95-13183. Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 1996 Rates

[Federal Register Volume 60, Number 106 (Friday, June 2, 1995)]
[Proposed Rules]
[Pages 29202-29434]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-13183]




[[Page 29201]]

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Part II





Department of Health and Human Services





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Health Care Financing Administration



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42 CFR Parts 412, 413, et al.



Medicare Program; Changes to the Hospital Inpatient Prospective Payment 
Systems and Fiscal Year 1996 Rates; Proposed Rule

Federal Register / Vol. 60, No. 106 / Friday, June 2, 1995 / Proposed 
Rules
[[Page 29202]] 
DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Parts 412, 413, 424, 485, and 489

[BPD-825-P]
RIN 0938-AG95


Medicare Program; Changes to the Hospital Inpatient Prospective 
Payment Systems and Fiscal Year 1996 Rates

AGENCY: Health Care Financing Administration (HCFA), HHS.

ACTION: Proposed rule.

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SUMMARY: We are proposing to revise the Medicare hospital inpatient 
prospective payment systems for operating costs and capital-related 
costs to implement necessary changes arising from our continuing 
experience with the system. In addition, in the addendum to this 
proposed rule, we are describing proposed changes in the amounts and 
factors necessary to determine prospective payment rates for Medicare 
hospital inpatient services for operating costs and capital-related 
costs. These changes would be applicable to discharges occurring on or 
after October 1, 1995. We are also setting proposed rate-of-increase 
limits as well as proposing policy changes for hospitals and hospital 
units excluded from the prospective payment systems.

DATES: Comments will be considered received at the appropriate address, 
as provided below, no later than 5 p.m. on August 1, 1995.

ADDRESSES: Mail written comments (an original and 3 copies) to the 
following address: Health Care Financing Administration, Department of 
Health and Human Services, Attention: BPD-825-P, P.O. Box 7517, 
Baltimore, MD 21207-0517.
    If you prefer, you may deliver your written comments (an original 
and 3 copies) to one of the following addresses:

Room 309-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., 
Washington, DC 20201, or
Room 132, East High Rise Building, 6325 Security Boulevard, Baltimore, 
MD 21207.

    Because of staffing and resource limitations, we cannot accept 
comments by facsimile (FAX) transmission. In commenting, please refer 
to file code BPD-825-P. Comments received timely will be available for 
public inspection as they are received, generally beginning 
approximately 3 weeks after publication of a document, in Room 309-G of 
the Department's offices at 200 Independence Avenue, SW., Washington, 
DC, on Monday through Friday of each week from 8:30 a.m. to 5 p.m. 
(phone: [phone]).
    For comments that relate to information collection requirements, 
mail a copy of comments to: Office of Information and Regulatory 
Affairs, Office of Management and Budget, Room 10235, New Executive 
Office Building, Washington, DC 20503, Attn: Allison Herron Eydt, HCFA 
Desk Officer.
    Copies: To order copies of the Federal Register containing this 
document, send your request to: New Orders, Superintendent of 
Documents, P.O. Box 371954, Pittsburgh, PA 15250-7954. Specify the date 
of the issue requested and enclose a check or money order payable to 
the Superintendent of Documents, or enclose your Visa or Master Card 
number and expiration date. Credit card orders can also be placed by 
calling the order desk at [phone] or by faxing to (202) 512-
2250. The cost for each copy is $8.00. As an alternative, you can view 
and photocopy the Federal Register document at most libraries 
designated as Federal Depository Libraries and at many other public and 
academic libraries throughout the country that receive the Federal 
Register.
    To obtain data used in deriving the standardized amounts and DRG 
relative weights, see section VIII.B of the Supplementary Information 
section of this preamble, Requests for Data From the Public.

FOR FURTHER INFORMATION CONTACT:

Nancy Edwards [phone], Operating Prospective Payment, DRG, Wage 
Index Issues.
Tzvi Hefter [phone], Capital Prospective Payment, Excluded 
Hospitals, EACH, RPCH.

SUPPLEMENTARY INFORMATION:

I. Background

A. Summary

    Under section 1886(d) of the Social Security Act (the Act), a 
system of payment for the operating costs of acute care hospital 
inpatient stays under Medicare Part A (Hospital Insurance) based on 
prospectively-set rates was established effective with hospital cost 
reporting periods beginning on or after October 1, 1983. Under this 
system, Medicare payment for hospital inpatient operating costs is made 
at a predetermined, specific rate for each hospital discharge. All 
discharges are classified according to a list of diagnosis-related 
groups (DRGs). The regulations governing the hospital inpatient 
prospective payment system are located in 42 CFR part 412. On September 
1, 1994, we published a final rule with comment period (59 FR 45330) to 
implement changes to the prospective payment system for hospital 
operating costs beginning with Federal fiscal year (FY) 1995. We 
invited comments only on certain revisions to the criteria for 
geographic reclassification by the Medicare Geographic Classification 
Review Board (MGCRB). We did not receive any timely comments in 
response to the September 1, 1994 final rule with comment period. 
Therefore, we are confirming the provisions of that rule as final and 
are not publishing another final rule.
    For cost reporting periods beginning before October 1, 1991, 
hospital inpatient operating costs were the only costs covered under 
the prospective payment system. Payment for capital-related costs had 
been made on a reasonable cost basis because, under sections 1886(a)(4) 
and (d)(1)(A) of the Act, those costs had been specifically excluded 
from the definition of inpatient operating costs. However, section 
4006(b) of the Omnibus Budget Reconciliation Act of 1987 (Public Law 
100-203) revised section 1886(g)(1) of the Act to require that, for 
hospitals paid under the prospective payment system for operating 
costs, capital-related costs would also be paid under a prospective 
payment system effective with cost reporting periods beginning on or 
after October 1, 1991. As required by section 1886(g) of the Act, we 
replaced the reasonable cost-based payment methodology with a 
prospective payment methodology for hospital inpatient capital-related 
costs. Under the new methodology, effective for cost reporting periods 
beginning on or after October 1, 1991, a predetermined payment amount 
per discharge is made for Medicare inpatient capital-related costs. 
(See subpart M of 42 CFR part 412, and the August 30, 1991, final rule 
(56 FR 43358) for a complete discussion of the prospective payment 
system for hospital inpatient capital-related costs.)

B. Major Contents of This Proposed Rule

    In this proposed rule, we are setting forth proposed changes to the 
Medicare hospital inpatient prospective payment systems for both 
operating costs and capital-related costs. This proposed rule would be 
effective for discharges occurring on or after October 1, 1995. 
Following is a summary of the major changes that we are proposing to 
make: [[Page 29203]] 
1. Changes to the DRG Classifications and Relative Weights
    As required by section 1886(d)(4)(C) of the Act, we must adjust the 
DRG classifications and relative weights at least annually. Our 
proposed changes for FY 1996 are set forth in section II of this 
preamble.
2. Changes to the Hospital Wage Index
    In section III of this preamble, we discuss revisions to the wage 
index and the annual update of the wage data. Specific issues addressed 
in this section include:
     FY 1996 wage index update.
     Allocation of general service salaries and hours to 
excluded areas.
     Revisions to the wage index based on hospital 
redesignations.
     Criteria for seeking MGCRB reclassification.
     Alternative labor market areas.
3. Other Changes to the Prospective Payment System for Inpatient 
Operating Costs
    In section IV of this preamble, we discuss several provisions of 
the regulations in 42 CFR parts 412, 424, and 485 and set forth certain 
proposed changes concerning the following:
     Payment for transfer cases.
     Rural referral centers.
     Determination of number of beds in determining the 
indirect medical education adjustment.
     Disproportionate share adjustment.
     Essential access community hospitals (EACHs) and rural 
primary care hospitals (RPCHs).
     Rebasing the hospital market baskets.
4. Changes and Clarifications to the Prospective Payment System for 
Capital-Related Costs
    In section V of this preamble, we discuss several provisions of the 
regulations in 42 CFR part 412 and set forth certain proposed changes 
concerning the following:
     New update framework.
     Specific adjustment for taxes to the capital prospective 
payment system Federal rate.
5. Changes for Hospitals and Hospital Units Excluded From the 
Prospective Payment Systems
    In section VI of this preamble, we discuss changes to the 
regulations at 42 CFR parts 412 and 413 for hospitals and hospital 
units excluded from the prospective payment system. The proposed 
changes concern the following:
     Requirements for certain long-term care hospitals excluded 
from the prospective payment systems.
     Payment window for preadmission services.
     Criteria for exclusion.
     Request for payment adjustment.
6. Determining Prospective Payment Rates and Rate-of-Increase Limits
    In the addendum to this proposed rule, we set forth proposed 
changes to the amounts and factors for determining the FY 1996 
prospective payment rates for operating costs and capital-related 
costs. We are also proposing new update factors for determining the 
rate-of-increase limits for cost reporting periods beginning in FY 1996 
for hospitals and hospital units excluded from the prospective payment 
system.
7. Impact Analysis
    In Appendix A, we set forth an analysis of the impact that the 
proposed changes described in this rule would have on affected 
entities.
8. Capital Acquisition Model
    Appendix B contains the technical appendix on the proposed FY 1996 
capital acquisition model.
9. Report to Congress on the Update Factor for Prospective Payment 
Hospitals and Hospitals Excluded From the Prospective Payment System
    Section 1886(e)(3)(B) of the Act requires that the Secretary report 
to Congress no later than March 1, 1995 on our initial estimate of an 
update factor for FY 1996 for both hospitals included in and hospitals 
excluded from the prospective payment systems. This report is included 
as Appendix C to this proposed rule.
10. Proposed Recommendation of Update Factor for Hospital Inpatient 
Operating Costs
    As required by sections 1886 (e)(4) and (e)(5) of the Act, Appendix 
D provides our recommendation of the appropriate percentage change for 
FY 1996 for the following:
     Large urban area and other area average standardized 
amounts (and hospital-specific rates applicable to sole community 
hospitals) for hospital inpatient services paid for under the 
prospective payment system for operating costs.
     Target rate-of-increase limits to the allowable operating 
costs of hospital inpatient services furnished by hospitals and 
hospital units excluded from the prospective payment system.
11. Discussion of Prospective Payment Assessment Commission 
Recommendations
    The Prospective Payment Assessment Commission (ProPAC) is directed 
by section 1886(e)(2)(A) of the Act to make recommendations on the 
appropriate percentage change factor to be used in updating the average 
standardized amounts. In addition, section 1886(e)(2)(B) of the Act 
directs ProPAC to make recommendations regarding changes in each of the 
Medicare payment policies under which payments to an institution are 
prospectively determined. In particular, the recommendations relating 
to the hospital inpatient prospective payment systems are to include 
recommendations concerning the number of DRGs used to classify 
patients, adjustments to the DRGs to reflect severity of illness, and 
changes in the methods under which hospitals are paid for capital-
related costs. Under section 1886(e)(3)(A) of the Act, the 
recommendations required of ProPAC under sections 1886(e)(2) (A) and 
(B) of the Act are to be reported to Congress not later than March 1 of 
each year.
    We are printing ProPAC's March 1, 1995 report, which includes its 
recommendations, as Appendix E of this document. The recommendations, 
and the actions we are proposing to take with regard to them (when an 
action is recommended), are discussed in detail in the appropriate 
sections of this preamble, the addendum, or the appendices to this 
proposed rule. See section VII of this preamble for specific 
information concerning where individual recommendations are addressed. 
For a brief summary of the ProPAC recommendations, we refer the reader 
to the beginning of the ProPAC report as set forth in Appendix E of 
this proposed rule. ProPAC also produced technical appendices in its 
March 1, 1995 report that provide background material and detailed 
analyses used in preparation of the ProPAC recommendations. For further 
information relating specifically to the ProPAC report or to obtain a 
copy of the technical appendices, contact ProPAC at [phone].

II. Proposed Changes to DRG Classifications and Relative Weights

A. Background

    Under the prospective payment system, we pay for inpatient hospital 
services on the basis of a rate per discharge that varies by the DRG to 
which a beneficiary's stay is assigned. The formula used to calculate 
payment for a specific case takes an individual hospital's payment rate 
per case and multiplies it by the weight of the DRG to which the case 
is assigned. Each DRG weight represents the average resources required 
to care for cases in that [[Page 29204]] particular DRG relative to the 
average resources used to treat cases in other DRGs.
    Congress recognized that it would be necessary to recalculate the 
DRG relative weights periodically to account for changes in resource 
consumption. Accordingly, section 1886(d)(4)(C) of the Act requires 
that the Secretary adjust the DRG classifications and relative weights 
annually. These adjustments are made to reflect changes in treatment 
patterns, technology, and any other factors that may change the 
relative use of hospital resources. The proposed changes to the DRG 
classification system and the proposed recalibration of the DRG weights 
for discharges occurring on or after October 1, 1995 are discussed 
below.
B. DRG Reclassification

1. General
    Cases are classified into DRGs for payment under the prospective 
payment system based on the principal diagnosis, up to eight additional 
diagnoses, and up to six procedures performed during the stay, as well 
as age, sex, and discharge status of the patient. The diagnosis and 
procedure information is reported by the hospital using codes from the 
International Classification of Diseases, Ninth Edition, Clinical 
Modification (ICD-9-CM). The Medicare fiscal intermediary enters the 
information into its claims system and subjects it to a series of 
automated screens called the Medicare Code Editor (MCE). These screens 
are designed to identify cases that require further review before 
classification into a DRG can be accomplished.
    After screening through the MCE and any further development of the 
claims, cases are classified by the GROUPER software program into the 
appropriate DRG. The GROUPER program was developed as a means of 
classifying each case into a DRG on the basis of the diagnosis and 
procedure codes and demographic information (that is, sex, age, and 
discharge status). It is used both to classify past cases in order to 
measure relative hospital resource consumption to establish the DRG 
weights and to classify current cases for purposes of determining 
payment. The records for all Medicare hospital inpatient discharges are 
maintained in the Medicare Provider Analysis and Review (MedPAR) file. 
The data in this file are used to evaluate possible DRG classification 
changes and to recalibrate the DRG weights.
    Currently, cases are assigned to one of 492 DRGs in 25 major 
diagnostic categories (MDCs). Most MDCs are based on a particular organ 
system of the body (for example, MDC 6, Diseases and Disorders of the 
Digestive System); however, some MDCs are not constructed on this basis 
since they involve multiple organ systems (for example, MDC 22, Burns).
    In general, principal diagnosis determines MDC assignment. However, 
there are five DRGs to which cases are assigned on the basis of 
procedure codes rather than first assigning them to an MDC based on the 
principal diagnosis. These are the DRGs for liver, bone marrow, and 
lung transplant (DRGs 480, 481, and 495, respectively) and the two DRGs 
for tracheostomies (DRGs 482 and 483). Cases are assigned to these DRGs 
before classification to an MDC.
    Within most MDCs, cases are then divided into surgical DRGs (based 
on a surgical hierarchy that orders individual procedures or groups of 
procedures by resource intensity) and medical DRGs. Medical DRGs 
generally are differentiated on the basis of diagnosis and age. Some 
surgical and medical DRGs are further differentiated based on the 
presence or absence of complications or comorbidities (hereafter CC).
    Generally, GROUPER does not consider other procedures; that is, 
nonsurgical procedures or minor surgical procedures generally not 
performed in an operating room are not listed as operating room (OR) 
procedures in the GROUPER decision tables. However, there are a few 
non-OR procedures that do affect DRG assignment for certain principal 
diagnoses, such as extracorporeal shock wave lithotripsy for patients 
with a principal diagnosis of urinary stones.
    The changes we are proposing to make to the DRG classification 
system for FY 1996 and other decisions concerning DRGs are set forth 
below.
2. MDC 5 (Diseases and Disorders of the Circulatory System)
    a. Automatic Implantable Cardioverter Defibrillator (AICD) 
Procedures (DRG 116). For several years, we have received 
correspondence regarding the appropriate DRG assignment of certain 
procedures involving automatic implantable cardioverter defibrillators 
(AICDs). When a patient whose principal diagnosis is classified to MDC 
5 (Diseases and Disorders of the Circulatory System) receives a total 
AICD system implant or replacement (procedure code 37.94), the case is 
assigned to DRG 104 or 105 (Cardiac Valve Procedures With or Without 
Cardiac Catheterization). However, for discharges occurring before 
October 1, 1992, if a procedure was performed that involved the 
implantation or replacement of only part of the AICD system (that is, 
replacement or implant of either the leads or pulse generator only), 
the case was assigned to DRG 120 (Other Circulatory System OR 
Procedures). Effective with discharges occurring on or after October 1, 
1992, these procedures were reclassified to DRG 116 (Other Permanent 
Cardiac Pacemaker Implant or AICD Lead or Generator Procedure).
    As we stated in the September 1, 1994, final rule (59 FR 45347), we 
have continued to monitor the appropriate placement of the AICD cases 
that are currently assigned to DRG 116. The AICD cases are represented 
by the following procedure codes: 37.95 (Implantation of automatic 
cardioverter/defibrillator lead(s) only), 37.96 (Implantation of 
automatic cardioverter/defibrillator pulse generator only), 37.97 
(Replacement of automatic cardioverter/defibrillator lead(s) only), 
37.98 (Replacement of automatic cardioverter/defibrillator pulse 
generator only). Some hospitals and the manufacturer of the first of 
these devices to be approved by the Food and Drug Administration (FDA) 
believe that a more appropriate DRG assignment would be DRG 115 
(Permanent Cardiac Pacemaker Implantation with AMI, Heart Failure or 
Shock), because, in their opinion, the higher relative weight assigned 
to this DRG would provide more equitable payment.
    As explained in detail in the September 1, 1992 final rule (57 FR 
39749), the current clinical composition and relative weights of the 
surgical DRGs in MDC 5 do not offer a perfect match with the AICD 
cases. After reviewing the current DRGs in terms of clinical coherence 
and similar resource use, we determined that DRG 116 was the best 
possible fit.
    Since reassignment of these procedures to DRG 116, we have annually 
analyzed the cases based on the most recent data. Based on data in the 
FY 1994 Medicare Provider Analysis and Review (MedPAR) file, the 
average standardized charge for the 2,459 AICD cases assigned to DRG 
116 is $27,965. The average standardized charge for all cases in DRG 
116 is $19,584 and, for DRG 115, $28,965. The $8,381 difference between 
the average charge for AICD cases in DRG 116 and all cases in DRG 116 
is within the variation in charges for that DRG. We note that compared 
to last year's analysis using FY 1993 MedPAR data, the average charge 
for the AICD cases has decreased slightly as has the difference in 
charges [[Page 29205]] between all cases in DRG 116 and the AICD cases.
    The average length of stay for the AICD cases in DRG 116 is 4.0 
days compared to 5.89 days for all cases in DRG 116. However, the 
length of stay for cases in DRG 115 is 11.77. In general, the patients 
classified to DRG 115 are seriously ill and the long length of stay 
supports this contention. We continue to believe that the AICD patients 
are clinically much more similar to the patients classified to DRG 116 
than to those in DRG 115 and that it is the cost of the AICD device 
that is responsible for the high average charge for these cases and not 
the intensity of hospital services required to treat the patient.
    In the September 1, 1994 final rule, we stated our belief that as 
new AICD devices were approved by the FDA and entered the market, 
increased competition would result in a decrease in the price of the 
devices and a corresponding drop in the average charge for a hospital 
stay for AICD procedures. Second and third generations of several 
manufacturers' devices are now on the market. In addition, we believe 
that the slight decrease in average charges seen in the FY 1994 data 
compared to the FY 1993 data is a direct result of hospitals' ability 
to obtain AICD devices from multiple sources. (The increase in charges 
for AICD cases between FY 1992 data and FY 1993 was approximately 
$6,000.) Based on this evidence, we will continue to assign the AICD 
implant cases to DRG 116 for FY 1996. We will reassess this assignment 
as a part of our FY 1997 DRG analysis.
    b. Sympathectomy Procedures. When performed in connection with a 
principal diagnosis assigned to MDC 5, procedure code 05.24 (presacral 
sympathectomy) is assigned to DRGs 478 and 479 (Other Vascular 
Procedures).1 However, the four other sympathectomy procedures 
related to MDC 5 diagnoses are classified to DRG 120 (Other Circulatory 
System OR Procedures). In order to improve clinical consistency, we 
propose to assign procedure code 05.24 to DRG 120 rather than to DRGs 
478 and 479.

    \1\A single title combined with two DRG numbers is used to 
signify pairs. Generally, the first DRG is for cases with CC and the 
second DRG is for cases without CC. If a third number is included, 
it represents cases of patients who are age 0-17. Occasionally, a 
pair of DRGs is split on age >17 and age 0-17.
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    We realize that this proposal moves a procedure from a specific 
surgical DRG class to the ``other OR procedures'' surgical class in MDC 
5. There are very few presacral sympathectomies performed for the 
Medicare population, therefore, we believe that this move will not 
unduly affect any cases in the Medicare population. We note that we are 
not moving this procedure from the DRGs to which it is assigned in MDC 
1 (Diseases and Disorders of the Nervous System) or MDC 13 (Diseases 
and Disorders of the Female Reproductive System).
3. MDC 15 (Newborns and Other Neonates With Conditions Originating in 
the Perinatal Period)
    In the September 1, 1994 final rule (59 FR 45341), we stated our 
intention to improve the classification and relative weights of the 
DRGs that apply to newborns, children, and maternity patients. Because 
the Medicare population does not include many of these individuals, the 
original DRG classification system was developed from analysis of 
claims data representative of the total inpatient population. Non-
Medicare discharge records from Maryland and Michigan hospitals were 
used to calculate the original Medicare weights for the DRGs to which 
newborns, children, and maternity patients are classified. Since that 
time, because of the lack of Medicare data, these low-volume DRGs have 
not been analyzed and refined, and the relative weights assigned to 
them may no longer be entirely reflective of the resources needed to 
treat patients.
    Accordingly, we have acquired hospital claims data representative 
of the total patient population for analysis and evaluation. These 
data, collected and formatted by the Urban Institute under contract 
with HCFA (Contract 500-92-0024), represent claims for non-Medicare 
payers from 19 States. The data base contains approximately 17 million 
discharge records. Using this data, we are evaluating possible 
modifications to MDC 15 that would better address the requirements for 
an all-patient population.
    As we have not yet completed this evaluation, we are not proposing 
an MDC 15 DRG reclassification structure for FY 1996. However, we are 
proposing to adjust the DRG relative weights for the Medicare low-
volume DRGs. We identified 36 low-volume DRGs (defined as those DRGs 
with fewer than 10 cases) in the FY 1994 MedPAR data, which is being 
used to calculate the FY 1996 DRG relative weights. These DRGs are 
generally those assigned to patients age 0-17, many of the neonate and 
newborn MDC 15 DRGs, and one DRG in MDC 14 (Pregnancy, Childbirth and 
Puerperium). The DRG relative weights for these low-volume DRGs were 
calculated based on the non-Medicare data we acquired from the 19 
States.
    During the year, we have received suggestions from the public 
concerning improvements for the neonate DRG classifications. Among 
these suggestions have been recommendations concerning specific 
diagnoses that are currently considered significant problems in 
determining the assignment of a neonate case to DRG 390 (Neonate with 
other Significant Problems) rather than DRG 391 (Normal Newborn). 
Another issue is the assignment to MDC 15 of discharges with a 
principal diagnosis of certain congenital defects regardless of the age 
of the patient. Because the MDC 15 modifications that we are 
considering should resolve these concerns, we are not proposing to 
revise the assignment of these diagnoses and conditions at this time. 
Rather, we will incorporate the necessary and appropriate assignment of 
these cases with our overall modification of the neonate DRGs.
4. MDC 24 (Multiple Significant Trauma)
    Several years ago, we created a new MDC 24 to classify cases of 
multiple significant trauma. In order to be assigned to this MDC, a 
patient must have a principal diagnosis of trauma and at least two 
significant trauma diagnosis codes from two different body sites 
reported as either principal or secondary diagnoses. We recognize eight 
different body site categories: head, chest, abdomen, kidney, urinary, 
pelvis and spine, upper limb, and lower limb.
    It has been brought to our attention that diagnosis code 851.06 
(Cerebral cortex contusion with loss of consciousness of unspecified 
duration) was mistakenly excluded from the list of diagnoses that count 
as principal or secondary diagnoses in the significant head trauma 
section of MDC 24. Because this code is clinically similar to those 
already on the list of principal or secondary diagnoses that cause 
assignment to DRG 487 (Other Multiple Significant Trauma), we propose 
to add this diagnosis to the significant head trauma list effective 
with discharges occurring on or after October 1, 1995.
5. Surgical Hierarchies
    Some inpatient stays entail multiple surgical procedures, each one 
of which, occurring by itself, could result in assignment of the case 
to a different DRG within the MDC to which the principal diagnosis is 
assigned. It is, therefore, necessary to have a decision rule by which 
these cases are assigned to a single DRG. The surgical hierarchy, an 
ordering of surgical classes from [[Page 29206]] most to least resource 
intensive, performs that function. Its application ensures that cases 
involving multiple surgical procedures are assigned to the DRG 
associated with the most resource-intensive surgical class.
    Because the relative resource intensity of surgical classes can 
shift as a function of DRG reclassification and recalibration, we 
reviewed the surgical hierarchy of each MDC, as we have for previous 
reclassifications, to determine if the ordering of classes coincided 
with the intensity of resource utilization, as measured by the same 
billing data used to compute the DRG relative weights.
    A surgical class can be composed of one or more DRGs. For example, 
in MDC 5, the surgical class ``heart transplant'' consists of a single 
DRG (DRG 103) and the class ``coronary bypass'' consists of two DRGs 
(DRGs 106 and 107). Consequently, in many cases, the surgical hierarchy 
has an impact on more than one DRG. The methodology for determining the 
most resource-intensive surgical class, therefore, involves weighting 
each DRG for frequency to determine the average resources for each 
surgical class. For example, assume surgical class A includes DRGs 1 
and 2 and surgical class B includes DRGs 3, 4, and 5, and that the 
average charge of DRG 1 is higher than that of DRG 3, but the average 
charges of DRGs 4 and 5 are higher than the average charge of DRG 2. To 
determine whether surgical class A should be higher or lower than 
surgical class B in the surgical hierarchy, we would weight the average 
charge of each DRG by frequency (that is, by the number of cases in the 
DRG) to determine average resource consumption for the surgical class. 
The surgical classes would then be ordered from the class with the 
highest average resource utilization to that with the lowest, with the 
exception of ``other OR procedures'' as discussed below.
    This methodology may occasionally result in a case involving 
multiple procedures being assigned to the lower-weighted DRG (in the 
highest, most resource-intensive surgical class) of the available 
alternatives. However, given that the logic underlying the surgical 
hierarchy provides that the GROUPER searches for the procedure in the 
most resource-intensive surgical class, which may sometimes occur in 
cases involving multiple procedures, this result is unavoidable.
    We note that, notwithstanding the foregoing discussion, there are a 
few instances when a surgical class with a lower average relative 
weight is ordered above a surgical class with a higher average relative 
weight. For example, the ``other OR procedures'' surgical class is 
uniformly ordered last in the surgical hierarchy of each MDC in which 
it occurs, regardless of the fact that the relative weight for the DRG 
or DRGs in that surgical class may be higher than that for other 
surgical classes in the MDC. The ``other OR procedures'' class is a 
group of procedures that are least likely to be related to the 
diagnoses in the MDC but are occasionally performed on patients with 
these diagnoses. Therefore, these procedures should only be considered 
if no other procedure more closely related to the diagnoses in the MDC 
has been performed.
    A second example occurs when the difference between the average 
weights for two surgical classes is very small. We have found that 
small differences generally do not warrant reordering of the hierarchy 
since, by virtue of the hierarchy change, the relative weights are 
likely to shift such that the higher-ordered surgical class has a lower 
average weight than the class ordered below it.
    Based on the preliminary recalibration of the DRGs, we are 
proposing to modify the surgical hierarchy as set forth below. As we 
stated in the September 1, 1989 final rule (54 FR 36457), we are unable 
to test the effects of the proposed revisions to the surgical hierarchy 
and to reflect these changes in the proposed relative weights due to 
the unavailability of revised GROUPER software at the time this 
proposed rule is prepared. Rather, we simulate most major 
classification changes to approximate the placement of cases under the 
proposed reclassification and then determine the average charge for 
each DRG. These average charges then serve as our best estimate of 
relative resource use for each surgical class. We test the proposed 
surgical hierarchy changes after the revised GROUPER is received and 
reflect the final changes in the DRG relative weights in the final 
rule. Further, as discussed below in section II.C of this preamble, we 
anticipate that the final recalibrated weights will be somewhat 
different from those proposed, since they will be based on more 
complete data. Consequently, further revision of the hierarchy, using 
the above principles, may be necessary in the final rule.
    At this time, we would revise the surgical hierarchy for MDC 2 
(Diseases and Disorders of the Eye) and MDC 8 (Diseases and Disorders 
of the Musculoskeletal System and Connective Tissue) as follows:
     In MDC 2, we would reorder Extraocular Procedures Except 
Orbit (DRGs 40 and 41) above Retinal Procedures (DRG 36).
     In MDC 8, we would reorder Major Thumb or Joint Procedures 
or Other Hand or Wrist Procedures with CC (DRG 228) above Major 
Shoulder/Elbow Procedures or Other Upper Extremity Procedures with CC 
(DRG 223).
6. Refinement of Complications and Comorbidities List
    There is a standard list of diagnoses that are considered 
complications or comorbidities (CCs). We developed this list using 
physician panels to include those diagnoses that, when present as a 
secondary condition, would be considered a substantial complication or 
comorbidity. In preparing the original CC list, a substantial CC was 
defined as a condition that, because of its presence with a specific 
principal diagnosis, would increase the length of stay by at least 1 
day for at least 75 percent of the patients.
    In previous years, we have made changes to the standard list of 
CCs, either by adding new CCs or deleting CCs already on the list. For 
FY 1996, we are proposing the following changes to the current CC list:
     We would add diagnosis code 008.49 (Bacterial enteritis) 
to the CC list. This diagnosis would be considered a CC for any 
principal diagnosis not shown in Table 6f, Addition to the CC 
Exclusions List (see discussion of CC Exclusions list in section V of 
the addendum below).
     We would delete diagnosis code 276.8 (Hypopotassemia) from 
the CC list. This diagnosis would no longer be considered a CC for any 
principal diagnosis.
    In the September 1, 1987 final notice concerning changes to the DRG 
classification system (52 FR 33143), we modified the GROUPER logic so 
that certain diagnoses included on the standard list of CCs would not 
be considered a valid CC in combination with a particular principal 
diagnosis. Thus, we created the CC Exclusions List. We made these 
changes to preclude coding of CCs for closely related conditions, to 
preclude duplicative coding or inconsistent coding from being treated 
as CCs, and to ensure that cases are appropriately classified between 
the complicated and uncomplicated DRGs in a pair.
    In the May 19, 1987 proposed notice concerning changes to the DRG 
classification system (52 FR 18877), we explained that the excluded 
secondary diagnoses were established using the following five 
principles:
     Chronic and acute manifestations of the same condition 
should not be [[Page 29207]] considered CCs for one another (as 
subsequently corrected in the September 1, 1987 final notice (52 FR 
33154)).
     Specific and nonspecific (that is, not otherwise specified 
(NOS)) diagnosis codes for a condition should not be considered CCs for 
one another.
     Conditions that may not co-exist, such as partial/total, 
unilateral/bilateral, obstructed/unobstructed, and benign/malignant, 
should not be considered CCs for one another.
     The same condition in anatomically proximal sites should 
not be considered CCs for one another.
     Closely related conditions should not be considered CCs 
for one another.
    The creation of the CC Exclusions List was a major project 
involving hundreds of codes. The FY 1988 revisions were intended to be 
only a first step toward refinement of the CC list in that the criteria 
used for eliminating certain diagnoses from consideration as CCs were 
intended to identify only the most obvious diagnoses that should not be 
considered complications or comorbidities of another diagnosis. For 
that reason, and in light of comments and questions on the CC list, we 
have continued to review the remaining CCs to identify additional 
exclusions and to remove diagnoses from the master list that have been 
shown not to meet the definition of a CC stated above, as appropriate. 
(See the September 30, 1988 final rule for the revision made for the 
discharges occurring in FY 1989 (53 FR 38485); the September 1, 1989 
final rule for the FY 1990 revision (54 FR 36552); the September 4, 
1990 final rule for the FY 1991 revision (55 FR 36126); the August 30, 
1991 final rule for the FY 1992 revision (56 FR 43209); the September 
1, 1992 final rule for the FY 1993 revision (57 FR 39753); the 
September 1, 1993 final rule for the FY 1994 revisions (58 FR 46278); 
and the September 1, 1994 rule for the FY 1995 revisions (59 FR 
45334).)
    We are proposing a limited revision of the CC Exclusions List to 
take into account the changes that will be made in the ICD-9-CM 
diagnosis coding system effective October 1, 1995 as well as the 
proposed CC changes described above. (See section II.B.8, below, for a 
discussion of these changes.) These proposed changes are being made in 
accordance with the principles established when we created the CC 
Exclusions List in 1987.
    The changes discussed above have been added to Table 6g, Additions 
to the CC Exclusions List, in section V of the addendum to this 
proposed rule.
    Tables 6g and 6h in section V of the addendum to this proposed rule 
contain the proposed revisions to the CC Exclusions List that would be 
effective for discharges occurring on or after October 1, 1995. Each 
table shows the principal diagnoses with proposed changes to the 
excluded CCs. Each of these principal diagnoses is shown with an 
asterisk and the additions or deletions to the CC Exclusions List are 
provided in an indented column immediately following the affected 
principal diagnosis.
    CCs that are added to the list are in Table 6g--Additions to the CC 
Exclusions List. Beginning with discharges on or after October 1, 1995, 
the indented diagnoses will not be recognized by the GROUPER as valid 
CCs for the asterisked principal diagnosis.
    CCs that are deleted from the list are in Table 6h--Deletions from 
the CC Exclusions List. Beginning with discharges on or after October 
1, 1995, the indented diagnoses will be recognized by the GROUPER as 
valid CCs for the asterisked principal diagnosis.
    Copies of the original CC Exclusions List applicable to FY 1988 can 
be obtained from the National Technical Information Service (NTIS) of 
the Department of Commerce. It is available in hard copy for $84.00 
plus $6.00 shipping and handling and on microfiche for $20.50, plus 
$4.00 for shipping and handling. A request for the FY 1988 CC 
Exclusions List (which should include the identification accession 
number, (PB) 88-133970) should be made to the following address: 
National Technical Information Service; United States Department of 
Commerce; 5285 Port Royal Road, Springfield, Virginia 22161; or by 
calling [phone].
    Users should be aware of the fact that all revisions to the CC 
Exclusions List (FYs 1989, 1990, 1991, 1992, 1993, 1994, and 1995) and 
those in Tables 6g and 6h of this document must be incorporated into 
the list purchased from NTIS in order to obtain the CC Exclusions List 
applicable for discharges occurring on or after October 1, 1995.
    Alternatively, the complete documentation of the GROUPER logic, 
including the current CC Exclusions List, is available from 3M/Health 
Information Systems (HIS), which, under contract with HCFA, is 
responsible for updating and maintaining the GROUPER program. The 
current DRG Definitions Manual, Version 12.0, is available for $195.00, 
which includes $15.00 for shipping and handling. Version 13.0 of this 
manual, which will include the changes proposed in this document as 
finalized in response to public comment, will be available in September 
1995 for $195.00. These manuals may be obtained by writing 3M/HIS at: 
100 Barnes Road; Wallingford, Connecticut 06492; or by calling (203) 
949-0303. Please specify the revision or revisions requested.
7. Review of Procedure Codes in DRGs 468, 476, and 477
    Each year, we review cases assigned to DRG 468 (Extensive OR 
Procedure Unrelated to Principal Diagnosis), DRG 476 (Prostatic OR 
procedure Unrelated to Principal Diagnosis), and DRG 477 (Nonextensive 
OR Procedure Unrelated to Principal Diagnosis) in order to determine 
whether it would be appropriate to change the procedures assigned among 
these DRGs.
    DRGs 468, 476, and 477 are reserved for those cases in which none 
of the OR procedures performed is related to the principal diagnosis. 
These DRGs are intended to capture atypical cases, that is, those cases 
not occurring with sufficient frequency to represent a distinct, 
recognizable clinical group. DRG 476 is assigned to those discharges in 
which one or more of the following prostatic procedures are performed 
and are unrelated to the principal diagnosis:

60.0  Incision of prostate
60.12  Open biopsy of prostate
60.15  Biopsy of periprostatic tissue
60.18  Other diagnostic procedures on prostate and periprostatic 
tissue
60.2  Transurethral prostatectomy
60.61  Local excision of lesion of prostate
60.69  Prostatectomy NEC
60.81  Incision of periprostatic tissue
60.82  Excision of periprostatic tissue
60.93  Repair of prostate
60.94  Control of (postoperative) hemorrhage of prostate
60.95  Transurethral balloon dilation of the prostatic urethra
60.99  Other operations on prostate

    All remaining OR procedures are assigned to DRGs 468 and 477, with 
DRG 477 assigned to those discharges in which the only procedures 
performed are nonextensive procedures that are unrelated to the 
principal diagnosis. The original list of the ICD-9-CM procedure codes 
for the procedures we consider nonextensive procedures if performed 
with an unrelated principal diagnosis was published in Table 6C in 
section IV of the addendum to the September 30, 1988 final rule (53 FR 
38591). As part of the final rules published on September 4, 1990, 
August 30, 1991, September 1, 1992, September 1, 1993, and September 1, 
1994, we moved several other procedures from DRG 468 to 477. (See 55 FR 
36135, 56 [[Page 29208]] FR 43212, 57 FR 23625, 58 FR 46279, and 59 FR 
45336 respectively.)
    a. Adding Procedure Codes to MDCs. We annually conduct a review of 
procedures producing DRG 468 or 477 assignments on the basis of volume 
of cases in these DRGs with each procedure. Our medical consultants 
then identify those procedures occurring in conjunction with certain 
principal diagnoses with sufficient frequency to justify adding them to 
one of the surgical DRGs for the MDC in which the diagnosis falls. This 
year's review did not identify any necessary changes; therefore, we are 
not proposing to move any procedures from DRG 468 or DRG 477 to one of 
the surgical DRGs.
    b. Reassignment of Procedures Among DRGs 468, 476, and 477. We also 
reviewed the list of procedures that produce assignments to each of DRG 
468, 476, and 477 to ascertain if any of those procedures should be 
moved to one of the other DRGs based on average charges and length of 
stay.
    Generally, we move only those procedures for which we have an 
adequate number of discharges to analyze the data. Based on our review 
this year, we are proposing to move a limited number of procedures.
    In reviewing the list of OR procedures that produce DRG 468 
assignments, we analyzed the average charge and length of stay data for 
cases assigned to that DRG to identify those procedures that are more 
similar to the discharges that currently group to either DRG 476 or 
477. We identified several procedures that are significantly less 
resource intensive than the other procedures assigned to DRG 468. These 
procedures occur in the same ``family'' (that is, they relate to 
procedures on the same body part or system) and at least one of this 
family of codes is already present within DRG 477. Therefore, we are 
proposing to move the following procedures to the list of procedures 
that result in assignment to DRG 477:

18.21  Excision of preauricular sinus
18.31  Radical excision of lesion of external ear
18.39  Other excision of external ear
18.5  Surgical correction of prominent ear
18.6  Reconstruction of external auditory canal
18.71  Construction of auricle of ear
18.72  Reattachment of amputated ear
18.9  Other operations of external ear

    We conducted a similar analysis of the procedures that assign cases 
to DRG 477 to determine if any of those procedures might more 
appropriately be classified to DRG 468. Again, we analyzed charge and 
length of stay data to identify procedures that were more similar to 
discharges assigned to DRG 468 than to those classified in DRG 477. We 
did not identify any procedures in DRG 477 that should be assigned to 
DRG 468.
    All of the proposed reassignments of procedures in DRGs 468 and 477 
would be effective with discharges beginning on or after October 1, 
1995.
8. Changes to the ICD-9-CM Coding System
    As discussed above in section II.B.1 of this preamble, the ICD-9-CM 
is a coding system that is used for the reporting of diagnoses and 
procedures performed on a patient. In September 1985, the ICD-9-CM 
Coordination and Maintenance Committee was formed. This is a Federal 
interdepartmental committee charged with the mission of maintaining and 
updating the ICD-9-CM. That mission includes approving coding changes, 
and developing errata, addenda, and other modifications to the ICD-9-CM 
to reflect newly developed procedures and technologies and newly 
identified diseases. The Committee is also responsible for promoting 
the use of Federal and non-Federal educational programs and other 
communication techniques with a view toward standardizing coding 
applications and upgrading the quality of the classification system.
    The Committee is co-chaired by the National Center for Health 
Statistics (NCHS) and HCFA. The NCHS has lead responsibility for the 
ICD-9-CM diagnosis codes included in Volume 1--Diseases: Tabular List 
and Volume 2--Diseases: Alphabetic Index, while HCFA has lead 
responsibility for the ICD-9-CM procedure codes included in Volume 3--
Procedures: Tabular List and Alphabetic Index. 
    The Committee encourages participation in the above process by 
health-related organizations. In this regard, the Committee holds 
public meetings for discussion of educational issues and proposed 
coding changes. These meetings provide an opportunity for 
representatives of recognized organizations in the coding fields, such 
as the American Health Information Management Association (AHIMA) 
(formerly American Medical Record Association (AMRA)), the American 
Hospital Association (AHA), and various physician specialty groups as 
well as physicians, medical record administrators, health information 
management professionals, and other members of the public to contribute 
ideas on coding matters. After considering the opinions expressed at 
the public meetings and in writing, the Committee formulates 
recommendations, which then must be approved by the agencies.
    The Committee presented proposals for coding changes at public 
meetings held on May 5 and December 1 and 2, 1994, and finalized the 
coding changes after consideration of comments received at the meetings 
and in writing within 30 days following the December 1994 meeting. The 
initial meeting for consideration of coding issues for implementation 
in FY 1997 was held on May 4, 1995. Copies of the minutes of these 
meetings may be obtained by writing to one of the co-chairpersons 
representing NCHS and HCFA. We encourage commenters to address 
suggestions on coding issues involving diagnosis codes to: Sue Meads, 
Co-Chairperson; ICD-9-CM Coordination and Maintenance Committee; NCHS; 
Rm. 9-58; 6525 Belcrest Road; Hyattsville, Maryland 20782.
    Questions and comments concerning the procedure codes should be 
addressed to: Patricia E. Brooks, Co-Chairperson; ICD-9-CM Coordination 
and Maintenance Committee; HCFA, Office of Hospital Policy; Division of 
Prospective Payment System; Rm. 1-H-1 East Low Rise Building; 6325 
Security Boulevard; Baltimore, Maryland 21207.
    The ICD-9-CM code changes that have been approved will become 
effective October 1, 1995. The new ICD-9-CM codes are listed, along 
with their proposed DRG classifications, in Tables 6a and 6b (New 
Diagnosis Codes and New Procedure Codes, respectively) in section V of 
the addendum to this proposed rule. As we stated above, the code 
numbers and their titles were presented for public comment in the ICD-
9-CM Coordination and Maintenance Committee meetings. Both oral and 
written comments were considered before the codes were approved. 
Therefore, we are soliciting comments only on the proposed DRG 
classification.
    Further, the Committee has approved the expansion of certain ICD-9-
CM codes to require an additional digit for valid code assignment. 
Diagnosis codes that have been replaced by expanded codes, other codes, 
or have been deleted are in Table 6c (Invalid Diagnosis Codes). The 
procedure codes that have been replaced by expanded codes or have been 
deleted are in Table 6d (Invalid Procedure Codes). These invalid 
diagnosis and procedure codes will not be recognized by the GROUPER 
beginning with discharges occurring on or after October 1, 1995. The 
corresponding new or expanded codes are included in Tables 6a and 6b. 
Revisions to diagnosis and procedure code titles are in Tables 6e 
(Revised [[Page 29209]] Diagnosis Code Titles) and 6f (Revised 
Procedure Code Titles), which also include the proposed DRG assignments 
for these revised codes.
    There are three new procedure codes that were previously included 
in codes classified as operating room procedures even though the 
specific procedures specified by the new codes may not be routinely 
performed in an operating room. The three codes are as follows:

48.36  [Endoscopic] polypectomy of rectum
59.72  Injection of implant into urethra and/or bladder neck
92.3  Stereotactic radiosurgery

    These three new codes are being classified as Non-OR procedures 
that affect DRG assignment and are indicated as such in Table 6b--
New Procedure Codes. We will continue to assign these three codes to 
the surgical DRGs to which they are currently assigned. As we have 
stated in previous rules, most recently in the September 1, 1994, 
final rule (59 FR 45340), our practice is to assign a new code to 
the same DRG as its predecessor. One compelling reason for this 
practice is our inability to move the cases associated with the new 
code to a new DRG assignment as a part of DRG reclassification and 
recalibration. However, in 2 years, when data on the new procedure 
codes are available, we will reevaluate the DRG classification of 
the codes. At that time, we may move one or more of the procedure 
codes to a different surgical DRG or we may classify them as non-OR 
procedures that do not affect DRG assignment.
9. DRG Refinements
    For several years, we have been analyzing major refinements to the 
DRG classification system to compensate hospitals more equitably for 
treating severely ill Medicare patients. These refinements, generally 
referred to as severity of illness adjustments, would create DRGs 
specifically for hospital discharges involving very ill patients who 
consume far more resources than do other patients classified to the 
same DRGs in the current system. This approach has been taken by 
various other groups in refining the Medicare DRG system to include 
severity measurements, most notably the research done for Yale, the 
changes incorporated by the State of New York into its all patient (AP) 
DRG system, and the all-patient refined (APR) DRGs, which are a joint 
effort of 3M/HIS and the National Association of Children's Hospitals 
and Related Institutions.
    In the May 27, 1994 proposed rule, we announced the availability of 
a paper we had prepared that describes our preliminary severity DRG 
classification system as well as the analysis upon which our proposal 
was formulated.
    Comments were due to HCFA by September 30, 1994. We received 99 
individual letters commenting on the DRG refinements. Many of the 
commenters supported the change in theory, but there were numerous 
specific comments on the methodology.
    Our plan was to incorporate comments and suggestions we received 
and to consider proposing the complete revised DRG system as part of 
the FY 1996 prospective payment system proposed rule. However, as the 
final rule published on September 1, 1992 (57 FR 39761) indicated, we 
would not propose to make significant changes to the DRG classification 
system unless we are able either to improve our ability to predict 
coding changes by validating in advance the impact that potential DRG 
changes may have on coding behavior, or to make methodological changes 
to prevent building the inflationary effects of the coding changes into 
future program payments.
    Besides the mandate of section 1886(d)(4)(C)(iii) of the Act, which 
provides that aggregate payments may not be affected by DRG 
reclassification and recalibration changes, we do not believe it is 
prudent policy to make changes for which we cannot predict the effect 
on the case-mix index and, thus, payments. Our goal is to refine our 
methodology so that we can fulfill, in the most appropriate manner, 
both the statutory requirement to make appropriate DRG classification 
changes and to recalibrate DRG relative weights (as mandated by section 
1886(d)(4)(C) of the Act) as well as to make DRG changes in a budget 
neutral manner.
    One approach to this problem would be to maintain the average case 
weight at 1.0 after recalibration, thereby eliminating the process of 
normalization. In other words, after recalibration, we would not scale 
the new relative weights upward to carry forward the cumulative effects 
of past case-mix increases. We would, instead, make an adjustment or 
include in the annual update factor a specific allowance for any real 
case-mix change that occurred during the previous year. This is a 
relatively simple and straightforward system for preventing the effects 
of year-to-year increases in the case-mix index from accumulating in 
the DRG weights and to account for expected changes in coding practice. 
In addition, we are exploring a means of estimating anticipated case-
mix change due to changes in coding practice that are a result of DRG 
classification revisions. (See section VII.E of this preamble for a 
more detailed description of this process in response to a ProPAC 
recommendation.) However, since we have not yet resolved these issues, 
we are unable to propose our refined DRG severity system for FY 1996. 
We will continue to analyze the comments we received and validate our 
previous research with later MedPAR data. We remain committed to 
proposing our revised system as soon as possible.

C. Recalibration of DRG Weights

    We are proposing to use the same basic methodology for the FY 1996 
recalibration as we did for FY 1995. (See the September 1, 1994 final 
rule (59 FR 45347).) That is, we would recalibrate the weights based on 
charge data for Medicare discharges. However, we would use the most 
current charge information available, the FY 1994 MedPAR file, rather 
than the FY 1993 MedPAR file. The MedPAR file is based on fully-coded 
diagnostic and surgical procedure data for all Medicare inpatient 
hospital bills.
    The proposed recalibrated DRG relative weights are constructed from 
FY 1994 MedPAR data, based on bills received by HCFA through December 
1994, from all hospitals subject to the prospective payment system and 
short-term acute care hospitals in waiver States. The FY 1994 MedPAR 
file includes data for approximately 10.9 million Medicare discharges.
    Although we are using the same basic methodology for recalibration, 
we are making two revisions which are described below. The methodology 
used to calculate the proposed DRG relative weights from the FY 1994 
MEDPAR file is as follows:
     To the extent possible, all the claims were regrouped 
using the proposed DRG classification revisions discussed above in 
section II.B of this preamble. As noted in section II.B.4, due to the 
unavailability of revised GROUPER software, we simulate most major 
classification changes to approximate the placement of cases under the 
proposed reclassification. However, there are some changes that cannot 
be modeled.
     Charges were standardized to remove the effects of 
differences in area wage levels, indirect medical education costs, 
disproportionate share payments, and, for hospitals in Alaska and 
Hawaii, the applicable cost-of-living adjustment.
     The average standardized charge per DRG was calculated by 
summing the standardized charges for all cases in the DRG and dividing 
that amount by the number of cases classified in the DRG.
     We then eliminated statistical outliers. In computing the 
FY 1995 weights, we eliminated all cases outside of 3.0 standard 
deviations from the mean of the log distribution of charges per case 
for each DRG. For the proposed FY 1996 relative weights, we would 
[[Page 29210]] eliminate a case only if it met the current criterion 
and was also outside of 3.0 standard deviations from the mean log of 
distribution of charges per day. We believe that this refinement to the 
methodology will reduce the risk of eliminating cases with unusually 
low or high total charges that are nevertheless accurately reported. 
For example, a case with extremely high charges and a corresponding 
extremely long length of stay would be less likely to be eliminated 
under the revised methodology.
     The average charge for each DRG was then recomputed 
(excluding the statistical outliers) and divided by the national 
average standardized charge per case to determine the relative weight. 
The second revision we are making is in the treatment of transfer 
cases. In the current recalibration methodology, we count transfer 
cases as full cases. This distorts the average standardized charges, 
particularly in DRGs with a high percentage of transfer cases, because 
the charges associated with a transfer case often do not reflect the 
resources necessary for a complete course of treatment. Therefore, in 
calculating the proposed FY 1996 relative weights, a transfer case is 
counted as a fraction of a case based on the ratio of its length of 
stay to the geometric mean length of stay of the cases assigned to the 
DRG. That is, a 5-day length of stay transfer case assigned to a DRG 
with a geometric mean length of stay of 10 days is counted as 0.5 of a 
total case.
     We established the relative weight for heart and liver 
transplants (DRGs 103 and 480) in a manner consistent with the 
methodology for all other DRGs except that the transplant cases that 
were used to establish the weights were limited to those Medicare-
approved heart and liver transplant centers that have cases in the FY 
1994 MedPAR file. (Medicare coverage for heart and liver transplants is 
limited to those facilities that have received approval from HCFA as 
transplant centers.) Similarly, we limited the lung transplant cases we 
used to establish the weight for DRG 495 (Lung Transplant) to those 
hospitals that are established lung transplant centers. (As discussed 
in detail in the final notice with comment period of Medicare coverage 
of lung transplants published in the Federal Register on February 2, 
1995 (60 FR 6543), payment for lung transplants will not be limited to 
Medicare-approved facilities until July 31, 1995.)
     Acquisition costs for kidney, heart, liver, and lung 
transplants continue to be paid on a reasonable cost basis. Unlike 
other excluded costs, the acquisition costs are concentrated in 
specific DRGs (DRG 302 (Kidney Transplant); DRG 103 (Heart Transplant); 
DRG 480 (Liver Transplant); and DRG 495 (Lung Transplant)). Because 
these costs are paid separately from the prospective payment rate, it 
is necessary to make an adjustment to prevent the relative weights for 
these DRGs from including the effect of the acquisition costs. 
Therefore, we subtracted the acquisition charges from the total charges 
on each transplant bill that showed acquisition charges before 
computing the average charge for the DRG and before eliminating 
statistical outliers.
    When we recalibrated the DRG weights for previous years, we set a 
threshold of 10 cases as the minimum number of cases required to 
compute a reasonable weight. We propose to use that same case threshold 
in recalibrating the DRG weights for FY 1995. Using the FY 1994 MedPAR 
data set, there are 37 DRGs that contain fewer than 10 cases. As we 
discuss in detail in section II.B.3 of this preamble, we computed the 
weight for the 37 low-volume DRGs by using the non-Medicare cases from 
19 States.
    The weights developed according to the methodology described above, 
using the proposed DRG classification changes, result in an average 
case weight that is different from the average case weight before 
recalibration. Therefore, the new weights are normalized by an 
adjustment factor, so that the average case weight after recalibration 
is equal to the average case weight before recalibration. This 
adjustment is intended to ensure that recalibration by itself neither 
increases nor decreases total payments under the prospective payment 
system.
    Section 1886(d)(4)(C)(iii) of the Act requires that beginning with 
FY 1991, reclassification and recalibration changes be made in a manner 
that assures that the aggregate payments are neither greater than nor 
less than the aggregate payments that would have been made without the 
changes. Although normalization is intended to achieve this effect, 
equating the average case weight after recalibration to the average 
case weight before recalibration does not necessarily achieve budget 
neutrality with respect to aggregate payments to hospitals because 
payment to hospitals is affected by factors other than average case 
weight. Therefore, as we have done in past years and as discussed in 
section II.A.4.b of the Addendum to this proposed rule, we are 
proposing to make a budget neutrality adjustment to assure that the 
requirement of section 1886(d)(4)(C)(iii) of the Act is met.

III. Proposed Changes to the Hospital Wage Index

A. Background

    Section 1886(d)(3)(E) of the Act requires that, as part of the 
methodology for determining prospective payments to hospitals, the 
Secretary must adjust the standardized amounts ``for area differences 
in hospital wage levels by a factor (established by the Secretary) 
reflecting the relative hospital wage level in the geographic area of 
the hospital compared to the national average hospital wage level.'' In 
accordance with the broad discretion conferred by this provision, we 
currently define hospital labor market areas based on the definitions 
of Metropolitan Statistical Areas (MSAs) issued by the Office of 
Management and Budget (OMB). In addition, as discussed below, we adjust 
the wage index to take into account the geographic reclassification of 
hospitals in accordance with sections 1886(d)(8)(B) and 1886(d)(10) of 
the Act.
    Section 1886(d)(3)(E) of the Act also requires that the wage index 
be updated annually beginning October 1, 1993. This section further 
provides that the Secretary base the update on a survey of wages and 
wage-related costs of short-term, acute care hospitals. The survey 
should measure, to the extent feasible, the earnings and paid hours of 
employment by occupational category and must exclude data with respect 
to the wages and wage-related costs incurred in furnishing skilled 
nursing services.
    For determining prospective payments to hospitals in FY 1995, the 
wage index is based on the data collected from the Medicare cost 
reports submitted by short-term, acute care hospitals for cost 
reporting periods beginning in FY 1991 (that is, cost reporting periods 
beginning on or after October 1, 1990 and before October 1, 1991). The 
FY 1995 wage index includes wages and salaries paid by a hospital, home 
office salaries, fringe benefits, and certain contract labor costs. The 
FY 1995 computation for the wage index excludes salaries and wages 
associated with nonhospital-type services, such as skilled nursing 
facility services, home health agency services, or other subprovider 
components that are not subject to the prospective payment system.
    As discussed in detail below, we are proposing to use updated wage 
data to construct the wage index as required by section 1886(d)(3)(E) 
of the Act. The FY [[Page 29211]] 1996 wage index would be based on 
data for hospital cost reporting periods beginning on or after October 
1, 1991 and before October 1, 1992 (FY 1992).

B. FY 1996 Wage Index Update

    We propose to base the FY 1996 wage index, effective for hospital 
discharges occurring on or after October 1, 1995 and before October 1, 
1996, on the data collected from the Medicare cost report (Worksheet S-
3, Part II) submitted by hospitals for cost reporting periods beginning 
in FY 1992.
    We propose to use all of the categories of data collected from 
Worksheet S-3, Part II. Therefore, the proposed FY 1996 wage index 
reflects the following:
     Total short-term, acute care hospital salaries and hours.
     Home office costs and hours.
     Fringe benefits associated with hospital and home office 
salaries.
     Direct patient care related contract labor cost and hours.
     The exclusion of salaries and hours for nonhospital type 
services such as skilled nursing facility services, home health 
services, or other subprovider components that are not subject to the 
prospective payment system.
1. Verification of Wage Data From the Medicare Cost Report
    The data for the proposed FY 1996 wage index were obtained from 
Worksheet S-3, Part II, of the HCFA-2552 form submitted by short-term, 
acute care hospitals for cost reporting periods beginning during FY 
1992. The wage data are reported electronically to HCFA through the 
Hospital Cost Report Information System (HCRIS). As in past years, we 
initiated an intensive review of the wage data submitted by hospitals 
and made numerous edits to ensure quality and accuracy. Medicare 
intermediaries were instructed to transmit any revisions in wage data 
made as a result of this review through HCRIS by early January 1995.
    We then subjected the revised cost report data to several edit 
checks. Of the 5,304 hospitals in the data base, 3,274 hospitals had 
data elements that failed an edit. Five of these involved mathematical 
errors and have been resolved. The other edit failures involved data 
that appeared unusual and had to be verified by the intermediary. Only 
57 hospitals have data elements that were unresolved as of March 21, 
1995. Most of the unresolved data elements fall outside established 
edit parameters and require verification by the intermediary. We 
deleted seven hospitals from the database because they had extremely 
high fringe benefit to salary ratios, and the intermediary was unable 
to provide documentation to substantiate the fringe benefit amount. We 
will continue to try to resolve these problems so that these seven 
hospitals can be included in the data used to establish the final wage 
index.
    The wage file used to construct the proposed wage index includes 
data obtained in late January 1995 from the HCRIS data base and 
subsequent changes we received from intermediaries through March 21, 
1995. We have instructed the intermediaries to complete their 
verification of questionable data elements and to transmit any changes 
to the wage data, through HCRIS, no later than June 15, 1995. We expect 
that all outstanding data elements will be resolved by that date and 
that the revised data will be reflected in the final rule.
    Following a procedure initiated last year with the proposed FY 1995 
wage index, to allow hospitals more time to evaluate the wage data used 
to construct the proposed hospital wage index, we made available to the 
public a diskette containing the raw hospital wage data that were used 
to construct the proposed FY 1996 wage index. In a memorandum dated 
February 28, 1995, we instructed all fiscal intermediaries to inform 
the prospective payment hospitals they serve that the FY 1992 data 
diskette would be available approximately mid-March 1995. The fiscal 
intermediaries were also instructed to advise hospitals of the 
availability of the data either through their representative hospital 
organizations or directly from HCFA using order forms provided to them. 
Additional details on the cost and ordering of this data file are 
discussed below in section VIII.B of this preamble, Requests for Data 
from the Public.
    In addition, we note that Table 3C in the Addendum to this proposed 
rule contains each hospital's inflated average hourly wage used to 
construct the proposed wage index values. By dividing the hourly wage 
by the applicable inflation factors (set forth below in section 
III.B.3. of this preamble), a hospital can determine its uninflated 
average hourly wage as reflected in the proposed wage index. A 
corresponding table will also be included in the final rule. If, based 
on its review of the data on the diskette or in Table 3C, a hospital 
believes that there is a problem with its wage data, the hospital 
should immediately contact its intermediary as discussed below.
2. Requests for Wage Data Corrections
    As noted above, we will use cost report data from FY 1992 (that is, 
cost reporting periods beginning on or after October 1, 1991 and before 
October 1, 1992) for the FY 1996 update to the wage index. We believe 
hospitals have had ample time to ensure the accuracy of their FY 1992 
wage data. Moreover, the ultimate responsibility for accurately 
completing the cost report rests with the hospital, which must attest 
to the accuracy of the data at the time the cost report is filed. 
However, if after review of the diskette or Table 3C, a hospital 
believes that its FY 1992 wage data have been incorrectly reported, the 
hospital must submit corrections along with complete supporting 
documentation to its intermediary in time to allow for review, 
verification, and transmission of the data before the development of 
the final wage index.
    In the February 28 memorandum to the intermediaries, we indicated 
that, to allow sufficient time to process any changes, a hospital must 
submit requests for corrections to its fiscal intermediary by May 15, 
1995. Requests were to include all documentation necessary to support 
the requested change. To be reflected in the final wage index, any wage 
data corrections must be reviewed by the intermediary and transmitted 
to HCFA through HCRIS on or before June 15, 1995. These deadlines, 
which correspond to the deadlines we used last year for the FY 1995 
wage index, are necessary to allow sufficient time to review and 
process the data so that the final wage index calculation can be 
completed for development of the final prospective payment rates to be 
published by September 1, 1995. We cannot guarantee that corrections 
transmitted to HCFA after June 15, 1995, will be reflected in the final 
wage index.
    After reviewing requested changes submitted by hospitals, 
intermediaries will transmit any revised cost reports to HCRIS and 
forward a copy of the revised Worksheet S-3, Part II to the hospitals. 
If requested changes are not accepted, fiscal intermediaries will 
notify hospitals in writing of reasons why the changes were not 
accepted. This procedure will ensure that hospitals have an opportunity 
to verify the data that will be used to construct their wage index 
values. We believe that fiscal intermediaries are generally in the best 
position to make evaluations regarding the appropriateness of a 
particular cost and whether it should be included in the wage index 
data. However, if a hospital disagrees with the intermediary's 
resolution of a requested change, the hospital may contact HCFA in an 
effort to resolve the dispute. We note that the June 15 deadline also 
applies to these requested changes. [[Page 29212]] 
    We have created the process described above to resolve all 
substantive wage data correction disputes before we finalize the raw 
wage data for the FY 1996 payment rates. Accordingly, hospitals that do 
not meet the procedural deadlines set forth above will not be afforded 
a later opportunity to submit wage corrections or to dispute the 
intermediary's decision with respect to requested changes. We intend to 
make a diskette available in mid-August that will contain the finalized 
raw wage data that will be used to construct the wage index values in 
the final rule. As with the diskette made available in March 1995, HCFA 
will make the August diskette available to hospital associations and 
the public. This August diskette, however, is being made available only 
for the limited purpose of identifying any potential errors made by 
HCFA or the intermediary in the entry of the final wage data that 
result from the process described above, not for the initiation of new 
wage data correction requests. Hospitals are encouraged to review their 
hospital wage data promptly after the release of the second diskette.
    If, after reviewing the August diskette, a hospital believes that 
its wage data are incorrect due to a fiscal intermediary or HCFA error 
in the entry or tabulation of the final wage data, it should send a 
letter to both its fiscal intermediary and HCFA. The letters to the 
intermediary and HCFA should outline why the hospital believes an error 
exists. These requests must be received by HCFA no later than September 
21, 1995 to allow inclusion in the wage index values effective October 
1, 1995. Requests should be sent to: Office of Hospital Policy; 
Attention: Nancy Edwards, Director; Division of Prospective Payment 
System; Central 5-02-17; 7500 Security Boulevard; Baltimore, Maryland 
21244-1850. The intermediary will review requests upon receipt, and, if 
it is determined that an intermediary or HCFA error exists, the fiscal 
intermediary will notify HCFA immediately.
    As indicated above, after mid-August, we will make changes to the 
hospital wage data only in those very limited situations involving an 
error by the intermediary or HCFA that the hospital could not have 
known about before its review of the August diskette. Specifically, 
neither the intermediary nor HCFA will accept the following types of 
requests in conjunction with this mid-August process: requests for wage 
data corrections that were submitted too late to be included in the 
data transmitted to the HCRIS system on or before June 15, 1995; 
requests for correction of errors made by the hospital that were not, 
but could have been, identified during the hospital's review of the 
March 1995 data; or requests to revisit factual determinations or 
policy interpretations made by the intermediary or HCFA during the wage 
data correction process. Verified corrections to the wage index made as 
a result of an intermediary or HCFA error received timely (that is, by 
September 21, 1995) will be effective October 1, 1995.
    We believe the wage data correction process described above 
provides hospitals with sufficient opportunity to bring errors made 
during the preparation of Worksheet S-3 to the intermediary's 
attention. Moreover, because hospitals will have access to the raw wage 
data in mid-August, they will have the opportunity to detect any data 
entry or tabulation errors made by the intermediary or HCFA before the 
implementation of the prospective payment rates on October 1. We 
believe that if hospitals avail themselves of this opportunity, the 
wage index implemented on October 1 should be free of such errors. 
Nevertheless, in the unlikely event that such errors should occur, we 
retain the right to make midyear changes to the wage index under very 
limited circumstances.
    Specifically, in accordance with Sec. 412.63(s)(2), we may make 
midyear corrections to the wage index only in those limited 
circumstances where a hospital can show: (1) That the intermediary or 
HCFA made an error in tabulating its data, and (2) that the hospital 
could not have known about the error, or did not have an opportunity to 
correct the error, before the beginning of FY 1996 (that is, by the 
September 21, 1995 deadline). As indicated earlier, since a hospital 
will have the opportunity to verify its data, and the intermediary will 
notify the hospital of any changes, we do not foresee any specific 
circumstances under which midyear corrections would be made. However, 
should a midyear correction be necessary, the wage index change for the 
affected area will be made prospectively from the date the correction 
is made.
    It has been our longstanding policy to make midyear revisions to 
wage index data prospectively only (see, for example, 49 FR 258 (Jan. 
3, 1984); 54 FR 36,478 (Sept. 1, 1989)), and we continue to believe 
that, to the extent that midyear wage data revisions are appropriate, 
those revisions should be made prospectively only. Some hospitals whose 
requests for wage data revisions have been denied by HCFA have sought 
relief in the Federal courts. While no court has yet reversed a HCFA 
decision denying a hospital's wage data revision request, these cases 
have the potential to present the question of what effect we would give 
to such a final judicial decision.
    Because we have not previously addressed this question in any 
rulemaking, we now propose to clarify our position regarding the 
temporal effect of a final judicial decision reversing a HCFA denial of 
a hospital's request for a wage data revision. We propose to add a new 
Sec. 412.63(s)(5) to give such a decision limited retroactive effect. 
If a final judicial decision reverses a HCFA denial of a hospital's 
wage data revision request, we propose to treat the hospital as if 
HCFA's decision on the hospital's wage data revision request had been 
favorable rather than unfavorable. HCFA would pay the hospital by 
applying a revised wage index that reflects the revised wage data at 
issue. The revised wage data would not be considered for purposes of 
revisiting past adjudications of requests for geographic 
reclassification under section 1886(d)(10) of the Act. Under the 
statutory scheme established by Congress, decisions on applications for 
MGCRB reclassification must be finalized prior to the Federal fiscal 
year for which the reclassifications would take effect.
    In some Federal fiscal years, wage data revision requests were 
initially reviewed by the intermediaries and forwarded to HCFA's Office 
of Hospital Policy (or the former Office of Payment Policy) for a 
determination of whether a revision should be made. In other years, the 
intermediaries themselves have made determinations on wage data 
revision requests. The latter is our current policy. Therefore, in the 
foregoing discussion, the phrases ``HCFA denial of a hospital's wage 
data revision request'' and ``HCFA decision on the hospital's wage data 
revision request'' mean the decision by either HCFA's Office of 
Hospital Policy or the intermediary denying a hospital's request for a 
wage data revision.
    We considered proposing to apply a strict policy of prospectivity 
to final judicial decisions reversing HCFA denials of wage data 
revision requests--that is, adopting a policy to apply such judicial 
decisions prospectively from the date they are made. While we continue 
to believe that prospective-only changes are most appropriate under a 
prospective rate-setting system such as the hospital inpatient 
prospective payment system, we also recognize that hospitals have 
sought, and will continue to seek, judicial [[Page 29213]] review of 
unfavorable HCFA decisions on hospitals' requests for wage data 
revisions. Applying a policy of strict prospectivity to final judicial 
decisions reversing HCFA denials of wage data revision requests might 
be viewed, in some cases, as frustrating the purpose of judicial 
review, since such a decision might not be made until after the close 
of the fiscal year or years at issue. Therefore, on balance, we believe 
the better policy is the one we are currently proposing, under which we 
would give effect to a final judicial decision reversing a HCFA denial 
of a hospital's wage data revision request by applying a revised wage 
index that reflects the revised wage data as if HCFA's decision had 
been favorable rather than unfavorable.
3. Computation of the Wage Index
    As noted above, we are proposing to base the FY 1996 wage index on 
wage data reported on the FY 1992 cost report. The proposed wage index 
is based on data from 5,238 hospitals paid under the prospective 
payment system and short-term, acute care hospitals in waiver States. 
The method used to compute the proposed wage index is as follows:
    Step 1--We gathered data from each of the non-Federal short-term, 
acute care hospitals for which data were reported on the Worksheet S-3, 
Part II of the Medicare cost report for the hospital's cost reporting 
periods beginning on or after October 1, 1991, and before October 1, 
1992. Each hospital was assigned to its appropriate urban or rural area 
prior to any reclassifications under section 1886(d)(8) or 1886(d)(10) 
of the Act. In addition, we included data from a few hospitals that had 
cost reporting periods beginning in September 1991 and had reported a 
cost reporting period exceeding 52 weeks. The data were included 
because no other data from these hospitals would be available for the 
cost reporting period described above, and particular labor market 
areas might be affected due to the omission of these hospitals. 
However, we generally describe these wage data as FY 1992 data.
    Step 2--For each hospital, we subtracted the excluded salaries 
(that is, direct salaries attributable to skilled nursing facility 
services, home health services, and other subprovider components not 
subject to the prospective payment system) from gross hospital salaries 
to determine net hospital salaries. To the net hospital salaries, we 
added hospital contract labor costs, hospital fringe benefits, and any 
home office salaries and fringe benefits reported by the hospital to 
determine total salaries plus fringe benefits.
    Step 3--For each hospital, we inflated or deflated, as appropriate, 
the total salaries plus fringe benefits resulting from Step 2 to a 
common period to determine total adjusted salaries. To make the wage 
inflation adjustment, we used the percentage change in average hourly 
earnings for each 30-day increment from October 14, 1991 through 
September 15, 1993, for hospital industry workers from Standard 
Industry Classification 806, Bureau of Labor Statistics Employment and 
Earnings Bulletin. The annual inflation rates used were 5.6 percent for 
FY 1991, 4.8 percent for FY 1992, and 3.6 percent for FY 1993. The 
inflation factors used to inflate the hospital's data were based on the 
midpoint of the cost reporting period as indicated below.

                    Midpoint of Cost Reporting Period                   
------------------------------------------------------------------------
                                                            Adjustment  
                  After                       Before          factor    
------------------------------------------------------------------------
10/14/91................................        11/15/91        1.059411
11/14/91................................        12/15/91        1.055280
12/14/91................................        01/15/92        1.051165
01/14/92................................        02/15/92        1.047066
02/14/92................................        03/15/92        1.042983
03/14/92................................        04/15/92        1.038916
04/14/92................................        05/15/92        1.034865
05/14/92................................        06/15/92        1.030830
06/14/92................................        07/15/92        1.026810
07/14/92................................        08/15/92        1.022806
08/14/92................................        09/15/92        1.018818
09/14/92................................        10/15/92        1.014845
10/14/92................................        11/15/92        1.011859
11/14/92................................        12/15/92        1.008881
12/14/92................................        01/15/93        1.005912
01/14/93................................        02/15/93        1.002952
02/14/93................................        03/15/93        1.000000
03/14/93................................        04/15/93        0.997057
04/14/93................................        05/15/93        0.994123
05/14/93................................        06/15/93        0.991197
06/14/93................................        07/15/93        0.988280
07/14/93................................        08/15/93        0.985372
08/14/93................................        09/15/93        0.982472
------------------------------------------------------------------------

For example, the midpoint of a cost reporting period beginning January 
1, 1992 and ending December 31, 1992 is June 30, 1992. An inflation 
adjustment factor of 1.026810 would be applied to the wages of a 
hospital with such a cost reporting period. In addition, for the data 
for any cost reporting period that began in FY 1992 and covers a period 
of less than 360 days or greater than 370 days, we annualized the data 
to reflect a 1-year cost report. Annualization is accomplished by 
dividing the data by the number of days in the cost report and then 
multiplying the results by 365.
    Step 4--For each hospital, we subtracted the reported excluded 
hours from the gross hospital hours to determine net hospital hours. We 
increased the net hours by the addition of any reported contract labor 
hours and home office hours to determine total hours.
    Step 5--As part of our editing process, we deleted data for 59 
hospitals for which we lacked sufficient documentation to verify data 
that failed [[Page 29214]] edits because the hospitals are no longer 
participating in the Medicare program or are in bankruptcy status. We 
retained the data for other hospitals that are no longer participating 
in the Medicare program because these hospitals contributed to the 
relative wage levels in their labor market areas during their FY 1992 
cost reporting period.
    Step 6--Within each urban or rural labor market area, we added the 
total adjusted salaries plus fringe benefits obtained in Step 3 for all 
hospitals in that area to determine the total adjusted salaries plus 
fringe benefits for the labor market area.
    Step 7--We divided the total adjusted salaries plus fringe benefits 
obtained in Step 6 by the sum of the total hours (from Step 4) for all 
hospitals in each labor market area to determine an average hourly wage 
for the area.
    Step 8--We added the total adjusted salaries plus fringe benefits 
obtained in Step 3 for all hospitals in the nation and then divided the 
sum by the national sum of total hours from Step 4 to arrive at a 
national average hourly wage. Using the data as described above, the 
national average hourly wage is $18.8939.
    Step 9--For each urban or rural labor market area, we calculated 
the hospital wage index value by dividing the area average hourly wage 
obtained in Step 7 by the national average hourly wage computed in Step 
8.
C. Allocation of General Service Salaries and Hours to Areas Excluded 
From the Wage Index

    In constructing the wage index, we exclude the direct wages and 
hours associated with certain subprovider components of the hospital, 
such as skilled nursing facilities and home health agencies. The cost 
reporting form used to collect the FY 1992 wage data also includes 
within the definition of excluded areas any rehabilitation and 
psychiatric distinct part units of the hospital that are excluded from 
the prospective payment system. Thus, the wage index is constructed by 
including only the direct wages and hours associated with those areas 
of the hospital subject to the prospective payment systems. However, 
the general service hours associated with excluded areas are not 
excluded from the wage index calculation.
    In the May 26, 1993 proposed rule, we discussed our analysis of our 
first attempt to allocate overhead salaries and hours to areas of the 
hospital that are excluded from the prospective payment system (58 FR 
30237). This analysis was prompted by several suggestions from hospital 
representatives that, in addition to excluding the direct salaries and 
hours for subprovider components of the hospital, HCFA should also 
exclude the general service, or overhead, wages and hours that are 
associated with these areas. For example, we currently include all of 
the wage costs associated with housekeeping in the wage index data, 
even if a facility has excluded subprovider components that receive 
housekeeping services. Because the hours associated with workers in the 
general service areas of the hospital were not collected in the FY 1990 
cost reports (the most recent wage data available in 1993), we 
initiated a special data collection to obtain these data in order to 
calculate an overhead allocation to excluded areas for the FY 1994 wage 
index. As we discussed in detail in the May 26, 1993 proposed rule, we 
identified several problems with the data collected that led us to the 
conclusion that it would be inappropriate to use the data in allocating 
the overhead wages and hours. Specifically, there were a large number 
of hospitals removed due to the edits, a large number of hospitals that 
experienced significant swings in their average hourly wages when the 
overhead salaries and hours were allocated, and a large proportion of 
hospitals whose average hourly wage decreased as a result of the 
allocation (58 FR 30237-30238). Thus, we did not allocate general 
service salaries and hours to the excluded areas of hospitals in 
calculating the FY 1994 wage index.
    In the September 1, 1993 final rule, we indicated that we would 
revisit this issue when the data for cost reporting periods beginning 
in FY 1992 became available (58 FR 46298). We stated that the overhead 
allocation performed with data from the 1992 cost reports would be more 
accurate because the overhead salaries and hours would be determined at 
the same time. We believed that the retroactive determination of 
overhead hours for the FY 1990 cost reports may have caused some of the 
problems with the data. We stated that the FY 1992 cost report might 
allow a more accurate allocation since both overhead salaries and 
overhead hours would be directly reported on the Worksheet S-3.
    In calculating the FY 1996 wage index, we are using data for cost 
reporting periods beginning in FY 1992. We received general service 
hour data for 4,356 of the 4,441 hospitals that reported excluded 
salaries. We analyzed these data to determine whether we could 
reasonably allocate the overhead wages and hours to the excluded areas 
of the hospital. First, we determined the total general service wages 
(including fringe benefits) from Worksheet A of the cost report. We 
then developed a ratio of total indirect costs (net of capital costs) 
allocated to the excluded areas of the hospital to total noncapital 
general service costs (using Worksheet B, Parts I, II, and III from the 
cost report). We call this the ``indirect cost ratio.'' We computed the 
general service salaries and hours allocated to the excluded areas by 
multiplying the indirect cost ratio by the total general service 
salaries and by the total general service hours reported by the 
hospital on the cost report. For example, if 10 percent of a hospital's 
total indirect costs were allocated to excluded areas, we allocated 10 
percent of its overhead salaries and 10 percent of its overhead hours 
to the excluded areas.
    We analyzed the results of the general service allocation to remove 
any clearly incorrect or distorted allocations. We began by performing 
preliminary data edits. We eliminated 20 hospitals with allocated 
salaries or hours greater than the total salaries or hours reported on 
the cost report (after adjustment for the excluded areas of the 
hospital). We then analyzed the data for the remaining 4,336 hospitals 
in order to remove any obviously incorrect allocations. Two hospitals 
had general service average hourly wages below $5.00. Considering the 
Federal minimum wage of $4.25, we believe this indicates an obvious 
error in reporting the hours or salaries. We also eliminated the 
allocation for eight hospitals with a general service average hourly 
wage of $100 per hour or greater.
    The next edit we performed was based on a comparison of the 
indirect cost ratio and the ratio of excluded hours (as reported on the 
cost report) to total hours (including excluded hours). We reasoned 
that the allocation was probably erroneous if the indirect cost ratio 
was extraordinarily high, unless there was also a large proportion of 
the hospital's total hours reported in excluded areas of the hospital. 
As a result, we eliminated allocations for 58 hospitals that had 
indirect cost ratios more than 3 standard deviations above the mean 
(that is, above 0.589986) but hour ratios less than 3 standard 
deviations above the mean (0.445800).
    After completing the above edits, we eliminated the allocation for 
48 hospitals whose general service average hourly wage was more than 3 
standard deviations above the mean for the remaining hospitals, or 
above $36.75. Finally, we eliminated the allocation for 21 hospitals 
for which the percentage difference between their pre-allocation 
average hourly wage and their general service average hourly wage was 
more than 3 standard deviations from the mean (if the difference was 
greater than [[Page 29215]] 66.62 percent or less than -88.24 percent, 
we eliminated the allocation). These edits eliminated the most extreme 
and inexplicable general service allocations.
    After we completed the above edits, 4,199 hospitals still had 
overhead allocations. Of these, 71 percent (2,978) had average hourly 
wages that were lower after the overhead allocation was made to the 
excluded areas. The average difference between the pre- and post-
allocation average hourly wage was -0.14 percent. Eighty-six hospitals 
had a percentage change of more than 10 percent in their average hourly 
wage, of which 45 were decreases. An additional 158 hospitals had a 
percentage change of between 5 and 10 percent, of which 104 were 
decreases. Thirty-seven of 49 rural labor market areas would experience 
decreases in their wage index value if we performed the allocation, 
while 195 of 317 urban areas would experience decreases. The average 
wage index value for all hospitals would decrease 0.08 percentage 
points if we performed the overhead allocation.
    Thus, we again conclude that it would not be appropriate to perform 
the allocation of overhead salaries and hours to excluded areas of the 
hospital in computing the wage index. The data still have the same 
variations that were prevalent when we declined to use this methodology 
in the proposed rule for FY 1994: Many hospitals were removed due to 
the edits, many have large swings in their average hourly wages, and 
many more hospitals' average hourly wages would decrease as a result of 
the allocation than would increase, particularly for rural hospitals.
    As we noted in the September 1, 1993 final rule (58 FR 46297), if 
these allocations are accurate, it would mean that for the majority of 
hospitals with excluded areas, the average hourly wage for the overhead 
areas (such as laundry and housekeeping) is higher than that for 
patient care areas (such as nursing). We do not believe that this could 
be the case for such a large number of hospitals, and we have therefore 
concluded that the reported data regarding overhead hours are 
inaccurate. As a result, we have decided not to employ the allocation 
of general service salaries and hours to excluded areas of the hospital 
in constructing the FY 1996 wage index.
    We note that hospital representatives that support the allocation 
of overhead salaries to excluded areas do so because they believe that, 
for those hospitals with excluded areas, the current average hourly 
wage is artificially weighted downward (see the September 1, 1994 final 
rule (59 FR 45359)). They believe that the current methodology, which 
removes the higher nursing costs in excluded areas from the hospital's 
direct salaries, but leaves in the lower general services salaries, 
distorts wages downward. The reported data, however, are not consistent 
with this concern.
    While we continue to believe that an allocation of overhead 
salaries and hours to the excluded subprovider components may be 
appropriate, it would not benefit the hospital industry or the Medicare 
program to implement an allocation that is not reliable. Clearly, the 
overhead hours reported by many hospitals did not accurately reflect 
the salaries reported. In addition, we realize that the allocation 
method described above may not necessarily be the most accurate method 
to make this allocation. We invite public comment concerning 
alternative methods that might produce a more accurate and uniform 
allocation method and at the same time impose little or no additional 
reporting burden on the hospital industry. Commenters should note that, 
under any acceptable allocation method, we would require that the 
method be used by all hospitals with excluded areas and that the 
intermediary be able to verify the accuracy of the reported data.
    The cost report effective for FY 1995 (that is for cost reporting 
periods that begin on or after October 1, 1994 and before October 1, 
1995) will collect overhead data, both paid hours and the related 
salaries, by general service area. These data will be used to construct 
the wage index for FY 1999. We propose to reevaluate an allocation of 
overhead salaries and hours to excluded areas of the hospital once the 
data from this new cost report are available or possibly earlier if we 
receive comments or suggestions from the public or otherwise determine 
alternative methods to better allocate overhead salaries.

