a beneficiary must be “entitled to benefits under Part A and enrolled under Part B,”see section 1852(a)(1)(B)(i) of the Act. There is nothing in the Act that suggests beneficiaries who enroll in Part C plan forfeit their entitlement to Part A benefits. Second, once a beneficiary enrolls in Part C, the MA plan must provide the beneficiary with the benefits to which the enrollee is entitled under Medicare Part A, even though it may also provide for additional supplemental benefits. See section 1852(a)(1)(A) of the Act. Third, under certain circumstances, Medicare Part A pays for care furnished to patients enrolled in Part C plans. For example, if, during the course of the year, the scope of benefits provided under Medicare Part A expands beyond a certain cost threshold due to Congressional action or a national coverage determination, Medicare Part A will pay the provider for the cost of the services directly. (See section 1852(a)(5) of the Act.) Similarly, Medicare Part A also pays for Federally qualified health center services and hospice care furnished to MA patients. See42 U.S.C. section 1853(a)(4), (h)(2) of the Act. Thus, a patient enrolled in a Part C plan remains entitled to benefits under Medicare Part A.

Accordingly, for purposes of determining the number of discharges for “individuals entitled to, or enrolled for, benefits under Part A,” we propose to include all discharges associated with individuals entitled to Part A, including discharges associated with individuals whose inpatient benefits are exhausted or whose stay was not covered by Medicare and discharges of individuals enrolled in an MA plan under Medicare Part C. Since a hospital may only qualify for this adjustment if the hospital has fewer than 1,600 discharges for patients entitled to Part A, thehospital must submit a claim to Medicare on behalf of all Part A entitled individuals, including a no-pay claim for patients who are enrolled in Part C, in order for Medicare to assure that these discharges are included in the determination of whether the hospital has fewer than 1,600 discharges for patients entitled to Part A.

Currently, a prior cost reporting period is used to determine if the hospital meets the discharge criteria to receive the low-volume payment adjustment in the current year.

Finally, sections 3125(4) of Public Law 111-148 and 10314(2), add a new section 1886(d)(12)(D) of the Act that modifies the methodology for calculation of the payment adjustment under section 1886(d)(12)(A) of the Act for low-volume hospitals for discharges occurring in FYs 2011 and 2012. Currently, sections 1886(d)(12)(A) and (B) of the Act require the Secretary to determine an applicable percentage increase for low-volume hospitals based on the “empirical relationship” between “the standardized cost-per-case for such hospitals and the total number of discharges of such hospitals and the amount of the additional incremental costs (if any) that are associated with such number of discharges.” The statute thus mandates the Secretary to develop an empirically justifiable adjustment based on the relationship between costs and discharges for these low-volume hospitals. The statute also limits the adjustment to no more than 25 percent. Based on analyses, we conducted for the FY 2005 IPPS final rule (69 FR 49099 through 49102) and the FY 2006 IPPS final rule (70 FR 47432 through 47434), a 25 percent low-volume adjustment to all qualifying hospitals with less than 200 discharges was found to be most consistent with the statutory requirement to provide relief to low-volume hospitals where there is empirical evidence that higher incremental costs are associated with low numbers of total discharges. However, section 1886(d)(12)(D) of the Act, provides that for discharges occurring in FYs 2011 and 2012, the Secretary shall determine the applicable percentage increase using a continuous, linear sliding scale ranging from an additional 25 percent payment adjustment for hospitals with 200 or fewer Medicare discharges to 0 percent additional payment for hospitals with more than 1,600 Medicare discharges. We propose to apply this payment adjustment based on increments of 100 discharges (beginning with 200 or fewer discharges), with the applicable percentage increase decreasing linearly in equal amounts by 1.6667 percent for every additional 100 Medicare discharges, with no payment adjustment for hospitals with more than 1,599 Medicare discharges. We have not proposed an adjustment for a hospital with exactly 1,600 discharges since, as specified in statute at section 1886(d)(12)(C)(i) of the Act, as amended, a hospital must have “less” than 1,600 discharges in order to qualify as a low volume hospital. The proposed payment adjustment would be as determined below:

Medicare discharge rangePayment adjustment(percent add-on)
1-200 25.0000
201-300 23.3333
301-400 21.6667
401-500 20.0000
501-600 18.3333
601-700 16.6667
701-800 15.0000
801-900 13.3333
901-1000 11.6667
1001-1100 10.0000
1101-1200 8.3333
1201-1300 6.6667
1301-1400 5.0000
1401-1500 3.3333
1501-1599 1.6667
1600 or more 0.0000

While we are proposing to revise the qualifying criteria and the payment adjustment for low-volume hospitals for FYs 2011 and 2012, consistent with the amendments made by the Affordable Care Act, we note that we are not proposing to modify the process for requesting and obtaining the low-volume hospital payment adjustment. In order to qualify, a hospital must provide to its FI or MAC sufficient evidence to document that it meets the number of Medicare discharges and distance requirements. The FI or MAC will determine, based on the most recent data available, if the hospital qualifies as a low-volume hospital, so that the hospital will know in advance whether or not it will receive a payment adjustment and, if so, the add-on percentage. The FI or MAC and CMS may review available data, in addition to the data the hospital submits with its request for low-volume status, in order to determine whether or not the hospital meets the qualifying criteria.

We also note that as compared to the existing methodology for determining the payment adjustment for low-volume hospitals, no hospital would receive a lower payment adjustment under our proposed methodology for FYs 2011 and 2012. Although the statute specifies that, for years other than FYs 2011 and 2012, a hospital is a low-volume hospital if it has less than 800 discharges, currently only hospitals with fewer than 200 discharges receive a payment adjustment, an additional 25 percent, because the statute requires that the adjustment be empirically based to provide relief to low-volume hospitals where there is empirical evidence that higher incremental costs are associated with low numbers of total discharges. Consistent with section 1886(d)(12)(D) of the Act, for FYs 2011 and 2012, we will continue to pay hospitals with fewer than 200 discharges a payment adjustment amount equal to an additional 25 percent.

We are proposing to revise our regulations at 42 CFR 412.101 to reflect our proposal outlined above.

Currently, 42 CFR 412.101(a)(3) states that “The fiscal intermediary makes the determination of the discharge count for purposes of determining a hospital's qualification for the adjustment based on the hospital's most recent submitted cost report.” This may mistakenly be interpreted to mean that once a hospital qualifies as a low-volume hospital, no further qualification is needed. We, therefore, are proposing to clarify that a hospital must continue to qualify as a low-volume hospital in order to receive the payment adjustment in that year; that is, it is not based on a one-time qualification.

D. Medicare-Dependent, Small Rural Hospitals (MDHs) (§ 412.108)

1. Background

Medicare-dependent, small rural hospitals (MDHs) are eligible for the higher of the Federal rate for their inpatient hospital services or a blended rate based in part on the Federal rate and in part on the MDH's hospital-specific rate. Section 1886(d)(5)(G)(iv) of the Act defines an MDH as a hospital that is located in a rural area, has not more than 100 beds, is not an SCH, and has a high percentage of Medicare discharges (that is, not less than 60 percent of its inpatient days or discharges either in its 1987 cost reporting year or in two of its most recent three settled Medicare cost reporting years). The regulations that set forth the criteria that a hospital must meet to be classified as an MDH are at 42 CFR 412.108.

Although MDHs are paid under an adjusted payment methodology, they are still IPPS hospitals paid under section 1886(d) of the Act. Like all IPPS hospitals paid under section 1886(d) of the Act, MDHs are paid for their discharges based on the DRG weightscalculated under section 1886(d)(4) of the Act.

Through and including FY 2006, under section 1886(d)(5)(G) of the Act, MDHs are paid based on the Federal rate or, if higher, the Federal rate plus 50 percent of the amount by which the Federal rate is exceeded by the updated hospital-specific rate based on the hospital's FY 1982 or FY 1987 costs per discharge, whichever of these hospital-specific rates is higher. Section 5003(b) of Public Law 109-171 (DRA 2005) amended section 1886(d)(5)(G) of the Act to provide that, for discharges occurring on or after October 1, 2006, MDHs are paid based on the Federal rate or, if higher, the Federal rate plus 75 percent of the amount by which the Federal rate is exceeded by the updated hospital-specific rate based on the hospital's FY 1982, FY 1987, or FY 2002 costs per discharge, whichever of these hospital-specific rates is highest.

For each cost reporting period, the fiscal intermediary or MAC determines which of the payment options will yield the highest aggregate payment. Interim payments are automatically made at the highest rate using the best data available at the time the fiscal intermediary or MAC makes the determination. However, it may not be possible for the fiscal intermediary or MAC to determine in advance precisely which of the rates will yield the highest aggregate payment by year's end. In many instances, it is not possible to forecast the outlier payments, the amount of the DSH adjustment or the IME adjustment, all of which are applicable only to payments based on the Federal rate and not to payments based on the hospital-specific rate. The fiscal intermediary or MAC makes a final adjustment at the settlement of the cost report after it determines precisely which of the payment rates would yield the highest aggregate payment to the hospital.

If a hospital disagrees with the fiscal intermediary's or the MAC's determination regarding the final amount of program payment to which it is entitled, it has the right to appeal the determination in accordance with the procedures set forth in 42 CFR Part 405, Subpart R, which govern provider payment determinations and appeals.

2. Extension of the MDH Program

Section 3124 of Public Law 111-148 extends the MDH program, from the end of FY 2011 (that is, for discharges before October 1, 2011) to the end of FY 2012 (that is, for discharges before October 1, 2012). Under prior law, as specified in section 5003(a) of Public Law 109-171 (DRA of 2005), the MDH program was to be in effect through the end of FY 2011 only. Section 3124 (a) of Public Law 111-148 amends sections 1886(d)(5)(G)(i) and (ii)(II) of the Act to extend the MDH program and payment methodology from the end of FY 2011 to the end of FY 2012, by “striking “October 1, 2011” and inserting “October 1, 2012”.” Section 3125(b) of Public Law 111-148 also makes conforming amendments to sections 1886(b)(3)(D)(i) and (iv) of the Act. Section 3124(b)(2) of Public Law 111-148 also amends section 13501(e)(2) of OBRA 1993 (42 U.S.C. 1395ww note) to extend the provision permitting hospitals to decline reclassification as an MDH through FY 2012.

E. Additional Payments for Qualifying Hospitals With Lowest Per Capita Medicare Spending

1. Background

Section 1109 of Public Law 111-152, provides for additional payments for FY 2011 and 2012 for “qualifying hospitals.” Section 1109(d) defines a “qualifying hospital” as a “subsection (d) hospital * * * that is located in a county that ranks, based upon its ranking in age, sex and race adjusted spending for benefits under parts A and B * * * per enrollee within the lowest quartile of such counties in the United States.” Therefore, a “qualifying hospital” is one that meets the following conditions: (1) A “subsection (d) hospital” as defined in section 1886(d)(1)(B) of the Act; and (2) located in a county that ranks within the lowest quartile of counties based upon its spending for benefits under Medicare Part A and Part B per enrollee adjusted for age, sex, and race. Section 1109(b) of Public Law 111-152 makes available $400 million to qualifying hospitals for FY 2011 and FY 2012. Section 1109(c) of Public Law 111-152 requires the $400 million to be divided among each qualifying hospital in proportion to the ratio of the individual qualifying hospital's FY 2009 IPPS operating hospital payments to the sum of total FY 2009 IPPS operating hospital payments made to all qualifying hospitals.

2. Eligible Counties

Section 1109 of Public Law 111-152 provides $400 million for FYs 2011 and 2012 for supplemental payments to qualifying hospitals located in counties that rank within the lowest quartile of counties in the United States for spending for benefits under Medicare Part A and Part B. The provision requires that the Medicare Part A and Part B county-level spending per enrollee to be adjusted by age, sex and race. We are proposing our methodology for determining the bottom quartile of counties with the lowest Medicare Part A and Part B spending adjusted by age, sex, and race and invite public comment on the methodology we propose to use to adjust for age, sex, and race described below. We further propose that we will determine this bottom quartile of counties one time in the FY 2011 IPPS/RY 2011 LTCH PPS final rule for the purpose of disbursing the $400 million as required by section 1109 of Public Law 111-152.

We developed an adjustment model by age, sex, and race, as required under the provision. We then applied this adjustment to the county Medicare Part A and Part B spending data to account for the demographics of the Medicare beneficiaries in those counties. After those adjustments are applied, we determined the Medicare Part A and Part B spending by county per enrollee. Our proposed methodology to determine the Medicare Part A and Part B spending per enrollee by county adjusted for age, sex, and race is similar to how we calculate risk adjustment models for Medicare Advantage (MA) ratesetting. Risk adjustment for MA ratesetting is discussed in the annual announcement of calendar year MA capitation rates and MA and Part D payment policies. For more information on the methodology for risk adjustment used for MA ratesetting, we refer readers to the CMS Web site where we announce MA rates through our 45-day notice (http://www.cms.gov/MedicareAdvtgSpecRateStats/Downloads/Announcement2010.pdf).

a. Development of Risk Adjustment Model

As required by section 1109(d) of Public Law 111-152, we are proposing a risk adjustment model that accounts for differentials in Medicare spending by age, sex, and race. Consistent with how we develop our risk adjustment models for MA ratesetting as described above, we developed a prospective risk adjustment model using 2006 data for beneficiary characteristics and 2007 data for Part A and Part B spending. However, unlike the risk adjustment mode used for MA which includes diseases and demographic factors, the only independent variables or prospective factors in the model for payments under section 1109 of Public Law 111-152 are age, sex and race, as required by the provision. The dependent variable was annualized Medicare Part A and B spending at the beneficiary level for 2007 as it is the most recent and complete data available. The categorization of age, sex, and race variables are described below.

The age, sex, race (ASR) model(s) was estimated using the Five Percent Standard Analytic Denominator file, a standard 5-percent sample from the 2007 Denominator file which is also used to estimate CMS risk adjustment models for payment to MA organizations. We chose to use Five Percent Standard Analytic Denominator file from 2007 in order to optimize the amount of time after the timely claim submission deadlines and the latest available data; in other words because it is most complete data currently available. This file has the demographic and enrollment characteristics of all Medicare beneficiaries. The Denominator File is an abbreviated file of the Enrollment Data Base (EDB). The Denominator File contains data on all Medicare beneficiaries enrolled and/or entitled to be enrolled in Medicare in a given year while the EDB is the source of enrollment and entitlement information for all people who are or were ever entitled to Medicare. The model was estimated using all beneficiaries residing in the community and long-term institutions. The sample had 1,603,998 beneficiaries.

The Denominator File contains a sex variable where the beneficiaries can identify themselves as male or female. The file also contains an age variable which is defined as the beneficiary's age at the end of the prior year. Beneficiaries with an age greater than 98 are coded as age 98. The race demographic variable in the Denominator File is populated by data from the Social Security Administration (SSA). The SSA's data for this race demographic variable are collected on form SS-5. Prior to 1980, the SS-5 form included 3 categories for race: White, Black or Other. Since that time, Form SS-5 instructed a beneficiary to voluntarily select one of the following 5 categories: (1) Asian, Asian-American or Pacific Islander; (2) Hispanic; (3) Black (Not Hispanic); (4) North American Indian or Alaskan Native; and (5) White (Not Hispanic). Form SS-5 is completed when an individual does the following: (1) Applies for a social security number; (2) requests a replacement of the social security card; or (3) requests changes to personal information on their record such as a name change. (Social Security Administration Web site instructions http://ssa.gov/online/ss-5.pdf). Each January, CMS obtains data from SSA to update the EDB for beneficiaries who were added during the previous calendar year as well as all living beneficiaries whose race is identified as “Other” or “Unknown.”

Discussed in the context of the ESRD payment system in the ESRD proposed rule on September 29, 2009 (74 FR 49962), we noted concerns with using the EDB as a data source due to missing data, and that racial and ethnic categories are not well defined. However, we believe that the current EDB, particularly with respect to the more recent and ongoing updates we perform, remains a useful source of race and ethnicity data on 46 million Medicare beneficiaries. Additionally, because this is our only currently available data source on the racial and ethnic demographics of Medicare beneficiaries, we propose to use the EDB as our data source for beneficiary race so that we can fulfill the requirements of section 1109(d) of Public Law 111-152 to adjust county Medicare Part A and Part B spending by race.

We used the MedPAR claims file as the source to determine Medicare inpatient spending. We used the National Claims History File to determine spending on DMEPOS and supplies. The other spending under Medicare Part A and Part B was determined using the Standard Analytic File. The Standard Analytic File and MedPAR claims file are subsets of the National Claims History File. These data files are also used in the MA ratesetting process and are our data source for Medicare spending stored at the beneficiary level.

In order to determine annual spending (the dependent variable in the risk adjustment model), we annualized the Medicare Part A and Part B spending for beneficiaries with less than a full year of eligibility, and these amounts were weighted in the analysis by the fraction of the year they were in the data.

We used a linear regression model to determine the demographic adjustments. This is consistent with how we model our risk adjustment for the MA rates. The linear regression used 24 age-sex regression categories, 12 age categories each for males and females. The age categories are as follows; 0-34, 35-44, 45-49, 50-54, 55-59, 60-64, 65-69, 70-74, 75-79, 80-84, 85-89, and 90+. The age-sex coefficients displayed in the table below reflect the difference in Medicare Part A and Part B spending per enrollee in those age-sex categories relative to national average Part A and Part B spending based on our linear regression model.

In addition, we used the same linear regression model to determine how to adjust Medicare Part A and Part B spending for race. In addition to the age-sex regression categories described above, we included variables to adjust for race. We considered two methods to adjust for race in county spending because of the way that the SS-5 form collects race information, which is then reported in the same format in the EDB. As discussed earlier, the EDB currently categorizes race by the following five categories, as reported by the Medicare beneficiary: (1) Asian, Asian-American or Pacific Islander; (2) Hispanic; (3) Black (Not Hispanic); (4) North American Indian or Alaskan Native; and (5) White (Not Hispanic). One method categorized race by White, Black, Hispanic, and Other (WBHO). The “Other” category includes Asian/Pacific Islander, American Indian/Alaska Native, and all others. The second method categorized race by White, Black, and Other (WBO), where beneficiaries who identified themselves as Hispanic were categorized as Other. The race/ethnicity categories are mutually exclusive; if a beneficiary identified themselves as Hispanic he or she was not further classified as another category, such as White or Black. In our regression modeling we used the largest group, White, as the reference group; the coefficients on the difference in spending by race, displayed in the table below, are additive to the reference group. In other words, the coefficients for each race category represent the difference in predicted Medicare Part A and Part B spending relative to our reference group. Where the coefficients are positive, this implies that the predicted spending for that category is higher than that of the reference group. Conversely, where the coefficients are negative, this implies that the predicted spending for that category is lower than that of the reference group.

Below are two tables representing the coefficients used to adjust Medicare Part A and Part B spending by county. The first table shows the coefficients for each age and sex category. The second table shows the coefficients for race. These national coefficients are applied to each counties' relative demographic for age, sex and race, so that each county has a risk score by age, sex and race.

SexAge categories (in years)
0-3435-4445-5455-5960-6465-6970-7475-7980-8485-8990-94Greater than 95
Female 0.67896 0.80089 0.96917 1.09810 1.18855 0.67358 0.83818 1.01599 1.189727 1.364575 1.475495 1.366515
Male 0.52664 0.70067 0.82262 0.93750 1.03792 0.71932 0.90896 1.11809 1.32812 1.50008 1.68184 1.77046
RaceCoefficient
White Baseline.
Black 0.17667.
Hispanic 0.229.
Other −0.110.

We are proposing to adjust for race using the WBHO method where we separately account for cost differences associated with Hispanic beneficiaries. The Office of Management and Budget (OMB) has promulgated standards for the classification of Federal data on race and ethnicity. Under OMB's classification standards, the category of Hispanic is treated as an ethnic category as opposed to a race category. The current OMB Standards of 1997 require collection of specific demographic data using a total of five race categories, plus other (62 FR 58782 through 58790). The five race categories are—(1) American Indian or Alaska Native; (2) Asian; (3) Black or African American; (4) Native Hawaiian or Other Pacific Islander; and (5) White. In addition, OMB specified two separate ethnic categories—Hispanic or Latino, and not Hispanic or Latino. However, as explained above, Hispanic or Latino ethnicity is treated as a race category by EDB, and beneficiaries can self-identify as Hispanic among mutually exclusive racial categories. Despite the inconsistency in reporting by the OMB and the EDB, we propose to treat the category of Hispanic as a separate category for purposes of the race adjustment required by section 1109 of Public Law 111-152. We found that the coefficient for the Hispanic category is statistically significant, suggesting that Medicare Part A and Part B spending associated with this category of beneficiaries is different from the spending for our reference group and that it should be a separate coefficient to adjust county spending. In addition, the EDB treats Hispanic as a separate racial classification, consistent with our WBHO method, therefore; we believe that our proposal appropriately interprets the required race adjustment. Therefore, we propose to adjust for race using the WBHO method.

For purposes of this supplemental proposed rule, we also adjusted county spending using the WBO methodology to compare the two approaches. We found minimal difference in the county rankings under the two methodologies. We found that some counties would qualify as an eligible county only under the WBO methodology, and others would no longer qualify as an eligible county using this alternative. The decision to use the WBHO methodology affects whether 9 subsection (d) hospitals, located in 5 counties, would be eligible to receive a payment under section 1109. In Table 3, we publish the differences in counties, eligible hospitals, and payments by State under the two methodologies. This is the first time we have developed an adjustment for Medicare spending based on race, and we welcome public comment on our proposal to use the WBHO methodology to adjust for race as required by section 1109 of Public Law 111-152. We also welcome public comment on the WBO methodology to adjust for race though we note that we are not proposing this methodology at this time.

b. Calculation of County Level Part A and Part B Spending

In order to rank counties by Medicare Part A and B spending, we first calculated Medicare Part A and Part B county level spending for each county in the 50 States and the District of Columbia using a similar methodology used to establish county level FFS rates for MA payments. Using a 5 year average of each county's actual spending (from 2002 to 2006), CMS's Office of the Actuary calculated an average geographic adjuster (AGA), which reflects the county's expenditure relative to the national expenditure. We believe a 5-year average is appropriate, as it accounts for fluctuations in year-to-year expenditures, which could distort the counties' historic level of spending and is consistent with how MA rates are calculated. The AGA was then applied to the 2009 United States Per Capita Cost estimate (USPCC), which is the national average cost per Medicare beneficiary, to determine 2009 Medicare Part A and Part B spending for each county. We welcome public comment on this methodology to calculate county-level Part A and Part B spending.

3. Application of the Age/Sex/Race Adjustment to Part A and Part B County Spending

To estimate the county level risk scores for 2009, beneficiary enrollment information was first extracted from the EDB. We chose to calculate Medicare Part A and Part B county spending for 2009 to be consistent with how we are required to determine qualifying hospitals' payment amounts, under section 1109(c) of Public Law 111-152. That is, section 1109(c) of Public Law 111-152 requires that qualifying hospitals located in the bottom quartile of counties with the lowest Medicare Part and Part B spending per enrollee will receive a portion of the allotted $400 million based on their FY 2009 operating payments. Therefore, we propose to calculate Medicare Part A and Part B County spending for 2009 as well. We only include beneficiaries enrolled in Medicare Part A and/or Part B, consistent with the language of section 1109(d) of Public Law 111-152, which refers to spending under Part A and B. Based on these criteria, there were 30,666,295 beneficiaries included in the adjustment process. To determine the age, sex and race make-up of the Part A and/or Part B beneficiaries for each county, we used the EDB to identify date of birth, sex, race, and State/county of residence to create a person level file with the data needed to run the ASR model.

A county level average risk score was developed for each county in the United States by applying the ASR model to each individual in the county enrolled in Medicare Part A and/or Part B, summing the resulting risk scores and dividing by the number of beneficiaries by county enrolled in Medicare Part A and/or Part B. The county level Medicare Part A and or Part B spending was adjusted by dividing the county level Medicare Part A and/or Part B spending by the county level average risk score. The resulting spending distribution was then sorted lowest to highest dollars the 786 counties in the lowest quartile of spending (that is, lowest adjusted spending per enrollee) were determined to be eligible counties under section 1109 of Public Law 111-152.

We invite comment on our methodology for determining the age, sex, race adjustments for determining adjusted Medicare Part A and B spending by county for the purpose of determining eligible counties under section 1109 of Public Law 111-152.

3. Qualifying Hospitals and Annual Payment Amounts

We have developed a methodology to identify the qualifying hospitals located in our list of eligible counties. Consistent with section 1109(d) of Public Law 111-152, a qualifying hospital is a “subsection (d) hospital” (as defined for purposes of section 1886(d) of the Act) that is “located in” an eligible county (as identified using the methodology proposed in section B). A subsection (d) hospital is defined in section 1886(d)(1)(B) of the Act in part as a “hospital located in one of the fifty States or the District of Columbia”. The term “subsection (d) hospital” does not include hospitals located in the territories or hospitals located in Puerto Rico. Section 1886(d)(9)(A) of the Act separately defines a “subsection (d) Puerto Rico hospital” as a hospital that is located in Puerto Rico and that “would be a subsection (d) hospital * * * if it were located in one of the 50 States.” Therefore, Puerto Rico hospitals are not eligible for these additional payments. Indian Health Services hospitals enrolled as a Medicare provider meet the definition of a subsection(d) hospital and can qualify to receive this payment if they are located in an eligible county. In addition, hospitals that are MDHs and sole community hospitals (SCHs), though they can be paid under a hospital-specific rate instead of under the Federal standardized amount under the IPPS, are “subsection (d)” hospitals. The statutory definition of a “subsection (d)” hospital in section 1886(d)(1)(B) of the Act specifically excludes hospitals and hospital units excluded from the IPPS, such as psychiatric, rehabilitation, long term care, children's, and cancer hospitals. In addition, critical access hospitals (CAHs) are not considered qualifying hospitals because they do not meet the definition of a “subsection (d) hospital” as they are paid under section 1814(l) of the Act. CAHs are not paid under the IPPS; rather they are paid under a reasonable cost methodology, so they do not meet the definition of “qualifying hospital” under section 1109(d) of Public Law 111-152.

For the purposes of section 1109 of Public Law 111-152, we are proposing to identify “qualifying hospitals” based on their Medicare Provider number or Centers for Medicare and Medicaid Services Certification Number (CCN), because this is also how hospitals identify themselves when they file their Medicare cost reports. We also propose that in order to meet the definition of a “qualifying hospital”, the facility, as identified by the Medicare Provider Number or CCN, must: (1) Have existed as a subsection (d) hospital as of April 1, 2010; (2) be geographically located in an eligible county; and (3) have received IPPS operating payments (in accordance with section 1886(d)) of the Act under their Medicare provider number in FY 2009. We used the Online Survey, Certification and Reporting (OSCAR) database to determine a hospital's county location associated with that CCN provider number. County data in OSCAR is supplied by the U.S Postal Service and is cross walked to the address reported by the provider. Under this proposal, the address listed for a hospital's Medicare provider number must be currently located in a qualifying county in order for a hospital to meet the definition of “qualifying hospital.”

We have published a list of the qualifying IPPS hospitals that we have identified based on the factors described above in Table 3. We invite comment on our methodology for identifying qualifying hospitals. We also invite comment on whether our list is accurate and whether any providers are missing from this list using the methodology described above.

4. Payment Determination and Distribution

As mentioned above, under section 1109(b), the total pool of payments available to qualifying hospitals for FY 2011 and FY 2012 is $400 million. The statute is not specific as to the timing of these payments. Since Congress has allocated a set amount—$400 million—for hospitals for FYs 2011 and 2012 under this provision, we believe it is consistent with the statute to spread these payments over the 2-year period. We are proposing to distribute $150 million for FY 2011 and $250 million for FY 2012. Because this is a new policy, we are proposing to distribute a smaller amount of money for the first year ($150 million for FY 2011 and $250 million for FY 2012) so that the public will have an opportunity to review our proposal and finalized policy in the FY 2011 IPPS/LTCH PPS final rule, and notify us of any possible revisions to the list of qualifying hospitals, so that we can adjust payments for FY 2012. This will ensure that we correctly identify qualifying hospitals and their proper payment amounts without exceeding the program's funding. We invite public comment to give hospitals the opportunity to request that we make changes to the qualifying hospital list in order to ensure the accuracy of the qualifying hospital list based on the methodology set forth in the final rule. However, we are proposing to identify eligible counties, qualifying hospitals and their payment amounts under section 1109 of Public Law 111-152 only once. Because Congress has allocated a specific amount of money, we are proposing to identify eligible counties, qualifying hospitals and their payment amounts once in order to ensure we do not exceed the fixed amount of money and to ensure predictability of payments.

We propose to distribute payments through the individual hospital's Medicare contractor through an annual one-time payment during each of FY 2011 and FY 2012. We believe that annual payments made by the FI or A/B MACs would be an expeditious way to give the qualifying hospitals the money allotted under section 1109 of Public Law 111-152. Alternatively, these payments could be distributed to qualifying hospitals at the time of cost report settlement for the qualifying providers' fiscal year end FY 2011 and FY 2012 cost reports. However, cost report settlement typically takes several years beyond a hospital's fiscal year end. If we distributed these additional payments at the time of cost report settlement, it may take several years until hospitals receive these additional payments. Therefore, we believe our proposal to give hospitals their section 1109 payments as annual payments during FY 2011 and FY 2012 presents the most expedient method to distribute these payments to hospitals, and is in the spirit of the intent of Congress. We welcome public comment on our proposal to distribute $150 million in FY 2011 and $250 million in FY 2012 through an annual payment in each of those years made to the qualifying providers through their FI or A/B MAC.

We propose that qualifying hospitals report these additional payments on their Medicare hospital cost report corresponding to the appropriate cost reporting period that the hospitals have received the payments. On the Medicare Hospital Cost report, Form 2552 has an “other adjustment” line on Worksheet E, Part A that can used by hospitals to report the payments received under section 1109 of Public Law 111-152. We plan to issue additional cost reporting instructions for qualifying hospitals to report these additional payments on a subscripted line of the “other adjustment” line to identify this payment. We note that we are requiring these payments be reported on the cost report for tracking purposes only; these additional payments will not be adjusted or settled by the FI or A/B MAC on the cost report.

5. Hospital Weighting Factors

Section 1109(c) of Public Law 111-152 requires that the payment amount for a qualifying hospital shall be determined “in proportion to the portion of the amount of the aggregate payments under section 1886(d) of the Social Security Act to the hospital for fiscal year 2009 bears to the sum of all such payments to all qualifying hospitals for such fiscal year.” We are proposing that the portion of a hospital's payment under section 1109 is based on the proportion of their IPPS operating payments made in FY 2009 relative to the total IPPS operating payments made to all qualifying hospitals in FY 2009. These FY 2009 IPPS operating payments made under section 1886(d) include DRG and wage adjusted payments made under the IPPS standardized amount with add-on payments for operating DSH, operating IME, operating outliers and new technology (collectively referred to in this proposed rule as the IPPS operating payment amount). We are proposing to include IME MA payments made to IPPS hospitals because these payments are made under section 1886(d) of the Act. Under 42 CFR 412.105(g) of the regulations and as implemented in Transmittal A-98-21 (Change Request 332), hospitals that are paid under the IPPS and train residents in approved GME programs may submit claims associated with MA enrollees to the FI/MAC for the purpose of receiving an IME payment. No IPPS operating payment or other add-on payment is made for these MA enrollees. This is consistent with how the IPPS includes these IME MA payments when adjusting for budget neutrality of the IPPS standardized amounts.

In addition, we are including in the FY 2009 IPPS operating payment amount beneficiary liabilities (coinsurance, copayments, and deductibles) because the payments made under section 1886(d) of the Act “are subject to the provisions of section 1813.” That is, the payment received by the hospital includes the amount paid by Medicare, as well as the amount for which the beneficiary is responsible, as set forth in section 1813 of the Act. We propose to exclude IPPS capital payments because they are payments made under section 1886(g) of the Act. We also propose to exclude payments for organ acquisition costs because it is a payment made under section 1881(d) of the Act and we propose to exclude payments for blood clotting factor because they are payments made under section 1886(a)(4) of the Act.

Consistent with our IPPS ratesetting process, we are proposing to use the FY 2009 MedPAR inpatient claims data to determine the FY 2009 IPPS operating payments amount made to qualifying hospitals in order to set the ratio for determining a qualifying hospital's share of the $400 million payment under section 1109 of Public Law 111-152. Though these claim payments may be later changed and adjusted at cost report settlement, this settlement generally occurs after FY 2011 and FY 2012. Furthermore, we believe that use of the FY 2009 MedPAR inpatient claims data is consistent with our proposal to make the payments under section 1109 of Public Law 111-152 in two annual payments in FY 2011 and 2012 instead of waiting for cost report settlement. Furthermore, we use MedPAR data in other areas of the IPPS, including calculating IPPS relative weights, budget neutrality factors, outlier thresholds and the standardized amount. The FY 2009 MedPAR data can be ordered to allow the public to verify qualifying hospitals' FY 2009 IPPS operating payments. Interested individuals may order these files through the Web site at:http://www.cms.hhs.gov/LimitedDataSets/ by clicking on MedPAR Limited Data Set (LDS)-Hospital (National). This Web page describes the file and provides directions and further detailed instructions for how to order.

Persons placing an order must send the following: a Letter of Request, the LDS Data Use Agreement and Research Protocol (refer to the Web site for further instructions), the LDS Form, and a check for $3,655 to:

Mailing address if using the U.S. Postal Service:Centers for Medicare Medicaid Services,RDDC Account,Accounting Division,P.O. Box 7520,Baltimore, MD 21207-0520.

Mailing address if using express mail:Centers for Medicare Medicaid Services,OFM/Division of Accounting—RDDC,Mailstop C3-07-11,7500 Security Boulevard,Baltimore, MD 21244-1850.

For this proposed rule, we used the December 2009 update to the FY 2009 MedPAR data (which is the latest available update to the file) to determine the proposed qualifying hospitals' IPPS operating payment amounts. For the FY 2011 IPPS/LTCH PPS final rule, we plan on using the March 2010 update to the FY 2009 MedPAR data to determine qualifying hospitals' IPPS operating payment amounts which will then be used to set the hospital weighting factors for FYs 2011 and 2012

As discussed earlier in section II.E.3. of the preamble to this supplemental proposed rule, qualifying hospitals can include SCHs and MDHs as they meet the definition of subsection (d) hospitals. SCHs are paid in the interim (prior to cost report settlement) on a claim by claim basis at the amount that is the higher of the payment based on the hospital-specific rate or the IPPS Federal rate based on the standardized amount. At cost report settlement, the FI orA/B MAC determines if the hospital would receive higher IPPS payments in the aggregate using the hospitals specific rate (on all claims) or the Federal rate (on all claims). The FI or A/B MAC then assigns the hospital the higher payment amount (either the hospital specific rate for all claims or the Federal rate amount for all claims) for the cost reporting period. To determine the FY 2009 operating payment amount for SCHs that meet the definition of a qualifying hospital, we propose to use the IPPS operating payment made on the Medicare IPPS claim in the FY 2009 MedPAR rather than the SCH's final payment rate that is determined at cost report settlement. We believe this approach is consistent with the treatment of other qualifying hospitals under our proposal, and again allows for the timely distribution of funds in two annual payments, as discussed above. MDHs are paid the sum of the Federal payment amount plus 75 percent of the amount by which the hospital specific rate exceeds the Federal payment amount. This amount is considered their IPPS operating payment reported on their Medicare IPPS claim.

In order to calculate payment amounts consistent with section 1109(c) of Public Law 111-152, we propose to use a weighting factor for each qualifying hospital that is equal to the qualifying hospital's FY 2009 IPPS operating payment amount (as described above) divided by the sum of FY 2009 IPPS operating payment amounts for all qualifying hospitals. We believe this methodology is consistent with the requirement of section 1109(c) of Public Law 111-152, because qualifying hospitals with a larger proportion of operating payments would have a proportionately higher weighting factor and would receive the proportionately larger share of the $400 million, while hospitals with a smaller proportion of operating payments would have proportionately smaller weighting factor and would receive proportionately smaller shares of the $400 million. We welcome public comment on our methodology to determine the amount of money distributed to qualifying hospitals consistent with the languagein section 1109(c) of Public Law 111-152.

6. Results

In calculating county-level Medicare Part A and B spending, we have found that there are 3,144 counties in the United States. Therefore, there are 786 counties that rank in the lowest quartile of counties with regards to adjusted Medicare Part A and Part B spending per beneficiary. We have listed the 786 eligible counties in Table 2. Of those 786 eligible counties, there are only 276 counties in which qualifying hospitals are located, using the methodology we proposed in section II.E.3. of the preamble to this supplemental proposed rule. Using Medicare provider numbers, as proposed above in section II.E.3. of the preamble to this supplemental proposed rule, we have identified 415 IPPS hospitals that are currently located in those eligible counties and received IPPS operating payments in FY 2009. We have listed the qualifying IPPS provider numbers, their counties and their weighting factors in Table 2. We invite public comment on our proposed methodology for adjusting spending for age, sex, and race as well as the alternative methodology discussed in section II.E.2.a. of the preamble to this supplemental proposed rule. For these two methodologies (WBHO and WBO), we list the number of eligible counties, the number of eligible counties in which a qualifying hospital is located, the payment amount, and the percentage of the total payment under section 1109 of Public Law 111-152 by State in Table 3.

We invite public comment on the accuracy of the lists of eligible counties, qualifying hospitals and qualifying hospitals' payment weighting factors (based on the proposed methodologies described above).

7. Finalization of Eligible Counties, Qualifying Hospitals and Qualifying Hospitals' Weighting Factors

Based on public comments, it is possible that we will finalize a methodology to determine the list of eligible counties and hospitals that differs from our current proposal. A change in our methodology could, in turn, result in changes to the list of eligible counties or qualifying hospitals. We note again that we are proposing to identify eligible counties, qualifying providers and their payments under section 1109 of Public Law 111-152 only once in the FY 2011 IPPS/LTCH PPS final rule. Based on this proposal, the methodology for determining a final list of eligible counties would produce the actual list of eligible counties that would be finalized in the FY 2011 IPPS final rule and would not be updated in a future fiscal year based on updated data.

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F. Rural Community Hospital Demonstration Program

1. Background

Section 410A(a) of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), Public Law 108-173, required the Secretary to establish a demonstration program to test the feasibility and advisability of establishing “rural community hospitals” to furnish covered inpatient hospital services to Medicare beneficiaries. The demonstration pays rural community hospitals for such services under cost based methodology for Medicare payment purposes for covered inpatient hospital services furnished to Medicare beneficiaries. A rural community hospital, as defined in section 410A(f)(1) of MMA, is a hospital that—

• Is located in a rural area (as defined in section 1886(d)(2)(D) of the Act) or is treated as being located in a rural area under section 1886(d)(8)(E) of the Act;

• Has fewer than 51 beds (excluding beds in a distinct part psychiatric or rehabilitation unit) as reported in its most recent cost report;

• Provides 24-hour emergency care services; and

• Is not designated or eligible for designation as a CAH under section 1820 of the Act.

Subsection 410A(a)(4) of the MMA, in conjunction with paragraphs (2) and (3) of subsection 410A(a), provided that the Secretary was to select for participation no more than 15 rural community hospitals in rural areas of States that the Secretary identified as having low population densities. Using 2002 data from the U.S Census Bureau, we identified the 10 States with the lowest population density in which rural community hospitals were to be located in order to participate in the demonstration: Alaska, Idaho, Montana, Nebraska, Nevada, New Mexico, North Dakota, South Dakota, Utah, and Wyoming. (Source: U.S. Census Bureau, Statistical Abstract of the United States: 2003).

We originally solicited applicants for the demonstration in May 2004; 13 hospitals began participation with cost report years beginning on or after October 1, 2004. (Four of these 13 hospitals withdrew from the program and became CAHs). In a notice published in the Federal Register on February 6, 2008 (73 FR 6971), we announced a solicitation for up to 6 additional hospitals to participate in the demonstration program. Four additional hospitals were selected to participate under this solicitation. These four additional hospitals began under the demonstration payment methodology with the hospital's first cost reporting period starting on or after July 1, 2008. Three hospitals (two of the hospitals were among the thirteen hospitals that were original participants in the demonstration and one of the hospitals was among the four hospitals that began the demonstration in 2008) withdrew from the demonstration during CY 2009. (Two of these hospitals indicated that they will be paid more for Medicare inpatient services under the rebasing allowed under the SCH methodology allowed by the Medicare Improvement for Patients and Providers Act of 2008 (Pub. L. 110-275). The other hospital restructured to become a CAH.) For purposes of the analyses that follow in section II.F.3 of the preamble, we make the assumption that there are 10 currently participating hospitals (8 hospitals that are actively participating since the initial demonstration period had not yet concluded for them at the time of the passage of Public Law 111-148 and 2 hospitals that concluded the demonstration in December 2009 upon the conclusion of their initial demonstration period). For the 2 hospitals that concluded the demonstration in December 2009, we assume that they will continue the demonstration under the 5-year extension provided by Affordable Care Act since they participated in their entire initial 5-year demonstration period, which we believe indicates that those hospitals favored the payment rate provided in the demonstration and will continue to avail themselves of such reimbursement.

Section 410A(a)(5) of Public Law 108-173 required a 5-year demonstration period of participation. Prior to the enactment of Public Law 111-148, for the seven currently participating hospitals that began the demonstration during FY 2005 (“originally participating hospitals”), the demonstration was scheduled to end for each of these hospitals on the last day of its cost reporting period that ends in FY 2010. The end of the participation for the three participating hospitals that began the demonstration in CY 2008 was scheduled to be September 30, 2010.

In addition, section 410A(c)(2) of Public Law 108-173 requires that, “[i]n conducting the demonstration program under this section, the Secretary shall ensure that the aggregate payments made by the Secretary do not exceed the amount which the Secretary would have paid if the demonstration program under this section was not implemented.” This requirement is commonly referred to as “budget neutrality”.

Generally, when we implement a demonstration program on a budget neutral basis, the demonstration program is budget neutral in its own terms; in other words, the aggregate payments to the participating hospitals do not exceed the amount that would be paid to those same hospitals in the absence of the demonstration program. Typically, this form of budget neutrality is viable when, by changing payments or aligning incentives to improve overall efficiency, or both, a demonstration program may reduce the use of some services or eliminate the need for others, resulting in reduced expenditures for the demonstration program's participants. These reduced expenditures offset increased payments elsewhere under the demonstration program, thus ensuring that the demonstration program as a whole is budget neutral or yields savings. However, the small scale of this demonstration program, in conjunction with the payment methodology, makes it extremely unlikely that this demonstration program could be viable under the usual form of budget neutrality. Specifically, cost-based payments to participating small rural hospitals are likely to increase Medicare outlays without producing any offsetting reduction in Medicare expenditures elsewhere. Therefore, a rural community hospital's participation in this demonstration program is unlikely to yield benefits to the participant if budget neutrality were to be implemented by reducing other payments for these same hospitals.

In the past six IPPS final regulations, spanning the period for which the demonstration has been implemented, we have adjusted the national inpatient PPS rates by an amount sufficient to account for the added costs of this demonstration program, thus applying budget neutrality across the payment system as a whole rather than merely across the participants in this demonstration program. As we discussed in the FY 2005, FY 2006, FY 2007, FY 2008, FY 2009, and FY 2010 IPPS final rules (69 FR 49183; (70 FR 47462); (71 FR 48100); (72 FR 47392); (73 FR 48670); and (74 FR 43922)), we believe that the language of the statutory budget neutrality requirements permits the agency to implement the budget neutrality provision in this manner.

In light of the statute's budget neutrality requirement, we proposed in the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule (75 FR 24012) a methodology to calculate a budget neutrality adjustment factor to the FY2011 national IPPS rates. In the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule, the only amount that was identified to be offset for the FY 2011 IPPS/LTCH final rule was that by which the costs of the demonstration program, as indicated by settled cost reports beginning in FY 2007 for hospitals participating in the demonstration during FY 2007, exceeded the amount that was identified in the FY IPPS 2007 final rule as the budget neutrality offset for FY 2007. No dollar amount was specified for purpose of this offset, because of a delay in the settlement process of FY 2007 cost reports. Due to the timing of the proposed rule in relation to the passage of Public Law 111-148, we were unable to include in the proposed budget neutrality adjustment factor to the FY 2011 national IPPS rates an offset that would accont for the estimated financial impact that the demonstration would have for certain time frames under the extension required by such Act.

In this supplemental proposed rule, we propose that such an adjustment would incorporate the following 4 components: (1) The estimated costs that would be incurred in FY 2011 for the 10 currently participating hospitals as a result of the demonstration's continuation in FY 2011; (2) the estimated cost incurred in FY 2010 for the 7 “originally participating hospitals” that were not accounted for in the FY 2010 IPPS final rule but that now must be accounted for as a result of the demonstration being continued by the Affordable Care Act's 5-year extension for such hospitals; (3) the estimated FY 2011 demonstration costs associated with the participation of up to 20 new hospitals; and (4) a factor by which the cost of the demonstration program in 2007, as indicated by settled cost reports beginning in FY 2007, exceeded the amount that was identified in the FY IPPS 2007 final rule as the budget neutrality offset for FY 2007.

2. Section 410A of the MMA as Amended by Section 3123 of the Public Law 111-148 and as Further Amended by Section 10313 of Public Law 111-148.

Section 410Aof the MMA as amended by section 3123 of Public Law 111-148, and as further amended by section 10313 of Public Law 111-148, affects this demonstration in several ways. First, the Secretary is required to conduct the demonstration for an additional 5-year period that begins on the date immediately following the last day of the initial 5-year period under section 410A(a)(5) of the MMA as amended. (Section 410A(g)(1) of the MMA as added by section 3123(a) of Public Law 111-148 and as further amended by section 10313 of Public Law 111-148). Further, the Affordable Care Act requires that in the case of a rural community hospital that is participating in the demonstration program as of the last day of the initial 5-year period, the Secretary shall provide for the continued participation of such rural hospital in the demonstration program during the 5-year extension unless the hospital makes an election, in such form and manner as the Secretary may specify, to discontinue such participation. (Section 410A(g)(4)(A) of MMA as added by section 3123(a) of Public Law 111-148 and as amended by section 10313 of Public Law 111-148). In addition, it provides that during the 5-year extension period, the Secretary shall expand the number of States with low population densities determined by the Secretary to 20. (Section 410A(g)(2) of MMA as added by section 3123(a) of Public Law 111-148 and as amended by section 10313 of Public Law 111-148.) Further, the Secretary is required to use the same criteria and data that the Secretary used to determine the States under section 410A(a)(2) of MMA for purposes of the initial 5-year period. It also allows not more than 30 rural community hospitals in such States to participate in the demonstration during the 5-year extension period. (Section 410A(g)(3) of MMA as added by section 3123(a) of Public Law 111-148 and as amended by section 10313 of Public Law 111-148.) Additionally, it provides that the amount of payment under the demonstration program for covered inpatient hospital services furnished in a rural community hospital, other than services furnished in a psychiatric or rehabilitation unit of the hospital which is a distinct part, is the reasonable costs of providing such services for discharges occurring in the first cost reporting period beginning on or after the first day of the 5-year extension period. (Section 410A(g)(4)(b) of MMA as added by section 3123(a) of Public Law 111-148 and as amended by section 10313 of Public Law 111-148.) For discharges occurring in a subsequent cost reporting period paid under the demonstration, the formula in section 410A(b)(1)(B) of MMA as amended would apply. In addition, various other technical and conforming changes were made to section 410A of MMA, as amended by section 3123(a) of Public Law 111-148 and as amended by section 10313 of Public Law 111-148.

3. Proposed FY 2011 Budget Neutrality Adjustment

In order to ensure that the demonstration is budget neutral as is required by the statute, we are proposing to adjust the national IPPS rates in the FY 2011 IPPS final rule to account for any added costs attributable to the demonstration. Specifically, the proposed budget neutrality adjustment would account for: (1) The estimated costs of the demonstration in FY 2011 for the 10 currently participating hospitals; (2) the estimated FY 2010 costs of the demonstration that were not accounted for in the FY 2010 IPPS/RY 2010 LTCH PPS final rule for the seven “originally participating hospitals” because we estimated those hospitals' FY 2010 costs under the assumption that the demonstration would be concluding before the end of FY 2010 for those hospitals; (3) the estimated FY 2011 costs for up to 20 new hospitals selected to participate in the demonstration; and (4) the amount by which the costs of the demonstration program, as indicated by settled cost reports beginning in FY 2007 for hospitals participating in the demonstration during FY 2007, exceeded the amount that was identified in the FY 2007 IPPS final rule as the budget neutrality offset for FY 2007.

a. Component of the Proposed FY 2011 Budget Neutrality Adjustment That Accounts for Estimated FY 2011 Costs of the Demonstration of the Ten Currently Participating Hospitals

The component of the proposed FY 2011 budget neutrality adjustment to the national IPPS rates that accounts for the estimated cost of the demonstration in FY 2011 for the ten currently participating hospitals would be calculated by utilizing separate methodologies for the 7 hospitals that have participated in the demonstration since its inception and that, as explained previously, we consider to be continuing to participate in the demonstration (“originally participating hospitals”), and the 3 hospitals that are currently participating in the demonstration that were among the 4 hospitals that joined the demonstration in 2008. Different methods are used because fiscal intermediaries' most recent final settlements of cost reports are for periods beginning in FY 2006 for the “originally participating hospitals,” whereas we are relying on available submitted documentation for the hospitals that began participation in the demonstration in 2008. Because the hospitals that began the demonstration in 2008 have no settled cost reports forthe demonstration, we are using as submitted cost documents. The budget neutrality analysis is based on the assumption that all 10 of these hospitals will continue the demonstration under the 5-year extension period provided by the Affordable Care Act. We believe that this assumption is warranted since they have participated in the initial 5 year demonstration period so far, which we believe indicates that they will choose to continue to avail themselves of the levels of reimbursement under the demonstration.

The estimate of the portion of the proposed budget neutrality adjustment that accounts for the estimated costs of the demonstration in FY 2011 for the 7 “originally participating hospitals” is based on data from their second year cost reports—that is, cost reporting periods beginning in FY 2006. We propose to use these cost reports because they are the most recent complete cost reports and thus we believe they enable us to estimate FY 2011 costs as accurately as possible. In addition, we estimate the cost of the demonstration in FY 2011 for 2 of the 4 hospitals that joined the demonstration in 2008 based on data from each of their cost reporting periods beginning January 1, 2008. Similarly, we propose to use these cost reports because they are the most recent cost reports and thus we believe they enable us to estimate FY 2011 costs for these 2 hospitals as accurately as possible. Since one of the 4 hospitals that began in 2008 has withdrawn, there is one hospital remaining among those that began in that year. The remaining hospital of the 4 that began in 2008 is an Indian Health Service provider. Historically, the hospital has not filed standard Medicare cost reports. In order to estimate its costs, we are proposing to use an analysis of Medicare inpatient costs and payments submitted by the hospital for the cost reporting period October 1, 2005 through September 30, 2006. We are proposing to use this data because it represents a detailed analysis of the hospital's cost-payment profile, and we expect that such an account will not change appreciably from year to year because it is a relatively small provider serving a limited population. When we add together the estimated costs of the demonstration in FY 2011 for the 7 “originally participating hospitals” that have participated in the demonstration since its inception and the 3 hospitals selected in 2008 that are still participating, the total estimated cost is $20,930,484. This estimated amount reflects the difference between these 10 participating hospitals' estimated costs in FY 2011 under the methodology set forth in Public Law 108-173 as amended by Public Law 111-148 and the estimated amount the hospitals would have been paid under the IPPS in FY 2011. With the exception of the Indian Health Service provider, the estimated costs under the demonstration are derived from data on the hospitals' cost reports. The cost reports state the dollar amount attributable to Medicare inpatient costs for the cost report year. They also state the dollar amount that would be paid if the inpatient prospective payment system were in effect. For each hospital, the difference between these two amounts is updated according to the market basket update factors for inpatient hospital costs reported by the CMS Office of the Actuary for the years between the cost report year and FY 2011. In accordance with guidance from the Office of the Actuary, we also assume a 2 percent annual volume increase. In the FY 2011 final rule, we may revise this estimate if updated cost report data becomes available.

b. Portion of the Proposed FY 2011 Budget Neutrality Adjustment That Accounts for Estimated FY 2010 Costs of the Demonstration That Were Not Accounted for in the FY 2010 IPPS Final Rule for the Seven “Originally Participating Hospitals”

As explained above, subsection (g)(4)(A) of 410A of the MMA as added by section 3123(a) of Public Law 111-148 as amended by section 10313 of Public Law 111-148, provided for the continued participation of rural community hospitals that were participating in the demonstration as of the last day of the initial 5-year [demonstration] period. One of the effects of this extension is that the seven “originally participating hospitals” (those hospitals that have participated in the demonstration since its inception and that continue to participate in the demonstration or were participating in the demonstration as of the last day of its initial 5-year demonstration period (that, is the 2 rural community hospitals that concluded their period of performance in December 2009)) which were scheduled to end their participation in the demonstration before the conclusion of FY 2010 would continue to participate for the remainder of FY 2010 and beyond as applicable. Section II.F.3. of the preamble, we are assuming for purposes of our budget neutrality analysis in section II. F.3.a. of the preamble that the seven “originally participating hospitals” are also currently participating hospitals. See for our explanation). However, we note that the portion of the FY 2010 budget neutrality adjustment to the national IPPS rates that was included in the FY 2010 IPPS final rule that accounted for the estimated costs of the demonstration in FY 2010 did not take into account costs of the demonstration for those hospitals beyond the anticipated end date of their initial demonstration period. (For example, for a hospital whose cost report ended in June 30, 2010, we counted only nine months for the budget neutrality adjustment for the FY 2010 IPPS/LTCH PPS final rule. Under this proposal, we would also adjust the national IPPS rates to account for the estimated costs for this hospital for the remaining three months of FY 2010.) We are proposing to include a component in the FY 2011 budget neutrality adjustment to account for the estimated costs of the demonstration in FY 2010 that were not accounted for in the FY 2010 IPPS/RY 2010 LTCH PPS final rule for the seven “originally participating hospitals” because we calculated the FY 2010 cost estimate for that year's final rule assuming that the demonstration would end before the end of that fiscal year for those hospitals. We are proposing the following methodology to account for such estimated costs: Step one, for each of the seven “originally participating hospitals,” we divide the number of months that were not included in the estimate of the FY 2010 demonstration costs included in the final IPPS FY 2010 rule by 12. This step is necessary to determine for each of the seven “originally participating hospitals” the fraction of FY 2010 for which the estimate of the FY 2010 demonstration was not included. Step two, for each of the seven “originally participating hospitals,” the percentage that results in step one is multiplied by the estimate of the cost attributable to the demonstration in FY 2010 for the hospital. The estimate for the fraction of the hospital's cost for fiscal year 2010 not included in the estimate in the FY 2010 IPPS rule is arrived at by multiplying this fraction by the estimate of costs for the entire year. The estimate of the costs of the demonstration for FY 2010 for the seven “originally participating” hospitals is derived from data found in their cost reports for cost report years beginning in FY 2006. These cost reports show dollar amounts for costs for Medicare inpatient services (that is, the Medicare payment amount in that cost report year for Medicare inpatient services) and the dollar amount that would have been paid under the IPPS. Since these cost report years all ended during FY 2007, thisdifference, respective to each of the seven “originally participating hospitals”, is updated according to the market basket updates for inpatient hospital costs reported by the CMS Office of the Actuary for the years from FY 2008 through FY 2011. In accordance with guidance from the Office of the Actuary, we also assume an annual two percent volume increase. (This calculation is not necessary for the hospitals that began participating in the demonstration in 2008 because the portion of the FY 2010 budget neutrality adjustment that accounts for estimated FY 2010 demonstration costs in the FY 2010 IPPS/RY 2010 LTCH PPS final rule incorporates a cost estimate for each of these hospitals based on the entirety of the Federal fiscal year.) The estimate of additional costs attributable to the demonstration in FY 2010 for the 7 “originally participating hospitals” that were not accounted for in the FY 2010 final rule is $6,488,221. Similar to above, this estimate is based on the assumption that the seven “originally participating hospitals” will choose to continue participating in the demonstration past the end of their original 5-year demonstration periods. We believe that this assumption is valid, because they are participating in the demonstration to this date, or, for the case of the two hospitals that ended active participation in the demonstration program in December 2009, they were participating as of the last day of their initial 5-year period.

c. Portion of the Proposed FY 2011 Budget Neutrality Adjustment That Accounts for Estimated FY 2011 Costs for Hospitals Newly Selected To Participate in the Demonstration

Section 410A(g)(3) of MMA, as added by section 3123 of Public Law 111-148, and as amended by section 10313 of Public Law 111-148, provides that “[n]otwithstanding subsection (a)(4), during the 5-year extension period, not more than 30 rural community hospitals may participate in the demonstration program under this section.” Consequently, up to 20 additional hospitals may be added to the demonstration (30 hospitals minus the 10 currently participating hospitals). In order to ensure budget neutrality for 20 new participating hospitals, we are proposing to include a component in the budget neutrality adjustment factor to the FY 2011 national IPPS rates to account for the estimated FY 2011 costs of those new hospitals. For purposes of estimating the FY 2011 costs of the demonstration for 20 new hospitals, we are proposing to estimate such costs from the average annual cost per hospital derived from the estimate of the 10 currently participating hospitals' costs attributable to the demonstration for FY 2011. Because the statute allows the potential for 20 additional hospitals for the demonstration, we are basing this estimate on the assumption that 20 hospitals will join. Our experience analyzing the cost reports so far for demonstration hospitals shows a wide variation in costs among the hospitals. Given the wide variation in cost profiles that might occur for additional hospitals, we believe that estimating the total demonstration cost for FY 2011 for 20 additional hospitals from the average annual cost of the currently existing hospitals yields the most accurate prediction because it is reflective of the historical trend of participant behavior under the demonstration and should give an accurate as possible prediction of future participant behavior. We believe that, although there is variation in costs, formulating an estimate from the average costs of as many as 10 hospitals gives as good as possible a prediction of what the demonstration costs for each of 20 additional hospitals. We are estimating the average cost for each of the 20 additional hospitals not on a range of costs, but on an estimate of this average cost per hospital, obtained by dividing $20,930,484, the estimated cost amount for FY 2011 identified for the 10 participating hospitals in subsection (a), by 10. The estimate for costs attributable to the demonstration for 20 additional hospitals in FY 2011 is $41,860,968.

d. Portion of the Proposed FY 2011 Budget Neutrality Adjustment That Offsets the Amount by Which the Costs of the Demonstration in FY 2007 Exceeded the Amount That Was Identified in the Final FY 2007 IPPS Final Rule as the Budget Neutrality Offset for FY 2007

In addition, in order to ensure that the demonstration in FY 2007 was budget neutral, we are proposing to incorporate a component into the budget neutrality adjustment factor to the FY 2011 national IPPS rates, which would offset the amount by which the costs of the demonstration program as indicated by settled cost reports beginning in FY 2007 for hospitals participating in the demonstration during FY 2007 exceeded the amount that was identified in the FY 2007 IPPS final rule as the budget neutrality offset for FY 2007. Specifically, we are proposing the following methodology:

Step One: Calculate the FY 2007 costs of the demonstration program according to the settled cost reports that began in FY 2007 for the then participating hospitals (which represent the third year of the demonstration for each of the then participating hospitals). (We propose to use these settled cost reports, which represent the third year of the demonstration for each of the then participating hospitals because they correspond most precisely to FY 2007 and we therefore believe correctly represent FY 2007 inpatient costs for the demonstration during that period).

Step Two: Subtract the amount that was offset by the budget neutrality adjustment for FY 2007 ($9,197,870) from the costs of the demonstration in FY 2007 as calculated in step one; and

Step Three: The result of step two is a dollar amount, for which we would calculate a factor that would offset such amounts and would be incorporated into the proposed overall budget neutrality adjustment to national IPPS rates for FY 2011. This specific component to the overall budget neutrality adjustment for FY 2011 would account for the difference between the costs of the demonstration in FY 2007 and the amount of the budget neutrality adjustment published in the FY 2007 IPPS final rule and therefore ensures that the demonstration is budget neutral for FY 2007.

Because the settlement process for the demonstration hospitals' third year cost reports, that is, cost reporting periods starting in FY 2007, has experienced a delay, for this FY 2011 IPPS proposed rule, we are unable to state the costs of the demonstration corresponding to FY 2007 and as a result are unable to propose the specific numeric adjustment representing this offsetting process that would be applied to the national IPPS rates. However, we expect the cost reports beginning in FY 2007 for hospitals that participated during FY 2007 to be settled before the FY 2011 IPPS/LTCH final rule is published. Therefore, for the FY 2011 IPPS/LTCH PPS final rule, we expect to be able to calculate the amount by which the costs corresponding to FY 2007 exceeded the amount offset by the budget neutrality adjustment for FY 2007. Consequently, by adding this proposed amount to the above proposed amounts estimated in subsections (a) through (c) of section II.F.3.a. of the preamble, we arrive at a proposed amount, from which we would be able to calculate the proposed budget neutrality factor which we would use to adjust the FY 2011 national IPPS rates in the FY 2011 IPPS/LTCH PPS final rule.

For this supplemental proposed FY 2011/LTCH PPS rule, the estimated amount for the adjustment to the national IPPS rates is the sum of the amounts specified in subsections (a)through (c) above or $69,279,673 and the amount resulting from the proposed method in subsection (d) that we expect to be calculated in the FY 2011 IPPS/LTCHPPS final rule. Subsections (a) through (c) state dollar amounts, which represent estimated costs attributable to the demonstration for the respective component of the overall estimated calculation of the budget neutrality factor for FY 2011. This estimated amount is based on the specific assumptions identified, as well as from data sources that are used because they represent either the most recently finalized or, if as submitted, the most recent available cost reports. The overall budget neutrality change in the final FY 2011 IPPS/LTCH PPS rule, if any of these factors were to change.