D. Revisions to the Wage Index Based on Hospital Redesignation

    Under section 1886(d)(8)(B) of the Act, hospitals in certain rural 
counties adjacent to one or more Metropolitan Statistical Areas (MSAs) 
are considered to be located in one of the adjacent MSAs if certain 
standards are met. Under section 1886(d)(10) of the Act, the Medicare 
Geographic Classification Review Board (MGCRB) considers applications 
by hospitals for geographic reclassification for purposes of payment 
under the prospective payment system.
    The methodology for determining the wage index values for 
redesignated hospitals is applied jointly to the hospitals located in 
those rural counties that were deemed urban under section 1886(d)(8)(B) 
of the Act and those hospitals that were reclassified as a result of 
the MGCRB decisions under section 1886(d)(10) of the Act. Section 
1886(d)(8)(C) of the Act provides that the application of the wage 
index to redesignated hospitals is dependent on the hypothetical impact 
that the wage data from these hospitals would have on the wage index 
value for the area to which they have been redesignated. Therefore, 
pursuant to section 1886(d)(8)(C) of the Act, the wage index values 
were determined by considering the following:
     If including the wage data for the redesignated hospitals 
reduces the MSA wage index value by 1 percentage point or less, the MSA 
wage index value determined exclusive of the wage data for the 
redesignated hospitals applies to the redesignated hospitals.
     If including the wage data for the redesignated hospitals 
reduces the wage index value for the area to which the hospitals are 
redesignated by more than 1 percentage point, the hospitals that are 
redesignated are subject to the wage index value of the area that 
results from including the wage data of the redesignated hospitals (the 
``combined'' wage index value). However, the wage index value for the 
redesignated hospitals cannot be reduced below the wage index value for 
the rural areas of the State in which the hospitals are located.
     Rural areas whose wage index values would be reduced by 
excluding the data for hospitals that have been redesignated to another 
area continue to have their wage index calculated as if no 
redesignation had occurred. Those rural areas whose wage index value 
increases as a result of excluding the wage data for the hospitals that 
have been redesignated to another area have their wage index calculated 
exclusive of the redesignated hospitals.
     The wage index value for an urban area is calculated 
exclusive of the wage data for hospitals that have been reclassified to 
another area. However, geographic reclassification may not reduce the 
wage index for an urban area below the Statewide rural average, 
provided the wage index prior to reclassification was greater than the 
Statewide rural wage index value.
     A change in classification of hospitals from one area to 
another may not result in the reduction in the wage index for any urban 
area whose wage index is below the rural wage index for the State. This 
provision also applies to any urban area that encompasses an entire 
State.
    We note that, except for those rural areas where redesignation 
would reduce [[Page 29216]] the rural wage index value, and for urban 
areas whose wage index values are already below the rural wage index 
and would be reduced by redesignations, the wage index value for each 
area is computed exclusive of the data for hospitals that have been 
redesignated from the area for purposes of their wage index. As a 
result, several MSAs listed in Table 4a have no hospitals remaining in 
the MSA. This is because all the hospitals originally in these MSAs 
have been reclassified to another area by the MGCRB. For those areas, 
we have listed the Statewide rural wage index value.
    The proposed revised wage index values for FY 1996 are shown in 
Tables 4a, 4b, and 4c of the addendum to this proposed rule. Hospitals 
that are redesignated should use the wage index values shown in Table 
4c. For some areas, more than one wage index value will be shown in 
Table 4c. This occurs when hospitals from more than one State are 
included in the group of redesignated hospitals, and one State has a 
higher Statewide rural wage index value than the wage index value 
otherwise applicable to the redesignated hospitals. Tables 4d and 4e 
list the average hourly wage for each labor market area based on the FY 
1992 wage data. In addition, as discussed above, we have expanded Table 
3C (Hospital Case-Mix Indexes for Discharges) to include the average 
hourly wage for each hospital based on the FY 1992 data. The MGCRB will 
use the average hourly wage published in the final rule to evaluate a 
hospital's application for reclassification, unless that average hourly 
wage is later revised in accordance with the wage data correction 
policy described in Sec. 412.63(s)(2). In such cases, the MGCRB will 
use the most recent revised data used for purposes of the hospital wage 
index. Hospitals that choose to apply before publication of the final 
rule can use the proposed wage data in applying to the MGCRB for wage 
index reclassifications that would be effective for FY 1997. We note 
that in adjudicating these wage reclassification requests during FY 
1996, the MGCRB will use the average hourly wages for each hospital and 
labor market area that are reflected in the final FY 1996 wage index.
    The proposed FY 1996 wage index values incorporate all hospital 
redesignations for FY 1996. At the time this proposed wage index was 
constructed, the MGCRB had completed its review. For FY 1996, 436 
hospitals are redesignated for purposes of the wage index (including 
hospitals redesignated under both sections 1886(d)(8)(B) and 
1886(d)(10) of the Act). The number of reclassifications may change 
because some MGCRB decisions are still under review by the 
Administrator.
    Any changes to the wage index that result from withdrawals of 
requests for reclassification, wage index corrections, appeals, and the 
Administrator's review process will be incorporated into the wage index 
values published in the final rule. The changes may affect not only the 
wage index value for specific geographic areas, but also whether 
redesignated hospitals receive the wage index value for the area to 
which they are redesignated or a combined wage index that includes the 
data for both the hospitals already in the area and the redesignated 
hospitals. Further, the wage index value for the area from which the 
hospitals are redesignated may be affected.
    Under Sec. 412.273, hospitals that have been reclassified by the 
MGCRB are permitted to withdraw their applications within 45 days of 
the publication of this Federal Register document. The request for 
withdrawal of an application for reclassification that would be 
effective in FY 1996 must be received by the MGCRB by July 17, 1995. A 
hospital that requests to withdraw its application may not later 
request that the MGCRB decision be reinstated.

E. Proposed Changes to the Medicare Geographic Classification Review 
Board (MGCRB) Guidelines

    Under section 1886(d)(10) of the Act, the MGCRB considers 
applications by hospitals for geographic reclassification for purposes 
of payment under the prospective payment system. Guidelines concerning 
the criteria and conditions for hospital reclassification are located 
at Secs. 412.230 through 412.236. The purpose of these criteria is to 
provide direction, to both the MGCRB and those hospitals seeking 
geographic reclassification, with respect to the situations that merit 
an exception to the rules governing the geographic classification of 
hospitals under the prospective payment system. As discussed in detail 
below, we are proposing the following three changes to the MGCRB 
guidelines:
     Individual hospitals may not be reclassified from rural to 
other urban areas for purposes of the standardized amount.
     An individual hospital may be reclassified for purposes of 
the wage index only to an area that has a higher pre-reclassification 
average hourly wage.
     For group reclassifications either the standardized amount 
or the pre-reclassification average hourly wage of the area to which 
the hospitals seek reclassification must be higher than the 
standardized amount or pre-reclassification average hourly wage, 
respectively, of the area in which the hospitals are currently located.
    In addition to the changes to the MGCRB guidelines, we propose a 
minor revision to Sec. 412.266 concerning hospital requests for data 
from HCFA that are needed to complete applications to the MGCRB.
1. Limitations on Hospital Reclassification (Secs. 412.230, 412.232, 
and 412.234)
    a. Elimination of Reclassification from Rural to Other Urban Areas 
for Purposes of the Standardized Amount. Section 1886(d)(10)(C)(i)(I) 
of the Act requires the MGCRB to consider applications of hospitals 
requesting reclassification for purposes of the standardized amount. 
Section 1886(d)(10)(D)(i)(II) of the Act requires that the MGCRB 
utilize guidelines published by the Secretary for determining whether 
the county in which a particular hospital is located should be treated 
as being a part of a particular MSA. Accordingly, the MGCRB allows 
reclassifications for purposes of the standardized amount for 
individual hospitals that meet the guidelines under Sec. 412.230, and 
for groups of rural and urban hospitals that represent an entire county 
and that meet the guidelines under Secs. 412.232 and 412.243 
respectively.
    As required by section 1886(d)(3)(A)(iii) of the Act, effective for 
discharges occurring on or after October 1, 1994, the average 
standardized amount for hospitals located in a rural area was made 
equal to the average standardized amount for hospitals located in other 
urban areas. The standardized amount effective for those areas is now 
known as the other standardized amount. Large urban areas continue to 
receive a separate, higher standardized amount. The effect of this 
provision is that in FY 1995 or later, hospitals reclassified from 
rural to other urban areas for purposes of the standardized amount 
receive no increase in their standardized payment amount, since the two 
rates are now the same.
    However, we continue to receive applications from individual 
hospitals seeking to be reclassified from rural to other urban areas 
for the standardized amount because of certain payment advantages that 
accompany the urban designation. When an individual 
[[Page 29217]] hospital reclassifies from a rural to an urban area for 
purposes of the standardized amount, we consider it urban for all 
purposes except the wage index. For some rural hospitals, the urban 
designation enables them to qualify as a disproportionate share 
hospital (DSH) and to receive special payment adjustments. For other 
rural hospitals that already qualify for DSH payments, the urban 
designation qualifies them for a higher adjustment than they would 
receive as a rural hospital.
    We do not believe that the MGCRB provisions of the law were 
intended to allow hospitals to be reclassified merely for the purpose 
of receiving higher DSH payments. Rather, we believe that the intent of 
the MGCRB legislation was to provide a hospital with the opportunity to 
receive a more appropriate base payment rate, that is, the standardized 
amount. Applying to an area with an identical standardized amount does 
not produce this benefit. Section 1886(d)(10)(C)(i) of the Act states, 
in part:

    ``The [MGCRB] shall consider the application of any subsection 
(d) hospital requesting that the Secretary change the hospital's 
geographic classification for purposes of determining for a fiscal 
year--
    (I) the hospital's average standardized amount under paragraph 
(2)(D) * * *''

    Since the standardized amounts applicable to hospitals in rural 
areas and other urban areas are now equal, there is no reason to 
request geographic reclassification from a rural area to an other urban 
area ``for purposes of * * * the hospital's standardized amount.'' 
Therefore, we propose to provide under new Sec. 412.230(a)(5)(ii) that 
a rural hospital may not be reclassified to an other urban area for 
purposes of the standardized amount. This change would be effective for 
hospital applications due October 2, 1995, requesting reclassification 
for FY 1997. (Since October 1 is a Sunday, the MGCRB will accept 
applications through October 2, 1995.)
    We note that this change would not prevent individual rural 
hospitals from applying for reclassification to large urban areas, 
since the standardized amount for large urban areas is greater than 
that of rural or other urban areas. Also, group applications from all 
hospitals in a rural county to be reclassified to urban areas would not 
be affected, since these hospitals are required to meet a different 
``metropolitan character'' criterion under Sec. 412.232(b).
    b. Reclassification for Purposes of the Wage Index. Section 
1886(d)(10)(C)(i)(II) of the Act requires the MGCRB to consider the 
application of any prospective payment hospital for purposes of 
changing its applicable wage index. Sections 412.230, 412.232, and 
412.234 set forth the types of individual and group reclassifications 
that are currently allowed. An individual rural hospital may reclassify 
to another rural area or to an urban area. An individual urban hospital 
may reclassify to another urban area for purposes of the wage index, 
the standardized amount or both. A rural group may reclassify to an 
urban area and an urban group may reclassify to another urban area, but 
only for purposes of both the wage index and the standardized amount.
    We have recently received hospital requests for reclassification to 
a labor market area with a lower wage index. Although such requests 
initially would appear illogical, they can result, in some cases, in a 
hospital gaining reclassification to an area from which all other 
hospitals have reclassified, that is, to an empty labor market area. 
Thus, a hospital reclassified to such an area could receive a wage 
index value based only on its own hourly wages.
    In the June 4, 1991 final rule with comment period, we stated our 
belief that geographic reclassification should be limited to hospitals 
that are disadvantaged by their current classification because they 
compete with hospitals that are located in the geographic area to which 
they seek reclassification (56 FR 25469). We do not believe it is 
appropriate for hospitals to seek reclassification to an area with a 
lower wage index in an effort to use the MGCRB system inequitably.
    Therefore, we are proposing that a hospital that seeks to 
reclassify for the purpose of the wage index may apply for 
reclassification only to an area that has a higher pre-reclassified 
average hourly wage than the pre-reclassified average hourly wage in 
the hospital's original geographic area. We would revise Secs. 412.230, 
412.232, and 412.234 to reflect this proposal.
    We recognize that this change could present a problem for hospital 
group requests for reclassification from a rural or other urban area to 
a large urban area for purposes of the standardized amount. A group of 
hospitals seeking to reclassify to a large urban area must apply for 
both the wage index and the standardized amount. It is possible that 
the pre-reclassified average hourly wage for the area to which the 
group seeks reclassification may be lower than the average hourly wage 
for the group's original area. The same problem could occur if a group 
seeks to reclassify to an area that has a higher wage index, although 
the standardized amount is the same (that is, a group of rural 
hospitals seek to reclassify to an other urban area). Therefore, for 
group reclassifications, we propose that either the pre-reclassified 
average hourly wage or the standardized amount of the area to which the 
hospitals seek reclassification must be higher than the corresponding 
figure of the area in which the hospitals are located for the group to 
qualify for reclassification. These revisions would be effective for 
applications for reclassification due by October 1, 1995, for 
reclassifications effective October 1, 1996.
    Accordingly, we propose the following changes to the MGCRB 
guidelines:
     We would specify under new Sec. 412.230(a)(5)(i) that, for 
purposes of the wage index, a hospital may not be reclassified to an 
area whose pre-reclassification average hourly wage is lower than the 
hospital's current pre-reclassification average hourly wage. As noted 
above, we would provide under Sec. 412.230(a)(5)(ii) that a rural 
hospital may not be reclassified to an other urban area for purposes of 
the standardized amount. In addition, we would move the current 
limitation that a hospital may only be reclassified to one area from 
Sec. 412.230(a)(1) to new Sec. 412.230(a)(5)(iii).
     We would add a new paragraph (a)(4) to Secs. 412.232 and 
412.234 to provide that for rural or urban group requests for 
reclassification, the standardized amount of the area to which the 
group seeks reclassification must be higher than the group's current 
standardized amount, or the average hourly wage of the area to which 
the group seeks reclassification must be higher than the group's 
current average hourly wage.
2. Hospital Requests for Wage Data from HCFA
    Currently, regulations at Sec. 412.266 provide that a hospital may 
request from HCFA certain wage data that are necessary for a complete 
reclassification application to the MGCRB. The regulations also set 
forth dates by which HCFA must respond to such requests. Before 1994, 
hospitals needed to obtain data on average hourly wages directly from 
HCFA, since the data were not available from any other source. 
Beginning with the May 27, 1994, proposed rule, we have included the 
average hourly wage data for each hospital in the proposed and final 
rules as part of Table 3c. Therefore, hospitals no longer need to 
contact HCFA to obtain the data necessary to apply for 
reclassification. Thus, we are proposing [[Page 29218]] to revise 
Sec. 412.266 to indicate that hospitals are to obtain the necessary 
data from the Federal Register document.
3. Elimination of the MGCRB
    As discussed above, under section 1886(d)(10) of the Act, the MGCRB 
is charged with reviewing and making decisions on hospital requests for 
geographic reclassification. Since implementation of this process 5 
years ago, many changes have been made to the criteria that hospitals 
must meet in order to qualify for reclassification. The majority of 
these criteria are now objective standards that are easily assessed. 
However, the MGCRB application process remains essentially unchanged.
    We believe that it may be appropriate to revise the current MGCRB 
process. That is, we believe that it may now be possible to establish a 
simplified hospital application process and transfer the Board's 
decision making authority to HCFA. In general, we believe that this 
could result in a more efficient system and reduce the paperwork burden 
to hospitals. However, we would need a change in the current law to 
accomplish this transfer.
    One area in which it may be possible to make changes if we are 
granted legislative authority is in the use of more current data. By 
statute, the MGCRB must issue all of its decisions by March 30 each 
year, before the final wage data for the upcoming Federal fiscal year 
are computed. Given the current application and review process, the 
best data we can use are the previous year's final wage data. If the 
reclassification system were revised and simplified, then it might be 
possible to use more current data in making the reclassification 
decisions. However, this would require a statutory change. We welcome 
comments on this issue and on how we could simplify the application 
process.
F. Alternative Labor Market Areas

1. Background
    Almost from the beginning of the prospective payment system, we 
have received comments from hospitals and ProPAC questioning the use of 
MSA-based labor market areas to construct the wage index. In light of 
these concerns, we have examined a variety of options for revising wage 
index labor market areas.
    In the May 27, 1994, proposed rule (59 FR 27724), we presented our 
latest research concerning possible future refinements to the wage 
index labor market areas. Specifically, we discussed in detail ProPAC's 
proposal for hospital-specific labor market areas based on each 
hospital's nearest neighbors, and our research and analysis on 
alternative labor market areas. We solicited comments on these possible 
revisions to the labor market areas. In this proposed rule, we will 
summarize our position with regard to further research into changing 
labor market areas and summarize the major comments we received in 
response to last year's proposals.
2. Summary of Research on Labor Market Areas
    In the May 27, 1994 proposed rule, we described our research on 
alternative labor market areas including a number of hospital-specific 
labor market alternatives and the criteria we used to analyze each of 
the alternatives. We also discussed our belief that even though none of 
the alternative labor market areas that we studied provided a distinct 
improvement over the current reclassification wage index, a combination 
of the current MSA-based system and the ``nearest neighbors'' based 
system proposed by ProPAC, in which a hospital's wage index is based on 
its wages and those of the other hospitals closest to it, might have 
considerable potential for improving the wage index.
    We presented an option using the current MSA-based system but 
generally giving a hospital's own wages a higher weight than under the 
current system. Under this approach, the wage index of each hospital 
would be based on a weighted average of that hospital's own average 
hourly wages and the average hourly wages of other hospitals in its 
labor market area (either an MSA or Statewide rural area).
    We considered two alternative wage indexes. The first, known as 
``M25'' or ``minimum 25,'' placed a minimum 25 percent (.25) weight on 
each hospital's own average hourly wage and a 75 percent weight (.75) 
on the average hourly wage of the other hospitals in each hospital's 
MSA or Statewide rural area. If a hospital's data already represented 
more than 25 percent of the hours in its labor market area, that higher 
percent was used instead in calculating the hospital's weighted average 
hourly wage. The resulting weighted average hourly wage was divided by 
the national average hourly wage to obtain each hospital's wage index 
value. The second wage index, known as ``M50'' or ``Minimum 50,'' 
differs from the first alternative only in that a minimum 50 percent 
weight is given to the hospital's own average hourly wage, instead of a 
minimum 25 percent. We refer to these as the M25/50 labor market 
classification options.
    However, we recognized that in some cases a hospital's immediate 
labor market area as defined under a ``nearest neighbor'' approach 
could be more representative of its true labor market area than an MSA-
based labor market area. To address such situations, we described a 
mechanism that would essentially provide a hospital with an alternative 
wage index derived entirely or in part from its nearest neighbors labor 
market. We presented two methods for reclassification, a ``simple'' 
method and a ``refined'' method. Both methods utilized the two wage 
indexes described above and like the current MGCRB reclassification 
system, also required a hospital's own wages to exceed certain 
thresholds to meet eligibility. Under the simple reclassification 
methodology, if a hospital's wages met certain thresholds, the average 
hourly wage of that hospital's 10 nearest neighbors would be 
substituted for the MSA or statewide rural average hourly wage in 
calculating the numerator of that hospital's wage index. Under the 
refined reclassification methodology, if certain tests were met, in 
addition to using the neighboring hospitals' average hourly wages in 
computing a hospital's wage index, the hospital's hours percentage in 
its nearest neighbors' labor market area would also be substituted for 
the weight that would otherwise be used. For example, if a hospital's 
wages made up 80 percent of all hospital wages in its nearest 
neighbors' labor market area, then the hospital would receive that 
weight (.80) in computing its wage index.
    We also described for comment a State labor market option (SLMO) 
under which hospitals would be allowed to design labor market areas 
within their own State boundaries. We specified that aggregate payments 
to hospitals participating in the SLMO must be budget neutral; that is, 
the payments could be no higher than they otherwise would have been in 
the absence of the SLMO. We discussed options for applying the budget 
neutrality adjustment and a number of issues that would have to be 
resolved before a SLMO could be instituted. Among these issues were how 
to determine when a SLMO should be approved for a particular area. We 
asked for comment on whether unanimous support from all of the 
hospitals participating should be required, or whether it would be 
sufficient to obtain support from only a specific percentage of the 
covered hospitals. [[Page 29219]] 
3. Summary of Comments on Labor Market Areas
    We received 74 comments on our labor market alternatives. These 
comments were from individual hospitals, national, State and local 
hospital associations, hospital consultant groups and ProPAC. Of the 
individual comments received, 27 were from New York hospitals and the 
rest were relatively evenly distributed around the country.
    Many of the commenters limited their comments to specific aspects 
of the issues mentioned in the proposed rule. The majority focused on 
the M25/50 labor market classifications option. Of those, 42 were 
opposed, 16 gave conditional support, and 11 were in favor. The 
alternative reclassification mechanism received 43 comments of which 36 
opposed the option, 4 gave conditional support, and 3 were in favor. We 
received the fewest number of comments on the SLMO proposal, with nine 
commenters expressing opposition, nine expressing conditional support, 
and two in favor.

M25/50 Labor Market Option

     Many of those who commented on the M25/50 proposal expressed 
concern that a blended wage index would undermine the principles on 
which the prospective payment system is based. One commenter said that 
the present system is designed to allow a cost effective hospital to 
move toward profitability and questioned why HCFA would want to change 
directions. Other commenters noted that a blended wage index would 
reward the highest cost hospitals with high wage indexes.
    Several commenters believe that we should complete a detailed 
financial analysis for each option. Although we did not include sample 
wage index values in the proposed rule, two associations did financial 
analyses upon which many hospitals based their comments. A number of 
commenters were concerned about the redistribution of funds under the 
blended wage index. One association commented that under such a 
proposal, twice as many hospitals in its State would receive a lower 
wage index as would benefit. Two national associations recommended that 
if M25/50 were adopted it should be implemented gradually because of 
the redistributive nature of the proposal. One association recommended 
that we provide ``buffer zones'' to protect hospitals from payment 
swings that exceeded a fixed percentage. Rural referral centers were 
generally opposed to the blended wage index because they believe it 
would create a new system with significant redistribution of funds, 
produce new inequities, and not correct the major problem of rural 
referral centers being grouped with unlike hospitals in rural areas. 
Both ProPAC and another commenter stated that labor market changes 
should be implemented in conjunction with an occupational mix 
adjustment. ProPAC said that it was difficult to evaluate competing 
labor market options without such data and that therefore it had not 
done so. ProPAC also stated that a blended wage index would be likely 
to increase occupational mix bias as more weight is attached to a 
hospital's own wage rate.
    Several State and national hospital association representatives 
recommended that we convene a meeting of hospital association 
representatives to discuss our labor market proposals in greater 
detail. They called for a meeting similar to the one we held in 
November 1993 to discuss options for redefining labor market areas, as 
discussed in last year's May 27, 1994 proposed rule (59 FR 27726).
    On the positive side, several hospital associations expressed their 
belief that a blended wage index holds potential to create a more 
equitable and supportable payment mechanism and could significantly 
reduce the number of hospitals requiring reclassification. One national 
association stated that a blended wage index balances the model that 
hospitals can purchase labor at the same price within a market with the 
recognition that imperfections in measuring labor markets will persist.

Reclassification Option

    As noted above, the majority of commenters (36 of 43) were opposed 
to the alternative reclassification option. A number of commenters are 
concerned that the proposed 'simple' and 'refined' reclassification 
methodologies were too complicated. A State hospital association 
favored ``a simplified [reclassification] approach that could easily be 
administered by the intermediary.'' Some commenters stated that they 
disagreed with the formula-driven nature of the reclassification 
process and believed that it was contrary to Congressional intent. Some 
commenters were concerned about the effect of this proposal on group 
reclassifications. While some commenters decried the loss of group 
reclassification, another commenter believes that hospitals should be 
allowed to continue to use commuting data to justify their county's 
eligibility for reclassification. One State hospital association 
expressed its belief that reclassification was originally intended to 
benefit small, rural hospitals, but that our proposal went far beyond 
that original intent by allowing many more urban and large urban 
hospitals to qualify for reclassification.
    Rural referral centers are concerned that they will lose money due 
to more stringent reclassification criteria in proposed methodologies.
    Two commenters were concerned that the reclassification proposal 
did not address inequities in the Boston NECMA (New England County 
Metropolitan Area). They believe that the core problem is the Boston 
NECMA itself, which should be replaced by a central/outlying county 
framework.
    Two hospital associations were concerned about the proposed 
reclassification methodologies' reliance on ``nearest neighbors''. A 
regional hospital association questioned why the nearest neighbor 
approach would be utilized for geographic reclassification purposes 
after it was rejected as a model for all market areas.
    ProPAC stated that the reclassification options are likely to 
increase occupational mix bias. A hospital with a low wage rate, which 
results partially from a low occupational mix, would be unlikely to 
qualify for reclassification. However, a hospital with a high wage 
index (such as a large teaching hospital) would be more likely to 
qualify for reclassification and thus be able to ``lock in'' the 
occupational mix bias. One positive comment received was that the data 
for all hospitals in the region would be retained in calculating wage 
index values and that it would be an improvement over the current 
system.
State Labor Market Option

    Regarding this option, the main area of concern was the level of 
support required to allow hospitals in a State to select the SLMO. Some 
commenters expressed concern that if a SLMO could be established only 
by an overwhelming or unanimous majority of a State's hospitals, the 
possibility of such unanimity would be unrealistic given the 
requirement of budget neutrality. As one hospital stated, ``We do not 
understand the circumstances in which a hospital that would lose 
reimbursement under this method would consent to participate.'' On the 
other hand, some commenters expressed concern that if we were to allow 
the creation of a SLMO with less than full agreement by all 
participating hospitals, it could create a system where the few would 
suffer greatly at the whim of the many.
4. Conclusion
    As the comment summary illustrates, there was no consensus among 
the [[Page 29220]] commenters on the choice for new labor market areas. 
Many individual hospitals that commented expressed dissatisfaction with 
all of the proposals. However, several State hospital association 
representatives commented that while the M25/50 labor market 
classification option and the simple and refined reclassification 
options were not ready for implementation, they did merit further 
study. Based on the commenters' suggestions that we convene a group of 
hospital association representatives to discuss these issues, in 
February we sent letters to association representatives that 
participated in our November 1993 meeting on labor market issues in 
which we solicited ideas for additional types of labor market research 
that HCFA should conduct. None of the individuals we contacted 
suggested any new avenues for research. While we believe a blended wage 
index such as the M25 or M50 option may have merit, we are not planning 
to propose it at this time given the comments we received. Although we 
believe that the response to the various proposals we have made in the 
last couple of years demonstrates that there is no clear ``best'' labor 
market area option to pursue, we are willing to continue research on 
possible labor market refinements. However, we believe we have 
exhausted most available avenues for new research.
IV. Other Decisions and Proposed Changes to the Prospective Payment 
System for Inpatient Operating Costs

A. Payment for Transfer Cases (Sec. 412.4)

    The prospective payment system distinguishes between 
``discharges,'' situations in which a patient leaves an acute-care 
hospital after receiving complete treatment, and ``transfers,'' 
situations in which the patient is transferred to another acute-care 
hospital for related care. If a full DRG payment were made to each 
hospital involved in a transfer situation irrespective of the length of 
time the patient spent in the ``sending'' hospital before transfer, 
this would create a strong incentive to increase transfers, thereby 
unnecessarily endangering patients' health. Therefore, the regulations 
at Sec. 412.4(d) provide that, in a transfer situation, full payment is 
made to the final discharging hospital and each transferring hospital 
is paid a per diem rate for each day of the stay, not to exceed the 
full DRG payment that would have been made if the patient had been 
discharged without being transferred.
    Currently, the per diem rate paid to a transferring hospital is 
determined by dividing the full DRG payment that would have been paid 
in a nontransfer situation by the geometric mean length-of-stay for the 
DRG into which the case falls. Transferring hospitals are also eligible 
for outlier payments for cases that meet the cost outlier criteria 
established for all cases (nontransfer and transfer cases alike) 
classified to the DRG. They are not, however, eligible for day outlier 
payments. Two exceptions to the transfer payment policy are transfer 
cases classified into DRG 385 (Neonates, Died or Transferred to Another 
Acute Care Facility) or DRG 456 (Burns, Transferred to Another Acute 
Care Facility), which are not paid on a per diem basis but instead 
receive the full DRG payment.
    In the May 27, 1994 proposed rule, we proposed to revise our 
payment methodology for transfer cases. Under the proposal, for the 
first day of a transfer, the per diem amount would be doubled, while a 
flat per diem amount would be paid for each succeeding day, up to the 
full DRG payment (59 FR 27734). We also proposed at that time to change 
our definition of a transfer case to include cases transferred from an 
acute-care setting paid under the prospective payment system to a 
hospital or unit excluded from the prospective payment system. When we 
published the September 1, 1994 final rule with comment period, we 
withdrew these proposals for FY 1995 (59 FR 45362) based on negative 
comments and further analysis. In that final rule, however, we stated 
our intention to continue to evaluate the appropriateness of our 
transfer policy.
    For FY 1996, we are again proposing to adopt a graduated per diem 
payment methodology for transfer cases. Again, under this proposed 
methodology, we would pay double the per diem amount for the first day 
and the per diem amount for subsequent days. We are not proposing to 
revise our definition of transfers at this time. However, we note that 
we are concerned about an accelerating trend toward earlier discharges 
to post-acute settings. We are, therefore, soliciting public comments 
regarding this trend and the implications this has for the design of 
our payment systems. In its March 1, 1995 report, ProPAC supported our 
proposed payment methodology (Recommendation 11) and expressed its 
concern ``about the continuity of care across treatment settings.'' The 
Commission also indicated its willingness to work with the Secretary to 
explore this issue. The following discussion describes our proposed 
change to the transfer payment methodology and some of the issues 
identified by our further analysis of transfer cases.
1. Payment for Transfer Cases
    As part of a study of Medicare transfer cases funded by HCFA 
(``Transfers of Medicare Hospital Patients under the Prospective 
Payment System'', PM-191-HCFA, January 1994), RAND found that among 
cases transferred before reaching the geometric mean length-of-stay, 1-
day stays cost 2.096 times the per diem payment amount for cases in 
nonsurgical DRGs and 2.576 times the per diem for surgical DRGs (based 
on FY 1991 data). Among nonsurgical transfer cases, the costs of 2-day 
stays were about 1.215 times the per diem payment amount, and cases 
transferred after 2 days cost about 10 percent more than the applicable 
per diem amount. Among surgical cases, the costs of stays of 2 or more 
days were actually about 7 percent below the applicable per diem 
amount.
    In order to pay hospitals more appropriately for the treatment they 
furnish to patients before transfer, we are proposing to revise 
Sec. 412.4(d)(1) to pay transfers twice the per diem amount for the 
first day of any transfer stay plus the per diem amount for each of the 
remaining days before transfer, up to the full DRG amount. (Our 
concerns about basing the gradation of the per diem scale on the actual 
coefficients as estimated by RAND were described in last year's 
proposed and final rules, as referenced above.) We are proposing that 
this change be applied uniformly for both medical and surgical transfer 
cases; although surgical transfer cases appear to be more costly on 
average for the first day, they are relatively less costly for the 
second day and beyond.
    If the patient is transferred again before final discharge, then, 
under the change we are proposing, all sending hospitals involved would 
be paid using the graduated per diem methodology rather than the flat 
per diem rate they currently receive. For example, a case transferred 
from a community hospital to a tertiary care hospital for a procedure 
that is not performed at the community hospital, may subsequently be 
transferred back to the community hospital, which ultimately discharges 
the patient home. In such a case, the community hospital and the 
tertiary care hospital would be paid using the transfer payment 
methodology for the first two phases of the hospitalization, and the 
community hospital would also receive a DRG amount for the final phase 
when it discharges the patient. This is our current policy, as well. 
Each phase of the hospitalization is assigned a DRG based on the 
diagnosis and procedures applicable to that particular 
[[Page 29221]] phase; therefore, a different DRG could be assigned to 
each phase.
    Transfer cases would continue to be eligible for additional 
payments as cost outliers. In the September 1, 1993 final rule, we set 
forth revised qualifying criteria for transfer cases to be eligible for 
cost outlier payments (58 FR 46305). Before that change, transfer cases 
were required to meet the same criteria to qualify for cost outliers as 
were discharges. The revised policy adjusts the outlier threshold for 
transfer cases to reflect the fact that transfer cases were receiving a 
reduced payment amount under the per diem methodology. Last year, when 
we revised the cost outlier qualifying criteria so that it was based on 
a fixed loss threshold, the qualifying criteria for transfers continued 
to reflect the fact that their payment amounts are reduced relative to 
discharges. Specifically, the cost outlier threshold for transfer cases 
is equal to the fixed loss amount (for FY 1995, the prospective payment 
rate for the DRG plus $20,500), divided by the geometric mean for the 
DRG, multiplied by the length of stay before transfer. Although we did 
not state this explicitly in the September 1, 1994 final rule, it is 
the policy we have employed, and intend to continue to employ, since 
the fixed loss threshold was implemented October 1, 1994.
    Using the proposed graduated per diem methodology, RAND estimated 
the payment-to-cost ratio of transfer cases that were transferred 
before reaching the geometric mean length of stay would be 0.9321. 
While this is somewhat less than the payment-to-cost ratio for 
nontransfer cases (0.9645), it represented a significant improvement 
over the current ratio for transfer cases (0.7224). Using more recent 
data (FY 1993 MedPAR) and payment policies (FY 1995), we estimated the 
improvement in the payment-to-cost ratio for transfer cases to be from 
0.7548 under the current flat per diem policy to 0.9701 under the 
proposed graduated per diem policy.
    Section 109 of the Social Security Act Amendments of 1994 (Public 
Law 103-432) authorized the Secretary to make adjustments to the 
prospective payment system standardized amounts so that adjustments to 
the payment policy for transfer cases do not affect aggregate payments. 
In light of this authority, we believe the benefits of the graduated 
per diem methodology now outweigh the concerns that we expressed in the 
September 1, 1994 final rule. Our methodology for applying this 
adjustment is described in section II of the Addendum to this proposed 
rule.
    Finally, we are also proposing to revise the DRG recalibration 
methodology so that transfer cases are treated as a proportion of a 
full case based on the length of stay (as discussed above in section 
II.C of this preamble). Specifically, we are proposing to weight 
transfer cases as less than a full discharge based on the proportion of 
the number of days the patient was hospitalized before transfer. This 
would have the effect of increasing the relative weights of the DRGs 
with a high number of short stay transfer cases.
2. Definition of a Transfer Case
    Under current policy, cases that are transferred from an acute-care 
hospital paid under the prospective payment system to another type of 
provider or unit are considered to be discharges (as opposed to 
transfers) from the acute-care hospital. As a discharge, payment for 
the case is the full DRG amount.
    As noted above, we are concerned that the current trend of 
declining average lengths of stay as hospitals transfer Medicare 
patients into alternative health care settings (other than acute care) 
in less time may result in a misalignment of payments and costs under 
our existing payment systems. In particular, we are concerned that 
hospitals paid under the prospective payment system may be shifting 
costs (for which they are compensated through the DRG payments) to 
alternative settings, which are in turn paid on a cost basis.
    In the September 1, 1994 final rule, we explained our rationale for 
proposing to consider patients transferred to excluded hospitals or 
units as transfers rather than discharges. Briefly, our proposal was 
``based upon the premise that an increasing number of patients are 
being transferred to excluded hospitals or units and that these 
patients are still in the acute care phase of treatment when they are 
transferred.'' (See 59 FR 45364). We also explained our reason for 
continuing to consider patients going to a skilled nursing facility 
(SNF) as discharges. In that regard, we stated that ``(w)e did not 
propose to consider discharges to SNFs as transfers because we do not 
consider SNFs to be hospital settings; thus, there is generally little 
overlap with acute care hospitals in the services provided.'' Based 
upon further analysis of patient discharge trends and research on the 
type and outcomes of care provided in SNFs, as well as anecdotal 
evidence drawn from the health care industry, we no longer believe 
there is a clear distinction between the type of care provided in SNFs 
and the type of care provided in hospitals or units excluded from the 
prospective payment system, such as rehabilitation facilities and long-
term care hospitals.
    Therefore, we considered proposing to expand our definition of 
transfers to include not only cases going from one hospital paid under 
the prospective payment system to another but also cases transferred to 
excluded hospitals and units as well as SNFs. However, as discussed 
below, our analysis has identified problems that need to be addressed. 
Nevertheless, once we are convinced these problems can be effectively 
handled, we intend to proceed with implementing policy changes designed 
to remedy this issue.
    First, our analysis (as well as anecdotal evidence) indicates that 
the settings where acute care is now being delivered are rapidly 
expanding and evolving. To the extent that payment is affected by where 
a patient goes after an acute hospitalization, it is critical to 
understand the clinical capabilities of different types of settings, so 
that the incentives treated by the payment system do not unduly 
influence the choice of where to send a patient for post-acute care. 
That is, all like provider settings should be treated equally in terms 
of payment incentives. Currently, the settings that are considered as 
alternatives to acute care are expanding rapidly, and we want to be 
sure that we do not create unforeseen financial incentives toward one 
alternative over another by any redefinition of transfers.
    In addition, as discussed in last year's final rule, hip 
replacement cases (which, as a group, constitute one of the largest 
sources of Medicare cases going from acute to post-acute settings) 
would be systematically underpaid under either the current or the 
proposed per diem methodology. This is because the cost of the surgery 
including the prosthetic device, which is incurred in the first day or 
two of the stay, constitutes a large percentage of the total cost of 
the stay. A graduated per diem would have to be skewed greatly toward 
the first day to approximate the daily cost distribution.
    We are soliciting public comment with regard to these issues. 
Specifically, we are interested in suggestions on how best to adapt our 
payment methodologies for hospitals and units (both acute care paid 
under the prospective payment system and those excluded from this 
system), SNFs, and home health agencies in response to the evolving 
integrated delivery systems. We are particularly interested in comments 
and suggestions on how to design a comprehensive payment system that 
better matches payments with the costs providers actually incur 
[[Page 29222]] in furnishing care (that is, reducing hospital payments 
when a significant phase of a patient's acute episode is treated in 
other than an acute hospital inpatient setting). A major issue in 
developing such an integrated payment system is to neutralize the 
incentives that arise in terms of where patients are treated. For 
example, hospitals should continue to be adequately compensated for 
acute inpatient hospitalization where appropriate, so that there will 
not be an adverse incentive to move patients prematurely to alternative 
settings.
    We will continue to analyze and explore various solutions to this 
issue, including any that are provided by commenters.

B. Rural Referral Centers (Sec. 412.96)

    Under the authority of section 1886(d)(5)(C)(i) of the Act, 
Sec. 412.96 sets forth the criteria a hospital must meet in order to 
receive special treatment under the prospective payment system as a 
rural referral center. For discharges occurring before October 1, 1994, 
rural referral centers received the benefit of payment based on the 
other urban payment rate rather than the rural payment rate. As of that 
date, the other urban and rural payment rates are the same. However, 
rural referral centers continue to receive special treatment under both 
the disproportionate share hospital payment adjustment and the criteria 
for geographic reclassification.
    One of the criteria under which a rural hospital may qualify as a 
referral center is to have 275 or more beds available for use. A rural 
hospital that does not meet the bed size criterion can qualify as a 
rural referral center if the hospital meets two mandatory criteria 
(number of discharges and case-mix index) and at least one of three 
optional criteria (medical staff, source of inpatients, or volume of 
referrals). With respect to the two mandatory criteria, a hospital may 
be classified as a rural referral center if its--
     Case-mix index is at least equal to the lower of the 
median case-mix index for urban hospitals in its census region, 
excluding hospitals with approved teaching programs, or the median 
case-mix index for all urban hospitals nationally; and
     Number of discharges is at least 5,000 discharges per year 
or, if fewer, the median number of discharges for urban hospitals in 
the census region in which the hospital is located. (The number of 
discharges criterion for an osteopathic hospital is at least 3,000 
discharges per year.)
1. Case-Mix Index
    Section 412.96(c)(1) provides that HCFA will establish updated 
national and regional case-mix index values in each year's annual 
notice of prospective payment rates for purposes of determining rural 
referral center status. In determining the proposed national and 
regional case-mix index values, we would follow the same methodology we 
used in the November 24, 1986 final rule, as set forth in regulations 
at Sec. 412.96(c)(1)(ii). Therefore, the proposed national case-mix 
index value includes all urban hospitals nationwide, and the proposed 
regional values are the median values of urban hospitals within each 
census region, excluding those with approved teaching programs (that 
is, those hospitals receiving indirect medical education payments as 
provided in Sec. 412.105).
    These values are based on discharges occurring during FY 1994 
(October 1, 1993 through September 30, 1994) and include bills posted 
to HCFA's records through December 1994. Therefore, in addition to 
meeting other criteria, we are proposing that to qualify for initial 
rural referral center status or to meet the triennial review standards 
for cost reporting periods beginning on or after October 1, 1995, a 
hospital's case-mix index value for FY 1994 would have to be at least--
     1.3165; or
     Equal to the median case-mix index value for urban 
hospitals (excluding hospitals with approved teaching programs as 
identified in Sec. 412.105) calculated by HCFA for the census region in 
which the hospital is located.
    The median case-mix values by region are set forth in the table 
below:

------------------------------------------------------------------------
                                                                Case-mix
                            Region                               index  
                                                                 value  
------------------------------------------------------------------------
1. New England (CT, ME, MA, NH, RI, VT)......................     1.2186
2. Middle Atlantic (PA, NJ, NY)..............................     1.2090
3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV).......     1.3112
4. East North Central (IL, IN, MI, OH, WI)...................     1.2280
5. East South Central (AL, KY, MS, TN).......................     1.2782
6. West North Central (IA, KS, MN, MO, NE, ND, SD)...........     1.1912
7. West South Central (AR, LA, OK, TX).......................     1.2995
8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY).................     1.3606
9. Pacific (AK, CA, HI, OR, WA)..............................     1.3300
------------------------------------------------------------------------

    The above numbers will be revised in the final rule to the extent 
required to reflect the updated MedPAR file, which will contain data 
from additional bills received for discharges through September 30, 
1994.
    For the benefit of hospitals seeking to qualify as referral centers 
or those wishing to know how their case-mix index value compares to the 
criteria, we are publishing each hospital's FY 1994 case-mix index 
value in Table 3C in section V of the addendum to this proposed rule. 
In keeping with our policy on discharges, these case-mix index values 
are computed based on all Medicare patient discharges subject to DRG-
based payment.
2. Discharges
    Section 412.96(c)(2)(i) provides that HCFA will set forth the 
national and regional numbers of discharges in each year's annual 
notice of prospective payment rates for purposes of determining 
referral center status. As specified in section 1886(d)(5)(C)(ii) of 
the Act, the national standard is set at 5,000 discharges. However, we 
are proposing to update the regional standards. The proposed regional 
standards are based on discharges for urban hospitals' cost reporting 
periods that began during FY 1993 (that is, October 1, 1992 through 
September 30, 1993). That is the latest year for which we have complete 
discharge data available.
    Therefore, in addition to meeting other criteria, we are proposing 
that to qualify for initial rural referral center status or to meet the 
triennial review standards for cost reporting periods beginning on or 
after October 1, 1995, the number of discharges a hospital must have 
for its cost reporting period that began during FY 1994 would have to 
be at least--
     5,000; or
     Equal to the median number of discharges for urban 
hospitals in the census region in which the hospital is located, as 
indicated in the table below.

------------------------------------------------------------------------
                                                               Number of
                           Region                             discharges
------------------------------------------------------------------------
1. New England (CT, ME, MA, NH, RI, VT).....................        6808
2. Middle Atlantic (PA, NJ, NY).............................        8611
3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV)......        7320
4. East North Central (IL, IN, MI, OH, WI)..................        6959
5. East South Central (AL, KY, MS, TN)......................        5520
6. West North Central (IA, KS, MN, MO, NE, ND, SD)..........        5001
7. West South Central (AR, LA, OK, TX)......................        4473
8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY)................        8421
9. Pacific (AK, CA, HI, OR, WA).............................        5594
------------------------------------------------------------------------

     [[Page 29223]] We reiterate that, to qualify for rural referral 
center status for cost reporting periods beginning on or after October 
1, 1995, an osteopathic hospital's number of discharges for its cost 
reporting period that began during FY 1994 would have to be at least 
3,000.
3. Retention of Referral Center Status
    Section 412.96(f) states that each hospital receiving the referral 
center adjustment is reviewed every 3 years to determine if the 
hospital continues to meet the criteria for referral center status. To 
retain status as a referral center, a hospital must meet the criteria 
for classification as a referral center specified in Sec. 412.96(b)(1) 
or (b)(2) or (c) for 2 of the last 3 years, or for the current year. A 
hospital may meet any one of the three sets of criteria for individual 
years during the 3-year period or the current year. For example, a 
hospital may meet the two mandatory requirements in Sec. 412.96(c)(1) 
(case-mix index) and (c)(2) (number of discharges) and the optional 
criterion in paragraph (c)(3) (medical staff) during the first year. 
During the second or third year, the hospital may meet the criteria 
under Sec. 412.96(b)(1) (rural location and appropriate bed size).
    A hospital must meet all of the criteria within any one of these 
three sections of the regulations in order to meet the retention 
requirement for a given year. That is, it will have to meet all of the 
criteria of Sec. 412.96(b)(1) or Sec. 412.96(b)(2) or Sec. 412.96(c). 
For example, if a hospital meets the case-mix index standards in 
Sec. 412.96(c)(1) in years 1 and 3 and the number of discharge 
standards in Sec. 412.96(c)(2) in years 2 and 3, it will not meet the 
retention criteria. All of the standards would have to be met in the 
same year.
    In accordance with Sec. 412.96(f)(2), the review process is limited 
to the hospital's compliance during the last 3 years. Thus, if a 
hospital meets the criteria in effect for at least 2 of the last 3 
years or if it meets the criteria in effect for the current year (that 
is, the criteria for FY 1996 outlined above in this section of the 
preamble), it will retain its status for another 3 years. We have 
constructed the following chart and example to aid hospitals that 
qualify as referral centers under the criteria in Sec. 412.96(c) in 
projecting whether they will retain their status as a referral center.
    Under Sec. 412.96(f), to qualify for a 3-year extension effective 
with cost reporting periods beginning in FY 1996, a hospital must meet 
the criteria in Sec. 412.96(c) for FY 1996 or it must meet the criteria 
for 2 of the last 3 years as follows:

------------------------------------------------------------------------
                                              Use the                   
                                            discharges                  
                                    Use       for the     Use numerical 
                                hospital's  hospital's    standards as  
 For the cost reporting period   case-mix      cost     published in the
      beginning during FY        index for   reporting  Federal Register
                                    FY        period           on       
                                             beginning                  
                                             during FY                  
------------------------------------------------------------------------
1995..........................      1993         1993   Sept. 1, 1994.  
1994..........................      1992         1992   Sept. 1, 1993.  
1993..........................      1991         1991   Sept. 1, 1992.  
------------------------------------------------------------------------

    Example: A hospital with a cost reporting period beginning July 
1 qualified as a referral center effective July 1, 1993. The 
hospital has fewer than 275 beds. Its 3-year status as a referral 
center is protected through June 30, 1996 (the end of its cost 
reporting period beginning July 1, 1995). To determine if the 
hospital should retain its status as a referral center for an 
additional 3-year period, we will review its compliance with the 
applicable criteria for its cost reporting periods beginning July 1, 
1993, July 1, 1994, and July 1, 1995. The hospital must meet the 
criteria in effect either for its cost reporting period beginning 
July 1, 1996, or for two out of the three past periods. For example, 
to be found to have met the criteria at Sec. 412.96(c) for its cost 
reporting period beginning July 1, 1994, the hospital's case-mix 
index value during FY 1992 must have equaled or exceeded the lower 
of the national or the appropriate regional standard as published in 
the September 1, 1993 final rule with comment period. The hospital's 
total number of discharges during its cost reporting year beginning 
July 1, 1992, must have equaled or exceeded 5,000 or the regional 
standard as published in the September 1, 1993 final rule with 
comment period.

    For those hospitals that seek to retain referral center status by 
meeting the criteria of Sec. 412.96(b)(1) (i) and (ii) (that is, rural 
location and at least 275 beds), we will look at the number of beds 
shown for indirect medical education purposes (as defined at 
Sec. 412.105(b)) on the hospital's cost report for the appropriate 
year. We will consider only full cost reporting periods when 
determining a hospital's status under Sec. 412.96(b)(1)(ii). This 
definition varies from the number of beds criterion used to determine a 
hospital's initial status as a referral center because we believe it is 
important for a hospital to demonstrate that it has maintained at least 
275 beds throughout its entire cost reporting period, not just for a 
particular portion of the year.
C. Determination of Number of Beds Used in Calculating the Indirect 
Medical Education Adjustment (Sec. 412.105)

    In the September 1, 1994 final rule (59 FR 45373), in an effort to 
clarify our policy, we amended the regulations at Sec. 412.105(b), 
which describe how to determine the number of beds in a hospital for 
purposes of the indirect medical education adjustment. At that time, we 
added language to the regulations that specifically excludes as a bed 
``nursery'' beds assigned to newborns ``that are not in intensive care 
areas.'' This change was supposed to have left little doubt that, with 
regard to infants, only beds in a nursery used for newborns (see 
section 2815 of the Provider Reimbursement Manual-Part 2) are excluded 
from the count. As we stated in the preamble to the May 27, 1994 
proposed rule (59 FR 27741), we made this revision ``to exclude 
specifically only beds assigned to newborns in the nursery'' (emphasis 
added). Furthermore, when we published the final rule, we added the 
reference to nursery beds directly into the text of Sec. 412.105(b) 
``(t)o prevent any future confusion about the term ``newborn'' (59 FR 
45374).
    Although we received no public comments as to whether beds occupied 
by sick infants in areas other than a neonatal intensive care area or a 
nursery could be counted, we continue to receive questions on this 
issue. Therefore, we are once again revising Sec. 412.105(b) to clarify 
our bed counting policy. This year, rather than specifically 
identifying intensive care beds occupied by infants as eligible to be 
counted, we are deleting that phrase and inserting the phrase ``beds in 
the healthy newborn nursery.'' Thus, our policy is and has been that 
only beds in a healthy, or regular, baby nursery are excluded from the 
count. All other beds available for occupation by a newborn are to be 
counted.

D. Disproportionate Share Adjustment (Sec. 412.106)

    Section 1886(d)(5)(F) of the Act provides for additional payments 
for hospitals that serve a disproportionate share of low income 
patients. A hospital's disproportionate share adjustment is determined 
by calculating two patient percentages (Medicare Part A/SSI covered 
days to total Medicare covered days and Medicaid but not Medicare Part 
A covered days to total inpatient hospital days), adding them together, 
and comparing that total percentage to the hospital's qualifying 
criteria. These calculations are done by HCFA and the fiscal 
intermediary on a Federal fiscal year basis. However, 
Sec. 412.106(b)(3) states that if a hospital prefers that HCFA use its 
cost reporting period instead of the Federal fiscal year, it must 
furnish to its intermediary, in machine-readable format as prescribed 
by HCFA, data on its Medicare Part A [[Page 29224]] patients for its 
cost reporting period. These data take the place of the Federal fiscal 
year MedPAR file data in obtaining the Medicare Part A/SSI percentage. 
However, we match the hospital's data to the HCFA MedPAR data to ensure 
that the hospital is reporting actual Medicare Part A patient days. In 
addition, we have required that a hospital accept the recalculated 
percentage, even if it is lower than the Federal fiscal year 
percentage.
    In the last few years, this process has proven to be unsatisfactory 
for several reasons. First, it is an administrative burden for the 
hospital to prepare a tape that includes all its Medicare Part A 
inpatient days. In addition, the hospital's tape data have seldom 
exactly matched the MedPAR data. In that case, we can use only the data 
that match. Finally, and probably often due to this second problem, the 
resulting disproportionate patient percentages are invariably lower 
than the original HCFA determined percentage. Therefore, we are 
proposing to alleviate these problems by continuing to provide 
hospitals an alternative to base their percentage on their cost 
reporting year, but relieving them of the tape requirement.
    We propose that, if a hospital wishes a recalculation based on its 
cost reporting period, the hospital would notify HCFA in writing of its 
request that the Medicare Part A/SSI percentage be calculated based on 
its own cost reporting year. The hospital would be required to provide 
HCFA with its name, provider number, and cost report period end date. 
HCFA, in turn, would use all MedPAR records for that hospital from the 
requested time period, as opposed to only those records that matched 
between the MedPAR file and the hospital's tape data. This should 
provide hospitals with a better opportunity to possibly increase their 
Medicare Part A/SSI percentages.
    In addition, we propose that we would process these requests on a 
quarterly basis. Processing these individual requests for recalculation 
on a flow basis has become an administrative burden on the available 
HCFA computer processing resources. Therefore, we believe it is 
necessary to batch these requests and run the MedPAR data on a set 
schedule. This will be much more efficient and predictable.
    Therefore, we are proposing to revise Sec. 412.106(b)(3) to provide 
that HCFA will accept a hospital's written request, transmitted through 
its fiscal intermediary, for a recalculation of its Medicare Part A/SSI 
percentage based on its cost reporting period. The written request 
would include the hospital's name, provider number, and cost report 
period end date. We would perform a recalculation only once per 
hospital per cost report period, and the resulting percentage becomes 
the hospital's official Medicare Part A/SSI percentage for that period.

E. Essential Access Community Hospitals (EACHs) and Rural Primary Care 
Hospitals (RPCHs) (Secs. 412.109, 413.70, 424.15, 485.603, 485.606, 
485.614, 485.620, and 485.639)

    On May 26, 1993, we published a final rule to implement the EACH 
program (58 FR 30630). The rule set forth the requirements for 
designating certain hospitals as EACHs or RPCHs, the conditions that an 
RPCH must meet to participate in Medicare, and the rules for Medicare 
payment for services furnished by EACHs and RPCHs. The final rule 
implemented section 1820 of the Act, as added by sections 6003(g) and 
6116(b)(2) of Public Law 101-239 and revised by section 4008(d) of 
Public Law 101-508. The amendments were intended to promote 
regionalization of rural health services in grant States, improve 
access to hospital and other health services for rural residents, and 
enhance the provision of emergency and other transportation services 
related to health care.
    Section 102 of the Social Security Act Amendments of 1994, Public 
Law 103-432 (SSAA '94), made significant changes in the provisions of 
the Medicare law governing the EACH/RPCH program. To implement these 
changes, we propose to revise the regulations as follows:
1. Designation of Urban Hospitals as EACHs (Sec. 412.109)
    Section 1820(e) of the Act previously provided that only rural 
facilities could be designated as EACHs, and all EACHs were to be paid 
as sole community hospitals (SCHs). Section 102(b)(1) of SSAA '94 
revised section 1820(e) of the Act to allow hospitals located in urban 
areas to be designated as EACHs if they have entered into network 
agreements with RPCHs and meet other applicable requirements. As EACHs, 
these urban facilities may qualify for EACH grants. However, they are 
not eligible for the special payment methodology afforded rural EACHs. 
For payment purposes, rural EACHs are treated as sole community 
hospitals (SCH). Section 1886(d)(5)(D) of the Act was amended to 
clarify that only hospitals designated as EACHs and located in rural 
areas are treated as SCHs for payment purposes. Urban EACHs will 
therefore continue to be paid at the applicable urban rates.
    To implement this provision, we propose to revise Sec. 412.109 to 
remove the current rural location requirement for EACH designation, and 
to provide that payment as an SCH is limited to EACHs in rural areas. 
As explained below, we also propose to revise that section to allow a 
State that has received an EACH grant to designate an otherwise 
qualified hospital in an adjoining State as an EACH.
    In conjunction with this change, we are making a technical 
correction to a reference in Sec. 485.603.
2. Designation of EACHs and RPCHs in States Adjoining Grant States 
(Secs. 412.109 and 485.606)
    Section 1820(c) of the Act previously provided that hospitals could 
be designated as EACHs only if they were located in States receiving 
EACH grants. Section 1820(i)(2) of the Act did authorize designation of 
RPCHs outside the grant States; however, the number of facilities 
designated under this authority was limited to 15 nationally, and only 
the Secretary, not individual grant States, could make the designation. 
Section 1820(i)(2) of the Act further requires the Secretary, in making 
the special designations, to give preference to facilities that have 
entered into network agreements with other facilities in grant States, 
thus indicating a strong preference for designation of RPCHs in States 
adjoining grant States. Section 102(b)(2) of SSAA '94 amended section 
1820 of the Act to authorize the individual grant States to make 
designations of both EACHs and RPCHs in adjoining States, if the 
facilities so designated are otherwise qualified and have entered into 
network agreements with EACHs or RPCHs in the grant State. The 
legislation does not limit the number of such designations. To 
implement this change, we propose to revise Secs. 412.109 and 485.606 
to permit these new designations of EACHs and RPCHs by adjacent States 
that have received grants. We propose that hospitals designated in this 
way will be required to meet other applicable requirements, and we plan 
to make such designations subject to review and approval by the HCFA 
regional offices on the same basis as designations of facilities in the 
grant State. That is, the designation will not result in recognition of 
a facility as an EACH or RPCH for Medicare or Medicaid purposes until 
HCFA has determined that the requirements are met.

[[Page 29225]]

3. Designation of EACHs and RPCHs by States That Have Received Grants 
(Secs. 412.109 and 485.606)
    Section 1820(a)(1) of the Act establishes a program under which the 
Secretary makes grants available to not more than seven States to carry 
out certain activities, including designating hospitals or facilities 
in the State as either an EACH or an RPCH. Because there is no 
assurance that funding of this grant program will continue, some or all 
of the seven States may not receive grants under section 1820(a)(1) of 
the Act in the future. Since States may not continue to ``receive'' 
grants, we propose to revise the regulations pertaining to EACHs and 
RPCHs by replacing references to ``States receiving grants'' with 
references to ``States that have received grants'' or ``a State that 
has received a grant,'' as appropriate. Specifically, we propose to 
revise the designation of EACHs and RPCHs under current Sec. 412.109(b) 
and (c), and Sec. 485.606, respectively, to include these revised 
references. Should the grant program expire, these proposed revisions 
would prevent any uncertainty that may arise as to the status of 
designations made by States that have received grants.
4. Change in Payment for Outpatient RPCH Services (Sec. 413.70)
    Previously, section 1834(g) of the Act provided that payments to 
RPCHs for outpatient services under the cost-based facility fee plus 
professional charges method were to be determined under section 
1833(a)(2)(B) of the Act. That section states that payment is to be 
made at the lesser of the reasonable cost of the services or the 
customary charges for the services. (This is commonly referred to as 
``LCC,'' that is, the lesser of costs or charges.) Current regulations 
at Sec. 413.70(b)(2)(i) require that payment to RPCHs under the cost-
based facility fee plus professional services be made in accordance 
with the LCC principle. This principle is set forth under Sec. 413.13.
    Section 102(e)(2) of SSAA '94 amended section 1834(g)(1) of the Act 
to provide that payment for outpatient RPCH services under the cost-
based facility fee plus professional charges method are to be 
determined without regard to the amount of the customary charge. To 
implement this change, we propose to amend Sec. 413.70(b)(2)(i) to 
provide that for payment for RPCH outpatient services made under the 
cost-based RPCH payment plus professional services method, the 
principle of the lesser of costs or charges does not apply.
5. Content of Required Physician Certification (Sec. 424.15)
    Section 1814(a)(8) of the Act previously provided that Medicare 
Part A could pay for inpatient RPCH services only if a physician 
certified that the services were required to be furnished immediately 
on a temporary, inpatient basis. Section 102(a)(3) of SSAA '94 deleted 
this requirement and provided instead that Medicare Part A will pay for 
the inpatient RPCH services only if a physician certifies that the 
individual may reasonably be expected to be discharged or transferred 
to a hospital within 72 hours after admission to the RPCH. We are 
proposing to revise Sec. 424.15 to reflect the new requirement.
6. Length-of-Stay Requirement for RPCHs (Secs. 485.614 and 485.620)
    Section 1820(f)(1)(F) of the Act previously allowed all RPCHs to 
keep inpatients no longer than 72 hours before discharging them or 
transferring them to a full-service hospital, unless discharge or 
transfer was precluded by inclement weather or other emergency 
conditions. Section 102(a)(1) of SSAA '94 removed the per-stay 
limitation and substituted for it a provision under which the Secretary 
may terminate the designation of a facility as an RPCH if the Secretary 
finds that the average length of stay in the preceding year exceeded 72 
hours. The provision further states that periods of stay in excess of 
72 hours that occurred because discharge or transfer were precluded by 
inclement weather or other emergency conditions are not to be taken 
into account in computing a facility's average length of stay for this 
purpose.
    To implement this change, we propose to revise Secs. 485.614 and 
485.620 to delete the current per-stay limitation, and to replace it 
with a requirement for a facility-wide average length of stay that does 
not exceed 72 hours, excluding parts of stays in excess of 72 hours 
that occurred because of inclement weather or other emergencies. In the 
case of a currently participating RPCH, termination of the RPCH 
designation can be made effective only by ending Medicare 
participation. Therefore, we propose to revise Sec. 489.53 to authorize 
termination of the provider agreement of an RPCH if the Secretary finds 
that it does not maintain the required average length of stay.
7. Restriction on Scope of Surgical Services to RPCH Inpatients 
(Sec. 485.614 and new Sec. 485.639)
    Before the Social Security Act Amendments of 1994 were enacted, 
there were no explicit restrictions on the type or extent of surgical 
activity that could be performed in a RPCH. These facilities and their 
practitioners were, however, required to conform to applicable State 
licensure and scope of practice laws. Section 102(a)(1) of SSAA '94 
added an explicit restriction on surgical activity by RPCHs. 
Specifically, a State may not designate a facility as an RPCH if the 
facility provides inpatient hospital services consisting of surgery or 
any other service requiring the use of general anesthesia (other than 
surgical procedures specified by the Secretary under section 
1833(i)(1)(A) of the Act), unless the attending physician certifies 
that the risk associated with transferring the patient to a hospital 
for such services outweighs the benefits of transferring the patient to 
a hospital for such services. The procedures specified by the Secretary 
under section 1833(i)(1)(A) of the Act are those that are performed on 
an inpatient basis in a hospital but which also can be performed safely 
on an ambulatory basis in an ambulatory surgical center (ASC) or in a 
hospital outpatient department. Implementing regulations for section 
1833(i)(1)(A) of the Act are set forth at Sec. 416.65. HCFA also 
publishes a list of covered surgical procedures in Addendum A to Part 3 
of the Medicare Carriers Manual.
    To implement this change, we propose to revise Sec. 485.614 to 
reflect the new statutory provision. We note that the law still does 
not limit the scope of surgical procedures that can be performed for 
RPCH outpatients, and that both hospitals and ASCs, the other two 
facilities in which ASC procedures can be performed, are subject to 
specific health and safety rules on administration of anesthesia and 
performance of the surgery. To ensure adequate health and safety 
protection for RPCH patients and to apply Medicare standards uniformly 
to ASC-type procedures, we are further proposing to add, at 
Sec. 485.639, a new RPCH condition of participation for surgical 
services. We note that the new condition would apply the same rules in 
the RPCH as now apply in an ASC, and that it would apply to both 
inpatient and outpatient surgery. Given the similarities between RPCHs 
and ASCs and the fact that identical procedures can be performed in 
each, we believe uniform health and safety rules are needed.

F. Rebasing the Hospital Market Basket

    Effective for cost reporting periods beginning on or after July 1, 
1979, we developed and adopted a hospital input price index (that is, 
the hospital ``market basket'') for operating costs. Although 
[[Page 29226]] ``market basket'' technically describes the mix of goods 
and services used to produce hospital care, this term is also commonly 
used to denote the input price index, which includes both the market 
basket and the price proxy series that are used to measure price 
changes over time. Accordingly, the term ``market basket'' as used in 
this document refers to the hospital input price index.
    The percentage change in the market basket reflects the average 
change in the price of goods and services purchased by hospitals to 
furnish inpatient care. We first used the market basket to adjust 
hospital cost limits by an amount that reflected the average increase 
in the prices of goods and services used to furnish inpatient care. 
This approach linked the increase in the cost limits to the efficient 
utilization of resources.
    With the inception of the prospective payment system on October 1, 
1983, we continued to use the hospital market basket to update each 
hospital's 1981 inpatient operating cost per discharge used in 
establishing the FY 1984 standardized payment amounts. In addition, the 
projected change in the hospital market basket has been the integral 
component of the update factor by which the prospective payment rates 
and the rate-of-increase limits applicable to hospitals and hospital 
units excluded from the prospective payment system are updated every 
year.
    The hospital market basket is a fixed-weight price index 
constructed in two steps. First, a base period is selected and the 
proportion of total expenditures accounted for by designated spending 
categories is calculated. These proportions are called cost or 
expenditure weights. Second, a rate of price increase for each spending 
category is multiplied by the cost weight for the category. The sum of 
these products for all cost categories yields the percentage change in 
the market basket, an estimate of price changes for a fixed quantity of 
purchased goods and services.
    The market basket is described as a fixed-weight index because it 
answers the question of how much more or less it would cost, at a later 
time, to purchase the same mix of goods and services that was purchased 
in the base period. The effects on total expenditures resulting from 
changes in the quantity or mix of goods and services purchased 
subsequent to the base period are not considered. For example, shifts 
from an inpatient to an outpatient setting for the furnishing of a 
certain type of care might affect the volume of inpatient goods and 
services purchased by the hospital but would not be factored into the 
percentage change in the hospital market basket.
    We believe that it is desirable to rebase the market basket 
periodically, so the cost weights reflect changes in the mix of goods 
and services (hospital inputs) that hospitals purchase in furnishing 
inpatient care. We last rebased the hospital market basket cost weights 
effective for FY 1991. That market basket reflected base-year data from 
1987 in the construction of the cost weights. At that time, we also 
established a separate market basket for hospitals and hospital units 
excluded from the prospective payment system. Excluded hospitals and 
units tend to have different case mixes, practice patterns, and 
composition of inputs than hospitals subject to the prospective payment 
system.
    When prospective payment for capital-related costs was introduced 
effective October 1, 1991, a separate capital-related market basket was 
established. In its April 1, 1985 report to the Secretary, ProPAC 
suggested that the market basket should be rebased at least every 5 
years, or more frequently if significant changes in the weights occur. 
When reviewing whether to rebase the market basket, we consider the 
following factors:
     Evidence of cost structure changes indicating that the 
existing weights are no longer appropriate.
     Evidence that the continued use of existing price proxies 
should be reconsidered.
     The availability of new data sources to use in the 
rebasing.
    Our practice has been to update or rebase the market basket about 
every 5 years. Occasionally, we have adjusted this timing to coincide 
with the Department of Commerce, Bureau of Economic Analysis' schedule 
for updating the interindustry model of the United States (U.S.) 
economy, which is released every 5 to 7 years. The interindustry model 
includes detailed cost analyses of the entire U.S. economy including 
the hospital industry. In developing the current market basket, 
effective beginning October 1, 1990, we used 1987 hospital data from 
the American Hospital Association's (AHA's) 1988 Annual Survey for six 
major expense categories (wages and salaries, employee benefits, 
professional fees, depreciation, interest, and a residual ``all other'' 
category). We used AHA's Hospital Administrative Services (HAS) data 
from 1987 to derive the weights for professional liability insurance, 
food, and pharmaceutical products. Weights for most of the remaining 
subcategories were derived from Department of Commerce, Bureau of 
Economic Analysis data trended forward to 1987. For a detailed 
description of the rebased market basket effective October 1, 1990, see 
the September 1, 1990 final rule (55 FR 36043).
    Although it has been 5 years since the most recent rebasing of the 
market basket, we are announcing our intention to schedule market 
basket rebasing for FY 1997. We believe that a 1-year delay in the 
usual schedule is advantageous for the following reasons. First, it 
provides an opportunity to review and incorporate two important new 
data sources that are not available at this time. The first of these, 
the FY 1992 and 1993 Medicare cost report data, contain more detailed 
data on labor-related and capital-related costs. We are planning on 
replacing the AHA Annual Survey data with Medicare cost report data for 
the main operating and capital cost weights. In the next several 
months, we are planning to compare and analyze the impact of this 
change to ensure the validity and consistency of the rebased market 
baskets for operating and capital costs. We believe that using the 
Medicare data would be an improvement since these data are reported 
directly to HCFA by Medicare participating hospitals, are readily 
available to us in a timely manner, and would free us from relying on 
data that is collected by outside organizations.
    The second new data source we anticipate obtaining and analyzing is 
the 1992 Bureau of the Census' Assets and Expenditures Survey, which 
will be available later this year. The Census survey will provide much 
more detailed operating and capital cost data, and we anticipate that 
we will be able to use this survey to allocate the main cost category 
weights into more detailed subcategory weights for both operating and 
capital costs.
    In addition to using the market basket to update the payment rates, 
we also use the percentages of the labor-related items (that is, wages 
and salaries, employee benefits, professional fees, business services, 
computer and data processing, blood services, postage, and all other 
labor-intensive services) to determine the labor-related portion of the 
standardized amounts. The labor-related portion of the standardized 
amounts is that portion that is subject to adjustment by the hospital 
wage index. In order to estimate if postponement of the market basket 
rebasing would adversely affect hospital payments due to a potential 
change in the labor-related portion of the payment amounts, we 
conducted an analysis using the 1987 index rebasing methodology (with 
1992 equivalents of the data sources used in [[Page 29227]] 1987). This 
analysis indicates only a minor difference in the cost shares for 
compensation costs, which are the major portion of labor-related costs. 
Therefore, we believe that delaying the market basket rebasing until FY 
1997 will not disadvantage hospitals and will allow us to use more 
detailed and current data.
V. Changes and Clarifications to the Prospective Payment System for 
Capital-Related Costs

A. Update Framework for Prospective Payment System for Inpatient 
Hospital Capital-Related Costs and Possible Revisions to the Federal 
Rate (Sec. 412.308(c)(1)(ii))

1. Introduction
    For FY 1992 through FY 1995, Sec. 412.308(c)(1) provides that the 
update for the capital prospective payment rates (Federal rate and 
hospital-specific rate) will be based on a 2-year moving average of 
actual increases in Medicare inpatient capital costs per discharge. The 
regulations provide that, beginning in FY 1996, HCFA will determine the 
update in the capital prospective payment rates based on an analytical 
framework that will take into account (1) changes in the price of 
capital (which we will incorporate into a capital input price index), 
and (2) appropriate changes in capital requirements resulting from 
development of new technologies and other factors (such as existing 
hospital capacity and utilization). The objective of the capital update 
framework is to determine a rate of increase in aggregate capital 
prospective payments that, along with a rate of increase in DRG 
operating payments, ensures a flow of capital and operating services 
for efficient and effective care for Medicare patients.
    We have presented a series of preliminary models, using available 
data and concepts, of an update framework for the prospective payment 
system for hospital inpatient capital-related costs in our FY 1992, FY 
1993, FY 1994, and FY 1995 rulemaking documents. We received no public 
comments on our most recent version of the framework, which appeared in 
the September 1, 1994 final rule (59 FR 45517-45524). However, the 
Prospective Payment Assessment Commission (ProPAC) has presented its 
own update framework, along with a recommendation for the FY 1996 
update to the capital rates, in its March 1, 1995 report to Congress. 
Below we present our formal proposal for an update framework, based on 
our previously published versions and our continued analysis of the 
data and concepts incorporated into the framework. We also respond to 
the recommendations of ProPAC.
    The proposed update framework includes a capital input price index 
(CIPI) that parallels the operating input price index. The CIPI 
measures the pure price changes associated with changes in capital-
related costs (prices  x ``quantities''). The composition of capital-
related costs is maintained at base-year FY 1987 proportions in the 
CIPI. As such, the composition of capital reflects the underlying 
capital acquisition process. We employ FY 1987 as the base year for 
this preliminary CIPI for consistency with the operating input price 
index. We will periodically update both the operating and the capital 
input price indexes to reflect the changing composition of inputs for 
capital and operating costs.
    The proposed capital update framework, like the operating update 
framework, incorporates several policy adjustments in addition to the 
CIPI. We propose to adjust the CIPI rate of increase for case-mix 
index-related changes, for intensity, and for error in previous CIPI 
forecasts. We also discuss a possible adjustment for the efficient and 
cost-effective use of capital (such as movable equipment, buildings and 
fixed equipment) in the hospital industry.
    In this proposed framework, we have attempted to maximize 
consistency with the current operating framework, in order to 
facilitate the eventual development of a single prospective payment 
system update framework. We have also attempted to promote the goals 
that motivated the adoption of the capital prospective payment system, 
especially the goals of promoting more effective and efficient 
utilization of capital resources in the hospital industry and 
establishing incentives for hospitals to make cost-effective decisions 
regarding acquisition of new capital resources.
    We will consider comments and recommendations on any aspect of the 
proposed framework. We are interested in suggestions regarding the 
CIPI, the proposed policy adjustment factors, and alternative 
methodologies for deriving the factors. We are especially interested in 
comments on a possible efficiency adjustment. We welcome information 
concerning empirical studies and sources of data that could be useful 
in the framework. To assure consideration before publication of the 
final rule, comments should be sent by August 1, 1995, to the address 
listed at the beginning of this proposed rule.
2. ProPAC Recommendation for Updating the Capital Prospective Payment 
System Federal Rate
    In its March 1, 1995 report to Congress, ProPAC recommends the use 
of an update framework that includes a capital market basket component 
(Recommendation 2). The ProPAC market basket measures 1-year changes in 
the purchase prices of a fixed basket of capital goods purchased by 
hospitals. The ProPAC framework also includes several policy adjustment 
factors. A forecast error correction factor adjusts payment rates so 
that the effects of past errors are not perpetuated. A financing policy 
adjustment accounts for the effects of substantial deviations from 
long-term trends in interest rates on hospital capital costs. The 
ProPAC capital update framework also includes adjustments for 
scientific and technological advances, productivity, and case-mix 
change similar to those employed in the ProPAC operating update 
framework. ProPAC also recommends the adoption of a single update 
framework for adjusting PPS operating and capital rates when the 
transition to full Federal rate capital payments is complete 
(Recommendation 3).
    Our long-term goal is to develop a single prospective payment 
system update framework. Once we have completed work on an analytical 
framework for the capital prospective payment update in this year's 
final rule, we will begin to study development of a unified framework. 
In the meantime, we will continue to maintain as much consistency as 
possible with the current operating framework in order to facilitate 
the eventual development of a unified framework.
    The ProPAC and HCFA update frameworks share certain goals. The goal 
of each framework is to provide a rate of increase in capital 
prospective payments that, along with the rate of increase in operating 
prospective payments, will ensure a flow of capital and operating 
resources that will allow for efficient and effective care for Medicare 
patients. Both frameworks are designed to provide increases for the 
purchase of quality-enhancing new technologies. Both frameworks provide 
for case-mix adjustments to remove the effects of upcoding and to 
adjust for changes in within-DRG severity. Both frameworks also seek to 
encourage efficient capital spending behavior. Although the frameworks 
adopt different methodologies for promoting some of these goals, they 
are compatible to the degree that they share these 
goals. [[Page 29228]] 
    The major difference between the ProPAC and HCFA frameworks 
concerns the purpose and structure of the capital input price index, or 
market basket. ProPAC's framework is based on the premise that capital 
prospective payments are only for future capital purchases and should 
not reflect the vintage nature of capital. Thus, ProPAC's proposed 
capital market basket reflects the projected increase in the purchase 
price of capital goods from one year to the next. HCFA's framework is 
based on the premise that capital prospective payments are for 
hospitals' future capital-related expenses, which include the expenses 
related to future capital-related purchases. That is, HCFA's framework 
addresses the input price component of expenses associated with 
hospitals' given stock of capital in a particular fiscal year; ProPAC's 
framework ignores hospitals' present stock of capital and focuses on 
changes in input prices associated with capital purchases that 
hospitals will make in a particular fiscal year.
    The HCFA CIPI projects the price changes associated with the 
accounting or vintage costs of capital assets. The HCFA CIPI is based 
on a definition of capital-related expenses and associated capital-
related prices derived from accounting practice (including required 
HCFA PPS accounting practice) and consistent with economic theory. HCFA 
believes that the concept of capital-related prices incorporated into 
the HCFA CIPI is more appropriate than the concept incorporated into 
the ProPAC market basket because the consumption of capital is not just 
what is purchased in one year. The consumption of capital has a time-
dimension: Capital is not used up immediately but rather over time. 
This feature of capital is reflected in the accounting definition of 
capital cost, and it should be reflected as well in the concept of 
capital prices in the CIPI. The transition from reasonable cost 
reimbursement to payment under a prospective system does not cancel the 
applicability of general accounting practice or the HCFA accounting 
practice derived from it. Thus the concepts of capital-related expenses 
and capital-related prices continue to be appropriate. Furthermore, the 
base capital rates were computed on the basis of accounting costs. HCFA 
believes that it is more consistent to update those rates on the basis 
of the changes in prices associated with those costs rather than on the 
basis of changes in current year purchase prices alone.
    The HCFA CIPI captures the vintage feature of capital price by 
using a vintage average approach, that is, weighted averages of 
purchase prices and interest rates up to and including the current 
year. The use of vintage averages as the measure of price changes 
tracks the flow of consumption of capital. The vintage approach better 
reflects what hospital cash-flow needs are as new assets are brought 
on, since hospitals still bear the costs of older assets as the new 
assets are brought on.
    HCFA believes that the CIPI appropriately reflects the prices 
associated with past and current period purchases of capital. Under the 
HCFA approach, the price change associated with the capital costs for 
any year is a weighted average of the prices associated with 
depreciation, interest and other capital costs for that year. The 
prices associated with the depreciation costs during the year are an 
average of the pro-rated purchase prices for the assets in use during 
that year (25 years buildings and fixed equipment, 10 years movable 
equipment, including current year purchases). The prices associated 
with the interest costs during the year are an average of the interest 
rates on debt instruments in effect during that year (22 years, 
including debt instruments that are new in the current year). Capital-
related costs for insurance have an annual time dimension, and 
therefore the prices associated with those expenses are current year 
prices only.
    In addition to the disagreement with ProPAC over whether the CIPI 
should reflect the vintage nature of capital, HCFA and ProPAC also 
disagree over the treatment of interest. ProPAC proposes to account for 
interest rate changes through a separate financing policy adjustment 
which would account for significant changes in long term interest 
rates. This adjustment would increase the update in case of significant 
long-term interest rate increases, and decrease the update in cases of 
significant interest rate decreases. (ProPAC has not identified the 
threshold that constitutes ``significant'' interest rate changes.)
    HCFA believes that there must be an interest rate component in a 
capital input price index. Sound accounting practice includes interest, 
along with depreciation, as a component of capital cost. The interest 
and depreciation components of capital cost track the flow of 
consumption of capital inputs. Price is a component factor of cost 
(that is, cost is the product of price and quantity), and capital cost 
has both depreciation and interest components. There must therefore be 
an interest component of capital price just as there is an interest 
component of capital cost.
    Furthermore, ProPAC's treatment of interest assumes that only 
current year interest rate changes need to be measured to capture the 
relevant price effects of interest rate changes. HCFA believes that the 
price aspects of interest costs, like the price aspects of depreciation 
costs, have a time dimension that must be captured in the CIPI. Whether 
the current year interest rate reflects a net lower price of financing 
to the hospital depends not on comparison of the current year's 
interest rate to the previous year's interest rate, but on the effect 
of the current year interest rate on all the hospital's debt 
instruments. For example, assume that the previous year's interest rate 
was 8 percent, and the current year's interest rate is 5 percent. 
However, as the hospital enters new financing arrangements at the 
current rate of 5 percent, it retires debt instruments from 20 years 
earlier that bore an interest rate of 3 percent. The price effect of 
the current year's interest rate is thus higher, not lower, as new debt 
instruments at 5 percent replace old debt instruments at 3 percent. 
HCFA believes it to be a great advantage of its CIPI that it directly 
tracks price effects such as these.
    Finally, the pure price aspects of interest costs (that is, the 
interest rate and the purchase price that is represented in the amount 
of loan principal) are typically beyond the control of the hospital 
industry. To be sure, the actual decision to purchase capital assets or 
acquire debt is a ``quantity'' decision and typically is discretionary 
for a particular span of time. However, in measuring the actual 
expected price per unit of real capital, independently of any 
evaluation of the propriety of any actual purchase decisions, it is 
essential to recognize that the industry has some control over the 
amount of capital it purchases but little or no control over the price 
it pays for capital. Thus, the pure price aspect of interest cost 
changes must be incorporated into the CIPI. Otherwise, the CIPI will 
not accurately reflect the prices faced by hospitals who must borrow to 
finance necessary capital acquisitions. Limitations on the quantity of 
capital are appropriately implemented through policy adjustment 
factors. The ProPAC approach artificially eliminates pure price changes 
related to interest costs from the CIPI and incorporates them into a 
discretionary adjustment factor. The HCFA CIPI retains all price 
components of increases in interest costs as one measure of inflation 
in capital-related expenses. It thereby keeps price and quantity 
aspects distinct, allowing [[Page 29229]] separate analysis of each 
factor of increases in capital expenses.
    We provide further comments on particular ProPAC recommendations in 
section V.A.3 of this preamble.
3. Measurement of Capital Input Price Increases
    a. Introduction. HCFA discussed a capital input price index as one 
component in developing future update factors for the Federal rate in 
the September 1, 1992 Federal Register (57 FR 40016). We have presented 
revised versions of the capital input price index in the May 26, 1993 
(58 FR 30448), September 1, 1993 (58 FR 46490), May 27, 1994 (59 FR 
27876), and September 1, 1994 (59 FR 45517) issues of the Federal 
Register.
    In this proposed rule, we are formally presenting a capital input 
price index for public comments prior to adoption of a final rule. The 
proposed CIPI parallels the operating input price index. Both the CIPI 
and the operating input price index are designed to measure input price 
changes for hospitals' current year expenses, that is, to separate pure 
price changes from quantity and expenditure changes. The operating 
sector input price index measures input price changes for operating-
related expenses. The capital input price index measures input price 
changes for capital-related expenses, which include depreciation, 
interest, and other expenses (such as insurance related to capital 
goods.)
    b. Proposed HCFA Capital Input Price Index Methodology. The 
proposed CIPI is based on the following assumptions:
     The Federal rate is based on the concept of capital-
related expenses of capital assets used for patient care in the fiscal 
year and, therefore, any change in the Federal rate should take into 
account expected changes in the input price aspects of capital-related 
expenses;
     Capital-related expenses are defined as the sum of 
depreciation expense, capital-related interest costs, and other 
capital-related costs, including insurance and leases; and
     The input prices related to capital-related expenses are 
typically beyond the control of the hospital industry (that is, the 
hospital is a price-taker, not a price-setter).
    These assumptions lead directly to a definition of a CIPI that 
takes into account the price aspects of changes in depreciation 
expense, interest costs, and other capital-related costs. Thus, the 
proposed CIPI includes three categories of capital-related expenses: 
Depreciation, interest, and other capital-related costs (such as 
insurance). Further, the assumptions lead directly to input prices for 
depreciation and interest costs that, unlike operating costs, have a 
time dimension that must be captured in the CIPI.
    Current depreciation costs represent the summed depreciation 
charges for all purchases of capital assets that are still depreciable 
in the current period. The input prices associated with these 
depreciation expenses are the purchase prices attached to all past and 
current capital purchases for capital still depreciable in the current 
period. A weighted average of these purchase prices thus represents the 
input price associated with depreciation expenses in the current 
period. Thus, the depreciation input price for the current period 
measures price aspects of current depreciation expenses for capital 
just as the operating input price index for the current period measures 
price aspects of current operating expenses for labor and non-capital 
goods and services. The depreciation input price differs from the 
operating input price in that the depreciation input price is a 
vintage-weighted composite of all past capital purchase prices while 
the operating index input price measures purchase prices for current 
periods only.
    Current interest expenses represent the total interest costs for 
all still-active past debt instruments associated with past and current 
purchases of all capital assets. The input prices associated with these 
interest expenses are the interest rates associated with all past debt 
instruments that are still active in the current period. A weighted 
average of these interest rates thus represents the input price 
associated with interest expenses in the current period. Thus, the 
interest input price for the current period measures price aspects of 
current interest expenses just as the operating input price index for 
the current period measures price aspects of current operating expenses 
for labor and non-capital goods and services. The interest input price 
appropriately differs from the operating input price in that the 
interest input price is a vintage-weighted composite of all interest 
rates for debt instruments that are still active in the current period, 
while the operating index input price measures purchase prices for 
current periods only.
    Current year other capital-related expenses (for example, for 
insurance) have an annual time dimension and, therefore, prices 
associated with these expenses are, like operating input prices, 
current year prices only.
    A commenter on a previous version of the CIPI recommended that 
proportional annual vintage weights (implicit in moving averages) for 
capital price proxies be replaced by non-proportional annual vintage 
weights that reflect the relative vintage purchases of capital. The 
commenter pointed out that annual purchases of real capital tend to 
increase over time. As annual purchases of real capital increase, the 
later years in the moving average of depreciation and interest costs 
should be weighted more heavily than the earlier years. We agree with 
this comment. Accordingly, a special data base was prepared to provide 
appropriate historical vintage weights for depreciation and interest 
input prices.
    We have done preliminary research into the effects of changing the 
base year from FY 1987 to FY 1992 using capital-related data from the 
FY 1992 Medicare cost reports among other sources. The initial results 
have shown small differences between the FY 1987 and FY 1992 base year 
weights, resulting in a minimal effect on the CIPI. We will continue to 
analyze these data in preparation for a future change to a FY 1992 base 
year when more 1992 data become available.
    The FY 1987 composite data base starts with financial variables 
from the American Hospital Association (AHA) Panel Survey. The 
variables are enhanced with data from the Medicare cost reports and 
from the Department of Commerce Capital Expenditure Survey. The 
composite data base provides annual estimates of nominal purchases for 
building and fixed equipment and for movable equipment. Leasing amounts 
were distributed among building and fixed equipment and movable 
equipment nominal purchases by first computing the percentage of total 
owner-operated nominal purchases attributable to each type of 
equipment, and then applying these percentages to total leasing 
amounts. Nominal purchases were then converted to annual real (that is, 
constant dollar) purchases by dividing nominal expenditures by an 
appropriate purchase price proxy.
    Expected life for building and fixed equipment and for movable 
equipment were derived from Medicare cost reports by dividing the book 
value of assets by current year depreciation amounts. The relative 
distribution of real capital purchases within the respective life for 
building and fixed equipment (25 years) and for movable equipment (10 
years) were derived from the special data base. These relative 
distributions are shown in Table 1. Relative distributions for a number 
of different time periods were averaged to obtain the distributions in 
Table 1. These distributions were all very similar regardless of the 
periods [[Page 29230]] chosen and, therefore, we selected an average of 
the distributions in order to simplify the calculations.

                          Table 1.--Relative Weights for Capital-Related Price Proxies                          
----------------------------------------------------------------------------------------------------------------
    Building and fixed equipment                Movable equipment                         Interest              
----------------------------------------------------------------------------------------------------------------
      Expected life         25 years        Expected life         10 years        Expected life         22 years
----------------------------------------------------------------------------------------------------------------
1........................      0.015  1........................      0.064  1........................      0.007
2........................      0.019  2........................      0.072  2........................      0.009
3........................      0.022  3........................      0.077  3........................      0.010
4........................      0.024  4........................      0.085  4........................      0.011
5........................      0.023  5........................      0.095  5........................      0.013
6........................      0.022  6........................      0.101  6........................      0.015
7........................      0.020  7........................      0.109  7........................      0.017
8........................      0.021  8........................      0.122  8........................      0.020
9........................      0.025  9........................      0.132  9........................      0.023
10.......................      0.030  10.......................      0.142  10.......................      0.027
11.......................      0.033      Total................      1.000  11.......................      0.032
12.......................      0.034                                        12.......................      0.038
13.......................      0.034                                        13.......................      0.043
14.......................      0.035                                        14.......................      0.050
15.......................      0.038                                        15.......................      0.057
16.......................      0.043                                        16.......................      0.064
17.......................      0.049                                        17.......................      0.074
18.......................      0.053                                        18.......................      0.083
19.......................      0.056                                        19.......................      0.090
20.......................      0.057                                        20.......................      0.098
21.......................      0.060                                        21.......................      0.105
22.......................      0.066                                        22.......................      0.114
23.......................      0.071                                            Total................      1.000
24.......................      0.075                                                                            
25.......................      0.077                                                                            
    Total................      1.000                                                                            
----------------------------------------------------------------------------------------------------------------
Source: Health Care Financing Administration, Office of the Actuary (Medicare Cost Reports, AHA Panel Survey,   
  Securities Data Inc.)                                                                                         

    Table 2 shows the historical, annual percentage changes in the 
capital-related price proxies employed in the CIPI prior to vintage-
weighting. These proxies are: The institutional construction index 
maintained by Boeckh for the unit prices of fixed assets; the machinery 
and equipment component of the Producer Price Index (PPI-11) for 
movable equipment; the average yield on domestic municipal bonds from 
the Bond Buyer index of 20 bonds (Muni); the average yield on Moody's 
corporate bonds (AAA); a composite of Muni and AAA indexes (Combined 
Muni/AAA); and the residential rent component of the Consumer Price 
Index (CPI Rent) for other capital costs.
    We previously used the Engineering News-Record (ENR) building cost 
index as a price proxy for the unit price of fixed assets. However, we 
believe that the Boeckh institutional construction index is more 
applicable to the industry. The variation between the two indexes is 
minimal.
    We applied the relative vintage depreciation weights from Table 1 
to the appropriate non-vintage weighted historical, annual index levels 
(base year FY 1987) of depreciation price proxies to generate the 
current year, vintage-weighted component index levels for the CIPI 
depreciation sector. The annual percentage change between the non-
vintage weighted historical, annual depreciation index levels are 
listed in Table 2. The annual percentage change between the annual, 
vintage-weighted depreciation component index levels (base year FY 
1987) are listed in Table 3. For example, the FY 1996 movable equipment 
index component percentage change of 1.8 percent in Table 3 was 
computed as the percentage change between the FY 1995 and FY 1996 
vintage-weighted movable equipment component index levels. The 1996 
movable equipment component index (base year FY 1987) represents the 
weighted-average of the index levels in the movable equipment price 
proxy (PPI-11 in Table 2) for the previous 10 years (that is, FY 1987 
through 1996), weighted by the relative vintage weights listed for 
movable equipment in Table 1. These calculations are slightly different 
than prior versions of the CIPI in the Federal Register, and reflect a 
more refined weighting methodology.

Table 2.--Annual Percent Changes for Non-Vintage Weighted Capital Input Price Proxies, Fiscal Years 1949 to 2000
----------------------------------------------------------------------------------------------------------------
                                                                                             Combined           
                  Fiscal year                     BOECKH     PPI-11      Muni       AAA      muni/AAA   CPI rent
----------------------------------------------------------------------------------------------------------------
1949..........................................        3.3        7.4       -4.4       -3.1       -4.2        4.4
1950..........................................        1.4        0.5       -9.4       -4.2       -8.4        3.9
1951..........................................        8.6       13.6       -5.8        7.1       -3.4        3.7
1952..........................................        3.7        1.6       12.9        5.7       11.4        4.2
1953..........................................        3.5        0.8       25.9        7.3       22.2        4.7
1954..........................................        1.5        2.7       -8.2       -6.3       -7.9       4.8 
[[Page 29231]]
                                                                                                                
1955..........................................        1.8        1.9       -0.4        1.1       -0.1        1.4
1956..........................................        4.8        7.5        7.8        7.6        7.8        1.7
1957..........................................        3.6        8.0       24.0       18.0       23.0        1.9
1958..........................................        1.8        3.2       -3.7       -1.1       -3.3        1.9
1959..........................................        3.1        1.6       11.5       13.3       11.8        1.3
1960..........................................        2.7        1.5        1.7        4.9        2.3        1.6
1961..........................................        1.1       -0.3       -3.1       -3.2       -3.2        1.3
1962..........................................        2.2        0.0       -6.4        0.8       -5.1        1.3
1963..........................................        2.3        0.0       -3.4       -2.8       -3.3        1.0
1964..........................................        2.8        0.9        3.2        3.3        3.2        1.0
1965..........................................        3.1        0.6       -0.5        1.6       -0.1        1.0
1966..........................................        3.8        2.7       16.5       11.0       15.4        1.2
1967..........................................        5.3        3.8        2.4        8.3        3.5        1.7
1968..........................................        7.3        2.8       14.7       14.5       14.6        2.4
1969..........................................        8.4        3.3       21.5        9.8       19.2        2.8
1970..........................................        7.0        4.2       22.2       18.0       21.4        4.1
1971..........................................        8.7        4.2      -13.9       -4.9      -12.3        4.7
1972..........................................        8.0        2.2       -5.8       -3.8       -5.4        3.6
1973..........................................        6.0        2.6       -1.8        0.8       -1.3        4.0
1974..........................................        8.0        9.9       12.6       12.5       12.6        4.9
1975..........................................       11.1       19.5       19.2        7.9       16.9        5.2
1976..........................................        7.6        6.7       -1.2       -3.2       -1.5        5.3
1977..........................................        8.5        6.0      -15.8       -6.4      -14.1        5.8
1978..........................................        6.6        7.6        1.1        5.6        2.0        6.7
1979..........................................        7.5        8.7        7.3        8.9        7.6        7.1
1980..........................................        8.6       11.5       26.9       22.9       26.1        8.6
1981..........................................        9.8       10.6       32.9       20.7       30.5        8.8
1982..........................................        9.6        7.1       16.2        5.5       14.2        8.0
1983..........................................        7.0        3.2      -22.5      -17.7      -21.7        6.3
1984..........................................        5.2        2.3        4.8        6.9        5.1        5.0
1985..........................................        2.0        2.2       -5.3       -7.1       -5.6        5.9
1986..........................................        1.6        1.5      -18.1      -19.6      -18.4        6.2
1987..........................................        2.1        1.5       -5.5       -5.3       -5.5        4.5
1988..........................................        2.3        2.2        7.1        9.9        7.6        3.8
1989..........................................        3.6        3.5       -6.7       -4.8       -6.3        3.8
1990..........................................        2.5        3.1       -1.2       -2.0       -1.3        4.2
1991..........................................        2.7        2.2       -2.7       -2.6       -2.7        3.9
1992..........................................        3.1        0.5       -7.4       -8.2       -7.5        2.6
1993..........................................        2.4        0.4      -10.6       -8.9      -10.3        2.4
1994..........................................        2.8        0.8        0.0        0.2        0.0        2.3
1995..........................................        3.2        1.5       17.9       12.7       17.0        3.2
1996..........................................        3.0        3.2       -5.4       -3.0       -5.0        4.1
1997..........................................        3.1        2.6       -2.2       -1.8       -2.1        2.2
1998..........................................        3.4        2.5        2.5        1.6        2.3        3.1
1999..........................................        3.1        2.6        0.9        0.9        0.9        2.9
2000..........................................        3.1        2.6       -0.8        0.5       -0.5       2.9 
----------------------------------------------------------------------------------------------------------------
Proxy Name:                                                                                                     
BOECKH--Institutional construction.                                                                             
PPI-11-Machinery and equipment.                                                                                 
Muni--Average yield on domestic municipal bonds--bond buyer (20 bonds).                                         
AAA--Average yield on moody's AAA corporate bonds.                                                              
CPI RENT (all urban)--residential rent.                                                                         
Source: DRI/McGraw-Hill HCC, 1st Qtr 1995; @USSIM/Trend25YR95; @CISSIM/CONTROL951.                              
Released By: HCFA, OACT, Office of National Health Statistics.                                                  


       Table 3.--HCFA Capital Input Price Index Percent Changes, Total and Components, Fiscal Years     1979 to 
                                                      2000                                                      
----------------------------------------------------------------------------------------------------------------
                                                                     Depreciation                               
                                                          ---------------------------------                     
                  Fiscal year                     Total                Building              Interest    Other  
                                                             Total    and fixed   Movable                       
                                                                      equipment  equipment                      
----------------------------------------------------------------------------------------------------------------
Weights.......................................     1.0000     0.6510     0.3054     0.3456     0.3274     0.0216
    (FY1987)                                                                                                    
                                                                                                                
----------------------------------------------------------------------------------------------------------------
 [[Page 29232]]
                                                                                                                
                                                  Price Changes                                                 
                                                                                                                
----------------------------------------------------------------------------------------------------------------
1979..........................................        5.6        7.4        6.9        7.7        2.6        7.1
1980..........................................        7.1        7.9        7.2        8.6        5.6        8.6
1981..........................................        8.8        8.4        7.6        9.1        9.5        8.8
1982..........................................        9.3        8.5        7.9        9.0       10.7        8.0
1983..........................................        6.7        8.0        7.8        8.1        4.7        6.3
1984..........................................        6.3        7.2        7.5        7.0        4.8        5.0
1985..........................................        5.1        6.2        6.7        5.7        3.3        5.9
1986..........................................        3.7        5.5        6.1        5.0        0.3        6.2
1987..........................................        3.1        4.9        5.6        4.3       -0.5        4.5
1988..........................................        3.0        4.5        5.3        3.9        0.1        3.8
1989..........................................        2.7        4.3        5.1        3.6       -0.7        3.8
1990..........................................        2.4        4.0        4.8        3.2       -1.0        4.2
1991..........................................        2.1        3.6        4.5        2.7       -1.3        3.9
1992..........................................        1.7        3.2        4.3        2.1       -2.1        2.6
1993..........................................        1.3        2.9        4.1        1.8       -2.9        2.4
1994..........................................        1.3        2.8        4.0        1.6       -2.7        2.3
1995..........................................        1.8        2.7        3.9        1.6       -1.0        3.2
1996..........................................        1.8        2.8        3.8        1.8       -1.5        4.1
1997..........................................        1.8        2.9        3.7        2.0       -1.6        2.2
1998..........................................        1.9        2.9        3.6        2.0       -1.1        3.1
1999..........................................        2.0        2.8        3.5        2.0       -0.8        2.9
2000..........................................        2.0        2.8        3.5        2.1       -0.7       2.9 
----------------------------------------------------------------------------------------------------------------
Source: DRI/McGraw-Hill HCC, 1st Qtr 1995; @USSIM/Trend25YR95; @CISSIM/CONTROL951.                              
Released By: HCFA, OACT, Office of National Health Statistics.                                                  

  As we have discussed in connection with previous versions of the 
CIPI, stability is an important criterion for evaluating such an index. 
Stability is an inherent characteristic of capital because of its 
vintage nature; since capital assets are consumed over time, they are 
replaced at a relatively slow rate. An input price index for capital 
should reflect the relative stability of capital assets themselves. 
Furthermore, excessive volatility in a price index deprives the index 
of predictability, thus inhibiting the ability of institutions to plan 
for changes in capital payments resulting from changes in the CIPI. We 
graphically demonstrated (using the projections available at that time) 
the stability of the annual HCFA vintage-weighted CIPI compared to 
annual changes in non-vintage weighted capital purchase prices in 
Figures 1 and 2 in our discussion of May 27, 1994 (59 FR 27882).
    ProPAC recommends a capital input price index based on annual 
changes in current capital purchase prices excluding consideration of 
weighted historical capital purchase prices (that is, not vintage 
weighted). We previously argued that the ProPAC index was not 
consistent with the operating input price index that is currently used 
to assist updating DRG payment rates. We would add that the greater 
volatility in annual purchase prices would introduce an unacceptable 
degree of volatility in prospective capital payments and does not 
reflect the inherent stability that comes from the vintage nature of 
capital.
    Another commenter on a previous version of the CIPI recommended 
that data from Securities Data Corporation be incorporated into the 
CIPI interest computations. This source provides information on 
hospital issuances of municipal and commercial bonds. From this data 
base, we incorporated information showing that the average expected 
life of hospital bond debt instruments (that is, the time interval 
between the issue date and the maturation date) was about 13 years for 
municipal serial bonds and about 25 years for municipal term bonds. The 
weighted average life for the 2 types of bonds was 22 years.
    The relative nominal capital purchases within various 22-year 
periods provided appropriate vintage weights for annual changes in 
interest rates. Not all capital purchases are funded by debt. Medicare 
cost reports suggest that about 80 percent of new capital acquisitions 
are financed by debt and about 20 percent by equity financing. However, 
if the proportion of total purchases financed by debt does not change 
substantially from year to year, then it is irrelevant whether we use 
the full amount or a constant proportion of the full amount of nominal 
capital acquisitions as weights for relative amounts of the debt 
instruments still active in the current period.
    A third commenter on a previous version of the CIPI recommended 
that we investigate the effects on interest rate changes of changing 
structures of hospital bond ratings. If bond ratings are deteriorating, 
hospitals incur higher interest rate charges; if bond ratings improve, 
hospitals incur lower interest rates. Our CIPI currently recognizes 
only changes in pure interest rates and does not recognize changes in 
effective interest rates due to changes in bond ratings.
    We examined a hospital-municipal-bond data base from Securities 
Data Corporation, to examine that issue. The data showed that serial 
bonds continue to dominate short-term financing and that term bonds 
dominate long-term financing. We classified all bond amounts by ratings 
found in the data base for years 1980 to 1993. The 
[[Page 29233]] distribution of those issues described with a Moody's 
Quality Rating, shown in Table 4 (portions are applied to dollar amount 
of debt issued), indicates a trend toward higher quality issues since 
1984. Although the annual, aggregate issue amounts in Moody's quality 
range Aaa through A have remained approximately constant since 1980, 
issue amounts in the highest quality band have become substantially 
higher since inception of the prospective payment system. Both issue 
amounts in the Aaa-Aa3 ranges and those in the Aaa-A range are greater 
in 1993 than at any time since 1980. We conclude there is no evidence 
to justify a component for deteriorating bond ratings in the CIPI.

  Table 4.--Percent Distribution of Hospital Municipal Bond Amounts by  
                         Moody's Quality Rating*                        
------------------------------------------------------------------------
                          Pre-PPS                  Post-PPS             
                     ---------------------------------------------------
                         1980-1983       1984-1988                      
                         (percent)       (percent)    1989-1993(percent)
------------------------------------------------------------------------
Aaa-Aa3.............             7.1            36.8              49.0  
Aa-A................            50.6            24.1              21.7  
Baa1-Ba.............             9.6             3.6               8.0  
Not Rated...........            31.0            32.7             17.9   
------------------------------------------------------------------------
*Distributions do not sum to 100 percent due to a residual category of  
  missing data.                                                         
Notes:                                                                  
\1\Aggregate issues from Aaa-A have remained fairly constant since 1980.
\2\Issue amounts in the highest quality band have become substantially  
  higher since inception of PPS.                                        
\3\Both issue amounts in the Aaa-Aa3 ranges and those in the Aa-A ranges
  are greater in 1993 than at any time since 1980.                      

    Relative vintage interest weights derived from our procedure are 
shown in Table 1. When combined with index levels (base year FY 1987) 
of annual, non-vintage weighted interest rate proxies, the relative 
interest weights provide current year, vintage-weighted component index 
levels for interest rates in the CIPI. The annual percentage change 
between the non-vintage weighted historical, annual interest index 
levels are listed in Table 2. The annual percentage change between the 
annual, vintage-weighted interest component index levels (base year FY 
1987) are listed in Table 3. Thus, for example, the interest rate 
component change of -1.5 percent in Table 3 for FY 1996 represents the 
annual percentage change between the 1995 and 1996 vintage-weighted 
interest component index levels. The 1996 interest component index 
level (base year FY 1987) is computed as the vintage-weighted average 
of the previous 22 years in the interest rate proxy index level 
(Combined Muni/AAA) in Table 2, weighted by the interest weights listed 
in Table 1. We use an index level for a combined municipal and AAA 
commercial bond interest rate (percent changes shown in Table 2 as 
Combined Muni/AAA), giving the municipal rate an 85 percent weight and 
the AAA rate a 15 percent weight, reflecting the relative hospital 
debts of the government/non-profit hospital sector and the for-profit 
sector.
    Although Medicare cost reports show that only 60 percent of current 
hospital debt is in the form of notes or bonds (about 40 percent is in 
the form of mortgages), we assumed that the relative annual weights for 
all debt and the relative annual changes in interest rates for all debt 
were the same as bond-related weights and price changes. We are still 
searching for an appropriate source of information on hospital 
commercial mortgage data. We do not expect that the discovery of such 
data will materially alter our current conclusions about trends in 
effective interest rates over time.
    c. Projection of the CIPI for Fiscal Year 1996. DRI projects a 1.8 
percent increase in the CIPI for FY 1996 (Table 3). This is the outcome 
of a 2.8 percent increase in projected weighted depreciation prices in 
FY 1996, partially offset by a 1.5 percent decline in vintage-weighted 
interest rates in FY 1996.
    d. ProPAC Input Price Index. i. Introduction. Three major 
differences distinguish ProPAC's CIPI from HCFA's CIPI:
     The ProPAC CIPI measures changes in capital asset purchase 
prices in the year the asset is purchased (that is, not vintage 
weighted). HCFA's CIPI is designed to measure changes in a vintage-
weighted composite of capital asset purchase prices.
     The ProPAC CIPI uses the Marshall and Swift hospital 
equipment index as the movable equipment purchase price proxy while 
HCFA uses the Producer Price Index for machinery and equipment.
     The ProPAC CIPI has no interest component. ProPAC treats 
interest rate changes as an optional separate update policy adjustment 
factor.
    Through 1996, for example, ProPAC expects that long term interest 
rates will remain relatively stable and, therefore, believes that it is 
not appropriate to adjust capital input prices for forecasted changes 
in interest rates in the target year.
    HCFA incorporates a vintage-weighted composite of interest rates in 
its CIPI for the target year.
    ii. Depreciation. ProPAC states that its CIPI is analogous to the 
prospective payment operating price index. We disagree. The components 
of the operating index represent price changes in ongoing hospital 
expenses for labor and non-capital goods and services. The analogous 
capital expenses in this context are current depreciation costs, 
interest costs, and other capital-related expenses (such as insurance). 
Current depreciation and interest costs, according to HCFA, IRS, and 
accounting principles, are a cumulative composite of segments of 
expenses incurred in current and prior periods. Current interest costs 
are a cumulative composite of segments of past and current year debt 
costs. Since both depreciation and interest costs have a vintage 
component, the price aspect of these costs must have a vintage 
component as well. The HCFA CIPI attempts to capture these vintage 
components.
    Differences between HCFA and ProPAC with respect to choices for 
annual non-vintage weighted rates of change in alternative price 
proxies for movable equipment are small for much of the historical 
period. (We illustrated this fact in Figure 8 (Inset) in the May 27, 
1994 proposed rule (59 FR 27890), using earlier projections.) As noted 
in our September 1, 1992 final rule, one basic criterion for accepting 
price proxies is public availability of documentation on data sources 
and methodology (57 FR 40018-40019). [[Page 29234]] Despite repeated 
efforts, neither we nor Data Resources Inc. have been able to obtain 
documentation on the movable price proxy recommended by ProPAC 
(Marshall and Swift hospital equipment index) that explains how it is 
derived and what sampling frame and sampling error attach to the 
estimates. In the absence of such information we cannot adopt the 
ProPAC alternative.
    HCFA's assumption is that prices for movable equipment purchased by 
hospitals change at about the same rate as general prices for all 
machinery and equipment. This assumption is justified in part by the 
fact that not all movable equipment purchased by hospitals is medical 
equipment; it stands to reason that the prices for non-medical movable 
equipment purchased by hospitals, such as automobiles, desks, chairs, 
etc., would change at about the same rate as prices for all machinery 
and equipment. To examine this assumption further, we measured the rate 
of change in the HCFA movable price proxy relative to prices for 
medical equipment only by preparing a composite index of medical prices 
from the Bureau of Labor Statistics Producer Price Index (PPI) for two 
commodity categories--medical instruments/equipment and X-ray/electro-
medical equipment. The two PPI commodity indexes were then merged using 
their respective PPI weights. Price changes for this index are not 
available for years prior to 1984. Annual price changes for medical 
equipment follow the annual HCFA price proxy more closely than the 
ProPAC price proxy for most of the historical period. We will continue 
to monitor trends in these indexes to ensure that appropriate price 
proxies are incorporated in the CIPI.
    iii. Interest. ProPAC has proposed to project annual interest rates 
to future periods and then to decide whether to allow an add-on to the 
Federal capital rate depending on the magnitude of the projection. 
ProPAC has presented no objective criteria for determining when an 
interest adjustment is appropriate. We previously noted that a single-
year projection for interest rates is conceptually inappropriate since 
interest costs must be vintage-weighted. In addition to this conceptual 
problem, the ProPAC approach is impractical because future annual 
interest rates are volatile, vulnerable to unpredictable market forces, 
and subject to exogenous influences (such as Federal Reserve Board 
decisions) that are difficult to anticipate. Thus, any projection of 
future annual interest rates is likely to be inaccurate, resulting in 
underpayment or overpayment of the Federal capital rate relative to the 
capital-related expenses that the rate is supposed to compensate. The 
resulting uncertainty in payments under future Federal capital rates 
further complicates future capital expenditure decisions by hospitals. 
On the other hand, the projected HCFA CIPI interest component for the 
target year is the weighted average change over 22 years of interest 
rate history, of which 20 years experience in the non-vintage weighted 
price proxy is appropriately historical. The projected annual, non-
vintage weighted experience in the price proxy for the most recent 2 
years may be as inaccurate as any ProPAC projection, but any error will 
have minimal effects on Federal rates due to the appropriately weighted 
effect of the historical data in the HCFA CIPI. This stability in the 
interest rate component of the HCFA CIPI provides hospital planners 
with a degree of certainty about future Federal rate payments, other 
things remaining equal.
    iv. The Composite HCFA CIPI. Annual percentage changes in the 
historical and projected HCFA and ProPAC CIPI's differ markedly as 
shown in Table 5. The 3.1 percent increase for the ProPAC capital 
market basket in Table 5 for FY 1996 is lower than the 4.1 percent 
increase presented in ProPAC's March 1995 Report and Recommendation to 
the Congress. In the ProPAC March report, ProPAC used the 4th quarter 
1994 DRI forecasts, while the figure in this proposed rule represents 
1st quarter 1995 DRI forecasts. Between 4th quarter 1994 and 1st 
quarter 1995, DRI revised its forecast by 1.0 percent to reflect slower 
price growth in 1996 than originally expected. A lower forecast for the 
movable equipment price proxy (Marshall and Swift) was responsible for 
two-thirds of the 1.0 percent decline between forecasts. The remaining 
one-third of the decline was the result of lower forecasts in the fixed 
equipment price proxy (Boeckh) and the other capital-related expenses 
price proxy (CPI-residential rent), with each being equally 
responsible. We emphasize that the later forecast was not available 
when ProPAC released its March report.
    The ProPAC CIPI is much more volatile than the HCFA CIPI in the 
historical period through 1994 because it does not reflect vintage-
weighted capital input price factors for depreciation. Further, the 
ProPAC CIPI omits conceptually relevant interest rates. The cumulative 
effect of declining interest rates for all debt instruments in recent 
years has driven the rate of change in the HCFA vintage-weighted 
interest rate component downward, a trend projected by DRI into future 
rate years. The declining interest rate component appropriately brings 
the HCFA CIPI below the ProPAC CIPI in the projection period. Other 
things being equal, the ProPAC index would result in overpayment 
through the Federal rate because anticipated actual capital-related 
expenses will be less than ProPAC projects due to the effects of lower 
interest rates on capital-related expenses.

 Table 5.--Annual Percent Changes in HCFA Capital Input Price Index and 
             the ProPAC Capital Market Basket, 1979 to 2000             
------------------------------------------------------------------------
                                                       HCFA             
                                                     capital     ProPAC 
                    Fiscal year                       input     capital 
                                                      price      market 
                                                      index      basket 
------------------------------------------------------------------------
1979..............................................        5.6        8.3
1980..............................................        7.1        9.2
1981..............................................        8.8       10.0
1982..............................................        9.3        7.7
1983..............................................        6.7        4.6
1984..............................................        6.3        3.9
1985..............................................        5.1        2.2
1986..............................................        3.7        1.7
1987..............................................        3.1        2.1
1988..............................................        3.0        3.5
1989..............................................        2.7        4.6
1990..............................................        2.4        2.3
1991..............................................        2.1        3.0
1992..............................................        1.7        2.2
1993..............................................        1.3        2.1
1994..............................................        1.3        2.8
1995..............................................        1.8        3.5
1996..............................................        1.8        3.1
1997..............................................        1.8        3.3
1998..............................................        1.9        3.3
1999..............................................        2.0        3.2
2000..............................................        2.0       3.3 
------------------------------------------------------------------------
Source: DRI/McGraw-Hill HCC, 1st Qtr 1995; @USSIM/Trend25YR95; @CISSIM/ 
  CONTROL951.                                                           
Released by: HCFA, OACT, Office of National Health Statistics.          

    ProPAC believes that Medicare program payments should reflect both 
savings from low interest rate levels on new debt instruments and the 
additional costs of high interest rate levels. As explained above, the 
Commission has proposed accomplishing this through an interest policy 
adjustment. However, ProPac has neither presented a threshold level for 
making an interest adjustment nor established a process for determining 
the amount of the adjustment. The HCFA CIPI, on the other hand, 
automatically registers the price effects of interest rate changes on 
new debt instruments that carry over into future periods, although 
those effects are appropriately registered only very gradually. 
[[Page 29235]] 
    When interest rate levels decline, hospitals may refinance their 
existing debt. Refinancing has a price effect as new debt instruments 
with lower prices (interest rate levels) replace older debt instruments 
with higher prices (interest rate levels). ProPAC believes its interest 
policy adjustment can and should capture this behavior. In this way, 
Medicare can share in the savings from refinancing. The HCFA CIPI does 
not now automatically register the price effects of refinancing. 
Whether to do so or not is a policy judgment concerning whether HCFA 
should share in refinancing savings or allow hospitals to realize the 
full effects of refinancing. A refinancing adjustment would not only 
reflect actual hospital behavior, but would also add to the existing 
incentives of a rate-based system for hospitals to replace high 
interest debt instruments with lower interest debt instruments. 
However, the absence of a refinancing adjustment could allow individual 
hospitals to refinance and keep the savings, just as individual 
hospitals who become relatively more efficient in furnishing care for 
specific DRGs are rewarded for the more efficient behavior.
    We invite comment on whether to incorporate a refinancing 
adjustment within the HCFA framework. A refinancing adjustment would 
present specific problems because HCFA has not been able to obtain data 
to accurately determine refinancing amounts. Whether HCFA can 
ultimately propose a refinancing adjustment depends upon whether the 
necessary data can be obtained.
    Since refinancing is a price matter, the adjustment would 
appropriately be on the price side of the framework, rather than on the 
policy adjustment side, which deals with quantities. However, the 
adjustment would not be included directly within the CIPI because the 
price effect of refinancing involves a shift in the vintage weights 
applied to index levels. That is, interest expense associated with 
prices (interest rate levels) in the year the debt is originated would 
be shifted to reflect interest expense associated with prices in the 
year the debt is refinanced. This essentially would reduce the relative 
vintage weights for interest in the CIPI (Table 1) in some years and 
increase the relative vintage weights for interest in other years. Yet 
by definition, the fixed-weight CIPI holds all weights constant. 
However, a discretionary adjustment could be made on the relative 
vintage weights. This is analogous to the separate adjustments for real 
case-mix changes in the update framework.
    At this time we are continuing to analyze the merits and technical 
difficulties of including a refinancing adjustment in the HCFA update 
framework. We encourage comments and suggestions on a refinancing 
adjustment, as well as any studies or data sources that would be useful 
in assessing and implementing this potential adjustment.
4. Case-Mix Adjustment and Adjustment for Forecast Error
    The case-mix index (CMI) is the measure of the average DRG weight 
for cases paid under the prospective payment system. Because the DRG 
weight determines the prospective payment for each case, any percentage 
increase in the CMI corresponds to an equal percentage increase in 
hospital payments.
    The CMI can change for any of several reasons: Because the average 
resource use of Medicare patients changes (``real'' case-mix change); 
because changes in hospital coding of patient records result in higher 
weight DRG assignments (``coding effects''); and because the annual DRG 
reclassification and recalibration changes may not be budget neutral 
(``reclassification effect''). We define real case-mix change as actual 
changes in the mix (and resource requirements) of Medicare patients as 
opposed to changes in coding behavior that result in assignment of 
cases to higher-weighted DRGs but do not reflect higher resource 
requirements. In the update framework for the prospective payment 
system for operating costs, we adjust the update upwards to allow for 
real case-mix change, but remove the effects of coding changes on the 
CMI. We also remove the effect on total payments of prior changes to 
the DRG classifications and relative weights, in order to retain budget 
neutrality for all CMI-related changes other than patient severity. 
(For example, we adjusted for the effects of the FY 1992 DRG 
reclassification and recalibration as part of our FY 1994 update 
recommendation.) The operating adjustment consists of a reduction for 
total observed case-mix change, an increase for the portion of case-mix 
change that we determine is due to real case-mix change rather than 
coding modifications, and an adjustment for the effect of prior DRG 
reclassification and recalibration changes. We propose to adopt this 
CMI adjustment as well in the capital update framework.
    For FY 1996, we are projecting a 0.8 percent increase in the case-
mix index. We estimate that real case mix increase will equal projected 
case-mix increase in FY 1996. We do not anticipate any changes in 
coding behavior in our projected case-mix change. The proposed net 
adjustment for case-mix change in FY 1996 is therefore 0.0 percentage 
points.
    The -1.0 percent figure used in the ProPAC framework represents 
ProPAC's projection for observed case-mix change. ProPAC projects a 0.8 
percent increase in real case-mix change across DRG's and a 0.2 percent 
increase in within-DRG complexity. ProPAC's net adjustment for case mix 
is therefore zero.
    We estimate that DRG reclassification and recalibration resulted in 
a 0.3 percent increase in the case mix when compared with the case-mix 
index that would have resulted if we had not made the reclassification 
and recalibration changes to the DRGs. ProPAC does not make an 
adjustment for DRG reclassification and recalibration in its update 
recommendation.
    The current operating update framework contains an adjustment for 
forecast error. The input price index forecast is based on historical 
trends and relationships ascertainable at the time the update factor is 
established for the following year. In any given year there can be 
unanticipated price fluctuations that can result in differences between 
the actual increase in prices faced by hospitals and the forecast used 
in calculating the update factors. We continue to believe that the 
capital update framework should include a forecast error adjustment 
factor. In setting a prospective payment rate under the proposed 
framework, we would make an adjustment for forecast error only if our 
estimate of the capital input price index rate of increase for any year 
is off by 0.25 percentage points or more. There is a 2-year lag between 
the forecast and the measurement of the forecast error. Thus, for 
example, we would adjust for a forecast error made in FY 1996 through 
an adjustment to the FY 1998 update.
    5. Policy Adjustment Factors
    The capital input price index measures the pure price changes 
associated with changes in capital-related costs (prices  x  
``quantities''). The composition of capital-related costs is maintained 
at base-year 1987 proportions in the capital input price index. We 
would address appropriate changes in the amount and composition of 
capital stock through the policy adjustment factors.
    The current update framework for the prospective payment system for 
operating costs includes factors designed to adjust the input price 
index rate of increase for policy considerations. Under the revised 
[[Page 29236]] operating framework, we adjust for service productivity 
(the efficiency with which providers produce individual services such 
as laboratory tests and diagnostic procedures) and intensity (the 
amount of services used to produce a discharge). The service 
productivity factor for the operating update framework reflects a 
forward-looking adjustment for the changes that hospitals can be 
expected to make in service-level productivity during the year. A 
hospital retains any productivity increases above the average.
    The intensity factor for the operating update framework reflects 
how hospital services are utilized to produce the final product, that 
is, the discharge. This component accounts for changes in the use of 
quality-enhancing services, changes in within-DRG severity, and 
expected modification of practice patterns to remove cost-ineffective 
services. We are proposing that the intensity adjustment factor in the 
operating framework be adopted in the capital update framework. Under 
the operating update framework, we calculate case-mix constant 
intensity as the change in total charges per admission, adjusted for 
price level changes (the CPI hospital component) and changes in real 
case mix. The use of total charges in the calculation of the proposed 
intensity factor makes it a total intensity factor, that is, charges 
for capital services are already built into the calculation of the 
factor. We can therefore incorporate the proposed intensity adjustment 
from the operating update framework into the capital update framework. 
In the absence of reliable estimates of the proportions of the overall 
annual intensity increases that are due, respectively, to ineffective 
practice patterns and to the combination of quality-enhancing new 
technologies and within-DRG complexity, we would assume, as in the 
revised operating update framework, that one-half of the annual 
increase is due to each of these factors. The capital update framework 
would thus provide an add-on to the input price index rate of increase 
of one-half of the estimated annual increase in intensity to allow for 
within-DRG severity increases and the adoption of quality-enhancing 
technology.
    For FY 1996, we have developed a Medicare-specific intensity 
measure based on a five-year average using FYs 1990-1994. In 
determining case-mix constant intensity, we found that observed case-
mix increase was 2.2 percent in FY 1990, 2.8 percent in FY 1991, 1.8 
percent in FY 1992, 0.9 percent in FY 1993, and 0.8 percent in FY 1994. 
For FY 1990 through FY 1992, we estimate that 1.0 to 1.4 percent of the 
case-mix increase was real. (This estimate is supported by past studies 
of case-mix change by the RAND Corporation. The most recent study was 
``Has DRG Creep Crept Up? Decomposing the Case-Mix Index Change Between 
1987 and 1988'' by G.M. Carter, J.P. Newhouse, and D.A. Relles, R-4098-
HCFA/ProPAC (1991). The study suggested that real case-mix change was 
not dependent on total change, but was rather a fairly steady 1.0 to 
1.5 percent per year. We use 1.4 percent as the upper bound because the 
RAND study did not take into account that hospitals may have induced 
doctors to document medical records more completely in order to improve 
payment.) We assumed that all of the observed case-mix increase of 0.9 
percent for FY 1993 and 0.8 percent for FY 1994 was real. (This 
assumption is consistent with the FY 1996 CMI projections described 
above.) If we assume that real case-mix increase was 1.0 percent per 
year during FY 1990 through FY 1992 (but 0.9 percent in FY 1993 and 0.8 
percent in FY 1994), case-mix constant intensity declined by an average 
1.2 percent during FY 1990 through FY 1994, for a cumulative decrease 
of 6.1 percent. If we assume that real case-mix increase was 1.4 
percent per year during FY 1990 through FY 1992 (but 0.9 percent in FY 
1993 and 0.8 percent in FY 1994), case-mix constant intensity declined 
by an average 1.5 percent during FY 1990 through FY 1994, for a 
cumulative decrease of 7.2 percent. Since we estimate that intensity 
has declined during the FY 1990-1994 period, we are recommending a 0.0 
percent intensity adjustment for FY 1996.
    In our previous discussions of a possible efficiency adjustment, we 
suggested that such an adjustment should take into account two 
considerations. One is that capital inputs, unlike operating inputs, 
are generally fixed in the short run. The productivity target in the 
revised operating framework operates on a short-term, year-to-year 
basis. Targets for capital efficiency and cost effectiveness, however, 
must operate on a longer term basis. The other consideration is that, 
prior to the adoption of the capital prospective payment system, 
Medicare payment policy for capital-related costs, as well as the 
policies of other payers, did not provide sufficient incentives for 
efficient and cost-effective capital spending. As a result, capital 
costs per case, and therefore base year prospective capital rates, may 
be higher than would have been consistent with capital acquisition 
policy in more efficiency-oriented markets. A guiding principle in 
devising an efficiency adjustment is therefore that Medicare capital 
prospective payment rates should not provide for maintenance of capital 
in excess of the level that would be produced in an efficiency-oriented 
competitive market.
    To examine this issue, we analyzed the change in actual Medicare 
capital cost per case for FY 1986 through FY 1992 in relation to the 
change in the capital input price index (which accounts for change in 
the input prices for capital-related costs), and the other adjustment 
factors that we were then proposing to include in the framework. (The 
other adjustment factors are the increase in real case mix and the 
increase in intensity due to quality-enhancing technological change and 
within-DRG complexity.) We found rates of increase in actual spending 
per case that exceeded the rate of increase attributable to inflation 
in capital input prices, quality-enhancing intensity increases, and 
real case-mix growth.
    Economic theory suggests that an industry with a guaranteed return 
on capital (such as the hospital industry prior to prospective payment 
for capital-related costs) would have a tendency to be overly 
capitalized relative to more competitive industries. This is because 
the incentive for firms in such an industry is to compete on the basis 
of more capital-intensive production processes than firms in other 
industries. As a result, capital costs per case, and therefore base 
year prospective capital rates, may be higher than would have been 
consistent with capital acquisition policy in more efficiency-oriented 
competitive markets.
    Our analysis was designed to examine whether hospitals had in fact 
responded to the incentives of the cost-based payment system for 
capital by expanding beyond what was necessary for efficient and cost-
effective delivery of services. The analysis confirmed that volume and 
intensity of capital acquisition far outpaced the increase in capital 
input prices during the years between the implementation of the 
prospective payment system for operating costs and the introduction of 
the capital prospective payment system. Even accounting for real CMI 
increases and increases in intensity attributable to cost-increasing 
but quality-enhancing new technologies, there remains a large excess of 
capital-related spending.
    The following table shows the results of our most recent analysis, 
based on the most current data available and the most recent 
projections. Differences between this table and the tables in previous 
[[Page 29237]] discussions in the Federal Register reflect updated 
figures for average capital cost per case increases, based on the most 
recent data and projections, and our revised CIPI. This analysis 
encompasses all but 1 year of the period from the implementation of the 
prospective payment system for operating costs to the implementation of 
the prospective payment system for capital costs. (For FY 1984, 
sufficient data is not available to compute capital cost per case 
increases and intensity increases.) The results of the analysis in 
Table 6 are substantially similar to the results of previous analyses. 
In Table 6, real case-mix increase is assumed to be 1.0 percent 
annually.

     Table 6.--Cumulative Percentage Change in Capital-Related Cost Per Case Due to Inflation, Real CMI, and    
                                              Intensity, 1985-1992                                              
----------------------------------------------------------------------------------------------------------------
                                                                                          % Change              
               Year                  CIPI\1\    Real CMI\2\    Allowable    Resulting      cost/     Residual\6\
                                                             intensity\3\  increase\4\    case\5\               
----------------------------------------------------------------------------------------------------------------
1985.............................          5.1          1.0           3.7         10.1         12.5          2.2
1986.............................          3.7          1.0           2.1          6.9         19.9         12.2
1987.............................          3.1          1.0           2.5          6.7         14.9          7.6
1988.............................          3.0          1.0           1.5          5.5          7.1          1.5
1989.............................          2.7          1.0           0.5          4.3          7.9          3.5
1990.............................          2.4          1.0           0.2          3.6          6.7          2.9
1991.............................          2.1          1.0           0.1          3.2          5.7          2.4
1992.............................          1.7          1.0           0.1          2.8          4.1          1.2
Cumulative (compounded)..........  ...........  ...........  ............         52.0        110.1         38.3
----------------------------------------------------------------------------------------------------------------
\1\Figures from Table 1, section V.A.3 of this preamble.                                                        
\2\Assuming that real CMI increase is 1.0 percent annually.                                                     
\3\One half of observed intensity increase, as determined by the joint operating/capital intensity measure.     
\4\The increase attributable to inflation, real CMI, and allowable intensity, calculated as the product of the  
  rates of increase of those factors (that is, 1.031 x 1.01 x 1.025=1.067 for 1987).                            
\5\Figures supplied by HCFA's Office of the Actuary.                                                            
\6\The actual increase in average cost per case divided by the increase attributable to inflation, real CMI, and
  allowable intensity (that is, 1.149/1.067=1.076, a 7.6 percent residual for 1987).                            

    We believe that an adjustment for capital efficiency and cost-
effectiveness should take into account the efficiency and effectiveness 
of the capital resources present in the base year for the capital 
prospective payment system. We do not believe that Medicare capital 
payment rates should provide for maintenance of capital in excess of 
the level that would be produced in an efficiency-oriented competitive 
market. A capital efficiency adjustment should be designed to give 
hospitals an incentive to reduce inefficiency and ineffectiveness in 
capital resources. The analysis in Table 6 suggests that, in order to 
restore the Federal rate to the level at which it would have been if 
capital costs had not been excessive in the years before the 
implementation of capital prospective payment, a cumulative reduction 
in the rate of 27.7 percent (1.52/2.101=0.7235, or -27.7 percent) would 
be necessary.
    We are considering a range of options for such an efficiency 
adjustment. In particular, we are considering whether to provide, in 
the design of such an adjustment, for eventually reducing the rate by 
the entire 27.7 percent suggested by the above analysis. Alternatively, 
the eventual reduction to the rate could reflect some part, but not 
all, of the excess of actual capital cost increases over the identified 
factors. We are also considering the appropriate rate at which an 
adjustment based on the above analysis should be applied to the update 
factors. On the assumption that the updates to the rate should be 
reduced by the full 27.7 percent, such an adjustment could be 
accomplished over a shorter or longer period of time. For example, HCFA 
could adjust the updates to the rate over a period of 20 years at the 
rate of 1.4 percent per year. Similarly, the adjustment could be made 
over 5 years at the rate of 5.5 percent per year.
    We are proposing that HCFA have the discretion to apply an 
efficiency adjustment to the capital input price rate of change in 
determining the annual update factor. We invite comment on the 
advisability of such an adjustment, on the proportion of the residual 
that should be employed in adjustments to the update, and on the rate 
at which such an adjustment should be applied. We also welcome 
information on possible sources of data that would be useful in 
developing or refining such an adjustment, and on the possible effects 
of such an adjustment on various segments of the hospital industry.
6. Proposed FY 1996 Update Factor
    Table 7 summarizes HCFA's proposed FY 1996 update factor in 
comparison with the recommendation presented by ProPAC in its March 1, 
1995 report.
    ProPAC recommends a 4.1 percent update for FY 1996, in comparison 
to HCFA's proposed update of 1.5 percent. As Table 5 shows, the 
different update methodologies adopted by ProPAC and HCFA, 
respectively, can be expected to result in higher ProPAC update 
recommendations during some years, and higher HCFA update 
recommendations during other years. (As we note in the discussion of 
Table 5, the values for the ProPAC index in that table reflect recent 
projections that were not available to ProPAC at the time of its March 
1, 1995 report.)

         Table 7.--Comparison of FY 1996 Update Recommendations         
------------------------------------------------------------------------
                                                    HHS         ProPAC  
------------------------------------------------------------------------
Capital Input Price Index.....................          1.8          4.1
Difference Between HCFA & ProPAC CIPI's.......  ...........          2.3
                                               -------------------------
    Subtotal..................................          1.8          4.1
                                               =========================
[[Page 29238]]
                                                                        
Policy Adjustment Factors:                                              
    Productivity..............................  ...........        (\1\)
    Efficiency................................        (\2\)  ...........
    Intensity.................................          0.0  ...........
        Science and Technology................  ...........        (\1\)
        Intensity.............................  ...........        (\3\)
        Real Within DRG Change................  ...........        (\4\)
                                               -------------------------
            Subtotal..........................          0.0          0.0
                                               =========================
Case Mix Adjustment Factors:                                            
    Projected Case Mix Change.................         -0.8         -1.0
    Real Across DRG Change....................          0.8          0.8
    Real Within DRG Change....................        (\5\)          0.2
                                               -------------------------
        Subtotal..............................          0.0          0.0
                                               =========================
Effect of 1993 Reclassification and                                     
 Recalibration................................         -0.3  ...........
Forecast Error Correction.....................          0.0          0.0
                                               -------------------------
    Total Recommended Update..................          1.5         4.1 
------------------------------------------------------------------------
\1\Adjustments for scientific and technological advance and productivity
  offset each other. No specific values were recommended.               
\2\Efficiency adjustment may be adopted after public comment.           
\3\Included in ProPAC's Productivity Measure.                           
\4\Included in ProPAC's Case Mix=Adjustment.                            
\5\Included in HHS' Intensity Factor.                                   

7. Possible Adjustments to the Federal Rate and the Hospital-Specific 
Rates
    In the Addendum to this proposed rule, we discuss the effects of 
the expiration of the statutory budget neutrality provision on rates 
and aggregate payments under the capital-prospective payment system. 
Under that provision, we set the capital-prospective payment system 
rates during FY 1992 through FY 1995 so that payments would equal 90 
percent of estimated Medicare payments that would have been made on a 
reasonable cost basis for the fiscal year. As a result of the 
provision's expiration, both the capital-prospective payment system 
rates and payments under the transition system will increase 
significantly. The proposed FY 1996 Federal rate is 21.3 percent higher 
than the FY 1995 Federal rate. We estimate that payments will increase 
by 20.45 percent in FY 1996 compared to FY 1995, and that FY 1996 
payments will exceed projected FY 1996 Medicare hospital inpatient 
capital costs by 4.52 percent.
    We have considered possible revisions to the capital-prospective 
payment rates that would moderate these substantial increases in 
payments. These revisions could be made in conjunction with, or in 
place of, an update framework adjustment to account for possible 
inefficiency in capital spending prior to the capital-prospective 
payment system base period. While these possible revisions to the rate 
are not, strictly speaking, elements of the update framework, we are 
presenting them within this context in order to allow commenters the 
opportunity to consider all the possible rate revisions that may affect 
the future levels of rates and payments. We solicit comment on whether 
to make any of these possible revisions to the rate. Generally, we 
believe that reductions in Medicare spending should be addressed in the 
context of health care reform.
    Under Sec. 412.308, HCFA determined the standard Federal rate, 
which is used to determine the Federal rate for each fiscal year, on 
the basis of an estimate of the FY 1992 national average Medicare 
capital cost per discharge. The FY 1992 national average Medicare 
capital cost per discharge was estimated by updating the FY 1989 
national average Medicare capital cost per discharge by the estimated 
increase in Medicare inpatient capital cost per discharge. As we 
discussed in the preamble to the final capital-prospective payment 
system rule on August 30, 1991 (56 FR 43366-43384), HCFA used the July 
1991 update of HCRIS data to estimate an FY 1989 national average 
Medicare cost per case of $527.22. HCFA then updated that amount to FY 
1992 by using an actuarial projection of a 31.3 percent increase in 
Medicare capital cost per discharge from FY 1989 to FY 1992. The 
standard Federal rate was thus based on an estimated FY 1992 national 
average Medicare capital cost per discharge of $692.24 (prior to the 
application of a transfer adjustment and a payment parameter 
adjustment).
    Section 13501(a)(3) of Public Law 103-66 amended section 
1886(g)(1)(A) of the Social Security Act to require that, for 
discharges occurring after September 30, 1993, the unadjusted standard 
Federal rate be reduced by 7.4 percent. As we discussed in the 
September 1, 1993 final rule for FY 1994 (58 FR 46316ff.), the purpose 
of that reduction was to reflect revised inflation forecasts, as of May 
1993, for the increases in Medicare capital cost per discharge during 
FY 1989 through FY 1992. By that time, the estimate of increases in 
Medicare inpatient capital costs per discharge from FY 1989 through FY 
1992 had declined from 31.3 percent to 21.57 percent. The 7.4 percent 
reduction to the Federal rate was calculated to account for these 
revised forecasts (1.2157/1.313=.926, a 7.4 percent decrease). That 
provision of Public Law 103-66 also required that, for cost reporting 
periods beginning on or after October 1, 1993, the Secretary 
redetermine which hospital payment methodology should be applied under 
the capital prospective payment system transition rules to take into 
account the 7.4 percent reduction to the Federal rate.
    As a result of the reduction required by Public 103-66, the 
standard Federal rate is now based on an estimated FY 1992 Medicare 
inpatient capital cost per case of $641.01 ($692.24 x .926). At the 
time of the Public Law 103-66 [[Page 29239]] reduction to the Federal 
rate, actual cost report data on the FY 1992 Medicare capital cost per 
discharge were not yet available. The reduction was based on cost 
report data for FY 1990 and FY 1991, and a revised projection of the 
rate of increase in Medicare capital costs per discharge during FY 
1992. We now have extensive cost report data for FY 1992. The December 
1994 update of HCRIS data shows an audit-adjusted FY 1992 Medicare 
inpatient capital cost per discharge of $593.15, or 7.47 percent lower 
than the estimate on which the Federal rate is currently based. We do 
not believe that the Federal rate should necessarily remain at a level 
that reflects a known over-estimation of base year costs. We are 
therefore inviting comment on the appropriateness of an estimated 7.47 
percent reduction to the unadjusted standard Federal rate to account 
for that over-estimation.
    Under Sec. 412.328, HCFA determined the FY 1992 hospital-specific 
rate by using a process similar to the process for determining the FY 
1992 Federal rate. The intermediary determined each hospital's 
allowable Medicare inpatient capital cost per discharge for the 
hospital's latest cost reporting period ending on or before December 
31, 1990. The intermediary then updated each hospital's FY 1990 
allowable Medicare capital cost per discharge to FY 1992 based on the 
estimated increase in Medicare inpatient capital cost per case. As in 
the case with the Federal rate updates, current data demonstrate that 
the estimates used to update the hospital specific rates from FY 1990 
to FY 1992 were overstated. On the basis of the current data, we are 
also considering whether to correct for the original rate of increase 
estimates by decreasing the hospital-specific rates 8.27 percent. Such 
a reduction would not apply to hospital-specific rates that have been 
redetermined for a later cost reporting period. This is because the 
rate of increase estimates were not employed for redeterminations after 
FY 1992.
    We estimate that savings from simultaneous reductions of 7.47 
percent to the Federal rate and 8.27 percent to the hospital-specific 
rates would be approximately $2.7 billion for FY 1996 through FY 2000. 
Capital-prospective payments would be about 98 percent of Medicare 
inpatient capital costs in FY 1996 and about 95 percent of Medicare 
costs in FY 2000. By comparison, we estimate that payments under 
current law and regulations will be 104 percent of Medicare costs in FY 
1996 and 102 percent of Medicare costs in FY 2000.
    Finally, the analysis of capital cost increases prior to the 
implementation of the prospective payment system for capital-related 
costs could be the basis for an immediate adjustment to the Federal 
rate to compensate for the effects of the expiration of budget 
neutrality. As discussed in section V.A.6 above, a reduction to the 
Federal rate of 27.7 percent would be necessary to restore the rate to 
the level at which it would have been if capital costs had not exceeded 
the level that can be accounted for on the basis of known factors. Such 
an adjustment could be accomplished gradually over a number of years 
within the context of the update framework. We discuss how the residual 
could be employed within the context of the update framework in section 
V.A.6 above. Alternatively, some large part of the residual could be 
removed from the rate in a single adjustment. For example, retaining 
the FY 1995 budget neutrality adjustment of 0.8432 in the standard 
Federal rate would have the effect of recapturing a large part of the 
residual of capital cost increase over the identifiable factors. The 
remainder of the residual, if appropriate, could be removed from the 
rate on a gradual basis through an adjustment to the update factor, as 
discussed in section V.A.6 above. We are therefore requesting comments 
on the appropriateness of such measures, particularly on the 
appropriateness of retaining the FY 1995 budget neutrality adjustment 
in the rate as an efficiency measure.
    We estimate that savings from this approach would be approximately 
$5.5 billion for FY 1996 through FY 2000. Capital-prospective payments 
would be about 92 percent of Medicare inpatient capital costs in FY 
1996 and about 88 percent of costs in FY 2000.

B. Adjustment to the Capital Prospective Payment System Federal Rate 
for Capital-Related Taxes (Secs. 412.308, 412.312, and 412.323)

    In our September 1, 1994 final rule, we discussed an adjustment to 
the capital prospective payment system for capital-related tax costs. 
As we noted in that discussion, such an adjustment would be designed to 
remove a possible inequity in the capital prospective payment system. 
While capital-related taxes constitute a unique cost imposed on an 
identifiable group of hospitals, those costs are currently reflected in 
the Federal capital rate paid to all hospitals. Several commenters have 
pointed out that all hospitals are thus being reimbursed for costs that 
only some hospitals pay. We noted in our previous discussion that 
introducing an adjustment was then premature because we still lacked 
adequate data on capital-related tax payments and payments in lieu of 
taxes. Accordingly, we announced a special initiative to collect and 
verify the data on hospital capital-related tax costs. We also 
solicited comments on the merits of a possible tax adjustment and on 
the development of an adjustment methodology. Below we discuss a 
proposal for such a tax adjustment. (The proposed capital rates in 
Addendum D, and impact analysis in Appendix A.VII are based on the 
proposal for a tax adjustment.) We then discuss several difficult 
issues that such an adjustment may pose. We also respond to public 
comments on the merits of introducing a tax adjustment to the capital 
prospective payment system. Finally, we describe the preliminary 
results of our data collection effort and discuss several questions and 
issues that arose in the course of the data collection effort.
    Some commenters have maintained that the absence of an adjustment 
for capital-related tax costs poses a serious issue of equity. The 
argue that capital-related tax costs constitute a fully distinguishable 
category that can be readily identified and that applies to an 
identifiable group of hospitals. In fact, this cost may be even more 
clearly delineated than other costs for which we provide adjustment to 
prospective system rates, since whether a hospital bears such costs is 
determined by law entirely outside the Social Security Act. In the 
absence of an adjustment for those hospitals that actually bore the tax 
costs represented in the Federal rate, all hospitals are being 
reimbursed through the Federal rate portion of their payments for costs 
imposed only on an identifiable subset of hospitals.
    Since the publication of the September 1, 1994 final rule we have 
directed considerable analysis toward the development of an equitable 
adjustment for capital-related tax costs. That analysis has revealed 
issues that we have not yet been able to resolve fully. These issues 
involve equity to hospitals that may become subject to capital-related 
taxes in the future. They also involve our responsibility to protect 
the Medicare trust fund from possible manipulation as well as from any 
new open-ended commitments to increase Medicare payments. Although we 
have not yet fully resolved all of these issues, we remain open to 
discussion on a special adjustment to the capital Federal rate for tax 
costs, and to facilitate such a discussion we present a proposal for a 
special tax adjustment. We believe that presentation and analysis of a 
proposal provide the best opportunity for a full and public discussion 
of all the issues surrounding a possible adjustment for capital-related 
tax costs. [[Page 29240]] From our discussions with representatives of 
hospital associations and individual hospitals, we expect that this 
proposal will generate numerous substantive comments both for and 
against a possible adjustment for capital-related taxes. We will 
analyze all timely public comments carefully before deciding whether or 
not to proceed with an adjustment for taxes in the final rule. We hope 
that the process of public comment will produce a solution that in the 
most appropriate manner simultaneously protects the trust fund and 
satisfies the equity concerns of all hospitals.
    In order to facilitate this discussion, we are proposing to provide 
for a special adjustment for the capital-related tax costs of hospitals 
that paid such taxes for cost reporting periods beginning in FY 1992. 
The tax costs of those hospitals were included in the computation of 
the capital Federal rate. Hospitals that have begun operation since FY 
1992 would also be eligible for an adjustment. We are further proposing 
an adjustment of the Federal rate to offset the amount of capital-
related tax costs originally included in the computation of the rate. 
In this way, adoption of the tax adjustment will be budget neutral: 
Capital payments will neither increase nor decrease merely because of 
the tax adjustment.
    For those hospitals that are eligible for an adjustment, we propose 
to apply a hospital-specific Medicare tax cost per discharge amount to 
the Federal rate portion of each payment for each discharge from the 
hospital, beginning October 1, 1995. The hospital-specific Medicare tax 
cost per discharge would be determined on the basis of the updated FY 
1992 base year cost, as described below.
    The serious issues that arise in connection with the implementation 
of a tax adjustment concern hospitals whose tax-paying status has 
changed since FY 1992. We received several inquiries about the 
treatment of such hospitals. Some hospitals that paid capital-related 
taxes in FY 1992 may no longer be subject to such taxes (for example, 
because they converted to non-proprietary status in a taxing 
jurisdiction that does not tax non-proprietaries). Other hospitals may 
have been in operation during FY 1992, but have only become subject to 
tax payments since that time, either by a change in status (that is, 
from non-proprietary to proprietary) or by the action of state or local 
authorities to impose capital-related taxes on entities that had not 
previously been subject to such taxes.
    It is the situation of hospitals that have become subject to taxes 
through the action of state or local authorities that poses the most 
serious issues of equity and protection of the trust fund. On the one 
hand, it may seem unfair to prohibit hospitals on whom a tax cost is 
imposed after FY 1992 from receiving an adjustment available to 
hospitals on whom a tax cost was imposed in FY 1992. On the other hand, 
a capital Federal rate tax adjustment should not be vulnerable to 
possible efforts by state or local authorities to gain revenues from 
increased Medicare payments to hospitals. Nor should a tax adjustment 
provide an open-ended commitment to increase the overall level of 
Medicare capital payments as state and local governments extend 
taxation to previously tax-exempt facilities. The capital Federal rate 
tax adjustment that we are proposing reflects only the FY 1992 capital-
related tax costs included in the original computation of the Federal 
rate. It cannot reflect costs imposed on hospitals by the extension of 
state and local capital-related taxes after FY 1992. Therefore, in the 
absence of some additional budget neutrality provision, extending the 
tax adjustment to hospitals that become subject to capital-related 
taxes after FY 1992 could significantly increase the overall level of 
Medicare capital payment.
    We are proposing that hospitals will not qualify for the adjustment 
if they become subject to tax payments because of state or local action 
to change tax laws (for example, by extending taxation to non-
proprietary hospitals) since FY 1992. We are doing so both to prevent 
the possibility that state and local authorities could gain revenues 
through increased Medicare payments, and to prevent the adoption of a 
tax adjustment from producing large increases in Medicare capital 
payments if additional jurisdictions impose taxes on non-proprietary 
hospitals. Arguably, it is appropriate to exclude such hospitals from a 
tax adjustment since they had no capital-related tax costs included in 
the original rate computation, and one feature of a prospective system 
is that hospitals are at risk for cost changes. In addition, the 
updates to the Federal rate may be adequate to compensate such 
hospitals for tax costs imposed on them since FY 1992. Finally, at 
least during the transition period, hospitals on whom taxes are newly 
imposed may find some relief through the exceptions provision. We 
recognize, however, that this policy might be viewed as penalizing 
newly taxed hospitals for changes in circumstances over which they have 
no control. We invite comment on the appropriateness of this proposal, 
which raises issues of equity between hospitals subject to capital-
related taxes in FY 1992 and those newly subject to such taxes after FY 
1992. We also invite suggestions and comments on other approaches to 
dealing with the situation of hospitals that become subject to taxes 
after FY 1992. We believe that any proposal to deal with the situation 
of such hospitals should protect the Medicare trust fund against an 
open-ended commitment to increase Medicare payments in order to 
reimburse hospitals for Medicare's share of newly imposed capital-
related tax obligations.
    In particular, we invite comment on the possibility of providing an 
adjustment to such hospitals on a budget-neutral basis. Under such an 
approach, an annual tax adjustment budget neutrality factor would be 
applied to the Federal rate to account for the estimated cost of the 
tax adjustment over and above the costs attributable to capital-related 
taxes in the FY 1992 base year. In this way, payments including tax 
adjustments to hospitals that have become subject to taxes since FY 
1992 would not exceed the amount of payments in the absence of an 
adjustment to such hospitals. Such an approach would prevent the tax 
adjustment from becoming an open-ended drain on the Medicare trust 
fund. However, such an approach necessarily involves reducing the rate 
beyond the level accounted for by the capital-related tax costs 
originally included in the rate computation. In other words, such a 
budget neutrality adjustment would reduce the amount of other capital-
related costs incorporated in the original rate computation. Under such 
an approach, the reductions in payments to hospitals that do not pay 
taxes would exceed the amount of capital-related taxes included in the 
original rate computation; arguably, then, this approach would 
inappropriately disadvantage hospitals that do not pay capital-related 
taxes.
    With regard to the situation of other hospitals whose tax status 
has changed since FY 1992, we do not believe that hospitals which are 
no longer subject to capital-related taxes should receive an adjustment 
to their capital Federal rate payments. Therefore, we are providing in 
this proposed rule that a hospital (or a related organization) must be 
directly subject to capital-related taxes in order to qualify for the 
capital Federal rate tax adjustment. Hospitals may be required to 
verify their tax status by appropriate documentation in the course of 
normal auditing activity. [[Page 29241]] 
    In addition, we are proposing that no adjustment would be made for 
hospitals whose status changed from non-proprietary to proprietary 
after FY 1992. The decision to change status to a proprietary hospital 
is a voluntary decision of the hospital's management, and we therefore 
believe that an adjustment to allow special payment for additional 
taxes that result from such a decision is not warranted.
    However, we are proposing that hospitals which were not in 
operation in FY 1992, should be able to qualify for the adjustment. We 
are therefore providing that the intermediaries should accept data on 
capital-related tax payments from hospitals that have begun operation 
since FY 1992. Such hospitals should contact their intermediaries as 
soon as possible, but in any case no later than July 31, 1995, to 
submit the appropriate data and documentation. Such hospitals are 
responsible for identifying themselves and submitting the required 
information on their own initiative before that date. Specifically, 
each hospital should submit the exact amount of capital-related tax 
payments via resubmission of Medicare cost report Worksheet A-7, Part 
III, Column 6, Line 5 for the first year of operation. Each hospital 
should also submit documentation of their capital-related tax payments 
during that year for verification by the intermediaries. We will follow 
the same procedure discussed below to establish each hospital's FY 1996 
Federal rate tax add-on amount.
    Comment: We received several comments opposing a possible tax 
adjustment to capital-PPS Federal rate payments. Specifically, the 
commenters alleged that there are inpatient service costs associated 
with maintaining nonprofit status that are sufficient either to balance 
the costs of capital-related taxes borne by some hospitals, or to 
justify a special adjustment to non-proprietary hospitals for those 
costs. The commenters cited patient service costs including provision 
of 24-hour emergency room services to all regardless of ability to pay, 
public information and educational services, and general provision of 
charity care. The commenters therefore recommended either that we make 
no adjustment for capital-related tax costs, or that we also initiate a 
process to compensate nonprofit hospitals for the costs of maintaining 
that status through an appropriate adjustment.
    Response: Capital-related tax costs constitute a fully 
distinguishable category that can be readily identified and that 
applies to an identifiable group of hospitals. We do not believe that 
the existence of costs to maintain tax-exempt status justifies a 
separate adjustment under the capital prospective payment system. The 
costs cited by the commenters are largely inpatient operating costs, or 
even non-inpatient costs (e.g., for outpatient services). To the degree 
that the cited costs are not inpatient capital costs, they do not 
provide an appropriate basis for adjustment to the capital-PPS Federal 
payment rate. Furthermore, we believe that such costs may be adequately 
compensated by existing arrangements with Medicare and other payers 
(e.g., various state and local subsidies for charity care and bad debt, 
as well as the existing Medicare and Medicaid disproportionate share 
adjustments). Historically, many non-proprietary hospitals have 
received tax appropriations from state and local governments to 
compensate them for otherwise uncompensated care. If these hospitals no 
longer had tax-exempt status, they would no longer receive some of 
these subsidies. For the purposes of discussion we propose to institute 
a special adjustment to the capital-PPS Federal rate for tax costs. 
However, we will continue to analyze this issue of equity in 
preparation for the final rule. We welcome further comments on this 
issue. We would also appreciate submission of any data or analysis that 
may be useful.
    As we discussed in our prior Federal Register notice (59 FR 45377), 
adoption of any adjustment to the capital-PPS Federal rate payment for 
capital-related tax costs requires a corresponding adjustment of the 
Federal rate to offset the amount of capital-related tax costs 
originally included in the computation of the rate. In this way, 
adoption of the tax adjustment will be budget neutral: Capital payments 
will neither increase nor decrease merely because of the adoption of 
the tax adjustment. Adoption of a tax adjustment also requires 
hospital-specific information on capital-related tax costs in order to 
determine the appropriate adjustment amount for each hospital.
    Accordingly, we instructed the Medicare fiscal intermediaries in 
October 1994 to contact each prospective payment system hospital in 
writing in order to obtain the necessary data on capital-related tax 
costs for the first cost-reporting period beginning on or after October 
1, 1991 (the first year under the capital prospective payment system). 
Specifically, the intermediaries asked each prospective payment system 
hospital to submit the exact amount of capital-related tax costs via 
resubmission of Medicare cost report Worksheet A-7, Part III, Column 6, 
Line 5 for the first capital prospective payment system year. Hospitals 
were also required to submit documentation of their capital-related tax 
costs for verification by the intermediaries. The intermediaries were 
further instructed to verify the amount of the capital-related tax 
costs for each hospital, and to submit that amount, as verified and 
accepted, to HCFA via the Hospital Cost Report Information System 
(HCRIS).
    We have used the information submitted in response to the tax data 
collection effort to create a special HCRIS data set. The tax 
adjustment file contains hospital identifying information (from 
Worksheets S-2 and S-3), capital-related tax costs (from Worksheet A-
7), total capital-related costs (from Worksheets B, Parts II and III, 
Columns 27, Lines 103, respectively), and total Medicare inpatient 
capital-related cost data (from Worksheet D, Part I, Columns 6 and 8, 
Line 101, for routine costs; and from Part II, Columns 6 and 8, Line 
101, for ancillary costs). We have also incorporated into this data set 
information from the regular HCRIS files on hospitals that did not 
submit the requested information and documentation on any capital-
related tax costs. This latter information is necessary in order to 
determine the proportion of verified capital-related tax costs to all 
capital-related costs in the initial capital-PPS year. From this file 
we have determined the Medicare inpatient capital-related tax cost per 
discharge for each hospital that submitted verified data. We have also 
developed a proposed adjustment to the Federal capital rate, to account 
for the capital-related tax costs included in the original Federal rate 
computation.
    Approximately 45 percent of PPS hospitals responded to the data 
collection effort. We have verified data on 64 percent of proprietary 
hospitals and 39 percent of non-proprietary hospitals. We have verified 
that 60 percent of proprietary hospitals and 8 percent of non-
proprietary hospitals had capital-related tax costs in the initial 
capital-PPS year. We still lack verified data from 36 percent of 
proprietary hospitals. In addition, there may be non-proprietary 
hospitals who have not yet provided documentation for their FY 1992 tax 
costs. Approximately 7 percent of PPS hospitals reported capital-
related tax costs on previous cost report submissions, but have not yet 
submitted documentation to the intermediaries for verification.
    We therefore instructed the intermediaries to notify hospitals that 
did not respond to the initial request for tax information and 
documentation, that [[Page 29242]] further submissions will be accepted 
until June 1, 1995. The intermediaries were instructed to send the 
appropriate notification no later than May 1, 1995. In order to be 
eligible for a capital-related tax cost adjustment, a hospital must 
submit the exact amount of capital-related tax payments via 
resubmission of Medicare cost report Worksheet A-7, Part III, Column 6, 
Line 5 for the first capital-PPS year. A hospital must also submit 
documentation of those capital-related tax payments for verification by 
the intermediary. A hospital which has not submitted the required data 
and documentation to its intermediary by June 1, 1995 will not qualify 
for a tax adjustment.
    We also instructed the intermediaries to notify each hospital that 
did respond to the initial request for tax information and 
documentation, of the amount of total tax cost as reviewed, verified, 
and approved by the intermediary. The intermediaries notified the 
hospitals that they may provide further information and documentation 
on costs that the intermediary may have disallowed. The intermediaries 
were instructed to send the appropriate notification no later than May 
1, 1995. The notification from the intermediaries informed hospitals 
that they must submit any further information and documentation by June 
1, 1995. The intermediaries will submit any revised tax data, including 
new data, to HCFA via HCRIS no later than July 1, 1995. Hospitals that 
did submit tax data and documentation in response to the previous 
request, and that have no objections to the amount approved by the 
intermediary, need take no further steps. Hospitals will receive an 
appealable final notification of their tax adjustment amount once the 
final rule implementing the adjustment is published.
    We used the following methodology to calculate each hospital's 
Medicare capital-related tax cost per discharge for the first capital 
prospective payment system year. We first developed the ratio of the 
hospital's Medicare inpatient capital-related costs to total capital 
costs. We then applied that ratio to the amount of total hospital tax 
costs. The result is the hospital's Medicare inpatient capital-related 
tax cost. We used this method to compensate for the absence in HCRIS of 
the statistics, on Worksheet B-1 of the cost report, that are used for 
cost allocation purposes. In the absence of those statistics, applying 
the ratio of Medicare inpatient capital-related costs to total capital-
related costs provides the most accurate way to derive Medicare's share 
of capital-related taxes from total hospital capital-related taxes. We 
then divided Medicare's share of inpatient capital-related tax costs by 
Medicare inpatient discharges to determine the Medicare tax cost per 
discharge.
    We propose to use the following methodology to adjust the Federal 
rate to account for the tax costs included in the original computation 
of the rate. We propose to subtract the total FY 1992 Medicare capital-
related taxes allocated to Medicare for all hospitals from the total FY 
1992 Medicare capital-related costs for all hospitals. The result is FY 
1992 Medicare capital-related costs without taxes. We then determine 
the ratio of FY 1992 Medicare capital-related costs without taxes to 
total FY 1992 Medicare capital-related costs (including capital-related 
tax costs). Finally, we apply this ratio to the base Federal rate to 
remove the capital-related tax costs currently incorporated into that 
rate. As a result of these calculations, we are providing in this 
proposed rule for an estimated 1.14 percent decrease to the base 
Federal rate to account for the tax costs originally included in the 
rate. We discuss the effect of this preliminary adjustment to the 
Federal rate in Part III of the Addendum to this proposed rule.
    In estimating the proposed adjustment to the final rule, we took 
into account not only the FY 1992 capital-related tax costs as verified 
by the intermediaries, but also tax costs previously reported by 
hospitals that have not yet been verified by the intermediaries. We 
counted the latter costs, only for the purposes of estimating the 
Federal rate adjustment in this proposed rule, in order to provide the 
hospital industry with an estimate that reflects the maximum adjustment 
to the rate, given the current data. Since we are also providing, in 
this proposed rule, an additional opportunity for hospitals to report 
capital-related tax data, some hospitals that have not yet verified 
previously reported tax costs may yet provide us with appropriate 
documentation. We believe that the estimated Federal rate adjustment in 
this proposed rule should reflect those costs that may yet be verified. 
If this proposal is retained in the final rule, we would recalculate 
the adjustment to the Federal rate, using only data on FY 1992 tax 
costs that has been documented and verified by the intermediaries, and 
submitted to HCFA via HCRIS by July 1, 1995. (Hospitals that have not 
yet submitted documentation to verify their FY 1992 capital-related tax 
costs must do so no later than June 1, 1995 in order to qualify for a 
tax adjustment.) The final adjustment to the capital Federal rate could 
thus be higher or lower than the adjustment in this proposed rule, 
depending upon the results of further reporting and verification 
activity.
    In our previous discussion of a possible tax adjustment, we 
outlined two possible methodologies for determining the amount of the 
actual payment adjustment to hospitals. One possible method was to 
determine a property tax factor (PTF) on the basis of the ratio of the 
FY 1992 Medicare tax cost per discharge to the hospital's FY 1992 
adjusted Federal capital rate. This percentage would then be applied to 
the Federal rate for each discharge from an eligible hospital for 
discharges on or after October 1, 1995. However, we expressed 
reservations about this approach. Under this approach, payments would 
increase or decrease purely as a function of Federal rate changes. As a 
result, the change in payments received by a hospital under this 
methodology would correlate with the changes to the Federal rate. 
However, changes in the Federal rate are driven by factors that may not 
correlate with changes in capital-related tax costs.
    The second option was to apply a hospital-specific Medicare tax 
cost per discharge amount from the FY 1992 base year to the Federal 
rate portion of each payment for each discharge from an eligible 
hospital, beginning October 1, 1995. Under this approach, each 
hospital's FY 1992 Medicare tax cost per discharge would be calculated 
as described above. The FY 1992 tax cost per discharge would then be 
updated by an appropriate factor for subsequent periods. This direct 
dollar add-on approach has the advantage of separating the tax 
adjustment from changes to the Federal rate. A difficulty with this 
approach is the selection of an appropriate update mechanism. Any 
update mechanism would have to account for any differences between the 
factors that drive capital-related cost increase in general and those 
that drive capital-related tax cost increases in particular (e.g., 
changes in the assessed value of property and changes in tax rates). 
Any update mechanism would also need to be insulated from the effects 
of actions by taxing authorities, so that the amount of Medicare 
payment cannot be manipulated to increase tax revenues to state and 
local authorities. In addition, it will be several years before we have 
sufficient data on tax costs from Worksheet A-7 of the cost report to 
analyze trends in tax cost increases.
    We received no comments on the discussion of possible adjustment 
methodologies. We have therefore determined to proceed with a proposed 
[[Page 29243]] adjustment methodology that reflects the considerations 
we presented in our previous discussion (59 FR 45376ff.) Our proposal 
is to update each hospital's FY 1992 Medicare tax cost per discharge to 
FY 1996 by the total capital-PPS Federal rate updates for that period. 
The cumulative update is 14.75 percent (the product of the update 
factors for FY 1993, FY 1994, FY 1995, and the proposed factor for FY 
1996: 6.07 percent, 3.04 percent, 3.44 percent, and 1.50 percent). Once 
we have updated each hospital's Medicare tax cost per discharge, we 
would study the issues involved in developing an appropriate update 
mechanism. If we adopt a tax adjustment in the final rule, we propose 
to determine an update mechanism by FY 1998. We would then adjust each 
hospital's Medicare Federal rate tax add-on amount to reflect the 
appropriate updates under the mechanism.
    We propose to use the hospital-specific Medicare tax cost per 
discharge, as updated to FY 1996, as the capital-related tax add-on to 
the Federal rate portion of payment for each discharge, beginning on 
October 1, 1995. The Federal rate tax add-on amount would be added to 
the Federal rate payment amount prior to the application of the 
appropriate Federal rate payment percentages under the capital 
prospective payment system transition methodologies (e.g., 50 percent 
for fully prospective hospitals in FY 1996). This is because both old 
capital reasonable cost payments under the hold harmless methodology, 
and hospital-specific rate payments under the fully prospective 
methodology, reflect a hospital's actual cost experience, including the 
hospital's costs for capital-related taxes. Adding the tax adjustment 
amount outside the Federal rate payment percentage would thus 
constitute double payment for those costs.
    Since we are presenting a proposal for a capital-related tax 
adjustment, the impact analysis in Appendix A.VII of this proposed rule 
includes two new categories of hospitals. Table V of the Appendix shows 
that, with all the changes in this proposed rule, average payments per 
case to all hospitals are estimated to increase 20.45 percent. If a tax 
adjustment is instituted, average payments per case to hospitals that 
we expect to receive the adjustment are estimated to increase 20.9 
percent (an average increase of $139 per case from FY 1995 to FY 1996). 
In contrast, payments to other hospitals are expected to increase 20.2 
percent (an average increase of $117). We also estimate that, in the 
absence of a tax adjustment, payments to hospitals that would have 
received the adjustment would increase 19.1 percent (an average 
increase of $127), and payments to other hospitals would increase 21.1 
percent (an average increase of $122).
    In the course of the data collection initiative, we received one 
other inquiry that must be addressed in this proposed rule. Several 
intermediaries and other parties inquired about the treatment of taxes 
included in the terms of leases between unrelated parties on real 
property and equipment. Many leases of equipment and real estate 
require the lessee to pay the lessor's property tax costs on the leased 
property. In the course of the data collection effort, we instructed 
the intermediaries not to include such costs as provider tax costs for 
the purposes of the capital-related tax cost data collection effort. We 
have several reasons for adopting this position. The first reason is 
that, in such cases, the obligation to pay the lessor's tax costs 
arises from a contractual commitment rather than from the action of a 
taxing authority. In other words, it is the owner of the property, not 
the lessee, that bears the tax obligation. In case the lessee fails to 
pay the amount for taxes specified under the lease, the lessee would be 
subject not to action on the part of the taxing authority for failure 
to pay taxes due, but only to action on the part of the lessor for 
failure to meet a contractual obligation. For this reason, where a 
provider is obligated by the terms of a lease with an unrelated party 
to pay the lessor's tax costs, we believe that those costs are lease 
costs rather than tax costs for the provider.
    Even if we agreed that such costs should be considered tax costs, 
however, we still do not believe that they ought to be included within 
the scope of an adjustment for capital-related taxes. The purpose of 
making a tax payment adjustment within a rate-based system is to 
account for the unique costs of an identifiable group of hospitals. 
There is an identifiable group of hospitals that make tax payments on 
the value of the real assets that they own. Virtually all providers 
lease some real property or equipment. Thus, virtually all providers 
pay tax costs on leased property (whether or not the lease specifically 
identifies the portion of the lease payments that reflect the owner's 
tax costs). Since such costs are not unique to an identifiable group of 
hospitals, they are not an appropriate basis for a tax payment 
adjustment. These costs continue to be encompassed within the Federal 
rate.
    An additional consideration involves differences in lease terms. In 
some leases, tax costs on the leased property are separately identified 
in the terms of the lease agreements. It can even be the case that, 
under the terms of the lease, the annual tax bill is merely forwarded 
to the lessee for direct payment to the taxing authority. In other 
leases, the tax costs are not specifically identified, although they 
are certainly reflected, like other costs of the lessor, in the 
designated lease payments. In these latter cases, it may be 
administratively difficult to verify what portion of the lease payments 
reflect the lessor's tax costs as opposed to the lessor's other costs. 
We believe that it would be unfair to treat hospitals differently on 
the basis of differences in lease terms.
    Tax costs included in leases between related parties, however, 
should be treated in accordance with the established rules for related 
party costs under section 413.17 of the regulations. In these cases, it 
is not the existence of the lease, but rather the relationship of 
common ownership or control, that provides the basis for considering 
such costs as allowable capital-related tax costs for the hospital. 
Such costs would be treated as allowable capital-related tax costs even 
in the absence of a formal lease between the related parties. We are 
therefore providing, in this proposed rule, that only tax costs borne 
by a hospital (or a related organization) as the owner of property 
qualify for consideration under this special payment adjustment.
VI. Proposed Changes for Hospitals and Units Excluded From the 
Prospective Payment Systems