G. Proposed Changes to Payment Rates for IPPS for Capital-Related Costs for FY 2011

Although the provisions of Public Law 111-148, do not directly affect the payment rates and policies for the IPPS for capital-related costs, in section II. of the Addendum of this supplemental proposed rule we are proposing the capital IPPS standard Federal rates for FY 2011. This is necessary because the wage index changes required by the provisions of Public Law 111-148 (discussed above in section II.A. of this preamble) affect the proposed budget neutrality adjustment factor for changes in DRG classifications and weights and the geographic adjustment factor (GAF) since the GAF values are derived from the wage index values (see§ 412.316(a)). In addition, the provisions of Public Law 111-148, (discussed above in this preamble) also necessitate a revision to the proposed outlier payment adjustment factor since a single set of thresholds is used to identify outlier cases for both inpatient operating and inpatient capital-related payments (see§ 412.312(c)). The outlier thresholds are set so that operating outlier payments are projected to be 5.1 percent of total operating IPPS DRG payments. Section 412.308(c)(2) provides that the standard Federal rate for inpatient capital-related costs be reduced by an adjustment factor equal to the estimated proportion of capital-related outlier payments to total inpatient capital-related PPS payments. The proposed capital IPPS standard Federal rates for FY 2011 are discussed in section II. of the Addendum of this supplemental proposed rule.

H. Payment for Critical Access Hospital Outpatient Services and Ambulance Services

Section 1834(g) of the Act establishes the payment rules for outpatient services furnished by a critical access hospital (CAH). Section 403(d) of Public Law 106-113 (BBRA) amended section 1834(g) of the Act to provide for two methods of payment for outpatient services furnished by a CAH. Specifically, section 1834(g)(1) of the Act, as amended by Public Law 106-113, provided that the amount of payment for outpatient services furnished by a CAH is equal to the reasonable costs of the CAH in providing such services (the physician or other practitioner providing the professional service receives payment under the Medicare Physician Fee Schedule). In the alternative, the CAH may make an election, under section 1834(g)(2) of the Act, to receive amounts that are equal to “the reasonable costs” of the CAH for facility services plus, with respect to the professional services, the amount otherwise paid for professional services under Medicare, less the applicable Medicare deductible and coinsurance amount. The election made under section 1834(g)(2) of the Act is sometimes referred to as “method II” or “the optional method.” Throughout this section of this preamble, we refer to this election as “the optional method.” Section 202 of Public Law 106-554 (BIPA) amended section 1834(g)(2)(B) of the Act to increase the payment for professional services under the optional method to 115 percent of the amount otherwise paid for professional services under Medicare. In addition, section 405(a)(1) of Public Law 108-173 (MMA) amended section 1834(g)(l) of the Act by inserting the phrase “equal to 101 percent of” before the phrase “the reasonable costs.” However, the MMA did not make a corresponding change to section 1834(g)(2)(A) of the Act regarding the amount of payment for facility services under the optional method.

Section 1834(l)(8), as added by section 205 of Public Law 106-554, establishes the payment methodology for ambulance services furnished by a CAH or by an entity that is owned and operated by a CAH. This provision states that payment is made at “the reasonable costs incurred in furnishing ambulance services if such services are furnished by a critical access hospital (as defined in section 1861(mm)(1) of the Act), or by an entity that is owned and operated by a critical access hospital, but only if the critical access hospital or entity is the only provider or supplier of ambulance services that is located within a 35-mile drive of such critical access hospital.”

Section 3128(a) of Public Law 111-148 amended sections 1834(g)(2)(A) and 1834(l)(8) of the Act by inserting “101 percent of” before “the reasonable costs.” As such, section 3128(a) increases payment for outpatient facility services under the optional method and payment for ambulance services furnished by a CAH or an entity owned and operated by a CAH, to 101 percent of reasonable costs. Section 3128(b) states that the amendments made under section 3128(a) shall take effect as if they were included in the enactment of section 405(a) of Public Law 108-173. Section 405(a) of Public Law 108-173, which provided that, in general, inpatient, outpatient, and covered SNF services provided by a CAH would be reimbursed at 101 percent of reasonable cost, was applicable to payments for services furnished during cost reporting periods beginning on or after January 1, 2004.

In order to implement section 3128 of Public Law 111-148, we are proposing to amend the regulations at § 413.70(b)(3)(ii)(A) to state that, effective for cost reporting periods beginning on or after January 1, 2004, under the optional method, payment for facility services will be made at 101 percent of reasonable cost. Accordingly, regardless of whether a physician/practitioner has reassigned his/her billing rights to the CAH, payment for CAH facility services will be made at 101 percent of reasonable costs. In addition, we are proposing to implement the change in payment for ambulance services provided by section 3128 of Public Law 111-148 by amending the regulations at § 413.70(b)(5)(i) to state that effective for cost reporting periods beginning on or after January 1, 2004, payment for ambulance services furnished by a CAH or an entity that is owned and operated by a CAH is 101 percent of the reasonable costs of the CAH or the entity in furnishing those services, but only if the CAH or the entity is the only provider or supplier of ambulance services located within a 35-mile drive of the CAH or the entity. We note that we do not believe these proposals will result in additional payments to CAHs for prior periods because we believe in fact that CMS has paid CAHs for these services at 101 percent of reasonable costs during these prior periods.

I. Extension of Certain Payment Rules for Long-Term Care Hospital Services and Moratorium on the Establishment of Certain Hospitals and Facilities

1. Background

On December 29, 2007 the Medicare, Medicaid, and SCHIP Extension Act of 2007 (MMSEA) (Pub. L. 110-173) was enacted. Section 114 of MMSEA,entitled “Long-term care hospitals,” made a number of changes affecting payments to LTCHs for inpatient services. In May 6, 2008 and May 22, 2008Federal Register(73 FR 24871 and 73 FR 29699, respectively), we issued two interim final rules (IFCs), implementing provisions of section 114 of the MMSEA. The May 6, 2008 IFC implemented section 114(c)(3) of the MMSEA which required a 3-year delay in the application of certain provisions of the payment adjustment for short-stay outliers (SSOs), and section 114(e)(4)(1) and (2) which specified revisions to the RY 2008 standard Federal rate for LTCHs. The May 22, 2008 IFC implemented section 114(c)(1) and (c)(2), providing for a 3-year delay in the application of the 25 percent threshold payment adjustment for discharges from LTCHs and LTCH satellite facilities that were admitted from certain referring hospitals in excess of various percentage thresholds. The May 22, 2008 IFC also implemented section 114(d) of the MMSEA relating to the 3-year moratorium on the establishment of new LTCHs and LTCH satellite facilities and on increases in beds in existing LTCHs and LTCH satellite facilities.

In addition, we revised regulations at § 412.523(d)(3) implementing section 114(c)(4) of MMSEA. Our regulations provided that for a 3-year period beginning on December 29, 2007, the Secretary shall not make the one-time prospective adjustment to the LTCH PPS payment rates earlier than December 29, 2010 and later than December 29, 2012 (73 FR 26804). Section 4302 of the American Recovery and Reinvestment Act of 2009 (ARRA) ( Pub. L. 111-5) enacted on February 17, 2009, included several amendments to section 114(c) and (d) of the MMSEA. The provisions of section 4302 of the ARRA were implemented in an IFC which was published with the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43990 through 43994). In that same final rule, we responded to comments and finalized the MMSEA provisions in the May 6, 2008 and the May 22, 2008 IFCs that had not otherwise modified by the ARRA. We intend to finalize the ARRA provisions and respond to comments on the ARRA IFC, in the FY 2011 IPPS/LTCH PPS final rule.

The discussion in section XX pertain to the specific changes to the LTCH PPS policies that are mandated by amendments to section 114(c) and (d) of the MMSEA, as amended by section 4302 of the ARRA and further amended by section 3106 of Public Law 111-148 as amended by section 10312 of Public Law 111-148.

Section 114(c) and (d) of the MMSEA as amended by section 4302 of ARRA as amended by section 3106 of the Public Law 111-148 and as further amended by section 10312 of Public Law 111-148 provides for a 2-year extension to payment policies relating to long-term care hospitals (LTCHs) and LTCH satellite facilities. Specifically, these provisions affect payment adjustments for short stay outliers (SSOs), the one-time prospective adjustment to the standard Federal rate, the 25 percent payment threshold policy, and the moratorium on the establishment of new LTCHs and LTCH satellite facilities. In this supplementary proposed rule for the LTCH PPS, we are implementing the policies mandated by the amendments to section 114(c) and (d) of the MMSEA as amended by section 4302 of the ARRA and as further amended by section 3106 of Public Law 111-148, and section 10312 of Public Law 111-148, and are proposing to revise the regulations accordingly to incorporate those changes. In the sections below, we will briefly describe each of these policies and propose to incorporate into the regulations their 2-year extension.

2. Short-Stay Outlier Policy

In the FY 2003 LTCH PPS final rule (67 FR 55995), we established a special payment policy for SSO cases at § 412.529. SSO cases are cases with a covered LOS that is less than or equal to five-sixths of the geometric average LOS for each LTC-DRG. When we established the SSO policy, we explained that “[a] short stay outlier case may occur when a beneficiary receives less than the full course of treatment at the LTCH before being discharged” (67 FR 55995).

We later refined the SSO policy in the RY 2008 LTCH PPS final rule. Specifically, the RY 2008 LTCH PPS final rule added an additional payment methodology at § 412.529(c)(3)(i) for a SSO case with a covered length of stay (LOS) that is less than or equal to one standard deviation from the geometric ALOS of the same DRG under the IPPS as the LTC-DRG to which the case had been assigned (referred to as the “IPPS comparable threshold”). The Medicare payment for that SSO case where the covered LOS is less than or equal to the “IPPS comparable threshold” would be based on the least of the following:

• 100 percent of the estimated cost of the case.

• 120 percent of the LTC-DRG specific per diem amount multiplied by the covered LOS of the particular case.

• The full LTC-DRG.

++ An amount comparable to the hospital IPPS per diem amount determined under § 412.529(d)(4). Under that SSO payment formula, cases where the covered LOS is greater than the “IPPS comparable threshold,” the fourth payment option would be replaced with the blend of the 120 percent of the LTC-DRG specific per diem amount and an amount comparable to the IPPS per diem amount determined under § 412.529(d)(4). (See(72 FR 26905 through 26918).)

Section 114(c)(3) of MMSEA established a 3-year delay of the application of the methodology at § 412.529(c)(3)(i) that was added in the RY 2008 LTCH PPS final rule. It specified that the Secretary shall not apply the amendments finalized on May 11, 2007 (72 FR 26992) made to the short-stay outlier payment provision for long-term care hospitals contained in § 412.529(c)(3)(i) or any similar provisions for the 3-year period beginning on the date of enactment of this Act [December 29, 2007]. Section 114(c)((3) of the MMSEA as amended by section 3106(a) of the Public Law 111-148, and as amended by section 10312(a) of Public Law 111-148, adds an additional 2 years to the 3-year delay of the application of § 412.529(c)(3)(i). Specifically, these provisions together result in the phrase “3-year period” being replaced with the phrase “5-year period” each place it appears in 114(c) of MMSEA as amended by the ARRA. Thus, the reference to the 3-year period in delay of application of § 412.529(c)(3)(i) is changed to be 5-year period of delay. Consequently, the Secretary will not apply for the 5-year period beginning on the date of enactment of MMSEA (December 29, 2007) the policy at § 412.529(c)(3)(i). We note that this provision of the law is self-implementing and in this supplementary proposed rule, we are proposing to incorporate existing law regarding the additional 2 year delay into the regulations at § 412.529(c)(3)(i) to reflect this policy change.

3. The One-time Adjustment of the Standard Federal Rate

In the August 30, 2002 LTCH PPS final rule (67 FR 56027), we provided in § 412.523(d)(3) of the regulations, for the possibility of making a one-time prospective adjustment to the LTCH PPS rates by July 1, 2008, 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.

Later, section 114(c)(4) of MMSEA was enacted which provided a 3-year delay in the application of§ 412.523(d)(3). Specifically, section 114(c)(4) of MMSEA provides that the ”Secretary shall not, for the 3-year period beginning on the date of the enactment of this Act, make the one time prospective adjustment to long-term care hospital prospective payment rates provided for in section 412.523(d)(3) of title 42, Code of Federal Regulations, or any similar provision.” The effect of this provision was that no one-time budget neutrality adjustment could be made earlier than December 29, 2010. (Following the enactment of MMSEA, we modified the regulations at § 412.523(d)(3) to capture the 3-year delay required by section 114(c)(4)MMSEA and our proposal to conform our regulation to more accurately reflect the purpose of providing for a possible one-time budget neutrality adjustment.) (See73 FR 26800 through 26805). Now, section 3106(a) of Public Law 111-148, together with section 10312 of Public Law 111-148 results in, an additional 2 years being added to the existing 3-year delay of § 412.523(d)(3). Specifically, these amendments together result in the phrase “3-year period” being replaced with the phrase “5-year period” each place it appears in 114(c) of MMSEA as amended by the ARRA. Thus, the reference to the 3-year period in delay of application § 412.523(d)(3) is changed to be a 5-year period of delay. Consequently, the Secretary shall not apply for the 5-year period beginning on the date of the enactment of MMSEA (December 29, 2007) the one-time prospective adjustment provided for in § 412.523(d)(3). We note that this provision of the law is self-implementing and we are proposing to incorporate existing law regarding this additional 2-year delay of the one-time budget neutrality adjustment into the regulations at § 412.523(d)(3) to reflect this policy. Thus, we are proposing to revise § 412.523(d)(3) to specify that the Secretary is precluded from making the one-time adjustment until December 29, 2012.

4. Modification of Certain Payment Adjustments to Certain LTCHs and LTCH Satellite Discharges

The timeframes outlined in section 114(c)(1) and (2) of MMSEA are amended by ARRA and section 3106(a) of Public Law 111-148, and as further amended by section 10312(a) of Public Law 111-148 are increased from 3 years to 5 years, thereby extending for an additional 2 years the delay in application of the 25 percent patient threshold amount under § 412.534 and § 412.536 for certain LTCHS and LTCH satellite facilities and the increases in the patient thresholds outlined in section 114(c)(2) of MMSEA as they apply to an “applicable” long-term care hospital or satellite facility as set forth in section 114(c)(2)(A) and (B) of MMSEA as amended. Specifically, § 3106(a) of Public Law 111-148 together with section 10312 of Public Law 111-148, results in the substituting of the phrase “5-year period” for the phrase “3-year period” each time it appears in section 114(c) of MMSEA as amended by ARRA. This provision of the law is self-implementing.

With respect to section 114(c)(1) of MMSEA as amended by ARRA (Delay in Application of [the] 25 Percent Patient Threshold Payment Adjustment), section 3106(a) of the Public Law 111-148 and as further amended by section 10312(a) of Public Law 111-148 results in an additional 2-year delay being added to the existing 3-year delay in application of the 25 percent threshold amount under § 412.534 and § 412.536. Specifically, under § 114(c)(1)(A) and (B) of MMSEA as amended by the ARRA and the Affordable Care Act, the Secretary shall not apply, for cost reporting periods beginning on or after July 1, 2007 for a 5-year period—(A) § 412.536 of title 42, Code of Federal Regulations, or any similar provision, to free standing long-term care hospitals or to a long-term care hospital, or satellite facility, that as of December 29, 2007, was co-located with an entity that is a provider-based, off-campus location of a subsection (d) hospital which did not provide services payable under section 1886(d) of the Act at the off-campus location; and (B) such section or § 412.534 of title 42, Code of Federal Regulations, or any similar provisions, to a long-term care hospital identified by the amendment made by section 4417(a) of the BBA. In order to incorporate existing law requiring that application of the above provisions will not be applied prior to cost reporting periods beginning on July 1, 2012, we are proposing to modify our regulations at § 412.534(h)(4) and § 412.536(a)(1).

With respect to section 114(c)(2) of MMSEA as amended by ARRA and section 3106(a) of Public Law 111-148 and as amended by section 10312 of Public Law 111-148 the effective date provided in section 114(c)(2)(C) of MMSEA is amended such that the provision specifies that subparagraphs A and B [of section 114(c)(2)] shall apply to cost reporting periods beginning on or after October 1, 2007 (or July 1, 2007, in the case of a satellite facility described in § 412.22(h)(3)(i) of title 42, Code of Federal Regulations) for a 5-year period.) The effect of this self-implementing effective date change is that under section 114(c)(2)(A) of MMSEA the time period during which the increased percentage thresholds apply to an “applicable long-term care hospital or satellite facility” which is located in a rural area or which is co-located with an urban single or MSA-dominant hospital, under 42 CFR 412.534(d) and (e) is increased from a 3-year period to a 5-year period. Thus, for the 5-year period beginning on or after October 1, 2007, payment to an “applicable LTCH hospital or LTCH satellite that is located in a rural area or is co-located with a MSA-dominant hospital or urban single hospital under paragraphs (d) and (e), of 42 CFR 412.534, shall not be subject to any payment adjustment under such section if no more than 75 percent of the hospital's Medicare discharges (other than discharges described in paragraph (d)(2) or (e)(3) of such section are admitted from a co-located hospital. We are proposing to incorporate into our regulations at 412.534(d)(1) through (d)(3) and(e)(1) through (e)(3); the above-described self-implementing the Affordable Care Act changes by extending the sunsetting of the threshold percentage increase an additional 2 years, to cost reporting periods beginning on or after October 1, 2012, as applicable, July 1, 2007 for a satellite facility described in 42 CFR 412.22(h)(3)(i).)

In addition, the change in the effective date change required in section 114(c)(2)(C) of MMSEA, as amended by ARRA and the Affordable Care Act, is that the time period during which the increased percentage threshold applicable to an “applicable” LTCH or satellite, as defined in section 114(c)(2)(ii) of the MMSEA as amended by section 4302(a)(2)(A) of the ARRA, which is co-located with another hospital is increased from a 3-year period to a 5-year period. Thus, for the 5-year period beginning on or after October 1, 2007, payment to an “applicable” LTCH or LTCH satellite facility that is co-located with another hospital shall not be subject to any payment adjustment under § 412.534 if no more than 50 percent of the hospital's Medicare discharges (other than discharges described in paragraph (c)(3) of such section) are admitted from a co-located hospital. We are proposing to incorporate this self-implementing Affordable Care Act change into our regulations at § 412.534(c)(1), (2) and (3) by extending the sunsetting of the threshold percentage increase an additional 2 years, to cost reporting periods beginning on or after October 1, 2012 or July 1, 2012, as applicable.

5. Moratorium on the Increase in Number of Beds in Existing Long-Term Care Hospitals or Long-Term Care Hospital Satellite Facilities

Section 114(d) of MMSEA provides for a 3-year moratorium with two distinct aspects, one for the establishment and classification of a LTCH or a LTCH satellite facility, other than an existing LTCH or facility, and the other for the increase of hospital beds in existing LTCHs and LTCH satellite facilities. Specifically, section 114(d)(1)(A) of MMSEA provides that, during the 3-year period beginning on the date of enactment of this Act on December 29, 2007, the Secretary shall impose a moratorium “subject to paragraph (2), on the establishment and classification of a long-term care hospital or satellite facility, other than an existing long-term care hospital or facility.” Section 114(d)(1)(B) of MMSEA unamended, provides that, during the 3-year period beginning of the date of enactment of this Act, the Secretary shall impose a moratorium “subject to paragraph (3), on an increase of long-term care hospital beds in existing long-term care hospitals or satellite facilities.”

Sections 114(d)(2) of MMSEA unamended provides for exceptions to the moratorium on the development of a LTCH or LTCH satellite facility, other than an existing LTCH or LTCH satellite facility, imposed by section 114(d)(1)(A) of MMSEA. (The definition of an existing LTCH and satellite facility for purposes of this policy is codified at § 412.23(e)(7)(i).) Specifically, under this MMSEA provision, the moratorium, is effective from December 29, 2007 through December 28, 2010 unless one of the following three exceptions has been met:

• The LTCH began “its qualifying period for payment as a long-term care hospital under section 412.23(e) of title 42, Code of Federal Regulations, on or before the date of enactment of this Act.” (See section 114(d)(2)(A) of MMSEA).

• The LTCH has a binding written agreement with an outside, unrelated party for the actual construction, renovation, lease, or demolition for a LTCH and has expended before December 29, 2007 at least 10 percent of the estimated cost of the project or, if less, $2,500,000. (See section 114(d)(2)(B) of MMSEA).

• The LTCH has obtained an approved certificate of need in a State where one is required on or before December 29, 2007 (see section 114(d)(2)(C) of MMSEA). (See73 FR 29705 through 29707 and 74 FR 43985).

The moratorium on an increase of beds is subject to the exception at section 114(d)(3) of MMSEA. Specifically, section 114(d)(3) of the MMSEA unamended stated that the moratorium on an increase in beds shall not apply if an existing LTCH or LTCH satellite facility is “located in a State where there is only one other long-term care hospital; and requests an increase in beds following the closure or the decrease in the number of beds of another long-term care hospital in the State.” We implemented section 114(d) in the May 22, 2008 IFC (73 FR 29704 through 29707); the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43985 through 43990) and § 412.23(e)(5) through (e)(7).

Section 4302 of the ARRA added another exception to the moratorium on increases in the number of beds at existing LTCHs and LTCH satellite facilities. Specifically, section 4302(b) of the ARRA, added an additional exception to the bed-increase moratorium in an existing hospital or satellite facility “* * * if the hospital or facility obtained a certificate of need for an increase in beds that is in a State for which such certificate of need is required and that was issued on or after April 1, 2005, and before December 29, 2007, * * *.” Accordingly, we revised our regulations at § 412.23(e)(7)(B) to include this new exception to the moratorium on an increase in the number of beds in existence in an existing LTCH or LTCH satellite facility beyond those in existence on December 29, 2007. (See74 FR 43991 and 43992)

Section 114(d) of MMSEA as amended by section 4302(b) of ARRA and section 3106(b) of Public Law 111-148 and section 10312(b) of Public Law 111-148 adds an additional 2 years to the 3-year moratorium on the development of new LTCHs and LTCH satellite facilities and on the increase in the number of beds in existing LTCHs and LTCH satellites promulgated by MMSEA. Specifically, it raises the length of the moratorium specified in section 114(d) of MMSEA as amended by ARRA from a 3-year period to a 5-year period. Therefore, the moratorium will be in effect until December 28, 2012. In this supplementary proposed rule, we are proposing to revise § 412.23(e)(6)(i) and (e)(7)(ii) by changing the ending date of the moratorium provisions from December 28, 2010 to December 28, 2012 to reflect these self-implementing Affordable Care Act changes.

J. Long-Term Care Hospital Proposed Market Basket Update and Other Proposed Changes

1. Background

In section VII. of the preamble of the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule, we discuss our proposed changes to the payment rates, factors, and specific policies under the LTCH PPS for FY 2011. Although a number of the provisions of Public Law 111-148 and Public Law 111-152 affect the LTCH PPS, due to the timing of the passage of the legislation, we were unable to address those provisions in the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule. Therefore, the proposed policies and payment rates in that proposed rule do not reflect the new legislation.

Below we address the provisions of Public Law 111-148 and Public Law 111-152 that affect our proposed policies and payment rates for FY 2011 under the LTCH PPS. In addition, we have issued further instructions implementing the provisions of Public Law 111-148, as amended, that affect the policies and payment rates for RY 2010 under the LTCH PPS. Specifically, we have established revised RY 2010 rates and factors elsewhere is this Federal Register consistent with the provisions of sections 3401(c) and (p) and 10319(b) of Pub L. 111-148 and section 1105(b) of Public Law 111-152, as amended.

2. Revision of Certain Market Basket Updates as Required by Public Law 111-148 and Public Law 111-152

Section 1886(m)(3)(A)(ii) of the Act, as added by section 3401(c) of Public Law 111-148, specifies that for each of rate years 2010 through 2019, any annual update to the standard Federal rate shall be reduced by the other adjustment specified in new section 1886(m)(4) of the Act. Furthermore, section 1886(m)(3)(A)(i) of the Act specifies that for rate year 2012 and subsequent rate years, any annual update to the standard Federal rate shall be reduced by the productivity adjustment described in section 1886(b)(3)(B)(xi)(II) of the Act. Section 1886(m)(3)(A)(ii) and sections 1886(m)(4)(A) and (B) of the Act, require a 0.25 percentage point reduction for rate year 2010 and a 0.50 percentage point reduction for rate year 2011. Section 1886(m)(3)(B) of the Act provides that the application of paragraph 3 of 1886(m) of the Act may result in the annual update being less than zero for a rate year, and may result in payment rates for a rate year being less than such payment rates for thepreceding rate year. Furthermore, section 3401(p) of Public Law 111-148 specifies that the amendments made by section 3401(c) of Public Law 111-148 shall not apply to discharges occurring before April 1, 2010.

We note that in the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule, since the annual update to the LTCH PPS policies, rates and factors now occurs on October 1st, we proposed to adopt the term “fiscal year” (FY) rather than “rate year” (RY) under the LTCH PPS beginning October 1, 2010 to conform with the standard definition of the Federal fiscal year (October 1 through September 30) used by other PPSs, such as the IPPS (see75 FR 24046 through 24027). Consequently, in that proposed rule and in this supplemental proposed rule, for purposes of clarity, when discussing the annual update for the LTCH PPS, we employed “FY” rather than “RY” because it is our intent that the phrase “FY” be used prospectively in all circumstances dealing with the LTCH PPS. Similarly, although the language of section 3401(c) of Public Law 111-148 and section 10319 of Public Law 111-148, and section 1105(b) of Public Law 111-152 refer to years 2010 and thereafter under the LTCH PPS as “rate year,” consistent with our proposal to change the terminology used under the LTCH PPS from “rate year” to “fiscal year,” for purposes of clarity, in this supplemental proposed rule, when discussing the annual update for the LTCH PPS, including the provisions of the Affordable Care Act, we will continue to employ “FY” rather than “RY” for 2011 and subsequent years because it is our intent that “FY” be used prospectively in all circumstances dealing with the LTCH PPS.

3. Proposed Change to Reflect the Market Basket Update for LTCHs for RY 2010 (§ 412.523(c)(vi))

In the FY 2010 IPPS/RY 2010 LTCH PPS final rule appearing in the Federal Register on August 27, 2009 (74 FR 43754), we established policies, payment rates and factors for determining payments under the LTCH PPS for RY 2010 (October 1, 2009 through September 30, 2010). The provisions of the Affordable Care Act affect some of the policies, payment rates and factors for determining payments under the LTCH PPS for RY 2010 (some of which are discussed elsewhere in this supplemental proposed rule). In a separate notice published elsewhere in this Federal Register, we establish revised RY 2010 LTCH PPS rates and factors consistent with the provisions of section 1886(m)(3) of the Act as added by section 3401(c) of Public Law 111-148, and section 1886(m)(4) of the Act as added by section 3401(c) of Public Law 111-148 and amended by section 10319(b) of Public Law 111-148, as further amended by section 1105(b) of Public Law 111-152, as well as section 3401(p) of the Public Law 111-148. Section 1886(m)(3)(A)(ii) of the Act provides for each of RYs 2010 through 2019, the annual update to the standard Federal rate is reduced by the “other adjustment” described in section 1886(m)(4) of the Act. Specifically, sections 1886(m)(3)(A)(ii) and (4)(A) of the Act require a 0.25 percentage point reduction to the annual update to the standard Federal rate for RY 2010. Section 1886(m)(3)(A) of the Act on its face explicitly provides for a revised annual update to the standard Federal rate beginning RY 2010, thus resulting in a single revised RY 2010 standard Federal rate. Section 3401(p) of the Public Law 111-148 provides that, notwithstanding the previous provisions of this section, the amendments made by subsections (a), (c) and (d) shall not apply to discharges occurring before April 1, 2010. When read in conjunction we believe section 1886(m)(3)(A) of the Act and section 3401(p) of Public Law 111-148 provide for a single revised RY 2010 standard Federal rate; however, for payment purposes, discharges occurring on or after October 1, 2009 and before April 1, 2010, simply will not be based on the revised RY 2010 standard Federal rate.

As discussed in a separate notice published elsewhere in this Federal Register, consistent with our historical practice and the methodology used in the FY 2010 IPPS/RY 2010 final rule, we establish an update to the LTCH PPS standard Federal rate for RY 2010 of 1.74 percent. This annual update for RY 2010 is based on the full forecasted estimated increase in the LTCH PPS market basket for RY 2010 of 2.5 percent, adjusted by the 0.25 percentage point reduction required by sections 1886(m)(3)(A)(ii) and (4)(A) of the Act, and an adjustment to account for the increase in case-mix in a prior period (FY 2007) resulting from changes in documentation and coding practices of −0.5 percent. Therefore, in this supplemental proposed rule, under the authority of sections 1886(m)(3)(A)(ii) and (4)(A) of the Act, we are proposing to amend § 412.523(c)(3)(vi) to specify that the standard Federal rate for the LTCH PPS rate year beginning October 1, 2009 and ending September 30, 2010, is the standard Federal rate for the previous rate year updated by 1.74 percent. Furthermore, consistent with section 3401(p) of Public Law 111-148, we are also proposing to revise § 412.523(c)(3)(vi) to specify that with respect to discharges occurring on or after October 1, 2009 and before April 1, 2010, payments are based on the standard Federal rate in § 412.523(c)(v) updated by 2.0 percent (that is, a standard Federal rate of $39,896.65 (see74 FR 44022)). We note that the provisions of the law that add sections 1886(m)(3) and (4) of the Act are self-implementing and in this supplemental proposed rule, we are proposing to incorporate existing law regarding the 0.25 percentage point reduction to the annual update to the standard Federal rate for RY 2010 (including the application of the revised standard Federal rate that reflects that 0.25 percentage point reduction in making payments for discharges on or after April 1, 2010) into the regulations at § 412.529(c)(3)(vi) to reflect this required policy change.

4. Proposed Market Basket Update for LTCHs for FY 2011

As discussed in section VII.C.2. of the preamble of the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule, we are proposing to continue to use the FY 2002-based rehabilitation, psychiatric, long-term care (RPL) hospital market basket under the LTCH PPS for FY 2011. Also, in that proposed rule, we stated that at this time, the most recent estimate of the increase in the proposed LTCH PPS market basket (that is, the FY 2002-based RPL market basket) for FY 2011 is 2.4 percent. This increase is based on IHS Global Insight, Inc.'s first quarter 2010 forecast, with historical data through the 2009 fourth quarter, of the FY 2002-based RPL market basket increase. Since publication of the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule our estimate of the FY 2002-based RPL market basket for FY 2011 has not changed. Furthermore, as also stated in the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule, consistent with our historical practice of using market basket estimates based on the most recent available data, we propose that if more recent data are available when we develop the final rule, we would use such data, if appropriate.

Section 1886(m)(3)(A)(ii) of the Act as added by section 3401(c) of Public Law 111-148 specifies that for each of RYs 2010 through 2019, any annual update to the standard Federal rate shall be reduced by the other adjustment specified in new section 1886(m)(4) of the Act. Furthermore, section 1886(m)(3)(A)(i) of the Act specifies thatfor rate year 2012 and each subsequent rate year, any annual update to the standard Federal rate shall be reduced by the productivity adjustment described in section 1866(b)(3)(B)(xi)(II) of the Act.