A. New Requirements for Certain Long-Term Care Hospitals Excluded From 
the Prospective Payment Systems (Secs. 412.23(e))

1. Effect of Change of Ownership on Exclusion of Long-Term Care 
Hospitals
    Some questions have arisen as to whether a hospital's compliance 
with the length-of-stay requirement for long-term care (LTC) hospitals 
is affected by its sale to a new owner. A hospital that has operated as 
a general acute care facility and is paid under the prospective payment 
system may experience an increased length of stay that, if continued 
for all of the 6-month period immediately preceding the start of a cost 
reporting period, would qualify the facility for an LTC hospital 
exclusion. If there is a change of ownership, the issue arises whether 
the part of the hospital's operating experience that preceded the 
change of ownership should be counted toward the 6-month period of 
operating experience needed to justify exclusion [[Page 29244]] of the 
hospital, under its new owner, from the prospective payment system.
    After reviewing this issue, we have concluded that the operating 
experience of the hospital is the relevant consideration. If a change 
of ownership occurs at the start of a cost reporting period, or at any 
time during the 6 months immediately preceding the start of that 
period, the hospital is not required to begin a new qualifying period. 
To clarify current regulations, we would specify under 
Sec. 412.23(e)(2) that if a hospital undergoes a change of ownership at 
the start of a cost reporting period, or at any time within the 
preceding 6 months, it may be excluded from the prospective payment 
system as an LTC hospital if it is otherwise qualified and maintained 
an average length of stay in excess of 25 days, under both current and 
previous ownership, for that 6-month period. To qualify for the 
exclusion, the hospital must have been continuously in operation for 
all of the qualifying period and participated continuously in Medicare 
as a hospital. That is, as in the case of any hospital experiencing a 
change of ownership, periods during which the hospital was closed or 
did not participate in Medicare could not be counted toward the 
required experience.
2. Revised Criterion on Purchase of Services by LTC ``Hospitals Within 
Hospitals''
    Recently, some entities began to organize themselves under what 
they refer to as the ``hospital within a hospital'' model. Under this 
model, an entity may operate in space leased from a hospital and have 
most or all services furnished under arrangements by employees of the 
lessor hospital. The newly organized entity may be operated by a 
corporation formed and controlled by the lessor hospital, or by a third 
entity that controls both. In either case, the new entity seeks State 
licensure and Medicare participation as a hospital, demonstrates that 
it has an average length of stay of over 25 days, and seeks to obtain 
an exclusion from the prospective payment systems. However, the effect 
of excluding such a facility from the prospective payment systems would 
be to extend the LTC hospital exclusion, inappropriately, to what is 
for all practical purposes a LTC hospital unit.
    To avoid granting LTC hospital exclusions inappropriately to 
hospital units while still allowing adequate flexibility for legitimate 
networking and sharing of services, we set forth additional exclusion 
criteria for these ``hospitals within hospitals'' in our September 1, 
1994 final rule (59 FR 45389-45393). These regulations provide that, in 
addition to meeting the other LTC hospital exclusion requirements set 
forth in Sec. 412.23, to be excluded from the prospective payment 
systems, a hospital located in the same building or in one or more 
entire buildings located on the same campus as another hospital must 
have a separate governing body, a separate chief medical officer, a 
separate medical staff, and a separate chief executive officer. These 
criteria are stated in regulations at Secs. 412.23(e)(3)(i)(A) through 
412.23(e)(3)(i)(D). In addition, the hospital must either perform most 
basic hospital functions without any assistance from the hospital with 
which it shares space (or from a third entity which controls both) 
(Sec. 412.23(e)(3)(i)(E)) or receive at least 75 percent of its 
inpatient referrals from a source other than the other hospital during 
the period used to demonstrate compliance with the length-of-stay 
criterion (Sec. 412.23(e)(3)(ii)). We note that the criterion under 
Sec. 412.23(e)(3)(i)(E) does permit a hospital seeking exclusion to 
obtain certain services from a hospital occupying space in the same 
building, including food and dietetic services and housekeeping, 
maintenance, and other services necessary to maintain a clean and safe 
physical environment.
    Since publication of the September 1, 1994 final rule, hospital 
representatives have stated that there are some situations in which 
basic hospital services other than those related to dietetic, 
housekeeping and maintenance functions could be furnished in a more 
cost-effective manner, or more conveniently for patients, if they were 
provided by the hospital in which the LTC hospital is located. For 
example, a hospital must be able to perform some lab tests, known as 
``stat'' lab tests, on a 24-hour basis and to obtain results quickly. 
However, these tests are performed only infrequently, and it would not 
be cost-effective to maintain a separate in-house laboratory simply for 
them. Another frequently cited example of such services is specialized 
imaging procedures, such as CT scans and MRI procedures, which require 
very complex and costly equipment and may be available from only a few 
sources. If such procedures are available at the hospital in which the 
LTC hospital is located, it is safer and more convenient for patients 
for the services to be provided there than to transport the patient to 
another facility for them.
    We recognize the need to allow LTC hospitals within hospitals 
greater discretion to purchase services like these from their ``host'' 
facilities, when it is done in a cost-effective and convenient way. 
However, it is also important that the LTC hospital exclusion criteria 
be clear and definite enough to limit LTC exclusions to bona fide 
separate hospitals. To balance these competing objectives, we propose 
to revise the exclusion criteria to describe the scope of services that 
can be obtained from the host hospital in financial terms, rather than 
by type of service.
    Under our proposal, an otherwise qualified hospital could obtain a 
LTC hospital exclusion if the operating cost of services that it 
furnishes directly or obtains from a source other than the hospital 
with which it shares a building or campus (or from a third entity which 
controls both hospitals) constitutes at least 85 percent of its total 
inpatient operating costs. This test would be applied with respect to 
the cost reporting period or other time period used to establish the 
hospital's compliance with the length of stay criterion. (If a period 
other than a full cost reporting period is used, the LTC hospital is 
responsible for providing HCFA with verifiable information on its costs 
for that part of the period.)
    We are proposing a criterion of 85 percent of total inpatient 
operating costs as an appropriate test of separateness based on the 
level of dietetic, housekeeping, and maintenance expenses incurred by a 
small sample of LTC hospitals for which we have readily available data. 
Our review showed that these expenses generally ranged from 5 to 17 
percent of total inpatient operating costs for the periods under 
review. By setting the maximum acceptable level at 15 percent, we 
believe that we would allow hospitals an adequate margin for purchase 
of a limited range of services, without encouraging a level of 
dependence that calls into question the LTC hospital's status as a 
separate institution.
    To implement this policy, we would specify under proposed 
Sec. 412.23(e)(3)(i)(E) that the costs of any services a hospital 
obtains under contract or other agreements with a hospital occupying 
space in the same building or campus, or with a third entity that 
controls both hospitals, may not exceed 15 percent of the hospital's 
total inpatient operating costs, as defined under Sec. 412.2(c). Thus, 
a LTC hospital would be permitted to obtain dietetic, housekeeping, 
maintenance or other services from another hospital with which it 
shares a building or campus (or from a controlling third entity), 
provided that the aggregate cost of these services is no more than 15 
[[Page 29245]] percent of its total inpatient operating costs.

B. Clarifying Changes for Excluded Hospitals and Units (Secs. 412.23, 
412.29, 412.30 and 412.130)

    For clarity, we propose to revise Sec. 412.23(e)(3) to state more 
clearly that a hospital sharing space with another can qualify for 
exclusion only if it meets all of the requirements of paragraphs 
(e)(3)(i)(A) through (e)(3)(i)(D) of that section and, in addition, 
those in either paragraph (e)(3)(i)(E), which deals with separate 
performance of services, or Sec. 412.23(e)(3)(ii), which deals with the 
source of the hospital's patients.
    In addition, we propose to restate the rules in Secs. 412.29 and 
412.30 to differentiate more clearly between criteria that apply when a 
hospital seeks exclusion of a rehabilitation unit that is created 
through an addition to its existing bed capacity, and the criteria that 
apply when a hospital seeks exclusion of a unit that has been created 
by converting existing bed capacity from other uses. We also plan to 
clarify the rules that apply when a hospital expands an existing 
rehabilitation unit by increasing its bed capacity or by converting 
existing capacity. These revisions are being proposed in response to 
complaints from some hospital representatives that the current 
regulations do not state our criteria clearly. We want to emphasize 
that these proposals merely restate, and do not change, existing rules. 
In conjunction with this proposed change, we would make a technical 
change to a reference in Sec. 412.130.

C. Changes to the Regulations Addressing Limitations on Reimbursable 
Costs (Secs. 413.30(e) and (f), and 413.35(b))

    We propose to remove obsolete material from the regulations. 
Specifically, we propose to remove Sec. 413.30(e)(1), (e)(3), and 
(e)(4), since sole community hospitals, risk-basis HMOs, and rural 
hospitals with less than 50 beds are included under 42 CFR part 412, 
which governs the prospective payment system for operating costs. In 
addition, we propose to remove Sec. 413.30(f)(5), (f)(6), (f)(7) (a 
reserved paragraph), and (f)(9), concerning exceptions for hospital 
routine care, essential community hospital services, and hospital case-
mix changes for cost reporting periods beginning before October 1, 
1983. In conjunction with these proposed changes, we would incorporate 
the exemption requirements for new providers into paragraph (e) of 
Sec. 413.30, redesignate subparagraphs under paragraph (f) of 
Sec. 413.30, and make technical changes to references in 
Secs. 413.30(f) and 413.35(b)(2).

D. Payment Window for Hospitals and Hospital Units Excluded from the 
Prospective Payment Systems (Sec. 413.40(c))

    On January 12, 1994, we published an interim final rule with 
comment period to specify that inpatient hospital operating costs 
include costs of certain preadmission services furnished by the 
hospital (or by an entity that is wholly owned or operated by the 
hospital) to the patient up to 3 days before the date of the patient's 
admission to the hospital (59 FR 1654). The interim final rule 
implemented section 4003 of the Omnibus Budget Reconciliation Act of 
1990 (Public Law 101-508), which amended section 1886(a)(4) of the Act. 
Because the definition of inpatient operating costs in section 
1886(a)(4) of the Act applies to both prospective payment system 
hospitals and hospitals excluded from the system, the January 12, 1994 
interim final rule revised the regulations governing excluded hospitals 
as well as those governing prospective payment hospitals. Specifically, 
we revised Sec. 413.40(c)(2) of the regulations to reflect the 3-day 
payment window as required by the statute. We received 11 comments in 
response to the January 12, 1994 interim final rule.
    On October 31, 1994, Congress enacted the Social Security Act 
Amendments of 1994. Section 110 of that legislation amended section 
1886(a)(4) of the Act to state that, for hospitals excluded from the 
prospective payment system, the preadmission services to be included 
are those furnished during the 1 day (not 3 days) before a patient's 
admission.
    To implement this provision, we propose to revise Sec. 413.40(c)(2) 
to provide for a 1-day payment window for the hospitals and hospital 
units excluded from the prospective payment system. We note that the 
term ``day'' refers to the calendar day immediately preceding the date 
of admission, not the 24-hour time period that immediately precedes the 
hour of admission.
    This change may have an impact on the application of the hospital's 
target rate per discharge. With the implementation of the 3-day window 
of section 4003 of Public Law 101-508, the hospital may have received 
an adjustment to account for costs that had been reported in the TEFRA 
base year as Part B, that as a result of the Public Law 101-508 change 
were reported as Part A costs. In light of the 1994 amendment, such 
adjustments will be reviewed and if necessary revised to assure that 
the costs designated as Part A during the base year continue to be 
comparable to the costs reported as Part A during the subsequent cost 
year.
    In the final rule, we will address comments on the proposed change 
as well as the comments on the January 12, 1994 interim final rule.

E. Ceiling on the Rate of Increase in Hospital Inpatient Costs 
(Sec. 413.40(e) and (g))

    We propose to revise Sec. 413.40(e)(1) to clarify that a request 
for a payment adjustment must be received by a hospital's fiscal 
intermediary no later than 180 days from the date on the notice of 
amount of program reimbursement (NPR). As currently worded, this 
section states that a request must be ``made'' rather than 
``received.'' We have consistently interpreted the word ``made'' to 
mean ``received by the fiscal intermediary'' since the original 
regulation was promulgated (47 FR 43282, September 30, 1982). However, 
use of the word ``made'' in Sec. 413.40(e)(1) has resulted in varying 
interpretations of the timely filing requirement by hospitals and their 
fiscal intermediaries. In the interest of a uniform and consistent 
application of our policy, we are proposing to clarify the regulation 
by substituting ``received by the hospital's fiscal intermediary'' for 
``made'' in Sec. 413.40(e)(1).
    In Sec. 413.40(g)(1), we are proposing to clarify the determination 
of the amount of payment made to a hospital that receives a TEFRA 
adjustment. Since October 1, 1991, a hospital with operating costs in 
excess of its ceiling has been paid the ceiling plus an additional 
amount, as provided at Sec. 413.40(d)(3). For these cost reporting 
periods, a hospital receives some payment for costs in excess of the 
ceiling. We are proposing to add a sentence to clarify that the amount 
of payment made after a TEFRA adjustment may not exceed the difference 
between a hospital's operating costs and the payment previously 
allowed.
VII. ProPAC Recommendations

    We have reviewed the March 1, 1995 report submitted by ProPAC to 
Congress and have given its recommendations careful consideration in 
conjunction with the proposals set forth in this document. 
Recommendations 1, 4, and 5, concerning the update factors for 
inpatient operating costs, the update factor for hospitals paid on the 
basis of hospital-specific rates, and the update factor for hospitals 
excluded from the prospective payment system and distinct-part units, 
respectively, are [[Page 29246]] discussed in Appendix D of this 
proposed rule. Recommendations 2 and 3, concerning the update factors 
for inpatient capital costs and the single operating and capital update 
factor, respectively, are discussed in Section V of this proposed rule. 
Recommendation 11, concerning improving Medicare transfer payment 
policy, is discussed in section IV.A of the preamble. The remaining 
recommendations are discussed below.

A. Update to the Composite Rate for Dialysis Services (Recommendation 
6)

    Recommendation: For FY 1996, the composite rate for dialysis 
services should be updated to account for the following:
     The projected increase in the market basket index for 
dialysis services, currently estimated at 3.7 percent;
     A net adjustment of zero percentage points for scientific 
and technological advances and productivity; and
     A negative discretionary adjustment of 3.7 percentage 
points to reflect the relationship between payments and estimated 
fiscal year 1995 costs.
    This would result in an update of zero percent.
    Response: We agree with ProPAC's recommendation not to propose a 
payment rate increase for dialysis services. ProPAC's cost analysis 
indicates that, in aggregate, Medicare payments to independent dialysis 
facilities were about 12 percent higher than their Medicare allowable 
costs, and thus there is no basis to increase the composite rate. 
Furthermore, ProPAC concludes that without documented explanations for 
reported higher costs in hospital-based facilities, it cannot justify a 
differential update for these facilities.
    ProPAC's analysis of the 1993 unaudited cost data shows that 
Medicare allowable costs for independent facilities are less than their 
payment rate. Since 1983, the number of independent facilities has 
continued to increase in response to growing patient demand, even 
though payment rates have remained constant. As noted by ProPAC, the 
margin between independent facilities' composite payment rates and 
their Medicare allowable costs continues to decrease. Because of this 
trend, we will closely monitor the costs of dialysis treatments as 
reported by facilities on their cost reports. Further, if Medicare's 
conditions of coverage are revised to include an adequacy of dialysis 
standard, we will examine the need to adjust composite payment rates. 
The current composite payment rates are mandated by statute.
    To improve the quality of the cost report data and to address 
concerns about the cost report, we have revised the independent 
facilities' cost report, Form HCFA 265-94. The new cost report 
eliminates the allocation of the facility's overhead to the drug 
recombinant human erythropoietin (EPO). In addition, we are revising 
the independent cost reports edits. These edits would screen cost 
report data to ensure that data elements outside edit ranges are 
investigated by intermediaries.
    B. Level of the Indirect Medical Education (IME) Adjustment to 
Prospective Payment System Operating Payments (Recommendation 7)
    Recommendation: For FY 1996, the IME adjustment to prospective 
payment system operating payments should be reduced by 13 percent, from 
a 7.7 percent to a 6.7 percent increase for every 10 percent increment 
in teaching intensity. Ultimately, the IME adjustment should be reduced 
by about 40 percent, to a 4.5 percent increase for every 10 percent 
increment in teaching intensity.
    Response: ProPAC's IME estimate of 4.5 percent represents a 
significant acceleration in the downward trend of its estimates in the 
last several years (5.7 percent in 1992, 5.4 percent in 1993, and 5.2 
percent in 1994). Coupled with FY 1993 cost report data showing major 
teaching hospitals' Medicare operating margins (difference between 
payments and costs as a percentage of payments) rising to over 11 
percent, this declining IME estimate adds to the argument that the 
current adjustment is too high. Legislation would be required to reduce 
the IME adjustment. However, savings proposals of this sort would only 
be appropriate in the context of health care reform.

C. Improving Outlier Payment Policy (Recommendation 8)

    Recommendation: The Medicare statute should be amended so that the 
estimated cost of a case for determining outlier payment and the 
outlier payment amount are not adjusted to reflect a hospital's 
teaching and disproportionate share status. This change would make the 
outlier payment policy more effective in protecting hospitals from the 
risk of large losses on some cases.
    Response: We agree that it may be appropriate not to adjust the 
estimated cost of a case to reflect a hospital's teaching and 
disproportionate share status. However, as we have stated in the past 
(see, for example, 59 FR 27754, September 1, 1994), we believe this 
change would be appropriate only in conjunction with statutory changes 
providing that IME and DSH payments would no longer reflect outlier 
payments. Currently, sections 1886(d)(5) (B) and (F) of the Act, 
respectively, specify that IME and DSH payments are calculated by 
applying a factor to the sum of DRG payments and outlier payments. 
Therefore, the more outlier payments a hospital receives, the more IME 
and DSH payments the hospital receives (if it qualifies for such 
payments).
    We note that the current scheme leads to higher overall payments 
than might be intended, and this problem could be addressed by the 
changes discussed above. We set outlier payment policies for a Federal 
fiscal year so that estimated outlier payments equal 5.1 percent of 
estimated total payments based on DRGs. Under section 1886(d)(3)(B) of 
the Act, we reduce the standardized amounts by a corresponding factor. 
However, outlier payments affect the level of IME and DSH payments, 
and, generally, aggregate IME and DSH payments after accounting for 
outliers are greater (an estimated $80 million greater in FY 1996) than 
aggregate IME and DSH payments would be if there were no outliers (and 
no reduction to the standardized amounts to account for outliers). 
Currently, the statute does not provide for an adjustment to the 
standardized amounts to account for the increased IME and DSH payments.

D. Making DRG Payment Rates More Accurate (Recommendation 9)

    Recommendation: The Secretary should implement, as soon as 
practicable, the DRG severity refinements developed by HCFA. At the 
same time, she should improve the accuracy of basic DRG payment rates 
and outlier payments by changing the methods used to calculate the DRG 
relative weights. The weights should be based on the national average 
of hospital-specific relative values for all cases in each DRG, rather 
than the national average standardized charge per case.
    Response: In the May 27, 1994 proposed rule (59 FR 27716), we 
announced the availability of a paper we prepared that describes our 
preliminary severity DRG classification system and the analysis upon 
which our proposal was formulated. Based on the 100 comments we 
received on that paper, we are further analyzing and adjusting the 
severity DRG classifications. We are also examining the stability of 
the severity classifications over time. We agree with the Commission's 
judgment that adopting the severity DRGs would tend [[Page 29247]] to 
reduce current discrepancies between payments and costs for individual 
cases and thereby improve payment equity among hospitals. We therefore 
remain committed to implementing the severity DRG classification system 
as soon as possible. (See discussion in Section II.B of this preamble.)
    We also agree with the Commission that basing DRG weights on 
standardized charges results in weights that are somewhat distorted as 
measures of the relative costliness of treating a typical case in each 
DRG. The Commission notes several sources of distortion, including the 
following: Systematic differences among hospitals in cost-to-charge 
ratios; variation in mark-ups for services across hospitals; variation 
among DRGs in the average mark-up implicit in case level charges; 
standardization factors that inaccurately represent cost differences 
among hospitals; and the absence of adjustments to account for factors 
such as variations in practice patterns and efficiency. We recognize 
that the hospital-specific relative value method of setting weights may 
reduce or eliminate distortions from these sources, and we are studying 
its effect on DRG weights and hospital payments.
    The Commission also addresses two issues regarding current outlier 
financing policies: (1) How to account for outlier payments in setting 
a DRG weight that accurately reflects the relative costliness of 
treatment for typical cases; and (2) how to finance outlier payments so 
that the burden of treating such cases is spread fairly among all 
hospitals. We are studying these issues and look forward to working 
with ProPAC to find solutions.
    Because the effects on DRG weights of implementing DRG severity 
refinements and changing the methods used to calculate DRG relative 
weights are interactive, we believe that appropriate changes should be 
adopted concurrently. However, as stated in the final rule published on 
September 1, 1992 (57 FR 39761) and in subsequent rules, as well as in 
this rule, we would not make significant changes to the DRG 
classification system unless we are able either to improve our ability 
to predict coding changes by validating in advance the impact that 
potential DRG changes may have on coding behavior, or to make 
methodological changes to prevent building the inflationary effects of 
the coding changes into future program payments.
E. Improving Annual Update Policies (Recommendation 10)

    Recommendation: The Secretary should be given authority to adjust 
the standardized amounts if anticipated coding improvements would 
increase aggregate payments by more than 0.25 percent during the coming 
year. This adjustment should be separate from the annual update. It 
should be based on findings from empirical analysis of the new HCFA 
data base of reabstracted medical records. Once sufficient data are 
available, the Secretary should also make a correction if there is more 
than a 0.1 percentage point error in a previous adjustment.
    Response: We agree with ProPAC that anticipated coding changes 
should be taken into account and that the most appropriate method for 
recognizing valid increases in case mix as a result of improved coding 
practices is within the framework of the standardized payment amount. 
We acknowledge, with ProPAC, that shifts in the mix of cases among DRGs 
may result from changes in practice patterns, new technology, or 
variations in the incidence of illness, as well as changes in the 
coding of diagnoses and procedures.
    As ProPAC states, under section 1886(d)(4)(C) of the Act, we are 
required to make DRG reclassification and recalibration changes in a 
budget neutral manner. To meet this requirement, we normalize the DRG 
relative weights so that, for the discharges in the data base, the 
average DRG weights before and after reclassification and recalibration 
are equal. The recalibration of the DRG weights is accompanied by a 
budget neutrality adjustment to the standardized payment amount to 
ensure that estimated aggregate payments remain unchanged.
    We share ProPAC's concern that introduction of any major 
modification to the DRG classification system will result in major 
shifts in the distribution of cases among the DRGs. Because the 
severity refinements to the DRGs would create many new DRGs with 
relatively high weights, there will be increased incentive to hospitals 
to report those secondary diagnoses that result in assignment to the 
higher weighted DRG. We agree with ProPAC that this is not 
inappropriate and is indeed anticipated. We further agree that we need 
to ensure that hospitals are fairly compensated for increases in costs 
that reflect real increases in the level of severity of illness of 
their patient population.
    In order to protect the Medicare program from payment increases 
that are a consequence of improved coding practices that do not reflect 
a real increase in case mix, we have developed a methodology that would 
recalibrate the DRG relative weight to 1.0 each year, thus eliminating 
the normalization process and the concomitant inflationary adjustment 
to the DRG weights. This would prohibit upcoding and other coding 
improvements from having an impact on the DRG relative weight. To 
account for real case-mix increases, we have recommended an annual 
upward adjustment to the standardized amounts equal to the lesser of 
the total observed case-mix increase or 1.0 percent. Anticipated case-
mix change due to upcoding would be accounted for through a prospective 
adjustment to the standardized amounts. This adjustment would be for 
one year at a time and would not be cumulative.
    ProPAC recommends that an ongoing data base of reabstracted medical 
records be used to estimate the real and coding components of case-mix 
change and provide the basis for forecasting future coding changes. 
HCFA has recently implemented a record reabstracting process being 
conducted by two clinical data abstraction centers (CDACs) under 
contract with the Health Standards and Quality Bureau (HSQB). The CDACs 
will review a national random sample of 30,000 records per year from 
the National Case History file, gathered on a monthly basis. Registered 
Record Administrators (RRAs) and Associate Record Technicians (ARTs) 
will reabstract the medical record and perform complete record medical 
coding, which will be stored with the original coding.
    We will evaluate the results of this reabstracting process before 
making a decision to base adjustments for anticipated coding changes 
only on this data base. Our estimate of an annual real case-mix 
increase of 1.0 percent is supported by past studies of case-mix change 
by the Rand Corporation. The most recent study by RAND, ``Has DRG Creep 
Crept Up? Decomposing the Case Mix Index Change Between 1987 and 
1988'', by G.M. Carter, J.P. Newhouse and D.A. Relles, R-4098-kHCFA/
ProPAC (1991) uses medical records from those Federal fiscal years, 
using consistent standards, to determine real case-mix change.
    As we pursue options and alternatives to payment adjustments to 
account for real case-mix increases, we will take into consideration 
ProPAC's recommendations to limit adjustments to those occasions in 
which coding changes would increase aggregate payments by more than 
0.25 percent or when forecasts differ from observed, actual experience 
by more than 0.1 percent. We note, also, that we are considering a 
number of related modifications to the calculation of the 
[[Page 29248]] DRG relative weights that will have an impact on the 
prospective payment rates. (See response to ProPAC Recommendation 9, 
above.)

F. Controlling the Volume of Hospital Outpatient and Other Ambulatory 
Services (Recommendation 12)

    Recommendation: The Secretary should conduct research on 
appropriate and effective volume control methods for services provided 
in hospital outpatient departments and other ambulatory settings. Even 
with a prospective payment system that relies on ambulatory patient 
groups or some other service classification scheme, Medicare spending 
for ambulatory services will continue to grow at a rapid pace because 
of increased volume. The Secretary should also address how the changing 
health care delivery system will affect utilization and site of care.
    Response: ProPAC asserts that expenditures for ambulatory services 
provided in hospital outpatient departments will continue to grow 
rapidly even under an outpatient prospective payment system unless 
measures are taken to control volume of services. In our Report to 
Congress--Medicare Hospital Outpatient Prospective Payment (March 17, 
1995) (p. 21), HCFA explicitly recognizes the need for such measures 
under an outpatient prospective payment system. If outpatient 
prospective payment is implemented, HCFA intends to investigate various 
methods to control the volume of ambulatory services in the hospital 
setting, as well as in other sites. These include bundling, ancillary 
packaging, multiple-procedure discounting, and expenditure targets 
(volume performance standards).
    We fully concur with ProPAC's assessment of the difficulties 
involved in controlling the volume of ambulatory services. We recognize 
that because Medicare's payment methods differ by site of service, if 
payment and volume controls are imposed in one setting, utilization 
probably would shift to another. We would hope to ensure that payment 
encourages shifting of services to appropriate sites. We are aware of 
these difficulties and fully intend to address them if and when we 
implement an outpatient prospective payment system.
G. Changes to Medicare's Hospital Outpatient Payment Method 
(Recommendation 13)

    Recommendation: Beneficiary coinsurance for hospital-provided 
outpatient services should be reduced from 20 percent of charges to 20 
percent of payments. Further, until prospective payment for hospital 
outpatient services is implemented, the payment formula should be 
changed to fully reflect beneficiary coinsurance payments. The savings 
from correcting the payment formula should be used to offset program 
expenditure increases caused by reducing beneficiary liability.
    Response: ProPAC notes that due to the way Medicare payments are 
calculated, beneficiaries pay more than 20 percent of total payments to 
hospitals for outpatient services. In addition, part of the payment 
formula for hospital outpatient services is based on the incorrect 
assumption that 20 percent of the prospective rate equals 20 percent of 
charges. This flaw in the payment formula prevents HCFA from fully 
benefiting from beneficiary coinsurance payments, resulting in a 
``formula-driven overpayment'' to hospitals. ProPAC recommends the 
immediate reduction of beneficiaries' share of payments to 20 percent 
of the total payments, and the simultaneous correction of the payment 
formula. ProPAC also raises the possibility of phasing in a correction 
in the payment formula over the next several years.
    HCFA has investigated this problem at considerable length, and has 
reported the results of this investigation in our Report to Congress--
Medicare Hospital Outpatient Prospective Payment (March 17, 1995) (p. 
24). Outpatient prospective payment would provide an excellent 
opportunity to reduce the beneficiary percentage of payments; in fact, 
contrary to ProPAC's assertion that the coinsurance problem should be 
addressed independently of the implementation of an outpatient 
prospective payment system, HCFA believes that the issues are 
inextricably linked. The Medicare payment amounts for most outpatient 
services furnished by hospitals are not known at the time the services 
are provided, because most hospital outpatient services are paid, at 
least in part, on a retrospective cost basis. Accordingly, the statute 
requires that coinsurance be based on 20 percent of charges for the 
majority of hospital outpatient services. However, the implementation 
of a prospective payment system would allow for the coinsurance issue 
to be addressed since payment would be known at the time of service. We 
do recognize, however, that the ``formula-driven overpayment'' problem 
can be corrected independently of the prospective payment system and 
beneficiary coinsurance.
    In our report to Congress, we have presented several options for 
phasing down the beneficiary coinsurance to 20 percent, in conjunction 
with the outpatient prospective payment system. However, since 
implementation of any given option would require legislation, HCFA 
currently does not have the authority to modify the outpatient payment 
methodology as suggested.
VIII. Other Required Information

A. Paperwork Reduction Act

    This proposed rule contains information collection requirements 
that are subject to review by the Office of Management and Budget under 
the authority of the Paperwork Reduction Act of 1980 (44 U.S.C. 3501 et 
seq.). Following is a discussion of each of these requirements:
     Under Sec. 412.106(b)(3), for purposes of the DSH 
adjustment, a hospital's Medicare Part A/SSI percentage may be 
calculated based on its cost reporting period rather than the Federal 
fiscal year. (See section IV.E of the preamble.) Under current policy, 
a hospital must submit, in machine-readable format, data on its 
Medicare Part A patients for its cost reporting period. We are 
proposing to revise this requirement to provide that hospitals need 
only make a written request for the recalculation and need not submit 
the data. We estimate that the current burden associated with 
submitting the data is approximately 24 hours per request. Under the 
proposed revision, we estimate a burden of 1 hour per request. Based on 
an estimate of 12 requests per year, the total proposed burden would be 
12 hours, in comparison to the current total burden of approximately 
288 hours.
     Section 412.323 of this proposed rule contains new 
requirements concerning how a hospital may qualify for an adjustment to 
the Federal rate payment to account for its capital-related tax costs. 
(See section V.B of the preamble.) Currently, each Medicare-
participating hospital is required to identify the amount of its 
capital-related tax costs on the hospital cost report (HCFA Form 2552-
92). The reporting and recordkeeping burden associated with the 
hospital cost report is approved through August 31, 1996 under OMB No. 
0938-0050.
    Under proposed Sec. 412.323, we are requiring that a hospital 
submit supporting documentation to its intermediary to verify the 
amount of capital-related tax costs reported on the hospital's cost 
report for FY 1992, or its first year of operation, if later. A 
hospital cannot qualify for an adjustment to the Federal rate payment 
unless it submits the required supporting documentation.
    Based on our current cost reporting data, we estimate that the 
large majority [[Page 29249]] of hospitals will be essentially 
unaffected by the proposed documentation requirement because they have 
no relevant capital-related tax costs to report. For this group of 
almost 4,000 hospitals, simple verification of the lack of any such 
costs should take no more than 15 minutes per response, resulting in a 
one-time burden of no more than 1,000 hours. For the remaining group of 
approximately 1,300 hospitals with capital-related tax costs, we are 
unable to develop a quantifiable estimate of the burden associated with 
submitting the necessary documentation. The associated burden for an 
individual hospital will depend on the complexity of its property 
holdings and tax situation. We estimate that the burden could range 
from as little as 15 minutes per response to 8 hours, producing a 
possible burden ranging from 325 to 10,400 hours. However, we note 
that, as part of their cost reporting responsibilities, all hospitals 
are required to be able to furnish documentation of information 
reported on the hospital cost report. Thus, we believe that for most of 
these 1,300 hospitals, the associated burden should be much closer to 
the lower end of the estimated range.
    We welcome comments on the information collection requirements 
associated with the provisions discussed above. These information 
collection and recordkeeping requirements are not effective until they 
have been approved by OMB. A notice will be published in the Federal 
Register when approval is obtained. Organizations and individuals 
desiring to submit comments on these information collection and 
recordkeeping requirements should direct them to the Office of 
Management and Budget, Human Resources and Housing Branch, Room 10235, 
New Executive Office Building, Washington, D.C., 20503, Attention: 
Allison Eydt, HCFA Desk Officer.
B. Requests for Data From the Public

    In order to respond promptly to public requests for data related to 
the prospective payment system, we have set up a process under which 
commenters can gain access to the raw data on an expedited basis. 
Generally, the data are available in computer tape format or 
cartridges; however, some files are available on diskette. Data files 
are listed below with the cost of each. Anyone wishing to purchase data 
tapes, cartridges, or diskettes should submit a written request along 
with a company check or money order (payable to HCFA-PUF) to cover the 
cost, to the following address: Health Care Financing Administration, 
Public Use Files, Accounting Division, P.O. Box 7520, Baltimore, 
Maryland 21207-0520, [phone].
1. Expanded Modified MEDPAR-Hospital (National)
    The Medicare Provider Analysis and Review (MEDPAR) file contains 
records for 100 percent of Medicare beneficiaries using hospital 
inpatient services in the United States. (The file is a Federal fiscal 
year file which means discharges occurring October 1 through September 
30.) The records are stripped of most data elements that will permit 
identification of beneficiaries. The hospital is identified by the 6-
position Medicare billing number. The file is available to persons 
qualifying under the terms of the Notice of Proposed New Routine Uses 
for an Existing System of Records published in the Federal Register on 
December 24, 1984 (49 FR 49941), and amended by the July 2, 1985 notice 
(50 FR 27361). The national file consists of approximately 11 million 
records. Under the requirements of these notices, a data release must 
be signed by the purchaser before release of these data. For all files 
requiring a signed data release agreement, please write or call to 
obtain a blank agreement form before placing order. Two versions of 
this file are created each year. They support the following:
     Notice of Proposed Rulemaking (NPRM) published in the 
Federal Register, usually available by the end of May. This file is 
derived from the MedPAR file with a cutoff of 3 months after the end of 
the fiscal year (December file).
     Final Rule published in the Federal Register, usually 
available by the first week of September. This file is derived from the 
MedPAR file with a cutoff of 9 months after the end of the fiscal year 
(June file).

Media: Tape/Cartridge
File Cost: $3,415.00 per fiscal year
Periods Available: FY 1988 through FY 1994
2. Expanded Modified MedPAR-Hospital (State)
    The State MedPAR file contains records for 100 percent of Medicare 
beneficiaries using hospital inpatient services in a particular State. 
The records are stripped of most data elements that will permit 
identification of beneficiaries. The hospital is identified by the 6-
position Medicare billing number. The file is available to persons 
qualifying under the terms of the Notice of Proposed New Routine Uses 
for an Existing System of Records published in the December 24, 1984 
Federal Register notice, and amended by the July 2, 1985 notice. This 
file is a subset of the Expanded Modified MedPAR-Hospital (National) as 
described above. Under the requirements of these notices, a data 
release must be signed by the purchaser before release of these data. 
Two versions of this file are created each year. They support the 
following:
     NPRM published in the Federal Register, usually available 
by the end of May. This file is derived from the MedPAR file with a 
cutoff of 3 months after the end of the fiscal year (December file).
     Final Rule published in the Federal Register, usually 
available by the first week of September. This file is derived from the 
MedPAR file with a cutoff of 9 months after the end of the fiscal year 
(June file).

Media: Tape/Cartridge
File Cost: $1,050.00 per State per year
Periods Available: FY 1988 through FY 1994
3. HCFA Hospital Wage Index Data File
    This file is composed of four separate diskettes. Included are: (1) 
The hospital hours and salaries for FY 1992 used to create the proposed 
FY 1996 prospective payment system wage indexes; (2) a history of all 
wage indexes used since October 1, 1983; (3) a list of State and county 
codes used by SSA and FIPS (Federal Information Processing Standards), 
county name, and Metropolitan Statistical Area (MSA); and (4) a file of 
hospitals that were reclassified for the purpose of the FY 1996 wage 
index. Two versions of these files are created each year. They support 
the following:
     NPRM published in the Federal Register, usually by the end 
of May.
     Final Rule published in the Federal Register, usually by 
the first week of September.

Media: Diskette
File Cost: $500.00
Periods Available: FY 1996 PPS Update

    We note that the files also are available individually as indicated 
below:
    (1) HCFA Hospital Wage Index Survey Only usually available by the 
end of March for the NPRM and the middle of August for the final rule.)
    (2) Urban and Rural Wage Indices Only.
    (3) PPS SSA/FIPS MSA State and County Crosswalk Only (usually 
available by the end of March).
    (4) Reclassified Hospitals by Provider Only.

Media: Diskette
File cost: $145.00 per file

[[Page 29250]] 4. PPS-IV to PPS-XI Minimum Data Sets
    The Minimum Data Set contains cost, statistical, financial, and 
other information from the Medicare hospital cost report. The data set 
includes only the most current cost report (as submitted, final settled 
or reopened) submitted for a Medicare participating hospital by the 
Medicare Fiscal Intermediary to HCFA. This data set is updated at the 
end of each calendar quarter and is available on the last day of the 
following month.

                          Media: Tape/Cartridge                         
------------------------------------------------------------------------
                                                  Periods               
                                                 beginning    and before
                                                on or after             
------------------------------------------------------------------------
PPS IV........................................     10/01/86     10/01/87
PPS V.........................................     10/01/87     10/01/88
PPS VI........................................     10/01/88     10/01/89
PPS VII.......................................     10/01/89     10/01/90
PPS VIII......................................     10/01/90     10/01/91
PPS IX........................................     10/01/91     10/01/92
PPS X.........................................     10/01/92     10/01/93
PPS XI........................................     10/01/93             
------------------------------------------------------------------------

(Note: The PPS XI Minimum Data Set covering 1994 will not be 
available until 07/31/95.)

File Cost: $715.00 per year
5. PPS-IX to PPS-XI Capital Data Set
    The Capital Data Set contains selected data for capital-related 
costs, interest expense and related information and complete balance 
sheet data from the Medicare hospital cost report. The data set 
includes only the most current cost report (as submitted, final settled 
or reopened) submitted for a Medicare certified hospital by the 
Medicare fiscal intermediary to HCFA. This data set is updated at the 
end of each calendar quarter and is available on the last day of the 
following month.

                          Media: Tape/Cartridge                         
------------------------------------------------------------------------
                                                  Periods               
                                                 beginning    and before
                                                on or after             
------------------------------------------------------------------------
PPS IX........................................     10/01/91     10/01/92
PPS X.........................................     10/01/92     10/01/93
PPS XI........................................     10/01/93             
------------------------------------------------------------------------

(Note: The PPS XI Capital Data Set covering 1994 will not be 
available until 07/31/95.)

File Cost: $715.00 per year
6. Provider-Specific File
    This file is a component of the PRICER program used in the fiscal 
intermediary's system to compute DRG payments for individual bills. The 
file contains records for all prospective payment system eligible 
hospitals, including hospitals in waiver States, and data elements used 
in the prospective payment system recalibration processes and related 
activities. Beginning with December 1988, the individual records were 
enlarged to include pass-through per diems and other elements.

Media: Tape/Cartridge
File Cost: $500.00 per file
Periods Available: FY 1987 through FY 1995 (December updates)

Media: Diskette
File Cost: $265.00
Periods Available: FY 1995 PPS Update
7. HCFA Medicare Case-Mix Index File
    This file contains the Medicare case-mix index by provider number 
as published in each year's update of the Medicare hospital inpatient 
prospective payment system. The case-mix index is a measure of the 
costliness of cases treated by a hospital relative to the cost of the 
national average of all Medicare hospital cases, using DRG weights as a 
measure of relative costliness of cases. Two versions of this file are 
created each year. They support the following:
     NPRM published in the Federal Register, usually by the end 
of May.
     Final rule published in the Federal Register, usually by 
the first week of September.

Media: Diskette
Price: $145.00 per year
Periods Available: FY 1985 through FY 1994
8. Table 5 DRG File
    This file contains a listing of DRGs, DRG narrative description, 
relative weight, geometric mean, length of stay, and day outlier trim 
points as published in the Federal Register. The hardcopy image has 
been copied to diskette. There are two versions of this file as 
published in the Federal Register:
    a. NPRM, usually published by the end of May.
    b. Final rule, usually published by the first week of September.

Media: Diskette
File Cost: $145.00
Periods Available: FY 1996 PPS Update
9. PPS Payment Impact File
    This file contains data used to estimate payments under Medicare's 
hospital inpatient prospective payment systems for operating and 
capital-related costs. The data are taken from various sources, 
including the Provider-Specific File, the PPS-VII and PPS-VIII Minimum 
Data Sets, and prior impact files. The data set is abstracted from an 
internal file used for the impact analysis of the changes to the 
prospective payment systems published in the Federal Register. This 
file is available for release 1 month after the final rule is published 
in the Federal Register, usually during the first week of September.

Media: Diskette
File Cost: $145.00
Periods Available: FY 1995 PPS Update
10. AOR/BOR Tables
    This file contains data used to develop the DRG relative weights. 
It contains mean, maximum, minimum, standard deviation and coefficient 
of variation statistics by DRG for length of stay and standardized 
charges. The BOR tables are ``Before Outliers Removed'' and the AOR is 
``After Outliers Removed.'' (Outliers refers to statistical outliers, 
not payment outliers.) Two versions of this file are created each year. 
They support the following:
     NPRM published in the Federal Register, usually by the end 
of May.
     Final rule published in the Federal Register, usually by 
the first week of September.

Media: Diskette
File Cost: $145.00
Periods Available: FY 1996 PPS Update
11. HCFA FY 1992 Capital-Related Tax File
    This file contains data used to develop a special property tax 
adjustment to the capital prospective payment system for capital-
related costs. The dataset includes a preliminary hospital-specific 
add-on amount for all PPS hospitals. The dataset also contains the 
information used to propose an adjustment to the Federal rate so that 
the tax add-on is budget neutral. The proposed property tax adjustment 
provides special treatment to qualified hospitals who pay capital-
related property taxes. The add-on was determined using base year tax 
costs per discharge attributable to Medicare. The data are taken from 
the FY 1992 Medicare hospital cost report and a special request for 
validation by the fiscal intermediaries.

Media: Diskette
File cost: $145.00
Period available: FY 1992 PPS Update

    For further information concerning these data tapes, contact Mary 
R. White at [phone].
    In addition, certain other data, such as area wage data and data 
used to construct the Puerto Rico standardized amounts, are available 
in hard copy format. Commenters interested in examining hard copy data 
should contact John Davis at [phone].
    We realize that commenters may be interested in obtaining data 
other than [[Page 29251]] those we have discussed above. These 
commenters should direct their requests to John Davis at the number 
provided above.
    Finally, in lieu of obtaining data through the mail, certain data 
may also be available for inspection at the central office of the 
Health Care Financing Administration in Baltimore, Maryland. Commenters 
interested in obtaining more information about this alternative for 
reviewing data should also contact John Davis.

C. Public Comments

    Because of the large number of items of correspondence we normally 
receive on a proposed rule, we are not able to acknowledge or respond 
to them individually. However, in preparing the final rule, we will 
consider all comments concerning the provisions of this proposed rule 
that we receive by the date and time specified in the ``Dates'' section 
of this preamble and respond to those comments in the preamble to that 
rule. We emphasize that, given the statutory requirement under section 
1886(e)(5) of the Act that our final rule for FY 1996 be published by 
September 1, 1995, we will consider only those comments that deal 
specifically with the matters discussed in this proposed rule.
List of Subjects

42 CFR Part 412

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

42 CFR Part 413

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

42 CFR Part 424

    Emergency medical services, Health facilities, Health professions, 
Medicare.

42 CFR Part 485

    Grant programs-health, Health facilities, Medicaid, Medicare, 
Reporting and recordkeeping requirements.

42 CFR Part 489

    Health facilities, Medicare, Reporting and recordkeeping 
requirements.

    42 CFR chapter IV would be amended as set forth below:
    A. Part 412 would be amended 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, 1815(e), 1820, 1871, and 1886 of the 
Social Security Act (42 U.S.C. 1302, 1395g(e), 1395i-4, 1395hh, and 
1395ww).

Subpart A--General Provisions

    2. Section 412.4 is amended as follows:
    a. In the first sentence of paragraph (d)(1), the phrase ``is paid 
a per diem rate'' is revised to read ``is paid a graduated per diem 
rate''.
    b. In paragraph (d)(1), a new sentence is added at the end of the 
paragraph.
    The addition is to read as follows:


Sec. 412.4  Discharges and transfers.

* * * * *
    (d) Payment to a hospital transferring an inpatient to another 
hospital. (1) * * * Payment is graduated by paying twice the per diem 
amount for the first day of the stay, and the per diem amount for each 
subsequent day, up to the limit as described in this paragraph.
* * * * *
Subpart B--Hospital Services Subject to and Excluded From the 
Prospective Payment Systems for Inpatient Operating Costs and 
Inpatient Capital-Related Costs

    3. Section 412.23 is amended as follows:
    a. Paragraphs (e)(2), (e)(3) introductory text, (e)(3)(i)(E), and 
(e)(3)(ii) are revised.
    b. In paragraph (e)(4), the phrase ``in paragraphs (e)(3) of this 
section'' is revised to read ``in paragraph (e)(3) of this section''.
    The revisions are to read as follows:


Sec. 412.23  Excluded hospitals: Classifications.

* * * * *
    (e) Long-term care hospitals. * * *
    (2) The hospital must have an average length of inpatient stay 
greater than 25 days--
    (i) As computed by dividing the number of total inpatient days 
(less leave or pass days) by the number of total discharges for the 
hospital's most recent complete cost reporting period;
    (ii) If a change in the hospital's average length of stay is 
indicated, as computed by the same method for the immediately preceding 
6-month period; or
    (iii) If a hospital has undergone a change of ownership (as 
described in Sec. 489.18 of this chapter) at the start of a cost 
reporting period or at any time within the preceding 6 months, the 
hospital may be excluded from the prospective payment system as a long-
term care hospital for a cost reporting period if, for the 6 months 
immediately preceding the start of the period (including time before 
the change of ownership), the hospital has the required average length 
of stay, continuously operated as a hospital, and continuously 
participated as a hospital in Medicare.
    (3) Except as provided in paragraph (e)(4) of this section, for 
cost reporting periods beginning on or after October 1, 1994, a 
hospital that occupies space in a building also used by another 
hospital, or in one or more entire buildings located on the same campus 
as buildings used by another hospital, must meet the criteria in 
paragraph (e)(3)(i)(A) through (e)(3)(i)(D) of this section, and either 
the criterion in paragraph (e)(3)(i)(E) of this section or the 
criterion in paragraph (e)(3)(ii) of this section.
    (i) * * *
    (E) Performance of basic hospital functions. For the period of at 
least 6 months used to determine compliance with the length-of-stay 
criterion in paragraph (e)(2) of this section, the cost of the services 
that the hospital obtained under contracts or other agreements with the 
hospital occupying space in the same building or on the same campus, or 
with a third entity that controls both hospitals, is no more than 15 
percent of the hospital's total inpatient operating costs, as defined 
in Sec. 412.2(c).
    (ii) For the period of at least 6 months used to determine 
compliance with the length-of-stay criterion in paragraph (e)(2) of 
this section, the hospital has an inpatient population of whom at least 
75 percent were referred to the hospital from a source other than 
another hospital occupying space in the same building or on the same 
campus.
* * * * *
    4. In Sec. 412.29, the introductory text is republished, and 
paragraph (a) is revised to read as follows:


Sec. 412.29  Excluded rehabilitation units: Additional requirements.

    In order to be excluded from the prospective payment systems, a 
rehabilitation unit must meet the following requirements:
    (a) Have met either the requirements for--
    (1) New units under Sec. 412.30(a); or
    (2) Converted units under Sec. 412.30(b).
* * * * *
    5. Section 412.30 is amended as follows: [[Page 29252]] 
    a. Paragraph (a) is revised.
    b. Paragraphs (b) and (c) are redesignated as paragraphs (c) and 
(d).
    c. A new paragraph (b) is added.
    d. Redesignated paragraph (c) is revised.
    e. In redesignated paragraph (d), the phrase ``under paragraph (b) 
of this section,'' is revised to read ``under paragraph (c) of this 
section,''.
    The revisions and addition are to read as follows:


Sec. 412.30  Exclusion of new rehabilitation units and expansion of 
units already excluded.

    (a) New units. (1) A hospital unit is considered a new unit if the 
hospital--
    (i) Has not previously sought exclusion for any rehabilitation 
unit; and
    (ii) Has obtained approval, under State licensure and Medicare 
certification, for an increase in its hospital bed capacity that is 
greater than 50 percent of the number of beds in the unit.
    (2) A hospital that seeks exclusion of a new rehabilitation unit 
may provide a written certification that the inpatient population the 
hospital intends the unit to serve meets the requirements of 
Sec. 412.23(b)(2) instead of showing that the unit has treated such a 
population during the hospital's most recent cost reporting period.
    (3) The written certification described in paragraph (a)(2) of this 
section is effective for the first full cost reporting period during 
which the unit is used to provide hospital inpatient care. If the 
hospital has not previously participated in the Medicare program as a 
hospital, the written certification also is effective for any cost 
reporting period of not less than 1 month and not more than 11 months 
occurring between the date the hospital began participating in Medicare 
and the start of the hospital's regular 12-month cost reporting period.
    (4) A hospital that has undergone a change of ownership or leasing 
as defined in Sec. 489.18 of this chapter is not considered to have 
participated previously in the Medicare program.
    (b) Converted units. A hospital unit is considered a converted unit 
if it does not qualify as a new unit under paragraph (a) of this 
section. A converted unit must have treated, for the hospital's most 
recent 12-month cost reporting period, an inpatient population of which 
at least 75 percent required intensive rehabilitation services for the 
treatment of one or more conditions listed under Sec. 412.23(b)(2).
    (c) Expansion of excluded rehabilitation units.
    (1) New bed capacity. The beds that a hospital seeks to add to its 
excluded rehabilitation unit are considered new beds only if--
    (i) The hospital's State-licensed and Medicare-certified bed 
capacity increases at the start of the cost reporting period for which 
the hospital seeks to increase the size of its excluded rehabilitation 
unit, or at any time after the start of the preceding cost reporting 
period; and
    (ii) The number of beds the hospital seeks to add to its excluded 
rehabilitation unit is greater than 50 percent of the number of beds by 
which the hospital's State licensed and Medicare certified bed capacity 
increased under paragraph (c)(1)(i) of this section.
    (2) Conversion of existing bed capacity.
    (i) Bed capacity is considered to be existing bed capacity if it 
does not meet the definition of new bed capacity under paragraph (c)(1) 
of this section.
    (ii) A hospital may increase the size of its excluded 
rehabilitation unit through conversion of existing bed capacity only if 
it shows that, for all of the hospital's most recent cost reporting 
period of at least 12 months, the beds have been used to treat an 
inpatient population meeting the requirements of Sec. 412.23(b)(2).
* * * * *

Subpart D--Basic Methodology for Determining Prospective Payment 
Federal Rates for Inpatient Operating Costs

    6. In Sec. 412.63, a new paragraph (s)(5) is added to read as 
follows:
Sec. 412.63  Federal rates for inpatient operating costs for fiscal 
years after Federal fiscal year 1984.

* * * * *
    (s) * * *
    (5) If a judicial decision reverses a HCFA denial of a hospital's 
wage data revision request, HCFA pays the hospital by applying a 
revised wage index that reflects the revised wage data as if HCFA's 
decision had been favorable rather than unfavorable.

Subpart G--Special Treatment of Certain Facilities Under the 
Prospective Payment System for Inpatient Operating Costs


Sec. 412.92  [Amended]

    7. In paragraph (b)(5) of Sec. 412.92, remove the phrase ``under 
Sec. 413.30(e)(1) of this chapter'', wherever it appears.
    8. In Sec. 412.105, paragraph (b) is revised to read as follows:


Sec. 412.105  Special treatment: Hospitals that incur indirect costs 
for graduate medical education programs.

* * * * *
    (b) Determination of number of beds. For purposes of this section, 
the number of beds in a hospital is determined by counting the number 
of available bed days during the cost reporting period, not including 
beds in the healthy newborn nursery, custodial care beds, or beds in 
excluded distinct part hospital units, and dividing that number by the 
number of days in the cost reporting period.
* * * * *
    9. In Sec. 412.106, paragraph (b)(3) is revised to read as follows:


Sec. 412.106  Special treatment: Hospitals that serve a 
disproportionate share of low-income patients.

* * * * *
    (b) * * *
    (3) First computation: Cost reporting period. If a hospital prefers 
that HCFA use its cost reporting period instead of the Federal fiscal 
year, it must furnish to HCFA, through its intermediary, a written 
request including the hospital's name, provider number, and cost 
reporting period end date. This exception will be performed once per 
hospital per cost reporting period, and the resulting percentage 
becomes the hospital's official Medicare Part A/SSI percentage for that 
period.
* * * * *
    10. Section 412.109 is amended as follows:
    a. Paragraph (a) is revised.
    b. Paragraphs (b) through (e) are redesignated as paragraphs (c) 
through (f).
    c. A new paragraph (b) is added.
    d. Redesignated paragraphs (c)(1), (c)(2)(ii), (d) introductory 
text, and (d)(1) are revised.
    e. The paragraph heading of redesignated paragraph (e) and 
redesignated paragraph (e)(1) are revised.
    The revisions and addition are to read as follows:


Sec. 412.109  Special treatment: Essential access community hospitals 
(EACHs).

    (a) General rule. For payment purposes, HCFA treats as a sole 
community hospital any hospital that is located in a rural area as 
described in paragraph (b) of this section and that HCFA designates as 
an EACH under the criteria in paragraph (c) of this section. The 
payment methodology for sole community hospitals is set forth at 
Sec. 412.92(d).
    (b) Location in a rural area. For purposes of this section, a 
hospital is located in a rural area if it-- [[Page 29253]] 
    (1) Is located outside any area that is a Metropolitan Statistical 
Area as defined by the Office of Management and Budget or that has been 
recognized as urban under Sec. 412.62;
    (2) Is not deemed to be located in an urban area under Sec. 412.63;
    (3) Is not classified as an urban hospital for purposes of the 
standardized payment amount by HCFA or the Medicare Geographic 
Classification Review Board; or
    (4) Is not located in a rural county that has been redesignated to 
an adjacent urban area under Sec. 412.232.
    (c) Criteria for HCFA designation. (1) HCFA designates a hospital 
as an EACH if the hospital is located in a State that has received a 
grant under section 1820(a)(1) of the Act or in an adjacent State and 
is designated as an EACH by the State that has received the grant.
* * * * *
    (2) * * *
    (ii) Is not eligible for State designation solely because the 
hospital is located in a rural area, has fewer than 75 beds and is 
located 35 miles or less from any other hospital; and
* * * * *
    (d) Criteria for State designation. A State that has received a 
grant under section 1820(a)(1) of the Act may designate as an EACH any 
hospital in the State or in an adjoining State that meets the criteria 
of this paragraph (d).
    (1) Geographic location. The hospital meets one of the following 
requirements:
    (i) If it is located in a rural area as described in paragraph (b) 
of this section, the hospital is located more than 35 miles from any 
hospital that either has been designated as an EACH, or has been 
classified as a rural referral center under Sec. 412.96.
    (ii) The hospital meets other criteria relating to geographic 
location, imposed by the State with HCFA's approval.
* * * * *
    (e) Adjustment to the hospital-specific rate for rural EACH's 
experiencing increased costs--(1) General rule. HCFA increases the 
applicable hospital-specific rate of an EACH that it treats as a sole 
community hospital if, during a cost reporting period, the hospital 
experiences an increase in its Medicare inpatient operating costs per 
discharge that is directly attributable to activities related to its 
membership in a rural health network.
* * * * *

Subpart H--Payments to Hospitals Under the Prospective Payment 
Systems


Sec. 412.130  [Amended]

    11. In paragraph (a)(3) of Sec. 412.130, remove the reference 
``Sec. 412.30(b)'' wherever it appears and add, in its place, the 
reference ``Sec. 412.30(c)''.

Subpart L--The Medicare Geographic Classification Review Board

    12. In Sec. 412.230, paragraph (a)(1) is revised and a new 
paragraph (a)(5) is added to read as follows:


Sec. 412.230  Criteria for an individual hospital seeking redesignation 
to another rural area or an urban area.

    (a) General--(1) Purpose. Except as provided in paragraph (a)(5) of 
this section, an individual hospital may be redesignated from a rural 
area to an urban area, from a rural area to another rural area, or from 
an urban area to another urban area for the purposes of using the other 
area's standardized amount for inpatient operating costs, wage index 
value, or both.
* * * * *
    (5) Limitations on redesignation. The following limitations apply 
to redesignation:
    (i) An individual hospital may not be redesignated to another area 
for purposes of the wage index if the pre-reclassified average hourly 
wage for that area is lower than the pre-reclassified average hourly 
wage for the area in which the hospital is located.
    (ii) A hospital may not be redesignated for purposes of the 
standardized amount if the area to which the hospital seeks 
redesignation does not have a higher standardized amount than the 
standardized amount the hospital currently receives.
    (iii) A hospital may not be redesignated to more than one area.
* * * * *
    13. In Sec. 412.232, a new paragraph (a)(4) is added to read as 
follows:
Sec. 412.232  Criteria for all hospitals in a rural county seeking 
urban redesignation.

    (a) * * *
    (4) The hospitals may be redesignated only if one of the following 
conditions is met:
    (i) The pre-reclassified average hourly wage for the area to which 
they seek redesignation is higher than the pre-reclassified average 
hourly wage for the area in which they are currently located.
    (ii) The standardized amount for the area to which they seek 
redesignation is higher than the standardized amount for the area in 
which they are located.
* * * * *
    14. In Sec. 412.234, a new paragraph (a)(4) is added to read as 
follows:


Sec. 412.234  Criteria for all hospitals in an urban county seeking 
redesignation to another urban area.

    (a) * * *
    (4) The hospitals may be redesignated only if one of the following 
conditions is met.
    (i) The pre-reclassified average hourly wage for the area to which 
they seek redesignation is higher than the pre-reclassified average 
hourly wage for the area in which they are currently located.
    (ii) The standardized amount for the area to which they seek 
redesignation is higher than the standardized amount for the area in 
which they are currently located.
* * * * *
    15. Section 412.266 is revised to read as follows:


Sec. 412.266  Availability of wage data.

    A hospital may obtain the average hourly wage data necessary to 
prepare its application to the MGCRB from Federal Register documents 
published in accordance with the provisions of Sec. 412.8(b).

Subpart M--Prospective Payment System for Inpatient Hospital 
Capital Costs

    16. In Sec. 412.308, new paragraphs (b)(3) and (b)(4) are added and 
paragraph (c)(1)(ii) is revised to read as follows:


Sec. 412.308  Determining and updating the Federal rate.

* * * * *
    (b) * * *
    (3) Effective FY 1996, the standard Federal rate used to determine 
the Federal rate each year under paragraph (c) of this section is 
reduced by 0.28 percent to account for the effect of the revised policy 
for payment of transfers under Sec. 412.4(d).
    (4) Effective FY 1996, the standard Federal rate used to determine 
the Federal rate each year under paragraph (c) of this section is 
reduced by 1.14 percent to account for capital-related tax costs 
included in the original rate computation.
    (c) * * *
    (1) * * *
    (ii) Effective FY 1996. Effective FY 1996, the standard Federal 
rate is updated based on an analytical framework. The framework 
includes a capital input price index, which measures the annual change 
in the prices associated with capital-related costs during the year. 
HCFA adjusts the capital input price index rate of change 
[[Page 29254]] to take into account forecast errors, changes in the 
case mix index, the effect of changes to DRG classification and 
relative weights, and allowable changes in the intensity of hospital 
services. HCFA may also adjust the annual rate of change to take into 
account the efficiency and cost-effectiveness of capital resources and 
other factors as appropriate.
* * * * *
    17. In Sec. 412.312, a new paragraph (b)(5) is added to read as 
follows:


Sec. 412.312  Payment based on the Federal rate.

* * * * *
    (b) * * *
    (5) An additional payment is made, as provided in Sec. 412.323, to 
account for the capital-related tax costs of qualifying hospitals.
* * * * *
    18. A new Sec. 412.323 is added under the undesignated heading of 
subpart M that continues to read: Basic Methodology for Determining the 
Federal Rate for Capital-Related Costs.
    The new section reads as follows:


Sec. 412.323  Special treatment: Capital-related tax costs.

    (a) Definition. As used in this section, the term capital-related 
tax costs means the costs for taxes on land or depreciable assets owned 
by a hospital (or a related organization consistent with the terms of 
Sec. 413.17 of this chapter) and used for patient care. Taxes assessed 
on some basis other than valuation of land or depreciable assets used 
for patient care, or on assets not owned by the hospital, are not 
considered capital-related tax costs.
    (b) Effective date. Effective for discharges beginning on or after 
October 1, 1995, HCFA provides an adjustment to the Federal rate 
payment for each eligible hospital to account for capital-related tax 
costs.
    (c) Eligibility--(1) General requirement for initial eligibility. 
If a hospital paid capital-related taxes during the first cost 
reporting period beginning on or after October 1, 1991, and meets the 
requirements for verifying those costs under paragraph (d) of this 
section, the hospital is eligible for an adjustment subject to 
paragraph (c)(3) of this section.
    (2) Special rule for initial eligibility of a hospital that began 
operation after FY 1992. If a hospital began operation after Federal FY 
1992, and is subject to capital-related taxes, the hospital is eligible 
for an adjustment provided that it meets the special requirement for 
verifying those costs under paragraph (d) of this section.
    (3) Continued basis for eligibility. A hospital that meets the 
requirements for initial eligibility remains eligible for a tax 
adjustment as long as it continues to pay capital-related taxes. The 
intermediary may require the hospital to submit proof of continued 
eligibility for the adjustment.
    (d) Verification of eligibility. (1) A hospital that meets the 
general requirement for initial eligibility must provide the 
intermediary with complete documentation of its capital-related tax 
costs during the hospital's first cost reporting period beginning on or 
after October 1, 1991.
    (2) A hospital that meets the special requirements for initial 
eligibility under paragraph (c)(2) of this section must provide the 
intermediary with complete documentation of its tax costs during the 
first year in which it pays such costs.
    (e) Methodology. (1) The intermediary determines the amount of a 
hospital's total allowable capital-related tax costs during the first 
cost reporting period beginning on or after October 1, 1991, on the 
basis of the documentation submitted by the hospital to meet the 
eligibility requirements under paragraph (c) of this section. The 
intermediary reports that amount to HCFA.
    (2) HCFA determines each hospital's FY 1992 Medicare inpatient 
capital-related tax cost per discharge by applying, to the amount 
determined under paragraph (e)(1) of this section, the ratio of the 
hospital's Medicare inpatient capital-related costs to total inpatient 
capital-related costs, and then dividing the result by the number of 
Medicare inpatient discharges during that cost reporting period.
    (3) HCFA updates the amount in paragraph (e)(2) of this section by 
a factor that represents the total amount of the updates to the Federal 
rate for FY 1993 through FY 1996 under Sec. 412.308(c)(1).
    (4) For discharges occurring on or after October 1, 1995, the 
intermediary adds the amount determined under paragraph (e)(3) of this 
section to the Federal rate portion of each eligible hospital's 
payment, before the application of the appropriate Federal rate payment 
percentage under Sec. 412.340 or Sec. 412.344.
    (5) For discharges occurring on or after October 1, 1998, HCFA 
updates the prior year tax per discharge amount by an analytical 
framework that accounts for changes in the factors that determine 
capital-related costs.
    (6) For a hospital that qualifies for an adjustment under the 
special rule in paragraph (c)(2) of this section, determination of the 
payment amount follows the following steps:
    (i) The intermediary determines the amount of a hospital's total 
allowable capital-related tax costs during the first cost reporting for 
which the hospital is subject to capital-related taxes, on the basis of 
the documentation submitted by the hospital to meet the eligibility 
requirements under paragraph (c) of this section. The intermediary 
reports that amount to HCFA.
    (ii) HCFA determines each hospital's first year Medicare inpatient 
capital-related tax costs per discharge by applying, to the amount 
determined under paragraph (e)(6)(i) of this section, the ratio of the 
hospital's Medicare inpatient capital-related costs to total capital 
costs, and by dividing the result by the number of Medicare inpatient 
discharges during that cost reporting period.
    (iii) For discharges occurring on or after October 1, 1995, HCFA 
updates the amount under paragraph (e)(6)(ii) of this section by a 
factor that represents the total amount, if any, of the updates to the 
Federal rate from the first year in which the hospital paid capital-
related taxes to FY 1996, under Sec. 412.308(c)(1).
    (iv) The intermediary adds the amount determined under paragraph 
(e)(6)(iii) of this section to the Federal rate portion of each 
eligible hospital's payment, before the application of the appropriate 
Federal rate payment percentage under Sec. 412.340 or Sec. 412.344.
    (v) For discharges occurring on or after October 1, 1998, HCFA 
updates the prior year tax per discharge amount by an analytical 
framework that accounts for changes in the factors that determine 
capital-related costs.
    19. In Sec. 412.328, a new paragraph (e)(4) is added to read as 
follows:


Sec. 412.328  Determining and updating the hospital-specific rate.

* * * * *
    (e) * * *
    (4) Effective FY 1996, the intermediary reduces the updated amount 
determined in paragraph (d) of this section by 0.28 percent to account 
for the effect of the revised policy for payment of transfers under 
Sec. 412.4(d).
* * * * *
    B. Part 413 would be amended as follows:

PART 413--PRINCIPLES OF REASONABLE COST REIMBURSEMENT; PAYMENT FOR 
END-STAGE RENAL DISEASE SERVICES

    1. The authority citation for part 413 is revised to read as 
follows:

    [[Page 29255]] Authority: Secs. 1102, 1122, 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, 1320a-1, 1395f(b), 1395g, 1395l (a), 
(i), and (n), 1395x(v), 1395hh, 1395rr, 1395tt, and 1395ww).

Subpart C--Limits on Cost Reimbursement

    2. Section 413.30 is amended as follows:
    a. Paragraph (e) is revised.
    b. In paragraph (f) introductory text, the first sentence is 
revised.
    c. Paragraphs (f)(5), (f)(6), (f)(7), and (f)(9) are removed and 
paragraph (f)(8) is redesignated as paragraph (f)(5).
    The revisions are to read as follows:


Sec. 413.30  Limitations on reimbursable costs.

* * * * *
    (e) Exemptions. Exemptions from the limits imposed under this 
section may be granted to a new provider. A new provider is a provider 
of inpatient services that has operated as the type of provider (or the 
equivalent) for which it is certified for Medicare, under present and 
previous ownership, for less than three full years. An exemption 
granted under this paragraph expires at the end of the provider's first 
cost reporting period beginning at least two years after the provider 
accepts its first patient.
    (f) Exceptions. Limits established under this section may be 
adjusted upward for a provider under the circumstances specified in 
paragraphs (f)(1) through (f)(5) of this section. * * *
* * * * *


Sec. 413.35  [Amended]

    3. In paragraph (b)(2) of Sec. 413.35, remove the reference 
``Sec. 413.30(e)(2)'' wherever it appears in the paragraph and add, in 
its place, the reference ``Sec. 413.30(e)''.
    4. Section 413.40 is amended as follows:
    a. In Sec. 413.40(c)(2), remove the phrase ``during the 3 days'' 
wherever it appears in the paragraph and add, in its place, the phrase 
``on the calendar day''.
    b. Paragraph (e)(1) is revised.
    c. A new sentence is added at the end of paragraph (g)(1).
    The revision and addition are to read as follows:


Sec. 413.40  Ceiling on the rate of increase in hospital inpatient 
costs.

* * * * *
    (e) Hospital requests regarding adjustments to the payment allowed 
under the rate-of-increase ceiling--(1) Timing of application. A 
hospital may request an adjustment to the rate-of-increase ceiling 
imposed under this section. The hospital's request must be received by 
the hospital's fiscal intermediary no later than 180 days after the 
date on the intermediary's initial notice of amount of program 
reimbursement (NPR) for the cost reporting period for which the 
hospital requests an adjustment.
* * * * *
    (g) * * *
    (1) * * * The amount of payment made to a hospital after a TEFRA 
adjustment may not exceed the difference between the hospital's 
operating costs and the payment previously allowed.
* * * * *

Subpart E--Payment to Providers

    5. In Sec. 413.70, the first sentence of paragraph (b)(2)(i) is 
revised to read as follows:


Sec. 413.70  Payment for services of an RPCH.

* * * * *
    (b) * * *
    (2) * * * (i) RPCH services. Payment under this method for 
outpatient RPCH services is equal to the amounts described in section 
1833(a)(2)(B) of the Act (which describes amounts paid for hospital 
outpatient services) and subject to the applicable principles of cost 
reimbursement in this part and in part 405, subpart D of this chapter, 
except for the principle of the lesser of costs or charges in 
Sec. 413.13. * * *
* * * * *
    C. Part 424 would be amended as follows:

PART 424--CONDITIONS FOR MEDICARE PAYMENT

    1. The authority citation for part 424 continues to read as 
follows:

    Authority: Secs. 216(j), 1102, 1814, 1815(c), 1835, 1842 (b) and 
(p), 1861, 1866(d), 1870 (e) and (f), 1871, and 1872 of the Social 
Security Act (42 U.S.C. 416(j), 1302, 1395f, 1395g(c), 1395n, 1395u 
(b) and (p), 1395x, 1395cc(d), 1395gg (e) and (f), 1395hh, and 
1395ii).