For FY 2011, section 1886(m)(4)(B) of the Act as added by section 3401(c) of Public Law 111-148, as amended by section 10319 of Public Law 111-148 and as further amended by section 1105(b) of Public Law 111-152, requires a 0.50 percentage point reduction to the annual update to the standard Federal rate for rate year 2011. Consequently, the proposed market basket update under the LTCH PPS for FY 2011 is 1.9 percent (that is, the most recent estimate of the LTCH PPS market basket of 2.4 percent minus the 0.50 percentage points required in section 1886(m)(4)(B) of the Act. Again, we note that consistent with our historical practice of using market basket estimates based on the most recent available data, we propose that if more recent data are available when we develop the final rule, we would use such data, if appropriate, in determining the final market basket update under the LTCH PPS for FY 2011. (We note that in section III.A. of the Addendum to this supplemental proposed rule, for FY 2011, we are proposing to update the LTCH PPS standard Federal rate by −0.59 percent. This proposed update reflects proposed market basket update under the LTCH PPS for FY 2011 (of 1.9 percent as discussed above) and a proposed adjustment to account for the increase in case-mix in the prior periods that resulted from changes in documentation and coding practices rather than increases in patients' severity of illness (discussed in section VII.C.3. of the preamble of the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule).)

5. Proposed Medicare Severity Long-Term Care Diagnosis-Related Group (MS-LTC-DRG) Relative Weights

As discussed above, the proposed LTCH PPS policies and payment rates in the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule do not reflect the provisions of the Affordable Care Act. The revised proposed standard Federal rate for FY 2011 that incorporates the “other adjustment” required in section 1886(m)(3)(A)(ii) as amended and described in section 1886(m)(4) as amended is discussed in section III.A. of the Addendum of this supplemental proposed rule. This revision to the proposed standard Federal rate for FY 2011 requires us to revise the proposed relative weights for the MS-LTC-DRGs for FY 2011. This is the case since our established methodology for updating the annual update to the MS-LTC-DRG classifications and relative weights in a budget neutral manner requires that estimated aggregate LTCH PPS payments would be unaffected. That is, under the budget neutrality requirement estimated aggregate LTCH PPS payments would be neither greater than nor less than the estimated aggregate LTCH PPS payments that would have been made without the MS-LTC-DRG classification and relative weight changes.

As discussed in section VII.B.3.g. (step 7) of the preamble of the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule (75 FR 24042 through 24043), we proposed to use our established two-step budget neutrality methodology. In the first step of our MS-LTC-DRG budget neutrality methodology, we calculate and apply a normalization factor to the proposed recalibrated relative weights to ensure that estimated payments are not influenced by changes in the composition of case types or the changes to the classification system. That is, the normalization adjustment is intended to ensure that the recalibration of the proposed MS-LTC-DRG relative weights (that is, the process itself) neither increases nor decreases the average case-mix index (CMI). The normalization factor is calculated using the ratio average CMIs (that is, the average MS-LTC-DRG relative weight) and is independent of the standard Federal rate. (We refer readers to the FY 2011 IPPS/LTCH PPS proposed rule for additional details on the proposed calculation of the normalization factor applied used in determining the proposed FY 2011 MS-LTC-DRG relative weights (75 FR 24042 through 24043).) Therefore, this step was not revised for this supplemental proposed rule. However, in the second step of our established two-step budget neutrality methodology (described in section VII.B.3.g. (step 7) of the preamble of the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule), for FY 2011 we proposed to determine a budget neutrality adjustment factor based on simulating estimated total LTCH PPS payments. Consequently, revising the standard Federal rate to reflect the provisions of newly added sections 1886(m)(3)(A)(ii) and (4) of the Act would impact the estimated aggregated LTCH PPS payments upon which we determine the proposed budget neutrality factor applied in determining the proposed FY 2011 MS-LTC-DRG relative weights.

For this supplemental proposed rule, consistent with the proposed methodology described in the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule (75 FR 24042 through 24043), we are proposing to apply a budget neutrality adjustment factor of 0.987632 in determining the proposed FY 2011 MS-LTC-DRG relative weights, which was determined based on payments simulations after using the proposed FY 2011 standard Federal rate that reflects the reductions required by sections 1886(m)(3)(A)(ii) and (4)(A) and (B) of the Act (discussed above) and LTCH claims from the December 2009 update of the FY 2009 MedPAR files (that is the same data used in the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule). Specifically, we determined the proposed FY 2011 budget neutrality adjustment factor using the following three steps: (2.a.) we simulate estimated total LTCH PPS payments using the normalized proposed relative weights for FY 2011 and GROUPER Version 28.0 (as described above); (2.b.) we simulate estimated total LTCH PPS payments using the FY 2010 GROUPER (Version 27.0) and the FY 2010 MS-LTC-DRG relative weights shown in Table 11 of the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 44183 through 44192); and (2.c.) we calculate the ratio of these estimated total LTCH PPS payments by dividing the estimated total LTCH PPS payments using the FY 2010 GROUPER (Version 27.0) and the FY 2010 MS-LTC-DRG relative weights (determined in step 2.b.) by the estimated total LTCH PPS payments using the proposed FY 2011 GROUPER (Version 28.0) and the normalized proposed MS-LTC-DRG relative weights for FY 2011 (determined in Step 2.a.).

Therefore, under our established two-step budget neutrality methodology, in determining the proposed FY 2011 MS-LTC-DRG relative weights, each normalized proposed relative weight (determined as described in section VII.C.3.g.(step 7) of the preamble of the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule) is multiplied by a budget neutrality factor of 0.987632 in the second step of the budget neutrality methodology to determine the proposed budget neutral FY 2011. (We note that in determining the proposed FY 2011 budget neutral MS-LTC-DRG relative weights for this supplemental proposed rule, with the exception of the proposed budget neutrality adjustment factor of 0.987632 discussed above, we used the proposed methodology as presented in the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule (75 FR 24042 through 24043).) Consistent with our historical policy of using the best available data, we are proposing to use the most recent available data fordetermining the budget neutrality adjustment factor in the final rule.

Accordingly, in determining the proposed FY 2011 MS-LTC-DRG relative weights in Table 11 in the Addendum to this supplemental proposed rule, consistent with our existing methodology, we are proposing to apply a normalization factor of 1.10362 (computed as described in section VII.C.3.g. (step 7) of the preamble to the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule) and a budget neutrality factor of 0.987632 (computed as described above). Table 11 in the Addendum to this supplemental proposed rule lists the proposed MS-LTC-DRGs and their respective proposed relative weights, geometric mean length of stay, and five-sixths of the geometric mean length of stay (used in determining SSO payments under § 412.529) for FY 2011. (We note that there are no changes to the geometric mean length of stay and five-sixths of the geometric mean length of stay that were published in Table 11 of the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule as the calculation of these statistics is independent of the standard Federal rate.)

III. Other Required Information

A. Collection of Information Requirements

This document does not impose information collection and recordkeeping requirements. Consequently, it need not be reviewed by the Office of Management and Budget under the authority of the Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35).

B. Waiver of 60-Day Comment Period

We ordinarily publish a notice of proposed rulemaking in the Federal Register and permit a 60-day comment period, as provided in section 1871(b)(1) of the Act. This period, however, may be shortened, as provided under section 1871(b)(2)(C) of the Act, when the Secretary finds good cause that a 60-day comment period would be impracticable, unnecessary, or contrary to the public interest and incorporates a statement of the finding and its reasons in the rule issued. For this supplemental proposed rule, we are waiving the 60-day comment period for good cause and allowing a comment period that coincides with the comment period provided for on the FY 2011 IPPS/LTCH PPS proposed rule (75 FR 23852).

As we explained in the FY 2011 IPPS/LTCH PPS proposed rule (75 FR 23859), due to the timing of the enactment of Public Law 111-148 and Public Law 111-152, the policies and payment rates outlined in the proposed rule did not reflect the changes made by either law to the IPPS and LTCH PPS. This supplemental proposed rule addresses the changes that affect our proposed policies and payment rates for FY 2011 under the IPPS and the LTCH PPS.

A 60-day comment period on this supplemental proposed rule would be both impracticable and contrary to the public interest because it would not allow for coordinated consideration of the comments on this supplemental proposed rule with those on the FY 2011 IPPS/LTCH PPS proposed rule. Because the issues raised in this supplemental proposed rule are integral to our consideration of comments on certain proposals in the FY 2011 IPPS/LTCH PPS proposed rule, we do not believe it would be appropriate to review comments on the issues raised in this supplemental proposed rule in isolation from the comments received on the FY 2011 IPPS/LTCH PPS proposed rule. We further note that a full 60-day comment period would end on a date that would not allow the agency sufficient time to process the comments and respond to them in a meaningful manner by the August 1, 2010 date for issuing the final rule. If we allowed for a full 60-day comment period, timely filed comments would receive a shorter period of time for consideration by the agency, and the agency would be left with insufficient time to properly respond to comments and appropriately resolve whether any of the proposed policies should be modified in light of comments received. For all of these reasons, we find good cause to waive the 60-day comment period for this rule of proposed rulemaking, and we are instead providing for a comment period that coincides with the comment period provided for the FY 2011 IPPS/LTCH PPS proposed rule that appeared in the May 4, 2010Federal Register.

IV. Response to Comments

Because of the large number of public comments we normally receive on Federal Register documents, we are not able to acknowledge or respond to them individually. We will consider all comments we receive by the date and time specified in the DATES section of this preamble, and, when we proceed with a subsequent document, we will respond to the comments in the preamble to that document.

List of subjects

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

Health facilities, Kidney diseases, Medicare, Puerto Rico, Reporting and recordkeeping requirements.

For the reasons stated in the preamble of this proposed rule, the Centers for Medicare Medicaid Services is proposing to amend 42 CFR chapter IV as follows:

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), and sec. 124 of Public Law 106-113 (113 Stat. 1501A-332).

§ 412.23

2. In § 412.23, paragraphs (e)(6)(i) and (e)(7)(ii) are amended by removing the date “December 28, 2010” and adding the date “December 28, 2012” in its place.

3. Section 412.64 is amended by—

A. Revising paragraphs (d)(1) and (e)(4).

B. Adding a new paragraph (m).

§ 412.64 * * * * *

(d)Applicable percentage change for fiscal year 2005 and for subsequent fiscal years.

(1) Subject to the provisions of paragraph (d)(2) of this section, the applicable percentage change for updating the standardized amount is—

(i) For fiscal year 2005 through fiscal year 2009, the percentage increase in the market basket index for prospective payment hospitals (as defined in § 413.40(a) of this subchapter) for hospitals in all areas.

(ii) For fiscal year 2010, for discharges—

(A) On or after October 1, 2009 and before April 1, 2010, the percentage increase in the market basket index for prospective payment hospitals (as defined in § 413.40(a) of this subchapter) for hospitals in all areas; and

(B) On or after April 1, 2010 and before October 1, 2010, the percentage increase in the market basket index minus 0.25 percentage points forprospective payment hospitals (as defined in § 413.40(a) of this subchapter) for hospitals in all areas.

(iii) For fiscal year 2011, the percentage increase in the market basket index minus 0.25 percentage points for prospective payment hospitals (as defined in § 413.40(a) of this subchapter) for hospitals in all areas.

* * * * *

(e) * * *

(4) CMS makes an adjustment to the wage index to ensure that aggregate payments after implementation of the rural floor under section 4410 of the Balanced Budget Act of 1997 (Pub. L. 105-33) and the imputed floor under paragraph (h)(4) of this section are equal to the aggregate prospective payments that would have been made in the absence of such provisions as follows:

(i) Beginning October 1, 2008, such adjustment is transitioned from a nationwide to a statewide adjustment as follows:

(A) From October 1, 2008 through September 30, 2009, the wage index is a blend of 20 percent of a wage index with a statewide adjustment and 80 percent of a wage index with a nationwide adjustment.

(B) From October 1, 2009 through September 30, 2010, the wage index is a blend of 50 percent of a wage index with a statewide adjustment and 50 percent of a wage index with a nationwide adjustment.

(ii) Beginning October 1, 2010, such adjustment is a full nationwide adjustment.

* * * * *

(m)Adjusting the wage index to account for the Frontier State floor.

(1)General criteria. For discharges occurring on or after October 1, 2010, CMS adjusts the hospital wage index for hospitals located in qualifying States to recognize the wage index floor established for frontier States. A qualifying frontier State meets both of the following criteria:

(i) At least 50 percent of counties located within the State have a reported population density less than 6 persons per square mile.

(ii) The State does not receive a non-labor related share adjustment determined by the Secretary to take into account the unique circumstances of hospitals located in Alaska and Hawaii.

(2)Amount of wage index adjustment. A hospital located in a qualifying State will receive a wage index value not less than 1.00.

(3)Process for determining and posting wage index adjustments.(i) CMS uses the most recent Population Estimate data published by the U.S. Census Bureau to determine county definitions and population density. This analysis will be periodically revised, such as for updates to the decennial census data.

(ii) CMS will include a listing of qualifying Frontier States and denote the hospitals receiving a wage index increase attributable to this provision in its annual updates to the hospital inpatient prospective payment system published in the Federal Register.

4. Section 412.73 is amended by—

A. Revising paragraph (c)(15).

B. Adding a new paragraph (c)(16).

The revision and addition read as follows:

§ 412.73 * * * * *

(c) * * *

(15)For Federal fiscal year 2003 through Federal fiscal year 2009. For Federal fiscal year 2003 through Federal fiscal year 2009, the update factor is the percentage increase in the market basket index for prospective payment hospitals (as defined in § 413.40(a) of this chapter).

(16)For Federal fiscal year 2010 and subsequent years. For Federal fiscal year 2010 and subsequent years, the update factor is the percentage increase specified in § 412.64(d).

* * * * *
§ 412.75

5. In § 412.75, paragraph (d) is amended by removing the citation “§ 412.73(c)(15)” and adding the citation “§ 412.73(c)(15) and § 412.73(c)(16)” in its place.

§ 412.77

6. In § 412.77, paragraph (e) is amended by removing the reference “(c)(15)” and adding the reference “(c)(16)” in its place.

§ 412.78

7. In § 412.78, paragraph (e) is amended by removing the citation “§ 412.73(c)(15)” and adding the citation “§ 412.73(c)(15) and § 412.73(c)(16)” in its place.

§ 412.79

8. In § 412.79, paragraph (d) is amended by removing the phrase “and (c)(15)” and adding the phrase “through (c)(16)” in its place.

9. Section 412.101 is revised to read as follows:

§ 412.101

(a)Definitions. Beginning in FY 2011, the terms used in this section are defined as follows:

Medicare discharges means discharge of inpatients entitled to Medicare Part A, including discharges associated with individuals whose inpatient benefits are exhausted or whose stay was not covered by Medicare and also discharges of individuals enrolled in a MA organization under Medicare Part C.

Road miles means “miles” as defined in § 412.92(c)(1).

(b)General considerations.(1) CMS provides an additional payment to a qualifying hospital for the higher incremental costs associated with a low volume of discharges. The amount of any additional payment for a qualifying hospital is calculated in accordance with paragraph (c) of this section.

(2) In order to qualify for this adjustment a hospital must meet the following criteria:

(i) For FY 2005 through FY 2010, a hospital must have less than 200 total discharges, which includes Medicare and non-Medicare discharges, during the fiscal year, as reflected in its cost report specified in paragraph (b)(3) of this section, and be located more than 25 road miles (as defined in paragraph (a) of this section from the nearest “subsection (d)” (section 1886(d) of the Act) hospital.

(ii) For FY 2011 and FY 2012, a hospital must have less than 1,600 Medicare discharges, as defined in paragraph (a) of this section, during the fiscal year, as reflected in its cost report specified in paragraph (b)(3) of this section, and be located more than 15 road miles, as defined in paragraph (a) of this section, from the nearest “subsection (d)” (section 1886(d) of the Act) hospital.

(iii) For FY 2013 and subsequent fiscal years, a hospital must have less than 200 total discharges, which includes Medicare and non-Medicare, during the fiscal year, as reflected in its cost report specified in paragraph (b)(3) of this section, and be located more than 25 road miles as defined in paragraph (a) of this section from the nearest “subsection (d)” (section 1886(d) of the Act) hospital.

(3) The fiscal intermediary or Medicare administrative contractor makes the determination of the discharge count for purposes of determining a hospital's qualification for the adjustment based on the hospital's most recently submitted cost report and for qualification for FYs 2011 and 2012 other documentation ofMedicare discharges (as defined in paragraph (a) of this section).

(4) In order to qualify for the adjustment, a hospital must provide its fiscal intermediary or Medicare administrative contractor with sufficient evidence that it meets the distance requirement specified under paragraph (b)(2) of this section. The fiscal intermediary or Medicare administrative contractor will base its determination of whether the distance requirement is satisfied upon the evidence presented by the hospital and other relevant evidence, such as maps, mapping software, and inquiries to State and local police, transportation officials, or other government officials.

(c)Determination of the adjustment amount. The low-volume adjustment for hospitals that qualify under paragraph (b) of this section are as follows for the applicable fiscal year:

(1) For FY 2005 through FY 2010, the adjustment is 25 percent for each Medicare discharge.

(2) For FY 2011 and FY 2012, the adjustment is as follows:

Medicare discharge rangePaymentadjustment (percent add-on)
1-200 25.0000
201-301 23.3333
301-400 21.6667
401-500 20.0000
501-600 18.3333
601-700 16.6667
701-800 15.0000
801-900 13.3333
901-1,000 11.6667
1,001-1,100 10.0000
1,101-1,200 8.3333
1,201-1,300 6.6667
1,301-1,400 5.0000
1,401-1,500 3.3333
1,501-1,599 1.6667
1,600 or more 0.0000

(3) For FY 2013 and subsequent years, the adjustment is 25 percent for each Medicare discharge.

(d)Eligibility of new hospitals for the adjustment. A new hospital will be eligible for a low-volume adjustment under this section once it has submitted a cost report for a cost reporting period that indicates that it meets discharge requirements during the applicable fiscal year and has provided its fiscal intermediary or Medicare administrative contractor with sufficient evidence that it meets the distance requirement, as specified under paragraph (b)(2) of this section.

§ 412.108

10. Section 412.108 is amended as follows:

A. In paragraph (a)(1) introductory text the phrase “before October 1, 2011” is removed and the phrase “before October 1, 2012” is added in its place.

B. In paragraph (c)(2)(iii) introductory text the phrase “before October 1, 2010” is removed and the phrase “before October 1, 2012” is added in its place.

11. Section 412.211 is amended by revising paragraph (c) to read as follows:

§ 412.211 * * * * *

(c)Computing the standardized amount. CMS computes a Puerto Rico standardized amount that is applicable to all hospitals located in all areas. The applicable percentage change for updating the Puerto Rico specific standardized amount is as follows:

(1) For fiscal year 2004 through fiscal year 2009, increased by the applicable percentage change specified in § 412.64(d)(1)(ii)(A).

(2) For fiscal year 2010, increased by the market basket index for prospective payment hospitals (as defined in § 413.40(a) of this subchapter) for hospitals in all areas.

(3) For fiscal year 2011, increased by the applicable percentage change specified in § 412.64(d)(1)(iii).

* * * * *
§ 412.230

12. In § 412.230 paragraph (d)(1)(iv)(E) is amended by removing the figures “86” and “88” adding the figures “82” and “84” in their place, respectively.

§ 412.232

13. In § 412.232, paragraph (c)(3) is amended by removing the figure “88” and adding the figure “85” in its place.

§ 412.234

14. In § 412.234, paragraph (b)(3) is amended by removing the figure “88” and adding the figure “85” in its place.

§ 412.523

15. Section 412.523 is amended as follows:

A. Revise paragraph (c)(3)(vi).

B. Add paragraph (c)(3)(vii).

C. Paragraph (d)(3) is amended by removing the phrase “December 29, 2010, and by no later than October 1, 2012” and adding the phrase “December 29, 2012,” in its place.

The revision and addition read as follows:

§ 412.523 * * * * *

(c) * * *

(3) * * *

(vi)For long-term care hospital prospective payment system rate year beginning October 1, 2009 and ending September 30, 2010.(A) The standard Federal rate for long-term care hospital prospective payment system rate year beginning October 1, 2009 and ending September 30, 2010 is the standard Federal rate for the previous long-term care hospital prospective payment system rate year updated by 1.74 percent. The standard Federal rate is adjusted, as appropriate, as described in paragraph (d) of this section.

(B) With respect to discharges occurring on or after October 1, 2009 and before April 1, 2010, payments are based on the standard Federal rate in paragraph (c)(3)(v) of this section updated by 2.0 percent.

(vii)For long-term care hospital prospective payment system fiscal year beginning October 1, 2010, and ending September 30, 2011. The standard Federal rate for the long-term care hospital prospective payment system fiscal year beginning October 1, 2010, and ending September 30, 2011, is the standard Federal rate for the previous long-term care hospital prospective payment system rate year updated by −0.59 percent. The standard Federal rate is adjusted, as appropriate, as described in paragraph (d) of this section.

* * * * *
§ 412.529

16. In § 412.529, paragraphs (c)(2) introductory text and (c)(3) introductory text are amended by removing the date “December 29, 2010” and adding in its place the date “December 29, 2012” each time it appears.

§ 412.534

17. Section 412.534 is amended as follows:

A. Paragraphs (c)(1), (c)(2), (d)(1), (d)(2), (e)(1), (e)(2) are amended by removing the date “October 1, 2010” and adding in its place the date “October 1, 2012” each time it appears.

B. Paragraphs (c)(3), (d)(3), (e)(3), (h)(4), and (h)(5) are amended by removing the date “July 1, 2010” and adding in its place the date “July 1, 2012” each time it appears.

§ 412.536

18. In § 412.536, paragraph (a)(2) introductory text is amended by removing the date “July 1, 2010” and adding the date “July 1, 2012” in its place.

Part 413—principles of reasonable cost reimbursement; payment for end-stage renal disease services; optional prospectively determined payment rates for skilled nursing facilities

19. The authority citation for part 413 continues to read as follows:

Authority:

Secs. 1102, 1812(d), 1814(b), 1815, 1833(a), (i), and (n), 1861(v), 1871, 1881, 1883, and 1886 of the Social Security Act (42 U.S.C. 1302, 1395d(d), 1395f(b), 1395g, 1395l(a), (i), and (n), 1395x(v), 1395hh, 1395rr, 1395tt, and 1395ww); and sec. 124 of Public Law 106-133 (113 Stat. 1501A-332).

20. Section 413.70 is amended as follows:

A. Revise paragraph (b)(3)(ii)(A).

B. Redesignate paragraph (b)(5)(i) as (b)(5)(i)(A).

C. In newly redesignated paragraph (b)(5)(i)(A), the phrase “on or after December 21, 2000,” is removed and the phrase “on or after December 21, 2000 and on or before December 31, 2003,” is added in its place.

D. Add a new paragraph (b)(5)(i)(B).

The revision and addition read as follows:

§ 413.70 * * * * *

(b) * * *

(3) * * *

(ii) * * *

(A) Effective for cost reporting periods beginning on or after January 1, 2004, for facility services not including any services for which payment may be made under paragraph (b)(3)(ii)(B) of this section, 101 percent of the reasonable costs of the services as determined under paragraph (b)(2)(i) of this section; and

* * * * *

(5) * * *

(i) * * *

(B) Effective for cost reporting periods beginning on or after January 1, 2004, payment for ambulance services furnished by a CAH or an entity that is owned and operated by a CAH is 101 percent of the reasonable costs of the CAH or the entity in furnishing those services, but only if the CAH or the entity is the only provider or supplier of ambulance services located within a 35-mile drive of the CAH or the entity.

* * * * *

Authority:

(Catalog of Federal Domestic Assistance Program No. 93.773, Medicare—Hospital Insurance; and Program No. 93.774, Medicare—Supplementary Medical Insurance Program)

Dated: May 13, 2010. Marilyn Tavenner,

Acting Administrator, Centers for Medicare Medicaid Services.

Approved: May 18, 2010. Kathleen Sebelius,

Secretary.

Note:

The following Addendum and Appendix will not appear in the Code of Federal Regulations.

Addendum: FY 2011 Supplemental Proposed Payment Rates

I. Supplemental Proposed FY 2011 Prospective Payment Systems Payment Rates for Hospital Inpatient Operating and Capital Related Costs

As discussed in section II.B. of the preamble to this supplemental proposed rule, changes to the applicable percentage increase, wage index, and rural community hospital demonstration mandated by the Affordable Care Act necessitate the recalculation of the FY 2011 proposed budget neutrality factors, outlier threshold and standardized amounts. In the FY 2011 IPPS/LTCH PPS proposed rule we explained our methodology for calculating the FY 2011 proposed budget neutrality factors (75 FR 24062 through 24073). Except as explained below, we apply this same methodology in recalculating these budget neutrality adjustments to reflect the changes to the standardized amount required by the Affordable Care Act. A complete discussion of our computation of the FY 2011 proposed budget neutrality factors, outlier threshold and standardized amounts is found below.

A. Updating the Average Standardized Amounts

As discussed section II.B. of the preamble to this supplemental proposed rule, sections 3401(a) and section 10319(a) of Public Law 111-148, amends section 1886(b)(3)(B)(i) of the Act to provide that the FY 2011 applicable percentage increase for IPPS hospitals equals the rate-of-increase in the hospital market basket for IPPS hospitals in all areas minus a 0.25 percentage point, subject to the hospital submitting quality information under rules established by the Secretary in accordance with section 1886(b)(3)(B)(viii) of the Act. For hospitals that fail to submit quality data consistent with section 1886(b)(3)(B)(viii) of the Act, the update is equal to the market basket percentage increase minus a 0.25 percentage point less an additional 2.0 percentage points. Therefore, for this supplemental proposed rule, based on IHS Global Insight, Inc.'s first quarter 2010 forecast of the FY 2011 market basket increase, the estimated update to the FY 2011 operating standardized amount is 2.15 percent (that is, the FY 2011 estimate of the market basket rate-of-increase of 2.4 percent minus 0.25 percentage points) for hospitals in all areas, provided the hospital submits quality data in accordance with our rules. For hospitals that do not submit quality data, the estimated update to the operating standardized amount is 0.15 percent (that is, the adjusted FY 2011 estimate of the market basket rate-of-increase of 2.15 percent minus 2.0 percentage points).

B. Proposed Budget Neutrality Adjustments Factors for Recalibration of DRG Weights and Updated Wage Index

In the FY 2011 IPPS/LTCH PPS proposed rule we explained our methodology for calculating the FY 2011 proposed DRG reclassification and recalibration and updated wage index budget neutrality factor (75 FR 24064). Except as explained below, we apply this same methodology in recalculating this budget neutrality adjustment to reflect the changes to the standardized amount required by the Affordable Care Act.

As discussed above, sections 3401(a) and section 10319(a) of Public Law 111-148 amends section 1886(b)(3)(B)(i) of the Act, which defines the applicable percentage increase. Although these amendments modify the applicable percentage increase applicable to the FY 2010 rates under the IPPS, section 3401(p) of Public Law 111-148 states that the amendments do not apply to discharges occurring prior to April 1, 2010. Accordingly, for purposes of determining payment amounts for discharges occurring on or after April 1, 2010, in order to comply with the statute in section 3401(p) of Public Law 111-148, we applied the revised FY 2010 rates effective with discharges on or after April 1, 2010 until the end of FY 2010. However, for purposes of determining the budget neutrality adjustments for FY 2011, the statute requires us to simulate the FY 2010 hospital as if hospitals were paid for all of FY 2010 based on the FY 2010 rates that are effective for payments for discharges occurring on or after April 1, 2010.

For FY 2011 we are proposing a proposed DRG reclassification and recalibration factor of 0.996867 and a proposed budget neutrality factor of 1.000070 for changes to the wage index. We multiplied the proposed DRG reclassification and recalibration budget neutrality factor of 0.996867 by the proposed budget neutrality factor of 1.000070 for changes to the wage index to determine the proposed DRG reclassification and recalibration and updated wage index budget neutrality factor of 0.996937 (as required by sections 1886(d)(4)(C)(iii) and 1886(d)(3)(E)(i) of the Act).

C. Reclassified Hospitals—Budget Neutrality Adjustment

Due to the Affordable Care Act, it is also necessary to revise the reclassification budget neutrality factor. As discussed in section II.A. of the preamble to this supplemental proposed rule, section 3137(c) of Public Law 111-148 revised the average hourly wage standards resulting in our estimate that 23 additional hospitals will be reclassified (or receive their primary reclassifications. Using the methodology proposed in the FY 2011 IPPS proposed rule, and incorporating the provision above, we computed a factor of 0.991476 for reclassification budget neutrality, as required by section 1886(d)(8)(D) of the Act.

D. Rural and Imputed Floor Budget Neutrality

We make an adjustment to the wage index to ensure that aggregate payments after implementation of the rural floor under section 4410 of the BBA (Pub. L. 105-33) and the imputed floor under § 412.64(h)(4) of the regulations are made in a manner that ensures that aggregate payments to hospitals are not affected. As discussed in section III.B. of the preamble of the FY 2009 IPPS final rule (73 FR 48570 through 48574), we adopted as final State level budget neutrality for the rural and imputed floors, effective beginning with the FY 2009 wage index. In response to the public's concerns and taking into account the potentially significant payment cuts that could occur to hospitals in some States if we implemented this change with no transition, we decided to phase in, over a 3-year period, the transition from the national rural floor budget neutrality adjustment on the wage index to the State level rural floor budget neutrality adjustment on the wage index. In FY 2011 IPPS/LTCH PPS proposed rule, in the absence of provisions of Public Law 111-148, the proposed adjustment would have been completely transitioned to the State level methodology, such that the wage index that was proposed in the FY 2011 IPPS/LTCH PPS proposed rule was determined by applying 100 percent of the State level budget neutrality adjustment. However, section 3141 of Public Law 111-148 restores the budget neutrality adjustment for the rural and imputed floors to a uniform, national adjustment, beginning with the FY 2011 wage index.

Using the same methodology in prior final rules to calculate the national rural and imputed floor budget neutrality adjustment factor (which was part of the methodology to calculate the blended rural and imputed floor budget neutrality adjustment factors), to determine the proposed wage index adjusted by the national rural and imputed floor budget neutrality adjustment, we used FY 2009 discharge data and proposed FY 2011 wage indices to simulate IPPS payments. First, we compared the national simulated payments without the rural and imputed floors applied to national simulated payments with the rural and imputed floors applied to determine the national rural and imputed floor budget neutrality adjustment factor of 0.995425. This national adjustment was then applied to the wage indices to produce a national rural and imputed floor budget neutral wage index.

E. Proposed Rural Community Hospital Demonstration Program Adjustment

As discussed in section II.F. of the preamble to this supplemental proposed rule, section 410A of Public Law 108-173 requires the Secretary to establish a demonstration that will modify reimbursement for inpatient services for up to 15 small rural hospitals. Section 410A(c)(2) of Public Law 108-173 requires that “in conducting the demonstration program under this section, the Secretary shall ensure that the aggregate payments made by the Secretary do not exceed the amount which the Secretary would have paid if the demonstration program under this section was not implemented.” In the proposed rule we did not apply an adjustment to the standardized amount to ensure the effects of the rural community hospital demonstration are budget neutral. However, section 450(a) of the MMA as amended by sections 3123 and 10313 of Public Law 111-148 extends the demonstration for an additional 5 years, and allows not more than 30 hospitals to participate in the 20 least densely populated States.

In order to achieve budget neutrality, we are proposing to adjust the national IPPS rates by an amount sufficient to account for the added costs of this demonstration. In other words, we are proposing to apply budget neutrality across the payment system as a whole rather than merely across the participants of this demonstration, consistent with past practice. We believe that the language of the statutory budget neutrality requirement permits the agency to implement the budget neutrality provision in this manner. The statutory language requires that “aggregate payments made by the Secretary do not exceed the amount which the Secretary would have paid if the demonstration * * * was not implemented,” but does not identify the range across which aggregate payments must be held equal. As mentioned section II.F. of the preamble to this supplemental proposed rule, the proposed estimated amount for the adjustment to the national IPPS rates for FY 2011 is $69,279,673. Accordingly to account for the changes in the Affordable Care Act, we computed a proposed factor of 0.999313 for the rural community hospital demonstration program adjustment. We note that because the settlement process for the demonstration hospitals' third year cost reports, that is, cost reporting periods starting in FY 2007, has experienced a delay, for this FY 2011 IPPS proposed rule, we are unable to state the costs of the demonstration corresponding to FY 2007 and as a result are unable to propose the specific numeric adjustment representing this offsetting process that would be applied to the national IPPS rates (as discussed above). However, we expect the cost reports beginning in FY 2007 for hospitals that participated during FY 2007 to be settled before the FY 2011 IPPS/LTCH final rule is published. Therefore, for the FY 2011 IPPS/LTCH PPS final rule, we expect to be able to calculate the amount by which the costs corresponding to FY 2007 exceeded the amount offset by the budget neutrality adjustment for FY 2007.

F. Proposed FY 2011 Outlier Fixed-Loss Cost Threshold

In order to compute the FY 2011 proposed outlier threshold, we used the same methodology in this supplemental proposed rule that we used in the FY 2011 IPPS/LTCH PPS proposed rule (75 FR 24068 through 24069; and incorporated the provisions of Pub. L. 111-148 and Pub. L. 111-152 as discussed above). However, as discussed in section II.A. of the preamble to this supplemental proposed rule, in accordance with section 10324(a) of Public Law 111-148, beginning in FY 2011, we are proposing to create a wage index floor of 1.00 for all hospitals located in States determined to be Frontier States. We noted that the Frontier State floor adjustments will be calculated and applied after rural and imputed floor budget neutrality adjustments are calculated for all labor market areas, so as to ensure that no hospital in a Frontier State will receive a wage index lesser than 1.00 due to the rural and imputed floor adjustment. In accordance with section 10324(a) of Public Law 111-148, the Frontier State adjustment will not be subject to budget neutrality, and will only be extended to hospitals geographically located within a Frontier State. However, for purposes of estimating the proposed outlier threshold for FY 2011, it is necessary to apply this provision by adjusting the wage index of those eligible hospitals in a Frontier State when calculating the outlier threshold that results in outlier payments being 5.1 percent of total payments for FY 2011. If we did not take into account this provision, our estimate of total FY 2011 payments would be too low, and as a result, our proposed outlier threshold would be too high, such that estimated outlier payments would be less than our projected 5.1 percent of total payments.

We are proposing an outlier fixed-loss cost threshold for FY 2011 equal to the prospective payment rate for the DRG, plus any IME and DSH payments, and any add-on payments for new technology, plus $24,165.

G. FY 2011 Proposed Outlier Adjustment Factors

Using the same methodology in this supplemental proposed rule that we used in the FY 2011 IPPS/LTCH PPS proposed rule (75 FR 24069; and incorporating the provisions of the Affordable Care Act as discussed above), we computed the following proposed FY 2011 outlier adjustment factors that are applied to the proposed FY 2011 standardized amount for the proposed FY 2011 outlier threshold:

Operatingstandardized amounts Capital federal rate
National 0.948995 0.943217
Puerto Rico 0.951459 0.925238

H. Proposed FY 2011 Standardized Amount

We calculated the proposed FY 2011 standardized amounts using the methodology proposed in the FY 2011 IPPS proposed rule taking into account the changes required by the provisions of Public Law 111-148. Tables 1A and 1B in this supplemental proposed rule contain the proposed national standardized amount that we are applying to all hospitals, except hospitals in Puerto Rico. The proposed Puerto Rico-specific amounts are shown in Table 1C. The proposed amounts shown in Tables 1A and 1B differ only in that the labor-related share applied to the proposed standardized amounts in Table 1A is 68.8 percent, and the labor-related share applied to the proposed standardized amounts in Table 1B is 62 percent.

In addition, Tables 1A and 1B include the proposed standardized amounts reflecting the adjusted marker basket update of 2.15 percent update for FY 2011, and proposed standardized amounts reflecting the 2.0 percentage point reduction to the update (a 0.15 percent update) applicable for hospitals that fail to submit quality data consistent with section 1886(b)(3)(B)(viii) of the Act. Below is a revised table reflecting the changes required by the provisions of the Affordable Care Act that details the calculation of the proposed FY 2011 standardized amounts. We note that our proposed adjustment for documentation and coding discussed at (75 FR 24065 through 24067) has not changed since publication of the FY 2011 IPPS/LTCH proposed rule. Similar to the FY 2011 IPPS/LTCH PPS proposed rule, the adjustment of 0.957 is reflected within the table below.

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The proposed labor-related and nonlabor-related portions of the national average standardized amounts for Puerto Rico hospitals for FY 2011 are set forth in Table 1C in this supplemental proposed rule. (The labor-related share applied to the Puerto Rico-specific standardized amount is either 62.1 percent or 62 percent, depending on which is more advantageous to the hospital.)

I. Proposed Adjustments for Area Wage Levels

The following wage index tables were revised in this supplemental proposed rule as a result of the provisions of Public Law 111-148: Tables 2, 4A, 4B, 4C, 4D-2, 4J, and 9A. (These tables are also available on the CMS Web site.)

II. Supplemental Proposed FY 2011 Prospective Payment Systems Payment Rates for Capital Related Costs

Although the provisions of Public Law 111-148, do not directly affect the payment rates and policies for the IPPS for capital-related costs, as discussed in section II.G. of the preamble of this supplemental proposed rule, we are proposing the capital IPPS standard Federal rates for FY 2011. This is necessary because the wage index changes required by the provisions of Public Law 111-148 (discussed above in section II.A. of preamble to this supplemental proposed rule) affect the proposed budget neutrality adjustment factor for changes in DRG classifications and weights and the geographic adjustment factor (GAF) since the GAF values are derived from the wage index values (see§ 412.316(a)). In addition, the provisions of Public Law 111-148, also necessitate a revision to the proposed outlier payment adjustment factor since a single set of thresholds is used to identify outlier cases for both inpatient operating and inpatient capital-related payments (see§ 412.312(c)).

In this supplemental proposed rule, we have calculated the proposed FY 2011 capital Federal rates, offsets, and budget neutrality factors using the same methodology we proposed in the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule (CMS-1498-P) that was used to calculate the proposed rates included in that rule which did not reflect the provision of Public Law 111-148. For a complete description of this methodology, please see the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule (75 FR 24073 through 24082).

A. Proposed Capital Standard Federal Rate Update for FY 2011

The proposed factors used in the update framework are not affected by the provisions of the Affordable Care Act. Therefore, the proposed update factor for FY 2011 is not being revised from the proposed capital IPPS standard Federal rate update factor discussed in section III.A.1. of the Addendum to the May 4, 2010 FY 2011 IPPS proposed rule and remains at 1.5 percent for FY 2011.

A full discussion of the proposed update framework is provided in that proposed rule (75 FR 24074 through 24076).

B. Proposed Outlier Payment Adjustment Factor

Based on the thresholds as set forth in section III.A.6. of this Addendum, we estimate that outlier payments for capital-related costs would equal 5.68 percent for inpatient capital-related payments based on the proposed capital Federal rate in FY 2011. Therefore, we are proposing to apply an outlier adjustment factor of 0.9432 in determining the capital Federal rate. For FY 2010, after taking into account the provisions of the Affordable Care Act, we estimated that outlier payments for capital would equal 5.22 percent of inpatient capital-related payments (which required an outlier adjustment factor of 0.9478) based on the capital Federal rate in FY 2010 (as discussed elsewhere in this Federal Register). Thus, we estimate that the percentage of capital outlier payments to total capital standard payments for FY 2011 would be higher than the percentage for FY 2010. This increase in capital outlier payments is primarily due to the estimated decrease in capital IPPS payments per discharge. That is, because capital payments per discharge are projected to be slightly lower in FY 2011 compared to FY 2010, as shown in Table III. in section VIII. of the Appendix to this supplemental proposed rule, more cases would qualify for outlier payments.

The outlier reduction factors are not built permanently into the capital rates; that is, they are not applied cumulatively in determining the capital Federal rate. The proposed FY 2011 outlier adjustment of 0.9432 is a -0.49 percent change from the FY 2010 outlier adjustment of 0.9478. Therefore, the net change in the outlier adjustment to the proposed capital Federal rate for FY 2011 is 0.9951 (0.9432/0.9478). Thus, the proposed outlier adjustment decreases the proposed FY 2011 capital Federal rate by 0.49 percent compared with the FY 2010 outlier adjustment.

A single set of thresholds is used to identify outlier cases for both inpatient operating and inpatient capital-related payments (see§ 412.312(c)). The outlier thresholds are set so that operating outlier payments are projected to be 5.1 percent of total operating IPPS DRG payments. The proposed outlier thresholds for FY 2011 are in section III.A.6. of this Addendum. For FY 2011, a case would qualify as a cost outlier if the cost for the case plus the IME and DSH payments is greater than the prospective payment rate for the MS-DRG plus the fixed-loss amount of $24,165.

C. Proposed Budget Neutrality Adjustment Factor for Changes in DRG Classifications and Weights and the GAF

Using the methodology discussed in section III.A.3. of the Addendum to the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule (75 FR 24077 through 24079), for FY 2011, we are proposing a GAF/DRG budget neutrality factor of 1.0015, which is the product of the proposed incremental GAF budget neutrality factor of 1.0023 and the proposed DRG budget neutrality factor of 0.9992 (the proposed DRG budget neutrality factor remains unchanged from the May 4, 2010 FY 2011 IPPS proposed rule). The GAF/DRG budget neutrality factors are built permanently into the capital rates; that is, they are applied cumulatively in determining the capital Federal rate. This follows the requirement that estimated aggregate payments each year be no more or less than they would have been in the absence of the annual DRG reclassification and recalibration and changes in the GAFs. The incremental change in the proposed adjustment from FY 2010 to FY 2011 is 1.0015. The cumulative change in the proposed capital Federal rate due to this adjustment is 0.9926 (the product of the incremental factors for FYs 1995 though 2010 and the proposed incremental factor of 1.0015 for FY 2011). (We note that averages of the incremental factors that were in effect during FYs 2005 and 2006, respectively, and the revised FY 2010 factor of 0.9994 that reflect the effect of the provisions of the Affordable Care Act (as discussed elsewhere in this Federal Register) were used in the calculation of the cumulative adjustment of 0.9926 for FY 2011.) The proposed cumulative adjustments for MS-DRG classifications and proposed changes in relative weights and for proposed changes in the national GAFs through FY 2011 is 0.9926. The following table summarizes the adjustment factors for each fiscal year:

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The proposed factor accounts for the proposed MS-DRG reclassifications and recalibration and for proposed changes in the GAFs, which include the changes to the wageindex as required by the provisions of Public Law 111-148, as amended (as discussed in section II.A. of the preamble of this supplemental proposed rule). It also incorporates the effects on the proposed GAFs of FY 2011 geographic reclassification decisions made by the MGCRB compared to FY 2010 decisions. However, it does not account for changes in payments due to changes in the DSH and IME adjustment factors.

D. Exceptions Payment Adjustment Factor

The provisions of Public Law 111-148, as amended, have no effect on capital exceptions payments. Therefore, the special exceptions adjustment factor remains at 0.9997 as discussed in section III.A.4. of the May 4, 2010 FY 2011 IPPS proposed rule (75 FR 24079).

E. Prospective MS-DRG Documentation and Coding Adjustment to the Capital Federal Rates for FY 2011 and Subsequent Years

The provisions of Public Law 111-148, as amended, have no effect on the proposed prospective documentation and coding adjustment to the capital Federal rates. Therefore, as discussed in greater detail in section V.E. of the preamble of the May 4, 2010 FY 2011 IPPS proposed rule (75 FR 24013 through 24015), proposed an additional 2.9 percent reduction to the national capital Federal payment rate in FY 2011, resulting in a cumulative documentation and coding adjustment factor of 0.957 for the proposed FY 2011 national capital Federal rate percent (that is, the existing −0.6 percent adjustment in FY 2008 plus the −0.9 percent adjustment in FY 2009 plus the proposed additional −2.9 percent adjustment, computed as 1 divided by (1.006 × 1.009 × 1.029).

F. Proposed Capital Standard Federal Rate for FY 2011

As a result of the proposed 1.5 percent update and other proposed budget neutrality factors discussed above, we are proposing to establish a national capital Federal rate of $422.18 for FY 2011. We are providing the following chart that shows how each of the proposed factors and adjustments for FY 2011 affects the computation of the proposed FY 2011 national capital Federal rate in comparison to the FY 2010 national capital Federal rate (revised to reflect the effect of the provisions of the Affordable Care Act (as discussed elsewhere in this Federal Register). The proposed FY 2011 update factor has the effect of increasing the proposed capital Federal rate by 1.5 percent compared to the FY 2010 capital Federal rate. The proposed GAF/DRG budget neutrality factor of 1.0015 has the effect of increasing the proposed capital Federal rate by 0.15 percent compared to the FY 2010 capital Federal rate. The proposed FY 2011 outlier adjustment factor has the effect of decreasing the proposed capital Federal rate by 0.49 percent compared to the FY 2010 capital Federal rate. The proposed FY 2011 exceptions payment adjustment factor has the effect of decreasing the proposed capital Federal rate by 0.01 percent compared to the FY 2010 capital Federal rate. Furthermore, as shown in the chart below, the resulting cumulative adjustment for changes in documentation and coding that do not reflect real changes in patients' severity of illness (that is, the proposed cumulative adjustment factor of 0.957 has the net effect of decreasing the proposed FY 2011 national capital Federal rate by 2.8 percent as compared to the FY 2010 national capital Federal rate. The combined effect of all the proposed changes would decrease the proposed national capital Federal rate by approximately 1.72 percent compared to the FY 2010 national capital Federal rate.

Comparison of Factors and Adjustments: FY 2010 Capital Federal Rate and Proposed FY 2011 Capital Federal Rate
FY 2010 *ProposedFY 2011 ChangePercentchange
1The update factor and the GAF/DRG budget neutrality factors are built permanently into the capital rates. Thus, for example, the incremental change from FY 2010 to FY 2011 resulting from the application of the proposed 1.0015 GAF/DRG budget neutrality factor for FY 2011 is a net change of 1.0015.
2The outlier reduction factor and the exceptions adjustment factor are not built permanently into the capital rates; that is, these factors are not applied cumulatively in determining the capital rates. Thus, for example, the proposed net change resulting from the application of the proposed FY 2011 outlier adjustment factor is 0.9432/0.9478, or 0.9951.
3The documentation and coding adjustment factor includes the −0.6 percent in FY 2008, −0.9 percent in FY 2009, and no additional reduction in FY 2010.
4The documentation and coding adjustment factor includes the −0.6 percent in FY 2008, −0.9 percent in FY 2009, no additional reduction in FY 2010 and the proposed −2.9 percent reduction in FY 2011.
5The change is measured from the FY 2009 cumulative factor of 0.9850.
* The revised FY 2010 capital Federal rate, which reflects the effect of the provisions of the Affordable Care Act (as discussed elsewhere in this Federal Register).
Update Factor1 1.0120 1.0150 1.0150 1.50
GAF/DRG Adjustment Factor1 0.9994 1.0015 1.0015 0.15
Outlier Adjustment Factor2 0.9478 0.9432 0.9951 −0.49
Exceptions Adjustment Factor2 0.9998 0.9997 0.9999 −0.01
MS-DRG Documentation and Coding Adjustment Factor 30.9850 40.9570 50.9716 −2.84
Capital Federal Rate $429.56 $422.18 0.9828 −1.72

G. Proposed Special Capital Rate for Puerto Rico Hospitals

Using the methodology discussed in the May 4, 2010 FY 2011 IPPS proposed rule (75 FR 24081), with the changes we are proposing to make to the factors used to determine the capital rate, the proposed FY 2011 special capital rate for hospitals in Puerto Rico is $199.49. (See the May 4, 2010 FY 2011 IPPS proposed rule (75 FR 24015 through 24016 and 24081) for additional information on the calculation of the proposed FY 2011 capital Puerto Rico specific rate.)

III. Supplemental Proposed Changes to the Payment Rates for the LTCH PPS for FY 2011

A. Proposed LTCH PPS Standard Federal Rate for FY 2011

1. Background

In section VII. of the preamble of the May 4, 2011 FY 2011 proposed rule, we discuss our proposed changes to the payment rates, factors, and specific policies under the LTCH PPS for FY 2011. As noted previously, on March 23, 2010, the Patient Protection and Affordable Care Act, Public Law 111-148, was enacted, and the Health Care and Education Reconciliation Act of 2010, Public Law 111-152, which amended certain provisions of Public Law 111-148, was enacted on March 30, 2010. Although a number of the provisions of Public Law 111-148 and Public Law 111-152 affect the LTCH PPS, due to the timing of the passage of the legislation, we were unable to address those provisions in the May 4, 2011 FY 2011 IPPS/LTCH PPS proposed rule. Therefore, the proposed policies and payment rates in that proposed rule do not reflect the new legislation. Below we address the provisions of the Affordable Care Act that affect our proposed policies and payment rates for FY 2011 under the LTCH PPS. In addition, we have issued further instructions implementing the provisions of the Affordable Care Act, that affect the policies and payment rates for RY 2010 under the LTCH PPS. Specifically, we have establishedrevised RY 2010 rates and factors in a separate notice elsewhere is this Federal Register consistent with the provisions of sections 1886(m)(3) and (4) of the Act and section 3401(p) of Public Law 111-148.

2. Revision of Certain Market Basket Updates Incorporating the Provisions of the Affordable Care Act

New section 1886(m)(3)(A)(ii) of the Act by specifies that for each of the rate years 2010 through 2019, any annual update to the standard Federal rate, for discharges for the hospital for the rate year, shall be reduced by the other adjustment specified in new section 1886(m)(4) of the Act. Additionally, new 1886(m)(3)(A)(i) of the Act provides that any annual update to the standard Federal rate, for discharges occurring during the rate year, shall be reduced for rate year 2012 and each subsequent rate year by the productivity adjustment described in section 1866(b)(3)(B)(xi)(II) of the Act. Sections 1886(m)(3)(A)(ii) and (4)(A)-(B) require a 0.25 percentage point reduction for rate year 2010 and a 0.50 percentage point reduction for rate year 2011. In addition, section 1886(m)(3)(B) of the Act provides that the application of section 1886(m)(3) may result in the annual update being less than zero for a rate year, and may result in payment rates for a rate year being less than such payment rates for the preceding rate year. Furthermore, section 3401(p) of Public Law 111-148 specifies that the amendments made by section 3401(c) of Public Law 111-148 shall not apply to discharges occurring before April 1, 2010.

We note that in the May 4, 2010 FY 2011 proposed rule, since the annual update to the LTCH PPS policies, rates and factors now occurs on October 1st, we proposed to adopt the term “fiscal year” (FY) rather than “rate year” (RY) under the LTCH PPS beginning October 1, 2010 to conform with the standard definition of the Federal fiscal year (October 1 through September 30) used by other PPSs, such as the IPPS (see75 FR 24146 through 24147). Consequently, in that proposed rule and this supplemental proposed rule, for purposes of clarity, when discussing the annual update for the LTCH PPS, we employed “FY” rather than “RY” because it is our intent that the phrase “FY” be used prospectively in all circumstances dealing with the LTCH PPS. Similarly, although the language of sections 3401(c) and 10319 of Public Law 111-148, and section 1105(b) of Public Law 111-152 refers to years 2010 and thereafter under the LTCH PPS as “rate year,” consistent with our proposal to change the terminology used under the LTCH PPS from “rate year” to “fiscal year,” for purposes of clarity, in this supplemental proposed rule, when discussing the annual update for the LTCH PPS, including the provisions of the Affordable Care Act, we will continue to employed “FY” rather than “RY” for 2011 and subsequent years because it is our intent that “FY” be used prospectively in all circumstances dealing with the LTCH PPS.

The proposed FY 2011 LTCH PPS standard Federal rate, discussed below in section III.A.3. of this supplemental proposed rule, would be calculated by applying the required 0.50 percentage point reduction to the proposed FY 2011 market basket update consistent with sections 1886(m)(3)(A)(ii) and (4)(B) of the Act (that is, 1.9 percent) in addition to the proposed adjustment to account for any changes in documentation and coding practices that do not reflect increased patient severity of illness discussed in section VII.C.3. of the preamble of the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule (that is, 2.5 percent).

3. Development of the Proposed FY 2011 LTCH PPS Standard Federal Rate

As discussed in the May 4, 2010 FY 2011 proposed rule, while we continue to believe that an update to the LTCH PPS standard Federal rate should be based on the most recent estimate of the increase in the LTCH PPS market basket, we also believe it is appropriate that the standard Federal rate be offset by an adjustment to account for any changes in documentation and coding practices that do not reflect increased patient severity of illness. Such an adjustment protects the integrity of the Medicare Trust Funds by ensuring that the LTCH PPS payment rates better reflect the true costs of treating LTCH patients.

For FY 2011, as discussed in section II.J.4. of the preamble of this proposed rule, the proposed market basket update under the LTCH PPS for FY 2011 is 1.9 percent (that is, the most recent estimate of the LTCH PPS market basket of 2.4 percent minus the 0.50 percentage points required by sections 1886(m)(3)(A)(ii) and (4)(B) of the Act. Furthermore, as discussed in greater detail in section VII.C.3. of the preamble of the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule, we performed a CMI analysis using the most recent available LTCH claims data (FY 2009) under both the current MS-LTC-DRG and the former CMS LTC-DRG patient classification systems. Based on this evaluation, we determined that there was a cumulative increase in LTCH CMI of 2.5 percent due to changes in documentation and coding that did not reflect real changes in patient severity of illness for LTCH discharges occurring in FY 2008 and FY 2009.

In this supplemental proposed rule, consistent with our historical practice, we are proposing to update the LTCH PPS standard Federal rate for FY 2011 based on the full proposed LTCH PPS market basket increase estimate of 2.4 percent, adjusted by the 0.50 percentage point reduction required by sections 1886(m)(3)(A)(ii) and (4)(B) of the Act, and an adjustment to account for the increase in case-mix in a prior periods (FYs 2008 and 2009) that resulted from changes in documentation and coding practices of −2.5 percent. Consequently, the proposed update factor to the standard Federal rate for FY 2011 is −0.59 percent (that is, we are proposing to apply a factor of 0.9941 in determining the LTCH PPS standard Federal rate for FY 2011, calculated as 1.019 × 1 divided by 1.025 = 0.9941 or −0.59 percent (0.9941 minus 1 equals 0.59 percent)). Furthermore, consistent with our historical practice of updating the standard Federal rate for the previous rate year, in determining the proposed standard Federal rate for FY 2011 in this supplemental proposed rule, we are applying the proposed update factor of 0.9941 to the revised RY 2010 standard Federal rate that is being established in accordance with the provisions of sections 1886(m)(3)(A)(ii) and (4)(A) of the Act, as implemented in a separate notice published elsewhere in this Federal Register.

Therefore, in this supplemental proposed rule, under the authority of sections 1886(m)(3)(A)(ii) and (4)(B) of the Act, we are proposing to amend § 412.523 to add a new paragraph (c)(3)(vii) to specify that the standard Federal rate for discharges occurring on or after October 1, 2010, through September 30, 2011, is the standard Federal rate for the previous rate year updated by −0.59 percent. In determining the proposed standard Federal rate for FY 2011, we are applying the proposed 0.9941 update factor to the RY 2010 Federal rate of $39,794.95 (as established elsewhere in this Federal Register). Consequently, the proposed standard Federal rate for FY 2011 is $39,560.16. We also are proposing that if more recent data become available, we would use those data, if appropriate, to determine the update to the standard Federal rate for FY 2011 in the final rule, and, thus, the standard Federal rate update specified in the proposed regulation text at § 412.523(c)(3)(vii) could change accordingly.

B. Proposed Adjustment for LTCH PPS High-Cost Outlier (HCO) Cases

1. Background

When we implemented the LTCH PPS in the FY 2003 LTCH PPS final rule, in the regulations at § 412.525(a), we established an adjustment for additional payments for outlier cases that have extraordinarily high costs relative to the costs of most discharges (see(67 FR 56022 through 56027)). We refer to these cases as high cost outliers (HCOs). 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 incurred when 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 estimated outlier payments are projected to equal 8 percent of total estimated payments under the LTCH PPS.

Under § 412.525(a) in the regulations (in conjunction with § 412.503), we make outlier payments for any discharges if the estimated cost of a case exceeds the adjusted LTCH PPS payment for the MS-LTC-DRG plus a fixed-loss amount. Specifically, in accordance with § 412.525(a)(3) (in conjunction with § 412.503), we pay outlier cases 80 percent of the difference between the estimated cost of the patient case and the outlier threshold, which is the sum of the adjusted Federal prospective payment for the MS-LTC-DRG and the fixed-loss amount. The fixed-loss amount is the amount used to limit the loss that a hospital will incur under the outlier policy for a case with unusually high costs. This results in Medicare and the LTCH sharing financial risk in the treatment of extraordinarily costly cases. Under the LTCH PPS HCO policy, the LTCH's loss is limited to the fixed-loss amount and a fixedpercentage of costs above the outlier threshold (MS-LTC-DRG payment plus the fixed-loss amount). The fixed percentage of costs is called the marginal cost factor. We calculate the estimated cost of a case by multiplying the Medicare allowable covered charge by the hospital's overall hospital cost-to-charge ratio (CCR).

Under the LTCH PPS, 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 estimating aggregate payments with and without an outlier policy. The fixed-loss amount results in estimated total outlier payments being projected to be equal to 8 percent of projected total LTCH PPS payments. Currently, MedPAR claims data and CCRs based on data from the most recent provider specific file (PSF) (or from the applicable statewide average CCR if a LTCH's CCR data are faulty or unavailable) are used to establish a fixed-loss threshold amount under the LTCH PPS.

As discussed previously in this section, the proposed policies and payment rates in the May 4, 2011 FY 2011 proposed rule do not reflect the provisions of the Affordable Care Act that affect LTCH PPS payments. The revised proposed standard Federal rate for FY 2011 that was developed consistent with the provisions of sections 1886(m)(3)(A)(ii) and (4)(B) of the Act is discussed above in section III.A.3. of the Addendum of this supplemental proposed rule. This revision to the proposed standard Federal rate for FY 2011 requires us to revise the proposed high cost outlier fixed-loss amount for FY 2011. This is necessary in order to maintain the requirement that the fixed-loss amount results in estimated total outlier payments being projected to be equal to 8 percent of projected total LTCH PPS payments.

2. The Proposed LTCH PPS Fixed-Loss Amount for FY 2011

When we implemented the LTCH PPS, as discussed in the August 30, 2002 LTCH PPS final rule (67 FR 56022 through 56026), we established a fixed-loss amount so that total estimated outlier payments are projected to equal 8 percent of total estimated payments under the LTCH PPS. To determine the fixed-loss amount, we estimate outlier payments and total LTCH PPS payments for each case using claims data from the MedPAR files. Specifically, to determine the outlier payment for each case, we estimate the cost of the case by multiplying the Medicare covered charges from the claim by the applicable CCR. Under § 412.525(a)(3) (in conjunction with § 412.503), if the estimated cost of the case exceeds the outlier threshold (the sum of the adjusted Federal prospective payment for the MS-LTC-DRG and the fixed-loss amount), we pay an outlier payment equal to 80 percent of the difference between the estimated cost of the case and the outlier threshold (the sum of the adjusted Federal prospective payment for the MS-LTC-DRG and the fixed-loss amount).

As discussed in the May 4, 2010 FY 2011 proposed rule, we are proposing to continue to use our existing methodology to calculate the proposed fixed-loss amount for FY 2011 in order to maintain estimated HCO payments at the projected 8 percent of total estimated LTCH PPS payments. (For an explanation of our rationale for establishing an HCO payment “target” of 8 percent of total estimated LTCH payments, we refer readers to the August 30, 2002 LTCH PPS final rule (67 FR 56022 through 56024).) Consistent with our historical practice of using the best data available, in determining the proposed fixed-loss amount for FY 2011, we use the most recent available LTCH claims data and CCR data. Specifically, for this proposed rule, we used LTCH claims data from the December 2009 update of the FY 2009 MedPAR files and CCRs from the December 2009 update of the PSF to determine a fixed-loss amount that would result in estimated outlier payments projected to be equal to 8 percent of total estimated payments in FY 2011 because these data are the most recent complete LTCH data currently available. (We note that these are the same data used to determine the proposed FY 2011 fixed-loss amount in the May 4, 2010 FY 2011 proposed rule.) Consistent with the historical practice of using the best available data, we are proposing that if more recent LTCH claims data become available, we will use them for determining the fixed-loss amount for FY 2011 in the final rule. Furthermore, we are proposing to determine the proposed FY 2011 fixed-loss amount based on the MS-LTC-DRG classifications and relative weights from the version of the GROUPER that will be in effect as of the beginning of FY 2011, that is, proposed Version 28.0 of the GROUPER (discussed in section VII.D. of the preamble of this supplemental proposed rule).

In this proposed rule, we are proposing to establish a fixed-loss amount of $19,254 for FY 2011. Thus, we would 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 MS-LTC-DRG and the fixed-loss amount of $19,254).

The proposed fixed-loss amount for FY 2011 of $19,254 is slightly higher than the revised RY 2010 fixed-loss amount of $18,615 (established elsewhere in this Federal Register). Based on our payment simulations using the most recent available data and the proposed 0.59 percent reduction to the standard Federal rate for FY 2011, the proposed increase in the fixed-loss amount for FY 2011 would be necessary to maintain the existing requirement that estimated outlier payments would equal 8 percent of estimated total LTCH PPS payments. (For further information on and our rationale for the existing 8 percent HCO “target” requirement, we refer readers to the August 30, 2002 LTCH PPS final rule (67 FR 56022 through 56024.) Maintaining the fixed-loss amount at the current level would result in HCO payments that are greater than the current 8 percent regulatory requirement because a higher fixed-loss amount would result in fewer cases qualifying as outlier cases as well as decreases the amount of the additional payment for a HCO case because the maximum loss that a LTCH must incur before receiving an HCO payment (that is, the fixed-loss amount) would be larger. For these reasons, we believe that proposing to raise the fixed-loss amount is appropriate and necessary to maintain that estimated outlier payments would equal 8 percent of estimated total LTCH PPS payments as required under § 412.525(a).