Subpart B--Physician Certification Requirements

    2. In Sec. 424.15, paragraph (a) is revised to read as follows:


Sec. 424.15  Requirements for inpatient RPCH services.

    (a) Content of certification. Medicare part A pays for inpatient 
RPCH services only if a physician certifies that the individual may 
reasonably be expected to be discharged or transferred to a hospital 
within 72 hours after admission to the RPCH.
* * * * *
    D. Part 485 would be amended as follows:

PART 485--CONDITIONS OF PARTICIPATION: SPECIALIZED PROVIDERS

    1. The authority citation for part 485 continues to read as 
follows:

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

Subpart F--Conditions of Participation: Rural Primary Care 
Hospitals (RPCHs)


Sec. 485.603  [Amended]

    2. In paragraph (a)(2)(i) of Sec. 485.603, remove the reference 
``Sec. 412.109(c)'' wherever it appears in the paragraph and add, in 
its place, the reference ``Sec. 412.109(d)''.
    3. In Sec. 485.606, paragraphs (a)(1), (b)(1), (b)(3), the 
paragraph heading of paragraph (c), (c)(1) introductory text, 
(c)(1)(i), (c)(2) introductory text, and (c)(2)(ii) are revised to read 
as follows:


Sec. 485.606  Designation of RPCHs.
    (a) Criteria for State designation--(1) A State that has received a 
grant under section 1820(a)(1) of the Act may designate as an RPCH any 
hospital that--
    (i) Is located in the State that has received the grant, or is 
located in an adjoining State and is a member of a rural health network 
that also includes one or more facilities located in the State that has 
received the grant;
    (ii) Meets the RPCH conditions of participation in this subpart F; 
and
    (iii) Applies to the State that has received the grant for 
designation as an RPCH.
* * * * *
    (b) Criteria for HCFA designation--(1) HCFA designates a hospital 
as an RPCH if the hospital is designated as an RPCH by the State in 
which it is located or by an adjoining State that has received a grant.
* * * * *
    (3) HCFA may also designate not more than 15 hospitals as RPCHs if 
the hospitals are not located in States that have received grants under 
section 1820(a)(1) of the Act and meet the requirements of paragraph 
(c)(1) of this section.
    (c) Special rule: Hospitals not designated by a State as RPCHs--(1) 
HCFA may designate not more than 15 hospitals as RPCHs under this 
paragraph (c)(1). These hospitals must be located in a State that has 
not received a grant under section 1820(a)(1) of the Act, must not have 
[[Page 29256]] been designated as RPCHs by a State that has received a 
grant under paragraph (a)(1) of this section, and must meet the 
requirements with regard to location, participation in the Medicare 
program, and emergency services as defined in Secs. 485.610, 485.612, 
and 485.618, respectively. In designating a hospital as an RPCH under 
this paragraph (c)(1), HCFA--
    (i) Gives preference to a hospital that has entered into an 
agreement with a rural health network as defined in Sec. 485.603 that 
is located in a State that has received a grant under section 
1820(a)(1) of the Act; and
* * * * *
    (2) HCFA may designate a hospital as an RPCH if the hospital is 
located in a State that has received a grant under section 1820(a)(1) 
of the Act and is not eligible for State designation under paragraph 
(a) of this section solely because the hospital--
* * * * *
    (ii) Has more than six inpatient beds or does not maintain an 
average length of stay for inpatients not greater than 72 hours for 
each 12-month cost reporting period, excluding periods of stays that 
exceeded 72 hours because transfer was precluded because of inclement 
weather or other emergency conditions, as described in Sec. 485.620; or
* * * * *
    4. Section 485.614 is revised to read as follows:


Sec. 485.614  Condition of participation: Termination of inpatient care 
services.

    (a) General rule. The hospital has ceased providing inpatient 
hospital care or has agreed to cease providing inpatient hospital care 
upon approval of its application for designation as an RPCH except to 
the extent permitted under paragraph (b) of this section.
    (b) Limitations on inpatient care--(1) If the RPCH does not have a 
swing-bed agreement under Sec. 485.645, it provides not more than six 
inpatient beds for providing inpatient RPCH care to patients, but only 
if--
    (i) The patient requires stabilization before discharge or transfer 
to a hospital;
    (ii) The patient's attending physician certifies that the patient 
may reasonably be expected to be discharged or transferred to a 
hospital within 72 hours of admission to the facility; and
    (iii) The RPCH complies with the limitation on inpatient surgery 
set forth in paragraph (b)(3) of this section.
    (2) If the RPCH has a swing-bed agreement under Sec. 485.645, it 
provides inpatient RPCH care as described under paragraph (b)(1) of 
this section and, under the swing-bed agreement, provides posthospital 
SNF care.
    (3) The RPCH does not provide any inpatient hospital services 
consisting of surgery or any other service requiring the use of general 
anesthesia (other than surgical procedures specified by HCFA under 
Sec. 416.65 of this chapter), unless the attending physician certifies 
that the risk associated with transferring the patient to a hospital 
for such services outweighs the benefits of transferring the patient to 
a hospital for such services.
    (c) Exception for RPCHs designated by HCFA. If an RPCH is 
designated by HCFA under the specific criteria in Sec. 485.606(c), the 
RPCH is not subject to the requirements in this section.
    5. In Sec. 485.620, paragraph (b) is revised to read as follows:


Sec. 485.620  Condition of participation: Number of beds and length of 
stay.

* * * * *
    (b) Standard: Length of stay. The RPCH maintains an average length 
of stay for inpatients that is not greater than 72 hours for each 12-
month cost reporting period. In determining the average length of stay, 
periods of stay of inpatients in excess of 72 hours are not taken into 
account to the extent such periods exceed 72 hours because transfer to 
a hospital is precluded because of inclement weather or other emergency 
conditions.
    6. A new Sec. 485.639 is added to read as follows:


Sec. 485.639  Condition of participation: Surgical services.

    Surgical procedures must be performed in a safe manner by qualified 
practitioners who have been granted clinical privileges by the 
governing body of the RPCH in accordance with the designation 
requirements under paragraph (a) of this section.
    (a) Designation of qualified practitioners. The RPCH designates the 
practitioners who are allowed to perform surgery for RPCH patients, in 
accordance with its approved policies and procedures, and with State 
scope of practice laws. Surgery is performed only by--
    (1) A doctor of medicine or osteopathy, including an osteopathic 
practitioner recognized under section 1101(a)(7) of the Act;
    (2) A doctor of dental surgery or dental medicine; or
    (3) A doctor of podiatric medicine.
    (b) Anesthetic risk and evaluation. A qualified practitioner, as 
described in paragraph (a) of this section, must examine the patient 
immediately before surgery to evaluate the risk of anesthesia and of 
the procedure to be performed. Before discharge from the RPCH, each 
patient must be evaluated for proper anesthesia recovery by a qualified 
practitioner as described in paragraph (a) of this section.
    (c) Administration of anesthesia. The RPCH designates the person 
who is allowed to administer anesthesia to RPCH patients in accordance 
with its approved policies and procedures and with State scope of 
practice laws.
    (1) Anesthetics must be administered only by--
    (i) A qualified anesthesiologist;
    (ii) A doctor of medicine or osteopathy other than an 
anesthesiologist, including an osteopathic practitioner recognized 
under section 1101(a)(7) of the Act;
    (iii) A doctor of dental surgery or dental medicine;
    (iv) A doctor of podiatric medicine;
    (v) A certified registered nurse anesthetist, as defined in 
Sec. 410.69(b) of this chapter;
    (vi) An anesthesiologist's assistant, as defined in Sec. 410.69(b) 
of this chapter; or
    (vii) A supervised trainee in an approved educational program, as 
described in Secs. 413.85 or 413.86 of this chapter.
    (2) In those cases in which a certified registered nurse 
anesthetist administers the anesthesia, the anesthetist must be under 
the supervision of the operating practitioner. An anesthesiologist's 
assistant who administers anesthesia must be under the supervision of 
an anesthesiologist.
    (d) Discharge. All patients are discharged in the company of a 
responsible adult, except those exempted by the practitioner who 
performed the surgical procedure.
    E. Part 489 would be amended as follows:

PART 489--PROVIDER AGREEMENTS AND SUPPLIER APPROVAL

    1. The authority citation for part 489 continues to read as 
follows:

    Authority: Secs. 1102, 1819, 1861, 1864(m), 1866, and 1871 of 
the Social Security Act (42 U.S.C. 1302, 1395i-3, 1395x, 1395aa(m), 
1395cc, and 1395hh).

Subpart E--Termination of Agreement and Reinstatement After 
Termination

    2. In Sec. 489.53, a new paragraph (a)(14) is added to read as 
follows:


Sec. 489.53  Termination by HCFA.

    (a) * * *
    (14) In the case of a rural primary care hospital as defined in 
part 485, subpart F of this chapter, the rural primary care hospital 
maintains an average length of [[Page 29257]] stay for inpatients in 
its most recent 12-month cost reporting period that is in excess of 72 
hours. In determining the length of stay of a rural primary care 
hospital for purposes of this paragraph, HCFA does not take into 
account periods of stay in excess of 72 hours that occurred because 
transfer to a hospital was precluded because of inclement weather or 
other emergency conditions.
* * * * *
(Catalog of Federal Domestic Assistance Program No. 93.773, 
Medicare--Hospital Insurance; and Program No. 93.774, Medicare--
Supplementary Medical Insurance Program)

    Dated: May 12, 1995.
Bruce C. Vladeck,
Administrator, Health Care Financing Administration.
    Dated: May 23, 1995.
Donna E. Shalala,
Secretary.

[Editorial Note: The following addendum and appendixes will not 
appear in the Code of Federal Regulations.]

Addendum--Proposed Schedule of Standardized Amounts Effective With 
Discharges On or After October 1, 1995 and Update Factors and Rate-of-
Increase Percentages Effective With Cost Reporting Periods Beginning On 
or After October 1, 1995

I. Summary and Background

    In this addendum, we are setting forth the proposed amounts and 
factors for determining prospective payment rates for Medicare 
inpatient operating costs and Medicare inpatient capital-related costs. 
We are also setting forth new proposed rate-of-increase percentages for 
updating the target amounts for hospitals and hospital units excluded 
from the prospective payment system.
    For discharges occurring on or after October 1, 1995, except for 
sole community hospitals and hospitals located in Puerto Rico, each 
hospital's payment per discharge under the prospective payment system 
will be based on 100 percent of the Federal national rate.
    Sole community hospitals are paid based on whichever of the 
following rates yields the greatest aggregate payment: the Federal 
national rate, the updated hospital-specific rate based on FY 1982 cost 
per discharge, or the updated hospital-specific rate based on FY 1987 
cost per discharge. For hospitals in Puerto Rico, the payment per 
discharge is based on the sum of 75 percent of a Puerto Rico rate and 
25 percent of a national rate (section 1886(d)(9)(A) of the Act).
    As discussed below in section II, we are proposing to make changes 
in the determination of the prospective payment rates for Medicare 
inpatient operating costs. The changes, to be applied prospectively, 
would affect the calculation of the Federal rates. In section III, we 
discuss our proposed changes for determining the prospective payment 
rates for Medicare inpatient capital-related costs. Section IV sets 
forth our proposed changes for determining the rate-of-increase limits 
for hospitals excluded from the prospective payment system. The tables 
to which we refer in the preamble to the proposed rule are presented at 
the end of this addendum in section V.

II. Proposed Changes to Prospective Payment Rates For Inpatient 
Operating Costs for FY 1996

    The basic methodology for determining prospective payment rates for 
inpatient operating costs is set forth at Sec. 412.63 for hospitals 
located outside of Puerto Rico. The basic methodology for determining 
the prospective payment rates for inpatient operating costs for 
hospitals located in Puerto Rico is set forth at Secs. 412.210 and 
412.212. Below, we discuss the manner in which we are changing some of 
the factors used for determining the prospective payment rates. The 
Federal and Puerto Rico rate changes, once issued as final, will be 
effective with discharges occurring on or after October 1, 1995. As 
required by section 1886(d)(4)(C) of the Act, we must also adjust the 
DRG classifications and weighting factors for discharges in FY 1996.
    In summary, the proposed standardized amounts set forth in Tables 
1a, 1b, and 1c of section V of this addendum reflect--
     Updates of 1.5 percent for all areas (that is, the market 
basket percentage increase of 3.5 percent minus 2.0 percentage points);
     An adjustment to ensure budget neutrality as provided for 
in sections 1886(d)(4)(C)(iii) and (d)(3)(E) of the Act by applying new 
budget neutrality adjustment factors to the large urban and other 
standardized amounts;
     An adjustment to ensure budget neutrality as provided for 
in section 1886(d)(8)(D) of the Act by removing the FY 1995 budget 
neutrality factor and applying a revised factor;
     An adjustment to apply the revised outlier offset by 
removing the FY 1995 outlier offsets and applying a new offset; and
     An adjustment to apply a budget neutrality factor for the 
proposed change concerning transfer cases.
A. Calculation of Adjusted Standardized Amounts

1. Standardization of Base-Year Costs or Target Amounts
    Section 1886(d)(2)(A) of the Act required the establishment of 
base-year cost data containing allowable operating costs per discharge 
of inpatient hospital services for each hospital. The preamble to the 
September 1, 1983 interim final rule (48 FR 39763) contains a detailed 
explanation of how base-year cost data were established in the initial 
development of standardized amounts for the prospective payment system 
and how they are used in computing the Federal rates.
    Section 1886(d)(9)(B)(i) of the Act required that Medicare target 
amounts be determined for each hospital located in Puerto Rico for its 
cost reporting period beginning in FY 1987. The September 1, 1987 final 
rule contains a detailed explanation of how the target amounts were 
determined and how they are used in computing the Puerto Rico rates (52 
FR 33043, 33066).
    The standardized amounts are based on per discharge averages of 
adjusted hospital costs from a base period or, for Puerto Rico, 
adjusted target amounts from a base period, updated and otherwise 
adjusted in accordance with the provisions of section 1886(d) of the 
Act. Sections 1886(d)(2)(C) and (d)(9)(B)(ii) of the Act required that 
the updated base-year per discharge costs and, for Puerto Rico, the 
updated target amounts, respectively, be standardized in order to 
remove from the cost data the effects of certain sources of variation 
in cost among hospitals. These include case mix, differences in area 
wage levels, cost of living adjustments for Alaska and Hawaii, indirect 
medical education costs, and payments to hospitals serving a 
disproportionate share of low-income patients.
    Since the standardized amounts have already been adjusted for 
differences in case mix, wages, cost-of-living, indirect medical 
education costs, and payments to hospitals serving a disproportionate 
share of low-income patients, no additional adjustments for these 
factors for FY 1996 were made. That is, the standardization adjustments 
reflected in the FY 1996 standardized amounts are the same as those 
reflected in the FY 1995 standardized amounts.
    Sections 1886(d)(2)(H) and (d)(3)(E) of the Act require that, in 
making payments under the prospective payment system, the Secretary 
adjust the proportion (as estimated by the Secretary from time to time) 
of costs that are wages and wage-related costs. Beginning October 1, 
1990, when the [[Page 29258]] market basket was rebased, we have 
considered 71.40 percent of costs to be labor-related for purposes of 
the prospective payment system.
2. Computing Large Urban and Other Averages Within Geographic Areas
    Section 1886(d)(3) of the Act requires the Secretary to compute two 
average standardized amounts for discharges occurring in a fiscal year: 
one for hospitals located in large urban areas and one for hospitals 
located in other areas. In addition, under sections 1886(d)(9)(B)(iii) 
and (C)(i) of the Act, the average standardized amount per discharge 
must be determined for hospitals located in urban and other areas in 
Puerto Rico. Hospitals in Puerto Rico are paid a blend of 75 percent of 
the applicable Puerto Rico standardized amount and 25 percent of a 
national standardized payment amount.
    Section 1886(d)(2)(D) of the Act defines ``urban areas'' as those 
areas within a Metropolitan Statistical Area (MSA). A ``large urban 
area'' is defined as an urban area with a population of more than 
1,000,000. In addition, section 4009(i) of Public Law 100-203 provides 
that a New England County Metropolitan Area (NECMA) with a population 
of more than 970,000 is classified as a large urban area. As required 
by section 1886(d)(2)(D) of the Act, population size is determined by 
the Secretary based on the latest population data published by the 
Bureau of the Census. Urban areas that do not meet the definition of a 
``large urban area'' are referred to as ``other urban areas.'' Areas 
that are not included in MSAs are considered ``rural areas'' under 
section 1886(d)(2)(D). Payment for discharges from hospitals located in 
large urban areas will be based on the large urban standardized amount. 
Payment for discharges from hospitals located in other urban and rural 
areas will be based on the other standardized amount.
    Based on 1994 population estimates published by the Bureau of the 
Census, 56 areas meet the criteria to be defined as large urban areas 
for FY 1996. These areas are identified by an asterisk in Table 4a.
    Table 1a contains the two national standardized amounts that we are 
proposing be applicable to most hospitals. Table 1b sets forth the 18 
regional standardized amounts that would continue to be applicable for 
hospitals located in census areas subject to the regional floor. Under 
section 1886(d)(9)(A)(ii) of the Act, the national standardized payment 
amount applicable to hospitals in Puerto Rico consists of the 
discharge-weighted average of the national large urban standardized 
amount and the national other standardized amount (as set forth in 
Table 1a). The national average standardized amount for Puerto Rico is 
set forth in Table 1c. This table also includes the two standardized 
amounts that would be applicable to most hospitals in Puerto Rico.
3. Updating the Average Standardized Amounts
    In accordance with section 1886(d)(3)(A)(iv) of the Act, we are 
proposing to update the large urban and the other areas average 
standardized amounts for FY 1996 using the applicable percentage 
increases specified in section 1886(b)(3)(B)(i) of the Act. Section 
1886(b)(3)(B)(i)(XI) of the Act specifies that, for hospitals in all 
areas, the update factor for the standardized amounts for FY 1996 is 
the market basket percentage increase minus 2.0 percentage points.
    The percentage change in the market basket reflects the average 
change in the price of goods and services purchased by hospitals to 
furnish inpatient care. The most recent forecast of the hospital market 
basket increase for FY 1996 is 3.5 percent. For FY 1996, this yields an 
update to the average standardized amounts of 1.5 percent (3.5 percent 
minus 2.0 percent).
    As in the past, we are adjusting the FY 1995 standardized amounts 
to remove the effects of the FY 1995 geographic reclassifications and 
outlier payments before applying the FY 1996 updates. That is, we are 
increasing the standardized amounts to restore the reductions that were 
made for the effects of geographic reclassification and outliers. After 
including offsets to the standardized amounts for outliers and 
geographic reclassification, we estimate that there will be an actual 
increase of 1.2 percent to the large urban and other area standardized 
amounts.
    Beginning in FY 1995, we revised the national average standardized 
amounts based on national average labor/nonlabor shares. In FY 1996, we 
will continue to adjust the labor and nonlabor proportions of the 
standardized amount to reflect the national average. As a result, the 
national average labor share (as reflected in the hospital market 
basket) will equal 71.4 percent of the standardized payment amounts. 
(We are revising the Puerto Rico standardized amounts by applying the 
average labor share in Puerto Rico of 82.8 percent.)
    Although the update factor for FY 1996 is set by law, we are 
required by section 1886(e)(3)(B) of the Act to report to Congress on 
our initial recommendation of update factors for FY 1996 for both 
prospective payment hospitals and hospitals excluded from the 
prospective payment system. For general information purposes, we have 
included the report to Congress as Appendix C to this proposed rule. 
Our proposed recommendation on the update factors (which is required by 
sections 1886(e)(4)(A) and (e)(5)(A) of the Act), as well as our 
responses to ProPAC's recommendation concerning the update factor, are 
set forth as Appendix D to this proposed rule.
4. Other Adjustments to the Average Standardized Amounts
    a. Recalibration of DRG Weights and Updated Wage Index--Budget 
Neutrality Adjustment.
    Section 1886(d)(4)(C)(iii) of the Act specifies that beginning in 
FY 1991, the annual DRG reclassification and recalibration of the 
relative weights must be made in a manner that ensures that aggregate 
payments to hospitals are not affected. As discussed in section II of 
the preamble, we normalized the recalibrated DRG weights by an 
adjustment factor, so that the average case weight after recalibration 
is equal to the average case weight prior to recalibration.
    Section 1886(d)(3)(E) of the Act specifies that the hospital wage 
index must be updated on an annual basis beginning October 1, 1993. 
This provision also requires that any updates or adjustments to the 
wage index must be made in a manner that ensures that aggregate 
payments to hospitals are not affected by the change in the wage index.
    To comply with the requirement of section 1886(d)(4)(C)(iii) of the 
Act that DRG reclassification and recalibration of the relative weights 
be budget neutral and the requirement in section 1886(d)(3)(E) of the 
Act that the updated wage index be budget neutral, we compared 
aggregate payments using the FY 1995 relative weights and the wage 
index effective October 1, 1994 to aggregate payments using the 
proposed FY 1996 relative weights and wage index. The same methodology 
was used for the FY 1995 budget neutrality adjustment. (See the 
discussion in the September 1, 1992 final rule (57 FR 39832).) Based on 
this comparison, we computed a budget neutrality adjustment factor 
equal to 0.999174. This budget neutrality adjustment factor is applied 
to the standardized amounts without removing the effects of the FY 1995 
budget neutrality adjustment. We do not remove the prior budget 
neutrality adjustment because estimated aggregate payments after the 
changes in [[Page 29259]] the DRG relative weights and wage index 
should equal estimated aggregate payments prior to the changes. If we 
removed the prior year adjustment, we would not satisfy this condition.
    In addition, we are proposing to continue to apply the same FY 1996 
adjustment factor to the hospital-specific rates that are effective for 
cost reporting periods beginning on or after October 1, 1995, in order 
to ensure that we meet the statutory requirement that aggregate 
payments neither increase nor decrease as a result of the 
implementation of the FY 1996 DRG weights and updated wage index. (See 
the discussion in the September 4, 1990 final rule (55 FR 36073).)
    Section 1886(d)(5)(I) of the Act, as amended by section 109 of the 
Social Security Act Amendments of 1994 (Public Law 103-432), authorizes 
the Secretary to make adjustments to the prospective payment system 
standardized amounts so that adjustments to the payment policy for 
transfer cases do not affect aggregate payments. As discussed in 
section IV of the preamble, we are proposing to revise our payment 
methodology for transfer cases, so that we would pay double the per 
diem amount for the first day of a transfer case, and the per diem 
amount after that, up to the full DRG amount. For the data that we 
analyzed, this would result in additional payments for transfer cases 
of $159 million. To implement this proposed change in a budget neutral 
manner, we adjusted the standardized amounts by applying a budget 
neutrality adjustment of 0.997583. This adjustment will only be applied 
on a one-time basis to the FY 1996 standardized amounts. After FY 1996, 
there will be no need for a further budget neutrality adjustment unless 
or until we make further changes to the transfer payment methodology.
    b. Reclassified Hospitals--Budget Neutrality Adjustment.
    Section 1886(d)(8) (B) of the Act provides that certain rural 
hospitals are deemed urban effective with discharges occurring on or 
after October 1, 1988. In addition, section 1886(d)(10) of the Act 
provides for the reclassification of hospitals based on determinations 
by the Medicare Geographic Classification Review Board (MGCRB). Under 
section 1886(d)(10) of the Act, a hospital may be reclassified for 
purposes of the standardized amount or the wage index, or both.
    Under section 1886(d)(8)(D) of the Act, the Secretary is required 
to adjust the standardized amounts so as to ensure that total aggregate 
payments under the prospective payment system after implementation of 
the provisions of sections 1886(d)(8) (B) and (C) and 1886(d)(10) of 
the Act are equal to the aggregate prospective payments that would have 
been made absent these provisions. We are applying an adjustment of 
0.994125 to ensure that the effects of reclassification are budget 
neutral.
    The adjustment factor is applied to the standardized amounts after 
removing the effects of the FY 1995 budget neutrality adjustment 
factor. We note that the proposed FY 1996 adjustment reflects wage 
index and standardized amount reclassifications approved by the MGCRB 
or the Administrator as of March 14, 1995. The effects of any 
additional reclassification changes resulting from appeals and reviews 
of the MGCRB decisions for FY 1996 or from a hospital's request for the 
withdrawal of a reclassification request will be reflected in the final 
budget neutrality adjustment required under section 1886(d)(8)(D) of 
the Act and published in the final rule for FY 1996.
c. Outliers.
    Section 1886(d)(5)(A) of the Act provides that, in addition to the 
basic prospective payment rates, for discharges occurring before 
October 1, 1997, payments must be made for discharges involving day 
outliers and may be made for cost outliers. Section 1886(d)(3)(B) of 
the Act requires the Secretary to adjust both the large urban and other 
areas national standardized amounts by the same factor to account for 
the estimated proportion of total DRG payments made to outlier cases. 
Section 1886(d)(9)(B)(iv) of the Act requires that the urban and other 
standardized amounts applicable to hospitals in Puerto Rico be reduced 
by the proportion of estimated total DRG payments attributable to 
estimated outlier payments. Furthermore, under section 
1886(d)(5)(A)(iv) of the Act, estimated outlier payments in any year 
may not be less than 5 percent nor more than 6 percent of total 
payments projected or estimated to be made based on DRG prospective 
payment rates.
    Beginning with FY 1995, section 1886(d)(5)(A) of the Act requires 
the Secretary to reduce the proportion of total outlier payments paid 
under the day outlier methodology. Under the requirements of section 
1886(d)(5)(A)(v) of the Act, the proportion of outlier payments made 
under the day outlier methodology, relative to the proportion of 
outlier payments made under the day outlier methodology in FY 1994 
(which we estimated at 31.3 percent in our September 1, 1993 final rule 
(58 FR 46348)), will be 75 percent in FY 1995, 50 percent in FY 1996, 
and 25 percent in FY 1997. For discharges occurring after September 30, 
1997, the Secretary will no longer pay for day outliers under the 
provisions of section 1886(d)(5)(A)(i) of the Act.
    i. FY 1996 Outlier Thresholds.
    For FY 1995, the day outlier threshold is the geometric mean length 
of stay for each DRG plus the lesser of 22 days or 3.0 standard 
deviations. The marginal cost factor for day outliers (or the percent 
of Medicare's average per diem payment paid for each outlier day) is 
equal to 47 percent in FY 1995. The fixed loss cost outlier threshold 
is equal to the prospective payment for the DRG plus $20,500 ($18,800 
for hospitals that have not yet entered the prospective payment system 
for capital-related costs). The marginal cost factor for cost outliers 
(or the percent of costs paid after costs for the case exceed the 
threshold) is 80 percent. We applied an outlier adjustment to the FY 
1995 standardized amounts of 0.948940 for the large urban and other 
areas rates and 0.9414 for the capital Federal rate.
    For FY 1996, we propose to set the day outlier threshold at the 
geometric mean length of stay for each DRG plus the lesser of 23 days 
or 3.0 standard deviations. Section 1886(d)(5)(A)(iii) of the Act, as 
amended by section 13501(c)(3) of Public Law 103-66, provides that 
additional payments for day outlier cases are allowed to be reduced 
below the marginal cost of care to meet the requirements of section 
1886(d)(5)(A)(v) of the Act. We are proposing to reduce the marginal 
cost factor for each outlier day from 47 percent to 45 percent in FY 
1996. We estimate that our proposed policies will reduce the proportion 
of outlier payments paid as day outliers to approximately 16 percent in 
accordance with section 1886(d)(5)(A) of the Act.
    We are also proposing a fixed loss cost outlier threshold in FY 
1996 equal to the prospective payment rate for the DRG plus $16,700 
($15,200 for hospitals that have not yet entered the prospective 
payment system for capital-related costs). In addition, we are 
proposing to maintain the marginal cost factor for cost outliers at 80 
percent.
    As provided in section 1886(d)(5)(A)(iv) of the Act, we calculated 
outlier thresholds so that estimated outlier payments equal 5.1 percent 
of estimated total payments based on DRGs. The model to determine the 
outlier thresholds for FY 1996 uses the FY 1994 MedPAR file and the 
most recent available information on hospital-specific payment 
parameters (such as the cost-to-charge ratios). This information is 
based on the December 1994 update of the provider-specific file used in 
the PRICER program. Using [[Page 29260]] these data, we simulate the 
payments that would be made for these cases under certain assumptions 
and policies. The simulation provides estimates of outlier payments and 
total payments for the set of cases analyzed.
    In simulating payments, we convert billed charges to costs for 
purposes of estimating cost outlier payments. As we explained in the 
September 1, 1993 final rule (58 FR 46347), prior to FY 1994, we used a 
charge inflation factor to adjust charges to costs; beginning with FY 
1994, we are using a cost inflation factor to estimate costs. In other 
words, instead of inflating the FY 1994 charge data by a charge 
inflation factor for 2 years in order to estimate FY 1996 charge data 
and then applying the cost-to-charge ratio, we adjust the charges by 
the cost-to-charge ratio and then inflate the estimated costs for 2 
years of cost inflation. In this manner, we automatically adjust for 
any changes in the cost-to-charge ratios that may occur, since the 
relevant variable is the costs estimated for a given case.
    In setting the proposed FY 1996 outlier thresholds, we used a cost 
inflation factor of 1.02009. This reflects the average increase in cost 
per case between the data from cost reporting periods beginning in FY 
1991 (referred to as PPS-VIII data) and the data from cost reporting 
periods beginning in FY 1993 (PPS-X data) for a matched set of 
hospitals. We made an audit adjustment for any cost report that had not 
been settled, based on the average ratio of submitted to final cost 
report data. This adjustment was made separately for Medicare inpatient 
capital costs and Medicare inpatient operating costs. We used the 
actual settlement ratio for PPS-VIII data, since most cost reports for 
that period have been settled. We also used the settlement ratio from 
PPS-VIII for the PPS-IX cost reports, since the PPS-IX settlement ratio 
currently available is based on many fewer hospitals (approximately 36 
percent, as opposed to 93 percent for PPS-VIII).
    When we modeled the combined operating and capital outlier 
payments, we found that using a common set of thresholds resulted in a 
lower percentage of outlier payments for capital-related costs than for 
operating costs. We estimate the proposed thresholds for FY 1996 will 
result in outlier payments equal to 5.1 percent of operating DRG 
payments and 4.7 percent of capital payments based on the Federal rate.
    As stated in the September 1, 1993 final rule (58 FR 46348), we 
have established outlier thresholds that would be applicable to both 
inpatient operating costs and inpatient capital-related costs. As 
explained earlier, we will apply a reduction of approximately 5.1 
percent to the FY 1996 standardized amounts to account for the 
proportion of payments paid to outliers. The proposed outlier 
adjustment factors applied to the standardized amounts and the capital 
Federal rate for FY 1996 are as follows:

------------------------------------------------------------------------
   Operating standardized amounts            Capital federal Rate       
------------------------------------------------------------------------
0.949054...........................                    0.9526           
------------------------------------------------------------------------

    We would apply the proposed outlier adjustment factors after 
removing the effects of the FY 1995 outlier adjustment factors on the 
standardized amounts and the capital Federal rate.
    ii. Other Changes Concerning Outliers.
    Table 5 of section V of this addendum contains the DRG relative 
weights, geometric and arithmetic mean lengths of stay, as well as the 
day outlier threshold for each DRG. When we recalibrate DRG weights, we 
set a threshold of 10 cases as the minimum number of cases required to 
compute a reasonable weight and geometric mean length of stay. DRGs 
that do not have at least 10 cases are considered to be low volume 
DRGs. For the low volume DRGs, we use the original geometric mean 
lengths of stay, because no arithmetic mean length of stay was 
calculated based on the original data.
    Table 8a in section V of this addendum contains the updated 
Statewide average operating cost-to-charge ratios for urban hospitals 
and for rural hospitals to be used in calculating cost outlier payments 
for those hospitals for which the intermediary is unable to compute a 
reasonable hospital-specific cost-to-charge ratio. These Statewide 
average ratios would replace the ratios published in the September 1, 
1994 final rule (59 FR 45480), effective October 1, 1995. Table 8b 
contains comparable Statewide average capital cost-to-charge ratios. 
These average ratios would be used to calculate cost outlier payments 
for those hospitals for which the intermediary computes operating cost-
to-charge ratios lower than 0.25960 or greater than 1.30826 and capital 
cost-to-charge ratios lower than 0.012912 or greater than 0.21945. This 
range represents 3.0 standard deviations (plus or minus) from the mean 
of the log distribution of cost-to-charge ratios for all hospitals. The 
cost-to-charge ratios in Tables 8a and 8b would be applied to all 
hospital-specific cost-to-charge ratios based on cost report 
settlements occurring during FY 1996.
    iii. FY 1994 and FY 1995 Outlier Payments. In the September 1, 1994 
final rule (59 FR 45408), we estimated that actual FY 1994 outlier 
payments would be approximately 3.9 percent of total DRG payments. This 
figure was computed by simulating payments using actual FY 1993 bill 
data available at the time. That is, the figure did not reflect actual 
FY 1994 bills but instead reflected the application of FY 1994 rates 
and policies to available FY 1993 bills. Our current estimate, using FY 
1994 rates, policies, and available bills, is that actual FY 1994 
outlier payments were approximately 3.5 percent of total DRG payments.
    In FY 1994, we began using a cost inflation factor rather than a 
charge inflation factor to update billed charges for purposes of 
estimating outlier payments. This refinement was made in order to 
improve our estimation methodology. We believe that actual FY 1994 
outlier payments as a percentage of total DRG payments may be lower 
than expected because actual hospital costs may be lower than reflected 
in the methodology used to set the FY 1994 outlier thresholds. Our most 
recent data on hospital costs show a significant trend in declining 
rates of increase. Thus, the cost inflation factor of 8.3 percent used 
to set FY 1994 outlier policy (based on the best available data) 
appears to have been overstated. For FY 1995, we used a cost inflation 
factor of 2.5 percent. For FY 1996, based on more recent data, we are 
proposing a cost inflation factor of 2.009 percent to set outlier 
policy. Also, although we estimate that FY 1994 outlier payments will 
approximate 3.5 percent of total DRG payments, we note that the 
estimate of the market basket rate of increase used to set the FY 1994 
rates was 4.3 percentage points, while the latest FY 1994 market basket 
rate of increase forecast is 2.5 percent. Thus, the net effect is that 
hospitals are receiving higher FY 1994 payments than would have been 
established based on a more recent forecast of the market basket rate 
of increase.
    We currently estimate that FY 1995 outlier payments will 
approximate 4.2 percent of total DRG payments. This estimate is based 
on simulations using the December 1994 update of the provider-specific 
file and the December 1994 update of the FY 1994 MedPAR file. We used 
these data to estimate an outlier percentage by applying FY 1995 rates 
and policies to available FY 1994 bills.
    We believe that there are two main reasons why our current estimate 
of actual FY 1995 outlier payments is below 5.1 percent. First, in 
setting the [[Page 29261]] outlier thresholds for FY 1995, we used 2.5 
percent as our cost inflation factor to inflate FY 1993 bills to FY 
1995 levels. Our current estimate of cost inflation is 2.009 percent, 
demonstrating that the rate of increase in costs continues to slow.
    Second, in setting the outlier thresholds for FY 1995, we used 
cost-to-charge ratios that had a mean value of 0.618. Our current 
estimate of cost-to-charge ratios for FY 1995 is down to 0.605. Thus, 
not only are costs not rising as fast as we estimated, but they also 
make up a lower percentage of charges than we estimated in setting FY 
1995 thresholds. We are continuing to explore better ways to forecast 
the changes in cost inflation.
B. Adjustments for Area Wage Levels and Cost of Living

    The adjusted standardized amounts are divided into labor and 
nonlabor portions. Tables 1a, 1b, and 1c, as set forth in this 
addendum, contain the actual labor-related and nonlabor-related shares 
that will be used to calculate the prospective payment rates for 
hospitals located in the 50 States, the District of Columbia, and 
Puerto Rico. This section addresses two types of adjustments to the 
standardized amounts that are made in determining the prospective 
payment rates as described in this addendum.
1. Adjustment for Area Wage Levels
    Sections 1886(d)(3)(E) and 1886(d)(9)(C)(iv) of the Act require 
that an adjustment be made to the labor-related portion of the 
prospective payment rates to account for area differences in hospital 
wage levels. This adjustment is made by multiplying the labor-related 
portion of the adjusted standardized amounts by the appropriate wage 
index for the area in which the hospital is located. In section III of 
the preamble, we discuss certain revisions we are making to the wage 
index. This index is set forth in Tables 4a through 4e of this 
addendum.
2. Adjustment for Cost of Living in Alaska and Hawaii
    Section 1886(d)(5)(H) of the Act authorizes an adjustment to take 
into account the unique circumstances of hospitals in Alaska and 
Hawaii. Higher labor-related costs for these two States are taken into 
account in the adjustment for area wages described above. For FY 1996, 
we propose to adjust the payments for hospitals in Alaska and Hawaii by 
multiplying the nonlabor portion of the standardized amounts by the 
appropriate adjustment factor contained in the table below. If the 
Office of Personnel Management releases revised cost-of-living 
adjustment factors before August 1, 1995, we will publish them in the 
final rule and use them in determining FY 1996 payments.

 Table of Cost-of-Living Adjustment Factors, Alaska and Hawaii Hospitals
                                                                        
                                                                        
Alaska--All areas.............................................     1.25 
Hawaii:                                                                 
  Oahu........................................................     1.225
  Kauai.......................................................     1.20 
  Maui........................................................     1.20 
  Molokai.....................................................     1.20 
  Lanai.......................................................     1.20 
  Hawaii......................................................     1.15 

    (The above factors are based on data obtained from the U.S. Office 
of Personnel Management.)

C. DRG Relative Weights

    As discussed in section II of the preamble, we have developed a 
classification system for all hospital discharges, assigning them into 
DRGs, and have developed relative weights for each DRG that reflect the 
resource utilization of cases in each DRG relative to Medicare cases in 
other DRGs. Table 5 of section V of this addendum contains the relative 
weights that we propose to use for discharges occurring in FY 1996. 
These factors have been recalibrated as explained in section II of the 
preamble.

D. Calculation of Prospective Payment Rates for FY 1996

General Formula for Calculation of Prospective Payment Rates for FY 
1996
    Prospective payment rate for all hospitals located outside Puerto 
Rico except sole community hospitals = Federal rate.
    Prospective payment rate for sole community hospitals = Whichever 
of the following rates yields the greatest aggregate payment: 100 
percent of the Federal rate, 100 percent of the updated FY 1982 
hospital-specific rate, or 100 percent of the updated FY 1987 hospital-
specific rate.
    Prospective payment rate for Puerto Rico = 75 percent of the Puerto 
Rico rate + 25 percent of a discharge-weighted average of the national 
large urban standardized amount and the national other standardized 
amount.
    1. Federal Rate
    For discharges occurring on or after October 1, 1995 and before 
October 1, 1996, except for sole community hospitals, hospitals subject 
to the regional floor, and hospitals in Puerto Rico, the hospital's 
payment is based exclusively on the Federal national rate. Section 
1866(d)(1)(A)(iii) of the Act provides that the Federal rate is 
comprised of 100 percent of the Federal national rate except for those 
hospitals in census regions that have a regional rate that is higher 
than the national rate. The Federal rate for hospitals located in 
census regions that have a regional rate that is higher than the 
national rate equals 85 percent of the Federal national rate plus 15 
percent of the Federal regional rate. Based on the proposed rates, for 
discharges occurring on or after October 1, 1995, hospitals in regions 
are affected by the regional floor.
    The payment amount is determined as follows:

Step 1--Select the appropriate national or regional adjusted 
standardized amount considering the type of hospital and designation of 
the hospital as large urban or other (see Tables 1a and 1b, section V 
of this addendum).
Step 2--Multiply the labor-related portion of the standardized amount 
by the applicable wage index for the geographic area in which the 
hospital is located (see Tables 4a, 4b, and 4c, section V of this 
addendum).
Step 3--For hospitals in Alaska and Hawaii, multiply the nonlabor-
related portion of the standardized amount by the appropriate cost-of-
living adjustment factor.
Step 4--Add the amount from Step 2 and the nonlabor-related portion of 
the standardized amount (adjusted if appropriate under Step 3).
Step 5--Multiply the final amount from Step 4 by the relative weight 
corresponding to the appropriate DRG (see Table 5, section V of this 
addendum).

    2. Hospital-Specific Rate (Applicable Only to Sole Community 
Hospitals)
    Sections 1886(d)(5)(D)(i) and (b)(3)(C) of the Act provide that 
sole community hospitals are paid based on whichever of the following 
rates yields the greatest aggregate payment: the Federal rate, the 
updated hospital-specific rate based on FY 1982 cost per discharge, or 
the updated hospital-specific rate based on FY 1987 cost per discharge.
    Hospital-specific rates have been determined for each of these 
hospitals based on both the FY 1982 cost per discharge and the FY 1987 
cost per discharge. For a more detailed discussion of the calculation 
of the FY 1982 hospital-specific rate and the FY 1987 hospital-specific 
rate, we refer the reader to the September 1, 1983 interim 
[[Page 29262]] final rule (48 FR 39772); the April 20, 1990 final rule 
with comment (55 FR 15150); and the September 4, 1990 final rule (55 FR 
35994).
    a. Updating the FY 1982 and FY 1987 Hospital-Specific Rates for FY 
1996. We are proposing to increase the hospital-specific rates by 1.5 
percent (the hospital market basket percentage increase minus 2.0 
percentage points) for sole community hospitals located in all areas in 
FY 1996. Section 1886(b)(3)(C)(ii) of the Act provides that the update 
factor applicable to the hospital-specific rates for sole community 
hospitals equals the update factor provided under section 
1886(b)(3)(B)(ii) of the Act, which, for FY 1996, is the market basket 
rate of increase minus 2.0 percentage points.
    b. Calculation of Hospital-Specific Rate. For sole community 
hospitals, the applicable FY 1996 hospital-specific rate would be 
calculated by multiplying a hospital's hospital-specific rate for the 
preceding fiscal year by the applicable update factor (1.5 percent), 
which is the same as the update for all prospective payment hospitals. 
In addition, the hospital-specific rate would be adjusted by the budget 
neutrality adjustment factor (that is, .999174) as discussed in section 
II.A.4.a of this addendum. This resulting rate would be used in 
determining under which rate a sole community hospital is paid for its 
discharges beginning on or after October 1, 1995, based on the formula 
set forth above.
    3. General Formula for Calculation of Prospective Payment Rates for 
Hospitals Located in Puerto Rico Beginning On or After October 1, 1995 
and Before October 1, 1996
    a. Puerto Rico Rate. The Puerto Rico prospective payment rate is 
determined as follows:

Step 1--Select the appropriate adjusted average standardized amount 
considering the large urban or other designation of the hospital (see 
Table 1c, section V of the addendum).
Step 2--Multiply the labor-related portion of the standardized amount 
by the appropriate wage index (see Tables 4a and 4b, section V of the 
addendum).
Step 3--Add the amount from
Step 2 and the nonlabor-related portion of the standardized amount.
Step 4--Multiply the result in
Step 3 by 75 percent.
Step 5--Multiply the amount from
Step 4 by the appropriate DRG relative weight (see Table 5, section V 
of the addendum).

    b. National Rate. The national prospective payment rate is 
determined as follows:
Step 1--Multiply the labor-related portion of the national average 
standardized amount (see Table 1c, section V of the addendum) by the 
appropriate wage index.
Step 2--Add the amount from
Step 1 and the nonlabor-related portion of the national average 
standardized amount.
Step 3--Multiply the result in
Step 2 by 25 percent.
Step 4--Multiply the amount from
Step 3 by the appropriate DRG relative weight (see Table 5, section V 
of the addendum).

    The sum of the Puerto Rico rate and the national rate computed 
above equals the prospective payment for a given discharge for a 
hospital located in Puerto Rico.
III. Proposed Changes to Payment Rates for Inpatient Capital-Related 
Costs for FY 1996

    The prospective payment system for hospital inpatient capital-
related costs was implemented for cost reporting periods beginning on 
or after October 1, 1991. Effective with that cost reporting period and 
during a 10-year transition period extending through FY 2001, hospital 
inpatient capital-related costs are paid on the basis of an increasing 
proportion of the capital prospective payment system Federal rate and a 
decreasing proportion of the historical costs for capital.
    The basic methodology for determining Federal capital prospective 
rates is set forth at Secs. 412.308 through 412.352. Below we discuss 
the factors that we used to determine the proposed Federal rate and the 
hospital-specific rates for FY 1996. The rates will be effective for 
discharges occurring on or after October 1, 1995.
    For FY 1992, we computed the standard Federal payment rate for 
capital-related costs under the prospective payment system by updating 
the FY 1989 Medicare inpatient capital cost per case by an actuarial 
estimate of the increase in Medicare inpatient capital costs per case. 
Each year after FY 1992 we update the standard Federal rate, as 
provided in Sec. 412.308(c)(1), to account for capital input price 
increases and other factors. Also, Sec. 412.308(c)(2) provides that the 
Federal rate is adjusted annually by a factor equal to the estimated 
additional payments under the Federal rate for outlier cases, 
determined as a proportion of total capital payments under the Federal 
rate. Section 412.308(c)(3) further requires that the Federal rate be 
reduced by an adjustment factor equal to the estimated additional 
payments made for exceptions under Sec. 412.348, and 
Sec. 412.308(c)(4)(ii) requires that the Federal rate be adjusted so 
that the annual DRG reclassification and the recalibration of DRG 
weights and changes in the geographic adjustment factor are budget 
neutral. For FY 1992 through FY 1995, Sec. 412.352 required that the 
Federal rate also be adjusted by a budget neutrality factor so that 
estimated aggregate payments for inpatient hospital capital costs will 
equal 90 percent of the estimated payments that would have been made 
for capital-related costs on a reasonable cost basis during the fiscal 
year. As discussed below, that provision has now expired.
    The hospital-specific rate for each hospital was calculated by 
dividing the hospital's Medicare inpatient capital-related costs for a 
specified base year by its Medicare discharges (adjusted for 
transfers), and dividing the result by the hospital's case mix index 
(also adjusted for transfers). The resulting case-mix adjusted average 
cost per discharge was then updated to FY 1992 based on the national 
average increase in Medicare's inpatient capital cost per discharge and 
adjusted by the exceptions payment adjustment factor and the budget 
neutrality adjustment factor to yield the FY 1992 hospital-specific 
rate. The hospital-specific rate is updated each year after FY 1992 for 
inflation and for changes in the exceptions payment adjustment factor. 
For FY 1992 through FY 1995, the hospital-specific rate was also 
adjusted by a budget neutrality adjustment factor.
    To determine the appropriate budget neutrality adjustment factors 
and the exceptions payment adjustment factor, we developed a dynamic 
model of Medicare inpatient capital-related costs, that is, a model 
that projects changes in Medicare inpatient capital-related costs over 
time. With the expiration of the budget neutrality provision, the model 
is still used to estimate the exceptions payment adjustment and other 
factors. The model and its application are described more fully in 
Appendix B.
    In accordance with section 1886(d)(9)(A) of the Act, under the 
prospective payment system for inpatient operating costs, hospitals 
located in Puerto Rico are paid under a special payment formula. These 
hospitals are paid a blended rate that is comprised of 75 percent of 
the applicable standardized amount specific to Puerto Rico hospitals 
and 25 percent of the applicable national average standardized amount. 
Section 412.374 [[Page 29263]] provides for the use of this blended 
payment system for payments to Puerto Rico hospitals under the 
prospective payment system for inpatient capital-related costs. 
Accordingly, for capital-related costs we compute a separate payment 
rate specific to Puerto Rico hospitals using the same methodology used 
to compute the national Federal rate for capital. Hospitals in Puerto 
Rico are paid based on 75 percent of the Puerto Rico rate and 25 
percent of the Federal rate.
A. Determination of Federal Inpatient Capital-Related Prospective 
Payment Rate Update

    For FY 1995, the Federal rate was $376.83. With the changes we are 
proposing to the factors used to establish the Federal rate, the FY 
1996 Federal rate would be $457.11.
    In the discussion that follows, we explain the factors that were 
used to determine the FY 1996 Federal rate. In particular, we explain 
why the FY 1996 Federal rate has increased 21.3 percent compared to the 
FY 1995 Federal rate. We also explain that aggregate payments for 
capital in FY 1996 are estimated to increase by 20.45 percent.
    The major factor contributing to the increase in the FY 1996 rate 
in comparison to FY 1995 is the expiration of the budget neutrality 
requirement. Section 412.352 required that estimated payments each year 
from FY 1992 through FY 1995 for capital costs equal 90 percent of the 
amount that would have been payable that year on a reasonable cost 
basis. Accordingly, each year from FY 1992 through FY 1995, we applied 
an adjustment to the Federal rate and the hospital-specific rate so 
that estimated capital prospective payments would equal 90 percent of 
estimated Medicare hospital inpatient capital-related costs.
    Based on the most recent data, we now estimate that capital 
payments equalled 95.11 percent of reasonable costs in FY 1992, 91.07 
percent of reasonable costs in FY 1993, 91.00 percent of reasonable 
costs in FY 1994, and 91.06 percent of reasonable costs in FY 1995. 
Thus, the data indicate that the budget neutrality adjustments for FY 
1992, FY 1993, and FY 1994 were not sufficient to meet the 90 percent 
target and, consequently, the Federal rates for FY 1992, FY 1993, FY 
1994, and FY 1995 were higher than they should have been. We do not 
retroactively adjust the budget neutrality factor and the Federal rate 
for previous years to account for revised estimates. For FY 1996, we 
estimate that payments will exceed costs by 4.52 percent as a result of 
the expiration of the budget neutrality provision.
    As we explain in section III.A.8 below, the predominant factor in 
the 21.3 percent increase in the Federal rate, as well as the 20.45 
percent increase in payments, is the expiration of the budget 
neutrality provision. For FY 1995, the budget neutrality adjustment was 
0.8432, a 15.68 percent reduction to the rates. The expiration of that 
provision alone accounts for an 18.6 percent increase (1.00/.8432 = 
1.186, or 18.6 percent) in the rate. The FY 1996 update factor and 
changes in the outlier and exceptions factors also contribute to the 
increase in the rate. The factors contributing to the increase in the 
rate were partially offset by special adjustments to the rate to 
account for the effects of the new transfer policy and the new 
treatment of capital-related tax costs, and by the effect of the DRG/
GAF reduction factor.
    Total payments to hospitals under the prospective payment system 
are relatively insensitive even to changes of such magnitude in the 
capital Federal rate. Since capital payments constitute about 10 
percent of hospital payments, a 1 percent change in the capital Federal 
rate yields only about 0.1 percent change in actual payments to 
hospitals. Therefore, the large increase in the FY 1996 Federal rate 
can be expected to increase total payments to hospitals under the 
prospective payment system by only about 2.04 percent.
1. Standard Federal Rate Adjustment for the New Treatment of Capital-
Related Tax Costs
    Section V.B of the preamble to this proposed rule discusses our 
proposal to revise the treatment of capital-related tax costs within 
the prospective payment system for capital-related costs. As we discuss 
in that section, adoption of any adjustment to the capital Federal rate 
payment for capital-related tax costs requires a corresponding 
adjustment of the standard Federal rate to offset the amount of 
capital-related tax costs originally included in the computation of the 
rate. In this way, adoption of the tax adjustment will be budget 
neutral: capital payments will neither increase nor decrease because of 
the adoption of the tax adjustment.
    We propose to use the following methodology to adjust the standard 
Federal rate to account for the tax costs included in the original 
computation of the rate. We propose to subtract the total FY 1992 
Medicare capital-related taxes for all hospitals from the total FY 1992 
Medicare capital-related costs for all hospitals. The result is FY 1992 
Medicare capital-related costs without taxes. We then determine the 
ratio of FY 1992 Medicare capital-related costs without taxes to total 
FY 1992 Medicare capital-related costs, including capital-related tax 
costs. We then apply this ratio to the base Federal rate to remove the 
capital-related tax costs currently incorporated into that rate. As a 
result of these calculations, we are providing in this proposed rule 
for an estimated 1.14 percent decrease to the base Federal rate to 
account for the tax costs originally included in the rate. As discussed 
in section V.B of the preamble to this proposed rule, we will recompute 
this adjustment on the basis of the verified hospital FY 1992 capital-
related tax cost data available for the final rule.
2. Special Federal Rate Adjustment for the Effects of the New Transfer 
Payment Policy
    Section 412.312(d) provides that payment under the capital 
prospective payment system for transfer cases is made under the same 
rules governing transfer payments under the operating prospective 
payment system. Transfer cases under the prospective payment system for 
capital-related costs have been paid on a per diem basis, using the 
full prospective payment amount for the DRG (both Federal rate and 
hospital-specific rate, if appropriate) divided by the geometric mean 
length of stay for the DRG, but not to exceed the full prospective 
payment. Section IV.A of the preamble describes our proposal to adopt a 
graduated per diem payment methodology for transfer cases. Under this 
proposal, we would pay double the per diem amount for the first day and 
the per diem amount for subsequent days, up to the full prospective 
payment amount. Section 109 of the Social Security Amendments of 1994 
(Public Law 103-432) authorizes the Secretary to make adjustments to 
the operating prospective payment system rates so that adjustments to 
the payment policy for transfer cases do not affect aggregate payments. 
Section II of the addendum describes the methodology for making the 
adjustment to the operating rates.
    In order to maintain consistency with the prospective payment 
system for operating costs, we believe that a parallel adjustment to 
the Federal capital rate and the hospital-specific capital rates is 
warranted. In this way, revision of the payment policy for transfer 
cases will not affect aggregate payments under the prospective payment 
system for capital-related costs. We describe the methodology for 
making this adjustment in Appendix B to this proposed rule. Following 
that [[Page 29264]] methodology, we have determined that a special 
adjustment of .9972 (-0.28 percent) to the standard Federal rate and 
the hospital-specific rates is required.
3. Standard Federal Rate Update
    Section 412.308(c)(1)(ii) provides that, effective FY 1996, the 
standard Federal rate is updated on the basis of an analytical 
framework that takes into account changes in a capital input price 
index and other factors. We discuss the proposed analytical framework 
and the derivation of the proposed FY 1996 update factor under that 
framework in section V.A of the preamble to this proposed rule. The 
proposed update factor is 1.5 percent.
4. Outlier Payment Adjustment Factor
    Section 412.312(c) establishes a unified outlier methodology for 
inpatient operating and inpatient capital-related costs. A single set 
of thresholds is used to identify outlier cases for both inpatient 
operating and inpatient capital-related payments. Outlier payments are 
made only on the portion of the Federal rate that is used to calculate 
the hospital's inpatient capital-related payments (for example, 50 
percent for cost reporting periods beginning in FY 1996 for hospitals 
paid under the fully prospective methodology). 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 
additional payments under the Federal rate for outlier cases, 
determined as a proportion of inpatient capital-related payments under 
the Federal rate. The outlier thresholds are set so that estimated 
outlier payments are 5.1 percent of estimated total DRG payments. The 
inpatient capital-related outlier reduction factor is then set 
according to the estimated inpatient capital-related outlier payments 
that would be made if all hospitals were paid according to 100 percent 
of the Federal rate. For purposes of calculating the outlier thresholds 
and the outlier reduction factor, we model all hospitals as if paid 100 
percent of the Federal rate because, as explained above, outlier 
payments are made only on the portion of the Federal rate that is 
included in the hospital's inpatient capital-related payments.
    In the September 1, 1994 final rule, we estimated that outlier 
payments for capital in FY 1995 would equal 5.86 percent of inpatient 
capital-related payments based on the Federal rate. Accordingly, we 
applied an outlier adjustment factor of 0.9414 to the Federal rate. 
Based on the thresholds as set forth in section II.A.4.d of the 
addendum, we estimate that outlier payments will equal 4.74 percent of 
inpatient capital-related payments based on the Federal rate in FY 
1996. We are, therefore, proposing an outlier adjustment factor of 
0.9526 to the Federal rate. Thus, proposed capital outlier payments for 
FY 1996 represent a lower percentage of total capital standard payments 
than in FY 1995.
    The outlier reduction factors are not built permanently into the 
rates; that is, they are not applied cumulatively in determining the 
Federal rate. Therefore, the proposed net change in the outlier 
adjustment to the Federal rate for FY 1996 is 1.0119 (.9526/.9414). 
Thus, the proposed outlier adjustment increases the FY 1996 Federal 
rate by 1.19 percent (1.0119-1) compared with the FY 1995 outlier 
adjustment.
5. Budget Neutrality Adjustment Factor for Changes in DRG 
Classifications and Weights and the Geographic Adjustment Factor
    Section 412.308(c)(4)(ii) requires that the Federal rate be 
adjusted so that estimated aggregate payments for the fiscal year based 
on the Federal rate after any changes resulting from the annual DRG 
reclassification and recalibration and changes in the geographic 
adjustment factor equal estimated aggregate payments that would have 
been made on the basis of the Federal rate without such changes. We use 
the actuarial model described in Appendix B to estimate the aggregate 
payments that would have been made on the basis of the Federal rate 
without changes in the DRG classifications and weights and in the 
geographic adjustment factor. We also use the model to estimate 
aggregate payments that would be made on the basis of the Federal rate 
as a result of those changes. We then use these figures to compute the 
adjustment required to maintain budget neutrality for changes in DRG 
weights and in the geographic adjustment factor.
    For FY 1995, we calculated a GAF/DRG budget neutrality factor of 
0.9998. For FY 1996, we are proposing a GAF/DRG budget neutrality 
factor of 0.9993. The GAF/DRG budget neutrality factors are built 
permanently into the rates; that is, they are applied cumulatively in 
determining the Federal rate. This follows from the requirement that 
estimated aggregate payments each year be no more than they would have 
been in the absence of the annual DRG reclassification and 
recalibration and changes in the geographic adjustment factor. The 
proposed incremental change in the adjustment from FY 1995 to FY 1996 
is 0.9993. The proposed cumulative change in the rate due to this 
adjustment is 1.0024 (the product of the incremental factors for FY 
1993, FY 1994, FY 1995, and the proposed incremental factor for FY 
1996: .9980 x 1.0053 x .9998 x .9993=1.0024).
    This factor accounts for DRG reclassifications and recalibration 
and for changes in the geographic adjustment factor. It also 
incorporates the effects on the geographic adjustment factor of FY 1996 
geographic reclassification decisions made by the MGCRB compared to FY 
1995 decisions. However, it does not account for changes in payments 
due to changes in the disproportionate share and indirect medical 
education adjustment factors or in the large urban add-on.
6. Exceptions Payment Adjustment Factor
    Section 412.308(c)(3) requires that the standard Federal rate for 
inpatient capital-related costs be reduced by an adjustment factor 
equal to the estimated additional payments for exceptions under 
Sec. 412.348 determined as a proportion of total payments under the 
hospital-specific rate and Federal rate. We use the model originally 
developed for determining the budget neutrality adjustment factor to 
estimate payments under the exceptions payment process and to determine 
the exceptions payment adjustment factor. We describe that model in 
Appendix B to this proposed rule.
    For FY 1995, we estimated that exceptions payments would equal 2.66 
percent of aggregate payments based on the Federal rate and the 
hospital-specific rate. Therefore, we applied an exceptions reduction 
factor of 0.9734 (1-.0266) in determining the Federal rate. For this 
proposed rule, we estimate that exceptions payments for FY 1996 will 
equal 1.60 percent of aggregate payments based on the Federal rate and 
the hospital-specific rate. We are, therefore, proposing an exceptions 
payment reduction factor of 0.9840 to the Federal rate for FY 1996.
    The proposed exceptions reduction factor for FY 1996 is thus 1.09 
percent higher than the factor for FY 1995. The reduced level of 
estimated exceptions payments for FY 1996 compared to FY 1995 is a 
result of the significant increases in the capital rates and in 
aggregate capital payments.
    The exceptions reduction factors are not built permanently into the 
rates; that is, the factors are not applied cumulatively in determining 
the Federal rate. Therefore, the proposed net adjustment to the FY 1996 
Federal rate is .9840/.9734, or 1.0109. [[Page 29265]] 
7. Expiration of Budget Neutrality Provision
    For FY 1992 through FY 1995, Sec. 412.352 required that the Federal 
rate also be adjusted by a budget neutrality factor so that estimated 
aggregate payments for inpatient hospital capital costs would equal 90 
percent of the estimated payments that would have been made for 
capital-related costs on a reasonable cost basis during the fiscal 
year. That provision has now expired. The expiration of the budget 
neutrality provision is the predominant factor in the 21.3 percent 
increase in the Federal rate, as well as the 20.4 percent increase in 
payments.
    For FY 1995, the budget neutrality adjustment was 0.8432, a 15.68 
percent reduction to the rates. The budget neutrality factors were not 
built permanently into the rates; that is, the factors were not applied 
cumulatively in determining the Federal rate. With the expiration of 
the budget neutrality provision, the proposed net adjustment to the 
rate is thus 1.186 (1.00/.8432=1.186), or 18.6 percent. The expiration 
of the provision, therefore, accounts for an 18.6 percent increase in 
the rate.
8. Standard Capital Federal Rate for FY 1996
    For FY 1995, the capital Federal rate was $376.83. With the changes 
we are proposing to the factors used to establish the Federal rate, the 
FY 1996 Federal rate would be $457.11. The proposed Federal rate for FY 
1996 was calculated as follows:
     The proposed special adjustment to the standard Federal 
rate to account for the change in transfer payment policy is 0.9972.
     The proposed special adjustment to remove the capital-
related tax costs included in the original computation of the rate is 
0.9886.
     The proposed FY 1996 update factor is 1.0150.
     The proposed FY 1996 outlier adjustment factor is 0.9526.
     The proposed FY 1996 budget neutrality adjustment factor 
that is applied to the standard Federal payment rate for changes in the 
DRG relative weights and in the geographic adjustment factor is 0.9993.
     The proposed FY 1996 exceptions payments adjustment factor 
is 0.9840.
     The expiration of the budget neutrality provision requires 
that the FY 1995 budget neutrality adjustment be removed from the rate 
without further incremental adjustment.
    Since the Federal rate has already been adjusted for differences in 
case mix, wages, cost of living, indirect medical education costs, and 
payments to hospitals serving a disproportionate share of low-income 
patients, we propose to make no additional adjustments in the standard 
Federal rate for these factors other than the budget neutrality factor 
for changes in the DRG relative weights and the geographic adjustment 
factor.
    We are providing a chart that shows how each of the factors and 
adjustments for FY 1996 affected the computation of the proposed FY 
1996 Federal rate in comparison to the FY 1995 Federal rate. The 
proposed special adjustments to account for the effects of changes in 
transfer payment policy and in the treatment of capital-related tax 
costs have the effect of reducing the rate by 0.28 percent and 1.14 
percent, respectively. The proposed FY 1996 update factor has the 
effect of increasing the Federal rate 1.50 percent compared to the rate 
in FY 1994, while the proposed geographic and DRG budget neutrality 
factor has the effect of decreasing the Federal rate by 0.07 percent. 
The proposed FY 1996 outlier adjustment factor has the effect of 
increasing the Federal rate by 1.19 percent compared to FY 1995. The 
proposed FY 1996 exceptions reduction factor has the effect of 
increasing the Federal rate by 1.09 percent compared to the exceptions 
reduction for FY 1995. Finally, the expiration of the budget neutrality 
provision has the effect of increasing the proposed FY 1996 rate by 
18.60 percent compared to the effect of the budget neutrality reduction 
in FY 1995. The combined effect of all the proposed changes is to 
increase the proposed Federal rate by 21.3 percent compared to the 
Federal rate for FY 1995.

Comparison of Factors and Adjustments: FY 1995 Federal Rate and Proposed
                          FY 1996 Federal Rate                          
------------------------------------------------------------------------
                                                                 Percent
                                                       Change    change 
------------------------------------------------------------------------
Transfer adjustment                                                     
  FY 1995:................................       N/A                    
  Proposed FY 1996:.......................    0.9972    0.9972     -0.28
Tax adjustment                                                          
  FY 1995:................................       N/A                    
  Proposed FY 1996:.......................    0.9886    0.9886     -1.14
Update factor\1\                                                        
  FY 1995:................................    1.0344                    
  Proposed FY 1996:.......................    1.0150    1.0150      1.50
GAF/DRG adjustment factor\1\                                            
  FY 1995:................................    0.9998                    
  Proposed FY 1996:.......................    0.9993    0.9993     -0.07
Outlier adjustment factor\2\                                            
  FY 1995:................................    0.9414                    
  Proposed FY 1996:.......................    0.9526    1.0119      1.19
Exceptions adjustment factor                                            
  FY 1995\2\..............................    0.9734                    
  Proposed FY 1996:.......................    0.9840    1.0109      1.09
Budget neutrality adjustment factor\2\                                  
  FY 1995:................................    0.8432                    
  Proposed FY 199.........................    1.0000    1.1860     18.60
Federal rate                                                            
  FY 1995:................................   $376.83                    
  Proposed FY 1996:.......................   $457.11    1.2130    21.30 
------------------------------------------------------------------------
\1\The update factor and the GAF/DRG budget neutrality factors are built
  permanently into the rates. Thus, for example, the incremental change 
  from FY 1995 to FY 1996 resulting from the application of the 0.9993  
  GAF/DRG budget neutrality factor for FY 1996 is 0.9993.               
[[Page 29266]]
                                                                        
\2\The outlier reduction factor and the exceptions reduction factor are 
  not built permanently into the rates; that is, these factors are not  
  applied cumulatively in determining the rates. Thus, for example, the 
  net change resulting from the application of the FY 1996 exceptions   
  reduction factor is 0.9840/0.9734, or 1.0119.                         

9. Special Rate for Puerto Rico Hospitals
    For FY 1995, the special rate for Puerto Rico hospitals was 
$289.87. With the changes we are proposing to the factors used to 
determine the rate, the proposed FY 1996 special rate for Puerto Rico 
would be $351.61.

B. Determination of Hospital-Specific Rate Update

    Section 412.328(e) of the regulations provides that the hospital-
specific rate for FY 1996 be determined by adjusting the FY 1995 
hospital-specific rate by the following factors:
1. Special Adjustment for the Effects of the New Transfer Policy
    Section 412.312(d) of the regulations provides that payment under 
the capital prospective payment system for transfer cases is made under 
the same rules governing transfer payments under the operating 
prospective payment system. Transfer cases under the prospective 
payment system for capital-related costs have been paid on a per diem 
basis, using the full prospective payment amount for the DRG (both 
Federal rate and hospital-specific rate, if appropriate) divided by the 
geometric mean length of stay for the DRG, but not to exceed the full 
prospective payment. Section IV.A of the preamble to this proposed rule 
describes our proposal to adopt a graduated per diem payment 
methodology for transfer cases. Under this proposal, we would pay 
double the per diem amount for the first day and the per diem amount 
for subsequent days, up to the full prospective payment amount. Section 
109 of the Social Security Amendments of 1994 (Public Law 103-432) 
authorizes the Secretary to make adjustments to the operating 
prospective payment system rates so that adjustments to the payment 
policy for transfer cases do not affect aggregate payments. Section II 
of this Addendum describes the methodology for making the adjustment to 
the operating rates.
    In order to maintain consistency with the prospective payment 
system for operating costs, we believe that a parallel adjustment to 
the Federal capital rate and the hospital-specific capital rates is 
warranted. In this way, revision of the payment policy for transfer 
cases will not affect aggregate payments under the prospective payment 
system for capital-related costs. We describe the methodology for 
making this adjustment in Appendix B of this proposed rule. Following 
that methodology, we have determined that a special adjustment of 
0.9972 (-0.28 percent) to the standard Federal rate and the hospital-
specific rates is required. We propose to revise Sec. 412.328(e) 
accordingly.
2. Hospital-Specific Rate Update Factor
    The hospital-specific rate is updated in accordance with the update 
factor for the standard Federal rate determined under 
Sec. 412.308(c)(1). For FY 1996, we are proposing that the hospital-
specific rate be updated by a factor of 1.015.
3. Exceptions Payment Adjustment Factor
    For FY 1992 through FY 2001, the updated hospital-specific rate is 
multiplied by an adjustment factor to account for estimated exceptions 
payments for capital-related costs under Sec. 412.348, determined as a 
proportion of the total amount of payments under the hospital-specific 
rate and the Federal rate. For FY 1996, we estimate that exceptions 
payments will be 1.60 percent of aggregate payments based on the 
Federal rate and the hospital-specific rate. We therefore propose that 
the updated hospital-specific rate be reduced by a factor of 0.9840. 
The exceptions reduction factors are not built permanently into the 
rates; that is, the factors are not applied cumulatively in determining 
the hospital-specific rate. Therefore, the proposed net adjustment to 
the FY 1996 hospital-specific rate is .9840/.9734, or 1.0109.
4. Expiration of the Budget Neutrality Provision
    For FY 1992 through FY 1995, the updated hospital-specific rate was 
adjusted by a budget neutrality adjustment factor determined under 
Sec. 412.352, so that estimated aggregate payments under the capital 
prospective payment system would equal 90 percent of estimated payments 
that would have been made on a reasonable cost basis. (The budget 
neutrality adjustment for changes in the DRG classifications and 
relative weights and in the geographic adjustment factor is not applied 
to the hospital-specific rate.) For FY 1995, the budget neutrality 
adjustment was 0.8432. The budget neutrality provision has now expired. 
Therefore, for FY 1996 there is no budget neutrality adjustment. The 
budget neutrality factor was not built permanently into the rates; that 
is, the factor was not applied cumulatively in determining the 
hospital-specific rate. Therefore, the proposed net adjustment to the 
FY 1996 hospital-specific rate as a result of the expiration of the 
budget neutrality provision is 1.0000/.8432, or 1.1860.
5. Net Change to Hospital-Specific Rate
    We are providing a chart to show the net change to the hospital-
specific rate. The chart shows the factors for FY 1995 and FY 1996 and 
the net adjustment for each factor. It also shows that the proposed 
cumulative net adjustment from FY 1995 to FY 1996 is 1.2134, which 
represents a proposed increase of 21.34 percent to the hospital-
specific rate. The proposed FY 1996 hospital-specific rate for each 
hospital is determined by multiplying the FY 1995 hospital-specific 
rate by the cumulative net adjustment of 1.2134.

   Proposed FY 1996 Update and Adjustments to Hospital-Specific Rates   
------------------------------------------------------------------------
                                                        Net      Percent
                                                    adjustment   change 
------------------------------------------------------------------------
Transfer adjustment                                                     
  FY 1995:..............................       N/A                      
  Proposed FY 1996:.....................    0.9972     0.9972      -0.28
Update factor                                                           
  FY 1995:..............................    1.0304                      
  Proposed FY 1996:.....................    1.0150     1.0150       1.50
Exceptions payment adjustment factor                                    
  FY 1995:..............................    0.9734                      
  Proposed FY 1996:.....................    0.9840     1.0109       1.09
Budget neutrality factor                                                
[[Page 29267]]
                                                                        
  FY 1995:..............................    0.8432                      
  Proposed FY 1996:.....................    1.0000     1.1860      18.60
Cumulative adjustments                                                  
  FY 1995:..............................    0.8457                      
  Proposed FY 1996:.....................    1.0262     1.2134     21.34 
------------------------------------------------------------------------
Note: The update factor for the hospital-specific rate is applied       
  cumulatively in determining the rates. Thus, the incremental increase 
  in the update factor from FY 1995 to FY 1996 is 1.0150. In contrast,  
  the exceptions payment adjustment factor and the budget neutrality    
  factor are not applied cumulatively. Thus, for example, the           
  incremental increase in the exceptions reduction factor from FY 1995  
  to FY 1996 is .9840/.9734, or 1.0109.                                 

C. Calculation of Inpatient Capital-Related Prospective Payments for FY 
1996

    During the capital prospective payment system transition period, a 
hospital is paid for the inpatient capital-related costs under one of 
two alternative payment methodologies: the fully prospective payment 
methodology or the hold-harmless methodology. The payment methodology 
applicable to a particular hospital is determined when a hospital comes 
under the prospective payment system for capital-related costs by 
comparing its hospital-specific rate to the Federal rate applicable to 
the hospital's first cost reporting period under the prospective 
payment system. The applicable Federal rate was determined by 
adjusting:
     For outliers by dividing the standard Federal rate by the 
outlier reduction factor for that fiscal year; and,
     For the payment adjustment factors applicable to the 
hospital (that is, the hospital's geographic adjustment factor, the 
disproportionate share adjustment factor, and the indirect medical 
education adjustment factor, when appropriate).
    If the hospital-specific rate is above the applicable Federal rate, 
the hospital is paid under the hold-harmless methodology. If the 
hospital-specific rate is below the applicable Federal rate, the 
hospital is paid under the fully prospective methodology.
    For purposes of calculating payments for each discharge under both 
the hold-harmless payment methodology and the fully prospective payment 
methodology, the standard Federal rate is adjusted as follows: 
(Standard Federal Rate)  x  (DRG weight)  x  (Geographic Adjustment 
Factor)  x  (Large Urban Add-on, if applicable)  x  (COLA adjustment 
for hospitals located in Alaska and Hawaii)  x  (1 + Disproportionate 
Share Adjustment Factor + Indirect Medical Education Adjustment Factor, 
if applicable). The result is termed the adjusted Federal rate.
    Payments under the hold-harmless methodology are determined under 
one of two formulas. A hold-harmless hospital is paid the higher of:
     100 percent of the adjusted Federal rate for each 
discharge; or
     An old capital payment equal to 85 percent (100 percent 
for sole community hospitals) of the hospital's allowable Medicare 
inpatient old capital costs per discharge for the cost reporting period 
plus a new capital payment based on a percentage of the adjusted 
Federal rate for each discharge. The percentage of the adjusted Federal 
rate equals the ratio of the hospital's allowable Medicare new capital 
costs to its total Medicare inpatient capital-related costs in the cost 
reporting period.
    Once a hospital receives payment based on 100 percent of the 
adjusted Federal rate in a cost reporting period beginning on or after 
October 1, 1994 (or the first cost reporting period after obligated 
capital that is recognized as old capital under Sec. 412.302(c) is put 
in use for patient care, if later), the hospital continues to receive 
capital prospective payment system payments on that basis for the 
remainder of the transition period.
    Payment for each discharge under the fully prospective methodology 
is the sum of:
     The hospital-specific rate multiplied by the DRG relative 
weight for the discharge and by the applicable hospital-specific 
transition blend percentage for the cost reporting period; and
     The adjusted Federal rate multiplied by the Federal 
transition blend percentage.
    The blend percentages for cost reporting periods beginning in FY 
1996 are 50 percent of the adjusted Federal rate and 50 percent of the 
hospital-specific rate.
    In addition, we are proposing that, for discharges on or after 
October 1, 1995, a hospital that was subject to capital-related tax 
payments in FY 1992 would receive a dollar add-on to the Federal rate 
payment as an adjustment for capital-related tax costs. The hospital-
specific amount of the adjustment would be determined in accordance 
with the methodology described in section V.B of the preamble to this 
proposed rule. During the transition, the hospital-specific dollar add-
on amount is multiplied by the Federal rate percentage applicable to 
the hospital under its transition payment methodology (e.g., 50 percent 
in FY 1996 for fully prospective hospitals).
    Hospitals may also receive outlier payments for those cases that 
qualify under the thresholds established for each fiscal year. Section 
412.312(c) provides for a single set of thresholds to identify outlier 
cases for both inpatient operating and inpatient capital-related 
payments. Outlier payments are made only on that portion of the Federal 
rate that is used to calculate the hospital's inpatient capital-related 
payments. For fully prospective hospitals, that portion is 50 percent 
of the Federal rate for discharges occurring in cost reporting periods 
beginning during FY 1996. Thus, a fully prospective hospital will 
receive 50 percent of the capital-related outlier payment calculated 
for the case for discharges occurring in cost reporting periods 
beginning in FY 1996. For hold-harmless hospitals paid 85 percent of 
their reasonable costs for old inpatient capital, the portion of the 
Federal rate that is included in the hospital's outlier payments is 
based on the hospital's ratio of Medicare inpatient costs for new 
capital to total Medicare inpatient capital costs. For hold-harmless 
hospitals that are paid 100 percent of the Federal rate, 100 percent of 
the Federal rate is included in the hospital's outlier payments.
    The outlier thresholds for FY 1996 are published in section 
II.A.4.c of this Addendum. For FY 1996, a case qualifies as a cost 
outlier if the cost for the case (after standardization for the 
indirect teaching adjustment and disproportionate share adjustment) is 
greater than the prospective payment rate for the DRG plus $16,700. A 
case qualifies as a day outlier for FY 1996 if the length of stay is 
greater than the geometric mean length of stay for the 
[[Page 29268]] DRG plus the lesser of three standard deviations of the 
length of stay or 23 days.
    During the capital prospective payment system transition period, 
any hospital may also receive an additional payment under an exceptions 
process if its total inpatient capital-related payments are less than a 
minimum percentage of its allowable Medicare inpatient capital-related 
costs. The minimum payment level is established by class of hospital 
under Sec. 412.348. The minimum payment levels for portions of cost 
reporting periods occurring in FY 1996 are:
     Sole community hospitals (located in either an urban or 
rural area), 90 percent;
     Urban hospitals with at least 100 beds and a 
disproportionate share patient percentage of at least 20.2 percent and 
urban hospitals with at least 100 beds that qualify for 
disproportionate share payments under Sec. 412.106(c)(2), 80 percent; 
and,
     All other hospitals, 70 percent.
    Under Sec. 412.348(d), the amount of the exceptions payment is 
determined by comparing the cumulative payments made to the hospital 
under the capital prospective payment system to the cumulative minimum 
payment levels applicable to the hospital for each cost reporting 
period subject to that system. Any amount by which the hospital's 
cumulative payments exceed its cumulative minimum payment is deducted 
from the additional payment that would otherwise be payable for a cost 
reporting period.
    New hospitals are exempted from the capital prospective payment 
system for their first 2 years of operation and are paid 85 percent of 
their reasonable costs during that period. A new hospital's old capital 
costs are its allowable costs for capital assets that were put in use 
for patient care on or before the later of December 31, 1990 or the 
last day of the hospital's base year cost reporting period, and are 
subject to the rules pertaining to old capital and obligated capital as 
of the applicable date. Effective with the third year of operation, we 
will pay the hospital under either the fully prospective methodology, 
using the appropriate transition blend in that Federal fiscal year, or 
the hold-harmless methodology. If the hold-harmless methodology is 
applicable, the hold-harmless payment for assets in use during the base 
period would extend for 8 years, even if the hold-harmless payments 
extend beyond the normal transition period.