As we noted in the May 4, 2010 FY 2011 proposed rule (75 FR 24089), under some rare circumstances, a LTCH discharge could qualify as a SSO case (as defined in the regulations at § 412.529 in conjunction with § 412.503) and also as a HCO case. In this scenario, a patient could be hospitalized for less than five-sixths of the geometric average length of stay for the specific MS-LTC-DRG, and yet incur extraordinarily high treatment costs. If the costs exceeded the HCO threshold (that is, the SSO payment plus the fixed-loss amount), the discharge is eligible for payment as a HCO. Thus, for a SSO case in FY 2011, the HCO 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 $19,254 and the amount paid under the SSO policy as specified in § 412.529).

C. Computing the Proposed Adjusted LTCH PPS Federal Prospective Payments for FY 2011

In accordance with § 412.525, the proposed standard Federal rate is adjusted to account for differences in area wages by multiplying the proposed labor-related share of the proposed standard Federal rate by the appropriate proposed LTCH PPS wage index (as shown in Tables 12A and 12B of the Addendum of 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 proposed nonlabor-related share of the proposed standard Federal rate by the appropriate cost-of-living factor (shown in the chart in section V.C.5. of the Addendum of the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule). In this proposed rule, we are proposing to establish a standard Federal rate for FY 2011 of $39,560.16, as discussed in section V.A.3. of the Addendum of this supplemental proposed rule. We illustrate the methodology to adjust the proposed LTCH PPS Federal rate for FY 2011 in the following example:

Example: During FY 2011, a Medicare patient is in a LTCH located in Chicago, Illinois (CBSA 16974). The proposed FY 2011 LTCH PPS wage index value for CBSA 16974 is 1.0573 (Table 12A of the Addendum of this proposed rule). The Medicare patient is classified into MS-LTC-DRG 28 (Spinal Procedures with MCC), which has a proposed relative weight for FY 2011 of 1.0834 (Table 11 of the Addendum of this supplemental proposed rule).

To calculate the LTCH's total adjusted 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 ($39,560.16) by the proposed labor-related share (75.407 percent) and the proposed wage index value (1.0573). This wage-adjusted amount is then added to theproposed nonlabor-related portion of the unadjusted proposed standard Federal rate (24.593 percent; adjusted for cost of living, if applicable) to determine the adjusted proposed Federal rate, which is then multiplied by the proposed MS-LTC-DRG relative weight (1.0834) to calculate the total adjusted proposed Federal LTCH PPS prospective payment for FY 2011 ($45,046.57). The table below illustrates the components of the calculations in this example.

Unadjusted Proposed Standard Federal Prospective Payment Rate $39,560.16
Proposed Labor-Related Share × 0.75407
Labor-Related Portion of the Proposed Federal Rate = $29,831.13
Proposed Wage Index (CBSA 16974) × 1.0573
Proposed Wage-Adjusted Labor Share of Federal Rate = $31,540.45
Proposed Nonlabor-Related Portion of the Federal Rate ($39,560.16 × 0.24593) + $9,729.03
Adjusted Proposed Federal Rate Amount = $41,269.48
Proposed MS-LTC-DRG 28 Relative Weight × 1.0834
Total Adjusted Federal Prospective Payment = $44,711.36

IV. Tables

This section contains the tables referred to throughout the preamble to this proposed rule and in this Addendum. Tables 1A, 1B, 1C, 1D, 1E, 2, 4A, 4B, 4C, 4D-2, 4J, 9A, 10, and 11 are presented below. The tables presented below are as follows:

Table 1A.—Supplemental Proposed National Adjusted Operating Standardized Amounts, Labor/Nonlabor (68.8 Percent Labor Share/31.2 Percent Nonlabor Share If Wage Index Is Greater Than 1).

Table 1B.—Supplemental Proposed National Adjusted Operating Standardized Amounts, Labor/Nonlabor (62 Percent Labor Share/38 Percent Nonlabor Share If Wage Index Is Less Than or Equal To 1).

Table 1C.—Supplemental Proposed Adjusted Operating Standardized Amounts for Puerto Rico, Labor/Nonlabor.

Table 1D.—Supplemental Proposed Capital Standard Federal Payment Rate.

Table 1E.—Supplemental Proposed LTCH Standard Federal Prospective Payment Rate.

Table 2.—Acute Care Hospitals Case-Mix Indexes for Discharges Occurring in Federal Fiscal Year 2009; Proposed Hospital Wage Indexes for Federal Fiscal Year 2011; Hospital Average Hourly Wages for Federal Fiscal Years 2009 (2005 Wage Data), 2010 (2006 Wage Data), and 2011 (2007 Wage Data); and 3-Year Average of Hospital Average Hourly Wages.

Table 4A.—Proposed Wage Index and Capital Geographic Adjustment Factor (GAF) for Acute Care Hospitals in Urban Areas by CBSA and by State—FY 2011.

Table 4B.—Proposed Wage Index and Capital Geographic Adjustment Factor (GAF) for Acute Care Hospitals in Rural Areas by CBSA and by State—FY 2011.

Table 4C.—Proposed Wage Index and Capital Geographic Adjustment Factor (GAF) for Acute Care Hospitals That Are Reclassified by CBSA and by State—FY 2011.

Table 4D-2.—Urban Areas with Acute Care Hospitals Receiving the Statewide Rural Floor or Imputed Floor Wage Index—FY 2011.

Table 4J.—Proposed Out-Migration Adjustment for Acute Care Hospitals—FY 2011.

Table 9A.—Hospital Reclassifications and Redesignations—FY 2011.

Table 10.—Geometric Mean Plus the Lesser of .75 of the National Adjusted Operating Standardized Payment Amount (Increased to Reflect the Difference Between Costs and Charges) or .75 of One Standard Deviation of Mean Charges by Medicare Severity Diagnosis-Related Group (MS-DRG)—April 2010.

Table 11.—Supplemental Proposed MS-LTC-DRGs, Relative Weights, Geometric Average Length of Stay, and Short-Stay Outlier (SSO) Threshold for Discharges Occurring from October 1, 2010 through September 30, 2011 under the LTCH PPS.

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Appendix: Regulatory Impact Analysis

I. Overall Impact

We have examined the impacts of this proposed rule as required by Executive Order 12866 (September 1993, Regulatory Planning and Review) and the Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L. 96-354), section 1102(b) of the Social Security Act, the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4), Executive Order 13132 on Federalism, and the Congressional Review Act (5 U.S.C. 804(2)).

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

We have determined that this proposed rule is a major rule as defined in 5 U.S.C. 804(2). We estimate that the proposed changes for FY 2011 acute care hospital operating and capital payments will redistribute in excess of $100 million among different types of inpatient cases. The proposed applicable percentage increase to the IPPS rates required by the statute, in conjunction with other proposed payment changes in this proposed rule, would result in an estimated $929 million decrease in FY 2011 operating payments (or −0.9 percent increase), and an estimated $20 million decrease in FY 2011 capital payments (or −0.2 percent change). The impact analysis of the capital payments can be found in section VIII. of this Appendix. In addition, as described in section IX. of this Appendix, LTCHs are expected to experience an increase in payments by $12.9 million (or 0.3 percent).

Our operating impact estimate includes the proposed −2.9 percent documentation and coding adjustment applied to the hospital-specific rates, the proposed −2.4 percent documentation and coding adjustment applied to the Puerto Rico-specific rates and the proposed −2.9 percent adjustment for documentation and coding changes to the IPPS standardized amounts, which was discussed in the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule (75 FR 24288). In addition, our operating impact estimate includes the proposed 2.15 percent market basket update to the standardized amount (which includes the proposed 2.4 percent update with the 0.25 reduction required under the Affordable Care Act). The estimates of IPPS operating payments to acute care hospitals do not reflect any changes in hospital admissions or real case-mix intensity, which would also affect overall payment changes.

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 small government jurisdictions. Most hospitals and most other providers and suppliers are considered to be small entities, either by being nonprofit organizations or by meeting the Small Business Administration definition of a small business (having revenues of $34.5 million or less in any 1 year). (For details on the latest standards for health care providers, we refer readers to the Table of Small Business Size Standards for NAIC 622 found on the Small Business Administration Office of Size Standards Web site at:http://www.sba.gov/contractingopportunities/officials/size/GC-SMALL-BUS-SIZE-STANDARDS.html.) For purposes of the RFA, all hospitals and other providers and suppliers are considered to be small entities. Individuals and States are not included in the definition of a small entity. We believe that the provisions of this proposed rule relating to acute care hospitals would have a significant impact on small entities as explained in this Appendix. Because we lack data on individual hospital receipts, we cannot determine the number of small proprietary LTCHs. Therefore, we are assuming that all LTCHs are considered small entities for the purpose of the analysis in section IX. of this Appendix. Medicare fiscal intermediaries and MACs are not considered to be small entities. Because we acknowledge that many of the affected entities are small entities, the analysis discussed throughout the preamble of this proposed rule constitutes our proposed regulatory flexibility analysis. Therefore, we are soliciting public comments on our estimates and analysis of the impact of this proposed rule on those small entities.

The Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA), Public Law 104-121, as amended by section 8302 of Public Law 110-28, requires an agency to provide compliance guides for each rule or group of related rules for which an agency is required to prepare a final regulatory flexibility analysis. The compliance guides associated with this proposed rule are available on the CMS IPPS Web page at http://www.cms.hhs.gov/AcuteInpatientPPS/01_overview.asp. We also note that the Hospital Center Web page at http://www.cms.hhs.gov/center/hospital.asp was developed to assist hospitals in understanding and adapting to changes in Medicare regulations and in billing and payment procedures. This Web page provides hospitals with substantial downloadable explanatory materials.

In addition, section 1102(b) of the Act requires us to prepare a regulatory impact analysis for any proposed or final rule that 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 603 of the RFA. With the exception of hospitals located in certain New England counties, for purposes of section 1102(b) of the Act, we now define a small rural hospital as a hospital that is located outside of an urban area and has fewer than 100 beds. Section 601(g) of the Social Security Amendments of 1983 (Pub. L. 98-21) designated hospitals in certain New England counties as belonging to the adjacent urban area. Thus, for purposes of the IPPS and the LTCH PPS, we continue to classify these hospitals as urban hospitals. (We refer readers to Table 1 and section VI. of this Appendix for the quantitative effects of the proposed policy changes under the IPPS for operating costs.)

Section 202 of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4) also requires that agencies assess anticipated costs and benefits before issuing any rule whose mandates require spending in any 1 year of $100 million in 1995 dollars, updated annually for inflation. That threshold level is currently approximately $133 million. This proposed rule would not mandate any requirements for State, local, or Tribal governments, nor would it affect private sector costs.

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. As stated above, this proposed rule would not have a substantial effect on State and local governments.

The following analysis, in conjunction with the remainder of this document, demonstrates that this proposed rule is consistent with the regulatory philosophy and principles identified in Executive Order 12866, the RFA, and section 1102(b) of the Act. The proposed rule would affect payments to a substantial number of small rural hospitals, as well as other classes of hospitals, and the effects on some hospitals may be significant.

II. Objectives of the IPPS

The primary objective of the IPPS is to create incentives for hospitals to operate efficiently and minimize unnecessary costs while at the same time ensuring that payments are sufficient to adequately compensate hospitals for their legitimate costs. In addition, we share national goals of preserving the Medicare Hospital Insurance Trust Fund.

We believe the proposed changes in this proposed rule would further each of these goals while maintaining the financial viability of the hospital industry and ensuring access to high quality health care for Medicare beneficiaries. We expect that these proposed changes would ensure that the outcomes of the prospective payment systems are reasonable and equitable while avoiding or minimizing unintended adverse consequences.

III. Limitations of Our Analysis

The following quantitative analysis presents the projected effects of our proposed policy changes, as well as statutory changes effective for FY 2011, on various hospital groups. We estimate the effects of individual policy changes by estimating payments per case while holding all other payment policies constant. We use the best data available, but, generally, we do not attempt to make adjustments for future changes in such variables as admissions, lengths of stay, or case-mix.

IV. Hospitals Included in and Excluded From the IPPS

The prospective payment systems for hospital inpatient operating and capital-related costs of acute care hospitalsencompass most general short-term, acute care hospitals that participate in the Medicare program. There were 33 Indian Health Service hospitals in our database, which we excluded from the analysis due to the special characteristics of the prospective payment methodology for these hospitals. Among other short-term, acute care hospitals, only the 46 such hospitals in Maryland remain excluded from the IPPS pursuant to the waiver under section 1814(b)(3) of the Act.

As of March 2010, there are 3,472 IPPS acute care hospitals to be included in our analysis. This represents about 64 percent of all Medicare-participating hospitals. The majority of this impact analysis focuses on this set of hospitals. There are also approximately 1,338 CAHs. These small, limited service hospitals are paid on the basis of reasonable costs rather than under the IPPS. (We refer readers to section VII. of this Appendix for a further description of the impact of CAH-related proposed policy changes.) There are also 1,270 IPPS-excluded hospitals and 2,169 IPPS-excluded hospital units. These IPPS-excluded hospitals and units include IPFs, IRFs, LTCHs, RNHCIs, children's hospitals, and cancer hospitals, which are paid under separate payment systems. Changes in the prospective payment systems for IPFs and IRFs are made through separate rulemaking. Payment impacts for these IPPS-excluded hospitals and units are not included in this proposed rule. The impact of the proposed update and policy changes to the LTCH PPS for FY 2011 are discussed in section IX. of this Appendix.

V. Effects on Hospitals and Hospital Units Excluded From the IPPS

As of March 2010, there were 3,439 hospitals and hospital units excluded from the IPPS. Of these, 78 children's hospitals, 11 cancer hospitals, and 17 RNHCIs are being paid on a reasonable cost basis subject to the rate-of-increase ceiling under § 413.40. The remaining providers, 228 rehabilitation hospitals and 961 rehabilitation units, and 429 LTCHs, are paid the Federal prospective per discharge rate under the IRF PPS and the LTCH PPS, respectively, and 507 psychiatric hospitals and 1,208 psychiatric units are paid the Federal per diem amount under the IPF PPS. As stated above, IRFs and IPFs are not affected by rate updates discussed in this proposed rule. The impacts of the changes to LTCHs are discussed in section IX. of this Appendix.

In the past, certain hospitals and units excluded from the IPPS have been paid based on their reasonable costs subject to limits as established by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). Cancer and children's hospitals continue to be paid on a reasonable cost basis subject to TEFRA limits for FY 2011. For these hospitals (cancer and children's hospitals), consistent with the authority provided in section 1886(b)(3)(B)(ii) of the Act, the update is the percentage increase in the FY 2011 IPPS operating market basket. In compliance with section 404 of the MMA, in the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43930), we replaced the FY 2002-based IPPS operating and capital market baskets with the revised and rebased FY 2006-based IPPS operating and capital market baskets. Therefore, consistent with current law, based on IHS Global Insight, Inc.'s 2010 first quarter forecast, with historical data through the 2009 fourth quarter, we are estimating that the proposed FY 2011 update to the IPPS operating market basket would be 2.4 percent (that is, the current estimate of the market basket rate-of-increase) which was included in the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule. However, the Affordable Care Act requires a 0.25 reduction to the market basket update resulting in a proposed 2.15 percent applicable percentage increase for IPPS hospitals. RNCHIs, children's hospitals and cancer hospitals are not subject to the reduction in the applicable percentage increase required under the Affordable Care Act. In accordance with § 403.752(a) of the regulations, RNHCIs are paid under § 413.40. Therefore, for RNHCIs, the proposed update is the same as for children's and cancer hospitals, which is the percentage increase in the FY 2011 IPPS operating market basket increase (which was included in the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule) without the reductions required under the Affordable Care Act, estimated to be 2.4 percent.

The impact of the proposed update in the rate-of-increase limit on those excluded hospitals depends on the cumulative cost increases experienced by each excluded hospital since its applicable base period. For excluded hospitals that have maintained their cost increases at a level below the rate-of-increase limits since their base period, the major effect is on the level of incentive payments these excluded hospitals receive. Conversely, for excluded hospitals with per-case cost increases above the cumulative update in their rate-of-increase limits, the major effect is the amount of excess costs that will not be reimbursed.

We note that, under § 413.40(d)(3), an excluded hospital that continues to be paid under the TEFRA system, whose costs exceed 110 percent of its rate-of-increase limit receives its rate-of-increase limit plus 50 percent of the difference between its reasonable costs and 110 percent of the limit, not to exceed 110 percent of its limit. In addition, under the various provisions set forth in § 413.40, cancer and children's hospitals can obtain payment adjustments for justifiable increases in operating costs that exceed the limit.

VI. Quantitative Effects of the Policy Changes Under the IPPS for Operating Costs

A. Basis and Methodology of Estimates

In this proposed rule, we are announcing proposed policy changes and payment rate updates for the IPPS for operating costs of acute care hospitals. Updates to the capital payments to acute care hospitals are discussed in section VIII. of this Appendix. Based on the overall percentage change in payments per case estimated using our payment simulation model, we estimate that total FY 2011 operating payments would decrease by 0.9 percent compared to FY 2010, largely due to the documentation and coding adjustments and the applicable percentage increase applied to the IPPS rates. This amount reflects the proposed FY 2011 documentation and coding adjustments described in the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule: −2.9 percent for the IPPS national standardized amounts, −2.9 percent for the IPPS hospital-specific rates, and −2.4 percent for the IPPS Puerto Rico-specific standardized amount. The impacts do not illustrate changes in hospital admissions or real case-mix intensity, which will also affect overall payment changes.

We have prepared separate impact analyses of the proposed changes to each system. This section deals with changes to the operating prospective payment system for acute care hospitals. Our payment simulation model relies on the most recent available data to enable us to estimate the impacts on payments per case of certain proposed changes in this proposed rule. However, there are other proposed changes for which we do not have data available that would allow us to estimate the payment impacts using this model. For those proposed changes, we have attempted to predict the payment impacts based upon our experience and other more limited data.

The data used in developing the quantitative analyses of changes in payments per case presented below are taken from the FY 2009 MedPAR file and the most current Provider-Specific File that is used for payment purposes. Although the analyses of the proposed changes to the operating PPS do not incorporate cost data, data from the most recently available hospital cost report were used to categorize hospitals. Our analysis has several qualifications. First, in this analysis, we do not make adjustments for future changes in such variables as admissions, lengths of stay, or underlying growth in real case-mix. Second, due to the interdependent nature of the IPPS payment components, it is very difficult to precisely quantify the impact associated with each change. Third, we use various sources for the data used to categorize hospitals in the tables. In some cases, particularly the number of beds, there is a fair degree of variation in the data from different sources. We have attempted to construct these variables with the best available source overall. However, for individual hospitals, some miscategorizations are possible.

Using cases from the FY 2009 MedPAR file, we simulated payments under the operating IPPS given various combinations of payment parameters. Any short-term, acute care hospitals not paid under the IPPS (Indian Health Service hospitals and hospitals in Maryland) were excluded from the simulations. The impact of payments under the capital IPPS, or the impact of payments for costs other than inpatient operating costs, are not analyzed in this section. Estimated payment impacts of the capital IPPS for FY 2011 are discussed in section VIII. of this Appendix.

The changes discussed separately below are the following:

• The effects of the proposed annual reclassification of diagnoses and procedures, full implementation of the MS-DRG system and 100 percent cost-based MS-DRG relative weights.

• The effects of the proposed changes in hospitals' wage index values reflecting wagedata from hospitals' cost reporting periods beginning during FY 2007, compared to the FY 2006 wage data.

• The effects of the recalibration of the MS-DRG relative weights as required by section 1886(d)(4)(C) of the Act, including the proposed wage and recalibration budget neutrality factors.

• The effects of geographic reclassifications by the MGCRB that will be effective in FY 2011.

• The effects of the Frontier wage index provision that requires that hospitals located in States that qualify as frontier States cannot have a wage index less than 1.0. This is a nonbudget neutral provision.

• The effects of the rural floor and imputed floor with a national budget neutrality applied to the wage index, as required by the Affordable Care Act the Affordable Care Act.

• The effects of section 505 of Public Law 108-173, which provides for an increase in a hospital's wage index if the hospital qualifies by meeting a threshold percentage of residents of the county where the hospital is located who commute to work at hospitals in counties with higher wage indexes.

• The total estimated change in payments based on the proposed FY 2011 policies relative to payments based on FY 2010 policies that include the applicable percentage increase of 2.15 (or 2.4 percent market basket with a 0.25 percentage reduction, as required under the Affordable Care Act). The FY 2010 operating payments also account for provisions under the Affordable Care Act that were effective for FY 2010.

To illustrate the impacts of the proposed FY 2011 changes, our analysis begins with a FY 2010 baseline simulation model using: the proposed FY 2011 applicable percentage increase of 2.15 percent; the FY 2010 MS-DRG GROUPER (Version 27.0); the most current CBSA designations for hospitals based on OMB's MSA definitions; the FY 2010 wage index; and no MGCRB reclassifications. Outlier payments are set at 5.1 percent of total operating MS-DRG and outlier payments.

Section 1886(b)(3)(B)(viii) of the Act, as added by section 5001(a) of Public Law 109-171, provides that, for FY 2007 and subsequent years, the update factor will be reduced by 2.0 percentage points for any hospital that does not submit quality data in a form and manner and at a time specified by the Secretary. At the time that this impact was prepared, 104 hospitals did not receive the full market basket rate-of-increase for FY 2010 because they failed the quality data submission process or did not choose to participate. For purposes of the simulations shown below, we modeled the proposed payment changes for FY 2011 using a reduced update for these 104 hospitals. However, we do not have enough information at this time to determine which hospitals will not receive the full market basket rate-of-increase for FY 2011.

Each policy change, statutory or otherwise, is then added incrementally to this baseline, finally arriving at an FY 2011 model incorporating all of the changes. This simulation allows us to isolate the effects of each proposed change.

Our final comparison illustrates the proposed percent change in payments per case from FY 2010 to FY 2011. Three factors not discussed separately have significant impacts here. The first factor is the update to the standardized amount. In accordance with section 1886(b)(3)(B)(i) of the Act, we are proposing to update the standardized amounts for FY 2011 using an applicable percentage increase of 2.15 percent. In addition, we are updating the Puerto Rico specific amount by an applicable percentage increase of 2.15 percent. This includes our forecasted hospital market basket increase of 2.4 percent with a 0.25 percentage reduction as required under the Affordable Care Act. (Hospitals that fail to comply with the quality data submission requirements to receive the full update will receive an update reduced by 2.0 percentage points from 2.15 percent to 0.15 percent.) Under section 1886(b)(3)(B)(iv) of the Act, the updates to the hospital-specific amounts for SCHs and for MDHs are also equal to the market basket percentage increase, or 2.15 percent.

A second significant factor that affects the changes in hospitals' payments per case from FY 2010 to FY 2011 is the change in a hospital's geographic reclassification status from one year to the next. That is, payments may be reduced for hospitals reclassified in FY 2010 that are no longer reclassified in FY 2011. Conversely, payments may increase for hospitals not reclassified in FY 2010 that are reclassified in FY 2011.

A third significant factor is that we currently estimate that actual outlier payments during FY 2010 will be 4.9 percent of total MS-DRG payments. Our FY 2010 outlier estimate accounts for changes to the FY 2010 IPPS payments required under the Affordable Care Act. When the FY 2010 final rule was published, we projected FY 2010 outlier payments would be 5.1 percent of total MS-DRG plus outlier payments; the average standardized amounts were offset correspondingly. The effects of the lower than expected outlier payments during FY 2010 (as discussed in the Addendum to this proposed rule) are reflected in the analyses below comparing our current estimates of FY 2010 payments per case to estimated FY 2011 payments per case (with outlier payments projected to equal 5.1 percent of total MS-DRG payments).

B. Analysis of Table I

Table I displays the results of our analysis of the proposed changes for FY 2011. The table categorizes hospitals by various geographic and special payment consideration groups to illustrate the varying impacts on different types of hospitals. The top row of the table shows the overall impact on the 3,472 acute care hospitals included in the analysis.

The next four rows of Table I contain hospitals categorized according to their geographic location: all urban, which is further divided into large urban and other urban; and rural. There are 2,502 hospitals located in urban areas included in our analysis. Among these, there are 1,365 hospitals located in large urban areas (populations over 1 million), and 1,137 hospitals in other urban areas (populations of 1 million or fewer). In addition, there are 970 hospitals in rural areas. The next two groupings are by bed-size categories, shown separately for urban and rural hospitals. The final groupings by geographic location are by census divisions, also shown separately for urban and rural hospitals.

The second part of Table I shows hospital groups based on hospitals' FY 2011 payment classifications, including any reclassifications under section 1886(d)(10) of the Act. For example, the rows labeled urban, large urban, other urban, and rural show that the numbers of hospitals paid based on these categorizations after consideration of geographic reclassifications (including reclassifications under sections 1886(d)(8)(B) and 1886(d)(8)(E) of the Act that have implications for capital payments) are 2,555; 1,403; 1,152; and 917, respectively.

The next three groupings examine the impacts of the changes on hospitals grouped by whether or not they have GME residency programs (teaching hospitals that receive an IME adjustment) or receive DSH payments, or some combination of these two adjustments. There are 2,434 nonteaching hospitals in our analysis, 798 teaching hospitals with fewer than 100 residents, and 240 teaching hospitals with 100 or more residents.

In the DSH categories, hospitals are grouped according to their DSH payment status, and whether they are considered urban or rural for DSH purposes. The next category groups together hospitals considered urban or rural, in terms of whether they receive the IME adjustment, the DSH adjustment, both, or neither.

The next five rows examine the impacts of the changes on rural hospitals by special payment groups (SCHs, RRCs, and MDHs). There were 183 RRCs, 340 SCHs, 187 MDHs, and 108 hospitals that are both SCHs and RRCs, and 13 hospitals that are both an MDH and an RRC.

The next series of groupings are based on the type of ownership and the hospital's Medicare utilization expressed as a percent of total patient days. These data were taken from the FY 2008 or FY 2007 Medicare cost reports.

The next two groupings concern the geographic reclassification status of hospitals. The first grouping displays all urban hospitals that were reclassified by the MGCRB for FY 2011. The second grouping shows the MGCRB rural reclassifications. These groupings account for the change in the MGCRB reclassification policy as required under the Affordable Care Act.

The final category shows the impact of the proposed policy changes on the 19 cardiac hospitals in our analysis.

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C. Effects of the Proposed Changes to the MS-DRG Reclassifications and Relative Cost-Based Weights (Column 1)

In Column 1 of Table I, we present the effects of the proposed MS-DRG reclassifications, as discussed in section II. of the preamble to this supplemental proposed rule. Section 1886(d)(4)(C)(i) of the Act requires us annually to make appropriate classification changes in order to reflect changes in treatment patterns, technology, and any other factors that may change the relative use of hospital resources.

As discussed in the preamble of the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule, the proposed FY 2011 MS-DRG relative weights will be 100 percent cost-based and 100 percent MS-DRGs. For FY 2011, the MS-DRGs are calculated using the FY 2009 MedPAR data grouped to the Version 28.0 (FY 2011) MS-DRGs. The methods of calculating the proposed relative weights and the reclassification changes to the grouper are described in more detail in the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule. The proposed changes to the relative weights and MS-DRGs shown in Column 2 are prior to any offset for budget neutrality. Overall, hospitals will experience a 0.3 percent increase in payments due to the changes in the MS-DRGs and relative weights prior to budget neutrality. Urban hospitals and rural hospitals will experience a 0.3 percent increase in payments under the updates to the relative weights and MS-DRGs.

D. Effects of the Application of Recalibration Budget Neutrality (Column 2)

Column 2 shows the effects of the changes to the MS-DRGs and relative weights with the application of the recalibration budget neutrality factor to the standardized amounts. Consistent with section 1886(d)(4)(C)(iii) of the Act, we are calculating a recalibration budget neutrality factor to account for the changes in MS-DRGs and relative weights to ensure that the overall payment impact is budget neutral. We revised the recalibration budget neutrality factor in this notice because we applied a 0.25 reduction to the market basket update to the standardized amount as required under the Affordable Care Act.

The “All Hospitals” line in Column 1 indicates that proposed changes due to MS-DRGs and relative weights will increase payments by 0.3 percent before application of the budget neutrality factor. The proposed recalibration budget neutrality factor is 0.996867, which is applied to the standardized amount. Thus, the impact after accounting only for budget neutrality for changes to the MS-DRG relative weights and classification is somewhat lower than the figures shown in Column 1 (approximately 0.3 percent). Consequentially, urban and rural hospitals will not experience a change in payments when recalibration budget neutrality is applied.

E. Effects of Proposed Wage Index Changes (Column 3)

Section 1886(d)(3)(E) of the Act requires that, beginning October 1, 1993, we annually update the wage data used to calculate the wage index. In accordance with this requirement, the proposed wage index for acute care hospitals for FY 2011 is based on data submitted for hospital cost reporting periods beginning on or after October 1, 2006 and before October 1, 2007. The estimated impact of the updated wage data on hospital payments is isolated in Column 3 by holding the other payment parameters constant in this simulation. That is, Column 3 shows the percentage change in payments when going from a model using the FY 2010 wage index, based on FY 2006 wage data, and having a 100-percent occupational mix adjustment applied, to a model using the FY 2011 pre-reclassification wage index, also having a 100-percent occupational mix adjustment applied, based on FY 2007 wage data (while holding other payment parameters such as use of the Version 28.0 MS-DRG GROUPER constant). The occupational mix adjustment is based on the FY 2008/2009 occupational mix survey. The wage data was not affected by any of the provisions under the Affordable Care Act for FY 2011.

Column 3 shows the impacts of updating the wage data using FY 2007 cost reports. Overall, the new wage data will lead to a 0.0 percent change for all hospitals before being combined with the wage budget neutrality adjustment shown in Column 5. Among the regions, the largest increase is in the rural Middle Atlantic region, which experiences a 0.4 percent increase before applying an adjustment for budget neutrality. The largest decline from updating the wage data is seen in Urban East South Central (0.5 percent decrease).

F. Application of the Wage Budget Neutrality Factor (Column 4)

Column 4 shows the impact of the new wage data with the application of the wage budget neutrality factor. In FY 2010, we began calculating separate wage budget neutrality and recalibration budget neutrality factors, in accordance with section 1886(d)(3)(E) of the Act, which specifies that budget neutrality to account for wage changes or updates made under that subparagraph must be made without regard to the 62 percent labor-related share guaranteed under section 1886(d)(3)(E)(ii) of the Act. Therefore, for FY 2011, we are calculating the wage budget neutrality factor to ensure that payments under updated wage data are budget neutral without regard to the lower labor-related share of 62 percent applied to hospitals with a wage index less than or equal to 1. In other words, the wage budget neutrality is calculated under the assumption that all hospitals receive the higher labor-related share of the standardized amount. The wage budget neutrality factor is revised because the market basket update to the standardized amount was reduced by 0.25 percent under the Affordable Care Act. Because the wage data changes did not change overall payments (displayed in Column 3), the revised wage budget neutrality factor is 1.00007, and the overall payment change is 0.0 percent.