IV. Proposed Changes for Excluded Hospitals and Hospital Units

A. Proposed Rate-of-Increase Percentages for Excluded Hospitals and 
Hospital Units

    The inpatient operating costs of hospitals and hospital units 
excluded from the prospective payment system are subject to rate-of-
increase limits established under the authority of section 1886(b) of 
the Act, which is implemented in Sec. 413.40 of the regulations. Under 
these limits, an annual target amount (expressed in terms of the 
inpatient operating cost per discharge) is set for each hospital, based 
on the hospital's own historical cost experience trended forward by the 
applicable rate-of-increase percentages (update factors). The target 
amount is multiplied by the number of Medicare discharges in a 
hospital's cost reporting period, yielding the ceiling on aggregate 
Medicare inpatient operating costs for the cost reporting period.
    Effective with cost reporting periods beginning on or after October 
1, 1991, a hospital that has Medicare inpatient operating costs in 
excess of its ceiling is paid its ceiling plus 50 percent of its costs 
in excess of the ceiling. Total payment may not exceed 110 percent of 
the ceiling. A hospital that has inpatient operating costs less than 
its ceiling is paid its costs plus the lower of--
     Fifty percent of the difference between the allowable 
inpatient operating costs and the ceiling; or
     Five percent of the ceiling.
    Each hospital's target amount is adjusted annually, at the 
beginning of its cost reporting period, by an applicable rate-of-
increase percentage. Section 1886(b)(3)(B) of the Act provides that for 
cost reporting periods beginning on or after October 1, 1993 and before 
October 1, 1994, the applicable rate-of-increase percentage is the 
market basket percentage increase minus the lesser of one percentage 
point or the percentage point difference between 10 percent and the 
hospital's ``update adjustment percentage'' except for hospitals with 
an ``update adjustment percentage'' of at least 10 percent. The rate-
of-increase percentage for hospitals in the latter case is the market 
basket percentage increase. The ``update adjustment percentage'' is the 
percentage by which a hospital's allowable inpatient operating costs 
exceeds the hospital's ceiling for the cost reporting period beginning 
in Federal fiscal year 1990. For cost reporting periods beginning on or 
after October 1, 1994 and before October 1, 1997, the update adjustment 
percentage is the update adjustment percentage from the previous year 
plus the previous year's applicable reduction. The applicable reduction 
and applicable rate of increase percentage are then determined in the 
same manner as for FY 1994. The most recent forecasted market basket 
increase for FY 1996 for hospitals and hospital units excluded from the 
prospective payment system is 3.6 percent.
V. Tables

    This section contains the tables referred to throughout the 
preamble to this proposed rule and in this addendum. For purposes of 
this proposed rule, and to avoid confusion, we have retained the 
designations of Tables 1 through 5 that were first used in the 
September 1, 1983 initial prospective payment final rule (48 FR 39844). 
Tables 1a, 1b, 1c, 1d, 3C, 4a, 4b, 4c, 4d, 4e, 5, 6a, 6b, 6c, 6d, 6e, 
6f, 6g, 6h, 7A, 7B, 8a, and 8b are presented below. The tables 
presented below are as follows:

Table 1a--National Adjusted Operating Standardized Amounts, Labor/
Nonlabor
Table 1b--Regional Adjusted Operating Standardized Amounts, Labor/
Nonlabor
Table 1c--Adjusted Operating Standardized Amounts for Puerto Rico, 
Labor/Nonlabor
Table 1d--Capital Standard Federal Payment Rate
Table 3C--Hospital Case Mix Indexes for Discharges Occurring in Federal 
Fiscal Year 1994 and Hospital Average Hourly Wage for Federal Fiscal 
Year 1996 Wage Index
Table 4a--Wage Index and Capital Geographic Adjustment Factor (GAF) for 
Urban Areas
Table 4b--Wage Index and Capital Geographic Adjustment Factor (GAF) for 
Rural Areas
Table 4c--Wage Index and Capital Geographic Adjustment Factor (GAF) for 
Hospitals That Are Reclassified
Table 4d--Average Hourly Wage for Urban Areas
Table 4e--Average Hourly Wage for Rural Areas
Table 5--List of Diagnosis Related Groups (DRGs), Relative Weighting 
Factors, Geometric Mean Length of Stay, and Length of Stay Outlier 
Cutoff Points Used in the Prospective Payment System
Table 6a--New Diagnosis Codes
Table 6b--New Procedure Codes
Table 6c--Invalid Diagnosis Codes
Table 6d--Invalid Procedure Codes
Table 6e--Revised Diagnosis Code Titles
Table 6f--Revised Procedure Code Titles [[Page 29269]] 
Table 6g--Additions to the CC Exclusions List
Table 6h--Deletions to the CC Exclusions List
Table 7A--Medicare Prospective Payment System Selected Percentile 
Lengths of Stay FY 94 MEDPAR Update 12/94 GROUPER V12.0
Table 7B--Medicare Prospective Payment System Selected Percentile 
Lengths of Stay FY 94 MEDPAR Update 12/94 GROUPER V13.0
Table 8a--Statewide Average Operating Cost-to-Charge Ratios for Urban 
and Rural Hospitals (Case Weighted) April 1995
Table 8b--Statewide Average Capital Cost-to-Charge Ratios for Urban and 
Rural Hospitals (Case Weighted) April 1995

                   Table 1a.--National Adjusted Operating Standardized Amounts, Labor/Nonlabor                  
----------------------------------------------------------------------------------------------------------------
                    Large urban areas                                           Other areas                     
----------------------------------------------------------------------------------------------------------------
       Labor-related               Nonlabor-related              Labor-related             Nonlabor-related     
----------------------------------------------------------------------------------------------------------------
$2,741.66..................                  $1,098.20                   $2,698.26                   $1,080.82  
----------------------------------------------------------------------------------------------------------------


                   Table 1b.--Regional Adjusted Operating Standardized Amounts, Labor/Nonlabor                  
----------------------------------------------------------------------------------------------------------------
                                                                  Large urban areas            Other areas      
                                                             ---------------------------------------------------
                                                                 Labor-     Nonlabor-      Labor-     Nonlabor- 
                                                                related      related      related      related  
----------------------------------------------------------------------------------------------------------------
1. New England (CT, ME, MA, NH, RI, VT).....................     2,874.42     1,151.39     2,828.91     1,133.15
2. Middle Atlantic (PA, NJ, NY).............................     2,623.32     1,050.80     2,581.79     1,034.16
3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV)......     2,685.89     1,075.86     2,643.37     1,058.83
4. East North Central (IL, IN, MI, OH, WI)..................     2,926.74     1,172.34     2,880.40     1,153.77
5. East South Central (AL, KY, MS, TN)......................     2,538.10     1,016.66     2,497.42     1,000.57
6. West North Central (IA, KS, MN, MO, NE, ND, SD)..........     2,743.46     1,098.92     2,700.03     1,081.52
7. West South Central (AR, LA, OK, TX)......................     2,670.25     1,069.60     2,627.98     1,052.66
8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY)................     2,653.09     1,062.72     2,611.08     1,045.90
9. Pacific (AK, CA, HI, OR, WA).............................     2,712.47     1,086.51     2,669.53     1,069.31
----------------------------------------------------------------------------------------------------------------


               Table 1c.--Adjusted Operating Standardized Amounts for Puerto Rico, Labor/Nonlabor               
----------------------------------------------------------------------------------------------------------------
                                                                  Large urban areas            Other areas      
                                                             ---------------------------------------------------
                                                                 Labor-     Nonlabor-      Labor-     Nonlabor- 
                                                                related      related      related      related  
----------------------------------------------------------------------------------------------------------------
National....................................................    $2,714.90    $1,087.48    $2,714.90    $1,087.48
Puerto Rico.................................................     2,445.01       509.56     2,406.30       501.49
----------------------------------------------------------------------------------------------------------------


            Table 1d.--Capital Standard Federal Payment Rate            
------------------------------------------------------------------------
                                                                  Rate  
------------------------------------------------------------------------
National.....................................................    $457.11
Puerto Rico..................................................     351.61
------------------------------------------------------------------------


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Table 4a.--Wage Index and Capital Geographic Adjustment Factor (GAF) for
                               Urban Areas                              
------------------------------------------------------------------------
     Urban area (Constituent counties or county         Wage            
                    equivalents)                        index      GAF  
------------------------------------------------------------------------
0040  Abilene, TX...................................    0.8347    0.8836
  Taylor, TX                                                            
0060  Aguadilla, PR.................................    0.4753    0.6009
  Aguada, PR                                                            
  Aguadilla, PR                                                         
  Moca, PR                                                              
0080  Akron, OH.....................................    0.9596    0.9722
  Portage, OH                                                           
  Summit, OH                                                            
0120  Albany, GA....................................    0.8624    0.9036
  Dougherty, GA                                                         
  Lee, GA                                                               
0160  Albany-Schenectady-Troy, NY...................    0.8796    0.9159
  Albany, NY                                                            
  Montgomery, NY                                                        
  Rensselaer, NY                                                        
  Saratoga, NY                                                          
  Schenectady, NY                                                       
  Schoharie, NY                                                         
0200  Albuquerque, NM...............................    0.9561    0.9697
  Bernalillo, NM                                                        
  Sandoval, NM                                                          
  Valencia, NM                                                          
0220  Alexandria, LA................................    0.8025    0.8601
  Rapides, LA                                                           
0240  Allentown-Bethlehem-Easton, PA................    1.0218    1.0149
  Carbon, PA                                                            
  Lehigh, PA                                                            
  Northampton, PA                                                       
0280  Altoona, PA...................................    0.9024    0.9321
  Blair, PA                                                             
0320  Amarillo, TX..................................    0.8711  0.9098  
  Potter, TX                                                            
  Randall, TX                                                           
0380  Anchorage, AK.................................    1.3398    1.2218
  Anchorage, AK                                                         
0440  Ann Arbor, MI.................................    1.2138    1.1419
  Lenawee, MI                                                           
  Livingston, MI                                                        
  Washtenaw, MI                                                         
0450  Anniston, AL..................................    0.8139    0.8685
  Calhoun, AL                                                           
0460  Appleton-Oshkosh-Neenah, WI...................    0.8861    0.9205
  Calumet, WI                                                           
  Outagamie, WI                                                         
  Winnebago, WI                                                         
0470  Arecibo, PR...................................    0.4273    0.5586
  Arecibo, PR                                                           
  Camuy, PR                                                             
  Hatillo, PR                                                           
0480  Asheville, NC.................................    0.9235    0.9470
  Buncombe, NC                                                          
  Madison, NC                                                           
0500  Athens, GA....................................    0.9082    0.9362
  Clarke, GA                                                            
  Madison, GA                                                           
  Oconee, GA                                                            
0520  *Atlanta, GA..................................    1.0130    1.0089
  Barrow, GA                                                            
  Bartow, GA                                                            
  Carroll, GA                                                           
  Cherokee, GA                                                          
  Clayton, GA                                                           
  Cobb, GA                                                              
  Coweta, GA                                                            
  De Kalb, GA                                                           
  Douglas, GA                                                           
  Fayette, GA                                                           
  Forsyth, GA                                                           
  Fulton, GA                                                            
  Gwinnett, GA                                                          
  Henry, GA                                                             
  Newton, GA                                                            
  Paulding, GA                                                          
  Pickens, GA                                                           
  Rockdale, GA                                                          
  Spalding, GA                                                          
  Walton, GA                                                            
0560  Atlantic City-Cape May, NJ....................    1.0852    1.0576
  Atlantic City, NJ                                                     
  Cape May, NJ                                                          
0600  Augusta-Aiken, GA-SC..........................    0.8975    0.9286
  Columbia, GA                                                          
  McDuffie, GA                                                          
  Richmond, GA                                                          
  Aiken, SC                                                             
  Edgefield, SC                                                         
0640  Austin-San Marcos, TX.........................    0.9049    0.9339
  Bastrop, TX                                                           
  Caldwell, TX                                                          
  Hays, TX                                                              
  Travis, TX                                                            
  Williamson, TX                                                        
0680  Bakersfield, CA...............................    1.0521    1.0354
  Kern, CA                                                              
0720  *Baltimore, MD................................    0.9885    0.9921
  Anne Arundel, MD                                                      
  Baltimore, MD                                                         
  Baltimore City, MD                                                    
  Carroll, MD                                                           
  Harford, MD                                                           
  Howard, MD                                                            
  Queen Annes, MD                                                       
0733  Bangor, ME....................................    0.9377    0.9569
  Penobscot, ME                                                         
0743  Barnstable-Yarmouth, MA.......................    1.3482    1.2270
  Barnstable, MA                                                        
0760  Baton Rouge, LA...............................    0.8695    0.9087
  Ascension, LA                                                         
  East Baton Rouge, LA                                                  
  Livingston, LA                                                        
  West Baton Rouge, LA                                                  
0840  Beaumont-Port Arthur, TX......................    0.8384    0.8863
  Hardin, TX                                                            
  Jefferson, TX                                                         
  Orange, TX                                                            
0860  Bellingham, WA................................    1.2705    1.1782
  Whatcom, WA                                                           
0870  Benton Harbor, MI.............................    0.8320    0.8817
  Berrien, MI                                                           
0875  *Bergen-Passaic, NJ...........................    1.1475    1.0988
  Bergen, NJ                                                            
  Passaic, NJ                                                           
0880  Billings, MT..................................    0.8721    0.9105
  Yellowstone, MT                                                       
0920  Biloxi-Gulfport-Pascagoula, MS................    0.8464    0.8921
  Hancock, MS                                                           
  Harrison, MS                                                          
  Jackson, MS                                                           
0960  Binghamton, NY................................    0.9012    0.9312
  Broome, NY                                                            
  Tioga, NY                                                             
1000  Birmingham, AL................................    0.8999    0.9303
  Blount, AL                                                            
  Jefferson, AL                                                         
  St. Clair, AL                                                         
  Shelby, AL                                                            
1010  Bismarck, ND..................................    0.8314    0.8812
  Burleigh, ND                                                          
  Morton, ND                                                            
1020  Bloomington, IN...............................    0.8445    0.8907
  Monroe, IN                                                            
1040  Bloomington-Normal, IL........................    0.8756    0.9130
  McLean, IL                                                            
1080  Boise City, ID................................    0.9091    0.9368
  Ada, ID                                                               
  Canyon, ID                                                            
1123  *Boston-Brockton-Nashua, MA-NH................    1.1691    1.1129
  Bristol, MA                                                           
  Essex, MA                                                             
  Middlesex, MA                                                         
  Norfolk, MA                                                           
  Plymouth, MA                                                          
  Suffolk, MA                                                           
  Worcester, MA                                                         
  Hillsborough, NH                                                      
  Merrimack, NH                                                         
  Rockingham, NH                                                        
  Strafford, NH                                                         
1125  Boulder-Longmont, CO..........................    0.8223    0.8746
  Boulder, CO                                                           
1145  Brazoria, TX..................................    0.8313    0.8812
  Brazoria, TX                                                          
1150  Bremerton, WA.................................    1.0314    1.0214
  Kitsap, WA                                                            
1240  Brownsville-Harlingen-San Benito, TX..........    0.8666    0.9066
  Cameron, TX                                                           
1260  Bryan-College Station, TX.....................    0.9004    0.9307
  Brazos, TX                                                            
1280  *Buffalo-Niagara Falls, NY....................    0.9215    0.9456
  Erie, NY                                                              
  Niagara, NY                                                           
1303  Burlington, VT................................    0.9270    0.9494
  Chittenden, VT                                                        
  Franklin, VT                                                          
  Grand Isle, VT                                                        
1310  Caguas, PR....................................    0.4716    0.5977
  Caguas, PR                                                            
  Cayey, PR                                                             
  Cidra, PR                                                             
  Gurabo, PR                                                            
  San Lorenzo, PR                                                       
[[Page 29303]]
                                                                        
1320  Canton-Massillon, OH..........................    0.8826    0.9180
  Carroll, OH                                                           
  Stark, OH                                                             
1350  Casper, WY....................................    0.8466    0.8922
  Natrona, WY                                                           
1360  Cedar Rapids, IA..............................    0.8375    0.8856
  Linn, IA                                                              
1400  Champaign-Urbana, IL..........................    0.8883    0.9221
  Champaign, IL                                                         
1440  Charleston-North Charleston, SC...............    0.8947    0.9266
  Berkeley, SC                                                          
  Charleston, SC                                                        
  Dorchester, SC                                                        
1480  Charleston, WV................................    0.9454    0.9623
  Kanawha, WV                                                           
  Putnam, WV                                                            
1520  *Charlotte-Gastonia-Rock Hill, NC-SC..........    0.9664    0.9769
  Cabarrus, NC                                                          
  Gaston, NC                                                            
  Lincoln, NC                                                           
  Mecklenburg, NC                                                       
  Rowan, NC                                                             
  Union, NC                                                             
  York, SC                                                              
1540  Charlottesville, VA...........................    0.9196    0.9442
  Albemarle, VA                                                         
  Charlottesville City, VA                                              
  Fluvanna, VA                                                          
  Greene, VA                                                            
1560  Chattanooga, TN-GA............................    0.9140    0.9403
  Catoosa, GA                                                           
  Dade, GA                                                              
  Walker, GA                                                            
  Hamilton, TN                                                          
  Marion, TN                                                            
1580  Cheyenne, WY..................................    0.7950    0.8546
  Laramie, WY                                                           
1600  *Chicago, IL..................................    1.0653    1.0443
  Cook, IL                                                              
  De Kalb, IL                                                           
  Du Page, IL                                                           
  Grundy, IL                                                            
  Kane, IL                                                              
  Kendall, IL                                                           
  Lake, IL                                                              
  McHenry, IL                                                           
  Will, IL                                                              
1620  Chico-Paradise, CA............................    1.0538    1.0365
  Butte, CA                                                             
1640  *Cincinnati, OH-KY-IN.........................    0.9474    0.9637
  Dearborn, IN                                                          
  Ohio, IN                                                              
  Boone, KY                                                             
  Campbell, KY                                                          
  Gallatin, KY                                                          
  Grant, KY                                                             
  Kenton, KY                                                            
  Pendleton, KY                                                         
  Brown, OH                                                             
  Clermont, OH                                                          
  Hamilton, OH                                                          
  Warren, OH                                                            
1660  Clarksville-Hopkinsville, TN-KY...............    0.7556    0.8254
  Christian, KY                                                         
  Montgomery, TN                                                        
1680  *Cleveland-Lorain-Elyria, OH..................    0.9847    0.9895
  Ashtabula, OH                                                         
  Cuyahoga, OH                                                          
  Geauga, OH                                                            
  Lake, OH                                                              
  Lorain, OH                                                            
  Medina, OH                                                            
1720  Colorado Springs, CO..........................    0.9311    0.9523
  El Paso, CO                                                           
1740  Columbia, MO..................................    0.9479    0.9640
  Boone, MO                                                             
1760  Columbia, SC..................................    0.9050    0.9339
  Lexington, SC                                                         
  Richland, SC                                                          
1800  Columbus, GA-AL...............................    0.7758    0.8404
  Russell, AL                                                           
  Chattanoochee, GA                                                     
  Harris, GA                                                            
  Muscogee, GA                                                          
1840  *Columbus, OH.................................    0.9747    0.9826
  Delaware, OH                                                          
  Fairfield, OH                                                         
  Franklin, OH                                                          
  Licking, OH                                                           
  Madison, OH                                                           
  Pickaway, OH                                                          
1880  Corpus Christi, TX............................    0.8957    0.9273
  Nueces, TX                                                            
  San Patricio, TX                                                      
1900  Cumberland, MD-WV.............................    0.8388    0.8866
  Allegany, MD                                                          
  Mineral, WV                                                           
1920  *Dallas, TX...................................    0.9810    0.9869
  Collin, TX                                                            
  Dallas, TX                                                            
  Denton, TX                                                            
  Ellis, TX                                                             
  Henderson, TX                                                         
  Hunt, TX                                                              
  Kaufman, TX                                                           
  Rockwall, TX                                                          
1950  Danville, VA..................................    0.8470    0.8925
  Danville City, VA                                                     
  Pittsylvania, VA                                                      
1960  Davenport-Rock Island-Moline, IA-IL...........    0.8372    0.8854
  Scott, IA                                                             
  Henry, IL                                                             
  Rock Island, IL                                                       
2000  Dayton-Springfield, OH........................    0.9160    0.9417
  Clark, OH                                                             
  Greene, OH                                                            
  Miami, OH                                                             
  Montgomery, OH                                                        
2020  Daytona Beach, FL.............................    0.9013    0.9313
  Flagler, FL                                                           
  Volusia, FL                                                           
2030  Decatur, AL...................................    0.8189    0.8721
  Lawrence, AL                                                          
  Morgan, AL                                                            
2040  Decatur, IL...................................    0.7805    0.8439
  Macon, IL                                                             
2080  *Denver, CO...................................    1.0414    1.0282
  Adams, CO                                                             
  Arapahoe, CO                                                          
  Denver, CO                                                            
  Douglas, CO                                                           
  Jefferson, CO                                                         
2120  Des Moines, IA................................    0.8794    0.9158
  Dallas, IA                                                            
  Polk, IA                                                              
  Warren, IA                                                            
2160  *Detroit, MI..................................    1.0850    1.0575
  Lapeer, MI                                                            
  Macomb, MI                                                            
  Monroe, MI                                                            
  Oakland, MI                                                           
  St. Clair, MI                                                         
  Wayne, MI                                                             
2180  Dothan, AL....................................    0.7700    0.8361
  Dale, AL                                                              
  Houston, AL                                                           
2190  Dover, DE.....................................    0.8977    0.9288
  Kent, DE                                                              
2200  Dubuque, IA...................................    0.8051    0.8620
  Dubuque, IA                                                           
2240  Duluth-Superior, MN-WI........................    0.9678    0.9778
  St. Louis, MN                                                         
  Douglas, WI                                                           
2281  Dutchess County, NY...........................    1.0654    1.0443
  Dutchess, NY                                                          
2290  Eau Claire, WI................................    0.8676    0.9073
  Chippewa, WI                                                          
  Eau Claire, WI                                                        
2320  El Paso, TX...................................    0.8844    0.9193
  El Paso, TX                                                           
2330  Elkhart-Goshen, IN............................    0.8822    0.9177
  Elkhart, IN                                                           
2335  Elmira, NY....................................    0.8476    0.8929
  Chemung, NY                                                           
2340  Enid, OK......................................    0.8186    0.8719
  Garfield, OK                                                          
2360  Erie, PA......................................    0.9213    0.9454
  Erie, PA                                                              
2400  Eugene-Springfield, OR........................    1.1206    1.0811
  Lane, OR                                                              
2440  Evansville-Henderson, IN-KY...................    0.8916    0.9244
  Posey, IN                                                             
  Vanderburgh, IN                                                       
  Warrick, IN                                                           
  Henderson, KY                                                         
2520  Fargo-Moorhead, ND-MN.........................    0.8929    0.9254
  Clay, MN                                                              
[[Page 29304]]
                                                                        
  Cass, ND                                                              
2560  Fayetteville, NC..............................    0.8860    0.9205
  Cumberland, NC                                                        
2580  Fayetteville-Springdale-Rogers, AR............    0.7100    0.7909
  Benton, AR                                                            
  Washington, AR                                                        
2640  Flint, MI.....................................    1.0667    1.0452
  Genesee, MI                                                           
2650  Florence, AL..................................    0.7985    0.8572
  Colbert, AL                                                           
  Lauderdale, AL                                                        
2655  Florence, SC..................................    0.8553    0.8985
  Florence, SC                                                          
2670  Fort Collins-Loveland, CO.....................    1.0612    1.0415
  Larimer, CO                                                           
2680  *Ft Lauderdale, FL............................    1.0959    1.0647
  Broward, FL                                                           
2700  Fort Myers-Cape Coral, FL.....................    0.9684    0.9783
  Lee, FL                                                               
2710  Fort Pierce-Port St Lucie, FL.................    1.0320    1.0218
  Martin, FL                                                            
  St Lucie, FL                                                          
2720  Fort Smith, AR-OK.............................    0.7624    0.8305
  Crawford, AR                                                          
  Sebastian, AR                                                         
  Sequoyah, OK                                                          
2750  Fort Walton Beach, FL.........................    0.8757    0.9131
  Okaloosa, FL                                                          
2760  Fort Wayne, IN................................    0.8708    0.9096
  Adams, IN                                                             
  Allen, IN                                                             
  De Kalb, IN                                                           
  Huntington, IN                                                        
  Wells, IN                                                             
  Whitley, IN                                                           
2800  *Fort Worth-Arlington, TX.....................    0.9947    0.9964
  Hood, TX                                                              
  Johnson, TX                                                           
  Parker, TX                                                            
  Tarrant, TX                                                           
2840  Fresno, CA....................................    1.0550    1.0373
  Fresno, CA                                                            
  Madera, CA                                                            
2880  Gadsden, AL...................................    0.8584    0.9007
  Etowah, AL                                                            
2900  Gainesville, FL...............................    0.9024    0.9321
  Alachua, FL                                                           
2920  Galveston-Texas City, TX......................    1.0269    1.0183
  Galveston, TX                                                         
                                                      ........          
2960  Gary, IN......................................    0.9470    0.9634
  Lake, IN                                                              
  Porter, IN                                                            
2975  Glens Falls, NY...............................    0.9294    0.9511
  Warren, NY                                                            
  Washington, NY                                                        
2980  Goldsboro, NC.................................    0.8180    0.8715
  Wayne, NC                                                             
2985  Grand Forks, ND-MN............................    0.9000    0.9304
  Polk, MN                                                              
  Grand Forks, ND                                                       
3000  Grand Rapids-Muskegon-Holland, MI.............    1.0067    1.0046
  Allegan, MI                                                           
  Kent, MI                                                              
  Muskegon, MI                                                          
  Ottawa, MI                                                            
3040  Great Falls, MT...............................    0.9139    0.9402
  Cascade, MT                                                           
3060  Greeley, CO...................................    0.9164    0.9420
  Weld, CO                                                              
3080  Green Bay, WI.................................    0.9288    0.9507
  Brown, WI                                                             
3120  *Greensboro-Winston-Salem-High Point, NC......    0.9123    0.9391
  Alamance, NC                                                          
  Davidson, NC                                                          
  Davie, NC                                                             
  Forsyth, NC                                                           
  Guilford, NC                                                          
  Randolph, NC                                                          
  Stokes, NC                                                            
  Yadkin, NC                                                            
3150  Greenville, NC................................    0.9119    0.9388
  Pitt, NC                                                              
3160  Greenville-Spartanburg-Anderson, SC...........    0.8981    0.9290
  Anderson, SC                                                          
  Cherokee, SC                                                          
  Greenville, SC                                                        
  Pickens, SC                                                           
  Spartanburg, SC                                                       
3180  Hagerstown, MD................................    0.9091    0.9368
  Washington, MD                                                        
3200  Hamilton-Middletown, OH.......................    0.8264    0.8776
  Butler, OH                                                            
3240  Harrisburg-Lebanon-Carlisle, PA...............    0.9991    0.9994
  Cumberland, PA                                                        
  Dauphin, PA                                                           
  Lebanon, PA                                                           
  Perry, PA                                                             
3283  *Hartford, CT.................................    1.2412    1.1595
  Hartford, CT                                                          
  Litchfield, CT                                                        
  Middlesex, CT                                                         
  Tolland, CT                                                           
3285  Hattiesburg, MS...............................    0.7253    0.8026
  Forrest, MS                                                           
  Lamar, MS                                                             
3290  Hickory-Morganton, NC.........................    0.8002    0.8584
  Alexander, NC                                                         
  Burke, NC                                                             
  Caldwell, NC                                                          
  Catawba, NC                                                           
3320  Honolulu, HI..................................    1.1233    1.0829
  Honolulu, HI                                                          
3350  Houma, LA.....................................    0.7613    0.8296
  Lafourche, LA                                                         
  Terrebonne, LA                                                        
3360  *Houston, TX..................................    0.9836    0.9887
  Chambers, TX                                                          
  Fort Bend, TX                                                         
  Harris, TX                                                            
  Liberty, TX                                                           
  Montgomery, TX                                                        
  Waller, TX                                                            
3400  Huntington-Ashland, WV-KY-OH..................    0.9014    0.9314
  Boyd, KY                                                              
  Carter, KY                                                            
  Greenup, KY                                                           
  Lawrence, OH                                                          
  Cabell, WV                                                            
  Wayne, WV                                                             
3440  Huntsville, AL................................    0.8146    0.8690
  Limestone, AL                                                         
  Madison, AL                                                           
3480  *Indianapolis, IN.............................    0.9774    0.9845
  Boone, IN                                                             
  Hamilton, IN                                                          
  Hancock, IN                                                           
  Hendricks, IN                                                         
  Johnson, IN                                                           
  Madison, IN                                                           
  Marion, IN                                                            
  Morgan, IN                                                            
  Shelby, IN                                                            
3500  Iowa City, IA.................................    0.9387    0.9576
  Johnson, IA                                                           
3520  Jackson, MI...................................    0.9139    0.9402
  Jackson, MI                                                           
3560  Jackson, MS...................................    0.7652    0.8325
  Hinds, MS                                                             
  Madison, MS                                                           
  Rankin, MS                                                            
3580  Jackson, TN...................................    0.8527    0.8966
  Madison, TN                                                           
3600  Jacksonville, FL..............................    0.8927    0.9252
  Clay, FL                                                              
  Duval, FL                                                             
  Nassau, FL                                                            
  St Johns, FL                                                          
3605  Jacksonville, NC..............................    0.6939    0.7786
  Onslow, NC                                                            
3610  Jamestown, NY.................................    0.7550    0.8249
  Chautaqua, NY                                                         
3620  Janesville-Beloit, WI.........................    0.8802    0.9163
  Rock, WI                                                              
3640  Jersey City, NJ...............................    1.1041    1.0702
  Hudson, NJ                                                            
3660  Johnson City-Kingsport-Bristol, TN-VA.........    0.8785    0.9151
  Carter, TN                                                            
  Hawkins, TN                                                           
  Sullivan, TN                                                          
  Unicoi, TN                                                            
  Washington, TN                                                        
  Bristol City, VA                                                      
  Scott, VA                                                             
  Washington, VA                                                        
3680  Johnstown, PA.................................    0.8534    0.8971
  Cambria, PA                                                           
[[Page 29305]]
                                                                        
  Somerset, PA                                                          
3710  Joplin, MO....................................    0.7938    0.8537
  Jasper, MO                                                            
  Newton, MO                                                            
3720  Kalamazoo-Battlecreek, MI.....................    1.0776    1.0525
  Calhoun, MI                                                           
  Kalamazoo, MI                                                         
  Van Buren, MI                                                         
3740  Kankakee, IL                                      0.7524    0.8230
  Kankakee, IL                                                          
3760  *Kansas City, KS-MO...........................    0.9373    0.9566
  Johnson, KS                                                           
  Leavenworth, KS                                                       
  Miami, KS                                                             
  Wyandotte, KS                                                         
  Cass, MO                                                              
  Clay, MO                                                              
  Clinton, MO                                                           
  Jackson, MO                                                           
  Lafayette, MO                                                         
  Platte, MO                                                            
  Ray, MO                                                               
3800  Kenosha, WI...................................    0.8888    0.9224
  Kenosha, WI                                                           
3810  Killeen-Temple, TX............................    1.0546    1.0371
  Bell, TX                                                              
  Coryell, TX                                                           
3840  Knoxville, TN.................................    0.8534    0.8971
  Anderson, TN                                                          
  Blount, TN                                                            
  Knox, TN                                                              
  Loudon, TN                                                            
  Sevier, TN                                                            
  Union, TN                                                             
3850  Kokomo, IN....................................    0.8851    0.9198
  Howard, IN                                                            
  Tipton, IN                                                            
3870  La Crosse, WI-MN..............................    0.8603    0.9021
  Houston, MN                                                           
  La Crosse, WI                                                         
3880  Lafayette, LA.................................    0.8515    0.8958
  Acadia, LA                                                            
  Lafayette, LA                                                         
  St Landry, LA                                                         
  St Martin, LA                                                         
3920  Lafayette, IN.................................    0.8343    0.8833
  Clinton, IN                                                           
  Tippecanoe, IN                                                        
3960  Lake Charles, LA..............................    0.8109    0.8663
  Calcasieu, LA                                                         
3980  Lakeland-Winter Haven, FL.....................    0.8684    0.9079
  Polk, FL                                                              
4000  Lancaster, PA.................................    0.9587    0.9715
  Lancaster, PA                                                         
4040  Lansing-East Lansing, MI......................    1.0124    1.0085
  Clinton, MI                                                           
  Eaton, MI                                                             
  Ingham, MI                                                            
4080  Laredo, TX....................................    0.6604    0.7527
  Webb, TX                                                              
4100  Las Cruces, NM................................    0.8878    0.9217
  Dona Ana, NM                                                          
4120  *Las Vegas, NV-AZ.............................    1.0964    1.0651
  Mohave, AZ                                                            
  Clark, NV                                                             
  Nye, NV                                                               
4150  Lawrence, KS..................................    0.8565    0.8994
  Douglas, KS                                                           
4200  Lawton, OK....................................    0.8611    0.9027
  Comanche, OK                                                          
4243  Lewiston-Auburn, ME...........................    0.9451    0.9621
  Androscoggin, ME                                                      
4280  Lexington, KY.................................    0.8352    0.8840
  Bourbon, KY                                                           
  Clark, KY                                                             
  Fayette, KY                                                           
  Jessamine, KY                                                         
  Madison, KY                                                           
  Scott, KY                                                             
  Woodford, KY                                                          
4320  Lima, OH......................................    0.8575    0.9001
  Allen, OH                                                             
  Auglaize, OH                                                          
4360  Lincoln, NE...................................    0.9097    0.9372
  Lancaster, NE                                                         
4400  Little Rock-North Little Rock, AR.............    0.8543    0.8978
  Faulkner, AR                                                          
  Lonoke, AR                                                            
  Pulaski, AR                                                           
  Saline, AR                                                            
4420  Longview-Marshall, TX.........................    0.8669    0.9068
  Gregg, TX                                                             
  Harrison, TX                                                          
  Upshur, TX                                                            
4480  *Los Angeles-Long Beach, CA...................    1.2521    1.1664
  Los Angeles, CA                                                       
4520  Louisville, KY-IN.............................    0.9345    0.9547
  Clark, IN                                                             
  Floyd, IN                                                             
  Harrison, IN                                                          
  Scott, IN                                                             
  Bullitt, KY                                                           
  Jefferson, KY                                                         
  Oldham, KY                                                            
4600  Lubbock, TX...................................    0.8459    0.8917
  Lubbock, TX                                                           
4640  Lynchburg, VA.................................    0.8065    0.8631
  Amherst, VA                                                           
  Bedford City, VA                                                      
  Bedford, VA                                                           
  Campbell, VA                                                          
  Lynchburg City, VA                                                    
4680  Macon, GA.....................................    0.9008    0.9310
  Bibb, GA                                                              
  Houston, GA                                                           
  Jones, GA                                                             
  Peach, GA                                                             
  Twiggs, GA                                                            
4720  Madison, WI...................................    1.0074    1.0051
  Dane, WI                                                              
4800  Mansfield, OH.................................    0.8389    0.8867
  Crawford, OH                                                          
  Richland, OH                                                          
4840  Mayaguez, PR..................................    0.4654    0.5923
  Anasco, PR                                                            
  Cabo Rojo, PR                                                         
  Hormigueros, PR                                                       
  Mayaguez, PR                                                          
  Sabana Grande, PR                                                     
  San German, PR                                                        
4880  McAllen-Edinburg-Mission, TX..................    0.8685    0.9080
  Hidalgo, TX                                                           
4890 Medford-Ashland, OR............................    1.0181    1.0124
  Jackson, OR                                                           
4900  Melbourne-Titusville-Palm Bay, FL.............    0.9408    0.9591
  Brevard, Fl                                                           
4920  *Memphis, TN-AR-MS............................    0.8411    0.8883
  Crittenden, AR                                                        
  De Soto, MS                                                           
  Fayette, TN                                                           
  Shelby, TN                                                            
  Tipton, TN                                                            
4940  Merced, CA....................................    1.0898    1.0607
  Merced, CA                                                            
5000  *Miami, FL....................................    0.9530    0.9676
  Dade, FL                                                              
5015  *Middlesex-Somerset-Hunterdon, NJ.............    1.0549    1.0373
  Hunterdon, NJ                                                         
  Middlesex, NJ                                                         
  Somerset, NJ                                                          
5080  *Milwaukee-Waukesha, WI.......................    0.9516    0.9666
  Milwaukee, WI                                                         
  Ozaukee, WI                                                           
  Washington, WI                                                        
  Waukesha, WI                                                          
5120  *Minneapolis-St. Paul, MN-WI..................    1.0726  1.0492  
  Anoka, MN                                                             
  Carver, MN                                                            
  Chisago, MN                                                           
  Dakota, MN                                                            
  Hennepin, MN                                                          
  Isanti, MN                                                            
  Ramsey, MN                                                            
  Scott, MN                                                             
  Sherburne, MN                                                         
  Washington, MN                                                        
  Wright, MN                                                            
  Pierce, WI                                                            
  St. Croix, WI                                                         
5160  Mobile, AL....................................    0.7720    0.8376
  Baldwin, AL                                                           
  Mobile, AL                                                            
5170  Modesto, CA...................................    1.0575    1.0390
  Stanislaus, CA                                                        
5190  *Monmouth-Ocean, NJ...........................    1.0515    1.0350
  Monmouth, NJ                                                          
  Ocean, NJ                                                             
5200  Monroe, LA....................................    0.7963    0.8556
  Ouachita, LA                                                          
5240  Montgomery, AL................................    0.7914    0.8520
  Autauga, AL                                                           
[[Page 29306]]
                                                                        
  Elmore, AL                                                            
  Montgomery, AL                                                        
5280  Muncie, IN....................................    0.8843    0.9192
  Delaware, IN                                                          
5330  Myrtle Beach, SC..............................    0.7976    0.8565
  Horry, SC                                                             
5345  Naples, FL....................................    0.9890    0.9925
  Collier, FL                                                           
5360  *Nashville, TN................................    0.9273    0.9496
  Cheatham, TN                                                          
  Davidson, TN                                                          
  Dickson, TN                                                           
  Robertson, TN                                                         
  Rutherford TN                                                         
  Sumner, TN                                                            
  Williamson, TN                                                        
  Wilson, TN                                                            
5380  *Nassau-Suffolk, NY...........................    1.2680    1.1766
  Nassau, NY                                                            
  Suffolk, NY                                                           
5483  *New Haven-Bridgeport-Stamford-Danbury-                           
 Waterbury, CT......................................    1.2585    1.1705
  Fairfield, CT                                                         
  New Haven, CT                                                         
5523  New London-Norwich, CT........................    1.2111    1.1401
  New London, CT                                                        
5560  *New Orleans, LA..............................    0.9419    0.9598
  Jefferson, LA                                                         
  Orleans, LA                                                           
  Plaquemines, LA                                                       
  St. Bernard, LA                                                       
  St. Charles, LA                                                       
  St. James, LA                                                         
  St. John The Baptist, LA                                              
  St. Tammany, LA                                                       
5600  *New York, NY.................................    1.3845    1.2496
  Bronx, NY                                                             
  Kings, NY                                                             
  New York, NY                                                          
  Putnam, NY                                                            
  Queens, NY                                                            
  Richmond, NY                                                          
  Rockland, NY                                                          
  Westchester, NY                                                       
5640  *Newark, NJ...................................    1.1185    1.0797
  Essex, NJ                                                             
  Morris, NJ                                                            
  Sussex, NJ                                                            
  Union, NJ                                                             
  Warren, NJ                                                            
5660  Newburgh, NY-PA...............................    1.0529    1.0359
  Orange, NY                                                            
  Pike, PA                                                              
5720  *Norfolk-Virginia Beach-Newport News, VA-NC...    0.8448  0.8909  
  Currituck, NC                                                         
  Chesapeake City, VA                                                   
  Gloucester, VA                                                        
  Hampton City, VA                                                      
  Isle of Wight, VA                                                     
  James City, VA                                                        
  Mathews, VA                                                           
  Newport News City, VA                                                 
  Norfolk City, VA                                                      
  Poquoson City, VA                                                     
  Portsmouth City, VA                                                   
  Suffolk City, VA                                                      
  Virginia Beach City VA                                                
  Williamsburg City, VA                                                 
  York, VA                                                              
5775  *Oakland, CA..................................    1.5219    1.3332
  Alameda, CA                                                           
  Contra Costa, CA                                                      
5790  Ocala, FL.....................................    0.8960    0.9276
  Marion, FL                                                            
5800  Odessa-Midland, TX............................    0.8769    0.9140
  Ector, TX                                                             
  Midland, TX                                                           
5880  *Oklahoma City, OK............................    0.8343    0.8833
  Canadian, OK                                                          
  Cleveland, OK                                                         
  Logan, OK                                                             
  McClain, OK                                                           
  Oklahoma, OK                                                          
  Pottawatomie, OK                                                      
5910  Olympia, WA...................................    1.1130    1.0761
  Thurston, WA                                                          
5920  Omaha, NE-IA..................................    0.9812    0.9871
  Pottawattamie, IA                                                     
  Cass, NE                                                              
  Douglas, NE                                                           
  Sarpy, NE                                                             
  Washington, NE                                                        
5945  *Orange County, CA............................    1.4733    1.3039
  Orange, CA                                                            
5960  *Orlando, FL..................................    0.9356    0.9554
  Lake, FL                                                              
  Orange, FL                                                            
  Osceola, FL                                                           
  Seminole, FL                                                          
5990  Owensboro, KY.................................    0.7512    0.8221
  Davies, KY                                                            
6015  Panama City, FL...............................    0.8147    0.8691
  Bay, FL                                                               
6020  Parkersburg-Marietta, WV-OH...................    0.7766    0.8410
  Washington, OH                                                        
  Wood, WV                                                              
6080  Pensacola, FL.................................    0.8228    0.8750
  Escambia, FL                                                          
  Santa Rosa, FL                                                        
6120  Peoria-Pekin, IL..............................    0.8635    0.9044
  Peoria, IL                                                            
  Tazewell, IL                                                          
  Woodford, IL                                                          
6160  *Philadelphia, PA-NJ..........................    1.1103    1.0743
  Burlington, NJ                                                        
  Camden, NJ                                                            
  Gloucester, NJ                                                        
  Salem, NJ                                                             
  Bucks, PA                                                             
  Chester, PA                                                           
  Delaware, PA                                                          
  Montgomery, PA                                                        
  Philadelphia, PA                                                      
6200  *Phoenix-Mesa, AZ.............................    0.9799    0.9862
  Maricopa, AZ                                                          
  Pinal, AZ                                                             
6240  Pine Bluff, AR................................    0.7842    0.8466
  Jefferson, AR                                                         
6280  *Pittsburgh, PA...............................    0.9761    0.9836
  Allegheny, PA                                                         
  Beaver, PA                                                            
  Butler, PA                                                            
  Fayette, PA                                                           
  Washington, PA                                                        
  Westmoreland, PA                                                      
6323  Pittsfield, MA................................    1.0859    1.0581
  Berkshire, MA                                                         
6360  Ponce, PR.....................................    0.4756    0.6011
  Guayanilla, PR                                                        
  Juana Diaz, PR                                                        
  Penuelas, PR                                                          
  Ponce, PR                                                             
  Villalba, PR                                                          
  Yauco, PR                                                             
6403  Portland, ME..................................    0.9763    0.9837
  Cumberland, ME                                                        
  Sagadahoc, ME                                                         
  York, ME                                                              
6440  *Portland-Vancouver, OR-WA....................    1.1272    1.0855
  Clackamas, OR                                                         
  Columbia, OR                                                          
  Multnomah, OR                                                         
  Washington, OR                                                        
  Yamhill, OR                                                           
  Clark, WA                                                             
6483  *Providence-Warwick, RI.......................    1.1048    1.0706
  Bristol, RI                                                           
  Kent, RI                                                              
  Newport, RI                                                           
  Providence, RI                                                        
  Washington, RI                                                        
6520  Provo-Orem, UT................................    0.9886    0.9922
  Utah, UT                                                              
6560  Pueblo, CO....................................    0.8524    0.8964
  Pueblo, CO                                                            
6580  Punta Gorda, FL...............................    0.8764    0.9136
  Charlotte, FL                                                         
6600  Racine, WI....................................    0.8424    0.8892
  Racine, WI                                                            
6640  Raleigh-Durham-Chapel Hill, NC................    0.9558    0.9695
  Chatham, NC                                                           
  Durham, NC                                                            
  Franklin, NC                                                          
  Johnston, NC                                                          
  Orange, NC                                                            
  Wake, NC                                                              
6660  Rapid City, SD................................    0.8283    0.8790
  Pennington, SD                                                        
6680  Reading, PA...................................    0.9588    0.9716
  Berks, PA                                                             
[[Page 29307]]
                                                                        
6690  Redding, CA...................................    1.1725    1.1151
  Shasta, CA                                                            
6720  Reno, NV......................................    1.1108    1.0746
  Washoe, NV                                                            
6740  Richland-Kennewick-Pasco, WA..................    1.0028    1.0019
  Benton, WA                                                            
  Franklin, WA                                                          
6760  Richmond-Petersburg, VA.......................    0.8852    0.9199
  Charles City County, VA                                               
  Chesterfield, VA                                                      
  Colonial Heights City, VA                                             
  Dinwiddie, VA                                                         
  Goochland, VA                                                         
  Hanover, VA                                                           
  Henrico, VA                                                           
  Hopewell City, VA                                                     
  New Kent, VA                                                          
  Petersburg City, VA                                                   
  Powhatan, VA                                                          
  Prince George, VA                                                     
  Richmond City, VA                                                     
6780  *Riverside-San Bernardino, CA.................    1.1588    1.1062
  Riverside, CA                                                         
  San Bernardino, CA                                                    
6800  Roanoke, VA...................................    0.8586    0.9009
  Botetourt, VA                                                         
  Roanoke, VA                                                           
  Roanoke City, VA                                                      
  Salem City, VA                                                        
6820  Rochester, MN.................................    1.0565    1.0384
  Olmsted, MN                                                           
6840  *Rochester, NY................................    0.9602    0.9726
  Genesee, NY                                                           
  Livingston, NY                                                        
  Monroe, NY                                                            
  Ontario, NY                                                           
  Orleans, NY                                                           
  Wayne, NY                                                             
6880  Rockford, IL..................................    0.8889    0.9225
  Boone, IL                                                             
  Ogle, IL                                                              
  Winnebago, IL                                                         
6895  Rocky Mount, NC...............................    0.8852    0.9199
  Edgecombe, NC                                                         
  Nash, NC                                                              
6920  *Sacramento, CA...............................    1.2581    1.1703
  El Dorado, CA                                                         
  Placer, CA                                                            
  Sacramento, CA                                                        
6960  Saginaw-Bay City-Midland, MI..................    0.9507    0.9660
  Bay, MI                                                               
  Midland, MI                                                           
  Saginaw, MI                                                           
6980  St Cloud, MN..................................    0.9567    0.9701
  Benton, MN                                                            
  Stearns, MN                                                           
7000  St Joseph, MO.................................    0.8473    0.8927
  Andrews, MO                                                           
  Buchanan, MO                                                          
7040  *St Louis, MO-IL..............................    0.8889    0.9225
  Clinton, IL                                                           
  Jersey, IL                                                            
  Madison, IL                                                           
  Monroe, IL                                                            
  St Clair, IL                                                          
  Franklin, MO                                                          
  Jefferson, MO                                                         
  Lincoln, MO                                                           
  St Charles, MO                                                        
  St Louis, MO                                                          
  St Louis City, MO                                                     
  Warren, MO                                                            
7080  Salem, OR.....................................    0.9593    0.9719
  Marion, OR                                                            
  Polk, OR                                                              
7120  Salinas, CA...................................    1.4290    1.2769
  Monterey, CA                                                          
7160  *Salt Lake City-Ogden, UT.....................    0.9643    0.9754
  Davis, UT                                                             
  Salt Lake, UT                                                         
  Weber, UT                                                             
7200  San Angelo, TX................................    0.7792    0.8429
  Tom Green, TX                                                         
7240  *San Antonio, TX..............................    0.8404    0.8877
  Bexar, TX                                                             
  Comal, TX                                                             
  Guadalupe, TX                                                         
  Wilson, TX                                                            
7320  *San Diego, CA................................    1.1917    1.1276
  San Diego, CA                                                         
7360  *San Francisco, CA............................    1.4332    1.2795
  Marin, CA                                                             
  San Francisco, CA                                                     
  San Mateo, CA                                                         
7400  *San Jose, CA.................................    1.4352    1.2807
  Santa Clara, CA                                                       
7440  *San Juan-Bayamon, PR.........................    0.4481    0.5771
  Aguas Buenas, PR                                                      
  Barceloneta, PR                                                       
  Bayamon, PR                                                           
  Canovanas, PR                                                         
  Carolina, PR                                                          
  Catano, PR                                                            
  Ceiba, PR                                                             
  Comerio, PR                                                           
  Corozal, PR                                                           
  Dorado, PR                                                            
  Fajardo, PR                                                           
  Florida, PR                                                           
  Guaynabo, PR                                                          
  Humacao, PR                                                           
  Juncos, PR                                                            
  Los Piedras, PR                                                       
  Loiza, PR                                                             
  Luguillo, PR                                                          
  Manati, PR                                                            
  Naranjito, PR                                                         
  Rio Grande, PR                                                        
  San Juan, PR                                                          
  Toa Alta, PR                                                          
  Toa Baja, PR                                                          
  Trujillo Alto, PR                                                     
  Vega Alta, PR                                                         
  Vega Baja, PR                                                         
  Yabucoa, PR                                                           
7460  San Luis Obispo-Atascadero-Paso Robles, CA....    1.1427    1.0957
  San Luis Obispo, CA                                                   
7480  Santa Barbara-Santa Maria-Lompoc, CA..........    1.1114    1.0750
  Santa Barbara, CA                                                     
7485  Santa Cruz-Watsonville, CA....................    1.0175    1.0120
  Santa Cruz, CA                                                        
7490  Santa Fe, NM..................................    1.1129    1.0760
  Los Alamos, NM                                                        
  Santa Fe, NM                                                          
7500  Santa Rosa, CA................................    1.2758    1.1815
  Sonoma, CA                                                            
7510  Sarasota-Bradenton, FL........................    0.9871    0.9911
  Manatee, FL                                                           
  Sarasota, FL                                                          
7520  Savannah, GA..................................    0.8888    0.9224
  Bryan, GA                                                             
  Chatham, GA                                                           
  Effingham, GA                                                         
7560  Scranton-Wilkes-Barre-Hazleton, PA............    0.8740    0.9119
  Columbia, PA                                                          
  Lackawanna, PA                                                        
  Luzerne, PA                                                           
  Wyoming, PA                                                           
7600  *Seattle-Bellevue-Everett, WA.................    1.1229    1.0826
  Island, WA                                                            
  King, WA                                                              
  Snohomish, WA                                                         
7610  Sharon, PA....................................    0.9110    0.9382
  Mercer, PA                                                            
7620  Sheboygan, WI.................................    0.7996    0.8580
  Sheboygan, WI                                                         
7640  Sherman-Denison, TX...........................    0.8795    0.9158
  Grayson, TX                                                           
7680  Shreveport-Bossier City, LA...................    0.9023    0.9320
  Bossier, LA                                                           
  Caddo, LA                                                             
  Webster, LA                                                           
7720  Sioux City, IA-NE.............................    0.8398    0.8873
  Woodbury, IA                                                          
  Dakota, NE                                                            
7760  Sioux Falls, SD...............................    0.8778    0.9146
  Lincoln, SD                                                           
  Minnehaha, SD                                                         
7800  South Bend, IN................................    0.9429    0.9605
  St Joseph, IN                                                         
7840  Spokane, WA...................................    1.0401    1.0273
  Spokane, WA                                                           
7880  Springfield, IL...............................    0.8957    0.9273
  Menard, IL                                                            
  Sangamon, IL                                                          
7920  Springfield, MO...............................    0.7911    0.8517
  Christian, MO                                                         
  Greene, MO                                                            
[[Page 29308]]
                                                                        
  Webster, MO                                                           
8003  Springfield, MA...............................    1.0488    1.0332
  Hampden, MA                                                           
  Hampshire, MA                                                         
8050  State College, PA.............................    1.0181    1.0124
  Centre, PA                                                            
8080  Steubenville-Weirton, OH-WV...................    0.8471    0.8926
  Jefferson, OH                                                         
  Brooke, WV                                                            
  Hancock, WV                                                           
8120  Stockton-Lodi, CA.............................    1.1687    1.1127
  San Joaquin, CA                                                       
8140  Sumter, SC....................................    0.8360    0.8846
  Sumter, SC                                                            
8160  Syracuse, NY..................................    0.9548    0.9688
  Cayuga, NY                                                            
  Madison, NY                                                           
  Onondaga, NY                                                          
  Oswego, NY                                                            
8200  Tacoma, WA....................................    1.0822    1.0556
  Pierce, WA                                                            
8240  Tallahassee, FL...............................    0.8337  0.8829  
  Gadsden, FL                                                           
  Leon, FL                                                              
8280 *Tampa-St Petersburg-Clearwater, FL............    0.9319    0.9528
  Hernando, FL                                                          
  Hillsborough, FL                                                      
  Pasco, FL                                                             
  Pinellas, FL                                                          
8320  Terre Haute, IN...............................    0.8688    0.9082
  Clay, IN                                                              
  Vermillion, IN                                                        
  Vigo, IN                                                              
8360  Texarkana, AR-Texarkana, TX...................    0.8272    0.8782
  Miller, AR                                                            
  Bowie, TX                                                             
8400  Toledo, OH....................................    1.0349    1.0238
  Fulton, OH                                                            
  Lucas, OH                                                             
  Wood, OH                                                              
8440  Topeka, KS....................................    0.9607    0.9729
  Shawnee, KS                                                           
8480  Trenton, NJ...................................    1.0176    1.0120
  Mercer, NJ                                                            
8520  Tucson, AZ....................................    0.9292    0.9510
  Pima, AZ                                                              
8560  Tulsa, OK.....................................    0.8274    0.8783
  Creek, OK                                                             
  Osage, OK                                                             
  Rogers, OK                                                            
  Tulsa, OK                                                             
  Wagoner, OK                                                           
8600  Tuscaloosa, AL................................    0.7937    0.8537
  Tuscaloosa, AL                                                        
8640  Tyler, TX.....................................    0.9448    0.9619
  Smith, TX                                                             
8680  Utica-Rome, NY................................    0.8530    0.8968
  Herkimer, NY                                                          
  Oneida, NY                                                            
8720  Vallejo-Fairfield-Napa, CA....................    1.3341    1.2182
  Napa, CA                                                              
  Solano, CA                                                            
8735  Ventura, CA...................................    1.2760    1.1816
  Ventura, CA                                                           
8750  Victoria, TX..................................    0.8451    0.8911
  Victoria, TX                                                          
8760  Vineland-Millville-Bridgeton, NJ..............    0.9985    0.9990
  Cumberland, NJ                                                        
8780  Visalia-Tulare-Porterville, CA................    1.0525    1.0357
  Tulare, CA                                                            
8800  Waco, TX......................................    0.7913    0.8519
  McLennan, TX                                                          
8840  *Washington, DC-MD-VA-WV......................    1.1088    1.0733
  District of Columbia, DC                                              
  Calvert, MD                                                           
  Charles, MD                                                           
  Frederick, MD                                                         
  Montgomery, MD                                                        
  Prince Georges, MD                                                    
  Alexandria City, VA                                                   
  Arlington, VA                                                         
  Clarke, VA                                                            
  Culpepper, VA                                                         
  Fairfax, VA                                                           
  Fairfax City, VA                                                      
  Falls Church City, VA                                                 
  Fauquier, VA                                                          
  Fredericksburg City, VA                                               
  King George, VA                                                       
  Loudoun, VA                                                           
  Manassas City, VA                                                     
  Manassas Park City, VA                                                
  Prince William, VA                                                    
  Spotsylvania, VA                                                      
  Stafford, VA                                                          
  Warren, VA                                                            
  Berkeley, WV                                                          
  Jefferson, WV                                                         
8920  Waterloo-Cedar Falls, IA......................    0.8655    0.9058
  Black Hawk, IA                                                        
8940  Wausau, WI....................................    1.0053    1.0036
  Marathon, WI                                                          
8960  West Palm Beach-Boca Raton, FL................    1.0175    1.0120
  Palm Beach, FL                                                        
9000  Wheeling, OH-WV...............................    0.7554    0.8252
  Belmont, OH                                                           
  Marshall, WV                                                          
  Ohio, WV                                                              
9040  Wichita, KS...................................    0.9580    0.9710
  Butler, KS                                                            
  Harvey, KS                                                            
  Sedgwick, KS                                                          
9080  Wichita Falls, TX.............................    0.7772    0.8415
  Archer, TX                                                            
  Wichita, TX                                                           
9140  Williamsport, PA..............................    0.8524    0.8964
  Lycoming, PA                                                          
9160  Wilmington-Newark, DE-MD......................    0.9598    0.9723
  New Castle, DE                                                        
  Cecil, MD                                                             
9200  Wilmington, NC................................    0.9317    0.9527
  New Hanover, NC                                                       
  Brunswick, NC                                                         
9260  Yakima, WA....................................    0.9894    0.9927
  Yakima, WA                                                            
9270  Yolo, CA......................................    1.1640    1.1096
  Yolo, CA                                                              
9280  York, PA......................................    0.9182    0.9432
  York, PA                                                              
9320  Youngstown-Warren, OH.........................    0.9600    0.9724
  Columbiana, OH                                                        
  Mahoning, OH                                                          
  Trumbull, OH                                                          
9340  Yuba City, CA.................................    1.0631    1.0428
  Sutter, CA                                                            
  Yuba, CA                                                              
9360  Yuma, AZ......................................    0.9787    0.9854
  Yuma, AZ                                                              
------------------------------------------------------------------------


Table 4b.--Wage Index and Capital Geographic Adjustment Factor (GAF) for
                               Rural Areas                              
------------------------------------------------------------------------
                                                        Wage            
                    Nonurban area                       index      GAF  
------------------------------------------------------------------------
Alabama.............................................    0.7172    0.7964
Alaska..............................................    1.2064    1.1371
Arizona.............................................    0.8156    0.8697
Arkansas............................................    0.6915    0.7768
California..........................................    1.0175    1.0120
Colorado............................................    0.8223    0.8746
Connecticut.........................................    1.3142    1.2058
Delaware............................................    0.8986    0.9294
Florida.............................................    0.8684    0.9079
Georgia.............................................    0.7670    0.8339
Hawaii..............................................    0.9866    0.9908
Idaho...............................................    0.8424    0.8892
Illinois............................................    0.7524    0.8230
Indiana.............................................    0.8047    0.8617
Iowa................................................    0.7353    0.8101
Kansas..............................................    0.7249    0.8023
Kentucky............................................    0.7678    0.8345
Louisiana...........................................    0.7284    0.8049
Maine...............................................    0.8441    0.8904
Maryland............................................    0.8479    0.8932
Massachusetts.......................................    1.0597    1.0405
Michigan............................................    0.8776    0.9145
Minnesota...........................................    0.8143    0.8688
Mississippi.........................................    0.6710    0.7609
Missouri............................................    0.7217    0.7998
Montana.............................................    0.8088    0.8647
Nebraska............................................    0.7226    0.8005
Nevada..............................................    0.8805    0.9165
New Hampshire.......................................    1.0032    1.0022
New Jersey\1\.......................................  ........  ........
New Mexico..........................................    0.8347    0.8836
New York............................................    0.8624    0.9036
North Carolina......................................    0.8002    0.8584
North Dakota........................................    0.7305    0.8065
[[Page 29309]]
                                                                        
Ohio................................................    0.8264    0.8776
Oklahoma............................................    0.7005    0.7837
Oregon..............................................    0.9509    0.9661
Pennsylvania........................................    0.8534    0.8971
Puerto Rico.........................................    0.3888    0.5237
Rhode Island\1\.....................................  ........  ........
South Carolina......................................    0.7746    0.8395
South Dakota........................................    0.6952    0.7796
Tennessee...........................................    0.7433    0.8162
Texas...............................................    0.7269    0.8038
Utah................................................    0.8698    0.9089
Vermont.............................................    0.9132    0.9397
Virginia............................................    0.7813    0.8445
Washington..........................................    0.9791    0.9856
West Virginia.......................................    0.8073    0.8636
Wisconsin...........................................    0.8424    0.8892
Wyoming.............................................    0.7933    0.8534
------------------------------------------------------------------------
\1\All counties within the State are classified urban.                  


Table 4c.--Wage Index and Capital Geographic Adjustment Factor (GAF) for
                     Hospitals That Are Reclassified                    
------------------------------------------------------------------------
                                                        Wage            
                Area reclassified to                    index      GAF  
------------------------------------------------------------------------
Abilene, TX.........................................    0.8347    0.8836
Albuquerque, NM.....................................    0.9561    0.9697
Alexandria, LA......................................    0.8025    0.8601
Allentown-Bethlehem-Easton, PA......................    1.0218    1.0149
Amarillo, TX........................................    0.8711    0.9098
Anchorage, AK.......................................    1.3398    1.2218
Ann Arbor, MI.......................................    1.2014    1.1339
Asheville, NC.......................................    0.9235    0.9470
Atlanta, GA.........................................    1.0130    1.0089
Augusta-Aiken, GA-SC................................    0.8975    0.9286
Baton Rouge, LA.....................................    0.8695    0.9087
Benton Harbor, MI...................................    0.8320    0.8817
Benton Harbor, MI (Rural Michigan Hosp.)............    0.8776    0.9145
Bergen-Passaic, NJ..................................    1.1361    1.0913
Biloxi-Gulfport-Pascagoula, MS......................    0.8464    0.8921
Birmingham, AL......................................    0.8999    0.9303
Bismarck, ND........................................    0.8188    0.8721
Boise City, ID......................................    0.9091    0.9368
Boston-Brockton-Nashua, MA-NH.......................    1.1691    1.1129
Brazoria, TX........................................    0.7556    0.8254
Casper, WY..........................................    0.8466    0.8922
Champaign-Urbana, IL................................    0.8680    0.9076
Charleston-North Charleston, SC.....................    0.8947    0.9266
Charleston, WV......................................    0.9276    0.9498
Charlotte-Gastonia-Rock Hill, NC-SC.................    0.9664    0.9769
Charlottesville, VA.................................    0.9041    0.9333
Chattanooga, TN-GA..................................    0.8966    0.9280
Chicago, IL.........................................    1.0534    1.0363
Cincinnati, OH-KY-IN................................    0.9474    0.9637
Cleveland-Lorain-Elyria, OH.........................    0.9847    0.9895
Columbia, MO........................................    0.9167    0.9422
Columbus, GA-AL.....................................    0.7758    0.8404
Columbus, OH........................................    0.9747    0.9826
Dallas, TX..........................................    0.9810    0.9869
Davenport-Rock Island-Moline, IA-IL.................    0.8372    0.8854
Dayton-Springfield, OH..............................    0.9160    0.9417
Denver, CO..........................................    1.0414    1.0282
Des Moines, IA......................................    0.8688    0.9082
Detroit, MI.........................................    1.0850    1.0575
Duluth-Superior, MN-WI..............................    0.9678    0.9778
Dutchess County, NY.................................    1.0468    1.0318
Eau Claire, WI......................................    0.8676    0.9073
Elkhart-Goshen, IN..................................    0.8822    0.9177
Eugene-Springfield, OR..............................    1.1206    1.0811
Fargo-Moorhead, ND-MN...............................    0.8781    0.9148
Fayetteville, NC....................................    0.8518    0.8960
Flint, MI...........................................    1.0667    1.0452
Florence, AL........................................    0.7985    0.8572
Florence, SC........................................    0.8553    0.8985
Fort Lauderdale, FL.................................    1.0959    1.0647
Fort Pierce-Port St Lucie, FL.......................    1.0021    1.0014
Fort Smith, AR-OK...................................    0.7624    0.8305
Fort Walton Beach, FL...............................    0.8656    0.9059
Fort Worth-Arlington, TX............................    0.9947    0.9964
Gadsden, AL.........................................    0.8584    0.9007
Grand Forks, ND-MN..................................    0.9000    0.9304
Great Falls, MT.....................................    0.9139    0.9402
Greeley, CO.........................................    0.9010    0.9311
Green Bay, WI.......................................    0.9288    0.9507
Greenville-Spartanburg-Anderson, SC.................    0.8848    0.9196
Harrisburg-Lebanon-Carlisle, PA.....................    0.9991    0.9994
Hartford, CT........................................    1.2218    1.1470
Honolulu, HI........................................    1.1233    1.0829
Houston, TX.........................................    0.9836    0.9887
Huntington-Ashland, WV-KY-OH........................    0.9014    0.9314
Huntsville, AL......................................    0.7975    0.8565
Indianapolis, IN....................................    0.9659    0.9765
Jackson, MS.........................................    0.7652    0.8325
Jacksonville, FL....................................    0.8927    0.9252
Johnson City-Kingsport-Bristol,.....................                    
 TN-VA..............................................    0.8785    0.9151
Joplin, MO..........................................    0.7938    0.8537
Kalamazoo-Battlecreek, MI...........................    1.0557    1.0378
Kansas City, KS-MO..................................    0.9373    0.9566
Knoxville, TN.......................................    0.8534    0.8971
Lafayette, LA.......................................    0.8515    0.8958
Lansing-East Lansing, MI............................    1.0124    1.0085
Las Vegas, NV-AZ....................................    1.0964    1.0651
Lexington, KY.......................................    0.8352    0.8840
Lima, OH............................................    0.8575    0.9001
Lincoln, NE.........................................    0.8892    0.9227
Little Rock-North Little Rock, AR...................    0.8543    0.8978
Longview-Marshall, TX...............................    0.8495    0.8943
Los Angeles-Long Beach, CA..........................    1.2521    1.1664
Louisville, KY-IN...................................    0.9345    0.9547
Lubbock, TX.........................................    0.8459    0.8917
Madison, WI.........................................    1.0074    1.0051
Mansfield, OH.......................................    0.8389    0.8867
Medford-Ashland, OR.................................    1.0181    1.0124
Memphis, TN-AR-MS...................................    0.8307    0.8807
Middlesex-Somerset-Hunterdon, NJ....................    1.0405    1.0276
Milwaukee-Waukesha, WI..............................    0.9516    0.9666
Minneapolis-St Paul, MN-WI..........................    1.0726    1.0492
Modesto, CA.........................................    1.0575    1.0390
Monroe, LA..........................................    0.7963    0.8556
Montgomery, AL......................................    0.7914    0.8520
Nashville, TN.......................................    0.9273    0.9496
New London-Norwich, CT..............................    1.2111    1.1401
New Orleans, LA.....................................    0.9419    0.9598
New York, NY........................................    1.3845    1.2496
Newark, NJ..........................................    1.1185    1.0797
Newburgh, NY-PA.....................................    1.0529    1.0359
Oakland, CA.........................................    1.5219    1.3332
Odessa-Midland, TX..................................    0.8769    0.9140
Oklahoma City, OK...................................    0.8343    0.8833
Omaha, NE-IA........................................    0.9812    0.9871
Orange County, CA...................................    1.4733    1.3039
Peoria-Pekin, IL....................................    0.8635    0.9044
Philadelphia, PA-NJ.................................    1.1103    1.0743
Pittsburgh, PA......................................    0.9661    0.9767
Portland, ME........................................    0.9763    0.9837
Portland-Vancouver, OR-WA...........................    1.1272    1.0855
Provo-Orem, UT......................................    0.9714    0.9803
Raleigh-Durham-Chapel Hill, NC......................    0.9558    0.9695
Rapid City, SD......................................    0.8283    0.8790
Richland-Kennewick-Pasco, WA........................    0.9854    0.9900
Roanoke, VA.........................................    0.8586    0.9009
Rochester, MN.......................................    1.0565    1.0384
Rockford, IL........................................    0.8889    0.9225
Rocky Mount, NC.....................................    0.8852    0.9199
Sacramento, CA......................................    1.2581    1.1703
Saginaw-Bay City-Midland, MI,.......................    0.9507    0.9660
St Cloud, MN........................................    0.9567    0.9701
St Louis, MO-IL.....................................    0.8889    0.9225
Salem, OR...........................................    0.9593    0.9719
Salinas, CA.........................................    1.4168    1.2695
Salt Lake City-Ogden, UT............................    0.9643    0.9754
San Diego, CA.......................................    1.1917    1.1276
San Francisco, CA...................................    1.4332    1.2795
San Jose, CA........................................    1.4352    1.2807
Santa Rosa, CA......................................    1.2635    1.1737
Sarasota-Bradenton, FL..............................    0.9871    0.9911
Savannah, GA........................................    0.8888    0.9224
Seattle-Bellevue-Everett, WA........................    1.1229    1.0826
Sharon, PA..........................................    0.9110    0.9382
Sherman-Denison, TX.................................    0.8604    0.9022
Sioux Falls, SD.....................................    0.8778    0.9146
South Bend, IN......................................    0.9429    0.9605
Springfield, IL.....................................    0.8852    0.9199
Springfield, MO.....................................    0.7911    0.8517
Stockton, CA........................................    1.1687    1.1127
Syracuse, NY........................................    0.9548    0.9688
Tampa-St Petersburg-Clearwater, FL..................    0.9319    0.9528
[[Page 29310]]
                                                                        
Texarkana, TX-Texarkana, AR.........................    0.8272    0.8782
Topeka, KS..........................................    0.9302    0.9517
Trenton, NJ.........................................    1.2622    1.1729
Tucson, AZ..........................................    0.9292    0.9510
Tulsa, OK...........................................    0.8274    0.8783
Tyler, TX...........................................    0.9182    0.9432
Ventura, CA.........................................    1.2760    1.1816
Victoria, TX........................................    0.8451    0.8911
Waco, TX............................................    0.7741    0.8392
Washington, DC-MD-VA-WV.............................    1.1088    1.0733
Waterloo-Cedar Falls, IA............................    0.8655    0.9058
Wausau, WI..........................................    0.9697    0.9792
Wichita, KS.........................................    0.9328    0.9535
Rural Arkansas......................................    0.6915    0.7768
Rural Florida.......................................    0.8684    0.9079
Rural Kentucky......................................    0.7678    0.8345
Rural Louisiana.....................................    0.7284    0.8049
Rural Michigan......................................    0.8776    0.9145
Rural Minnesota.....................................    0.8143    0.8688
Rural Missouri......................................    0.7217    0.7998
Rural New Hampshire.................................    1.0032    1.0022
Rural North Carolina................................    0.8002    0.8584
Rural Virginia......................................    0.7813    0.8445
Rural West Virginia.................................    0.8073    0.8636
Rural Wyoming.......................................    0.7933    0.8534
------------------------------------------------------------------------


             Table 4d.--Average Hourly Wage for Urban Areas             
------------------------------------------------------------------------
                                                                Average 
                          Urban area                             hourly 
                                                                  wage  
------------------------------------------------------------------------
Abilene, TX..................................................    15.7713
Aguadilla, PR................................................     8.9796
Akron, OH....................................................    18.0935
Albany, GA...................................................    16.2942
Albany-Schenectady-Troy, NY..................................    16.6194
Albuquerque, NM..............................................    18.0635
Alexandria, LA...............................................    14.9860
Allentown-Bethlehem-Easton, PA-NJ............................    19.3050
Altoona, PA..................................................    17.0490
Amarillo, TX.................................................    16.4576
Anchorage, AK................................................    25.3141
Ann Arbor, MI................................................    22.9331
Anniston, AL.................................................    15.3769
Appleton-Oshkosh-Neenah, WI..................................    16.7413
Arecibo, PR..................................................     8.0736
Asheville, NC................................................    17.4487
Athens, GA...................................................    17.1598
Atlanta, GA..................................................    19.1400
Atlantic City-Cape May, NJ...................................    20.5031
Augusta-Aiken, GA-SC.........................................    16.9581
Austin-San Marcos, TX........................................    17.0978
Bakersfield, CA..............................................    19.8791
Baltimore, MD................................................    18.6758
Bangor, ME...................................................    17.7164
Barnstable-Yarmouth, MA......................................    25.4728
Baton Rouge, LA..............................................    16.4273
Beaumont-Port Arthur, TX.....................................    15.8400
Bellingham, WA...............................................    24.0042
Benton Harbor, MI............................................    15.6323
Bergen-Passaic, NJ...........................................    22.0724
Billings, MT.................................................    16.4779
Biloxi-Gulfport-Pascagoula, MS...............................    15.9912
Binghamton, NY...............................................    17.0278
Birmingham, AL...............................................    17.0034
Bismarck, ND.................................................    15.7090
Bloomington, IN..............................................    15.9556
Bloomington-Normal, IL.......................................    16.5439
Boise City, ID...............................................    16.9658
Boston-Brockton-Nashua, MA-NH................................    22.0851
Boulder-Longmont, CO.........................................    18.5131
Brazoria, TX.................................................    16.2335
Bremerton, WA................................................    19.4876
Brownsville-Harlingen-San Benito, TX.........................    16.3732
Bryan-College Station, TX....................................    17.0117
Buffalo-Niagara Falls, NY....................................    17.4103
Burlington, VT...............................................    17.5139
Caguas, PR...................................................     8.9106
Canton-Massillon, OH.........................................    16.6748
Casper, WY...................................................    15.9558
Cedar Rapids, IA.............................................    15.8233
Champaign-Urbana, IL.........................................    16.7843
Charleston-North Charleston, SC..............................    16.9003
Charleston, WV...............................................    17.8630
Charlotte-Gastonia-Rock Hill, NC-SC..........................    18.2595
Charlottesville, VA..........................................    17.3750
Chattanooga, TN-GA...........................................    17.2687
Cheyenne, WY.................................................    15.0213
Chicago, IL..................................................    20.1273
Chico-Paradise, CA...........................................    19.9101
Cincinnati, OH-KY-IN.........................................    17.8346
Clarksville-Hopkinsville, TN-KY..............................    14.2763
Cleveland-Lorain-Elyria, OH..................................    18.6053
Colorado Springs, CO.........................................    17.5930
Columbia, MO.................................................    17.9090
Columbia, SC.................................................    17.0995
Columbus, GA-AL..............................................    14.6584
Columbus, OH.................................................    18.4158
Corpus Christi, TX...........................................    16.9241
Cumberland, MD-WV............................................    15.8483
Dallas, TX...................................................    18.5344
Danville, VA.................................................    16.0030
Davenport-Moline-Rock Island, IA-IL..........................    15.8183
Dayton-Springfield, OH.......................................    17.8047
Daytona Beach, FL............................................    17.0281
Decatur, AL..................................................    15.4729
Decatur, IL..................................................    14.7466
Denver, CO...................................................    19.6754
Des Moines, IA...............................................    16.6145
Detroit, MI..................................................    20.4702
Dothan, AL...................................................    14.5485
Dover, DE....................................................    16.9613
Dubuque, IA..................................................    15.2109
Duluth-Superior, MN-WI.......................................    18.2853
Dutchess County, NY..........................................    20.1296
Eau Claire, WI...............................................    16.3926
El Paso, TX..................................................    16.7092
Elkhart-Goshen, IN...........................................    16.5895
Elmira, NY...................................................    16.0141
Enid, OK.....................................................    15.4658
Erie, PA.....................................................    17.4068
Eugene-Springfield, OR.......................................    21.0833
Evansville, Henderson, IN-KY.................................    16.8454
Fargo-Moorhead, ND-MN........................................    16.8702
Fayetteville, NC.............................................    16.7399
Fayetteville-Springdale-Rogers, AR...........................    13.4138
Flint, MI....................................................    20.1573
Florence, AL.................................................    14.5759
Florence, SC.................................................    16.1316
Fort Collins-Loveland, CO....................................    20.0496
Fort Lauderdale, FL..........................................    19.8995
Fort Myers-Cape Coral, FL....................................    18.2971
Fort Pierce-Fort St. Lucie, FL...............................    19.4990
Fort Smith, AR-OK............................................    14.3665
Fort Walton Beach, FL........................................    16.5450
Fort Wayne, IN...............................................    16.4522
Fort Worth-Arlington, TX.....................................    18.7773
Fresno, CA...................................................    19.9329
Gadsden, AL..................................................    16.2189
Gainesville, FL..............................................    17.0500
Galveston-Texas City, TX.....................................    19.4029
Gary, IN.....................................................    18.0636
Glens Falls, NY..............................................    17.5596
Goldsboro, NC................................................    15.4556
Grand Forks, ND-MN...........................................    16.9349
Grand Rapids-Muskegon-Holland, MI............................    19.0210
Great Falls, MT..............................................    17.1426
Greeley, CO..................................................    17.3139
Green Bay, WI................................................    16.8657
Greensboro-Winston-Salem-High Point, NC......................    17.2367
Greenville, NC...............................................    17.2294
Greenville-Spartanburg-Anderson, SC..........................    16.9679
Hagerstown, MD...............................................    17.1762
Hamilton-Middletown, OH......................................    16.6240
Harrisburg-Lebanon-Carlisle, PA..............................    18.8766
Hartford, CT.................................................    23.4517
Hattiesburg, MS..............................................    13.7034
Hickory-Morganton, NC........................................    16.4126
Honolulu, HI.................................................    21.2237
Houma, LA....................................................    14.3835
Houston, TX..................................................    18.5845
Huntington-Ashland, WV-KY-OH.................................    17.0304
Huntsville, AL...............................................    15.3910
Indianapolis, IN.............................................    18.4664
Iowa City, IA................................................    17.7359
Jackson, MI..................................................    17.2666
Jackson, MS..................................................    14.2689
Jackson, TN..................................................    16.1114
Jacksonville, FL.............................................    16.8656
Jacksonville, NC.............................................    13.1113
Jamestown, NY................................................    14.2640
Janesville-Beloit, WI........................................    16.6310
Jersey City, NJ..............................................    20.8846
Johnson City-Kingsport-Bristol, TN-VA........................    16.5552
Johnstown, PA................................................    16.4137
Joplin, MO...................................................    14.9986
Kalamazoo-Battle Creek, MI...................................    20.3592
Kankakee, IL.................................................    17.2516
Kansas City, KS-MO...........................................    17.7093
Kenosha, WI..................................................    16.7936
Killeen-Temple, TX...........................................    19.9249
Knoxville, TN................................................    16.1236
Kokomo, IN...................................................    16.7227
LaCrosse, WI-MN..............................................    16.2552
Lafayette, LA................................................    15.9838
Lafayette, IN................................................    15.7641
Lake Charles, LA.............................................    15.3218
Lakeland-Winter Haven, FL....................................    16.8079
Lancaster, PA................................................    18.1140
Lansing-East Lansing, MI.....................................    19.1281
Laredo, TX...................................................    12.4773
[[Page 29311]]
                                                                        
Las Cruces, NM...............................................    16.7732
Las Vegas, NV-AZ.............................................    20.7139
Lawrence, KS.................................................    16.1829
Lawton, OK...................................................    16.2688
Lewiston-Auburn, ME..........................................    17.8565
Lexington, KY................................................    15.7793
Lima, OH.....................................................    16.2023
Lincoln, NE..................................................    17.1871
Little Rock-North Little Rock, AR............................    16.1414
Longview-Marshall, TX........................................    16.5201
Los Angeles-Long Beach, CA...................................    23.7140
Louisville, KY-IN............................................    17.6561
Lubbock, TX..................................................    15.9821
Lynchburg, VA................................................    15.2374
Macon, GA....................................................    17.0204
Madison, WI..................................................    19.0333
Mansfield, OH................................................    15.8496
Mayaguez, PR.................................................     8.7937
McAllen-Edinburg-Mission, TX.................................    16.4091
Medford-Ashland, OR..........................................    18.8231
Melbourne-Titusville-Palm Bay, FL............................    17.7745
Memphis, TN-AR-MS............................................    15.8921
Merced, CA...................................................    20.5898
Miami, FL....................................................    19.1521
Middlesex-Somerset-Hunterdon, NJ.............................    20.2661
Milwaukee-Waukesha, WI.......................................    17.9785
Minneapolis-St. Paul, MN-WI..................................    20.2652
Mobile, AL...................................................    14.7679
Modesto, CA..................................................    20.9677
Monmouth-Ocean, NJ...........................................    19.8663
Monroe, LA...................................................    14.9551
Montgomery, AL...............................................    14.9086
Muncie, IN...................................................    16.7085
Myrtle Beach, SC.............................................    15.0700
Naples, FL...................................................    18.6860
Nashville, TN................................................    17.5194
Nassau-Suffolk, NY...........................................    25.3790
New Haven-Bridgeport-Stamford-Danbury-Waterbury, CT..........    23.7784
New London-Norwich, CT.......................................    22.5252
New Orleans, LA..............................................    17.7954
New York, NY.................................................    26.0720
Newark, NJ...................................................    22.4086
Newburgh, NY-PA..............................................    19.8924
Norfolk-Virginia Beach-Newport News, VA-NC...................    15.9621
Oakland, CA..................................................    28.7549
Ocala, FL....................................................    16.9285
Odessa-Midland, TX...........................................    16.5687
Oklahoma City, OK............................................    15.7626
Olympia, WA..................................................    21.0283
Omaha, NE-IA.................................................    18.5393
Orange County, CA............................................    23.3465
Orlando, FL..................................................    17.6766
Owensboro, KY................................................    14.1939
Panama City, FL..............................................    15.3923
Parkersburg-Marietta, WV-OH..................................    14.6723
Pensacola, FL................................................    15.5451
Peoria-Pekin, IL.............................................    16.3153
Philadelphia, PA-NJ..........................................    21.0153
Phoenix-Mesa, AZ.............................................    18.5146
Pine Bluff, AR...............................................    14.8160
Pittsburgh, PA...............................................    18.4432
Pittsfield, MA...............................................    20.5161
Ponce, PR....................................................     8.9854
Portland, ME.................................................    18.4464
Portland-Vancouver, OR-WA....................................    21.2978
Providence-Warwick, RI.......................................    20.8739
Provo-Orem, UT...............................................    18.6788
Pueblo, CO...................................................    16.1052
Punta Gorda, FL..............................................    17.9343
Racine, WI...................................................    16.4769
Raleigh-Durham-Chapel Hill, NC...............................    18.0596
Rapid City, SD...............................................    15.6494
Reading, PA..................................................    18.1153
Redding, CA..................................................    22.1527
Reno, NV.....................................................    20.9876
Richland-Kennewick-Pasco, WA.................................    18.9472
Richmond-Petersburg, VA......................................    16.7248
Riverside-San Bernardino, CA.................................    22.1620
Roanoke, VA..................................................    16.0589
Rochester, MN................................................    19.9607
Rochester, NY................................................    18.1428
Rockford, IL.................................................    16.7939
Rocky Mount, NC..............................................    16.5823
Sacramento, CA...............................................    23.7695
Saginaw-Bay City-Midland, MI.................................    17.9615
St Cloud, MN.................................................    18.0754
St Joseph, MO................................................    16.0095
St Louis, MO-IL..............................................    16.7946
Salem, OR....................................................    18.1534
Salinas, CA..................................................    26.9989
Salt Lake City-Ogden, UT.....................................    18.2195
San Angelo, TX...............................................    14.7224
San Antonio, TX..............................................    15.8781
San Diego, CA................................................    22.4937
San Francisco, CA............................................    27.3080
San Jose, CA.................................................    27.0561
San Juan-Bayamon, PR.........................................     8.4669
San Luis Obispo-Atascadero-Paso Robles, CA...................    21.5899
Santa Barbara-Santa Maria-Lompoc, CA.........................    20.9996
Santa Cruz-Watsonville, CA...................................    26.3954
Santa Fe, NM.................................................    21.0277
Santa Rosa, CA...............................................    24.1046
Sarasota-Bradenton, FL.......................................    18.4291
Savannah, GA.................................................    16.7920
Scranton-Wilkes Barre-Hazleton, PA...........................    16.5137
Seattle-Bellevue-Everett, WA.................................    21.2065
Sharon, PA...................................................    16.8537
Sheboygan, WI................................................    15.1072
Sherman-Denison, TX..........................................    16.6168
Shreveport-Bossier City, LA..................................    17.0487
Sioux City, IA-NE............................................    15.8679
Sioux Falls, SD..............................................    16.5847
South Bend, IN...............................................    17.8143
Spokane, WA..................................................    19.6518
Springfield, IL..............................................    16.9223
Springfield, MO..............................................    14.9476
Springfield, MA..............................................    19.8153
State College, PA............................................    19.2360
Steubenville-Weirton, OH-WV..................................    16.0044
Stockton-Lodi, CA............................................    21.8188
Sumter, SC...................................................    15.7945
Syracuse, NY.................................................    18.0407
Tacoma, WA...................................................    20.4462
Tallahassee, FL..............................................    15.7519
Tampa-St. Petersburg-Clearwater, FL..........................    17.5134
Terre Haute, IN..............................................    16.4157
Texarkana, TX-Texarkana, AR..................................    15.5179
Toledo, OH...................................................    19.7305
Topeka, KS...................................................    18.1518
Trenton, NJ..................................................    19.2270
Tucson, AZ...................................................    17.5524
Tulsa, OK....................................................    15.6323
Tuscaloosa, AL...............................................    14.9955
Tyler, TX....................................................    17.8508
Utica-Rome, NY...............................................    16.1173
Vallejo-Fairfield-Napa, CA...................................    25.2072
Ventura, CA..................................................    23.3668
Victoria, TX.................................................    15.9679
Vineland-Millville-Bridgeton, NJ.............................    18.8648
Visalia-Tulare-Porterville, CA...............................    19.8859
Waco, TX.....................................................    14.9500
Washington, DC-MD-VA-WV......................................    20.9501
Waterloo-Cedar Falls, IA.....................................    16.2799
Wausau, WI...................................................    18.9938
West Palm Beach-Boca Raton, FL...............................    19.2693
Wheeling, WV-OH..............................................    14.2732
Wichita, KS..................................................    18.1011
Wichita Falls, TX............................................    14.6842
Williamsport, PA.............................................    16.1054
Wilmington-Newark, DE-MD.....................................    21.8395
Wilmington, NC...............................................    17.6028
Yakima, WA...................................................    18.6937
Yolo, CA.....................................................    21.9919
York, PA.....................................................    17.3484
Youngstown-Warren, OH........................................    18.1388
Yuba City, CA................................................    20.0865
Yuma, AZ.....................................................    18.4923
------------------------------------------------------------------------


             Table 4e.--Average Hourly Wage for Rural Areas             
------------------------------------------------------------------------
                                                                Average 
                        Nonurban area                            hourly 
                                                                  wage  
------------------------------------------------------------------------
Alabama......................................................    13.5508
Alaska.......................................................    22.7927
Arizona......................................................    15.4106
Arkansas.....................................................    13.0577
California...................................................    19.2244
Colorado.....................................................    15.5365
Connecticut..................................................    24.8299
Delaware.....................................................    16.9772
Florida......................................................    16.4079
Georgia......................................................    14.4909
Hawaii.......................................................    18.6401
Idaho........................................................    15.9158
Illinois.....................................................    14.2153
Indiana......................................................    15.2039
Iowa.........................................................    13.8935
Kansas.......................................................    13.6955
Kentucky.....................................................    14.4872
Louisiana....................................................    13.7616
Maine........................................................    15.9481
Maryland.....................................................    16.0195
Massachusetts................................................    20.0223
Michigan.....................................................    16.5806
Minnesota....................................................    15.3816
Mississippi..................................................    12.6782
Missouri.....................................................    13.6327
Montana......................................................    15.2814
Nebraska.....................................................    13.6525
Nevada.......................................................    16.6365
New Hampshire................................................    18.9536
New Jersey\1\................................................  .........
New Mexico...................................................    15.7706
New York.....................................................    16.2939
[[Page 29312]]
                                                                        
North Carolina...............................................    15.1121
North Dakota.................................................    13.8011
Ohio.........................................................    15.6140
Oklahoma.....................................................    13.2346
Oregon.......................................................    17.9670
Pennsylvania.................................................    16.1247
Puerto Rico..................................................     7.3467
Rhode Island\1\..............................................  .........
South Carolina...............................................    14.6343
South Dakota.................................................    13.1352
Tennessee....................................................    14.0446
Texas........................................................    13.7338
Utah.........................................................    16.4331
Vermont......................................................    17.2545
Virginia.....................................................    14.7381
Washington...................................................    18.4996
West Virginia................................................    15.1887
Wisconsin....................................................    15.9157
Wyoming......................................................    14.9877
------------------------------------------------------------------------
\1\All counties within the State are classified urban.                  


BILLING CODE 4120-01-P

[[Page 29313]]

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[[Page 29314]]

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[[Page 29315]]

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[[Page 29316]]

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[[Page 29317]]

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[[Page 29318]]

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[[Page 29319]]

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[[Page 29320]]

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[[Page 29321]]

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[[Page 29322]]

[GRAPHIC][TIFF OMITTED]TP02JN95.064



[[Page 29323]]

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[[Page 29324]]

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[[Page 29325]]

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[[Page 29326]]

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[GRAPHIC][TIFF OMITTED]TP02JN95.069


BILLING CODE 4120-01-C

                                                                        
[[Page 29328]]
                                         Table 6a.--New Diagnosis Codes                                         
----------------------------------------------------------------------------------------------------------------
 Diagnosis                                                                                                      
    code                      Description                        CC           MDC                 DRG           
----------------------------------------------------------------------------------------------------------------
005.81.....  Food poisoning due to Vibrio vulnificus......  N                      6  182, 183, 184             
005.89.....  Other bacterial food poisoning...............  N                      6  182, 183, 184             
041.86.....  Helicobacter pylori (H. pylori) infection....  N                     18  423                       
079.81.....  Hantavirus infection.........................  N                     18  421, 422                  
278.00.....  Obesity, unspecified.........................  N                     10  296, 297, 298             
278.01.....  Morbid obesity...............................  N                     10  296, 297, 298             
415.11.....  Iatrogenic pulmonary embolism and infarction.  Y                      4  78                        
                                                            ............          15  387, 389                  
415.19.....  Other pulmonary embolism and infarction......  Y                      4  78                        
                                                            ............          15  387, 389                  
435.3......  Vertebrobasilar artery syndrome..............  N                      1  15                        
458.2......  Iatrogenic hypotension.......................  N                      5  141, 142                  
569.60.....  Colostomy and enterostomy complication, not    Y                      6  188, 189, 190             
              otherwise specified.                                                                              
569.61.....  Infection of colostomy or enterostomy........  Y                      6  188, 189, 190             
569.69.....  Other colostomy and enterostomy complication.  Y                      6  188, 189, 190             
690.10.....  Seborrheic dermatitis, unspecified...........  N                      9  283, 284                  
690.11.....  Seborrhea capitis............................  N                      9  283, 284                  
690.12.....  Seborrheic infantile dermatitis..............  N                      9  283, 284                  
690.18.....  Other seborrheic dermatitis..................  N                      9  283, 284                  
690.8......  Other erythematosquamous dermatosis..........  N                      9  283, 284                  
728.86.....  Necrotizing fasciitis........................  Y                      8  248                       
787.91.....  Diarrhea.....................................  N                      6  182, 183, 184             
787.99.....  Other symptoms involving digestive system....  N                      6  182, 183, 184             
989.81.....  Toxic effect of asbestos.....................  N                     21  449, 450, 451             
989.82.....  Toxic effect of latex........................  N                     21  449, 450, 451             
989.83.....  Toxic effect of silicone.....................  N                     21  449, 450, 451             
989.84.....  Toxic effect of tobacco......................  N                     21  449, 450, 451             
989.89.....  Toxic effect of other substance, chiefly       N                     21  449, 450, 451             
              nonmedicinal as to source, not elsewhere                                                          
              classified.                                                                                       
997.00.....  Nervous system complication, unspecified.....  Y                      1  34, 35                    
                                                            ............          15  387, 389                  
997.01.....  Central nervous system complication..........  Y                      1  34, 35                    
                                                            ............          15  387, 389                  
997.02.....  Iatrogenic cerebrovascular infarction or       Y                      1  34, 35                    
              hemorrhage.                                                                                       
                                                            ............          15  387, 389                  
997.09.....  Other nervous system complications...........  Y                      1  34, 35                    
                                                            ............          15  387, 389                  
997.91.....  Complications affecting other specified body   N                     21  452, 453                  
              systems, hypertension.                                                                            
997.99.....  Complications affecting other specified body   Y                     21  452, 453                  
              systems, not elsewhere classified.                                                                
V12.50.....  Personal history of unspecified circulatory    N                     23  467                       
              disease.                                                                                          
V12.51.....  Personal history of venous thrombosis and      N                     23  467                       
              embolism.                                                                                         
V12.52.....  Personal history of thrombophlebitis.........  N                     23  467                       
V12.59.....  Personal history of other diseases of          N                     23  467                       
              circulatory system, not elsewhere classified.                                                     
V15.84.....  Personal history of exposure to asbestos.....  N                     23  467                       
V15.85.....  Personal history of exposure to potentially    N                     23  467                       
              hazardous body fluids.                                                                            
V15.86.....  Personal history of exposure to lead.........  N                     23  467                       
V43.81.....  Larynx replacement status....................  N                     23  467                       
V43.82.....  Breast replacement status....................  N                     23  467                       
V43.89.....  Other organ or tissue replacement status, not  N                     23  467                       
              elsewhere classified.                                                                             
V45.83.....  Breast implant removal status................  N                     23  467                       
V56.1......  Fitting and adjustment of dialysis             N                     11  317                       
              (extracorporeal) (peritoneal) catheter.                                                           
V58.61.....  Long-term (current) use of anticoagulants....  N                     23  465, 466                  
V58.69.....  Long-term (current) use of other medications.  N                     23  465, 466                  
V58.82.....  Fitting and adjustment of nonvascular          N                     23  465, 466                  
              catheter, not elsewhere classified.                                                               
V59.01.....  Blood donor, whole blood.....................  N                     23  467                       
V59.02.....  Blood donor, stem cells......................  N                     23  467                       
V59.09.....  Other blood donor............................  N                     23  467                       
V59.6......  Liver donor..................................  N                      7  205, 206                  
----------------------------------------------------------------------------------------------------------------


                                         Table 6b.--New Procedure Codes                                         
----------------------------------------------------------------------------------------------------------------
Procedure code                  Description                      OR           MDC                 DRG           
----------------------------------------------------------------------------------------------------------------
05.25.........  Periarterial sympathectomy................  Y                      1  7, 8                      
                                                            ............           5  120                       
32.22.........  Lung volume reduction surgery.............  Y                      4  75                        
33.50.........  Lung transplantation, not otherwise         Y                    Pre  495                       
                 specified.                                                                                     
33.51.........  Unilateral lung transplantation...........  Y                    Pre  495                       
[[Page 29329]]
                                                                                                                
33.52.........  Bilateral lung transplantation............  Y                    Pre  495                       
36.06.........  Insertion of coronary artery stent(s).....  N                         ..........................
37.65.........  Implant of an external, pulsatile heart     Y                      5  110, 111                  
                 assist system.                                                                                 
37.66.........  Implant of an implantable, pulsatile heart  Y                      5  110, 111                  
                 assist system.                                                                                 
39.50.........  Angioplasty or atherectomy of non-coronary  Y                      1  5                         
                 vessel.                                                                                        
                                                            ............           5  478, 479                  
                                                            ............           9  269, 270                  
                                                            ............          10  292, 293                  
                                                            ............          11  315                       
                                                            ............          21  442, 443                  
                                                            ............          24  486                       
48.36.........  [Endoscopic] polypectomy of rectum........  N\1\                  17  412                       
59.72.........  Injection of implant into urethra and/or    N\1\                  11  308, 309                  
                 bladder neck.                                                                                  
                                                            ............          13  356                       
60.21.........  Transurethral (ultrasound) guided laser     Y                     11  306, 307                  
                 induced prostatectomy (TULIP).                                                                 
                                                            ............          12  336, 337, 476             
60.29.........  Other transurethral prostatectomy.........  Y                     11  306, 307                  
                                                            ............          12  336, 337, 476             
92.3..........  Stereotactic radiosurgery.................  (\1\)                  1  1, 2, 3                   
                                                            ............          10  286                       
                                                            ............          17  400, 406, 407             
99.00.........  Perioperative autologous transfusion of     N                         ..........................
                 whole blood or blood components.                                                               
----------------------------------------------------------------------------------------------------------------
\1\Non-OR procedure that affects DRG assignment.                                                                


                                       Table 6c.--Invalid Diagnosis Codes                                       
----------------------------------------------------------------------------------------------------------------
 Diagnosis                                                                                                      
   code                       Description                        CC           MDC                 DRG           
----------------------------------------------------------------------------------------------------------------
005.8.....  Other bacterial food poisoning................  N                      6  182, 183, 184             
278.0.....  Obesity.......................................  N                     10  296, 297, 298             
415.1.....  Pulmonary embolism and infarction.............  Y                      4  78                        
                                                                                  15  387, 389                  
569.6.....  Colostomy and enterostomy malfunction.........  Y                      6  188, 189, 190             
690.......  Erythematosquamous dermatosis.................  N                      9  283, 284                  
787.9.....  Other symptoms involving digestive system.....  N                      6  182, 183, 184             
989.8.....  Toxic effect of other substances, chiefly       N                     21  449, 450, 451             
             nonmedicinal as to source.                                                                         
997.0.....  Central nervous system complications..........  Y                      1  34, 35                    
                                                                                  15  387, 389                  
997.9.....  Complications affecting other specified body    Y                     21  452, 453                  
             systems, not elsewhere classified.                                                                 
V12.5.....  Personal history of diseases of circulatory     N                     23  467                       
             system.                                                                                            
V43.8.....  Organ or tissue replaced by other means, not    N                     23  467                       
             elsewhere classified.                                                                              
V59.0.....  Blood donor...................................  N                     23  467                       
33.5......  Lung transplant...............................  Y                    Pre  495                       
39.7......  Periarterial sympathectomy....................  Y                      5  478, 479                  
60.2......  Transurethral prostatectomy...................  Y                     11  306, 307                  
                                                            ............          12  336, 337                  
                                                            ............  ..........  476                       
----------------------------------------------------------------------------------------------------------------


                                    Table 6e.--Revised Diagnosis Code Titles                                    
----------------------------------------------------------------------------------------------------------------
 Diagnosis                                                                                                      
    code                      Description                        CC           MDC                 DRG           
----------------------------------------------------------------------------------------------------------------
441.00.....  Dissection of aorta, unspecified site........  Y                      5  121, 130, 131             
441.01.....  Dissection of aorta, thoracic................  Y                      5  121, 130, 131             
441.02.....  Dissection of aorta, abdominal...............  Y                      5  121, 130, 131             
441.03.....  Dissection of aorta, thoracoabdominal........  Y                      5  121, 130, 131             
560.81.....  Intestinal or peritoneal adhesions with        Y                      6  180, 181                  
              obstruction (postoperative) (postinfection).                                                      
568.0......  Peritoneal adhesions (postoperative)           N                      6  188, 189, 190             
              (postinfection).                                                                                  
614.6......  Pelvic peritoneal adhesions, female            N                     13  358, 359, 369             
              (postoperative) (postinfection).                                                                  
650........  Normal delivery..............................  N                     14  370, 371, 372,            
                                                            ............              373, 374, 375             
780.6......  Fever........................................  N                     18  419, 420, 422             
997.4......  Digestive system complication................  Y                      6  188, 189, 190             
V52.4......  Fitting and adjustment of breast prosthesis    N                     23  467                       
              and implant.                                                                                      
V53.5......  Fitting and adjustment of other intestinal     N                      6  188, 189, 190             
              appliance.                                                                                        
[[Page 29330]]
                                                                                                                
V58.81.....  Fitting and adjustment of vascular catheter..  N                     23  465, 466                  
V67.51.....  Follow-up examination following completed      N                     23  467                       
              treatment with high-risk medications, not                                                         
              elsewhere classified.                                                                             
----------------------------------------------------------------------------------------------------------------


                                    Table 6f.--Revised Procedure Code Titles                                    
----------------------------------------------------------------------------------------------------------------
Procedure code                  Description                      OR           MDC                 DRG           
----------------------------------------------------------------------------------------------------------------
99.02.........  Transfusion of previously collected         N                                                   
                 autologous blood.                                                                              
----------------------------------------------------------------------------------------------------------------


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[[Page 29354]]
 Table 8a.--Statewide Average Operating Cost-to-Charge Ratios for Urban 
             and Rural Hospitals (Case Weighted) April 1995             
------------------------------------------------------------------------
                         State                           Urban    Rural 
------------------------------------------------------------------------
ALABAMA...............................................    0.435    0.483
ALASKA................................................    0.535    0.721
ARIZONA...............................................    0.459    0.643
ARKANSAS..............................................    0.552    0.515
CALIFORNIA............................................    0.436    0.536
COLORADO..............................................    0.518    0.582
CONNECTICUT...........................................    0.556    0.576
DELAWARE..............................................    0.533    0.516
DISTRICT OF COLUMBIA..................................    0.532  .......
FLORIDA...............................................    0.435    0.431
GEORGIA...............................................    0.541    0.540
HAWAII................................................    0.510    0.504
IDAHO.................................................    0.580    0.673
ILLINOIS..............................................    0.523    0.605
INDIANA...............................................    0.580    0.633
IOWA..................................................    0.554    0.716
KANSAS................................................    0.506    0.684
KENTUCKY..............................................    0.522    0.562
LOUISIANA.............................................    0.497    0.559
MAINE.................................................    0.613    0.560
MARYLAND..............................................    0.764    0.806
MASSACHUSETTS.........................................    0.612    0.622
MICHIGAN..............................................    0.549    0.657
MINNESOTA.............................................    0.583    0.647
MISSISSIPPI...........................................    0.544    0.532
MISSOURI..............................................    0.473    0.531
MONTANA...............................................    0.544    0.661
NEBRASKA..............................................    0.529    0.694
NEVADA................................................    0.343    0.628
NEW HAMPSHIRE.........................................    0.592    0.625
NEW JERSEY............................................    0.543  .......
NEW MEXICO............................................    0.485    0.549
NEW YORK..............................................    0.633    0.721
NORTH CAROLINA........................................    0.567    0.521
NORTH DAKOTA..........................................    0.652    0.695
OHIO..................................................    0.594    0.633
OKLAHOMA..............................................    0.506    0.571
OREGON................................................    0.604    0.637
PENNSYLVANIA..........................................    0.454    0.579
PUERTO RICO...........................................    0.554    0.851
RHODE ISLAND..........................................    0.615  .......
SOUTH CAROLINA........................................    0.510    0.524
SOUTH DAKOTA..........................................    0.558    0.656
TENNESSEE.............................................    0.530    0.570
TEXAS.................................................    0.490    0.593
UTAH..................................................    0.591    0.648
VERMONT...............................................    0.627    0.611
VIRGINIA..............................................    0.513    0.547
WASHINGTON............................................    0.656    0.675
WEST VIRGINIA.........................................    0.577    0.529
WISCONSIN.............................................    0.640    0.706
WYOMING...............................................    0.611    0.765
------------------------------------------------------------------------


Table 8b.--Statewide Average Capital Cost-to-Charge Ratios for Urban and
               Rural Hospitals (Case Weighted) April 1995               
------------------------------------------------------------------------
                             State                                Ratio 
------------------------------------------------------------------------
ALABAMA........................................................    0.053
ALASKA.........................................................    0.075
ARIZONA........................................................    0.062
ARKANSAS.......................................................    0.050
CALIFORNIA.....................................................    0.041
COLORADO.......................................................    0.051
CONNECTICUT....................................................    0.036
DELAWARE.......................................................    0.055
DISTRICT OF COLUMBIA...........................................    0.043
FLORIDA........................................................    0.052
GEORGIA........................................................    0.050
HAWAII.........................................................    0.063
IDAHO..........................................................    0.075
ILLINOIS.......................................................    0.049
INDIANA........................................................    0.059
IOWA...........................................................    0.058
KANSAS.........................................................    0.062
KENTUCKY.......................................................    0.059
LOUISIANA......................................................    0.074
MAINE..........................................................    0.042
MASSACHUSETTS..................................................    0.061
MICHIGAN.......................................................    0.059
MINNESOTA......................................................    0.054
MISSISSIPPI....................................................    0.055
MISSOURI.......................................................    0.053
MONTANA........................................................    0.067
NEBRASKA.......................................................    0.061
NEVADA.........................................................    0.036
NEW HAMPSHIRE..................................................    0.065
NEW JERSEY.....................................................    0.051
NEW MEXICO.....................................................    0.056
NEW YORK.......................................................    0.061
NORTH CAROLINA.................................................    0.048
NORTH DAKOTA...................................................    0.075
OHIO...........................................................    0.061
OKLAHOMA.......................................................    0.059
OREGON.........................................................    0.068
PENNSYLVANIA...................................................    0.047
PUERTO RICO....................................................    0.078
RHODE ISLAND...................................................    0.027
SOUTH CAROLINA.................................................    0.064
SOUTH DAKOTA...................................................    0.065
TENNESSEE......................................................    0.057
TEXAS..........................................................    0.058
UTAH...........................................................    0.050
VERMONT........................................................    0.050
VIRGINIA.......................................................    0.057
WASHINGTON.....................................................    0.068
WEST VIRGINIA..................................................    0.058
WISCONSIN......................................................    0.048
WYOMING........................................................    0.072
------------------------------------------------------------------------

Appendix A--Regulatory Impact Analysis

I. Introduction

    We generally prepare a regulatory flexibility analysis that is 
consistent with the Regulatory Flexibility Act (RFA) (5 U.S.C. 601 
through 612), unless the Secretary certifies that a proposed rule would 
not have a significant economic impact on a substantial number of small 
entities. For purposes of the RFA, we consider all hospitals to be 
small entities.
    Also, section 1102(b) of the Act requires the Secretary to prepare 
a regulatory impact analysis for any proposed rule that may have a 
significant impact on the operations of a substantial number of small 
rural hospitals. Such an 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 define a small rural hospital as a hospital with fewer than 100 
beds that is located outside of a Metropolitan Statistical Area (MSAs) 
or New England County Metropolitan Area (NECMA). Section 601(g) of the 
Social Security Amendments of 1983 (Public Law 98-21) designated 
hospitals in certain New England counties as belonging to the adjacent 
NECMA. Thus, for purposes of the prospective payment system, we 
classified these hospitals as urban hospitals.
    It is clear that the changes being proposed in this document would 
affect both a substantial number of small rural hospitals as well as 
other classes of hospitals, and the effects on some may be significant. 
Therefore, the discussion below, in combination with the rest of this 
proposed rule, constitutes a combined regulatory impact analysis and 
regulatory flexibility analysis.

II. Objectives

    The primary objective of the prospective payment system is to 
create incentives for hospitals to operate efficiently and minimize 
unnecessary costs, and at the same time ensure that payments are 
sufficient to adequately compensate hospitals for their legitimate 
costs. In addition, we share national goals of deficit reduction and 
restraints on government spending in general.
    We believe the proposed changes would further each of these goals 
while maintaining the financial viability of the hospital industry and 
ensuring access to high quality care for beneficiaries. We expect that 
these proposed changes would ensure that the outcomes of this payment 
system are, in general, reasonable and equitable while avoiding or 
minimizing unintended adverse consequences.

III. Limitations of Our Analysis

    As has been the case in previously published regulatory impact 
analyses, the following quantitative analysis presents the projected 
effects of our proposed policy changes, as well as statutory changes 
effective for FY 1996, on various hospital groups. We estimate the 
effects of each policy change by estimating payments while holding all 
other payment variables constant. We use the best data available, but 
we do not attempt to predict behavioral responses to our policy 
changes, and we do not make adjustments for future 
[[Page 29355]] changes in such variables as admissions, lengths of 
stay, or case mix. As we have done in previous proposed rules, we are 
soliciting comments and information about the anticipated effects of 
these changes on the prospective payment system, and our methodology 
for estimating them.

IV. Hospitals Included In and Excluded From the Prospective Payment 
System

    The prospective payment systems for hospital inpatient operating 
and capital-related costs encompass nearly all general, short-term, 
acute care hospitals that participate in the Medicare program. There 
were 46 Indian Health Service hospitals in our database, which we 
excluded from the analysis due to the special characteristics of the 
payment method for these hospitals. Only the 49 short-term, acute care 
hospitals in Maryland remain excluded from the prospective payment 
system under the waiver at section 1814(b)(3) of the Act. (As of 
January 1, 1995, the hospitals participating in the New York Finger 
Lakes demonstration project began to be paid under the prospective 
payment system.) Thus, as of April 1995, just over 5,150 hospitals were 
receiving prospectively based payments for furnishing inpatient 
services. This represents about 82 percent of all Medicare-
participating hospitals. The majority of this impact analysis focuses 
on this set of hospitals.
    The remaining 18 percent are specialty hospitals that are excluded 
from the prospective payment system and continue to be paid on the 
basis of their reasonable costs, subject to a rate-of-increase ceiling 
on their inpatient operating costs per discharge. These hospitals 
include psychiatric, rehabilitation, long-term care, children's, and 
cancer hospitals. The impacts of our proposed policy changes on these 
hospitals is discussed below.

V. Impact on Excluded Hospitals and Units

    As of April 1995, just over 1,100 specialty hospitals are excluded 
from the prospective payment system and are instead paid on a 
reasonable cost basis subject to the rate-of-increase ceiling under 
Sec. 413.40. In addition, approximately 2,230 psychiatric and 
rehabilitation units in hospitals that are subject to the prospective 
payment system are excluded from the prospective payment system and 
paid in accordance with Sec. 413.40.
    In accordance with section 1886(b)(3)(B)(ii)(V) of the Act, the 
update factor applicable to the rate-of-increase limit for excluded 
hospitals and units for FY 1996 would be the hospital market basket 
minus 1.0 percentage point, adjusted to account for the relationship 
between the hospital's allowable operating cost per case and its target 
amounts. We are currently projecting an increase in the excluded 
hospital market basket of 3.6 percent.
    The impact on excluded hospitals and units of the proposed update 
in the rate-of-increase limit depends on the cumulative cost increases 
experienced by each excluded hospital and excluded unit since its 
applicable base period. For excluded hospitals and units that have 
maintained their cost increases at a level below the percentage 
increases in the rate-of-increase limits since their base period, the 
major effect will be on the level of incentive payments these hospitals 
and units receive. Conversely, for excluded hospitals and units with 
per-case cost increases above the cumulative update in their rate-of-
increase limit, the major effect will be the amount of excess costs 
that the hospitals would have to absorb.
    In this context, we note that, under Sec. 413.40(d)(3), an excluded 
hospital or unit whose costs exceed the rate-of-increase limit is 
allowed to receive the lower of its rate-of-increase ceiling plus 50 
percent of reasonable costs in excess of the ceiling, or 110 percent of 
its ceiling. In addition, under the various provisions set forth in 
Sec. 413.40, excluded hospitals and units can obtain payment 
adjustments for significant, yet justifiable, increases in operating 
costs that exceed the limit. At the same time, however, by generally 
limiting payment increases, we continue to provide an incentive for 
excluded hospitals and units to restrain the growth in their spending 
for patient services.

VI. Quantitative Impact Analysis of the Proposed Policy Changes Under 
the Prospective Payment System for Operating Costs

A. Basis and Methodology of Estimates

    In this proposed rule, we are announcing policy changes and payment 
rate updates for the prospective payment systems for operating and 
capital-related costs. We have prepared separate analyses of the 
proposed changes to each system, beginning with changes to the 
operating prospective payment system.
    The data used in developing the quantitative analyses presented 
below are taken from the FY 1994 MedPAR file and the most current 
provider-specific file that is used for payment purposes. Although the 
analyses of the changes to the operating prospective payment system do 
not incorporate any actual cost data, the most recently available 
hospital cost report data were used to create some of the variables by 
which hospitals are categorized. Our analysis has several 
qualifications. First, we do not make adjustments for behavioral 
changes that hospitals may adopt in response to these proposed policy 
changes. Second, due to the interdependent nature of the prospective 
payment system, it is very difficult to precisely quantify the impact 
associated with each proposed change. Third, we draw upon 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. For 
individual hospitals, however, some miscategorizations are possible.
    Using cases in the FY 1994 MedPAR file, we simulated payments under 
the operating prospective payment system given various combinations of 
payment parameters. Any short-term, acute care hospitals not paid under 
the general prospective payment systems (Indian Health Service 
Hospitals and hospitals in Maryland) are excluded from the simulations. 
Payments under the capital prospective payment system, or payments for 
costs other than inpatient operating costs, are not analyzed here. 
Estimated payment impacts of proposed FY 1996 changes to the capital 
prospective payment system are discussed below in section VII of 
Appendix A.
    The proposed changes discussed separately below are the following:
     The effects of the annual reclassification of diagnoses 
and procedures and the recalibration of the diagnosis-related group 
(DRG) relative weights required by section 1886(d)(4)(C) of the Act.
     The effects of changes in hospitals' wage index values 
reflecting the wage index update.
     The effects of changing the transfer payment policy to a 
graduated per diem payment methodology.
     The effects of geographic reclassifications by the 
Medicare Geographic Classification Review Board (MGCRB) that are 
effective in FY 1996.
     The effects of phasing out payments for extraordinarily 
lengthy cases (day outlier cases) by 50 percent (with a corresponding 
increase in payments for extraordinarily costly cases (cost outliers)), 
in accordance with section 1886(d)(5)(A)(v) of the Act.
     The total change in payments based on FY 1996 policies 
relative to payments based on FY 1995 policies. [[Page 29356]] 
    To illustrate the impacts of the FY 1996 proposed changes, our FY 
1996 baseline simulation model uses: the FY 1995 GROUPER (version 
12.0); the FY 1995 wage indexes; the current uniform per diem transfer 
payment policy; no effects of FY 1996 reclassifications; and current 
outlier policy (25 percent phase-out of day outlier payments). Outliers 
are estimated to be 5.1 percent of total DRG payments.
    Each policy change is then added incrementally to this baseline 
model, finally arriving at an FY 1996 model incorporating all of the 
proposed changes. This allows us to isolate the effects of each 
proposed change.
    Our final comparison illustrates the percent change in payments per 
case from FY 1995 to FY 1996. Three factors not displayed in the 
previous five columns have significant impacts here. First is the 
update to the standardized amounts. In accordance with section 
1886(d)(3)(A)(iv) of the Act, we are proposing to update the large 
urban and the other areas average standardized amounts for FY 1996 
using the most recent forecasted hospital market basket increase for FY 
1996 of 3.5 percent, minus 2.0 percentage points. Thus, the update to 
the large urban and other areas standardized amounts is 1.5 percent. 
Similarly, section 1886(b)(3)(C)(ii) of the Act provides that the 
update factor applicable to the hospital-specific rates for sole 
community hospitals (SCHs) and essential access community hospitals 
(EACHs) (which are treated as SCHs for payment purposes) is also the 
market basket increase minus 2.0 percent, or 1.5 percent.
    A second significant factor impacting upon changes in payments per 
case from FY 1995 to FY 1996 is a change in MGCRB reclassification 
status from one year to the next. That is, hospitals reclassified in FY 
1995 that are no longer reclassified in FY 1996 may have a negative 
payment impact going from FY 1995 to FY 1996, and vice versa. In some 
cases these impacts can be quite substantial, so that a relatively few 
number of hospitals in a particular category that lost their 
reclassification status can hold the average percentage change for the 
category below the mean.
    Third, when comparing our estimated FY 1995 payments to FY 1996 
payments, another significant consideration is that we currently 
estimate that outlier payments during FY 1995 will be 4.2 percent of 
total DRG payments. When the FY 1995 final rule was published September 
1, 1994 (59 FR 45330), we estimated FY 1995 outlier payments would be 
5.1 percent of total DRG payments, and the standardized amounts were 
correspondingly reduced. The effects of the lower than expected outlier 
payments during FY 1995 are reflected in the analyses below comparing 
our current estimates of FY 1995 total payments to estimated FY 1996 
payments.
    Table I demonstrates the results of our analysis. 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 5,154 hospitals included in the analysis. This is 100 fewer 
hospitals than were included in the impact analysis in the FY 1995 
final rule (59 FR 45330). Data for 106 hospitals that were included in 
last year's analysis were not available for analysis this year; 
however, data were available this year for 1 hospital for which data 
were not available last year. In addition, 5 hospitals previously 
excluded from our analysis because they were participating in the 
Finger Lakes demonstration project are included in our analysis this 
year because the demonstration authority has expired and these 
hospitals are now being paid under the prospective payment system.
    The next four rows of Table I contain hospitals categorized 
according to their geographic location (all urbans as well as large 
urban and other urban or rural). There are 2,895 hospitals located in 
urban areas (MSAs or NECMAs) included in our analysis. Among these, 
there are 1,622 hospitals located in large urban areas (populations 
over 1 million), and 1,273 hospitals in other urban areas (populations 
of 1 million or fewer). In addition, there are 2,259 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 changes in payments based on 
hospitals' FY 1996 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 the 
numbers of hospitals being paid based on these categorizations, after 
consideration of geographic reclassifications, are 3,106, 1,815, 1,291, 
and 2,048, respectively.
    The next three groupings examine the impacts of the proposed 
changes on hospitals grouped by whether or not they have residency 
programs (teaching hospitals that receive an indirect medical education 
(IME) adjustment), receive disproportionate share (DSH) payments, or 
some combination of these two adjustments. There are 4,104 nonteaching 
hospitals in our analysis, 826 with fewer than 100 residents, and 224 
with 100 or more residents.
    In the DSH categories, hospitals are grouped according to their DSH 
payment status. In the past, we have included as urban hospitals those 
that are located in a rural area but were reclassified as urban by the 
MGCRB for purposes of the standardized amount, since they have been 
considered urban in determining the amount of their DSH adjustment. 
This year, however, we have isolated these hospitals in separate rows 
to identify the payment impacts of reclassification solely for DSH. In 
these rows, labeled ``Large Urban and DSH'' and ``DSH Only'', under the 
heading ``Reclassified Rural DSH,'' we group reclassified rural 
hospitals that receive DSH after reclassification based on whether they 
also receive the higher large urban amount, or are only benefitting 
from reclassification by receiving higher DSH payments. Hospitals in 
the rural DSH categories, therefore, including those in the rural 
referral center (RRC) and SCH categories, represent hospitals that were 
not reclassified for purposes of the standardized amount (they may, 
however, have been reclassified for purposes of assigning the wage 
index). The next category groups hospitals paid on the basis of the 
urban standardized amount in terms of whether they receive the IME 
adjustment, the DSH adjustment, both, or neither.
    The next six rows examine the impacts of the proposed changes on 
rural hospitals by special payment groups (SCHs, RRCs, and EACHs). 
Rural hospitals reclassified for FY 1996 for purposes of the 
standardized amount are not included here.
    The RRCs (111), SCH/EACHs (612), and SCH/EACH and RRCS (46) shown 
here were not reclassified for purposes of the standardized amount. 
There are 2 EACHs included in our analysis and 3 EACH/RRCs.
    There are 9 RRCs and 13 SCHs that will be reclassified for the 
standardized amount in FY 1996 and are therefore not included in these 
rows. In addition, two hospitals that are both SCH/RRCs will be 
reclassified for the standardized amount (one of these hospitals will 
also be reclassified for the wage index).
    The next two groupings are based on type of ownership and the 
hospital's Medicare utilization expressed as a percent of total patient 
days. These data are taken from the FY 1993 Medicare cost report files, 
the latest available. [[Page 29357]] Data needed to calculate Medicare 
utilization percentages were unavailable for 68 hospitals. For the most 
part, these are either new hospitals or hospitals filing manual cost 
reports that are not yet entered into the data base.
    The next series of groupings concern the geographic reclassication 
status of hospitals. The first three groupings display hospitals that 
were reclassified by the MGCRB for either FY 1995 or FY 1996, or for 
both years, by urban/rural status. The next rows illustrate the overall 
number of reclassifications, as well as the numbers of reclassified 
hospitals grouped by urban and rural location. The final row in Table I 
contains hospitals located in rural counties but deemed to be urban 
under section 1886(d)(8)(B) of the Act.

              Table I.--Impact Analysis of Changes for FY 1996 Operating Prospective Payment System             
                                     [Percent Changes in Payments per Case]                                     
                                                                                                                
                                                                                              Day               
                    No. of          DRG         New wage     New            MGCRB           outlier    All FY 96
                  hosps.\1\  recalibration\2\   data\3\    transfer  reclassification\5\    policy    changes\7\
                                                          policy\4\                       changes\6\            
                        (0)            (1)           (2)        (3)             (4)              (5)         (6)
                                                                                                                
----------------------------------------------------------------------------------------------------------------
 (By Geographic                                                                                                 
    Location)                                                                                                   
                                                                                                                
All Hospitals...      5,154            0.0           0.0        0.0             0.0              0.0         2.4
Urban Hospitals.      2,895            0.0          -0.1        0.0            -0.4              0.0         2.3
    Large Urban.      1,622            0.1          -0.4        0.0            -0.5             -0.1         2.1
    Other Urban.      1,273            0.0           0.4        0.0            -0.1              0.1         2.8
Rural Hospitals.      2,259            0.1           0.3        0.3             2.3              0.0         2.9
                                                                                                                
Bed Size (Urban)                                                                                                
                                                                                                                
  0-99 Beds.....        716            0.0           0.0        0.3            -0.4              0.2         2.6
100-199 Beds....        918            0.0           0.2        0.1            -0.4              0.1         2.7
200-299 Beds....        601            0.0           0.1        0.0            -0.3              0.0         2.5
300-499 Beds....        480            0.0          -0.2       -0.1            -0.4              0.0         2.2
500 or more Beds        180            0.1          -0.3       -0.2            -0.3             -0.2         2.0
                                                                                                                
Bed Size (Rural)                                                                                                
                                                                                                                
  0-49 Beds.....      1,171            0.1           0.2        0.6             0.0              0.0         2.9
 50-99 Beds.....        644            0.1           0.2        0.4             0.9              0.1         3.1
100-149 Beds....        230            0.1           0.4        0.3             3.5              0.0         2.9
150-199 Beds....        108            0.1           0.2        0.1             2.6              0.0         2.6
200 or more Beds         86            0.0           0.4        0.0             4.8              0.0         2.7
                                                                                                                
 Urban by Census                                                                                                
    Division                                                                                                    
                                                                                                                
New England.....        163            0.1          -0.2        0.0            -0.1             -0.2         2.0
Middle Atlantic.        440            0.4          -0.7       -0.1            -0.4             -0.7         1.7
South Atlantic..        431            0.0           0.0        0.0            -0.5              0.1         2.4
East North                                                                                                      
 Central........        481           -0.1           0.0        0.0            -0.1              0.2         2.5
East South                                                                                                      
 Central........        164           -0.1           0.0       -0.1            -0.4              0.1         2.5
West North                                                                                                      
 Central........        196           -0.1          -0.6       -0.1            -0.5              0.2         1.8
West South                                                                                                      
 Central........        371           -0.2           0.5       -0.1            -0.5              0.3         3.2
Mountain........        119            0.0          -0.5       -0.1            -0.4              0.3         2.0
Pacific.........        483           -0.1           0.6        0.0            -0.5              0.2         2.7
Puerto Rico.....         47           -0.2           2.2       -0.2            -0.5              0.0         4.5
                                                                                                                
 Rural by Census                                                                                                
    Division                                                                                                    
                                                                                                                
New England.....         53            0.1           0.7        0.1             1.3              0.1         3.6
Middle Atlantic.         84            0.4          -0.5        0.1             1.1             -0.2         2.4
South Atlantic..        297            0.1           0.6        0.3             3.1              0.0         2.8
East North                                                                                                      
 Central........        305            0.1           0.5        0.4             1.9              0.1         3.4
East South                                                                                                      
 Central........        275            0.0           0.9        0.4             3.2              0.0         3.2
West North                                                                                                      
 Central........        527            0.1          -0.1        0.3             2.1              0.1         2.6
West South                                                                                                      
 Central........        352            0.1          -0.4        0.3             3.3              0.1         2.9
Mountain........        218            0.1          -0.1        0.2            -0.1              0.1         1.9
                                                                                                                
Pacific.........        143            0.1           0.8        0.2             1.7              0.1         3.3
Puerto Rico.....          5            0.6          -6.9       -0.1            -0.5              0.2        -4.2
   (By Payment                                                                                                  
   Categories)                                                                                                  
                                                                                                                
Urban Hospitals.      3,106            0.0          -0.1        0.0            -0.3              0.0         2.3
    Large Urban.      1,815            0.1          -0.3        0.0            -0.3             -0.1         2.2
    Other Urban.      1,291            0.0           0.3        0.0            -0.2              0.1         2.7
Rural Hospitals.      2,048            0.1           0.2        0.3             1.9              0.0         2.9
                                                                                                                
 Teaching Status                                                                                                
                                                                                                                
Non-Teaching....      4,104            0.0           0.1        0.1             0.3              0.1         2.7
Less than 100                                                                                                   
 Res............        826            0.0           0.0       -0.1            -0.4              0.0         2.3
100+ Residents..        224            0.1          -0.4       -0.1            -0.3             -0.4         1.8
                                                                                                                
Disproportionate                                                                                                
 Share Hospitals                                                                                                
      (DSH)                                                                                                     
                                                                                                                
Non-DSH.........      3,223            0.1           0.0        0.1             0.1              0.1         2.6
Urban DSH 100                                                                                                   
 Beds or more...      1,302            0.0          -0.1       -0.1            -0.5             -0.1         2.2
[[Page 29358]]
                                                                                                                
Fewer than 100                                                                                                  
 Beds...........        112           -0.2           0.1        0.3            -0.6              0.3         3.1
Reclassified                                                                                                    
 Rural DSH Large                                                                                                
 Urban and DSH..         54            0.0           0.4        0.0             3.1              0.0         3.4
DSH Only........         53            0.1           0.5        0.3             8.4             -0.1         2.7
Rural DSH Sole                                                                                                  
 Community (SCH)        137            0.1           0.1        0.2             0.1              0.0         1.8
Referral Centers                                                                                                
 (RRC)..........         40            0.1           0.4        0.1             3.7             -0.1         3.0
Other Rural DSH                                                                                                 
 Hosp. 100 Beds                                                                                                 
 or More........         83            0.1           0.5        0.4             5.5              0.0         3.2
Fewer than 100                                                                                                  
 Beds...........        150            0.0           0.7        0.7            -0.1              0.1         3.3
                                                                                                                
 Urban Teaching                                                                                                 
     and DSH                                                                                                    
                                                                                                                
Both Teaching                                                                                                   
 and DSH........        653            0.0          -0.2       -0.1            -0.4             -0.3         2.0
Teaching and No                                                                                                 
 DSH............        350            0.0          -0.2       -0.1            -0.3              0.0         2.3
No Teaching and                                                                                                 
 DSH............        868            0.0           0.2        0.0             0.0              0.1         2.6
No Teaching and                                                                                                 
 No DSH.........      1,235            0.1           0.0        0.1            -0.2              0.2         2.7
                                                                                                                
 Rural Hospital                                                                                                 
      Types                                                                                                     
                                                                                                                
Nonspecial                                                                                                      
 Status                                                                                                         
 Hospitals......      1,279            0.1           0.4        0.6             1.9              0.1         3.4
RRC.............        111            0.0           0.4        0.1             5.0              0.1         3.4
SCH/Each........        612            0.2          -0.1        0.1             0.1              0.0         1.9
SCH/Each and RRC         46            0.2           0.0        0.0             0.1             -0.1         1.9
                                                                                                                
     Type of                                                                                                    
    Ownership                                                                                                   
                                                                                                                
Voluntary.......      3,095            0.1          -0.1        0.0            -0.1             -0.1         2.3
Proprietary.....        725           -0.1           0.0        0.0             0.3              0.2         2.6
Government......      1,334            0.0           0.2        0.1             0.2              0.0         2.7
                                                                                                                
    Medicare                                                                                                    
Utilization as a                                                                                                
   Percent of                                                                                                   
 Inpatient Days                                                                                                 
                                                                                                                
0-25............        268           -0.1          -0.1        0.0            -0.1             -0.1         2.2
25-50...........      1,357            0.0          -0.1       -0.1            -0.2             -0.1         2.2
50-65...........      2,227            0.0           0.1        0.0             0.1              0.0         2.5
Over 65.........      1,234            0.1          -0.2        0.1             0.2              0.0         2.6
Unknown.........         68            0.5          -0.7        0.0            -0.4             -1.3         1.0
                                                                                                                
    Hospitals                                                                                                   
 Reclassified by                                                                                                
  the Medicare                                                                                                  
   Geographic                                                                                                   
  Review Board                                                                                                  
                                                                                                                
Reclassification                                                                                                
Status During FY                                                                                                
  95 and FY 96                                                                                                  
                                                                                                                
Reclassified                                                                                                    
 During Both FY                                                                                                 
 95 and FY 96...        465            0.1           0.2        0.1             4.4              0.0         2.7
    Urban.......        175            0.1           0.1        0.0             2.3              0.0         2.5
    Rural.......        290            0.0           0.3        0.2             8.1              0.0         2.9
Reclassified                                                                                                    
 During FY 96                                                                                                   
 Only...........        153            0.2           0.1        0.1             3.1              0.0         7.1
    Urban.......         34            0.3          -0.1        0.1             2.3             -0.2         7.4
    Rural.......        119            0.1           0.3        0.2             3.7              0.1         6.8
Reclassified                                                                                                    
 During FY 95                                                                                                   
 Only...........        220           -0.1           0.2        0.1            -1.0              0.1        -1.2
    Urban.......         58           -0.2           0.3       -0.1            -2.2              0.1        -1.6
    Rural.......        162            0.1           0.2        0.3             1.2              0.1        -0.4
                                                                                                                
      FY 96                                                                                                     
Reclassification                                                                                                
        s                                                                                                       
                                                                                                                
All Reclassified                                                                                                
 Hosp...........        618            0.1           0.2        0.1             4.1              0.0         3.5
    Stand.                                                                                                      
     Amount Only        213            0.1           0.6        0.1             1.2              0.0         2.8
    Wage Index                                                                                                  
     Only.......        260            0.1           0.1        0.1             7.3              0.0         4.3
    Both........        145            0.1           0.0        0.0             3.2              0.0         3.2
    Nonreclassif                                                                                                
     ied........      4,509            0.0          -0.1        0.0            -0.6              0.0         2.3
All Urban                                                                                                       
 Reclass........        209            0.1           0.1        0.0             2.3             -0.1         3.3
    Stand.                                                                                                      
     Amount Only         69            0.0           0.7        0.0             0.6              0.0         3.1
    Wage Index                                                                                                  
     Only.......         37            0.2          -0.2       -0.1             5.4             -0.2         3.9
    Both........        103            0.1          -0.1        0.0             1.7              0.0         3.0
    Nonreclassif                                                                                                
     ied........      2,686            0.0          -0.1        0.0            -0.6              0.0         2.2
All Rural                                                                                                       
 Reclass........        409            0.0           0.3        0.2             6.9              0.1         3.9
    Stand.                                                                                                      
     Amount Only        144            0.1           0.4        0.3             2.2              0.1         2.5
    Wage Index                                                                                                  
     Only.......        223            0.0           0.2        8.2             8.5              0.1         4.6
    Both........         42            0.0           0.5        0.1            10.6              0.1         4.0
    Nonreclassif                                                                                                
     ied........      1,823            0.1           0.3        0.3            -0.2              0.0         2.3
Other                                                                                                           
 Reclassified                                                                                                   
 Hospitals                                                                                                      
 (Section                                                                                                       
 1886(d)(8)(B)).         27            0.1          -0.2        0.4            -0.4              0.1         2.8
\1\Because data necessary to classify some hospitals by category were missing, the total number of hospitals in 
  each category may not equal the national total. Discharge data are from FY 1994, and hospital cost report data
  are from cost reporting periods beginning in FY 1992 and FY 1993.                                             
\2\This column displays the payment impacts of the recalibration of the DRG weights and the classification      
  changes, based on FY 1994 MedPAR data, in accordance with section 1886(d)(4)(C) of the Act.                   
[[Page 29359]]
                                                                                                                
\3\This column shows that payment impacts of updating the data used to calculate the wage index.                
\4\This column displays the payment impacts of revising the per diem methodology for transfer cases from the    
  current flat per diem methodology to a graduated per diem methodology.                                        
\5\Shown here are the combined effects of geographic reclassification by the Medicare Geographic Classification 
  Review Board (MGCRB). The effects shown here demonstrate the FY 1996 payment impacts of going from no         
  reclassifications to the reclassifications scheduled to be in effect for FY 1996. Reclassification for prior  
  years has no bearing on the payment impacts shown here.                                                       
\6\This column illustrates the payment impacts of our changes affecting payments for day outliers, in accordance
  with section 1886(d)(5)(A) of the Act.                                                                        
\7\This column shows changes in payments from FY 1995 to FY 1996. It incorporates all of the changes displayed  
  in columns 1 through 5. It also displays the impacts of the updates to the FY 1996 standardized amounts,      
  change in hospitals' reclassification status in FY 1996 compared to FY 1995, and the difference in projected  
  outlier payments from FY 1995 to FY 1996. The sum of the first five columns plus these effects may be slightly
  different from the percentage changes shown here, due to rounding errors and interactive effects.             

B. The Impact of the Proposed Changes to the DRG Weights (Column 1)

    In column 1 of Table I, we present the combined effects of the DRG 
reclassification and recalibration, as discussed in section II of the 
preamble to this proposed rule. Section 1886(d)(4)(C)(i) of the Act 
requires us each year to make appropriate classification changes and to 
recalibrate the DRG weights in order to reflect changes in treatment 
patterns, technology, and any other factors that may change the 
relative use of hospital resources. The impact of reclassification and 
recalibration on aggregate payments is required by section 
1886(d)(4)(C)(iii) of the Act to be budget neutral.
    The first row of Table I shows that the overall effect of these 
proposed changes is budget neutral. That is, the percentage change when 
adding the proposed FY 1996 GROUPER (version 13.0) to the FY 1996 
baseline is 0.0. As described previously, all of the other payment 
parameters are held constant for the comparison in column 1, only the 
version of the GROUPER is different.
    Consistent with the minor changes we are proposing for the FY 1996 
GROUPER, the redistributional impacts across hospital groups are very 
small (an increase of 0.1 for large urban and rural hospitals). Among 
other hospital categories, the net effects are slightly positive 
changes for small (up to 200 beds) rural hospitals and slightly 
positive changes for larger urban hospitals. The largest single effect 
on any of the hospital categories examined is a 0.6 percent increase in 
payments for rural hospitals in Puerto Rico. This is a function of the 
fact that only five hospitals are included in this category, and one 
hospital has a 1.2 percent increase in its case-mix index value.
    We also note that both urban and rural hospitals in the Middle 
Atlantic census division show a positive increase of 0.4 percent. We 
attribute this to the changes we proposed to our methodology for 
identifying statistical outliers that are trimmed from the data used to 
recalibrate the DRG weights (described in section II of the preamble to 
this proposed rule). In previous recalibrations, we trimmed all cases 
outside 3.0 standard deviations from the geometric mean of standardized 
charges per case for each DRG. In the proposed DRG recalibration set 
forth in this proposed rule, we eliminated only cases that met both the 
current criterion and an additional criterion that the cases fall 
outside 3.0 standard deviations from the geometric mean of standardized 
charges per day for each DRG. Because hospitals in the Middle Atlantic 
census division have longer lengths of stay (as demonstrated by the 
impacts of phasing out the day outliers--see the discussion below 
concerning column 5), they would be likely to have cases that exceed 
the per case threshold but not the per day threshold. Thus, costly 
cases previously trimmed would be left in the recalibration, thereby 
influencing the weights of the DRGs to which they are assigned.
    Rural hospitals overall exhibit a positive effect in column 1. 
Because rural hospitals send out relatively more transfers, this effect 
is probably a reflection of the modification in the way we count 
transfer cases in the recalibration methodology (see section II of the 
preamble to this proposed rule). A study by the Rand Corporation for 
HCFA, ``An Evaluation of Medicare Payments for Transfer Cases'' 
(Contract Number 500-92-0023), identified 12 DRGs that account for more 
than half of all transfer cases. These DRGs experience a 7 percent 
increase in their average relative weights under the proposed 
recalibration, which contributes to the increases experienced by rural 
hospitals and select urban hospitals. The average change in the 
proposed weights of all DRGs from FY 1995 to FY 1996 is less than 1 
percent.

C. The Impact of Updating the Wage Data (Column 2)

    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 wage index for FY 1996 
is based on data submitted for hospital cost reporting periods 
beginning on or after October 1, 1991 and before October 1, 1992. As 
with the previous column, the impact of the new data on hospital 
payments is isolated by holding the other payment parameters constant 
in the two simulations. That is, column 2 shows the percentage changes 
in payments when going from our FY 1996 baseline--using the FY 1995 
wage index before geographic reclassifications based on 1991 wage data 
and incorporating the FY 1996 GROUPER--to a model substituting the FY 
1996 pre-reclassification wage index based on 1992 wage data.
    Section 1886(d)(3)(E) of the Act also requires that any updates or 
adjustments to the wage index be made in a manner that ensures that 
aggregate payments to hospitals are not affected by changes in the wage 
index. To comply with the requirements that the DRG and wage index 
changes be implemented in a budget neutral manner, we compute a budget 
neutrality adjustment factor to apply to the standardized amounts. For 
the FY 1996 proposed standardized amounts, this adjustment factor is 
0.999174. This factor is applied to the standardized amounts to ensure 
that the overall effect of the wage index changes are budget neutral.
    The results indicate that the new wage data do not have a 
significant overall impact on urban and rural hospitals. As discussed 
below, 94 percent of all prospective payment system hospitals would 
experience a change in their wage index of less than 5 percent. This 
column demonstrates that hospitals with significant changes in their 
wage indexes are not concentrated within any particular hospital group. 
For FY 1996, some of the largest changes are evident among both urban 
and rural hospitals grouped by census division. More census divisions 
experience payment increases, of greater magnitude, for rural hospitals 
than for urban hospitals. In most cases, payments changed by less than 
one percent. Although a degree of variation across census categories is 
evident in this column, our review of the wage data (as described 
below) indicates that most of the significant changes were attributable 
to improved reporting.
    In the States and the District of Columbia, the greatest changes 
are [[Page 29360]] increases of 0.9 and 0.8 percent for rural hospitals 
in the East South Central and the Pacific census divisions, 
respectively, and a 0.7 percent decrease for urban hospitals in the 
Middle Atlantic region. This effect contributes to the 0.4 percent 
decline among major teaching hospitals--New York City's wage index 
falls by over 1 percent. The Middle Atlantic region also experiences a 
payment decrease of 0.5 percent for its rural hospitals. The Pacific 
region experiences an increase in payments to both urban and rural 
hospitals, with increases of 0.6 and 0.8 percent, respectively. In 
Puerto Rico, payments decline by 6.9 percent in five rural hospitals 
and increase 2.2 percent in urban hospitals. Of the six urban areas in 
Puerto Rico, five experience large increases in wage index values while 
only one experiences a slight decline.
    The FY 1996 proposed wage index represents the third annual update 
to the wage data, and will continue to include salaries, fringe 
benefits, home office salaries, and certain contract labor salaries. In 
the past, updates to the wage data have resulted in significant payment 
shifts among hospitals. Since the wage index is now updated annually, 
we expect these payment fluctuations will be minimized.
    Based on the proposed wage index calculation (after 
reclassifications under sections 1886(d)(8)(B) and 1886(d)(10) of the 
Act) compared to the FY 1995 wage index, there are more labor markets 
that experience an increase of 5 percent or more in their wage index 
values, and fewer labor markets that experience a significant decrease 
of 5 percent or more. We reviewed the data for any area that 
experienced a wage index change of 10 percent or more to determine the 
reason for the fluctuation. When necessary, we contacted the 
intermediaries to determine the validity of the data or to obtain an 
explanation for the change. The following chart compares the shifts in 
wage index values (after reclassifications) for labor markets for FY 
1996 with those experienced as a result of last year's wage index 
update.

------------------------------------------------------------------------
                                                       Number of labor  
                                                        market areas    
    Percentage change in area wage index values    ---------------------
                                                     FY 1996    FY 1995 
------------------------------------------------------------------------
Increase more than 10 percent.....................          8          5
Increase between 5 and 10 percent.................         21         17
Decrease between 5 and 10 percent.................          8         13
Decrease more than 10 percent.....................          3         10
------------------------------------------------------------------------

    Under the proposed FY 1996 wage index, 92.0 percent of rural 
prospective payment hospitals and 94.8 percent of urban hospitals would 
experience a change in their wage index value of less than 5.0 percent. 
Approximately 3.5 percent (2.1 percent of rural hospitals and 4.5 
percent of urban hospitals) would experience a change of between 5 and 
10 percent, and 2.7 percent (5.4 percent of rural hospitals and 0.6 
percent of urban hospitals) would experience a change of more than 10 
percent. The following chart shows the projected impact for urban and 
rural hospitals.

------------------------------------------------------------------------
                                                    Percent of hospitals
                                                      (by urban/rural)  
    Percentage change in area wage index values    ---------------------
                                                      Rural      Urban  
------------------------------------------------------------------------
Decrease more than 10 percent.....................        1.7        0.1
Decrease between 5 and 10 percent.................        1.0        1.8
Change between -5 and +5 percent..................       92.0       94.8
Increase between 5 and 10 percent.................        1.1        2.7
Increase more than 10 percent.....................        3.7        0.5
------------------------------------------------------------------------

D. Transfer Changes (Column 3)

    Column 3 of Table I shows the impacts of the change we are 
proposing in transfer payment policy. This change would revise our 
methodology for payment for transfer cases under the prospective 
payment system to more appropriately compensate transferring hospitals 
for the higher costs they incur, on average, on the first day of a 
hospital stay prior to transfer. Our current transfer policy pays a 
flat per diem amount for each day prior to transfer up to the full DRG 
amount. The per diem is calculated by dividing the full DRG amount by 
the geometric mean length of stay for that DRG. Our proposal is to 
replace this flat per diem methodology with a graduated methodology 
that would pay twice the per diem amount for the first day, and the per 
diem amount for each day beyond the first up to the full DRG amount.
    The payment impacts shown in column 3 illustrate the effects of 
this change, relative to the baseline simulation based on current 
policy (a flat per diem transfer payment methodology). In order to 
simulate the effects of the proposed changes, it was first necessary to 
identify current transfer cases. Current transfers are identifiable by 
the discharge destination code on the patient bill (see the RAND study 
for a thorough discussion of identifying transfer cases on the MedPAR 
file).
    Next, to determine whether payment would be made under the per diem 
methodology, we compared the actual length of stay prior to transfer to 
the geometric mean length of stay for the DRG to which the case is 
assigned. A full discharge or a transfer case that received the full 
discharge payment would be counted as 1.0, while, under our current 
transfer policy, a transfer case that stayed 2 days in a DRG with a 
geometric mean length of stay of 5 days would count as 0.4 of a 
discharge, and would be paid 40 percent of the full DRG amount. In this 
manner, transfer cases are counted only to the extent that the 
transferring hospital received payment for them. To simulate our 
proposed change to the per diem payment methodology, we added 1 day to 
the actual length of stay for transfer cases, thereby replicating 
paying double the per diem for the first stay and the flat per diem, up 
to the full DRG amount, for subsequent days.
    Finally, we calculated transfer-adjusted case-mix indexes for each 
hospital. The adjusted case-mix indexes are calculated by summing the 
transfer-adjusted DRG weights and dividing by the transfer-adjusted 
number of cases. The transfer-adjusted DRG weights are calculated by 
multiplying the DRG weight by the lesser of 1 or the fraction of the 
length of stay for the case divided by the geometric mean length of 
stay for the DRG. By adjusting the DRG weights, nontransfer cases and 
transfer cases that have a length of stay at least as long as the 
geometric mean length of stay will be represented by the full DRG 
weight, while transfer cases with lengths of stay below the geometric 
mean length of stay for the DRG will be represented by a lower number, 
reflective of their payment.
    The FY 1996 baseline model reflected in columns 1 and 2 
incorporates transfer-adjusted discharges and case-mix indexes based on 
current policies. That is, cases transferred prior to reaching the 
geometric mean length of stay received payments based on the flat per 
diem. In column 3, our model substitutes transfer-adjusted discharges 
and case-mix indexes that reflect our proposed policy change.
    The first row in column 3 shows that the net effect of our proposed 
change is budget neutral compared to total payments under current 
transfer policy. As specified in section 109 of the Social Security Act 
Amendments of 1994 (Pub. L. 103-432), the Secretary is authorized to 
make adjustments to the standardized amounts so that adjustments to the 
payment policy for transfer cases do not affect aggregate payments. As 
described in section II.A.4 of the Addendum to [[Page 29361]] this 
proposed rule, we applied a budget neutrality factor of 0.997583 to the 
standardized amounts to account for the higher payments going to 
transfer cases based on our proposal.
    The distributional effects of these changes are to increase 
payments to rural hospitals by 0.3 percent and decrease urban 
hospitals' payments by less than 0.1 percent (the overall change is 0.0 
percent). Rural hospitals clearly benefit from changing the per diem 
payment methodology. RAND found that rural hospitals as a whole 
transfer 4.5 percent of their patients, compared to 1.7 percent in 
large urban hospitals and 1.6 percent in other urban hospitals. 
Therefore, one would expect rural hospitals to benefit from the change 
to the per diem payment methodology.
    The impact on small hospitals is also positive, consistent with 
RAND's finding that hospitals with fewer than 50 beds transfer 6.1 
percent of their cases, and hospitals with 50 to 99 beds transfer 4.9 
percent of cases. Rural hospitals with fewer than 50 beds receive a 0.6 
percent increase in per case payments, and rural hospitals with 50 to 
99 beds receive a 0.4 percent increase. Urban hospitals with fewer than 
100 beds experience a 0.3 percent rise in payments. Among rural 
hospital groups, nonspecial status rural hospitals benefit by 0.6 
percent.

E. Impacts of MGCRB Reclassifications (Column 4)

    By March 30 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 reclassify a hospital to an urban 
area or a rural area with which it has a close proximity for the 
purpose of using the other area's standardized amount, wage index 
value, or both. (RRCs and SCHs are exempt from the proximity 
requirement.)
    To this point, all of the simulation models have assumed hospitals 
are paid on the basis of their geographic location (with the exception 
of ongoing policies that provide that certain hospitals receive 
payments on bases other than where they are geographically located, 
such as RRCs and hospitals in rural counties that are deemed urban 
under section 1886(d)(8)(B) of the Act). The changes in column 4 
reflect the per case payment impact of moving from this baseline to a 
simulation incorporating the MGCRB decisions for FY 1996. As noted 
above, these decisions affect hospitals' standardized amount and wage 
index area assignments. In addition, hospitals reclassified for the 
standardized amount also qualify to be treated as urban for purposes of 
the DSH adjustment.
    The proposed FY 1996 standardized payment amounts and wage index 
values incorporate all of the MGCRB's reclassification decisions that 
will be effective for FY 1996. The wage index values also reflect any 
decisions made by the HCFA Administrator through the appeals and review 
process for MGCRB decisions as of March 14, 1995. Additional changes 
that result from the Administrator's review of MGCRB decisions will be 
reflected in the final rule implementing changes to the prospective 
payment system for FY 1996.
    The overall effect of geographic reclassification is required to be 
budget neutral by section 1886(d)(8)(D) of the Act. Therefore, we 
applied an adjustment of 0.994125 to ensure that the effects of 
reclassification are budget neutral. (See section II.A.4 of the 
Addendum to this proposed rule).
    As a group, rural hospitals benefit from geographic 
reclassification. Their payments rise 2.3 percent, while payments to 
urban hospitals decline 0.4 percent. Large urban hospitals lose 0.5 
percent because, as a group, they have the smallest percentage of 
hospitals that are reclassified, fewer than 5 percent. There are enough 
hospitals in other urban areas that are reclassified to limit the 
decline in payments stemming from the budget neutrality offset to 0.1 
percent. Among urban hospital groups generally, payments fall between 
0.3 and 0.5 percent.
    Rural hospitals that reclassify for the standardized amount and 
receive DSH payments experience a significant increase in payments as a 
result of receiving higher DSH payments as urban hospitals. Rural 
hospitals that reclassify to large urban areas and also receive DSH 
receive a 3.1 percent increase in payments. One percent of this change 
is due to the higher large urban rate, and the remaining 2.1 percent is 
due to DSH payments and to any wage index increase that hospitals 
reclassified for both the wage index and the standardized amount 
receive.
    Rural hospitals reclassifying to other urban areas for the 
standardized amount receive an 8.4 percent increase in payments. Since 
there are no longer separate rural and other urban rates, this large 
increase is attributable to the higher DSH payments these 53 hospitals 
receive as a result of being classified as urban (as well as any 
increase in the wage index for those hospitals reclassified for both 
the wage index and the standardized amount). Under our proposed 
revision to the rules for MGCRB reclassification, these hospitals would 
no longer be eligible to reclassify solely to receive higher DSH 
payments effective with reclassifications for FY 1997.
    Among rural hospitals designated as RRCs, 54 hospitals are 
reclassified for the wage index only and experience a 5 percent 
increase in payments overall. This positive impact on RRCs is also 
reflected in the category of rural hospitals with 200 or more beds, 
which have a 4.8 percent increase in payments.
    Rural hospitals reclassified for FY 1995 and FY 1996 experience an 
8.1 percent increase in payments, the greatest of any group in the 
category. This may be due to the fact that these hospitals have the 
most to gain from reclassification and have been reclassified for a 
period of years. Rural hospitals reclassified for FY 1996 alone 
experience a 3.7 percent increase in payments. Urban hospitals 
reclassified for FY 1995 but not FY 1996 experience a 2.2 percent 
decline in payments overall. This appears to be due to the combined 
impacts of the budget neutrality adjustment and a number of hospitals 
in this category that experience a 6 percent drop in their wage index 
after reclassification. Urban hospitals reclassified for FY 1996 but 
not for FY 1995 experience a 2.3 percent increase in payments.
    The FY 1996 reclassification section of Table I shows the changes 
in payments per case for all FY 1996 reclassified and nonreclassified 
hospitals in urban and rural locations for each of the three 
reclassification categories (standardized amount only, wage index only, 
or both). The table illustrates that the large impact for reclassified 
rural hospitals is due to reclassifications for both the standardized 
amount and the wage index. These hospitals receive a 10.6 percent 
increase. In addition, rural hospitals reclassified for the wage index 
receive an 8.5 percent payment increase. The overall impact on 
reclassified hospitals is to increase their payments per case by an 
average of 4.1 percent for FY 1996.
    The reclassification of hospitals primarily affects payment to 
nonreclassified hospitals through changes in the wage index and the 
geographic reclassification budget neutrality adjustment required by 
section 1886(d)(8)(D) of the Act. Among hospitals that are not 
reclassified, the overall impact of hospital reclassifications is an 
average decrease in payments per case of about 0.6 percent, which 
corresponds closely with the geographic reclassification budget 
neutrality factor. Rural nonreclassified hospitals decrease slightly 
less, [[Page 29362]] experiencing a 0.2 percent decrease. This occurs 
because the wage index values in some rural areas increase after 
reclassified hospitals are excluded from the calculation of those index 
values.
    The number of reclassifications for the standardized amount, or for 
both the standardized amount and the wage index, has declined from 496 
in FY 1995 to 358 in FY 1996. This is not surprising because of the 
elimination of the separate rural amount. Some of these rural hospitals 
are reclassifying for the large urban amount, thereby receiving a 
payment rate even higher than they would receive from the other 
national standardized amount. Rural hospitals also may be reclassifying 
for the standardized amount even though they are only eligible to 
reclassify to an other urban area either to meet the lower eligibility 
requirements for DSH payments, or to receive higher DSH payments. The 
payment impact upon hospitals reclassifying for the standardized amount 
only, however, is significantly lower than it is for hospitals 
reclassifying either for the wage index alone or for both the wage 
index and the standardized amount.
    The foregoing analysis was based on MGCRB and HCFA Administrator 
decisions made by March 14 of this year. As previously noted, there may 
be changes to some MGCRB decisions through the appeals and review 
process. The outcome of these cases will be reflected in the analysis 
presented in the final rule.
F. Outlier Changes (Column 5)

    Medicare provides extra payment in addition to the regular DRG 
payment amount for extremely costly or extraordinarily lengthy cases 
(cost outliers and day outliers, respectively). Section 
1886(d)(5)(A)(v) of the Act requires the Secretary to phase out payment 
for day outliers from FY 1994 day outlier levels in 25 percent 
increments beginning in FY 1995. Day outliers in FY 1996 should account 
for approximately 16 percent of total outlier payments (50 percent of 
1994 levels). This reduction in day outlier payments will be offset by 
an increase in payments for cost outliers. As discussed in the 
Addendum, for FY 1996, we are proposing a day outlier threshold equal 
to the geometric mean length of stay for each DRG plus the lesser of 23 
days or 3.0 standard deviations. The proposed marginal cost factor for 
day outliers is 45 percent.
    The statute also authorizes the Secretary to set a fixed loss 
threshold for cost outliers. For FY 1996, we are proposing that a case 
would receive cost outlier payments if its costs exceed the DRG amount 
plus $16,700. We are also proposing to maintain the marginal cost 
factor for cost outliers at 80 percent.
    The payment impacts of these changes are minimal. The largest 
impacts appear to be related to geographic location in terms of census 
divisions. Urban hospitals in the Middle Atlantic census division have 
payment reductions of 0.7 percent per case. Rural Middle Atlantic 
hospitals have a 0.2 percent decline. In New England, urban hospitals 
experience decreases of 0.2 percent. Since the changes to outlier 
policy result in a shift in payments from cases paid as day outliers to 
cases paid as cost outliers, this indicates that these areas have 
higher percentages of day outliers. This is consistent with our 
previous analysis indicating above average impacts related to day 
outlier policy changes in the northeastern portion of the country (see 
the June 4, 1992 proposed rule, 57 FR 23824).
    The largest negative impact occurs among hospitals for which we 
could not determine Medicare utilization rates. This group experiences 
a 1.3 percent fall in payments per case. The bulk of the decline is 
attributable to a group of New York hospitals included in this category 
that experience significant drops in outlier payments.

G. All Changes (Column 6)

    Column 6 compares our estimate of payments per case for FY 1996 to 
our estimate of payments per case in FY 1995. It includes the 1.5 
percent update to the standardized amounts and the hospital-specific 
rates for SCHs and EACHs, and the 0.9 percent lower than estimated 
outlier payments during FY 1995, as described in the introduction and 
the Addendum.
    A single geographic reclassification budget neutrality factor of 
0.994125 was applied to the proposed FY 1996 standardized amounts, 
compared to the FY 1995 factor of 0.994055. The budget neutrality 
adjustment factor for the updated wage index and the DRG recalibration 
is 0.999174, compared to the FY 1995 factor of 0.998050. Although the 
net effect of these changes is small, they are reflected in the payment 
differences shown in this column.
    There may 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 6 may not equal the sum of the 
previous columns plus the other impacts that we are able to identify.
    We also note that column 6 includes the impacts of FY 1995 
geographic reclassifications compared to the payment impacts of FY 1996 
reclassifications. Therefore, the percent changes due to FY 1996 
reclassifications shown in column 4 need to be offset by the effects of 
reclassification on hospitals' FY 1995 payments. For example, the 
impact of MGCRB reclassifications on rural hospitals' FY 1995 payments 
was approximately a 2.0 percent increase, compared to a 2.3 percent 
increase for FY 1996. Therefore, the net increase in FY 1996 payments 
due to reclassification is 0.3 percent.
    The overall payment increase from FY 1996 to FY 1995 for all 
hospitals is a 2.4 percent increase. This reflects the 0.0 percent net 
change in total payments due to the proposed changes for FY 1996 shown 
in columns 1 through 5, the 1.5 percent update for FY 1996, and the 0.9 
percent higher outlier payments in FY 1996 compared to FY 1995, as 
discussed above.
    Hospitals in rural areas experience the largest payment increase, a 
2.9 percent rise in payments per case over FY 1995. The increase in 
estimated outlier payments over FY 1995 for rural hospitals is 0.5 
percent, below the 0.9 percent difference for all hospitals. As noted 
above, the net increase for rural hospitals in FY 1996 due to 
geographic reclassification is 0.3 percent. They also benefit from DRG 
recalibration, the new wage index, and the change in the transfer 
payment policy.
    Urban hospitals' overall payments increase 2.3 percent. Hospitals 
in large and other urban areas experience 2.1 percent and 2.8 percent 
increases, respectively. Both large and other urban hospitals 
experience 0.9 percent increases in payments for FY 1996 due to the 
larger outlier payout, plus the 1.5 percent update. In addition, large 
urban hospitals' 0.5 percent decline due to reclassification is 
identical to the FY 1995 impact of reclassification, thus the net 
impact is 0.0. The FY 1995 reclassification impact on other urban 
hospitals was a 0.2 percent decline, compared to the 0.1 percent 
decline in column 4 of Table I, for a net increase of 0.1 percent from 
FY 1995 to FY 1996.
    Among urban bed size groups, column 6 shows changes in payments are 
higher for the smallest urban hospitals compared to larger urban 
hospitals. The relatively smaller increases for the larger urban 
hospitals appears to be due to the negative impacts of the new wage 
data, as shown in column 2, and to the new transfer policy (column 4). 
Among rural bed size groups the impacts are less varied, ranging from 
2.7 percent to 3.1 percent.
    Greater variation is evident in the impacts displayed for the 
urban/rural census divisions, ranging from a 4.5 percent increase to a 
4.2 percent [[Page 29363]] decrease, respectively, for hospitals in 
urban and rural Puerto Rico. These impacts are primarily attributable 
to the effects of the new wage data, as discussed above. Other census 
divisions below the average payment increase are urban Middle Atlantic, 
urban West North Central, and rural Mountain (all increase less than 
2.0 percent). The reason for the relatively small increase for urban 
hospitals in the Middle Atlantic is that they have sizeable negative 
impacts due to the new wage data and the phase-out of day outliers. 
Urban hospitals in the West North Central division also experience a 
negative impact from the new wage data. Rural hospitals in the Mountain 
division appear to have a lower percentage increase than other 
hospitals primarily because they have a smaller percentage increase in 
outlier payments than other hospitals (0.4 percent).
    Conversely, rural New England hospitals experience a 3.6 percent 
increase. They have a 0.5 percent net increase over FY 1995 due to 
reclassification, and a 0.7 percent increase due to the new wage data. 
West South Central hospitals have the second largest payment increase 
(behind Puerto Rico hospitals) among urban divisions (3.2 percent).
    Except for rural Puerto Rico, the only other hospital groups with 
negative payment impacts from FY 1995 to FY 1996 are hospitals that 
were reclassified during FY 1995 and are not reclassified for FY 1996. 
Overall, these hospitals lose 1.2 percent, with 58 urban hospitals in 
this category losing 1.6 percent and 162 rural hospitals losing 0.4 
percent. On the other hand, hospitals reclassified for FY 1996 that 
were not reclassified for FY 1995 would experience the greatest payment 
increase: 7.4 percent for 34 urban hospitals in this category and 6.8 
percent for 119 rural hospitals.
    Reclassification appears to be a significant factor influencing the 
payment increases for a number of rural hospital groups with above 
average overall payment increases in column 6. For example, among 
hospital groups identified in the discussion of the impacts of MGCRB 
reclassifications for FY 1996 (column 4), almost all have overall 
increases of 3.0 or greater. This outcome highlights the redistributive 
effects of reclassification decisions upon hospital payments. This 
impact is illustrated even more clearly when one examines the rows 
categorizing hospitals by their reclassification status for FY 1996. 
All nonreclassified hospitals have an average payment increase of 2.3 
percent. The average payment increase for all reclassified hospitals is 
3.5 percent.
    Major teaching hospitals with 100 or more residents have a payment 
increase of only 1.8 percent. This is attributable to the combined 
negative impacts of the new wage data, reclassification, and the 
continued phase-out of day outliers. As discussed above, teaching 
hospitals located in New York City account for much of this impact. 
(They also account for much of the below average increase for hospitals 
for which we do not have Medicare utilization data (1.0 percent 
increase), along with several Puerto Rican hospitals.)
    Finally, among SCH/EACHs, and SCH/EACH and RRCs, the payment 
increase is 1.9 percent. The primary reason for this below average 
increase is that there is minimal impact upon these hospitals from the 
higher FY 1996 outlier payments. Because these hospital groups receive 
their hospital-specific rate if it exceeds the applicable Federal 
amount (including outliers), there is less of an impact due to changes 
in outlier payment levels, which are not applied to the hospital-
specific rate.