G. Combined Effects of Proposed MS-DRG and Wage Index Changes (Column 5)

Section 1886(d)(4)(C)(iii) of the Act requires that changes to MS-DRG reclassifications and the relative weights cannot increase or decrease aggregate payments. In addition, section 1886(d)(3)(E) of the Act specifies that any updates or adjustments to the wage index are to be budget neutral. We computed a proposed wage budget neutrality factor of 1.00007, and a proposed recalibration budget neutrality factor of 0.996867 (which is applied to the Puerto Rico specific standardized amount and the hospital-specific rates). The product of the two budget neutrality factors is the cumulative wage and recalibration budget neutrality factor. The proposed cumulative wage and recalibration budget neutrality adjustment is 0.996937, or approximately −0.3 percent, which is applied to the national standardized amounts. Because the wage budget neutrality and the recalibration budget neutrality are calculated under different methodologies according to the statute, when the two budget neutralities are combined and applied to the standardized amount, the overall payment impact is not necessarily budget neutral. However, in this proposed rule, we are estimating that the proposed changes in the MS-DRG relative weights and updated wage data with wage and budget neutrality applied will result in a 0.0 change in payments.

We estimate that the combined impact of the proposed changes to the relative weights and MS-DRGs and the proposed updated wage data with budget neutrality applied will result in no change in payments for urban or rural hospitals. Urban New England would experience a 0.6 decrease in payments due to reductions in their case-mix and wages compared to the national average, while the urban Pacific area would experience a 0.5 percent increase in payments because of above average increases in wages and case-mix. Among the rural hospital categories, rural South Atlantic hospitals would experience the greatest decline in payment (−0.9 percent) primarily due to the changes to MS-DRGs and the relative cost weights.

H. Effects of MGCRB Reclassifications (Column 6)

Our impact analysis to this point has assumed acute care hospitals are paid on the basis of their actual geographic location (with the exception of ongoing policies that provide that certain hospitals receive payments on other bases than where they are geographically located). The changes in Column 6 reflect the per case payment impact of moving from this baseline to a simulation incorporating the MGCRB decisions for FY 2011 which affect hospitals' wage index area assignments.

By spring of each year, the MGCRB makes reclassification determinations that will be effective for the next fiscal year, which begins on October 1. The MGCRB may approve a hospital's reclassification request for the purpose of using another area's wage index value. Hospitals may appeal denials of MGCRB decisions to the CMS Administrator. Further, hospitals have 45 days from publication of the IPPS rule in the Federal Register to decide whether to withdraw or terminate an approved geographic reclassification for the following year. Provisions in the Affordable Care Act required us to revert to FY 2008 averagehourly wage reclassification criteria for reclassifications effective in FY 2011. Therefore, additional hospitals will qualify for MGCRB reclassification compared to the FY 2011 IPPS/LTCH PPS proposed rule (or will qualify for their primary reclassification), published on May 4, 2010. This column reflects an expectation that these additional hospitals will qualify for geographic reclassification.

The overall effect of geographic reclassification is required by section 1886(d)(8)(D) of the Act to be budget neutral. Therefore, for the purposes of this impact analysis, we are applying an adjustment of 0.995425 to ensure that the effects of the section 1886(d)(10) reclassifications are budget neutral (section II.A. of the Addendum to this supplemental proposed rule). Geographic reclassification generally benefits hospitals in rural areas. We estimate that geographic reclassification will increase payments to rural hospitals by an average of 1.6 percent. By region, all the rural hospital categories will experience increases in payments due to MGCRB reclassification where rural hospitals in the Mountain region will experience a 0.1 percent increase in payments and rural hospitals in the East South Central region will experience a 2.4 percent increase in payments.

Table 9A of the Addendum to this proposed rule reflects the approved reclassifications for FY 2011.

I. Effects of the Rural Floor and Imputed Floor, Including Application of National Budget Neutrality (Column 7)

As discussed in section III.B. of the preamble of the FY 2009 IPPS final rule, the FY 2010 IPPS/RY 2010 LTCH final rule and this proposed rule, section 4410 of Public Law 105-33 established the rural floor by requiring that the wage index for a hospital in any urban area cannot be less than the wage index received by rural hospitals in the same State. In FY 2008, we changed how we applied budget neutrality to the rural floor. Rather than applying a budget neutrality adjustment to the standardized amount, a uniform budget neutrality adjustment is applied to the wage index. In the FY 2009 final rule, we finalized the policy to apply the rural floor budget neutrality at the State level with a 3-year transition. In FY 2009, hospitals received a blended wage index that is 20 percent of a wage index with the State level rural and imputed floor budget neutrality adjustment and 80 percent of a wage index with the national budget neutrality adjustment. In FY 2010, hospitals received a blended wage index that is 50 percent of a wage index with the State level rural and imputed floor budget neutrality and 50 percent of a wage index with the national budget neutrality adjustment. For FY 2011, the Affordable Care Act requires that we apply one rural floor budget neutrality to the wage index, nationally. The proposed FY 2011 rural floor budget neutrality factor applied to the wage index is 0.995425.

Furthermore, the FY 2005 IPPS final rule (69 FR 49109) established a temporary imputed floor for all urban States from FY 2005 to FY 2007. The rural floor requires that an urban wage index cannot be lower than the wage index for any rural hospital in that State. Therefore, an imputed floor was established for States that do not have rural areas or rural IPPS hospitals. In the FY 2008 IPPS final rule with comment period (72 FR 47321), we finalized our proposal to extend the imputed floor for 1 additional year. In the FY 2009 IPPS final rule (73 FR 48573), we extended the imputed floor for an additional 3 years through FY 2011. In the FY 2011 IPPS/LTCH PPS proposed rule published on May 4, 2010, we applied rural floor budget neutrality at the State-level. However, the Affordable Care Act requires that, effective for FY 2011, we apply rural floor and imputed floor budget neutrality at the national level, as we did in FY 2008.

Column 7 shows the projected impact of the rural floor and the imputed floor with the national rural and imputed floor budget neutrality factor applied to the wage index. The column compares the proposed post-reclassification FY 2011 wage index of providers before the rural floor adjustment and the post-reclassification FY 2011 wage index of providers with the rural floor and imputed floor adjustment. Only urban hospitals can benefit from the rural floor provision. Because the provision is budget neutral, all other hospitals (that is, all rural hospitals and those urban hospitals to which the adjustment is not made) experience a decrease in payments due to the budget neutrality adjustment applied nationally to their wage index.

We project that, in aggregate, rural hospitals will experience a 0.1 percent decrease in payments as a result of the application of rural floor budget neutrality because the rural hospitals located in States with a rural floor do not benefit from the rural floor, but have their wage indexes downwardly adjusted to ensure that the application of the rural floor is budget neutral overall within the State. We project hospitals located in other urban areas (populations of 1 million or fewer) will experience a 0.1 percent increase in payments because those providers benefit from the rural floor. Urban hospitals in the Pacific region can expect 0.9 percent increase in payments because a large percentage of hospitals in this region receive the rural floor. Urban hospitals in the Middle Atlantic can expect a 0.1 percent increase in payments because New Jersey hospitals receive the imputed floor with a national budget neutrality adjustment. Rural hospitals in all regions can expect a 0.1 to 0.2 percent decrease in payments because the rural and imputed floors only benefit urban hospitals.

J. Effects of the Proposed Application of the Frontier Wage Index (Column 8)

Section 10324(a) of Affordable Care Act requires that we establish a minimum post-reclassified wage-index of 1.00 for all hospitals located in Frontier States. Frontier States are defined in the statute as States with at least 50 percent of its counties with a population density lesser than 6 persons per square mile. Based on these criteria, five States (Montana, North Dakota, Nevada, South Dakota, and Wyoming) are considered Frontier States and 51 hospitals located in those States would receive a frontier wage index of 1.0. This provision is not budget neutral and is estimated to increase IPPS operating payments by approximately $48 million.

Urban hospitals located in the West North Central region and urban hospitals located in the Mountain region will experience an increase in payments by 0.5 percent and 0.2, respectively, because many of the hospitals located in this region are frontier hospitals. Similarly, rural hospitals located in the West North Central and rural hospitals in the Mountain region will experience an increase in payments by 0.1 and 0.5, respectively.

K. Effects of the Proposed Wage Index Adjustment for Out-Migration (Column 9)

Section 1886(d)(13) of the Act, as added by section 505 of Public Law 108-173, provides for an increase in the wage index for hospitals located in certain counties that have a relatively high percentage of hospital employees who reside in the county, but work in a different area with a higher wage index. Hospitals located in counties that qualify for the payment adjustment are to receive an increase in the wage index that is equal to a weighted average of the difference between the wage index of the resident county, post-reclassification and the higher wage index work area(s), weighted by the overall percentage of workers who are employed in an area with a higher wage index. With the out-migration adjustment, small rural providers with less than 100 beds will experience a 0.5 percent increase in payments in FY 2011 relative to no adjustment at all. We included these additional payments to providers in the impact table shown above, and we estimate the impact of these providers receiving the out-migration increase to be approximately $20 million.

L. Effects of All Proposed Changes Prior to Documentation and Coding (or CMI) Adjustment (Column 10)

Column 10 shows our estimate of the changes in payments per discharge from FY 2010 and FY 2011, resulting from all proposed changes reflected in this supplemental rule and the May 4, 2010 IPPS/LTCH PPS proposed rule for FY 2011 (including statutory changes), other than the proposed documentation and coding adjustment. Column 10 reflects the impact of all other FY 2011 changes relative to FY 2010, including those shown in Columns 1 through 9. We note that our baseline FY 2010 operating estimates account for the provisions under the Affordable Care Act that affected the FY 2010 operating payments. The average increase in payments under the IPPS for all hospitals is approximately 2.0 percent. This includes the 2.15 percent applicable percentage increase (including the −0.25 reduction to the market basket increase required under the Affordable Care Act). In addition, it reflects the estimated 0.2 percentage point difference between the projected outlier payments in FY 2010 (5.1 percent of total MS-DRG payments), the current estimate of the percentage of actual outlier payments in FY 2010 (4.9 percent) as described in the introduction to this Appendix and the Addendum to thisproposed rule. Finally, it accounts for −0.2 percent decrease in payments due to the expiration of Section 508 reclassifications that had been extended for FY 2010 under the Affordable Care Act.

There might also be interactive effects among the various factors comprising the payment system that we are not able to isolate. For these reasons, the values in Column 10 may not equal the sum of the percentage changes described above.

M. Effects of All FY 2011 Proposed Changes With CMI Adjustment (Column 11)

Column 11 shows our estimate of the changes in payments per discharge from FY 2010 and FY 2011, resulting from all proposed changes reflected in the May 4, 2010 IPPS/LTCH PPS proposed rule for FY 2011 and provisions described in this supplemental proposed rule required under the Affordable Care (including statutory changes). The FY 2010 baseline estimates account for the provisions under the Affordable Care Act that affected the FY 2010 operating payments. Specifically, the FY 2010 baseline payment estimates account for the additional −0.25 reduction in the applicable percentage increase applied to discharges for FY 2010 discharges occurring on or after April 1, 2010 and accounts for the extension of Section 508 reclassifications for FY 2010. As discussed in the FY 2011 IPPS/LTCH PPS proposed rule, this column includes the proposed FY 2011 documentation and coding adjustment of −2.9 percent on the national standardized amount, −2.9 percent on the hospital-specific rates, and −2.4 percent on the Puerto Rico-specific standardized amount, which overall accounts for a 2.9 percent decrease in payments.

The average decrease in payments under the IPPS for all hospitals is approximately −0.9 percent. As described in Column 10, this average decrease includes the effects of the 2.15 percent market basket update (including the −0.25 reduction in the applicable percentage increase required under the Affordable Care Act), the 0.2 percentage point difference between the projected outlier payments in FY 2011 (5.1 percent of total MS-DRG payments), and the current estimate of the percentage of actual outlier payments in FY 2010 (4.9 percent). In addition, it includes a −0.2 percent decrease in payments due to the expiration of Section 508 reclassifications that had been extended for FY 2010 under the Affordable Care Act. Section 508 reclassification was not a budget-neutral provision. There might also be interactive effects among the various factors comprising the payment system that we are not able to isolate. For these reasons, the values in Column 11 may not equal the sum of the percentage changes described above.

The overall proposed change in payments per discharge for hospitals paid under the IPPS in FY 2011 is estimated to decrease by 0.9 percent. The payment decreases among the hospital categories are largely attributed to the proposed documentation and coding adjustments. Hospitals in urban areas would experience an estimated 0.8 percent decrease in payments per discharge in FY 2011 compared to FY 2010. Hospital payments per discharge in rural areas are estimated to decrease by 1.4 percent in FY 2011 as compared to FY 2010. The decreases larger than the national average for rural areas are largely attributed to the differential impact of the MS-DRGs and wage data and due to the −2.9 percent documentation and coding adjustment applied to the national standardized amount and the −2.9 percent documentation and coding adjustment to the hospital-specific rate applied to SCHs and MDHs, which generally are classified as rural hospitals.

Among urban census divisions, the largest estimated payment decreases will be 2.0 percent in the New England region and 1.4 percent in the Middle Atlantic region because many of the urban providers in these regions had benefited from Section 508 reclassification in FY 2010 that has expired for FY 2011. Urban hospitals in the Pacific will see the largest payment increases (0.6 percent) because urban providers in this region will benefit from the rural floor and application of a national rural floor budget neutrality factor. Among the rural regions, the providers in the New England region will experience the largest decrease in payments (2.3 percent) because of the expiration of Section 508 reclassifications while rural hospitals in the Mountain region will experience the smallest decreases in payments by 0.4 percent because the rural providers in this region benefit from MGCRB reclassification and the Frontier wage index provision, required under the Affordable Care Act.

Among special categories of rural hospitals, MDHs will receive an estimated payment decrease of 1.1 percent. MDHs are paid the higher of the IPPS rate based on the national standardized amount, that is, the Federal rate, or, if the hospital-specific rate exceeds the Federal rate, the Federal rate plus 75 percent of the difference between the Federal rate and the hospital-specific rate. MDHs will experience a decrease in payments because of the proposed documentation and coding adjustments applied to both the hospital-specific rate and the Federal rate. SCHs are also paid the higher of their hospital-specific rate or the Federal rate. Overall, SCHs will experience an estimated decrease in payments by 1.8 percent due to the proposed documentation and coding adjustments to the national standardized amount and the hospital-specific rates.

Rural hospitals reclassified for FY 2011 are anticipated to receive a 1.0 percent payment decrease, and rural hospitals that are not reclassifying are estimated to receive a payment decrease of 1.9 percent.

Cardiac hospitals are expected to experience a payment increase of 0.3 percent in FY 2011 relative to FY 2010 due to increases in payments attributable to changes in the MS-DRGs and relative weights.

N. Impact Analysis of Table II

Table II presents the projected impact of the proposed changes for FY 2011 as published in the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule and the provisions required under the Affordable Care Act in this notice for urban and rural hospitals and for the different categories of hospitals shown in Table I. It compares the estimated average payments per discharge for FY 2010 with the proposed payments per discharge for FY 2011, as calculated under our models. The estimated FY 2010 payments per discharge incorporate the provisions in the Affordable Care Act. Thus, this table presents, in terms of the average dollar amounts paid per discharge, the combined effects of the proposed changes presented in Table I. The estimated percentage changes shown in the last column of Table II equal the estimated percentage changes in average payments per discharge from Column 11 of Table I.

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VII. Effects of Other Supplemental Proposed Policy Changes

In addition to those supplemental proposed policy changes discussed above that we are able to model using our IPPS payment simulation model, we are proposing to make various other changes in this supplemental proposed rule. Generally, we have limited or no specific data available with which to estimate the impacts of these changes. Our estimates of the likely impacts associated with these other supplemental proposed changes are discussed below.

A. Effects of the Supplemental Proposed Low-Volume Hospital Payment Adjustment: Changes for FYs 2011 and 2012

The low-volume hospital payment adjustment changes for FYs 2011 and 2012, as discussed in section II.C. of the preamble to this supplemental proposed rule, expands eligibility for the low-volume hospital payment adjustment to hospitals with less than 1,600 Medicare discharges (instead of the prior requirement of less than 800 total, Medicare and non-Medicare, discharges) and more than 15 miles from other IPPS hospitals (rather than the prior requirement of more than 25 miles). The payment adjustment is changed also, from an empirically determined (69 FR 49099 through 49102 and 70 FR 47432 through 47434) additional 25 percent payment adjustment to qualifying hospitals with less than 200 total discharges, to a continuous, linear sliding scale adjustment ranging from an additional 25 percent payment adjustment to hospitals with 200 or less Medicare discharges to no additional payment to hospitals with 1,600 or more Medicare discharges.

We estimate, based on FY 2009 claims (MedPAR) data, an additional 1,524 hospitals would meet the Medicare discharges criterion to qualify as a low-volume hospital. However, we are not able to estimate the number of these 1,524 hospitals that would also meet the distance criterion. The actual number of hospitals that would also meet the distance criterion to qualify as a low-volume hospital would be less, very likely much less, than the estimated 1,524 maximum number of potential low-volume hospitals for FY 2011. If all 1,524 hospitals that meet the Medicare discharge requirement also meet the distance requirement, the additional Medicare IPPS dollars the temporary change to the low-volume hospital payment adjustment would require, at most, based on each hospital's number of Medicare discharges and the corresponding payment adjustment amount, an estimated $877 million for FY 2011. At this time, we are not able to estimate the impact of the change for FY 2012.

B. Effects of the Supplemental Proposed Change for Medicare-Dependent, Small Rural Hospitals

As discussed in section II.D. of the preamble to this supplemental proposed rule, section 3124 of Public Law 111-148 extends the MDH program for 1 additional year, from the end of FY 2011 (that is, for discharges before October 1, 2011) to the end of FY 2012 (that is, for discharges before October 1, 2012). The extension has no impact on FY 2011. For FY 2012, the extension allows the continuation of MDH status and the payment methodology, for an MDH to be paid its hospital-specific rate, based on its FY 1982, 1987, or 2002 costs per discharge, rather than the Federal rate, if this results in a greater aggregate payment (section II.D. of the preamble to this supplemental proposed rule). Therefore, the impact of the extension is one additional year of hospital-specific rate payments for MDHs rather than Federal rate payments for IPPS hospitals without special treatment as an MDH.

C. Effects of the Supplemental Proposed Additional Payments to Qualifying Hospitals in Low Medicare Spending Counties

Under section 1109 of Public Law 111-152, Congress has allocated $400 million to be spent for FYs 2011 and 2012 to qualifying hospitals located in the bottom quartile of counties with the lowest Medicare Part A and Part B spending per enrollee. In our proposal described in section II.E. of the preamble to this supplemental proposed rule, we have identified the list of eligible counties and the qualifying hospitals located in those counties that would receive the $400 million. We are proposing to spend $200 million in FY 2011 and $200 million in FY 2012. This money will be given to the qualifying hospitals by the FI or A/B MAC through a one-time annual payment. In section II.E. of the preamble to this supplemental proposed rule, Table 2 lists the distribution of payments among the proposed list of qualifying hospitals. In addition, Table 3 in section II.E. of the preamble to this supplementalproposed rule lists the distribution of payment by State for FY 2011.

D. Effects of the Supplemental Proposed Implementation of the Rural Community Hospital Demonstration Program

In section II.F. of the preamble of this supplemental rule, we discuss our implementation of section 410A of Public Law 108-173, which required the Secretary to establish a demonstration that would modify reimbursement for inpatient services for up to 15 small rural hospitals. Section 410A(c)(2) Public Law 108-173 requires that “[i]n conducting the demonstration program under this section, the Secretary shall ensure that the aggregate payments made by the Secretary do not exceed the amount which the Secretary would have paid if the demonstration program under this section was not implemented.” As discussed in section II.F. of the preamble of this supplemental rule, in the IPPS final rule for each of the previous 6 fiscal years, we have estimated the additional payments as a result of the demonstration for each of the participating hospitals. In order to achieve budget neutrality, we are proposing to adjust the national IPPS rates by an amount sufficient to account for the added costs of this demonstration. In other words, we are proposing to apply budget neutrality across the payment system as a whole rather than merely across the participants of this demonstration. We believe that the language of the statutory budget neutrality requirement permits the agency to implement the budget neutrality provision in this manner. The statutory language requires that “aggregate payments made by the Secretary do not exceed the amount which the Secretary would have paid if the demonstration * * * was not implemented” but does not identify the range across which aggregate payments must be held equal.

An extension of this demonstration has been mandated by the Affordable Care Act. The demonstration will be extended for an additional 5 years and expanded to up to 30 hospitals. We are proposing to make an adjustment in the FY 2011 IPPS/LTCH PPS final rule of $69,279,673 to the national IPPS rates. This amount ($69,279,673) accounts for the following: (1) An estimate of the demonstration cost for FY 2011 for the 10 hospitals that are currently participating in the demonstration; (2) an estimate of the cost of the continuation of the 7 hospitals that have participated in the demonstration since its inception and that are still participating—for the portions of their cost reporting periods in FY 2010 that are not covered in the estimated cost of the demonstration in the FY 2010 IPPS final rule because we formulated these estimates under the assumption that the demonstration would end in FY 2010; and (3) an estimate of the cost of participation in the demonstration for 20 additional hospitals in FY 2011. Not included in this amount is an adjustment that we proposed to make in addition for the FY 2011 IPPS/LTCH PPS final rule to account for any differences between the cost of the demonstration program for hospitals participating in the demonstration during FY 2007, as indicated by their settled cost reports beginning in FY 2007, and the amount that was offset by the budget neutrality adjustment for FY 2007. The specific numeric value associated with this component of the proposed adjustment to the national IPPS rates cannot be known until cost reports beginning in FY 2007 for the hospitals participating during FY 2007 in the demonstration are settled. We expect those cost reports to be settled prior to the publication of the FY 2011 IPPS/LTCH PPS final rule, and that we will be able to incorporate the estimated amount in the FY 2011 IPPS/LTCH PPS final rule.

E. Effects of the Supplemental Proposed Payment for Critical Access Hospital Outpatient Services and Ambulance Services

In section II.H. of the preamble of this supplemental proposed rule, we discuss our proposal to implement section 3128 of Public Law 111-148 by amending the regulations at § 413.70(b)(3)(ii)(A) to state that, effective for cost reporting periods beginning on or after January 1, 2004, payment for outpatient facility services under the optional method will also be made at 101 percent of reasonable costs. We are also proposing to amend the regulations at § 413.70(b)(5)(i) to state that effective for cost reporting periods beginning on or after January 1, 2004, payment for ambulance services furnished by a CAH or an entity that is owned and operated by a CAH is 101 percent of the reasonable costs of the CAH or the entity in furnishing those services, but only if the CAH or the entity is the only provider or supplier of ambulance services located within a 35-mile drive of the CAH or the entity. We do not believe these proposals will result in additional payments to CAHs for prior periods because we believe that in fact we have paid CAHs for these services at 101 percent of reasonable costs during these prior periods.

VIII. Effects of Proposed Changes in the Capital IPPS

A. General Considerations

Provisions of Public Law 111-148 necessitated revising the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule. While the proposed IPPS payment rates for capital-related costs were not directly affected by provisions of Public Law 111-148, changes to the wage index as well as to the outlier payment adjustment factor were required by the law. Changes to the wage index affect the geographic adjustment factor (GAF) under the capital IPPS which is used in conjunction with a factor for changes in DRG classifications and weights to determine a proposed budget neutrality adjustment factor in calculating the proposed capital IPPS rate. A revision of the proposed outlier payment adjustment factor was required because both inpatient operating and inpatient capital-related payments use a single set of thresholds to identify outlier cases. Changes resulting from the provisions of Public Law 111-148 are discussed in more detail in section II.A. of the preamble of this supplemental proposed rule.

The data used in developing the impact analysis presented below are the same as that used for the impact analysis in the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule—the December 2009 update of the FY 2009 MedPAR file and the December 2009 update of the Provider-Specific File (PSF) that is used for payment purposes. Although the analyses of the changes to the capital prospective payment system do not incorporate cost data, we used the December 2009 update of the most recently available hospital cost report data (FYs 2006 and 2007) to categorize hospitals. Our analysis has several qualifications. We use the best data available and make assumptions about case-mix and beneficiary enrollment as described below. In addition, as discussed in section V.E. of the Preamble to the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule, we are proposing a −2.9 percent documentation and coding adjustment to the national capital rate for FY 2011 in addition to the −0.6 percent adjustment established for FY 2008, and the −0.9 percent adjustment for FY 2009. This results in a cumulative adjustment factor of 0.957 that we are proposing to apply to the national capital rate to account for improvements in documentation and coding under the MS-DRGs in FY 2011. We also are proposing to adjust the Puerto Rico-specific capital rate in FY 2011 to account for changes in documentation and coding resulting from the adoption of the MS-DRGs.

Due to the interdependent nature of the IPPS, it is very difficult to precisely quantify the impact associated with each change. In addition, we draw upon various sources for the data used to categorize hospitals in the tables. In some cases (for instance, the number of beds), there is a fair degree of variation in the data from different sources. We have attempted to construct these variables with the best available sources overall. However, for individual hospitals, some miscategorizations are possible.

Using cases from the December 2009 update of the FY 2009 MedPAR file, we simulated payments under the capital IPPS for revised FY 2010 and revised FY 2011 (both years have been revised to account for provisions in the Affordable Care Act that required changes to the wage index and outlier threshold, as discussed above in this section) for a comparison of total payments per case. Any short-term, acute care hospitals not paid under the general IPPS (Indian Health Service hospitals and hospitals in Maryland) are excluded from the simulations.

The basic methodology for determining a capital IPPS payment is set forth at § 412.312. The basic methodology for calculating capital IPPS payments in FY 2011 is as follows:

(Standard Federal Rate) × (DRG weight) × (GAF) × (COLA for hospitals located in Alaska and Hawaii) × (1 + DSH Adjustment Factor + IME adjustment factor, if applicable).

In addition to the other adjustments, hospitals may also receive outlier payments for those cases that qualify under the threshold established for each fiscal year. We modeled payments for each hospital by multiplying the capital Federal rate by the GAF and the hospital's case-mix. We then added estimated payments for indirect medical education, disproportionate share, and outliers, if applicable. For purposes ofthis impact analysis, the model includes the following assumptions (we note that these are the same assumptions used for the impact analysis in the FY 2011 IPPS/LTCH PPS proposed rule (75 FR 24310):

• We estimate that the Medicare case-mix index will increase by 1.0 percent in both FYs 2010 and 2011.

• We estimate that the Medicare discharges will be approximately 11.8 million in FY 2010 and 12 million FY 2011.

• The capital Federal rate was updated beginning in FY 1996 by an analytical framework that considers changes in the prices associated with capital-related costs and adjustments to account for forecast error, changes in the case-mix index, allowable changes in intensity, and other factors. The proposed factors used in the update framework are not affected by the provisions of Pub. L. 111-148, as amended, and therefore, remains at the proposed 1.5 percent for FY 2011, as discussed in section III.A.1. of the May 4, 2010 FY 2011 I PPS/LTCH PPS proposed rule.

• In addition to the proposed FY 2011 update factor, the proposed FY 2011 capital Federal rate was calculated based on a proposed GAF/DRG budget neutrality factor of 1.0015, a proposed outlier adjustment factor of 0.9432, and a proposed (special) exceptions adjustment factor of 0.9997.

• For FY 2011, as discussed above and in section V.E. of the preamble to the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule, we are proposing to apply a 0.957 adjustment to the proposed FY 2011 national capital rate for changes in documentation and coding that are expected to increase case-mix under the MS-DRGs.

B. Results

We used the actuarial model described above to estimate the potential impact of our proposed changes for FY 2011 on total capital payments per case, using a universe of 3,472 hospitals. As described above, the individual hospital payment parameters are taken from the best available data, including the December 2009 update of the FY 2009 MedPAR file, the December 2009 update to the PSF, and the most recent cost report data from the December 2009 update of HCRIS. In Table III, we present a comparison of estimated total payments per case for FY 2010, as revised per the Affordable Care Act, compared to FY 2011 based on the proposed FY 2011 payment policies. Column 2 shows estimates of payments per case under our model for FY 2010 (as revised). Column 3 shows estimates of payments per case under our model for FY 2011. Column 4 shows the total percentage change in payments from revised FY 2010 to FY 2011. The change represented in Column 4 includes the proposed 1.5 percent update to the capital Federal rate and other proposed changes in the adjustments to the capital Federal rate. The comparisons are provided by: (1) Geographic location; (2) region; and (3) payment classification.

The simulation results show that, on average, capital payments per case in FY 2011 are expected to decrease as compared to capital payments per case in FY 2010. The proposed capital rate for FY 2011 would increase 1.5 percent as compared to the FY 2010 capital rate. The proposed changes to the GAFs are expected to result, on average, in a slight decrease in capital payments, although, for rural regions, it is more of a contributing factor to the overall decrease in capital payments than to urban areas mostly due to the application of the rural floor to the wage index. We also are estimating an increase in outlier payments from FY 2010 to FY 2011 due primarily to an estimated decrease in capital IPPS payments per discharge. Since capital payments per discharge are projected to be slightly lower in FY 2011 compared to FY 2010, more cases would qualify for outlier payments. Because our impact analysis includes actuarial assumptions of growth from FY 2010 to FY 2011, the analysis shows a slight increase in capital payments. However, the net impact of these proposed changes is an estimated −0.2 percent change in capital payments per discharge from FY 2010 to FY 2011 for all hospitals (as shown below in Table III).

The geographic comparison shows that, on average, all urban hospitals, as well as hospitals in large urban areas, are expected to experience a 0.1 percent decrease in capital IPPS payments per case in FY 2011 as compared to FY 2010. Capital IPPS payments per case for rural hospitals are expected to decrease 0.6 percent.

The change comparisons by regions show some regions experiencing slight increases in total capital payments, while other regions are estimated to experience slight decreases in capital payments from FY 2010 to FY 2011. For the urban regions, changes in capital payments range from a −1.6 percent in the New England region to an increase of 1.4 percent for the Pacific region. The rural regions show estimates of a −2.4 percent change in capital payments from FY 2010 to FY 2011 in the New England rural region to a 2.1 percent increase for the Mountain rural region.

By type of ownership, proprietary hospitals are estimated to experience a 0.2 percent change in capital payments, voluntary hospitals are estimated to experience a 0.3 percent decrease in capital payments per case, while there is no change estimated for government hospitals in capital payments per case from FY 2010 to FY 2011.

Section 1886(d)(10) of the Act established the MGCRB. Hospitals may apply for reclassification for purposes of the wage index for FY 2011. Reclassification for wage index purposes also affects the GAFs because that factor is constructed from the hospital wage index.