 Table II.--Impact Analysis of Changes for FY 1996 Operating Prospective
                             Payment System                             
                           [Payments per Case]                          
                                                                        
                                          Average    Average            
                                No. of    FY 1995    FY 1996      All   
                              hospitals   payment    payment    changes 
                                          per case   per case           
                                    (1)     (2)\1\     (3)\1\        (4)
                                                                        
------------------------------------------------------------------------
  (By Geographic Location)                                              
                                                                        
All Hospitals...............      5,154      6,255      6,405        2.4
Urban Hospitals.............      2,895      6,749      6,906        2.3
Large Urban Areas...........      1,622      7,252      7,401        2.1
Other Urban Areas...........      1,273      6,061      6,228        2.8
                                                                        
Rural Areas.................      2,259      4,259      4,382        2.9
                                                                        
      Bed Size (Urban)                                                  
  0-99 Beds.................        716      4,613      4,734        2.6
100-199 Beds................        918      5,708      5,863        2.7
200-299 Beds................        601      6,267      6,421        2.5
300-499 Beds................        480      7,138      7,297        2.2
500 or More Beds............        180      8,779      8,952        2.0
                                                                        
      Bed Size (Rural)                                                  
                                                                        
  0-49 Beds.................      1,171      3,516      3,630        2.9
 50-99 Beds.................        664      3,961      4,084        3.1
100-149 Beds................        230      4,439      4,568        2.9
150-199 Beds................        108      4,545      4,665        2.6
200 or More Beds............         86      5,213      5,356        2.7
                                                                        
    Urban by Census Div.                                                
                                                                        
New England.................        163      7,172      7,318        2.0
Middle Atlantic.............        440      7,429      7,555        1.7
South Atlantic..............        431      6,423      6,576        2.4
East North Central..........        481      6,493      6,657        2.5
East South Central..........        164      5,917      6,065        2.5
West North Central..........        196      6,421      6,538        1.8
West South Central..........        371      6,225      6,425        3.2
[[Page 29364]]
                                                                        
Mountain....................        119      6,543      6,677        2.0
Pacific.....................        483      7,771      7,982        2.7
Puerto Rico.................         47      2,472      2,583        4.5
                                                                        
    Rural by Census Div.                                                
                                                                        
New England.................         53      5,135      5,318        3.6
Middle Atlantic.............         84      4,714      4,827        2.4
South Atlantic..............        297      4,395      4,518        2.8
East North Central..........        305      4,245      4,388        3.4
East South Central..........        275      3,819      3,942        3.2
West North Central..........        527      4,021      4,126        2.6
West South Central..........        352      3,846      3,955        2.9
Mountain....................        218      4,775      4,864        1.9
Pacific.....................        143      5,309      5,487        3.3
Puerto Rico.................          5      1,964      1,882       -4.2
                                                                        
   (By Payment Categories)                                              
                                                                        
Urban Hospitals.............      3,106      6,659      6,815        2.3
Large Urban Areas...........      1,815      7,093      7,247        2.2
Other Urban Areas...........      1,291      5,962      6,123        2.7
Rural Areas.................      2,048      4,218      4,340        2.9
                                                                        
       Teaching Status                                                  
                                                                        
Non-Teaching................      4,104      5,160      5,301        2.7
Fewer Than 100 Residents....        826      6,708      6,862        2.3
100 or More Residents.......        224     10,342     10,527        1.8
                                                                        
   Disproportionate Share                                               
       Hospitals (DSH)                                                  
                                                                        
Non-DHS.....................      3,223      5,506      5,649        2.6
          Urban DSH                                                     
100 Beds or More............      1,302      7,389      7,548        2.2
Fewer Than 100 Beds.........        112      4,818      4,968        3.1
                                                                        
     Reclass. Rural DSH                                                 
                                                                        
Large Urban and DSH.........         54      6,345      6,562        3.4
DSH Only....................         53      4,354      4,472        2.7
                                                                        
          Rural DSH                                                     
                                                                        
Sole Community (SCH)........        137      4,638      4,719        1.8
Referral Centers (RRC)......                                            
                                     40      5,193      5,347        3.0
    Other Rural DSH Hosp.                                               
                                                                        
100 Beds or More............         83      4,019      4,149        3.2
Fewer Than 100 Beds.........                                            
                                    150      3,257      3,363        3.3
   Urban Teaching and DSH                                               
                                                                        
Both Teaching and DSH.......        653      8,333      8,498        2.0
Teaching and No DSH.........        350      6,914      7,075        2.3
No Teaching and DSH.........        868      5,852      6,007        2.6
No Teaching and No DSH......      1,235      5,278      5,421        2.7
                                                                        
    Rural Hospital Types                                                
                                                                        
Nonspecial Status Hospitals.      1,279      3,595      3,718        3.4
RRC.........................        111      4,801      4,963        3.4
SCH/EACH....................        612      4,704      4,794        1.9
SCH/EACH and RRC............         46      5,590      5,695        1.9
                                                                        
      Type of Ownership                                                 
                                                                        
Voluntary...................      3,095      6,422      6,573        2.3
Proprietary.................        725      5,686      5,831        2.6
Government..................      1,334      5,812      5,966        2.7
                                                                        
  Medicare Utilization as a                                             
  Percent of Inpatient Days                                             
                                                                        
 0-25.......................        268      8,390      8,578        2.2
25-50.......................      1,357      7,523      7,690        2.2
50-65.......................      2,227      5,734      5,880        2.5
Over 65.....................      1,234      4,936      5,066        2.6
Unknown.....................         68      8,184      8,266        1.0
                                                                        
[[Page 29365]]
                                                                        
  Hospitals Reclassified by                                             
   the Medicare Geographic                                              
        Review Board                                                    
                                                                        
   Reclassification Status                                              
    During FY95 and FY96                                                
                                                                        
Reclassified During Both                                                
 FY95 and FY96..............        465      5,739      5,894        2.7
    Urban...................        175      6,581      6,748        2.5
    Rural...................        290      4,759      4,899        2.9
Reclassified During FY96                                                
 Only.......................        153      5,203      5,572        7.1
    Urban...................         34      6,561      7,049        7.4
    Rural...................        119      4,416      4,716        6.8
Reclassified During FY95                                                
 Only.......................        220      5,726      5,658       -1.2
    Urban...................         58      7,051      6,939       -1.6
    Rural...................        162      4,242      4,225       -0.4
                                                                        
   FY 96 Reclassifications                                              
                                                                        
All Reclassified Hosp.......        618      5,630      5,828        3.5
    Stand. Amt. Only........        213      5,060      5,203        2.8
    Wage Index Only.........        260      5,769      6,018        4.3
    Both....................        145      6,054      6,248        3.2
    Nonreclass..............      4,509      6,359      6,502        2.3
All Urban Reclass...........        209      6,578      6,793        3.3
    Stand. Amt. Only........         69      5,834      6,013        3.1
    Wage Index Only.........         37      8,402      8,730        3.9
Both........................        103      6,338      6,531        3.0
Nonreclass..................      2,686      6,764      6,916        2.2
All Rural Reclass...........        409      4,670      4,852        3.9
    Stand. Amt. Only........        144      4,235      4,339        2.5
    Wage Index Only.........        223      4,831      5,051        4.6
    Both....................         42      5,016      5,214        4.0
    Nonreclass..............      1,823      4,045      4,138        2.3
Other Reclassified Hospitals                                            
 (Section 1886(d)(8)(B))....         27      4,391      4,513        2.8
\1\These payment amounts per case do not reflect any estimates of annual
  case mix increase.                                                    

  Table II presents the projected average payments per case under the 
changes for FY 1996 for urban and rural hospitals and for the different 
categories of hospitals shown in Table I. It compares the projected 
payments per case for FY 1996 with the average estimated per case 
payments for FY 1995. Thus, this table presents, in terms of the 
average dollar amounts paid per discharge, the combined effects of the 
changes presented in Table I. The percentage changes shown in the last 
column of Table I equal the percentage changes in average payments from 
column 6 of Table I.

VII. Impact of Proposed Changes in the Capital Prospective Payment 
System

A. General Considerations

    We now have data that were unavailable in previous impact analyses 
for the capital prospective payment system. Specifically, we have cost 
report data for the second year of the capital prospective payment 
system (cost reports beginning in FY 1993) available through the 
December 1994 update of the Hospital Cost Report Information System 
(HCRIS). We also have information on the projected aggregate amount of 
obligated capital approved by the fiscal intermediaries. However, our 
impact analysis of payment changes for capital-related costs is still 
limited by the lack of hospital-specific data on several items. These 
are the hospital's projected new capital costs for each year, its 
projected old capital costs for each year, and the actual amounts of 
obligated capital that will be put in use for patient care and 
recognized as Medicare old capital costs in each year. The lack of such 
information affects our impact analysis in the following ways:
     Major investment in hospital capital assets (for example 
in building and major fixed equipment) occurs at irregular intervals. 
As a result, there can be significant variation in the growth rates of 
Medicare capital-related costs per case among hospitals. We do not have 
the necessary hospital-specific budget data to project the hospital 
capital growth rate for an individual hospital.
     Moreover, our policy of recognizing certain obligated 
capital as old capital makes it difficult to project future capital-
related costs for individual hospitals. Under Sec. 412.302(c), a 
hospital is required to notify its intermediary that it has obligated 
capital by the later of October 1, 1992, or 90 days after the beginning 
of the hospital's first cost reporting period under the capital 
prospective payment system. The intermediary must then notify the 
hospital of its determination whether the criteria for recognition of 
obligated capital have been met by the later of the end of the 
hospital's first cost reporting period subject to the capital 
prospective payment system or 9 months after the receipt of the 
hospital's notification. The amount that is recognized as old capital 
is limited to the lesser of the actual allowable costs when the asset 
is put in use for patient care or the estimated costs of the capital 
expenditure at the time it was obligated. We have substantial 
information regarding intermediary determinations of projected 
aggregate obligated capital amounts. However, we still do not know when 
these projects will actually be put into use for patient care, the 
amount [[Page 29366]] that will be recognized as obligated capital when 
the project is put into use, or the Medicare share of the recognized 
costs. Therefore, we do not know actual obligated capital commitments 
to be used in the FY 1996 capital cost projections. We discuss in 
Appendix B the assumptions and computations we employ to generate the 
amount of obligated capital commitments for use in the FY 1996 capital 
cost projections.
    In Table III of this appendix, we present the redistributive 
effects that are expected to occur between ``hold-harmless'' hospitals 
and ``fully prospective'' hospitals in FY 1996. In addition, we have 
integrated sufficient hospital-specific information into our actuarial 
model to project the impact of the proposed FY 1996 capital payment 
policies by the standard prospective payment system hospital groupings. 
We caution that while we now have actual information on the effects of 
the transition payment methodology and interim payments under the 
capital prospective payment system and cost report data for most 
hospitals, we need to randomly generate numbers for the change in old 
capital costs, new capital costs for each year, and obligated amounts 
that will be put in use for patient care services and recognized as old 
capital each year. This means that we continue to be unable to predict 
accurately an individual hospital's FY 1996 capital costs; however, 
with the more recent data on the experience to date under the capital 
prospective payment system, there is adequate information to estimate 
the aggregate impact on most hospital groupings.
    We present the transition payment methodology by hospital grouping 
in Table IV. In Table V we present the results of the cross-sectional 
analysis using the results of our actuarial model. This table presents 
the aggregate impact of the FY 1996 payment policies.

B. Projected Impact Based on the Proposed FY 1996 Actuarial Model

1. Assumptions
    In this impact analysis, we model dynamically the impact of the 
capital prospective payment system from FY 1995 to FY 1996 using a 
capital acquisition model. The FY 1996 model, described in Appendix B 
of this proposed rule, integrates actual data from individual hospitals 
with randomly generated capital cost amounts. We have capital cost data 
from cost reports beginning in FY 1989 through FY 1993 received through 
the December 1994 update of the Hospital Cost Reporting Information 
System (HCRIS), interim payment data for hospitals already receiving 
capital prospective payments through PRICER, and data reported by the 
intermediaries that include the hospital-specific rate determinations 
that have been made through January 1, 1995 in the Provider-Specific 
file. We used this data to determine the proposed FY 1996 capital 
rates. However, we do not have individual hospital data on old capital 
changes, new capital formation, and actual obligated capital costs. We 
have data on costs for capital in use in FY 1993, and we age that 
capital by a formula described in Appendix B. We therefore need to 
randomly generate only new capital acquisitions for any year after FY 
1993. All Federal rate payment parameters are assigned to the 
applicable hospital.
    For purposes of this impact analysis, the FY 1996 actuarial model 
includes the following assumptions:
     Medicare inpatient capital costs per discharge will 
increase at the following rates during these periods:

                 Average Percentage Increase in Capital                 
------------------------------------------------------------------------
                                                               Costs per
                         Fiscal year                           discharge
------------------------------------------------------------------------
1995.........................................................       4.61
1996.........................................................       4.93
------------------------------------------------------------------------

     The Medicare case-mix index will increase by 0.8 percent 
in FY 1995 and FY 1996.
     The Federal capital rate as well as the hospital-specific 
rate will be updated 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 FY 1996 update 
for inflation is 1.50 percent (see Addendum, Part III).
2. Results
    We have used the actuarial model to estimate the change in payment 
for capital-related costs from FY 1995 to FY 1996. Table III shows the 
effect of the capital prospective payment system on low capital cost 
hospitals and high capital cost hospitals. We consider a hospital to be 
a low capital cost hospital if, based on a comparison of its initial 
hospital-specific rate and the applicable Federal rate, it will be paid 
under the fully prospective payment methodology. A high capital cost 
hospital is a hospital that, based on its initial hospital-specific 
rate, will be paid under the hold-harmless payment methodology. Based 
on our actuarial model, the breakdown of hospitals is as follows:

                                     Capital Transition Payment Methodology                                     
----------------------------------------------------------------------------------------------------------------
                                                                                          FY 1996      FY 1996  
                                                               Percent of    FY 1996     percent of   percent of
                      Type of hospital                         hospitals    percent of    capital      capital  
                                                                            discharges     costs       payments 
----------------------------------------------------------------------------------------------------------------
Low cost hospital...........................................           66           62           51           55
High cost hospital..........................................           34           38           49           45
----------------------------------------------------------------------------------------------------------------

    A low capital cost hospital may request to have its hospital-
specific rate redetermined based on old capital costs in the current 
year, through the later of the hospital's cost reporting period 
beginning in FY 1994 or the first cost reporting period beginning after 
obligated capital comes into use (within the limits established in 
Sec. 412.302(e) for putting obligated capital in use for patient care). 
If the redetermined hospital-specific rate is greater than the adjusted 
Federal rate, these hospitals will be paid under the hold-harmless 
payment methodology. Regardless of whether the hospital became a hold-
harmless payment hospital as a result of a redetermination, we have 
continued to show these hospitals as low capital cost hospitals in 
Table III.
    Assuming no behavioral changes in capital expenditures, Table III 
displays the percentage change in payments from FY 1995 to FY 1996 
using the above described actuarial model.

                                                                                                                
[[Page 29367]]
                                      Table III.--Impact of Proposed Changes for FY 1996 on Payments per Discharge                                      
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                       Adjusted     Average    Hospital      Hold-                                      
                                                No. of    Discharges    federal     federal    specific    harmless   Exceptions     Total      Percent 
                                               hospitals                payment     percent     payment     payment     payment     payment     change  
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                             FY 1995 payments per discharge                                                             
                                                                                                                                                        
--------------------------------------------------------------------------------------------------------------------------------------------------------
Low Cost Hospitals..........................       3,393   6,548,545     $260.45       43.42     $191.07      $47.69      $15.33     $514.53  ..........
    Fully Prospective.......................       1,621   3,140,867      237.50       40.00      228.18  ..........        4.62      470.30  ..........
    Rebase--Fully Prospective...............       1,408   2,487,365      238.66       40.00      214.90  ..........       33.06      486.61  ..........
    Rebase--100% Federal Rate...............         179     483,766      642.82      100.00  ..........  ..........        2.50      645.31  ..........
    Rebase--Hold Harmless...................         185     436,547      125.96       20.48  ..........      715.40        5.56      846.93  ..........
High Cost Hospitals.........................       1,758   4,081,014      360.03       57.60  ..........      377.33        4.14      741.50  ..........
    100% Federal Rate.......................         689   1,744,966      647.48      100.00  ..........  ..........        0.00      647.48  ..........
    Hold Harmless...........................       1,069   2,336,048      145.31       23.89  ..........      659.19        7.23      811.73  ..........
        Total Hospitals.....................       5,151  10,629,560      298.68       49.00      117.71      174.25       11.03      601.67  ..........
                                                                                                                                                        
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                             FY 1996 payments per discharge                                                             
                                                                                                                                                        
--------------------------------------------------------------------------------------------------------------------------------------------------------
Low Cost Hospitals..........................       3,393   6,548,545     $392.98       53.57     $194.75      $39.42      $12.98     $642.41       24.85
    Fully Prospective.......................       1,621   3,140,867      363.00       50.00      232.57  ..........        3.97      601.56       27.91
    Rebase--Fully Prospective...............       1,408   2,487,365      364.77       50.00      219.04  ..........       26.50      611.94       25.75
    Rebase--100% Federal Rate...............         226     602,562      780.03      100.00  ..........  ..........        8.25      795.17       23.22
    Rebase--Hold Harmless...................         138     317,751      176.09       23.46  ..........      812.48        5.20      995.06       17.49
High Cost Hospitals.........................       1,758   4,081,014      562.98       73.70  ..........      279.77        3.65      856.74       15.54
    100% Federal Rate.......................         991   2,528,050      779.48      100.00  ..........  ..........        0.00      792.32       22.37
    Hold Harmless...........................         767   1,552,965      210.53       28.51  ..........      735.20        9.59      961.60       18.46
                                             -----------------------------------------------------------------------------------------------------------
        Total Hospitals.....................       5,151  10,629,560      458.25       61.49      119.98      131.70        9.40      724.70       20.45
--------------------------------------------------------------------------------------------------------------------------------------------------------

  Under section 1886(g)(1)(A) of the Act, estimated aggregate 
payments under the capital prospective payment system for FY 1992 
through 1995 respectively, are to equal 90 percent of estimated 
payments that would have been payable on a reasonable cost basis in 
each year. With the expiration of the capital budget neutrality 
provision, we estimate that there will be an aggregate 20.45 percent 
increase in FY 1996 Medicare capital payments over the FY 1995 
payments.
    We project that low capital cost hospitals paid under the fully 
prospective payment methodology will experience an average increase in 
payments per case of 24.85 percent, and high capital cost hospitals 
will experience an average increase of 15.54 percent.
    For hospitals paid under the fully prospective payment methodology, 
the Federal rate payment percentage will increase from 40 percent to 50 
percent and the hospital-specific rate payment percentage will decrease 
from 60 to 50 percent in FY 1996.
    The Federal rate payment percentage for a hospital paid under the 
hold-harmless payment methodology is based on the hospital's ratio of 
new capital costs to total capital costs. The average Federal rate 
payment percentage for hospitals receiving a hold-harmless payment for 
old capital will increase from 23.89 percent to 28.51 percent. We 
estimate the percentage of hold-harmless hospitals paid based on 100 
percent of the Federal rate will increase from 41 percent to 57 
percent.
    Despite the reduction in the hospital-specific rate blend 
percentage from 60 percent in FY 1995 to 50 percent in FY 1996, we 
expect that the average hospital-specific rate payment per discharge 
will increase from $117.71 in FY 1995 to $119.98 in FY 1996. This is 
due to the large increase (21.34 percent) in the FY 1996 hospital-
specific rate compared to FY 1995.
    We are proposing no changes in our exceptions policies for FY 1996. 
As a result, the minimum payment levels would be:
     90 percent for sole community hospitals;
     80 percent for urban hospitals with 100 or more beds and a 
disproportionate share patient percentage of 20.2 percent or more; or
     70 percent for all other hospitals.
    We estimate that exceptions payments will decrease from 1.83 
percent of total capital payments in FY 1995 to 1.30 percent of 
payments in FY 1996. This is due to the large increase in the rates--as 
rate-based payments increase, exceptions payments decrease. The 
projected distribution of the payments is shown in the table below:

                                                                                                                                                        
[[Page 29368]]
                  Estimated FY 1996 Exceptions Payments                 
------------------------------------------------------------------------
                                                              Percent of
                 Type of hospital                    No. of   exceptions
                                                   hospitals   payments 
------------------------------------------------------------------------
Low capital cost.................................        209         85 
High capital cost................................        124         15 
                                                  ----------------------
      Total......................................        333        100 
------------------------------------------------------------------------

C. Cross-Sectional Comparison of Capital Prospective Payment 
Methodologies

    Table IV presents a cross-sectional summary of hospital groupings 
by capital prospective payment methodology. This distribution is 
generated by our actuarial model.

  Table IV.--Distribution by Method of Payment (Hold-harmless/Fully Prospective) of Hospitals Receiving Capital 
                                                    Payments                                                    
----------------------------------------------------------------------------------------------------------------
                                                                         (2) Hold-harmless                      
                                                                 -------------------------------- (3) Percentage
                                                   (1) Total No.    Percentage      Percentage      paid fully  
                                                   of hospitals     paid hold-      paid fully      prospective 
                                                                   harmless (A)     federal (B)        rate     
----------------------------------------------------------------------------------------------------------------
By Geographic Location:                                                                                         
    All hospitals...............................           5,151            17.6            23.6            58.8
    Large urban areas (populations over 1                                                                       
     million)...................................           1,620            20.1            31.5            48.5
    Other urban areas (populations of 1 million                                                                 
     of fewer)..................................           1,273            22.5            27.4            50.1
    Rural areas.................................           2,258            13.0            15.9            71.1
    Urban hospitals.............................           2,893            21.1            29.7            49.2
        0-99 beds...............................             715            21.8            24.1            54.1
        100-199 beds............................             917            25.0            31.5            43.5
        200-299 beds............................             601            21.1            31.6            47.3
        300-499 beds............................             480            16.5            31.0            52.5
        500 or more beds........................             180            11.1            32.8            56.1
    Rural hospitals.............................           2,258            13.0            15.9            71.1
        0-49 beds...............................           1,170            10.2            10.7            79.1
        50-99 beds..............................             664            14.5            19.0            66.6
        100-149 beds............................             230            20.0            27.0            53.0
        150-199 beds............................             108            18.5            19.4            62.0
        200 or more beds........................              86            15.1            27.9            57.0
By Region:                                                                                                      
    Urban by Region.............................           2,893            21.1            29.7            49.2
        New England.............................             163             7.4            25.2            67.5
        Middle Atlantic.........................             440            11.6            30.5            58.0
        South Atlantic..........................             431            25.8            34.6            39.7
        East North Central......................             481            15.4            25.8            58.8
        East South Central......................             164            31.7            27.4            40.9
        West North Central......................             195            23.6            24.6            51.8
        West South Central......................             371            37.5            36.9            25.6
        Mountain................................             119            21.0            37.8            41.2
        Pacific.................................             482            18.9            27.0            54.1
        Puerto Rico.............................              47            21.3            12.8            66.0
    Rural by Region.............................           2,258            13.0            15.9            71.1
        New England.............................              53             7.5            15.1            77.4
        Middle Atlantic.........................              84             9.5            15.5            75.0
        South Atlantic..........................             297            14.5            22.9            62.6
        East North Central......................             305            11.8             9.8            78.4
        East South Central......................             275            14.9            26.2            58.9
        West North Central......................             527            10.2            10.8            78.9
        West South Central......................             351            13.4            19.9            66.7
        Mountain................................             218            15.1            11.9            72.9
        Pacific.................................             143            19.6             9.1            71.3
By Payment Classification:                                                                                      
    All hospitals...............................           5,151            17.6            23.6            58.8
    Large urban areas (populations over 1                                                                       
     million)...................................           1,813            19.5            31.2            49.3
    Other urban areas (populations of 1 million                                                                 
     or fewer)..................................           1,291            22.7            27.0            50.3
    Rural areas.................................           2,047            12.5            14.8            72.6
    Teaching Status:                                                                                            
        Non-teaching............................           4,101            18.0            22.7            59.3
        Fewer than 100 Residents................             826            17.3            27.2            55.4
        100 or more Residents...................             224             9.8            28.1            62.1
    Disproportionate share hospitals (DSH):                                                                     
        Non-DSH.................................           3,220            17.4            20.2            62.5
        Urban DSH:                                                                                              
          100 or more beds......................           1,387            19.1            32.7            48.2
          Less than 100 beds....................             134            21.6            25.4            53.0
[[Page 29369]]
                                                                                                                
        Rural DSH:                                                                                              
          Sole community (SCH/EACH).............             137            14.6            10.2            75.2
          Referral Center (RRC/EACH)............              40            12.5            20.0            67.5
          Other Rural:                                                                                          
              100 or more beds..................              83            19.3            30.1            50.6
              Less than 100 beds................             150             6.7            22.0            71.3
    Urban teaching and DSH:                                                                                     
        Both teaching and DSH...................             653            13.5            30.3            56.2
        Teaching and no DSH.....................             350            18.3            24.6            57.1
        No teaching and DSH.....................             868            23.7            33.4            42.9
        No teaching and no DSH..................           1,233            23.4            27.6            49.0
    Rural Hospital Types:                                                                                       
        Non special status hospitals............           1,278             9.4            15.9            74.7
        RRC/EACH................................             111            17.1            22.5            60.4
        SCH/EACH................................             612            18.0            10.9            71.1
        SCH, RRC and EACH.......................              46            19.6            17.4            63.0
    Type of Ownership:                                                                                          
        Voluntary...............................           3,092            16.8            24.1            59.1
        Proprietary.............................             725            31.6            38.6            29.8
        Government..............................           1,334            11.8            14.4            73.8
    Medicare Utilization as a Percent of                                                                        
     Inpatient Days:                                                                                            
        0-25....................................             268            26.1            19.4            54.5
        25-50...................................           1,357            19.7            28.5            51.7
        50-65...................................           2,227            17.1            23.7            59.2
        Over 65.................................           1,234            14.6            18.6            66.8
----------------------------------------------------------------------------------------------------------------

  As we explain in Appendix B, we were not able to determine a 
hospital-specific rate for 3 of the 5,154 hospitals in our data base. 
Consequently, the payment methodology distribution is based on 5,151 
hospitals. This data should be fully representative of the payment 
methodologies that will be applicable to hospitals.
    The cross-sectional distribution of hospital by payment methodology 
is presented by: (1) geographic location, (2) region, and (3) payment 
classification. This provides an indication of the percentage of 
hospitals within a particular hospital grouping that will be paid under 
the fully prospective payment methodology and under the hold-harmless 
methodology.
    The percentage of hospitals paid fully Federal (100 percent of 
Federal rate) is expected to increase to 23.6 percent in FY 1996. The 
expiration of the budget neutrality provision resulted in a large rate 
increase in the capital Federal rate. This large increase means more 
hold-harmless hospitals will fare better under the fully Federal 
payment method.
    Table IV indicates that 58.8 percent of hospitals are paid under 
the fully prospective payment methodology. (This figure, unlike the 
figure of 66 percent for low cost capital hospitals in the previous 
section, takes account of the effects of redeterminations. In other 
words, this figure does not include low cost hospitals that, following 
a hospital-specific rate redetermination, are now paid under the hold-
harmless methodology.) As expected, a relatively higher percentage of 
rural and governmental hospitals (72.6 percent and 73.8 percent, 
respectively by payment classification) are being paid under the fully 
prospective methodology. This is a reflection of their lower than 
average capital costs per case. In contrast, only 29.8 percent of 
proprietary hospitals are being paid under the fully prospective 
methodology. This is a reflection of their higher than average capital 
costs per case. (We found at the time of the August 30, 1991 final rule 
(56 FR 43430) that 62.7 percent of proprietary hospitals had a capital 
cost per case above the national average cost per case.)

D. Cross-Sectional Analysis of Changes in Aggregate Payments

    We used our FY 1996 actuarial model to estimate the potential 
impact of our proposed changes for FY 1996 on total capital payments 
per case, using a universe of 5,151 hospitals. The individual hospital 
payment parameters are taken from the best available data, including: 
the January 1, 1995 update to the Provider-Specific file, cost report 
data, and audit information supplied by intermediaries. Table V 
presents estimates of payments per case for FY 1995 and FY 1996 
(columns 2 and 3). Column 4 shows the total percentage change in 
payments from FY 1995 to FY 1996. Column 5 presents the percentage 
change in payments that can be attributed to Federal rate changes 
alone.
    Federal rate changes represented in Column 5 include the 21.30 
percent increase in the Federal rate, a 0.85 percent increase in case 
mix, changes in the adjustments to the Federal rate (for example, the 
effect of the new hospital wage index on the geographic adjustment 
factor), and reclassifications by the Medicare Geographic 
Classification Review Board. We note that the 21.3 percent increase in 
the Federal rate incorporates the 1.14 percent decrease in the base 
rate to remove FY 1992 tax costs. Therefore, any effect of that 
decrease to the rate is represented in column 5. Column 4 includes the 
effects of the Federal rate changes represented in column 3. Column 4 
also includes the effects of all other changes. Those other changes 
[[Page 29370]] include: the change from 40 percent to 50 percent in the 
portion of the Federal rate for fully prospective hospitals, the 
hospital-specific rate update, changes in the proportion of new to 
total capital for hold-harmless hospitals, changes in old capital (for 
example, obligated capital put in use), hospital-specific rate 
redeterminations, exceptions, and the special payments to certain 
hospitals for capital-related taxes. The comparisons are provided by: 
(1) geographic location and (2) payment classification and payment 
region.
    The simulation results show that, on average, capital payments per 
case can be expected to increase 20.4 percent in FY 1996. The results 
show that the effect of the Federal rate changes alone is to increase 
payments by 11.0 percent. In addition to the increase attributable to 
the Federal rate changes, a 9.4 percent increase is attributable to the 
effects of all other changes.
    Our comparison by geographic location shows that urban and rural 
hospitals experience similar rates of increase (20.3 percent and 21.2 
percent, respectively). Urban hospitals will gain at the same rate as 
rural hospitals (11.0 percent) from the Federal rate changes. Urban 
hospitals will gain slightly less than rural hospitals (9.3 percent 
compared to 10.2 percent) from the effects of all other changes.
    By region, there is relatively little variation compared to some 
previous years. All regions are estimated to receive large increases in 
total capital payments per case, due to the expiration of the budget 
neutrality provision. Increases by region vary from a low of 16 percent 
(rural Mountain and urban East South Central regions) to a high of 25 
percent (rural hospitals of the New England and Middle Atlantic 
regions).
    By type of ownership, proprietary hospitals are projected to have 
the highest rate of increase (21.9 percent, of which 11.0 percent is 
due to Federal rate changes and 10.9 percent to the effects of all 
other changes). Payments to voluntary hospitals will increase 20.2 
percent (10.9 percent due to the Federal rate changes and 9.3 percent 
due to the effects of all other changes) and payments to government 
hospitals will increase 20.7 percent (11.8 percent due to Federal rate 
changes and 8.9 percent due to the effects of all other changes). We 
believe that one factor contributing to the higher rate of increase for 
proprietary hospitals is the proposed change in the treatment of tax 
costs. Proportionately more proprietary hospitals are subject to 
capital-related taxes than other categories.
    Section 1886(d)(10) of the Act established the Medicare Geographic 
Classification Review Board (MGCRB). Hospitals may apply for 
reclassification for purposes of the wage index, standardized payment 
amount, or both. Although the Federal capital rate is not affected, a 
hospital's geographic classification for purposes of the operating 
standardized amount does affect a hospital's capital payments as a 
result of the large urban adjustment factor and the disproportionate 
share adjustment for urban hospitals with 100 or more beds. 
Reclassification for wage index purposes affects the geographic 
adjustment factor since that factor is constructed from the hospital 
wage index.
    To present the effects of the hospitals being reclassified for FY 
1996 compared to the effects of reclassification for FY 1995, we show 
the average payment percentage increase for hospitals reclassified in 
each fiscal year and in total. For FY 1996 reclassifications, we 
indicate those hospitals reclassified for standardized amount purposes 
only, for wage index purposes only, and for both purposes. The 
reclassified groups are compared to all other nonreclassified 
hospitals. These categories are further identified by urban and rural 
designation.
    Hospitals reclassified during FY 1996 as a whole are projected to 
experience a 22.0 percent increase in payments (11.7 percent 
attributable to Federal rate changes and 10.3 percent attributable to 
the effects of all other changes). Nonreclassified hospitals will gain 
slightly less (20.2 percent) than reclassified hospitals (22.0 percent) 
overall. Nonreclassified hospitals will gain slightly less than 
reclassified hospitals from the Federal rate changes (10.9 percent 
compared to 11.7 percent); they will also gain slightly less from the 
effects of all other changes (9.3 percent compared to 10.3 percent).
    Since we are proposing a capital-related tax adjustment effective 
in FY 1996, we have added two new categories of hospitals to our 
analysis in Table V. For hospitals that we expect to receive special 
payments for taxes, average payments per case are estimated to increase 
from $667 in FY 1995 to $806 in FY 1996 (an increase of 20.9 percent). 
In contrast, payments to other hospitals are expected to increase at a 
slightly lower rate (20.2 percent). We believe that the proposed change 
in the treatment of taxes is a major factor in the difference in the 
payment increase between these two groups of hospitals.

                                 Table V--Comparison of Total Payments Per Case                                 
                                 [FY 1995 payments compared to FY 1996 payments]                                
----------------------------------------------------------------------------------------------------------------
                                                                                                      Portion   
                                      No. of        Average FY      Average FY                     attributable 
                                     hospitals    1995 payments/  1996 payments/    All changes     to Federal  
                                                       case            case                         rate change 
----------------------------------------------------------------------------------------------------------------
By Geographic Location:                                                                                         
    All hospitals...............           5,151             602             725            20.4            11.0
    Large urban areas                                                                                           
     (populations over 1                                                                                        
     million)...................           1,620             688             833            21.1            11.4
    Other urban areas                                                                                           
     (populations of 1 million                                                                                  
     or fewer)..................           1,273             602             718            19.2            10.5
    Rural areas.................           2,258             396             480            21.2            11.0
    Urban hospitals.............           2,893             652             785            20.3            11.0
        0-99 beds...............             715             497             597            20.1            10.6
        100-199 beds............             917             595             712            19.7            10.4
        200-299 beds............             601             616             740            20.2            11.1
        300-499 beds............             480             666             804            20.6            11.4
        500 or more beds........             180             801             968            20.8            11.2
    Rural hospitals.............           2,258             396             480            21.2            11.0
        0-49 beds...............           1,170             297             370            24.9            11.5
        50-99 beds..............             664             361             439            21.4            11.2
        100-149 beds............             230             429             518            20.7            11.7
        150-199 beds............             108             430             518            20.4             9.5
        200 or more beds........              86             507             606            19.5            10.9
[[Page 29371]]
                                                                                                                
By Region:                                                                                                      
    Urban by Region.............           2,893             652             785            20.3            11.0
        New England.............             163             632             768            21.5            12.0
        Middle Atlantic.........             440             681             834            22.5            11.4
        South Atlantic..........             431             660             783            18.6            10.6
        East North Central......             481             600             727            21.1            11.0
        East South Central......             164             614             713            16.1             8.9
        West North Central......             195             651             771            18.5             9.6
        West South Central......             371             680             798            17.4            11.1
        Mountain................             119             647             775            19.8            13.0
        Pacific.................             482             719             885            22.9            11.7
        Puerto Rico.............              47             249             294            18.0            10.2
    Rural by Region.............           2,258             396             480            21.2            11.0
        New England.............              53             533             666            24.9             8.8
        Middle Atlantic.........              84             397             496            25.0            12.6
        South Atlantic..........             297             410             498            21.4            12.1
        East North Central......             305             390             467            19.8            10.1
        East South Central......             275             368             444            20.4            11.7
        West North Central......             527             371             451            21.8            11.2
        West South Central......             351             378             459            21.3            10.4
        Mountain................             218             447             519            16.1             8.5
        Pacific.................             143             450             554            23.2            10.8
By Payment Classification:                                                                                      
    All hospitals...............           5,151             602             725            20.4            11.0
    Large urban areas                                                                                           
     (populations over 1                                                                                        
     million)...................           1,813             675             818            21.2            11.4
    Other urban areas                                                                                           
     (populations of 1 million                                                                                  
     or fewer)..................           1,291             596             708            18.8            10.4
    Rural areas.................           2,047             383             464            21.3            10.9
    Teaching Status:                                                                                            
        Nonteaching.............           4,101             525             629            19.7            10.9
        Fewer than 100 Residents             826             632             764            20.9            11.1
        100 or more Residents...             224             889           1,082            21.7            11.3
DIsproportionate share hospitals                                                                                
 (DSH):                                                                                                         
    Non-DSH.....................           3,220             553             668            20.8            10.7
    Urban DSH:                                                                                                  
        100 or more beds........           1,387             680             817            20.1            11.3
        Less than 100 beds......             134             460             554            20.5            11.4
    Rural DSH:                                                                                                  
        Sole Community (SCH/                                                                                    
         EACH)..................             137             367             433            18.0             9.8
        Referral Center (RRC/                                                                                   
         EACH)..................              40             441             529            20.0            10.3
        Other Rural:............                                                                                
            100 or more beds....              83             392             474            20.9            11.4
            Less than 100 beds..             150             290             361            24.8            13.8
Urban teaching and DSH:                                                                                         
    Both teaching and DSH.......             653             741             896            20.9            11.4
    Teaching and no DSH.........             350             661             806            22.0            10.8
    No teaching and DSH.........             868             591             703            18.8            11.2
    No teaching and no DSH......           1,233             570             682            19.7            10.6
Rural Hospital Types:                                                                                           
    Nonspecial status hospitals.           1,278             333             412            23.7            12.4
    RRC/EACH....................             111             463             559            20.8            10.6
    SCH/EACH....................             612             392             465            18.6             9.2
    SCH, RRC and EACH...........              46             491             576            17.3             8.9
Hospitals Reclassified by the                                                                                   
 Medicare Geographic                                                                                            
 Classification Review Board:                                                                                   
    Reclassification Status                                                                                     
     During FY95 and FY96:                                                                                      
        Reclassified During Both                                                                                
         FY95 and FY96..........             465             557             675            21.2            11.4
        Reclassified During FY96                                                                                
         Only...................             153             491             616            25.5            13.1
        Reclassified During FY95                                                                                
         Only...................             220             598             680            13.7             6.7
    FY96 Reclassifications:                                                                                     
        All Reclassified                                                                                        
         Hospitals..............             618             543             663            22.0            11.7
        All Nonreclassified                                                                                     
         Hospitals..............           4,506             611             735            20.2            10.9
        All Urban Reclassified                                                                                  
         Hospitals..............             209             622             760            22.1            11.7
        Urban Nonreclassified                                                                                   
         Hospitals..............           2,684             655             787            20.2            11.0
        All Reclassified Rural                                                                                  
         Hospitals..............             409             463             564            21.8            11.7
        Rural Nonclassified                                                                                     
         Hospitals..............           1,822             361             436            20.8            10.5
[[Page 29372]]
                                                                                                                
    Other Reclassified Hospitals                                                                                
     (Section 1886(D)(8)(B))....              27             434             527            21.5            13.4
Real Estate Tax Status:                                                                                         
    No Payments for Taxes.......           3,906             574             691            20.2            11.3
    Special Payments for Taxes..           1,245             667             806            20.9            10.5
Type of Ownership:                                                                                              
    Voluntary...................           3,092             614             738            20.2            10.9
    Proprietary.................             725             631             769            21.9            11.0
    Government..................           1,334             507             612            20.7            11.8
Medicare Utilization as a                                                                                       
 Percent of Inpatient Days:                                                                                     
    0-25........................             268             667             818            22.6            10.5
    25-50.......................           1,357             715             864            20.8            11.1
    50-65.......................           2,227             560             671            19.9            10.9
    Over 65.....................           1,234             501             604            20.5            11.3
----------------------------------------------------------------------------------------------------------------

Appendix B: Technical Appendix on the Capital Acquisition Model and 
Required Adjustments

    Section 1886(g)(1)(A) of the Act requires that for FY 1992 through 
FY 1995 aggregate prospective payments for operating costs under 
section 1886(d) of the Act and prospective payments for capital costs 
under section 1886(g) of the Act be reduced each year in a manner that 
results in a 10 percent reduction of the amount that would have been 
payable on a reasonable cost basis for capital-related costs in that 
year. To implement this requirement, we developed the capital 
acquisition model to determine the budget neutrality adjustment factor. 
Even though the budget neutrality requirement expires effective with FY 
1996, we must continue to determine the recalibration and geographic 
reclassification budget neutrality adjustment factor, and the reduction 
in the Federal and hospital-specific rates for exceptions payments. We 
continue to use the capital acquisition model to determine these 
factors.
    The following data are used in the capital acquisition model: the 
December 1994 update of the PPS-9 (cost reporting periods beginning in 
FY 1992) and PPS-10 (cost reporting periods beginning in FY 1993) cost 
reports, the January 1, 1995 update of the provider specific file, and 
the March 1994 update of the intermediary audit file.
    The available data still lack certain items that were required for 
the determination of budget neutrality, including a hospital's 
projected new capital costs for each year, its projected old capital 
costs for each year, and the projected obligated capital amounts that 
will be put in use for patient care services and recognized as old 
capital each year.
    Since hospitals under alternative payment system waivers (that is, 
hospitals in Maryland) are currently excluded from the capital 
prospective payment system, we excluded these hospitals from our model.
    We then developed FY 1992, FY 1993, FY 1994, and FY 1995 hospital-
specific rates using the provider-specific file, the intermediary audit 
file, and when available, cost reports. (We used the cumulative 
provider-specific file, which includes all updates to each hospital's 
records, and chose the latest record for each fiscal year.) We checked 
the consistency between the provider-specific file and the intermediary 
audit file. We also ensured that the FY 1993 increase in the hospital-
specific rate was at least 0.62 percent (the net FY 1993 update), that 
the FY 1994 hospital-specific rate was at least as large as the FY 1993 
hospital-specific rate decreased by 2.16 percent (the net FY 1994 
update), and that the FY 1995 increase in the hospital-specific rate 
was at least 0.05 percent (the net FY 1995 update). We were able to 
match hospitals to the files as shown in the following table.

------------------------------------------------------------------------
                                                               Number of
                            Source                             hospitals
------------------------------------------------------------------------
Provider-Specific File Only..................................         54
Provider-Specific and Audit File.............................       5100
                                                              ----------
      Total..................................................       5154
------------------------------------------------------------------------

    Thirty-nine of these hospitals had unusable or missing data. We 
were able to back-fill a hospital-specific rate for 36 of these 
hospitals from the cost reports as shown in the following table.

------------------------------------------------------------------------
                                                               Number of
                            Source                             hospitals
------------------------------------------------------------------------
PPS-5 Cost Reports...........................................          2
PPS-7 Cost Reports...........................................          2
PPS-8 Cost Reports...........................................          2
PPS-9 Cost Reports...........................................         10
PPS-10 Cost Reports..........................................         18
PPS-11 Cost Reports..........................................          2
                                                              ----------
      Total..................................................         36
------------------------------------------------------------------------

    We did not have data for 3 hospitals, and had to eliminate them 
from the capital analysis. These hospitals likely are new hospitals or 
hospitals with very few Medicare admissions. This leaves us with 5151 
hospitals and should not affect the precision of the required 
adjustment factors.
    Next, we determined old and new capital amounts for FY 1992 using 
the PPS-9 cost reports as the first source of data. For FY 1993 we used 
PPS-9 and PPS-10 cost reports as the first source of data weighting 
each cost report by the number of days in FY 1993. We were able to 
match 5,097 PPS-9 cost reports and 4,824 PPS-10 cost reports. In cases 
where cost reports could not be matched, we used the provider-specific 
file for old capital information. Even in cases where a cost report was 
available, the breakout of old and new capital was not always 
available. In these cases, we used the old capital amounts and new 
capital ratios from the provider-specific file. If these were missing, 
we derived the old capital amount from the hospital-specific rate.
    Finally, we used the intermediary audit file to develop obligated 
capital [[Page 29373]] amounts. Since the obligated amounts are 
aggregate projected amounts, we computed a Medicare capital cost per 
admission associated with these amounts. We adjusted the aggregate 
amounts by the following factors:
    (1) Medicare inpatient share of capital. This was derived from cost 
reports and was limited to the Medicare share of total inpatient days. 
It was necessary to limit the Medicare share because of data integrity 
problems. Medicare share of inpatient days is a reasonably good proxy 
for allocating capital. However, it may be understated if Medicare 
utilization is high, and may be overstated because it does not reflect 
the outpatient share of capital.
    (2) Capitalization factor. This factor allocates the aggregate 
amount of obligated capital to depreciation and interest amounts. 
Consistent with the assumptions in the capital input price index, we 
used a 25-year life for fixed capital and a 10-year life for movable 
capital, and an average projected interest rate of 6.7 percent. We also 
assumed that fixed capital acquisitions are about one-half of total 
capital. In conjunction with the useful life and interest rate 
assumptions, the resulting capitalized fixed capital is about one-half 
of total capitalization. This is consistent with the allocations 
between fixed and movable capital found on the cost reports. The ratio 
we developed is 0.137, which produces the first year capitalization 
based on the aggregate amount.
    (3) A divisor of Medicare admissions to derive the capital per 
discharge amount. Since we must project capital amounts for each 
hospital, we continued to use a Monte Carlo simulation to develop these 
amounts. (This model is described in detail in the August 30, 1991 
final rule (56 FR 43517).) The Monte Carlo simulation is now used only 
to project capital costs per discharge amounts for each hospital. We 
analyzed the distributions of capital increases, and noted a slightly 
negative correlation between the dollar level of capital cost per 
admission, and the rate of increase in capital. To determine the rate 
of increase in capital cost per admission, we multiplied the lesser of 
$3,000 or the capital cost per admission by .00006 and subtracted this 
result from 1.2. (Increases for capital levels over $3,000 were not 
influenced by the level of capital, so this part of the calculation was 
capped at $3,000.) We selected a random number from the normal 
distribution, multiplied it by 0.17 (the standard deviation) and added 
it to -0.04 (the mean) and then added 1 to create a multiplier. This 
random result was multiplied by the previous result to assign a rate of 
increase factor which was multiplied by the prior year's capital per 
discharge amount to develop a capital per discharge amount for the 
projected year.
    To model a projected year, we used the old and new capital for the 
prior year multiplied by 0.96 (aging factor). The 0.96 aging factor is 
the average of changes in capital over its life. The aged new and old 
capital is subtracted from the projected capital described in the 
previous paragraph. The difference represents newly acquired capital. 
We assume that the hospital would accrue only a half year of costs for 
newly acquired capital in the year in which the capital comes on line. 
This is because, on average, new capital will come on line in the 
middle of the year. We make the same assumption for obligated capital. 
If the hospital has obligated capital, the lesser of one half of the 
adjusted costs (as described in the succeeding paragraph) for newly 
acquired capital or one half of the costs (for FY 1993, all of the 
costs) for obligated capital are deemed to apply to the current year. 
The full year's costs for new or obligated capital are assumed to apply 
for the following year. For FY 1994, one half of the costs for any 
outstanding obligated capital were deemed to apply to FY 1994; a full 
year's costs were deemed to apply to FY 1995. With the exception of 
certain hospitals about whom we have information to the contrary, we 
assume that hospitals would meet the expiration dates provided under 
the obligated capital provision. The on-line obligated amounts are 
added to old capital and subtracted from the newly acquired capital to 
yield residual newly acquired capital, which is then added to new 
capital. The residual newly acquired capital is never permitted to be 
less than zero.
    Next, we computed the average total capital cost per discharge from 
the capital costs that were generated by the model and compared the 
results to total capital costs per discharge that we had projected 
independently of the model. We adjusted the newly acquired capital 
amounts proportionately, so that the total capital costs per discharge 
generated by the model match the independently projected capital costs 
per discharge.
    Once each hospital's capital-related costs are generated, the model 
projects capital payments. We use the actual payment parameters (for 
example, the case-mix index and the geographic adjustment factor) that 
are applicable to the specific hospital.
    To project capital payments, the model first assigns the applicable 
payment methodology (fully prospective or hold-harmless) to the 
hospital. If available, the model uses the payment methodology 
indicated in the PPS-9 cost reports or the provider-specific file. 
Otherwise, the model determines the methodology by comparing the 
hospital's FY 1992 hospital-specific rate to the adjusted Federal rate 
applicable to the hospital. The model simulates Federal rate payments 
using the assigned payment parameters and hospital-specific estimated 
outlier payments. The case-mix index for a hospital is derived from the 
1994 MedPAR file using the proposed FY 1996 DRG relative weights 
published in this rule. The case-mix index is increased each year after 
FY 1994 consistent with the continuing trend in case-mix increase.
    We analyzed the case-mix increases for the recent past and found 
that case-mix increases have decelerated to about 1.53 percent in FY 
1992, 0.78 percent in FY 1993, and 0.75 percent in FY 1994. It is too 
early to reliably determine a case-mix increase for FY 1995 from the 
discharge data. Since case-mix increases appear to be decelerating, we 
have reduced our projected long-term increase of 2 percent to .8 
percent for both FY 1995 and FY 1996. We will continue to monitor case-
mix increases and make appropriate adjustments to our projections. 
(Since we are using FY 1994 cases for our analysis, the FY 1994 
increase in case mix has no effect on projected capital payments.)
    Changes in geographic classification and revisions to the hospital 
wage data used to establish the hospital wage index affect the 
geographic adjustment factor. Changes in the DRG classification system 
and the relative weights affect the case-mix index.
    Section 1886(g)(1)(A) of the Act requires that, for discharges 
occurring after September 30, 1993, the unadjusted standard Federal 
rate be reduced by 7.4 percent. Consequently, the model reduces the 
unadjusted standard Federal rate by 7.4 percent effective in FY 1994. 
Since budget neutrality expires effective with FY 1996, this adjustment 
affects the Federal rate starting in FY 1996.
    Since we are proposing separate payments for real estate taxes, we 
are adjusting the Federal rate so that aggregate payments from the 
Federal rate and tax payments are budget neutral. Using data from the 
tax verification survey, and the information from the PPS-9 cost 
reports, we compared Medicare's share of taxes, with Medicare's share 
of capital. Medicare's share of taxes is computed by multiplying total 
taxes by the ratio of [[Page 29374]] Medicare's share of capital to 
total capital. In computing Medicare's share of capital, we applied 
adjustments to account for the estimated effects of future audits and 
reopenings. For unaudited cost reports, Medicare's share of capital was 
multiplied by .9299 to reflect the anticipated effects of auditing. For 
audited cost reports, Medicare's share of capital was multiplied by 
1.0034 to reflect the anticipated effects of reopening cost reports. We 
used all short-stay hospitals, including hospitals in waiver States and 
hospitals with no taxes, but excluded cancer hospitals. We used the 
group of all short-stay acute care hospitals because the waivers for 
certain areas could be terminated at some future date. We believe that, 
in determining permanent changes to the rates, we should include 
hospitals that may be incorporated into the prospective payment system 
at a later date. We used tax information from all hospitals, including 
those that did not respond to the tax verification survey. Since we are 
providing a final opportunity to verify tax information, we decided to 
use information from all hospitals in this analysis. However, we 
propose to use only verified tax information in the final rule. The 
ratio of taxes to capital costs is 0.0114. The adjustment to the 
Federal rate for taxes is 1-0.0114= 0.9886. For modeling payments we 
divided Medicare's share of taxes by Medicare discharges to determine 
taxes per discharge, which were then updated by 1.1475 (the cumulative 
Federal rate increase for FY 1993 through FY 1996). This amount is then 
multiplied by the Federal rate percentage and added to the payments for 
capital.
    The proposed change in the method of paying transfer cases affects 
total capital payments. We are making the effect of this change budget 
neutral. To determine the budget neutrality adjustment factor for 
transfers, we followed the methodology described in section VI.D of 
Appendix A to this proposed rule. We computed the transfer-adjusted 
number of discharges and case-mix under the current transfer policy, 
and the proposed transfer policy for each hospital. We multiplied the 
corresponding number of discharges and case-mix numbers for each 
hospital and added all hospitals together. The number computed under 
the current transfer policy divided by the number computed under the 
proposed transfer policy yielded the transfer adjustment factor of 
0.9972. This adjustment factor is applied to both the hospital specific 
rate and the Federal rate.
    Section 412.308(c)(4)(ii) requires that the estimated aggregate 
payments for the fiscal year, based on the Federal rate after any 
changes resulting from DRG reclassifications and recalibration and the 
geographic adjustment factor, equal the estimated aggregate payments 
based on the Federal rate that would have been made without such 
changes. For FY 1995, the budget neutrality adjustment factor was 
1.0031. To determine the factor for FY 1996, we first determined the 
portion of the Federal rate that would be paid for each hospital in FY 
1996 based on its applicable payment methodology. We then compared 
estimated aggregate Federal rate payments based on the FY 1995 DRG 
relative weights and FY 1995 geographic adjustment factor to estimated 
aggregate Federal rate payments based on the FY 1996 relative weights 
and the FY 1996 geographic adjustment factor. In making the comparison, 
we held the FY 1996 Federal rate portion constant and set the other 
budget neutrality adjustment factor and exceptions reduction factor to 
1.00. We determined that to achieve budget neutrality for the changes 
in the geographic adjustment factor and DRG classifications and 
relative weights, an incremental budget neutrality adjustment of 0.9993 
for FY 1996 should be applied to the previous cumulative FY 1995 
adjustment of 1.0031 (the product of the FY 1993 incremental adjustment 
of 0.9980, the FY 1994 incremental adjustment of 1.0053, and the FY 
1995 incremental adjustment of 0.9998), yielding a cumulative 
adjustment of 1.0024 through FY 1996.
    The methodology used to determine the recalibration and geographic 
(DRG/GAF) budget neutrality adjustment factor is similar to that used 
in establishing budget neutrality adjustments under the prospective 
payment system for operating costs. One difference is that under the 
operating prospective payment system, the budget neutrality adjustments 
for the effect of geographic reclassifications are determined 
separately from the effects of other changes in the hospital wage index 
and the DRG weights. Under the capital prospective payment system, 
there is a single DRG/GAF budget neutrality adjustment factor for 
changes in the geographic adjustment factor (including geographic 
reclassification) and the DRG relative weights. In addition, there is 
no adjustment for the effects that geographic reclassification has on 
the other payment parameters, such as the payments for serving low 
income patients or the large urban add-on.
    In addition to computing the DRG/GAF budget neutrality adjustment 
factor, we used the model to simulate total payments under the 
prospective payment system.
    Additional payments under the exceptions process are accounted for 
through a reduction in the Federal and hospital-specific rates. 
Therefore, we used the model to calculate estimated exceptions payments 
and the exceptions reduction factor. This exceptions reduction factor 
ensures that estimated aggregate payments under the capital prospective 
payment system, including exceptions payments, equal estimated 
aggregate payments under the capital prospective payment system without 
an exceptions process. Since changes in the level of the payment rates 
change the level of payments under the exceptions process, the 
exceptions reduction factor must be determined through iteration. Even 
though the additional payments for taxes are used to determine whether 
exceptions would be paid and the amount of the exceptions, the 
adjustment factor is not applied to the tax amounts.
    In the August 30, 1991 final rule (56 FR 43517), we indicated that 
we would publish each year the estimated payment factors generated by 
the model to determine payments for the next 5 years. The table below 
provides the actual factors for FY 1992, FY 1993, FY 1994, and FY 1995, 
the proposed factors for FY 1996, and the estimated factors that would 
be applicable through FY 2000. We caution that, except with respect to 
FY 1992, FY 1993, FY 1994, FY 1995 and the proposed FY 1996, these are 
estimates only, and are subject to revisions resulting from continued 
methodological refinements, more recent data, and any payment policy 
changes that may occur. In this regard, we note that in making these 
projections we have assumed that the cumulative DRG/GAF adjustment 
factor will remain at 1.0024 for FY 1996 and later because we do not 
have sufficient information to estimate the change that will occur in 
the factor for years after FY 1996.
    The projections are as follows:

                                                                        
[[Page 29375]]
------------------------------------------------------------------------
                                                               Federal  
                         Update     Exceptions     Budget    rate (after
     Fiscal year         factor     reduction    neutrality    outlier  
                                      factor       factor     reduction)
------------------------------------------------------------------------
1992................          N/A       0.9813       0.9602       415.59
1993................         6.07        .9756        .9162    \1\417.29
1994................         3.04        .9485        .8947    \2\378.34
1995................         3.44        .9734        .8432    \3\376.83
1996................         1.50        .9840          N/A    \4\457.11
1997................         1.80        .9804          N/A       463.63
1998................         1.90        .9723          N/A       468.54
1999................         2.00        .9572          N/A       470.49
2000................         2.00        .9375          N/A      470.02 
------------------------------------------------------------------------
\1\Note: Includes the DRG/GAF adjustment factor of 0.9980 and the change
  in the outlier adjustment from 0.9497 in FY 1992 to 0.9496 in FY 1993.
                                                                        
\2\Note: Includes the 7.4 percent reduction in the unadjusted standard  
  Federal rate. Also includes the DRG/GAF adjustment factor of 1.0033   
  and the change in the outlier adjustment from 0.9496 in FY 1993 to    
  0.9454 in FY 1994.                                                    
\3\Note: Includes the DRG/GAF adjustment factor of 1.0031 and the change
  in the outlier adjustment from 0.9454 in FY 1994 to 0.9414 in FY 1995.
                                                                        
\4\Note: Includes the adjustment of .9886 for taxes, and the transfer   
  adjustment of .9972. Also includes the DRG/GAF adjustment factor of   
  1.0024 and the change in the outlier adjustment from .9414 in FY 1995 
  to .9526 in FY 1996. Future adjustments are, for purposes of this     
  projection, assumed to remain at the same level.                      


BILLING CODE 4120-01-P

[[Page 29376]]

Appendix C
[GRAPHIC][TIFF OMITTED]TP02JN95.070



[[Page 29377]]

[GRAPHIC][TIFF OMITTED]TP02JN95.071



[[Page 29378]]

[GRAPHIC][TIFF OMITTED]TP02JN95.072



[[Page 29379]]

[GRAPHIC][TIFF OMITTED]TP02JN95.073



BILLING CODE 4120-01-C

[[Page 29380]]

Appendix D: Recommendation of Update Factors for Operating Cost Rates 
of Payment for Inpatient Hospital Services

I. Background

    Several provisions of the Social Security Act (the Act) address the 
setting of update factors for services furnished in FY 1996 by 
hospitals subject to the prospective payment system and those excluded 
from the prospective payment system. Section 1886(b)(3)(B)(i)(XI) of 
the Act sets the FY 1996 percentage increase in the operating cost 
standardized amounts equal to the rate of increase in the hospital 
market basket minus 2.0 percentage points for prospective payment 
hospitals in all areas. Section 1886(b)(3)(B)(iv) of the Act sets the 
FY 1996 percentage increase to the hospital-specific rate applicable to 
sole community hospitals equal to the rate set forth in section 
1886(b)(3)(B)(i) of the Act, that is, the same update factor as all 
other hospitals subject to the prospective payment system, or the rate 
of increase in the market basket minus 2.0 percentage points. Section 
1886(b)(3)(B)(ii) of the Act sets the FY 1996 percentage increase in 
the rate of increase limits for hospitals excluded from the prospective 
payment system equal to the rate of increase in the excluded hospital 
market basket minus the applicable reduction or, in the case of a 
hospital in a fiscal year for which the hospital's update adjustment 
percentage is at least 10 percent, the excluded hospital market basket 
percentage increase. Under section 1886(b)(3)(B)(v) of the Act, a 
hospital's update percentage increase for FY 1996 is the percentage 
increase by which the hospital's allowable operating costs of inpatient 
hospital services recognized under this title for the cost reporting 
period beginning in FY 1990 exceed the hospital's target amount for 
such cost reporting period, increased for each fiscal year (beginning 
with FY 1994) by the sum of any of the hospital's applicable reductions 
for previous years. The applicable reduction with respect to a hospital 
for FY 1996 is the lesser of 1 percentage point or the percentage point 
difference between 10 percent and the hospital's update adjustment 
percentage for FY 1996.
    In accordance with section 1886(d)(3)(A) of the Act, we are 
proposing to update the standardized amounts, the hospital-specific 
rates, and the rate-of-increase limits for hospitals excluded for the 
prospective payment system as provided in section 1886(b)(3)(B) of the 
Act. Based on the first quarter 1995 forecasted market basket increase 
of 3.5 percent for hospitals subject to the prospective payment system, 
the proposed updates in the standardized amounts are 1.5 percent for 
hospitals in both large urban and other areas. The proposed update in 
the hospital-specific rate applicable to sole community hospitals is 
1.5 percent (that is, the market basket rate of increase of 3.5 percent 
minus 2.0 percentage points). The proposed update for hospitals 
excluded from the prospective payment system is based on the percentage 
increase in the excluded hospital market basket (currently estimated at 
3.6 percent) minus the applicable reduction factor. The applicable 
reduction factor is the lesser of 1 percentage point or the percentage 
point difference between 10 percent and the hospital's update 
adjustment percentage. Therefore, for excluded hospitals, the hospital-
specific update can vary between 2.6 and 3.6 percent.
    Sections 1886(e)(2)(A) and (3)(A) of the Act require that the 
Prospective Payment Assessment Commission (ProPAC) recommend to the 
Congress by March 1, 1995 an update factor that takes into account 
changes in the market basket rate of increase index, hospital 
productivity, technological and scientific advances, the quality of 
health care provided in hospitals, and long-term cost effectiveness in 
the provision of inpatient hospital services.
    In its March 1, 1995 report, ProPAC recommended update factors to 
the standardized amounts equal to the percentage increase in the market 
basket minus 1.8 percentage points for hospitals in both large urban 
and other areas. Based on its market basket rate of increase estimate 
of 3.9 percent, ProPAC's recommended update to the standardized amounts 
equal 2.1 percent for hospitals in both large urban and other areas. 
ProPAC recommended that the update for the hospital-specific rates 
applicable to sole community hospitals be the same factor as the rate 
for all other prospective payment hospitals. This recommendation would 
result in a 2.1 percent update to the hospital-specific rates. The 
components of ProPAC's update factor recommendations are described in 
detail in the ProPAC report, which is published as Appendix E to this 
document. We discuss ProPAC's recommendations concerning the update 
factors and our responses to these recommendations below.
    Section 1886(e)(4) of the Act requires that the Secretary, taking 
into consideration the recommendations of ProPAC, recommend update 
factors for each fiscal year that take into account the amounts 
necessary for the efficient and effective delivery of medically 
appropriate and necessary care of high quality. Under section 
1886(e)(5) of the Act, we are required to publish the update factors 
recommended under section 1886(e)(4) of the Act. Accordingly, this 
appendix provides the recommendations of appropriate update factors, 
the analysis underlying our recommendations, and our responses to the 
ProPAC recommendations concerning the update factors.

II. Secretary's Recommendations

    Under section 1886(e)(4) of the Act, we are recommending that the 
standardized amounts be increased by an amount equal to the market 
basket rate of increase minus 2.0 percentage points for hospitals 
located in large urban and other areas. We are also recommending an 
update of the market basket rate of increase minus 2.0 percentage 
points to the hospital-specific rate for sole community hospitals. 
These figures are consistent with the President's budget 
recommendation, given the current market basket forecast of 3.5 
percent.
    We recommend that hospitals excluded from the prospective payment 
system receive an update equal to the percentage increase in the market 
basket that measures input price increases for services furnished by 
excluded hospitals minus 1.0 percentage point. That market basket rate 
of increase is currently forecast at 3.6 percent. Subtracting 1.0 
percentage point would result in an update for hospitals excluded from 
the prospective payment system of 2.6 percent.
    As required by section 1886(e)(4) of the Act, we have taken into 
consideration the recommendations of ProPAC in setting these 
recommended update factors. Our responses to the ProPAC recommendations 
concerning the update factors are discussed below.

III. ProPAC Recommendation for Updating the Prospective Payment System 
Standardized Amounts

    For FY 1996, ProPAC recommends that the standardized amounts be 
updated by the following factors:
     The projected increase in the HCFA market basket index, 
estimated at 3.9 percent, based upon the fourth quarter 1994 forecast;
     An adjustment of 0.4 percentage points to reflect the 
difference between the ProPAC and HCFA market baskets;
     A negative adjustment of 1.8 percentage points to correct 
for substantial error in the FY 1994 market basket forecast;
     A positive adjustment of 0.3 percentage points to reflect 
the cost- [[Page 29381]] increasing effects of scientific and 
technological advances;
     A negative adjustment of 0.3 percentage points to 
encourage hospital productivity improvements; and
     A net adjustment of zero percentage points for case-mix 
change in FY 1995.
    Overall, the net increase employing the above factors is the 
percentage increase in the hospital market basket minus 1.8 percentage 
points. Based on the market basket estimate of 3.9 percent, ProPAC 
recommends that hospitals in large urban and other areas receive a 2.1 
percent update.
    Response: We are recommending an update that is consistent with the 
Administration's budget proposal and the requirements of section 
1886(b)(3)(B)(i) of the Act, as amended by section 13501(a) of Public 
Law 103-66. Our recommendation is that the update for prospective 
payment system hospitals located in large urban and other areas for FY 
1996 be equal to the market basket rate of increase forecast minus 2.0 
percentage points. Based on HCFA's current forecast of the market 
basket rate of increase (3.5 percent), we recommend an update for FY 
1996 for large urban and other hospitals equal to 1.5 percent. Our 
recommendation is supported by the following analyses that measure 
changes in hospital productivity, scientific and technological 
advances, practice pattern changes, and changes in case mix:
     Productivity: Service level productivity is defined as the 
ratio of total service output to full-time equivalent employees (FTEs). 
While we recognize that productivity is a function of many variables 
(for example, labor, nonlabor material, and capital inputs), we use a 
labor productivity measure in our framework, since the current update 
framework applies to operating payment. To recognize that we are 
apportioning the short run output changes to the labor input, we weigh 
our productivity measure for operating costs by the appropriate share 
of labor input relative to total operating input to determine the 
expected effect on cost per case.
    Our recommendation for the service productivity component is based 
on historical trends in productivity and total output for both the 
hospital industry and the general economy, and projected levels of 
future hospital service output. ProPAC has also estimated cumulative 
service productivity growth to be 4.9 percent from 1985-1989, or 1.2 
percent annually. At the same time, they estimate total output growth 
at 3.4 percent annually, implying a ratio of service productivity 
growth to output growth of 0.35. Our MedPAR analysis indicates total 
Medicare service output (charges per admission, adjusted for CPI 
change) increased 16.5 percent from 1985-1994, or an approximate 
average annual increase of 1.7 percent. Since it is not possible at 
this time to develop a productivity measure specific to Medicare 
patients, we examined productivity (output per hour) and output (gross 
domestic product) for the economy. Depending on the exact time period, 
annual changes in productivity range from .3 to .35 of the change in 
output (that is, a 1.0 percent increase in output would be correlated 
with an 0.3 to 0.35 percent change in output per hour).
    Under our framework, the recommended update is based in part on 
expected productivity--that is, projected service output during the 
year multiplied by the historical ratio of service productivity to 
total service output, multiplied by the share of labor in total 
operating inputs, as calculated in the hospital market basket rate of 
increase. This method estimates an expected labor productivity 
improvement in the same proportion to expected total service growth 
that has occurred in the past and assumes that, at a minimum, growth in 
FTEs changes proportionally to the growth in total service output. 
Thus, the recommendation allows for unit productivity to be smaller 
than the historical averages in years that output growth is relatively 
low and higher in years that output growth is larger than the 
historical trend. Based on the above estimates from both the hospital 
industry and the economy, we have chosen to employ the range of ratios 
of productivity change to output change of 0.30 to 0.35.
    The expected change in total hospital service output is the product 
of projected growth in total admissions (adjusted for outpatient 
usage), projected real case-mix growth, and expected quality enhancing 
intensity growth, net of expected decline in intensity due to reduction 
of cost ineffective practice. Case-mix growth and intensity numbers for 
Medicare are used as proxies for those of the total hospital, since 
case-mix increases (used in the intensity measure as well) are 
unavailable for non-Medicare patients. Thus, expected output growth is 
simply the sum of the expected change in intensity (0.0 percent), 
projected admissions change (3.0 percent for FY 1996), and projected 
real case-mix growth (.8 percent), or 3.8 percent. The share of direct 
labor services in the market basket rate of increase (consisting of 
wages, salaries, and employee benefits) is 61.7 percent. Multiplying 
the expected change in total hospital service output (3.8 percent) by 
the ratio of historical service productivity change to total service 
growth of 0.30 to 0.35 and by the direct labor share percentage (0.617) 
provides our productivity standard of 0.7 to 0.8 percent.
    ProPAC also believes hospitals should be given an incentive for 
additional productivity improvement. ProPAC measures productivity as 
the ratio of hospital admissions (adjusted for case mix and outpatient 
services) per FTE employee (adjusted for changes in skill mix). ProPAC 
includes in its productivity measurement the effect of changes in 
practice patterns. We treat practice pattern changes as a portion of 
our intensity adjustment, described below. This year, ProPAC assumes a 
productivity gain of at least 0.6 percent and recommends a -0.3 
percentage point adjustment on the basis that any productivity gains 
should be shared equally by Medicare and hospitals.
     Intensity: We base our intensity standard on the combined 
effect of three separate factors: changes in the use of quality 
enhancing services, changes in the use of services due to shifts in 
within-DRG severity, and changes in the use of services due to 
reductions of cost-ineffective practices. For FY 1996, we recommend an 
adjustment of 0.0 percent. The basis of this recommendation is 
discussed below.
    We have no empirical evidence that accurately gauges the level of 
quality-enhancing technology changes. Typically, a specific new 
technology increases cost in some uses and decreases cost in other 
uses. Concurrently, health status is improved in some situations while 
in other situations it may be unaffected or even worsened using the 
same technology. It is difficult to separate out the relative 
significance of each of the cost increasing effects for individual 
technologies and new technologies.
    The quality enhancing technology component is intended to recognize 
the use of services which increase cost but whose value in terms of 
enhanced health-status is commensurate with these costs. Such services 
may result from technological change, or in some cases, increased use 
of existing technologies. The latter recognizes that as cost and 
medical effectiveness studies become available, some increased use of 
existing, as well as new, services may be warranted.
    The component for reduction of cost-ineffective practice recognizes 
that some improvements in practice patterns could be made so that the 
intensity of services [[Page 29382]] provided is more consistent with 
the efficient use of limited resources. That is, improvements could be 
made so that the number of services provided during an inpatient stay, 
and their complexity, produce an improvement in health status that is 
consistent with the cost of care. This component of our update 
recommendation is intended to encourage both hospitals and physicians 
to more carefully consider the cost-effectiveness of medical care. This 
component of the framework also accounts for real within-DRG change, 
since that should be directly reflected in the CMI-adjusted growth in 
real charges per case.
    Following methods developed by HCFA's Office of the Actuary for 
deriving hospital output estimates from total hospital charges, we have 
developed Medicare-specific intensity measures based on a 5-year 
average using FY 1990-1994 MedPAR billing data. Case-mix constant 
intensity is calculated as the change in total Medicare charges per 
discharge adjusted for changes in the average charge per unit of 
service as measured by the Medical CPI hospital component and changes 
in real case-mix. For FY 1990 through FY 1992, we estimate that 1.0 to 
1.4 percent of observed case-mix increase was real. This estimate is 
supported by past studies of case-mix change by the RAND Corporation. 
The most recent study was ``Has DRG Creep Crept Up? Decomposing the 
Case Mix Index Change Between 1987 and 1988'' by G.M. Carter, J.P. 
Newhouse, and D.A. Relles, R-4098-HCFA/ProPAC (1991). The study 
suggests that real case-mix change was not dependent on total change, 
but was rather a fairly steady 1.0 to 1.5 percent per year. We use 1.4 
percent as the upper bound because the RAND study did not take into 
account that hospitals may have induced doctors to document medical 
records more completely in order to improve payment. For FY 1993 and FY 
1994, we assumed that all of the observed case-mix increases of 0.9 and 
0.8 percent, respectively, were real. If we assume that real case-mix 
increase was 1.0 percent for FY 1990-1992, 0.9 percent for FY 1993, and 
0.8 percent for FY 1994, we estimate case-mix constant intensity 
declined by an average 1.2 percent during FY 1990 through 1994, for a 
cumulative decrease of 6.1 percent. If we assume that real case-mix 
increase was 1.4 percent for FY 1990-1992, 0.9 percent for FY 1993, and 
0.8 percent for FY 1994, we estimate case-mix constant intensity 
declined by an average of 1.5 percent during FY 1990 through 1994, for 
a cumulative decrease of 7.2 percent. Since we estimate that intensity 
has declined during FY 1990-1994 period, we are recommending a 0.0 
percent intensity adjustment for FY 1996.
     Quality Enhancing New Science and Technology: For FY 1996, 
ProPAC used a qualitative approach to develop its estimate by examining 
technologies considered in last year's estimate and reviewing the 
literature for potential new advances. ProPAC decided that 0.3 percent 
was the appropriate level for the FY 1996 adjustment. This is the same 
estimate ProPAC used in FY 1995. ProPAC stated that there is no reason 
to believe that the rate of increase in scientific and technological 
advances had risen or fallen from last year's estimate.
    We still believe that there may be several shortcomings with 
ProPAC's recommendations with regard to technology. First, the estimate 
does not account for offsetting changes in DRG assignment. Second, it 
is not clear that all of the new technologies listed in ProPAC's study 
significantly enhance health status. To the extent the new technologies 
are not quality enhancing, an adjustment is inappropriate. Finally, 
some of the technologies have considerable potential for cost savings 
relative to the technologies they are replacing.
     Change in Case Mix: Our analysis takes into account 
projected changes in case-mix, adjusted for changes attributable to 
improved coding practices. For our FY 1996 update recommendation, we 
are projecting a 0.8 percent increase in the case-mix index. We define 
real case-mix increase as actual changes in the mix (and resource 
requirements) of Medicare patients as opposed to changes in coding 
behavior that result in assignment of cases to higher-weighted DRGs but 
do not reflect greater resource requirements. For FY 1996, we believe 
that real case-mix increase is equal to our projected change in case 
mix. We do not see any changes in coding behavior in our projected 
case-mix change. Our net adjustment to case-mix change for FY 1996 is 
0.0 percentage points.
    The -1.0 percent figure used in the ProPAC framework represents 
ProPAC's projection for observed case-mix change. ProPAC projects a 0.8 
percentage points increase in real case-mix change across DRG's and a 
0.2 percentage points increase in within-DRG case-complexity change. 
ProPAC's net adjustment for case mix is 0.0 percentage points.
     Effect of FY 1994 DRG Reclassification and Recalibration: 
We estimate that DRG reclassification and recalibration for FY 1994 
resulted in a 0.3 percent increase in the case-mix index when compared 
with the case-mix index that would have resulted if we had not made the 
reclassification and recalibration changes to the GROUPER. ProPAC does 
not make an adjustment for DRG reclassification and recalibration in 
its update recommendation. (We note that Congress asks the Secretary 
for an estimate of these effects in our update recommendation.)
     Correction for Market Basket Forecast Error: The FY 1994 
estimated market basket percentage increase used to update the payment 
rates was 4.3 percent. Our most recent data indicate the actual FY 1994 
increase was 2.5 percent, reflecting that the actual increase in wages 
was lower than projected. The resulting forecast error in the projected 
FY 1994 market basket rate of increase is 1.8 percentage points. Our 
policy has been to make a forecast error correction if our estimate is 
off by 0.25 percentage points or more. Therefore, we are recommending 
an adjustment of -1.8 percentage points to reflect this overestimation 
of the FY 1994 market basket rate of increase. The following is a 
summary of the update ranges supported by our analyses compared to 
ProPAC's framework.

                                                                        
[[Page 29383]]
         Table 1.--Comparison of FY 1996 Update Recommendations         
------------------------------------------------------------------------
                                                   HHS           ProPAC 
------------------------------------------------------------------------
Market Basket............................                  MB         MB
Difference Between HCFA & ProPAC Market                                 
 Baskets.................................  ..................       +0.4
                                          ------------------------------
    Subtotal.............................                  MB     MB+0.4
                                          ==============================
Policy Adjustment Factors:                                              
    Productivity.........................        -0.7 to -0.8       -0.3
Intensity:                                                0.0  .........
    Science and Technology...............  ..................       +0.3
    Practice Patterns....................  ..................      (\1\)
    Real Within DRG Change...............  ..................      (\2\)
                                          ------------------------------
      Subtotal...........................        -0.7 to -0.8       +0.0
                                          ==============================
Case Mix Adjustment Factors:                                            
    Projected Case Mix Change............                -0.8       -1.0
    Real Across DRG Change...............                 0.8       +0.8
    Real Within DRG Change...............               (\3\)       +0.2
                                          ------------------------------
      Subtotal...........................                 0.0        0.0
                                          ==============================
Effect of 1993 Reclassification and                                     
 Recalibration...........................                -0.3  .........
Forecast Error Correction................                -1.8       -1.8
                                          ------------------------------
    Total Recommended Update.............    MB-2.8 to MB-2.9    MB-1.4 
------------------------------------------------------------------------
\1\Included in ProPAC's Productivity Measure.                           
\2\Included in ProPAC's Case Mix Adjustment.                            
\3\Included in HHS's Intensity Factor.                                  

  While the above analysis would support a recommendation that the 
update be no more than market basket minus 2.8 percentage points, we 
are recommending an update of market basket minus 2.0 percentage 
points, consistent with current law. Any further reduction in the 
update factor would be most appropriate within the context of health 
care reform. We also recommend that the hospital-specific rates 
applicable to sole community hospitals be increased by the same update, 
market basket minus 2.0 percentage points.

IV. ProPAC Recommendation for the Elimination of a Separate Update for 
Sole Community Hospitals

    ProPAC recommends an update factor for hospitals paid the hospital-
specific rate equal to the factor used for all other prospective 
payment hospitals. As discussed earlier, the statute sets the update 
equal to the market basket minus 2.0 percentage points. In addition, 
ProPAC suggests that it is no longer necessary to calculate a separate 
update for these hospitals since section 1886(b)(3)(B)(iv) of the Act 
dictates that the update for sole community hospitals be the same as 
for other prospective payment hospitals in the future.
    Response: We agree with the ProPAC recommendation that the update 
factor for hospitals paid the hospital-specific rate be the same as the 
update applicable to other prospective payment hospitals. That update 
factor is equal to the market basket percentage increase minus 2.0 
percentage points, or 1.5 percent. We concur with the ProPAC suggestion 
to eliminate a separate update for the hospital-specific rate for the 
time being. We will continue to monitor the financial condition of sole 
community hospitals for signs of potential stress and provide a 
separate recommendation when and if conditions warrant it.

V. ProPAC Recommendation for Updating the Rate-of-Increase Limits for 
Excluded Hospitals

    ProPAC recommends an update factor equal to the market basket rate 
of increase minus 1.6 percentage points for excluded hospitals and 
units. The 1.6 percentage points reduction represents a reduction of 
1.6 percentage points to account for the forecast error in the FY 1994 
market basket rate of increase for excluded units, no increase to 
reflect the different compensation price proxies used by ProPAC, and no 
allowance for new technology. ProPAC no longer recommends an additional 
allowance based on the year the hospital or unit was excluded from the 
prospective payment system, pending our report to Congress on payment 
reform for excluded hospitals and units as mandated by Public Law 101-
508.
    Response: We recommend that hospitals excluded for the prospective 
payment system receive an update equal to the percentage increase in 
the market basket that measures input price increases for services 
furnished by excluded hospitals minus 1.0 percentage point. The 
reduction is consistent with the updates provided under the current law 
and in the President's budget. The market basket rate of increase for 
excluded hospitals is currently forecast at 3.6 percent. Subtracting 
1.0 percentage point would result in an update of 2.6 percent for 
excluded hospitals and units.

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[FR Doc. 95-13183 Filed 6-1-95; 8:45 am]
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