To present the effects of the hospitals being reclassified for FY 2011, we show the average capital payments per case for reclassified hospitals for FY 2010, as revised per the Affordable Care Act. All classifications of reclassified hospitals are expected to experience a decrease in capital payments in FY 2011 as compared to FY 2010. Urban reclassified and rural reclassified hospitals are expected to have a decrease in capital payments of −0.4 percent and −0.3 percent, respectively. No change is estimated in capital payments for urban non-reclassified hospitals, while rural non-reclassified hospital capital payments are estimated to decrease 0.9 percent. Other reclassified hospitals (that is, hospitals reclassified under section 1886(d)(8)(B) of the Act) are expected to experience a decrease of 1.6 percent in capital payments from FY 2010 to FY 2011.

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IX. Effects of Supplemental Proposed Payment Rate Changes and Policy Changes Under the LTCH PPS

A. Introduction and General Considerations

In section II.J. of the preamble and section III. of the Addendum of this proposed rule, we are setting forth the proposed annual update to the payment rates for the LTCH PPS for FY 2011. In the preamble, we specify the statutory authority for the proposed provisions that are presented, identify those proposed policies and present rationale for our decisions as well as alternatives that were considered. In this section IX. of Appendix to this supplemental proposed rule, we discuss the impact of the proposed changes to the payment rates, factors, and other payment rate policies related to the LTCH PPS that are presented in the preamble of this proposed rule in terms of their estimated fiscal impact on the Medicare budget and on LTCHs.

A number of the provisions of the Affordable Care Act affect the IPPS and the LTCH PPS and the providers and suppliers addressed in the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule and this supplemental proposed rule. The impacts of the Appendix to this supplemental proposed rule include the provisions from these laws effective for FY 2011.

Currently, our database of 421 LTCHs includes the data for 77 nonprofit (voluntary ownership control) LTCHs and 301 proprietary LTCHs. Of the remaining 43 LTCHs, 12 LTCHs are government-owned and operated and the ownership type of the other 31 LTCHs is unknown. In the impact analysis, we are using the proposed rates, factors, and policies presented in this supplemental proposed rule, including the 0.50 percentage point reduction to the market basket update required by sections 1886(m)(3) and (4) of the Act and the proposed updated wage index values and the labor-related share (presented in the May 4, 2010 FY 2010 IPPS/LTCH PPS proposed rule), and the best available claims and CCR data to estimate the change in payments for FY 2011. The standard Federal rate for RY 2010 is $39,794.95, which reflects the 0.25 percentage point reduction applied to the RY 2010 market basket update required under sections 1886(m)(3) and (4) of the Act (as established in a separate notice published elsewhere in this Federal Register). Discharges in RY 2010 occurring on or after April 1, 2010 are aid under the revised RY 2010 standard Federal rate consistent with section 3401(p) of Public Law 111-148. Discharges in RY 2010 occurring on or after October 1, 2009 and on or before March 31, 2010 are paid under the standard Federal rate of $39,896.65 (see74 FR 44022).

As discussed in section III.A.3. of the Addendum to this proposed rule, consistent with our historical practice, we are proposing to update the standard Federal rate for FY 2011 by −0.59 percent in order to establish the proposed FY 2011 standard Federal rate at $39,560.16. This includes a proposed market basket update of 2.4 percent with a 0.50 percentage point reduction as required under sections 1886(m)(3) and (4) of the Act, and a proposed documentation and coding adjustment of −2.5 percent to account for increases in case-mix associated with the adoption of the MS-LTC-DRGs. Based on the best available data for the 421 LTCHs in our database, we estimate that the proposed update to the standard Federal rate for FY 2011 (discussed in section III.A.3. of the Addendum of this supplemental proposed rule) and the proposed changes to the area wage adjustment for FY 2011 (discussed in section V.B. of the Addendum to the May 4, 2010 IPPS/LTCH PPS FY 2011 IPPS/LTCH PPS proposed rule (75 FR 24085 through 24086)), in addition to an estimated increase in HCO payments and an estimated increase in SSO payments, would result in an increase in estimated payments from RY 2010 of approximately $12.9 million (or about 0.3 percent). Based on the 421 LTCHs in our database, we estimate RY 2011 LTCH PPS payments to be approximately $4.913 billion, an increase from FY 2010 LTCH PPSpayments of approximately $4.901 billion. Because the combined distributional effects and estimated changes to the Medicare program payments would be greater than $100 million, this proposed rule, in conjunction with the May 4, 2010 IPPS/LTCH PPS FY 2011 IPPS/LTCH PPS proposed rule, is considered a major economic rule, as defined in this section. We note the approximately $12.9 million for the projected increase in estimated aggregate LTCH PPS payments from RY 2010 to FY 2011 does not reflect changes in LTCH admissions or case-mix intensity in estimated LTCH PPS payments, which also would affect overall payment changes.

The projected 0.3 percent increase in estimated payments per discharge from RY 2010 to FY 2011 is attributable to several factors, including the proposed −0.59 percent decrease to the standard Federal rate, proposed changes in the wage index values (including the proposed change to the labor-related share) presented in the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule (75 FR 24085 through 24086) and projected increases in estimated HCO and SSO payments. As Table IV shows, the proposed change attributable solely to the standard Federal rate is projected to result in a decrease of 0.5 percent in estimated payments per discharge from RY 2010 to FY 2011, on average, for all LTCHs, while the proposed changes to the area wage adjustment are projected to result in an increase in estimated payments of 0.1 percent, on average, for all LTCHs.

As discussed in the May 4, 2010 FY 2011 IPPS/LTCH proposed rule (75 FR 24085 through 24086), we are proposing to update the wage index values for FY 2011 based on the most recent available data. In addition, we are proposing to decrease the labor-related share slightly from 75.779 percent to 75.407 percent under the LTCH PPS for FY 2011 based on the most recent available data on the relative importance of the labor-related share of operating and capital costs of the RPL market basket. Consistent with the May 4, 2010 FY 2011 IPPS/LTCH proposed rule, the wage data and the labor-related share is expected to increase LTCH PPS payments by 0.1 percent (75 FR 24317 through 27318).

Table IV below shows the impact of the proposed payment rate and proposed policy changes on LTCH PPS payments for FY 2011 presented in this supplemental proposed rule, in conjunction with the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule, by comparing RY 2010 estimated payments to FY 2011 estimated payments. The projected increase in payments per discharge from RY 2010 to FY 2011 is 0.3 percent (shown in Column 8). This projected increase in payments is attributable to the impacts of the proposed change to the standard Federal rate (−0.5 percent in Column 6) and the proposed change due to the area wage adjustment (0. percent in Column 7), as well as the effect of the estimated increase in payments for HCO cases and SSO cases in FY 2011 as compared to RY 2010 (0.5 percent and 0.3 percent, respectively). That is, estimated total HCO payments are projected to increase from RY 2010 to FY 2011 in order to ensure that estimated HCO payments will be 8 percent of total estimated LTCH PPS payments in FY 2011. An analysis of the most recent available LTCH PPS claims data (that is, FY 2009 claims from the December 2009 update of the MedPAR files) indicates that the RY 2010 HCO threshold of $18,615 (as established in a separate notice published elsewhere in this Federal Register) may result in HCO payments in RY 2010 that fall below the estimated 8 percent. Specifically, we currently estimate that HCO payments will be approximately 7.5 percent of estimated total LTCH PPS payments in RY 2010. We note that the RY 2010 outlier payment estimate in this impact analysis takes into account for the revised RY 2010 rate and outlier threshold determined consistent with sections 1886(m)(3) and (4) of the Act and section 3401(p) of Public Law 111-148 that are used to make payments for discharges in RY 2010 that occur on or after April 1, 2010. Consistent with our estimate in the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule, we estimate that the impact of the increase in HCO payments would result in approximately a 0.5 percent increase in estimated payments from RY 2010 to FY 2011 on average for all LTCHs. Furthermore, in calculating the estimated increase in payments from RY 2010 to FY 2011 for HCO and SSO cases, we increased estimated costs by the applicable market basket percentage increase as projected by our actuaries, which increases payments by 0.3 percent relative to last year. We note that estimated payments for all SSO cases comprise approximately 14 percent of estimated total LTCH PPS payments, and estimated payments for HCO cases comprise approximately 8 percent of estimated total LTCH PPS payments. Payments for HCO cases are based on 80 percent of the estimated cost of the case above the HCO threshold, while the majority of the payments for SSO cases (over 65 percent) are based on the estimated cost of the SSO case.

As we discuss in detail throughout this supplemental proposed rule, based on the most recent available data, we believe that the provisions of this supplemental proposed rule in conjunction with the provisions of the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule, relating to the LTCH PPS will result in an increase in estimated aggregate LTCH PPS payments and that the resulting LTCH PPS payment amounts result in appropriate Medicare payments.

B. Impact on Rural Hospitals

For purposes of section 1102(b) of the Act, we define a small rural hospital as a hospital that is located outside of an urban area and has fewer than 100 beds. As shown in Table IV, we are projecting a 0.7 percent increase in estimated payments per discharge for FY 2011 as compared to RY 2010 for rural LTCHs that would result from the proposed changes presented in this supplemental proposed rule and those changes in the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule as well as the effect of estimated changes to HCO and SSO payments. This estimated impact is based on the data for the 26 rural LTCHs in our database of 421 LTCHs, for which complete data were available. The RY 2010 average payment per case in Table IV accounts for the changes required by sections 1886(m)(3) and (4) of the Act and section 3401(p) of Public Law 111-148 which affects payments for discharges occurring on or after April 1, 2010, as described below in section IX.C.3. of the Appendix to this supplemental proposed rule.

Consistent with the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule, the estimated increase in LTCH PPS payments from RY 2010 to FY 2011 for rural LTCHs is primarily due to the higher than average impacts from the proposed changes to the area wage adjustment and the proposed reduction in the labor-related share from 75.779 to 75.407, which results in a estimated 0.6 percent increase in payments.

C. Anticipated Effects of Proposed LTCH PPS Payment Rate Change and Policy Changes

We discuss the impact of the proposed changes to the payment rates, factors, and other payment rate policies under the LTCH PPS for FY 2011 (in terms of their estimated fiscal impact on the Medicare budget and on LTCHs) in section II.I. of the preamble of this supplemental proposed rule.

1. Budgetary Impact

Section 123(a)(1) of the BBRA requires that the PPS developed for LTCHs “maintain budget neutrality.” We believe that the statute's mandate for budget neutrality applies only to the first year of the implementation of the LTCH PPS (that is, FY 2003). Therefore, in calculating the FY 2003 standard Federal rate under § 412.523(d)(2), we set total estimated payments for FY 2003 under the LTCH PPS so that estimated aggregate payments under the LTCH PPS were estimated to equal the amount that would have been paid if the LTCH PPS had not been implemented.

As discussed in section IX.A. of this Appendix, we project an increase in aggregate LTCH PPS payments in FY 2011 of approximately $12.9 million (or 0.3 percent) based on the 421 LTCHs in our database.

2. Impact of Moratorium and Other Provisions

Section 114(c) and (d) of the Medicare, Medicaid, and SCHIP Extension Act of 2007 (MMSEA) as amended by section 4302 of the American Recovery and Reinvestment Act of 2009 (ARRA) provided for a 3-year delay in certain payment policies relating to LTCHs and LTCH satellite facilities. Section 3106 of Public Law 111-148 and section 10312 of Public Law 111-148 together provide for a 2-year extension of the 3-year delay in implementation of certain payment policies relating to LTCHs and LTCH satellite facilities. Specifically, these provisions affect payment adjustments for “very” short stay outliers (SSOs), the one-time adjustment to the standard Federal rate, the 25 percent payment threshold policy, and the moratorium on the establishment of new LTCHs and LTCH satellite facilities and the moratorium on the increase on LTCH beds in existing LTCHs or satellite facilities.

Sections 3106 and 10312 of Public Law 111-148 together provide for a 2-year extension of the 3-year delay in implementation of the revision to the SSOpolicy at § 412.529(c)(3)(i) that was finalized in the RY 2008 final rule. We estimate that the extension of the SSO provision will result in a projected increase in estimated aggregate LTCH PPS payments of approximately $20 million in FY 2011. Sections 3106 and 10312 of Public Law 111-148 together provide for a 2-year extension to several modifications to the regulations at § 412.534 and § 412.536 required by section 114(c) of MMSEA as amended by section 4302 of the ARRA, which addressed the percentage thresholds between referring hospitals and LTCHs and satellites of LTCHs. We estimate that the implementation of this extension of the MMSEA provisions, as amended by the ARRA, pertaining to § 412.534 and § 412.536 will result in a projected increase in estimated aggregate LTCH PPS payments of approximately $20 million for FY 2011.

Regarding the 2-year extension of the moratorium on the development of new LTCHs and LTCH satellites and the increase in beds in existing LTCHs and LTCH satellites, as we noted in the May 22, 2008 interim final rule with comment period when the original 3-year delay required by section 114(d) of the MMSEA as amended by the ARRA, was implemented, we are unable to quantify the impact of the additional 2 year moratorium on the establishment of LTCHs, LTCH satellite facilities, and on the increase of LTCH beds in existing LTCHs or satellite facilities with limited exceptions. We are unable to provide an estimate of the impact of the 2-year extension of this provision because we have no way of determining how many LTCHs would have opened in the absence of the moratorium, nor do we have sufficient information at this time to determine how many new LTCHs will meet the exceptions criteria provided for in the statute.

3. Impact on Providers

The basic methodology for determining a per discharge LTCH PPS payment is set forth in § 412.515 through § 412.536. In addition to the basic MS-LTC-DRG payment (standard Federal rate multiplied by the MS-LTC-DRG relative weight), we make adjustments for differences in area wage levels, COLA for Alaska and Hawaii, and SSOs. Furthermore, LTCHs may also receive HCO payments for those cases that qualify based on the threshold established each year.

To understand the impact of the proposed changes to the LTCH PPS payments presented in this supplemental proposed rule on different categories of LTCHs for FY 2011, it is necessary to estimate payments per discharge for RY 2010 using the rates, factors, including the FY 2010 GROUPER (Version 27.0) and relative weights, and policies established in the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43945 through 43994 and 44021 through 44030) and to include any changes to payments due to the provisions under sections 1886(m)(3) and (4) of the Act and section 3401(p) of Public Law 111-148 which affects payments for discharges occurring on or after April 1, 2010 in RY 2010 (as established in a separate notice published elsewhere in this Federal Register). It is also necessary to estimate the payments per discharge that would be made under the proposed revised LTCH PPS rates, factors, policies, and GROUPER (Version 28.0) for FY 2011 (as discussed in II.J. of the preamble and section III.A. of the Addendum to this supplemental proposed rule and section VII. of the preamble and section V. of the Addendum of the May 4, 2011 IPPS/LTCH PPS FY 2011 proposed rule). These estimates of RY 2010 and FY 2011 LTCH PPS payments are based on the best available LTCH claims data and other factors, such as the application of inflation factors to estimate costs for SSO and HCO cases in each year. We also evaluated the change in estimated RY 2010 payments to estimated FY 2011 payments (on a per discharge basis) for each category of LTCHs.

Hospital groups were based on characteristics provided in the OSCAR data, FY 2006 through FY 2007 cost report data in HCRIS, and PSF data. Hospitals with incomplete characteristics were grouped into the “unknown” category. Hospital groups include the following:

• Location: Large urban/other urban/rural.

• Participation date.

• Ownership control.

• Census region.

• Bed size.

To estimate the impacts of the payment rates and policy changes among the various categories of existing providers, we used LTCH cases from the FY 2009 MedPAR file to estimate payments for RY 2010 and to estimate payments for FY 2011 for 421 LTCHs. We believe that the discharges based on the FY 2009 MedPAR data for the 421 LTCHs in our database, which includes 301 proprietary LTCHs, provide sufficient representation in the MS-LTC-DRGs containing discharges for patients who received LTCH care for the most commonly treated LTCH patients' diagnoses.

4. Calculation of Prospective Payments

For purposes of this impact analysis, to estimate per discharge payments under the LTCH PPS, we simulated payments on a case-by-case basis using LTCH claims from the FY 2009 MedPAR files. For modeling estimated LTCH PPS payments for RY 2010, we calculated a blended RY 2010 payment to account for changes in the rate in accordance with sections 1886(m)(3) and (4) of the Act and section 3401(p) of Public Law 111-148. Specifically, we applied the RY 2010 standard Federal rate (that is, $39,896.65, under which LTCH discharges occurring on or after October 1, 2009, and through March 31, 2010 are paid, and $39,794.95, under which LTCH discharges occurring on or after April 1, 2010 to September 30, 2010 are paid). For modeling estimated LTCH PPS payments for FY 2011, we applied the proposed FY 2011 standard Federal rate of $39,560.16, which would be effective for LTCH discharges occurring on or after October 1, 2010, and through September 30, 2011.

Furthermore, in modeling estimated LTCH PPS payments for both RY 2010 and FY 2011 in this impact analysis, we applied the RY 2010 and proposed FY 2011 adjustments for area wage differences and the COLA for Alaska and Hawaii. Specifically, we adjusted for area wage differences for estimated RY 2010 payments using the current LTCH PPS labor-related share of 75.779 percent (74 FR 43968), the wage index values established in the Tables 12A and 12B of the Addendum to the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 44192 through 44213) and the RY 2010 COLA factors shown in the table in section V. of the Addendum to that final rule (74 FR 44026). Similarly, we adjusted for area wage differences for estimated FY 2011 payments using the proposed LTCH PPS FY 2011 labor-related share of 75.407 percent (section VII.C.2.d. in the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule), the FY 2011 proposed wage index values presented in Tables 12A and 12B of the Addendum to this proposed rule, and the FY 2011 COLA factors shown in the table in section V.B.5. of the Addendum to the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule.

As discussed above, our impact analysis reflects an estimated change in payments for SSO cases as well as an estimated increase in payments for HCO cases (as described in section V.C. of the Addendum to this proposed rule). In modeling proposed payments for SSO and HCO cases in RY 2010, we applied an inflation factor of 1.024 percent (determined by OACT) to the estimated costs of each case determined from the charges reported on the claims in the FY 2009 MedPAR files and the best available CCRs from the December 2009 update of the PSF. In modeling proposed payments for SSO and HCO cases in FY 2011, we applied an inflation factor of 1.049 (determined by OACT) to the estimated costs of each case determined from the charges reported on the claims in the FY 2009 MedPAR files and the best available CCRs from the December 2009 update of the PSF. Furthermore, in modeling estimated LTCH PPS payments for both RY 2010 and FY 2011 in this impact analysis, we applied the RY 2010 HCO fixed-loss amount of $18,425 (74 FR 44029) for the first half of RY 2010, the revised RY 2010 HCO fixed-loss amount of $18,615 established in conjunction with implementing the provisions of sections 1886(m)(3) and (4) of the Act and section 3401(p) of Public Law 111-148 for the second half of RY 2010, and the proposed FY 2011 fixed loss amount of $19,254 (as discussed in section III.A. of the Addendum of this supplemental proposed rule).

These impacts reflect the estimated “losses” or “gains” among the various classifications of LTCHs from the RY 2010 to FY 2011 based on the proposed payment rates and policy changes presented in this proposed rule. Table IV illustrates the estimated aggregate impact of the LTCH PPS 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 LTCH cases.

• The fourth column shows the estimated payment per discharge for RY 2010 (as described above).

• The fifth column shows the estimated payment per discharge for FY 2011 (as described above).

• The sixth column shows the percentage change in estimated payments per discharge from RY 2010 to FY 2011 for proposed changes to the standard Federal rate (asdiscussed in section III.A.3. of the Addendum to this supplemental proposed rule).

• The seventh column shows the percentage change in estimated payments per discharge from RY 2010 to FY 2011 for proposed changes to the area wage adjustment at § 412.525(c) (as discussed in section V.B. of the Addendum to the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule).

• The eighth column shows the percentage change in estimated payments per discharge from RY 2010 (Column 4) to FY 2011 (Column 5) for all proposed and statutory changes (and includes the effect of estimated changes to HCO and SSO payments).

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5. Results

Based on the most recent available data (as described previously for 421 LTCHs, we have prepared the following summary of the impact (as shown in Table IV) of the proposed LTCH PPS payment rate and policy changes presented in this supplemental proposed rule. The impact analysis in Table IV shows that estimated payments per discharge are expected to increase approximately 0.3 percent, on average, for all LTCHs from RY 2010 to FY 2011 as a result of the proposed payment rate and policy changes presented in this supplemental proposed rule and the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule, as well as estimated increases in HCO and SSO payments. We note that we are proposing a −0.59 percent increase to the standard Federal rate for FY 2011, based on the latest proposed market basket estimate (2.4 percent), the −0.50 percent reduction to the annual update required under of sections 1886(m)(3) and (4) of the Act, and the proposed adjustment for the cumulative effect of changes in documentation and coding in FYs 2008 and 2009 (−2.5 percent). We noted earlier in this section that for most categories of LTCHs, as shown in Table IV (Column 6), the impact of the proposed decrease of approximately −0.6 percent to the standard Federal rate is projected to result in approximately a −0.5 percent decrease in estimated payments per discharge for all LTCHs from RY 2010 to FY 2011. Because payments to cost-based SSO cases and a portion of payments to SSO cases that are paid based on the “blend” option ofthe SSO payment formula at § 412.529(c)(2)(iv) are not affected by the proposed update to the standard Federal rate, we estimate that the effect of the proposed 0.59 percent reduction to the standard Federal rate would result in a 0.5 percent reduction on estimated aggregate LTCH PPS payments to all LTCH PPS cases, including SSO cases. Furthermore, as discussed previously in this regulatory impact analysis, the average increase in estimated payments per discharge from the RY 2010 to FY 2011 for all LTCHs of approximately 0.3 percent (as shown in Table IV) was determined by comparing estimated FY 2011 LTCH PPS payments (using the proposed rates, proposed policies and statutory changes discussed in this supplemental proposed rule and in the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule) to estimated RY 2010 LTCH PPS payments (as described above in section IX.C.3. of this Appendix).

a. Location

Based on the most recent available data, the vast majority of LTCHs are located in urban areas. Only approximately 6 percent of the LTCHs are identified as being located in a rural area, and approximately 4 percent of all LTCH cases are treated in these rural hospitals. The impact analysis presented in Table IV shows that the average percent increase in estimated payments per discharge from RY 2010 to FY 2011 for all hospitals is 0.3 percent for all proposed changes. For rural LTCHs, the percent change for all proposed changes is estimated to be 0.7 percent, while for urban LTCHs, we estimate the increase to be 0.2 percent. Large urban LTCHs are projected to experience an increase of 0.3 percent in estimated payments per discharge from RY 2010 to FY 2011, while other urban LTCHs are projected to experience an increase of 0.1 percent in estimated payments per discharge from RY 2010 to FY 2011, as shown in Table IV.

b. Participation Date

LTCHs are grouped by participation date into four categories: (1) Before October 1983; (2) between October 1983 and September 1993; (3) between October 1993 and September 2002; and (4) after October 2002. Based on the most recent available data, the majority (approximately 49 percent) of the LTCH cases are in hospitals that began participating between October 1993 and September 2002, and are projected to experience nearly the average increase (0.2 percent) in estimated payments per discharge from RY 2010 to FY 2011, as shown in Table IV.

In the participation category where LTCHs began participating in Medicare before October 1983, LTCHs are projected to experience a higher than average percent increase (0.6 percent) in estimated payments per discharge from RY 2010 to FY 2011, as shown in Table IV. Approximately 4 percent of LTCHs began participating in Medicare before October 1983. The LTCHs in this category are projected to experience a higher than average increase in estimated payments because of increases in their wage data, increase under the proposed MS-LTC-DRG GROUPER (Version 28) and relative weights, and also because of estimated increases in their SSO payments relative to last year. Approximately 10 percent of LTCHs began participating in Medicare between October 1983 and September 1993. These LTCHs are projected to experience a slightly above average increase (0.4 percent) in estimated payments from RY 2010 to FY 2011. LTCHs that began participating in Medicare after October 2002 currently represent approximately 38 percent of all LTCHs, and are projected to experience an average increase (0.3 percent) in estimated payments from RY 2010 to FY 2011.

c. Ownership Control

Other than LTCHs whose ownership control type is unknown, LTCHs are grouped into three categories based on ownership control type: voluntary, proprietary, and government. Based on the most recent available data, approximately 18 percent of LTCHs are identified as voluntary (Table IV). We expect that, for these LTCHs in the voluntary category, estimated FY 2011 LTCH payments per discharge will increase higher than the average (0.6 percent) in comparison to estimated payments in RY 2010 primarily because we project an increase in estimated HCO payments and SSO payments to be higher than the average for these LTCHs. The majority (71 percent) of LTCHs are identified as proprietary and these LTCHs are projected to experience an average increase (0.2 percent) in estimated payments per discharge from RY 2010 to FY 2011. Finally, government-owned and operated LTCHs (3 percent) are expected to experience a higher than the average increase (0.7 percent) in estimated payments primarily due to a larger than the average increase in estimated HCO payments and increases under the proposed MS-LTC-DRG GROUPER (Version 28) and relative weights.

d. Census Region

Estimated payments per discharge for FY 2011 are projected to increase for LTCHs located in all regions in comparison to RY 2010. Of the 9 census regions, we project that the increase in estimated payments per discharge will have the largest positive impact on LTCHs in the New England region (0.6 percent, as shown in Table IV). The estimated percent increase in payments per discharge from RY 2010 to FY 2011 for New England is largely attributable to the projected increase in estimated HCO and SSO payments (explained in greater detail above in section IX.A. of this Appendix).

In contrast, LTCHs located in the East South Central region are projected to experience a slight decrease in estimated payments per discharge from RY 2010 to FY 2011. The average estimated decrease in payments of 0.1 percent for LTCHs in the East South Central region is primarily due to estimated decreases in payments associated with the proposed wage index because 50 percent of LTCHs located in this region will have a proposed FY 2011 wage index value that is less than their RY 2010 wage index value. Similarly, LTCHs in the South Atlantic and West North Central are expect to experience no change in payments primarily due to an estimated decrease in payment because of the proposed FY 2011 wage index changes and the decrease in the Federal rate.

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 greater than 200 beds.

We project that payments for small LTCHs (0-24 beds) would experience a 0.8 percent increase in payments due to increases in their wage index while large LTCHs (200+ beds) would experience no change in payments. LTCHs with between 75 and 124 beds and between 125 and 199 beds are expected to experience an above average increase in payments per discharge from RY 2010 to FY 2011 (0.6 percent and 0.5 percent, respectively) primarily due to a larger than average estimated increase in payments from the proposed FY 2011 changes to the area wage adjustment.

D. Effect on the Medicare Program

As noted previously, we project that the provisions of this supplemental proposed rule would result in an increase in estimated aggregate LTCH PPS payments in FY 2011 of approximately $12.9 million (or about 0.3 percent) for the 421 LTCHs in our database.

E. 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 would enhance the efficiency of the Medicare program.

X. Alternatives Considered

This supplemental proposed rule contains a range of policies. The preamble of this supplemental proposed rule provides descriptions of the statutory provisions that are addressed, identifies policies and presents rationales for our decisions and, where relevant, alternatives that were considered.

XI. Overall Conclusion

A. Acute Care Hospitals

Table I of section VI. of this Appendix demonstrates the estimated distributional impact of the IPPS budget neutrality requirements for the proposed MS-DRG and wage index changes, and for the wage index reclassifications under the MGCRB. Table I also shows an overall decrease of 0.9 percent in operating payments. We estimate that operating payments will decrease by approximately $929 million in FY 2011. In addition, we estimates the reporting of hospital quality data program costs at $2.4 million, a savings of $23 million associated with the proposed HACs policies discussed in the May 4, 2010 FY 2011 IPPS/LTCH PPS proposed rule, an additional $150 million to hospitals that qualify for an additional payment as provided under section 1109 of Public Law 111-152, and all other proposed operating payment policies described in section VII. of this Appendix . These estimates added to our FY 2011 operating estimate of −$929 million results in a decrease of $800 million for FY 2011. We estimate that capital payments willexperience −0.2 percent change in payments per case, as shown in Table III of section VIII. of this Appendix. We project that there will be a $20 million decrease in capital payments in FY 2011 compared to FY 2010. The proposed cumulative operating and capital payments should result in a net decrease of $820 million to IPPS providers. The discussions presented in the previous pages, in combination with the rest of this proposed rule and the May 10, 2010 FY 2011 IPPS/LTCH PPS proposed rule, constitute a regulatory impact analysis.

B. LTCHs

Overall, LTCHs are projected to experience an increase in estimated payments per discharge in FY 2011. In the impact analysis, we are using the proposed rates, factors, and policies presented in this supplemental proposed rule, including proposed updated wage index values and relative weights, and the best available claims and CCR data to estimate the change in payments under the LTCH PPS for FY 2011. Accordingly, based on the best available data for the 421 LTCHs in our database, we estimate that FY 2011 LTCH PPS payments will increase approximately $13 million (or about 0.3 percent).

XII. Accounting Statements

A. Acute Care Hospitals

As required by OMB Circular A-4 (available at http://www.whitehousegov/omb/circulars/a004/a-4.pdf), in Table V below, we have prepared an accounting statement showing the classification of the expenditures associated with the provisions of this proposed rule as they relate to acute care hospitals. This table provides our best estimate of the change in Medicare payments to providers as a result of the proposed changes to the IPPS presented in this supplemental proposed rule and the May 10, 2010 FY 2011 IPPS/LTCH PPS proposed rule. All expenditures are classified as transfers to Medicare providers.

Table V—Accounting Statement: Classification of Estimated Expenditures Under the IPPS From FY 2010 to FY 2011
CategoryTransfers
Annualized Monetized Transfers −$820 million.
From Whom to Whom Federal Government to IPPS Medicare Providers.
Total −$820 million.

B. LTCHs

As discussed in section IX. of this Appendix, the impact analysis for the proposed changes under the LTCH PPS for this proposed rule projects an increase in estimated aggregate payments of approximately $13 million (or about 0.3 percent) for the 421 LTCHs in our database that are subject to payment under the LTCH PPS. Therefore, as required by OMB Circular A-4 (available at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf), in Table VI below, we have prepared an accounting statement showing the classification of the expenditures associated with the provisions of this supplemental proposed rule and the May 10, 2010 FY 2011 IPPS/LTCH PPS proposed rule as they relate to changes to the LTCH PPS. Table VI provides our best estimate of the proposed increase in Medicare payments under the LTCH PPS as a result of the proposed provisions presented in this proposed rule based on the data for the 421 LTCHs in our database. All expenditures are classified as transfers to Medicare providers (that is, LTCHs).

Table VI—Accounting Statement: Classification of Estimated Expenditures From the 2010 LTCH PPS Rate Year to the FY 2011 LTCH PPS
CategoryTransfers
Annualized Monetized Transfers Positive transfer—Estimated increase in expenditures: $13 million.
From Whom to Whom Federal Government to LTCH PPS Medicare Providers.
Total $13 million.

XIII. Executive Order 12866

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

References

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